Welcome Remarks, 10th FVR_RPDEV Lecture

By Romeo L. Bernardo (for RFO Center for Public Finance and Regional Cooperation)

Good afternoon distinguished speakers and guests. Welcome to the 10th RPDEV Lecture Series.

I have been asked by my former boss and still friend, Bobby de Ocampo to deliver the  welcome remarks on his behalf as a member of the Board of Advisers of the RFO Center, as he had to travel on urgent business.

Let me start by quoting something he said over a decade ago when he received the highly esteemed recognition of Euromoney Finance Minister of the Year in 1996, explaining the hard tasks of a Finance Secretary--- “ A Finance Secretary has many difficult and important decisions he has to make—the most critical by far being --- which president to serve.”

He has decided most wisely—( Pause for applause.. “palakpak naman diyan” ! ;^)

The nation is at that threshold when we need to decide whom to choose to lead us.  But even before then we need to ensure first of all that we do have credible and orderly elections in 2010 that will allow us to renew our faith in democracy and to chose our leaders.

At this time of unprecedented global financial and economic challenge and domestic divisiveness and failures in governance, perhaps at no time in our history do we need visionary and effective leadership as do we do today.  Such kind of leadership was defined in a paper documenting the  Political Economy of Reform during the Ramos Administration ( Growth Commission, World Bank, 2008) as one, like PFVR’s, able  “to set the vision, rally the people to bring results in ways that are possible to accomplish at the time given and openings available and working through  weak institutions and contending with  strong vested interests.

This is the third time RPDEV and the RFO Center are working together to ensure that our common advocacy of an informed public sector is realized. Past Lectures have tackled issues concerning our development post 1997 Asian financial crisis and global financial situation relative to the current crisis. .

 Today we have brought together 6 people whom you perceive as potential leaders of our country.  We will listen to what they have to say on socio-economic development and prospects for peace.  Our speakers have consistently been mentioned as possible “presidentiables” in the forthcoming 2010 elections.  

(We look forward to listening to and interacting with them, even though some may believe that it is useless to try to hold people to anything they say when they are madly in love, drunk or running for office. )

Now with all seriousness, allow me to formally welcome all of you to the 10th FVR-RPDEV Lecture.


I turn you over to our Moderator, Atty Mike Toledo, Country President of  Webershandwick Worldwide, our co-sponsor-- to begin the Presentation Proper.

Slow drag

Business World
Introspective

We do not foresee a recession in the Philippines in the technical sense, but the economy will in all likelihood grow at a snail's pace. Though the sharp slowdown of economic activity in the first quarter has set the pace for the entire year, we don't expect conditions rapidly deteriorating from that point forward. Remittances have so far managed to hold steady, which means any decline, if it happens, will be minimal, while export and import numbers have been observed to slowly even out, improving the balance.

The effects of higher fiscal spending may soon start to become perceptible especially as elections near, while expectations of a global recovery should help revitalize consumers somewhat later in the year.

But an upturn in the world economy, especially a weak one, may not mean much for the Philippines. Ironically, while low export vulnerability has kept the country sheltered from the global downturn, this same feature prevents it from riding any global revival to the hilt. With major trade partners on a slow road to recovery and nothing much on the domestic front to spark domestic activity, we see the Philippine economy still performing below trend even in the subsequent year.

Growth numbers for 1Q09 were worse than expected, at 0.4% year on year or below consensus expectations of about 2%. The results have prompted multilateral agencies to slash further their gloomy forecasts. The IMF now predicts a GDP decline of about 1% from earlier expectations of flat growth, while the World Bank expects a 0.5% dip in output (from 1.9%). The consensus estimate of private analysts has likewise fallen to a mere 1.2%.

The pessimism comes from the sudden weakness in consumer spending (up by just 0.8% year on year), which had been a stable engine of growth for nearly two decades. We are wary of the reported statistics for several reasons: (1) remittances during the period slowed but did not decline while the peso correspondingly depreciated; (2) purchasing power had actually risen due to softer prices of oil and commodities; (3) minimum wage tax exemptions should have worked to increase personal incomes; and (4) employment numbers did not deteriorate radically based on government statistics.

The sharp slowdown in consumer spending, initially measured with the help of production data, is likely traced in part to what appeared to be a plunge in tobacco consumption as manufacturers front-loaded sales to marketing arms to escape a scheduled increase in excise taxes this year. Moreover, value-added taxes rose 14% annually in 1Q09 (10% in the first four months), indicating that the domestic economy may not have been as anemic as the national income accounts estimates suggest. Hence, we will not be surprised to see some correction upward in future periods.

Going forward, we continue to see growth of 0.5%-1% with downside risks. Remittances may slow further and possibly still decline (by as much as 3% in our latest estimate) as world unemployment trails the global recession. Capital formation will likely still suffer as firms cut down inventory and defer large-scale investment under an uncertain business environment. The spread of swine flu - the Philippines already has the highest count in Southeast Asia and the seventh highest in the world - may be another dampener to economic activity, particularly for tourism-related sectors and businesses dependent on people coming out and converging such as in malls, hotels, and restaurants.

However, exports may have already bottomed and we can realistically expect external trade to even out further and the decline in manufacturing to slow. Services exports, especially of the business process outsourcing (BPO) sector, will remain strong according to industry insiders we have talked to, likely growing at double-digit rates. Government spending delayed by the late signing of the national budget and allegedly held back for reasons of political strategy may begin to reflect in the national accounts beginning 2Q09. We also hope to see some clarity in the political scene after the President's state-of-the-nation address later this month (July 27, 2009). This should serve as the strongest signal for unleashing election-related spending which can help push up domestic demand.

The latest consumer expectations survey by the central bank was still downbeat, but with possible "green shoots" in the world economy those holding out for bad days may eventually start loosening purse strings. It is interesting to note that business expectations had started to turn around in the last survey, particularly in construction and services and we can expect a sense of normalcy returning to the business sector. Real estate companies, for instance, have noticed a marked improvement in sales beginning 2Q09 even in the high-end property sector.

While fiscal and monetary policies remain supportive, we will probably not see more aggressive measures to prop up growth. The most recent widening of the fiscal deficit target (from P199.2 billion to P250 billion) basically involved a P56.6-billion reduction in expected revenues and a P5.8-billion cutback in planned spending. Finance officials seem deeply concerned these days about the impact of large deficits on fiscal sustainability as opposed to intensifying the fiscal stimulus to spur growth.

Monetary policy could remain expansionary for the meantime though supply side risks to inflation may eventually constrain monetary authorities, especially with world oil prices rising along with some recovery in global demand. There is also an acknowledged limit to what monetary policy can achieve in spurring bank lending given current appetites for investment and consumption combined with banks' precautionary tightening of loan standards.

The Bangko Sentral ng Pilipinas notes how policy cuts have only partially translated to a decline in lending rates - only about 40% of the 175 bps decline in the overnight RRP rate since December has translated to a fall in bank lending rates.

We may not see unemployment rising above 8% on average this year as anticipated by many analysts, as the latest numbers even improved on quarter-ago and year-ago figures (7.5% recorded last April compared with 7.7% last January and 8% a year ago). While this can be interpreted as another sign that a recession may not be afoot, the picture is mixed. Employment numbers rose for unpaid family workers and the self-employed who do not employ other workers, while jobs for wage and salary workers in private establishments hardly grew. The former classes of workers are negatively correlated with GDP growth while the latter are positively correlated with growth.

Meanwhile, even if global economic recovery is expected by the end of the year, the Philippines may not capitalize much from this. Low export exposure has shielded the country from the global downturn, but also prevents it from maximizing the benefits of a revival. Coupled with likely weak recovery in advanced economies, we see only 3.0%-3.5% growth next year, which is still below trend.

The risks to our forecasts include the following: * Prolonged global downturn. Things are starting to look up though as global projections have lately improved. The IMF in its latest World Economic Update now sees forces pulling the world economy down decreasing in intensity, but also says the forthcoming recovery will likely be weak. * Larger-than-expected remittance drop. The likely shock to our forecast now seems to be on the upside, with remittances still up by 2.6% in the first four months of the year and deployment reportedly growing. Forecasts of economists from the World Bank and the IMF range between -4% to -7%, which is similar to the average for private analysts. Their poor prognosis for remittance inflows partly underpins their expectations of a Philippine recession (between -0.5% and -1% GDP decline). * Oil market volatility. This remains a serious risk that could derail recovery in the local economy. A continued uptick in oil prices may be the inevitable consequence however as forward-looking oil markets detect a global recovery. Crude oil prices (Dubai fateh) have risen over 70% since the start of the year, when prices bottomed. * Fiscal slippage. This can be a serious concern for the country given both structural and cyclical drags to revenue collection. This is one area that needs to be constantly monitored especially given its impact on financial markets. * Political turmoil. There continue to be rumblings about the push for a charter change (cha-cha) initiative by administration allies, possibility of failure of elections, and of the President possibly running for a congressional seat in her home province with the end goal of becoming prime minister. This is happening in an environment of isolated bombings in the South and pyrotechnic bombings in Metro Manila by unidentified parties with unclear objectives, thus raising the much-feared scenario of martial law and emergency rule.

Excerpt from Global Source quarterly report on the Philippines - "Snail's Pace" by Mr. Romeo Bernardo and Ms. Margarita Gonzales. Mr. Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc.