WHILE Americans have started to see mortgages rise, local economists said the impact of the US Federal Reserve decision to increase interest rates will have global repercussions and the Philippines could again be sucked into another whirlpool of recessions.
International wire agencies have polled economists, and a consensus emerged that there is a 70-percent chance the US will again enter into a recession. However, local economists believe this may be far worse as a global recession is not far behind, given the weak economic recovery from the pandemic.
Ateneo de Manila Economics Department Chairperson Alvin P. Ang, who is currently in the United States completing a study grant, said mortgages in the US have already started to rise and this would likely lead to a recession as early as the first quarter of 2023.
“The high interest rates will pull the breaks. The impact on the Philippine economy (will be) more on interest rates (but the) global recession is almost there. (It’s) just a matter of timing,” Ang told BusinessMirror. “There is very little elbow room (now).”
Hard-hit sectors
Ang said for the Philippines, the primary sectors that will experience the impact of the recession will be trade, tourism, and, to a certain extent, the Business Process Outsourcing (BPO) industry. Trade and tourism performance could again weaken as a result of a recession in the US and globally.
In April, the United States was the country’s third top trade partner with total trade reaching $1.64 billion. Imports reached $687.76 million while export earnings from the US reached $955.17 million, leading to a trade surplus of $267.41 million for the month.
University of Asia and the Pacific (UA&P) economist Cid L. Terosa said that in 2020, the US and the Philippines traded at least $19 billion in goods and services. Besides being the Philippines’s third largest trading partner, the US is one of the country’s largest foreign investors.
Philippine Statistics Authority (PSA) data also showed imports from the United States reached $2.97 billion in January to April 2022 while exports reached $3.95 billion during the period. This also results in a trade surplus of $979.76 billion.
Department of Tourism (DOT) data showed 211,816 American tourists arrived in the Philippines. This was an 80.1-percent contraction from the 1.064 million US tourists who visited the country in 2019.
For the BPO industry, Ang said, the impact would not be significant given that the industry offers basic services, including for US-based clients.
The IT & Business Process Association of the Philippines (IBPAP) earlier projected a potential growth of 5.5 percent in revenue and 5 percent in headcount in Compound Annual Growth Rate (CAGR) between 2020 and 2022.
“’When the US sneezes the whole world catches (a) cold,’ we used to say. But we already have ‘sinat’ (low grade fever) because of the pandemic and the food and oil crisis. We are trying to prevent a debt-induced recession. If you’re up to your knees in mud, another inch higher or lower hardly matters to what you need to do,” National Scientist Raul V. Fabella told BusinessMirror.
While Ang does not believe that Overseas Filipino Workers and the remittances they send to their families will be impacted, Terosa disagrees saying that remittances may still be affected.
“Recession in the USA next year or Q1 (first quarter) 2024 will derail the full economic recovery to prepandemic levels of the Philippines,” Terosa said. “Remittances from overseas Filipinos in the US reached around $13 billion in 2021. All these will be negatively affected if the US economy will fall into a recession.”
Preparing for the inevitable
Meanwhile, Ateneo Eagle Watch Senior Fellow Leonardo A. Lanzona Jr. told BusinessMirror there is already “a high probability that a global recession may happen.” Surviving this will really depend on the country’s ability to find new markets and develop local resources, he said.
The agriculture sector is one “viable option” for the Philippines but, Lanzona said, investing in agriculture will not be enough because this sector cannot absorb all the Filipinos who will experience joblessness as a result of the recession.
The overall priority for the government, particularly the incoming administration, is to develop industries and attract investments. Lanzona said this will hinge on the country’s ability to adopt digital technologies.
“We need to further develop the services sector and digital technology in a way that will reduce the costs of industrialization. In the short term, programs that will promote productive employment and skills development will be vital,” Lanzona told this newspaper.
For his part, Terosa said surviving the crisis means the Philippines should strengthen the foundations for sustainable domestic economy-led growth. This will involve sustaining infrastructure development and stimulating the local business environment.
Terosa noted that the country needs to mobilize domestic sources of economic growth such as domestic consumption spending and capital formation. “Macroeconomic stability has to be the prime concern of the government.”
If the US enters a recession, he said, “the rest-of-the world will experience varying degrees of economic slowdown as well. Hence, the Philippines cannot rely on the external environment to cushion the impact of a US recession.”
Blaming Russia-Ukraine war ‘oversimplification’
One way to survive what is to come is for the next administration to finally address inequality, according to Freedom from Debt Coalition (FDC) President Rene E. Ofreneo.
Ofreneo told BusinessMirror in an email that it would benefit the next administration to consider what civil society organizations have been recommending: a wealth tax.
The FDC President and former dean of the University of the Philippines School of Labor and Industrial Relations (SOLAIR) said blaming a recession in the US as well as the Ukraine-Russia war would “oversimplify” the situation, particularly of countries like the Philippines.
Ofreneo said the debt bomb has already and is still exploding in the global south. Some of these countries include Zambia, Argentina, Sri Lanka, and Pakistan.
The country’s level of indebtedness, he said, is not sustainable. Ofreneo said the Philippines’s debt reaching P13 trillion or 70 percent of GDP indicates a need to find a better path other than more borrowings, relying on Foreign Direct Investments, and austerity measures.
“Growing the economy by having more FDIs? But have they not read the news? FDI declining, GVCs being disrupted, trade wars protectionism on the rise. Why don’t they show the performance of the CREATE law, which is supposed to generate a high level of foreign investment? Weak outcome but great savings for the MNCs and big corporations. In short, more inequality,” Ofreneo said. He was referring to the Corporate Recovery and Tax Incentives for Enterprises law enacted last year.
Wealth tax
“This brings us to the correctness and validity of the call of the FDC and the Nagkaisa Labor Coalition: wealth tax to save the economy, wealth tax to reduce the regressivity in the tax system, wealth tax to save both the poor and the rich. Will PBBM heed their call? Hopefully, he will, because it is a key to the survival of the economy and the PBBM Administration,” he added.
Earlier, civil society groups estimated that legislating a progressive annual wealth tax on the “super rich” would swell the country’s revenues by $9.2 billion annually.
In a study by the Fight Inequality Alliance, Institute for Policy Studies, Oxfam, and Patriotic Millionaires, the estimate is based on a wealth tax of 2 percent on wealth over $5 million; 5 percent on wealth over $50 million; and 10 percent over $1 billion.
A less progressive wealth tax would still yield a significant amount at $6.3 billion annually. This is based on tax rates of 2 percent on wealth over $5 million; 3 percent on wealth over $50 million; and 5 percent over $1 billion.
In the Philippines, the study stated, there are 6,685 individuals with a net worth of $5 million or more, with wealth totaling $164 billion. There are 365 individuals with $50 million or more with combined wealth of $91.45 billion.
Between 2016 and 2021, the number of individuals with wealth over $50 million increased from 295 to 365, with combined wealth increasing from $75.36 billion to $91.45 billion, a gain of 21.36 percent, adjusted for inflation.
There are 16 billionaires with a wealth total of $45 billion. Throughout the pandemic, beginning in mid-March 2020, the wealth of the Filipino billionaire class increased by $11.68 billion. The study said billionaires saw their wealth increase by 35.1 percent during the pandemic while 3.7 million people are estimated to have been pushed into extreme poverty in 2020 alone.