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Manila's 'good news' cannot mask downturn

Asia Times - December 22, 2008

Joel D. Adriano, Manila – As global economic and financial turmoil mounts, Philippine President Gloria Macapagal-Arroyo has launched a "good news" offensive. Government spin won't, however, alleviate the impact of the global downturn on the local economy, where rising unemployment could thrust millions of Filipinos back under the poverty line.

Arroyo's government this month placed advertisements in local newspapers promoting the results of a recent public opinion survey that showed that 52% of Filipinos considered themselves poor. That marked a 7% improvement on the previous year's survey result, but the wealth effect will likely be shortlived, economists say.

A recent Nielsen Ratings survey found that 70% of Filipinos think the local economy is already in recession, signaling a likely decline in consumer confidence going into 2009. The World Bank projects Philippine gross domestic product (GDP) will expand 4% this year, down from last year's 7.2%, which marked a three-decade high.

The bank expects growth will fall further to just 3% next year, while investment bank UBS predicts growth will fall to 1.8%, noting "business confidence is already falling sharply". Both projections are more bearish than the government's official target range of 3.7% to 4.7%.

Officials base that more upbeat assessment on the fact the economy grew a surprisingly strong 4.6% during the third quarter, which was at the high end of the government's forecast. But there are growing indications, including a recent downbeat Citibank report on the local economy, that the economic situation will deteriorate sharply beginning in the first quarter of next year.

Exports represent around 50% of GDP, and UBS says real export growth will go negative in 2009. Already Philippine exports contracted by almost 15% in October, according to government data released this month. Overall, export receipts from January to October posted almost flat growth of just 1.9%, up slightly to US$42.8 billion from $42 billion last year.

Senator Edgardo Angara recently delivered his own gloomy assessment, when he said in a speech during budget deliberations that the two pillars of the economy – exports and remittances – were both "shaking". He estimated that by next year some 590,000 Filipinos would be at risk of losing their jobs, including 130,000 workers now employed on temporary visas in the United States. Another 50,000 overseas workers have already lost their jobs, including in Dubai in the United Arab Emirates and Taiwan, where massive layoffs are underway.

More than 9 million Filipinos are working abroad. Nearly 1 million Filipinos left the country for work overseas last year, while another million ventured out during the first nine months this year. Last year remittances from abroad accounted for 11.6% of GDP. And while remittances have so far held up, a number of foreign workers are believed to be dipping into their savings to keep money flowing to their families back home.

Meanwhile, foreign direct investment plunged 45% in the first nine months of this year, falling to $1.39 billion from $2.52 billion over the same period in 2007. Growing capital outflows have in turned weighed against the local currency, which has lost about 14% against the US dollar this year, driving up the cost and diminishing the availability of capital for local businesses and investors.

UBS says the falling price of assets on banks' balance sheets has been mitigated by quick government action, but that "the risk of adverse economic impacts from capital flight remains". This will be compounded, some analysts say, by enduring political uncertainties surrounding Arroyo's rule, including a rise in already rampant corruption.

Economic blind spot

That's weighing against the Philippines' international competitiveness, which slid to 140 from 133 in 2007, as rated by the World Bank and International Finance Corp in their "Doing Business 2009" report. Angara and others claim that the government is turning a blind eye to these mounting economic difficulties.

Philippine officials have consistently downplayed the impact of the global crisis on the local economy, claiming the country had diversified its exports and that a slowdown in the US would no longer have the same negative effect as in the past. They also have pointed to the supposed "sound fundamentals" of the financial system as reason for confidence.

Arroyo has also emphasized gains made by the information and communications technology (ICT) and business process outsourcing (BPO) industries, which she claims will remain robust and drive the economy forward. "Employment is on the rise and investors are excited and placing money to back up that excitement," she said in November.

Yet the touted BPO sector, which is one of the largest sources of employment and foreign exchange earnings in the Philippines, is also showing signs of weakness. For instance, Paxys Inc, which provides telemarketing and customer services, said in a recent filing to the local stock exchange that it would be cutting its 4,200 employees by one-fifth due to weakening caused by the global financial crisis.

The country's unemployment rate is already a stubbornly high 7.4% – the second highest in the Asia-Pacific region after Indonesia. In a poll conducted by the Makati Business Club last month, 60% of local businesses said they expected their workforce to contract next year. As of July, more than 10 million Filipinos were unemployed or underemployed, according to government statistics.

Given high inflation – it topped a 17-year high of 12.2% in July, but has since moderated with falling global fuel and commodity prices – the World Bank expects more people will soon fall below the poverty line. Arsenio Balisacan, of the Southeast Asian Regional Center for Graduate Studies, said this year poverty was increasing despite years of steady economic growth. Official statistics from 2006, the most recent data released on household incomes, showed that 32.9% of the population was poor.

Economists say the government must provide more fiscal stimulus to cushion the economy against the global downturn. So far, that additional spending has not been earmarked or allocated, they say. The government projects a deficit of 102 billion pesos (US$2 billion), or 1.2% of GDP, for next year; private economists believe that level must rise to at least 2% by 2010 to avoid a sharp and deep downturn.

Yet financing such deficits will expose the country to new risks if global funding conditions do not soon improve. Angara said the government must move quickly to generate jobs, but the Arroyo government's record of corruption and slippage means a substantial percentage of any earmarked funds will likely fail to reach those most need. Despite the government's good news spin, the average Filipino faces harder economic times.

[Joel D. Adriano is an independent consultant and award-winning freelance journalist. He was a sub-editor for the business section of The Manila Times and writes for Asean BizTimes, Safe Democracy and People's Tonight.]

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