Regions and Countries

	Table of Contents
p. 2 of 20 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Subregional Economic Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Philippines : I. Country Performance Assessment

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I. Country Economic Performance

A. Economic Performance Assessment

1. The economy experienced a gross domestic product (GDP) growth of 3.2 percent in 1999, clearly indicating a recovery from the Asian financial crisis. However, recovery has been uneven across sectors and components of demand. Thus, although the agriculture and service sectors grew by 6.6 and 3.9 percent respectively, the industry sector only experienced 0.5 percent growth in 1999. Also, the severe decline in investment, which occurred during the financial crisis, persisted in 1999. The corporate sector has still not fully recovered from the crisis, as indicated in the continued high rate of non-performing loans of the banking system, which has been persisting at around 14 percent in late 1999 and early 2000.

2. There has been considerable improvement in inflation, with inflation rates gradually receding to about 3 percent in early 2000 but increasing again in the third quarter largely due to oil price and peso depreciation. Sufficient inventory of key food items arising from the positive agricultural performance in 1999 as well as prudent monetary management are responsible for checking inflation. The large deficit (3.6 percent of gross national product [GNP]) run by the national Government did not impact much on the trend of falling interest rates because foreign borrowing was used as the mode of financing the deficit. With the fiscal constraints, the Government faces a challenge in 2000 to retain allocation shares for economic and social sectors at targeted levels.

3. The balance of payments situation eased considerably in 1999 as a result of both strong export growth, as well as active steps taken by the authorities to bolster the balance of payments through officially arranged debt. As a result, gross international reserves had risen to over $15 billion by December 1999. The momentum of export growth, which had been robust throughout the crisis period, continued in 1999 with an export growth of 18.8 percent. With imports slowing as a result of the delayed recovery of industry, a trade surplus emerged, and despite a drop in remittances, a significant current account surplus resulted in 1999. The Government's active intervention through official borrowings and bond flotations in international capital markets helped the capital account to fare better in 1999, particularly in view of continued outflows of private capital which continued in 1999. There has been an increase in the external debt to GNP ratio (65 percent in June 1999) after the financial crisis, however, mainly as a result of the peso depreciation. This is a matter of some concern especially if the current rate of export growth, which makes debt service manageable at present, is not sustained.

4. The Government’s renewed attempts to speed up structural reforms have begun to show results. Thus, the amendments to the General Banking Act which will considerably strengthen the Central Bank's supervisory authority, and the Securities Act, which will improve the functioning of the stock market, have been passed. The Omnibus Power Sector Reform Bill is also in final stages of deliberation in Congress. However, progress elsewhere has been slow, including reforms on taxation and expenditure management. While preparatory work on privatizing the National Power Corporation (NPC) has begun, legislation is yet to be enacted, and measures to strengthen the financial position of NPC prior to privatization are still pending. Pushing through with the restructuring of other government corporations such as the National Food Authority (NFA) and the Philippine National Railways (PNR) is also necessary.

5. At the beginning of 2000, prospects of continued recovery with higher growth than that achieved in 1999 were seen as a distinct possibility. Poor agricultural performance, however, led to a lackluster first quarter GDP growth rate of only 3.4 percent. The escalation of conflict in Mindanao is also likely to adversely impact on investor perceptions, the Government’s ability to push through with planned development initiatives, and therefore, ultimately on growth. The Government has indicated that its expected GDP growth target for 2000 would probably be at the lower end of the projected range of 4 to 5 percent. The recovery process could also be affected by slow progress on key reforms initiated by the Government after the advent of the crisis.

6. The two-year standby arrangement with the International Monetary Fund (IMF) which was to end in March 2000, has been extended six months by the Government. Since the Government was unable to meet the stipulated fiscal deficit target of P62.5 billion, the Government decided not to apply for the release of the last tranche of $314 million. The Government and the IMF have therefore agreed to a non-loan monitoring program which would be limited to regular assessments by IMF without entailing any performance criteria.

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