Clear Ahead The Economy in the Near Term

1
Clear AheadThe Economy in the Near Term

• Cayetano Paderanga, Jr.
• Chairman, Institute for Development and
  Econometric Analysis, Inc. (IDEA, Inc.)
• Professor, UP School of Economics
• 26 August 2009

2
Flow of the presentation

• An Examination of the Crisis and its Effects
• Genesis evolution of the crisis
• The global crisis and the Philippines
• Will the Philippines be hit by recession?
• Prospects for businesses in Cebu
• The Filipino consumer market
• Challenges opportunities in Cebu
• Revised IDEA Forecasts

3
An Examination of the Crisis and its Effects
4
Review of the crisis
Over -consumption of American consumers
Oil Cereals
Low inflation due to cheap imports
Higher interest rates lower asset prices
Bursting of sub-prime bubble (July 2007)
Dot-com crash 9/11
Very low fed funds rate
5
Global economic slowdownEffects on the
Philippines
Toxic assets Flight to quality Risk aversion
Credit slowdown Real economy slowdown
Financial sector Portfolio investments FDIs Expo
rts OFW employment
Risk aversion (? r) Portfolio balancing
Demand decline Retrenchment?
6
Drops in the economy
Source NSO

• Exposure of Phil. financial system (less than 1)
  to Lehman Brothers
• Net outflow in portfolio investments
• Net outflow in direct investments
• Lower merchandise exports
• Single-digit growth of OFW remittances

7
Slowdown From demand to supply side

• Slowdown in the economys Expenditure side
  translated to weaker demand for products of the
  ff
• Travel Tourism
• Banking Finance
• Manufacturing and Logistics
• Wholesale and Retail
• Some BPOs
• Expenditure side
• GDP Personal consumption expenditure
  Investments Government consumption (Exports
  Imports)

8
National Income AccountsExpenditure side
Source NIA
PCE, Investments, and Exports growth dropped
significantly
9
Cause of expenditure slowdownEffects of the
crisis on Filipino consumers
Source LFS

• Unemployment has been increasing from Oct 2007
  (6.3) to Apr 2009 (7.5)
• 26.4 of the labor force is underutilized

10
Cause of expenditure slowdown Effects of the
crisis on OFWs
Source NSCB

• OFW deployment and remittances were on a
  downtrend in the later half of 2008

11
Personal consumption to domestic industries growth

• PCE has grown by only 0.8 in Q1 2009
• Far lower than its recent 4-5 percent growth
• Affected Trade and Private Services
• (indirectly Transport. Comm. Storage, Utilities)
• Merchandise exports declined by 24.6
• Affected Manufacturing
• Capital Formation declined by 16.5
• Affected Finance

12
National Income AccountsProduction side
Source NIA
13
Will the Philippines be hit by recession?

• OFW remittances growth is still positive 2.7 in
  Q1 of 2009
• 3.0 in Q2
• Relatively better economic growth than neighbor
  countries
• Not likely to experience recession
• PHISIX already on the uptrend

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How recovery is unfolding

• In large industrialized countries where the
  crisis started.
• First, Financial sector
• Then, the Real sector
• The Philippines can only put in place
  policies/programs to temper effects of lower
  exports and remittances to Filipino consumers

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IMF calculationsDuration of recessions

• Financial crises take longer.

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When is the recovery?

• Evidence from the US (stocks as proxy)
• US financial shock only 8 months
• Global crisis 16 months from last peak
• Predicted Q4 2009 or Q1 2010
• Illustration

peak
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Key Government Policies (1)

• Philippine Economic Resiliency Plan (P330
  billion)
• Ensure sustainable growth
• Save and create jobs
• Protect the most vulnerable sectors
• poorest of the poor, returning overseas Filipino
  workers, and workers in export industries
• Ensure low and stable prices
• Improve competitiveness

18
Key Government Policies

• Breakdown of the Philippine Economic Resiliency
  Plan (P330 billion)
• PhP 160 billion for small, community level
  infrastructure projects and social protection
  measures
• PhP 40 billion tax cuts and the scheduled cut in
  corporate income taxes
• PhP 100 billion for large infrastructure
  projects.
• PhP 30 billion (US638 million) additional
  benefits to members by social security
  institutions

19
Key Government Policies (2)

• Increased efforts in the deployment of OFWs
• Hiring agreements with some host countries and
• Training OFWs
• For healthcare, education, power/energy, and real
  estate sectors

20
Key monetary policies

• Policy rate cuts
• BSP has slashed key policy rates by as much as 2
  percentage points since Dec 2008
• Managing exchange rate level
• Domestic liquidity
• Managed inflation expectations

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Other forces to RPs recovery

• OFW Remittances
• Continued growth in remittances (latest 3.3 )
• Increase in OFW deployment
• Government spending
• Governments pump-priming activities
• Foreign Direct Investments
• In Agri-industrial sector, Business process
  outsourcing sector, Creative industries (film,
  design, music), Infrastructure and logistics,
  Manufacturing, Mining, Tourism
• (Joint Foreign Chambers of the Philippines
  (JFC))
• Election spending

22
Prospects for Business in CebuThe Filipino
Consumers
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Profiling Cebu

• A study from a strategic advisory firm for
  global outsourcing and investments revealed that
  Cebu is actually the most promising city
  worldwide in terms of hosting BPO investments.
• Ranked as 8th in the Top 10 Asian Cities of the
  Future -- the Finance Direct Investment (fDi)
  magazine of the Financial Times Group (2008)
• One of the top 20 (20th)Best Places to Live" in
  the country MoneySense (2008)
• Tholons

24
Profiling Region 7Gross Regional Domestic
Expenditure

• Within the past ten years, the region recorded an
  average year-on-year growth rate of 5.2.

Source National Statistical Coordination Board

• Industries with double-digit growth
• Forestry, Construction, Trade, Finance

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Drivers of growth

• Tourism
• Cebu posted an 8.51 growth in tourist arrivals
  despite the drop in key foreign markets at the
  onset of the global economic crisis last year --
  Dept. of Tourism
• A record from the Department of Tourism Planning
  and Promotions Department revealed that Cebu
  generated a total of 321,116 foreign tourists in
  the first semester of this year and topped the
  over-all foreign arrival comparative by
  provinces.
• BPO industry
• BPO companies based in Cebu employ 50,000 people
  and there have been no reports of retrenchments
  in the industry -- Cebu Investment and Promotions
  Center (CIPC)
• Cebu City leads the Top 50 Emerging Global
  Outsourcing Cities according to a recent study
  released by Tholons, a strategic advisory firm
  for global outsourcing and investments (2009).

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Spillover effects of Tourism BPO

• Other industries that benefit
• Banking
• Construction
• Power
• Retail trade
• Transportation
• Investments related to tourist accommodations
• Spa centers
• Fitness wellness hubs

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ChallengesThe economy and the households

• Effects of the slowdown to vary across
  socio-economic status of HHs
• Higher-income HHs lower savings
• Middle-income HHs lower consumption,
  substitution in consumer goods, priority for
  certain goods and services
• Lower-income HHs run down savings, cut down
  spending, borrow resources

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ChallengesCoping strategies

• Reduce consumption of non-food items
• Reduce consumption of food
• Look for other sources of income
• OFW remittances
• Borrow
• Dip into Savings

Source Pulse Asia, Inc.
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2nd Quarter 2009Consumer Confidence
Source BSP

• Weaker consumer outlook attributed to the
  softening labor market and lower family income
  due to the recessionary conditions in the global
  economy
• Declined consumer confidence on all 3 indicators
  economic condition of the country, family
  financial situations, and family income

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2nd Quarter 2009Business Confidence
Source BSP

• Business sentiment improved as respondents
  expected an economic turnaround to commence in Q3
  2009.

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2nd Quarter 2009Business Confidence

• Optimism was driven by improving confidence in
  the US and global financial markets - due to
  fiscal stimulus packages of G20 nations - and by
  the announcement of the govt's Economic
  Resiliency Plan, series of policy rate cuts, and
  the decelerating inflation. Also helped by the
  summer season and school opening in June
• Exporters and importers turn optimistic in the
  next quarter
• Small, medium and large firms are more positive
  in the next quarter
• Positive outlook across all sectors
• Expectations of better credit access and
  financial conditions improve
• Employment outlook turns less negative but the
  number of industrial firms with expansion plans
  is still quite limited
• Competition, weak demand, and financial problems
  are still the major risks to business

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Challenges for Cebu Reg. 7

• Global crisis threatens foreigners buying power
• Manufacturing industry in the region has been in
  a hemorrhagic state due to the lifestyle change
  of the provinces foreign markets stemming from
  the economic downturn

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Challenges for Cebu Reg. 7Cost of doing
business
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Challenges for Cebu Reg. 7Cost of doing
business
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Other challenges

• Lack of software developers threatens BPO sector
  growth
• CIPC Infrastructure is Cebus weakest point.
• Water and power supply should be the main focus
  and it should be privatized to ensure stability
  of supply. The roads should be improved to
  address congestion in the streets
• Strong private-public partnership should continue
  to be harnessed in view of addressing major
  challenges, and eventually improving Cebus
  ranking.

CIPC Cebu Investments Promotion Center
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Government assistance

• DOLE Multi-million fund allotted by the national
  government for employment assistance for
  retrenched workers
• Alternative employment and livelihood programs
  will also be introduced to retrenched workers
• Even students interested to work during the
  summer break will be given the chance to fill out
  the 20,000 slots prepared for them

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Opportunities amidst the crisis

• The global economic crisis has not restrained
  Cebus fast-advancing BPO industry according to
  NEDA Region 7.
• Even if other export industries have stopped
  expanding and were even forced to downsize
  operations, the BPO and related industries have
  continued to expand and remain bullish.
• Local officials from different parts of Cebu
  pledged commitment to support BPO companies in
  all aspects, even with their immigration
  concerns.
• The cost of doing business in the province is
  relatively lower office space rentals are only
  one-third of the going rate in Metro Manila and
  electricity rates are approximately 30 less than
  the rate in Metro Manila at Php7 per
  kilowatt-hour.
• A labor force with more than 3.7 million members
  is also present in the province.
• These workers are fluent in English, equipped
  with working knowledge, and trainable. Roughly
  one-fifth of the annual 23,000 college graduates
  hold engineering and computer-related degrees.
• Cebu Citys 300-hectare South Road Properties
  (SRP) is envisioned to be the growth and
  development driver of the city

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Economic performance in 2009-2011Revised IDEA
Forecasts
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IDEA ForecastsAssumptions
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Gross domestic product

• Production side
• GDP A I S
• GDP Agriculture, Fishery, Forestry Industry
  Services

41
Production sideAgriculture, Fishery and Forestry

• High output this year due to earlier harvests,
  but expected to slow down
• Rice prices are lower
• Biggest risk factors costly fertilizer, weather
  conditions and economic downturn

42
Production sideIndustry sector

• Decline in Manufacturing due to slowdown in
  demand from developed countries
• Utilities slowdown due to small growth in
  personal and corporate expenditures
• Construction boosted by government stimulus
  programs and lower interest rates

43
Production sideService sector

• Slow pickup in demand to affect Trade, Logistics,
  and Private Services
• Weak US economy reinforces cost considerations,
  supporting BPO industry

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Gross domestic product

• Production side
• GDP A I S
• GDP Agriculture, Fishery, Forestry Industry
  Services
• Demand side
• GDP C I G (X M)
• GDP Personal Consumption Investments
  Government Consumption Net Exports

45
IDEA Forecasts Expenditure side

• PCE to rely on consumer confidence in the economy
• Govt Consumption to boost the economy through
  stimulus packages
• Investments, Exports, and Imports will depend on
  external developments and government policies

46
IDEA Forecasts Philippine economic growth

• Revised IDEA Forecast for 2009 within DBCC target
  of 0.8-1.8
• Higher growth in 2010 and 2011 expected

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Clear AheadThe Economy in the Near Term

• Cayetano Paderanga, Jr.
• Chairman, Institute for Development and
  Econometric Analysis, Inc. (IDEA, Inc.)
• Professor, UP School of Economics
• Thank you.

48
GDP growth in Q1 2009 (yoy)

• Large industrialized nations
• US -4.6
• EU (27-nation) -4.4
• Europe (16-nation) -4.6
• Russia -9.5
• Germany -6.7
• Japan -15.2
• Singapore -10.1
• Hongkong -7.8
• Emerging developing
• China 6.1
• India 5.8
• Indonesia 4.4
• Philippines 0.4
• Malaysia -6.2
• S. Africa -6.4
• Thailand -7.1

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US Current Account Balance
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Global economic slowdownDevelopment of the crisis
Original Mortgages
Securitization/CDOs
SIVs (e.g. REITs)/Banks
High credit ratings
Public
51
Global economic slowdownDevelopment of the crisis

• Process of subordination (tranche-ing)

SIV C
SIV structured investment vehicles
52
Global economic slowdownDevelopment of the crisis

• What happens when the original mortgagor
  defaults?

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PHISIX

• Index is already on the uptrend