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The True State of the Economy

17 August 2009

Response of Rep. Ferdinand Bongbong Marcos Jr.
To the State of the Nation Address
Of President Gloria Macapagal Arroyo
House of Representatives

Mr. Speaker,
Distinguished Colleagues,
Ladies and Gentlemen:

Last July 27, before a joint session of Congress, the President delivered her annual report on the State of the Nation. She painted before us a world reeling from an economic tsunami, while our country watched calmly from the sidelines, safe from its gales and floodwaters.

Today, we in the Opposition will show the nation the stark reality, so that Congress and our people can better cope with the challenges.

I will specifically respond to the President’s report on the economy – a report which left many of us wondering whether we are living in two different countries: she and her coterie in a robust and strong economy, and we and the rest of the nation in a contracting and embattled one.

The President said that we can bask in the glow of the many good things that have happened during her watch. We, however, live with the reality today of all economic sectors producing less, of people losing their jobs or working less, of companies closing or cutting down their operations, of the national budget devoting more public money to service debt, and of Government incurring bigger deficits just to continue its operations.

Our perceptions differ because the President – for rhetorical reasons – chose to report on the history of her administration, instead of reporting on the state of the nation during the fiscal year that ended last June 30.

By shifting focus, the President avoided the troubling story of where we really are today – in the economy and other sectors of national life. Very clever, Madame President, but not clever enough to deceive the nation. What she presented Congress and the nation was a doughnut – an enticing tale about a strong economy, with a big hole in the middle.

What are the missing facts and omissions?

First, the President conveniently omitted to report that in the first quarter this year the economy posted a 0.4 percent growth in GDP – a dramatic decline from the 4.6 percent growth posted last year and the 7.3 percent growth in 2007.

It is not a case of just one sector going out of synch. Nearly all sectors experienced and are experiencing decline:

• Industry contracted by 6.6 percent in the first quarter from 0.1 percent growth in the last quarter of 2008.
• Services posted no growth in the first quarter compared to 0.2 percent growth last year.
• Agriculture, fishery and forestry contracted by 1 percent in the first quarter after expanding 0.9 percent in the last quarter last year.

The pervasive slowdown in every sector leaves in doubt that Government can attain its target of 3.1 to 4.1 percent GDP growth this year.

As a result of this general economic weakening, per capita GDP contracted by more than 1.1 percent. And personal consumption expenditures dropped by 3.1 percent during the first quarter after more than 50 consecutive quarters of positive growth.

Second, totally omitted from the address is any mention of the major slowdown in the nation’s trade with the world. Exports contracted by 34.5 percent during the first five months of the year. The trend will likely persist for the rest of the year because of the gloomy global economic outlook. This is significant because exports account for 40 percent of our GDP.

Similarly, imports dropped significantly by 32.9 percent during the first five months – in stark contrast to the government’s forecast of 10 percent growth. The substantial drop in imports will most certainly mean a corresponding fall in industrial production and exports since both are heavily dependent on imported intermediate goods and raw materials for sustained production.

Third, unmentioned in the address is the fact that the budget deficit hit P153.4 billion as of June this year. This is already more than half the adjusted P250B ceiling that the government had targeted for 2009. When the government presented the budget to us last year, the target deficit was just P40B. Since then, they have adjusted the target four times already – and probably will again. According to the forecasts of domestic and foreign institutions, the P250B target deficit will be breached – with foreign international banks like Citigroup forecasting a deficit as high as P350B.

Fourth, the National Statistics Coordination Board (NSCB) has reported that the composite leading economic indicator (LEI) – composed of 11 indicators -- has now declined for the fourth quarter in a row. The indicators are: money supply, consumer price index, foreign exchange rate, total merchandise imports, wholesale price index, terms of trade index, hotel occupancy rate, tourist arrivals, number of new businesses, stock price index and electric energy consumption. Of these 11 indicators, 9 were negative contributors. Only money supply and CPI were positive contributors.

In sum therefore, we have an economy slowing down and under stress. Far from the picture of strength that President painted before us, the economy was lucky to weather difficulties last year and will be under challenge this year. It is bad news for both the President and her critics because, like it or not, we all live in the same economy.

I could rest this case with just this recitation of the facts. But the President’s claim that her eight and a half years in office have been an unmitigated boon to the nation also deserves correction. Here again, she misrepresented the record – or at the very least, did not tell the whole story.
The President boasted that since she took office, there has been a faster growth of GDP. From a compounded annual average of 2.45 percent in the 1990s, growth has increased to an average of 4.28 percent.

What she failed to mention is where the growth is coming from, how much government policies were responsible for it, and how it is being distributed. The growth is not rooted in greater productivity. Investments and exports are not leading the way. The growth has been service-oriented and consumption-led. And the underlying support for domestic consumption has been OFW remittances, which now accounts for over 9 percent of GDP.

Since growth in investments and exports has been at best mediocre, it cannot be said that economic expansion is the result of pivotal policies and programs of the administration. Our OFWs, not the government, are the ultimate cause of the economy’s growth and resilience during the past 8 years.
We have reason to worry that the economy and the nation have come to depend on OFW remittances as a lifeline – like a diabetic dependent on regular injections of insulin to stay healthy.

As things now stand, any substantial drop or slowdown in remittances or deployment of our workers, which is beginning to happen with the global financial crisis, will impact heavily on overall economic performance. In the first quarter, GDP almost crawled to a halt when remittances growth slowed to 2.7 percent.

This is unhealthy for the economy and the nation. Any development strategy that critically depends on the deployment of workers abroad is cause for alarm – not for bragging. We cannot anchor our future on the export of our brawn and brainpower without suffering, sooner or later, a major decline
Similarly, we cannot gloss over the fact that economic growth over the past eight years has not filtered down to the masses of our people. Corporate profits take the lion’s share of growth, benefitting only their owners and stockholders. So much of the expansion is “jobless growth” – meaning that few new jobs are being created and there is not uplift in income and well-being among the greater majority of the nation.

The President also boasted that “the next generation will benefit from our lower public debt to GDP ratio…Kung meron man tayong malaking kaaway na tinalo, walang iba kundi ang utang, iyong foreign debt. Past administrations conjured the demon of foreign debt. We exorcised it.”
This is a clever but deceptive manipulation of the facts.

First, the truth is Government’s foreign debt increased by $9 billion during the President’s watch. While the total foreign debt settled at $52.5B as of end-March 2009 – increasing only by $600 million since 2001 – it was not the doing of her administration. In the breakdown of foreign debt, the BSP and other sectors managed to reduce their total indebtedness since 2001, whereas government debt increased from $20.3B in 2001 to $29.2B today. So the administration did not exorcise anything. In fact, we have to brace ourselves for the likely increase of foreign borrowings this year.

Second, Department of Finance officials started belying the President just a day after the SONA. They said that:

• In the first semester, government spent a total of P361.5 billion to service debts, 2.8 percent more than the same period last year. For the entire year, government projects that debt servicing will reach 8.7% of GDP, compared to 8.2% last year.
• Finance Secretary Gary Teves himself said that because of the global recession government debt (including both domestic and foreign borrowings) will rise to 57.3 percent of GDP, a reversal of the DOF’s aim to reduce the ratio to just half this year.

The President also reported that “net foreign direct investments multiplied 15 times during [her] administration” – leaving the impression that international capital inflows have been trooping to the country under her watch.

What she neglected to mention is that Direct Foreign Investments fell by 47.9 percent last year to $1.5B, and that we won’t fare any better this year given the global slowdown. The entry of Kirin Holdings into SMC is the major contributor to investments this year, but analysts doubt any surge or increase in FDIs for the rest of the year because of the general forecast of a drop in foreign capital flows to Asia this year. Our share of that pie in ASEAN is low, when you consider that while we took in $1.5B last year, Malaysia, Vietnam, Indonesia and Thailand took over $8B each. And Singapore received an influx of $22.8B. It is quite clear that we have not become the big player in the international arena that the President would have us believe.

Finally, the President slipped in a curious paragraph on employment and poverty alleviation in her address. “Bumaba [daw]”, sabi niya, “ang bilang ng nagsasabing mahihirap sila, mula 59% sa 47%. Kahit na lumaki ang ating populasyon, nabawasan ng dalawang milyon ang bilang ng mahihirap. GNP per capita rose from a Third World $967 to $2,051. Lumikha tayo ng walong milyong trabaho, an average of a million per year, much, much more than at any other time.”

She offered no details to back these stunning assertions.

So once again, let us examine the true state of the economy. According to an Inquirer report written by Tomas Africa, a former officer of the National Statistics Office, the administration’s scorecard in employment has been a combination of “the good, the bad and the ugly.”

The good is that the government has attained a measure of its target of 1 million jobs in certain years, though not every year. And the POEA deployed 1.23 million workers abroad last year, which was 14.7 percent higher than the year before.

The bad is that the jobs increase is largely of the unsustainable kind. Few jobs have been added in industry. Although agriculture employment has increased, it has not reversed the shift of workers away from the sector because of low pay, climate change, etc. The government jobs programs have raised the number of paid workers, but there is a similar increase in unpaid family workers.

The ugly is that Government’s chosen investment and employment strategies have created structural problems that will take years to straighten out. With more agriculture workers shifting to the service sectors, there will be surely repercussions in food self-sufficiency. This, coupled with the declining employment in industry, sets us farther back from the avowed goal of joining the ranks of developed countries by 2020.

As for the reduction of poverty and unemployment, let us take note that Government has changed the definition of unemployment starting April 2005. By this device, it removed 1.4m Filipinos from the ranks of the unemployed. Likewise, poverty incidence, while improving overall during the eight-year period, increased last year, with more Filipinos living under the poverty line.

To be sure, there are substantial achievements during the eight-year period that have surely helped the economy to achieve growth and are enabling us to meet the present recession.

These include the better fiscal balance achieved during the second half of the decade. After the high deficit years from 1999 to 2005, which threatened ruin to the country, the government’s budget deficit from 2006 to 2008 has been under greater control. This was made possible by the fiscal reform program, which includes the value-added taxes to offset amongst other things, the decision to condone the indebtedness to Napocor. Significantly, it was Congress and public opinion that made the reform possible, not the President who was reported to be deathly afraid of the RVAT.

Also a major favorable development has been the taming of inflation, which has averaged 5.5 percent over the decade. Credit for this belongs not to the President’s policies, but to the independent Bangko Sentral ng Pilipinas, which has been a prudent steward of our currency and financial system.

Likewise contributing positively to the economy are the growth of business process outsourcing (BPO) and tourism. But these growth drivers are umbilically tied to the health of first-world economies. Our tourism industry is already reeling from the drastic slowdown in global tourism.

Finally, there is the strength of our human resources, which at home and abroad have been the real backbone of our economy. Nothing in our country confers more competitive advantage than our workers. In this, we are truly fortunate and blessed.

But having said this, let us not delude ourselves with statements that we have brushed aside the global crisis while the rest of the world is being battered by it. Nor should we boast of strength in the national economy when we know how precariously it hangs upon the stars aligning in our favor.

To be plain:

The economy is not strong when it is contracting across nearly all sectors, and when most indicators point to nearly zero growth this year.

The economy is not strong when 9 percent of the GDP is dependent on the remittances of OFWs whose deployment and income are determined by factors that are not under our control.

The economy is not strong when the country has become the biggest rice importer in the world – this despite the fact that our country is a rice producer by long tradition and in the past produced a surplus of the staple.

The economy is not strong when it attracts only a small portion of foreign investments flowing into Southeast Asia, and is usually the fourth or fifth option for most investors.

The economy is not strong when poor infrastructure continues to hobble national development, and when our infrastructure stock lags behind those of our neighbors.

The economy is not strong when graft and corruption continues to hound Government and national life, exacting a hefty part of every peso in the national budget.

Finally, the economy is not strong when Government is not meeting its own avowed economic targets, and almost every quarter has to adjust the targets downwards.

This should serve to remind us all that we have work to do together – the executive and the legislative -- to cushion the nation from crisis and to build a truly strong economy.

The crisis now stalking the world and the efforts of nations to face it down raise confidence that in time adversity will be surmounted. We should be part of this tidal effort, but we can only be equal to the challenge if we are not smug and complacent but rather resolute in policy and action.

In this final session of Congress before the 2010 elections, we have to address the slowdown of the economy with the proper stimulus that we can afford and will avail. We have to shore up the safety net for our millions who are most vulnerable to economic adversity. And we have to adopt quickly measures that will make the economy more resilient and productive over the long term.

Among these measures that Congress should consider, Mr. Speaker, are:

1.In agriculture and agrarian reform, instead of 'bragging' about a 90-day rice buffer which has made us the biggest rice importer in the world, we propose that we aim only for a 45-to-60-day buffer, and direct the savings toward actual agri infrastructure, agri lending or partial subsidies for agri inputs which are more sustainable, provide more jobs and will directly impact on productivity.

2. In services, we should provide incentives such as market development assistance, training subsidies, guarantees and the like for A-class RP corporations to bid for jobs overseas instead of merely depending on our individual “brains and brawns” to carry us through. We can similarly direct development assistance to retirement and medical tourism developers.

3. To further strengthen the financial system, we need not only the proposed amendments of the BSP law but a full updating of our regulatory guidelines and mechanisms for financial services including pre-need.

4. To improve and streamline our tax collection efforts, we should once and for all adopt new technologies and advances for better tax collection and administration, instead of merely relying once again on increased 'sin taxes'.

5. In power and energy, we should pull together – administration and opposition alike -- to lower electricity rates in order to spur economic activity. Our efforts should include bringing to parity with imported fuels the government's share in royalties from indigenous energy sources, and directing more funds and assistance toward renewable energy development and energy conservation.

6. Finally, we urge a review of the level of debt payments and subsidies for GOCCs and study of how we can reduce the number of money-losing corporations or task groups.
These and other vital initiatives, Mr. Speaker, must engage this chamber in the session now before us.
It’s not a question of whether or not we should fortify our economic house against the difficulties and challenges of the times. We simply must.
Our people – particularly our workers -- know this from the experience of countless adversities. They will not understand, if in this time of challenge, when so much of the future is at risk, their government fails in its duty to lead wisely and govern well.

Thank you, Mr. Speaker.