Sunday, December 14, 2008


Disclaimer: This is an article based on research and on my own opinion and analysis. Use this information on your own risk. I will not be held liable for any loses that might arise from the use of the information from this article. However, I would very much appreciate if people who manage to profit from the use of the information contained in this article to share their “profit” with me. “ )
If you were to read the business section of any newspaper nowadays, all you could read are bad news, more bad news, and much more bad news about the global economy. And this you get to read every day and every hour (if you follow the news channels and the internet). Almost every day, there is news about the on – going recession, the free – falling commodity prices, the depressed corporate earnings resulting into stock prices hitting multi – year lows and employment and other economic data hitting multi – decade lows. The reports are so negative that as if there is no longer any good news out there about the economy. So it is rather surprising actually to hear from some quarters that the Philippines is actually “lucky” for being rather mildly affected by the contagion that is the Global Financial Crisis of 2008. Is this assertion true and well founded or rather, this is just a political spin let out by an unpopular administration to score some brownie points? If the Philippine economy isn’t really immune to the global crisis, then exactly, how bad is it? Well, I’ve managed through diligent research to cobble together some figures to try to portray the economic future of the Philippines in 2009 and 2010. But before everything else, a few points should be noted first. As much as I’d tried to get the latest figures for the forecast, I’m hampered by two things. First is the dearth of the forecasts available since most forecasts are actually internal research of companies (and as such, I took pains to acknowledge my sources in the reference section). It is difficult therefore to get as much data as I would have wanted much less the concise analysis behind the figures. Second, some of the forecasts listed are in my opinion outdated already. This is due to the extreme volatility happening in the world markets today. To say that most analysts are caught surprise by the steep and rapid deterioration of the world economy is a huge understatement. The markets are just simply too unstable and unpredictable for the moment. An example is the fact that most of the forecasters I’ve researched kept constantly revising their forecasts every month based on the latest evidence available. I included these “outdated” forecasts as well in my analysis because of the scarcity of the data. Anyway, a good forecast is always better than a bad forecast and a bad forecast is invariably better than having no forecast or guidance at all. Another point need to be noted here is that the analysis are Philippine specific, i.e., one cannot apply the same analysis on another country. A case in point is the GDP growth rate. A 3 – 4% growth maybe pathetic by Philippine standards but is considered a huge improvement in an advance economy like the US. On the same account, a 7% growth rate is a huge reason to celebrate in the Philippines but the same growth figure is a cause for sleepless nights in China.
IMF1/ 3.5%13/ 4.5%/ 4.3 – 7.0%/ 3.5%
ADB2/ 3.5%13/NONE/ 8.0%/NONE
State Street Global Advisor3/ 3.8%/NONE/ 7.0%/NONE
UN4/ 3.5%/ NONE/ 7.2%/ NONE
WB5/ 3.0%13/ 4.0 – 4.5%/ 8.5%/ 5.5%
DBS6/ 3.8%/ NONE/ 3.2%/ NONE
ATR Kim Eng Securities7/ 6.0%/ NONE/ NONE/ NONE
Bank Of America7/ NONE/ NONE/ 5.0%/NONE
BPI7/ 4.0%/ NONE/ 6.0 – 7.0%/NONE
CITIBANK/ 3.0%10/ 4.6%/ 6.5%7/ NONE
Deutche Bank7/ NONE/ NONE/ 7.0%/ NONE
EIU12/ 1.8%/ 3.2%/ 6.0%/ 4.5%
Forecast Pte Ltd7/ NONE/ NONE/ 6.4%/ NONE
HSBC7/ 3.9%/ NONE/ 5.9%/NONE
IDEA7/ 3.7%/ NONE/ 10.0%/ NONE
ING Bank7/ NONE/ NONE/ 6.4%/ NONE
Nomura Securities7/ NONE/ NONE/ 6.7%/ NONE
Philippine Equity Partners7/ 3.1%/ NONE/ 6.6%/ NONE
Standard Chartered Bank7/ 3.1%/ NONE/ 3.2%/ NONE
DBCC8/ 3.7 – 4.7%/ NONE/ 6 – 8%/ 3.5 – 5.5%
UBS9/ 1.8%/ NONE/ 3%/ 3.8%
Fitch Ratings11/ 2.5%/ NONE/ NONE/ NONE
Global Source/ 3.5 – 4.0%/ NONE/ NONE/ NONE
JP Morgan/ NONE/ NONE/ 2.5 – 4.5%/ NONE
S&P/ 3.3 – 3.8%/ NONE/ NONE/ NONE
UOB/ 4.0%/ NONE/ 7.0%/ NONE
RANGE/ 1.8 – 4.7%/ 3.2 – 4.8%/ 2.5 – 10.0%/ 3.5 – 5.5%
AVERAGE/ 3.29 – 3.39%/ 4.08 – 4.20%/ 6.11 – 6.39%/ 4.16 – 4.56%

The above table list the various forecasts made by different institutions. It showed a forecast range of 1.8 – 4.7% for the 2009 GDP growth rate, which is quite a wide range. The various forecasts actually posit 2 differing views about the Philippine economy in 2009. Those whose forecast GDP growth rate of below 3% actually viewed the Philippines experiencing a sharp slowdown due to a prolonged and deep recession among the advance economies led by the US, which translates into lesser demand for exports from countries like the Philippines. This is collaborated by government forecast through the DBCC which sees export growth at 1 – 3% in 2009. Also, the economic downturn in the advance economies would result in lay – offs among the OFWs where a majority are located. This in turn would lead to diminish remittances from OFWs, which in the past 5 or so years is actually the main growth driver in the Philippine economy since remittances from OFW fuels domestic consumption. Again, this is collaborated by forecast such as the WB, who predicted remittance growth for 2009 would only be at 4% and 5% in 2010 (the remittance growth so far in 2008 is 15%). On the other hand, those forecasting a GDP growth of above 3% are more optimistic though they also acknowledge a slowdown from 2008 (which churn out 4.6% based on the latest figure) but not that much. Though these forecasters think that export would be severely trashed by the ongoing financial crisis in 2009, they held the belief that remittances wouldn’t be that bad. This is shown by the rather optimistic forecast of 6 - 10% remittance growth in 2009 by the government. It is also noteworthy to point out that of all the forecasts listed, the government’s figure through the DBCC are the most optimistic of the lot. In fact, the government’s forecast are so optimistic that it would seem unrealistic compared to the majority of the forecasts. And in the past, government most often downgrades their GDP growth forecasts to conform to “reality”. Despite this, government’s forecast cannot be simply ignored no matter how “unrealistic” it may seem. This is because the government’s GDP growth forecasts aren’t really forecast at all but more of a performance target. While the rest of the forecasters are simply “guessing” what the 2009 picture might be using their complex mathematical models, the government on the other hand is in a position to “realize” their targets. Nevertheless, it is but only prudent to place just the right amount of trust on government forecasts. So having said that, the next question is “would the economy be in a good or bad shape in 2009”? What does 1.8% or 4.7% GDP growth rate actually mean? Well, to understand that, we need to make a few comparisons but first thing first. The first thing we need to understand is what is GDP? A GDP is a measure of the total domestic output of an economy minus foreign receipts such as income of multi – nationals from other countries, earnings of OFW in other countries, etc. A positive GDP growth rate “may” signify that the economy is growing or expanding while a negative figure points to a shrinking or contracting economy and two consecutive negative GDP growth rate is by definition, a recession. A prolonged economic contraction (like more than a year) indicates that the economy is in a depression. The more prolonged, the deeper is the economic depression. Moving along, the first significant comparison that could be used for analysis is to compare the forecast growth figure with past performances most especially the current year, 2008. The GDP growth rate as of the 3rd quarter of 2008 is at 4.6%. Now comparing this figure with the average forecast for 2009 of 3.29 – 3.39%, the forecast growth rate is just down by 1.21 – 1.31% however, if the current GDP rate is compared to the lower end of the forecast growth range, which in this case is 1.8%, the difference is a whopping 2.8%. To conceptualize the magnitude of the “slowdown” and get a feel of what is it like. Imagine driving a car at 80 kmh. A 1% or less drop – off would be like gently applying the brakes such that one would have a smooth stop. It is therefore a slight slowdown with business volume likely down from the previous year. Depending on how badly hit a company is, a few might begin to downsize. A 1 - 2% drop – off in GDP growth rate is akin to stepping the brake a little harder in such a way that the halt is a bit sudden. That is what we call a major slowdown or a soft landing (depending of course of the magnitude). Expect some business to downsize either mildly or drastically depending on the magnitude of the loss of demand loss. Expect also some business to close though it wouldn’t be that many. Now, more than 2% fall off from the GDP is very much similar to the Motorlite commercial of “Kagat Agad” wherein you virtually “kicked” the brake and felt the force of the brake hurling you out of the windshield and into the street if not for the restraint of the seatbelt you’re wearing. That in economist’s parlance is called a hard landing. In this case, expect bankruptcies and closure to happen. Beyond that, it is a total collapse. Just use your imagination to conjure what the scenario would look like. A second comparison that could made for the forecast GDP growth rate is to compare the forecast GDP growth rate with the population growth rate. The Philippine population growth rate according to the 2007 census is at 2.04% and the current population size is at around 90 million, making the Philippines the 12th most populous country in the world. So what does population growth rate have to do with GDP? Picture this, a moderate size family of say 5 earning a respectable income as a result of taking advantage of the opportunity that is abound in the economy would have sufficient resources to not only provide the basic needs for the family but to also manage to live in some level of comfort. Now, if a new baby is born to the family, strains on the family finances would be surely felt. However, this would be mitigated if economic opportunities are readily available such that the family could easily exploit it and thus alleviate their financial condition but if the opposite happens, i.e., the rate of increase in income cannot sufficiently cope with the rate of increase in financial burden as a result of the addition of a new member. Deterioration in the quality of life for the family would be felt. This is the logic behind the comparison between the GDP and the population growth rate. Now at the current rate of 4.6%, the figure is grudgingly acceptable. A 3% GDP rate is a real cause of concern while a 1.8% GDP rate is for all practical purpose pure hardship. The third comparison that could be made with the forecast GDP is with the forecast inflation rate. The relationship between inflation rate and the GDP rate can be discern from understanding the total sales revenue equation. To calculate a company’s total sales (assuming that the company is selling a single product only), we use the equation: TOTAL SALES REVENUE (R) = SELLING PRICE (SP) x SALES VOLUME (V). To compute for the sales growth rate, SALES GROWTH RATE (GR) = R2 – R1 = (SP2 x V2) – (SP1 x V1). Assuming that the selling price is constant, the total sales equation can now be simplified into GR = SP x (V2 – V1). What this meant is that we could increase our sales growth rate by simply increasing our sales volume without increasing the selling price. Conversely, if the sales volume were to remain constant, the only way we could increase our growth is through increasing our sales price or GR = V x (SP2 – SP1). Since the economy is just the aggregate sum of all businesses/ companies within the country, we could expand the sales equation applicable to a single company by a million fold and apply it to the economy as a whole and instead of Sales Growth Rate, we use GDP. Instead of Selling Price, we use Price level and replace Volume with Economic Activity Level (GDP = (P2 x AL2) – (P1 x AL1)). What this tells us is that an economy could “apparently expand” without creating much jobs and opportunities simply by inflation (of course, in reality, GDP driven purely by inflation doesn’t exist). Therefore, one shouldn’t be overtly ecstatic just because of the GDP figure registered positive. Inflation should also be taken into consideration. It is for this reason (and along with the population growth rate issue) that Celito Habito, the former NEDA director under President Ramos said that in order for the economic growth to have a significant, real impact on the lives of the ordinary Filipinos, the Philippine GDP has to grow by an average of 7% annually. With that in mind, we could come up with a fair idea about what the GDP numbers meant. For GDP rate below 1%, the economy is contracting. Expect demand for goods and services to fall resulting in business closures and high unemployment rates. Between 1 – 2% growth, depending on population growth rate and inflation rate, the economy could either be stagnant or worst, shrinking as well. The same thing would happen, poor sales, business closure and high jobless rate. Growth between 2 – 4%, again depending on inflation and population growth rate, the economy could be either stagnant or chugging along sluggishly. At this point, demand could be described as either paltry, or pathetic, or thriving demanding on the magnitude. Furthermore, this is only applicable to basic commodities. Sales of luxury items or durable goods like automobiles and real estate could be pretty limited. With 4 – 5% GDP, growth is decent, fairly moderate. At this rate, basic necessities could be doing well while luxury goods are doing so – so. At 5 – 6% rate, the rate is respectable and one could expect consumption (including luxury goods) in the economy to be fairly robust. By the time the GDP hits 6 – 7%, better take that bottle of champagne out, uncork it and celebrate. Good times are here but unfortunately, it is unsustainable on the long run in the Philippines’ case because inflation would hit near 10% at that point (due to “structural problems”). Some years back, I remember my economics professor in MBA used to say that there is one particular Philippine product whose consumption perfectly mirrors the economic growth of the country and that is the sale of San Miguel Beer (not condoms as one of my classmate loudly answered). So if I were to venture to create a scenario using that logic, less than 1% growth, nobody is drinking SMB because they don’t have money to keep their stomach full. 1 – 2%, probably a beer once in a full moon. 2 – 4%, a beer every week. 3 – 4%, a case of beer every weekend. 4 – 5%, a beer every day. 5 – 6%, beer drinking session every weekend on top of beer every day. 6 – 7%, why drink beer when you can have gin or rum instead. So, in assessing the 2009 Philippine GDP, the economy is definitely slowing down and rather abruptly perhaps with demand contracting if not stagnant or sluggish. Things would start to only brighten up however from 2010 onwards assuming that the worst of the global financial crisis would be over by mid 2009.

/ 2009/ 2010 / 2009 / 2010 / 2009/ 2010 / 2009/ 2010 / 2009/ 2010
I.D.E.A /4.6%/ 4.3% /5.6% / 5.6% /3.6% /4.6% /1.8%/ 2.4% /1.8%/ 2.4%
DBS / / / / / / /3.4%
The GDP growth rate is a very broad measure and at times companies might find it too unwieldy for use in forecasting and planning. This is precisely the reason why economic sector forecasts are more useful. An example would be that retailers would rather used PCE as gauge in assessing the demand for the next year while agro – industrial companies would look at agricultural growth rate for planning their sales strategies for 2009. Sadly, however, economic sector forecast data are very difficult to come by if it wasn’t paid for. Luckily, I manage to garner some numbers for “free”. According to economic theory, the economy can be described from two perspectives, the supply side and the demand side. The supply side of the GDP refers to the production output of each individual “sector”, which in this case refers to INDUSTRY, SERVICE, and AGRICULTURE. The idea of using the demand equation for GDP is to understand which of the sectors contributed more to the output in the economy. Take note that by Industry, the definition used in economics refers to the economic sector encompassing MANUFACTURING, CONSTRUCTION, and MINING. SERVICE on the other hand comprised of that part of the economy engage in BANKING and FINANCE, TRADE, TRANSPORTATION, and SERVICES like business outsourcing, restaurant etc. AGRICULTURE is comprised of CROP like rice and corn, POULTRY, FISHERY, and FORESTRY like lumber. The demand side of the GDP refers to the consumption pattern or the spending behavior of the economy by the 3 major spenders in an economy, namely: Government, Consumers, and Private Businesses. The idea of scrutinizing the GDP into its make – up component is to discover what “drives” the economic growth. By Government Spending, what is referred here is the money spent on infrastructure projects like roads. It also includes money spent on defense and into the built up of a war machine as well as national public healthcare system. Personal Consumption Expenditures (PCE) of consumers refers to money spent by any kind of consumer be it in class A, B, C, D or E on practically everything under the sun. Private Investments of businesses do not refer to stock investments at all by these entities rather it refers to the investments of businesses in productive capacities that can be used to create products and services to satisfy consumer needs. This also includes investments on inventories for eventual sale. It quite apparent from the ongoing description of the above that though each account are separate, the three (Gov’t spending, PCE, Private Investments) are actually interrelated to each other. Increase government spending could create economic opportunities for the general populace and this would in turn put more money in their pockets, which could boost PCE. With increased PCE, businesses would be “motivated” to increase their investments to meet the increasing demand. Economic theories also hold that the both sides of the equation (the demand and the supply sides) should be equal since the economy only consumes what it produces. The story of the Philippines for the past few years is that the GDP is buoyed by two growth drivers; private consumption on the demand side and services on the production side. The two however have lost momentum in 2008. Private consumption last year grew at about 6% every quarter. This year, its growth eased to 5.2% in the first quarter and pulled back to 3.4% in the second as inflation accelerated and consumer spending sentiment cooled. For next year, PCE is expected to grow by a measly 1.8% while SERVICE sector growth rate would slow considerably as well to 3.6% from 4.3% in the 2nd quarter of 2008. By the way, the service sector contributed 46% of the GDP. The rather dismal forecast of PCE for 2009 is largely attributed to the projected slowing of remittances from OFWs, since they might be severely affected by the mounting job losses due to the ongoing global financial crisis. The service sector, which largely caters to the domestic clientele (which in turn derive their spending power from remittances) would thus be dragged down by the spending slowdown. In addition to that, there are some unconfirmed reports of lay – offs from the BPO (business process outsourcing, aka, call centers) sectors. This is due to the fact that the majority of the BPO’s clients are banks based in the US (the worst affected sector in the US currently). On the other hand, the more optimist forecasters are saying that remittances may not be that badly hit. Besides, the depreciating peso in 2009 may actually be a boon because remittances would be worth more in peso terms and these could potentially crop up consumer spending. Looking at the other numbers, agriculture is forecast to do better in 2009 but this is after that sector took a severe beating in 2008 due to the high crude oil prices. As a result of high crude oil prices, fertilizer prices increase by leaps and bounds “forcing” some farmers to go “organic farming”. This unfortunately had the effect of decreasing crop yields. In addition to that, the fishery sector also got hit by the high oil prices since fishing vessels are power by diesel oil derive from crude. Fishermen got reluctant to go out fishing if they felt the yield wouldn’t be enough to break – even. Apparently, paddling was never considered an option. In short, the forecast figures for agriculture in 2009 represent more of a recovery from 2008 lows rather than actual growth. The 2009 industry growth forecast is also seem to be fairly steady considering that industry is growing more or less around 4% for years. Well, this is because the industry sector is recently buoyed by the construction sub – sector. There are actually numerous construction projects going on right now, mostly catering to OFWs residential needs and to the booming BPO demand for commercial space. Over the spending side, the most surprising figure here is actually the forecast for government expenditures, which is a pittance at 1.8%. I mean with the looming passage of the 2009 national budget of 1.4 trillion peso, which is 15% higher than 2008 and with infrastructure spending also 20% higher plus the fact that 2010 is a presidential election year, 1.8% is too low a forecast. Well, maybe the forecast is outdated as some of the figures are. Speaking of presidential election, the election is just 18 months away and campaigning at this time is not in any way early by Philippine standard. By historical precedents, politicians would try every means to get government to spend on their pet projects so as to ingratiate themselves with the electorates in the hopes that they would get re – elected come payday. If that is the case, what more could you expect in a slowing economy wherein conventional economic theory would strongly support massive government spending? Expect unbridled, aggressive, irresponsible spending by the government, which would naturally bloats the budget deficit and could probably send the Philippine economy in a downward spiral in the future (after 2010) but would do miracles in 2009. Looking at the inflation forecasts, we could discern a huge disparity in the forecasts varying from 2.5% to 10%. Granted that some of the figures are already outdated and thus, obsolete, the figures still varied widely. Again, the forecasts revealed two widely divergent views on inflation picture in 2009. On one hand, some forecasters are one in saying that with the free fall in commodity prices in the global market the past few months, it is only but natural for inflation to move slowly in 2009. Inflation by the way is the rate of increase in the general price level within an economy. On the other side of the divide, some forecasters are telling a different story, that the inflation would remain high in 2009 especially the early part. This is because they believe that businesses still hold expensive stocks in their inventory, which they bought when the prices of goods sky rocketed in July of 2008 in anticipation of further increases. And these inventories haven’t been flushed out of the system yet. As a result, businesses saddled with high cost inventories are less likely to sell them at cheaper price otherwise they would incur losses (maybe they would if the economy sputters even more in 2009). A case in point is the oil companies. International crude oil prices has plunged by 60% since their July peak into 4 year lows, yet, the prices of gasoline in the Philippines haven’t fallen to their levels at the start of the year yet, much less to their price level 4 years ago. Another factor in the works in 2009 that affects inflation is the potential depreciation of the peso as a result of “deleveraging” or the massive pull out of US funds from non – cash assets and into near cash assets like the US treasury notes. By average, using the collected forecast data, inflation in 2009 is expected to be around 6%. To appreciate what 6% means, picture this. Inflation rate of less than 2% and even though the number maybe positive, the economy is experiencing deflation. Deflation by definition means that prices are falling and to consumers, it is good news however, far from it, deflation is a bad news. Using the logic of demand and supply theory, an increasing demand and a stagnant supply, prices would increase as buyers competitively bid for dwindling supplies whereas a falling demand and increasing supply situation would force prices to fall as suppliers saddled with high fixed costs would be tempted to shade their prices just in order to incur sales and break – even. In an economy, price rise and fell regularly over a period but not simultaneously or “all” at the same time or even prolonged like during a deflationary spiral. In a deflation, there is so much demand destruction that virtually nobody is buying and business trying to stave off impending doom would cast off prudence and engaged in an indiscriminate fire sale trying to get hold of cash just to survive through the bleak period. However, as business gets more pessimistic over their future, they would also withheld further investments and scale down production, which would in turn affects employment and with bleak employment prospects, consumers would crimp further their spending creating a debilitating spiral that would get worst over time. An inflation rate of between 2 – 4% is for all intent, mild. Consumer would barely felt the hurt in their pocket. Between 4 – 6%, inflation is moderate. Consumer would notice the increase in prices but in general wouldn’t feel much. Some might feel the pinch more than others but their numbers are few. Inflation of 7 – 9% is somewhat high. Consumer would definitely notice and more would feel the pinch. From 9% to 10%, inflation is high and the pockets of a large majority would feel the pain of relentless price increase resulting in a marked change in spending behavior. Above 10%, inflation is relentless and raging and nearly everybody would feel the pressure, drastically altering established spending behavior into a crisis mode spending focusing on daily essentials. Above 20%, very high inflation, demand would drastically halt on virtually every item except bare necessities. Beyond that level, ditch the peso for there is no point in holding “those worthless pieces of paper” in a hyper inflationary regime. Also, it is likely that we would be in the midst of a war to experience such extremities. So base on this line of thinking, prognosis on inflation in 2009 is a bit high but not much too drastic as to seriously alter spending pattern like the one seen this year. Overall, to proclaim that the Philippines is “lucky” is to my view, an unfounded optimism. It is not hell either but definitely hardship will be felt in 2009, which could be worst than 2008. However, recovery could be expected in late 2009 and in 2010. In short, 2009 will not be a year of the raging bull as one would dream of but rather the year of the snoring bull. Hopefully, 2009 would lay the foundation for 2010, the year of the roaring tiger!

1. ADB = Asian Development Bank
2. BDO = Banco De Oro Philippines
3. BPI = Bank of Philippine Island
4. DBS = Development Bank of Singapore
5. DBCC = Development Budget Coordinating Committee, Department of Budget, Philippines
6. EIU = Economist Intelligence Unit
7. FAO = United Nations Food and Agriculture Organization
8. GDP = Gross Domestic Product
9. GEO = Global Economic Outlook
10. GNP = Gross National Product
11. Gov’t Exp = Government Expenditures
12. IMF = International Monetary Fund
13. IEA = International Energy Agency
14. OFW = Overseas Filipino Workers
15. OPEC = Organization of Petroleum Exporting Countries
16. PCE = Personal Consumption Expenditures
17. RCBC = Rizal Commercial Banking Company, Philippines
18. S&P = Standard and Poors
19. UBS = Union Bank of Switzerland
20. UN = United Nations
21. UOB = United Overseas Bank of Singapore
22. WB = WorldBank
1. World Economic Outlook Update, IMF, November 6, 2008.
2. Asian Development Outlook Update, October 2008.
3. Asia Economic and Bond Outlook – Q42008, State Street Global Advisor.
4. Global Economic Outlook; United Nations, Department of Economic and Social Affairs, Expert Group Meeting on the World Economy. October 2008.
5. Quarterly Update, The World Bank, November 2008.
6. Philippine Daily Inquirer, November 22,2008
7. Inflation Report, 3rd Quarter, 2008. Bangko Sentral ng Pilipinas.
8. Philippine Daily Inquirer, November 14,2008.
9. Philippine Daily Inquirer, November 18,2008.
10. Philippine Daily Inquirer, December 3,2008
11. BusinessWorld, December 4,2008
12. BusinessWorld, December 5,2008
13. BusinessWorld, December 12 – 13,2008