A Mid-Year Economic Assessment

Dr. Cielito F. Habito

Ateneo Center for Economic Research & Development

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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
2003 2004 2005 2006 2007 J uly-08 Non-NCR F ood Year Ave.

Inflation Rate (%)

3.1 5.5 7.6 6.2 2.8 12.2 13.9 18.6 8.3
Jobs (April 2008):
Massive Job Losses
Employment (NSO-LFS) Unemployment Rate (%)
New Definition

Latest Period
Apr '08 8.0 -168 46 -244 30 19.8

Year Ago

Prev 2007 Period Average

(Jan-Apr 2008) 7.7 -10 101 -120 10 19.3

Apr '07 J an '08 7.4 1,005 572 21 413 18.9 7.4 149 156 4 -11 18.9

Jobs Generated ('000)

Agriculture Industry Services

Underemployment Rate (%)

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 (T housands) Agri Agri, Hunting & For Fishery Industry Mining
Manufacturing Utilities Construction Services W&R T rade Hotels & Rest T rans-
Stor-Comm Finance Real Est&Bus Act Public Adm Educ Health & SW Other Serv Priv HH
Emp Intl Orgs New J obs Apr-07 583 438 112 26 5 -105 4 121 431 -17 -39 77 10 119
46 -2 11 94 134 0 New J obs J ul-07 -221 -206 -49 195 5 2 35 154 434 24 42 78 20
161 37 9 4 17 43 0 New Jobs Oct-07 -25 22 -47 172 2 44 2 125 335 -78 -20 137 5 79
56 48 39 11 58 0 New Jobs Jan-08 -197 -227 -2 23 3 -42 33 29 99 -72 -126 4 74 4
-30 45 2 38 35 0 New J obs Apr-08 41 184 -108 -261 -34 -183 -1 -9 18 -99 63 21 32
29 126 28 -2 -105 -75 0
Production Performance:
Services-Led Growth
Indicator GNP Growth (%) Net Factor Inc fr Abr GDP Growth (%) Agri, Fish &
Forestry Industry Services 2006 FY 6.1 13.3 5.4 3.8 4.5 6.7 Q1f 7.3 11.3 7.0 4.0
6.6 8.4 Q2f 9.8 25.3 8.3 4.2 10.3 8.4 2007 Q3f 9.1 31.9 7.1 5.7 6.6 8.0 Q4f 6.0
0.6 6.4 5.7 4.9 7.8 FYf 8.0 16.5 7.2 4.9 7.1 8.1 2008 Q1 7.3 30.3 5.2 3.0 3.9 6.9

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Industry Sector Performance:
Construction, Mining Slow Down; 2006 2007 2008 Utilities Pick Up Sector
FY Q1f Q2f Q3f Q4f FYf Q1 INDUST SECT RY OR Mining/Quarrying Manufacturing
Construction Utilities 4.5 -6.1 4.6 7.3 6.4 6.6 14.7 4.1 21.7 4.4 10.3 38.9 3.4
37.0 5.4 6.6 24.0 3.7 17.8 8.4 4.9 21.5 2.6 13.4 8.3 7.1 25.9 3.4 23.1 6.7 3.9
13.4 2.3 4.5 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 SECT OR T rans, Comm & Stor Transport & Storage
Communication T rade Finance Own Dwell & Real Est Real Estate Private Services
Government Servcs 6.7 6.3 3.1 9.0 6.1 11.4 5.7 17.1 6.9 4.7 8.4 10.5 7.0 13.2 7.2
16.3 5.5 19.1 8.4 1.7 8.4 9.6 5.5 13.0 7.6 14.2 6.0 21.4 9.1 2.4 8.0 5.8 5.2 6.4
9.1 11.4 6.8 21.3 8.7 3.4 7.8 7.4 6.6 8.0 8.8 10.7 5.0 11.4 7.6 2.9 8.1 8.3 6.1
10.1 8.2 13.1 5.9 18.1 8.4 2.6 6.9 6.7 10.0 4.3 6.8 12.9 5.8 15.6 5.1 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%) Government Consumption (10%) Public Construction (30.8%)
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• Spending (D) side:

Demand Side:
Last Year’s Main Booster, Government Spending, Fizzles Out 2006 2007 2008
Indicator
F Y Q1f 5.9 9.5 8.7 20.4 18.9 21.3 4.3 2.0 10.8 -1.8 Q2f 5.6 11.9 17.6 34.4 59.4
13.7 8.8 7.1 4.9 -10.5 Q3f 5.7 6.4 7.6 16.8 11.5 19.5 2.3 3.6 3.7 -5.0 Q4f 6.2 4.6
11.0 11.7 15.4 9.2 2.6 5.1 3.9 0.2 F Yf Q1 Personal Consn Exp Govt Consumption
Capital F ormation Of which: Construction Public Private Durable Eqpt Br S tck &
Orch Dev Exports Imports 5.5 6.1 2.7 5.5 24.7 -3.7 -1.8 -0.4 11.2 1.9 5.8 8.3 11.2
21.3 29.6 15.9 4.5 4.5 5.6 -4.5 5.1 -1.0 7.3 6.1 -9.5 15.1 8.2 -1.5 -11.1 -6.6

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ASEAN Investment Growth
(2002-2006 Annual Growth Rates, %)
19.7
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 - 2.0

18.1

11.1

7.5

4.2 3.1

4.7

0.0

0.2

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 F oreign Direct Investments Equity Capital
Reinvested Earnings Other Capital 175.9 44.3 -13.9 484.6 -43.5 -59.4 -7.7 -31.9

*Based on J an-Apr figures (Source: BS P)

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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 -5.0 Q2-06 Q3-06 Q4-06 F Y-06 Q1-07 Q2-07 Q3-07 Q4-07 F Y-07 Q1-08

-10.0

-15.0

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Government Finances, 2008
Goodbye, Balanced Budget Jan-Jun
Fiscal Variables Revenues T ax Non-T ax Expenditures Surplus (Deficit) Full YearT
arget '08 (P billion) (P billion) (P billion) 87.56 80.36 7.21 86.80 0.77 0.00
122.03 114.00 8.03 96.27 25.76 0.00 569.99 512.27 57.72 587.99 (18.00) 0.00 Jun
'08 May '08

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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 of poor
families increased by Ateneo Center for Economic Research and Development
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% Ateneo ―GlobalCenter for
Economic Research and Development food and oil price surge
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 ―Eddie Bauer ―Cache ―Lane Bryant ―Talbots, J. Jill ―Gap Inc. ―Foot
Locker ―Wickes (furn) ―Levitz (furn) : : : : : : : : : 117 stores

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27 stores 20-23 stores 150 stores 78+22 stores 85 stores 140 stores out of
business out of business
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 : ―Wilsons : ―Sharper Image: ―Bombay Co. : ―Kaybee Toys : ―Dillards
: ―Ethan Allen : ―JC Penneys :
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125 locations 158 stores 90 stores 384 stores 356 stores scaling back scaling back
scaling back
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The US Contagion
A 10% drop in US: GDP:
Merchandise Exports Services Exports FDI Remittances

∆RP
% % % %

-0.70 -0.63 -0.04 -0.37

Total Impact 1.74 %

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-
10.0

15.0

20.0

25.0

0.0

5.0

Tax & Revenue Effort Dropped Anew

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Low Fuel

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 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01
20 02 20 03 20 04 20 05 20 06 20 07
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 View to stay High oil prices are here
• 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 Ateneo Center for complacency Economic
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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 Development Ateneo Center for Economic Research and
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 - 4.55.3% Inflation - 9.010.0% Unemployment - 7.58.5% 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
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