Philippines Economy

ECONOMY

Since the end of World War II, the Philippine economy has been on an unfortunate trajectory, going from one of the richest countries in Asia (following Japan) to one of the poorest. Growth immediately after the war was rapid, but slowed over time. Years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation and resulted in macroeconomic instability. A severe recession from 1984 through 1985 saw the economy shrink by more than 10 percent, and perceptions of political instability during the Aquino administration further dampened economic activity.

During the 1990s, the Philippine government introduced a broad range of economic reforms designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, although the Asian financial crisis in 1997 slowed Philippine economic development once again.

Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened crumbling infrastructure and education systems, and trade and investment barriers. International competitiveness rankings have slipped.

The service sector contributes more than half of overall Philippine economic output, followed by industry (about a third), and agriculture (less than 20%). Important industries include food processing; textiles and garments; electronics and automobile parts; and business process outsourcing. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant natural gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
The Philippine economy seems comparatively well-equipped to weather the global financial crisis in the short term as a result of the efforts over the past few years to control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector -- which comprises 80% of total financial system resources -- has limited direct exposure to distressed financial institutions overseas (i.e., $2 billion, less than 2 percent of aggregate banking system assets). Conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector from exposure to distressed financial firms. While direct financial exposure to problematic investments and financial institutions is limited, the impact of external shocks to economic growth, poverty alleviation, employment, remittances, credit availability, and overall investment prospects is a concern.

GDP grew by 7.3% in 2007, the fastest annual pace of growth in over three decades--fueled by increased government and private construction expenditures; a robust information communications technology industry; improved post-drought agricultural harvests; and strong private consumption, spurred in part by $14.4 billion in remittances from overseas workers (equivalent to about 10% of GDP). However, real year-on-year GDP growth slowed to 4.6% during 2008, reflecting the impact of high food and fuel prices and global financial uncertainties on the domestic economy. Overseas workers remittances--which increased 13.7% year-on-year in 2008 to a new $16.4 billion record--helped cushion the impact of external shocks on economic growth, but began to slow during 2008’s fourth quarter. It will take a higher, sustained economic growth path to make more appreciable progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 30% to 33% between 2003 and 2006, equivalent to an additional 3.8 million poor Filipinos. Slower economic growth here and abroad and uncertainties over domestic and overseas employment opportunities threaten to push more Filipinos into poverty.

Business process outsourcing (BPO) has been the fastest-growing segment of the Philippine economy and has been relatively resilient amid the global financial turmoil, totaling an estimated 10% of the global outsourcing market and generating more than $6 billion in revenues in 2008 (up 26% and equivalent to about 3.6% of Philippine GDP). Although revenue growth has slowed from 40% during 2006 and 2007, industry officials expect the BPO sector to post double-digit revenue growth of between 20%-30%, and to generate about 100,000 new jobs, during 2009. The balance of payments surplus--which hit a record $8.6 billion in 2007 from higher overseas worker remittances, tourism receipts, BPO-related revenues, portfolio investments, and official development assistance funds--narrowed to $18 million during 2008. Merchandise exports--which rely heavily on electronics shipments for about two-thirds of sales--declined by nearly 3% year-on-year during 2008, pulled down by a 23% year-on-year decline in fourth-quarter revenues. Although there has been some improvement over the years, the local value added of electronics exports remains relatively low at about 30%. Net foreign direct investment (FDI) inflows dropped by 48% from 2007, to $1.5 billion; and net foreign portfolio capital reversed from a $3.8 billion net inflow in 2007 to a $3.6 billion net outflow in 2008. Import growth slowed but nevertheless increased by more than 2%, mainly because of spikes in international prices of fuel, rice, and petroleum-based agricultural inputs. Foreign tourist arrivals sputtered to 1.5% growth and tourism-related revenues weakened. The United States remains the Philippines' largest trading partner with $17 billion in two-way trade during 2008, and is among the largest investors with $6.7 billion in total direct investments.

The Philippine stock market index--which closed 2007 among the top performers in East Asia--closed 2008 down more than 48%. The Philippine peso, which appreciated about 16% against the U.S. dollar over the course of 2007, closed 2008 15% weaker from the beginning of the year. Gross international reserves ended 2008 up 11% year-on-year to a new record high of $37.6 billion and, partly because of foreign loan/bond proceeds, had increased further to nearly $38.9 billion as of March 2009, adequate for more than 6 months of goods and services imports and equivalent to nearly three times foreign debts maturing over the next 12 months.

Efforts in recent years to reduce the fiscal deficit by raising new taxes have helped reduce high debt ratios, create additional fiscal space to increase spending on vital social services and infrastructure after years of tight budgets, and improve confidence. December 2004 legislation provided for biennial adjustments to the excise tax rates for tobacco and liquor products until 2011; the government began implementing an amended value added tax (VAT) law in November 2005 that expanded VAT coverage and increased the VAT rate from 10% to 12%; and a law signed in January 2005 seeks to institute a performance-based rewards system in the government's revenue collection agencies. Although still high by regional and emerging country standards, the debt of the national government has declined to about 56% of GDP; and that of the consolidated public sector to about 71% of GDP. Major credit rating agencies raised their rating outlook from “negative” to “stable” in recognition of fiscal progress and more manageable debt ratios.

The national government worked to reduce its fiscal deficits for five consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008. The Arroyo administration no longer targets leaving office in 2010 with a balanced budget, opting instead for measured deficit spending to help stimulate the economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 with a deficit equivalent to 0.9% of GDP and has programmed a higher deficit for 2009 equivalent to 2.5% of GDP. Looking forward, further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. Despite recent improvements, challenges remain to the long-term viability of state-run pension funds. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; however, it declined and stagnated at 14% in 2007 and 2008 and remains low relative to historical performance (i.e., 1997’s 17% peak ratio) and vis-à-vis regional standards. The government has intermittently relied on heftier privatization receipts to make up for the shortfall in targeted tax collections but this is not a sustainable revenue source. Legislation passed in 2008 providing tax relief for minimum wage earners and individual taxpayers, a cut in the corporate income tax rate from 35% to 30% starting 2009, and no further adjustments to liquor and tobacco excise taxes after 2011 will erode government revenues further.

The Philippine Congress enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The FATF removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important concerns include the exclusion of casinos from the list of covered institutions and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. The Philippines’ financial intelligence unit is pushing for amendments to the anti-money laundering law to address these concerns.

Eight years after the Arroyo administration enacted legislation to rationalize the electric power sector and privatize the government's debt-saddled National Power Corporation (NPC), significant progress was made only in 2007, with the privatization of the state-owned transmission company (Transco) and sales of 68% of total generating assets in Luzon and the Visayas. The Arroyo government is confident it will complete its privatization targets in 2009.

The U.S. Trade Representative removed the Philippines from its Special 301 Priority Watch List in 2006, reflecting improvement in its enforcement of intellectual property rights (IPR) protection. It has maintained the Philippines on the Special 301 Watch List through 2009. However, sustained effort and continuing progress on key IPR issues will be essential to maintain this status.

Despite a number of policy reforms, the Philippines continues to face important challenges and must sustain the reform momentum to catch up with regional neighbors, spur investments, achieve higher growth, generate employment, and alleviate poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal stability will require more aggressive tax collection efficiency to address the severe under-spending in infrastructure and social services after years of tight budgets. Continuing efforts to fast-track power sector privatization remain critical to the long-term stability of public sector finances, ensuring reliable electricity supply, and bringing down the cost of power.

Potential foreign investors, as well as tourists, remain concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. Competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, to lower costs of doing business, and to promote good public and private sector governance. The government has been working to reinvigorate its anti-corruption drive, and the Office of the Ombudsman has reported improved conviction rates. Nevertheless, its slipping anti-corruption ranking indicates that the Philippines’ efforts are lagging and that more needs to be done to improve international perception of its anti-corruption campaign -- an effort that will require strong political will and significantly greater financial and human resources.

Agriculture and Forestry
Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs more than one-third of the work force but provides less than one-fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. The government has instituted conservation programs, but deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for the agriculture subsector, the marine fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. Despite the adverse effects of successive strong typhoons in the last four months of 2006, the overall agricultural output expanded by 3.8% during that year. In 2007, the sector grew by 4.7%, led by gains in the fisheries subsector. The sector registered slower growth in 2008 at 3.9%, due mainly to negative growth in the livestock sector and lesser output in the crops and fisheries subsector.

Industry
Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper products, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron and steel, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones.

The industrial sector is concentrated in the urban areas, especially in the metropolitan Manila region and has only weak linkages to the rural economy. Inadequate infrastructure, transportation and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Mining
The Philippines is one of the world’s most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold and chromite deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan Island has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industry’s overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil and gas.

GDP (2008): $168.6 billion.
Annual GDP growth rate (2008): 4.6% at constant prices.
GDP per capita (2008): $1,864.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, food processing, electronics and semiconductor assembly, petroleum refining, fishing, business process outsourcing services.
Trade (2008): Exports--$49.0 billion. Imports--$56.6 billion.