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ECONOMY REPORT - PHILIPPINES
www.apecsec.org.sg/member/memberecreport/phi.html
REAL GROSS DOMESTIC PRODUCT
In 1999, the Philippines recovered from the output decline caused by the
currency and financial turbulence that hit East and Southeast Asia starting in
July 1997. Gross domestic (GDP) growth, spurred by the increase in government
and personal consumption as well as exports, rebounded from –0.6 percent in
1998 to 3.3 percent in 1999. The government’s pump-priming activities
contributed to the recovery as government consumption went from –1.9 percent
in 1998 to 5.3 percent in 1999. Meanwhile, total exports of goods and services
turned around from a decline of 21 per cent in 1998 to a growth of 3.6 percent
in 1999. The growth in total exports stemmed largely from the gain in
merchandise exports (8.7.percent) which was bolstered by increased exports of
finished electrical machinery semiconductors and electronics, ignition wiring
harness and other manufactured products.
On the production side, agriculture, services and industry all joined the
expansion with growth rates of 6 percent, 4.1 percent and 0.9 percent
respectively, in 1999. Higher growth in the gross value added (GVA) of the
economy’s major crops including palay, corn, sugarcane and banana largely
contributed to the 6.4 percent growth of agriculture and fishery. Agricultural
gross value added (GVA) had decreased by 6.5 percent in 1998 on account of
the El Niño. Favorable weather conditions, investments in irrigation systems,
proper usage of farm inputs, and increased use of certified seeds boosted palay
production by 37.8 percent in 1999. Increases in the GVA of private services
(5.8 percent), transportation, communication and storage (5.3 percent) and
trade (4.9 percent) contributed to the steady performance of services which
grew from 3.5 percent in 1998 to 4.1 percent in 1999. The industry sector got a
lift from manufacturing, which grew 1.6 percent to overcome the decline of 1.1
percent in 1998. Mining and quarrying, however, declined 8.4 percent, in view
of depressed world market prices of metals, suspension in operation of some
mining companies and the economic slowdown of importing countries.
The economy continued to perform well in the first half of 2000 recording a
growth of 3.9 percent. This was mainly attributed to the 12.3 percent growth in
exports of goods and services. Merchandise exports increased by 15.8 percent
due largely to the increase in exports of semiconductors and electronic
microcircuits (21.1 percent) and garments (11.3 percent). Personal
consumption expenditures also increased by 3.2 percent arising from higher
household expenditures on electrical appliances, increased cellular and landline
phone subscriptions, and higher expenditures on utilities (i.e., fuel, light and
water). In contrast, government expenditures contracted by 0.5 percent in the
first half as a result of continued cuts in maintenance and other operating
expenses to maintain the targeted deficit for the year.
Industry rebounded to register a growth of 4.1 percent against –1.5 percent in
the first half of 1999. Manufacturing grew by 6.1 percent during the first half of
2000 on account of higher growths attained in electrical machinery (31.6
percent), paper and paper products (28.9 percent) and transport equipment
(28.2 percent). Mining and quarrying turned around from a –14.9 percent a year
ago to a 14.1 percent increase in the first semester of 2000. The increase was
largely due to the substantial increases in gold, nickel and crude oil production.
Reflective of the rapid change in technology, the communications sub-sector
grew by 16.1 percent in the first half of 2000. Increases in the subscriber base
of wireless and landline communication services, and the emergence of data
and other network services were the main source of growth. As a whole, the
services sector grew by 4.4 percent in the first semester.
The agriculture sector continued to recover from the effects of El Niño and La
Niña weather disturbances which led to the better than expected increase in
production in the second quarter of the first semester of 2000. Production of
palay, the economy’s staple crop, grew by 3.2 percent. Additional fruit bearing
plants and good crop maintenance also resulted in increase in the production of
banana by 11.4 percent. Fishery production grew by 0.8 percent.
INFLATION
Despite the inflationary pressures exerted by the series of oil price increases,
wage and transport fare hikes, inflation went down to an average of 6.6
percent in 1999, compared to 9.8 percent in the previous year, and below the
government’s inflation target of 7 percent.
The country’s inflation rate continued to go down registering at 3.4 percent for
the first half of 2000. The increase in agriculture production in the first
semester resulted in an inflation rate of just 0.73 percent for food, beverage
and tobacco compared to 8.48 percent in the first half of 1999. The minimal
increase in food prices together with lower price increases for clothing (2.45
percent) and housing and repairs (6.12 percent) offset the increase in the
inflation rate recorded for fuel, light and water from 5.25 percent during the
first half of 1999 to 8.95 percent during the first half of this year.
EMPLOYMENT
Total employment grew 3.8 percent in 1999. The total number of employed
people increased from 27.9 million in 1998 to 29 million in 1999, an increase in
the employment rate to 90.3 percent from 89.9 percent. Employment in
agriculture increased by 6.5 per cent, and services by 3.5 percent. Meanwhile,
the overall unemployment rate decreased to 9.7 percent in 1999 from 10.1
percent in 1998. In absolute numbers, the unemployed decreased from 3.143
million to 3.102 million in 1999.
For the first half of 2000, however, the unemployment rate increased to 11.6
percent compared to 10.4 percent during the same period in 1999. Except for
the services sector which registered increased employment by 3.4 percent,
agriculture and industry including manufacturing registered decreases in
employment for the first half of 2000. The decrease in employment in
agriculture is mainly seasonal in nature as the second quarter coincides with
the post-harvest rest period for farmers.
TRADE ACCOUNTS
The recovery was accompanied by an increase in the current account surplus,
which expanded 369 percent from US$1.5 billion in 1998 to US$7.2 billion in
1999. Exports of goods grew 19 percent, outpacing imports’ 4.1 percent
growth, resulting in a surplus of US$4 billion, compared to the deficit of US$28
million in 1998. Manufactured products constituted the bulk of Philippine
exports with a share of 89.4 percent. Exports of electrical and electronic
equipment/parts and telecom remained the top export items, which grew 23.5
percent in 1999 followed by machinery and transport equipment, which
expanded by 49.3 percent. Likewise, service trade receipts exceeded payments
by US$2 billion in 1999 for an increase of 110.8 percent over the previous
year’s surplus of US$1.1 billion.
Net foreign investments declined by 27.2 percent as a result of a reduction in
direct investments, new foreign investments and reinvested earnings by an
average of 44 percent in 1999. However, portfolio investments increased by
93.9 percent during the same period from higher placements which increased
206.9 percent. Despite the drop in net investments, the overall balance of
payments posted a surplus of US$3.8 billion in 1999 compared to US$1.4 million
in 1998. The improved external payments position allowed the government to
build-up its international reserves to US$15.1 billion, 39.8 percent higher than
the previous year’s level of US$10.8 billion.
The current account surplus further increased growing by 24 percent from
US$2.9 billion in the first half of 1999 to US$3.6 billion in the first semester of
2000. Exports of goods and services grew by a hefty 362.1 percent to reach
US$1.4 billion in the first half of 2000 as it recovers from a US$546 million
decline a year earlier. However, the economy’s capital and financial account
balance declined by 170 percent due to decreases in direct investment (71 per
cent) and portfolio investments (110.7 percent). Overall the BOP position as of
the first half of 2000 stands at US$205 million compared to US$2.9 billion in the
first semester of 1999.
GROSS EXTERNAL DEBT
Total foreign exchange liabilities in 1999 went up to US$52.2 billion from
US$47.8 billion in 1998. Around US$307 million (P 120 billion) in foreign
borrowings was utilized to finance the national government’s budgetary deficit
of P 111.7 billion in 1999, redeem some of its debts and build up its cash
position. Medium- and long-term loans comprised the bulk of total liabilities
with a share of 89 percent compared to short-term loans with a share of 11
percent. The public sector was the biggest borrower with a 55.6 percent share
in total liabilities followed by the private/business sector at 25.4 percent and
the banking sector with 19 percent. The economy’s total foreign exchange
liabilities increased by US$205 million from US$52.2 billion as of end-1999 to
US$52.4 billion as of the first quarter of 2000.
EXCHANGE RATE
The Philippine peso exhibited greater stability in 1999, trading in a narrower
range against the dollar compared to the previous year. The exchange rate
averaged at P 39.09/US$, appreciating by 4.4 percent from the 1998 average
of P 40.89/US$. The appreciation was mainly due to foreign exchange inflows
through the equities market, especially in the first half of the year, as well as
the slack corporate dollar demand from restrained industrial activity. Net direct
investments and net portfolio investments in the first half of 1999 grew by 32.6
percent and 71.2 percent, respectively. For the first half of 2000, the Philippine
peso averaged P 41.26/US$, a depreciation of around 7.6 percent as against P
38.34/US$ of the first half of 1999.
FISCAL POLICY
Government spending rose by 15.2 percent to P 590.16 billion in 1999 resulting
in a deficit in the governments cash operations by P 111.66 billion. The
government’s pump-priming activities caused government expenditures to
exceed the target level of P 576 billion by P 14.2 billion. Meanwhile, the slow
growth in manufacturing and other industrial sectors contributed to a narrower
tax base and lower collection performance. Consequently, revenue collection
only increased by 3.5 percent in 1999 (P 478.5 billion), lower by P 12.2 billion
than the 1999 target level of P 490.7 billion.
Government expenditures exceeded total government revenue collection by P
47.69 billion in the first half of 2000 as government tax revenues increased by
only 5.5 percent from P215.95 billion in the first half of 1999 to P 227.87
billion. The total revenue collection was likewise below the programmed level of
P 268.26 billion for year 2000. The lower revenue collection was caused by the
shortfall in privatization proceeds which only amounted to P 1.36 billion against
the programmed P 15.45 billion, as well as reduced collections by the Bureau of
Internal Revenue which grew by only 2.9 percent during the first semester.
Sixty percent of total government’s expenditure was allocated for the use of
the national government, 20 percent for interest payments and 18 percent for
allotment to local government units.
MONETARY POLICY
Domestic liquidity grew by 19.3 percent in 1999. A more accommodative
monetary policy through a low interest rate environment helped achieve the
better than expected inflation rate in 1999 at 6.6 percent. Measures to reduce
intermediation cost and to spur bank lending by the private/business sector
were implemented. The reserve requirements were reduced from 17 percent in
October 1998 to 12 percent in July 1999. The overnight borrowing rate by the
central monetary authority (Bangko Sentral ng Pilipinas – BSP) was also cut to
8.75 percent in November 1999 from 13.5 percent as of December 1998, and its
lending rate to 11.8 percent in December 1999 from 15.4 percent in December
1998. Further, the application of the 2 percent general loan-loss provision was
relaxed, while the Exporters’ Dollar Facility was expanded to include
yen-denominated loans.
New regulatory guidelines enhanced the stability of the banking system.
Disclosure requirements for banks, entailing quarterly information on
non-performing loans, amount of specific and general loan-loss reserves, return
on equity, and loans to insiders, have been widened to include even those that
are unlisted at the Philippine Stock Exchange. Banks were also required to
increase their capitalization in 2000 with accompanying remedial actions and
sanctions for banks with capital deficiencies. The Philippine Central Bank (BSP)
has completed its first-generation early warning system for commercial banks
which can predict a bank’s capitalization ration or solvency one year ahead. To
promote consolidation, the BSP imposed an indefinite moratorium on the
establishment of new banks except in cities and municipalities where there are
no existing banking offices and under other special conditions.
In 2000, the government’s monetary policy continued to aim for a decline in
inflation and broad stability in foreign exchange while ensuring that interest
rates are reasonably low to support economic growth. The exchange rate
continued to be market determined and build up of foreign reserves was
pursued to the extent allowed by monetary and foreign exchange market
conditions.
Likewise, the policies which were instrumental in supporting the country
through the crisis of 1997 continued to be followed including implementation of
prudent fiscal and monetary policies, liberalization and privatization of the
banking sector, proactive management of external debt and progressive
development of capital markets.
MEDIUM-TERM OUTLOOK
A fairly strong performance in GDP in 1999 highlighted by a robust growth in
merchandise exports, expansion in output of the production sectors, i.e.,
agriculture, industry and services as well as a low inflation rate showed that the
economy is well on track to achieve the government’s growth and inflation
targets. Further, based on a strong performance in the first half 2000, the
Philippines is likely to achieve the target of at least 4 per cent growth in GDP
for the whole of 2000. Agriculture, fishery and forestry is predicated to grow by
2.5 percent, industry by 4 percent, and services by 4.1 percent in 2000. The
inflation rate is expected to be kept within single digit level at 5 percent.
For 2001, the GDP growth target will range from 4 percent to 5 percent. The
growth for next year hinges on strong export growth, higher fiscal spending on
capital outlays especially for foreign-assisted projects, and recovery of bank
lending. Inflation is expected to increase in 2001 to 6 – 6.5 percent due to
lagged effects of the increase in oil prices and the weaker peso in 2000, and
the impact of the El Nino on food prices.
However, the government will continue to assess the impact of the peso-dollar
rate, oil prices, and world interest rates on the economy and on the growth and
inflation targets.
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