ECONOMICS

Since the end of the Second World War, the Philippine economy has had a mixed history of growth and development. Over the years, the Philippines has gone from being one of the richest countries in Asia (following Japan) to being one of the poorest. Growth immediately after the war was rapid, but slowed over time. A severe recession in 1984-85 saw the economy shrink by more than 10%, and perceptions of political instability during the Aquino administration further dampened economic activity. During his administration, President Ramos introduced a broad range of economic reforms and initiatives designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, but the Asian financial crisis triggered in 1997 slowed economic development in the Philippines once again. President Estrada managed to continue some of the reforms begun by the Ramos administration. Important laws to strengthen regulation and supervision of the banking system (General Banking Act) and securities markets (Securities Regulation Code), to liberalize foreign participation in the retail trade sector, and to promote and regulate electronic commerce were enacted during his abbreviated term. Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Gloria Macapagal-Arroyo has made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. However, despite recent progress, fiscal problems remain one of the economy's weakest points and its biggest vulnerability.

Important sectors of the Philippine economy include agriculture and industry, particularly food processing, textiles and garments, and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromite, 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.


The Philippines was less severely affected by the Asian financial crisis than its neighbors, aided in part by more than $7 billion in annual remittances from overseas Filipino workers. Except for 1998 -- when drought and weather-related disturbances pulled down agricultural harvests, combining with the contraction in industrial sector production -- real Gross Domestic Product (GDP) has recorded positive growth year-on-year. From a 0.6% decline in 1998, GDP expansion picked up in 1999 (3.4%) and 2000 (4.4%) but slowed to barely 2% in 2001 in the context of a global economic slowdown, export slump, and domestic as well as global political and security concerns. Year-on-year GDP growth accelerated to 4.3% in 2002, reflecting the continued resilience of the service sector, gains in industrial sector output, and recovering exports. The economy exhibited resilience during 2003 with 4.7% GDP growth, notwithstanding serious external and domestic shocks. (including the Iraq War, SARS, uncertainties over global economic prospects, sovereign credit-rating downgrades, and resurgent law-and-order worries).It will take a higher, sustained economic-growth path to make more appreciable progress in poverty alleviation given the Philippines' high annual population growth rate of 2.36 percent -- one of the highest in Asia.

Agriculture generally suffers from low productivity, low economies-of-scale, and inadequate infrastructure support. Agricultural output fell in 1997 and 1998 due to an El Ni?o-related drought but increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.8% year-on-year in 2002 and in 2003.

The global economic and electronics-demand slowdown combined with softer prices of resource-based commodities to depress export performance in 2001. Full-year export receipts -- which last declined in 1985 -- contracted by 16.2% year-on-year, dragged down by a nearly 24% drop in revenues from shipments of electronic and telecommunications parts and equipment (which comprise about 60% of annual export revenues). Reflecting improved levels of intra-Asia trade, export receipts expanded from April-December 2002, breaking from 14 consecutive months of negative year-on-year growth and nudging up the full-year 2002 export growth rate to positive territory (10%). Weaker global demand saw 2003 export revenues sputter to 1.4% growth. Export receipts were up 5% year-on-year during the first quarter of 2004.

Although less severely affected than its neighbors, the Philippines' banking sector was not spared from high interest rates and non-performing loan (NPL) levels during the Asian financial crisis and its aftermath. Increases in minimum capitalization requirements, increasing loan-loss provisions, and generally healthy capital-adequacy ratios have helped temper systemic risk. Philippine banks? average NPL ratio, which peaked at 18% in 2002, has since stabilized to between 14%-15%. However, this current performance now lags most hard-hit neighboring countries that have moved more aggressively to address their NPL problem The burden of non-performing assets has squeezed profit margins and inhibited bank lending, posing risks to the longer-term viability and stability of the banking system.

As of end-December 2003, the Philippine peso (which closed at P55.50) had weakened by 4.7% year-on-year and by more than 110% vis-?-vis the US dollar?since mid-1997, reflecting uncertainties over export and balance of payments prospects, resurgent peace-and-order worries, and political uncertainties in the run-up to the May 2004 national elections. Elsewhere, there have been some recent, positive developments in the Philippine economy. Year-on-year inflation, a perennial problem in the Philippines, is under control. Year-on-year inflation averaged 3.1% during 2002 and 2003, the lowest since 1987, tempered in part by generally stable food prices, under-utilized capacities, still high unemployment, and government efforts to control utility-rate increases. The Government expects to contain average inflation within a 4%-5% range during 2004 despite cost-push pressures from oil price increases and public utility rate adjustments The monetary authority?s adoption since January 2002 of an inflation-targeting framework has enhanced price stability. Although under pressure due in part to higher inflation expectations, domestic interest rates have tapered significantly in recent years, aided by moderate inflation and a stable monetary policy. The Government -- which is targeting lower fiscal deficits starting 2003 toward balancing the budget by 2009 -- contained the full-year 2003 budget deficit to 4.6% of GDP, reflecting spending restraint and more vigorous efforts by tax collection agencies to improve administration, enforcement, and governance.

The Aquino and Ramos administrations opened up the relatively closed Philippine economy and provided a firmer base for sustainable economic growth. After a slow start, President Estrada and his cabinet continued with, and expanded, liberalization and market-based policies and reforms. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange, and the President's close ties to certain businessmen, shook confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

President Macapagal-Arroyo workedto continue with economic reforms in areas beyond retail trade, electronic commerce, banking reform, and securities regulation. Her administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). While the Philippines has avoided FATF countermeasures, effective implementation will be key to the Philippines? removal from the FATF?s watch list of "noncooperating countries and territories." Although encountering implementation hitches, her administration also enacted legislation to rationalize and privatize the electric power sector. In January 2003, President Macapagal-Arroyo signed into law two priority initiatives to reform the government procurement system (the Government Procurement Reform Act) and to help ease the burden of non-performing assets on the financial sector through the establishment of private asset management companies (the Special Purpose Vehicle Act).

During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the Philippines? convoluted documentary stamp tax system and encourage secondary trading of financial instruments, as well as legislation (the Securitization Act) towards establishing the necessary infrastructure and market environment for a wide range of asset-backed securities. She also signed legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of overburdened court dockets.

Notwithstanding favorable developments, the Philippine economy continues to juggle extremely limited financial resources while attempting to meet the needs of a rapidly expanding population and address intensifying demands for the current administration to deliver on its anti-poverty promises. The current high level of government debt, the substantial share of foreign obligations, the emerging risks posed by contingent liabilities (particularly those of the Government?s debt-saddled power generation firm, the National Power Corporation), and the worrisome deterioration in the tax collection performance over the past five years have increased the country?s vulnerability to severe external and domestic shocks. Reflecting weaknesses in intellectual property rights protection, the country remains on the U.S. Trade Representative's Special 301 Priority Watchlist. Potential foreign investors, as well as tourists, continue to be concerned about law and order, inadequate infrastructure, 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, lower costs of doing business, and promote good public and private sector governance.

During 2017, the current account balance fell into the negative range, the first time since the 2008 global financial crisis, in part due to an ambitious new infrastructure spending program announced this year. However, international reserves remain at comfortable levels and the banking system is stable.

Efforts to improve tax administration and expenditures management have helped ease the Philippines' debt burden and tight fiscal situation. The Philippines received investment-grade credit ratings on its sovereign debt under the former AQUINO administration and has had little difficulty financing its budget deficits. However, weak absorptive capacity and implementation bottlenecks have prevented the government from maximizing its expenditure plans. Although it has improved, the low tax-to-GDP ratio remains a constraint to supporting increasingly higher spending levels and sustaining high and inclusive growth over the longer term.

Economic growth has accelerated, averaging over 6% per year from 2011 to 2017, compared with 4.5% under the MACAPAGAL-ARROYO government; and competitiveness rankings have improved. Although 2017 saw a new record year for net foreign direct investment inflows, FDI to the Philippines has continued to lag regional peers, in part because the Philippine constitution and other laws limit foreign investment and restrict foreign ownership in important activities/sectors - such as land ownership and public utilities.

Although the economy grew at a rapid pace under the AQUINO government, challenges to achieving more inclusive growth remain. Wealth is concentrated in the hands of the rich. The unemployment rate declined from 7.3% to 5.7% between 2010 and 2017; while there has been some improvement, underemployment remains high at around 17% to 18% of the employed population. At least 40% of the employed work in the informal sector. Poverty afflicts more than a fifth of the total population but is as high as 75% in some areas of the southern Philippines. More than 60% of the poor reside in rural areas, where the incidence of poverty (about 30%) is more severe - a challenge to raising rural farm and non-farm incomes. Continued efforts are needed to improve governance, the judicial system, the regulatory environment, the infrastructure, and the overall ease of doing business.

2016 saw the election of President Rodrigo DUTERTE, who has pledged to make inclusive growth and poverty reduction his top priority. DUTERTE believes that illegal drug use, crime and corruption are key barriers to economic development. The administration wants to reduce the poverty rate to 17% and graduate the economy to upper-middle income status by the end of President DUTERTE’s term in 2022. Key themes under the government’s Ten-Point Socioeconomic Agenda include continuity of macroeconomic policy, tax reform, higher investments in infrastructure and human capital development, and improving competitiveness and the overall ease of doing business. The administration sees infrastructure shortcomings as a key barrier to sustained economic growth and has pledged to spend $165 billion on infrastructure by 2022. Although the final outcome has yet to be seen, the current administration is shepherding legislation for a comprehensive tax reform program to raise revenues for its ambitious infrastructure spending plan and to promote a more equitable and efficient tax system. However, the need to finance rehabilitation and reconstruction efforts in the southern region of Mindanao following the 2017 Marawi City siege may compete with other spending on infrastructure.

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 nearly 40% 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.

Industry
Industrial production is centered on 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.

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 country is well-endowed with mineral and thermal energy resources. A recent discovery of natural gas reserves off Palawan Island has been brought on-line to generate electricity. Philippine copper, gold and chromite deposits are among the largest in the world. Other important minerals include gold, nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate.

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 January 2004 Philippine Supreme Court decision prohibiting full foreign ownership in mining operations under the 1995 Mining Act has further discouraged international investments in large-scale mining. Largely unregulated, small-scale operators produce the majority of gold but contribute little to tax revenue and have virtually no environmental protection and amelioration programs.