The world today is experiencing what could turn out to be the worst economic storm in our lifetimes, at least for those of us born after the 1930s.

What started as a crisis in the US housing sector, in particular the so-called subprime segment of the market, has intensified into a full-blown financial and economic crisis, that has wrought and continues to wreak havoc across different asset classes, different markets and different economies.

This crisis started in the middle of 2007, when increasing strains in the US mortgage market led to rising defaults and the collapse of two hedge funds managed by Bear Stearns & Co. The involvement of a major Wall Street name in what was then an emerging problem catapulted the subprime mess into the consciousness of investors in other credit and asset markets. Since then, prices in most major asset markets, outside of commodities and the safe-haven US Treasury market, began to reverse the uptrend that most markets were enjoying for the past several years.

At the start, the markets were uncertain about the extent of the subprime crisis and its effect on other markets and the real economies of the affected countries. There were hopes then that the crisis could be contained to this segment of the US housing market, while insulating the broader property market and, more importantly, the other sectors of the US economy. Outside the US, particularly in emerging economies such as the Philippines, hopes were also pinned on the concept of decoupling, i.e. that other sources of demand, particularly the red-hot economies of China and India could mitigate the impact of a US slowdown.

As the year 2008 progressed, however, it became more apparent that the problems in the US property market are deeper than originally thought and, more importantly, that US financial institutions were deeply exposed to very risky assets that were funded through very aggressive leverage. As housing prices in the US continued to plummet, the quality of housing-related assets held not only by banks, but also by investment banks, insurance companies, hedge funds, mutual funds, and even by money-market funds became more and more suspect. Trust and confidence, which are very critical for the efficient functioning of the financial system, became increasingly frayed, leading to what is now acknowledged as practically a seizure of the financial systems sometime in the third quarter of this year. Credit stopped flowing, as banks and financial institutions became reluctant to lend to one another and to their clients. Credit conditions became increasingly tight, even as the Federal Reserve and other central banks began to cut rates more aggressively. Thus, the subprime problem became a full-blown credit crisis, affecting not only housing-related assets but other industries as well. Leverage, which used to be the darling of investors and the key to creating value during the boom years, became a kiss of death as greed quickly gave way to extreme fear. As the crisis took its toll on financial institutions, it became more obvious that many institutions, including leaders in global finance, engaged in irresponsible behavior driven by overconfidence and the insatiable quest for ever higher returns.

The fear in the markets reached its peak sometime in September of this year, when the US Treasury and the Fed decided not to bail out Lehman Brothers and allowed it to fail. The reaction in the financial markets, not only in the US but in all other markets, whether major or small, was so violent that the US government was forced to announce a bailout package for AIG, the ailing US insurance giant. The alternative was simply unthinkable, as the collapse of the entire financial system at that point was a real and imminent possibility. Since then, bailouts became the name of the game and the US Government, and the governments of major industrial economies, reached the conclusion that this crisis is too deep for the markets and private investors to resolve on their own. The governments of major economies, in the US, the UK, continental Europe, Japan and China realized that, in the next few years at least, the fate of the world economy and the financial markets rests on the shoulders of government, and all of them announced bailout and/or stimulus packages of staggering proportions. We cannot fully anticipate the full implications of this development, and I am certain that there will be significant unintended consequences, but the fact is that the severity of this crisis has forced the hands of governments to become more pro-active not only in encouraging and stimulating the economy, but in controlling, running, and deciding the fates of business enterprises.

The dramatic response, particularly of the US government in terms of committing huge fiscal resources to counteract the crisis, seems to be working, at least in terms of calming down market fears and preventing uncontrolled panic. Credit conditions have improved significantly, particularly in the interbank market, but also in the long-term mortgage market where rates have come down from previous peaks. It is too early to proclaim, however, that the global economy and financial markets are out of the woods. After all, the US recession is just beginning to bite and the US economy is expected to remain weak at least for most of the year 2009. Moreover, the fact remains that mind-boggling asset values have been destroyed by this crisis. In the equities market alone, the current estimate of the combined decline in global stock markets now runs at 30 trillion US dollars. This does not count the losses in the bond markets, the derivatives market, the property markets, and the commodities markets. The wealth effect of this widespread destruction of value is expected to be very significant, and is underpinning the fears about how deep and prolonged the global recession could become.

In the Philippines, we are relatively fortunate that our financial institutions are not as highly leveraged as their US and European counterparts and are not as heavily exposed to toxic assets, such as the US housing-related credits. We are also fortunate that our economy continues to benefit from sustained remittances from overseas workers, and is less dependent on manufactured exports, which have borne the brunt of the US economic slowdown. Thus, we have been able to sustain growth, albeit at lower rates, although the outlook for next year has become more uncertain.

This uncertainty arises from three main sources of concern: First, the global economic downturn could affect the deployment of Filipino workers abroad. Even now, we are beginning to hear more news about Filipino workers losing their jobs and being repatriated from various countries. Second, our access to foreign capital will be significantly limited next year. The significant deleveraging being undertaken by various types of investors means that equity flows into our stock markets will be very limited, direct investments will be weak, and the credit markets more difficult to access. Even now, the Philippine government has cancelled its planned bond issuance for this year, hoping for better market conditions next year. If these conditions do not improve significantly, our government and private corporations will have difficulty accessing the offshore credit markets next year, with serious implications not only on investments, but on the exchange rate and domestic interest rates as well. Third, we are facing this more difficult financial environment at a time when the fiscal resources of government have become more constrained. Our revenue effort has fallen, and is expected to be weaker next year as a result of the economic slowdown, the decline in the tax take from oil, the reduction in the corporate income tax rate, and the additional exemptions granted to individual taxpayers. This reduction in revenue effort will come at a time when the demand for government spending will have increased, as there is a need to mitigate the effects of the economic slowdown through some stimulus spending.

Furthermore, the earlier hopes pinned on the idea of decoupling from the US economy have proven to be unrealistic, as Asia is now beginning to post significant declines in exports. China and India, the vaunted new powerhouses that were expected to support growth in the region, now look overheated as well and are expected to experience a slowdown in the coming year.

Clearly, therefore, the Philippines now faces more difficult times ahead. It is just a question of how severe the impact will be, whether we will be able to manage modest growth of 3 to 4% or suffer an even more significant slowdown or even a recession. And, as some economists have opined, a very slow growth of 1 to 2% is effectively a recession for the country, given our relatively higher population growth.

Let me now move on to the implications of the ongoing financial crisis on the activities of groups such as CODE-NGO that are heavily involved in social development work.

The first impact of this crisis is that corporations, individuals, and donor organizations are now facing more significant budget constraints in terms of their ability and willingness to support social development causes. As some of you may be more familiar than me, Philippine organizations involved in social development rely to a significant degree on foreign-based funding. But even in the country, we hear stories of significant losses incurred by wealthy families and corporations, as a result of their investments in offshore markets. This could have a significant impact on local foundations and charity organizations, depending on the mix of their funding sources.

Second, foundations themselves, here and abroad, may have incurred losses in their endowment funds and investment portfolios. One of the more dramatic stories that we have read recently was the 8 billion dollar loss incurred by the Harvard endowment and how this could affect the operations of the university moving forward. While the Harvard experience may stand out in terms of the amount involved, this story must be the common experience of several foundations and charity organizations in the US. In the Philippines, the problems faced by local foundations should be much less: first because we do not have the 37 billion endowment fund of Harvard but also because our local foundations are probably less exposed to the more risky assets that are available in more sophisticated financial markets. Nevertheless, it is fair to say that investment returns this year and perhaps in the next year will not be a reliable source of funding for social development programs.

The bottom line is that financial resources have become a more significant constraint for social development organizations today and perhaps in the next few years. Arrayed against this is the third impact of the crisis, which is that the demand for social development programs and projects will become greater as a result of the economic dislocations that this crisis will bring. More children will grow hungry; more people will be unable to afford health care; more children will drop out of school; and more of our workers will have greater difficulty finding gainful employment. The country’s limited gains in reducing poverty could be derailed even more if the economic slowdown proves to be deeper and persistent, thus necessitating an even stronger response from development organizations if we are to avoid a significant deterioration in the already pitiful human development indicators of the country.

Limited resources; unlimited needs. What is new in the stories of our lives as development organizations? Of course this reality is not new to us. But we need to prepare ourselves for perhaps a more pronounced and dramatic manifestation of this constant reality.

I can think of three themes that I can offer for the consideration of organizations such as CODE-NGO involved in social development work. The first is the need for even greater focus. As development organizations, we are perhaps more naturally prone to pressures, both internal and external to overreach and try to do as many things as possible. Our own people can and will always identify problems out there that need to be solved. People from outside will always approach us to solicit our help in the worthwhile projects that they are undertaking. Of course, we have to remain open and pro-active in responding to new and emerging situations but this has to be always be tempered by our own mandates and visions as organizations and a realistic assessment of our organizational capabilities. Aside from the availability of financial resources, the capabilities of our people and organizations require that focus on programs and projects where we can effectively contribute towards meaningful social development. Otherwise, our efforts will just lead to waste, which is unforgivable particularly in the new economic reality that we now live in.

The second is the need for greater coordination among organizations involved in the same sector or undertaking related activities. Coordination allows us to tackle bigger issues than what our more limited resources as individual organizations would allow us to even consider. Coordination allows us to pool resources to undertake bigger projects. With a broader perspective of the problems and issues we face, coordination allows us to prioritize on projects with the greatest impact. Furthermore, coordination allows us to complement the work of other groups to avoid duplication and waste and be able to work on implementing more sustainable and effective programs to address deeper and chronic problems. This is the main idea behind our formation of Philippine Business for Education. Recognizing that we are facing a crisis in education which threatens the welfare of our fellow Filipinos and our development as a nation, we in the business community have decided to pool what used to be disparate and uncoordinated education-related programs into a cohesive set of programs that are designed to produce more meaningful and lasting success in improving the quality of education in the country. I believe that this is the same spirit that moved the formation of CODE-NGO, which has supported its success throughout these years. I can only encourage you to continue improving your programs to coordinate the efforts of various social development organizations and networks in the country to effectively address our most critical social needs.

Finally, the third theme is the even greater need now for us to be more pro-active in influencing and monitoring the activities of government to help direct these towards effective development programs. As resources to the non-government sector becomes more limited and as government responds to the need to spend more to offset the effects of the crisis, we need to make sure that these resources do not go to waste or get diverted to other uses or beneficiaries. The conditional cash transfer programs of government, for example, are worthwhile programs that can directly impact the welfare of the poor and are a good form of fiscal stimulus that can help overall economic growth, but only if these are implemented properly and are insulated from the usual political considerations. As development organizations, therefore, we cannot tolerate the current state of corruption in the country and we must join our voices and our hands with those who are calling for meaningful change and reform in public governance. The reality is that the bulk of resources that can be deployed to achieve real and sustainable gains in providing better education, healthcare, and livelihood to the poor will come from government and it is an important part of our responsibility to help make sure that these resources are put to good use. We must therefore never lose sight of our role as an important part of the constituency for change and reform needed to establish good and effective governance in the public sector. This role becomes even more critical in the context of the continuing decline in other civil institutions, such as media and the justice system, in terms of their effectiveness in promoting transparency and accountability in government. The day when social development organizations such as CODE-NGO become indifferent and cynical about corruption and selfish governance is the day when I will join those who believe that this country really has no hope. But I know that your spirit remains strong and fiery and I want to say that you are a great source of hope and encouragement for us who continue to work for change in this country.

In closing, let me quote Horace, who said, “Adversity reveals genius, prosperity conceals it.” There is no doubt that the ongoing financial crisis will present challenges to all of us, particularly in our efforts to promote genuine social and human development. But I believe that something good will come out of this, and that we will develop not only more effective social development programs but even new institutional arrangements that can help build a better society. Economic and social philosophers are now talking about new economic models and new financial architectures as a reaction to the inordinately profit-oriented and unfettered capitalism that contributed to the severity of the crisis. For those of us in business who have embraced the principles of corporate social responsibility, we hope that one of the dimensions of this new order is the greater integration of corporate responsibility into the core business of enterprises, an arrangement that can insulate social development programs from the volatility of the business cycle. In the meantime, we accept and confront adversity: we shape up and improve ourselves and will only become the stronger for it.