The Government has over the last few years undertaken a range of fiscal reforms which have strengthened the financial system and banking sector in the Philippines and improved economic prospects. In 2007, the economy has posted the strongest growth in three decades which reflects improved economic conditions.
According to the IMF (International Monetary Fund) a GDP growth of 7.3% was due to increased government and private construction expenditure, robust information and communication technology industry, improved agricultural harvests, increased disposable income and strong private consumption.
Consumer expenditure is further boosted by reduced unemployment which reached about 7.9% in 2008, down from just over 12% in 2006 and by remittances from the large number of Filipinos working abroad which have reached $16.1 Billion in 2008.
Increasing Central bank reserves and large remittances from abroad have helped support the Philippine currency the Peso and resulted in a strong and stable currency which continues to appreciate against the US Dollar. The FDI was about $4.6 Billion according to the Philippine National Statistics Coordination Board.
In 2008, higher inflation due to the global increase in the price of food and fuel has brought a reduction in GDP growth to 4.40% with domestic household consumption growth slower at 3.4% down from a long term trend of 5.4%.
At the same time, the Bangko Sentral Pilipinas’ (BSP’s), the Philippine Central Bank, hiked interest rate to control inflation while public consumption and investment in real terms were lower by 5.9% and 6.4% respectively reflecting lower government expenditure which aimed to contain its deficit to 18 billion Peso ($382 million) or 0.2% of the GDP.
According to the World Bank, expansionary fiscal policy, as a means to stimulate the economy, was therefore underutilised and contributed to the lower growth.
The slowdown arising from the global financial turmoil has also affected the performance of the external sector, in particular foreign investment inflows but higher growth of capital formation and private construction and investments in durable equipments held up well with capital formation growing at a respectable rate of 14.7% in the second quarter of 2008 according to the World Bank.
On the production side, growth was supported by higher production in mining one of the biggest industries in the Philippines as the country is rich in chromite, copper and nickel, agriculture and manufacturing sectors in particular in automotive parts, food processing, electronics, garments, and textiles with the manufacturing sector growing at the rate of 6.10%, the highest in 13 quarters.
Furthermore, the Philippines has one of the highest literacy rates in Asia; low wages and an English-speaking population is expected to drive the IT, call centers and business process outsourcing (BPO) boom and the Philippines is aiming to capture 10% of the $130 billion worldwide outsourcing industry by 2010.
The effect of the global financial crisis on the domestic financial system in Philippines has to date been limited to a decline in stock market and asset prices and a rise in the spreads on its international bonds. The decline in the stock market has not had a significant impact as stocks are not widely help by the population who tends to direct its investment into property with an estimated 30% of all remittances being invested in housing.
At the same time, according to the World Bank, the Philippine banking sector has limited direct exposure to distressed financial institutions overseas (less than 2% of aggregate banking system assets) and conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector from exposure to distressed financial firms.
Why is the Philippine likely to weather the global financial crisis?
According to the World Bank, the Philippines is expected to weather the crisis and the economy is expected to remain resilient and manageable with the appropriate fiscal and monetary policies while short-term growth prospects expected to improve and inflationary pressures to be contained with growth predicted at 3.0 to 4.0% in 2009. The Economist Intelligence Unit (EIU) predicts growth in the Philippines to range from around 3.9% in 2009 to 5.7% in 2013 while the IMF noted that significant fiscal and banking sectors reforms in the past few years, as well as the build-up of reserves in good times, have reduced the economy’s vulnerability as it resulted in controlled fiscal deficit, low debt ratios, and internationally-accepted banking sector capital adequacy standards. Furthermore, the effect of the global slowdown is likely to be subdued because of the following factors:
• Growth in 2009 will be sustained by public expenditure. The hike in food and fuel prices and slower growth in 2008 has prompted the government to declare its intention to postpone its goal of a balanced budget to 2010 and increase spending by providing additional expenditure for infrastructure, subsidies, and social protection to offset the effects of the global slowdown and higher prices and soften the impact of the global shock on the domestic economy. According to the World Bank, the public sector’s fiscal position is expected to remain manageable while the government undertakes counter-cyclical measures to protect the poor and sustain growth.
• “Windfall” VAT revenues from higher oil prices in 2008, is supporting the Philippines’ government fiscal position.
• The Philippine National Food Authority (NFA) is aiming to targeted subsidies more efficiently which will reduce their burden.
• Despite the global slowdown, the external sector remained resilient. In 2008, the Balance of Payment showed a surplus and the current account also remained in surplus at 2% of GDP.
The Balance of The Philippines is a world Payment surplus has contributed to a higher reserve position.
leader in renewable energy
• According to the IMF, the level of reserves is high enough to help sustain confidence in the Peso and lead to the resilience of the financial system.
• Rapid growth of remittances which is not expected to slowdown with the global crisis as according to the World Bank, the country continues to deploy overseas workers at an astonishing speed with an increase in deployment of 26.4% in the first 8 months of 2008.
• Rapid increase in remittances has lead to greater channeling of these funds into investments, especially housing.
• The BSP, the Central Bank of the Philippines is introducing a number of measures to support liquidity positions.
• The IMF expects inflation to average 6.0% in 2009 and an easing of monetary policy.
• Domestic financial markets have been resilient despite the turbulence in the international financial markets.
According to the World Bank, the Philippine banking system remained adequately capitalised and with the exception of a handful of banks, the banking system as a whole was mildly affected by the financial crisis.
• According to the World Bank, with the exception of a handful of banks, Philippines’ direct exposure to sub-prime related distressed credit products appears to be limited.
• The Philippines is a world leader in renewable energy sources and is less vulnerable to a rise in oil prices as around a quarter of the Philippine energy is generated from underground heat sources.
• The recent Personal Equity and Retirement Account Act and Credit Information Systems Act will lead to improved access to finance as well as an increased saving ratio both of which will support the economy.