General Membership Meeting
The Philippines and the Global Crisis

17 April 2009 – World Bank country director Bert Hofman shared his perspectives on the current global crisis that is already affecting the Philippines with members of the Makati Business Club at the Hotel InterContinental Manila.

World growth is expected to turn negative for the first time since the Great Depression before World War II. The International Monetary Fund predicts a half a percent drop this year, while the World Bank foresees an even larger one and a half percent decline. In East Asia, a number of countries are already in outright recession, including Japan, South Korea, and probably Thailand. Other countries in the region, such as China and the Philippines, are also experiencing a major slowdown. Developing countries will face a financing gap of some $250 billion to $700 billion this year.

Investors in developing countries have lost a lot of wealth in the stock markets. In the Philippines, financial flows from remittances play a major role in the economy, so a significant slowdown in remittances would surely affect consumption in the future. Governments are working to offset these wealth effects in the developing world by implementing fiscal stimulus programs.

The G20 meeting in April 2009 was actually remarkable in many ways because of the consensus reached on issues related to fiscal stimulus, financial regulation, and the international financial architecture. Few economic analysts and observers expect a “V” recovery where economies will spring back rapidly from a slump. It seems, however, that the world economy may be in for an “L”-shaped recovery where the economy hits bottom and is then followed by a prolonged period of flat performance.

The IMF has become very flexible in supporting countries that have been sideswiped by the global crisis, a crisis that is really none of their doing. So countries that observed prudent financial and fiscal policies will now find themselves not only in reasonable economic shape but will also have much more flexible access to IMF resources than before. The world’s bankers will be encouraged to lend more to them.

As a result of tight financial regulation, access to capital is going to be more expensive than before. There was a time when the Philippines accessed the international capital markets at 150 basis points over Libor for a 10-year paper. Aside from regulations that would make risks very expensive, Hofman foresees more countries will incur larger debts, entailing cuts in social or defense spending.

In the future, the G20 is expected to meet regularly and determine a lot of economic policies to be pursued around the world. However, Hofman also sees China and India as gaining a stronger voice in the World Bank and the IMF. China’s influence within the IMF, though, will not result in a major departure from the Fund’s market-oriented thinking. He also predicts a more prominent role for China in the recovery and integration of ASEAN.

Turning to the Philippines, the World Bank’s outlook for the country is more pessimistic than that of the Philippine government due to its observations on migration and investments. Nevertheless, Hofman sees the country as a “relative shining star” in the region. He cited our financial sector as being less vulnerable to the crisis and pointed to the country’s public spending on conditional cash transfers and employment generation measures. Hofman is less positive on the outlook on the fiscal deficit, however, expecting a slowdown in the debt-to-GDP ratio. The World Bank is also worried about unemployment. A 2% growth is barely enough to cover for productivity growth.

Download Hofman’s presentation

ABOUT THE SPEAKER

Bert Hofman
Mr. Hofman has been country director of the World Bank in the Philippines since December 2007. He has been connected with the World Bank for 16 years, and 13 of those years were spent in Asia. Before his assignment to the Philippines, Hofman led a team in China that offered advice on economic policy to the Chinese government.