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No recession but economy gloomy

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By Judith Balea, abs-cbnNEWS.com | 01/01/2009 1:12 PM

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Editor's note: This is the tenth in our series of year beginners.
 
From bad to worse. That's how the Philippine economy will fare in 2009 as the effects of the global financial crisis become more pronounced, experts say.

By worse, they mean a negative spiral of low consumer spending and dwindling demand that will eventually lead to more production cuts and job layoffs, and then greater poverty.

In other parts of the world, the country's major trading partners have already succumbed to the financial crisis and slipped into recession.

While most economists believe that the Philippines won't suffer the same fate, with a likely serious economic slowdown, hardly anyone is expecting a rebound in the economy anytime soon. Not in 2009, at least.

GDP growth

Compared to an expansion of between 4.1 to 4.8 percent in 2008, the government sees only a 3.7 to 4.7 percent growth in the country's gross domestic product (GDP) this year.

Other forecasters are more pessimistic. The World Bank gave a projection of 3 percent while other multilateral agencies, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), threw in forecasts of 3.5 percent and 3.8 percent, respectively. Local analyst group Philippine Equity Partners, meanwhile, had an estimate of 3.1 percent. London-based think tank Economist Intelligence Unit perhaps is leading the race to the bottom, with a 1.8 percent growth forecast, which means the economy could grind to a near halt.

In one of its recent reports, the ADB said the grim outlook for the Philippines, along with its peers in Asia, is based largely on the projected sharp decline in world trade and tighter funding conditions.

The Philippines is dependent now more than ever on exports, foreign capital inflows and remittances-- all of which are hinged on what's happening overseas.

To illustrate, the current lack of funds in global credit markets have caused major foreign corporations to hold back their expansion locally, resulting in a 45 percent decline in foreign direct investments in the first nine months of the year.

Exports, which account for about 40 percent of GDP, have also fallen sharply, by 14.9 percent as of October, as the economies of the country's top markets like the US and Japan, continued to contract.

The same is true with remittances, a vital economic indicator driving domestic consumption in retail and real estate. Recent central bank data showed that remittances, which account for a tenth of GDP, began to soften this fourth quarter.

As these three pillars of the local economy continue to hurt from the global downturn, jobs for Filipinos remain at risk.

Govt spending program

To mitigate the slowdown in exports, investments and remittances in 2009, the government said it would speed up spending on infrastructure and social services.

The government has a budget of P1.41 trillion for 2009, 14 percent higher than what was allocated in 2008.

In anticipation of more job losses this year, it is also preparing a P300-billion stimulus package aimed at creating employment.

Over 1,000 Filipinos had already lost their jobs abroad, of which half were based in the US, according to a recent government announcement. Thousands more in the financial, information technology and export sectors, among others, are expected to be laid off in the coming months.

Fiscal deficit

Since the government is boosting its spending program, it has decided to abandon its commitment to balance the budget and postponed fiscal consolidation back to the original 2010 schedule.

The Philippines expects to incur a deficit of P75 billion or 1 percent of GDP in 2008 and P102 billion or 1.2 percent of GDP in 2009. With the planned stimulus package, the budget shortfall could increase to as much as P162 billion next year.

In an earlier report by the AFP, ATR Kim Eng Securities' chief economist Luz Lorenzo was quoted as saying that historically, big budget deficits have been bad for the economy because they "prevented spending on fixed investment."

In 2007, the government was able to trim its deficit to P9.4 billion, the lowest in 10 years, after several tax reforms and privatization of public assets that allowed it to raise more revenues.

However, this year, there are only a few assets left to be auctioned and tax collections are expected to decline further with the implementation of the exemptions for minimum wage earners and reduction in corporate income tax.

Multilateral lender IMF expects the budget deficit in 2009 to reach P140 billion or 1.7 percent of GDP, with the onset of political spending for the 2010 national elections.

Advantages

Luckily, the global economic slowdown has some advantages.

Lower demand has pulled down the prices of oil from their peak in July, resulting in easing inflation, which could encourage more household spending.

Construction material costs have also dropped, allowing the government and private sector to expand their infrastructure projects that in turn, would attract investors to come into the country.

After a gloomy 2009, the World Bank said, investments and possibly, exports, would start to pick up again to buoy the economy in 2010.