A Test in Resilience

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The Filipino economy is fortunate to post flat year-on-year growth this year as the worldwide economic turmoil comes into full swing. Most analysts point to a decline in exports and overseas foreign workers (OFW) remittances as posing the largest threats to the sustainability of the economy in 2009.

As developed economies around the world slipped into recession during 2008, the Filipino economy fell from its high mark of 7% GDP growth in 2007 to 4.6% GDP growth in 2008. The worsening economic outlook is raising scepticism about growth prospects in 2009. Last week, at the biannual Philippine Economic Briefing, the government slightly revised down its initial growth figures from 3.7-4.7% to 3.7-4.4% for 2009, while the International Monetary Fund (IMF) was more pessimistic, predicting 2.25% growth.

According to the Bangko Sentral ng Pilipinas (BSP), the weakening demand for manufactured goods and the decline in overseas remittances will both lead to reduced capital inflows in the country. These declines, combined with tight liquidity in worldwide financial markets, have the potential to impact the wider economy.

OFW remittances play a central role in the Filipino economy, accounting for 10% of GDP last year, or the equivalent of $16.4bn. Analysts are expecting a sharp decline in remittances from overseas Filipinos this year as economies worldwide plunge deeper into a recession. In particular, the hard hit economies of the US and the Middle East, traditionally some of the larger labour markets for Filipino OFWs, have already started sending OFW workers back home.

However, according to Secretary Recto, the government remains confident labour markets in the Middle East will remain strong. He also pointed out that it was possible to reposition any displaced workforce in new markets, such as Australia and Japan. One example of newly created OFW job opportunities stems from last month's Japan-Philippines Economic Partnership Agreement (JPEPA). In addition to improving bilateral trade, the agreement will provide Filipino caregivers with job opportunities in Japan as early as May of this year.

Nevertheless, the Central Bank, which had initially forecasted continued growth of remittances from $16.4bn in 2008 to $16.9bn-17.4bn in 2009, has revised down its growth projections and now predicts flat growth in OFW remittances for 2009. Maintaining a stable growth rate in OFW remittances is a vital component to achieving the GDP growth targets set by the government.

The other primary cause of concern for the Filipino economy is the continued decline in demand for the country's exports, especially from its three major trading partners: the US, Japan and China. Exports plunged 40% year-on-year in December, and decreased 2.9% overall in 2008. The government expects exports to drop an additional 6-8% in 2009, limiting growth prospects. On the other hand, demand for imports is also expected to slide 8-10% in 2009, which would leave the current account with a surplus of $2.9bn. But if demand for Filipino manufactured goods dwindles more than the anticipated 8% in 2009, the country may find itself on the low end of growth predictions.

During last week's biannual briefing, Ralph G. Recto, the Director-General of the National Economic Development Authority, said, "The recession in our trading partners has hit our exports sector hard and the contraction in exports has resulted in 39,000 layoffs."

"The good news is that the inflation rate is also dropping steeply and easing inflation in turn boosts private consumption," he added.

Indeed, according to the latest figures from the BSP, inflation has steadily decreased from a peak of 9.4% in August last year to 7.1% in January, due to weakening demand and falling international commodity prices. The central bank projects that inflationary pressures will further ease to 3-5% by the end of the year.

That said, most analysts reckon that the additional domestic demand resulting from reduced inflation will not make up for the decreased demand abroad, though it should help moderate the damage. The easing of inflation is giving the BSP plenty of room for further monetary policy adjustments to increase liquidity in the financial markets. The overnight borrowing rate has already been cut twice since December and now stands at 5%.

BSP Governor Amando M. Tetangco, Jr stated during the same forum that the bank "will consider opportunities to further ease monetary policy to help stimulate growth".

Another factor mitigating the negative impact of decreased capital inflows from overseas is the business process outsourcing (BPO) sector. Indeed, the deepening recession in developed economies is forcing a large number of private sector companies to undertake cost-cutting measures. As many of these companies look to outsource non-core and back office operations to more cost-effective locations, the Philippines could see its BPO industry post strong figures in 2009. The Business Processing Association of the Philippines (BPAP) predicts BPO will grow in the range of 25-30% in 2009.

In an attempt to spur consumer and investor confidence, budgetary figures have also been revised to allow for greater government spending. The budget deficit cap, originally set at P102bn ($2.1bn) or 1.2% of GDP, has been raised to P177.2bn ($3.6bn) or 2.2% of GDP. In line with other major economies, the government has signed a P300bn ($6.2bn) emergency economic stimulus package. The government has earmarked a large amount of the funding for labour-intensive infrastructure programmes to create jobs. During the briefing Secretary Recto stated that the government expects to create 800,000 jobs in the coming year as a result of the stimulus package and its Comprehensive Livelihood and Emergency Employment Program (CLEEP).

Drumming support for the stimulus package, President Gloria Macapagal-Arroyo said during the meeting, "Our GDP growth in the face of global recession shows that stimulus works. It shows it is not bound to fail. But we all have to work together to make sure that it succeeds," adding that the package "is always open for refinements as we go along".

She also reflected on the country's economic development since the Asian financial crisis, and told OBG , "The country has been focused for the past seven years on implementing pro-poor, pro-growth reforms that have yielded some of the most significant economic gains in more than three decades. These are the reforms that are helping to keep our economy resilient and ensuring our government finances remain in check, despite continued volatility in the global environment."

Assuming that the government's predictions regarding increases in domestic consumption, stable remittances, growth in the BPO sector and an effective stimulus package are all validated throughout the year, it just may be possible for the country to achieve its economic goals in 2009. However, should the global economic turmoil prove to be more resilient than the Filipino economy and pull world economies even deeper into recession, the government could find itself in an even more uncomfortable position.

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