Govt response seen crucial vs global financial crisis

MANILA, Philippines - The government’s response will be crucial if the Philippines is to weather the impact of a worsening global financial crisis, economists Wednesday stressed. And while no new solutions have been offered so far, they said the initial answers — made in the wake of the US Congress rejection on Monday of a massive bailout plan — were on the right track. The country’s economic managers issued a statement late on Tuesday saying the state’s focus would be on four items: increased infrastructure and agriculture spending, added financial sector reforms, revenue gains, and regulatory amendments. While general and not new — the most specific news released that day involved lower growth outlooks, officials Wednesday claimed that more specific items had been identified and would be detailed in due course. "We decided to keep this to ourselves until we are able to present them to the President. It is best to keep these from being disclosed as there are players in the finance market and they may pre-empt our moves," Trade Secretary Peter B. Favila said. Particularly important Experts polled by BusinessWorld said the stress on increased spending and revenue improvements was particularly important. Leonardo A. Lanzona, an economist at the Ateneo de Manila University, said "The government will have to stimulate the economy. We can increase expenditures and we should spend on areas that will yield returns. Spending for infrastructure is crucial." University of the Philippines economist Benjamin E. Diokno, Budget secretary during the Estrada administration, said the focus should include long-term reforms as an economic slow-down cannot be avoided, bailout or no bailout. "When you are sick during this period, what you can do is to make sure that your body is healthy once you have recovered ... We should pay attention to education and health. We should do all those structured reforms that are not short-term," he said. Mr. Diokno also cited the need to spend for projects such as farm to market roads, which are necessary to increase agricultural output while also creating jobs. "We should be choosy with the projects we are investing in. We do not have much money so we must make sure that the money we spend would be worthwhile," he said. Victor A. Abola, an economist at the University of Asia and the Pacific, said the crisis in the US could lead to a slowdown in investments, so the Philippines should count on domestic-driven growth. "We should increase the productivity of agriculture and spend for infrastructure," he said. Mr. Diokno, however, said the government must not impose new taxes — the economic managers’ statement referred to "revenue collection improvements via ... legislative measures" — to fund its expenditures as this would lessen the ability of consumers to spend. Mr. Abola said "[revenue collection] is an important area" and proposed the wider use of electronic payment methods to minimize corruption. Mr. Favila, who spoke to reporters via a phone patch, declared "By and large the action plan that we put in place is it is best to shield the Philippine economy from further external shocks..." Socioeconomic Planning Secretary Ralph G. Recto, who on Tuesday said 2008 growth could fall below target, said there was a need to rationalize fiscal incentives and approve the 2009 budget on schedule. "Congress should pass the budget on time so we can spend more," he said. Scenarios drawn up Finance Secretary Margarito B. Teves, meanwhile, told reporters on Tuesday that the inter-agency Development Budget Coordination Committee was looking at a worst case budget deficit scenario of P100 billion this year, up from the official target of P75 billion, if the US does not adopt a bailout plan. "We need to spend for social services and infrastructure. There will be more people who will need help," he said. "Revenues will also be affected," Mr. Teves said, but added "we don’t have specific revenue reduction. We are looking at a broad number." In the worst-case scenario, he said economic growth this year could slow to as low as 3.8%, with 4.7% the likely outcome and 5.5% an optimistic view. "We provided three scenarios: best case, medium case, and worst case. If the US is in a recession, that means some of our overseas Filipino workers will be affected; some of them have two or three jobs. "The amount of remittances will also go down. We don’t have the numbers yet. If there is a recession, there will be a curtailment in the flow of funds. Those with excess funds will be looking at economies with very strong fundamentals," Mr. Teves said. The Finance chief’s growth projections are much lower than that announced by Mr. Recto, who had said growth could slow to 4.4-4.9% this year, below the official target of 5.5-6.4%. Mr. Recto’s predecessors concurred with the slower growth outlook. "Given what’s happening abroad, growth will be lower," said Felipe M. Medalla, National Economic and Development Authority (NEDA) chief during the Estrada administration. Cielito F. Habito, NEDA chief under Fidel V. Ramos, said the reduced 4.4-4.9% estimate was "reasonable ... given the likelihood of further decline in exports, slow-down in consumption investments due to high-externally induced inflation and high interest rates used by BSP (Bangko Sentral ng Pilipinas), and slow government spending due to tight revenues." Still optimistic Mr. Teves, meanwhile, said "By and large, we have seen improvements in our fundamentals. There are still some areas for improvement. We have to work on that," Mr. Teves said. "For the worst case to happen is the bailout plan in the US to be rejected. The effect on the world economy will be worst because the US will enter into recession instead of a slowdown. "A recession will have a larger effect. It is not going to be just on the financial markets but on the real economy." But the Finance chief said the government remained optimistic that some form of rescue plan would eventually be approved in Washington. "We attached high probability that the bailout plan will be approved ... It is for planning purposes we have the worst case scenario," Mr. Teves said. "If this (bailout) is going to be successful, we can see a curtailment of the prevailing mood which is bearish, conservative and pessimistic. If the plan will have the details, then we won’t see an extreme adverse effect," he told BusinessWorld. "Emerging economies like Philippines should continue to improve the domestic economy including generating more taxes as possible from existing taxes and enhancement measures such as the rationalization of fiscal incentives and sin taxes." The government, said Mr. Teves, "can handle the situation at a medium-case scenario." — from reports by A. D. B. Romero and R. A. M. Rubio, BusinessWorld