By Des Ferriols Updated November 05, 2008 12:00 AM
Swiss banking giant UBS AG has downscaled its 2009 growth projections for the Philippines from 3.5 percent to 1.8 percent, warning that after the financial contagion has subsided, declining trade would drag Asia into recession.
By 2010, UBS said the Philippine economy would recover slightly and post a 3.4-percent growth.
UBS said in its latest investment research that it has lowered its overall growth projection for Asia (excluding Japan) from 6.1 percent to 4.6 percent—its weakest growth in 30 years except during the 1997 crisis.
“Rates would of course fall in that scenario in Asia but our consistent view is that lost income from exports will weaken consumption and investment across the region,” said UBS economist Duncan Wooldridge.
He said, Asia as a whole would recover by 2010 and grow by six percent which was marginally above the 5.5-6 percent range that was normally marked as “recession-like” in the context of Asia’s growth experience.
UBS kept its growth forecast for the Philippines at 4.6 percent for 2008 but downscaled its projection for 2009 putting the country squarely in the middle.
It projected growth to slow down to 2.5 percent in Indonesia (from the original forecast of 4.7 percent) and flat in Malaysia (down from the original three percent.)
These growth rates, according to UBS, would be accompanied by a dramatic decline in inflation rate from its projected 9.4-percent average this year to three percent in 2009 (due to base-effects) and an average of 3.8 percent in 2010.
UBS said the country’s current account balance would drop to 1.7 percent of gross domestic product compared with the original projection of 1.9 percent of GDP for this year.
By 2009, however, UBS said the current account position would rise to four percent of GDP and settle down at 3.6 percent of GDP by 2010.
UBS said exchange rates were also expected to bring the peso at an average of 50 to the dollar this year, strengthening slightly to 48 to $1 in 2009 on through 2010.
UBS had originally projected the peso to rise to 44 to the dollar in 2009.
Interest rates, on the other hand, are expected to be at an average seven percent this year and ease to 6.5 percent in 2009 and 2010.
It said the deterioration of the global financial conditions and evidence of sharper economic downturns across the world economy prompted it is cut its 2009 global GDP growth projections as well.
UBS said it now experts the US and Western Europe to contract in 2009, accompanied by weaker activity in emerging economies. Global GDP is projected to grow by only 1.3 percent, making it the sharpest downturn in the world economy since the global recession in 1981-1982.
By Ted P. Torres Updated April 08, 2009 12:00 AM
MANILA, Philippines – Economic growth in the Philippines is expected to further slow to 1.9 percent this year, marking its worst performance since the Asian financial crisis more than a decade ago, the World Bank said yesterday.
“Growth in 2009 would likely slow to 1.9 percent,” the World Bank said in its latest East Asia report, adding it would be the country’s slowest growth since 1998 when the economy contracted by 0.6 percent.
World Bank senior economist Eric Le Borgne said a series of negative developments over the last four months forced a lower outlook for growth in the region, including the Philippines, as weak global demand for the country’s goods and services slowed down consumption and investments.
“There are also strong indications that the anticipated recovery for 2010 has diminished,” Borgne said, adding that a 2.8-percent growth for the Philippines next year remains dependent on how the developed countries deal with the global recession.
The World Bank projection compares to forecasts of 2.5 percent by the Asian Development Bank and 3.5 percent by the International Monetary Fund.
The government’s own forecast is a 4.4-percent growth in gross domestic product (GDP), down from 4.6 percent last year and 7.2 percent in 2007 – the fastest pace in 30 years.
The Arroyo administration said it plans to achieve the 4.4-percent rate through massive government spending to take up the slack of reduced economic activity.
The World Bank attributed the weak 2009 economic outlook to two main culprits: the country’s vulnerability to a slowdown in the amount sent home by Filipinos working abroad and an ambitious size of the stimulus package, which could have a limited impact and be undermined by weak tax collections.
“Domestic demand, boosted to a large extent by strong remittances since 2001, has been the most important growth driver for the economy,” the report said.
Last month, the World Bank said money sent home by overseas Filipino workers (OFWs) will contract by 4.4 percent this year as a result of the global slowdown, lower than the bank’s projected five to eight percent fall in remittance flows to developing countries. The latest outlook was also bleaker than the previous forecast of 0.9 to 5.7 percent the World Bank made in November last year.
But the Bangko Sentral ng Pilipinas (BSP) is more optimistic. It said remittances are likely to stay flat in 2009 at around last year’s level of $16.4 billion. In January, the BSP reported a 0.1-percent growth in remittances compared to the same period last year.
The multilateral lender likewise described the government’s P330-billion stimulus package (labeled the Economic Resiliency Plan or ERP) as “ambitious” since it accounts for 4.1 percent of the country’s GDP.
The ERP is focused on providing jobs, even if temporary, to those who are displaced as their employers, whether here or abroad, close shop or reduce operations as worldwide sluggish consumption and credit flows squeeze their ability to stay afloat.
The World Bank cited the government for postponing its medium-term balanced budget goal in 2011 to make way for the hiked spending. It noted, however, that the actual impact of the stimulus package in 2009 would be limited as government spending plans could be undermined by a huge budget deficit, no thanks to lower-than-target tax collections.
A measure that has been passed by Congress and is now awaiting the President’s signature may yet be one of the answers to the current economic crisis and at the same time may provide a long-term solution to the problem of poverty. The measure, the Tourism Act of 2009, creates the Tourism Development Estate Zone Authority and the Tourism Promotion Board.
Alejandra Clemente, president of the Federation of Tourism Industries of the Philippines (FTIP), said the tourism economic zones to be developed by the Authority would create millions of jobs and generate $10 billion in foreign exchange. She said that tourism could be an important engine of socioeconomic and cultural growth and generate investments, earn foreign exchange and create jobs.
Many countries today are visited by millions of tourists every year and earn billions of dollars in foreign exchange. According to the World Tourism Organization, in 2007 the top five most visited countries were France, 81.9 million tourist arrivals, $54.2 billion in tourism receipts; Spain, 59.2 million, $57.8 billion; United States, 56 million, $96.7 billion; China, 54.7 million, $41.9 billion; and Italy, 43.7 million, $42.7 billion.
The Philippines was visited by only 3.4 million tourists in 2007, compared with the 17 million of Malaysia, 14 million of Thailand and 14 million of the small country of Singapore. Clemente said that even Vietnam, which is still recovering from the devastation of a long war, was slowly overtaking the Philippines.
The Philippines could study the experience of Spain which was an underdeveloped country until the 1960s. It developed its tourism industry and is now one of the top five most visited countries and the second biggest earner from tourism in the world. Spain is not resting on its laurels and is continuing to develop business models that are environmentally, socially and culturally sustainable.
What does Spain have or, for that matter, what do Malaysia and Thailand have that the Philippines does not have? The Philippines has many tourist attractions like Boracay, one of the best beaches in the world; Palawan, “the last frontier,” which has exotic wildlife, white sand beaches and natural wonders like an underground river; Bohol, which has the world-famous Chocolate Hills and superb diving spots like Panglao and Balicasag; the Banaue rice terraces, called the Eighth Wonder of the Modern World; and Tubbataha Reefs, an excellent diving spot. The Philippines has a gentle, hospitable people, most of whom speak English. A melting pot of Malay, Chinese, Arabic, Indian, Spanish and American culture, the Philippines is a culturally active nation inhabited by musically and artistically gifted people.
What the Philippines lacks is a comprehensive, systematic tourism plan. A lot of infrastructure has to be constructed to bring many destinations up to world standards. Many hotels still have to be built to accommodate the growing number of tourists. And the government has to improve peace and order conditions; it has to crack down on kidnappers, robbers and con artists.
The development of the tourist industry would have a multiplier effect on the economy. The tourism master plan would create 30 million jobs over a 10-year period and earn about $10 billion in foreign exchange. When the number of tourist arrivals increases, there will be greater demand for food and services. A burgeoning tourist industry would benefit agriculture and the information technology industries. More factories would be needed to manufacture supplies for hotels and resorts.
A growing tourist industry could absorb the tens of thousands of overseas Filipino workers who have lost their jobs and are returning to the country. These workers only need to be retrained so that they can enter the tourism industry. An added advantage is that they would not have to leave the country again, and the social problems created by absentee parents would be partially relieved.
Government officials are pushing stimulus plans to revive an economy that is being affected by the global economic meltdown. The tourism program envisioned under the Tourism Act of 2009 is one concrete, doable stimulus plan. If President Gloria Macapagal-Arroyo wants a ready answer to the current economic crisis as well as a long-term plan to solve the problem of poverty, she can find it in the measure that is just waiting for her signature.
NUMEROUS projects have become possible because of financial assistance through debt. This is where we get acquainted with the roles being played by financial institutions like World Bank in the country’s economy.
While the Arroyo administration have claimed that our economy has reached unprecedented growth and displayed infrastructure projects being undertaken everywhere as evidence, the debt toll has also reached unimaginable levels. Various projects likewise serve as evidence that best describe why we as people do not feel the growth that this government has been bragging about.
This is happening because the Arroyo economy is debt-ridden. Not only that the debts of this administration have been accumulating because of numerous debt financed projects were reduced as milking cows.
Take for instance the case of the SEMP2 Textbook Anomaly. The loan meant to fund 17.5 million Social Studies textbooks and teachers’ manuals for public elementary and high schools – had been allegedly riddled by high-profile fraud and power-play issues.
The project amounts to $100-million from World Bank. In the bidding process, the World Bank allegedly pressured the Inter-Agency Bids and Awards Committee (IABAC) to reverse its earlier decision to disqualify Vibal Publishing Group despite being ineligible due to “conflict of interests”.
Not only was Vibal, who had been able to monopolize DepEd textbook publication in recent years, able to qualify, the publishing company later secured the contract for the project, fueling suspicions of corporate-government collusion and manipulation on the part of the World Bank.
The more ominous thing about the project, however, comes with its output. Opposition Senator Panfilo Lacson exposed that at least 60,000 textbooks funded by the projects were found to have inverted and erroneous pages. It is thus not hard to imagine that the defective textbooks were ultimately the product of defective processes of textbook procurement.
Another World Bank funded project is the Small Coconut Farms Development Project (SCFDP) amounting to $121.8-billion.
In 1990, the World Bank extended a loan to the Philippines supposedly to address rural poverty, especially among small coconut farmers, through distribution of free farm inputs like fertilizers. However, the project had been beset with wide-spread corruption among government officials and the private contractors involved in the project.
The irregularities range from complete non-delivery, to the sale of fertilizers to private companies engaged in trading or manufacturing fertilizers, and non-deliveries due to default by principal contractors in their obligation to pay the intermediary warehouses or contractors hired.
It is estimated that at least 40 percent of the funds intended for the project’s fertilizer deliveries had been malversed. Ultimately, the SCFDP failed to accomplish its objective of rehabilitating the country’s struggling coconut industry. Surprisingly, the World Bank hailed the project as successful, in the process condoning the anomalies that hounded its implementation.
What makes these projects illegitimate debts are the issues of transgression of sovereignty, monopolistic corruption and mal-education as the case of SEMP2 Textbook anomaly. As in the case of the SCFDP, there was obvious negligence on the side of the creditor, incompetence of implementing agencies and more glaring is the failure of the loan to reach its target beneficiaries – the farmers.
What is the impact of these loans to our economy and people is the fact that the national government are forced to pay for debts of these projects which turned-out to be useless.
Under the principle of the illegitimacy of debts, our national government could have stopped wasting people’s money for these projects. We could have utilized these funds in achieving genuine development goals and improving social services. (Comments to firstname.lastname@example.org)
Author: Ted Aldwin Ong
This is the longer version of an essay by the author released by the British Broadcasting Corporation (BBC) on Feb. 6, 2009.
Week after week, we see the global economy contracting at a pace worse than predicted by the gloomiest analysts. We are now, it is clear, in no ordinary recession but are headed for a global depression that could last for many years.
The fundamental crisis: overaccumulation
Orthodox economics has long ceased to be of any help in understanding the crisis. Non-orthodox economics, on the other hand, provides extraordinarily powerful insights into the causes and dynamics of the current crisis. From the progressive perspective, what we are seeing is the intensification of one of the central crises or “contradictions” of global capitalism: the crisis of overproduction, also known as overaccumulation or overcapacity. This is the tendency for capitalism to build up, in the context of heightened inter-capitalist competition, tremendous productive capacity that outruns the population’s capacity to consume owing to income inequalities that limit popular purchasing power. The result is an erosion of profitability, leading to an economic downspin.
To understand the current collapse, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975. This was a period of rapid growth both in the center economies and in the underdeveloped economies — one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of the Second World War, and partly by the new socioeconomic arrangements and instruments based on a historic class compromise between Capital and Labor that were institutionalized under the new Keynesian state
But this period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which was not supposed to happen under neoclassical economics.
Stagflation, however, was but a symptom of a deeper cause: the reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while income inequality within countries and between countries limited the growth of purchasing power and demand, thus eroding profitability. This was aggravated by the massive oil price rises of the seventies.
The most painful expression of the crisis of overproduction was global recession of the early 1980s, which was the most serious to overtake the international economy since the Great Depression, that is, before the current crisis.
Capitalism tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization
Escape Route # 1: Neoliberal Restructuring
Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by 1) removing state constraints on the growth, use, and flow of capital and wealth; and 2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.
The problem with this formula was that in redistributing income to the rich, you were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production. In fact, it could be more profitable to invest in speculation.
In fact, neoliberal restructuring, which was generalized in the North and south during the eighties and nineties, had a poor record in terms of growth: Global growth averaged 1.1 percent in the 1990s and 1.4 percent in the ‘80s, compared with 3.5 percent in the 1960s and 2.4 percent in the ‘70s, when state interventionist policies were dominant. Neoliberal restructuring could not shake off stagnation.
Escape Route # 2: Globalization
The second escape route global capital took to counter stagnation was “extensive accumulation” or globalization, or the rapid integration of semi-capitalist, non-capitalist, or pre-capitalist areas into the global market economy. Rosa Luxemburg, the famous German radical economist, saw this long ago in her classic “The Accumulation of Capital” as necessary to shore up the rate of profit in the metropolitan economies.
How? By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital, and abolishing barriers to foreign investment.
China is, of course, the most prominent case of a non-capitalist area to be integrated into the global capitalist economy over the last 25 years.
By the middle of the first decade of the 21st century, roughly 40-50 percent of the profits of US corporations came from their operations and sales abroad, especially in China.
The problem with this escape route from stagnation is that it exacerbates the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the last 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of US corporations stopped growing. According to one calculation, the profit rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to 1.32 in 2000-2002. By the end of the 1990s, with excess capacity in almost every industry, the gap between productive capacity and sales was the largest since the Great Depression.
Escape Route # 3: Financialization
Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route — financialization — became very critical for maintaining and raising profitability.
With investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds have been circulating in or invested and reinvested in the financial sector — that is, the financial sector is turning on itself.
The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive noted in the pages of the Financial Times, “there has been an increasing disconnect between the real and financial economies in the last few years. The real economy has grown … but nothing like that of the financial economy — until it imploded.” What this observer does not tell us is that the disconnect between the real and the financial economy is not accidental — that the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy
One indicator of the super-profitability of the financial sector is that while profits in the US manufacturing sector came to one percent of US gross domestic product (GDP), profits in the financial sector came to two percent. Another is the fact that 40 percent of the total profits of US financial and non-financial corporations is accounted for by the financial sector although it is responsible for only fiv percent of US gross domestic product (and even that is likely to be an overestimate).
The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value — only industry, agricultural, trade, and services create new value. Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value — for instance, the stock of Internet startups may keep rising to heights unknown, driven mainly by upwardly spiraling financial valuations.
Profits then depend on taking advantage of upward price departures from the value of commodities, then selling before reality enforces a “correction,” that is a crash back to real values. The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.
Profitability being dependent on speculative coups, it is not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another.
Because it is driven by speculative mania, finance driven capitalism has experienced about 100 financial crises since capital markets were deregulated and liberalized in the 1980s, the most serious before the current crisis being the Asian Financial Crisis of 1997.
Dynamics of the Subprime Implosion
The current Wall Street collapse has its roots in the Technology Bubble of the late 1990s, when the price of the stocks of Internet startups skyrocketed, then collapsed, resulting in the loss of $7 trillion worth of assets and the recession of 2001-2002.
The loose money policies of the Fed under Alan Greenspan had encouraged the Technology Bubble, and when it collapsed into a recession, Greenspan, trying to counter a long recession, cut the prime rate to a 45-year low of 1.0 percent in June 2003 and kept it there for over a year. This had the effect of encouraging another bubble — the real estate bubble.
As early as 2002, progressive economists were warning about the real estate bubble. However, as late as 2005, then Council of Economic Advisers Chairman and now Federal Reserve Board Chairman Ben Bernanke attributed the rise in US housing prices to “strong economic fundamentals” instead of speculative activity. Is it any wonder that he was caught completely off guard when the Subprime Crisis broke in the summer of 2007?
The subprime mortgage crisis was not a case of supply outrunning real demand. The “demand” was largely fabricated by speculative mania on the part of developers and financiers that wanted to make great profits from their access to foreign money — most of it Asian and Chinese in origin — that flooded the US in the last decade. Big ticket mortgages were aggressively sold to millions who could not normally afford them by offering low “teaser” interest rates that would later be readjusted to jack up payments from the new homeowners.
How did problematic mortgages become such a massive problem? The reason is that these assets were then “securitized” — that is converted into spectral commodities called “collateralized debt obligations” (CDOs) that enabled speculation on the odds that the mortgage would not be paid. These were then traded by the mortgage originators working with different layers of middlemen who understated risk so as to offload them as quickly as possible to other banks and institutional investors. These institutions in turn offloaded these securities onto other banks and foreign financial institutions.
The idea was to make a sale quickly, get your money upfront and make a tidy profit, while foisting the risk on the suckers down the line — the hundreds of thousands of institutions and individual investors that bought the mortgage-tied securities. This was called “spreading the risk,” and it was actually seen as a good thing because it lightened the balance sheet of financial institutions, enabling them to engage in other lending activities.
When the interest rates were raised on the subprime loans, adjustable mortgage, and other housing loans, the game was up. There are about four million subprime mortgages which will likely go into default in the next two years, and five million more defaults from adjustable rate mortgages and other “flexible loans” that were geared to snag the most reluctant potential homebuyer will occur over the next several years. But securities whose value run into as much as$2 trillion had already been injected, like virus, into the global financial system. Global capitalism’s gigantic circulatory system was fatally infected. And, as with a plague, we don’t know who and how many are fatally infected until they keel over because the whole financial system has become so non-transparent owing to lack of regulation.
For Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bear Stearns, Bank of America, and Citigroup, the losses represented by these toxic securities simply overwhelmed their reserves. Iceland’s banks and many European financial institutions have since joined the list of victims. Some, like Lehman Brothers, have been allowed to die, but most have been kept alive with massive injections of taxpayers’ cash by governments that want the banks to lend to keep the real economy going.
Collapse of the Real Economy
But instead of performing their primordial task of lending to facilitate productive activity, the banks are holding on to their cash or buying up rivals to strengthen their financial base. Not surprisingly, with global capitalism’s circulatory system seizing up, it was only a matter of time before the real economy would contract, as it has with frightening speed in the last few weeks. Woolworth, a retail icon, has folded in Britain, the US auto industry is on emergency care, and even mighty Toyota has suffered an unprecedented decline in its profits. With American consumer demand plummeting, China and East Asia have seen their goods rotting on the docks, bringing about a sharp contraction of their economies and massive layoffs.
Globalization has ensured that economies that went up together in the boom would also go down together, with unparalleled speed, in the bust, the end of which is nowhere to be discerned.
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Walden Bello is professor at the University of the Philippines, Diliman; senior analyst at Focus on the Global South; and president of the Freedom from Debt Coalition. He can be reached at email@example.com.