The Global Recession and the Philippine Economy: Implications on Educational Institutions Institutions

Hon. Juanita D. Amatong

Courtesies Good morning, (courtesies) and ladies and gentlemen. When Ms. Edna Orteza asked me if I can share with you the developments of the news which have been hugging the headlines starting in the last quarter of 2007 up to this time, i.e. the global financial crisis of the century and its impact on the Philippine economy, I did not hesitate to say yes. For one, I think the financial turmoil which started in the United States and spread to other parts of the globe, causing financial losses amounting to trillions of US dollars; bringing about unprecedented changes of reforms in the financial world; and affecting millions of people, thereby resulting in the biggest global economic downturn since the Great Depression of the 1930s. One cannot ignore a phenomenon like this and go about doing activities as if it is business as usual. These happenings is everybodys concern and we all have a stake in what is here now and what is to come. Seeds of the Financial Meltdown Let us trace how the financial meltdown started. It started in the United States when the interest rate regime in the US was low and there was much incentive to borrow because of the cheap cost of borrowing and this encouraged the borrowers (even those who have no credit historysubprime borrowers) to borrow to buy houses by using their houses as collaterals. Mortgage finance was in vogue. The mortgages then were transformed into other financial securities thru the process of securitization, creating other securities backed by mortgages or collateralized debt obligations. Picture 1 Because banks cannot hold on indefinitely mortgages and banks needed cash for their operations, they created financial instruments such as collateralized debt obligations (CDO) or mortgaged backed securities (MBS) or structure investment vehicles to liquefy an otherwise a long dated financial instrument. So banks get their cash and other people got the other financial assets, otherwise called derivatives which were traded in the financial market. You will note the underlying asset of those CDOs, MBS, or other named derivatives were the houses mortgaged to the banks. Buyers of the derivatives did not know the origins of these derivatives. As you can guess, the derivatives were bought by investors (hedge funds, mutual funds, or by fund managers who manage other peoples money). So when interest rates were raised and the borrowers could not pay their debt due to the high cost of borrowing, defaults on loans were made and caused massive headaches 1|Page

to the mortgage lenders and other financial institutions because they found themselves cash strapped all of a sudden. Big banks and investment institutions were the casualties. Holders of derivatives cannot get back their investments and banks became bankrupt, and the stock market was in a spin. Financial losses were incurred and this started to reverberate in the real economy--investments went down, retail sales declined, unemployment went up, incomes were slashed, bringing down the whole economy to a down ward slope. In a highly integrated world we live in now, it is no longer possible for a countrys economy to remain independent to movements in a global market. Because movements of capital from one country to another are less constrained with the technological advancement and the flow of economic transactions and information is untrammeled, the financial crisis in the US is felt in other parts of the world at a remarkable speed. Globalization did not spare the markets and economies of Europe, Asia and other parts of the world even the so called emerging markets. Generally, how countries are impacted or contaminated by the global crisis is done through basically three linkages: the trade linkage, the financial linkage, and the employment linkage. Impact on the Philippine Economy How is the Philippine economy affected by what I described earlier? So let me begin by describing the way this global crisis affect our own economy. In the case of the Philippines, the channels of transmission can be categorized into three: the trade channel, the investment channel, and the employment channel. The trade channel is generally how much goods our country sells to other countries in the form of exports and how much it buys from other countries in the form of imports. In 2008, because of the weakening of global demand not only for the goods we produce but for all goods in general, our export receipts have dramatically dropped. Although there has been some structural shifts in the export destination countries, i.e. the US as an export destination country now represents 17 percent of total exports compared to 30 percent in 2000 and Asia (including Japan) is our biggest export destination at 61 percent compared to 48 percent in 2000, the total exports of the Philippines to the US., Asia, and Europe still constitute the greatest bulk of our exports. For this reason, exports in 2008 fell by 41 percent and this means that we earn less foreign exchange from exports. On the import side, Philippine imports likewise was very much affected by the global downturn. This can be gleaned from the data provided by the National Statistics Office which shows that imports of goods declined by 21.5 percent year on year in quarter 4 of 2008, a reversal from a growth. A year ago and in the previous quarter, imports of raw materials and intermediate goods contributed 11.5 percentage points to the contraction of imports, mainly because 2|Page

of the decline in the production of electronic equipments which is the biggest export item from the Philippines. Importation of capital goods also declined. The country of origin of our importations and the US still remains the biggest single country supplier of our imports. Asia, covering some 20 countries in terms of sources of imports got the biggest slice of our importation business. The second channel by which global economic disruption is transmitted to our economy is via the investment channel. There are two types of foreign investments in the Philippines. These are the foreign direct investments and foreign portfolio investments. Foreign direct investments are investments where the foreign investors put up their factories, employ Filipino workers, and employ technological methodologies in producing goods or services in the Philippines. This type of investment is long term in nature and most of the foreign direct investments in the Philippines are found in the Philippine Export Processing Zone where they manufacture products for the export market. On the other hand, portfolio investments are investment in shares of stock or short-dated financial instruments. The investment that come in through this route is called hot money because investment flows come in and out of the country in very short notice. The United States is the biggest source of investment from a single country. Our dependency on the United States on direct foreign investments and if you link this to the trade data we have with the United States, you can see the big impact that the economic problem in the United States has on the Philippines. Due to unfavorable global demand conditions, investors find themselves unable to keep their heads above water much less ear profit. As such, a number of foreign direct investors have pulled the plug on their operations in the country. Compounding this, is the global sentiment of risk aversion, such that short term investments (portfolio investments) flowed to save harbors. In other words, investors are opting to keep their investments in safer places than in emerging markets. Finally, the third transmission channel and perhaps the most significant for our purpose is the remittance channel. It is estimated that a quarter of the entire Philippine labor force works abroad. The money that they send home in the form of remittances has proved to be vital in augmenting household Incomes for consumption and investment purposes. As of March 2009, 45,000 Overseas Filipinos have been recorded to have lost their jobs and another 30,000 were forced to go on leave or cut their working hours as a result of cost-cutting measures by companies abroad. The effect of the global downturn on the Overseas Filipinos depends naturally on where they are employed. The United States has the biggest share of the OF destination at 32% followed by West Asia at 25%, but West Asia consist of 13 countries. Happily, though, a portion of the Filipinos employed in the United States are already American citizens or permanent residents, and therefore, their categories are differentially treated from those who are on working visas only. 3|Page

The translation of the effect of the global crisis through the three channels to the macroeconomy is a deceleration of the growth of the Gross Domestic Product. It is important what this means. A reduction in the GDP growth in 2009 per Governments calculation ranging from 3.7 % to 4.4% (IMF estimates a zero growth in 2009 and ADB projects 2.2% growth) compared to the 4.6 % in 2008 and 7.3% in 2007, will definitely slow down production which in turn will mean less employment, and therefore less income for our people. This will bring about less consumption expenditures which discourage business from investing further. If these developments will not be reversed, this would result in a free fall of the economy. Given all these data, what therefore is the bottom line on the impact of the global crisis on the Philippine economy? Here, I would like to quote Professor Solita Monsod, a foremost economist from the University of the Philippines School of Economics and she says: The Philippines is facing the global economic crisis from a much better macroeconomic position than it did in previous downturns. Notably the Philippines has built up buffers to withstand economic and financial shocksa respectable economic growth rate which feeds job creation, low inflation, low interest rates, adequate foreign exchange reserves, manageable fiscal deficit and external debt levels, well-capitalized banks with stronger balance sheets and commitments to structural reforms-----but there is no escaping the fact that the Philippines will be affected. Governments Response to the Global Economic Crisis Let me just be short on this portion of my speech. There are two major policy areas which have tremendous influence on how the economy can be led to recovery. Fiscal and Monetary Policy There are of course, other policies which are complementary and coordinatively necessary. Fiscal Policy involves taxation, government expenditures and management of government debt and this policy is basically handled by the Department of Finance, the Department of Budget and Management, the National Economic Development Authority, the Office of the President and our Congress (both House and Senate). As we learned from the fiscal authorities, a fiscal stimulus package in the amount of about P 300 billion. This amount will be spent to pump-prime the economy by building infrastructure, cash transfers to poor families and expenditures for social services. The idea of a fiscal stimulus is to pump money into the economy, so that recipients of this money will spend more for consumption and investment, thereby encouraging businesses to produce more goods, hire more people, and increase the income level. As I understand it, the cash transfer portion of this stimulus has already been implemented through the local governments as executed by the Department of Social Welfare. The infrastructure expenditure, I believe is underway as I am seeing already construction of roads, putting up of water pipes, etc.etc.

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The Central Bank, thru the Monetary Board, the policy making body of the Central Bank, has approved measures which we call monetary easing. This involves the reduction of the policy interest rates in order to encourage banks to lend more to borrowers for investment and consumption purpose because we are trying to make the cost of borrowing less costly. Studies have shown that monetary policy is effective during financial crisis because it supports demand in three ways: First, lower policy rates could help lower credit spreads thereby counteracting traditional credit problems Shich normally follow a weakened financial sector. Second, since financial systems generally hold long term illiquid assets financed by short term liabilities, bringing down interest rates can raise the profitability of intermediation and relieve the negative feedback loop of deleveraging in times of financial strains; and Third, in an environment where the availability of external financing has been significantly reduced, bringing down the cost of borrowing will help promote easier and wider access to domestic sources of financing In addition to reducing the policy rate, the Monetary Board has also reduced the reserve requirements that the Banks make together with the increase in the rediscounting budget which the banks can borrow from the Central Bank. All these policies are intended to increase the liquidity in the financial system to encourage expenditures to bring back the economy into full health. Impact on the Educational Sector What do all these data information tell us? How do we link this information on the crisis to the education sector? For the educational institutions, the lower income and low employment will mean that there may be a reduction of the students going to be enrolled and therefore, reduction in the tuition and other fees as income of the schools. On the other hand, because education is considered a necessity in the context of the Filipino culture, parents may opt to send their children to low cost schools and a shift in enrolment from the Manila and other highly urbanized places to the provinces may occur. Thus we find some Provincial schools increasing in enrolment as a result of some geographical shift. We find this true this summer in Silliman University, as summer enrolment has gone up in spite of the economic slowdown. The other development that our schools should be watching as an aftermath of the global turmoil is the change in the direction of our international trading and investment partners. Recession has hit the developed countries of the western world such as the United States, Europe, and some developed countries in Asia such as Japan, Singapore, and Hongkong. Where before, our major trading partners are the United States, Japan and Europe, these countries cannot now be depended upon as our export destinations and as sources of investments. The recession in countries that the Philippines have traditionally been dealing with on trade and investments may not be able to sustain the trade and investment flows of the past years. For this reason, we need to be shifting our sights to other countries and broaden our contact points to compensate for the 5|Page

downturn losses and to enhance our economic gains. On the issue of our OFs, paradigm shifts in the type or kind of skills needed in the countries which are in need of Filipino workers is a must. For example, in the Middle East, there is a need for more construction workers, port operators, information technology experts, engineers, city planners, tourism and financial service providers, in addition to the health and medical workers. We therefore need to offer courses that allow our OFs to adjust to less traditional job markets. By the way, I visited Saudi Arabia two weeks ago to meet with our Overseas Filipinos to conduct a financial literacy program among our kababayans there. I am pleased to note that the profile of Filipino workers in Saudi Arabia is now 70% skilled and professionals while the remaining 30% is still unskilled and fill domestic jobs. As we moved from supplying Filipino workers from the developed world to the middle income and less developed countries, we will experience the tremendous need for more skilled workers and professionals. Our schools should be ready for this dramatic change in the demand for Filipinos abroad and we should not only provide training for the technical knowhows, but also prepare our students with a global mindset, imbued with ethically sound and culturally sensitive principles. Finally, I believe that educational institutions hold the key to getting out of the rut that is this global economic crisis. Our schools play a very instrumental role in providing financial learning among our students and faculty, such that they will learn to act in a way that is most favorable to their own economic welfare and most favorable to the economic welfare of the nation as well. Parting Words Let me close by giving you this anecdote. In Chinese, the word crisis is written as a combination of two characters. The first is the character for danger. The second one is the character for opportunity. As educators, it is incumbent upon us to look beyond the swirling chaos of this global economic crisis, but instead recognize the opportunity that may await as soon as the dust settles.

Thank you and Good Day!

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