Catalog

	Table of Contents
p. 22 of 68 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 Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

---

Philippines

In 2002, GDP grew faster than in 2001, supported by strong growth in industry and by increased services sector activity. However, the fiscal deficit deteriorated sharply, and measures to increase revenues are needed urgently. The passage of the Special Purpose Vehicle Act offers a promising start to reducing banking NPLs. While governance needs to be improved, peace and order (especially in the south) are also crucial to attract investment and facilitate economic development.

Macroeconomic Assessment

In 2002, GDP growth strengthened to 4.6% from 3.2% in 2001, while GNP growth accelerated to 5.2% from 3.4% over the same period. Industrial growth strengthened to 4.1% from 1.3% in 2001, largely as a result of a recovery in manufacturing, in turn due to stronger external demand for electronics and garments. The services sector, which grew strongly by 5.4%, remained the main pillar of economic growth, driven by the transport and communications subsectors. While agricultural growth decelerated, to 3.5% from 3.7% in 2001, it picked up strongly toward the end of the year.

On the demand side, personal consumption expenditure continued to be the main driver of rising GDP. Propelled by strong demand for household furnishing, transport, and communications, personal consumption expenditure rose by 3.9%. Investment grew by 2.1, after a 2.2% decline in 2001. Benefiting from the gradual recovery of the world economy, exports and imports increased in 2002, by 12.2% and 4.6%, respectively, after a contraction in 2001. In spite of budget constraints, government consumption expenditures grew by 1.8%, compared with 0.3% in 2001.

The total labor force in 2002 of 33.9 million rose by 3.4% from the prior year's level. Employment growth, though, was only 3.1%, compared with 6.2% in 2001. With employment growing slowly, unemployment remained high at 11.4% in 2002, edging up from 9.8% in the previous year. The unemployment rate remains one of the highest among ASEAN members, and has been exacerbated by the rapid growth in the labor force and by relatively slow economic growth in recent years. This has led to fewer job opportunities in urban areas, despite additional jobs created by the services sector.

In 2002, the fiscal deficit deteriorated sharply to reach P212.7 billion, or 64% above the revised full-year target of P130 billion and equivalent to 5.4% of GDP. In 2001, the budget deficit of P147 billion (4.0% of GDP) only slightly exceeded the fiscal deficit target of P145 billion. The principal reason for the wider deficit was a shortfall in tax collections. The lack of incentives for tax officers to monitor and follow up with taxpayers, a complicated tax system, the effect of unexpected low interest rates on withholding tax, and a noninflation-indexed rate for excise tax were among the main reasons for the revenue shortfalls.

However, efforts to improve tax revenues were made in the last quarter of 2002. The performance of the Bureau of Internal Revenue (BIR) improved as reflected in the higher tax collections on net income and profits as well as in VAT, which increased by 12.5% and 21.0%, respectively, compared with the corresponding period of the previous year. Measures to enhance tax revenues by BIR included tightening collection measures; setting up a tax payment warning system; charging VAT on professionals; and sanctioning some firms once the expiration of the 5-day VAT compliance notice takes effect. An electronic filing and payment system was expanded for all types of tax payments at BIR. A rise in revenues in the last quarter of 2002 showed that the enhancement measures were taking effect, but not enough to reduce the sizable deficit accumulated in the first three quarters of the year.

Disbursements of the central Government for the whole of 2002 grew by 8.2% from the 2001 level. Public expenditures are estimated to have remained at about 19.0% of GDP during 2002, with the wage bill and other mandated expenditures, such as interest payments and allocations to local government units (LGUs), accounting for a large part of total central government expenditures. However, personal services and maintenance expenditures in general contracted in 2002 due to government expenditure-reduction measures. During the year, internal revenue allotment to LGUs grew by 16.4%, largely due to the need to support LGUs in their poverty reduction and peace and order programs. Capital outlays likewise continued to increase, by 29.9%, as a result of the faster implementation of foreign-assisted projects. The disbursement rate of foreign loans against the target disbursement rate rose to 80% in 2002, compared with 74% in 2001.

Growth in the money supply slowed somewhat in 2002 as a result of weak credit demand and an increase in the reserve requirement. Domestic liquidity (M3) grew by 9.5%, compared with 6.8% growth in 2001. Growth was especially slow in the first half of 2002, but accelerated during the second half, largely due to an increase in net foreign assets in the banking system The sale of dollars by the nonbanking sector, including remittances from overseas workers during the Christmas holiday season, helped boost the net foreign asset position of banks in the second half of the year.

Interest rates remained generally stable over 2002. At the beginning of the year, Bangko Sentral ng Pilipinas (BSP) reduced the overnight borrowing rate and overnight lending rate by 75 basis points to 7.0% and 9.25%, respectively, from 7.75% and 10.0% in 2001; these interest rates remained unchanged until the end of 2002. Following the repeated downward adjustment in interest rates by the US Federal Reserve in 2001, Philippine interest rate policy was calibrated carefully, to maintain price stability while taking into account the risks associated with exchange rate movements and their impact on inflation. Treasury bill rates also fell during the year, to an average of 5.5% from 9.9% in 2001. With BSP's reduction of its policy rates to the lowest levels since 1995, the benchmark 91-day treasury bills fell to a historical low of around 4.0% in December 2002.

In 2002, the Government issued P109.3 billion in treasury bonds in the domestic market, as against P80.6 billion issued in the previous year. The Government also issued P2,850 billion (about $57 billion) in international bonds, compared with P420 billion in 2001. The main reasons for the sharp increase of domestic and international bonds were the Government's requirement to finance the fiscal deficit.

With the growing fiscal deficit and an unstable security situation, the peso depreciated to P53-54 to the dollar by end-2002 from about P50 in mid-2002. The real effective exchange rate has been declining since 1999. Regional currency weakness in 2002 also contributed to peso depreciation. Domestic inflation was not a major factor. Indeed, inflation in 2002 was the lowest since 1988, averaging 3.1%. This was well below the Government's full-year target of 4.5-5.5%, and the 6.1% seen in 2001. Inflation in December 2002 was 2.6%, compared with 4.1% 12 months earlier. The deceleration in inflation during the year resulted mainly from a slowdown in food price increases, mild domestic demand, and prudent monetary policy.

The Philippine financial system is dominated by the banking sector, in which 44 major commercial banks account for the major part of the market. Since the Asian financial crisis, the banking sector has become cautious about extending new credits to commercial borrowers. Together with a lack of investor confidence, this kept lending levels in 2002 low. Since 1997, the banking sector has weakened, as characterized by low profitability, a steady increase in the level of NPLs and nonperforming assets (NPAs, defined as NPLs plus properties owned or acquired), and stagnation in credit growth. Banks with excess liquidity have been a major source of demand for government securities at public auctions, helping drive interest rates down. At the same time, mainly due to reclassification of NPLs, the nominal NPL ratio in commercial banks declined to 16.4% of the total loan portfolio in 2002, from 17.4% in 2001. It is hoped that the passage of the Special Purpose Vehicle Act at the end of 2002 will encourage private asset management companies to acquire, turn around, and resell the financial sector's NPLs and NPAs.

After a contraction of 16.2% in 2001, merchandise exports rose by 12.2% in 2002, boosted by some recovery in global demand for electronics, which account for half total exports. Exports were also helped by improved markets for garments and agricultural products. On the back of stronger domestic demand, merchandise imports also swung into growth, at 4.6%, from a 4.5% contraction in 2001. As a result, the trade balance registered a surplus in 2002. Remittances of overseas workers for the year of $6.9 billion also helped bring the current account into surplus at 1.6% of GNP, slightly higher than the 0.4% surplus in 2001. The overall balance-of-payments surplus was about $750 million in 2002, compared with a deficit of $1.3 billion in 2001. This development was mainly the result of the improvement in the current account.

The country's gross international reserves at the end of 2002 stood at $16.2 billion or 5 months of imports of goods and services, up slightly from the $15.7 billion recorded at the end of 2001. Reserves rose following the deposit by the National Power Corporation (NPC) of the proceeds of the flotation of its zero coupon notes and the Power Sector Assets and Liabilities Management Corporation's bond issuance in Japanese yen to fund the NPC's 2003 foreign exchange requirements. The increase in reserves was partly offset, however, by the debt service requirements of the central Government.

At the end of December 2002, outstanding external debt amounted to about $54.0 billion, up from $52.4 billion at the end of 2001. The increase in debt arose largely from government borrowings to meet its financial requirements during the year and from the upward revaluation adjustments of liabilities and net obligations by nonbank borrowers from the public and private sectors. The structure of the external debt has shifted toward longer maturities in recent years—long-term debt now accounts for 89% of total debt. The debt service ratio was 17.0% in 2002. Public sector obligations (including official public debts and debts of government-owned and controlled corporations) made up 64.6% of total external debt and official public debts accounted for 48.7% of total external debts. The bulk of the country's external debt is denominated in dollars (56.2%) and yen (26.0%).

Policy Developments

Since 1998, the fiscal deficit has been large and increasing. The main problem lies with the shortfalls in tax revenues, and indeed the Government has focused on reforms directed at improving the revenue base and tax effort, mainly in the following four areas: rationalization and simplification of tax systems (which are currently complicated and difficult to implement and monitor); using ICT to make the tax system more streamlined and offer transparency for tax collection; organizational reform to restructure BIR into a taxpayer-focused organization; and capacity building and human resources development at BIR. Despite these measures, the enhancement of certain administrative actions is needed to improve revenue collection, including strengthening the monitoring of large taxpayers, more intensive audits on tax payments, indexation of excise taxes to inflation, redefinition of automobiles to remove tax loopholes (i.e., classification of vehicles for tax purposes), improvement of VAT collection, and rationalization of fiscal incentives to encourage investment.

Policy measures and incentives need to be formulated to minimize tax evasion, particularly to minimize underdeclaration of income taxes by companies and self-employed professionals. In this regard, a legal framework to prevent tax evasion already exists, but implementation has been poor. In the short term, the Government will need to strengthen its efforts to enhance tax revenues through a review in excise taxes, which requires legal support, and the imposition of a limit on taxpayers' expenses that are deducted from taxable income.

The current monetary policy stance remains supportive of noninflationary economic growth. In the near term, the Government will need to take account of pending increases in user charges (such as those for electricity, transport, and water), and the impact of the conflict in Iraq on international oil prices as well as the challenges on the fiscal front.

The approval of the Special Purpose Vehicle Act at the end of 2002 is an encouraging move to solve the problem of NPLs and NPAs in the banking sector. The Act provides for the creation of private sector asset management companies (AMCs) to acquire commercial banks' NPLs and NPAs; it stresses an approach toward the resolution of bank's NPLs with adequate safeguards. Compared with other Asian countries hit by the financial crisis, the amount of banks' NPLs and NPAs in the Philippines is moderate, and estimated at roughly P500 billion. While the Government is keen to attract foreign companies specializing in asset management, it expects local companies to take the lead in purchasing the bad loans. The sale of NPLs and NPAs may trigger banking sector consolidation in the long run because banks will face more competition and higher turnover costs. The key challenge is the recovery of lending activities in the banking sector, which has been saddled by these NPLs and NPAs. Further reducing NPLs and NPAs must remain the focus of financial policy, while BSP's capability to detect, avert, and respond to potential bank failures should be strengthened.

The Government's commitment to maintain structural reforms and promote good governance, as well as its pursuance of sound macroeconomic policies should encourage capital inflows. The Anti-Money Laundering Act (AMLA), which was passed in September 2001, will improve the business climate. Under the law, an Anti-Money Laundering Council was set up to monitor banks and suspicious accounts. However, a subsequent assessment of the law by the OECD's Financial Action Task Force (FATF) identified several deficiencies, which were addressed in amendments to the AMLA approved by congress in March 2003. To help stamp out corrupt practices, a new procurement law was enacted in January 2003, which led to the computerization of government procurement transactions and processes.

Peace and order are among the primary prerequisites for sustaining economic growth and development, as they remain a major concern for investors in the country. Conflicts in Mindanao, the second-largest island in the south of the country, have contributed to a loss of business confidence. This has had a negative impact on economic growth and development prospects, as well as on investment. However, in a difficult environment, the Government is taking the steps it can to help restore investor confidence, including proposing an Anti-Terrorism Act.

Outlook for 2003–2004

The following forecasts are based on the assumption that the conflict in Iraq will have only short-term negative impacts on the world economy, and that the SARS epidemic can quickly be brought under control. In 2003, GDP is expected to grow by 4.0%, driven by domestic consumption, improved exports, and public investment. Agricultural growth is expected to moderate because of continuing effects from El Niño, while growth in the industry sector should remain at the same level as in 2002, due to an expected moderate strengthening in the global economy, somewhat offset by continued weakness in domestic industry and sluggish investment demand.

Growth in services should continue at a higher rate than the other sectors, following a trend established in recent years of the economy moving slowly toward greater services orientation featuring more high-technology services, including computer software and other ICT elements. Imports will likely rise more slowly than exports, and thus net exports will contribute more strongly to GDP growth. In spite of higher oil prices at the beginning of the year, inflation should remain at a low level.

In 2004, GDP growth is expected to accelerate to about 4.5%. Agricultural growth is expected to pick up slightly, moving toward historical rates of growth while investment is projected to strengthen as the external climate improves further, offsetting contractionary forces resulting from a reduced fiscal deficit. The services sector will continue to do well.

On the demand side, consumption and net exports will likely continue to lead aggregate demand. The trade and current account balances should improve further as export growth continues to outpace import growth. Without a stronger recovery in investment, though, unemployment is likely to remain at around 10% in 2003-2004.

Inflation is projected to be higher than in 2002, reflecting partly the effect of the weaker peso on import prices, though the Government's target of 4.5% should be met. Domestic liquidity is expected to grow faster over the next 2 years if inflation remains moderate.

It is expected that the budget deficit will be contained to around 4.5% of GDP for 2003, in view of forceful measures to be taken by BIR and the Bureau of Customs in raising tax revenues. For 2004, with more reforms in the tax system and tax collection to be implemented, the budget deficit is projected to fall slightly to 4.0% of GDP.

The overall balance of payments is forecast to be in surplus in 2003. An increase in the current account surplus will more than offset capital outflows. In 2004, the current account surplus is expected to rise to 2.5% of GNP. Capital outflows are likely to reverse direction as the effect of higher investment incentives and financial reforms starts to be felt.

Back Myanmar	Next Singapore