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p. 20 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Philippines

The economy grew by 3.4% in 2001, spurred by the agriculture and services sectors and continued robustness in private consumption spending. Intense efforts to trim public expenditures, together with steps to improve tax collection, enabled the Government to contain the fiscal deficit. Inflation remained moderate during the year. Reduced global demand for electronic goods, lack of investor confidence, and ongoing political and security challenges are expected to continue to limit economic growth in 2002.

Macroeconomic Assessment

Despite the global economic slowdown of 2001, and security issues in Mindanao in the south, the country registered GDP growth of 3.4% in 2001. The services sector displayed the strongest expansion during the year, rising by 4.3% relative to the previous year (Figure 2.10). The sector’s output contributed 1.9 percentage points of overall GDP growth in 2001. Expansion was also fueled by favorable performance of the agriculture sector (up by 3.9%), which benefited from good weather and some improvements in infrastructure. Agriculture remains important to the economy both because of its contribution to production and employment, and because agricultural products are important inputs to many manufacturing and services sector activities. An increase in both the harvested and irrigated areas as a result of investment to rehabilitate irrigation systems in some regions also helped in agriculture’s improved performance.

The industry sector expanded by only 1.9% year on year in 2001, largely as a result of sluggish performance in manufacturing. This subsector accounts for 71.1% of industry’s output, but grew by only 2.2%, or roughly a third of the increase registered in 2000. The electronics subsector was particularly hard hit by low global demand; electronics exports declined by 17% in 2001 compared with 3.9% growth in 2000. Garment exports, which represent about 8% of total exports, also fell in 2001. The construction sector stagnated, growing at an estimated rate of only 0.7%.

On the demand side, buoyant private consumption helped sustain economic growth. Government consumption expenditures bounced back from a 1.1% reduction in 2000 to a 0.1% increase in 2001. A large level of remittances, estimated to be over 8% of GNP, is one reason why consumption spending in the country held up so well, even though domestic income growth was weak.

Investment in the economy fell as a proportion of output, from 16.9% of GNP to 16.6% over the same period. Investment was particularly sluggish in the construction, durable equipment, and fixed capital subsectors. The low level of investment resulted from the unstable political and economic situation that has undermined investor confidence, and from poor incentives for capital investment in light of the depreciation of the peso and high investment costs.

The fiscal deficit in 2001 equaled P147 billion or 3.8% of GNP, or slightly above the Government’s target of P145 billion. Public revenues for the year totaled P563.7 billion, while public expenditures amounted to P710.8 billion. The tax revenue target of the Bureau of Internal Revenue (BIR) was achieved, though it was reduced from P408 billion to P388 billion at mid-year. The deficit would have been larger in the absence of the Government’s rigorous tax collection efforts during the year. Nevertheless, shortfalls in tax revenues are still a serious problem in public finance, as tax revenues declined as a proportion of GNP from 16.3% in 1997 to 12.7% in 2001. The Government made great efforts to keep fiscal expenditures within its target by trimming public expenditures, which mainly involved reducing expenditures on capital and infrastructure investments. The fiscal deficit in 2001 was financed through borrowing, and total public debt was estimated to be P1.2 trillion at the end of 2001, about P90 billion higher than at the end of 2000.

Prices rose by 6.1% in 2001, 1.7 percentage points higher than the historically low rate in 2000, though there was some evidence that inflation decelerated toward the end of the year. Slow growth in aggregate demand and decreases in the seasonally adjusted consumer prices for food contributed to this moderate rate.

Though inflation increased relative to 2000, sluggish economic growth prompted the central bank to pursue an expansionary monetary policy in an effort to spur economic recovery in 2001. Over the course of 2001, the central bank lowered its overnight borrowing rate from 13.0% to 7.5% and its lending rate from 15.25% to 9.75%. Interest rates on treasury bills experienced corresponding falls during the year. Domestic liquidity (M3) increased by about 6.8%, compared with the 4.6% rate of expansion in 2000. However, the slowdown in the economy, banks’ cautious lending stance, and weak corporate demand for new debt in light of existing production overcapacity (particularly among manufacturing firms) all contributed to sluggish bank lending. Domestic credit to the private sector contracted. In contrast, domestic credit to the public sector rose by around 16%.

Total external merchandise trade fell by about 12% in 2001 compared with the prior year, reflecting the impact of the global economic slowdown. Orders from the country’s principal export markets were weak and, as a result, exports declined by 16.2%. Imports shrank by 6.2%, reflecting a weakening in demand for intermediate inputs by export industries. As a result, the trade surplus fell by about $4.2 billion, a drop of over 60% from the 2000 level. The current account surplus is estimated to have fallen to about $4.5 billion, or 6% of GNP, in 2001, and the overall balance of payments to have run a deficit of $0.2 billion, or 0.3% of GNP.

The country’s outstanding external debt of about $52.4 billion was slightly above the level recorded at the end of 2000. The latest available figures show that external debt increased from 65.9% of GNP at the end of 2000 to 69.2% of GNP at the end of 2001. External debt is now well above its level prior to the Asian financial crisis. The maturity structure of the debt has been shortened and the level of external debt has been reduced. Debt obligations of the public sector constitute 64% of total external debt. Debt securities, such as bonds and notes that are generally traded in offshore capital markets, represent about a quarter of the total, while 22% pertain to obligations to private foreign banks and other financial institutions. External debt service payments in 2001 amounted to 16.4% of total exports of goods and services. In December 2001, gross international reserves were $15.7 billion, slightly higher than the $15.0 billion level in 2000, and provided import cover for 4.8 months.

While commercial banks had lower levels of bad debt in the aftermath of the financial crisis than banks in other crisis-affected economies, the share of nonperforming loans has been rising in recent years. In 2001, this share rose from about 16% in January to 17.3% in December. While the increasing nonperforming loan ratio was mainly attributable to shrinkage of banks’ total loan portfolios, this increase still raises concerns about progress in cleaning balance sheets to clear the way for renewed and stronger lending to support needed investment by the industry sector.

Capital markets suffered from the global downturn and from the continued effects of lost confidence emanating from corruption scandals in recent years. The index for the Philippine Stock Exchange reached a new 10-year low in October, although stocks did recover some of their lost value later in the fourth quarter.

In 2001, the unemployment rate held steady at around 11%, but remained among the highest in the region. This was partly the result of slow job creation combined with a large increase in new labor force entrants associated with the continued high population growth rate. High unemployment and population growth, combined with low economic growth, suggest that the incidence and severity of poverty in the country remained relatively unchanged in 2001. The latest estimates of poverty incidence cover 2000 and show that over 39% of the total population have incomes below the national poverty line, representing an increase of 2.6 percentage points from the level recorded in 1997. Poverty incidence is higher in rural areas than in urban areas (46.9% and 19.9%, respectively) and increased more in rural areas between 1997 and 2000 (2.5 percentage points compared with 2 percentage points). In October 2001, the Government signed a Poverty Partnership Agreement with ADB that set goals and outlined a strategy for reducing poverty in the country, paving the way for greater development assistance to aid the country in its poverty-reduction efforts.

Policy Developments

In early 2001, the Government was hampered in its efforts to carry out economic reforms due to more pressing political concerns. Once the new administration’s political position was consolidated, an ambitious program of economic reforms outlined in the President’s July state of the nation address was initiated. One of the major policy initiatives of the Government in 2001 was to reduce the fiscal deficit and government debt by cutting expenditures, strengthening the tax collection system, and improving revenues, so as to allow greater expenditures for infrastructure investments and social development. The tax system is being simplified and the BIR is being reformed to improve its efficiency. The Government seeks reform in four key areas: simplify the current tax structure, including a proposal to abolish the existing system of exemptions and move to a gross tax system; increase the use of Internet or computer technology in tax collection to simplify and improve collection; reorganize the BIR to reduce corruption and improve its standing among the public (at the moment, the Government is seeking to increase the BIR’s autonomy and eventually create a new revenue authority); and improve professional staff capacity at the BIR by improving human resources training, raising low salaries and benefits, and eliminating political intervention in BIR hiring.

Other major policy initiatives of the Government include efforts to curb money laundering, sell state-owned assets in power and construction enterprises, increase foreign and domestic investment in the economy, foster greater competition in domestic markets (e.g., shipping), and modernize the country’s agriculture sector.

The Anti-Money Laundering Act of 2001 is considered insufficient by the Financial Action Task Force of the Organisation for Economic Co-operation and Development, and the Government is working on revising it.

There were a number of significant developments in the energy sector, including the opening of the country’s first natural gas facility in October 2001 about 100 kilometers south of Manila. The Government is looking to open bidding on the construction of an overland pipeline to bring the gas to Manila. The state-owned energy company and two foreign energy enterprises jointly operate the facility. The new source of power promises to reduce the country’s energy deficit, lower energy imports, and could help bring down the domestic cost of electricity (which is above the regional average). The Electric Power Industry Reform Act was approved in June 2001. To enforce the Act, many critical interventions are necessary.

The Act proposes privatization of the sector and a major strengthening of transmission, subtransmission, and distribution systems, which are weak at present. In the process of privatization, crucial transmission and subtransmission projects will have to be implemented by the public sector to avoid another power crisis. The restructuring of the sector is expected ultimately to lower electricity costs, and put them on a par with those in neighboring countries. However, limited progress was made in the planned sale of state-owned assets of the main power retailer in the country.

In 2001, the Government pledged to invest P2 billion on implementing the Agricultural and Fisheries Modernization Act, which was passed some years ago and set an ambitious range of measures to boost low farm productivity.

Outlook for 2002–2003

GDP is expected to expand by 4% in 2002, with higher private consumption and improved exports. Achieving a higher rate will require sustaining growth in the agriculture sector, a recovery in industrial exports, and an improvement in the level of (and environment for) investment. GDP is expected to increase by 4.5% in 2003, as a foreseen global economic recovery takes place and the economy begins to reap the returns from ongoing economic and fiscal reform efforts. Investment is expected to improve to 18%–18.5% of GNP in 2002–2003.

Improvement of physical infrastructure is an important component of the measures needed to raise investment in the economy. A 19% spending increase for infrastructure construction is planned for 2002, which should help stimulate investment and broaden economic activity. The uncertain outlook for ongoing privatization efforts increases the difficulty of achieving deficit targets. Progress in the privatization program would foster higher growth and investment in the economy, increase revenues in the short run, and lessen expenditure demands on the Government in the long term.

Inflation should remain stable at 5–6% in 2002–2003. Domestic liquidity (M3) is expected to expand at a higher rate in 2002–2003 than in 2001. Interest rates are now low, having followed the recent worldwide trend down. However, rates are not expected to go any lower in 2002 and could rise slightly later in the year.

In 2002, the Government is expected to continue its ongoing efforts to reform the tax collection system, and to maintain the fiscal deficit to within its target of P130 billion. It is expected that the deficit will be further reduced to below P100 billion in 2003. The challenge of improving tax revenues remains. Strong support for reform from the tax authorities will be essential for enhancing collections and curbing the Government’s growing debt service payments.

The trade balance is expected to maintain a small surplus in 2002. However, the current account surplus is expected to continue its recent decline and shrink to $2.0 billion, or 2% of GNP, in 2002, and to $1.5 billion, or 1.5% of GNP, in 2003. The overall balance of payments is expected to run a deficit in 2002–2003, largely because of continuing net capital outflows (first seen in late 2000). Reforms in the finance sector hold the promise of slowing and eventually reversing these outflows. Government efforts to rehabilitate infrastructure augur well for lowering production costs and enhancing the competitiveness of Philippine enterprises.

To improve employment opportunities and reduce unemployment, underemployment, and poverty, it is vital that domestic and foreign investment be encouraged. Reforms to improve both the investment environment and the operating environment for labor-intensive domestic and foreign businesses should be continued. Between 1985 and 1997, the incidence of poverty in the Philippines was reduced from 44.2% to 31.8%. There was some erosion in these gains during the following 3 years as a result of the Asian financial crisis. There is, therefore, an urgent need to recover lost ground and to make further gains in reducing poverty. To do this, significant economic momentum will have to be maintained. GDP growth of 4% or more, if sustained, could result in progress in achieving the Government’s objectives of reducing poverty.

This is particularly true if institutions are reformed in favor of the poor by redistributing economic opportunities, protecting the vulnerable, and enhancing the capabilities of the poor to participate in decision making. Such socially inclusive development would require the provision of an enabling environment for poverty reduction through macroeconomic, political, and institutional reforms as well as the development of programs that will equalize access to economic resources and social opportunities. Further, the human potential of poorer members of society can be nurtured via (i) providing better educational facilities, (ii) reducing the transport cost of isolated communities, which have become “poverty traps,” through investments in infrastructure and agricultural development, and (iii) strengthening democratic institutions at various levels of government. Such policies have the potential to spur pro-poor growth in the economy.

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