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Philippines Quarterly Update—February 2010

World Bank Office Manila

www.worldbank.org.ph

Quarterly Update
LAYING OUT THE EXIT STRATEGIES

February 2010

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Philippines Quarterly Update—February 2010

TABLE OF CONTENTS

EXECUTIVE SUMMARY .................................................................................................................................................. 4 
RECENT ECONOMIC DEVELOPMENTS........................................................................................................................... 5 
OUTPUT AND DEMAND .............................................................................................................................................. 5 
EMPLOYMENT AND POVERTY .................................................................................................................................... 7 
BALANCE OF PAYMENTS AND EXTERNAL DEBT ........................................................................................................ 9 
FINANCIAL MARKETS AND CORPORATE SECTOR ..................................................................................................... 11 
POLICIES ...................................................................................................................................................................... 13 
MONETARY POLICY ................................................................................................................................................. 13 
FISCAL POLICY ........................................................................................................................................................ 14 
PROSPECTS .................................................................................................................................................................. 17 
EXTERNAL ENVIRONMENT ...................................................................................................................................... 17 
OUTPUT AND DEMAND ............................................................................................................................................ 18 
EMPLOYMENT AND POVERTY .................................................................................................................................. 21 
BALANCE OF PAYMENTS AND EXTERNAL DEBT ...................................................................................................... 21 
MONETARY POLICY ................................................................................................................................................. 22 
FISCAL POLICY ........................................................................................................................................................ 23 
APPENDIX: SUMMARY MACRO AND FISCAL TABLES ................................................................................................. 29 

BOXES

BOX 1. PETROLEUM TAXATION IN THE PHILIPPINES .................................................................................................... 26 


BOX 2. PHILIPPINES: REVISIONS TO THE NATIONAL INCOME ACCOUNTS ..................................................................... 28 

FIGURES

FIGURE 1. THE ECONOMY CONTRACTED FOR TWO QUARTERS BUT RECOVERED SINCE ................................................... 5 
FIGURE 2. GDP PER CAPITA DECLINED IN 2009 1/ .......................................................................................................... 5 
FIGURE 3. GDP GROWTH REBOUNDED THANKS TO PRIVATE CONSUMPTION ................................................................... 7 
FIGURE 4. EXCEPT FOR AGRICULTURE, ALL PRODUCTIVE SECTORS ALL POSTED MODERATE IMPROVEMENTS ................ 7 
FIGURE 5. STRONG JOB CREATION BUT NOT ENOUGH TO OFFSET RAPIDLY RISING WORKING-AGE POPULATION ............. 8 
FIGURE 6. RISING UNEMPLOYMENT AND UNDER-EMPLOYMENT ..................................................................................... 8 
FIGURE 7. FALLING HOURS WORKED AND RISING LABOR FORCE PARTICIPATION ............................................................ 8 
FIGURE 8. ROBUST OVERSEAS DEPLOYMENT PARTLY REFLECTS GLOBAL STAFFING RESTRUCTURING ............................ 8 
FIGURE 9. A RESILIENT CURRENT ACCOUNT SURPLUS .................................................................................................... 9 
FIGURE 10. EXTERNAL TRADE IS RECOVERING BUT REMAINS WELL BELOW PRE-CRISIS LEVEL ...................................... 9 
FIGURE 11. AFTER A SHARPER DECLINE, ELECTRONIC EXPORTS ARE POSTING A STRONG RECOVERY .......................... 10 
FIGURE 12. REMITTANCES HAVE BEEN STRONGLY COUNTERCYCLICAL IN REAL PESO TERMS ...................................... 10 
FIGURE 13. RESERVES HAVE SURGED BY $20 BILLION SINCE 2008Q4 DUE TO STRONG BOP ....................................... 11 
FIGURE 14. THE EXTERNAL DEBT POSITION REMAINS COMFORTABLE .......................................................................... 11 
FIGURE 15. EQUITIES HAVE SURGED PAST THEIR PRE-LEHMAN BROTHERS LEVEL… ................................................... 12 
FIGURE 16. … AS HAVE SPREADS ON DOLLAR DEBT ..................................................................................................... 12 
FIGURE 17. ….AND SIMILARLY FOR DOMESTIC FINANCING .......................................................................................... 12 
FIGURE 18. THE PESO IS RAPIDLY APPRECIATING FOLLOWING A LONG PERIOD OF STEADY DEPRECIATION ................. 12 
FIGURE 19. INFLATION TROUGHED AS THE FUEL AND FOOD PRICE SHOCKS DISAPPEARED, CORE REMAINS SUBDUED ... 13 

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Philippines Quarterly Update—February 2010

FIGURE 20. INFLATION REMAINS WITHIN THE BSP ANNOUNCED TARGET BAND ........................................................... 13 
FIGURE 21. BSP’S RATE CUT WERE INITIALLY BROADLY MATCHED BY THE BANKS TILL APRIL ................................... 14 
FIGURE 22. PRIVATE CREDIT AND BANK LENDING GROWTH ARE FADING BUT FINANCIAL ASSETS KEEP GROWING ....... 14 
FIGURE 23. GAPPING FISCAL DEFICITS AND RISING DEBT.............................................................................................. 15 
FIGURE 24. RAPIDLY DECLINING TAX EFFORT, AND RISING SHARE OF INTEREST PAYMENTS TO TOTAL REVENUE ......... 15 
FIGURE 25. A SHARPLY DETERIORATING STRUCTURAL FISCAL BALANCE ..................................................................... 16 
FIGURE 26. …MOSTLY DUE TO A STRUCTURAL DECLINE IN THE BIR’S TAX EFFORT ....................................................... 16 
FIGURE 27. CONSUMER SENTIMENT REMAINS CAUTIOUS .............................................................................................. 19 
FIGURE 28. REAL REMITTANCE GROWTH ...................................................................................................................... 19 
FIGURE 29. EL NIÑO’S IMPACT ON AGRICULTURE AND GDP ....................................................................................... 20 
FIGURE 30. BUSINESS SENTIMENT IS SURGING .............................................................................................................. 20 
FIGURE 31. INFLATION EXPECTATIONS REMAIN WELL ANCHORED................................................................................ 23 
FIGURE 32. CREDIT GROWTH LAGS BEHIND NOMINAL GDP GROWTH OVER THE MEDIUM-TERM .................................. 23 
FIGURE 33. NATIONAL GOVERNMENT DEBT SUSTAINABILITY PROSPECTS DETERIORATED BETWEEN 2008 AND 2009.. 24 
FIGURE 34. PHILIPPINES: PETROLEUM TAXATION AND THE POOR ................................................................................ 26 
FIGURE 35. GASOLINE AND DIESEL TAX ESTIMATES AROUND THE WORLD, 2008* .................................................... 26 

TABLES

TABLE 1. PHILIPPINES STOCK EXCHANGE INDEX AND ITS COMPONENTS, 2008-2009 .................................................. 12 
TABLE 2. GLOBAL ECONOMIC PROSPECTS ................................................................................................................... 17 
TABLE 3. PHILIPPINES: HOW DOES THE 2009 DOWNTURN COMPARE WITH PAST RECESSIONS? ................................... 19 
TABLE 4. PHILIPPINES: SELECTED ECONOMIC INDICATORS, 2006-2011 ....................................................................... 29 
TABLE 5. PHILIPPINES: NATIONAL GOVERNMENT CASH ACCOUNTS (GFS BASIS), 2006-2010 .................................... 30 

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Philippines Quarterly Update—February 2010

Executive Summary 
Contrary to previous official estimates, the economy contracted between 2008Q4 and 2009Q1 but
recovered moderately afterwards. GDP grew by 0.9 percent in 2009 but contracted by 1 percent on a per
capita basis. On the demand side, private consumption—partly driven by strong remittance inflows—and
robust public spending have been the key growth drivers. Investment and net exports continue to be a drag on
growth, but at a decelerating rate. On the supply-side, the typhoons profoundly impacted the agricultural
sector in Q4 2009 while industry is gradually recovering.

Amid bright spots, social and labor market indicators remain weak—reflecting the series of crises that
have hit the country. Unemployment and underemployment are both rising, as is the labor force
participation rate as household seek additional income in response to falling real wages and hours worked.
OFW deployment remained strong despite rapidly rising global unemployment, reflecting the high demand
for and supply of Filipino workers in the global labor market, particularly in the sea-faring industry.
However, the incidence of hunger reached record highs in Q4, with Manila particularly hard hit. This partly
results from the hardship that typhoon Ondoy brought to the capital region’s poor.

Despite a series of diverse global shocks, the balance of payments remained strong throughout the past
two years, thanks to strongly counter-cyclical workers remittance inflows. The country’s robust current
account and BoP surpluses have permitted the BSP to accumulate substantial foreign exchange reserves in
2009 ($20 billion), providing ample support to the country’s trade and external payments needs. Trade
recovered in late 2009 but exports are still at only 2005 levels. As expected, remittances accelerated in Q4, in
part due to transfers to typhoon-affected relatives. The countercyclical nature of real peso remittances has
been remarkable in the past three years; as the economy recovers, the strength of these remittances is
projected to wane in 2010.

The central bank has begun to implement an exit strategy from the extraordinary crisis-related
liquidity-support and monetary easing. As concerns about the liquidity and stability of the financial
system have abated, and inflation measures are rising moderately, the BSP signaled in January a measured
implementation of its exit strategy by realigning its rediscounting facility rate to the overnight RRP. Subject
to fulfilling its inflation target, the BSP is expected to link the pace the monetary policy normalization to the
strength of the economic recovery.

The largest fiscal easing in over two decades weakened the structural fiscal balance; a clear and
credible exit strategy is crucial to enabling a measured unwinding of the fiscal stimulus. Thanks to
previous fiscal consolidation efforts, for the first time in recent economic downturns, the government was
able to undertake a counter-cyclical fiscal policy. The 2½ percent of GDP in fiscal easing was the largest
since 1986 and clearly helped buffer the economy during the global recession. However, it generated a NG
fiscal deficit to 4.1 percent of GDP in 2009 (GFS basis), mostly of a structural nature as permanent revenue-
eroding and expenditure-increasing measures were introduced. To enable a measured unwinding of this fiscal
expansion—so as to protect the nascent recovery—laying out a specific medium-term plan that takes into
account the country’s inclusive growth agenda is warranted.

Real GDP growth is projected to reach 3.5 percent in 2010 and 3.8 percent in 2011. This represents an
upward revision from our previous Philippines Quarterly Update that reflects a stronger global outlook,
stronger-than-expected OFW deployment in 2009, and a looser fiscal stance in 2010 than anticipated earlier,
in part reflecting post-typhoon reconstruction activities. Our analysis shows that, so far, the size and pace of
the peak-to-trough and the projected recovery in 2010 is closely aligned with past recessions in the
Philippines. However, unless reforms address long-standing growth bottlenecks, the recovery’s shape over
the medium-term will move from V to \/----, i.e., stabilize at a lower equilibrium growth rate.

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Philippines Quarterly Update—February 2010

Recent Economic Developments1 
Output and Demand

1. Revised official GDP data reveal that the economy contracted for two quarters in
late 2008/early 2009 and expanded moderately thereafter. Revised GDP estimates show that,
contrary to initial estimates, GDP actually fell on a seasonally adjusted basis for two consecutive
quarters (2008Q4 and 2009Q1)—Figure 1.2 A soft rebound in the following three quarters
pushed the economy out of negative territory. In the fourth quarter of 2009, gains from the global
economic recovery and a rebuilding of inventories were offset by agricultural losses caused by
the massive typhoons-related flooding in Luzon island (where over two-third of domestic value
added is created).3 On a year-on-year basis, GDP managed to grow by 0.9 percent—the slowest
pace since the Asian financial crisis in 1998—but on a per capita basis, it decreased by 1 percent
(Figure 2 and Table 4).
Figure 1. The economy contracted for two quarters Figure 2. GDP per capita declined in 2009 1/
but recovered since
Seasonally Adjusted QoQ GDP Growth YoY GDP per capita growth
4.0   7.0 
6.0 
3.0  
5.0 
2.0   4.0 
in percent

1.0   3.0 
in percent

2.0 
0.0  
1.0 
GDP
‐1.0   0.0 
GNP
‐1.0 
‐2.0  
Private Consumption ‐2.0 
‐3.0   ‐3.0 
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ‐4.0 
1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

2009 
2006 2007 2008 2009

Source: National Statistical Coordination Board. Source: National Statistical Coordination Board.
1/ The series contains data breack in both 2000 and 2004

2. On the demand side, the recovery in private consumption and robust public
spending have been the key growth drivers. While the drop in private consumption in the first
quarter of 2009 led to a temporary contraction in GDP, its recovery in the second quarter helped
1
The Philippines Quarterly provides an update on recent economic developments and policies, and presents findings
from ongoing World Bank work on the Philippines. The update is produced by a PREM team from the Manila office
consisting of Eric Le Borgne (Senior Economist and task team leader), Sheryll Namingit, and Franz Loyola with
support from the Philippines country team. Questions can be addressed to David Llorito (dllorito@worldbank.org).
2
In terms of duration, the current technical recession is similar to that of the previous two recessions (2000 Q4-2001
Q1 and 1998 Q1-Q2), while in terms of depth it falls in between these two (i.e., worse than in 2000/2001 but better
than during the Asian Financial crisis).
3
For details on the impact of typhoons Ondoy (Ketsana) and Pepeng (Parma) on the Philippines’ economic,
financial and social sectors, see Box 1 of the November 2009 Philippines Quarterly Update as well as the
November 2009 Philippines Post-Disaster Needs Assessment (PDNA). Both reports are at www.worldbank.org.ph

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Philippines Quarterly Update—February 2010

buoy the economy—as private consumption accounts for over 70 percent of GDP. Private
consumption has grown more sensitive to shocks since the 2008 global food crisis when it first
registered its negative growth since 1992. The rebound in private consumption was likely driven
by strong remittances inflows (in real peso terms) and improved global outlook. While private
spending registered a notable improvement in the Q4 2009, the quality and sustainability of this
revival remains unclear as some of this additional spending in late 2009 was related to restoring
damaged assets during the typhoons. The government’s pump-priming efforts and the BSP’s
accommodative monetary policy have also been supportive of growth through 2009 (See policy
sections).

3. Investment and net exports continued to be a drag on growth, but at a decelerating


rate (Figure 3). In the fourth quarter of 2009, capital formation contracted by only 0.8 percent
(year-on-year) compared to the double-digit contraction of the previous four quarters, pushing
the full year contraction to 9.9 percent in 2009. The improved performance was driven by the
slowdown in the contraction of durable equipment and inventory re-stocking, motivated in part
by a need to replenish low stock levels in light of improved growth prospects as well as the need
to replace core equipments and machineries damaged by typhoons Ondoy and Pepeng. However,
in the fourth quarter both public and private construction shrank. For the former, the contraction
was due to the frontloading of capital spending in the Government’s Economic Resiliency Plan;
for the latter it mainly stems from oversupply in both residential and commercial real estate (as
discussed in our previous Philippines Quarterly Updates). As the global economy recovered, net
exports have also increasingly contributed to overall growth since the third quarter of 2009 (See
balance of payments section).

4. On the supply-side, the typhoons had a profound adverse impact on the agricultural
sector. As estimated in the PDNA report,4 agricultural production suffered heavily because of
weather disturbances especially in the central and northern part of Luzon which are heavy
producers of rice. Rice production, which account for 17 percent of the total agricultural
production, contracted on a year-on-year basis by 14 percent in the last quarter of 2009. This
contraction accounts for almost the agricultural sector’s entire 2.8 percent decline (year-on-year
basis) in that quarter and dragged down the full year growth to 0.1 percent from 2.9 percent in
January to September 2009.

5. Industry showed signs of a gradual recovery after three quarters of negative year-
on-year growth (Figure 4). With global recovery starting to take place, the manufacturing sector
posted its first growth in the fourth quarter after three quarters of consecutive contraction. The
utilities sector (electricity, gas and water), which is closely linked to manufacturing and
commercial sectors, also improved from its negative contribution to growth in the last two
quarters. The recent improvement, however, was not enough to prevent the overall industrial
sector from contracting by 2.0 percent in 2009. The strength of the recovery is still uncertain
based on seasonally adjusted growth.

6. The service sector has proved resilient but growth was subdued throughout 2009.
The services sector slowed down considerably in the first half of 2009 but has started to recover

4
Philippines Post-Disaster Needs Assessment (PDNA) report undertaken by the World Bank, other development
partners and government agencies. November 2009.

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Philippines Quarterly Update—February 2010

in the third quarter. Its pace, so far, has remained moderate and uneven (Q4 2009 QoQ sa growth
was slower than in the previous two quarters). Early election spending seems to have stimulated
the services sectors. For example, private services grew by a robust 6.1 percent in Q4—the
highest in eight quarters—with recreational services posting double digit growth.

Figure 3. GDP growth rebounded thanks to private Figure 4. Except for agriculture, all productive
consumption sectors all posted moderate improvements

Contribution to  YoY GDP growth
and Domestic Demand Growth YoY GDP Growth (Supply side) 
20
12
15
10 8

5
4
in percentage points

in percent
‐5
0
‐10 Agriculture Industry
Discrepancy Net Exports
‐15 ‐4 Services GDP Growth
Investment Govt Cons
Private Consumption GDP growth Manufacturing
‐20
Dom. Demand g.r. ‐8
‐25

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009 2006 2007 2008 2009

Sources: National Statistical Coordination Board and Department of Budget and Management

Employment and Poverty

7. While total employment continued to grow, the labor market continues to weaken.
Thanks, in part, to the Government’s fiscal stimulus and particularly to the Comprehensive
Livelihood and Emergency Employment Program (CLEEP) that employed 389,769 low income
Filipinos from October 2008 to January 2010, net job creation remained robust in 2009 (through
October), mostly due to the services sector (Figure 5). More generally, despite the rising number
of jobs created since 2007, this has not been sufficient to offset the rapid increase in the working-
age population and in the labor force (Figure 5). As a result, labor market indicators have
worsened since the economy decelerated from its 7.1 real GDP growth rate. These include a
steady increase in unemployment and, with a lag, in under-employment (Figure 6), a fall in the
share of full time jobs (Figure 5) and in the average hours worked (Figure 7), and a steady
increase in the labor force participation ratio (Figure 7). Labor Force Survey data also reveal that
daily real wages declined noticeably through the first half of 2009 (latest available data).

8. Robust deployment of workers overseas partly reflects global recession-induced


global staffing restructuring and the strong value-proposition of Filipino workers in the
global labor market. After posting a strong 17 percent growth in deployment in 2008,
deployment growth slowed down but remained robust, at 11.7 percent through November 2009
(Figure 8). This good performance could be partly related to an acceleration of global staffing
recruitment towards more cost efficient sources. For example, in the sea-faring industry—which
has been, and continues to be, sharply affected by the global recession and the collapse in global
trade and cruise ship tourism—the pressure to drastically reduce costs has led some companies to

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Philippines Quarterly Update—February 2010

accelerate their staff sourcing from countries such as the Philippines which has a large pool of
comparatively cheap, English-speaking, and well qualified sea-farers. As a result, sea-farers’
deployment increased by about 23 percent in the year through November 2009 (against an
average of 14 percent during 2005-2008).

Figure 5. Strong job creation but not enough to Figure 6. Rising unemployment and under-
offset rapidly rising working-age population employment
Thousands Labor Force Survey (October rounds) Percent Labor Force Survey (October rounds)
1,606 64.50  Percent Percent
7.8 22.0
Change in potential labor force (pop 15 years and over)
1,406
Change in actual labor force 64.00  Unemployment Rate (%)
Job creation 7.6
Share of full time jobs (RHS) Underemployment Rate (% of Employed)‐‐RHS 21.0
63.50 
1,206 7.4

63.00  20.0
1,006 7.2

62.50 
7.0 19.0
806
62.00 
6.8 18.0
606
61.50 
6.6
406 17.0
61.00 
6.4

206 60.50  16.0


6.2

6 60.00 
6.0 15.0
2005 2006 2007 2008 2009
2005 2006 2007 2008 2009

Figure 7. Falling hours worked and rising labor Figure 8. Robust overseas deployment partly
force participation reflects global staffing restructuring
Labor Force Survey (October rounds) Total OFW Deployment
Percent Percent (Land-based and Sea-based)
65 41.8
1.60

1.40 Land-based
41.7
64.5 1.20
41.6 Sea-based
1.00
Millions

64 41.5
0.80
41.4
0.60
63.5
41.3
0.40

63 41.2 0.20

41.1 0.00
Jan-Nov 2008

Jan-Nov 2009
2000

2001

2002

2003

2004

2005

2006

2007

2008

62.5
Labor Force Partcipation Rate (%) 41.0
Mean Weekly Hours Worked
62 40.9
2005 2006 2007 2008 2009

Source: National Statistics Office, October Labor Force Surveys. Source: POEA

9. Hunger incidence reached record highs in the fourth quarter of 2009; Manila fared
particularly badly, mostly on account of the typhoons. A Social Weather Station (SWS)
survey showed that hunger reached a record-high of 24.0 percent in December 2009 from 18.8 in
October 2009 and from its previous record of 23.7 percent in December 2008. A significant rise
was noted in Metro Manila. The jump in incidence might seem surprising at first as the impact
of typhoons Ondoy and Pepeng (September 26 and October 5) did not have any notable impact

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Philippines Quarterly Update—February 2010

on hunger incidence in October.5 A likely explanation for the initial subdued impact on hunger
was the large immediate relief operation that was established by the government (561 evacuation
camps providing food and shelter to over half a million people at the peak of the crisis—
including a large share of poor households who were living in the shantytowns; see Box 1 of our
November 2009 Philippines Quarterly Update for details). These operations greatly helped
struggling households in providing immediate relief but the spike in hunger incidence reveal that
several months after the typhoons struck, poor households in Manila have not been able to fully
recover.

Balance of Payments and External Debt

10. The overall balance of payments was hardly affected by the global crises despite
deep contraction in exports and some capital outflows especially in late 2008 / early 2009.
The balance of payments remained resilient through the third quarter of 2009 at 2.9 percent of
GDP, thanks to a strong current account which stood at 5.4 percent of GDP (Figure 9). The trade
sector was hit considerably by the global recession but with the contraction in imports greater
than that in exports, the impact on the trade balance through the September 2009 was positive
(Figure 10). Moreover, the resiliency of nominal dollar remittances which grew by 5.6 percent
in 2009 helped buoy the current account. Strong capital outflows occurred in Q4 2008 but were
gradually reversed and turned positive by Q3 2009.

Figure 9. A resilient current account surplus Figure 10. External trade is recovering but remains
well below pre-crisis level
Balance of Payments  Balance of Trade, 3 mma
6 6000 0.5 

4 5000

2 4000
in bln US$

in bln US$

in bln US$
0
3000 (0.5)

‐2
Others 2000
Financial Account (1.0)
‐4 Current Account Exports
1000
BOP position Imports
‐6 Trade Balance (rhs)
0 (1.5)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3

Nov‐06
Jan‐07

Nov‐07
Jan‐08

Nov‐08
Jan‐09

Nov‐09
May‐06

Jan‐10
Sep‐06

May‐07

Sep‐07

May‐08

Sep‐08

May‐09

Sep‐09
Jul‐06

Jul‐07

Jul‐08
Mar‐06

Jul‐09
Mar‐07

Mar‐08

Mar‐09

2006 2007 2008 2009

Source:Bangko Sentral ng Pilipinas Source:National Statistics Office

11. Exports are recovering but this reflects base effects as December data are still at
2005 levels. While both exports and imports have been posting strong year-on-year growth in Q4
(e.g., exports grew, on a year-on-year basis, by 24 percent in December and 43 percent in
January), this reflects a strong base effect as export had contracted by 40.3 percent in December
5
The fourth quarter of 2009 Social Weather Station survey was conducted from December 5 to 10 and asked about
the family's experience of hunger, self-rated poverty, and self-rated food-poverty in the last three months. The third
quarter survey was conducted from October 24 to 27, three to four weeks after the typhoons.

9
Philippines Quarterly Update—February 2010

2008 and by 40.6 percent in January 2009 (Figure 10). Electronic and semi-conductors exports—
accounting for about 60 percent of total Philippines exports—have posted a sustained recovery
(again from a low base) and the industry is confident that the uptrend is no longer due to re-
inventory stocking (Figure 11).

12. Remittance growth accelerated in the latter part of 2009, in part due to OFWs
sending money to typhoons-affected relatives. Remittances in nominal dollar terms grew
briskly in both November to December compared to the rest of 2009 (Figure 12). As discussed in
our November 2009 Philippines Quarterly Update, the uptick was expected as remittances in the
Philippines act as insurance to households affected by natural disasters. Recent research based on
Philippines data shows that an average of 60 percent of household income lost through natural
disasters is replaced by remittances (Yang and Choi, 2007).6 Notwithstanding the resiliency of
the dollar value of remittances during 2009, the real peso value of these remittances has steadily
(and rapidly in Q4) decreased during the year (Figure 12).

Figure 11. After a sharper decline, electronic exports Figure 12. Remittances have been strongly
are posting a stronger recovery than other exports countercyclical in real peso terms
Exports, 3 mma Philippines: Remittance Growth, 3 mma
5000 35

4500 30 Nominal USD Nominal Php


4000 25 Real Php

3500 20
15
in percent

3000
in bln US$

2500 10

2000 5

1500 0

1000 ‐5

500 Non‐electronics Electronics Total ‐10

0 ‐15
Apr‐07

Apr‐08

Apr‐09
Feb‐07

Feb‐08

Feb‐09
Jun‐07

Jun‐08

Jun‐09
Dec‐07

Dec‐08

Dec‐09
Aug‐09
Oct‐09
Aug‐07
Oct‐07

Aug‐08
Oct‐08
Sep‐06

Sep‐07

Sep‐08

Sep‐09
Mar‐06

Jul‐06

Mar‐07

Jul‐07

Mar‐08

Jul‐08

Mar‐09

Jul‐09
Nov‐06
Jan‐07

Nov‐07
Jan‐08

Nov‐08
Jan‐09

Nov‐09
Jan‐10
May‐06

May‐07

May‐08

May‐09

Source: North American Semiconductor Equipment Industry Source: Bangko Sentral ng Pilipinas

13. The Philippines showed a remarkable resiliency during 2009 on the external front.
Aside from a balance of payments and current account in surplus, the country’s foreign exchange
reserves have also continued to rise to record-highs through 2009 and in early 2010. As of
January 2010, gross international reserves stood at $45.7 billion, thereby providing the country
with ample liquidity (GIR can cover 9.3 months of imports and more than four times short-term
external debt by residual maturity—Figure 13). More remarkable is the $20 billion increase in
total reserves (NIR and the forward book of the BSP) from Q4 2008 to Q4 2009 (Figure 13).7 As
of November 2009, external debt as a ratio of GDP (BSP definition) rose slightly by more than
one percentage point as the public sector tapped global bond markets. This increase

6
Yang, Dean, and HwaJung Choi, 2007, “Are Remittances Insurance? Evidence from Rainfall Shocks in the
Philippines,” World Bank Economic Review, Vol. 21(2), pp. 219-48.
7
The IMF’s increased SDR allocation, deposits from global bond issuances, valuation gains and loan disbursements
from multilateral organizations have been important contributors to the rise in reserves.

10
Philippines Quarterly Update—February 2010

notwithstanding, the share of short-term external debt to total debt declined to 10 percent at end
Q3—Figure 14.

Figure 13. Reserves have surged by $20 billion Figure 14. The external debt position remains
since 2008Q4 due to strong BoP comfortable
External Debt
Foreign Currency Liquidity
60 450
70
400
50
60 NIR Forward Book 350
40 300
50

in bln US$
250
in mln US$

30 Long‐Term
40 200
Short‐Term
20 150
30
ST external debt cover  100
20 10 (rhs)
50

10 0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0
2006 2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Source: Bangko Sentral ng Pilipinas


2006 2007 2008 2009

Source: Bangko Sentral ng Pilipinas

Financial Markets and Corporate Sector

14. The impact of the global financial crisis and recession proved short-lived in both the
Philippines’ equities and debt markets (Figures 15 to 18). The Philippines Stock Exchange
index (PSEi) continued to surge beyond the 3,000 level through mid February, posting a 79
percent gain from its post Lehman Brothers trough in October 2008. As global risk appetite
recovered, nonresident net inflows in the first two months of 2010 continued to be positive.
Similarly, sovereign spreads have narrowed significantly since Q4 2008, notwithstanding the
country’s deteriorating structural fiscal balances. They are now lower than prior to Lehman
Brothers’ collapse partly due to temporary supply and demand conditions (a reduction in the
aggregate supply of global bonds in East Asia and ample demand for such bonds; the latter stems
from the ample global liquidity thanks to central banks large quantitative easing and easy
monetary policies, but also reflects the relative better performance of public finances in the
region than in other parts of the world).

15. Except for small and medium enterprises, and the property and mining sector, the
profitability of the corporate sector continued to improve.8 Listed companies in the
Philippines Stock Exchange posted a robust recovery in profits (through Q3 2009 profits grew by
61 percent year-on-year; Table 1). The financial, industrial, holding firms and services sectors
continued to grow their bottom line at double digit rates as both international and domestic
conditions normalize. On the other hand, listed SMEs and mining companies posted negative
profit growth during the same period. The property sector continued to be loss making as
inventories remain large and price pressures have materialized in all segments of the market.

8
Companies listed on the PSE are not representative of the overall Philippines corporate sector as they are
concentrated in a few sectors.

11
Philippines Quarterly Update—February 2010

Table 1. Philippines Stock Exchange Index and Its Components, 2008-2009

Net Income Revenues


Jan-Sep 2009 Jan-Sep 2008 % change Jan-Sep 2009 Jan-Sep 2008 % change
PSEi 188.55 132.03 42.81 1,175.94 1,097.79 7.12
Financials Sector 34.20 22.81 49.91 232.58 204.29 13.85
Industrial Sector 105.94 57.29 84.91 879.97 911.55 -3.46
Holding Firms Sector 52.94 26.96 96.40 408.94 352.63 15.97
Property Sector 19.63 20.63 -4.86 87.40 86.44 1.11
Services Sector 68.73 44.33 55.03 321.34 317.57 1.19
Mining & Oil Sector 2.32 4.45 -47.78 26.94 25.60 5.23
Small and Medium Enterprises 0.00 0.01 -60.73 0.06 0.06 2.35
Total 283.76 176.48 60.79 1,957.22 1,898.13 3.11
Source: Philippine Stock Exchange

Figure 15. Equities have surged past their pre- Figure 16. … as have spreads on dollar debt
Lehman Brothers level…
Philippine Stock Exchange Index Sovereign Debt Spread and Foreign Exchange Rate
600 75
3,100
70
2,900 500
65
2,700
400 60
in basis points

2,500
55
2,300 300
50
2,100 200 45
1,900 PHL EMBI (lhs) 40
100
1,700 Foreign Exchange Rate (Php/USD)(rhs) 35
Foreign Exchange Rate (PhP/Euro)(rhs)
1,500 0 30

Apr‐09
Feb‐09
Jun‐08

Jun‐09
Dec‐08
Dec‐09

Dec‐09
Dec‐08

Aug‐08

Oct‐08

Aug‐09

Oct‐09
Aug‐09
Oct‐09
Aug‐08

Oct‐08

Nov‐09

Jan‐10
Jan‐09
Feb‐09

May‐09
Sep‐08

Jun‐09
Jul‐09
Jun‐08
Jul‐08

Mar‐09

Source: CEIC database Source: Bangko Sentral ng Pilipinas, CEIC database

Figure 17. ….and similarly for domestic financing Figure 18. The Peso is rapidly appreciating
following a long period of steady depreciation 1/
Real and Nominal Effective Exchange Rate Indices 
Yield curve (Treasury Reference Rates) (1980=100)
14 15.5  86.0 
Real Effective Exchange Rate (lhs)
15.0  84.0 
Jul‐08 Nov‐08
12 Nominal effective Exchange Rate 
Feb‐09 Aug‐09 Index (rhs) 82.0 
14.5 
Jan‐10
10 80.0 
14.0 
in percent

78.0 
8 13.5 
76.0 
13.0 
6 74.0 
12.5  72.0 
4
12.0  70.0 
Apr‐08

Apr‐09
Feb‐08

Sep‐08

Feb‐09

Sep‐09
Jun‐08
Jul‐08

Jun‐09
Jul‐09
Mar‐08

Dec‐08

Mar‐09

Dec‐09
Aug‐08

Oct‐08

Aug‐09
Oct‐09
Jan‐08

Nov‐08

Jan‐09

Nov‐09
May‐08

May‐09

2
1M 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 10Y 20Y 25Y

Source: Philippine Dealing and Exchange Corporation Source: bsp. 1/ Against major trading partners (US, Japan,
European Monetary Union, United Kingdom).

12
Philippines Quarterly Update—February 2010

Policies   
Monetary Policy

16. Overall inflation eased in 2009 but upticks were seen in the latter part of 2009 as
recovery gathered pace and the base effects from the 2008 price shocks faded (Figure 19).
After average inflation reached 9.3 percent in 2008, it receded to 3.2 percent in 2009, in part
driven by a 7.7 percent fall in fuel prices. Core inflation dropped from 6.2 percent in 2008 to 4.1
percent in 2009, following weak domestic and international demand. After bottoming out in
August 2009, inflation edged up, partly due to the base effect from the 2008 global food and fuel
price shock fading out, but also due to typhoon-induced temporary supply shocks. As a result,
year-on-year inflation in December 2009 reached 4.4 percent—still within the BSP’s target
inflation for 2009 of 2.5-4.5 percent (Figure 20). In both January and February, headline
inflation decelerated slightly, to 4.3 and 4.2 percent, respectively, due to slower price increases
of food, beverage and tobacco, housing repair, and services.

17. The BSP has begun a prudent and paced exit from conditions of exceptional
liquidity by raising the rediscount rate. At the height of the crisis, the central bank
implemented liquidity-support measures and interest-rate stimulus (see previous Philippines
Quarterly Updates for details). As concerns on the financial system and liquidity have eased, the
central bank decided in January to increase and realign the rediscounting facility rate (which was
reduced by 50 basis points at the height of the crisis) to the overnight RRP rate. However, the
BSP kept its policy rates unchanged as economic growth remained weak and well below
potential so that inflationary pressures remain manageable, notwithstanding risks of a return to
global price shocks (e.g., to rice due to the El Niño phenomenon). It is notable that, while the
BSP has aggressively cut rates at the onset of the global recession, banks have only partially
passed on the BSP rate cuts (Figure 21). It is therefore unclear how quickly and fully banks
would transmit future rate hikes (though experience points to an asymmetry in the response to
rate cuts and rate increases).
Figure 19. Inflation troughed as the fuel and food Figure 20. Inflation remains within the BSP
price shocks disappeared, core remains subdued announced target band
Contribution to YoY Inflation Rate Monetary Policy
14 14
Headline Inflation Core Inflation
12
10 RRP Discount Rates
10
in percentage points

in percent

8
6
6

2 4
Inflation Target 
2
Band
‐2
Fuel Others 0
Food Inflation Rate
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3

Core Inflation PPI growth 
‐6
Jul‐07

Jul‐08

Jul‐09
Sep‐07

Sep‐08

Sep‐09
Jan‐08

Jan‐09

Jan‐10
May‐07

May‐08

May‐09
Nov‐07

Nov‐08

Nov‐09
Mar‐08

Mar‐09

2002 2003 2004 2005 2006 2007 2008 2009

Source: National Statistics Office Source: Bangko Sentral ng Pilipinas

13
Philippines Quarterly Update—February 2010

18. Bank lending and private sector credit growth is rising again, after a period of rapid
deceleration since the onset of the global crisis (Figure 22). From an average growth of 22.6
in August 2008 to January 2009, outstanding loans of universal and commercial banks grew at a
slower pace through most of 2009, partly due to tightening of lending standards. However, in late
2009, a temporary recovery in lending emerged, with lending growth reaching double digit again
in December. Most of the increase in bank lending was driven by loans for the transportation,
storage and communication sector. Meanwhile, construction and manufacturing loans continued
to decline on a year-on-year basis, by 27.4 percent and 16.7 percent respectively in December.
On the consumption side, the biggest drivers were car financing and credit cards. The January
figures reveal, however, that bank lending growth moderated to 5 percent, mainly due to a
deceleration of loans to production activities.
Figure 21. BSP’s rate cut were initially broadly Figure 22. Private credit and bank lending growth
matched by the banks till April are fading but financial assets keep growing
Cumulative Reduction in Policy Rate and Lending  Money and Credit Growth
Rate 27
0.5

22
0.0
Policy Rate (overnight reverse repo rate)
17
‐0.5 Bank lending rate in percent
in percentage points

12
‐1.0
7
‐1.5
2

‐2.0 Financial Assets Private sector credit


‐3
M4 Bank lending
‐2.5 ‐8
Apr‐09

Sep‐09
Feb‐09

Jul‐09

Dec‐09
Dec‐08

Mar‐09

Jun‐09

Oct‐09
Aug‐09

Nov‐09

Jan‐10
Nov‐08

Jan‐09

May‐09

Dec‐08

Dec‐09
Aug‐08

Oct‐08

Aug‐09

Oct‐09
Apr‐08

Apr‐09
Jan‐08
Feb‐08

May‐08

Sep‐08

Nov‐08

Jan‐09
Feb‐09

May‐09

Sep‐09

Nov‐09
Jun‐08
Jul‐08

Jun‐09
Jul‐09
Mar‐08

Mar‐09
Source: Bangko Sentral ng Pilipinas Source: Bangko Sentral ng Pilipinas

Fiscal Policy

19. The magnitude of the fiscal stimulus implemented in 2009 was unprecedented in
recent Philippines history. The 2.6 percentage points of GDP in fiscal easing of the overall
fiscal balance (GFS basis) from 2008 to 2009 was the largest one recorded since the 1986 People
Power revolution (Table 5). By comparison, during the Asian financial crisis, the 1997-98 fiscal
easing (the second largest after 2008-09) amounted to 2.0 percent of GDP. The large fiscal
stimulus helped buffer overall economic activity in 2009. The large fiscal stimulus, however,
pushed the national government’s primary fiscal balance (i.e., excluding interest payments) into
its first deficit since 2002, the estimated public sector balance into its first deficit since 2005, and
led to the first increase in the non-financial public sector debt-to-GDP ratio since 2003 (Figure
23 and Table 5).9 Such a large counter-cyclical and timely fiscal stimulus contrasts with past
fiscal behavior which had been pro-cyclical (Zakharova, 2006; Botman, 200910). The

9
The National Government debt increased for the second year in a row in 2009.
10
Zakharova, D., 2006, “Cyclically-Adjusted Balances and Fiscal Sustainability in the Philippines”, IMF Country
Report No. 06/181; Botman, D., 2009, “Fiscal Policy During Downturns and the Pros and Cons of Alternative Fiscal
Rules”, IMF Country Report No. 09/63.

14
Philippines Quarterly Update—February 2010

government was able to launch the ERP thanks to the combination of (1) fiscal space created in
previous years and (2) the strong balance of payments position resulting from large and sustained
OFW remittances.

20. The fiscal deficit reached 4.1 percent of GDP in 2009, the highest level since the
implementation of fiscal reforms in 2005-2006 (Figure 23). The worsening of the fiscal
balance was broadly evenly divided between higher spending (1.4 percentage points of GDP),
and lower revenue (1.2 percentage points of GDP). On the spending side, 40 percent of the
increase was due to discretionary primary spending (related to the Economic Resiliency Plan)
and more than 20 percent due to the increases in the wage bill due to the adoption of the Salary
Standardization Law (SSL III). On the revenue side, the decrease stems from a sharp drop in the
tax effort (1.3 percentage points of GDP) so that the tax effort is now lower than in 2005 (the
year of tax reforms). As a result, indicators of fiscal sustainability, such as the share of interest
payments to total revenue is growing rapidly even though the country is currently borrowing at
record low rates (Figure 24).

Figure 23. Gapping fiscal deficits and rising debt Figure 24. Rapidly declining tax effort, and rising
share of interest payments to total revenue
Percent  Percent  Percent 
of GDP Philippines: Public Finance Debt and Deficits of GDP Percent Philippines: Tax Effort  and Interest‐to‐Income  burden of GDP
110.0 2.0
CPS fiscal balance (RHS) 45.0 18.0
NG fiscal balance (GFS basis) (RHS)
NG Debt‐to‐GDP ratio 1.0 NG Tax collection (RHS)
100.0
NFPS debt‐to‐GDP ratio Interest payment‐to‐total revenue ratio (GFS) 17.0
0.0 40.0

90.0
‐1.0 16.0
35.0
80.0 ‐2.0
15.0
‐3.0
70.0 30.0

‐4.0
14.0

60.0
‐5.0 25.0
13.0

50.0 ‐6.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20.0 12.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Department of Finance. Source: Bureau of Treasury.

21. The change in fiscal balances from 2008 to 2009 was mostly due to a sharp
deterioration of the structural fiscal balance, and structural revenue in particular. While
the structural fiscal balance (i.e., excluding cyclical component and one-off items) had
significantly improved from 2006 to 2002. From 2006 to 2007, the balance remained broadly
unchanged. However, in 2009 it deteriorated markedly (Figure 25). Most of the deterioration
stems from the revenue side. Since the global food and fuel price shocks in 2008, Government
and Congress have responded to the global shocks by introducing permanent tax cuts or
exemptions. As a result, a large share of the gains from the 2005 reforms (e.g., eVAT) has been
undone (Figure 26).11

11
The most important recent tax eroding measures—which have been described in details in previous issues of our
Quarterly Update—are the following: 0.5 percentage points of GDP originate from the reduction in the corporate
income tax (from 35 to 30 percent), 0.3 percentage points of GDP stem from the cut in personal income tax, and
0.15 percentage points of GDP are due to the replacement of the VAT by a lower-yielding franchise tax on power
transmission.

15
Philippines Quarterly Update—February 2010

22. Recently, cyclical and one-off factors have been more pronounced on the fiscal
balance (oil and rice price shocks; financial crisis and recession; typhoons)—Figure 25. In
2008, the rapid increases in oil prices has allowed the government to collect a large revenue
windfall (notably on the VAT), though some of it was offset by increased rice price support (but
only a small part of the fiscal support to NFA is on-budget). The global financial crisis and
recession led the government to introduce a temporary fiscal stimulus, the Economic Resiliency
Plan. Finally, the impact of typhoons Ondoy and Pepeng on public finances, both revenue and
expenditure, will remain noticeable in the short- to medium-term.

Figure 25. A sharply deteriorating structural fiscal Figure 26. …mostly due to a structural decline in the
balance… 1/ BIR’s tax effort
Percent of 
potential GDP
Decomposition Analysis of the NG Fiscal Balance Percent of 
Components of the NG Structural Fiscal Balance  Percent of 
potential GDP potential GDP
2.00
24.0 6.00
1.00
Total revenues
Total expenditures
5.00
22.0 Structural fiscal deficit (RHS)
0.00
4.00
‐1.00 20.0

3.00
‐2.00 18.0
2.00
‐3.00
16.0
1.00
‐4.00
14.0
0.00
‐5.00 Cyclical fiscal balance
cyclically‐adjusted fiscal balance
12.0 ‐1.00
‐6.00
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Source: WB staff calculation based on the second method presented in Fedelino et.al., 2009, “Computing Cyclically Adjusted Balances
and Automatic Stabilizers”, IMF, FAD Technical Notes and Manual, Washington DC.
1/ The small share of cyclical factors in the overall fiscal balance is common in developing and emerging markets as automatic
stabilizers are rather modest.

23. Notwithstanding weaker public finances and renewed global sovereign risk aversion
(Dubai, Greece), the Philippine has accessed global bond markets on favorable terms.
Thanks to ample domestic liquidity and continued strong demand for emerging Asia global
bonds, the country has been able to tap the markets at record low rates and long maturities
(Figures 16 and 17). In particular, the government raised $1.5 billion in global bonds in early
January–the first Asian issuer in 2010—in two durations: 10 and 25-year dollar-denominated
bonds whose yields were 184 and 195 basis points over US Treasuries, respectively. In February,
the government issued $1.1 billion worth of Samurai bonds. With these two operations, 40
percent of the total planned foreign borrowing for 2010 has already been accomplished in the
first quarter. The remaining foreign financing is planned to come from non-market sources
(bilaterals and international financial institutions) though the government has also announced it
is preparing to issue its first Diaspora bond (raising $500 million and €100 million) for March
2010.

16
Philippines Quarterly Update—February 2010

PROSPECTS 
External Environment

24. The global economic recovery—though still fragile—is on firmer grounds (World
Bank, 201012). After an unprecedented 2.2 percent decline in 2009, global GDP is projected to
grow by 2.7 percent in 2010 and is expected to accelerate modestly to 3.2 percent in 2011 (Table
2). As the positive impact of the unprecedented fiscal and monetary stimuli and the inventory
cycle wanes, the pace of the recovery is projected to slow down. This is in part because spending
is expected to be less buoyant with households and the banking sector in need of rebuilding their
balance sheets. Risks to the baseline projection remain substantial, especially on the downside. In
particular, a double-dip characterized by a further slowing of growth could materialize if the
unwinding of the fiscal and monetary policy is too rapid and forceful. The financial system
remains weak in major parts of the world with 40 percent of anticipated write-downs of US-
domiciled banks and 33 percent of potential losses in major European banks yet to be recognized
and provisioned for (ECB Financial Stability Review, 201013).

Table 2. Global Economic Prospects


(Percent Change from previous year, except interest rates and oil prices)
2/ 3/ 3/
2007 2008 2009 2010 2011
1/
Real GDP growth
World 3.9 1.7 -2.2 2.7 3.2
High income 2.6 0.4 -3.3 1.8 2.3
United States 2.1 0.4 -2.5 2.5 2.7
Euro area 2.7 0.5 -3.9 1.0 1.7
Developing Countries 8.1 5.6 1.2 5.2 5.8
East Asia and Pacific 11.4 8.0 6.8 8.1 8.2
China 13.0 9.0 8.4 9.0 9.0
Memorandum items:
World trade volume 7.2 3.0 -14.4 4.3 6.2
Commodity prices (US$ terms)
Non-energy commodities 17.1 21.0 -21.6 5.3 0.7
4/
Oil Price (US$ per barrel) 71.1 97.0 61.8 76.0 76.6
Oil Price (percent change) 10.6 36.4 -36.3 23.1 0.8
Source: Global Economic Prospects 2010, World Bank
1/ Aggregate growth rates calculated using constant 2005 U.S. dollar GDP weights; 2/ Estimate; 3/ Forecast; 4/ Simple
average of Dubai, Brent and West Texas Intermediate.

25. Faster economic growth in East Asia will be more likely sustained but compared to
recovery from the Asian financial crisis and dotcom bust, the recovery is expected to be more
muted, reflecting weaker global demand and less buoyant financial conditions. Continued strong
advances in China’s domestic demand, and associated imports, should play an important role in
underpinning a second export-led revival phase for the remainder of the region.

12
World Bank, 2010, Global Economic Prospects 2010, Washington DC, January.
13
European Central Bank (ECB), 2009, December 2009 Financial Stability Review, Frankfurt, Germany.

17
Philippines Quarterly Update—February 2010

26. As consumption and investment activity remain vulnerable, world trade will
continue to lag behind economic activity (WB’s Global Economic Prospects 2010). Global
investment activity fell by 9.7 percent in 2009 and is estimated to grow by only 4.9 percent in
2010. Given that investment goods are generally heavily traded, world trade will remain
depressed until economic recovery picks up. Furthermore, even with trade in goods and service
projected to grow by 4.3 percent and 6.2 percent in 2010 and 2011, respectively, overall volume
will still be 5 percent lower than its 2008 peak as a result of the weak recovery and base effects.

27. Commodity prices will be relatively stable over the medium term. Crude oil prices
are expected to rise only slightly as a result of the large inventory overhang from the huge drop
in demand and soft economic recovery. However, prices of major metal commodities, aluminum
and copper are anticipated to rise moderately as metal demand expands with the recovery and
excess capacity seen during the crisis is reduced. Even with increasing production costs and
rising demand for biofuels, agricultural commodities are expected to be steady due to
improvements in total factor productivity. Short-term food security concerns have settled down
as most countries have reversed restrictive trade policies that followed from the 2008 food price
crisis.

Output and Demand

28. The Philippine economy is projected to grow by 3.5 percent in 2010, and 3.8 percent
in 2011. Growth in 2010 is slightly higher by 0.4 percentage points compared to our earlier
forecast (November 2009 Philippines Quarterly Update). The upward revision reflects (1) a
stronger global outlook, (2) stronger than expected OFW deployment in 2009 leading to an
upward revision in our remittance projections (to 6.0 percent), and (3) a looser fiscal stance in
2010 than previously anticipated (in part to reflect additional spending for post-typhoon
reconstruction activities). Other important growth drivers for 2010 include a replenishment of
depleted stocks, election-related spending in the first half of 2010, and the strong short-term
outlook for the Business Process Outsourcing (BPO) sector. The growth uptick from 2010 to
2011 is, however, expected to be moderate given our projected slow global recovery, the
projected acceleration of the unwinding of monetary and fiscal policy stimuli, and more binding
constraints arising from growth bottlenecks.

29. The magnitude of the current economic downturn and its projected short-term
recovery in 2010 is aligned with past Philippines recessions (Table 3). A simple statistical
comparison of growth trends around the average of the 1991 and 1998 recessions with the 2009
downturn reveals that the peak-to-trough decline in GDP are similar then and now (6.9 versus
6.2) but the composition differs noticeably. In previous recessions, the Philippines had weaker
public finances and a current account deficit (Panels a and b of Table 3). This prevented the use
of a forceful fiscal stimulus (-8.6 then, +2 now) and required a stronger domestic adjustment in
private consumption and investment. Interestingly, the projected strength of the recovery from
2009 to 2010 is very close to that experienced in past recessions (our 3.5 percent growth
projection compares to the simulated 3.4 growth—Table 3, panel b). One notable difference
concerns the medium-term part of the recovery, with our global prospects projecting a protracted
and muted recovery, the recovery in 2011 will not be as strong as during the previous recoveries
(the recovery’s shape will change from V to square root).

18
Philippines Quarterly Update—February 2010

Table 3. Philippines: How does the 2009 Downturn Compare with Past Recessions?
Average GDP Growth During Crisis Years Projected GDP Growth 2010-13 based on historical
(t = 1991,1998) crisis and recovery path (t=2009)
Σ peak to
/
t-2 t-1 t t+1 t+2 t+3 trough 1 t-2 t-1 t t+1 t+2 t+3 Σ peak to
Actual Simulated trough 1/

Private Consumption 4.8 5.2 2.9 2.9 3.3 3.7 -2.6 Private Consumption 5.8 4.7 3.8 3.9 4.2 4.6 -2.0
Government Consumption 5.6 5.7 -2.0 2.9 6.2 0.4 -8.6 Government Consumption 6.6 3.2 8.5 13.5 16.7 11.0 2.0
Capital Formation 16.5 13.8 -16.8 2.9 15.9 0.7 -30.4 Capital Formation 12.4 1.7 -9.9 9.8 22.8 7.6 -22.3
Fixed Capital 16.8 13.2 -12.7 2.1 14.3 -2.8 -26.9 Fixed Capital 10.9 2.9 -3.5 11.3 23.5 6.4 -14.3
Construction 15.6 14.8 -13.5 2.2 18.9 -9.4 -27.9 Construction 19.4 4.6 3.9 19.5 36.2 7.9 -15.5
Durable Equipment 21.0 13.1 -13.6 1.9 10.9 4.1 -30.2 Durable Equipment 4.5 1.9 -11.4 4.2 13.1 6.3 -15.9
Exports 12.1 9.5 -7.4 4.0 11.6 8.2 -22.4 Exports 5.4 -1.9 -14.2 -2.8 4.8 1.4 -19.6
Imports 16.0 11.8 -7.9 2.9 7.9 9.0 -26.1 Imports -4.1 2.4 -5.8 5.1 10.0 11.1 -1.7
GDP 6.0 4.1 -0.6 1.9 4.0 3.1 -6.9 GDP 7.1 3.8 0.9 3.4 5.5 4.6 -6.2

Source: World Bank staff calculations.

30. Growth in private consumption is projected to hold up well in 2010 but its pace will
be slower than in the pre-crisis years. Demand is projected to benefit from increased election
spending. Heightened precautionary savings that dampened spending in 2009 will more likely
diminish as consumer expectation gradually over the next 12 months improve (Figure 27). The
higher marginal propensity to spend is, however, projected to be partly offset by a reduced pace
of remittance inflows (in real peso terms14)—Figure 28—and continued downward pressure on
real wages.
Figure 27. Consumer sentiment remains cautious Figure 28. Real remittance growth
Overall Consumer Outlook: Composite Index Remittance Growth1/
20 45
nominal $
10 40
0 35 nominal Php

‐10 30 real Php
25
in percent

‐20
OFW Deployment
‐30
20
15
‐40 Current Quarter 
Next 3 Months  10
‐50
Next 12 Months  5
‐60
Q1  Q2  Q3  Q4  Q1  Q2  Q3  Q4  Q1  Q2  Q3  Q4 
0
‐5
2007 2008 2009
2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: National Statistics Office Source: Bangko Sentral ng Pilipinas


1/ Growth for OFW deployment for 2009 is only from Jan-Nov.

31. Investment is projected to post a small rebound. Capital formation is expected to


remain weak, expanding by 2 percent in 2010. While restocking and some reconstruction efforts
to restore lost assets during the September-October 2009 floods will provide some support,
investment is projected to remain at historically low levels in 2010 as companies will want to (1)
have more visibility regarding the sustainability and strength of the recovery; and (2) delay some

14
While the rate of growth of remittance inflows are projected to increase in US dollar terms, partly on account of
still robust deployment of Filipino workers that took place in 2009 (12 percent growth in January to November 2009
compared to 17 percent in 2008) the impact of these inflows on consumers’ purchasing power will be tempered by
the expected higher increase in prices and moderate strengthening of the Peso (compared to 2009).

19
Philippines Quarterly Update—February 2010

investment to after the May general elections before committing to long-term irreversible
investment plans. On the public sector side, investment will be constrained by the election ban
on the inception of new projects. With the Philippines’ global ranking in Doing Business surveys
steadily declining over time, FDI inflow is expected to remain moderate.

32. On the production side, a weak but more-broad based improvement is seen in 2010,
as revealed by the overall improvement in business sentiment (Figure 30). Having been
devastated by the massive flooding in the last quarter of 2009, the agriculture sector is expected
to recover and grow moderately percent in 2010 from 0.1 percent. The slow growth pick up is
due to the moderately strong El Niño phenomenon that is projected by the Philippine
Atmospheric, Geophysical and Astronomical Services Administration (PAGASA). This will
negatively impact agriculture output, and rice production in particular. A rebound in
manufacturing worldwide will push overall industrial production to 3.1 percent in 2010. Backed
by increased demand for transportation, communication and storage, and trade service during the
election period, the services sector is projected to grow by 4½ percent this year.

Figure 29. El Niño’s impact on Agriculture and GDP Figure 30. Business sentiment is surging
El Nino Phenomenon & Agricultural  Production Business Sentiment
60
7.0
Services 50
contribution to growth, in ppt

Industry 40
5.0 Agri
30
20
3.0
10
0
1.0
‐10 Current Quarter
‐20 Next Quarter
‐1.0 2003: Mild El Nino
‐30
1998: Severe El Nino
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
Q3 
Q1 
‐3.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: National Statistics Office Source: Bangko Sentral ng Pilipinas

33. The outlook is subject to El Niño-related downside risk. A worse-than-expected El


Niño could significantly pull down the economy’s aggregate growth rate. Indeed, the severe
1998 El Niño phenomenon impacted agricultural output so much that the sector’s contribution to
the drop in GDP was actually larger than the impact of the Asian financial crisis (Figure 29).
Production would be further affected if typhoon-damaged agricultural infrastructure were not
reconstructed on time. A worse El Niño could also cause supply disruptions and a resurgent food
price shock. As in 2008, this could result to an uptick in inflation, reduce real income and
increase the losses of the National Food Agency. The latter’s loss would be an automatic liability
of the public sector.15 El Niño has already noticeably reduced the capacity of hydroelectric
power plants, especially in Mindanao where this has resulted in large scale rotating power cuts.
Similar but less extensive power cuts have also taken place in Manila. A worse than expected El
15
For an overview of the stark inefficiency of the NFA in providing support to the poor and the large fiscal cost
involved, see Box 3 of the November 2009 Philippines Quarterly Update.

20
Philippines Quarterly Update—February 2010

Niño phenomenon, through its impact on electricity supply, would significantly affect energy-
intensive industry sectors, including electronics and semi-conductors that account for about 60
percent of the country’s exports.

34. Upside risks to the outlook include a stronger-than-expected global recovery. This
could have a positive impact on the domestic economy via its impact on OFW deployment,
remittances and exports which could grow faster than anticipated in our baseline scenario.

Employment and Poverty

35. The labor market is expected to improve but its structural weaknesses will remain
unless reforms are introduced. Aside from the general recovery in economic activity, the
general election campaign will provide temporary employment opportunities especially for
unskilled workers. Structural improvements, however, can only occur through structural reforms
of the labor market. Overseas working opportunities, while somewhat reduced compared to the
pre-global recession period, are projected to continue providing relief to the rapidly expanding
domestic labor force.

36. Generating inclusive growth is projected to remain a fundamental challenge for the
Philippine economy; poverty incidence is estimated to remain high. The food crisis in 2008,
the economic downturn and the recent typhoons have thrown an estimated 1.4 million
households into poverty, compared to a no-crisis scenario (See November 2009 Philippines
Quarterly Update for details). While the resumption in growth is a necessary condition for
poverty incidence to decrease, as the experience between 2003 and 2006 testifies, this is not a
sufficient condition. The El Niño phenomenon could, in particular, be a significant source of new
duress for poor and near poor households. This could also generate large increases in hunger
incidence as 74.8 percent of the poor reside in rural area where self-subsistence farming is
widespread (World Bank, 201016).

Balance of Payments and External Debt

37. The outlook on the balance of payment remains positive with the current account
projected to remain in surplus thanks to remittances (Table 4). While it is expected to be
lower than the expected surplus of 5.5 percent of GDP in 2009, the current account is projected
to post a robust surplus of 3.5 percent of GDP in 2010. The strong outlook hinges on the prospect
of higher remittances as a result of increased deployment of Filipino workers during the crisis
and the recovery in the global economy. The capital account is expected to widen, due to higher
external financing needs from the public sector. To date, the issuance of global and Samurai
bonds have already boosted the overall BOP balance in 2010. Total inflow of foreign direct
investment is expected to moderately improve.

38. Exports and imports are projected to recover in 2010 but would still remain
significantly below pre-crisis levels. Exports are projected to return to pre-crisis level only
gradually (by 2012). With nearly 60 percent of the country’s exports consisting of electronics
and semi-conductors which were traditionally mostly aimed at final consumers in developed

16
See chapters 4 and 6 of Philippines: Fostering More Inclusive Growth, World Bank, forthcoming

21
Philippines Quarterly Update—February 2010

countries (the US, EU, and Japan in particular), the country is expected to only benefit
moderately from the strong projected growth in the East Asia region. The country’s improved
ranking in the World Bank’s World Trade Indicators, notably in the Logistics Performance
Index, is welcome and encouraging. Continued improvement in the overall investment climate
would greatly help the country increase capacity and diversify its exports.

39. Continued demand for Overseas Filipino Workers ensures growth of remittances
for 2010. As deployment of both unskilled and skilled workers like engineers, health workers
and teachers remained strong in 2009 (growth of 12 percent through November), workers
remittance inflows are projected to continue growing (by 6 percent). Demand for Filipino labor
is expected to continue in 2010, albeit at a slower pace than in 2009, as the global recovery is
projected to have a low job intensity in 2010.

Monetary Policy

40. Inflation is expected to accelerate modestly in 2010 but to stay within the BSP’s
announced target band. Well anchored inflation expectations (Figure 31), a weak labor market,
a positive output gap, and a projected modest rise in global commodity prices all point to
contained domestic inflation. However, some supply side bottlenecks are expected to drive up
inflation slightly (to 4.8 percent in 2010). These include some localized food supply shock
stemming from the El Niño phenomenon which is already being felt in 14 provinces and is
expected to persist until June 2010 (PAGASA, 201017). As a result, food prices this year are
expected to rise faster than in 2009. Also, while electricity supply is constrained by lower water
level in hydropower plants/dams, demand for electricity and water are expected to increase due
to higher heat levels. Upside risks to our inflation forecast include the possibility, after the
general election, of adjustment in politically sensitive administered prices (e.g., utilities tariffs)
and in taxes. Potentially higher commodity prices also present an important upside risk.

41. The central bank’s exit strategy from the crisis-fighting measures is clearly and
coherently articulated. The Bangko Sentral ng Pilipinas (BSP) has clearly and explicitly
announced sound principles to guide its exit strategy. First, the discontinuation of liquidity-
support measures contingent on the normalization of activity in the financial markets. Second,
subject to maintaining the inflation outlook and inflation expectations within the BSP’s target
band, the central bank will continue its accommodative monetary policy stance until the
economic recovery gathers pace and traction. Such a strategy is consistent and aligned with the
overarching objective of achieving inclusive and sustained economic growth in the Philippines
(MTPDP 2004-2010).

42. Well anchored inflation expectations and a slow elimination of the positive output
gap provide some leeway for the BSP to implement its exit strategy. With inflation
expectations well anchored (Figure 31), the BSP has enough room to maintain accommodative
monetary policies to support the recovery. In addition, the output gap is projected to remain large
and positive in 2010 and to close only in 2013. Demand-driven inflationary pressures are,
therefore, expected to remain tame for some time. As far as asset-price inflation is concerned,
while stock market prices have sharply rebounded and exceed their pre-Lehman Brothers level

17
PAGASA Advisory no. 6 (February, 2010)

22
Philippines Quarterly Update—February 2010

(Figure 15), stock market ownership remains limited in the Philippines (estimated at less than 2
percent of the population) so that they are not expected to have a significant macroeconomic
impact on domestic demand conditions. Similarly, while domestic credit growth greatly outpaced
nominal GDP growth in 2009, such rapid expansion likely reflects the low base and a catch up
effects from years of below nominal GDP growth (Figure 32).

Figure 31. Inflation expectations remain well Figure 32. Credit growth lags behind nominal GDP
anchored growth over the medium-term
Inflation Forecast Performance Domestic Credit and Nominal GDP Growth
Forecast Period
14 18
Expected Inflation (One‐year ahead)
12
Actual Inflation 13
10
in percent

in percent
8 8

6
3
4
Inflation  Domestic Credit
‐2
2 Target Band
Nominal GDP
0 ‐7
Q2
Q3
Q4

Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1

Q1

Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007

Source: Bangko Sentral ng Pilipinas Source: Bangko Sentral ng Pilipinas

Fiscal Policy
43. Establishing and clearly disseminating a detailed and credible fiscal exit strategy is
crucial to enabling a measured unwinding of the fiscal stimulus. While the fiscal stimulus
helped buffer the economic slowdown, the structural deterioration in the fiscal balance is not
sustainable over the medium-term. A comparison of the prospects for the debt path of the
National Government between 2008 and 2009 (“Fan chart” of Figure 33, panel a and b,
respectively) reveals that probabilistic distribution of debt exhibits a notable upward shift, with
far fewer likelihood of the debt ratio going down.18 A detailed and credible strategy to reduce the
large structural fiscal deficit over time is therefore crucial to maintaining investor, entrepreneur,
and consumer confidence which is necessary to generate inclusive growth. Such a strategy could,
for instance, lay out specific measures that would be used, both on the revenue and the
expenditure side to achieve the stated goal of reaching fiscal balance by 2013. Some countries
have found that pre-announcing the timing of some of these measures can be used both to instill
confidence in the exit strategy itself but also to boost current consumption (e.g., this would be
the case with a pre-announced increase in taxes on consumption).

44. Nesting the planned unwinding of the fiscal stimulus within a detailed medium-term
fiscal framework would enhance credibility. A specific medium-term plan and path for
unwinding the fiscal stimulus would minimize a fiscal crisis risk. While the Government aims to

18
For example, as of 2008, the probability that the NG debt-to-GDP ratio would reach or exceed 80 percent by 2013
was a relatively low 15 percent. By 2009, that probability has increased to 30 percent (Figure 33).

23
Philippines Quarterly Update—February 2010

achieve an overall fiscal balance by 2013, accompanying this commitment with detailed
measures (and their likely timing and yield) and embedding them within a medium-term fiscal
framework and a medium-term expenditure framework would be desirable. Undertaking and
publishing (say, as an annex of the annual NG budget document) a statement of fiscal risks
surrounding the National Government budget would also help in improving the transparency and
credibility of fiscal policy.19
Figure 33. The National Government debt sustainability prospects deteriorated between 2008 and 2009
Percentile
DSA based on 2008 data Percentile DSA based on 2009 data
distribution distribution
150
150
140 90-95th
140
130 80-90th
130 90-95th
120 70-80th
120 80-90th 110

in percent of GDP
110 60-70th
in percent of GDP

70-80th 100
100 50-60th
60-70th 90
90 40-50th
50-60th 80
80
70 30-40th
70 40-50th
60 60 20-30th
30-40th
50 50 10-20th
20-30th 40
40 5-10th
10-20th 30
30
20 5-10th 20

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: World Bank staff calculations based on Celasun et al. (2006), “Primary Surplus Behavior and Risks to Fiscal Sustainability in
Emerging Market Countries: A "Fan-Chart" Approach,” IMF Staff Papers, Vol. 53(3), pp3-34. The “fan chart” approach builds on the
baseline debt path projected in a standard debt sustainability analysis (using the baseline macroeconomic scenario shown in Table 4) by
adding confidence intervals around this central projection (the confidence interval is constructed by drawing on the joint distribution of
historical shocks to key macroeconomic variables—e.g., economic growth, the exchange rate, domestic and foreign interest rates). The
fan chart reveals that while the baseline scenario (50th percentile) projects a debt path that is broadly stable, there is significant
uncertainty surrounding this projection. See Chapter 2 of the 2009 Philippines Development Report for further details on the
methodology and its application to the Philippines.

45. Creating a strong revenue base is crucial to increasing fiscal space needed to
support a sustained and inclusive growth. With no new revenue-increasing policy measures to
boost tax collection and a few to erode it, the tax effort is projected to reach 13.0 percent of GDP
in 2010, only marginally higher than in 2009 (Table 5). The rebound in the tax effort from high-
elasticity taxes such as the corporate income tax is expected to be offset with (1) the loss carry
forward stemming from the 2009 economic downturn and the Ondoy and Pepeng typhoons20 and
the new tax eroding measures such as the selective VAT exemption for senior citizens. On the
expenditure side, the salaries of government employees will continue to increase (by 50 percent
over four years starting in July 2009) as a result of the Salary Standardization Law III (the total
cost is budgeted at P125.6 billion or 1.6 percent of 2009 GDP). Capital spending is projected to
shrink as a ratio of GDP compared to 2009 as a large part of the 2009 increase was related to the
fiscal stimulus plan. The fiscal deficit (GFS definition) is projected to reach 3.8 percent of GDP

19
See the forthcoming 2009 Philippines Development Report for an overview of fiscal risks in the Philippines.
20
The tax impact of the typhoon will also arise from VAT input refunds that companies are entitled to. The extent of
the actual refunds is unclear, however, as such refunds are surprisingly low in the Philippines. One reason is that
such requests require extensive administrative paperwork and trigger an automatic audit of the company seeking
such a refund. The refund process takes several years (far exceeding the legally mandated six months) and, even
when granted, the funds would seldom be given in cash but be provided in the form of a tax credit certificate. A lack
of a well functioning input credit refund process fundamentally destroys the neutrality and efficiency of the VAT—
whereas these are precisely the advantages of relying on a VAT.

24
Philippines Quarterly Update—February 2010

in 2010 from 4.1 percent in 2009. Barring new reform measures, the deficit—which is mostly of
a structural nature (Figure 26)—is expected to remain sizeable over the medium term.

46. The following measures could be considered to efficiently and equitably strengthen the
revenue base:21

o Tax policy: (1) A moratorium on new tax eroding policy measures until the tax
effort has returned to, at least, its 2008 level, (2) the rationalization of fiscal
incentives, which would broaden the base, eliminate tax redundancies (estimated
at 1 percent of GDP), improve horizontal equity among firms, not distort capital
allocation, and facilitate tax administration and governance, (3) implementation of
a law that limits deductions to core business expenses (as provided in some
versions of the SNITS), and (4) increased excises on tobacco, alcohol, and
gasoline. This last measure has the best revenue potential because it is efficient,
highly progressive, and easy to collect; Box 1).

o Tax administration: such reforms would both help with short-term revenue gains
and pave the way for long-term improvement in administrative efficiency.
Through improved tax compliance they would also improve horizontal and
vertical equity. The renewed focus of the BIR leadership to strengthen its Large
Taxpayers Service (LTS) is commendable. At the same time, ongoing tax
compliance and collection reform measures need to be pursued forcefully.31 Focus
on these compliance-improving measures is warranted by a provision in the 2009
budget to institutionalize the RATE, RATS, and RIPS programs as permanent
offices in the BIR, BOC, and DOF respectively. Improving performance
monitoring and evaluation in BIR and BOC would help strengthening
accountability, professionalism, and transparency of the Bureaus.

47. Rationalizing expenditure, including off-budget spending could also help increase
the spending efficiency. To increase fiscal space and make room for more effective and targeted
spending, reforms aimed at streamlining costly and non-targeted social spending programs such
as the rationalization programs of the NFA and NIA should be a priority.22 While these programs
mostly operate off-budget, they generate losses that affect the public sector fiscal balance.

21
These recommendations are detailed in the 2009 Philippine Development Report (forthcoming).
31
These include expanding the tax base via third party information sharing and strengthening enforcement via the
Run After Tax Evaders (RATE), Run After the Smugglers (RATS), and Revenue Integrity Protection Service
(RIPS) programs. See the November 2008 Philippines Quarterly Update for details.
22
See Box 3 of the November 2009 Philippines Quarterly Update for a comparison of the efficiency and cost-
effectiveness of the NFA and the CCT program as social safety net programs. The analysis concludes that, by
reallocating the fiscal transfers from the NFA to the CCT, 100 percent of the poor would receive coverage, against
25 percent, with each poor household receiving 7 times the benefits it receives with the NFA.

25
Philippines Quarterly Update—February 2010

Box 1. Petroleum Taxation in the Philippines

Tax collection from gasoline and diesel excises has plummeted since 1997; the beneficiaries have been the
most well-off Filipinos. From 1997 to 2009, excise collection (in percent of GDP) has been reduced by 1.8
percentage points of GDP. The sum of the annual losses in excise collection since 1997 reaches a staggering
18.2 percentage points of GDP (P1,400 billion; $30 billion) once interest costs are included.1/ Maintaining the
1997 excise effort level, or the real value of excises, would have resulted in a drastically lower public debt
(currently exceeding 60 percent of GDP). Such a relatively high level of debt requires about 4 percent of GDP
in annual debt service payment; this money could have been allocated for the much needed priority spending on
infrastructure, health, education, and social protection, thereby benefiting the poor. Petroleum excises on
gasoline and diesel are among the most progressive taxes in the Philippines—i.e., the tax rate increases as your
income increases (Figure 34). However, with the real tax rate decreasing steadily over time, this has eroded the
effective progressivity of tax system in the country. Hence, the richer the household, the larger the benefit
received from lower excises on petroleum products… at the expense of the budget.

Figure 34. Philippines: Petroleum Taxation and the Poor

Percent Household Expenditure Shares on Gasoline and 
Diesel for Transport
4.0
Petroleum consumption increases 
3.0 as total consumption/income rises
2.0
1.0
0.0
0‐1 1‐10 10‐25 25‐50 50‐75 75‐90 90‐99 100
Quantiles of Total Household Expenditure (i.e., expenditure distribution)
Source: FIES 2006 and World Bank staff calculations.

Gasoline and diesel taxation in the Philippines is low by international standards—Rich consumers in most
countries pay higher taxes than rich Filipino consumers (especially for diesel)—Figure 35. The range of
countries with higher petroleum taxation ranges from emerging markets (e.g., Turkey) to low income (e.g.,
Bangladesh, Mauritania) and developed countries (e.g., Japan, Hong Kong, Korea, Singapore).

Figure 35. Gasoline and Diesel Tax Estimates Around The World, 2008*
Gas Tax Estimates Around The World Diesel Tax Estimates Around The World 
US$/liter (excl. oil exporting countries, November 2008) US$/liter
(excl. oil exporting countries, November 2008)
1.60 1.20

1.40
1.00
1.20

1.00 0.80

0.80
Philippines
0.60

0.60
0.40 Philippines
0.40

0.20 0.20

0.00
0.00
Madagascar
Greece
Brazil
Chile
Jordan

Ukraine

Central African Rep.

Finland
Portugal
Lao People's Dem.Rep

Albania

Netherlands
Romania
Armenia
Suriname

Somalia

Korea
Afghanistan, I.R. of

Sweden

China,P.R.:Hong Kong

Sweden
Nepal

Luxembourg

Korea
Uruguay
Macedonia, FYR

Turkey
Afghanistan, I.R. of

Portugal
Dominican Republic

Brazil

Slovenia

Madagascar
Jordan

Albania
Tajikistan

Somalia
Congo, Dem. Rep. of

France
South Africa   

New Zealand    

Mauritania   
Lithuania    

Gambia, The    
El Salvador    

New Zealand    
Guatemala   

Bulgaria   

Bangladesh    

Mozambique    
Zimbabwe   

Costa Rica   
Honduras   

Singapore    
Namibia   

Estonia   

Grenada   
Lebanon   

Poland    

Zimbabwe    

Mongolia    
Malawi   
Israel   
Bhutan   

Denmark    
Grenada    
Lebanon    

Lesotho    
Haiti   
Kenya   
Niger   

Jamaica   
Benin   

Cyprus    
Estonia   
Uganda    
Guinea    

Malta    
Fiji   

Mali   

Niger    
Haiti   
Togo    

Fiji   

Source: OECD, International Energy Agency, “Energy Prices and Taxes”.


* Excluding oil exporting countries. Data as of November 2008.
_________________
1/ Since the fiscal balance has been in deficit, the foregone revenue was financed through debt issuance.

26
Philippines Quarterly Update—February 2010

Box 1 (Continued). Petroleum Taxation in the Philippines

Raising revenue through petroleum excises has several economic and social advantages. First, excises on
petroleum products satisfy two key tax policy principles: efficiency and equity.2/ They are efficient since they
are imposed on goods with low short-term elasticity of demand. They are vertically equitable since the share
of gasoline and diesel consumption in total household consumption sharply increases with income. Provided
smuggling activity can be controlled, they are also comparatively horizontally equitable since avoiding the
excise on petroleum products is less easily available to taxpayers than, say, avoiding corporate profits.
Second, petroleum excises are introduced to correct negative externalities—i.e., bad side effects—created by
the consumption of petroleum products (e.g., traffic congestion, accidents, but also pollution which creates
health hazards and environmental damages). As the Philippines is systematically affected by major natural
disasters, one would expect the country to internalize more—and certainly not less—than others the
environmental impact of gasoline consumption; as Figure 35 reveals, this is not the case. Third, they are easy
to administer since excises are levied at the border when good are imported (an effective border control and
anti-smuggling operation is important).

Preliminary estimates reveal that, for each 5 percent increase in retail pump prices of gasoline and
diesel, tax revenue would increase by 0.1 percent of GDP. Hence, an increase in excises generating a 25
percent increase in retail pump prices would enable to raise 0.5 percent of GDP in tax revenue (both through
excises and the associated higher VAT). Such an increase would offset most of the structural deterioration of
the fiscal balance observed in 2009. This would increase petroleum excise collection to half its 1997 level of
1.2 percent of GDP. To further increase the progressivity of such a measure, the revenue raised (from the most
well off citizens) could be partly allocated to pro-poor spending and partly contribute to the goal of balancing
the budget by 2013.

Governments around the world have introduced large increases in petroleum excises either in one step
or progressively but according to credible, simple and automatic mechanisms. In the latter case,
international experience shows that asymmetric adjustment mechanisms have many desirable features that
make them socially and politically acceptable. One such mechanism could have the following features:3/
1. Each month, the excise level would be automatically adjusted according to the following formula:
1    0
,    , where and E is gasoline
0    0
excise (in peso per liter), t stands for time (expressed in month), Pt is the pre-tax retail price the end of
period t (in peso per liter), and E* is the target level of excise to be achieved (in peso per liter).
2. Once the target level of excise is achieved, this target level should be automatically adjusted with
inflation, preferably semi-annually but, at a minimum, annually.
To conclude, increasing petroleum excises would generate revenue from the richer Filipino households
and would enable to provide resources for pro-poor pro-growth spending; evidence shows it need not be
politically infeasible. Raising petroleum excises should rank high among priority policy measures
considering that (1) revenues are crucially needed to finance needed priority spending on health, education,
social protection, and infrastructure, especially given the 2009 deterioration of the structural fiscal balance, (2)
petroleum excises are strongly progressive in the Philippines with the poor hardly consuming gasoline and
diesel, (3) the rich are lightly taxed on their petroleum consumption in the Philippines compared to the rest of
the world, (4) the Philippines under-taxes (compared to the rest of the world) a major source of global
warming and natural disasters to which the country is severely exposed. The 2008 large increase in retail
pump prices of petroleum products (accompanied with a cash transfer program to protect the poor) in
Indonesia reveals that raising retail pump prices need not be politically costly as President Yudhoyono was re-
elected in 2009.
_____________________

2/ The efficiency arises as they are imposed on goods with a low elasticity of demand such as petroleum products; as a result, they create
limited tax distortions. Vertical equity is said to occur when lower earning taxpayers pay lower effective tax rates than higher income ones
while horizontal equity arises when taxpayers with similar incomes face similar effective tax rates (where “effective” refer to the actual
tax paid, not the statutory one; in practice, weak tax compliance and corruption can drive a large wedge between the two).
3/ More complex formula can be designed, however, political economy considerations as well as public understanding and support of such
reforms favor relatively simple adjustment mechanisms.

27
Philippines Quarterly Update—February 2010

Box 2. Philippines: Revisions to the National Income Accounts

The National Statistical Coordination Board (NSCB) will soon release a new GDP series that adopts some of the
recommendations of the 1993/2008 SNA.
The system of national accounts consists of a coherent and integrated set of macroeconomic accounts and tables
based on internationally agreed concepts, classifications, and accounting rules. It provides a systematic statistical
framework within which economic data can be compiled and presented for the purposes of economic analysis
and policy making. Regular updates in the methodology are needed to better capture changes in the economy and
improve accuracy of the estimates.

Currently, the Philippine System of National Accounts (PSNA) is still largely based on the 1968 SNA but to a
certain extent has adopted some recommendations of the 1993 SNA and uses an outdated base year of 1985. The
NSCB is now embarking on a major revision and rebasing of the PSNA to enhance its relevance.
The revised and rebased PSNA features include the following:
 New base year of 2000
 Use of the amended 1994 Philippine Standard Industrial Classification and the 2004 Philippine
Standard Commodity Classification
 Highlighting of the following subsectors in agriculture, industry and services: mango, pineapple,
coffee, cassava, rubber, steam, BPO, among others
 Use of the Classification of Individual Consumption by Purpose (COICOP) for PCE items that used to
be under Miscellaneous Expenditures, such as: health, transport, communication, recreation, education,
restaurants and hotels
 Highlighting of a new set of principal merchandise exports and imports of the Philippines
 Use of updated data and new data
 Use of updated parameters and price/price indices
 New concepts/definitions due to the adoption of the 1993/2008 SNA international guidelines for the
compilation of national accounts, such as:
o Extension of gross capital formation to include military equipment, computer software and
database, research and development
o Treatment of monetization of gold as financial asset and excluded from exports
o Valuation of merchandise exports and imports at Free-on-Board (FOB)
o Transfer of freight and insurance from imports of merchandise goods to exports of services
o Transfer of motor vehicle repair from other services to trade
o Transfer of public education and public health services from government services to other
services
o Transfer of business activities from other services to real estate, renting and business services.

NSCB is targeting to release the rebased/revised annual and quarterly national accounts for the years 1998-2008
in May 2010 and the rebased annual gross regional domestic product by September 2010. The rest of the series
(i.e., 1946-1997) will be revised and rebased by May 2011.

28
Philippines Quarterly Update—February 2010

Appendix: Summary Macro and Fiscal Tables 

Table 4. Philippines: Selected Economic Indicators, 2006-2011

2006 2007 2008 2009 2010 2011


Actual Prel. Act. Projection

Growth, inflation and unemployment (in percent of GDP, unless otherwise indicated)
Gross domestic product (% change) 5.3 7.1 3.8 0.9 3.5 3.8
Inflation (period average) 6.2 2.8 9.3 3.2 4.8 4.5

Savings and investment


Gross national savings 19.1 20.3 17.8 19.5 17.2 17.2
Gross domestic investment 14.5 15.4 15.2 14.0 13.8 13.8

Public sector
1/
National government balance (GFS basis) -1.4 -1.7 -1.5 -4.1 -3.8 -3.5
National government balance (Govt Definition) -1.1 -0.2 -0.9 -3.9 -3.5 -3.2
Total revenue (Govt Definition) 16.2 17.1 16.2 14.6 14.7 14.9
Tax revenue (Govt Definition) 14.3 14.0 14.1 12.8 13.0 13.1
Total spending (Govt Definition) 17.3 17.3 17.1 18.5 18.3 18.1
National government debt 63.9 55.8 56.9 58.3 59.3 60.4
Consolidated non-financial public sector debt 73.9 61.1 60.0 62.0 62.6 63.4
Balance of payments
Merchandise exports (% change) 15.6 6.4 -2.5 -21.9 12.0 7.0
Merchandise imports (% change) 10.9 8.7 5.6 -24.2 13.1 7.8
Remittances (% change of US$ remittance) 19.4 13.2 13.7 5.6 6.0 8.5
Current account balance 4.5 4.9 2.3 5.5 3.5 3.4
FDI (billions of dollars) 2.8 -0.6 1.1 1.3 2.0 1.8
Portfolio Investment (billions of dollars) 3.0 4.6 -3.8 1.7 1.0 1.0
International reserves
2/
Gross official reserves (billions of dollars) 23.0 33.8 37.6 44.2 46.5 48.2
Gross official reserves (months of imports) 4.3 5.9 6.0 9.0 8.3 8.0
External debt
3/
Total 51.29 45.8 38.9 42.2 39.6 37.7
Sovereign Spreads (EMBI plus, in basis points) 154.0 206 325 334.0 220.0 260.0
Source: Government of the Philippines and World Bank staff.
1/ Excludes privatization receipts (these are treated as financing items, in accordance with GFSM) and includes CB-BOL
restructuring revenues and expenditures.
2/ Includes gold.
3/ World Bank definition.

29
Philippines Quarterly Update—February 2010

Table 5. Philippines: National Government Cash Accounts (GFS Basis), 2006-2010

2006 2007 2008 2009 2010


Actual Prel. Act. Rev. Bud. WB proj.
(in percent of GDP, unless otherwise stated)
Revenue and grant 16.1 15.7 15.8 14.6 14.9 14.6
Tax revenue 14.3 14.0 14.1 12.8 13.4 13.0
Nontax revenue 1/ 1.9 1.7 1.6 1.8 1.5 1.6
Grant 0.0 0.0 0.0 0.0 0.0 0.0

Total expenditure 2/ 17.5 17.4 17.3 18.7 18.8 18.4


Current Expenditures 15.2 14.4 14.1 15.0 15.7 15.2
Personal services 5.4 5.3 5.0 5.4 6.1 5.8
MOOE 1.7 1.9 1.9 2.2 2.1 2.1
Allotment to LGUs 2.3 2.2 2.3 2.7 2.6 2.6
Subsidies 0.2 0.3 0.2 0.2 0.2 0.2
Tax expenditures 0.3 0.5 0.8 0.7 0.5 0.6
Interest payment 5.3 4.1 3.9 3.8 4.3 4.0
Capital Outlays 2.3 2.9 3.0 3.6 3.0 3.1
Net lending 0.0 0.1 0.2 0.2 0.2 0.2

Balance (GFS definition) -1.4 -1.7 -1.5 -4.1 -3.9 -3.8


Balance (Government definition) -1.1 -0.2 -0.9 -3.9 -3.5 -3.5
Primary Balance (GFS) 4.0 2.5 2.3 -0.3 0.4 0.2

Memorandum Items
Privatization receipts (PHP billions) 5.8 90.6 31.3 1.4 12.5 12.5
CB-BOL interest payments (% of GDP) 0.2 0.1 0.2 0.2 0.2 0.2
National Government Debt 3/ 63.9 55.8 56.7 … … …
Nominal GDP (PHP billions) 4/ 6,031 6,647 7,423 7,669 8,319 8,319
Source: Department of Finance, Bureau of Treasury, Department of Budget and Management, and World Bank staff.
1/ Excludes privatization receipts (these are treated as financing items, in accordance with GFSM)
2/ Data from DBM; Allocation to Local Government Units excludes capital transfers to LGUs
3/As defined by the Bureau of Treasury.
4/ Nominal GDP for 2009 and 2010 is World Bank estimate/forecast.

30
Philippines Quarterly Update—February 2010

SELECTED RECENT WORLD BANK PUBLICATIONS ON THE PHILIPPINES


(for an exhaustive list, please go to http://go.worldbank.org/BRHFJLLQD0)
 
Title  Publication Date  Document Type 
Philippines - Integrated Persistent Organic Pollutants (POPs) Management Project: 2009/12/28 Board Report
environmental and social assessment
Philippines quarterly update: towards an inclusive recovery November 2009 Economic Monitoring Report
Philippines: Typhoons Ondoy and Pepeng: post-disaster needs assessment (Volume 1 & 2) November 2009 Special Report
Disparities in labor market performance in the Philippines 2009/11/01 Policy Research Working Paper
Education and wage differentials in the Philippines 2009/11/01 Policy Research Working Paper
Philippines – Country environmental analysis 2009/10/29 Country Environmental Analysis
Output-based aid in the Philippines: improved access to water services for poor households 2009/07/01 Brief
in Metro Manila
Philippines quarterly update: sailing through stormy waters 2009/07/01 Economic Monitoring Report
The power of information: the impact of mobile phones on farmers’ welfare in the 2009/07/01 Policy Research Working Paper
Philippines
Philippines - Transport for growth : an institutional assessment of transport infrastructure 2009/02/24 Public Expenditure Review
Climate resilient cities : a primer on reducing vulnerabilities to disasters - Makati city, 2009/01/01 Working Paper
Philippines
Grand corruption in utilities 2008/12/01 Policy Research Working Paper
Protecting temporary workers : migrant welfare funds from developing countries 2008/10/24 Brief
Philippines - Country procurement assessment report 2008/10/03 Country Procurement Assessment (CPAR)

Doing business 2009 : country profile for Philippines - comparing regulation in 181 2008/09/29 Working Paper
economies
A road to trust 2008/09/01 Policy Research Working Paper
Managing migration : lessons from the Philippines 2008/08/11 Brief
Do community-driven development projects enhance social capital? Evidence from the 2008/07/01 Policy Research Working Paper
Philippines
Doing business in the Philippines 2008 : comparing regulation in 21 cities and 178 2008/06/03 Working Paper
economies
Engaging local private operators in water supply and sanitation services 2008/06/01 Brief
So you want to quit smoking : have you tried a mobile phone ? 2008/06/01 Policy Research Working Paper
Philippines - 2008 Development Forum Clark Field, Philippines March 26-27, 2008 : 2008/04/29 Board Report
summary report
Rising growth, declining investment : the puzzle of the Philippines 2008/01/01 Policy Research Working Paper
Who's at the wheel when communities drive development? The case of the KALAHI CIDSS 2007/09/01 Working Paper
Yield impact of irrigation management transfer : story from the Philippines 2007/08/01 Policy Research Working Paper
Doing business 2008 Philippines : a project benchmarking the regulatory cost of doing 2007/06/01 Working Paper
business in 178 economies
Economic results of CDD programs : evidence from Burkina Faso, Indonesia and the 2007/06/01 Brief
Philippines
The Philippine environmental impact statement system : framework, implementation, 2007/06/01 Working Paper
performance and challenges
Philippines - The indigenous peoples rights act : legal and institutional frameworks, 2007/06/01 Working Paper
implementation and challenges
Philippines : Agriculture public expenditure review 2007/06/01 Working Paper
Philippines environment monitor 2006 2007/06/01 Working Paper
Philippines - Invigorating growth, enhancing its impact 2007/05/18 Development Policy Review
Philippines - client perspectives on elements of World Bank support 2007/04/24 Working Paper
Philippines - Consultative group meeting : summary report 2007/03/21 Board Report
Inequality and relative wealth: do they matter for trust? Evidence from poor communities 2007/03/01 Working Paper
Measuring the costs and benefits of community driven development : the KALAHI-CIDSS 2007/01/01 Working Paper
project
Mindanao Trust Fund reconstruction and development program : annual report 2006 2007/01/01 Annual Report
Unsolicited infrastructure proposals : how some countries introduce competition and 2007/01/01 Working Paper
transparency
Engaging local private operators in water supply and sanitation services 2006/12/01 UNDP-Water & Sanitation Program

31
COVER PHOTOS BY Nikki Victoriano (Import Export); Nichole Arellano (Stable Macroeconomy)