A Mid-Year Economic Assessment

Dr. Cielito F. Habito

Ateneo Center for Economic Research &
Development
Ateneo Center for Economic Research and Development
 Overview
• Key Economic Trends for 1st
Half of 2008
• Persistent Challenges:
– Storm winds
– Low fuel
– Excess baggage
• Food and oil prices: quo vadis?
• Outlook for remainder of 2008
• Economic imperatives
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 2008 Highlights
Pluses

+Private domestic investment

has rebounded; offsets drop
in public construction and FDI
+Consecutive government
surpluses

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 2008 Highlights:
Minuses
―Prices: Inflation hits double-digits
―Jobs: Massive job losses
―Incomes/Output: Slowdown or
reversal across the board
―Personal Consumption:
Dramatic slowdown
―Net FDI inflows: Steep decline
―Government Spending: Now a
drag
―Exports & Imports: Stunning
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 Prices:
Steepest rise in 17 years
Year Inflation Rate (%)

2003 3.1
2004 5.5
2005 7.6
2006 6.2
2007 2.8
J uly-08 12.2
Non-NCR 13.9
Food 18.6
Year Ave. 8.3
Jobs (April 2008):
Massive Job Losses
Latest Year Prev 2007
Employment (NSO-LFS)
Period Ago Period Average
(Jan-Apr
Unemployment Rate (%) Apr '08 Apr '07 J an '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

 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
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 Where Did The New Jobs
Come From?
J obs by Sector New J obs New J obs New Jobs New Jobs New J obs
(Thousands) Apr-07 J ul-07 Oct-07 Jan-08 Apr-08
Agri 583 -221 -25 -197 41
Agri, Hunting & For 438 -206 22 -227 184
Fishery 112 -49 -47 -2 -108
Industry 26 195 172 23 -261
Mining 5 5 2 3 -34
Manufacturing -105 2 44 -42 -183
Utilities 4 35 2 33 -1
Construction 121 154 125 29 -9
Services 431 434 335 99 18
W&R Trade -17 24 -78 -72 -99
Hotels & Rest -39 42 -20 -126 63
Trans-Stor-Comm 77 78 137 4 21
Finance 10 20 5 74 32
Real Est&Bus Act 119 161 79 4 29
Public Adm 46 37 56 -30 126
Educ -2 9 48 45 28
Health & SW 11 4 39 2 -2
Other Serv 94 17 11 38 -105
Priv HH Emp 134 43 58 35 -75
Intl Orgs 0 0 0 0 0
 Production
Performance:
Services-Led Growth
2006 2007 2008
Indicator
FY Q1f Q2f Q3f Q4f FYf Q1

GNP Growth (%) 6.1 7.3 9.8 9.1 6.0 8.0 7.3
Net Factor Inc fr Abr 13.3 11.3 25.3 31.9 0.6 16.5 30.3
GDP Growth (%) 5.4 7.0 8.3 7.1 6.4 7.2 5.2
Agri, Fish & Forestry 3.8 4.0 4.2 5.7 5.7 4.9 3.0
Industry 4.5 6.6 10.3 6.6 4.9 7.1 3.9
Services 6.7 8.4 8.4 8.0 7.8 8.1 6.9

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 Industry Sector
Performance:
Construction, Mining Slow
Down;
Sector
Utilities
2006 Pick
2007 Up 2008
FY Q1f Q2f Q3f Q4f FYf Q1

INDUSTRY SECTOR 4.5 6.6 10.3 6.6 4.9 7.1 3.9

Mining/Quarrying -6.1 14.7 38.9 24.0 21.5 25.9 13.4
Manufacturing 4.6 4.1 3.4 3.7 2.6 3.4 2.3
Construction 7.3 21.7 37.0 17.8 13.4 23.1 4.5
Utilities 6.4 4.4 5.4 8.4 8.3 6.7 10.4

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 Services Sector
Performance:
Real Estate & Finance Continue to
2006 Lead 2007 2008
Sector
FY Q1f Q2f Q3f Q4f FYf Q1

SERVICE SECTOR 6.7 8.4 8.4 8.0 7.8 8.1 6.9

Trans, Comm & Stor 6.3 10.5 9.6 5.8 7.4 8.3 6.7
Transport & Storage 3.1 7.0 5.5 5.2 6.6 6.1 10.0
Communication 9.0 13.2 13.0 6.4 8.0 10.1 4.3
Trade 6.1 7.2 7.6 9.1 8.8 8.2 6.8
Finance 11.4 16.3 14.2 11.4 10.7 13.1 12.9
Own Dwell & Real Est 5.7 5.5 6.0 6.8 5.0 5.9 5.8
Real Estate 17.1 19.1 21.4 21.3 11.4 18.1 15.6
Private Services 6.9 8.4 9.1 8.7 7.6 8.4 5.1
Government Servcs 4.7 1.7 2.4 3.4 2.9 2.6 3.5

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What pushed 2007 growth
beyond 7%?
• Production (S) side:
Mining (26%)
Construction (23%)
Real Estate (18%)
Finance (13%)
Communication (10%)
• Spending (D) side:
Government Consumption (10%)
Public Construction (30.8%)
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 Demand Side:
Last Year’s Main Booster,
Government Spending, Fizzles
Out
Indicator
2006 2007 2008
FY Q1f Q2f Q3f Q4f FYf Q1

Personal Consn Exp 5.5 5.9 5.6 5.7 6.2 5.8 5.1

Govt Consumption 6.1 9.5 11.9 6.4 4.6 8.3 -1.0

Capital Formation 2.7 8.7 17.6 7.6 11.0 11.2 7.3

Of which:
Construction 5.5 20.4 34.4 16.8 11.7 21.3 6.1
Public 24.7 18.9 59.4 11.5 15.4 29.6 -9.5
Private -3.7 21.3 13.7 19.5 9.2 15.9 15.1
Durable Eqpt -1.8 4.3 8.8 2.3 2.6 4.5 8.2
Br Stck & Orch Dev -0.4 2.0 7.1 3.6 5.1 4.5 -1.5

Exports 11.2 10.8 4.9 3.7 3.9 5.6 -11.1

Imports 1.9 -1.8 -10.5 -5.0 0.2 -4.5 -6.6

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ASEAN Investment Growth
(2002-2006 Annual Growth Rates,
%) 19.7
20.0
18.1

18.0

16.0

14.0

11.1
12.0

10.0

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 INDO THA VIET CAM MYA

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 Foreign Direct
Investment
Sharp Drop in 2008
Annual Growth Rate (%)*
2007 2008
Foreign Direct Investments 175.9 -43.5
Equity Capital 44.3 -59.4
Reinvested Earnings -13.9 -7.7
Other Capital 484.6 -31.9
*Based on J an-Apr figures (Source: BSP)

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 Foreign Trade
Slowed in 2007; Drops in 2008
25.0

20.0

15.0

10.0

5.0

0.0
Q1-06 Q2-06 Q3-06 Q4-06 FY-06 Q1-07 Q2-07 Q3-07 Q4-07 FY-07 Q1-08

-5.0

-10.0

-15.0

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 Government Finances,
2008
Goodbye, Balanced Budget
Jan-Jun
Jun '08 May '08
Fiscal Variables '08
(P billion) (P billion) (P billion)
Revenues 87.56 122.03 569.99
Tax 80.36 114.00 512.27
Non-Tax 7.21 8.03 57.72
Expenditures 86.80 96.27 587.99
Surplus (Deficit) 0.77 25.76 (18.00)
Full YearTarget 0.00 0.00 0.00
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How Does It All Feel
From Below?

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 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
Ateneoof poor
Center families
for Economic Research increased
and Development by
 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
constant 2003 prices)
• First time FIES average real income fell
• More consistent with tax revenue trends
• Middle & lower income groups took the
hit
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Self Rated Poverty:
Rising again
Hunger is on the rise anew…
…and climbs steeply in Metro
Manila
What’s in store
for the rest of
2008?
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 Storm Winds
• US slowdown/recession
―Credit crisis now beyond sub-prime
housing loans (auto loans, credit
cards)
―Consumption & investment slowdown
―IMF: GDP growth 0.8% (vs. 2.6% in
2007)
• Global economic slowdown
―US: 21% of China’s exports
―IMF: Global growth to moderate to
4.1% in 2008 (from 4.9% in 2007);
emerging markets to 6.9% from 7.8%
―Global food and Research
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oil price surge
and Development
 Storm Winds
The US Slowdown/Recession:
The Plot Thickens
―Major automakers suffer 18%
(GM), 21% (Toyota) & 28% (Ford)
sales slump
―New unemployment claims top
380,000, a level associated with
recession
―Starbucks announces >600 store
closures and 12,000 job cuts
―“Slow motion recession”
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 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) :
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Research and Development
 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
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 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
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 The US Contagion

A 10% drop in US:  ∆RP

GDP:
 Merchandise Exports -0.70 %
 Services Exports -0.63 %
 FDI -0.04 %
 Remittances -0.37 %
Total Impact -
1.74 %
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 0.0
5.0
10.0
15.0
20.0
25.0
19
75
19
76
19
77
19
78
19
79
19
8
0
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90

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19
91
19
92
19
93
19
Anew

94
19
95
19
96
19
97
Low Fuel

19
98
19
99
20
00
20
01
20
02
20
Research and Development

03
20
04
20
05
20
06
20
07
Tax & Revenue Effort Dropped
 Excess Baggage
• Governance Weaknesses
―Tax Evasion
―Smuggling
―Massive Graft & Corruption
―Regulatory Capture
• Political Uncertainty
―Weakened Institutions
―Leadership instability
(Cabinet reshuffles; weak
Presidency)
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Domestic Drivers
Sustained overseas remittances
 fuels consumption spending
Agricultural supply response to
higher prices
Rebounding private domestic
investments (substantial
announced investment
intentions for the year)
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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
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Oil Price
Outlook:
Optimistic View
Price bubble will eventually burst
• Fundamentals have not changed as
drastically as prices have
• Dollar weakness & commodity markets
• Overreaction (i.e., overbuying) by
market players
• Global economic slowdown will weaken
demand, pull down prices
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Oil Price
Outlook:
Pessimistic
High oil prices View
are here to stay
• Rising supplies unable to match surging
demands, especially from developing
economies (e.g. China & India)
• Resource prices generally up because of
unrelenting global growth (no recession
in the last 16 years)
This is the more popular view;
prudence is better than
complacency
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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
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 Outlook for 2008:
A Very Different Year
• Growth in 2007 surprised all
―Partly a measurement issue
―Entirely due to government stimulus
• 2008 a challenging year:
―Global and US slowdown
―Faltering revenue performance
―Rising interest rates
―Private Investment growth unable to
offset the drags
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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 - P44-45
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 Currency Movements
Weak $ no longer the main
driver

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Sectoral Gainers
Gainers:
Services: Finance (Banks &
Insurance), Real Estate, Transport
(Water and Air)
Agriculture: Bananas, Corn, Forestry
Industry: Mining, Utilities
(Electricity)

Slowdown:
Communication, Business services
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Sectoral Losers
Negative Growth:
 Agriculture:
Livestock, Other Crops
 Manufacturing:
Wood & cork prods,
Publishing/ printing,
Electrical machinery, Textiles
Rubber prods, Chemical prods,
Basic metal industries, Paper
prods
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 Sectoral Outlook: Near
Term
Slowdown:
Motor vehicles, Consumer durables
Electronics, Apparel, Recreation
Finance (Banks, Insurance)
Real estate, Power, Transport
Neutral:
Food Mfg, Business Svcs (incl
BPOs)
Gainers:
Agriculture, Mining
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 Sectoral Drivers &
Imperatives
Agriculture: stronger LGU roles;
supply chain management
Tourism: proper policy environment
(open skies)
Construction: durable govt
revenues
Mining: social & environmental
responsibility, confidence building
Real Estate, BPOs: vulnerable to
US & global slowdown
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Overall Imperatives
• “Moderate the greed” (on both
revenue and expenditure sides)
• Deliberately pursue broad-based,
inclusive growth (agriculture,
SMEs)
• It’s the governance, stupid:
Restore public trust in government
Restore investor confidence
Restore our faith in our future!
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 E-mail: chabito@ateneo.edu
Ateneo Center for Economic Research and Development