Economic Crisis and Response in the Philippines

The Global Economic Crisis pulled countries down from around the globe to a recession. Wideranging declines in many aspects of growth characterize the overall impact it had had on the
global scale. Following the Asian economic crisis in 1997, the present global economic
crisis imposes new challenges to the Philippines as a developing country. Following are
expositions of the macroeconomic impacts of the crisis in the Philippine setting, its implications
in the prevalent poverty scenario, and policies and programs undertaken by the government in
response to the crisis.
Overview of the Global Economic Crisis
The 2008 global economic crisis started upon the bursting of the United States housing bubble,
which was followed by bankruptcies, bailouts, foreclosures, and takeovers of financial institutions
and national governments. During a period of housing and credit booms, banks encouraged
lending to home owners by a considerably high amount without appropriate level of transparency
and financial supervision. As interest rates rose in mid-2007, housing prices dropped extensively,
and all institutions that borrowed and invested found themselves suffering significant losses.
Financial institutions, insurance companies, and investment houses declared either declared
bankruptcies or had to be rescued financially. Economies worldwide slowed during this period
and entered to a recession.[1]
The crisis, initially financial in nature, has now taken a full-blown economic and global scale
affecting every country to the left and to the right of the United States, and wreaking havoc in
the level of both industrialized and developing nations.[2]
The Philippine Situation before the Crisis
The Philippines has long been undermined with long-term structural problems such
that sustainable economic development is yet to be a dream come true. According to the pages
of Philippine economic history, the country has been dominated by a sequence of growth spurts,
brief and mediocre, followed by shard to very-sharp, severe, and extended downturnsa cycle
that came to be known as the boom-bust cycle. As such, economic growth record of the country
has been disappointing in comparison with itsEast Asian counterparts in terms of per capita GDP.
What makes matters worse is the seemingly perennial impoverished state of its inhabitants, that
is, in 2007, an absolute poverty incidence of 13.2 percenthigher than Indonesias 7.7
and Vietnams 8.4 percenthas been recorded, and thus giving further testimony of the unequal
distribution of wealth that keeps growth and development a far reach for the Philippines.[3]
Macroeconomic Impacts of the Crisis
The Philippines, points Professor Diokno of the University of the Philippines, has been affected by
the crisis in a decline in three aspects: exports, remittances from overseas Filipino workers, and
foreign direct investments. Heavily dependent on electronic and semiconductor exports, the
Philippines has seen a downward trend in its export earnings as countries in demand of these
exports are now in recession. The recession has also put to risk the jobs in the developed
countries which include those where migrant workersare employed. Consequently, OFW
remittances decreased and grew a meagre 3.3% in October 2008. Foreign direct
investments (FDI) lowered because of investors losing confidence in the financial market. Lower
FDIs mean slower economic growth.[4]
Impacts of Asset Markets, Financial Sector, and Real Sector
The freeze in liquidity in US and European financial markets reversed capital flows to developing
countries and induced a rise in the price of risk which entailed a drop in equity prices
and exchange rate volatility. However, following the effects of an increase in the foreign currency
government bond spread, the Philippine stock market was actually one of the least affected by
the crisis with the main index of the stock market dropping only by 24 percent, a relatively low
percentage change in comparison to those of other countries across Asia. Similarly, from the
period between July 2008 and January 2009, the peso devaluated only by 3 percent which

explains why the peso was one of the currencies least affected by the crisis. This minimal effect
on the stock market and the Philippine peso can be attributed to the recovery of asset prices
across the Asia-Pacific region recovered in early 2009 as foreign portfolio investments surged.[5]
Financially, the banking system in the Philippines has been relatively stable, because of reforms
that were put in place since Asian financial crisis in 1997. Maintenance of high levels of loan to
deposit ratios together with the decline of the ratio of nonperforming loans to total loans kept
profitability of local banking generally high despite the crisis. To the countrys fortune, no
meltdowns occurred as during the previous 1997 Asian crisis.[6]
Fall in the growth rate of personal consumption and expenditures and fixed investment assail
2008. Personal consumption expenditure, the largest contributor to GDP growth, behaved a
downward trend from a sharp drop from 5.8 percent in 2007 to 4.7 percent in 2008, and 3.7
percent in 2009.[7] GDP growth during fourth quarter of 2008 and first quarter of 2009 fell to 1.7
percent, a staggering fall from 5.7 percent average for the three previous years. Furthermore, a
contraction of 29.2 percent in the manufacturing sector involving electricity, gas, water, trade
and finance services. The service sector also had its share of downturns as growth in the fourth
quarter and first quarters of 2008 and 2009, respectively, suffered from a meagre growth of 2.1
percent, a far contrast from the 6.7 percent average from the last three years. However, the
Philippines has generally endured the least declines in comparison with other East Asian
countries despite recorded declines. For instance, OFW remittances, though at a slower pace, still
grew in the first half of 2009.[8]
Impact of fiscal deficit and external accounts
To counter adverse effects of the crisis, the Philippine government felt the need to increase its
expenditures. Apart from government expenditure, of primary concern was the weak revenues
generated by the government with fiscal deficit reaching P111.8 billion in the first quarter of
2009 as compared to P25.8 billion in the same period of the previous year. Despite suffering the
least in terms of the stock exchange and financial markets among East Asian countries, the
Philippines lagged in tax effort in comparison to other nations. Meanwhile, private sector flows in
the external account declined and led to a net outflow of $708 million in 2009, a sharp turning
away from a net inflow of $507 million in 2008. This eventually led to a fall in stock prices and
depreciation or devaluation of the peso.[9]
Policy Responses
Efforts of poverty alleviation, reduction, eradication
The Medium-Term Philippine Development Plan (MTPDP) was implemented during the Ramos
Administration and later on continued by the following administrations to help reduce poverty in
the country and improve on the economic welfare of the Filipinos. The Ramos Administration
(19931998) targeted to reduce poverty from 39.2% in 1991 to about 30% by 1998. The Estrada
Administration (19992004) then targeted to reduce poverty incidence from 32% in 1997 to 2528% by 2004,[15] while the Arroyo government targeted to reduce poverty to 17% by creating
10 million jobs but this promise was not fulfilled by the administration.[16] As for the current
Aquino Administration, the 2011-2016 MTDPD is still being drafted.
President Benigno Aquino III has plans to expand the Conditional Cash Transfer (CCT) program
from 1 to 2.3 million households, and several long term investments in education and healthcare.
Also, last September 2010, Aquino met with US Secretary of State, Hillary Clinton, during the
signing of the $434-million Millennium Challenge Corporation (MCC) grant in New York. The MCC
grant would fund infrastructure and rural development programs in the Philippines to reduce
poverty and spur economic growth.[17]
Macroeconomic and Social Protection programs
To respond to the recent financial crisis, the Philippine government, through the Department of
Finance and National Economic and Development Authority (NEDA), crafted a PhP 330-billion
fiscal package, formally known as the Economic Resiliency Plan (ERP). The ERP is geared towards

the stimulation of the economy through tax cuts, increased government spending, and publicprivate sector projects that can also prepare the country for the eventual upturn of the global
economy.[18]
The implementation of ERP is spearheaded by NEDA with the following specific aims:[19]
To ensure sustainable growth, attaining the higher end of the growth rates;
To save and create as many jobs as possible;
To protect the most vulnerable sectors: the poorest of the poor, returning OFWs, and workers in
export industries;
To ensure low and stable prices to supports consumer spending; and
To enhance competitiveness in preparation for the global rebound.
Regional responses
Poverty incidence remains to be one of the highest in the region with the continued low domestic
private investment. To overcome legal, political and institutional constraints, regional financial
cooperation must be encouraged. The ASEAN+3 financial cooperation can promote further the
development of domestic financial markets to facilitate the intermediation of Asian savings
within the region, as well as attract foreign investment. Such alternative sources of funding
would reduce Asias reliance on foreign currency borrowing and along with, the risk exposure of
the region to maturity and currency mismatches.[20]
Moreover, the Network of East Asian Think Tanks has recently proposed the establishment of the
Asia Investment Infrastructure Fund (AIIF) to prioritize the funding of infrastructure projects in the
region to support suffering industries. The AIIF, as well as multilateral institutions especially
the Asian Development Bank, also promotes greater domestic demand and intra-regional trade
to offset the decline in exports to industrialized countries and narrow the development gap in the
region.[21]
Prospects for Growth in the Future
Poverty reduction for the Philippines in the years to come is promising, bearing in mind where
she left off prior to the economic crisis. Nevertheless, it is still a tough challenge. Figures
persistently reflect a Philippine poverty reduction campaign that pales in comparison with
other ASEAN countries. In addition, a blistering population growth rate sinks more Filipinos below
the poverty threshold placing the countrys laudable long term economic growth under its
shadow.[22]
Taking into account that the Philippine economy has a significant reliance on remittances from
Overseas Filipino Workers (OFWs), past threats demonstrated the resiliency of the Philippine
economy despite external shocks. In spite of the disaster in Japan (3rd largest market for
Philippine exports) and the geopolitical tensions in West Asia, the Philippine economy looked
unfazed. New York-based Global Source Partners stated, "The Philippine economy has already
proven to be quite resilient in the face of varied external shocks in the past, yow especially
bolstered by a strong external position and capable monetary management. This time should not
be much different. [23]
The new administration of President Benigno Noynoy Aquino III faces three key constraints on
Philippine growth:
Tight fiscal situation due to weak revenue generation
Poor infrastructure (i.e. transportation, power, etc.)
Pessimism in investment resulting from corruption and political instability

Fortunately, the government offers various projects to loosen these restrictions. Data from the
quarterly ING Investor Dashboard Survey showed stability in investor confidence for the
Philippine economy over the first two quarters of 2010. She even scored a 157 in the third
quarter of the same year. This is well on the higher percentiles of the optimistic range and a
mere 3 points from the very optimistic level. These figures emerge in the midst of decrepit
infrastructure and a lack of efficient institutions. Subsequently, the prospect of the Philippine
economy improving into the very optimistic range is very bright. Presidential spokesman Edwin
Lacierda declared that the Philippine economic competitiveness score improved from 56.526 the
previous year to 63.291 in 2011 (based on The World Competitiveness Yearbook). Lacierda also
boasts of infrastructure improvement projects of the Department of Public Works and
Highways scheduled to commence within one or two years. He attributes the stepping up of our
competitiveness rating to the public-private partnership (PPP) projects next year. These projects
raise optimism for the post-crisis economy of the Philippines.