Confronting Economic Slowdown

Costs, Challenges and
Opportunities
Cielito
Cielito F.
F. Habito
Habito
Ateneo
Ateneo Center
Center for
for Economic
Economic Research
Research &
& Development
Development
Ateneo Center for Economic Research and Development
Overview
• Ten Key Economic Trends

• Social & Economic Costs
• Outlook for 2008-2009
– Challenges & Opportunities
– Food and Oil prices: Outlook
– Sectoral Winners & Losers
– Imperatives
1
Ten Key Economic Trends
The “Perfect Storm”
1. Prices are rising rapidly.

2. Large numbers of jobs are
being lost.
3. Incomes/production have
slowed down significantly.
4. Government spending has
become a drag on growth.

“The Perfect Storm”
5. Net foreign direct investments

have fallen steeply.
6. Personal consumption dropped
for the first time in recent
memory.
7. Exports recover in Q2 after a
steep drop in Q1.
2
Silver Linings
8. Private domestic investment has
rebounded (after years of
“investment drought”).
9. Growth in net income inflows
remained respectable.
10.Gross international reserves have
surged since last year.
1. Prices are rising rapidly.

Steepest rise in 17 years
Year Inflation Rate (%)
2003 3.1
2004 5.5
2005 7.6
2006 6.2
2007 2.8
Aug-08 12.5
Non-NCR 14.2
Food 17.2
Year Ave. 8.8
3
ASEAN Inflation Rates (%)
June 2008
%
%
25.0
25.0
21.4
21.4
20.0
20.0
15.0
15.0
11.4
11.4
8.9
8.9
10.0
10.0
7.5
7.5 7.5
7.5 7.7
7.7
7.1
7.1
5.9
5.9
5.0
5.0
5.0
5.0
0.0
0.0
TW
TWNN KO
KORR C
CHI
HI SIN
SIN TH
THAA M
MAL
AL IN
IND
DOO RP
RP V
VNNM
M
2. Large numbers of jobs were lost.

April 2008 Labor Force Survey
Latest Year Prev 2007
Employment (NSO-LFS)
Period Ago Period Average
(Jan-Apr
Unemployment Rate (%) Apr '08 Apr '07 Jan '08 2008)
New Definition 8.0 7.4 7.4 7.7
Jobs Generated ('000) -168 1,005 149 -10

Agriculture 46 572 156 101
Industry -244 21 4 -120
Services 30 413 -11 10
Underemployment Rate (%) 19.8 18.9 18.9 19.3
4
3. Incomes/Output slowed
down significantly.
Agriculture now leads growth
2006 2007 2008
Indicator
FY FYf Q1 Q2
GNP Growth (%) 6.1 8.0 5.8 5.5

Net Factor Inc fr Abr 13.3 16.5 18.3 14.1
GDP Growth (%) 5.4 7.2 4.7 4.6
Agri, Fish & Forestry 3.8 4.9 2.7 4.9
Industry 4.5 7.1 3.0 4.8
Services 6.7 8.1 6.5 4.3
Industry Sector Performance:

Mining Falls Steeply;
Utilities Pick Up
2006 2007 2008
Sector
FY FY Q1 Q2
INDUSTRY SECTOR 4.5 7.1 3.0 4.8

Mining/Quarrying -6.1 25.9 14.1 -18.5
Manufacturing 4.6 3.4 2.4 6.1
Construction 7.3 23.1 -3.4 8.3
Utilities 6.4 6.7 9.5 7.9
5
Services Sector Performance:
Real Estate Exceptionally Strong
2006 2007 2008
Sector
FY FYf Q1 Q2
SERVICE SECTOR 6.7 8.1 6.5 4.3

Trans, Comm & Stor 6.3 8.3 5.6 3.3
Transport & Storage 3.1 6.1 7.3 4.2
Communication 9.0 10.1 4.4 2.6
Trade 6.1 8.2 5.8 4.3
Finance 11.4 13.1 12.2 2.4
Own Dwell & Real Est 5.7 5.9 7.3 7.3
Real Estate 17.1 18.1 21.6 21.7
Private Services 6.9 8.4 5.7 6.2
Government Servcs 4.7 2.6 4.0 2.4
Sectoral Gainers
Gainers:
Services: Real Estate, Finance (Banks &
Insurance), Water Transport, Wholesale
Agriculture: Sugarcane, Bananas, Corn,
Palay, Coconut, Poultry
Industry: Utilities (Electricity), Food &
Beverages, Tobacco, Footwear, Leather
Prods
Slowdown:
Construction, Communication, Finance,
Land & Air Transport, Private Services
6
Sectoral Losers
Negative Growth:
Agriculture: Livestock, Other Crops,
Forestry
Mining: Nickel, Chromium
Services: Education
Manufacturing:
Textiles, Wood & cork prods,
Publishing/ printing, Electrical
machinery, Rubber prods
Where did the growth come from?

Growth in Regional GDP
10.0
9 .4
9.0
Metro Northern
8 .7 8.6
Manila Mimaropa Mindanao
7 .8
Central 7 .9 Caraga
8.0 7 .7 7.7
7 .2 7.2 Visayas 7 .4
7.0 6 .7 6 .7
6 .6
5 .8 6 .1
6.0
5 .5 5 .4
5.0
4.0
3 .2
3.0
2.0 Eastern
Visayas
1.0
0.0
M
I
R
II
A
B
P
II
I
II
IX
I
II
II
II
X
R
IV
IV
A
C
M
V
X
V
N
R
A
7
Revisiting 2007 GDP Growth:
What pushed it beyond 7%?
• Production (S) side:
Mining (26%)
Construction (23%)
Real Estate (18%)
Finance (13%)
Communication (10%)
• Spending (D) side:
Government Consumption (8.3%)
Public Construction (29.6%)
4. Government spending is
now a drag.
2006 2007 2008
In d ic a to r
FY FY f Q1 Q2
P e rs o n a l C o n s n E x p 5 .5 5 .8 5 .2 3 .4
G o v t C o n s u m p tio n 6 .1 8 .3 1 .9 - 5 .1
C a p ita l F o rm a tio n 2 .7 1 1 .2 4 .0 1 4 .7
O f w h ic h :
C o n s tru c tio n 5 .5 2 1 .3 - 3 .1 8 .1
P u b lic 2 4 .7 2 9 .6 - 1 2 .9 - 6 .4
P riv a te - 3 .7 1 5 .9 2 .6 2 5 .0
D u ra b le E q p t - 1 .8 4 .5 8 .6 4 .0
B r S tc k & O rc h D e v - 0 .4 4 .5 - 2 .0 - 5 .0
E x p o rts 1 1 .2 5 .6 - 6 .1 7 .7
Im p o rts 1 .9 - 4 .5 - 5 .8 - 1 .0
8
Government Finances, 2008
Goodbye, Balanced Budget
Jan-Jul
July '08 Jun '08
Fiscal Variables '08
(P billion) (P billion) (P billion)
Revenues 101.42 87.56 671.40
Tax 89.27 80.36 601.69
Non-Tax 12.14 7.21 69.71
Expenditures 116.85 86.80 704.84
Surplus (Deficit) (15.43) 0.76 (33.44)
Full YearTarget 0.00 0.00 0.00
5. Net Foreign Direct

Investments dropped
steeply.
Annual Growth Rate (%)*
2007 2008
Foreign Direct Investments 180.8 -68.5
Equity Capital 177.9 -79.2
Reinvested Earnings -20.3 -4.7
Other Capital 1,049.0 -58.7
*Based on Jan-May figures (Source: BSP)
9
ASEAN Investment Growth
Ave. Annual Growth Rates, 2002-2006 (%)
1 9 .7
2 0 .0
1 8 .1
1 8 .0
1 6 .0
1 4 .0
1 1 .1
1 2 .0
1 0 .0
7 .5
8 .0
6 .0 4 .7
4 .2
3 .1
4 .0
2 .0
0 .0 0 .2
0 .0
- 2 .0
RP LAO SIN MAL IN D O THA V IE T CAM M YA
6. Personal consumption has

slowed down markedly
• Year-on-year: PCE grew 3.4% in
Q2 2008 (Q2 2007 was 5.6%)
• Quarter-on-quarter:
PCE actually fell 0.3%, vs. past
average of 1.3-1.5% q-o-q
First time consumption spending
has fallen in recent memory
10
7. Exports recover after a
steep Q1 decline.
2 5 .0
2 0 .0
E x p o rtG ro w th
1 5 .0
1 0 .0
5 .0
0 .0
Q 1-06 Q 2 -0 6 Q 3 -0 6 Q 4 -0 6 FY -0 6 Q 1-07 Q 2 -0 7 Q 3-07 Q 4 -0 7 F Y -0 7 Q 1 -0 8 Q 2 -0 8
- 5 .0
Im p o rt G ro w th
-1 0 .0
-1 5 .0
8. Private investment
spending has rebounded.
2006 2007 2008
In d ic a to r
FY FYf Q1 Q2
P e rso n a l C o n sn E x p 5 .5 5 .8 5 .2 3 .4
G o v t C o n su m p tio n 6 .1 8 .3 1 .9 -5 .1
C a p ita l F o rm a tio n 2 .7 1 1 .2 4 .0 1 4 .7
O f w h ic h :
C o n stru c tio n 5 .5 2 1 .3 - 3 .1 8 .1
P u b lic 2 4 .7 2 9 .6 - 1 2 .9 -6 .4
P riv a te - 3 .7 1 5 .9 2 .6 2 5 .0
D u ra b le E q p t - 1 .8 4 .5 8 .6 4 .0
B r S tc k & O rc h D e v - 0 .4 4 .5 - 2 .0 -5 .0
E x p o rts 1 1 .2 5 .6 - 6 .1 7 .7
Im p o rts 1 .9 - 4 .5 - 5 .8 -1 .0
11
9. Growth in net income
inflows remains high.
• Net Factor Income from Abroad
grew a healthy 15.9% in H1 2008
• Partly due to drop in outflows
(-4.8%)
• Wage remittances grew 11.1%;
property income inflows fell 5.1 %
10. Gross foreign reserves

grew by almost 50%
• Gross international reserves up
to $36.9B from $28.0B last year
• Now 6 months’ worth of imports,
up from 4.6 months
• Mainly due to BSP operations to
prevent faster peso rise
• Situation has now reversed
12
Currency Movements
Weak $ no longer the main driver
Economic and Social Costs
13
Fact:
Poverty incidence worsened
from 2003 to 2006.
Family Income & Expenditures Survey:
• Proportion of poor rose from 30% to 33%
• Number of poor Filipinos increased by
nearly 4 million
• Poor families rose from 24.4% to 26.9%
• Number of poor families increased by
700,000
Fact:
Average Filipino family income had
gone down in recent years.
Family Income & Expenditures Survey:
• Average annual family income fell from
P148,000 in 2003 to P144,000 in 2006 (in
real terms, i.e. constant 2003 prices)
• First time FIES average real income fell
• Middle & lower income groups took the
biggest hit
• Share of labor income in GDP is falling
14
Profile of the Jobless
• 2.9 million are unemployed

• 6.6 million are underemployed;
mostly in agriculture
• Of the unemployed:
50% are within ages 15-24 years;
80% are within 15-34 years
59% reached only elementary or
high school
Self Rated Poverty:

Rising anew
15
Hunger has also risen again
again……
… and climbed steeply in

…and
Metro Manila
16
Other human development
indicators have worsened
• Enrollment rates in
elementary school are
declining
• Drop-out rates are rising
• Protein & calorie
malnutrition among
children are rising in many
areas
What’s the outlook

for the rest of 2008 &
2009?
17
The US Slowdown:
And The Plot Thickens
― “Slow motion recession”
― Fannie May/Freddie Mac bail-out
― Car sales slump by 18% (GM), 21%
(Toyota) & 28% (Ford)
― Job losses continue to mount
― Starbucks announces >600 store
closures and 12,000 job cuts
― Widespread store closures and job
cuts announced
US Store Closures
― Ann Taylor : 117 stores

― Eddie Bauer : 27 stores
― Cache : 20-23 stores
― Lane Bryant : 150 stores
― Talbots, J. Jill : 78+22 stores
― Gap Inc. : 85 stores
― Foot Locker : 140 stores
― Wickes (furn) : out of business
― Levitz (furn) : out of business
18
US Store Closures
― Zales, Piercing Pagoda
: 105 stores
― Disney Store : 98 stores
― Home Depot : 15 stores
― Macy’s : 9 stores
― Movie Gallery : 140 stores,
: 920 rentals
― Pacific Sunwear 153 stores
― Pep Boys : 33 stores
US Store Closures
― Sprint Nextel : 125 locations

― Wilsons : 158 stores
― Sharper Image : 90 stores
― Bombay Co. : 384 stores
― Kaybee Toys : 356 stores
― Dillards : scaling back
― Ethan Allen : scaling back
― JC Penneys : scaling back
19
Tax & Revenue Effort Faltering
25.0
Revenues/GDP
20.0
15.0
Taxes/GDP
10.0
5.0
0.0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Non-economic Impediments
• Governance Weaknesses
―Tax Evasion
―Smuggling
―Massive Graft & Corruption
―Regulatory Capture
• Political Uncertainty
―Weakened Institutions
―Leadership instability (Cabinet
reshuffles; weak Presidency)
20
Oil Price Outlook:
Opposing Views
Optimistic View:
• Overbuying) by market players due to $
weakness, panic
• Global economic slowdown will weaken
demand, pull prices back down
Pessimistic View:
• Rising supplies unable to match surging
demands, especially from China & India)
• Higher prices are here to stay
Food Prices Outlook

(UN-FAO)
• Prices expected to ease worldwide
with coming harvest; however…
• Prices not likely to return to former
low levels due to:
Escalating input costs (oil-related)
Increased utilization by producers,
diminished exportable surpluses
Rising demands by fast-growing food-
importing countries
21
Domestic Drivers
Sustained overseas remittances
fuels consumption spending
Agricultural “supply response” to
higher prices
Rebound in private domestic
investments (replacement
investment & technology
upgrades)
Domestic Drags
Rapid price increases
slower consumption spending
Weaker tax revenues
slower government spending
Rising interest rates
Dampened investment, consumption
Record high oil prices
higher production, transport costs
shifts in consumption patterns (e.g.
less eating out, car pooling, MRT)
22
Sectoral Outlook: Near Term
Slowdown:
Motor vehicles, Consumer durables
Electronics, Apparel, Recreation
Finance (Banks, Insurance)
Power, Transport
Neutral (at pace with overall growth):
Food Mfg, Business Services
Gainers:
Agriculture, Real Estate, Tourism(?)
Ateneo Macroeconomic
Forecasting Model
(AMFM)
2008 Projections from
Econometric Model
GDP Growth - 4.5-5.3%
Inflation - 9.0-10.0%
Unemployment - 7.5-8.5%
Assumes: Exchange Rate - P45
Crude Oil Price - $120
23
Where Do We Need To Push?
Agriculture: budget reform; transpa-
rency mechanisms; stronger LGU roles
Tourism: more liberal aviation policy
environment; focused investments
Construction: durable govt revenues
Real Estate, BPOs: mixed effects from
US & global slowdown
Mining: social & environmental
responsibility, confidence building
Addressing the Countryside Penalty

July-August price increases:
4x faster in the provinces (0.4%) than in
Metro Manila (0.1%)
Prices of services rose 8x faster in
provinces vs. Metro Manila
Food prices fell in Metro Manila, rose in
the provinces
Prices of fuel, light & water stood still in
Metro Manila, rose 0.8% in provinces
24
Addressing the Countryside Penalty
And yet Metro Manila:
Already accounts for one-third of the
country’s total incomes
Accounts for close to half of the
economy’s total income growth
Enjoys a lion’s share of the
infrastructure budget
Receives government subsidy
assistance indiscriminately
Broadening Economic
Development
• Need to reverse anti-countryside bias of
economic policies, interventions and
outcomes
• Growing hope in successful LGU
initiatives
• National government should limit itself to
“steering,” let LGUs do the “rowing”
• There is hope: Well-managed LGUs
are showing the way
25
E-mail: chabito@ateneo.edu
26

Confronting Economic Slowdown

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Confronting Economic Slowdown

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Costs, Challenges and

Ateneo Center for Economic Research and Development

• Ten Key Economic Trends

Ateneo Center for Economic Research and Development

1. Prices are rising rapidly.

Ten Key Economic Trends

5. Net foreign direct investments

1. Prices are rising rapidly.

2. Large numbers of jobs were lost.

New Definition 8.0 7.4 7.4 7.7

Jobs Generated ('000) -168 1,005 149 -10

Underemployment Rate (%) 19.8 18.9 18.9 19.3

GNP Growth (%) 6.1 8.0 5.8 5.5

Ateneo Center for Economic Research and Development

Industry Sector Performance:

INDUSTRY SECTOR 4.5 7.1 3.0 4.8

Ateneo Center for Economic Research and Development

SERVICE SECTOR 6.7 8.1 6.5 4.3

Ateneo Center for Economic Research and Development

Where did the growth come from?

Ateneo Center for Economic Research and Development

Ateneo Center for Economic Research and Development

5. Net Foreign Direct

Ateneo Center for Economic Research and Development

Ateneo Center for Economic Research and Development

6. Personal consumption has

Ateneo Center for Economic Research and Development

Ateneo Center for Economic Research and Development

Ateneo Center for Economic Research and Development

10. Gross foreign reserves

Ateneo Center for Economic Research and Development

Economic and Social Costs

Ateneo Center for Economic Research and Development

Ateneo Center for Economic Research and Development

• 2.9 million are unemployed

Self Rated Poverty:

… and climbed steeply in

What’s the outlook

― Ann Taylor : 117 stores

― Sprint Nextel : 125 locations

Food Prices Outlook

Addressing the Countryside Penalty

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