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As the
US financial crisis swept across markets in Europe and
industrialized Asia, years of financial gains quickly
eroded. With its underdeveloped financial system, the
Philippines, however, seems to be in a better position
than most. While this may offer a glimmer of hope that
the country is a safe haven for both local and foreign
investors, there is no reason to celebrate yet. Experts
believe that the crisis is deeper and more far-reaching
than anyone could have thought.
The US
financial crisis is now seen as the bigger and fiercer
version of the 1997 Asian financial crisis. Billionaire
investor Warren Buffett even dubs it the “economic Pearl
Harbor,” forcing the US government to cough up $700
billion to bail out its own financial institutions from
certain financial ruin. And just like the Asian crisis,
it, too, started in real estate.
The
subprime-mortgage crisis erupted in 2007 and was
characterized by contracted liquidity in global credit
markets and the banking system. This resulted in a
downturn in the US housing market and excessive
individual and corporate debts that spilled over to the
world economy.
While US
President George W. Bush has signed the $700-billion
bailout into law, markets all over the world continue to
sit and wait for results. However, local economists
think that the bailout plan will not signal the end of
the crisis. Some believe that more bailouts may be in
the offing in order to ease the burden of ailing US
financial institutions.
Economists project that it may take a couple of years or
more to recover. Affluent countries may see this only as
a medium-term setback to economic growth but for poor
and developing countries like the Philippines, the years
of healing from this financial turmoil may be longer. In
the meantime, industries will hurt and global trade will
be affected. Investors will shy away from Philippine
investments. Consumers, including the rich, will also
start feeling the pinch. And decent jobs, here and
abroad, will start becoming scarce.
Three
renowned local economists joined a recent roundtable
discussion with the BusinessMirror and said that, more
than anything else, this crisis is an issue of
confidence. As consumers worldwide tighten their belts
and avoid unnecessary spending, economic growth will be
flat. For the Philippines, this will only mean one
thing—tougher times ahead.
Hard to
predict
When the
subprime-mortgage crisis began to unravel last year, it
signaled a period of slower growth ahead—but not the
global financial mess we now find ourselves in.
While
economists have warned that the US economic boom after
the dot-com bubble, which ran from 1995 to 2001, was
unsustainable, nobody predicted that a crisis of a
bigger magnitude would be possible in the years ahead,
University of the Philippines economist and former
Budget Secretary Dr. Benjamin Diokno said in a separate
interview.
At best,
Diokno said, these economists, who were more familiar
with economic cycles, were only able to project that
economic growth could slow down—but would not lead to
historical losses in markets all over the world and
thousands of Americans grappling with foreclosure.
“At some
point, the economy will fall. But I guess nobody
predicted a hard landing,” Diokno remarked.
Leonor
Magtolis-Briones, former National Treasurer and current
professor at the University of the Philippines National
College of Public Administration and Governance,
however, thinks that some governments already knew what
was coming. Still, they chose greed over economic
stability and failed to warn the public of the impending
disaster, she said.
“They
failed to act. This is why the US government is blamed.
[There was a] failure of regulation [and there was]
greed for [gains from the] financial system and stock
market,” Briones said.
Ponciano
Intal Jr., De La Salle University Angelo King Institute
for Economic and Business Studies executive director and
former Philippine Institute for Development Studies
president, agreed with both Diokno and Briones that
nobody expected the depth of the crisis.
Intal
said that, somehow, the financial system of the US was
to blame. With so many complex financial instruments
such as derivatives, many could not see through the
warning signs, he noted.
“Mark-to-market pricing worsened [the] loss of
confidence and liquidity problems. Finally, investment
banks are highly leveraged and more vulnerable to loss
of confidence; clearer link between credit risk and
risk-management instruments would have the problem more
manageable,” Intal said.
Paying
the price
It was
already too late when people realized that the mortgage
problem in the US had already morphed into a financial
monster waiting to gobble up all financial and economic
gains obtained in the last few years.
Diokno
said Filipinos are already affected by the crisis,
adding that around 52.8 percent of Filipinos believe
“the sky is falling.” This is not only because of the
crisis itself but the risk that the US bailout plan will
not work.
Diokno
said that considering the size of the “damage,” he
expects several more bailouts to crop up after the US
presidential elections in November. He said this is
mainly due to the $1.3 trillion worth of losses now
attributable to the crisis.
With
that, he believes there is a lot at stake for the
Philippines, considering the US is its single-biggest
export market and all its other major trading partners
are also exceedingly dependent on the US.
“We have
already tightened our belts, right? Let me just say that
how it would affect us depends on how deep and long the
slowdown or the recession will be. Unfortunately, at
this point, no one really knows. I’ve seen analyses
which say, at the earliest, the US economy will pick up
in 2011. That’s the optimistic view; it could be as far
as 2015,” Diokno said during the forum.
Fortunately for the Philippines, the dampening effect of
the crisis on the economy, he said, has already been
recognized by the government. Last week the economic
managers have agreed to downscale the government’s
growth targets. The economic managers, as announced by
Socioeconomic Planning Secretary Ralph Recto, cut the
country’s gross domestic product (GDP) growth projection
to within the range of 4.4 percent to 4.9 percent in
2008 and 4.1 percent to 5.1 percent in 2009.
It is
worth noting that while the government has already
revised the country’s GDP targets for 2008 three times
this year, the new figures were the only ones that
seemed reasonable for local economists. This was also
the first time they agreed with the government targets.
Among
the most obvious effects of the low-growth regime,
Diokno said, is lower demand for Philippine exports. The
largest chunk of the country’s exports is focused on
electronics such as semiconductors, which are used in
electronic gadgets.
He
expects exports to only post a growth of 3 percent to 5
percent this year and next year. The National Statistics
Office (NSO) recently reported that the country’s total
export receipts in the first semester of 2008 only grew
by 4.1 percent to $25.598 billion from $24.6 billion
during the first semester of 2007.
This is
slower than the 15.8-percent growth of total imports to
$29.532 billion from $25.506 billion in the first
semester of 2007, and resulted in a larger trade deficit
of $3.934 billion in 2008 from a $906-million deficit in
the same period last year. The total external trade in
goods in the first half of the year posted a 10-percent
increase to $55.130 billion this year from $50.106
billion last year.
The
current trend and Diokno’s projection will not bode well
for the country. Diokno said this will directly impact
on the availability of jobs in the country, citing the
Labor Force Survey released by the NSO in January which
revealed that half a million jobs have been lost,
including jobs in the transport sector which posted more
than 100,000 jobs lost.
Diokno
added that slower trade would be exacerbated by a
possible decline in foreign direct investments. This
would mean fewer investors setting up shop in the
country and offering jobs to Filipinos.
OFW
remittances
Even
overseas Filipino workers (OFWs) will be affected and
may cause a slowdown in the flow of remittances into the
country, Diokno warned. With the US financial crisis
spilling over to European countries, it can be expected
that a number of Filipino workers may be sent home, he
said.
In a
special data release in July, the NSO reported that the
number of OFWs who worked abroad at any time during the
period April to September 2007 was registered at 1.75
million. This represented an increase of 15.3 percent
over the estimated 1.52 million OFWs in April to
September 2006.
Many of
these OFWs, or around 19.8 percent, are situated in
Saudi Arabia, while more than one in 10, or 12.1
percent, of OFWs are in the United Arab Emirates. Those
who worked in Europe accounted for 9.2 percent, slightly
lower than those in North and South America at 9.3
percent.
While
the majority of OFWs are in countries, Diokno pointed
out that many are out of port and are working in cruise
ships. With global tourism slowing down due to a decline
in the spending of people, there is also a threat that
Filipinos at sea or those about to be deployed will not
be able to maintain their jobs or work abroad at all, he
said.
“There’s
another twist here which is related to tourism. These
are anecdotal evidence. I’ve talked to people who have
taken luxury cruises. Some 60 percent of those employed
[in luxury liners] are Filipinos—starting from
machinists and upward, to entertainers. So they will be
affected likewise because of the tourism. If you look at
these OFW statistics, a lot of these are seamen. So
there, I guess we would also be hit there,” Diokno
explained. “Our problem here is simply confidence. Loss
of confidence actually.”
Apart
from these, the US elections may also add to our
complications. Diokno said that if Democratic nominee
Sen. Barack Obama wins, this may threaten the country’s
business-process outsourcing (BPO) firms.
Obama
recently made pronouncements that if he wins, he will
extend incentives to companies that will not outsource
jobs. If only to be prudent, Diokno advised BPOs in the
country to brace for tough competition since the main
contention in outsourcing services will now all boil
down to cost, particularly labor.
Rise in
crimes
Meanwhile, as the billions of some wealthy individuals
may miss some zeroes due to their direct exposure to
Lehman Brothers and other troubled financial
institutions, the poorest of the poor may have more to
lose. Whatever small wealth the average Filipino has
will likely be threatened as well.
Briones
said this dire financial situation, which will cut jobs,
could increase criminality in the streets. The very
poor, she explained, will now start to take from the
less poor and the poor. Petty crimes will abound and
even robberies that include murders could become
rampant.
She
added that the most vulnerable to these crimes will be
those who will have the least capacity to protect
themselves, such as retirees who take the public
transport or the unsuspecting citizen who regularly
commutes and walks urban streets.
“The
tragedy here is people like us, and I include myself
among them, are excluded out of the financial system. We
don’t engage in stocks. I asked my students, who among
you own a bank, or a mining company, who’s playing the
stock markets? None of them. But we’re paying the brunt
of this in terms of capacity. That’s the unfairness of
it all,” Briones said.
The
silver lining
While
the outcome of the crisis may seem all doom and gloom
for Filipinos, opportunities still exist. Some of these
opportunities lie in the possible revaluation of the
Chinese yuan, the diversification of exports and export
markets, and the 2010 Philippine elections.
Intal
said the problems in the US real-estate industry may
create more pressure for China to “open up,” which could
lead to a revaluation of the yuan.
If the
yuan revaluates, Intal said, this would create more
opportunity for the Philippines in terms of exports. If
Chinese exports become more expensive, he said low-cost
Philippine exports could have a chance in getting a
bigger share of the market, especially in electronics,
which is the biggest manufactured export of the country.
That
China is a major investor in the US and as such could
also be significantly affected by the crisis. If the
Philippines plays its cards right by ensuring that its
products continue to be of high quality and its cost
reasonable, Intal said this could prove to be a golden
opportunity to help the ailing export industry.
Apart
from ensuring the quality of exports, Intal said that
diversifying the country’s exports and finding niches
would be vital. Intal added that looking for other
export markets other than the US and Europe is
necessary.
Diokno
supported Intal’s view and said that if the country
fails to diversify exports, the country could be in more
economic trouble. And he also cautioned that without the
Olympic boom in China, its growth may not even reach 8
percent this year.
“If we
don’t diversify while Europe and the US are on the mend,
we will have a hard time. But China is a big question
mark. They have investments in the US, so they might
also slow down,” Diokno said.
“With
this melamine issue and other Chinese products, they
have a problem,” he added.
There
must also be a more conscious effort to improve the
business climate in the country. Intal said creating
specific measures to do this will help increase the
chances of the Philippines to make foreign investments
stay or flow into the country during the crisis.
Election
year
Meanwhile, Briones said the 2010 elections could be an
opportunity to improve consumption spending in the
country. Election spending has always spurred GDP growth
in the country. In 2007, an election year, the country
posted a 7.2-percent full-year growth. In the second
quarter alone, during the campaign period and the
conduct of the elections, the country’s growth peaked at
7.5 percent, the highest in 30 years.
Briones
said that while the elections are still slated for 2010,
the 2009 General Appropriations Act is considered “an
election budget,” such that election spending may
already be in the offing.
However,
she said this could only be considered an opportunity if
the spending will be used for things that can help
Filipinos cope with the crisis, such as spending for
social services. If election funds are spent on pens or
umbrellas that do not work, election spending will just
be a waste of funds.
In the
end, the ultimate question is whether the country will
be able to swim through the crisis. This may be
difficult to answer, since there is a mountain of risk
and just a small window of opportunity. In order to
survive, the country must burst open that window.
Unfortunately, it will not come cheap. The government
and the private sector must both work together,
otherwise that mountain of risks may turn into a
mudslide, drowning all Filipinos in its path. |
