Joint Membership Meeting
Implications of the World Financial Crisis
for the Philippines

27 November 2008 - Outgoing International Monetary Fund resident representative to the Philippines Reza Baqir told the members of the Makati Business Club, the Financial Executives Institute of the Philippines, and the Bankers Association of the Philippines that reforms in the fiscal, power, and financial sectors have placed the country “in a much stronger position to weather the crisis today.” However, like the rest of its neighbors in the region, the Philippines “is not immune to what happens externally.” Baqir spoke at the joint membership meeting of the three groups at the Hotel InterContinental Manila on 27 November 2008.

The IMF expects Philippine GDP growth to slow down to 3.5% in 2009 from 4.4% in 2008 with the current synchronized global slowdown, which is unlike other recessions in the past. The IMF had previously set a 3.8% GDP growth forecast for 2009 for the Philippines, prior to the revision of the US GDP growth projection by the US Federal Reserve. US GDP growth is now forecast to slow down to minus 0.7% in 2009 from 1.4% in 2008. World GDP is expected to grow 2.2% next year, down from 3.7% the preceding year, with Euro-area and Japan also expected to contract next year. Meanwhile, emerging and developing economies will still see growth but at a slower pace of 5.1% from 6.6%.

Fiscal Stimulus
The Washington-based IMF has called for a global coordinated fiscal stimulus, particularly among the advanced economies, “in the order of 2% of GDP” to raise growth in world GDP by 1%. It has added deflation among the primary concerns, aside from containing the spread of volatility in global financial markets.

The IMF estimates that there is additional room for fiscal spending in the Philippines next year by three-fourths of the GDP to cushion the impact of the slowdown on the real sector, particularly pointing to the Department of Social Welfare and Development’s conditional cash transfer program for the poor. But Baqir warned that investor concerns over fiscal discipline could trigger a rise in interest rates and depreciation of the exchange rate.

The IMF representative praised the country’s fiscal consolidation, in terms of both the broader and narrow fiscal deficit, as impressive. However, in terms of the debt-to-GDP ratio, which has been falling in the past years, the IMF expects the indicator to slightly increase next year. In terms of the tax effort, the IMF sees it returning to its level prior to VAT reform because of the recent change to the income tax law on the level of exemptions, the planned reduction in the corporate income tax for next year from 35% to 30%, and the “buoyancy effects of a recession.” It hopes legislative measures—tax reform on tobacco and alcohol, as well as the rationalization of fiscal incentives—can raise the tax effort. On the expenditure side, it cites issues of absorptive capacity for large infrastructure projects, since the country will face a trade-off between pushing or holding back spending on concerns over the quality of spending. The IMF has shown that the fiscal multiplier is more beneficial to the economy than the tax multiplier.

The Banking Sector
In the financial sector, Baqir noted progress in the “marked reduction” in the nonperfoming loans ratio and nonperforming assets ratio. Other banking reforms that kept the banking system strong include “the implementation of international accounting standards, the phased introduction of Basel II, and the strengthening of consolidated risk-based supervision.” Baqir observed “the direct impact from Lehman and other toxic assets like CDOs [collateralized debt obligations] has been limited in the Philippines.”

However, he warned the Philippines’ financial system can be affected by the global slowdown through external channels. Philippine banks are exposed to foreign currency–denominated sovereign bonds, such as the Republic of the Philippines bonds or ROPs, and credit derivatives lent to ROPs. In response to the stress that was observed in the market for sovereign bonds, Baqir enumerated the Bangko Sentral’s measures to safeguard against further fallout: allowing for reclassification of securities, the exemption (until the first quarter of 2009) of unrealized mark-to-market losses from the calculation of banks’ FCDU asset cover requirements, and the provision of US dollar repurchase agreements to try to provide for dollar liquidity in the banking system. Baqir also cautioned that spreads on Philippine sovereign bonds can rise even if the country maintains good fiscal discipline next year, reversing lower than its peers’ spread owing to fiscal reforms.

The IMF representative pointed out that the country’s financial system can be affected through domestic channels as well, such as the impact that a strained economy could have on asset quality and earnings for the banks.

IMF Help
Finally, Baqir cited the IMF’s role in helping emerging economies battered by the crisis and the sharp slowdown—including Iceland, Ukraine, Hungary, and Pakistan—with a $40 billion program thus far. He mentioned that, at that very time, IMF missions were already looking into countries that are “feeling the strains of the global financial crisis.” A new facility called Short-Term Liquidity Facility is being offered to countries with a “demonstrated frugal track record of macroeconomic policy” and without “fiscal sustainability problems.”
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ABOUT THE SPEAKER

Reza Baqir
Mr. Baqir has been the IMF resident representative to Manila since 2005. Previous to his Manila posting, he was based in Washington, DC, at the IMF’s headquarters, and has also been assigned to Brazil, China, and Thailand. Before the IMF, he was connected with the Harvard Institute for International Development and the World Bank. Mr. Baqir, a citizen of Pakistan, has a PhD in economics from the University of California at Berkeley.