Philippine economy: Quo vadis?

MANILA, Philippines - In Siargao, an island off Mindanao, the ride from Sayak Airport to the town of Gen. Luna takes about one hour over 30 kilometers of paved and rough roads that skirt around mountains, grazing land and mangroves. Despite the island’s relative remoteness, Alex, the driver I commissioned on my recent visit there, was knowledgeable enough to explain to me and my companions how tourist arrivals to the island have slowed down because of the global financial crisis and the A(H1N1) virus — tourism has become the main source of income for the local population. Clearly, the issues that are worrying leaders of economic powerhouses are also on the minds of regular folks in the remotest places. And yet, due to the very nature of forecasts and projections, experts, and people like Alex, cannot agree on what the future holds for the Philippines.  

A couple of realizations can be gleaned from our driver’s comments. First, that this is indeed the information age, where no one has an excuse not to know what is going on around the world. Second, that the world economy has become so integrated that even a flu strain that first became evident in Mexico can eventually affect the livelihood of people in Siargao. 

Compared to its neighbors, however, the Philippines may be one of the least affected by developments in the economies of the developed countries. It has actually been a place of relative peace and calm economically ever since the Asian financial crisis in the late 90’s. Our economy hasn’t stumbled as badly as our other Asian neighbors, but in the same token we also haven’t grown as fast as these countries during boom times.

In the current global financial crisis, for example, Singapore, Malaysia and Thailand have been hardest hit in the ASEAN region, with negative growth rates in the first half of 2009. On the other hand, the Philippines is one of three countries (aside from Indonesia and Vietnam) that registered positive year-on-year quarterly real growth rates in gross domestic product (GDP) among the major ASEAN economies (or the so-called ASEAN-6). True to form, however, the Philippines’ growth rates are generally not as high as the other two countries (see chart). The obvious question begging to be asked is: What’s so different about the Philippines and what role will such differences play (if at all) in the country’s recovery from the current economic crisis?

The answer to the first part of the question is actually relatively easy since the Philippines is indeed quite different economically from the ASEAN-6. Except for Indonesia, the Philippines has the lowest ratio of exports and total international trade to national income among the ASEAN-6 — 29.4 percent and 63.4 percent, respectively, in 2008. The country has also consistently attracted the lowest level and growth rate of foreign direct investments. Taken together, these characteristics make the Philippines the least integrated to the world economy among the ASEAN-6. Thus, when the economies of the developed countries began to stall and contract, the impact on the Philippines was not as severe.

This is not to say that the country is completely unaffected. On the contrary, there is another conduit through which the impact of the world economy is more directly transmitted to the Philippines: remittances from overseas Filipino workers (OFWs).

In 2008, remittances from OFWs reached $18.6 billion; that’s the fourth largest in the world. This is believed to be understated (by much, some analysts say) as it is limited to money that flowed through the financial system.

At a recent talk given to the executives of Punongbayan & Araullo, Dr. Bernie Villegas of the University of Asia and the Pacific said that the IMF came up with an estimate of how much global remittances will decline in 2009 and then distributed the decline equally among the countries. Such methodology, he said, does not account for the preference of the receiving countries for Filipino workers, which Dr. Villegas himself witnessed.

During a trip to Spain, Dr. Villegas noticed that most of the workers at the restaurant he was dining at were Filipinos. When he asked the owner about this, the restaurateur gamely answered that his patrons like Pinoys because, unlike other workers, they make it a point to bathe everyday. Through personal experience, another possible reason could be a substitution effect, whereby Filipinos abroad send more remittances during times of crises, thinking their families need the extra help. This can help combat the possible effects of the global recession. Whatever the reason, it is apparent that OFW remittances continue to prop up the economy despite its predicted weakening.

Does this mean then that the Philippines has this elixir that can guarantee continued economic growth? Well, maybe not an elixir, but as long as OFWs continue to channel large chunks of their earnings to their families here, remittances will remain one of the, if not the, primary driver of the economy. Let’s not forget, however, that a weakening in OFW remittances in the future could also spell big trouble for the economy.  

In this way, it can be said that the Philippines is in the same boat as its neighbors in that our economy is also captive to forces outside the country. The only difference is that we are dependent on remittances while our neighbors are dependent on trade. Thus, even though the Philippines is finding ways to power through this global recession, the country cannot escape the fact that like its neighbors, it is highly dependent on a handful of rich nations.

(The author is a director with Punongbayan & Araullo's Specialist Advisory Services division.)