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Can the Economy Outgrow

the National Debt?

Felipe M. Medalla

UP School of Economics

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Persistent Philippine economic problems thatwere aggravated by the global financial crisis

Tight Fiscal Situation and PoorRevenue Performance

Inadequate Infrastructure

Weak Investor Confidence due toGovernance concerns

Small Narrow, and Stagnant

Industrial Base High Incidence of Hunger and

poverty

Dismal Education Outcomes

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A country with a very youngpopulation.

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the vast majority of whom were born frommothers who have low education (and have morechildren than they desire)

Fertility by MothersEducation

DesiredFertility

ActualFertility

No education 4.1 5.3

Elementary 3.3 5.0

High school 2.5 3.5

College or higher 2.2 2.7

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The poorest forty percent of the mothers accountfor 56% of the births

Fertility by Wealth Quintile DesiredFertility

ActualFertilityWealth index quintile

Lowest 3.8 5.9

Second 3.1 4.6

Middle 2.6 3.5

Fourth 2.2 2.8

Highest 1.7 2.0

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And many of their children dont finishelementary school.

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Enrollment growth has lagged behind the growth ofschool-age population.

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National Government Debt Nearly Doubled From 2.2to 4.2 Trillion pesos.

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A big part of the increase in the public debtis not due to the national government sbudget deficit

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In a stable macroeconomic environment, the economy canout-grow the debt even with modest deficits provided that

off-budget deficits can be eliminated.

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The Philippine economy was less affected by theglobal crisis because exports of people of serviceswere less affected than the global trade of goodsand services.

PHILIPPINES: BALANCE OF PAYMENTS

2008, in million U.S. dollars Totals

CURRENT ACCOUNT Goods Services Income Transfers

Receipts 48,202 10,194 5,973 15,780 80,149Payments 60,784 8,756 5,827 555 75,922

Surplus/Deficit -12,582 1,438 146 15,225 4,227

CAPITAL ACCOUNT Direct Inv.PortfolioInv.

Derivatives

Other

Net Inflow/Outflow 1,283 -2,584 -144 -469 -1,914

NET UNCLASSIFIED ITEMS

-2,224

OVERALL BOP POSITION

89

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But remittances were much more resilient than

anticipated.

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Because of OFW remittance we have a BOPcurrent account surplus and a large and growinginternational reserves.

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That we have a BOP Current Acct Surplus alsomeans that there are more than enough savings(low rates of investments meant that much of theOFW savings ended up as reserves of the BSP)

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If not for the large excess savings, the ballooninggovernment deficit could have caused a lot of

problems.

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Unlike what happened in the past, thegrowth in the budget deficit did not cause aspike in interest rates.