Opening Forecast
The Philippine economy will weather the global financial crisis in 2009 by adopting the grand pause strategy. Basically, the approach is to maintain and conserve the strengths and energize or rev up the weaknesses of the national economy and its sectors.

These demand pro-active initiatives, creative, and lateral thinking from the leadership in government and private sector. This means that in addition to traditional tools and conventional wisdom, the leaders have to consider out-of-the-box initiatives, programs, and projects which may appear unorthodox. And they have to act quickly and in wholistic and adequate manner because they have to produce the products and services within 12 months of 2009. And they have to win and maintain the trust and confidence of the consumers and investors, in particular, and the people, in general.

Review of Global Financial Environment
The global business environment for the last 20 months determines to a significant degree what will happen to the Philippine economy in 2009. But, of course, there are factors that the Philippines can control or at least influence.

The world economy is now widely perceived as inexorably moving in a downward spiral triggered by banks granting loans to too many people and companies which are not credit worthy. These are better known as subprime mortgages that were securitized by investments banks offering high yield investments though at high-risk but nevertheless greedily bought by hedge funds, ultimately resulting in bankruptcies of banks, investment banks, and hedge funds when mortgagors increasingly failed to make payments and defaulted in their loans. It soon spread like wildfire burning revered investment houses and banks, and jumping over to global stock markets in New York , UK, continental Europe, and Asia.

Let us make a quick review of 2007-2008 events that led to the ongoing global financial crisis to get a clearer picture of what will happen in 2009. In February 2007, the early warning signals -- the first bankruptcies of banks specialized in high-risk loan in U.S. broke out in the media, but hardly noticed by the public worldwide. The CEO’s and CFO’s of banks and investment banks who should know better should have taken actions to quiet the impending financial turbulence, but greed and smugness blinded their tactical and strategic vision, making them “moral hazards”.

To begin with, the US government cannot be accused of dithering. In normal times, the US would stick to its free market economy approach. However, in times of crisis, it was forced to adopt State intervention in the economy in the form of equity investments in distressed banks, investment houses, and insurance companies. Deviating from its free market philosophy, the US government came out with rescue packages in the form of infusing capital to distressed banks, investments banks, and insurance companies. These raised howls of nationalization, socialism, and state capitalism from the Right, especially the Ultra Right who felt betrayed.

Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson launched a series of more than a dozen rescue measures in 2008 from the $200 billion bailout of Fannie Mae and Freddie Mac to the $1.4 trillion guarantee for interbank loans.

In January 2008, the US Federal Reserve (the Fed) used its power to cut rates to ease credit. Meanwhile, in February 2008, the British government nationalized Northern Rock, without any ideological wrenching. Contrary to the Republican ideology of free market or classical liberalism, JP Morgan Chase bought Bear Stearns in March 2008 with the support of the US Fed. July-August 2008 saw share prices of America’s two largest mortgage investment banks, Fannie Mae and Freddie Mac, took a sharp dive.

By September 7, 2008, the US Treasury Department took over Fannie Mae and Freddie Mac. On September 15, 2008 US investment bank Lehman Bros. filed bankruptcy protection, while Bank of America bought Merrill Lynch. This marked the shift to the turbulent phase of the global financial crisis with the loss of confidence in huge financial institutions and markets due to fears of insolvency confirmed by series of bankruptcies.

In June 2007, two Bear Stearns hedge funds declared bankruptcy, but was rescued by JP Morgan. Lehman Brothers with a $19 billion in cash on the day it declared bankruptcy collapsed for lack of enough counterparty to deal with them as the Federal Reserve and US Treasury withheld rescue funds on grounds of “moral hazard”. In September 2008, Merrill Lynch was rescued by Bank of America with subsidy of $38 billion from the US Treasury. Morgan Stanley was rescued by Mitsubishi UFJ. The high and mighty Goldman Sachs humbled itself by announcing it would convert to commercial bank with lower leverage. JP Morgan bought Washington Mutual and Wells Fargo acquired Wachovia, beating Citigroup. The US Treasury infused $123 billion in AIG, causing howls of nationalization which is anathema to the US free market economy.

From 2007, banks suffered losses of $633 billion while raising only $ 418 billion in fresh capital. No less than $9 trillion and 40 per cent and still counting was lost in stock market value compared to 90 per cent of stock market value in the Great Depression in 1929 onwards.
In UK and Continental Europe, being historically governed for decades by Social Democratic and Socialist Parties, adopted a four-pronged approach – nationalization, control or administration of distressed bank or investment bank, partial guarantee of retail deposits, and guarantee of interbank lending.
In July 2008, the emerging crisis moved to continental Europe when IKB bank in Germany suffered a shock and in August 2008 three investment funds handled by BNP Paribas in France were frozen, while stock markets in major financial centers around the world fell sharply. With the global financial system badly shaken, Central Banks pumped over $100 billion to stabilize the international system. The UK government offered capital infusion to save RBS and in September 2008, Northern Rock , a British bank, got an emergency government funding and nationalized, a decision consistent with the ideology of the ruling Fabian Socialist-oriented Labour Party. October 2007 saw the UBS, Switzerland’s largest bank, wrote off $37 billion asset and subsequently supported by the Swiss Federal government.
Overwhelming events forced involuntary mergers, and State interventions in the financial systems in US and Euro zone. In October 2008, the US Congress passed the $700 billion rescue fund to regain the confidence for the financial system to calm the turbulence in the global business environment.

Iceland: A Country Case Study
With the ongoing global financial crisis, Iceland became the first country to come close to the brink of national bankruptcy if not for the measures taken by its government, UK and other governments.
The immediate trigger of the financial crisis of Iceland was the collapse of three biggest banks – Kaupthing, Glitner, and Landsbanki – due to failure in refinancing or to pay short-term debt and the bank runs on their UK subsidiaries and branches.

The root cause started in 2001 with the bank deregulation which opened the door to banks to grant huge loans to foreign companies. Since Iceland has only small domestic market, the banks raised loanable funds by obtaining short-term loans in the interbank lending market and deposits in foreign countries like UK. These foreign deposits are considered external debts because deposits are obligations of bank depositary.
The foreign debt of the three major banks was in excess of 50 billion euros, or 160,000 euros per resident of Iceland, compared to Iceland’s GDP of 8.5 billion euros. The external debt is about seven times the size of its GDP.

Households swallowed an enormous amount of debt, some 213% of their disposable income which naturally led to inflation. The Central Bank of Iceland made the situation worse “by printing money on demand”.
Prices rose by 14% over a 12-month period up to September 2008. The Icelandic Central Bank raised the interest rates to 15.5% to counter inflationary tendency, compared to 5.5% n UK and 4% in eurozone. These encouraged investors to deposit in the Icelandic kroner which led to monetary inflation. M3 monetary supply jumped to 37.8% in 12 months up to August 2008 compared to 5% growth of GDP. The economic bubble got still bloated with investors overestimating the true value of the krona and it soon burst.

It was hell for the bank and the investors and depositors. Bank failed to pay their short-term loans obtained in the interbank market. Creditors insisted on repayment of the short-term interbank loans. No bank would grant fresh loans. The Central Bank of Iceland supposedly the bank of last resort just like any other central bank in the world cannot bail out the distressed banks because their loans were too big to pay, larger than the national economy. Worse, the government cannot guarantee the repayment of debts of the distressed banks. Result: collapse of the bankrupt banks.

Official reserves of Iceland Central Bank stood at 374.8 billion kronor as of end of September 2008 compared with 350 B kronor short-term interbank loan in the banking sector of Iceland. There were 6.5 B pounds (1,250 B kronor) of retail deposits in UK. Result: bank run on Landsbankski accounts in UK subsidiaries up to October 7, 2008.

Government responses to the financial crisis in Iceland had no ideological-intellectual wrenching. October 9, the Financial Monetary Authority of Iceland (FME) placed Kaupthing under receivership after the resignation of the entire board of directors because of Kaupthing’s technical default on its loan agreements after its UK subsidiary was placed under administration by UK.
Kaupthing’s Luxembourg subsidiary got a suspension of payments similar to the US Chapter 11 from a Luxembourg district court. In Switzerland, Kaupthing’s Geneva office of the branch of Luxembourg subsidiary was prevented by the Swiss Federal Banking Commission from making any payment over SF 5,000.

Sweden’s Central Bank – Sveriges Riksbank – extended a credit facility of 520 million pounds to Sveriges AB, Swedish subsidiary of Kaupthing Bank. In the Isle of Man, Kaupthing’s subsidiary, after consultations with Manx Authority by its board of directors, decided to wind up its operations.
In Finland, Rahoitustarkastur, its Financial Services Authority, took control of the Kaupthing branch in Helsinki as a pre-emptive move to prevent depositors’ money from being remitted to Iceland.
UK Treasury in a realistic move issued a licence under Landsbankski Freezing Order 2008 to allow the London branch to continue operating some business. A second licence was issued when the Bank of England provided 100 million pounds on secured loan of Landsbankski “to help maximize the returns to UK depositors”.

October 12, 2008, Norwegian government took control of Kaupthing Norewegian operations including “all bank assets and liabilities in Norway”.
October 21, 2008, the Central bank of Iceland asked the remaining independent financial institutions for new collateral against loans amounting to 2 billion pounds. Sparinsbank (SPB) OF Iceland could not come up and asked for government bailout.

October 24, 2008, Norway’s Exportfinans filed a complaint with the Norwegian police against Glitner for embezzlement of 47 million pounds for loans paid to it but payments were not turned over to Exportfinans.
UK government came out with 6.2 billion bailout fund.
November 5, 2008, 6,000 protesters demonstrated in front of the Parliament of Iceland – Alpingishus.

The government of Iceland came out with 310 billion kroner for the restructuring of its three largest banks – Kaupthing, Glitner, and Landsbankski.

The victims of the crisis were importers of food, medicines, and oil, aside from the depositors and investors. Sterling Airlines declared bankruptcy October 29, 2008. Winner was Icelander, the national airline, whose demand were up in year on year basis. Media cut jobs, 24 newspapers were closed, resulting in loss of 2000 jobs and still counting.

As a result of the unprecedented turbulence in the global financial system, the global economy, after four years of boom which lasted until the summer of 2007, took a steep downturn. The US finally admitted it has been in recession since 2007 and other advanced matured economies were entering or already in the cycle of recession. The emerging economies, particularly China, India, and Brazil, which were expected to come to the rescue found themselves also in a downward spiral.

At this point, it is clear the epicenter of the global financial crisis is the capital market, the investment banking institutions and banks which engage in both investment banking and orthodox banking financial services. Industries and corporations which raised capital or obtained loans from these institutions suffer collateral damage. International trade began to contract as US, Europe, and China the biggest export markets of suppliers from the developing and emerging market went into recession.
Jeffrey E. Garten, the Juan Trippe professor of international trade and finance at the Yale School of Management and undersecretary of commerce for international trade in the first Clinton term, in the December 22, 2008 issue of Newsweek, observes:

>The world’s dramatic financial rescue efforts are both unprecedented in scope and creativity, and wholly inadequate.
>The needed response is a big-bang global bailout that is bigger than what we have seen so far. The government should be in front of contagion instead of being one step behind.
>The response is large and sweeping enough to restore confidence. The total so far has run to $8 trillion, more than half of US GDP.
>According to Barry Ritholtz, author of “Bailout Nation”, the rescue funds are more than the sum of every major US federal project in the past century, plus the invasion of Iraq, the New Deal, and the Marshall Plan that rehabilitated Europe after the Second World War. It is more that the total spent by US in World War II - $3.6 trillion in today’s dollars.
>Europe’s response has been just as aggressive. The study of the Independent Strategy of London puts the total spent by the nine leading European economies to shore up wobbling banks at $3.36 trillion versus $3.35 trillion by US.
>More piecemeal, inadequate rescue attempts are not effective as economic conditions deteriorate. Tight credit slows down growth, raising unemployment and sapping consumer and investor confidence, scaring banks into restraining credit further.
>On the financial front, the recent rescue of Citigroup shows how the financial sector’s problems are metastasizing. Subsidy of Merrill Lynch cost the US Treasury $38 billion; bailing out AIG in September and October cost $123 billion. No one knows how many more toxic assets are in the system and when the bank can return to normal.
>IMF estimates downward projection of global economy, now 2.2 per cent growth in 2009 from 5% in the past four years. The World Bank estimates one per cent growth rate in 2009 and sharpest contraction in developing nations since the Great Depression.
>The fundamental issue is fear. Trust and confidence by consumers and investors can be restored by a big-bang response, not improvised, confused, and ineffective responses.
>Despite the colossal problem in the US economy, the dollar continues to strengthen and billions of dollars are invested in US treasuries in spite of zero interest, which shows investors just want to save their money even if they don’t earn.
>National treasuries and central banks need to do more than prop the financial system. The US treasury and the Fed‘s plans to expand credit to consumers and homeowners should be big enough. It is time to cleanse the financial system of toxic assets (illiquid or low-priced assets). More injections of equity to recapitalize the banks. President Barack Obama should announce in his Inaugural Speech a one-year moratorium on housing foreclosures, a major political and psychological boost to the economy that would help stop the rot.
>Uncertainty is the enemy of stability and growth. Governments, like it or not, are in charge. Obama needs to push for a G-20 consensus toward a vision on all these issues, all at once. The world needs a sweeping shock to the system.
>The world should spend $4 trillion, or about 7 per cent of global GDP.

Effects on the Philippines
The effects of the global financial crisis on the Philippines is limited and cannot cause the collapse of the national economy. So far it has only affected the capital market, the stock markets, and exports to matured economies of US, Europe, and Japan.

The Philippines is lucky for having a primitive capital market and a miniscule stock market limited to 115 companies. Only seven banks had $386 million exposure in Lehman Bros. This amount is only miniscule considering that it represented only 4% of the total assets of P6.4 trillion of the banking system. In other words, there is no way for the Philippine banking system or any single bank with Lehman exposure to collapse. And the public’s confidence remained. There was no bank run in any of the seven banks with Lehman exposure, even a mild one.

The other area of the economy affected by the financial turmoil is the Philippine Stock Exchange whose index lost 114.4 points to 2421.72 and the peso which wobbled to 47.20 Php to $1, a 16-month low, on the day Lehman Brothers collapsed. Even after the approval by the US Congress of the $700 billion rescue fund, the effects on the Philippine economy were basically the same.

The good thing is that the PSE is composed only of 115 companies broken down into 15 financial; 28 industrial; 19 holding companies; 16 property; 21 service; and15 mining and oil which traded only around P1.2 trillion or roughly 17% of the total assets of the banking system or roughly 1/6 of the GDP at current prices, or around 1.3% velocity of the M-1 money supply.
Foreign financial institutions affected by liquidity problems pulled out their portfolio investments of $1.2 billion from January to November 2008. This did not shake the economy because it was easily covered by OFW remittances, practically equivalent to one month remittance.
Nevertheless, the National Statistical Coordination Board (NSCB) reported that the economy slowed down to 4.6 per cent from the 7.2 per cent growth of the same period in 2007.

The World Bank, NEDA, the Bangko Sentral ng Pilipinas declared that the economy grew by 4.6% in the Third Quarter (Q3). The National Statistical Coordination Board (NSDB) said “the decent growth in GDP drew on strong performances of manufacturing, construction and trade. On the demand side, household spending led the growth.”
With these global and Philippine financial developments, what is in store for the Philippines in 2009?

Outlook for 2009
The predictions by multilateral funding agencies, foreign analysts, international and regional banks, and leading European banks and rating companies have disheartening sounds and this established the conventional wisdom in a conformist world reeling from loss of confidence and trust with the fall and degradation of revered investment houses and global banks.
The World Bank expected GDP growth for 2008 at 4.2 per cent compared to 7.2 per cent in 2007. And for 2009, World Bank expects a GDP growth of 3 per cent.

The Asian Development Bank expects a growth rate of 4.5 per cent for 2008 compared to GDP of 7.2 in 2007. For 2009, the ADB projects 3.5% growth rate. With deeper and prolonged global recession, the ADB sees a weakening of exports and sharp slowdown in capital flows in the Asia region.
The Union Bank of Switzerland forecasts a 1.8 per cent GDP for 2009 due to “anemic exports and slowdown in remittances from 0FWs”. HSBC foresees a downward growth of 3 – 4%, down from 7.2% in 2007. However, the HSBC country manager for the Philippines, Mark Watkinson, said:
“In this global dark times, a 3 -4% growth would not be bad. The Philippines will get through the storm just fine.”

The Arroyo government, avoiding being mocked by critics, predicts a growth rate of 3.7 to 4.7 per cent in 2009, scaling it down from 5.5 to 6.4%. But President Macapagal-Arrroyo may yet pull a surprise in 2009 as she continues to pursue with dogged determination foreign investors like the sheiks of Qatar who will invest some $1 billion in the Philippines in broadband internet technology through a partnership between Qtel, Qatar’s sole telecommunications service provider, and San Miguel Corporation. On top of this, the Prime Minister of Qatar, Hamad Bin Jassim, proposed the investment of $1 billion sovereign fund for the development of the Philippines, particularly infrastructure projects. Qatar will initially invest $150 million in 2009 until it reaches $1 billion in 2012. In addition, they have shown interest in acquiring 40% of Amanah Bank, including its management. Finally, Qatar has 100,000 new jobs available to Filipino workers, a figure that can easily cover up those laid-off in other countries.

Taiwan, in spite of its recession, will still import foreign workers, particularly Filipino skilled workers.

The Institute of Strategic and International Studies (ISIS) of International Academy of Management and Economics (IAME) expects GDP growth rate of 4.5 to 5.5 per cent in 2009, deviating from Cassandra-like prognosis of institutions using the framework of conventional wisdom.
To begin with, the GDP at current prices in 2008 is in the vicinity of P7.4 trillion. The total resources of the banking system is P6.8 trillion. The M1 of money supply is P1.019. The Philippine economy apparently has no liquidity problem. The 2009 budget of the government is P1.4 trillion.

The challenge to the economic managers of the government, bankers, manufacturers, entrepreneurs, and intrapreneurs – the public and private sectors—is how to make the M1 money supply turn around or have a velocity of 7.3 within the 12 months of 2009. This requires production of goods and services and stimulation of demand and consumption in a way that will make the MI roll over 7.3 times in 2009. When this happens, the grand pause strategic plan is realized. This means 10.20% growth rate in current prices or 7.2% at constant prices as in 2007.

One proactive approach is to push further the momentum of the strong performances of manufacturing, construction, and trade which kept the economy floating in 2008. At the same time, the service sector has to be reinvigorated to regain its strength as a lead sector. The fact that Boracay resorts and hotels were fully booked as early as November 2008 promises growing strength of hospitality and tourism industry.

Signs of positive things to come are the plans of Ayala Corporation to expand in Cebu; SM will continue to expand with more malls; foreign mining companies continue to enter into joint ventures; more construction in verticals and horizontals will proceed to meet the needs of service industries and housing sector; infrastructure projects of the government will pump prime the economy; domestic trading will become energetic; significant foreign investors from the Gulf states will come in while investors in matured and emerging economies are gasping for their breathe as their knees wobble.

The international reserves which stand at $ 36.12 billion by end of December 2008 can still be augmented by continuing OFW remittances of OFW,s in sectors not dramatically affected by the global financial crisis such as health and wellness, international maritime sea workers and officers, education, hospitality, culinary, the professions, small and medium entrepreneurs, and even construction. In other words, while OFWs may suffer a number of lay-offs they can replaced be by other OFWs hired in lines of work in need of manpower. Australia needs thousands of workers skilled in certain areas of business like mining, hospitality, etc. Canada needs 100,000 skilled workers from 2009 to 2012. Qatar needs 37,000 workers as 20 Qatari CEO’s made known their needs for manpower in 2009. This can run to 100,000 OFW’s including professional and managers.
No wonder Ayala Corporation CEO, Jaime Augusto Zobel de Ayala, recipient of Harvard’s most outstanding alumnus award in 2007, came out with an optimistic outlook for the Philippines in 2009, going against the voices of doom and gloom by stressing that the economic fundamentals of the Philippines are in “good shape”. He cited the $36 billion foreign exchange reserves and stable foreign exchange remittances of expatriate Filipinos. He said “overseas workers are not likely to lose their jobs because more of them are working in industries less exposed to the global slowdown”. He cited the fact that “the Philippine economy is not too dependent on exports and foreign investments”, thus putting to rest the fear that decline in exports may cause the steep decline in economic growth and cause mass lay-offs.
The weak areas to guard against are government budgetary deficits, collections by the BIR and BOC, and payments of foreign debts. So far, they are controllable and do not pose a threat to bring down the economy.
High fuel and food prices caused the double digit inflation in 2008. Inflation rate, however, is expected to go back to single digit. Fuel prices have gone down and the astronomical $154 per barrel in mid-2008 cannot be expected to return with the rest of the world turning to alternative sources of energy and fuel-efficient motor vehicles. In fact, crude oil has gone down to the vicinity of $40 per barrel. The recession in mature economies, and emerging markets of China, and India will keep oil prices down. At most fuel prices may rise to $75 per barrel as demanded by oil producers.
The common sense approach to bring down prices is to increase the supply to meet the demand. This simply means more production. This is doable. For instance, the increase in the production of sugar has resulted in the decline of price by around 12 per cent.

The same approach can be done with rice. Higher food prices can be moderated by massive production of rice through intensive farming. It is possible for the country to be self-sufficient in rice. Rafael Salas ,the rice czar during first term of President Marcos, was able to produce self sufficiency in rice.

A Chinese agriculturist In Iloilo and a farmer in Cabanatuan City have shown that they can harvest 300 sacks of palay per hectare.
An honest-to-goodness campaign through DA, DAR, and DENR field personnel to encourage farmers to maximize rice production with farm input support directly distributed to farm tillers with diligent oversight by government field personnel and NGO’s can reduce prices and reliance on rice importation which reduces the country’s dollar reserves.
In addition, students of agricultural colleges and universities can be harnessed to farm idle lands with attractive remuneration. These initiatives have to be fast-tracted within 2009.

One strategic approach is to pass a law requiring sale of farmlands at just compensation to agricultural corporations engaged in commercial farming if the farm failed to produce 200 sacks of palay per hectare for two consecutive years except when such failure is due to acts of God or fortuitous events. Or as an alternative, to lease the land for 99 years to commercial farming corporations at fair rates. Anyway, more than 90 per cent of land reform beneficiaries either have not been tilling the land themselves or have sold the land at market price. Agricultural corporations have the resources to raise the productivity of farmlands through commercial large scale farming which can take advantage of economy of scale.

Focus on Domestic Market
With the ongoing recession in the economy of trading partners of the Philippines, decline in exports can logically be expected. A strategy of concentrating on meeting the needs in food and other necessities of the huge domestic market of 90 million Filipinos can push the gross domestic product upwards, more than offsetting the shortfalls of industries affected by the global financial crisis. Appropriate incentives to the business sector have to be provided to energize those already engaged in the business and to encourage the new entrants.
Perhaps now in the midst of global financial crisis is the best time to revive the textile and garment industry with raw materials and fabrics getting cheaper because of recession in supplier countries. Clothing needs of the domestic market can be met with lower prices. Perhaps, a Chinese Filipino taipan can take the lead.
Filipinos will survive and a number may even find success as it is part of cultural value that there is always an opportunity in the midst of crisis.

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Author’s Note: This is a work in progress since the recession is ongoing. It will be updated from time to time.
Author Emmanuel Tiu Santos, a.k.a. Noli Santos is chairman-research fellow of the Institute of Strategic and International Studies (ISIS) and Chairman-CEO of the International Academy of Management and Economics (IAME [eye-aim]) located at Ayala Avenue Extension, (turn Left, off) Noli Santos International Tower, 1061 Metropolitan Avenue, Makati City, Philippines. E-mail: chairman@iame.edu.ph. website: iame.edu.ph / Landline: (632) 896.23.55. For more particulars: Visit www.wikipedia.org; then Search: Emmanuel T. Santos.