Transcript Challenges and Opportunities

The Philippine Economy After the
2010 Elections: Challenges and
Opportunities
Outline
I. Global Economic Conditions and How They
affect the Philippines
II. Governance, Politics and the Economy
III. What can a “Good” Government do to make
things better?
IV. What can/will the Noynoy Administration do
about it?
Bad News: Sluggish advanced economies still need fiscal stimulus but
growing concerns about fiscal sustainability in some these economies
impose severe constraints on the size and duration of the fiscal stimulus.
• “The global recovery is proceeding, although at different speeds. In the
advanced economies, the recovery is lukewarm, given high
unemployment, rising public debt, and, in some countries, weak
household balance sheets. Advanced economies are expected to expand
by 2¼ percent in 2010, following a more than 3 percent decline in output
in 2009.”
• “Due to the still-fragile nature of the recovery, fiscal policies need to
remain supportive of economic activity in the near term, and the fiscal
stimulus planned for 2010 should be implemented fully. However, given
growing concerns about fiscal sustainability, countries should also make
progress in devising and communicating exit strategies.”
5/3/10
3/3/10
1/3/10
11/3/09
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11/3/08
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5/3/08
3/3/08
1/3/08
11/3/07
9/3/07
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5/3/07
3/3/07
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11/3/06
9/3/06
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5/3/06
3/3/06
1/3/06
11/3/05
9/3/05
7/3/05
5/3/05
3/3/05
1/3/05
As a result, global liquidity is still high.
US T-Bill Yields
6
5
4
3
1 mo
3 mo
6 mo
2
1 yr
1
0
Good News For the Philippine Government : Low Cost of
borrowing provided global bond markets think that the
Philippines is not like Greece. (News item: 70% of “experts” surveyed think
Greece will default.)
US T-Bond Yields
6
5
4
5 yr
3
7 yr
10 yr
20 yr
2
1
5/3/10
3/3/10
1/3/10
11/3/09
9/3/09
7/3/09
5/3/09
3/3/09
1/3/09
11/3/08
9/3/08
7/3/08
5/3/08
3/3/08
1/3/08
11/3/07
9/3/07
7/3/07
5/3/07
3/3/07
1/3/07
11/3/06
9/3/06
7/3/06
5/3/06
3/3/06
1/3/06
11/3/05
9/3/05
7/3/05
5/3/05
3/3/05
1/3/05
0
Moreover, because our BPO sector and workers’ remittances are
not as sensitive as our exports and oil prices are to a fall in global
economic growth, our economy is not very vulnerable to global
economic slow downs.
Growth Rates of GDP, GNP and GNI
18.0%
16.0%
14.0%
12.0%
10.0%
GNI
8.0%
6.0%
4.0%
2.0%
0.0%
GDP
GNP
The Philippines is not very good in producing tradable
goods and has resorted exporting services and people.
(Philippine economic ship is safe, because it never left the port.)
PHILIPPINES: BALANCE OF PAYMENTS
2008, in million U.S. dollars
Totals
CURRENT ACCOUNT
Goods
Services
Income
Transfers
Receipts
48,202
10,194
5,973
15,780
80,149
Payments
60,784
8,756
5,827
555
75,922
-12,582
1,438
146
15,225
4,227
Surplus/Deficit
CAPITAL ACCOUNT
Net Inflow/Outflow
Direct Inv.
1,283
Portfolio Inv. Derivatives Other
-2,584
-144
-469
-1,914
NET UNCLASSIFIED ITEMS
-2,224
OVERALL BOP POSITION
89
We had bad and deteriorating
governance.
And a scandal-plagued president who was a captive of
congress and the military.
Moreover, our police, bureaucracy and justice system
were quite mediocre to begin with.
We have a very young population….
Age Distribution of Population in the Philippines
80 and over
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10 to 14
5 to 9
0 to 4
0%
2%
4%
6%
8%
10%
12%
14%
…and are not investing enough in them. For example, school
attendance has declined to alarming levels
As a result, enrollment growth has lagged behind the growth of
school-age population.
Growth Rate of Elementary School Enrollment
3.5%
100%
3.0%
90%
2.5%
80%
70%
2.0%
60%
1.5%
50%
Growth Rate of Elementary School
Enrollement
% in Public School (right vertical scale)
1.0%
40%
0.5%
30%
0.0%
1996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-07
20%
-0.5%
10%
-1.0%
0%
The under-investment in our youth
starts before they are born.
Physician-Attended Live Births
70%
60%
50%
40%
30%
20%
10%
0%
Given that nearly half the babies come from mothers who have either
not gone to school or have not reached or finished high school, it will
be hard to improve school attendance without direct assistance to
poor families that have school-aged children.
Fertility by Mother’s
Education
Education
No education
Elementary
High school
College or higher
Desired Fertility Actual Fertility
4.1
3.3
2.5
2.2
5.3
5.0
3.5
2.7
The Philippines has plenty of roads,
but lots of them are bad roads.
Quantity and Quality of Roads:
Selected Asian Countries
Country
Philippines
Korea
Malaysia
Pakistan
Thailand
Kilometers of
road per capita
2.45
2.09
3.97
1.7
0.9
Percent High Quality
18
87
78
88
98
Congressional Insertions and the
DPWH Budget
Comparison of 2009 Proposed and GAA
Allocation for Locally Funded DPWH
Projects (Billion Pesos)
Urgent National and Secondary
Roads and Bridges
Other Urgent Roads and Bridges
Projects
National Buildings
Various Infrastructure including
Local Projects
Rest of Locally Funded Projects
Locally Funded Projects
AS
Legislated
AS Proposed
by DBM
Difference
39.79
35.94
3.85
5.40
2.24
0.00
0.61
5.40
1.63
23.20
32.09
102.72
6.59
31.48
74.62
16.61
0.61
28.10
In the private sector, there is a surplus of savings. But this is due to
a bad investment climate which has resulted in low levels of capital
formation (investment).
National Savings and Investment
(% of GNP)
35%
30%
25%
20%
Gross Domestic Capital Formation
15%
10%
5%
0%
Gross National Savings (GNP minus
consumption)
The bad investment climate is reflected in the
balance sheets of banks as well.
Asset Composition: Philippine Banking System
Asset Type
1999
2004
2005
2009
Cash and Due from
Banks
11.4%
7.9%
8.1%
13.7%
Loan Portfolio (net)
57.2%
47.7%
45.9%
48.9%
Investments (net)
17.6%
29.6%
31.5%
27.8%
Other Assets
13.8%
14.8%
14.4%
9.6%
of which ROPA
7.4%
2.7%
Our government tries to help workers by passing laws that protect them. The Philippines has
one of the highest ratios of minimum wage to GDP ratio among developing countries.
This has probably stunted employment growth in the organized sector and
increased the size of the informal sector and underground economy. As a
result, nearly half of Philippine workers make less than the minimum wage.
Minimum Wage Coverage by Sector in 2007
(% below and above MW)
Below MW Above MW
Agriculture
Mining
Manufacturing
Elec., Gas and Water
Construction
Wholesale and Retail
Transport and Communication
Finance and Real Estate
Gov’t and Private Services
84.1
54.34
35.39
21.07
33.4
48.32
32.28
18.76
30.37
10.84
32.03
36.81
66.78
44.34
31.05
51.11
62.01
57.01
As a result of the foregoing, the Philippines has a
narrow and declining export base.
EXPORTS BY MAJOR COMMODITY GROUP
(in Million US$)
2008
2007
10.8%
5,275
4,944
2.5%
1,240
1,109
61.0%
29,928
32,243
4.6%
2,272
2,653
Wood Manuf., Furniture and Fixtures
2.3%
1,139
1,011
Machinery & Transport Equipment
4.3%
2,103
1,857
Other Manufactures
11.3%
5,537
5,192
Special Transactions
3.1%
1,529
1,458
100.0%
49,023
50,467
Agricultural, Forest and Mineral Prods.
Petroleum Products
Electronic Products
Garment, Footwear, Textiles and Related
Goods
TOTAL EXPORTS, as per NSO
Jan-98
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
And a small and declining manufacturing sector.
Monthly Integrated Survey of Selected Industries Vol. of Production Index (MISSI VOPI)
160
140
120
100
80
1994=100
60
2000=100
40
20
0
With a few exceptions, the manufacturing sector has
been losing ground long before the global crisis.
MISSI Volume of Production Index (Year 2000 = 100)
250
200
Fabricated Metals
150
Chemical Products
Furniture and Fixtures
Rubber Products
100
Total Manufacturing
Food Manufacturing
Beverage
50
2008M12
2008M9
2008M6
2008M3
2007M12
2007M9
2007M6
2007M3
2006M12
2006M9
2006M6
2006M3
2005M12
2005M9
2005M6
2005M3
2004M12
2004M9
2004M6
2004M3
2003M12
2003M9
2003M6
2003M3
2002M12
2002M9
2002M6
2002M3
2001M12
0
Many industries such as semi-conductors, footwear and
wearing apparel have lost competitiveness
MISSI Volume of Production Index in Declining Manufacturing
Industries
160
140
120
Machinery excluding Electrical
100
Electrical Machinery
Petroleum Products
80
Footwear and Wearing Apparel
Wood and Wood Products
60
Publishing and Printing
40
Tobacco
Textile
20
2008M12
2008M9
2008M6
2008M3
2007M9
2007M12
2007M6
2007M3
2006M12
2006M9
2006M6
2006M3
2005M12
2005M9
2005M6
2005M3
2004M12
2004M9
2004M6
2004M3
2003M12
2003M9
2003M6
2003M3
2002M12
2002M9
2002M6
2002M3
2001M12
0
The share of agriculture in total employment has declined, but it is the
service sector, not the manufacturing sector that absorbed the
workers that migrated from the rural to the urban areas.
Employment (in Millions,
Jan LFS)
Sectoral Distribution of Employment
(Jan LFS)
35
60
34
50
33
32
40
Services
31
%
30
Agriculture
Manufacturing
30
Industry ex Mfg
20
29
10
28
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
2002 2003 2004 2005 2006 2007 2008 2009
1999
0
27
Unfortunately, most of the jobs are created are in sectors such as
“wholesale, retail and repair” and “transportation, storage and
communications where most workers are “own-account” or “unpaid
family” workers who make less than the minimum wage.
Distribution of Service Sector Employment
45.0%
Wholesale and Retail and Repair
40.0%
Transport, storage and communication
35.0%
Private households with employed persons
30.0%
Public administration and defense,
compulsory social security
25.0%
Education
20.0%
Real estate, renting and business activities
15.0%
Hotels and restaurants
10.0%
5.0%
Other community, social and personal service
activities
0.0%
Health and social work
2002
2003
2004
2005
2006
2007
2008
2009
As a result, in spite of rapid urbanization and the rising share of NCR , Region III and
Calabarzon in total population, the share of wage and salary employment in total
employment has barely increased.
Employment by Class of Worker (Jan. Labor Force Surveys)
60
50
40
Wage and Salary Workers
%
30
Own Account
Unpaid Family Workers
20
10
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
The new president is inheriting all these problems at a
time the budget deficit is at an all time high.
Budget Surplus /(Deficit) of the National Gov't
12 month running total (Billion Pesos)
50
2010M4
2009M11
2009M6
2009M1
2008M8
2008M3
2007M5
2007M10
2006M12
2006M7
2006M2
2005M9
2005M4
2004M6
2004M11
2004M1
2003M8
2003M3
2002M10
2002M5
2001M7
2001M12
2001M2
2000M9
2000M4
1999M11
1999M6
1999M1
1998M8
1998M3
1997M10
1997M5
-50
1996M12
0
-100
-150
-200
-250
-300
-350
Surplus / (Deficit)
The resurgence of the deficit is due to a fall in revenue and a
decompression of government expenditures.
Revenue and Expenditures of the National Government 12 mo. Running Total (Billion Pesos)
1600
1400
1200
1000
800
Total Revenue
600
Expenditures
400
Surplus / (Deficit)
200
-400
-600
2010M4
2009M11
2009M6
2009M1
2008M8
2008M3
2007M10
2007M5
2006M12
2006M7
2006M2
2005M9
2005M4
2004M11
2004M6
2004M1
2003M8
2003M3
2002M5
2002M10
2001M12
2001M7
2001M2
2000M9
2000M4
1999M11
1999M6
1999M1
1998M8
1998M3
1997M5
1997M10
-200
1996M12
0
1996M12
1997M5
1997M10
1998M3
1998M8
1999M1
1999M6
1999M11
2000M4
2000M9
2001M2
2001M7
2001M12
2002M5
2002M10
2003M3
2003M8
2004M1
2004M6
2004M11
2005M4
2005M9
2006M2
2006M7
2006M12
2007M5
2007M10
2008M3
2008M8
2009M1
2009M6
2009M11
2010M4
The fall in revenue is due to the decline in collections of
both BIR and Customs
1400
1200
1000
800
Total Revenue
600
Tax Revenue
Bureau of Internal Revenue
Bureau of Customs
400
200
0
Government is currently borrowing not just to
refinance maturing principal but interest expense as
well.
Primary Surplus
(in billion pesos and in % of Interest Expenditures)
120%
350
100%
300
250
80%
200
60%
150
40%
100
20%
50
-20%
-40%
1996M12
1997M6
1997M12
1998M6
1998M12
1999M6
1999M12
2000M6
2000M12
2001M6
2001M12
2002M6
2002M12
2003M6
2003M12
2004M6
2004M12
2005M6
2005M12
2006M6
2006M12
2007M6
2007M12
2008M6
2008M12
2009M6
2009M12
0%
0
-50
-100
Ratio of Primary Surplus to Interest
Primary Surplus
-200
-400
-600
2010M4
2009M11
2009M6
2009M1
2008M8
2008M3
2007M10
2007M5
2006M12
2006M7
2006M2
2005M9
2005M4
2004M11
2004M6
2004M1
2003M8
2003M3
2002M10
2002M5
2001M12
2001M7
2001M2
2000M9
2000M4
1999M11
1999M6
1999M1
1998M8
1998M3
1997M10
1997M5
1996M12
But unlike the past, interest expense has not spiked.
1600
1400
1200
1000
800
600
Expenditures
Interest Payments
400
Surplus / (Deficit)
200
0
1978M1
1978M8
1979M3
1979M10
1980M5
1980M12
1981M7
1982M2
1982M9
1983M4
1983M11
1985M1
1985M8
1987M4
1987M11
1988M6
1989M1
1989M8
1990M3
1990M10
1991M5
1991M12
1992M7
1993M2
1993M9
1994M4
1994M11
1995M6
1996M1
1996M8
1997M3
1997M10
1998M5
1998M12
1999M7
2000M2
2000M9
2001M4
2001M11
2002M8
2003M4
2004M1
2004M9
2005M4
2005M11
2006M7
2007M5
2008M1
2008M9
Unlike what happened in the past, the growth in the budget
deficit did not cause a spike in domestic interest rates.
364 Day Treasury Bill Rate
50
45
40
35
30
25
20
15
10
5
0
Because of OFW remittance we have a BOP current account
surplus and a large and growing international reserves.
CURRENT ACCOUNT
(million USS Dollars)
8000
BSP's Gross International Reserves and BOP
Current Account Surpluses (billion US$)
40
35
6000
30
4000
25
20
2000
15
0
10
5
-2000
0
-4000
-5
BSP GIR
1999 GIR + Cum
Current Acct
Surplus
Current Acct
Surplus
This means that there is excess savings in the private sector and the
government can continue running deficits provided (a) the money is well
spent and (b) there is a credible medium term deficit reduction program.
National Savings and Investment
(% of GNP)
35%
30%
25%
20%
Gross Domestic Capital Formation
15%
10%
5%
0%
Gross National Savings (GNP minus
consumption)
Moreover, the government does not have to reduce its budget deficit to zero
provided it can maintain macroeconomic stability (e.g., no spikes in interest,
exchange and inflation rates). The economy can out-grow the debt even with
modest deficits provided that off-budget deficits can be eliminated.
Debt-GDP Ratio Scenarios with Zero Off-Budget Deficits
60.0%
50.0%
40.0%
w/ 200 B annual budget deficit
30.0%
w/ 300 B annual budget deficit
20.0%
10.0%
0.0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
A big part of the increase in the public debt is not due to the national
government ‘s budget deficit. The supervision of banks, the screening of BOT
contracts and the monitoring and management of government corporations
must be improved to prevent a repetition of what happened in the past.
Decomposition of the Growth of the National Government Debt (Trillion Pesos)
4.5
4
3.5
3
Due to Deficits and Changes in the Exchange
Rate
2.5
Actual NG Debt
2
NG Debt 2000
1.5
1
0.5
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
While it is important to reduce corruption and to make public
officials more accountable, it is also important to improve the
regulatory environment.
• The perception that government policies often change and
that the changes are hard to predict discourages investment.
(Ideally, politicians should appoint competent and honest
regulators and let the regulators do their jobs.)
• In the power sector, for instance, regulatory uncertainties
might have created an environment (which if not improved)
may delay investments in new plants until there is an obvious
shortage.
• In turn, even a successful anti-corruption program may not be
enough to cancel out the negative effects of a power
shortage in Luzon on the investment climate .
Tax administration must be improved. In spite of economic growth,
government revenue, after adjusting for inflation, grew only slightly faster
than population.
Growth of Government Revenue: 1997 to 2008
Total Revenue
1997 to 98
1999 to 99
99 t0 2000
2000 to 01
2001 to 02
2002 to 03
2003 to 04
2004 to 05
2005 to 06
2006 to 07
2007 to 08
Compounded
Annual Growth
BIR
Customs
-8.5%
-4.1%
0.2%
0.1%
-3.1%
4.4%
4.8%
10.8%
15.7%
5.6%
4.6%
-2.9%
-6.3%
-0.6%
1.3%
-2.9%
4.0%
3.6%
8.9%
14.1%
6.4%
1.5%
-27.4%
5.3%
3.3%
-4.8%
-4.4%
6.1%
8.8%
18.8%
21.9%
2.7%
15.5%
2.6%
2.3%
3.3%
But improvements in tax admin, may not be enough. After adjusting for
inflation, tax revenue from some sources actually had negative long-term
growth rates.
Worse Performing Revenue Sources
Non-W2 Bank
Customs
Indiv ITR Deposits Alcohol
Tobacco Fuel
Duties
1997 to 98
-3.1%
78.6%
-16.1%
-4.6%
-4.9%
-22.7%
1999 to 99
-3.0%
-40.6%
-6.7%
-8.7%
-9.8%
4.7%
99 t0 2000
79.4%
-12.5%
-2.5%
-0.9%
-11.2%
-2.1%
2000 to 01
-46.7%
21.1%
-9.6%
4.4%
-18.0%
-19.4%
2001 to 02
-11.5%
-31.1%
-1.6%
-0.8%
-14.9%
-18.5%
2002 to 03
-6.8%
-19.2%
3.9%
-4.1%
-6.3%
8.2%
2003 to 04
23.2%
5.5%
8.6%
8.8%
-19.6%
5.4%
2000 to 05
63.0%
6.0%
0.0%
-3.5%
-3.5%
44.3%
2005 to 06
14.5%
12.2%
-9.9%
7.5%
-34.1%
-8.5%
2006 to 07
-47.5%
-18.5%
13.2%
-15.9%
-24.8%
-4.8%
2007 to 08
7.2%
-13.8%
-1.8%
10.5%
5.4%
22.7%
Annualized GR
-0.4%
-5.3%
-2.4%
-1.0%
-13.5%
-0.8%
Must appoint good people in BIR and Customs. But it
may become necessary to impose new taxes or reduce
the granting of tax incentives.
• Increase sin taxes
• Reduce BOI incentives
• Increase VAT, fuel and real estate taxes but
reduce the income taxes of wage and salary
workers (who bear 95% of the individual
income tax)?
Must improve the quality of
government spending.
Better Infrastructure (improve governance and
prioritization in DPWH and DOTC, and use of BOT in
key infrastructure projects like the additional MRT
lines and the extension of SLEX to Lucena)
Less graft-ridden and more cost-effective ways to help
the poor (in much of Latin America, they have
increased reliance on Conditional Cash Transfer
Program and reduce many subsidies in kind).
Can Noynoy Hack it?
The nation hopes that he can. If the Filipino people support him (e.g., versus
a pork-barrel-driven congress), he could succeed.
Sometimes, the enemy of the good is the perfect. For example, there is no
such thing as a new taxes that hurt only rich tax evaders. Tax measures
that hurt some but help many (e.g., if they finance good spending) may be
superior to doing nothing.
Moreover, if the corruption is reduced and the regulatory environment and
public accountability are improved, investments may rise, increasing not
just economic growth but quality of life as well.
But our expectations should also be more realistic. Many of our problems
have deep historical roots and the out-going president that has done a
lot of things to make the job of her successor a very difficult one.