Philippines Economic Update DECEMBER 2021 EDITION Regaining Lost Ground, Revitalizing the Filipino Workforce PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 1 Preface The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analyses, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Philippines. The PEU is a biannual publication of the World Bank’s Macroeconomics, Trade, and Investment (MTI) Global Practice (GP), prepared in partnership with the Finance, Competitiveness and Innovation (FCI); Poverty and Equity; Social Protection and Jobs (SPJ); and Governance Global Practices. Lars Christian Moller (Practice Manager for the MTI GP), Souleymane Coulibaly (Lead Economist and Program Leader), and Rong Qian (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Chua (Senior Economist), Kevin Cruz (Economist), Karen Lazaro (Research Analyst), Eduard Santos and Ludigil Garces (Consultants) from the MTI GP; Isaku Endo (Senior Financial Sector Specialist), Uzma Khalil (Senior Financial Sector Specialist) and Ou Nie (Financial Sector Specialist) from the FCI GP; Nadia Belghith (Senior Economist) and Sharon Piza (Economist) from the Poverty & Equity GP; Yoonyoung Cho (Senior Economist) and Ma. Laarni Revilla (Consultant) from the SPJ GP; Junu Shrestha (Senior Environmental Specialist) and Agnes Balota (Environmental Specialist) from the Environment and Natural Resources GP; and Ekaterina Vashakmadze (Senior Economist). Yoonyoung Cho, Ruth Rodriguez, Dung Doan, and Ma. Laarni Revilla prepared the Special Focus Note on Jobs for Filipinos, Jobs for the Future, under the guidance of Yasser El-Gammal (Practice Manager). The report was edited by Oscar Parlback (Consultant), and the graphic designer was Pol Villanueva (Consultant). Peer reviewers were Ilyas Sarsenov (Senior Economist), Derek Hung Chiat Chen (Senior Economist), Achim Schmillen (Program Leader), Indhira Santos (Senior Economist), Ergys Islamaj (Senior Economist), Daisuke Fukuzawa (Junior Professional Officer), and Duong Le (Research Analyst). Logistics and publication support were provided by Kristiana Rosario (Team Assistant). The Manila External Communications Team, consisting of Clarissa David (Senior Communications Officer) and David Llorito (Communications Officer), prepared the media release, and Stephanie Margallo (Program Assistant) and Moira Enerva (Consultant) prepared the web and social media package. The team would like to thank Ndiame Diop (Country Director for Brunei, Malaysia, Philippines, and Thailand) for his advice and support. The report benefited from the recommendations and feedback of various stakeholders in the World Bank as well as from the government, the business community, labor associations, academic institutions, and civil society. The team is grateful for their contributions and perspectives. The findings, interpretations, and conclusions expressed in the PEU are those of the authors and do not necessarily reflect the views of the World Bank’s executive board or any national government. If you wish to be included in the email distribution list for the PEU and related publications, please contact Kristiana Rosario (krosario@worldbank.org). For questions and comments regarding the content of this publication, please contact Kevin Chua (kchua1@worldbank.org). Questions from the media should be addressed to David Llorito (dllorito@worldbank.org). For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION II Table of Contents Preface II Table of Contents III List of figures IV List of tables IV List of boxes IV Abbreviations and acronyms V Executive Summary 7 Part I. Recent Economic and Policy Developments 10 1.1 Economic Growth: Gaining Steam 11 1.2 External Sector: Reversal to a Balance-of-Payments Deficit 15 1.3 Inflation and Monetary Policy: Accommodative Policy Despite Inflationary Pressures 18 1.4 Fiscal Policy: Mounting Fiscal Pressure 22 1.5 Employment and Poverty: Fragile Recovery 23 Part II. Outlook and Risks 25 2.1 Growth Outlook 26 2.2 Poverty and Shared Prosperity 32 2.3 Risks and Policy Challenges 33 Part III. Jobs for Filipinos, Jobs for the Future 36 3.1 Jobs Market and COVID-19 37 3.2 Government’s Labor Market Response to COVID-19 49 3.3 Jobs Policy Priorities in the Philippines 51 References 59 List of figures Figure 1. The economic rebound gained steam in Q3 2021. 11 Figure 2. COVID-19 cases have declined from its September 2021 peak. 11 Figure 3. Vaccinations continued to lag ASEAN peers. 11 Figure 4. Improvements in domestic activity contributed to the recent growth. 13 Figure 5. Industry and services drove growth on the production side. 13 Figure 6. Goods trade began to return to pre-pandemic levels. 16 Figure 7. The recovery of imports swung the current account and overall BOP back into deficits in H1 2021. 16 Figure 8. Following most regional peers, the country’s FDI surged in H1 2021. 16 Figure 9. The Philippine peso remained among the strongest currencies in the region. 16 Figure 10. Inflation remained above the BSP’s target range throughout the first 10 months of 2021. 19 Figure 11. BSP loans and purchases of national government debt securities contributed to domestic liquidity. 19 Figure 12. Asset quality, capital adequacy and provisioning 21 Figure 13. Reason for firm financial constraint 21 Figure 14. The fiscal deficit widened in Q1-Q3 2021 amid elevated spending. 22 Figure 15. The debt-to-GDP ratio reached its highest level since 2006. 22 Figure 16. Labor Force Participation, January 2019–September 2021 23 Figure 17. Unemployment and Underemployment, January 2019–September 2021 23 Figure 18. Change in Household Monthly Income by Income Quintile, 2019-20 24 Figure 19. Change in Household Head’s Income Compared to Pre-Pandemic Levels 24 Figure 20. Mobility was not fully restricted by lockdown measures in August and September. 26 Figure 21. Economic growth is expected to recover in the medium term 26 PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION III Figure 22. Consumer confidence is steadily improving since mid-2020. 29 Figure 23. The agriculture sector has suffered from underinvestment. 29 Figure 24. The global economy is expected to grow significantly in 2021 31 Figure 25. Global tourism is expected to rebound slowly 31 Figure 26. Actual and projected US$3.20-a-day poverty rates 32 Figure 27. The COVID-19 pandemic has affected the labor market through multiple-interlinked channels 38 Figure 28. Firms’ operation has been rebounding but the majority is operational at below full capacity 40 Figure 29. The percentage change in number of workers relative to pre-pandemic level is the largest among micro firms 40 Figure 30. Share of firms (%) reporting to be open and operating increased from April 2020 to May 2021, but the pace of operational recovery varies largely by sector. 41 Figure 31. While level of technology use varies by sector, a significant share of firms reported intensifying their technology use, highlighting the increasing demand for digital skills 41 Figure 32. The number of actual jobs falls short of what the market could have created without the pandemic 42 Figure 33. Wage employment experienced a massive job loss in the initial phase and the subsequent rebound fell short 43 Figure 34. Services also suffered a large scale job loss, and share of agriculture in employment increased 43 Figure 35. Employment levels of a few sectors experience more dramatic changes during the pandemic compared with the level in January 2020. 44 Figure 36. Elementary jobs have increased while managers and professionals lost employment 44 Figure 37. Employment share of labor-absorbing, low-productivity sectors further increased 44 Figure 38. Annual outflow of OFWs plummeted due to the pandemic across all types of migration, and this is likely further pressuring the domestic labor market 45 Figure 39. Employment to population ratios by different groups, normalized to 1 in January 2020, show greater shocks for women, urban, and young workers 46 Figure 40. Firms report that many workers were unable to work from home for various reasons 47 Figure 41. Government should prioritize making a business environment conducive for job creation, and building capacities of workers and linking them to jobs 51 Figure 42. Percentage of plastic waste products along Pasig River 55 Figure 43. Material value loss analysis for all key resins (data based on 2019 volumes) 55 List of tables Table 1. The BOP reverted to a deficit in H1 2021. 17 Table 2. Economic Indicators for the Baseline Projections 28 Table 3. Real Growth Projections 31 Table 4. The job market has evolved over time in three broad phases depending on lockdown measures, policy environment, and government programs. 39 Table 5. Digital Skills Framework for General Workforce and Population 54 List of boxes Box 1. Recent Global Developments 14 Box 2. Financial Sector Resilience Despite Asset Quality Deterioration 20 Box 3. Global Economic Outlook 30 Box 4. Demand and Supply for Digital Skills in the Philippines 54 Box 5. Boosting New Green Jobs to Combat Marine Plastics Pollution 55 PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION IV Abbreviations and acronyms 4Ps Pantawid Pamilyang Pilipino Program G2G Government to government ADB Asian Development Bank GDP Gross Domestic Product ALMP Active labor market programs GVCs Global value chains APEC Asia-Pacific Economic Cooperation HOPE Household Panel and Economic APIS Annual Poverty Indicators Survey (Survey) ASEAN Association of Southeast Asian ICT Information, Communication, and Nations Technology Bayanihan 1 Bayanihan to Heal as One Act IT-BPM Information Technology and Bayanihan 2 Bayanihan to Recover as One Act Business Process Management BIR Bureau of Internal Revenue IOM International Organization for BOI Board of Investments Migration BOP Balance of payments KDQ Korean Digital Competency Quotient BOSS Business One Stop Shop LBP Land Bank of the Philippines BPO Business process outsourcing LFPR Labor force participation rate BPS Business Pulse Survey LFS Labor Force Survey BSP Bangko Sentral ng Pilipinas LGU Local Government Unit BTr Bureau of the Treasury LICs Low-income countries CAMP COVID-19 Adjustment Measures MFMOD Macro-Fiscal Model Program MSMEs Micro, small, and medium CHED Commission on Higher Education enterprises CREATE Corporate Recovery and Tax NCR National Capital Region Incentives for Enterprises NERs National Economic Recovery Strategy COVID-19 Coronavirus Disease 2019 NPL Non-performing loan DA Department of Agriculture OFWs Overseas Filipino workers DBM Department of Budget and PMI Purchasing Managers’ Index Management PSA Philippine Statistics Authority DBP Development Bank of the PPP Purchasing Power Parity Philippines PQF Philippine Qualification Framework DepEd Department of Education SAP Social Amelioration Program DICT Department of Information and SBCorp Small Business Corporation Communications Technology SBWS Small Business Wage Subsidy DOF Department of Finance SSS Social Security System DOH Department of Health TESDA Technical Education and Skills DOLE Department of Labor and Development Authority Employment TUPAD Tulong Panghanapbuhay sa Ating DTI Department of Trade and Industry Disadvantaged/Displaced Workers EAP East Asia and Pacific TVET Technical and Vocational Education EMDEs Emerging market and developing and Training economies U.S. United States EODB Ease of Doing Business UNESCO United Nations Educational, FDI Foreign direct investment Scientific and Cultural Organization FIES Family Income and Expenditure UNICEF United Nations Children’s Fund Survey UNWTO World Tourism Organization FIST Financial Institutions Strategic Transfer PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION V Executive Summary Recent Developments the same period in 2021. Tax revenues rebounded due to strong tax and customs collections, but non-tax revenue The economic rebound gained momentum in the third contracted following the significant dividend remittances to quarter of 2021 despite another COVID-19 wave. The the Bureau of the Treasury (BTr) in the beginning of the Philippines has, so far, faced its worst infection wave in pandemic. The fiscal deficit widened from 6.9 percent of September when the 7-day daily average reached about GDP in Q1-Q3 2020 to 8.3 percent of GDP in Q1-Q3 2021. 21,000 cases due to the Delta variant. In response, the The wider fiscal deficit has resulted in higher financing authorities reimposed stringent mobility restrictions in Metro needs, which have been met by increased public borrowing. Manila and other key metropolitan areas. Nonetheless, Public debt increased from 54.6 percent of GDP at end- compared with previous waves, domestic activity has been 2020 to 63.1 percent of GDP at end-September 2021. less sensitive to infections. Public containment measures constrained overall mobility less, while households and firms The monetary authority maintained a low interest rate to have learned to cope with infections and diminished mobility. support the economic recovery. This is in spite of headline As a result, the growth momentum was not severely inflation averaging 4.5 percent in the first 10 months of 2021, hampered, and the third quarter growth surprised on the and breaching the upper bound of the 2-4 percent inflation upside, exceeding market expectations. target range. Supply constraints drove the inflation uptick with food adversely affected by weather disturbances and The economy expanded by 4.9 percent in the first three the African Swine Fever outbreaks, alongside rising global quarters of 2021, rebounding from a 10.1 percent food and oil prices. The authorities are addressing the food contraction over the same period in 2020. Although supply constraints with non-monetary measures, such as partially driven by base effects, the growth expansion also allowing greater volume of private sector pork importation, reflected an increase in economic activity despite the and assistance to farmers. Excluding volatile food and implementation of several lockdowns. Growth was energy items, core inflation remained stable, averaging 3.3 supported by the industry sector, driven by double-digit percent in the first 10 months of 2021, from 3.1 percent in the growth in manufacturing and robust public construction same period last year. This is indicative of weak underlying activity. The services sector posted a more moderate price pressure especially as aggregate demand remained expansion as some key services were subdued by mobility generally tempered by the pandemic and mobility restriction measures. The agriculture sector contracted as restrictions. The Bangko Sentral ng Pilipinas (BSP) farm and livestock outputs were impacted by typhoons and maintained ample domestic liquidity, extended loans to the ongoing outbreak of African Swine Fever. Meanwhile, national government, and implemented regulatory measures domestic demand improved, supported by a resurgence in to minimize the economic fallout of the pandemic. public construction spending. Private consumption picked up but still tempered by elevated inflation and unemployment, The labor market has shown improvements with mobility restrictions, and low consumer confidence. Public increased labor force participation and accelerated job consumption growth eased, in part due to the base effects creation, but challenges on the quality of jobs persist. The from the swift disbursement of fiscal support a year ago. The labor force participation rate has been on the rise since Q4 global economic recovery strengthened exports, although 2020, and peaked at 65.0 percent in June 2021. It declined services trade remained weak. to 59.8 in July and levelled off around 63.3 percent in August and September. The high labor force participation, The fiscal stance remains supportive of economic which has been far more prominent for women, continued recovery, but the policy space is narrowing. Public despite the reimposition of enhanced quarantine measures. spending accelerated from 23.6 percent of GDP in the first The unemployment rate reached 8.9 percent in September, three quarters of 2020 to 24.6 percent of GDP in the same significantly higher than that of pre-pandemic levels. Net period in 2021, in line with the recovery in public investment increases in elementary occupations continued whereas and ongoing fiscal support. Infrastructure outlays increased managerial and professional jobs were lost between April from 3.5 percent of GDP to 4.7 percent of GDP in the first and September, raising the jobs quality concern. three quarters of 2021, a result of the government’s push on Underemployment spiked at 20.9 percent in July 2021, up investment spending as part of its recovery program. from 16–18 percent in the first quarter of 2021. The pandemic Meanwhile, public revenues fell from 16.8 percent of GDP in has reduced the number of hours worked, as the share of the first three quarters of 2020 to 16.3 percent of GDP over part-time workers remains higher than before the pandemic. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 7 It also continues to put pressure on household incomes, countries with high vaccination rates, infections have which will likely cause poverty to increase in the short term. continued to spread, albeit with greatly reduced severity of illness, hospitalization, and mortality. Variants of concerns, Outlook and Risks breakthrough cases, and waning vaccine efficacy have highlighted the complexity of economic reopening. Beyond Progress in vaccination has emerged as the critical the health aspect, uncertainty around the pandemic still condition to a firmer economic recovery. The medium-term weighs heavily on market sentiments and investment growth prospect hinges on an economic reopening and decisions, prompting businesses to hold off on productive containment strategy that depends on the successful rollout investments. Firm closures are directly contributing to of mass vaccination. The strategic focus to scale up permanent job and income losses. Moreover, firm vaccination in the National Capital Region (NCR), which insolvencies are posing a risk to the financial system as contributes to nearly 40 percent of GDP, is now paying nonperforming loans and loans at risk increased and dividend. About 92 percent of the adult population in the profitability ratios worsened. Nonetheless, the banking capital has been vaccinated as of mid-November, leading to system remain well-capitalized with captial adequacy ratio a decline in new COVID-19 cases and prompting the phased above the regulatory threshold. implementation of looser mobility restrictions. Nevertheless, vaccination continues to significantly lag in regions outside The government is encouraged to pursue a progressive the capital as implementation faces challenges in remote fiscal consolidation plan that protects the poor to ensure areas. At the current pace of 700,000 inoculations per day, long-term fiscal sustainability. It must, however, carefully the country will reach 70 percent coverage of the country’s manage the risks and trade-offs associated with almost 110 million population by Q1 2022. The country’s consolidation. Increased taxation or public spending vaccination is lagging behind some ASEAN peers due to reduction will hold back economic activity in the short to distribution bottlenecks in the provinces and far-flung areas, medium-term due to the reduction in aggregate demand. as well as on relatively high vaccine hesitancy among However, the improved macro management will help Filipinos. safeguard growth in the long-term. Employing new tax administration measures may prove to be the preferable With further economic reopening, the economy is intervention until the new administration takes over with a projected to grow faster over the medium term. The fresh mandate. Eliminating spending inefficiency and economy is projected to grow at 5.3 percent in 2021, and 5.8 increasing value for money in public procurements will be percent in 2022-23. Alongside the progress in vaccination, instrumental to an expenditure strategy. Moreover, the timing the phased economic reopening will support a return of of reforms requires careful consideration of the political market confidence and domestic dynamism. The reopening cycle. The incoming administration has a window of is expected to benefit the services sector especially opportunity to implement painful yet necessary reforms right transportation, domestic tourism, and wholesale and retail after the election when it still has political capital. trade. Sustained public investment and external demand will Consolidating too early to protect fiscal health may quell support construction and manufacturing activities. Prospect recovery but waiting too long may close the window of for the agriculture sector, however, remain weak due to a opportunity. The 2022-23 period would be critical for a combination of chronic underinvestment and vulnerability to successful implementation. As the national budget is weather-related shocks. On the demand side, public estimated to expand by about 11.0 percent next year, the investment is expected to be a key growth driver as the fiscal consolidation is likely to start in 2023. government pursues its infrastructure investment agenda. Private investment growth may remain tepid due to subdued With narrowing fiscal space, the authorities could improve lending and market uncertainty from the pandemic and the public investment management and leverage private upcoming government transition. Household consumption is sector participation, where viable, to address the projected to recover as remittances pick up and employment infrastructure gap. Public financing needs will remain improves, barring the resurgence of new COVID-19 cases. elevated as public revenues slowly recover while the Nonetheless, the nearly two-year long pandemic has already government continues to address the pandemic. The limited resulted in the closures of firms and losses of jobs and fiscal space should compel the authorities to improve the incomes, alongside health insecurities and education efficiency of public expenditure and explore different disruptions. These economic scarring may harm the sources of financing. The government could consider country’s long-term growth potential. increasing the participation of the private sector through public-private partnerships, in which the country has The growth outlook is subject to downside risks. The extensive experience. The private sector is a source of not COVID-19 pandemic remains a key downside risk. Even in only finance but also expertise, innovation, and solutions to PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 8 the country’s development objectives. Leveraging the Special Focus: Jobs for Filipinos, Jobs for the Future private sector can help fill the financing gap, consistent with the country’s overall fiscal sustainability. The pandemic massively disrupted the labor market with large-scale job losses and diminished job quality. One in To strengthen private sector development, the authorities five jobs were destroyed in Q2 2020 during the peak of should prioritize structural reforms that reduce regulatory lockdown measures, from which point many jobs have restrictiveness and encourage market competition. returned over time. The number of jobs in July 2021 (41.7 Removing the restrictiveness of regulations can have million) was close to that pre-pandemic number in January positive effects on value added, productivity, and export 2020 (42.5 million), but short of what it would have been growth. Reducing regulatory restrictiveness can be done by: without the pandemic (46.0 million) by over 4 million. (i) eliminating restrictions on foreign investment; (ii) reducing Outmigration fell by 75 percent from 2.2 million in 2019 to the scope of controlled prices to create the right incentives; 550,000 in 2020, adding pressure in the domestic market. and (iii) streamlining administrative procedures to facilitate The structural transformation of the labor market stalled as easy market entry. The approval of key reforms such as labor shifts to less productive sectors and jobs growth in amending the Public Sector Act and Foreign Investment Act productive industries slowed down. Labor demand remains could attract investments in key sectors and boost medium- low as firms operate below capacity, while workers fell back term growth and job creation. on agriculture and low productivity service sector for earning opportunities. The quality of jobs is of concern with an Social protection programs should be timely and increasing share of workers being absorbed by elementary targeted, reaching the individuals who need them the occupations and own-account work. The labor market shock most. They are important to mitigate the adverse impact of disproportionately affected the youth and female workers, the pandemic on livelihoods, health, and education, and the economic scarring may cause long lasting especially among the poor. Moving swiftly to provide productivity and earning losses for workers transitioning into transfers and support to poor households necessitates an the labor market. improvement in the government’s delivery and implementation capacity. To this end, the successful rollout The government responded with a combination of of the Philippine National ID system and use of the demand and supply side support, but the needs remain foundational ID for social protection delivery is a step daunting. On the supply side, large scale social protection towards the right direction by enabling the digital measures were implemented for displaced workers, along identification of recipients and digital transformation of the with other active labor market programs. On the demand delivery system. More specifically, the Philippines must side, support for access to credits as well as much needed leverage the National ID system for strengthening the reforms to improve the business environment were country’s targeting system, consolidating and systemizing introduced. However, due to the sheer magnitude and beneficiaries’ information in a unified database, harmonizing prolonged duration of the pandemic, government support various social protection programs, and facilitating financial could not fully mitigate the labor market impact of the inclusion and digital distribution of transfers. pandemic. To strengthen labor market programs and promote job creation, the government has institutionalized Harnessing the digitalization momentum will drive growth the National Employment Recovery Strategy, a masterplan and productivity, and help reverse the declining potential that focuses on wage subsidies, reskilling and upskilling of growth. The pace of digitalization has accelerated in the workers, implementation of youth employability program, Philippines, evidenced by the increased volume of digital support for existing and emerging businesses, and social transactions, use of online platforms, and expansion of protection for vulnerable groups. e-commerce. Even so, the use of digital technologies in the country has been uneven, with larger firms being more Going forward, the government should prioritize making adept than smaller ones to use technology to improve their the business environment conducive for job creation, and inventory management and operations. Equipping all firms building capabilities for workers and linking them to jobs with the skills and know-how to adopt new technology must In the short-term, priority should be on recovering from the be pursued and complemented with openness and pandemic shock and resuming economic activities for job competition policies to increase the incentives for firms to creation towards the endemic scenario. Strengthening wage exploit such technologies. While digital infrastructure for subsidies and implementing workfare for targeted workers basic technologies is often available, broadband access can achieve greater impact within the limited fiscal space. In needs to be expanded to facilitate the use of more the medium term, policies should address structural advanced technologies. challenges in enhancing firms’ productivity and competitiveness, and workers’ skills and protection. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 9 New sources of jobs and growth especially in uncharted various forms of employment could benefit from enhanced areas such as green jobs, new global value chain, or social programs including social insurance for better strategic international migration, should be explored. resilience. Finally, urgent actions are required for human Operationalizing the Green Jobs Act, for instance, will help capital to avoid the long-term consequences of health and the government to provide targeted support for green learning loss on the future of the country. sectors and occupations. At the same time, workers in Government should prioritize making a business environment conducive for job creation, and building capacities of workers and linking them to jobs. Jobs creating private sector Productive workers and Government entrepreneurs Demand side: Supply side: Ensuring an enabling environment for job creation and Building capabilities of workers, connecting workers helping businesses to be connected to the markets to jobs, and providing workers protection Short-term • Recovery • Activation Supporting firms to gain confidence and resume operations, Supporting workers to gain access to targeted active labor maintain or hire workers; promote entrepreneurship and market programs business start; create temporary opportunities at scale Medium-term • Transformation • Resilience Promoting innovations and digital transformation of Enhancing workers skills (technical, cognitive, and non- firms; providing incentives to engage in activities with cognitive) for the evolving market environment; revisiting positive externalities such as green jobs; supporting labor regulations; and strengthening social protection the explorations and identifications of the new markets especially in global value chains and international migration Long-term • Sustainability Promoting a strong early start (early childhood health and nutrition), restoring the lost learning due to the pandemic, and ensuring inclusion of the vulnerable populations in human capital investment opportunities PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 10 Part I Recent Economic and Policy Developments The economy expanded in the first three quarters of 2021, following a deep contraction in 2020. The rebound was driven in large part by base effects, an improved external environment, and more relaxed lockdown measures, despite several COVID-19 waves. Fiscal policy remains supportive of growth, aided by a substantial increase in infrastructure spending and stimulus measures for households and firms. Monetary policy remains accommodative despite a sustained uptick in inflation, driven by higher food and energy prices. The relaxation of containment measures and the gradual resumption of economic activity have led to improvements in labor force participation and job creation in recent months. Despite improvements in the labor market, the quality of jobs is a concern as workers remain vulnerable to frequent changes in containment measures. Photo: ultramansk PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 10 1.1 Economic Growth: Gaining Steam The economy rebounded in the second and third quarters of 2021, aided by a supportive external environment, a robust public investment program, and more relaxed containment measures. The Philippines is poised to carry its recovery momentum into the fourth quarter as the country recovered from the August-September COVID-19 wave. The economic rebound gained momentum in the third Figure 1. The economic rebound gained steam in Q3 2021. quarter of 2021. Although partially driven by base effects, GDP relative to pre-pandemic level the growth expansion in the second and third quarters also reflected an increase in economic activity despite the 120 implementation of several lockdowns. On a seasonally adjusted basis, output in the Philippines is inching towards 110 its pre-pandemic level (Figure 1), although at a slower rate compared to regional peers.1 Similar with other countries, 100 economic activity is now less sensitive to infections and Index 90 containment measures compared to previous lockdowns.2 Public health measures restrict overall mobility less, while 80 households and firms have learned to cope with infections and diminished mobility. Since the third wave in September, 70 COVID-19 case metrics have substantially improved with the 7-day daily average dropping from about 21,000 cases in 60 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 mid-September to 2,000 in mid-November (Figure 2). The 2019 2020 2021 drop in cases coincided with the acceleration in vaccination effort, which nonetheless, lagged behind ASEAN peers Real GDP Private C onsumption (Figure 3). The authorities have accelerated the pace of the Public Consumption Fixed Investment economic reopening, particularly in low-risk areas and areas Exports Imports with high vaccination rates, paving the way for the continued Source: Haver Analytics economic rebound. Note: Figure 1 shows seasonally adjusted real GDP indexed to 2019-Q4 (100). Figure 2. COVID-19 cases have declined from its September Figure 3. Vaccinations continued to lag behind ASEAN 2021 peak. peers. COVID-19 Cases Vaccinations (at least 1 dose) (7-day average) 90 25000 80 Delta Variant Surge 70 20000 Percent of population 60 50 15000 Alpha and Beta 40 Variants Surge 30 10000 20 First surge 10 5000 0 1 1 1 1 1 21 1 21 1 21 21 21 -2 r- 2 -2 -2 l-2 -2 -2 b- p- g- v- c- 0 n n ct ar ay Ju Ap Ju Ja Fe Se No De Au O M M Apr-20 May-20 Oct-20 Jan-21 Feb-21 Apr-21 May-21 Jun-21 Sep-21 Oct-21 Mar-20 Jun-20 Jul-20 Aug-20 Sep-20 Nov-20 Dec-20 Mar-21 Jul-21 Aug-21 Nov-21 Indonesia Malaysia Thailand Philippines Vietnam Source: Department of Health (DOH) Source: Our World in Data 1 On a seasonally-adjusted basis, the Philippines’ GDP is around 6 percent lower than pre-pandemic levels, compared with regional peers such as Thailand (5.0 percent lower than pre-pandemic), Vietnam (3.8 percent), and Indonesia (1.2 percent). 2 On average, 10 additional infected cases per 1 million are associated with less than one-half of a percent reduction in mobility now compared to over a two percent reduction in the first half of 2020. Similarly, countries imposing a stricter degree of domestic lockdown experienced over a 10 percent reduction in mobility in all months prior to December 2020, but the impact was one-half that much in the first half of 2021. Source: World Bank. 2021e. East Asia Pacific Economic Update October 2021: Long COVID. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 11 The economy expanded by 4.9 percent3 in the first three inflation and the multiple cycles of lockdowns that led to poor quarters of 2021, rebounding from a contraction of 10.1 employment outcomes and incomes losses. percent over the same period in 2020 (Figure 4). Growth was supported by the rebound of the industry sector, driven External demand benefitted from robust global activity in by double-digit growth in manufacturing amid a supportive merchandise trade. Exports increased by 7.7 percent in the external environment, and robust public construction activity. first three quarters of 2021, fueled by a 13.9 percent expansion The services sector posted a more moderate expansion in merchandise exports, which benefitted from robust global as some key services were subdued by mobility restriction trade activity (Box 1). The Philippines continued to benefit measures. The agriculture sector contracted as farm and from increased demand for electronics, its largest export livestock outputs were impacted by typhoons and ongoing commodity. However, travel restrictions weighed heavily outbreak of African Swine Fever. Domestic demand on travel and transport export services, which contracted improved, supported by a resurgence in public construction by 60.3 percent and 13.5 percent, respectively, in the first spending. Meanwhile, public consumption growth eased three quarters of 2021. Meanwhile, imports increased by 12.7 as additional fiscal support measures declined, and in part percent in the same period, driven by a broad-based recovery due to the base effects from the swift disbursement of fiscal in the importation of consumption goods, raw materials, support a year ago. Private consumption growth picked up and capital goods. The strong recovery of imports reflects but still tempered by elevated inflation and unemployment, increased domestic activity, particularly public investment, and mobility restrictions, and low consumer confidence. The the strong rebound in the manufacturing industry, leading to global economic recovery strengthened exports, although robust imports of raw materials and inputs. services trade remained weak. On the supply side, economic activity was supported Private domestic demand, albeit improving, remained by growth in the industry and services sectors (Figure generally weak. Investment activity was lifted by the sharp 5). The industry sector rebounded from -14.2 percent in increase in durable equipment investments in Q1-Q3 2021 Q1-Q3 2020 to 7.6 percent in the same period in 2021. Its (15.8 percent), which in turn was mostly driven by base effects strong performance was driven by double-digit growth in from a collapse over the same period in 2020 (-31.5 percent). manufacturing amid a more supportive external environment, Still, investment spending fell below pre-pandemic levels and robust public construction activity. In addition, the amid elevated uncertainty, depressed business confidence, services sector posted a more moderate expansion of 4.6 and limited access to finance. Private construction activity percent, as key services such as wholesale and retail trade, declined in the first three quarters of 2021, as firms held off transportation, and accommodation and food services on construction activities. Meanwhile, private consumption continue to struggle amid the pandemic. However, sectors showed signs of recovery as mobility has been less sensitive such as health, information, communication, and finance to lockdown measures and infections. The gap in private fueled growth, benefitting from increased reliance on their consumption from its pre-pandemic levels narrowed to four services. Agriculture contracted by 1.0 percent due to the percent in the third quarter of 2021 after remaining in double continued slump in livestock and fisheries output. In particular, digits since the start of the pandemic. Private consumption the sharp decline in livestock output was driven by the grew by 2.9 percent in the first three quarters of 2021, well ongoing outbreak of African Swine Fever, which has affected below pre-pandemic growth rates, impacted by elevated around one-third of the country’s hog population. Photo: Jed Regala 3 All growth numbers are year-on-year unless otherwise stated. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 12 Figure 4. Improvements in domestic activity contributed to the Figure 5. Industry and services drove growth on the recent growth. production side. 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Percentage point Percentage point 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 Agriculture -10 Net exports -12 Manufacturing -12 Investments Other industries -14 -14 Government Consumption -16 -16 Services Household Final Consumption Expenditure -18 GDP Growth -18 GDP growth -20 -20 2018 2018 2018 2018 2019 2019 2019 2019 202 0 202 0 202 0 202 0 202 1 202 1 202 1 2018 2018 2018 2018 2019 2019 2019 2019 202 0 202 0 202 0 202 0 202 1 202 1 202 1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: Philippine Statistics Authority (PSA). Source: PSA. Note: Other industries are mining and quarrying, construction, electricity, gas, and water. Photo: Jed Regala PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 13 Box 1. Recent Global Developments The continued resurgence of COVID-19, along with supply Vietnam (40.2). However, the region is still suffering from chain disruptions, has slowed the momentum of the global disruptions in GVCs. recovery. The ongoing pandemic continues to exact a heavy toll on economic activity in Asia, the Americas, and Europe. Global trade activity has rebounded but slowed The global composite output purchasing managers’ index recently, while tourism services remain far below their (PMI) fell from 55.8 in July to 52.6 in August—a seven-month pre-pandemic levels. The volume of global goods trade low. The decline was broad-based across the manufacturing increased by 0.5 percent, month-on-month, in June, following and services sectors, with the latter falling to its lowest level a contraction in May. PMIs point to a softening in the third since February 2021. Furthermore, supply bottlenecks and quarter, with new export orders easing to a seven-month strained global value chains (GVCs) exacerbated input price low of 51.0 in August. Nonetheless, goods trade has already inflation and lengthened delivery times, although there are surpassed its pre-pandemic level, in sharp contrast with signs that both are moderating. Global consumer confidence the slower recovery in services trade. Travel and tourism remains above pre-pandemic levels, although it conceals remained around 60 percent below their pre-pandemic enormous regional and income disparities, with consumer levels. Global supply chains remain under significant strain confidence in emerging market and developing economies because of factory and port shutdowns as well as logistic (EMDEs) remaining below pre-pandemic levels. Notably, bottlenecks due to weather disruptions and container consumer outlook in the Philippines remain below its 2019 shortages. Inventory levels have plummeted and the backlog level, although it has improved by large strides since Q3 of orders for traded goods has surged. 2020. While global financing conditions remain generally The global economic recovery remains uneven. Advanced favorable, a growing number of EMDEs have started to economies are generally experiencing a faster recovery than tighten their policy stance. The US Federal Reserve, in its EMDEs. The rapid rollout of vaccines, along with resilient September meeting, signaled its intention to reduce asset consumption, drove growth in the euro area, as countries purchases, raising 10-year US Treasury yields slightly to 1.4 relaxed pandemic-related measures. Second quarter growth percent. In advanced economies, corporate yield spreads in the United States (U.S.) fell below market expectations but have remained near record lows. Some EMDEs have started allowed output to return to its pre-pandemic level. Private to increase interest rates, although bond spreads still consumption proved resilient, with retail sales increasing hovered near post-pandemic lows in August. Portfolio inflows month-on-month in August against expectations of a decline. to EMDEs remain muted due to rising inflationary pressures Among EMDEs, activity in China moderated as retail sales and uncertain growth prospects. Finally, stock markets came and the composite output index dipped in August, mainly due under pressure in September due to concerns regarding the to a resurgence of COVID-19 infections. In Southeast Asia, financial health of Evergrande, a major real estate player in pandemic-related restrictions have eased, resulting in the China, but concerns have since retreated. rebound of the PMI (50.0 in September), except for Sources: Global Economic Prospects, June 2021; Global Monthly, September 2021. Photo: Ezra Acayan PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 14 1.2 External Sector: Reversal to a Balance-of-Payments Deficit Recovering goods imports and net capital outflows resulted in a current account deficit in H1 2021. The Philippine peso has started to depreciate against the US dollar in nominal terms since July 2021. In real terms, it gained strength, which may weigh on the country’s exports competitiveness. The current account reversed from a surplus of 2.8 The Philippine peso strengthened in real terms in the percent of GDP in H1 2020 to a deficit of 0.7 percent first 10 months of 2021. In nominal terms, the peso of GDP in H1 2021, driven by a wider trade deficit. depreciated by 2.3 percent against the US dollar in the Mirroring regional peers, both the merchandise import third quarter of 2021, amid recovering imports and capital and export activities accelerated in H1 2021, approaching outflows as well as the prospect of US monetary policy their pre-pandemic levels (Figure 6). Merchandise normalization. Nevertheless, on a year-to-date basis, the imports expanded faster than exports, resulting in a peso appreciated by 1.8 percent in the first 10 months wider goods trade deficit of 0.7 percent of GDP in H1 of the year, slower than the 4.2 percent appreciation in 2021. Imports recovered on the back of looser domestic the same period in 2020. The peso remained among the restrictions on mobility and business operations, as strongest performing currencies in the region (Figure 9). In well as higher global commodity prices. Meanwhile, real effective terms, the peso appreciated by 1.6 percent exports improved amid increased global demand for during the first 10 months of 2021, slower than 6.1 percent electronics and semiconductors, which composed a lion’s during the same period in 2020. The real appreciation share of the country’s exports, and a dynamic external may weigh on the country’s trade competitiveness as environment. The widening trade deficit outweighed its exports become relatively more expensive. Gross the steady influx of remittances from overseas Filipino international reserves reached US$107.9 billion as of workers (OFWs), which expanded by 5.7 percent in the October 2021, 4.0 percent higher than recorded as of first nine months of 2021 from the 1.4 percent contraction October 2020, representing 10.8 months of imports. in the same period in 2020, and net receipts from a resilient business process outsourcing (BPO) industry. Net capital outflows, coupled with the current account deficit, have resulted in a BOP deficit (Figure 7 and Table 1). The capital and financial accounts continued to record net outflows in H1 2021, albeit lower than in H1 2020. This was driven by portfolio investment outflows (3.7 percent of GDP), mainly in the form of the BSP investments in debt securities abroad and domestic corporations’ foreign debt repayments. While foreign portfolio investment4 outflows continued as of September (US$458.5 million year-to-date), the level was notably smaller compared to the same period in 2020. Portfolio investment outflows outweighed the rise in foreign direct investment (FDI) in H1 2021 (Figure 8), which continued to expand by 39.7 percent in the first 8 months of 2021. The combined effects of capital outflows and the current account deficit shifted the BOP from a surplus of US$4.1 billion (2.4 percent of GDP) in H1 2020 to a deficit of US$1.9 billion (1.0 percent of GDP) in H1 2021. The cumulative BOP deficit narrowed to US$665 million as of September 2021. Photo: aldarinho 4 BSP-Registered Portfolio Investments PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 15 Figure 6. Goods trade began to return to pre-pandemic Figure 7. The recovery of imports swung the current levels. account and overall BOP back into deficits in H1 2021. 60 5 Imports 4 50 3 2 Percentage of GDP 40 1 In billion US$ 0 30 Exports -1 -2 20 -3 -4 10 H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 Net unclassifi ed items Capital and Financial accounts 0 H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 Current account Overall BOP position Source: BSP. Source: PSA. Figure 8. Following most regional peers, the country’s FDI Figure 9. The Philippine peso remained among the surged in H1 2021. strongest currencies in the region. 110 FDI as share of GDP Index of USD/LCU (October 2019=100) 5 105 4 100 3 Percent 95 2 90 1 85 0 Fe 9 21 -19 20 20 1 21 1 0 Au 0 De 0 21 20 r- 2 -2 1 r- 2 2 -2 H1 2016 H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 c- g- n- b- g- c- n- ct ct b- Ap ct De Au Ju Fe Ap O O Ju O Philippines Indonesia Malaysia Philippines Indonesia Malaysia Thailand Vietnam Thailand Vietnam Source: CEIC and Haver Analytics. Source: Haver Analytics. Note: Decrease denotes depreciation. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 16 Table 1. The BOP reverted to a deficit in H1 2021. H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 In percent of GDP, unless otherwise indicated. Current account -0.7 -2.4 -1.4 -2.8 0.7 Goods -11.6 -14.0 -13.7 -9.1 -11.9 Exports 16.3 15.6 14.6 13.0 14.2 Imports 27.8 29.6 28.3 22.1 26.1 Services 1.7 2.8 3.4 3.2 3.0 Primary Income 1.0 0.8 1.4 1.2 0.9 Secondary Income 8.1 7.9 7.6 7.5 7.3 Capital and Financial accounts 0.3 1.4 3.4 -1.0 -0.6 Capital account 0.0 0.0 0.0 0.0 0.0 Financial account -0.3 -1.4 -3.4 1.0 0.6 Direct investment -2.0 -2.1 -1.2 -1.1 -1.8 Net acquisition of financial assets 0.6 1.4 1.1 0.7 0.5 Net incurrence of liabilities1/ 2.6 3.5 2.3 1.8 2.3 Portfolio investment 1.8 1.6 -2.6 -0.2 3.7 Financial derivatives -0.1 -0.0 -0.0 0.0 -0.1 Other investments -0.1 -0.8 0.5 1.9 -1.1 2/ Net unclassified items -0.1 -1.0 0.7 0.6 0.3 Overall BOP position -0.4 -2.0 2.7 2.4 -1.0 Memo: Basic Balance 1.3 -0.3 -0.2 3.9 1.1 Gross International Reserves (in billions US$) 81.3 77.5 84.9 93.5 105.8 Import Coverage (in months) 8.4 7.1 7.3 9.2 10.6 1 / Net incurrence of liabilities refers to net foreign direct investment to the Philippines. 2 /The term “Net unclassified items” is a balancing figure. There are two methods of computing the BOP position: the first approach uses the change in net international reserves due to transactions, while the second approach computes the sum balances of the current account, capital account less financial account. The two measures do not necessarily tally. The BSP uses the first approach to determine the overall BOP position. Note: Following the BSP presentation, the BOP balance = Current Account Balance + Capital Account Balance - Financial Account Balance + Net Unclassified Items. Source: BSP. Photo: MDV Edwards PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 17 1.3 Inflation and Monetary Policy: Accommodative Policy Despite Inflationary Pressures High food and energy prices pushed inflation above the BSP target range in the first 10 months of 2021. Viewing the high inflation as transitory, the BSP kept the key policy rate unchanged to support the economic recovery. The financial system remains well capitalized, although the quality of bank assets has deteriorated. Inflation remained above the upper bound of the BSP a main contributor to the growth of liquidity in the financial target due to high food and energy prices. Headline system. During the pandemic, the main source of domestic inflation in the first 10 months of 2021 averaged 4.5 percent, liquidity shifted to government financing as private sector higher than 2.5 percent during the same period in 2020 credit slowed down significantly with negative growth and above the 2-4 percent target range (Figure 10). The in the first two quarters in 2021 (Figure 11). The BSP has rise in global food prices, coupled with local agricultural been playing an important role in supporting adequate production woes due to weather disturbances and African public finances by purchasing government securities and Swine Fever outbreaks, was the primary cause of the ensuring the provision of liquidity in the financial system. inflation uptick.5 The authorities are addressing the food The Philippine financial system remains resilient as banks supply constraints with non-monetary measures, including stay well capitalized despite deterioration of asset quality. intensified importation and assistance to farmers. Moreover, The authorities have implemented various policy measures a global energy supply crunch fueled the high price of to mitigate the adverse impact of the pandemic, aiming coal, natural gas, and oil, resulting in higher transport and at the banking sector, non-bank financial institutions, electricity inflation. Excluding volatile food and energy liquidity and funding issues, and payment systems (Box 2). items, the core inflation rate averaged 3.3 percent in the first 10 months of 2021, higher than 3.1 percent in the same period last year. In the first 9 months of 2021, average domestic inflation was higher in the Philippines than in regional peers such as Indonesia (1.5 percent), Malaysia (2.3 percent), Thailand (0.8 percent), and Vietnam (1.8 percent). The BSP continued to support the economic recovery by keeping the key policy rate at historic lows. In their September 2021 meeting, the Monetary Board kept the key policy rate at 2.0 percent. The stable core inflation rate and well-anchored inflation expectations supported the BSP’s accommodative stance. In 2021, the BSP has engaged in open market operations, continued to extend loans to the national government, and implemented regulatory measures to minimize the economic fallout of the COVID-19 pandemic. To further support the economic recovery, the BSP has implemented new measures that focus on consumer protection and digital finance, including the imposition of ceiling rates for credit card charges and the issuance of digital bank licenses. Domestic liquidity remains high at Php14.6 trillion, with 8.2 percent year-on-year growth in September 2021. The central bank’s loans and purchases of government Photo: Danial Abdullah securities6 grew 24.3 percent in September, and has been 5 Food inflation averaged 5.6 percent in the first 9 months of 2021. Globally, the FAO Food Price Index rose to its highest level in 10 years so far this year. The high food prices are driven by the tight supply of cereals and vegetable oils. 6 Net Claims on Central Government (Debt securities, loans and other claims less government deposits and other liabilities) in the financial system. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 18 Figure 10. Inflation remained above the BSP’s target Figure 11. BSP loans and purchases of national govern- range throughout the first 10 months of 2021. ment debt securities contributed to domestic liquidity. 8 80 18 7 70 16 6 60 5 14 Year-on-year growth rate (percent) Year-on-year growth rate (percent) 50 4 12 Percent 3 40 10 2 30 1 8 20 0 6 10 -1 4 0 -2 Ju 0 -18 17 15 N 5 6 Se 1 8 - 15 16 19 21 N 0 7 M 7 0 - 19 r- 2 2 1 r- 1 -1 l-1 -2 -1 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 2 b- n- p- g- p- n- ay n- n- ec ov ct ar Ju 2 ov Ap Ap Fe Ju Ja Se Au Ja O -10 M D Core Inflation Headline Inflation Net Cl aims on C entral Government -20 0 Claims on Private Sector Food & Non-alcoholic beverage BSP Key policy rate M3 (rhs) Source: PSA and BSP. Source: BSP. Photo: junpinzon PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 19 Box 2. Financial Sector Resilience Despite Asset Quality Deterioration The financial system has remained broadly resilient so banks and non-financial corporates remain the main source far. The banking sector’s overall capital adequacy ratio of financial stability risk in this context, as capital market is remains stable at 17.2 percent as of Q2 2021, well above underdeveloped and firms rely heavily on bank loans. the BSP’s regulatory threshold of 10 percent. The sector’s overall liquidity is sufficient to absorb funding shocks Digitalization has accelerated during the pandemic, with a liquid asset to deposit ratio of 54.3 percent. Asset but new adoption or increased use of digital platforms quality has deteriorated over the last year, as gross non- appeared to have stalled. Digital payments grew 26.8 performing loans (NPL) ratio rose to about 4.5 percent percent year-on-year in 2020 according to the BSP. Overall, in end-August 2021 from about 2.0 percent in end-2019. the increase in the use of digital technologies in response However, extended forbearance measures may continue to COVID-19 was driven by increased intensity, but with to mask the true extent of vulnerabilities in asset quality relatively fewer new adopters. Increases in intensity was and warrant close monitoring. Forward-looking indicators motivated by customer-facing functions implemented such as restructured loans have seen significant increase, by medium and large firms. Lack of financial means was while profitability measures have seen declines. At the perceived to be the main challenge, based on 54 percent of same time, private credit growth registered a sharp surveyed firms, to incremental adoption of digital solutions. contraction of 3.5 percent in Q1 2021, following a trend decline in its pace of growth since the beginning of The authorities have implemented various policy 2020. However, signs of pickup in credit were evident measures to mitigate the adverse impact of the pandemic in August 2021 as bank credit growth turned positive, on the financial sector. These measures were aimed at the 1.3 percent, for the first time in 8 months (Figure 12). banking sector, non-bank financial institutions, liquidity and funding issues, and payment systems. Within the banking Against a backdrop of elevated corporate debt and sector, most were prudential policy measures to reduce reluctance of bank to extend credit, the risks non-essential regulatory reporting requirements for banks, of cash flow stresses morphing into insolvencies is temporarily ease liquidity requirements, and ease credit significant for firms, especially, micro small, and medium exposure limits. In March 2021, the government approved enterprises (MSMEs). The World Bank COVID-19 firm the Financial Institutions Strategic Transfer (FIST) Act which survey, conducted in May 2021, revealed that although the allows banks and other financial institutions to dispose or share of firms with acute liquidity problems (featuring less outsource the management of their non-performing assets than 1 month of cash reserves) has slightly decreased, firms to special-purpose vehicles. Many regulatory forbearance were more likely to have availed of adjusted loan terms measures are still in place and some have been extended (89 percent) and fallen behind in payments (51 percent). (i.e. extension of exclusion of eligible loans from past due Risk of future payment delays remained high, with about and NPL classification until end 2021), potentially masking 28 percent of firms expecting to file for bankruptcy. Micro underlying vulnerabilities in the financial sector. To strike a businesses and businesses in the NCR were the most cash delicate balance between supporting the recovery in the constrained. A significant share of firms reported having near-term and avoiding the buildup of financial stability risks difficulty in accessing formal financial sources, such as in the longer-run, forbearance measures need to be better- banks and government institutions, and relied on informal targeted and more transparent. access to finance (Figure 13). The tight linkages between Photo: Lekhawattana PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 20 Figure 12. Asset quality, capital adequacy and provisioning 18.0 5 17.5 4 17.0 3 Percent Percent 16.5 2 16.0 1 15.5 15.0 0 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Dec-20 Oct-20 Nov-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-20 NPL (RHS) CAR (LHS) Provision to NPL (RHS) Source: BSP. Figure 13: Reason for firm financial constraint 40 36 36 35 32 33 31 30 30 30 26 26 27 26 25 23 20 16 15 13 14 14 14 9 8 10 7 6 4 4 5 2 0 Micro (0-4) Small (5-19) Med/Large (20+) Not Interested Interest rates too high No guarantee/collateral Already have too many outstanding loans Repayment risk too high due to market uncertainty Suppliers are less willing to provide inputs on credit and/or loans Other Source: World Bank Business Pulse Survey round 3, May 2021 Photo: MDV Edwards PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 21 1.4 Fiscal Policy: Mounting Fiscal Pressure Public debt continues to rise amid an increase in financing needs. Revenue collection remains low while public spending continues to be elevated as the government pursues its infrastructure investment agenda to support economic growth. The fiscal deficit widened from 6.9 percent of GDP was in large part due to an increase in collection by the in Q1-Q3 2020 to 8.3 percent of GDP in Q1-Q3 2021 Bureau of Customs (18.0 percent growth in Q1-Q3 2021) (Figure 14), further increasing public debt (Figure 15). as merchandise trade recovered. Tax collections by the Public spending remains elevated and revenue collection Bureau of Internal Revenue (BIR) also rebounded, albeit low amid the government’s response to COVID-19 at a softer pace (6.9 percent growth in Q1-Q3 2021), and lower dividend remittances to the BTr. As a result, benefitting from base effects and increased domestic public debt increased from 54.6 percent of GDP at end- activity due to more relaxed containment measures in 2021. 2020 to 63.1 percent of GDP at end-September 2021. This is among the highest in the region, second only to Public spending accelerated further, supported by Malaysia (64.7 percent), though above Indonesia (45.4 ongoing fiscal support and a resurgence in public percent) and Thailand (50.4 percent). Nonetheless, debt investment. National government spending increased to metrics remain favorable toward maintaining long-term 24.6 percent of GDP in the first three quarters of 2021 from fiscal sustainability, as the country’s debt portfolio is 23.6 percent in the same period in 2020, driven by the composed largely of long-term peso-denominated debt. resurgence of infrastructure spending and implementation of stimulus measures. Infrastructure outlays increased from 3.5 Tax revenues have rebounded due to better tax and percent of GDP in the first three quarters of 2020 to an customs collection, but non-tax revenues fell following estimated 4.7 percent of GDP in Q1-Q3 2021. Its rebound was the high dividend remittance last year. National a result of the national government’s focus on investment government revenues fell from 16.8 percent of GDP in spending as part of the recovery program. Infrastructure the first three quarters of 2020 to 16.3 percent of GDP expenditure declined in 2020 as the government prioritized over the same period in 2021. The revenue decline was immediate COVID-19 response measures. Public spending driven by the fall in non-tax revenues from 2.3 percent also benefitted from additional fiscal measures as part of the of GDP in Q1-Q3 2020 to 1.5 percent of GDP in Q1-Q3 government’s COVID-19 response. In particular, public 2021, following a high level of dividend remittances to spending was buoyed by the continued implementation of the BTr in the beginning of the pandemic.7 Meanwhile, tax the Bayanihan to Recover as One Act (Bayanihan 2) and the revenues increased from 14.5 percent to 14.8 percent of disbursement of social assistance during the April 2021 GDP in the same period. The rebound in tax collection Enhanced Community Quarantine. Figure 14. The fiscal deficit widened in Q1-Q3 2021 amid Figure 15. The debt-to-GDP ratio reached its highest level elevated spending. since 2006. Domestic debt 30 3.5 External debt 70 4.0 1.5 NG Guaranteed debt (RHS) Fiscal balance (Percent of GDP) 25 60 3.5 -0.5 3.0 Percent of GDP 20 50 Percent of GDP Percent of GDP -3.1 -2.5 2.5 15 -3.4 40 -4.5 2.0 10 30 -6.9 -6.5 1.5 5 -7.6 20 -8.3 -8.5 1.0 0 -10.5 10 0.5 2018 2019 2020 Q1-Q3 Q1-Q3 2020 2021 0 0.0 2016 2017 2018 2019 2020 Q3 2021 Revenues Expenditure Fiscal Balance (RHS) Source: Department of Budget and Management (DBM), PSA. Source: DBM, PSA. 7 Non-tax revenues nearly doubled in the first quarter of 2020 due to early dividend remittances from the BSP and government-owned and controlled corporations to the BTr to help finance COVID-19 response measures early in the pandemic amid an anticipated shortfall in tax revenues. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 22 1.5 Employment and Poverty: Fragile Recovery While the labor market has shown improvements with increased labor force participation and accelerated job creation, challenges related to repeated quarantine measures persist. Reduced working hours, a rise in non-wage employment, and lower household earnings underline the vulnerabilities facing the labor force. More workers are entering the labor market and looking for earnings opportunities as economic activity slowly resumes. The labor force participation rate (LFPR) peaked at its highest level since January 2019 at 65.0 percent in June 2021. It remained high at 63.3 percent in September 2021 despite a temporary dip in July. The increasing trend in labor force participation, which has been far more prominent for women (Figure 16), slowed down since July, with the reimposition of enhanced quarantine measures. The unemployment rates reached 8.9 percent in September and appeared to remain relatively steady around the new equilibrium of 8.4 percent, significantly higher than that of pre-pandemic level. Meanwhile, the underemployment rates, reflecting the share of individuals working less than 40 hours a week and willing to work more, fluctuate widely depending on lockdown measures as firms rely more on the adjustments of their operations than employment decisions (Figure 17). Photo: Louise Infante Figure 16. Normalized Labor Force Participation Rates, Figure 17. Unemployment and Underemployment, January January 2019–September 2021 (Jan 2020=1) 2019–September 2021 Jun 2021 25 1.2 Male LFPR = 76.3% Female LFPR = 53.7% 20 1.1 Jan 2020 Male LFPR = 74.8% LFPR (Jan 2020 = 1) Female LFPR = 48.4% 15 1 Percent 10 0.9 Sep 2021 Male LFPR = 75.5% Female LFPR = 51.1% 5 0.8 Feb Aug Jul Apr Apr Mar Apr Jan Jan Jan Jun Oct Oct July July May Sep 0 Jan Apr July Oct Jan Apr July Oct Jan Feb Mar Apr May Jun Jul Aug Sep 2019 2020 2021 2019 2020 2021 Male LFPR Female LFPR Unemployment Rate Underemployment Rate Source: PSA-LFS Labor Force Survey (LFS) (various rounds). Source: PSA-LFS (various rounds). Note: Starting February 2021, the LFS is conducted monthly to produce more Note: Starting February 2021, the LFS is conducted monthly to produce more timely data. timely data. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 23 While job creation has continued, improvements in the of firms operated at below capacity. The share of wage labor market have varied widely across sectors. Between and salary workers and employers in the total labor force January and September 2021, there was a net increase remained nearly 3 percentage points lower than before of nearly 2.3 million jobs, despite many job losses due to the pandemic at 65 percent in September 2021. By community quarantines in April and July. The service sector occupation, the share of elementary jobs associated with accounts for the largest portion – nearly two thirds - of this lower pay remained high, registering at nearly one-third of growth. Moreover, the wholesale and retail trade sector total jobs in September 2021, in line with the large number added a significant number of jobs (net increase by 1.2 of jobs added in the wholesale and retail trade sectors. million). It is notable that construction and manufacturing also added a significant number of jobs (0.3 million and 0.2 Increased vulnerabilities in the labor market have reduced million, respectively) as these sectors have been driving earnings and household incomes. The most recent Annual economic recovery. By contrast, employment rates fell in Poverty Indicators Survey (APIS) shows that average monthly other sectors such as education. The decline in education real per capita household incomes declined by about jobs happened despite increased enrollment for the 2021- 14 percent between 2019 and 2020 (Figure 18). While all 22 academic year, as school operations remain limited.8 population groups were affected, urban households and those headed by women experienced the largest income Despite overall improvements in the labor market, the declines. Due to their concentration in areas and sectors quality of jobs remains a concern. Labor market indicators, that were hardest hit by the crisis, households in the third particularly the underemployment rate, have fluctuated and fourth deciles suffered higher declines in their incomes widely with the quarantine measures. Underemployment than other groups.9 Similarly, results from a nationwide high spiked at 20.9 percent in July 2021, up from 16–18 percent frequency monitoring household survey conducted in May in the first quarter of 2021. The pandemic has reduced and June 2021 show that about half of surveyed households the number of hours worked, as the share of part-time reported reduced incomes relative to pre-pandemic workers—those working less than 40 hours a week levels (Figure 19). Compared with the results of the survey (34.9 percent in September 2021)—remains higher than conducted in December 2020, the share of households before the pandemic (31.6 percent in January 2020). that report a loss in income has increased, indicating This is consistent with the findings of the World Bank’s continued financial difficulties for households, especially Business Pulse Survey (BPS) in May 2021, which showed due to imposed community quarantines in April 2021. that fewer firms had laid off workers but about 60 percent Figure 18. Change in Household Monthly Income by Figure 19. Change in Household Head’s Income Income Quintile, 2019-20 Compared to Pre-Pandemic Levels 0 100 90 -5 80 70 60 -10 Percent Percent 50 40 -15 30 20 -20 10 0 -25 Aug 20 20 Dec 2020 May 2021 Poorest Q2 Q3 Q4 Richest Philippines No Income Decreased Same Increased Source: PSA-APIS. Source: World Bank’s High Frequency Monitoring Household Survey. 8 The Department of Education announced that enrollments for the 2021-22 school year were 100.3 percent of the previous academic year, with enrollments in 11 out of 17 regions exceeding 100 percent—indicating a return of students who did not enroll in the previous year. 9 Households in the poorest quintiles tend to work in agriculture and those in the richest quintile tend to work in modern services (e.g., ICT, real estate and public administration) while households in the 3rd and 4th quintiles tend to concentrate more in traditional services (e.g., accommodation and food services, transportation) and construction and these sectors were significantly more affected by the crisis than agriculture and modern services. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 24 Part II Outlook and Risks The economy is projected to expand by 5.3 percent in 2021 and reach 5.8 percent in 2022-23, in line with its new lower long-term potential rate. Effective pandemic containment, mass vaccination, and a phased economic reopening will contribute to more robust domestic activity. The global economy continues to recover, despite recently slowing, which will support exports and remittance growth. There are, however, potential downside risks, with a prolonged pandemic due to new variants and slow global vaccination resulting in intermittent disruptions in economic activity and affecting long-term potential growth. In the medium term, the authorities will have to manage a credible plan for fiscal consolidation, promote private sector development, harness the digitalization momentum, and address the socioeconomic impact of the pandemic. Photo: Ezra Acayan PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 25 2.1 Growth Outlook The economy is expected to grow over the medium term, supported by the global economic rebound and recovery in domestic activity. Economic policy is expected to remain supportive of the recovery, but policy space is narrowing. Progress in vaccination has emerged as a necessary The growth projection for 2021 has improved in light condition to a firmer economic recovery. The medium-term of better-than-expected Q3 numbers. The economy is growth prospect hinges on an economic reopening and a virus now projected to grow at 5.3 percent year-on-year in 2021, containment strategy that depends on the successful rollout substantially higher than the projection of 4.3 percent of mass vaccination. Vaccines have proven key to contain the published in the East Asia and Pacific Economic Update, pandemic over the struggling testing, tracing, and isolating September 2021. This upward revision follows the official strategy in the Philippines. The strategic focus to scale up growth rate of 7.1 percent for Q3 2021, which exceeded vaccination in the NCR, which contributes to nearly 40 percent the Bank’s projection of 4.8 percent.10 The more infectious of GDP, is now paying dividend. About 92 percent of its adult Delta variant propelled new infections to its highest 7-day population has been vaccinated as of mid-November 2021, average in September, leading to the reimposition of mobility leading to a decline in new COVID-19 cases and prompting restriction in key metropolitan areas. Unlike in previous the phased implementation of looser mobility restrictions. episodes, however, domestic activity appeared to have been Nevertheless, vaccination continues to significantly lag in less sensitive to infections. Public containment measures regions outside the capital as implementation faces challenges constrained overall mobility less, while households and in remote areas. At the current pace of 700,000 inoculations firms have learned to cope with infections and diminished per day, the country will reach 70 percent coverage of the mobility (Figure 20). Moving forward, the economic impact country’s almost 110 million population by Q1 2022. The country’s of the pandemic is expected to be less severe especially as vaccination efforts lag behind some ASEAN peers, due to the government implements its policy of phased economic distribution bottlenecks in the provinces and far-flung areas, as reopening.11 well as on relatively high vaccine hesitancy among Filipinos. Figure 20. Mobility was not fully restricted by lockdown Figure 21. Economic growth is expected to recover in the measures in August and September 2021. medium term. 60 9 7 5.9 5.7 40 5 5.3 20 3 0 1 Percent -1 -20 -3 -40 -5 -60 -7 -9 -80 -11 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -100 Jan-21 Mar-21 Apr-21 Aug-21 Nov-21 Oct-21 Feb-20 Sep-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Nov-20 Dec-20 Oct-20 Feb-21 May-21 Jul-21 Sep-21 Jun-21 Actual growth September 2021 projection Grocery and pharmacy Workplaces December 2021 proje ction Linear (Grocery and pharmacy) Linear (Workplaces) Source: Google Mobility. Source: PSA, World Bank staff estimates. 10 The PSA officially revised the Q2 2021 growth upward from 11.8 percent to 12.0 percent. 11 Lockdown measures in the Philippines have evolved to be more granular, targeted, and less intrusive to economic activities. Essential services have continued and select industries such as manufacturing, information technology and business process management, export-oriented and agriculture-related industries, among others were allowed full operation provided the minimum public health and safety protocols are implemented. Depending on the tiered level of quarantine, other sectors were allowed operations but at lower capacity. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 26 With the prospect of further economic reopening, the expected to lead to higher public revenue collection from economy is projected to grow faster in 2022-23. taxes on consumption and trade. The government has The economy is projected to grow at an average of 5.8 explored new revenue sources including the taxation on percent in 2022-23 (Figure 21). Alongside the progress Philippine Offshore Gaming Operators, lifting of the ban in vaccination, the domestic economy will further on new mining permits, and efforts to digitalize tax and reopen, allowing for a return of market confidence, and custom administration. However, corporate income tax more dynamic economic activity. Public investment is revenue is expected to fall with the implementation of the expected to be a key growth driver in the medium term Corporate Recovery and Tax Incentives for Enterprises as the government is expected to pursue its infrastructure (CREATE) law. Meanwhile, the pace of public spending is investment agenda, while private investment remains tepid expected to decelerate over the medium term, driven by due to subdued lending and market uncertainty. Household an anticipated decline in recurrent operating expenditure consumption is projected to recover as remittances pick up as the authorities wind down their pandemic response. and employment slowly improves, barring new episodes of Still, capital outlays are expected to remain elevated case resurgence and sudden hikes in inflation. The global as the government pursues infrastructure investments economy continues to recover, despite recently slowing, to accelerate the recovery and close long-standing which will support exports and manufacturing activities. infrastructure gaps. Nonetheless, the nearly two-year long pandemic has already resulted in the closures of firms and losses of jobs Monetary policy is expected to remain accommodative and incomes, alongside health insecurities and education to growth, as inflation is anticipated to retreat to within disruptions. These will scar the country’s potential growth. the BSP’s target range next year. Headline inflation is expected to reach an average of 4.3 percent in 2021, Without mitigation measures, the country faces before declining to within the 2–4 percent target range in weaker long-term growth potential through lower succeeding years. Inflation is likely to remain elevated this capital investment and loss of human and intangible year, reflecting the impact of supply-side constraints on key capital. Nearly 10 percent of firms in the Philippines have food commodities, the rise in global oil prices, and weather closed and do not expect to reopen in short-term, while disturbances. As the authority addresses the constraints a further 15 percent have closed but expect to reopen at with non-monetary measures, the inflationary pressure is some capacity.12 Firm closures are directly contributing expected to decline next year. Monetary policy is expected to permanent jobs and income losses and the erosion to remain accommodative to support liquidity and the of valuable intangible assets, such as management and recovery while managing inflation within the target range. technical know-how, employee competencies, and value network and relationships. Some surviving firms face Growth recovery of advanced economies are expected impaired balance sheets and are deferring productive to support demand for Philippine exports. The global investments. Unemployment, disruption in education, and economy is expected to grow in 2021, before declining a higher incidence of malnutrition among the poor are in succeeding years, mainly driven by the recovery eroding human capital and hurting peoples’ future earning in advanced economies and China (Box 3). Growth in potential. The pandemic will have an adverse impact on advanced economies will help prop up demand for the economy, lowering the long-term growth potential to Philippine exports, as roughly 70 percent of the country’s a projected 5.7 percent, on average, in 2020–29, below goods exports are destined for high-income economies. the pre-pandemic estimate of more than 6.0 percent. The International logistics disruptions and rising shipping costs, challenge is to limit the scarring by capitalizing on growth however, are hampering the movement of goods. Net opportunities such as the acceleration of digitalization, services exports will also benefit from the BPO sector and implementing a catch-up plan to mitigate the adverse capitalizing on sustained demand. International tourism socio-economic impacts of the pandemic. will take longer to recover in the face of delayed travel reopening plans due to new COVID-19 variant. Meanwhile, The fiscal deficit is expected to remain elevated but import growth will accelerate as the government gradually decline over the medium-term. The fiscal deficit implements infrastructure projects, with renewed demand is projected to reach 7.6 percent of GDP in 2021, before for capital goods and construction materials. As a result, moderating in succeeding years. The declining trajectory the current account surplus is expected to narrow to is predicated on the expected economic recovery and 1.3 percent this year, before turning to deficits in 2022 consolidation measures on recurrent spending. The onwards (Table 2). domestic recovery and better external environment are 12 Impacts of COVID-19 on firms in the Philippines: May 2021: https://www.worldbank.org/en/country/philippines/brief/monitoring-covid-19-impacts-on-firms-and- families-in-the-philippines PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 27 Table 2. Economic Indicators for the Baseline Projections 2018 2019 2020 2021F 2022F 2023F Real GDP growth, at constant market prices 6.3 6.1 -9.6 5.3 5.9 5.7 Private Consumption 4.2 4.3 -5.7 2.9 4.0 3.9 Government Consumption 1.5 1.1 1.3 1.2 1.4 1.1 Capital Formation 2.9 0.9 -9.1 3.5 2.5 2.4 Exports, Goods and Services 3.4 0.8 -4.7 2.1 2.2 2.4 Imports, Goods and Services 5.7 1.0 -8.7 4.4 4.2 4.1 Real GDP growth, at constat factor prices 6.3 6.1 -9.6 5.3 5.9 5.7 Agriculture 0.1 0.1 0.0 -0.1 0.1 0.1 Industry 2.2 1.7 -4.0 2.2 2.0 1.9 Services 4.0 4.3 -5.6 3.3 3.9 3.7 Inflation (period average) 5.2 2.5 2.6 4.3 3.4 3.2 National government balance (% of GDP) -3.1 -3.4 -7.6 -7.6 -7.2 -6.5 National government debt (% of GDP) 39.9 39.6 54.6 58.3 60.3 61.9 Current account balance -2.6 -0.8 3.1 1.3 -0.9 -1.4 Source: PSA, BTr, and World Bank staff estimates. Note: Growth subcomponents show contributions to growth. Public investment is expected to be a key growth driver could lead to job creation and improve household income, in the medium term as the government pursues its while a recovery in foreign markets is likely to increase the infrastructure investment agenda. Public infrastructure demand for OFWs. Private consumption is anticipated to disbursements are programmed to rise from 5.1 percent of expand by 3.9 percent in 2021, before accelerating to 5.5 GDP in 2021 to 5.8 percent of GDP in 2022. The government percent in 2022, boosted by election-related activities. remains committed to pursuing its infrastructure investment agenda, as ramping up capital spending will help to restore The phased economic reopening will support growth business confidence and accelerate the economic recovery. in the industry and services sectors. The industry Meanwhile, private investment growth may remain tepid sector is expected to recover over the forecast horizon, due to subdued lending and market uncertainty from propelled by manufacturing and construction activities that the pandemic and the upcoming government transition. benefit from recovering external demand and sustained Some large corporations have seen their balance sheets public investment. Average capacity utilization in the deteriorate, which may put their investment decisions on manufacturing sector has recovered from a trough of hold. Nonetheless, as economic conditions improve and 55.1 percent in Q2 2020 to 65.7 percent in Q2 2021, but business sentiment strengthens, private investment is has yet to reach pre-pandemic levels of more than 70 expected to contribute more strongly to capital formation percent. Meanwhile, services sector growth will benefit in succeeding years. It will be important to attract private from the phased reopening of the economy, specially the sector investment, including FDI, as the government’s fiscal transportation, restaurant and food services, and wholesale space dwindles because of pandemic-related expenditures. and retail trade sectors. Unlike international tourism, the domestic tourism industry holds better prospects following Private consumption is expected to rebound in 2022-23 the reopening of tourist attractions, bigger capacity for as economic conditions improve. Household consumption venues, and relaxed travel requirements for local travelers. is projected to recover as remittances pick up and The growth prospects for the agriculture sector remain employment slowly improves. In 2021, intermittent quarantine weak due to a combination of chronic underinvestment restrictions and higher inflation have weakened consumption and vulnerability to weather-related shocks (Figure 23). growth, with consumer confidence levels remaining in Increasing agricultural productivity will be crucial for negative territory in the first three quarters (Figure 22). ensuring more inclusive growth as the sector employs a Nonetheless, the uptrend trajectory hints of better prospects, disproportionate share of the labor force, while consumer barring an uncontrolled virus resurgence. The loosening of price inflation is significantly influenced by food production. restrictions is expected to revitalize business activities, which PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 28 Figure 22. Consumer confidence is steadily improving Figure 23. The agriculture sector has suffered from un- since mid-2020. derinvestment. Overall C onsumer Confidence Index (C urre nt quarter) 0.20 Overall Business Confidence Index (Current quarter) 20 60 15.6 0.15 15 40 0.10 10 20 Percent Percent 0.06 6.1 0.04 0.05 5 0 0.00 0 0.00 -20 -5 -0.05 -40 -7.0 -10 -0.10 Credit growth (LHS) Share to FDI (equity other than -60 reinvestment, RHS) Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3Q4 Q1 Q2Q3 Jan - Aug 201 9 Jan - Aug 2020 Jan - Aug 2021 2016 2017 2018 2019 2020 2021 Source: BSP. Source: BSP. Photo: Suriya99 PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 29 Box 3. Global Economic Outlook The global economy is set to expand significantly in 2021, global financial conditions will adversely affect global output. but the recovery is uneven across countries. The global economy is expected to grow by 5.6 percent in 2021, the Global manufacturing trade has surpassed pre-pandemic fastest post-recession pace in 80 years (Figure 24). Global levels, but services trade will continue to be subdued. growth will be driven by growth in advanced economies, Global trade is projected to grow by 8.3 percent this year supported by strong vaccination efforts and substantial and 6.3 percent in 2022. The shift in consumer demand fiscal support. Growth in EMDEs is projected to reach 6 to durables during the pandemic benefited trade and the percent, due to the waning effects of previous pandemic manufacturing sector, but the continued threat of COVID-19 restrictions, higher commodity prices, and stronger external continues to depress services trade, including tourism demand (Table 3). However, growth in EMDEs, excluding and international travel (Figure 25). While strong growth China, is expected to be more subdued at 4.4 percent. In in global trade will be instrumental to ensure economic low-income countries (LICs), which already suffered from recovery, there are significant challenges to global trade. weak economic fundamentals even before the pandemic, In the short run, GVCs are struggling due to COVID-19- growth is expected to average 3.8 percent in 2021-22. related shutdowns, logistics bottlenecks, and container Despite the positive spillovers of the recovery in advanced shortages. In the long run, high trade costs due to policy economies, weak vaccination efforts, elevated COVID-19 barriers, costly logistics, cumbersome trade procedures, caseloads, and the partial withdrawal of macroeconomic and corruption should be addressed to promote trade. support drag growth in many EMDEs and LICs. Emerging inflation and high debt levels pose downside Global economic growth is projected to moderate in risks to the global financial system. Elevated agriculture 2022, and downside risks continue to threaten growth and energy prices, caused by weather disturbances and prospects. Global growth is expected to moderate in 2022 global supply chain issues, are increasing inflation in many as advanced economies and EMDEs wind down their countries. In EMDEs and LICs, recent price pressures are fiscal support while investment prospects in EMDEs remain complicating the accommodative stance of monetary subdued. The level of global GDP is expected to remain authorities, prompting some central banks to tighten 1.8 percent below pre-pandemic projections in 2022. The monetary policy despite the weak economic environment. COVID-19 pandemic remains the biggest risk to global Sustained inflationary pressure can lead to de-anchoring growth. The slow vaccination rollout in developing countries, of inflation expectations, increasing the risk of a financial which has been due to highly unequal vaccine access and crisis in EMDEs and LICs. In addition, high debt levels vaccine hesitancy, and the emergence of new COVID-19 are continuing to make financial markets vulnerable to variants, which could be more infectious, lethal, and vaccine sudden loss of investor confidence. Beyond the risks to resistant, will continue to make it challenging to contain the the financial system, elevated prices will also exacerbate pandemic. In addition, the exhaustion of pent-up demand, food insecurity, poverty, and unrest, especially in LICs. sustained inflationary pressures, and a sharp tightening of Photo: Bangtalay PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 30 Figure 24. The global economy is expected to grow Figure 25. Global tourism is expected to rebound slowly. significantly in 2021 8 50 6 4 40 2 Percent of respondents 0 Percent -2 30 -4 -6 20 -8 -10 10 -12 2018 2019 2020 2021 2022 2023 0 World 2021 2022 2023 2024 or later Advanced economies Emerging market and developing economies Philippines Source: Source: Global Economic Prospects June 2021. Source: World Tourism Organization (UNWTO) Note: Figure shows the expectations for international tourism to return to 2019 levels, according to a global survey among a panel of tourism experts conducted by the UNWTO in January 2021. Table 3. Real Growth Projections. 2019 2020 2021e 2022f 2023f World 2.5 -3.5 5.6 4.3 3.1 Advanced economies 1.6 -4.7 5.4 4.0 2.2 Emerging market and developing economies 3.8 -1.7 6.0 4.7 4.4 East Asia and Pacific 5.8 1.3 7.5 5.4 5.2 Philippines 6.1 -9.6 5.3 5.9 5.7 Notes: 1. Developing East Asia & Pacific includes Cambodia, China, Fiji, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Solomon Islands, Thailand, Timor-Leste, and Vietnam. 2. Global growth projections may be updated in the upcoming Global Economic Prospects January 2022. Source: Global Monthly September 2021; Global Economic Prospects June 2021; East Asia and Pacific Economic Update October 2021. Photo: CaveDweller99 PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 31 2.2 Poverty and Shared Prosperity The pandemic continues to put pressure on household incomes, which will likely cause poverty to increase in the short-term. The poverty rate, based on the lower middle-income poverty line of 3.2 dollars a day, 2011 PPP, is estimated to increase between 2018 and 2020, before slowly declining in succeeding years. Despite large social assistance from the government, the Poverty is expected to slowly decline in 2021 but will economic recession caused by the pandemic is expected remain higher than the pre-pandemic level. With the to have increased the incidence of poverty. The COVID-19 resumption of economic growth, the poverty rate would pandemic halted the growth momentum in 2020, setting reach 21.3 percent in 2021—declining slowly from 2020 but back the gains in poverty reduction. After a remarkable higher than the pre-pandemic level (Figure 26). If growth decline from 25.7 percent in 2015 to 17.0 percent in 2018, the forecasts hold and household incomes recover, the poverty poverty rate, based on the lower middle-income poverty line rate will likely continue a slow downward trend through of US$3.20 a day in 2011 purchasing power parity (PPP), is 2022. However, rising inflation and reimpositions of stricter projected to have increased to 22.0 percent in 2020.13 While quarantines over extended periods risk slowing down the the social assistance under Bayanihan to Heal as One Act pace of poverty reduction. Poverty will likely decline faster (Bayanihan 1) helped to reduce the impact of the crisis on in urban areas and Luzon than in the rest of the country vulnerable households, it could not fully prevent an increase starting in 2021. This is due to the reduction of emergency in poverty. Most of the increase in poverty in 2020 is transfers from the Bayanihan programs in 2021 (especially expected to have happened in Luzon and urban areas, outside Luzon and in rural zones), the concentration of where employment was severely affected by the quarantine rural employment in sectors that are likely to recover at a and restrictive mobility measures. The increase in poverty has slow pace (e.g., agriculture, traditional services), and the likely been less in rural areas, Visayas and Mindanao due to a heavy reliance of households in poorer regions on private combination of factors, which include less restrictive mobility transfers which declined substantially during the crisis. This measures and thus businesses shutdown, predominance of foreshadows that the crisis will have long-lasting effects on agriculture which was less affected by the crisis, and Filipinos’ well-being. emergency cash transfers under the Bayanihan Act. Figure 26. Actual and projected US$3.20-a-day poverty rates 45 40 35 30 25 Percent 20 15 10 5 0 2020 2022 2015 2016 2019 2012 2018 2009 2011 2021 2013 2014 2017 2008 2010 2007 2006 Photo: Ezra Acayan Source: PSA and World Bank staff estimates. 13 The poverty estimates used in this report differ from the estimates derived from the World Bank Macro-Fiscal Model (MFMOD) that appear in the Macro Poverty Outlook. The MFMOD model projects poverty based on the overall GDP growth and the income elasticity of poverty. The projections in this report are based on a macro-microsimulation model, which combines population and macroeconomic projections over 2020-2022 with pre‐crisis data from the 2018 Family Income and Expenditure Survey (FIES) to predict income at the individual and household levels. The model uses labor markets as the main transmission mechanism and allows for two types of shocks: (1) shocks to labor income, including employment shocks and earnings shocks from the pandemic, and (2) shocks to non‐labor income, including changes in private transfers and changes in social protection mechanisms (transfers from Bayanihan to Heal as One Act). PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 32 2.3 Risks and Policy Challenges A prolonged pandemic that disrupts economic activity remains a key downside risk. Firm closures, job and income losses, health insecurities, and education disruptions are likely to lead to long-term economic scarring. Moving forward, the government will need to leverage the private sector to fully implement its infrastructure agenda. Pursuing a solid fiscal consolidation plan will temper elevated financing needs and debt levels, and ultimately preserve strong macro fiscal framework. Easing regulatory restrictiveness, promoting market competition, and addressing socioeconomic and employment challenges must remain priorities as the Philippines prepares for a change in the administration in 2022. A protracted pandemic remains a downside risk. Even painful yet necessary reforms right after the election when it in countries with high vaccination rates, infections have still has political capital. In the Philippines and in many other continued to spread, albeit with greatly reduced severity of democracies, this window is typically open for 1-2 years illness, hospitalization, and mortality. Variants of concerns, only.17 Consolidating too early to protect fiscal health may breakthrough cases, and waning vaccine efficacy have quell recovery but waiting too long may close the window heightened uncertainties around the pandemic, highlighting of opportunity. This suggests that the 2022-23 period would the complexity of economic reopening. The authorities be critical for a successful implementation. As the national need to continue to accelerate their vaccination program, budget is estimated to expand by about 11.0 percent next focusing on improving the vaccine distribution system year, the fiscal consolidation is likely to start in 2023. and addressing vaccine hesitancy, in which, more than a third of the population remains vaccine hesitant. The While public debt levels have been rising, the debt profile Philippines is among the three countries with relatively remains favorable. Public debt levels have risen to support high vaccine hesitancy in the region, alongside Myanmar the pandemic response amid lower revenues. Nonetheless, and Indonesia. Barriers to vaccine acceptance pointed to the country’s public debt is mostly domestic (70.4 percent), concerns on side effects, safety, and vaccine ineffectiveness, long-term (65.1 percent), and peso-denominated (70.9 highlighting the importance of vaccine literacy and better percent). Financing risks are curtailed by a comfortable health communication strategy. The country also needs to access to domestic and international capital markets, strengthen the public healthcare capacity and keep in place and engagement with multilateral institutions. The market public health protocols such as mask-wearing and social borrowing costs of the country also remain relatively low distancing measures as precautions to the pandemic. with the EMBIG spreads at 98 basis points (bps), below the average of 150 bps for investment-grade sovereign Slower growth risks widening the fiscal deficit, resulting borrowers as of November 18. The Philippines continues in the need for more vigorous fiscal consolidation. The to enjoy investment-grade credit rating from the three government is encouraged to pursue a progressive fiscal major ratings agencies, although Fitch revised its outlook consolidation plan that protects the poor to ensure long- from stable to negative in July. Moving forward, the growth term fiscal sustainability. It must, however, carefully manage recovery and fiscal consolidation efforts will help temper the the risks and trade-offs associated with consolidation.16 elevated financing needs and rein in the debt. Employing new tax administration measures may prove to be the preferable intervention to raise revenues until Firm insolvency poses a risk to the financial system. the new administration takes over with a fresh mandate. Distressed firms are reporting acute liquidity constraints, Eliminating spending inefficiency and increasing value including having insufficient cash and falling behind on for money in public procurements will be instrumental to payments. This low level of solvency poses significant risks an expenditure strategy. Moreover, the timing of reforms to the financial system, especially as nonperforming loans requires consideration of the political cycle. The incoming and loans at risk increased and profitability ratios worsend administration has a window of opportunity to implement between H1 2020 and H1 2021. To aid the banking system, 14 Social Weather Stations, 2021. SWS September 27-30, 2021 National Survey: Willingness for vaccination rises to 64% - 35% already received at least one dose, 23% will surely, and 6% will probably, get vaccinated. Available Online: https://www.sws.org.ph/swsmain/artcldisppage/?artcsyscode=ART-20211105021650, November 5. 15 UNDP, 2021. Trend in COVID-19 Vaccine Acceptance in the Philippines and their Implication on Health Communication, August. 16 Increased taxation or public spending reduction will hold back economic activity in the short to medium-term due to the reduction in aggregate demand. However, the improved macro management will help safeguard growth in the long-term. 17 Reforms implemented at the beginning of an electoral term are likely to prove less politically costly. See G. Ciminelli et al., 2019. The Political Costs of Reforms: Fear or Reality?, IMF Staff Discussion Note SDN/19/08. Washington DC: IMF, October. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 33 the Philippines passed the FIST law, which allows special To strengthen private sector development, the authorities asset management firms to help dispose of nonperforming should prioritize structural reforms that aim to reduce assets and loans of banks and financial institutions. Banks regulatory restrictiveness and encourage market themselves have proactively raised their capital adequacy competition. Removing the restrictiveness of regulations above the regulatory threshold to buffer against the risks and can have positive effects on value added, productivity, and vulnerabilities. Still, the authorities also need to help firms export growth. Reducing regulatory restrictiveness can be by facilitating firm restructuring, exit, and debt resolution. done by: (i) eliminating restrictions on foreign investment; (ii) Simplified liquidation and small business restructuring reducing the scope of controlled prices to create the right frameworks would facilitate low-cost restructuring and incentives; and (iii) streamlining administrative procedures liquidation of micro, small, and medium-sized enterprises. to facilitate easy market entry. The approval of key reforms such as amending the Public Sector Act and Foreign The prospect of interest rate hikes in advanced economies Investment Act could attract investments in key sectors and can lead to capital market volatility in emerging markets. boost medium-term growth and job creation. The rapid recovery among advanced economies is causing demand pressure on consumer goods, which, along with To further narrow the infrastructure gap in the country, the global supply-chain bottlenecks, is leading to inflationary authorities could improve public investment management pressure. The US Federal Reserve has signaled its intention and leverage private sector participation where viable. to keep interest rates low, despite rising prices, to allow Public financing needs will remain elevated as public the job market to fully recover. However, strong and revenues slowly recover while the government continues to persistent inflation may force central banks to recalibrate address the pandemic. The limited fiscal space will compel their assessments and resort to interest rate hikes. This the authorities to improve the efficiency of public expenditure could lead to capital outflows from emerging markets and and explore different sources of financing. The government the depreciation of their local currencies, reminiscent of the should consider increasing the participation of the private 2013 ‘taper tantrum’. The capital market in the Philippines sector through public-private partnerships, in which the may turn volatile, weakening business sentiment, and country has extensive experience. The private sector is a putting investment decisions on hold. Moreover, currency source of not only finance but also expertise, innovation, and depreciations would place undue burden on firms with large solutions to the country’s development objectives. foreign currency-denominated loans. Monetary tightening Leveraging the private sector can help fill the financing gap, in advanced economies can also contribute to slowing of consistent with the country’s overall fiscal sustainability. the global economy, which can temper the country’s exports growth. Social protection programs should be timely and targeted, reaching the individuals who need them the most. They Harnessing the digitalization momentum will drive growth are important to mitigate the adverse impact of the pandemic and productivity. The pace of digitalization has accelerated on livelihoods, health, and education, especially among in the Philippines, evidenced by the increased volume of the poor. Moving swiftly to provide transfers and support digital transactions, use of online platforms, and expansion to poor and vulnerable households in the face of shocks of e-commerce. Between 2020 and 2021, the Philippines necessitates an improvement in the government’s delivery was the fastest growing digital market in Southeast Asia and implementation capacity. To this end, the successful with estimated growth of 93 percent from US$9 billion to rollout of the Philippine National ID system and use of the US$17 billion (average regional growth of 50 percent).18 Even foundational ID for social protection delivery is a step towards so, the use of digital technologies in the country has been the right direction by enabling the digital identification of uneven, with larger firms being more adept than smaller recipients and digital transformation of the delivery system. ones to use technology to improve their sales, marketing, More specifically, the Philippines must leverage the National inventory management and operations.19 Equipping all firms ID system for strengthening the country’s targeting system, with the skills and know-how to adopt new technology consolidating and systemizing beneficiaries’ information in must be pursued and complemented with openness and a unified database, harmonizing various social protection competition policies to increase the incentives for firms to programs, and facilitating financial inclusion and digital exploit such technologies. While digital infrastructure for distribution of transfers. basic technologies is often available, broadband access needs to be expanded to facilitate the use of more advanced The recovery of the labor market will be critical to protect technologies. households from the long-term scarring effects of the pandemic. In June 2021, the authorities institutionalized the 18 Google, Temasek, and Bain, 2021. “e-Conomy SEA 2021 - Roaring 20s: The SEA Digital Decade,” Available Online: https://economysea.withgoogle.com/. 19 World Bank Business Pulse Survey Round 3, May 2021. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 34 National Employment Recovery Strategy, a master plan for changes in 2022. Two key upcoming institutional changes the accelerated adoption of new technologies and the next year are: (i) the change in administration, following the restoration of the labor market in response to the pandemic. presidential elections; and (ii) the implementation of the The plan will foster quality employment through a whole-of- Mandanas ruling. On the one hand, the national elections in government approach, with a focus on implementing 2022 will usher in a new administration, which will normally livelihood and training programs, retooling and upskilling raise uncertainty regarding policy continuity. Swiftly and workers, supporting existing and emerging businesses, and decisively establishing policy direction will help to reassure providing social protection to vulnerable groups. The jobs the domestic and foreign business community. A new recovery agenda has become more critical amid the Administration would have a unique opportunity to implement pandemic, which has led to household indebtedness, the difficult reforms with a fresh mandate. On the other hand, sale of productive assets, and lost human capital. Part III of the Mandanas ruling will raise Internal Revenue Allotment the Philippines Economic Update focuses on Jobs for allocations to LGUs by around 1 percent of GDP, beginning Filipinos, Jobs for the Future, and provides an exposition of in 2022. Several national government agencies plan to re- labor challenges and opportunities in pursuing a resilient, devolve the funding and execution of programs, projects, sustainable, and inclusive development strategy. and activities to LGUs. The transition toward re-devolution, however, comes with risks related to budget execution and The authorities need to prudently manage institutional the quality of service delivery. Photo: Louise Infante PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 35 Part III Jobs for Filipinos, Jobs for the Future The COVID-19 pandemic disrupted the jobs market in the Philippines. A large number of jobs have returned as the economy rebounded, but most tend to be concentrated in the low skilled service sector. Wage employment has greatly declined, indicating weak recovery among firms and subdued confidence in hiring workers. Increases in the share of self-employment, subsistence business and agriculture could reverse progress in structural transformation and further expand informality. The impact of the pandemic on jobs is uneven, varying by sectors, occupations and tasks, and worker characteristics. This chapter reviews the impact of COVID-19 on jobs, and discusses policy measures that can help bring more and better jobs back. Amid the uncertain future of this pandemic, one area of certainty is that restoring Filipinos’ livelihoods and welfare should be a high priority. To this end, combinations of support are needed for both the demand and supply sides of the labor market. Beyond short-term recovery, policy measures should address more structural barriers to private sector- driven job creation and workers’ employability and protection. Finally, the importance of foundational human capital is highlighted for the long-term sustainability of the jobs market and the country’s competitiveness. The structure of Chapter 3 is as follows. Section 3.1 provides a brief context of the Philippine jobs market and dives into the COVID-19 impact on the economy, firms, and workers. Section 3.2 summarizes government’s pandemic response, initiatives for jobs, and programs for workers. Section 3.3 provides policy recommendations in priority areas. Photo: Jed Regala PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 36 3.1 Jobs Market and COVID-19 The Philippines has seen overall progress in the quantity contributing to steady streams of remittances to the country. and quality of jobs prior to the pandemic. Up until early 2020, the country was one of the fastest-growing The unprecedented shock of the pandemic has had economies in the East Asia and Pacific (EAP) region. With significant impacts on the Philippine jobs market. During accelerating growth, the economy has enjoyed strong job the initial period of the pandemic, strict quarantine measures growth and low unemployment. Much of the growth and resulted in the shedding of nearly 8.8 million (equivalent to job performance was associated with a steady structural 20 percent of total jobs in the economy) between January transformation. Economic activities moved from lower to and April 2020. As lockdown measures were gradually higher productivity sectors, with an increasing share of non- relaxed, the jobs market appeared to be rebounding and agricultural activities in both GDP and employment. Similarly, the levels of employment and LFPR approached their pre- labor has moved from non-wage to wage employment.20 pandemic levels. However, other labor market indicators Along with structural transformation, increases in labor showed the fragility with high under-employment of workers productivity (measured as total value added per worker) and under-capacity operations of firms. Between April have accelerated over time driven by growth in service and October 2021, the Philippines has oscillated between sector productivity. Non-agricultural wage earnings episodes of harsh mobility restrictions to curb infection explained about 60 percent of the poverty reduction surges and easing of restrictions to enable economic between 2006 to 2018 (World Bank, 2020a), suggesting activities. In November, the country may be entering a new the importance of jobs and livelihoods for Filipinos’ welfare. phase of pandemic as it witnesses declining COVID-19 cases An upward trend in outmigration was also noticeable, and increasing vaccination, which will help bring jobs back. Photo: Jed Regala 20 Labor achieved a steady transition out of agriculture, with the agricultural sector’s share of employment declining from 37% in 2000 to 23% in 2019. See World Bank (2018), World Bank (2020a), and ADB (2021). PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 37 Main channels of impact along phases of may seek earnings opportunities (i.e., added worker effect) the pandemic despite the limited availability of jobs. Those who lost jobs may leave the labor force (i.e., discouraged worker effect) COVID-19 and mobility constraints affect labor market without engaging in further job searches. The ability of outcomes through multiple channels (Figure 27). First, workers to maintain jobs is highly related to the varying the incomplete knowledge and understanding of the virus levels of exposure of employment sectors to shocks, and the fear of infection initially dampened consumer the type of occupations, and the tasks which determine and business confidence, significantly reducing private the intensity of physical contact and work-from-home consumption and investments. Second, mobility restrictions abilities. Firms’ decisions to hire or fire workers and adjust limited workplace activities, the transport of goods along hours, work arrangements, and benefits, also affect jobs the value chains, and retail and leisure travel, significantly outcomes. These are in turn affected by overall business reducing economic activities. Third, the shocks to trade confidence and investment, as well as their ability to access partners and other countries severely affected trade, capital and navigate government regulations. As seen in overseas workers deployment, and the tourism and travel some developed countries, heavy penalty in workplaces industry. for unvaccinated workers may also affect labor market attachment and employer-employee dynamics. Finally, Economic actors – firms, households and workers, and government’s actions directly affect jobs outcomes through the government – react to these shocks, with implications active labor market programs (ALMPs) such as wage on job market outcomes. While households experience subsidies and skills trainings. income losses, more workers, especially secondary earners, Figure 27. The COVID-19 pandemic has affected the labor market through multiple-interlinked channels Uncertainties & fear of Changes in infection Collapsed domestic Household: Labor employment & consumption supply decisions (e.g., income Weak consumer presence of childcare, confidence need for more income), ability to HEALTH Deteriorating business Lower private work from home, Changes in working CRISIS confidence investment physical contact conditions, wages & + intensity hours of work LOCKDOWNS/ Disrupted domestic & MOBILITY global supply chains CONSTRAINTS Changes in the Firms: Labor demand, Changed business sector and status of job creation, Increased employment operation conditions technology adoption, government investment & spending production Changes in Lower external demand, (in)formality of especially tourism Government: workers/sector GLOBAL Reduced export Assistance to workers and firms, labor RECESSION Returned OFWs & & import regulations adjustments, plummeted new International labor deployment and ALMPs migration Shocks Economy Economic Actors Impact on Jobs Source: Authors’ elaboration PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 38 These interconnected factors have interacted along Bayanihan 1 aiming to support pandemic-hit populations the three broad phases of COVID-19 that correspond to including displaced workers. Phase 2 was between Q3 the varying severity of quarantine measures, different of 2020 and Q1 of 2021, when the economy was slowly levels of compliance, and government responses (Table rebounding and jobs were coming back, in part, with the 4). Phase 1 of the pandemic covered Q1 and Q2 of 2020, help of the end-of-year seasonal effect. Better knowledge when the lockdown was most stringent and mobility was about the disease and active vaccine development and significantly limited.21 Little was known about the disease deployment22 provided cautious optimism and helped worldwide and compliance with lockdown measures improve business and consumer confidence. Small-scale was high as such measures were considered the only labor market support, through the Bayanihan 2, was initiated. option to “flatten the curve” and avoid the collapse of the Phase 3 began with another round of strict lockdown healthcare systems. During this time, many jobs were lost, measures in the NCR and the surrounding regions, with the unemployment rate skyrocketed, and the impact on the surge of COVID-19 cases in Q2 2021.23 Since then, the labor market was broad-based. Given the huge impact localized lockdowns depending on the number of new cases of the quarantines on economic activities, the Philippine were imposed, and lockdown fatigue, uncertainties and government introduced a large social protection program, inconsistencies related to community quarantines prevailed. the Social Amelioration Program (SAP), through the Table 4. The job market has evolved over time in three broad phases depending on lockdown measures, policy environment, and government programs Characteristics Phase 1 Phase 2 Phase 3 Beginning – Q2 2020 Q3 2020 – Q1 2021 Q2 2021 – Q3 2021 Lockdown measures Stringent community quarantines, Relaxed community Mixed community quarantines, high compliance quarantines lockdown fatigue Health policy environment Huge uncertainty; heavy reliance Modest confidence; need for Growing confidence; need for large on lockdowns tracing, isolating, and treating, vaccine procurement and distribu- in addition to lockdowns, tion highlighted highlighted Social assistance programs SAP 1st tranche SAP 2nd tranche (cash, large Local assistance [ayuda] including for displaced workers (cash, large scale, nationwide) scale, focusing on NCR and (cash and in-kind per LGU discretion) neighboring regions) Labor market programs Limited wage subsidies and cash Expanded cash for work, Continued programs, for work, increased demand for continuous repatriation and renewed commitment through NERS repatriation support of OFWs reintegration of OFWs; (National Economic Recovery training and livelihood Strategy) assistance External environment Global recession/uncertainty Economic rebounding/ Vaccine optimism mixed with caution vaccine optimismassis- against variants’ surge tance Source: Authors’ elaboration Photo: Jed Regala 21 This was when the growth rate plummeted (e.g., a -16.9 percent contraction from Q2 2019 to Q2 2020). 22 A global vaccine facility for COVID-19 vaccine development and deployment, COVAX, was launched in July 2020. 23 The aggregated labor market data for Phase 3 released by PSA are available up to September 2021, as of November 2021. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 39 and small firms in the business and employment landscapes COVID-19 impact on firms and labor demand in the country,25 the greater shock to smaller firms likely increased the vulnerabilities of workers significantly. The pandemic has significantly impacted firms’ operations and sales, initially due to stringent lockdowns The impacts of the crisis on firms and their pace of and later due to accumulated challenges, leading to recovery have been far from uniform across sectors massive employment disruptions. A nationwide firm (Figure 30). By May 2021, the operation rate (i.e., the share survey showed less than 5 percent of firms reportedly of firms operating in full or less than full capacity) in most stayed open at full capacity whereas over 66 percent of industries bounced back to an average of 71 percent from firms were temporarily closed in April 2020 (Figure 28).24 29 percent in April 2020. The Construction and Tourism An increasing share of firms resumed operations over time, sectors were hit the hardest with less than 20 percent firms albeit at below full capacity. Employment fell sharply as firms’ staying open in April 2020, followed by Arts, Entertainment, common coping mechanisms include laying off employees, and Recreation and Education. As of May 2021, Arts, reducing working hours, changing work arrangements (e.g., Entertainment, and Recreation and Tourism still continue to allowing workers to work from home), and lowering wages struggle. Across regions, business disruptions were more and benefits. The employment shock was significantly larger prevalent in areas where more stringent lockdown measures among micro and small firms compared with larger firms were imposed such as NCR, Region 4A, and surrounding (Figure 29). Micro and small firms were also more likely regions, and in areas that were more reliant on hard-hit to report inputs and liquidity shortages and heightened industries (e.g., tourism and accommodation in Cebu). competition during the crisis, thereby affecting their ability to maintain and create jobs. Given the dominance of micro Figure 28. Firms’ operation has been rebounding but the Figure 29. The percentage change in number of workers majority is operational at below full capacity relative to pre-pandemic level is the largest among micro firms Share of firms reporting their operation status to be… Percentage change in number of workers by firm size Micro Small Med/Large 70 66 (0-4) (5-19) (20+) 0 Percentage change (%) in number of employees 60 60 54 -5 50 Share of firms (%) -10 40 40 40 -15 29 30 30 22 -20 -18 20 16 -21 -25 9 9 9 10 7 4 5 1 -30 -29 0 -31 -32 Open with full Open with Temporaril y Permanently -35 capacity limited capacity closed closed -40 -38 April 2020 July 2020 December 2020 May 2021 Dec-20 May-21 Source: DOF-ADB firms survey for April 2020 and WB Business Pulse Survey Source: World Bank (2021) and WB Business Pulse Survey. for the remaining three periods. Photo: Jed Regala 24 According to a nationwide survey conducted by the Department of Finance, (DOF), in collaboration with Asian Development Bank (ADB). 25 The 2020 List of Establishments of PSA reports that out of nearly one million enterprises operating in the Philippines, micro, small, and medium enterprises (MSMEs) accounted for 99%, with microenterprises (those having fewer than 10 employees) accounting for 89% and small businesses (10-99 employees) accounting for approximately 10%. Micro and small enterprises account for approximately 55% of the employed whereas medium and large enterprises employ approximately 45% of workers. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 40 Figure 30. Share of firms (%) reporting to be open and operating increased from April 2020 to May 2021, but the pace of operational recovery varies largely by sector Share of firms reporting to be open and operating from April 2020 to May 2021 95 91 81 83 75 75 77 77 77 75 72 % of firms 70 66 70 55 56 56 49 44 35 38 29 30 33 26 28 19 23 23 15 16 g n rs g s l n es th s n ** e* ai ie tie tio in io rin io he es al et ag ic lit in at ct vi ea tu He r ic rv ot i m or t ru c t i d v ac U ct se u cr d r an st g, Ed se la ns uf re an g in d ia le an Co in d an d sh O nc sa oo as an M ,fi BP n na le le ;F tio t, re ho en Fi T: nd ism ta tu IC W m or la ul ur in sp ric ta To ta an en Ag er Tr ,r nt te ,e ta ts es Ar al Re Source: DOF-ADB firms survey for April 2020 and WB Business Pulse Survey for May 2021. Note: *Transportation includes transportation and storage and repair of motor-vehicles and motor-cycles; ** Tourism includes tourism and accommodation and food services Figure 31. While level of technology use varies by sector, a significant share of firms reported intensifying their technology use, highlighting the increasing demand for digital skills ICT: BPO and others Education Arts, entertainment, and recreation Financial activi ties Real estate, rental and leasing services Construction Tourism and accomodation Manufacturing Utilities Food services Transportation and storage Health Other servi ces Wholesale and retail Repair of motor vehicles and motorcycle Agriculture, fishing, mining 0 10 20 30 40 50 60 70 80 90 100 Percent Technology - nascent Technology- intensified Technology - maintaining No technology Source: World Bank staff’s calculation based on WB Business Pulse Survey, May 2021. Amid the overall shocks and labor adjustments, a technology. The education sector, which was already using significant share of firms has adopted or intensified the quite a bit of technology, had to expand even further given use of digital technologies.26 As of May 2021, over 70 the switch to distant learning and online education during percent of firms report using digital technology although the pandemic. Even sectors that have been traditionally the patterns of technology adoption and use vary greatly weak in technology adoption and heavy on labor use, by sector (Figure 31). Information, Communication, and such as agriculture, retail, or repair, report having started Technology (ICT) is by far the largest user of technology to use the technology. This suggests that the demand for with the majority already using and intensifying digital digital skills among the work force will be broad-based. 26 Widely used digital technologies include customer-facing digital transactions, such as online sales or payment solutions; social media and data analytics for marketing; software for enterprise customer relationship management (CRM) or supplier relationship management (SRM); software for Enterprise Resource Planning (ERP); and more advanced digital tools such as A/B testing (World Bank 2021b). In addition to these, cloud technology adoption for storage of data and virtual collaboration, and sales force automation, has been increasingly utilized. For instance, according to BSP data, transactions through PesoNet for digital payments between businesses and partners or customers have increased over four times from Q1 2020 to Q1 2021. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 41 COVID-19 impact on workers and labor supply The COVID-19 crisis has likely reversed labor market progress made over time, with respect to structural The primary impact of the pandemic on labor is job transformation. While all employment types suffered loss at large scale (Figure 32). The number of jobs in from shocks, wage employment was particularly hard-hit, the labor market was about 41.7 million in July 2021, which shedding over six million jobs – almost 20 percent of total recovered from 33.8 million in April 2020 and was close employment – during Phase 1 (Figure 33). This is in line with to that of January 2020 (42.5 million). The cumulative many firms’ report of suspension of operations and count of actual number of jobs, however, underestimates downsizing. As the economy rebounds, many jobs have the total foregone employment. Without the pandemic, if returned, but wage employment has not fully recovered. the Philippine economy were able add jobs at a 4 percent Instead, an increase in the self-employed without any paid growth rate - the rate it had over the period of January employees—likely subsistence business activities—was 2019 to January 2020, about 46 million individuals would observed. Similarly, the services sector bore the brunt of the have been employed in the labor market by July 2021. shock during the initial phase, losing 5.6 million jobs and This indicates that the total number of forgone jobs lost explaining 64 percent of the total job loss, far surpassing the due to the pandemic is estimated at around 4.3 million as sector’s share of employment in January 2020 at 59 percent of July 2021, equivalent to almost 10 percent of the total (Figure 34). Job loss in industry was also large at over 2.2 employed. Despite positive growth outlooks, recovering million.24 For the rest of the phases, most lost jobs were the number of jobs to the level predicted by the pre- recovered and agriculture added even more than what was pandemic trend would be challenging in the short term.27 lost, indicating an increase in the agriculture share in employment. Figure 32. The number of actual jobs falls short of what the market could have created without the pandemic Number of employment 50 Phase 1 Phase 2 Phase 3 Million 45 40 35 30 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 Actual numbe r of jobs Projected number of jobs (without the pandemic) Source: World Bank staff’s calculation based on LFS various years. Photo: Rey Borlaza 27 If the economy maintains the current jobs elasticity with respect to growth, the number of jobs in 2022 would still be below what was projected without the pandemic despite improving growth prospects. 28 The sector includes activities of live performances, operation of museums sites, sports, gambling and recreation. With closure of museums, sports events, theaters, amusement parks, and others that are not deemed essential, the sector was hit hard by the pandemic. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 42 Figure 33. Wage employment experienced a massive job loss in Figure 34. Services also suffered a large scale job loss, the initial phase and the subsequent rebound fell short and share of agriculture in employment increased Number of jobs lost or added by type of employment Number of jobs lost or added by sector of employment 6,000 5,500 4,000 3,500 Number of jobs (thousand) Number of jobs (thousand) 2,000 1,500 0 (500) (2,500) (2,000) (4,500) (4,000) (6,500) (6,000) Wage and salary Self-employed Employer Unpaid family workers worker Agricul ture Industry Services Jan-Apr 2020 Apr 2020 - Apr 2021 Jan-Apr 2020 Apr 2020 - Apr 2021 April - Sep 2021 Total (Jan 2020 - Sep 2021) April - Sep 2021 Total (Jan 2020 - Sep 2021) Source: LFS aggregate data from Jan 2020 to Sep 2021 Source: LFS aggregate data from Jan 2020 to Sep 2021 Employment shock was felt differently by economic number of workers in the sector exceeded that of the activities (Figure 35). The Arts, Recreation and pre-pandemic level by 11 percent. Entertainment sector29 lost almost half of its jobs by April 2020, followed by Accommodation and Food Services, Low-skilled occupations and workers in low productivity which lost 40 percent of its jobs. The struggles of these two sectors increased, indicating an overall deterioration of sectors continued while all other sectors showed a rebound job quality. Number of skilled professions, including in July 2020, and their employment still remain far below managers and professionals, declined whereas number of pre-pandemic levels. Likewise, Transportation and Storage’s elementary occupations increased (Figure 36). Managerial employment has remained at far below pre-pandemic level. and professional jobs were not added much during Meanwhile, employment in the primary sectors, such as economic rebounding of Phase 2, and were further lost in Agriculture and Mining, spiked in July 2020, indicating that Phase 3. Displaced workers were primarily absorbed by the they absorbed displaced workers. The ICT sector Agriculture and Wholesale and Retail Trade sectors, both of experienced a large employment loss initially, but which are characterized by lower labor productivity and a demonstrated a strong return during the period between large share of employment (Figure 37). Meanwhile, October 2020 and January 2021, far surpassing the pre- employment in high productivity sectors including real pandemic level of employment. This is likely due to the estate, finance, and information and communication gradual recovery of the global economy and strong IT-BPM remained flat. The reallocation of labor to less productive as well as increased demand for information technology sectors and the lack of jobs growth in more productive services with firms’ increased adoption of digital industries also point to a slowdown in the structural technologies. The large labor absorbing construction sector transformation of the labor market. experienced a steady recovery and by July 2021, the Photo: Jed Regala 29 The sector includes activities of live performances, operation of museums sites, sports, gambling and recreation. With closure of museums, sports events, theaters, amusement parks, and others that are not deemed essential, the sector was hit hard by the pandemic. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 43 Figure 35. Employment levels of a few sectors experience more dramatic changes during the pandemic compared with the level in January 2020. 40 Level of employment (Jan 2020=0) 20 22 . 11 7 0 Percent -20 -19 -30 -40 -60 -80 Jan 2020 Apr 2020 Jul 2020 Oct 2020 Jan 2021 Apr 2021 Jul 2021 Agriculture and forestry* Mining and quarrying Construction* Accommodation and food service activities* Information and communication Arts, Entertainment and recreation Source: LFS quarterly aggregate data from January 2020 to July 2021. Note: * indicates large sectors with more than 2 million workers. Figure 36. Elementary jobs have increased while Figure 37. Employment share of labor-absorbing, low- managers and professionals lost employment productivity sectors further increased Number of jobs lost or added by occupation 1.5 3,000 Real estate Log(sector productivity/average productivity) 2,000 1 Utilities Number of jobs (thousand) Finance 1,000 Information and communication Manufacturing 0.5 0 Mining Business services (1,000) 0 Health Government Wholesale and Education retail trade services (2,000) -0.5 Construction Agriculture (3,000) Transport Man Pro Te Cle Se Sk Cr Pla Ele Other services a gers f essio c hnicia rical s rv ice a illed ag aft and nt and menta nals ns a uppo nd s r r m ry nd a rt ales ic ult ura elated ac hin occup Hospitality ss o l, fo tr e op a ciat res tr ades erat tions e pr y , an ors -1 of es d fis sion hery als -3 -2 -1 0 1 2 3 4 Jan-Apr 2020 Apr 2020 - Apr 2021 Change in employment share (percentage points) April - Sep 2021 Total (Jan 2020 - Sep 2021) Source: LFS aggregate data from Jan 2020 to Sep 2021 Source: LFS aggregate data from 2019 – H1 2021 Note: The size of the bubble indicates the sector’s employment share. Photo: Jed Regala PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 44 The crisis also created additional pressure on the affected due to the high shares of women among OFWs.32 domestic job market through the disruptions on international labor migration. Large-scale overseas The COVID-19 impact on workers has been heterogeneous employment has provided important work opportunities by worker characteristics.33 Women, urban, and young for considerable share of the labor force,30 providing workers tend to be affected more by the pandemic (Figure substantial flows of remittances to the economy. Yet 39). After the initial shock, some workers recovered due to the impact of the pandemic, the outflow of OFWs relatively well while others experienced lingering negative plummeted to about half a million workers, a 75 percent impacts. In particular, young workers seem to be suffering drop from 2.2 million in the preceding year and the lowest the larger effects and their struggle continues. The rebound level since 1991 (Figure 38).31 Over 0.6 million OFWs have of employment in July 2020 was driven mostly by rural and been repatriated by March 2021 due to international border unskilled workers, likely due to significant increases in closure, health concerns, and employment disruption in Agriculture and Mining in this period, but their employment host countries. A survey by the International Organization displayed a sharper decline than their urban and skilled of Migration reports that the majority of OFWs (83 percent) counterparts in October 2020. Workers were further were unemployed three months after returning to the affected by the regional variations of the pandemic’s labor Philippines (IOM, 2021). The smaller number of Filipinos market impact: NCR, Region 1 (Ilocos), and Region 4A finding job overseas, combined with the weak reintegration (CALABARZON) all showed double-digit unemployment of returned migrant workers, has put upward pressure rates in October 2020. on unemployment, with female workers more severely Figure 38. Annual outflow of OFWs plummeted due to the pandemic across all types of migration, and this is likely further pressuring the domestic labor market. 2.5 14 Remittances as a share of GDP (%) 12 Number of outmigrants (million) 2.0 10 1.5 8 1.0 6 4 0.5 2 0.0 0 2003 2020 2000 2 001 2009 2015 2016 2005 2006 2012 2002 2008 2 018 201 9 199 8 2004 2007 2014 2010 2013 1990 1995 1996 1999 1992 1997 201 1 199 1 1993 1994 2017 Land Based (New) Land Based (Rehires) Seabased Share of GDP (%, Right Axis) Source: The Philippine Overseas Employment Authority (POEA). Photo: Sleeping cat 30 About 12 percent of households in the Philippines reported to have at least one member who was or has been an Overseas Filipino Worker in 2018. The stock of OFWs abroad has been estimated at around 2.2 million since 2011, with some fluctuations and a peak of 2.5 million in 2015. Source: PSA, National Migration Survey, 2018. 31 Contrary to predictions of a steep fall and negative implication on consumption and foreign exchange earnings, disruptions to labor mobility, however, did not translate into the same extent of decrease in remittances, at least in the short term. Aggregate remittances fell by only 0.8 percent y-o-y from US$ 33.5 billion to US$ 33.2 billion (BSP, 2021c). 32 The share of female OFWs among new hires has been between 67 to 76 percent of total workers. This is largely a reflection of the high demand for Filipinos in the care sector (e.g., household service workers) as well as in entertainment and in the nursing sector. 33 LFS microdata for the analysis is available up to October 2020. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 45 Figure 39. Employment to population ratios by different groups, normalized to 1 in January 2020, show greater shocks for women, urban, and young workers. A. Employment to Population Ratio by Gender B. Employment to Population Ratio by Locality (Urban/Rural) 1.050 1.050 1.000 1.000 0.950 0.950 0.900 0.900 0.850 0.850 0.800 0.800 0.750 0.750 0.700 0.700 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Male Female Rural Urban C. Employment to Population Ratio by Age Group D. Employment to Population Ratio by Education Group (Youth/Adults) (Below/Above high school) 1.050 1.050 1.000 1.000 0.950 0.950 0.900 0.850 0.900 0.800 0.850 0.750 0.800 0.700 0.750 0.650 0.600 0.700 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 15-24 Over 25 Below high school Above high school Source: LFS microdata January to October 2020 The ability to work from home (i.e., flexibility of a job) Similar to the findings in the U.S., flexible jobs showed matters in maintaining jobs in the context of COVID-19. greater survival rates relative to inflexible jobs. Yet the International evidence shows that flexible jobs that can be gap between flexible and inflexible jobs in the Philippine done at home were resistant during the pandemic, but that labor market was not as prominent as in the U.S., in part inflexible jobs that require physical presence or contact were due to agricultural employment in rural areas, which are hit hard. This has led to varying labor market performance mostly inflexible jobs and served as an additional cushion across different groups of workers, depending partly on for Filipino workers by allowing them to keep working. their access to flexible jobs. For instance, Albanesi and Kim (2021) showed that the disproportionately negative impact The analysis of flexible jobs also revealed a few additional of the pandemic on female workers in the United States dimensions of labor market vulnerability. First, having (U.S.) was explained in large part by their low presence in flexible jobs may not necessarily mean that workers can flexible jobs. In the Philippines, our analysis suggests that work from home in the Philippines. In December 2020, about 30 percent of jobs in January 2020 was classified only about 7 percent of firms reported the capacity to have as flexible jobs that could be carried out from home.34 the majority of their employees work remotely without 34 A job is assumed to be inflexible and should be carried out in person if it involves any of the following: repairing/maintaining electronic equipment, operating heavy machinery or industrial equipment, reporting that the job is physically demanding, reporting that contact with customers is very important, or not using e-mail at work. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 46 major issues (WB BPS).35 Apart from the nature of jobs not Bank, 2021c). Second, the youth group was far less likely suitable to home-based work, lack of equipment and reliable to work in flexible jobs, which contributed to increases in internet access at home are major barriers for workers to the youth-adult employment gap during the pandemic. perform their jobs remotely, indicating the digital divide Third, women were relatively better shielded with their high has an implication on labor market resilience (Figure 40). presence in flexible jobs, but childcare responsibilities, Despite the increasing digital technology adoption and use especially in the context of extended school closures, for business, only a small share of firms reported using the appeared to offset the ability to work even in flexible jobs. technology to facilitate flexible work arrangements (World Figure 40 . Firms report that many workers were unable to work from home for various reasons. Nature of work unsuitable to home-based work Lack of equipment needed for employees to work from home Unreliable/expensive internet connection in empl oyee's homes Employee's competing caregiving/family responsibilities Infrastructure of employees' home inadequate for home-based work 0 20 40 60 Percent of firms Source: World Bank Business Pulse Survey, December 2020 Photo: Junpinzon 35 The share was highest in ICT (23 percent), Tourism and Accommodation (14.6 percent), Utilities (15.6 percent) and Education (12.9 percent). PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 47 Implications on structural challenges Given the magnitude of the shock, firms may have Labor productivity is already showing stagnation in the focused on surviving rather investing in innovations and Philippines, deviating from the pre-pandemic trend of enhancing productivity. For instance, the adoption of digital robust growth. The Philippines has achieved accelerated technologies has been focused on customer facing activities progress in productivity gains. When measured as value to sustain the demand for products and services, rather than added per worker, the annual productivity growth rate bringing in digital transformation of firms’ internal operations increased from 2.15 percent (2000-2009) to 5.71 percent for better productivity and efficiency (e.g., business process (2010-2019). About half of this growth is explained by within the firm, market analysis). Firms’ technology adoption productivity growth in the service sector, followed by and productivity growth may not necessarily help create jobs productivity growth in industry and labor shifts out of in the short run as automation and efficiency likely dampens agriculture. In contrast, over the year between Q1 2020 labor demand initially. However, when firms’ productivity gain and Q1 2021, productivity growth was close to zero with leads to greater competitiveness, larger market shares and none of the three broad sectors experiencing productivity more active operations, it can create more jobs. growth. The pandemic also highlighted the disproportionate share The country’s future productivity is also of concern of employment among low productivity sectors. due to the loss of children’s health and nutrition and Businesses in the Agriculture and Wholesale and Retail education. Early childhood development and education, Trade sectors were able to add jobs easily, many of which and subsequent schooling, have a determining impact are likely informal and low costs to employers. Unskilled on an individual’s productivity and earnings in the labor workers without safety nets and in urgent needs for market and the country’s competitiveness. Even without additional incomes, sought immediate work opportunities in the pandemic, a large share of children was already these sectors. Workers likely have moved between the two suffering from undernutrition (Capanzano: 2019),37 and depending on relative lockdown measures in rural and urban the country’s rate of stunting was considered high for its areas, using these sectors as safety nets in times of crisis. level of income.38 Given the prevalence of food insecurity aggravated by the pandemic, unless immediate action is Disruptions in employment will likely have long-term taken, millions of Filipino children will face the increased impacts on labor productivity, earnings, and other labor risk of undernutrition and likely suffer the consequences of market outcomes. Previous crises such as the Asian financial poor school performance and low adult productivity even crisis in 1997 or the Great Recession in 2008 suggest that the if they survive these deficits. Further, the learning losses youth transitioning from school to the labor market during due to school closures and distance learning will have crisis periods suffer long-term scarring and lower lifetime significant consequences unless urgently addressed. Prior earnings.36 The pandemic has been particularly acute for to the pandemic, despite progress in school attendance young people much more than previous crises. Not only have and increased years of schooling, particularly through many young people experienced prolonged distance learning the K-12 reform,39 as well as the initiation of alternative without in-person classes, those looking for jobs also face learning programs for dropouts, the quality of education bleak employment prospects and high unemployment rates. was a serious concern.40 With several months of school Young workers are far more likely to be in inflexible jobs than closures and no face-to-face classes throughout the 2020- their older counterparts, significantly exposed to the 21 school year to date, the overall learning outcomes likely pandemic shock. Many young people who became worsened while disparities among students widened. A unemployed may have accepted low-paying jobs, driven by series of nationwide surveys consistently show uneven the search for earnings opportunities, that they would not access to internet and gadgets as well as divergences in have otherwise accepted under normal circumstances or for the ability of parents and caretakers to assist children with which they are over-qualified. Such scarring begins with labor learning and offline study, the ability of students to focus on market outcomes, but has a wide range of implications on distance learning, and local schools and teachers’ delivery overall wellbeing such as on earnings, marriage, fertility, and of modules, teaching, and information (Cho, et al.: 2021a). asset-building (Choi et al: 2020). 36 See Cockx and Ghirelli (2016); Genda, Kondo, and Ohta (2010); Hoynes, Miller, and Schaller (2012); Kahn (2010); and Oreopoulos, von Wachter, and Heisz (2012). 37 Stunting reflects chronic undernutrition, a consequence of a cumulative process that starts in pregnancy and continues in infancy and early childhood as repeated experiences of illness (such as diarrhea, malaria, or acute respiratory infection), combined with insufficient dietary intake, cause a child’s growth to falter. It is measured by height-for-age. Children whose height-for-age is more than two standard deviations below the median of the reference population are considered short for their age and are classified as moderately or severely stunted. About 30 percent of children under five years of age were estimated to be stunted in the Philippines. 38 The average under five stunting rate is about 20 percent for countries at similar levels of income. The Philippines ranks the fifth among countries in the East Asia and Pacific region with the highest stunting prevalence and among the 10 countries globally with the highest number of stunted children. 39 See World Bank (2021c). 40 Multiple standardized tests, such as Program for International Student’s Assessment (PISA), have shown that Filipino students were unable to manifest grade- appropriate level of competency in key subjects. See OECD country note for PISA: https://www.oecd.org/pisa/publications/PISA2018_CN_PHL.pdf PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 48 3.2 Government’s Labor Market Response to COVID-19 The government took various measures starting from SAP transfers, of which about 10 million received both.43 large scale social protection intended to help displaced Nationwide surveys consistently show that a large share of workers. Under Bayanihan 1, the eligibility criteria of household heads from low income households returned the large-scale cash assistance through SAP include to labor market activities rapidly and were able to receive unemployed and informal sector workers.41 In addition, government assistance.44 Nonetheless, their incomes were to prevent mass layoffs of workers in the early months of not fully recovered, and they report being concerned about the COVID-19 outbreak, the government launched two food security and their financial situation. This is in part major wage subsidy programs i.e., COVID-19 Adjustment because they turn to low pay jobs with reduced working Measures Program (CAMP) and the Small Business Wage hours in the labor market. Subsidy (SBWS).42 For CAMP, the Department of Labor and Employment (DOLE) provided a one-time financial assistance The Bayanihan 2 introduced more specific labor market of Php 5,000 (US$100) to about 1.5 million workers in the measures addressing challenges in both demand and formal sector. On the other hand, the SBWS provided Php supply sides, but the budget allocation was not as 5,000 - 8,000 (US$100 to 160) twice for workers in small extensive as the first one.45 The DOLE expanded its cash businesses affected by lockdown measures. The amount for work program, coined as TUPAD,46 that has helped more of subsidies for these programs were all set at the similar than 1.27 million informal sector workers. Initially limited to 10 level based on an average household subsistence level days of work involving disinfection and sanitation of houses income and level of regional minimum wages per month. For and the community, the program recruited beneficiaries, repatriated OFWs, another one-off cash assistance of Php and trained and contracted them as contact tracers for a 10,000 (US$200) was provided. longer work period i.e., three months or 90 days. Given that many firms suffer from credit constraints, Bayanihan Despite these interventions, the daunting needs for 2 included measures to provide capital with concessional earnings opportunities remain, given the sheer magnitude rates, especially to MSMEs, through Small Business of the shock and the prolonged period of the pandemic. Corporation (SBCorp), the Land Bank of the Philippines Records suggest that about 23 million household (or family) (LBP), Development Bank of the Philippines (DBP) and representatives received either first or second tranches of PhilGuarantee. Photo: Jed Regala 41 SAP is the largest social protection measure in the country’s history, with a target of covering 18 million households through two tranches of transfers ranging from Php 5,000-8,000 (US$100 to 160), with a budget equivalent to 2 percent of GDP. 42 Under the guidelines for the SBWS measure, small businesses are sole proprietorships, corporations, or partnerships not under the jurisdiction of the Bureau of Internal Revenue (BIR) Large Taxpayers Service. The SBWS a joint undertaking of the Department of Finance (DOF), Social Security System (SSS), and the BIR. 43 With the confusion between households (PSA’s unit of measuring poverty) and families (conventional unit for the public), and the lack of an updated social registry, SAP was split into two tranches with an adjustment of the pool of eligible beneficiaries. See Cho et al. (2021b) for more detailed discussion. 44 These include the World Bank’s High Frequency Monitoring Household Survey conducted in August and December 2020, and May 2021 and Household Panel and Economic Survey conducted in April, June, August, and October 2020, and PSA’s Annual Poverty Indicator Survey in 2020. 45 Based on the Department of Budget and Management (DBM) data on COVID-19 releases as of September 30, 2021, Bayanihan 1 had more than Php 387 billion total budget allocation to implement the law while for Bayanihan 2 about Php 214 billion was allocated. 46 Tulong Panghanapbuhay sa Ating Disadvantaged/Displaced Workers (TUPAD). PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 49 In an effort to promote private sector led economic To strengthen labor market programs and promote job recovery, reforms through new legislation or creation, the government has institutionalized implementation of existing initiatives were expedited, the National Employment Recovery Strategy (NERS). With the impact of which has yet to be seen. For instance, the the issuance of Executive Order 140 on June 25, 2021, a CREATE law (Republic Act No. 11534) was enacted on March 20-member agency NERS Task Force led by the Department 26, 2021. It includes provisions for reduced corporate taxes of Trade and Industry (DTI), the DOLE, and the Technical and larger deductions for labor and other expenses of firms. Education and Skills Development Authority (TESDA), was Also, efforts to improve the business environment were tasked to implement an employment recovery strategy evident. Mandated under the Ease of Doing Business and from 2021 to 2022. The NERS aims to serve as a master Efficient Government Service Delivery Act of 2018 (herein plan to restore the country’s labor market from the impact EODB law), all LGUs were required to have a Business One of the pandemic and to accelerate the adoption of new Stop Shop (BOSS) window in their office, beginning in April technologies. Pursuing a whole-of-government approach, the 2021. The BOSS window is designed to simplify processes NERS focuses on livelihood and training programs, reskilling for various permits and licenses, and facilitate the use of and upskilling of workers, support for existing and emerging standardized forms across different departments. businesses, and social protection for vulnerable groups. Photo by: Jed Regala PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 50 3.3 Jobs Policy Priorities in the Philippines This section summarizes the key policy agenda on both scale-up for skills enhancement and support for workers is the labor demand and supply sides (Figure 41). The needed. In the medium term, the Philippines will need to immediate policy areas for jobs are “recovery” from the identify and foster strategic and “transformative” sources pandemic and “activation” of workers to bringing economic of competitiveness for growth and quality jobs creation. activities and workers back. Government’s interventions At the same time, worker protection measures should should aim at achieving greater impacts within the limited be strengthened for “resilience” in the changing world of fiscal space by strengthening the design and better work. Finally, the country’s human capital needs urgent targeting, and by leveraging digital tools and promoting intervention to ensure a healthy and competent future economy-wide digitalization. Social protection policies can workforce for the country’s future and for the “sustainability” strengthen the workfare beyond cash transfers, and a bold of development. Figure 41. Government should prioritize making a business environment conducive for job creation, and building capacities of workers and linking them to jobs. Jobs creating private sector Productive workers and Government entrepreneurs Demand side: Supply side: Ensuring an enabling environment for job creation and Building capabilities of workers, connecting workers helping businesses to be connected to the markets to jobs, and providing workers protection Short-term • Recovery • Activation Supporting firms to gain confidence and resume operations, Supporting workers to gain access to targeted active labor maintain or hire workers; promote entrepreneurship and market programs business start; create temporary opportunities at scale Medium-term • Transformation • Resilience Promoting innovations and digital transformation of Enhancing workers skills (technical, cognitive, and non- firms; providing incentives to engage in activities with cognitive) for the evolving market environment; revisiting positive externalities such as green jobs; supporting labor regulations; and strengthening social protection the explorations and identifications of the new markets especially in global value chains and international migration Long-term • Sustainability Promoting a strong early start (early childhood health and nutrition), restoring the lost learning due to the pandemic, and ensuring inclusion of the vulnerable populations in human capital investment opportunities PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 51 RECOVERY: Economic and jobs policies and matching rules between firms and government, for the “Live and work with COVID” era duration of the program, and payment mechanisms, among others. In addition, by providing extra incentives Shift policy narratives and focus from the pandemic for firms paying wages through digital channels, wage response to smart reopening subsidies can also encourage firms’ digitalization efforts. Despite many uncertainties, an increasing number of Starting a business and entrepreneurial activity should countries are preparing for the COVID endemic scenario be made easier by leveraging digital tools. The launch after achieving a certain level of inoculation—mainly to of business one stop shops (supported by the EODB bring the economy and jobs back. No consensus exists if law) is encouraging. Such one stop shops started with a and when the world will see the end of COVID-19, with the consolidated window at the local office, but can greatly emergence of new variants and varying vaccination rates by benefit from an accelerated shift to digital platforms. They population groups and across countries. Previous pandemics, can further enable customized regulations, procedures, and however, suggest that as herd immunity is building up support according to firms’ needs and characteristics. For through large-scale inoculation or infection, the virus’ threat instance, business registration processes for individuals would become less serious. In such a case, even if the for entrepreneurial activities, online firms, and micro and number of cases increases, reduced hospitalization or death small businesses are certainly different from those for rates can encourage a cautious shift to a period of living with larger bricks-and-mortar firms internationally trading firms the virus as an endemic. likely have different requirements from domestic firms; and types of licenses and permits also vary by business In the Philippines, a more active diversification of policies sector and activity. Moreover, such a digital platform and narratives for the “Live and work with COVID” era is can also lead to better awareness and information of needed, which can help job creation. Shifting policy relevant programs, such as credit guarantees, wage priorities or mindsets regarding COVID will not be easy. subsidies, and skills development opportunities. However, as the vaccination rate increases, policy options should be considered to bring back normal activities Support for taxes and subsidies, and access to credits, notwithstanding increases in cases. This does not mean especially for MSMEs, should continue with active abandoning precautionary efforts, but implementing policies outreach efforts and customized information services. and taking calculated risks for the transition to reopening – Government initiatives such as rationalized taxes, subsidies, reopening of schools, economic activities, and borders. This and various deductions (supported by the CREATE) and should be of course accompanied by vaccination efforts access to credit programs (supported by Bayanihan 2) have including through booster shots and fight against vaccine the potential to promote business activities and labor hesitancy. demand. Unfortunately, not many firms were aware of these opportunities. The WB BPS in May 2021 suggests that over Clear and consistent guidelines to enable the return to 35 percent of responding firms reported being unable to operations can also help businesses resume their access government support, mainly due to lack of activities at full capacity. Cash-strapped firms would not be knowledge of such programs, and the barriers were greater able to hire or bring back their workers in the face of risks of for MSMEs. The public entities implementing these initiatives potential future closures or lockdowns. In order to give (e.g., BIR, SBcorp, LBP, DBP, PhilGuarantee) should develop confidence and assurance, standardized reopening protocols consolidated guidelines for available support and referral should be in place, such as workplace safety measures, firms’ systems, and engage business associations for better testing and tracing responsibilities and provision of flexible dissemination of information. Further, active support for work arrangements, employees’ vaccination and testing MSMEs such as digital skills extension services (as in rules, and contingency plans (in case of surges), especially for agriculture extension services) can be designed and labor intensive sectors. customized for their productivity gain and adoption of more sophisticated digital technologies. Boost labor demand through more targeted support for firms Design public works (public services) to create short term employment opportunities Wage subsidies should be strengthened and can be targeted at young workers. Currently, wage subsidies (e.g., Public works is a widely used policy instrument especially CAMP or SBWS) are designed in a way that one or two lump during the crisis to provide temporary work opportunities. sum, fixed amount subsidies are paid to firms regardless of Due to the mobility constraints during the pandemic, worker characteristics. In contrast, many other countries use however, efforts for public works in traditional projects (e.g., wage subsidies to increase labor demand for disadvantaged road repair) have been limited. As the economic activities workers (e.g., youth, minimum wage earners) by providing and workers return, large scale public works (or public a share of wages for a longer period. The existing wage services) can be designed, building on the current cash-for- subsidies can enhance the design by incorporating work initiatives. For instance, TUPAD can target unemployed clear eligibility criteria of workers and firms, cost sharing youth for public digital services such as encoding for vaccine PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 52 standardizing travel passes, and digitizing testing and agreement. In this context, TESDA’s enterprise-based contact tracing records. Such public services can be program (e.g., apprenticeship, learnership, and dual training combined with short-term training on basic digital skills. systems) can be expanded to the ICT sector, and further Public works’ menu of projects should also be expanded to enhanced and strengthened in both quantity and quality. include activities to manage the pandemic situation such as sanitization of public spaces and safely disposing health Establishing clear guidelines for overall qualifications and sector wastes. accreditation for digital skills would be important. The Republic of Korea, for instance, which recognizes digital skills ACTIVATION: Skills and employability of and jobs as a critical engine of job creation and growth, has a workers series of frameworks, policies, and guidelines dedicated to digital competency and skills development. It recognizes that Scale up skills development targeted for youth digital competency is not just about technology, but also about digital knowledge, skills, and attitudes. The Korean Targeted support for digital and ICT education and Digital Competency Quotient (KDQ), an index that measures training, particularly for young workers, should be digital competency, encompasses three dimensions: skills, further strengthened. The importance of digital skills usage, and mindset.50 The focus of digital skills training has through higher education and Technical and Vocational evolved from basic computer use to software training, and Education and Training (TVET) has been well recognized now to a variety of advanced technologies.51 Different levels even prior to the pandemic.47 Both Commission on Higher of digital skills are clearly mapped by the National Education (CHED) and TESDA strengthened their ICT Competency Standards, and major IT platforms and education and training even before the pandemic given the companies offer assistance either to designing or directly changing nature of work driven by the industrial revolution providing digital skills training for various occupations. The 4.0.48 Now the pandemic is catalyzing the digitalization of inaugural review of the Philippine Qualification Framework economic activities and there is an opportunity to scale up (PQF)52 suggests that digital competency has to be further digital skills training (World Bank, 2020c). This could strengthened in the framework and accreditation for labor provide a great solution to young workers who are mobility within and beyond borders. experiencing an increasing gap in the labor market. During the pandemic, TESDA’s online program offering 60 courses TRANSFORMATION: Support longer term job including digital skills training catered to around 1.5 million creation policies enrollees.49 Given the flexibility in such training, TESDA can further expand its reach and scale up its operations and Incentivize the creation of green jobs provide more tasks specific training while closely monitoring and tracing the labor market performance of Identifying new sources of productive job creation in the graduates. long-term and policy interventions in those areas is needed, and the green jobs agenda is a promising area Beyond traditional education and training institutions with positive externalities. The implementation of the and courses, the involvement of the private sector Green Jobs Act 53 can create jobs in a range of industries in the development of digital competency should be that produce goods and render services that would be promoted. The private sector’s co-development (of the good for the environment (Box 5), and eventually make curriculum), co-delivery (of training), and co-assessment (of economic growth more sustainable. Traditionally strong competency) has long been recognized as an important sectors such as tourism and construction can become more area for demand-driven skills development. For instance, eco-friendly and greener, creating new earnings leading industries and firms in some countries are already opportunities. Completion and approval of the green jobs offering IT apprenticeships. An IT apprenticeship can follow assessment and certification system and guidelines will pave a structured apprenticeship model to have a learning plan the way for the recognition of enterprises as green job with combinations of skills training and on-the-job practice, providers and be eligible for tax incentives. supervisors (or mentors), and duration and terms (including pay), all of which should be included in an apprenticeship 47 The Philippine Development Plan 2017-2022 highlighted the need to develop new programs in digital areas to meet the country’s post-pandemic labor needs, including programs in data science, machine learning, and nanotechnology, among others (NEDA 2021). The development plan also emphasized the need for continuous updating of higher education curricula in line with the fourth industrial revolution. 48 In the 2019-2020 academic year, higher education institutions saw enrollments of over 760,000 students in engineering and technology and IT disciplines (22 percent of total enrollments) and nearly 170,000 graduates from such programs (21 percent of total graduates) (CHED 2021). TESDA has also launched multiple initiatives to foster digital skills development, along with its Roadmap on the PH Workforce for Future Production. 49 Philippine News Agency, “1.5M enrolled in TESDA online courses” July 26, 2021, https://www.pna.gov.ph/articles/1148364. 50 Skills requirements measure the technical level of use of computers in terms of hardware and software and networks as digital citizens; usage requirements measure the level of utilization of information and communication technology that help social, economic, and cultural activities, such as information collection, internet shopping, and digital content; and mindset requirements measure behavior, ethics, and norms, as well as individual perception of informatization, including awareness of utilization and side-effects of digitalization and privacy protection. 51 Advanced technologies such as artificial intelligence, blockchain, big data, cloud, autonomous vehicles, and drones, have been receiving attention for further investment. 52 See World Bank (2021d). 53 Republic Act 10771. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 53 Box 4. Demand and Supply for Digital Skills in the Philippines Continued progress in technological advancement and manager (20th) among the most sought out jobs (DOLE the growing digitization of firms and economies spurred 2021). Demand for system developers, software developers by the COVID-19 pandemic is highlighting the need for and programmers, and web developers was likewise digital skills development at scale. APEC (2020) found strong. Among the emerging roles the Philippine DTI that 70 percent of the postings in the economies analyzed (2019) identified to meet future workforce needs were data were for digital occupations. Analysis of the employment analysts and scientists, artificial intelligence and machine rates of individuals possessing digital skills showed a 2.6 learning specialists, and specialists in big data, digital times increase in hiring from 2016 to 2019. The report transformation, new technology, among others. However, further noted that while the pandemic led to a hiring some of these may under-estimate the newly emerging slowdown in the first quarter of 2020, the strong demand and rapidly changing digital skills as labor statistics use for digital skills persisted alongside the pandemic—with the 2012 Philippine Standard Occupational Classification. the average hiring rate of digital skills in March 2020 being 1.4 times greater than the corresponding figure a Supply of digital skills and literacy has been mostly year earlier. In their Future of Skills report, LinkedIn (2019) provided by higher education and TVET in the found that the skills seeing demand three times greater Philippines. However, given broad based digitalization than the rest of the talent base were tech-dominated, trend in the country, the digital skills framework (an including front-end web development, blockchain, and example in Table 5) should be incorporated in the artificial intelligence, among others, although the sample Philippine Qualification Framework and digital skills is skewed to high skilled occupations and markets. should be fostered at all education levels accordingly. More occupation-specific skills development and training Similarly, in the Philippines, the pandemic has further can be provided for the existing workforce. Regardless fueled the need for digital skills and proficiencies in order of the modality of training, workers should be able to to successfully navigate the labor market. Digital receive credentials (including micro-credentials) following occupations figured heavily in the list of most in-demand qualifications and standards. Given the flourishing jobs in the country, with application and game developer (4th online gig market (e.g., freelancing and microtasks) in most in-demand occupation, 2020-2022), cyber security the Philippines, such credentials should be able to help expert (17th), data development engineer (18th), and database workers access opportunities through online platforms. Table 5. Digital Skills Framework for General Workforce and Population Domains Proficiency Levels 1. Devices and software operation Foundational (levels 1-2): with guidance, deal with simple tasks 2. Information and data literacy that involve remembering contents and instructions 3. Communication and collaboration fined routine Intermediate (levels 3-4): independently deal with well-de­ 4. Digital content creation and nonroutine problems that involve understanding contents 5. Safety 6. Problem solving Advanced (levels 5-6): independently deal with and provide 7. Career related competencies guidance to others on different tasks and problems that in­ volve applying and evaluating content in complex situations Highly specialized (levels 7-8): resolve complex problems with moving pieces, guide others, contribute to professional practices and propose new ideas to the field Source: World Bank (2020a: 9; 2021a: 42), adapted from European Commission (2017) and UNESCO Institute for Statistics (2018). Photo by: pickingpok PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 54 Box 5. Boosting New Green Jobs to Combat Marine Plastics Pollution Growing plastic pollution on land, in river systems across the country – highlighting a lost opportunity. A and along coastlines is negatively impacting key recent study revealed that the Philippines only recycled economic sectors in the Philippines. It is estimated 28 percent of key plastic resins in 2019, resulting in lost that the Philippines is the third largest contributor to material value of nearly US$890 million per year.56 mismanaged plastic waste globally, generating 1.88 million tons of plastic waste per year.54 With rapid urbanization Appropriate policies, incentives and investments are and its high concentration of population, Manila has needed to help unlock the economic potential in plastics become a specific hotspot of plastics waste –further recycling (and alternative materials) and encourage exacerbated during the ongoing COVID-19 pandemic. private sector financing in this area. Improved segregation Rivers across the country serve as conduits for plastic and collection would help avert recyclable plastics from waste; in Manila, the Pasig River is estimated to discharge co-mingling with other waste. In Metro Manila street ~ 63,000 tons of plastic waste per year into the ocean.55 collectors, collection workers and disposal site scavengers collected 1.63, 9.79 and 20.32 kg of recyclable plastics/ Surveys performed on the Pasig River (Figure 42) person/day respectively,57 indicating that a large amount highlight the throwaway culture around Manila, with of recyclables are brought to landfills and there is room packaging and take-away items (plastic bags, polystyrene to increase formal jobs in collection and segregation containers, wrappers, sachets and PET bottles) dominating of waste, before it reaches disposal sites, to improve plastic pollution leaking into the river. Interestingly, the quantity and quality of recyclables recovered. The recyclable plastic resins make up more than half of these informal sector can be formalized through establishment leaked plastics products, similar to observations at the of co-operatives and MSMEs, so that its workers can national level. However, plastic recycling remains low work under safer and more sanitary conditions. Figure 42. Percentage of plastic waste products along Figure 43. Material value loss analysis for all key resins Pasig River (data based on 2019 volumes) 78% of all resins material value is lost polystyrene 21.21% This is equivalent to US$793M to US$889M per year. pieces 100% Process loss sando bags 14.81% 90% Price loss plastic labo 14.75% 80% snack wrappers 13.48% 70% drink wrappers 9.92% Value Yield (%) 60% PET bottles 6.18% Not collected 50% diaper/napkin 5.82% Value unlocked 40% (22%) candy wrappers 5.30% 30% straws 4.63% 20% noodles/ 3.91% seasonings 10% Percent 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: World Bank Group 2021 Source: World Bank Group 2021 54 Jambeck, J.R., Geyer, R., Wilcox, C., Siegler, T.R., Perryman, M., Andrady, A., Narayan, R. and Law, K.L. (2015). Plastic waste inputs from land into the ocean. Science, 347(6223), 768-771; Meijer, L. J. J., van Emmerik, T., van der Ent, R., Schmidt, C., and Lebreton, L. 2021. More than 1000 rivers account for 80% of global riverine plastic emissions into the ocean. Science Advances; 55 Meijer, L. J. J., van Emmerik, T., van der Ent, R., Schmidt, C., and Lebreton, L. 2021. More than 1000 rivers account for 80% of global riverine plastic emissions into the ocean. Science Advances; 56 World Bank Group 2021. Market Study for the Philippines: Plastics Circularity Opportunities and Barriers. Marine Plastics Series, East Asia and Pacific Region. Washington DC. 57 Board of Investments- Department of Trade and Industry (BOI-DTI) and Japan International Cooperation Agency (JICA). Study on Recycling Industry Development in the Philippines, 2008 PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 55 Furthermore, the Philippines recycling industry is and other single use plastics for such trading programs. dominated by MSMEs which are largely unable to Also, downstream, in rivers where leaked plastics waste end capitalize on the growing demand for recycled resins up, there are opportunities for jobs in clean-up such as “river (Figure 43). Building technical capacity and increasing warriors” who routinely remove plastic waste from different investments in these enterprises can drastically increase areas along the Pasig River. Investments in new, efficient recycling capacity while adding green jobs in the country. technologies like river interceptors, accompanied by training, An estimated 1,418 MSMEs (97.46 percent) and 37 large would add to new skilled jobs in plastics waste management. enterprises58 (2.54 percent) were involved in water supply, sewerage, waste management and remediation The Philippines is currently working to develop a activities. This corresponded to total employment Roadmap to Phase out Single-use plastics, with attention of estimated 28,112 (65.49 percent) for MSMEs and also to relevant policies (such as Extended Producer 14,813 (34.51 percent) for large enterprises. The waste Responsibility), targets and standards (such as recycled management related activities had the highest year-on- content target, labelling, design for recycling) and economic year employment growth rate (23.2 percent) among the instruments (such as like taxes and fees). Increased employment sub-sectors based on the October 2020 LFS. collaboration and engagement of the private sector – including through consortia such as the Philippine Alliance There is increasing innovation at the community-level to for Recycling and Materials Sustainability – is helping build improve plastics collection, reduce leakage and increase momentum and markets for recycled plastic and alternatives. recycling in LGUs across the Philippines. LGUs like Las As the country emerges from the COVID-19 pandemic, Piñas, Makati, Malabon, Mandaluyong, and Marikina have such momentum can attract workers and create better programs that shred hard to recycle plastics like sachets, jobs with increased pay in waste collection, segregation, styrofoam and plastic bags, which are then mixed with and plastics recycling to meet the increasing demand for gravel and sand to produce ecobricks. Some, like Manila recycled plastics products and alternatives alike. The World and Muntinlupa are piloting innovative collection programs Bank is working closely with the Philippines government trading cash or groceries for plastic waste; plastics with value on key plastics diagnostics, related economic analyses, are then sold to junkshops for aggregation and onward sale and policy assessments to support the country achieve to recyclers. In Manila, the women-owned sari-sari stores objectives and targets under its National Plan of Action for serve as redemption centers for plastic sachets, wrappers the Prevention, Reduction and Management of Marine Litter. Photo by: junpinzon 58 Department of Trade and Industry, Philippines. 2020. Defining Philippine Micro, Small and Medium Enterprises (MSMEs) PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 56 Explore strategic directions for international labor migration productivity of a large number of agricultural workers in the country, aim for agro-food GVCs inclusion, and potentially A key focus would be to help migrant workers move up create large number of jobs (World Bank, forthcoming). the occupational ladder and explore more developed economies for destinations. For instance, many female RESILIENCE: Reinforce worker protection migrants going to the Middle East as domestic workers can for job retention and equity be upskilled to become social and health care workers. Aging countries in the region such as Japan, Korea, and Diversify policy instruments for worker protection Hong Kong, provide a promising market for social and care and strengthen the design of social insurance services. More proactive Government to Government (G2G) arrangements should be considered for the increased share Key instruments that would provide worker protection of Filipinos, strong worker compensation and protection and resilience to labor market risks include labor terms, and clear duration of services.59 Also, building regulations, social insurance, and linkages to social on the market dominance of seafarers, a clear career assistance and ALMPs. In particular, expanding coverage development path from general crews to more specialized of such support to informal workers has been recognized mates and operators can be provided to workers. as an important policy objective worldwide. For a long time, the Philippines has engaged in perennial discussions on Tap into global markets and strategize GVC integration informality often focusing on “endo” issues.60 However, with the advent of globalization and digital labor platforms, the With the worldwide disruptions in GVCs due to the Philippines has seen growth in contractual and temporary pandemic, opportunities arise for the Philippines to OFW work, freelancing/gig jobs, and IT-BPM outsourcing. In actively expand its share in the global labor markets. The a more digital era post COVID-19, flexible work arrangements IT-BPM sector that has been successful in the global market and the online gig economy are likely to further grow, and providing earnings opportunities to a large number of requiring a balanced approach to ensure both labor market workers, can be further supported. The sector faces great flexibility and worker protection. There are no ready-made competition from South Asian countries equipped with IT solutions as many of policies, though having good intentions, and English skills. Building on existing initiatives (e.g., Board may bring unintended consequences (e.g., dampening the of Investments [BOI], Department of Information and incentives for job creation or encouraging informality).61 Communications Technology [DICT]), the sector can further Key principles include: social assistance and ALMPs can diversify its services towards higher skilled sectors, expand be better targeted for both productivity and inclusion; destination countries, and build the relevant work force with the coverage of social insurance should be expanded the right skills. In addition, labor intensive manufacturing, regardless of work arrangements for a wide base for risk such as food processing, is promising for the creation of pooling; and a moderate level of labor regulations should be good jobs at scale. The food processing industry, maintained with enhanced compliance monitoring capacity. with enhanced skills and infrastructure, can upgrade the Photo by: Jed Regala 59 G2G arrangements for international migration provide an institutional mechanism to address destination countries’ labor shortages while strengthening migrant workers’ protection. See Cho et al. (2018). 60 “Endo” means end-of-contract or the termination of a worker’s fixed short-term employment. It is also known as 5-5-5 where a worker’s employment facilitated through job contracting or direct hiring, ends after five months of work. 61 For instance, Levy (2008) shows that Mexico’s social policy intended to provide protection for vulnerable workers had the unintended consequence of growth in the informal sector and distortions in the labor market. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 57 To balance worker protection and job creation and Address the country’s looming human capital crises and flexibility, the government needs to utilize all key policy scale up safe reopening of schools instruments. With the changing nature of work and as employment-based social protection falls short, the World Policies for the safe return to face-to-face school opening Bank (2019) underscores a multi-layered policy package. It should be prioritized. In mid-2021, the global community starts from a core non-contributory defined benefit for a (and bodies such as UNICEF, UNESCO, and the World Bank) small segment of the population and expands to contributory has urged governments to take three actions to: i) bring all systems for the wider population. Contributory systems can children back to school; ii) ensure remedial learning to help be combinations of mandated or voluntary, and subsidized students catch up on lost learning; and iii) support teachers or market-based mechanisms depending on the likelihood of in addressing learning losses and incorporating digital shocks and the magnitude of their consequences. In the technology for teaching. These three areas are all Philippine context, strengthening social insurance and desperately needed for the Philippines, as it is one of very ALMPs and ensuring their linkages with safety nets is few countries in the world that remained closed for in-person needed in the increasingly fluid labor market, compounded classes during the entire period since the pandemic began. by an aging population. Options to design a contributory Surveys confirm that parents, especially those from low- system and incentivize voluntary participation including income households, strongly support the return to in-person through matching contributions should be considered. Such classes.62 This can certainly help women’s labor market a system can build on the current social security system activities as well. The Philippines finally announced a (SSS) and should be strengthened to be financially small-scale pilot for face-to-face class from mid-November sustainable, delinked from worker’s employment type, and 2021, which should inform “how to” manage a safe return to subsidized for vulnerable populations. effective learning through combinations of face-to-face, at home, and hybrid learning. SUSTAINABILITY: Prevent a silent job crisis for the future workforce Photo: Jed Regala 62 The World Bank’s Household Surveys in December 2020 and May 2021 consistently show greater support for the resumption of in-person classes among lower income households. This is likely due to the digital divide, where higher income households have better access to online schooling using the internet and gadgets whereas lower income households rely on paper-based modules and offline study. PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 58 References Albanesi, S. and J. Kim. (2021). Effects of the COVID-19 Recession on the US Labor Market: Occupation, Family, and Gender. Journal of Economic Perspectives, 35 (3), pp. 3-24. https://www.aeaweb.org/articles?id=10.1257/jep.35.3.3 Asian Development Bank. (2021). ADB Philippine Enterprise Survey on COVID-19 Impact. https://data.adb.org/dataset/adb-philippine-enterprise-survey-covid-19-impact Asia-Pacific Economic Cooperation. (2020). 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PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 61 The World Bank PHILIPPINES 26th Floor, One Global Place 5th Ave. corner 25th St. Bonifacio Global City, Taguig City Philippines 1634 T: +63 2-465-2500 F: +63 2-465-2505 W: www.worldbank.org/en/country/philippines PHILIPPINES ECONOMIC UPDATE DECEMBER 2021 EDITION 62