Country Brief

Philippines At a Glance (pdf, 68.65kb)

Recent Economic Developments

The Presidential elections outcome in May has generated high hopes for reform, especially in the anti-corruption and governance areas. Mr. Benigno Simeon “Noynoy” Aquino III of the Liberal Party won with a large majority and took office as the country’s 15th president on June 30, 2010. Mr. Aquino’s core electoral platform rested on improving governance and reducing corruption so as to reduce poverty. These elections generate large hope for reforms and tackling well known structural bottlenecks, especially corruption—the perception of which has increased steadily over the past years as reported by various international cross country indices.

The Philippines’ economy posted robust growth in early 2010, in part due to one-off factors. After posting its slowest growth since the Asian financial crisis (1.1 percent in 2009), GDP grew by an impressive 7.3 percent (year-on-year) in the first quarter of 2010, far faster than expected, but in line with equally strong rebounds elsewhere in the region (Singapore at 15.5 percent, Thailand at 12.0, China at 11.9, Malaysia at 10.1, India at 8.6, Vietnam at 5.8, and Indonesia at 5.7). The regional recovery is driven, to a large extent, by a sharp rebound in exports and manufacturing, highlighting the important role that the global recovery plays for the region. In the Philippines, growth was further buoyed by strong election-related spending both private and public. The former is captured in strong growth of recreational services (e.g., advertising) and trade. The latter in government current consumption (as public construction slowed down, reflecting a pre-election ban on starting projects).

The sharp expansion in the manufacturing sector brought production above the pre-crisis level and contributed 4.3 percentage points to overall growth. Manufacturing production grew by 20.7 percent year-on-year in Q1 2009, pushing production 11.5 percent above its pre-crisis peak of Q1 2008. The strong growth reflects both a strong recovery as well as the sector’s sharp collapse in Q1 2009 (i.e., a base effect). Manufacturing of petroleum products, food, and electrical machinery (mainly for exports) were the top drivers of growth. The gains in manufacturing compensated for the 2.5 percent contraction in agriculture which continued to suffer from the damages brought about by the typhoons of late 2009 and the El Niño drought which persisted in the first half of the year. The services sector grew by 6.1 percent in Q1 driven by strong growth of private services (particularly recreational services, which could be related to elections) and trade, which returned to growth after contracting in 2009. To a lesser extent, finance and real estate services improved as the economic recovery firmed up.

On the demand side, growth was broad-based, with investment particularly strong. After contracting by 5.7 percent in 2009, investment grew by 24.3 percent in Q1, driven by investments in durable equipment, particularly in transport (81.6 percent annual growth) and telecoms (27.4 percent growth). Strong increases in large discretionary spending items such as cars2 reflect improved consumer confidence over the next three to twelve month (though current confidence remains broadly unchanged since 2009) but they could also reflect increased demand from households and businesses to replace damaged assets from typhoons Ondoy and Pepeng. Private consumption continued to recover from its weak 2009 performance. An improving labor market and continued remittance inflows contributed to this recovery.

The contribution of government spending to overall growth rose in the first quarter, seemingly reflecting pre-election spending. With the implementation of the Economic Resiliency Plan (ERP) last year, the contribution ofgovernment consumption and public construction to GDP growth was significant in 2009. As the ERP was front-loaded to battle the global recession the fiscal stimulus came into full force in Q2 and then progressively weakened in Q3 and especially Q4. Despite the Government’s aim for a moderate fiscal consolidation in 2010, NG spending increased sharply in Q1 and became a significant contributor to growth at 1.6 percentage points. Spending likely grew faster in Q1 to amid selective spending ban ahead of the election. Spending growth also reflects the electoral budget cycle (which the Philippines has in common with many other countries).

Corporate profitability registered strong growth in 2009, partly due to non-recurring gains (e.g. asset sales) as well as mark-to-market valuation gains. The global financial crisis and the ensuing global recession took its toll on the profitability of PSE-listed companies in 2008. Sectors particularly affected included the industrial and the services sectors and, to a lower extent, the properties sector. Despite the slowdown in economic activity in the Philippines, profitability of listed firms surged by 55 percent in 2009 reflecting, to a large extent, non-recurring revenue gains. These originate from divestments in a few large corporations that refocused their activity from tradable to non-tradable (see November 2009 Philippines Quarterly Update for details).

The quality of jobs improved in the formal labor market, but employment was insufficient to keep track with the rapid demographic growth. In 2009, as companies reduced working hours during the global recession, labor force participation increased as almost the entire potential labor force entered the labor market; seeking to stabilize household incomes. As economic growth revived in Q1 2010, labor entrants declined in April. Unemployment, however, increased to 8.0 percent (or 3.1 million people) from 7.5 percent (or 2.8 million people). The sharp decrease in job creation from April 2009 to April 2010 can be partly explained by the phasing out of the CLEEP job creation program that was introduced as part of the ERP. Part of the drop in the under-employment rate in April is expected to be reversed as many temporary jobs were election-related. The El Niño drought had a large negative impact on agricultural employment, with more than 800,000 net jobs lost. This offset jobs created in the manufacturing and services sectors. Despite rising unemployment, the improving economy led to lower underemployment and a higher share of salary and wage workers.

Self-rated poverty and hunger decreased noticeably in March, despite substantial job losses in the agricultural sector which accounts for a large share of the poor. According to Social Weather Stations surveys, after peaking in November 2009, self-rated poverty steadily decreased to reach its lowest level since March 1987 (though still affecting 43 percent of households). Similarly, hunger incidence decreased by three points from the record-high incidence (24.0 percent) reached in December 2009. The welcome improvement in these indicators is noticeable given the poor performance of the agricultural sector in Q4 2009 and Q1 2009. Strong growth in Q1 likely provided opportunities to the poor, especially the urban poor, to earn more income. The general election also generated many temporary low-skill jobs to assist the campaigns. The 4Ps conditional cash transfer program is also likely to have played a role as it was scaled up from 452,961 households in April 2009 to over 770,000 households in April 2010. Other programs, such as the NFA rice program may also have been increased during that period, as the larger budgetary subsidies transferred to the NFA suggest. The DSWD has also been running other social safety net programs during the SWS survey period (March 19-22, 2010), including ones aimed at assisting the poor affected by Ondoy, Pepeng, and El Niño,3 which is likely to have contributed to the improved poverty and hunger indicators.

The balance of payments (BoP) weakened but remained in surplus. The overall BoP surplus of 3.2 percent of GDP in Q1 2010 is notably lower than the 4.8 (4.3) percent surplus achieved in Q1 2009 (Q4 2009). The negative year-on-year growth in net inflows of unclassified items in Q1 2010 explains most of this decrease. A smaller current account surplus—4.4 percent of GDP in Q1 against 5.1 (5.7) in Q1 (Q4) 2009—also contributed to the decline in the BOP surplus. Increasing demand for imports as the economy recovers along with higher prices for key commodity imports (oil in particular) worsened the trade deficit by 1.2 percentage points of GDP compared to Q4 2009. A deterioration in the trade balance (based on preliminary trade data) also occurred in April. On the other hand, the financial account registered a significantly smaller net outflow this Q1 compared to Q1 2009 but this was a reversal from the positive inflows witnessed in Q4 2009. The renewed turbulence in global financial markets due to the debt problems in the Euro zone along with a potential waitand- see attitude ahead of the May 2010 general elections explain most of this reversal.

Exports and imports continue to rebound, but remain below their precrisis levels. After shrinking continuously from October 2008 to October 2009, exports and imports started recovering in November. Through April 2010, exports grew by 39.1 percent. Export levels, nonetheless, remain 18.2 percent lower than prior to the crisis (August 2008). Electronics and semi-conductors exports, which contracted sharply and rapidly during the global trade collapse, led the export recovery. The United States and Japan remain the Philippines’ top export destinations.

As the effects of the global crisis and end-2009 typhoons recede, remittance growth slowed down in 2010. Remittances in nominal dollar terms grew briskly by more than 11 percent in the last two months of 2009 in part due to OFWs sending money to typhoons-affected relatives. As the “insurance motives” for sending money decreased,4 remittance growth slowed down to 5.4 percent in April. While, the year-to-date growth of 6.6 percent in US dollar terms is stronger than last year, remittances have beensteadily declining in real peso terms—due to the strength of the Peso and the moderateincrease in inflation.

External debt rose in Q1 but reserves continue to strengthen and point to a robust external position. As of March 2010, the country’s external debt stood at 33.2 percent of GDP, 0.8 percentage points higher than in March 2009. While short-term loans have contracted since Q3 2009, medium- and long-term loans have been rising since Q2 2009. Public external debt, which accounts for 71 percent of total external debt, has been rising since Q2 2009, following several global bond issuances. While the non-banking private sector’s debt remained broadly stable, the banking system’s external debt continued to decline since early 2008, thereby limiting the impact of the global financial crisis on the sector. Reserves, including forward contracts, have surged to new record-highs and provide strong coverage of both shortterm external debt (by residual maturity) and imports.

One year into the financial markets rebound, European fiscal concerns generated increased volatility in the Philippines but the overall impact has been limited. After bottoming out in March 2009, the PSEi stock market index recovered strongly—but not entirely—through April 2010. In May, heightened concerns about debt sustainability in some European countries sparked a global financial asset sell-off which the PSEi did not escape. Foreign purchases have mostly been neutral. Renewed global risk aversion led to a strengthening of the dollar vis-à-vis the peso, while the peso appreciated noticeably against the euro. Overall, the nominal (real) effective exchange rate was broadly unchanged in 2010. With policy rates unchanged and ample domestic liquidity, domestic interest rates have remained broadly unchanged.

  Source: Philippines Quarterly Update (June 2010)

World Bank Assistance to the Philippines

The new World Bank Country Assistance Strategy for the Philippines which covers Fiscal Years (FY)2010-2012 has greater focus on poverty reduction, a strategic shift in the Bank’s approach to development in the country. With a central goal of achieving growth that works for the poor, the World Bank Group (WBG) will support the Philippines in pursuing macroeconomic stability, an improved investment climate, better public service delivery for the poor, reduced vulnerabilities to income shocks and natural disasters, and better governance.

Addressing the country’s fundamental development challenges, the new CAS focuses on poverty alleviation measures and on operationalizing governance in all Bank-supported activities. It also addresses emerging global challenges such as climate change, disaster risk management, and the financial crisis and emphasizes a knowledge agenda that supports the Philippines in addressing its own development challenges.

The new CAS pilots deeper integration of the operations of World Bank and the International Finance Corporation (IFC), the private sector financing arm of the WBG. The Bank is prepared to provide support amounting to US$700 million to US$1 billion per year for the next three years, coupled with a robust program of analytical and advisory activities. IFC’s program would be in the range of US$250-US$300 million per year. Specific areas of joint IFC and Bank collaboration are in infrastructure, agribusiness, and the financial sector. Another member of the World Bank Group, the Multilateral Investment Guarantee Agency (MIGA), will provide guarantees to foreign investors against losses caused by non-commercial risks, as well as technical assistance to help countries disseminate information on investment opportunities.

  Country Assistance Strategy for the Philippines (FY 2010-2012)

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Donor Coordination

The Philippines Development Forum (PDF) is the primary mechanism of the Government for facilitating substantive policy dialogue among stakeholders on the country’s development agenda. It also serves as a process for developing consensus and generating commitments among different stakeholders toward critical actionable items of the Government’s reform agenda.

The PDF has evolved from the traditional Government-Donors Consultative Group (CG) process, which was expanded into a multi-stakeholder forum that facilitates substantive policy dialogue on the country’s development agenda among participants from national and local government units, civil society, academia, private sector, and the international development partners. This is the fiftth annual PDF held since its transformation in 2005.

For more information, contact:

The World Bank Office in Manila
Leonora Gonzales, External Relations Officer
Tel: (632) 917-3003
Fax: (632) 637-5870
Email: Lgonzales@worldbank.org

The External Affairs Office in Washington DC
Elisabeth Jane Mealey, Senior Communications Officer
Tel: (202) 458-4475
Fax: (202) 477-0169
Email: Emealey@worldbank.org

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