Tuesday, 28 April 2009

Philippine Economy Likely to Continue to Expand This Year

Bangko Sentral
Media Release
04.23.2009
http://www.bsp.gov.ph/publications/media.asp?id=2056

BSP Governor Amando M. Tetangco, Jr. said that while the Philippines is not immune to the global economic slowdown, a flat growth, as announced by the IMF yesterday, is unlikely. There are fundamental forces in the economy that would help it to withstand global shocks and avoid a major slippage in growth.

A key factor that could drive the country’s growth is the strength of domestic demand. Personal consumption, which accounts for more than two-thirds of the Philippine economy, has been historically firm, with private spending resilient across business cycles. The only time in the past 30 years that private consumption contracted was in 1985, when the economy underwent external debt restructuring. Structural factors are behind this underlying resilience. The Philippines’ young and economically active population has propelled economic growth even in difficult times. Incomes are also at a level where the majority of the population has a high propensity to consume. Importantly, the recent easing of inflation should provide a welcome boost to household purchasing power.

The country’s export industry, remittances and outsourcing sectors, while exposed to more difficult global conditions, retain important elements that render them less vulnerable to the world-wide economic down cycle. First, the country’s dependence on external demand is comparably smaller relative to its Asian peers. The Philippines’ exports-to-GDP ratio has gone down to 29 percent in 2008 from 49 percent in 2000, considerably lower than those of its neighboring ASEAN economies. The share of Philippine exports (both direct and indirect) going to the United States has also dropped during the same period.

Second, the strength of overseas’ Filipinos remittances are supported by key fundamentals. The number of displaced overseas workers as reported by the Department of Labor and Employment (DOLE) is small when compared to the stock of overseas Filipinos, estimated at close to 9 million. Deployment has also continued to grow in 2009, and there has been a gradual increase in the share of workers with permanent resident status, suggesting a welcome shift from yearly contract renewals to more long-term employment. There has also been an observable rise in the deployment of skilled and professional workers. Apart from their higher earnings, they also tend to have more long-term work contracts. The Philippine Overseas Employment Administration has also indicated that labor demand could remain strong in some countries given the needs in their power/energy and tourism industries. The hiring program for nurses and caregivers in Japan under the Japan-Philippines Economic Partnership Agreement (JPEPA), which is expected to commence soon, could open up opportunities for Filipinos in the field of health and medical care. The DOLE has also been fielding labor teams in crisis-affected host countries to help displaced Filipino workers find other work opportunities.

Third, the continued shift to high-value services alongside the increasing need to outsource non-core business activities in firms in the advanced economies are expected to propel the growth of the Philippine BPO industry in 2009. Recessionary conditions in the global economy are expected to encourage firms to outsource, as they seek to streamline costs further. The growing success of firms that have adopted outsourcing could drive higher acceptance of such a business model.

Importantly, monetary policy has been appropriately stimulative, and this has helped support demand and minimize the corrosive feedback loop stemming from weaker economic and financial conditions. Furthermore, there is room to ease monetary policy settings should conditions warrant given the benign inflation outlook and well-cemented inflation expectations. Recent adjustments in fiscal spending plans should also provide needed boost to growth. Moreover, as a result of purposeful reforms in the past, including the clean-up of bad assets, capitalization build-up and enhanced risk management, the banking system remains fundamentally strong and is properly discharging its role to intermediate funds and manage risks.

The Philippine economy is also better able to ride out the current crisis due in part to lessons learned from past crises: it is therefore better prepared this time around as evident in the rise in foreign exchange reserves, sturdier external payments dynamics, lower public debt burden and improved supervision of the banking system as well as enhanced disclosure and information practices.

Governor Tetangco noted that, historically, the IMF has tended to be overly pessimistic in projecting Philippine GDP growth. In the past seven years, the IMF has consistently underestimated Philippine GDP growth forecast by an average of about half a percentage point.

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