Sunday, November 02, 2008 BSP exec bares 4 areas affected by global crisis
AN OFFICIAL of the Bangko Sentral ng Pilipinas (BSP) identified four areas where the Philippine economy will hurt most due to the global financial crisis.
BSP-Davao Director Cesar L. Balan, in a presentation for local business leaders and members of the Rotary Club of Davao last week, said the spillover of the global financial crisis to the Philippine economy will course through four channels or links -- trade, remittances, direct investments and other capital flows.
Balan said the United States accounts for about 17 percent of total RP exports, lower than its share of around 30 percent in 2000.
"Despite the declining share of exports to the US to total exports of the Philippines over time, the US slowdown poses some risk to the country's export earnings. This outcome is dependent on how much the US economy, and hence the global economy, would slow down," Balan said.
Balan added that since more than 30 percent of overseas Filipinos are based in the US, its slowdown poses a risk to overseas remittance flows.
In 2007, more than 30 percent of net foreign direct investment (FDI) in the Philippines came from the US, higher than the 12 percent share of FDI from the US in 2000.
"Slower US economic activity is, therefore, likely to reduce inward foreign direct investment. Privatization, a major channel of FDI in Asia, is also likely to be affected," Balan said.
"The peso has been weakening, reversing appreciation in 2007," Balan added.
Balan, however, said the Philippine economy is better equipped to deal with the crisis.
Balan said the Philippine economy continues to grow, with the GDP increasing by a respectable 4.6 percent in the first half of 2008. On the demand side, the main growth drivers are capital investments and consumption.
Meanwhile, higher inflation has put pressure on household spending which grew at a slower pace in the second quarter of 2008.
On the production side, the economic expansion was broad-based with all major production sectors posting moderate growth in the second quarter.
In the fiscal sector, the National Government fiscal position continues to benefit from past reforms.
For the first eight months of 2008, the National Government fiscal deficit, though higher than the previous year's, was lower than the programmed ceiling for the first three quarters. Recent fiscal reforms, such as VAT reform, have strengthened the Philippines' ability to cope with externally induced challenges.
"The impact on domestic financial markets of ongoing global financial stress would have been greater if these reforms had not been in place," Balan said.
He added that these reforms also provided resources to the government to undertake measures to protect the poor from high food and fuel prices.
The conditional cash transfer program is a good example of using these revenues for well-targeted spending.
The country's external payment position continues to be a source of strength for the economy.
"Our balance of payments which records our economic transactions with the rest of the world posted a record surplus of US$8.6 billion in 2007, supported by the sustained strong remittances of overseas Filipinos as well as higher services receipts and capital inflows. Meanwhile, for the first eight months of 2008, the BOP surplus has been sustained at US$2.0 billion," he said.
In 2008, remittances from overseas Filipinos from January to July reached US$9.6 billion, 18.2 percent higher relative to last year’s level.
These developments allowed the country to build up enough international reserves to cover our import and external debt payments. Our gross international reserves (GIR) rose to US$33.8 billion by the end of 2007 and further to US$36.7 billion as of August 2008.
Balan also said that Philippine banks have been relatively resilient to the financial turmoil due to its traditional conservatism. It remains generally sound and stable as the asset base has been expanding steadily.
"The continued asset clean-up of banks, accomplished without the use of public funds, has enhanced asset quality, bringing the NPL ratio closer to the pre-Asian crisis level of around 4.0 percent. In addition, the banking system continued to sustain its profitability," Balan said.
As of 2007, return-on-equity and return-on-assets have posted at 11.8 percent and 1.4 percent, respectively, and have increased since the post-1997 Asian financial crisis period.
Banks remained capitalized at levels above the BSP-regulatory requirement and the BIS standard.
"Owing to reforms earlier instituted, the Philippine banking system has not been significantly affected by the financial stresses experienced from the US subprime mortgage market. Furthermore, the Philippine domestic banks' exposure to structured products, such as CLNs and CDOs, issued by investment houses like Lehman Brothers has been limited and are well cushioned by banks' capital base," he said.
Balan said the BSP will continue to closely monitor developments in the global financial markets, including further risk aversion against emerging markets including the Philippines, as these may adversely impact the growth of the banking sector. (GLP)
