CONSEQUENCES AND IMPACT ASSESSMENT DOMESTIC - PHILIPPINES Higher interest rates and decreased access to credit

GDP and GNP Declined

Growth of investments declines

Poor performance of various industries

Other social effects Asian Financial Crisis Consequences and Impact in the Philippines

Outflow of foreign capital resulting to sizeable peso depreciation

Changes in poverty incidence and income distribution

Higher inflation rates

Decline in quality and quantity of basic social and economic services

Increasing prices of basic commodities and lower purchasing power of the poor

Lower labor demand resulting in higher unemployment

Decreased level of government revenues

GDP and GNP Declined

The effects of the financial crisis were soon transmitted into the real sectors, as seen in the large downward shift in economic growth during the 1997-1998 period. From a real GDP growth rate of 5.2 per cent in 1996, the growth rate declined to 5.1 per cent in 1997, and finally, a negative growth of -0.5 per cent in 1998. On a quarterly basis, GDP growth declined from 4.9 per cent in the third quarter of 1997 to about 2.0 per cent in the first quarter of 1998, and became -1.9 per cent in the fourth quarter of 1998 .Gross national product (GNP), on the other hand, squeaked in a 0.1 per cent growth in 1998,compared to 5.3 per cent and 7.2 per cent growth in 1997 and 1996, respectively. Net factor income from abroad, composed mainly of personal remittances, was again responsible for the positive growth level: remittances by overseas contract workers amounted to about US$ 4.4 billion in 1998, representing a gain of 12.9 per cent from 1997. After the crisis began in July 1997, GNP on a quarterly basis declined, exhibiting negative growth in the second and fourth quarters of 1998 y Growth of Investments Declined

In relation to expenditure, growth of investments declined rapidly from 14.9 per cent in the third quarter of 1997 to -23.9 per cent in the fourth quarter of 1998. The lack of confidence in the overall economic environment, the difficulty of borrowing from the banking sector and low

domestic demand took a toll on investment during the crisis. Despite this, household consumption and government consumption growth held steady in 1998 at 3.5 per cent and 0.8 per cent, respectively. y Poor Performance of Various Industries

An analysis of growth rates by industrial origin revealed that the agriculture, fishery and forestry sector performed poorly recording a growth of about -6.0 per cent in 1998. The poor performance of this sector could be traced to the El Nio weather phenomenon which left several areas of the country vulnerable to drought, and several monsoon rains which affected the planting season in October 1998. The countrys major crops -- rice, corn and coconut -were heavily affected by the adverse weather conditions, and these sectors reported productivity declines of more than 10 per cent during 1998. The industrial sector was influenced by poor demand throughout most of 1998 the most affected were the construction and manufacturing sub-sectors. Overcapacity in the real estate sector was mainly responsible for the decline in construction; in fact, many of the firms which declared bankruptcy or proclaimed problems in debt repayments were real estate companies. In the manufacturing sub-sector, the basic metal and non-metallic products and the transport equipment subsectors were severely affected by the crisis, and growth in these sub-sectors declined through much of 1998, by more than 20 per cent in the fourth quarter (NSO, various years). y Higher interest rates and decreased access to credit

The financial sector was severely affected by the crisis. The major problems faced by industrial firms were high interest rates, and the lack of sources of credit. In a survey by the Philippine Institute of Development Studies (1999), high loan rates and the lack of bank credit were among the top five major problems of companies during the financial crisis. In response, in 1998, the Bangko Sentral ng Pilipinas (BSP or the Philippines Central Bank) tried to reduce reserve requirements, while the national government reduced Treasury bill rates. The 5bellwether 91day Treasury bill rates dropped from 19.1 per cent in January 1998 to 13.4 per cent in December of that year (National Statistical Coordinating Board 1999). Published loan rates were also lowered to 18-20 per cent in 1999, from as high as 30 per cent in early 1998 y Outflow of foreign capital resulting to sizeable peso depreciation

One of the immediate effects of the financial crisis was the outflow of foreign capital, resulting in the sizeable depreciation of the peso. From 26.40 pesos per US dollar before the crisis, the exchange rate rose to 27.70 pesos per US dollar by July 1997, and reached a peak of 42.70 pesos per US dollar in January 1998. Since then, changes in the exchange rate have reflected the nervousness of financial markets. The peso reached 43.80 per US dollar in September 1998 when analysts became increasingly pessimistic over prospects of recovery in Asian countries. However, by mid-1999, the exchange rate had stabilized between 37 to 38 pesos per dollar. y Higher inflation rates

Prices increased slightly during the latter months of 1997. However, the rise in the inflation rate was cushioned by manufacturers who drew upon their existing inventories, as well as because of the government importing a record level of rice and corn in anticipation of the El Nio phenomenon. However, as agricultural productivity worsened by the second quarter of 1998,

prices started to rise over the double-digit level. Inflation peaked at 11.4 per cent in October 1998, when several typhoons devastated various rice and corn areas, affecting agricultural supply. y Decreased level of government revenues

The crisis also adversely affected the level of government revenues. At the onset of the crisis in 1997, actual revenue collections slipped below target because of shortfalls in income tax and import tax collections. Nonetheless, the government was able to achieve a P1.6 billion surplus. By 1998, however, fiscal performance had worsened; the cumulative deficit reached almost P50 billion, P10 billion more than the targeted level. y Lower labor demand resulting in higher unemployment

One of the more immediate effects of the economic slowdown was the increase in the number of job lay-offs and weaker demand for new labor entrants. This was driven by firm closures and downsizing in the corporate sector and the broad effects of the weak demand for goods and services. According to the Department of Labor and Employment (DOLE), for 1998, more than 155,000 workers were affected by job cuts while a total of 3,072 companies reported closure, retrenchment and/or have adopted work reduction programs. This figure had more than doubled since the previous year when 62,700 workers were affected and almost twice the figures of 1996 when 81,000 workers were affected by factory closure and retrenchment (Department of Labor and Employment 1999). These job cut-backs also indirectly affected informal sector workers in rural and urban areas as demand for their products declined. At the same time, more women and youth entered the workforce to augment family income and even offset the declines in wages of the primary breadwinners. y Increasing prices of basic commodities and lower purchasing power of the poor

As a result of exchange rate devaluation, the prices of imported consumer and intermediate products increased during the crisis. This had a negative effect on wages and informal sector incomes. A new welfare survey implemented by the government in 1998, the Annual Poverty Indicators Survey, revealed that 97 per cent of respondents were affected by the increase in the prices of basic commodities. Simultaneously, the inflation rate also lowered the purchasing power of the poor, through a rise in prices. The national Statistics Office recorded an inflation rate of 10.4 per cent in December 1998, compared to 5.0 per cent the same period in the previous year. This increase in inflation was primarily due to the increase in food prices, which rose to 11.2 per cent from 5.2 percent during the same period. The Department of Trade and Industry field offices also noted a 10 to 50 per cent increase in the prices of many consumer and industrial products in several regions in 1998. Such increases were felt most by poor households who suffered from a decline in their real budgets. While the government and the World Bank maintained that the poor were relatively protected because agriculture was their main source of income, studies have indicated the contrary. Balisacan (1994) measured the short-term effects of adjustment policies and showed that the short run effect of commodity (food, in particular) price increases may result in an increase in aggregate poverty, even in the agricultural sector. Small agricultural producers and landless workers who are net buyers of food would be particularly vulnerable. Moreover, inflation could worsen income distribution by reducing the ability of the poor to afford goods with higher prices.

Decline in quality and quantity of basic social and economic services

The national government budget experienced a period of lower revenues (as a result of lower economic growth) and higher expenditures on interest and maintenance and operating expenses (due to higher loan rates and the higher exchange rate) as a result of the crisis. In response, the national government imposed a 25 per cent statutory reserve on most of its agency budgets, and a 10 per cent cut in subsidies to local governments. Government spending recorded a P49.1 billion deficit for 1998. These government cuts were directly felt in the social sector. Capones (1998) reported that the governments nutrition and immunization programmes recorded a reduction in target beneficiaries, with consequent impacts on infant, child and maternal mortality rates. Reyes (1998) noted that simulations of the effects of the crisis on the health and nutrition sector resulted in a decline in calorie availability by 11.7 to 13.2 per cent, and a decline in protein availability between 12.7 to 13.8 per cent. Reports from the Department of Education, Culture and Sports also indicated an increase in the number of teacher shortages. Secondary schools faced a higher deficiency of teaching positions, from 2,625 in 1997 to 9,835 in 1998, as posts were slashed due to budget constraints. The implementation of the school building programme and textbook programme for 1998 was deferred for another year because of budget cutbacks. y Changes in poverty incidence and income distribution

Simulations made by Reyes (1998) suggested that there was a decline in incomes across all income groups, from a low of 4.6 per cent for the highest income group to a high of 7.3 per cent for the poorest income group. Furthermore, the study indicated that the countrys Gini coefficient, already at a high 0.49 in 1997 (an increase from 0.45 in 1994), further deteriorated to 0.50 in 1998, signalling a slight increase in income inequality. The Annual Poverty Indicators Survey or APIS (1998), a survey on household welfare undertaken to complement the triennial Family Income and Expenditure Survey (FIES), also indicated that income inequality had increased. While the last FIES in 1997 showed that the poorest 40 per cent of households had a 14.1 per cent share of all incomes, in the 1998 APIS, this share had dropped to 10.6 per cent. y Other social effects

Lim (1998) concluded that the crisis was especially hard on women, who enjoyed an improvement in their professional and wage status during the years of modest growth, but who were forced to return to their former positions as unpaid family workers or unemployed housewives. Women had to carry the burden of increased household work as the male breadwinners in the family were forced to increase their search time for additional employment. In general, violence against women and children also increases in an economic crisis. As a result of lower labour demand and the adverse effects of the El Nio phenomenon, incomes in the rural sector fell drastically. The crisis in Mindanao where thousands of Filipinos, especially children, were malnourished was caused not only by the recent drought, but also by the inadequate food supply and income intervention systems that were affected by the crisis. In addition to this, according to the Social Weather Stations (1999), peoples perception of their quality of life also declined. Self-rated poverty among Filipinos, or the percentage of those surveyed declaring themselves poor, increased to 63 per cent in December 1998 from 58 percent in June 1997. Furthermore, crime and socially-detrimental activities increased the

Philippine National Police reported a marginal increase in the number of murder, homicide and rape cases, by about 3 to 5 per cent in 1998, compared to 1997. 1997 Crisis Impact on Philippines Economic Impact of the Crisis y Sudden outflow of substantial amounts of foreign capital o Heavy strain in dollar reserves >> steep drop in peso value (more than 62% within 7 months after the crisis struck) Slight deceleration in the GDP growth in the first six months after the crisis struck o Agriculture sector >> flat growth o Industrial and service sectors >> signs of weakening Economic construction (1998 + 2nd quarter drought was most intense + 4th quarter 2 typhoons) o However this was due more to the weather disturbances Inflation slightly accelerated (first few months) o Agricultural output dropped (1998 2nd quarter) >> increase in food prices >> over-all inflation (double-digit) Imports outpaced exports (six months after crisis) >> trade gap widens o 1998 imports dropped drastically while exports continued to expand o 2nd half of 1998 trade balance because into a surplus >> reduced trade gap o Improved balance of payments position in 1998 (trade balance + foreign borrowings)

Fiscal Impact of the Crisis y National Government o Cut back expenditures  Adversely affected economic services sectors and national defense  Relatively protected social services and general public services sectors o Real capita spending on social services sectors (particularly health and education) went down in 1998 o Drop in revenues >> shortfall in import duties  National government 25% reserve in total maintenance and operating appropriations (February 1998)  Local Government Units (LGUs) 10% reserve share in the internal revenue allocation (IRA)  Despite these, still bigger budget deficit (toward end of 1998 continued into 1999) Local Government o Many registered a decline in locally-generated revenues o Since not allowed to incur fiscal deficit >> cut back expenditures  Per capita total expenditures in real terms dropped in 13 out of the 20 LGUs surveyed in 1998  10 out of 20 LGUs had lower per capita expenditures for social services (even theres some degree of protection)  12 had experienced a decline in per capita real expenditures on basic health services  25 30% cut on non-personnel recurrent expenditures

15 LGUs had lower per capita MOOE expenditures in 1998 compared to that in 1997

Social Impact of the Crisis Employment y Higher unemployment and underemployment rates o Slower growth in total employment and faster growth in labor force o Sectors most hurt construction, manufacturing, mining and quarrying  Agricultural mostly as a result of the El Nio y No massive layoff but there is significant loss of gainful employment o The more affected groups were the urban poor and fishing communities  Forced to abandon their jobs for more viable sources of livelihood o Presumed more skilled older workers were better able to hold on to their jobs y More firms (twice the number in 1997) closed or retrenched in 1998 due to economic reasons (DOLE) y More firms in the service sectors closed shop in 1998 (in fact three times higher than the 1997 figure) o Wholesale and retail trade, financing, insurance, and real estate y Decline in income (30% of the respondents) o Poor harvest bad weather o Lower product prices o Reduced number of earning family members y Higher income (17% of the respondents) o Job promotion o Increased number of earning family members o Better product prices o New or additional work o Increased financial support from relatives y Employed overseas benefited the most o Higher peso value of their dollar earnings in spite the decline in dollar earnings and remittance in 1997 and 1998 y Inflation rate went up from 5% in 1997 to 9% in 1998 o Result of peso depreciation and food supply shortage o Food prices alone rose by 6.4%  Was not matched by corresponding increase in wages  Weakened purchasing power of households  Decrease in their access to basic services y Increase in poverty Education y Lower enrollment rates and higher dropout rates o Financial difficulties, higher tuition fees and school expenses, higher transportation, school project costs, give priority to more essential items such as food y Dropout incidence more on public secondary schools o Not seem large in elementary and private secondary y Enrollment rates in elementary and secondary for AY 1997-19998 and 1998-1999 was lower than the historical average y Decline enrollment in Grade 1 and first year of the secondary level

Speculated that there was a shift in enrollment from private to public schools at the elementary level

Health y y

Reduced availability of medicine supplies and vaccines and other health services such as immunization Poorly maintained health facilities and suspended free health services o Drop in government health expenditures both at the national and local levels

Vulnerable Groups y Farming and fishing communities o Severity if the El Nio phenomenon o Prices of agricultural inputs y Coping mechanisms poor families o Compromised health, education and overall development of the young individuals o Women  Stretch the household budget  Took on income-earning opportunities  Access to credit sources y Communities in general remain peaceful o Only a few, particularly the urban poor and fishing villages, showed an increased frequency of drug-related problems and criminal incidents REFERENCES Mandap, Anne Bernadette E. and Reyes, Celia M., The Social Impact of the Regional Financial Crisis in the Philippines, Micro Impacts of Macroeconomic Adjustment Policies Project, February 1999 Reyes, Celia, Rosario Manasan, et. al., The 1997 Regional Financial Crisis: Its Social Impact on the Philippines, Development Research News Vol. XVII No. 5. Tuao, Philip Arnold P., The Effects of the Asian Financial Crisis on the Philippines Labour Markets, EADN Regional Project on the Social Impact of the Asian Financial Crisis, January 2002 http://en.wikipedia.org/wiki/1997_Asian_financial_crisis National Statistics Office (various years)