Coming financial crisis will make times much harder, warns economist

Expect the coming months to be tough, warned an economics professor. And the tough times may start next month.

“It’s going to be a hard year for us. Everyone will be affected. And the hurt will be deepest among the low-income families,” Ernesto Pernia, a professor of economics at the University of the Philippines and former economic chief at the Asian Development Bank told in an interview.

The United States, a major destination of our export products and the host of overseas Filipinos whose dollars account for half of total remittances to the country, is facing a looming economic recession or growth slowdown.

“We will probably start feeling the impact of the US slowdown by the second quarter, which is April to June, and up to the third quarter of 2008,” added Pernia. “It also depends on how the US government stirs its economy. If they (US) don’t recover by the third quarter, then most probably the Philippines will go through hard times the rest of 2008.”


Pernia’s prognosis describes a gloomy year never experienced by Filipinos in the past. Unlike the Asian crisis eleven years ago, which only hit Asian economies including the Philippines, this one is not just a regional financial crisis but a global one. “Brace yourself for difficult times ahead,” Pernia cautions.

The US economy is feared to be entering either an economic recession, defined as two consecutive quarters of negative growth, or a growth slowdown, which is like putting on the brake to the superpower’s economic growth to a point that it will decelerate to just less than one percent.

This will have an impact on all aspects of the Philippine economy—from generation of jobs to remittances to prices of basic goods.


While we have become less dependent on the US as a buyer of our products for export—the US accounts for only 17 percent now, compared to up to 30 percent in the past—we are selling a wide range of finished products and raw materials from electronics to furniture to countries like Japan (about 20 percent of our exports), recently to China and Hongkong (about 27 percent), and to a small extent to Europe.

These countries also sell to the US. Thus, while analysts and economists were betting on the rise of other possible superpowers like China and India, the slowdown or the recession in the US shows how intimately intertwined they all are.


The impact of a slowing superpower to the Philippines will be pervasive, says Pernia.

Take the twin case of peso-dollar exchange rate and the remittances from overseas workers. The $12 billion annual remittances account for 12 percent of our gross domestic product, or the overall measure of the state of the local economy.

But despite the sharp weakening of the dollar, the peso has not been appreciating as much. The central bank has said it is allowing the market conditions to prevail.


Pernia believes that the capacity of the overseas Filipinos to remit money home is being stretched to the limit because the peso equivalent of their previous remittances is just too much for them.

“The income of these remitters is not elastic. They cannot just continue to catch up. In other words, they are reaching their limit, and they cannot catch up,” explained Pernia.

The peso has lost about 30 percent of its value against the dollar since early last year.

In addition, Pernia thinks that the host countries of the OFWs are also feeling the pinch, so some of the OFWs might have not received their usual salary increases, or worse, have been laid off, or are just working part time now.

About 50 percent of total remittances to the Philippines come from US and Canada. As the economies of other major host countries—Europe, Japan, Singapore, Middle East, Taiwan, Hongkong, etc—also slow down, Pernia thinks remittances to the Philippines will also be affected.

Thus, while it has been earlier predicted by bankers that the peso-dollar exchange rate will reach P38, Pernia thinks otherwise. “My prognosis for the peso is that it will probably oscillate between P40 and P43 or 45. I don’t think the peso will go below P40, especially with this slowdown in the world economy.”


Every aspect of the economy will be affected, Pernia warns.

Foreign direct investments might slow down, and US investors will most probably have a wait-and-see attitude, with the possibility that a new administration will take over by the end of the year. “Both companies and the US government may not resume their investment spending or export and import activities in the meantime.”


That’s a threat to the likes of the business process outsourcing (BPO) sector, a popular job provider. American clients still account for a big chunk of those that local BPO companies currently serve. BPOs have been a major stimulus for other sectors like real estate, retail, transport, and consumer goods.

The real estate sector has boomed in the recent years because of office space needs of the growing number of BPOs setting up shop not only in Metro Manila, but in other cities, like Cebu. Residential properties, on the other hand, have also been growing, partly because OFWs and their families have bought 20 percent of the available supply.

Both sources—investments and remittances—now stand to be affected by the slowing global economy.


Even the tourism sector, which had a banner year in 2007 with more than three million tourism arrivals, stands to be affected too.

“One of the elements of tourism is how much spare income these foreigners have. They come from South Korea, the US, China, Japan, which will all be affected (by the global economic slowdown). Even balikbayans will most probably spend lesser money when and if they come home,” Pernia said.


Given that the economic slowdown is just around the corner, inevitably the next concern is how deep will the fall be and how long will it take for us to recover.

Pernia expects that compared to our Asian neighbors, the Philippines will take longer to recover.

He recalls the 1997 Asian crisis: “The economies of Thailand, South Korea, and Malaysia went through a sharp downturn. But they also had a sharp upturn. It was V-shaped: deep fall, but a quick recovery.”

The Philippines still posted a positive growth during that time, though a miniscule 0.5 percent. “But our rebound was very slow,” he explained. “Most probably it will be the same this time.

Pernia attributed this to the fact we have a consumption-led economy, which is dependent on whether there will be more job-generating investments soon, and if the OFWs are able to send more money home.


Our neighbors, on the other hand, will be able to cope better because they have a lot of “cushion” already. “The economies of Thailand, Malaysia, Korea, even the likes of Cambodia and Vietnam, have been growing steadily, some actually in double digits, even before the Asian crisis. They might slow down, but their growth surplus in the past has gone into their economic base, which is cushioning them now. Their economic base is already solid for a quick recovery.”

The Philippines, meantime, has had long periods of growth deficits. “A 7.3 percent growth last year is just a flash-in-the-pan. During the last seven years with [President Gloria Arroyo], the average growth rate is only 4.7 percent. That’s not enough.” Pernia said.

Pernia also notes other problems that will hamper a fast recovery for us: “We have a baggage of high population rate, low savings rate, low tax collection, low science and technology base. Then of course there is corruption. There are a lot of things are not going to our favor in terms of higher growth path.”


What lies ahead then?

If the Philippine economy will be severely affected by the US economy’s slowdown or recession, causing people to lose their jobs and making prices of basic commodities and transportation cost unaffordable, will these be enough to trigger social unrest?

Surely, a drastic economic slowdown in the Philippines will hit the poor, especially those in the lowest 40 percent of income distribution. When a restless and restive population connects the dots and blames the allegedly corrupt government officials for their hunger and strife, a recipe for disaster might be in the offing.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: