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The Philippines After the Asian Crisis
Joseph Anthony Lim
The Growth Pattern Before and After the Crisis
The Asian crisis was one of the busts in boom-bust cycles in a span of 3 decades: 1984-85, 91-93, 98-99, 2001. These busts made Phil. a laggard in East Asia
GNP and GDP per Capita
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2000
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46
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62
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72
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98
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85
Pes
os
GDP Per Capita
GNP Per Capita
Growth Rates Before and Asian Crisis. Looks like return to pre-1998 growth rates from 2002 to 1st Q of 2007. Continuing rise
of overseas’ workers’ remittances
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 200620071
Q
GDP Growth 4.68 5.85 5.19 -0.58 3.40 5.97 1.76 4.45 4.93 6.18 4.97 5.37 6.91
GNP Growth 4.88 7.24 5.25 0.41 3.73 7.07 2.26 4.18 5.95 6.72 5.64 6.21 6.64
NFIA, % of GDP 2.78 4.13 4.20 5.23 5.57 6.67 7.20 6.92 7.96 8.51 9.19 10.07 9.27
But there are problems:- The growth rates may be overestimated. - The quality of the growth is marred by:
- There are lower investment rates, as they are replaced by lower trade gaps, and the lead growth sector on the demand side is consumption. Productive capacity in the future is jeopardized.
- The growth rates occur as both savings and investment rates (as % of GDP) are falling
- It follows the previous growth path of a very low manufacturing and industrial base, and the current growth is spurred by services.
The latest high growth rates in 2002-2006 marred by exceedingly high and positive statistical discrepancy, which makes one suspect the supply side data are overestimated. Base year of constant prices is 1985, where the relative prices no longer hold.
Statistical discrepancy, % of GDP
-8
-6
-4
-2
0
2
4
6
8
10
12
Clear continuing decline in the share of investment after Asian crisis. Consumption share increases with each recession. Current growth spurred by consumption and declining trade deficits.
Demand Components, % of GDP
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06
Perc
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1. PersonalConsumptionExpenditure2. GovernmentConsumption
3. Capital Formation
4. Exports
5. Imports
There was large investment-savings gap (representing trade deficits) before crisis. This gap was reduced after the crisis as investment share fell, even as gross domestic savings as share of GDP also fell. Declining savings and investment rates!
Gross Domestic Savings and Gross Investments, % of GDP (not using stat disc)
0
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06
Gross Domestic Savings
Gross Investments
Economic Collapse in Mid-80s brought industry and manufacturing shares down and these have remained stagnant. As agriculture share falls, main growth comes from services
Share in GDP of Economic Sectors, by Industry
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10
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Perc
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t o
f G
DP
AGRI.FISHERY,FORESTRY
INDUSTRY SECTOR
Manufacturing
Construction
SERVICE SECTOR
High inflation rates occur during recessions because of the massive devaluation. The pass-thru effect had lessened in the Asian crisis and further
depreciation
GDP per Capita Growth vs CPI Inflation Rate
-10.000
0.000
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50.000
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Perc
ent CPI Inflation Rate
GDP per capita grow th
The External Sector
The Philippines Usually Enters a Crisis When International Reserves Fall Below Two Months of Imports
International Reserves in No. of Months of Imports of Goods and Services
0.00
2.00
4.00
6.00
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No.
of M
onth
s of
Impo
rts
Until the Asian Crisis, High Growth Leads to Current Account Deficits, Recessions Preceded by High Current Account Deficits, Recessions Accompanied by Devaluations and Improvements in Current Account Deficits
Current Account Balance as % of GDP vs GDP per Capita Growth
-10.00
-8.00
-6.00
-4.00
-2.00
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2.00
4.00
6.00
Perc
ent Current Account Balance, % of GDP
GDP per capita grow th
Balance of Payments, % of GDP 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CURRENT ACCOUNT -4.8 -5.3 2.4 -3.8 -2.9 -2.4 -0.4 0.4 1.9 2.0 4.3
Goods and Services -9.4 -12.3 -4.1 -10.0 -10.3 -12.0 -9.8 -9.8 -8.6 -9.3 -6.5
Goods 1/ -13.7 -13.5 0.0 -7.8 -7.9 -8.8 -7.2 -7.3 -6.6 -7.9 -5.9
Net Services 4.2 1.2 -4.0 -2.1 -2.5 -3.2 -2.6 -2.5 -2.0 -1.4 -0.6
Net Income and Current Transfers 4.7 7.0 6.5 6.2 7.4 9.6 9.5 10.2 10.5 11.3 10.8
CAPITAL AND FINANCIAL ACCOUNT 10.0 1.5 -0.4 8.7 2.3 1.5 0.6 -0.5 -2.2 0.4 -1.8
Net Financial Account 13.6 7.9 0.7 5.5 4.3 0.5 0.5 0.6 -1.9 2.2 -1.6
Net Direct Investment 1.6 1.3 3.3 1.5 2.8 0.5 1.9 0.2 0.1 1.7 1.9
Net Portfolio Investment 6.4 0.7 -1.4 4.8 -0.7 0.1 1.0 0.7 -0.7 3.5 2.3
Net Financial Derivatives 0.0 0.0 0.0 0.0 0.1 0.0 0.0 -0.1 0.0 0.0 -0.1
Net Other Investments 5.6 5.9 -1.1 -0.8 2.1 0.0 -2.3 -0.3 -1.4 -3.0 -5.7
Net Errors and Omissions -3.6 -6.4 -1.2 3.0 -2.1 0.9 0.0 -1.1 -0.3 -1.8 -0.3
OVERALL BOP POSITION 5.2 -3.8 2.0 4.9 -0.6 -1.0 0.2 -0.1 -0.3 2.4 2.5
Volatilities in the External Account. Capital Account volatile due to capital
account liberalization The recent growth period is still accompanied
by trade deficits but no longer current account deficits because of the exploding remittances of overseas workers
High portfolio and ‘other’ investments in 1996 (pre-crisis), fall in 1997 and 1998, fleeting and partial return in 1999 and 2000, net outflows in 2001 to 2004 because of political instabilities and fiscal crisis, return of direct and portfolio investments in 2005 and 2006, but increased outflows from residents in ‘other investments’ in 2005 and 2006.
Capital Account Liberalization Starting in the 1980s Has Resulted in Volatilities in Exchange Rate
Growth Rate of Exchange Rate
-10.00
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Per
cen
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Recent Strong Appreciation of Peso Worries Exporters and Overseas
Filipino Workers
Strong appreciation of the peso in 2005 up to present due to global weakness of the dollar and strong remittances of Filipino workers (plus some portfolio inflows as fiscal crisis waned) Worries exporters and import-competing
domestic sectors Reduces purchasing power of the
overseas Filipino workers
Loss of Confidence in Financial System Continues
Low Financial Confidence: Declining M2 and Domestic Credit as % of GDP After Asian Crisis
M2 and Domestic Credit, % of GDP
0.000
10.000
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90.000
M2, % of GDPDomestic Credit, % of GDP
Weak financial confidence: Banks don’t want to lend to private sector because of: Strict capital adequacy ratios, loan-loss
provisions, Strict view of having to quickly dispose of non-
performing assets Financial institutions prefer government
securities – had kept interest rates low despite fiscal crisis
Political instabilities Fiscal crisis (and other economic instabilities –
high oil prices included)
Ingredients of Another Asian Crisis Philippine Style in the Making
The volatile external sector, the strong appreciation of the peso
Banks not lending to private sector Recent rise in bank lending in early 2007 mostly to real
property (possible property bubble) Even as bank lending recovered in 2007, the Central
Bank instituted mopping up liquidity due to high inflows of remittances due to the inflation targeting policy
Stock market increasing by almost 100% between 2004 and present (speculative bubble)
Growing portfolio inflows especially to the stock market Only missing ingredient is current account deficits but
Phil international reserves much smaller than other countries
The Fiscal Crisis
Fiscal Crisis: 1) High national government deficit, initial losses of National Power Corporation (state
cos.)
National Government Deficit, % of GDP
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
Perc
ent
Fiscal Problem: 2) Decline in Tax Effort, temporary rise in 2006 with implementation of expanded-VAT system
Tax Effort, % of GDP
0.00
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1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Perc
ent
In 2002 to 2006, Fiscal Crisis Being Addressed by Expenditure Cutback as Interest Burden Increased and Fiscal Deficit Reduced
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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
ECONOMIC SERVICES SOCIAL SERVICES DEFENSE
GENERAL PUBLIC SERVICES NET LENDING INTEREST PAYMENTS
Extreme burden of public debt service, high public debt burden
As % of NG Revenues:
NG Debt Service Payments 35.6 42.9 44.3 48.4 61.9 73.5 85.1 83.2 87.2
Interest 21.6 22.2 27.4 30.8 32.1 35.4 36.9 36.7 31.7
Principal 14.0 20.7 16.9 17.6 29.8 38.1 48.2 46.5 55.6
As % of GDP As of July 2006**
Total National Gov't Debt 56.1 59.6 64.6 65.7 71.0 78.2 79.0 72.3 69.6
Domestic 31.9 32.9 31.8 34.4 37.1 39.7 41.5 40.2 38.2
Foreign 24.2 26.8 32.7 31.3 33.9 38.5 37.5 32.0 31.4
As % of GDP
Total Public Sector Debt 94.6 101.5 108.0 106.0 110.2 118.2 109.8 93.4 n.a.
Domestic 35.2 32.8 32.1 32.7 34.4 35.7 35.4 33.0 n.a.
Foreign 59.5 68.7 75.9 73.3 75.9 82.5 74.4 60.4 n.a.
But fiscal crisis continues despite improvements in 2006
S & P and Moody’s refused to upgrade Phil sovereign credit rating in 2007
Increase in 2006 tax effort due to implementation of expanded VAT (very popular with big business, very unpopular with the people) Expanded coverage of VAT to include services Increased VAT rates from 10% to 12%
But fiscal crisis continues despite improvements in 2006
Tax effort fell to 11.6% in first quarter of 2007 despite economy growing at 6.9%. Revenue collection and budget deficit targets from Jan to May 2007 missed. IMF, credit rating agencies and international financial
sector demanding new tax measures. Government officially resisting because of defeat in senatorial elections
Gov’t realizes need to increase tax administration of the big corporations and rich, but political will (??). Bureau of Internal Revenue head sacked in June 21, 2007.
Gov’t plans to sell and privatize government assets and companies to make up for missed targets
Gov’t has promised massive infrastructure building – now may no longer be feasible (effect on business confidence?)
Fiscal targets very strict -- trying to reach fiscal balance in 2008. Shooting oneself in the foot. Inability to achieve target fiscal balance causing loss in confidence
Jobless Growth
GDP Growth Rate and Unemployment Rate
Fig. 7: Unemployment Rate vs. GDP Growth Rate
-8
-6
-4
-2
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14
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Per
cen
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Unemployment Rate
GDP Growth Rate
Persistent High Unemployment in 2000-present: High Labor Force Entry, Low Absorption in Agriculture & Industry
Fig. 13: Employment by Sector and Unemployed, As % of Labor Force
0.00
5.00
10.00
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Per
cen
t Agriculture
Industry
Services
Unemployed
Increasing Labor Productivity in Agriculture and Industry at the Back of High Unemployment: Labor Cost-Cutting Is Coping Mechanism to Trade Lib and Adverse Macro Conditions
Fig. 14: Labor Productivity and GDP per Capita (in 1985 Prices)
10000.00
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38000.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Pes
os GDP per Capita
Labor Productivity
Unemployment rate was supposed to have fallen significantly in the first quarter of 2007 when GDP growth was 6.9%. But is this sustainable?? (Recall missed targets on tax revenue and budget deficit, jeopardizing pump-priming and infrastructure building)
Recipe for Another Crisis?
It is clear that the refusal to address the root causes of the Asian crisis and the faithful implementation of the standard ‘Washington Consensus’ policies
- very strict fiscal targets- capital account liberalization- floating exchange rate regime- full trade lib and deregulation- monetarist policy to inflation (inflation
targeting) are laying the ground for another potential financial crisis.
Alternative Economic Policies
Undervalued Currency With Market-Based Capital Controls on Inflows
Establish Peso narrow band at undervalued level (by more interventions in current appreciation trend)
Supported by Chilean tax on short-term capital inflows, or exit tax for capital outflows on funds less than one year (Malaysian style) - To reduce exaggerated short-term capital inflows and outflows- To ensure more exchange rate and price stability- To protect export and import-competing sectors- To protect purchasing power of overseas workers - Policy will bias monetary policy to more accommodating rather than contractionary stance- May still need to manage possible sudden sharp pressures for currency depreciation and capital outflows due to fiscal problems and political instabilities, but more manageable if currency is already undervalued.
Relax Overly Strict Fiscal Targets and Implement Progressive Taxation
Instead of imposing indirect taxes and targeting taxation of fixed income earners, the government should improve tax administration and remove the high exemptions for corporations and rich individuals
Fiscal deficit targets should allow for 2% to 3% of GDP, which are not at dangerous levels
The current high public debt service burden should be reduced by strong negotiations for debt and interest reduction, and if not possible, at least long-run rescheduling at lower interest rates to reflect current international lending rates
Industrial Policy: Market Failures vs. Gov’t Failures
Despite free trade policies, the government is actually promoting call centers and business process outsourcing (BPO). The high growth in services involve this sector plus financial sector and the informal low-productivity services. BPO has little multiplier effect.
It is recommended that promotion also be undertaken for viable sectors with more multiplier effect, higher technological spillover, employment generation and high economies of scale, via providing complementary infrastructure, direct or credit subsidies, tax incentives for such sectors (e.g. backward linkaging of semi-conductors)
This requires an efficient and honest government that undertakes these processes with transparency, fairness and correct incentives. Political struggle needed.
Reducing Restrictive Inflation Targeting and Financial Liberalization
Policies
Monetary and credit policies should be supportive of the integrated industrial policy, so that liquidity in the system will not be wasted in speculative activities (too much investments in high-end real property and the stock market)
Instead of mopping up liquidity for fear of inflation or over-speculation, the low lending to the private sector should be corrected by redirecting liquidity to lending of priority sectors through proper economic and credit incentives.
A More Pro-Growth Monetary Policy
Rediscount windows of Central Bank may become more active in credit allocation to banks with loan portfolios that are more productivity and employment-sensitive with healthy repayment rates. (Targeted credit is uphill fight in the Philippines)
If oil price and world interest rate increases abate, possible consideration of some monetizing of fiscal deficits to ease the fiscal problems (this is also an uphill fight for the Philippines) and stop constriction of fiscal spending
