Fighting recession

Published by rudy Date posted on March 24, 2009

very adjustment in our projected economic growth rate for this year has been downwards. That is not very encouraging.

Credit Suisse last week revised its estimate of our growth prospects and arrived at a rate below 2%. That compares rather dramatically with the standing government estimate of a growth rate of at least 3.5%.

The more pessimistic estimate is not just about half the standing official estimate.

Growth of 3.5% in GDP is about our historical average. Considering the propensity of our economy to enter into cycles of boom and bust, the historical average becomes understandable. The symbolic value of the 3.5% official estimate is that it reassures us that if our economy does not exceed expectations, it will still be at average. In other words, it will not be an unduly bad year.

Set that against the estimated 1.5% growth in the global economy expected for this year, the lowest since the Great Depression of the 1930s. The official figure, if we match it by yearend, will be over twice the global average.

Meeting the official growth target will allow this government to move to its twilight months claiming that it has successfully protected the country from hostile global conditions. It will be able to crow that the economic management it provided has been superior. The fiscal reforms it paid for with so much political capital proved to be our salvation.

There are quite a few things going for us in this embattled year.

Although we keep thinking of ourselves as a small nation, we actually have a large domestic market. Properly stimulated, the large domestic market can keep us afloat in this global economy storm.

Indeed, over the past few years, we have been able to trim our debt service load to a smaller percentage of our GDP. To be sure, our debt has increased in nominal terms. But in terms of a larger GDP, it has become a more manageable problem. The debt service as a percentage of the domestic product is no longer the heavy stone tied to our economy’s neck, making us vulnerable during global downturns.

Our domestic market is fueled by remittances. This year, remittance flows are expected to contract minimally. But those flows remain hefty and analysts of our retail sector report that consumer demand is holding quite well despite everything.

What was once considered our weakness — our chronic inability to compete in the export arena — is now seen as an unexpected source of strength.

Our exports, compared to our neighbors, compose a smaller share of our economic output. The dramatic shrinking of export markets threw many of our export dependent neighbors such as Japan and Singapore into deep recession.

By contrast, the Philippines and Indonesia, two countries with large domestic markets and smaller export sectors have performed comparatively better. Ironically, the two laggards of the core Asean economies are now the more stable ones. We both have a rather favorable balance between domestic demand and export dependence.

Should we slow even more this year, to below 2% as the latest bank estimates put it, the consequences could be profound.

I have this totally unscientific notion that when our economic growth rate remains above the population growth rate, domestic turbulence will not ensue. Conversely, if economic growth falls below population growth, we are in for troubled times.

Remember the aftermath of the Asian financial meltdown over a decade ago? When our economic growth plunged as we reeled from the effects of a dramatically depreciated peso, our voters simply went mad. In 1998, a populist wave swept the electorate and Joseph Estrada was carried to the highest post in the land.

A 3.5% growth rate might mean tough times. But not desperate times. Our electorate will probably remain sane by the time 2010 rolls around. Sober choices might be made.

But if the growth rate falls below the population growth rate, as the more conservative estimates put it, the whole nation might board yet another political rollercoaster. We might see the old movements of rage reoccupying the streets and the most outrageous characters seeking power.

The difference, therefore, between keeping our growth rate above the population growth rate could be profound.

The worst estimate I have seen expects the Philippine economy to actually fall into a recession in the second half of this year. Fortunately, the worst case scenario is not widely shared among the various institutions engaged in making economic projections.

We are about to close the first quarter if this year with our heads comfortably above water. Given the successive downgrades in growth projections we have seen, it should be safe to say that the coming quarters might be more challenged than this first one.

The projections, happily, are not inevitabilities. We could still fight the slowdown and make that fight more broad-based.

The national government will continue tinkering with one design over another of some stimulus package to support our economic growth and prevent a slide into recession. But the more important role, I think, is to be played by the local government units.

The local governments play an indispensable role as catalysts of vibrant economic activity at the ground level. By organizing cooperatives, encouraging investments and facilitating enterprises, the local governments should play the frontline role in this major economic battle.– FIRST PERSON By Alex Magno, Philippine Star

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