PHILIPPINES QUARTERLY UPDATE The Recovery Continues Despite Global Financial Turbulence June 2010 57422 The Recovery Continues Despite Global Financial Turbulence Preface The Philippines Quarterly Update provides an update on key economic developments and policies over the past three months. It also presents findings from recent World Bank work on the Philippines. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for the Philippines. Its coverage ranges from the macro-economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in the Philippines. The Philippines Quarterly Update is a product of the World Bank's Philippines Poverty Reduction and Economic Management (PREM) team. It was prepared by Eric Le Borgne (Senior Country Economist and task team leader), Sheryll Namingit, and Marianne Juco, under the general guidance of Ulrich Lächler (Lead Economist). Special contributors include Romy Bernardo and Christine Tang (Impact of the Greek crisis on the Philippines), David McKenzie, Caroline Theoharides and Professor Dean Yang (Migration during the global recession), and Soonhwa Yi (Box on Competitiveness). Comments received from the DOF, NEDA and the IMF are gratefully acknowledged. The findings, interpretations, and conclusions expressed in this Update are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. To be included on an email distribution list for this Philippines Quarterly Update series and related publications, please contact Nenette Santero (nsantero@worldbank.org). For questions and comments on the content of this publication, please contact Eric Le Borgne (eleborgne@worldbank.org). Questions from the media can be addressed to David Llorito (dllorito@worldbank.org). i PHILIPPINE QUARTERLY UPDATE - June 2010 TABLE OF CONTENTS PREFACE...................................................................................................................................................... i SUMMARY................................................................................................................................................. iv RECENT ECONOMIC DEvELOPMENTS ............................................................................................................................ 1 Output and Demand ..................................................................................................................................................... 1 Employment and Poverty ............................................................................................................................................. 4 Balance of Payments and External Debt ..................................................................................................................... 5 Financial Markets ........................................................................................................................................................ 7 POLICIES ............................................................................................................................................................................ 8 Monetary Policy ........................................................................................................................................................... 8 Fiscal Policy .................................................................................................................................................................. 9 PROSPECTS ...................................................................................................................................................................... 11 External Environment ............................................................................................................................................... 11 Output and Demand ................................................................................................................................................... 12 Employment and Poverty ........................................................................................................................................... 13 Balance of Payments and External Debt ................................................................................................................... 15 Monetary Policy ......................................................................................................................................................... 15 Fiscal Policy ................................................................................................................................................................ 16 DATA APPENDIx .............................................................................................................................................................. 25 SELECTED SPECIAL FOCUS FROM RECENT QUARTERLY UPDATES ..............................................................................26 SELECTED RECENT WORLD BANK PUBLICATIONS ON THE PHILIPPINES ...................................................................27 BOXES Box 1. Economic Development and Peace: the Case of Mindanao .............................................................................14 Box 2. Philippines Migration Patterns during the Global Recession: Resiliency through Diversification and Flexibility .......................................................................................................................... 17 Box 3. The European Sovereign Debt Turmoil and the Philippines .............................................................................20 Box 4. Bottlenecks to the Philippines' Competitiveness: ............................................................................................. 23 FIGURES Figure 1. Investment posted record contribution to growth ...................................................................................... 1 Figure 2. The sharpest rebounds occurred in countries buoyed by manufacturing growth ....................................1 Figure 3. Manufacturing as the key engine to the rapid recovery ............................................................................... 2 Figure 4. Manufacturing growth came almost exclusively from petroleum, food, and electronics ......................2 Figure 5. Car sales are growing briskly and are noticeably higher than their pre-crisis level .................................3 Figure 6. Government spending strongly contributed to Q1 growth ........................................................................3 Figure 7. The quality of jobs is improving but job creation lags population growth ................................................4 Figure 8. Less people fully-employed, more without jobs .............................................................................................. 4 Figure 9. Services continue to drive job creation; agriculture is suffering from El Nino ........................................4 Figure 10. Self-rated poverty is reaching historical lows, possibly due to the CCT/4Ps program .............................4 ii The Recovery Continues Despite Global Financial Turbulence Figure 11. The balance of payments remains firmly in surplus ......................................................................................5 Figure 12. The export rebound is softening while imports keep growing ....................................................................5 Figure 13. Merchandise exports remain below pre-crisis levels ....................................................................................6 Figure 14. Remittance growth is decelerating, as the crisis and natural disasters fade ............................................6 Figure 15. Reserves continue to accumulate at a robust pace ......................................................................................6 Figure 16. External debt cover, already comfortable, continues to increase..............................................................6 Figure 17. The Greek crisis led to a pause in the PSEi rally (with foreigners non-committal)... .................................7 Figure 18. ... a strong appreciation of the peso against the euro but a pause against the dollar... ...........................7 Figure 19. ... leading to a broadly stable effective exchange rates ... ...........................................................................7 Figure 20. ... but had limited impact on the sovereign yield curve ................................................................................7 Figure 21. Incomplete pass through from monetary policy to bank lending rates .....................................................8 Figure 22. Private sector credit to the economy has stabilized; bank credit growth remains low ...........................8 Figure 23. Core and headline inflation have been low and stable in 2010 ...................................................................9 Figure 24. Petroleum products have been the key driver of producer price inflation ...............................................9 Figure 25. Electricity generation costs account for most of the retail cost of electricity .....................................9 Figure 26. With rising oil prices and reduced hydro-power, generation costs have surged ......................................9 Figure 27. The NG fiscal deficit is predominantly structural ......................................................................................10 Figure 28. Both revenue and expenditure structurally deteriorated since 2007 ......................................................10 Figure 29. The buoyancy of the tax effort is modest, highlighting structural decreases since 2009 ......................10 Figure 30. Growth is higher during first two quarters during election years. ........................................................13 Figure 31. Business and consumer sentiments improves for the next twelve months ..............................................13 Figure 32. Economic density in the Philippines, 2007 ...................................................................................................18 Figure 33. Stable inflation outlook ...............................................................................................................................15 Figure 34. Total OFW deployments accelerated during the global recession ............................................................18 Figure 35. OFW deployment trends upward, even during the global recession ........................................................18 Figure 36. Rehires fared well during the global recession..........................................................................................18 Figure 37. Asymmetric gender response to the economic cycle ..................................................................................18 Figure 38. Occupational hazards during the global recession....................................................................................19 Figure 39. NG Debt sustainability ...................................................................................................................................21 Figure 40. The Greek crisis' impact on the Philippines has been moderate and short-lived ......................................22 Figure 41. The Philippines' REER against various trading partners .............................................................................22 Figure 42. Declining competitiveness compared to fellow ASEAN countries .............................................................23 Figure 43. Competitiveness weaknesses: quality of public institutions, infrastructure, innovation and labor market efficiency ......................................................................................................23 TABLES Table 1. Philippines: Profitability of Listed Companies (by Sectors), 2007-2009.............................................................3 Table 2. Global Economic Prospects, 2007-2012............................................................................................................11 Table 3. Deployment of Seafarers by Top 10 vessel Types ..............................................................................................19 Table 4. Philippines' exposure to Europe and the EU5 ...................................................................................................22 Table 5. Philippines: Financial vulnerability Indicators, 2005-2009 .............................................................................22 Table 6. Global governance ranking of the Philippines ................................................................................................23 Table 7. Philippines: Selected Economic Indicators, 2007-2012 ....................................................................................25 Table 8. Philippines: National Government Cash Accounts (GFS Basis), 2006-10 .........................................................25 iii PHILIPPINE QUARTERLY UPDATE - June 2010 Summary The Philippines' economy posted robust growth in early 2010, in part due to large one-off factors. As did many countries in the region, the Philippines benefited from a strong rebound in global trade. Manufacturing and investment activity expanded briskly as a result. Private consumption continued to expand, as consumer confidence improved. Growth also benefited from election-related spending. Expansionary (and now pro-cyclical) fiscal policy continued to support growth. Despite a withdrawal of liquidity-enhancing measures and a stronger peso, a closing output gap meant that monetary policy remained accommodative. Led by emerging markets, the global recovery is under way, but signs of fragility remain; domestic reforms would be a catalyst to higher growth. While large fiscal risks in some European countries have dampened growth prospects in that region, the global growth outlook remains favorable, especially for emerging markets. In the Philippines, while growth surged in early 2010, it is projected to ease as both monetary and fiscal policies normalize. We project GDP growth of 4.4 percent for 2010 and 4.0 percent for 2011, with risks being equally distributed--on the downside, these are primarily external (linked to developments in Europe), while on the upside they are internal (e.g., progress by the new Aquino government in achieving quick gains against corruption, the introduction of a strong reform program, and fiscal consolidation). Consumption is projected to benefit from better labor market performance, but to receive less support from remittances as their real peso value is projected to be broadly flat (against 10 percent growth in 2009). The inflation outlook is benign given the relatively soft labor market due to a rapid increase in the potential labor force and a stable outlook for key imported commodity prices (e.g., petroleum products and rice). Remittances are projected to grow by 8 percent in 2010 following the large deployment of emigrants in 2009. A World Bank study of Philippines migration pattern during the global recession reveals that deployment of overseas foreign workers (OFWs) actually accelerated during the crisis. Partly this reflected the fact that the top OFW destinations were not as affected as the rest of the world. The most affected OFWs were males, production workers (especially construction workers) and new hires. By contrast, females, services workers, seafarers and rehires proved resilient to the crisis or even benefited from it (e.g., demand for Filipino seafarers expanded sharply despite a sharp contraction in the shipping industry). Globally, less tolerance towards weak public finances is expected, raising the need to introduce a credible medium- term fiscal consolidation plan for the Philippines. Running a pro-cyclical fiscal policy with relatively high debt and limited fiscal space--as undertaken in the first-half of 2010--raises risks and should be reverted. Credibility towards such a goal could be achieved, for example, by designing a comprehensive multi-year reform package. The Aquino government's focus on creating fiscal space through higher revenue and expenditure efficiency is welcome and should generate notable gains given the political capital invested in fighting corruption. To further strengthen the government's goal of reducing the fiscal deficit to 2 percent of GDP within three years, contingency measures could usefully be identified and adopted as part of a comprehensive package. Stronger public finances--including by reducing overall fiscal risks--would enable the Philippines to (1) regain policy flexibility to tackle both downside risks (such as a deepening of the European sovereign debt crisis) and upside risks (such as the attraction of large capital inflows into the region), and (2) create more fiscal space for priority programs. Sound public finances would also provide the BSP with more flexibility in setting policies, as well as in managing such capital flows. As the output gap closes, the accommodative monetary policy introduced in 2008 would need to be gradually unwound, starting by reaching a broadly neutral stance in 2010. An increase in policy rates--currently negative or slightly positive--could achieve such a goal. iv The Recovery Continues Despite Global Financial Turbulence Recent Economic Developments 1. The Presidential elections outcome in May has generated high hopes for reform, especially in the anti-corruption and governance areas. Mr. Benigno Simeon "Noynoy" Aquino III of the Liberal Party won with a large majority and took office as the country's 15th president on June 30, 2010. Mr. Aquino's core electoral platform rested on improving governance and reducing corruption so as to reduce poverty. These elections generate large hope for reforms and tackling well known structural bottlenecks, especially corruption--the perception of which has increased steadily over the past years as reported by various international cross country indices. Output and Demand 2. The Philippines' economy posted robust growth in early 2010, in part due to one-off factors (Figure 1). After posting its slowest growth since the Asian financial crisis (1.1 percent in 2009), GDP grew by an impressive 7.3 percent (year- on-year) in the first quarter of 2010, far faster than expected, but in line with equally strong rebounds elsewhere in the region (Singapore at 15.5 percent, Thailand at 12.0, China at 11.9, Malaysia at 10.1, India at 8.6, vietnam at 5.8, and Indonesia at 5.7). The regional recovery is driven, to a large extent, by a sharp rebound in exports and manufacturing, highlighting the important role that the global recovery plays for the region (Figure 2). In the Philippines, growth was further buoyed by strong election-related spending both private and public. The former is captured in strong growth of recreational services (e.g., advertising) and trade. The latter in government current consumption (as public construction slowed down, reflecting a pre-election ban on starting projects). Figure 1. Investment posted record contribution Figure 2. The sharpest rebounds occurred in countries to growth buoyed by manufacturing growth1/ EAP Region: GDP Growth and Contribution to YoY GDP growth 20 percentage pt / percent 15 16 10 14 YoY GDP growth, in percent 5 0 12 -5 -10 10 -15 8 THA 6 MYS Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 PHL 4 VNM IDN 2006 2007 2008 2009 2010 2 Discrepancy Net Exports 0 Investment Govt Cons Private Consumption GDP growth Source: CEIC. 1/ The size of the bubble indicates the contribution of manufacturing to GDP growth. Inparticular:THA 8.5ppt, MYS 4.4ppt, Source: National Statistical Coordination Board (NSCB). PHL 4.3 ppt, VNM 1.7 ppt, and IDN 0.9 ppt. 3. The sharp expansion in the manufacturing sector brought production above the pre-crisis level and contributed 4.3 percentage points to overall growth (Figure 3). Manufacturing production grew by 20.7 percent year-on-year in Q1 2009, pushing production 11.5 percent above its pre-crisis peak of Q1 2008. The strong growth reflects both a strong recovery as well as the sector's sharp collapse in Q1 2009 (i.e., a base effect). Manufacturing of petroleum products, food, and electrical machinery (mainly for exports) were the top drivers of growth (Figure 4).1 The gains in manufacturing 1 The closure of Petron's refinery in Q1 2009 for preventive maintenance mostly explain the surge in petroleum manufacturing which contributed 1.5 percentage points to the 7.3 GDP growth. This surge took place amid a sharp contraction (over the past three quarters) in imports of "mineral fuels, lubricants and related materials" (NIA data). Food manufacturing growth also occurred despite a contraction in the agricultural sector. On the consumption side, the strong production of food was for exports. 1 PHILIPPINE QUARTERLY UPDATE - June 2010 Figure 3. Manufacturing as the key engine to the Figure 4. Manufacturing growth came almost exclusively rapid recovery from petroleum, food, and electronics YoY GDP Growth (Supply side) Manufacturing Sector: Top & Least 24 Contributor GDP Growth 20 Agriculture Industry 16 Services GDP Growth Products of petroleum & coal 12 Manufacturing Food manufactures Electrical machinery 8 Chemical & chemical prod. percent 4 Miscellaneous manufactures 0 Furniture and fixtures -4 Transport equipment Q1 2010 -8 Basic metal industries Q1 2009 -12 Footwear wearing apparel Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q3 Q4 -2.0 -1.0 0.0 1.0 2.0 2006 2007 2008 2009 2010 percentage points Source: National Statistical Coordination Board (NSCB). Source: National Statistical Coordination Board (NSCB) compensated for the 2.5 percent contraction in agriculture which continued to suffer from the damages brought about by the typhoons of late 2009 and the El Niño drought which persisted in the first half of the year. The services sector grew by 6.1 percent in Q1 driven by strong growth of private services (particularly recreational services, which could be related to elections) and trade, which returned to growth after contracting in 2009. To a lesser extent, finance and real estate services improved as the economic recovery firmed up. 4. On the demand side, growth was broad-based, with investment particularly strong (Figure 1). After contracting by 5.7 percent in 2009, investment grew by 24.3 percent in Q1, driven by investments in durable equipment, particularly in transport (81.6 percent annual growth) and telecoms (27.4 percent growth). Strong increases in large discretionary spending items such as cars2 reflect improved consumer confidence over the next three to twelve month (though current confidence remains broadly unchanged since 2009--Figure 31 page 19) but they could also reflect increased demand from households and businesses to replace damaged assets from typhoons Ondoy and Pepeng. Private consumption continued to recover from its weak 2009 performance. An improving labor market and continued remittance inflows contributed to this recovery. 5. The contribution of government spending to overall growth rose in the first quarter, seemingly reflecting pre-election spending (Figure 6). With the implementation of the Economic Resiliency Plan (ERP) last year, the contribution of government consumption and public construction to GDP growth was significant in 2009. As the ERP was front-loaded to battle the global recession the fiscal stimulus came into full force in Q2 and then progressively weakened in Q3 and especially Q4. Despite the Government's aim for a moderate fiscal consolidation in 2010, NG spending increased sharply in Q1 and became a significant contributor to growth at 1.6 percentage points. Spending likely grew faster in Q1 to amid selective spending ban ahead of the election. Spending growth also reflects the electoral budget cycle (which the Philippines has in common with many other countries). 6. Corporate profitability registered strong growth in 2009, partly due to non-recurring gains (e.g. asset sales) as well as mark-to-market valuation gains (Table 1). The global financial crisis and the ensuing global recession took its toll on the profitability of PSE-listed companies in 2008. Sectors particularly affected included the industrial and the services sectors and, to a lower extent, the properties sector. Despite the slowdown in economic activity in the Philippines, profitability of listed firms surged by 55 percent in 2009 reflecting, to a large extent, non-recurring revenue gains. These originate from divestments in a few large corporations that refocused their activity from tradable to non-tradable (see November 2009 Philippines Quarterly Update for details). 2 Total vehicle sales grew by 36 percent in Q1 and by 37 percent through May 2010 (Figure 5). 2 The Recovery Continues Despite Global Financial Turbulence Figure 5. Car sales are growing briskly and are noticeably Figure 6. Government spending strongly higher than their pre-crisis level contributed to Q1 growth Car Sales Contribution to Growth of Govt Spending 16 50 1.6 Levels Growth (rhs) 1.4 14 40 1.2 12 30 percentage point 1.0 thousands 10 20 0.8 percent 8 10 0.6 0.4 6 0 0.2 4 -10 0.0 -0.2 Government Consumption 2 -20 -0.4 Public Construction 0 -30 -0.6 Sep-2008 Sep-2009 Jul-2008 Jul-2009 Mar-2008 Mar-2009 Mar-2010 Jan-2008 Nov-2008 Jan-2009 Nov-2009 Jan-2010 May-2008 May-2009 May-2010 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008 2009 2010 Source: Chamber of Automotive Manufacturers in the Philippines, Inc. (CAMPI) Source: National Statistical Coordination Board (NSCB) Table 1. Philippines: Profitability of Listed Companies (by Sectors), 2007-2009 Net Income Revenues 2007 2008 2009 2007 2008 2009 Levels, in billion PhP PSEi 190.9 155.3 240.6 1,606.5 1,502.1 1615.5 Financials Sector 46.2 27.5 44.2 289.7 278.5 313.1 Industrial Sector 57.3 49.1 126.8 1,067.9 1,241.1 1232.6 Holding Firms Sector 62.0 37.2 70.9 439.3 509.0 576.3 Property Sector 26.7 25.7 28.8 108.8 119.7 123.1 Services Sector 82.4 55.1 84.0 432.3 433.6 432.4 Mining & Oil Sector 6.9 4.6 3.1 31.5 33.6 38.5 Small and Medium Enterprises 0.0 0.0 0.0 0.1 0.1 0.1 Total 281.5 199.2 357.8 2,369.5 2,615.5 2716.1 Total Non-financial 235.4 171.8 313.6 2,079.9 2,337.0 2403.0 Growth Rate PSEi - -18.6 54.9 - -6.5 7.6 Financials Sector - -40.5 61.0 - -3.9 12.4 Industrial Sector - -14.3 158.3 - 16.2 -0.7 Holding Firms Sector - -40.0 90.7 - 15.9 13.2 Property Sector - -3.6 11.8 - 10.0 2.8 Services Sector - -33.1 52.4 - 0.3 -0.3 Mining & Oil Sector - -33.2 -33.6 - 6.7 14.6 Small and Medium Enterprises - -54.3 111.5 - 40.9 25.1 Total - -29.2 79.6 - 10.4 3.8 Total Non-financial - -27.0 82.6 - 12.4 2.8 Source: Philippine Stock Exchange. 3 PHILIPPINE QUARTERLY UPDATE - June 2010 Employment and Poverty 7. The quality of jobs improved in the formal labor market, but employment was insufficient to keep track with the rapid demographic growth. In 2009, as companies reduced working hours during the global recession, labor force participation increased as almost the entire potential labor force entered the labor market; seeking to stabilize household incomes (Figure 7). As economic growth revived in Q1 2010, labor entrants declined in April. Unemployment, however, increased to 8.0 percent (or 3.1 million people) from 7.5 percent (or 2.8 million people)--Figure 8. The sharp decrease in job creation from April 2009 to April 2010 can be partly explained by the phasing out of the CLEEP job creation program that was introduced as part of the ERP. Part of the drop in the under-employment rate in April is expected to be reversed as many temporary jobs were election-related. The El Niño drought had a large negative impact on agricultural employment, with more than 800,000 net jobs lost (Figure 9). This offset jobs created in the manufacturing and services sectors. Despite rising unemployment, the improving economy led to lower underemployment and a higher share of salary and wage workers. Figure 7. The quality of jobs is improving (full time jobs Figure 8. Less people fully-employed, rose; underemployment declined) but job creation lags population growth more without jobs Labor Force Survey (April Sweeps) Labor Force Survey (April Sweeps) 2,100 65 8.5 27.0 1,600 8.0 25.0 60 thousands 1,100 percent 23.0 600 7.5 55 100 21.0 7.0 (400) 50 19.0 2006 2007 2008 2009 2010 6.5 Unemployment Rate (%) 17.0 Change in potential labor force (pop 15 years and over) Change in actual labor force Underemployment Rate (% of Employed)--RHS Job Creation 6.0 15.0 Share of full time jobs (RHS) 2006 2007 2008 2009 2010 Source: National Statistics Office (NSO). Source: National Statistics Office (NSO). Figure 9. Services continue to drive job creation; Figure 10. Self-rated poverty is reaching historical lows, agriculture is suffering from El Nino possibly due to the CCT/4Ps program Poverty and Hunger Incidence 60 30 Service Agri 25 1.6 Manuf Non-manuf Industry 55 20 percent percent Total 50 15 1.1 10 45 5 million 0.6 40 0 May-06 May-07 May-08 May-09 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Sep-06 Sep-07 Sep-08 Sep-09 Nov-06 Nov-07 Nov-08 Nov-09 0.1 (0.4) Self-rated Poverty Hunger: Overall Oct 07 Jan 08 Apr 08 Oct 08 Jan 09 Apr 09 Oct 09 Jan 10 Apr 10 Apr 07 Jul 09 Jul 07 Jul 08 Hunger: Moderate Hunger: Severe Source: National Statistics Office (NSO). Source: Social Weather Station (SWS) 4 The Recovery Continues Despite Global Financial Turbulence 8. Self-rated poverty and hunger decreased noticeably in March, despite substantial job losses in the agricultural sector which accounts for a large share of the poor (Figure 10). According to Social Weather Stations surveys, after peaking in November 2009, self-rated poverty steadily decreased to reach its lowest level since March 1987 (though still affecting 43 percent of households). Similarly, hunger incidence decreased by three points from the record-high incidence (24.0 percent) reached in December 2009. The welcome improvement in these indicators is noticeable given the poor performance of the agricultural sector in Q4 2009 and Q1 2009. Strong growth in Q1 likely provided opportunities to the poor, especially the urban poor, to earn more income. The general election also generated many temporary low- skill jobs to assist the campaigns. The 4Ps conditional cash transfer program is also likely to have played a role as it was scaled up from 452,961 households in April 2009 to over 770,000 households in April 2010. Other programs, such as the NFA rice program may also have been increased during that period, as the larger budgetary subsidies transferred to the NFA suggest. The DSWD has also been running other social safety net programs during the SWS survey period (March 19-22, 2010), including ones aimed at assisting the poor affected by Ondoy, Pepeng, and El Niño,3 which is likely to have contributed to the improved poverty and hunger indicators. Balance of Payments and External Debt 9. The balance of payments (BoP) weakened but remained in surplus (Figure 11). The overall BoP surplus of 3.2 percent of GDP in Q1 2010 is notably lower than the 4.8 (4.3) percent surplus achieved in Q1 2009 (Q4 2009). The negative year-on-year growth in net inflows of unclassified items in Q1 2010 explains most of this decrease. A smaller current account surplus--4.4 percent of GDP in Q1 against 5.1 (5.7) in Q1 (Q4) 2009--also contributed to the decline in the BOP surplus. Increasing demand for imports as the economy recovers along with higher prices for key commodity imports (oil in particular) worsened the trade deficit by 1.2 percentage points of GDP compared to Q4 2009. A deterioration in the trade balance (based on preliminary trade data) also occurred in April (Figure 12). On the other hand, the financial account registered a significantly smaller net outflow this Q1 compared to Q1 2009 but this was a reversal from the positive inflows witnessed in Q4 2009. The renewed turbulence in global financial markets due to the debt problems in the Euro zone along with a potential wait-and-see attitude ahead of the May 2010 general elections explain most of this reversal. Figure 11. The balance of payments remains Figure 12. The export rebound is softening while firmly in surplus imports keep growing Balance of Payments Balance of Trade, 3 mma 6 6000 0.5 4 5000 2 - mln US$ 4000 in bln US$ in bln US$ 0 3000 (0.5) -2 Others Financial Account 2000 -4 Exports (1.0) Current Account 1000 Imports -6 Trade Balance 0 (1.5) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Dec-07 Dec-08 Dec-09 Oct-07 Oct-08 Oct-09 Aug-07 Aug-08 Aug-09 Apr-07 Apr-08 Apr-09 Apr-10 Feb-07 Feb-08 Feb-09 Feb-10 Jun-07 Jun-08 Jun-09 2006 2007 2008 2009 2010 Sources: Bangko Sentral ng Pilipinas (BSP) Source: National Statistics Office (NSO). 3 These are: First, a Food-for-work program, which gives 25kg of rice per effected family for every 2 weeks of disaster-related work (e.g., road clean-up and reha- bilitation). About 1.5 metric tons of rice has been allocated for this program, which is still ongoing (http://www.dswd.gov.ph/index.php/component/ content/ article/1-latest-news/2060-dswd-un-wfp-award-food-packages-for-typhoon-ondoy-victims-in-rizal). Second is the Core Shelter program, which is funded out of the Calamity Fund. The program also provides rice to families whose houses have been totally/severely damaged by the typhoons. Third is assistance to El Niño affected families mainly in Regions 2, 6, and 12. 5 PHILIPPINE QUARTERLY UPDATE - June 2010 10. Exports and imports continue to rebound, but remain below their pre-crisis levels (Figure 12). After shrinking continuously from October 2008 to October 2009, exports and imports started recovering in November. Through April 2010, exports grew by 39.1 percent. Export levels, nonetheless, remain 18.2 percent lower than prior to the crisis (August 2008). Electronics and semi-conductors exports, which contracted sharply and rapidly during the global trade collapse, led the export recovery. The United States and Japan remain the Philippines' top export destinations. 11. As the effects of the global crisis and end-2009 typhoons recede, remittance growth slowed down in 2010 (Figure 14). Remittances in nominal dollar terms grew briskly by more than 11 percent in the last two months of 2009 in part due to OFWs sending money to typhoons-affected relatives (See Box 1, November 2009 Philippines Quarterly Update). As the "insurance motives" for sending money decreased,4 remittance growth slowed down to 5.4 percent in April. While, the year-to-date growth of 6.6 percent in US dollar terms is stronger than last year, remittances have been steadily declining in real peso terms--due to the strength of the Peso and the moderate increase in inflation. Figure 13. Merchandise exports remain below Figure 14. Remittance growth is decelerating, pre-crisis levels as the crisis and natural disasters fade Merchandise Exports Remittance Growth, 3 mma 5.0 35.0 4.5 30.0 Nominal USD Nominal Php 4.0 25.0 Real Php 3.5 20.0 in bln US$ 3.0 in percent 15.0 2.5 10.0 2.0 5.0 1.5 0.0 1.0 -5.0 0.5 Others Electronics Total -10.0 0.0 -15.0 Oct-07 Oct-08 Oct-09 Apr-07 Apr-08 Apr-09 Apr-10 Jan-08 Jan-09 Jan-10 Jul-07 Jul-08 Jul-09 Oct-07 Oct-08 Oct-09 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Apr-07 Apr-08 Apr-09 Apr-10 Source: National Statistics Office (NSO) Source: Bangko Sentral ng Pilipinas (BSP) Figure 15. Reserves continue to accumulate Figure 16. External debt cover, already comfortable, at a robust pace continues to increase Foreign Currency Liquidity External Debt 70 57 600 55 500 60 NIR Forward Book 53 400 50 in bln US$ 51 300 40 49 bln US$ 47 200 30 45 100 20 43 0 10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2006 2007 2008 2009 2010 Long-Term Short-Term 2006 2007 2008 2009 2010 GIR, ST External Debt Cover (rhs) Source: Bangko Sentral ng Pilipinas (BSP) Source: Bangko Sentral ng Pilipinas (BSP) 4 Yang, Dean, and HwaJung Choi, 2007, "Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines," World Bank Economic Review, vol. 21(2), pp. 219-48. 6 The Recovery Continues Despite Global Financial Turbulence 12. External debt rose in Q1 but reserves continue to strengthen and point to a robust external position. As of March 2010, the country's external debt stood at 33.2 percent of GDP, 0.8 percentage points higher than in March 2009 (Figure 16). While short-term loans have contracted since Q3 2009, medium- and long-term loans have been rising since Q2 2009. Public external debt, which accounts for 71 percent of total external debt, has been rising since Q2 2009, following several global bond issuances. While the non-banking private sector's debt remained broadly stable, the banking system's external debt continued to decline since early 2008, thereby limiting the impact of the global financial crisis on the sector. Reserves, including forward contracts, have surged to new record-highs and provide strong coverage of both short-term external debt (by residual maturity) and imports (Figure 15). Financial Markets 13. One year into the financial markets rebound, European fiscal concerns generated increased volatility in the Philippines but the overall impact has been limited. After bottoming out in March 2009, the PSEi stock market index recovered strongly--but not entirely--through April 2010. In May, heightened concerns about debt sustainability in some European countries sparked a global financial asset sell-off which the PSEi did not escape. Foreign purchases have mostly been neutral (Figure 17). Renewed global risk aversion led to a strengthening of the dollar vis-à-vis the peso, while the peso appreciated noticeably against the euro (Figure 18). Overall, the nominal (real) effective exchange rate was broadly unchanged in 2010 (Figure 19). With policy rates unchanged and ample domestic liquidity, domestic interest rates have remained broadly unchanged (Figure 20). Figure 17. The Greek crisis led to a pause in the PSEi rally Figure 18. ... a strong appreciation of the peso against (with foreigners' non-committal)... the euro but a pause against the dollar... Philippine Stock Exchange Exchange Rate 1000 51 75 500 49 70 0 47 65 -500 45 -1000 43 60 -1500 41 Php/US$ 55 PSEi: Cumulative change from peak in 2007 39 -2000 Stocks: Net Foreign Buy (million US$) Php/Euro (rhs) 50 -2500 37 35 45 Feb2008 Jun2008 Feb2009 Jun2009 Feb2010 Jun2010 Apr2008 Apr2009 Apr2010 Aug2008 Aug2009 Oct2007 Oct2008 Oct2009 Dec2007 Dec2008 Dec2009 Dec-08 Dec-09 Oct-08 Oct-09 Aug-08 Aug-09 Apr-08 Apr-09 Apr-10 Feb-08 Feb-09 Feb-10 Jun-08 Jun-09 Jun-10 Source: CEIC. Source: Bangko Sentral ng Pilipinas (BSP) Figure 19. ... leading to a broadly stable effective Figure 20. ... but had limited impact on exchange rates 1/... the sovereign yield curve Real and Nominal Effective Exchange Rate Yield Curve (Treasury Reference Rates) Indices (1980=100) 12.0 15.5 86 15 84 10.0 82 14.5 8.0 80 14 in percent 78 6.0 13.5 76 13 4.0 74 12.5 Real Effective Exchange Rate (lhs) Jul-08 Feb-09 Aug-09 72 2.0 Nominal effective Exchange Rate Index (rhs) Mar-10 Jun-10 12 70 0.0 Mar-08 Mar-09 Mar-10 May-08 May-09 May-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Sep-08 Sep-09 Nov-08 Nov-09 1M 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 10Y 20Y 25Y Source: Bangko Sentral ng Pilipinas. 1/ Against major trading Source: Philippine Dealing and Exchange Corporation (PDEX) partners (US, Japan, European Monetary Union, United Kingdom). 7 PHILIPPINE QUARTERLY UPDATE - June 2010 Policies Monetary Policy 14. The central bank has started to tighten monetary policy though, with a rapidly closing output gap, the stance remains accommodative. Monetary conditions tightened in 2010 thanks to the withdrawal of liquidity-enhancing measures in January (see February 2010 Philippines Quarterly Update) and an appreciation of the Peso's effective exchange rate compared to the same period in 2009 (Figure 19).5 However, with the surge in growth the output gap is closing rapidly so that this measured and paced unwinding of the monetary policy easing still results in a significantly accommodative policy stance. The growth in bank lending (and more generally private sector credit) to the economy remained slow--at an average of 6.9 percent in April and May (Figure 22)--despite a decrease in bank lending rates (Figure 21). A wait-and- see attitude by the business community ahead of the May elections likely explains these developments. 15. Inflationary pressures, mainly coming from rising utility prices, have been contained in early 2010 (Figure 23). From January to May 2010, overall inflation fluctuated within a 4.0 to 4.4 percent range which is within the central bank's forecast and slightly below the general public's median expectation of 4.7 percent6 (Figure 33, page 22). Inflationary pressures have remained concentrated in the utility and services sectors--these account for 48 percent of the January to May inflation--as well as fuel. Higher oil prices and lower hydro-electric power generation due to the El Niño drought has affected the costs of generating of electricity which account for more than half of the electricity bill (Figure 25 and Figure 26).7 Production stoppages in some power plants for maintenance work further added to electricity supply bottlenecks (culminating in brownouts in Mindanao and, to a lesser extent in Cebu) and caused utility inflation to rise in the spot market (WESM). Food prices have remained stable despite the El Niño phenomenon. The producer price index in manufacturing has been declining since May 2009 (the YTD decline reached 1.7 percent in April; Figure 24). Figure 21. Incomplete pass through from monetary policy Figure 22. Private sector credit to the economy has stabi- to bank lending rates lized; bank credit growth remains low Cumulative Reduction in Selected Domestic Money and Credit Growth 27 Interest Rates 1.5 22 Bank Lending Rate RRP Rates 17 in percentage points 0.5 Rediscount Rates in percent 12 -0.5 7 -1.5 2 -2.5 -3 Financial Assets Private sector credit -3.5 Bank Lending M2 -8 Mar-09 Mar-10 May-09 May-10 Dec-08 Dec-09 Oct-09 Jan-09 Jul-09 Aug-09 Jan-10 Apr-09 Apr-10 Feb-09 Feb-10 Sep-09 Jun-09 Nov-09 May-08 May-09 May-10 Dec-08 Dec-09 Oct-08 Oct-09 Mar-08 Mar-09 Mar-10 Jul-08 Aug-08 Jan-09 Jul-09 Aug-09 Jan-10 Apr-08 Apr-09 Apr-10 Feb-08 Feb-09 Feb-10 Sep-08 Sep-09 Jun-08 Nov-08 Jun-09 Nov-09 Source: Bangko Sentral ng Pilipinas /World Bank Staff Estimates Source: Bangko Sentral ng Pilipinas (BSP) 5 The BSP's policy rates--the overnight borrowing and lending rates--have remained unchanged since July 2009 at 4 and 6 percent, respectively. Both are 200 basis points lower than their pre-crisis levels. The pass-through from the policy rates to bank lending rates has remained incomplete at 80 percent (Figure 21). This has likely been a key factor being banks' surge in profitability in 2009 (Table 1). 6 BSP poll among private sector economists; as of March 2010. BSP Q1Inflation Report The regulated MERALCO distribution rate was increased by 23.3 percent in May 2010. A further increase is being considered by the regulator (ERC). If approved, 7 it would be effective in July 2010. 8 The Recovery Continues Despite Global Financial Turbulence Figure 23. Core and headline inflation have been Figure 24. Petroleum products have been low and stable in 2010 the key driver of producer price inflation 14 Contribution to YoY Inflation Rate PPI Sector Comparative Growth Rates Petroleum Products 10 Footwear and Wearing Apparel YOY Growth April Leather Products YOY Growth YTD Publishing and Printing percent/ ppts 6 Tobacco Basic Metals Food Manufacturing 2 Paper and Paper Products Non-Metallic Mineral Products Fabricated Metals -2 Fuel, Light & Water Others Miscellaneous Manufactures Food Inflation rate Electrical Machinery Core Inflation Machinery (except Electrical) -6 Furniture and Fixtures TOTAL MANUFACTURING Nov-07 Jan-08 Nov-08 Jan-09 Nov-09 Jan-10 Sep-07 Sep-08 Sep-09 May-08 May-09 May-10 Jul-07 Jul-08 Jul-09 Mar-08 Mar-09 Mar-10 -50 -30 -10 10 30 percent Source: National Statistics Office (NSO) Source: Bangko Sentral ng Pilipinas (BSP) Figure 25. Electricity generation costs account for Figure 26. With rising oil prices and reduced most of the retail cost of electricity 1/ hydro-power, generation costs have surged UNIVERSAL MERALCO Billing Component Changes in Generation Charges (MERALCO CHARGES bill) and Overall Light Inflation 1% TAX 60 6% 50 Generation Charge CROSS SUBSIDIES 40 Light 0% 30 MERALCO percent SYSTEM LOSS CHARGES 20 CHARGES 15% 10 8% 0 TRANSMISSIO -10 N -20 12% -30 Dec-07 Oct-08 Aug-09 Apr-06 Jan-05 Nov-05 Jan-10 Sep-06 Feb-07 May-08 Jun-05 Jun-10 Jul-07 Mar-09 GENERATION 58% Source: MERALCO; 1/ Average 2003-09 Source: MERALCO Fiscal Policy 16. Notwithstanding a 2010 goal of modest fiscal consolidation, fiscal policy has been noticeably expansionary to date, especially on a cyclically-adjusted basis. Despite strong economic growth and a closing output gap, the overall fiscal balance of the National Government worsened through May as expenditures expanded and revenues remained flat-- reaching a deficit of 2 percent of (annual) GDP, 0.3 percentage points of GDP larger than in the same period in 2009 (Table 8 page 32).8 Total revenue performance was on par with that of 2009, but the tax effort increased moderately while non-tax revenues decreased mostly due to lower interest rates. The deficit driver was increased spending and 8 This deterioration exceeds the 0.1 percent of GDP in ERP spending allocated to the 2010 budget. 9 PHILIPPINE QUARTERLY UPDATE - June 2010 especially non-interest (i.e., primary) spending, which rose by 0.5 percentage points of GDP to 6.3 percent of GDP. This resulted in a primary fiscal deficit of 0.3 percent of GDP against a surplus in the first five months of 2009. Hence, during the first five months of 2010, debt was issued to pay the interest on existing debt. The structural deterioration in NG fiscal balances started in 2007 (Figure 27).9 Figure 27. The NG fiscal deficit is predominantly structural; Figure 28. Both revenue and expenditure structurally only structural reforms can reduce it deteriorated since 2007 Decomposition Analysis of the Fiscal Balance Components of the Structural Fiscal Balance 2.00 25.0 6.0 1.00 5.0 20.0 % of potential GDP % of potential GDP 0.00 % of potential gdp 4.0 -1.00 15.0 3.0 -2.00 2.0 10.0 -3.00 1.0 -4.00 5.0 0.0 -5.00 cyclical deficit 0.0 -1.0 cyclically-adjusted deficit -6.00 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Revenues Expenses Deficit (RHS) Source: Updated (with new data) WB staff calculation based on the second method presented in Fedelino et.al., 2009, "Computing Cyclically Adjusted Balances and Automatic Stabilizers", IMF, FAD Technical Notes and Manual, Washington DC. See February 2010 Philippines Quarterly Update for a more detailed discussion of structural and cyclical fiscal balances in the Philippines. 17. Despite the strong economic rebound, tax buoyancy improved only slightly in the year through May confirming the structural nature of the 2009 tax effort decline (Figure 28). In 2009 the tax effort fell by 1.4 percentage point of GDP in 2009 (Table 8 page 32), mostly due to structural tax cuts rather than cyclical factors. Indeed, despite strong growth in early 2010, through May 2010 the tax effort improved by a modest 0.1 percentage points of GDP to 5.4 percent compared to the same period in 2009 (Figure 29). This improvement originated almost entirely from the Bureau of Customs, as importsrecovered from the sharp fall witnessed in 2009. Collections from the Bureau of Internal Revenue over that same period remained broadly unchanged from 2009, at 4.1 percent of GDP. 18. Government spending surged past its 2009 level--which included Figure 29. The buoyancy of the tax effort is the frontloaded stimulus package--on account of both structural modest, highlighting large structural and election-related factors (Table 8 page 32). Total expenditure decreases since 2009 in the year through May rose by 0.4 percentage points of GDP to 8 Tax Effort percent of annual GDP compared to the same period in 2009. In 2009, 7 total spending was ratcheted up by 0.8 percentage points of GDP 18 16 LHS RHS 6 from its 2009 level, as the Government implemented its Economic % of Quarterly GDP 14 5 12 Resiliency Plan (ERP). Primary spending increased even more since % of Annual GDP 4 10 3 2008. Permanent increases stemmed from the Salary Standardization 8 6 2 Law (SSL III), while election-related spending probably accounted for 4 2 1 some of the increases in maintenance and other operating expenses 0 0 (MOOE). Capital spending exceeded its level of the first five months of q107 q207 q307 q407 q108 q208 q308 q408 q109 q209 q309 q409 q110 Jan-May '06 Jan-May '07 Jan-May '08 Jan-May '09 Jan-May '10 2009. The decline in interest payments (GFS basis), partly reflecting a Others BOC BIR strengthening of the Peso as well as low issuance rates given ample Source: Bureau of Treasury (BTr), CEIC and National domestic liquidity, was not enough to offset increases in primary Statistical Coordination Board (NSCB) spending. 9 The change in fiscal balances from 2008 to 2009 was mostly due to a structural deterioration on the revenue side--See the February 2010 issue of the Philippines Quarterly Update for details. 10 The Recovery Continues Despite Global Financial Turbulence 19. Government financing has been broad-based across domestic and external borrowings. Notwithstanding global market turbulences, the financing the large fiscal deficit and rolling-over the debt stock have remained favorable. Philippines sovereign spreads have continued to fall, reaching level significantly below the pre-Lehman Brothers crisis level. Hence, average effective interest rates continued to decrease in 2010. Domestically, the first of its-kind issuance of multicurrency retail treasury bonds (RTBs) worth $346 million aimed at overseas Filipino workers (OFWs) started in April. In the year through April, the gross borrowing mix has been 40 percent external and 60 percent domestic. Prospects External Environment 20. Global growth is firming up and is projected to reach 3.1-3.3 percent in 2010 globally (6.1­6.2 percent in developing countries)--Table 2. The global economy is at a very difficult juncture.10 The situation in Greece and in other high-income European countries with high debt and high government deficits is evolving, and there is a significant uncertainty concerning its growth impact. Growth in the United States and Japan is firming up and has spread to the private-sector, becoming more broadly based and self-sustaining. In contrast, European growth remains weak and narrowly-based on "bounce-back" factors such as net exports, inventories and stimulus measures. Industrial production and international trade continue to expand rapidly, but are beginning to slow as the recovery moves into a more mature phase. Downside risks include a European debt crisis that has the potential to derail global growth. Deeper and more widespread effects might arise if the situation causes investors to become significantly more risk averse; or in a less likely scenario, if there is a major crisis of confidence. 21. Contagion from the European sovereign debt crisis to developing countries is so far limited Table 2. Global Economic Prospects, 2007-2012 to two countries with weak fiscal positions but complacency should be avoided. The price of 2007 2008 2009 2/ 2010 3/ 2011 3/ 2012 3/ Real GDP growth1/ credit default swaps for venezuela and Argentina World 3.9 1.7 -2.1 3.3 3.3 3.5 jumped by some 500 basis points compared to High income 2.6 0.4 -3.3 2.3 2.4 2.7 pre-crisis levels. The rapid decline of the euro, United States 2.1 0.4 -2.4 3.3 2.9 3.0 Euro area 2.7 0.5 -4.1 0.7 1.3 1.8 equity-market losses and lower commodity Developing Countries 8.1 5.6 1.7 6.2 6.0 6.0 prices point to rapid market re-assessment of East Asia and Pacific 11.4 8.0 7.1 8.7 7.8 7.7 economic and fiscal prospects (Box 3 analyzes the China 13.0 9.0 8.7 9.5 8.5 8.2 impact of the European sovereign debt crisis on Memorandum items: the Philippines). Both Argentina and venezuela's Global Conditions gross debt to GDP ratio are lower than that of World trade volume 7.2 3.0 -11.6 11.2 6.8 7.2 Manufactures Unit export valued 5.5 6.0 -4.9 0.0 -3.7 0.0 the Philippines. Recent large debt defaults have Commodity prices (US$ terms) occurred at debt levels that were notably lower Non-energy commodities 17.1 21.0 -21.6 16.8 -4.0 -5.4 than that of the Philippines.11 However, poor Oil Price (US$ per barrel)4/ 71.1 97.0 61.8 78.1 74.6 73.9 Oil Price (percent change) 10.6 36.4 -36.3 26.4 -4.5 -0.9 handling of the European crisis could potentially result in renewed turmoil in global financial Source: Global Economic Prospects Summer 2010, World Bank markets as banks in the European Union hold a 1/ Aggregate growth rates calculated using constant 2005 massive amount of Greek, Spanish and Portuguese U.S. dollar GDP weights; 2/ Estimate; 3/ Forecast; 4/ Simple average of Dubai, Brent and West Texas Intermediate. 10 World Bank, Global Economic Prospects (June 2010). 11 For example, Russia in 1998 and Argentina in 2001 had debt-to-GDP ratios of about 50 percent. 11 PHILIPPINE QUARTERLY UPDATE - June 2010 debt. Sovereign debt restructuring could cause major turmoil among the financial sector in Europe if mismanaged and would require massive capital injections into these European banks. This could sap capital flows to East Asia, make it more difficult for any country, the Philippines including, to avail of foreign financing. 22. Full recovery of world trade volume is expected by the end of 2010. In East Asia, the rapid growth of trade in early 2010 has brought most of the countries in the region to pre-crisis levels. Looking forward, export growth is expected to ease to more sustainable rates, as the global inventory cycle diminishes, China's import demand eases and growth in the OECD (notably Europe) continues to disappoint. Output and Demand 23. We are revising our GDP growth forecasts upwards to 4.4 percent in 2010 and 4.0 percent in 2011, based on the strong first quarter growth performance and leading economic indicators. The 7.3 percent growth seen in the Q1 is expected to gradually decline over the next three quarters as (1) the recovery base effect from the global recession dissipates, (2) election- related and (typhoons) reconstruction-related spending wane, (3) fiscal policy is not longer significantly expansionary, (4) the real peso value of remittances is broadly flat so that it no longer provides an important boost to private consumption, and (5) the agricultural sector continues to underperform as La Niña follows El Niño. As the Aquino administration takes office, and given its strong anti-corruption, improved governance and business climate agenda, growth prospects for 2011 and beyond could be significantly higher (one channel for such incremental growth could be a surge in investment--which has steadily declined since 1997 and reached a record low of 14.6 percent of GDP in 2009). Until more visibility on the reform prospects, measures, and implementation arises, our growth forecasts for 2011 and 2012 are at 4.0 percent (Table 7 page 32), reflecting both our global prospects, the projected progressive withdrawal of monetary and fiscal stimuli, and the economy's output potential given existing bottlenecks. Domestically-driven downside risks include a broadening of the brownouts currently being experienced in Mindanao and some parts of the visayas (Box 1 further dwells on the particular development challenges and opportunities of Mindanao). 24. Demand will continue to be broad-based with investment taking the lead. Investment growth is projected to reach 9.4 percent in 2010. The strong growth in overall investment is a result of the low 2009 base when investment sharply contracted during the crisis. Car sales, an indicator for investment in durable investment, are projected by the Chamber of Automotive Manufacturers in the Philippines Inc. (CAMPI) to grow by 11 percent (up from their earlier projection of 4 percent).12 The end of the wait-and-see attitude of investors ahead of the election is projected to result in increased investment in the remaining of 2010. Significant and sustainable increases in investment would remain largely determined by the investment climate and the country's overall competitiveness (Box 4). 25. Private consumption will continue to normalize as consumer sentiment continues to improve. An election-driven consumption and budget cycle is observable in the Philippines (Figure 30). We therefore project consumption to remain robust in Q2 before normalizing in subsequent quarters. With improving consumer sentiment over the next twelve months (Figure 31),13 positive consumption indicators,14 and moderate improvements in the labor market, private consumption is expected to grow by 5.3 percent in 2010 before slowing down to 4.9 percent in 2011. Our projections of broadly flat remittance inflows (in real peso terms) would act as a moderate brake on private consumption, in contrast to the large boost (about 10 percent growth rate) it provided during the midst of the global recession. 12 To some extent this good growth performance reflects demand from families and businesses whose cars were damaged during the Ondoy- and Pepeng-related floods in late 2009 so that the underlying demand is actually weaker. 13 Consumer Expectations Survey, Bangko Sentral ng Pilipinas, second quarter 2010. 14 Through April, loans for household consumption have grown at double digit annual rates, indicating strong spending so far. 12 The Recovery Continues Despite Global Financial Turbulence 26. Supply indicators, including business sentiment, suggest better prospects for manufacturing but risks are also present, especially in agriculture. Business sentiment continues to be bullish in second quarter of 2010 (Figure 31). Manufacturing, particularly the export-driven sub-sector, is projected to rapidly return to pre-crisis level. Leading indicators for exports point to a positive outlook. Downside risks to overall growth are, however, present. The agriculture sector is particularly at risk, with a 50 percent probability of La Niña occurring in the second half of the year. In contrast to the El Niño drought, but equally devastating for the agriculture sector, the La Niña phenomenon causes heavy rainfall. Figure 30. Growth is higher during first two quarters Figure 31. Business and consumer sentiments improves during election years. for the next twelve months Difference in GDP Growth: Index of Confidence Outlook Election vs. Non-election 60 10 40 8 20 percentage point 6 0 4 -20 2 0 -40 -2 -60 -4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 -6 q1 q2 q3 q4 2007 2008 2009 2010 Investment Private Cons Govt Cons Net Exports Business: Current Quarter Business: next Quarter Discrepancy GDP Consumer: Current Quarter Consumer: Next Quarter Consumer: Next 12 Mos. Source: National Statistics Office, World Bank staff estimate. Election Years: 2004,2007; Non-election years: 2005,2006,2008. Source: Bangko Sentral ng Pilipinas Employment and Poverty 27. Rapid demographic growth and a possible downsizing of crisis-mitigating public job programs will continue to put pressure on the labor market. Projections from the United Nations point to continued rapid demographic growth of the working age population over the next few years. While the economy is projected to recover, unless it has a strong job-intensity, the rapid increase in the potential labor force would result in excess labor, which would put pressure on real wages (these have already been falling since 2001) and continue generating large scale demand for overseas deployments. The projected continued weakness in the agriculture sector for the second half of 2010 due to the impact of La Niña, could led to further large scale net job destruction in the sector, with severe consequences for rural income and poverty. While CLEEP's job program provided some buffer during the economic slowdown, such programs are expected to be reduced in scale as the economy recovers. 28. Policies aimed at fostering greater labor mobility while strengthening the social safety net would help improve the job intensity of the recovery (World Bank, 201015). While labor market laws in the Philippines aim to protect workers, in practice, stringent and very protective and generous features of these laws often interfere with the labor market clearing process and artificially raise the cost of formal labor. This is particularly the case for low skilled jobs where the mandated minimum wage--at 150 percent of GDP per capita (in 2007)--is likely to exceed many workers marginal labor productivity. This effectively pushes a large share of the workforce into the informal labor market were no protection is afforded. A review the existing labor market legislation and institutions--especially those associated with minimum wages 15 World Bank (2010) Philippines: Fostering More Inclusive Growth, Manila. 13 PHILIPPINE QUARTERLY UPDATE - June 2010 Box 1. Economic Development and Peace: the Case of Mindanao 1/ Among the Philippines' three major islands Mindanao has consistently lagged behind Luzon and visayas economically, despite rich natural resources and opportunities opened up by recent market reforms. With a third of the country's total land area, good soil and rainfall, and a relatively typhoon-free climate, Mindanao has earned a reputation as the country's food basket. Yet it contributes only about a fifth of the Philippine GDP, and a fourth of total employment (Figure 32). A vicious circle of conflict and underdevelopment is the most common reason cited to explain why Mindanao has failed to become a large growth center. Figure 32. Economic density in the Philippines, 2007 1/ A recent World Bank study1/ building on the frame-work of the World Development Report 2009 argues that Mindanao also needs to achieve economic integration--both internal and external--to fulfilwits development potential and as a peace- building strategy. Economic integration stimulates growth through greater concentration of economic activities in certain localities. Growth in economic density attracts people to these places in search of economic opportunities and spurs demand for increasingly specialized goods and services, paving the way toward more growth and convergence of living standards across areas. A strategy for economic integration promotes growth of economic density in key leading areas,such as port cities, with complementary programsto promote the efficient flow of people, goods, and ideas so that leading areas can further specialize and growth opportunities can spill over to neighboring areas. When labor mobility is high, when doing business in different territories is simple and open to the entry of capital and Source: World Bank. 2009, World Development Report 2009: Reshaping Economic Geography. Washington, DC.1/ Expressed in terms of gross technology, and when efficient infrastructure regional domestic product (GRDP) per square kilometer provides easy physical access to remote areas,standards of living in lagging areas tend to converge with their more prosperous neighbors. Integration also has a social dimension, forged by universal provision of basic social services and equitable opportunities for citizens to realize their human potential. The basic development challenge that Mindanao, particularly Muslim Mindanao, faces is how to catch up with the level of development that leading regions in Luzon and visayas have achieved. Major tasks include: connecting the five growth centers of Mindanao to high-density areas within and even outside of the Philippines; and allowing the economic benefits of Mindanao's growing cities to spill over to communities in the peripheries. Achieving an economic turnaround for Mindanao will require Mindanao's urban growth centers--such as Cagayan de Oro, Davao, Iligan, General Santos, and Zamboanga cities--to become economically integrated with economically dense areas outside Mindanao. Sharing the benefits of development from the capital and growth centers with the lagging areas depends on mobility of all kinds, from labor to capital. Mindanao should aim to secure law and order, strengthen institutions, promote social infrastructure, and allow market forces to foster economic integration. 14 The Recovery Continues Despite Global Financial Turbulence and limitations on temporary contractual arrangements--is warranted. At the same time, while notable improvements in targeting occurred with the introduction of the 4Ps/CCT program, there is still a need to revisit many social protection and subsidy programs to enhance their targeting and accountability. This should be undertaken through: (1) better targeting--using the 4Ps targeting system--to reduce the amount of program leakage and ensure that social protection programs benefit the poor and vulnerable; and (2) developing the 4Ps program to serve as the backbone of a modern and more consolidated social protection system. Balance of Payments and External Debt 29. The country's external position remains favorable and strong enough to provide a reasonable buffer against moderate external shocks. The current account surplus is projected to remain comfortable, at 3.8 percent of GDP, in a large part driven by continued large remittance inflows. The latter are projected to grow by 8 percent in 2010 in dollar terms in large part thanks to continued large deployment in 2009, especially in the number of seafarers (Box 2). Downside risk to our remittances projections include (1) a further weakening of the euro vis-à-vis the dollar and (2) a weaker than projected economic growth and higher taxes in Europe that could lead to lower (net of tax) wages for OFWs and reduce new hires (as was the case during the global recession--Box 2). Gross international reserves are projected to reach $48.5 billion at end-2010, providing ample coverage for both imports (8.3 months) and short-term external debt by residual maturity. 30. Exports and imports are expected to continue expanding, but a recovery to pre-crisis levels will take time. Good performance to date in 2010 on the export side and improved book order going forward has led many exporters to revise upwards their annual exports projections.16 We project exports growth to reach 20 percent by end-2010 (this would still leave annual export values 9 percent below the pre-crisis level) while imports growth is projected to reach 19.2 percent. The trade deficit is projected to reach 5.5 percent of GDP in 2010. Monetary Policy 31. As the output gap closes, the accommodative monetary policy introduced in 2008 would need to be gradually unwound, starting in 2010. Given our growth outlook, the output gap would rapidly close. Combined with ample liquidity in the economy, this warrants a tightening of monetary policy. Reaching a broadly neutral stance in 2010 seems warranted. This could be achieved, for example, through an increase in the BSP's key policy rates which, given our 2010 inflation projection, are negative to slightly positive (the real overnight borrowing rate is at -0.8 percent and the real lending rate is at 1.2 percent). 32. Inflation is expected to remain within the BSP's target band. The BSP lowered its inflation forecast to 4.7 percent for 2010 and to 3.6 percent for Figure 33. Stable inflation outlook 2011. Private sector inflation expectations are consistent with such forecasts (Figure 33). A strong peso will help reduce imported inflation while a weak labor market would limit overall price increases. Oil prices for the remaining of 2010 are projected to remain broadly stable. The end of maintenance work on key power plants should limit brownouts and re-duce pressure on spot electricity prices. However, upward inflationary pressures persist in electricity prices as one pending application for rate increase by MERALCO Source: Bangko Sentral ng Pilipinas. 16 The Semiconductor and Electronics Industries of the Philippines, Inc. (SEIPI) latest forecast is that the sector's exports would grow by 25 percent in 2010, against 15-20 percent in their earlier forecast. 15 PHILIPPINE QUARTERLY UPDATE - June 2010 at the Energy Regulatory Commission could be approved and become effective in July 2010. Some upside inflation risk is the potential second round effect from the July 2010 5.8 percent increase in the minimum wages in the National Capital Region; this could trigger a broader wage increases after a pause observed in 2009. These risks notwithstanding, inflation is expected to reach 4.8 percent in 2010 and 4.0 percent in 2011. Fiscal Policy 33. Although fiscal policy is projected to be expansionary on a cyclically-adjusted basis in 2010, a gradual unwinding of the fiscal stimulus would have been warranted. As economic growth gathers pace between 2009 and 2010 (from 1.1 to 4.4 percent growth), our projection of unchanged overall fiscal deficit implies a notable cyclically-adjusted fiscal stimulus-- the fourth year in a row (Figure 27). Yet, with the output gap closing rapidly and relatively high debt level, a tighter fiscal stance would have been desirable. Given the size of the deficit through May, the weak tax revenue buoyancy to date, and known increases in wages and salaries in July due to the second installment of the Salary Standardization law, containing the deficit to our projected 4.1 percent of GDP would require (1) improved tax buoyancy as the Aquino government puts effort and political capital into improving tax compliance (e.g., through the effective resurgence of the RATE program) and governance--this is expected to push the tax effort to 13.2 percent of GDP, still significantly below the 2008 effort (Table 8); and (2) a slowing of primary discretionary spending as the government implements a selective zero-based budgeting for the 2011 budget. This is expected to produce some benefits (in terms of lower disbursements) for 2010 as spending programs are assessed in terms of their rationale, their efficiency, and their pro-poor bias. For the second year in a row, a primary fiscal deficit is projected for 2010; NG Debt would continue to rise, as a ratio of GDP, for the fourth year in a row (Table 7). 34. The European fiscal crises point to the risk of reaching even moderate debt levels and warrant a comprehensive and credible fiscal consolidation plan in the Philippines. At 60 percent of GDP (end-September 2009), the Philippines' public debt stock is comparable to the levels of some of the more vulnerable European economies (e.g., Spain). As most of the Philippines' fiscal deficit is of a structural/permanent nature, it can only be significantly reduced through reform measures. World Bank simulations reveal that under unchanged policies public debt is on an upward trend, with significant upside risks (in particular to lower economic growth and to exchange rate depreciation)--Figure 39. The presence of large fiscal risks further warrants the need for fiscal prudence. Hence the new government should (1) lay out a clear exit strategy from the current expansionary fiscal policy--as the economy is reaching record growth rates, undertaking a pro-cyclical fiscal policy when fiscal space is limited heightens macro-fiscal risks and severely constrains future fiscal policy flexibility; and (2) introduce a comprehensive and detailed medium-term fiscal consolidation plan. The Aquino's administration focus on improving the efficiency of both revenue and expenditure is welcome in that regard and is expected to generate important fiscal space. To further strengthen the new government's stated goal of reducing the fiscal deficit to 2 percent of GDP within three years, contingency measures could usefully be identified and introduced in a comprehensive reform package. 16 The Recovery Continues Despite Global Financial Turbulence Box 2. Philippines Migration Patterns during the Global Recession: Resiliency through Diversification and Flexibility A World Bank-commissioned paper examined how overseas Filipino workers (OFWs) have fared in the face of the crisis.1/ In the wake of the recent global financial crisis/recession of 2008-09, many fears have been expressed that the crisis would reduce demand for migrant workers. The Philippines sends over 1.5 million migrants abroad each year as contract workers to nearly all countries of the world. Started in 1974, the Overseas Employment Program has been instrumental in lifting many Filipino households out of poverty. The key findings from the World Bank study are the following: · Strong deployment growth: Despite the global recession, total deployments (both new hires and rehires) to all destinations actually posted stronger growth rates than in the pre-crisis period. The worst fears related to the impact of the crisis on OFWs have not come to pass: growth rates of both land- and sea-based OFW contracts during the crisis years (2008-09) have actually exceeded their growth rates in the pre-crisis period (Figure 34).2/ · Deployment slowed down by global recession: Growth in OFW deployments would probably have been even higher if the global recession had not occurred. Indeed, an econometric analysis reveals that demand for OFWs in the past 12 years has risen and fallen with economic conditions in migrants' countries of destination. The fact that OFW departures managed to increase during the crisis may in part be due to the fact that the top OFW destinations were not as affected as the rest of the world--as seen in Figure 35: from 2002-09 the highest volume OFW destinations performed better than either the U.S. or the world as a whole; This remains the case during the crisis period of 2008-09. · Most affected OFW categories: Males, production worker (such as construction workers), and new hires/3 experienced some duress during the global recession, as revealed by the decline in their new deployments. Several of the top 20 destination countries saw substantial declines in new hire deployments from 2008-09. Countries with rates of negative deployment growth worse than 10% include the UAE, Japan, Italy, the UK, South Korea, Canada, and the US. Each of these countries also experienced negative GDP growth over 2008-09 (save South Korea, whose rate of growth was only slightly positive, at 0.2%). Most of these countries nonetheless posted positive growth of rehires (e.g., UAE, Italy, and the US). · Most resilient OFW categories: Females, service workers, seafarers, and rehires, on the other hand, appear to be less susceptible to negative shocks from the financial crisis, and in many cases, employment in these subgroups actually increases (especially seafarers). The driving force behind the increases in total OFW deployment over time is increases in contract renewals (Figure 36). 1/ David McKenzie, Dean Yang, and Caroline Theoharides "The Impact of the Global Financial Crisis on Overseas Filipino Workers", mimeo, June 2010. The data used in the analysis were compiled from the Philippine Overseas Employment Agency's (POEA) annual Compendium of Overseas Employment Statistics. By using the POEA data, it is possible not only to test the effect of macroeconomic shocks on total migration flows, but also to look for heterogeneous effects by various OFW characteristics such as gender and occupation. 2/ Sea- and land-based OFWs increased at similar rates during the pre-crisis period (at 3.87% and 3.59% annual growth rates, respectively), from 2004 to 2007. Between 2007 and 2008, however, land-based OFWs increased at a dramatic rate of 9.6%, and from 2008-09 the growth rate was 5.87%, still higher than the growth rate in the pre-crisis period. The deployment of sea-based OFWs remained roughly stable between 2007 and 2008, the first year of the crisis (the annual growth rate between those years was slightly negative, -0.93%), but then increased substantially at a rate of 12.38% from 2008-09 as the global economy entered the depth of the financial crisis. 3/ An OFW is considered a new migrant if he or she is starting a contract with a new company or in a new destination. Contract renewal, on the other hand, indicates that the OFW signed a contract with their previous employer without a break in the employment spell. 17 PHILIPPINE QUARTERLY UPDATE - June 2010 Box 2 (continued). Philippines Migration Patterns during the Global Recession: Resiliency through Diversification and Flexibility Figure 34. Total OFW deployments accelerated Figure 35. OFW deployment trends upward, even during the global recession during the global recession count of OFWs count of OFWs Source: POEA and McKenzie et al. (2010). During the global recession, male migration declined while female migration increased (Figure 37). /4 This is likely indicative of differences in the types of occupations that employ males and females. Female OFWs are more likely to be employed in professional or service sector jobs such as nursing or domestic help. Males, however, are more likely to be employed in construction. Inasmuch as construction was more adversely affected by the crisis than the professional or service sectors, these differences in male and female deployments during the crisis are to be expected Figure 36. Rehires fared well during the Figure 37. Asymmetric gender response to global recession the economic cycle count of OFWs count of OFWs Source: POEA and McKenzie et al. (2010). The only sectors to experience deployment growth during the crisis were agriculture, the service industry, and seafaring (Figure 38). All other major occupation groups contracted in the face of the global crisis. The two largest employers of OFWs besides seafarers are production occupations and the service sector. Despite the onset of the global crisis in 2008, the upward trend of service workers continued through 2009. Production workers, on the other hand, were experiencing a slight upward trend from 2004 to 2008. In 2008, however, employment of production workers declined. Industries utilizing production workers (which include construction) were likely more adversely affected by the financial crisis, while the service industry appears to have been more insulated from it. _________________________________________________ 4/ The gender composition of OFWs makes the Philippines a unique migrant-sending country. Unlike migration from many other countries where male dominated migration is the norm, migration in the Philippines is much more gender-balanced, with women accounting for slightly more than half of all OFWs. 18 The Recovery Continues Despite Global Financial Turbulence Box 2 (continued). Philippines Migration Patterns during the Global Recession: Resiliency through Diversification and Flexibility While the shipping industry was hard-hit by the global Figure 38. Occupational hazards during recession and the collapse in global trade, sea-farers the global recession deployment surged in 2009. Almost a quarter of OFWs are employed in sea-based occupations (Figure 34). Despite the global recession, employment of seafarers increased substantially in 2009. This is particularly striking given the large negative effects of count of OFWs the crisis on the shipping industry. Starting in 2008, all types of ships from oil tankers to container ships have been adversely affected by the crisis. Lack of credit had such severe repercussions on the shipping industry that as of December 2009, 10 percent of the world's fleet was not in operation./5 Given the financial duress experienced by the shipping industry, it is even more striking that Filipinos managed to not only maintain employment in shipping, but also experience Source: POEA and McKenzie et al. (2010). large increases. This result may suggest that due to financial constraints, the shipping industry shifted to more inexpensive Filipino labor, thus inducing large Table 3. Deployment of Seafarers by Top 10 increases in the employment of Filipino seafarers. Vessel Types All seafaring occupations experienced growth throughout the crisis (Table 3). Gas, chemical, and oil tankers experienced the largest growth in OFWs during the crisis. Only passenger ships and tankers showed negative growth in OFWs at any point in the crisis. Even these two types of ships recovered between 2008 and 2009. There does not seem to be a consistent effect on more or less skilled seafaring occupations. _________________________________________________ 5/ Frost and Sullivan report on the shipping industry, December 2009. http://www.frost.com/prod/servlet/market-insight-top.pag?docid=188028767 19 PHILIPPINE QUARTERLY UPDATE - June 2010 Box 3. The European Sovereign Debt Turmoil and the Philippines The Philippines has minimal direct trade and financial linkages to troubled economies in Europe's periphery. Together, the five at-risk economies--Greece, Spain, Italy, Ireland and Portugal--account for modest shares of annual trade and investment flows of the Philippines (Table 4). In particular, relations with Greece--the epicenter of the crisis--deal mostly with Filipino workers many of whom are in the maritime industry where remittances have actually increased during the global financial crisis (Box 2 page 24). Financial links with the five countries are even less notable. Any exposures Filipino investors, including banks, may have to their sovereign debts are protected by a 750 billion-euro aid package backed by the European Commission and the International Monetary Fund.1/ A wider continental confidence crisis would increase risks of contagion and slower growth but barring a double dip global recession, overall impact will likely be limited. Prevailing pessimism over the affected economies' ability to meet tough fiscal austerity targets has bred fears of the crisis spilling over to a wider set of countries in Europe (including Eastern Europe). Nevertheless, Philippine growth is historically less sensitive to European than US growth (Table 4). On the other hand, with about two-thirds of Philippine exports to the EU in cyclically-sensitive consumer electronics products, the country may see sharper declines in exports as European growth weakens. Remittances are projected to remain resilient given the well documented diversification of the Philippines' OFW2/ as well as structural European factors such as its aging population which creates demand for Filipino workers in the health and services sector. The impact of a wider European crisis, however, may be larger to the extent that shocks transmit through broader indirect channels. The Philippines is part of the global electronics production chain with some exports of intermediate goods to Asian countries ultimately finding their way to advanced economies. A global economic slowdown would undoubtedly impact growth in the Philippines (especially since fiscal space for a fiscal stimulus is now extremely limited). What could potentially be more significant, however, is contagion risk from financial ties. While BIS data3/ reveal that the Philippines is less financially integrated with the EU5 countries than some Asian countries, a global and indiscriminate reduction in risk appetites would indirectly affect the Philippines. For example, further deleveraging by European banks with substantial holdings of at-risk sovereign debts could increase funding costs for global bonds which have been an important financing source for the Philippines. However, to date financial markets have been mostly concerned about the trio of (1) weak public finances, (2) large current account deficits, and (3) a weak banking system. Save for the first factor, the Philippines has a current account surplus (and, more generally, a healthy external position--Table 5), and its banks are conservatives in their lending, funding, and investment strategies. In 1/ Local banks have assets invested in euro- and British pound-denominated securities but these are likely to be quite small relative to assets invested in dollar securities (the financial statements of the Bank of the Philippine Islands for 2009 reveals that only 3.5 percent of assets exposed to foreign exchange risk are euro- and pound-denominated, with liabilities in these currencies comprising 62 percent of the assets). 2/ See Chapter 3 of the 2009 Philippines Development Report, World Bank (2010). 3/ The country's international investment position (IIP) and BIS locational statistics also show that Philippine resident holdings of foreign assets provide substantial offset against liabilities to non-residents. Latest IIP data for 2008 shows the ratio of liabilities to assets at 1.4% while the same ratio for BIS reporting banks is less than 1% in 2009. 20 The Recovery Continues Despite Global Financial Turbulence Box 3 (continued). The European Sovereign Debt Turmoil and the Philippines Tremors from the Greek crisis have led to some short-term volatility in Philippine financial markets but prices have mostly held up so far. Episodes of declining asset values have so far been temporary with the magnitude of price declines/spread increases fairly small relative to market swings during the global financial crisis and with prices mostly recovering soon after (Figure 40). The euro's weakness means reduced peso values for remittances and loss of competitiveness for Philippine exports in European markets. Since the onset of the Greek crisis in November 2009 through end-May 2010, the euro has depreciated steeply against the dollar (by 16 percent) even as most Asian currencies including the peso, appreciated. Assuming the value of the euro stays at May levels for the rest of the year, it would on the average lose over 10 percent of its value against the peso, implying income losses equivalent to about a fifth of 1 percent of GDP on the same amount of flows from Europe last year, a modest sum from a macroeconomic standpoint. However, the loss in competitiveness of Philippine exports in Europe may be a bigger concern. What may soften the impact of this loss in competitiveness are: (1) the rising importance of non-traditional markets, including China, as a source of final demand for Philippine products, and (2) a similar appreciation of most regional currencies with the peso even depreciating against various Asian currencies in real trade-weighted terms (Figure 41). Remittances originating from Euro-area countries would also be under pressure should the peso strengthen significantly against the euro. The euro's weakness may also complicate monetary policy, especially if euro weakness itself triggers more capital inflows to Asia, though imported products would be cheaper. With the Greek crisis stemming from unsustainable public finances, greater scrutiny on the Philippine's own fiscal Figure 39. NG Debt sustainability house is expected. At 60 percent of GDP (end-September 2009), the Philippine's (non-financial public sector) debt stock is comparable to some of the affected economies' debt ratios (notably Spain), eliciting closer market attention on the Philippine's underlying fiscal situation. World Bank simulations indicate that under current policy settings with fiscal deficits expected over the medium-term, Philippine public debt would be slowly rising over time (Figure 39). Public debt is also sensitive to exchange rate shocks and unfavorable interest-growth differentials. Both of these factors could result from a worsening of the Greek crisis. More generally, fiscal risks in the Philippines are likely to Source: World Bank staff (for details on the calculations, receive more scrutiny from financial markets (See Chapter please refer to the July 2009 Philippine Quarterly Update) 2 of the 2009 Philippines Development Report (World Bank, 2010) for an overview of such risks). A credible plan towards fiscal consolidation over the medium-term--along with measures to manage fiscal risks-- would significantly reduce the Philippines' exposure to a worsening of the EU5 crisis. Such credibility could be achieved, for example, by designing a comprehensive and multi-year reform package. Improved public finances would also enable the country to regain policy flexibility to tackle not just global downside risks (such as a worsening of the Greek crisis) but also upside risks whereby large capital inflows would flock to the region. Sound public finances would provide monetary authorities more flexibility to manage such capital flows. 21 PHILIPPINE QUARTERLY UPDATE - June 2010 Box 3 (continued). The European Sovereign Debt Turmoil and the Philippines Table 4. Philippines' exposure to Europe and the EU5 Affected economies Europe EU Total Portugal Ireland Italy Greece Spain Exports, % of total (2009) 21.1 20.7 0.9 0.0 0.1 0.6 0.0 0.2 Exports, % of GDP 5.0 4.9 0.2 0.0 0.0 0.1 0.0 0.0 Imports, % of total (2009) 9.3 7.6 1.1 0.0 0.4 0.4 0.0 0.3 Imports, % of GDP 2.5 2.0 0.3 0.0 0.1 0.1 0.0 0.1 Remittances, % of total (2009) 17.6 14.8 4.8 0.0 0.2 3.0 1.2 0.5 Landbased 11.0 10.0 4.0 0.0 0.2 3.0 0.4 0.4 Seabased 6.7 4.8 0.8 0.0 0.0 0.0 0.7 0.0 Remittances, % of GDP (2009) 1.9 1.6 0.5 0.0 0.0 0.3 0.1 0.1 Landbased 1.2 1.1 0.4 0.0 0.0 0.3 0.0 0.0 Seabased 0.7 0.5 0.1 0.0 0.0 0.0 0.1 0.0 Stock of overseas Filipinos, % of total (2008) 8.5 7.8 2.8 0.1 0.2 1.4 0.5 0.6 Deployed landbased workers, % of total (2009) 4.3 4.1 3.0 0.0 2.1 0.4 0.2 0.3 Tourist arrivals, % of total (2008) 10.8 9.1 1.2 0.2 0.1 0.5 0.0 0.4 Net foreign direct investments, US$m (avg 2005-09) 205 202 1 - 0 0 0 0 Net portfolio investments, US$m (avg, 2007-09) 3,835 3,386 155 1 124 8 - 22 BIS reporting European banks' claims on the Philippines, all sectors, US$m 15,156 13,667 408 - - 377 - 31 Sources: BSP, NSO, NSCB, POEA, DoT, BIS consolidated statistics Table 5. Philippines: Financial Vulnerability Indicators, 2005-2009 2005 2006 2007 2008 2009 External sector GIR, import cover (no. of months) 3.8 4.2 5.8 6.0 8.7 GIR, short-term external debt cover, residual maturity, % 164.6 251.3 300.7 333.2 449.4 GIR to debt-service burden, % 242.6 283.9 439.5 509.9 646.8 GIR to M2, % 42.4 39.9 44.7 49.4 52.8 Net foreign debt, % of GDP 36.1 25.9 14.7 9.8 5.6 Public sector Overall balance, % of GDP 1/ -2.1 0.1 0.2 -0.3 -3.9 Primary balance, % of GDP 1/ 4.3 5.8 4.8 3.8 0.5 Nonfinancial public sector gross financing, % of GDP 1/ 24.3 24.2 18.1 14.9 19.4 Foreign 1/ 5.1 5.3 1.9 1.0 3.8 Nonfinancial public sector debt, % of GDP 85.9 73.9 61.1 60.9 60.8 Foreign 52.3 45.3 34.9 35.4 35.9 Sources: BSP, DoF, IMF; 1/ From IMF Country Reports, various years; 2009 numbers are projections. Figure 40. The Greek crisis' impact on the Philippines Figure 41. The Philippines' REER against various has been moderate and short-lived trading partners Source: asianbondsonline.adb.org, BSP, PSE Source: BSP 22 The Recovery Continues Despite Global Financial Turbulence Box 4. Bottlenecks to the Philippines' Competitiveness: Findings Based on Competitiveness-related Indices The competitiveness of the Philippines has deteriorated noticeably over the past few years in international ranking tables. Given the critical importance of competitiveness for growth, this box provides a detailed look into the various components behind this troublesome trend. Since 2000, the Philippines' competitiveness has markedly declined compared to key neighboring ASEAN countries according to the Global Competitiveness Index (GCI) of the World Economic Forum (WEF)--Figure 42. A steep decline in 2009, is mostly driven by the opacity of government policy making (a drop of 19 places), favoritism in decisions of government officials (an 11 places-decline), a weak judicial system--especially judicial independence and efficiency of legal framework in settling disputes (11 and 19 places lower respectively), high inflation in 2008 (37 places lower), high agricultural policy costs (plummeting by 31 places), and a weaker relationship between wage and labor productivity (17 place lower). Quite strikingly, the Philippines scores lower than Indonesia, Malaysia and Thailand in practically all individual GCI indicators (Figure 43). Figure 43. Competitiveness weaknesses: quality of Figure 42. Declining competitiveness compared public institutions, infrastructure, innovation and to fellow ASEAN countries labor market efficiency Source: GCI 2009/2010 rankings The GCI 2009 ranking suggests that the Philippines' competitiveness is particularly weak in the areas of governance (the quality of Table 6. Global governance ranking of the Philippines public institutions), infrastructure, labor market efficiency and innovation. Within governance-related issues, surveys point out that GCI 2009/2010 Rank Diversion of public funds 122 the business community perceives corruption as the chief constraint Public trust of politicians 130 to their productivity (Investment Climate Survey (ICA) 2006, Enterprise Favoritism in decisions of Survey 2009, the WEF Executive Opinion Survey 2009 and UPS ABM government officials 128 2009)--see also Table 6. Wastefulness of government spending 119 23 PHILIPPINE QUARTERLY UPDATE - June 2010 Box 4 (continued). Bottlenecks to the Philippines' Competitiveness · Governance: The Enterprise Survey 2009 reveals that about one third of firms surveyed expect to pay informal payment to public officials to "get things done" and a half of the firms surveyed expect to give gifts--worth 3-5 percent of a contract--to secure government contracts. The GCI 2009/2010 indicates that ethical behavior of firms has worsened (from 102nd rank in 2008/2009 to 116th in 2009/2010). Senior business executives in the Philippines perceived customs as the most corrupt government body and they noted that the government's fight against corruption was largely ineffective (2008 Bribe Payers Survey by Transparency International). · Infrastructure is a widely-known constraint to productivity of the Philippines--especially as far as the quality of roads, ports and airports, and electricity costs is concerned. Infrastructure connectivity is a particularly important problem. The GCI 2009/2010 ranks the country 98th out of 133. The only East-Asia country to rank below the Philippines is vietnam--whose rank is affected by poor quality of electricity supply. Business leaders rank "inadequate supply of infrastructure" as the third most problematic factor for productivity in the Philippines, while in Malaysia and Thailand no respondents pointed to poor infrastructure as a source of problems. High electricity costs and relatively high loss caused by blackouts are one of the major bottlenecks to business in the Philippines (the ICA 2006 and the Enterprise Survey 2009). · Labor market efficiency: Business executives perceive that the practices of hiring and firing workers is largely impeded by regulations (110th ranking in the GCI 2009/2010). · Innovation: The environment for innovation is weak (99th in terms of innovation). Businesses perceive that the government hardly procure advanced technology products (119th rank) and the quality of scientific research institutions is weak (102nd). The Philippines also ranks poorly as a business-friendly country (the World Bank's Doing Business 2010 ranks the Philippines 144th out of 183 economies). The Philippines scores particularity low in terms of starting and closing a business. Other low-performing areas include getting credits (127th rank), protecting investors (132nd rank), and paying taxes (135th rank). The ICA 2006 and Enterprise Survey 2009 further indicate that "tax" constitutes as a burden to business productivity. In particular, the number of tax payments is high, 47 per annum, compared to the East-Asia average of 25. The 2010 Doing Business survey ranks the Philippines at 162nd place in terms of starting business. The only East-Asia country falling behind the Philippines is Cambodia (173rd). In the Philippines, it takes 52 days to start a business as compared with the EAP average of 41 days. The Philippines requires 15 procedures to start a business against 9 in Indonesia.1/ Simplifying start-up procedures to the regional average level (8), holding all else constant, would alone improve its rank in terms of starting a business by 19 places. Studies find that lower start-up costs encourage firm productivity, reduce corruption, and enhance employment opportunities.2/ The Philippines is one of the most difficult countries to close a business (ranking 153rd in the world according to the 2010 Doing Business survey, the lowest in the East-Asia region). In the Philippines, the recovery rate from closing insolvent firms is a mere 4 percent as opposed to 42 percent in Thailand and 91 percent in Singapore. In general, inefficient insolvency regimes result in low recovery rates.3/ The 2009 Enterprise Survey highlights that informality is a key constraint to business productivity as well: large firms in the services sector perceive informality to be a major constraint to their business. High barriers to starting a business and high costs to close may also explain a large informal sector in the Philippines,4/ suggesting large room for regulatory reform: the GCI 2009/2010 ranks the Philippines 113th in terms of burden of government regulation. _______________________________________________ 1/ IFC (2008), Doing Business in The Philippines 2008, pp. 9-10. Some of these procedures are viewed as redundant. For instance, entrepreneurs need to buy specialized accounting books, obtain authorization to print receipts and have the printed receipts stamped by the BIR. Numerous procedures drive entrepreneurs to intermediaries who can expedite the process with informal dealings. It should be noted however, variation in the number of procedures, time and costs is large at the local level (e.g., the number of procedures at the national level is 11 but varies from four in Marikina and Taguig to 23 in Davao. Furthermore, it requires 27-28 days to process in Taguig and Marikina but 42 days in Davao. Marikina and Taguig have set up one-stop shops to serve the business community). 2/ Perotti and volpin (2004), Antunes and Cavalcanti (2007), Djankov et al. (forthcoming); Chang, Kaltani and Loayza (2009). 3/ Nonetheless, it should be recognized that the Philippines undertook reforms in this area in 2009: it passed the Rules of Procedure on Corporate Rehabilitation that introduces the concept of pre-negotiated reorganizations that requires receivers to have certain qualifications. Furthermore it implemented rescue statues introducing and promoting the use of pre-insolvency procedures. 4/ Studies find that lower barriers to business start-up are associated with a smaller informal sector. See Masatlioglu and Rigolini (2008), Kaplan, Piedra and Seira (2008), Ardagna and Lusagi (2009) and Djankov and others (forthcoming). 24 The Recovery Continues Despite Global Financial Turbulence Data Appendix Table 7. Philippines: Selected Economic Indicators, 2007-2012 2007 2008 2009 2010 2011 2012 Actual Prel. Act. Projection Growth, inflation and unemployment (in percent of GDP, unless otherwise indicated) Gross domestic product (% change) 7.1 3.7 1.1 4.4 4.0 4.0 Inflation (period average) 2.8 9.3 3.2 4.8 4.5 4.0 Savings and investment Gross national savings 20.3 17.5 20.0 19.1 19.0 18.5 Gross domestic investment 15.4 15.3 14.6 15.3 15.4 15.4 Public sector 1/ National government balance (GFS basis) -1.7 -1.5 -4.1 -4.1 -3.4 -3.2 National government balance (Govt Definition) -0.2 -0.9 -3.9 -3.8 -3.1 -3.0 Total revenue (Govt Definition) 17.1 16.2 14.6 14.7 14.9 15.0 Tax revenue (Govt Definition) 14.0 14.2 12.8 13.2 13.2 13.3 Total spending (Govt Definition) 17.3 17.2 18.5 18.5 18.0 18.0 National government debt 55.8 57.0 57.3 59.1 60.9 62.2 Consolidated non-financial public sector debt ... 61.0 61.0 63.0 64.2 65.6 Balance of payments Merchandise exports (% change) 6.4 -2.5 -22.3 20.0 7.0 7.0 Merchandise imports (% change) 8.7 5.6 -24.1 19.2 7.8 7.3 Remittances (% change of US$ remittance) 13.2 13.7 5.6 8.0 8.5 9.0 Current account balance 4.9 2.2 5.3 3.8 3.6 3.1 FDI (billions of dollars) -0.6 1.3 1.6 2.0 1.8 1.8 Portfolio Investment (billions of dollars) 4.6 -3.8 1.4 1.0 1.0 1.0 International reserves 2/ Gross official reserves (billions of dollars) 33.8 37.6 44.2 48.5 50.3 52.1 Gross official reserves (months of imports) 5.9 6.0 8.7 8.3 8.0 7.7 External debt 3/ Total 45.8 38.9 41.0 40.3 39.7 39.5 Source: GOP for historical, World Bank for projections. 1/ Excludes privatization receipts (these are treated as financing items, in accordance with GFSM) and includes CB-BOL restructuring revenues and expenditures; 2/ Includes gold; 3/ World Bank definition Table 8. Philippines: National Government Cash Accounts (GFS Basis), 2006-10 2006 2007 2008 2009 2010 FY Jan-May FY Jan-May FY Jan-May Rev. Bud. WB proj. (in percent of GDP, unless otherwise stated) Revenue and grant 16.1 15.7 6.4 15.8 5.9 14.6 5.9 14.8 14.6 Tax revenue 14.3 14.0 5.8 14.2 5.3 12.8 5.4 13.3 13.2 Nontax revenue 1/ 1.9 1.7 0.6 1.7 0.7 1.8 0.5 1.5 1.4 Grant 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total expenditure 2/ 17.5 17.4 6.8 17.3 7.6 18.7 8.0 18.6 18.7 Current Expenditures 15.2 14.4 5.8 14.1 6.2 14.9 6.4 15.5 15.5 Personal services 5.4 5.3 2.0 5.1 2.1 5.4 2.3 6.0 6.0 MOOE 1.7 1.9 0.7 1.9 0.8 2.1 1.0 2.1 2.2 Allotment to LGUs 2.3 2.2 1.0 2.3 1.1 2.7 1.1 2.6 2.6 Subsidies 0.2 0.3 0.0 0.2 0.1 0.2 0.1 0.2 0.2 Tax expenditures 0.3 0.5 0.3 0.8 0.3 0.7 0.2 0.5 0.7 Interest payment 5.3 4.1 1.9 3.9 1.8 3.8 1.7 4.3 3.9 Capital Outlays 2.3 2.9 1.0 3.0 1.4 3.6 1.5 2.9 3.1 Net lending 0.0 0.1 0.0 0.2 0.0 0.2 0.0 0.2 0.1 Balance (GFS definition) -1.4 -1.7 -0.4 -1.5 -1.7 -4.1 -2.0 -3.8 -4.1 Balance (Government definition) -1.1 -0.2 -0.3 -0.9 -1.6 -3.9 -1.9 -3.5 -3.8 Primary Balance (GFS) 4.0 2.5 1.5 2.3 0.1 -0.3 -0.3 0.4 -0.2 Memorandum Items Privatization receipts (PHP billions) 5.8 90.6 6.9 31.3 0.0 1.4 1.1 12.5 12.5 CB-BOL interest payments (% of GDP) 0.2 0.1 0.1 0.2 0.0 0.2 0.0 0.2 0.2 Nominal GDP (PHP billions) 4/ 6,031 6,647 7,409 7,409 7,679 7,679 8,405 8,405 8,405 Source: Department of Finance, Bureau of Treasury, and Department of Budget and Management ; 1/ Excludes privatization receipts (these are treated as financing items, in accordance with GFSM) ; 2/ Data from the Department of Budget and Management; Allocation to Local Government Units excludes capital transfers to LGUs; 3/As defined by the Bureau of Treasury; 4/ Nominal GDP for 2010 is World Bank estimate/forecast. 25 PHILIPPINE QUARTERLY UPDATE - June 2010 Selected Special Focus from Recent Quarterly Updates February 2010 PQU: Layout the Exit Strategies Cyclical and permanent changes in fiscal policy during the global recession: For the first time in recent economic downturns, thanks to previous fiscal consolidation efforts, the government was able to undertake a counter-cyclical fiscal policy. The 2½ percent of GDP in fiscal easing was the largest since 1986 and helped buffer the economy during the global recession. However, it generated a large National Government fiscal deficit, mostly of a structural/permanent nature as permanent revenue-eroding and expenditure- increasing measures were introduced. To enable a measured unwinding of this fiscal expansion, laying out a specific and credible medium-term plan that takes into account the country's inclusive growth agenda is warranted. Petroleum Taxation in the Philippines (Box 1): Tax collection from gasoline and diesel excises has plummeted since 1997. The cumulative annual losses reach a staggering 18 percent of GDP or close to one third of the National Government's debt. Raising revenue through petroleum excises makes both economic and social sense since it would (1) raise revenue with minimal economic waste (these are "efficient" taxes); (2) raise revenue from the most well-off Filipinos (consumption is strongly "progressive" therefore guaranteeing vertical equity: the richer you are the more you pay); (3) reduce bad side effects of consuming petroleum products ("negative externalities") such as traffic congestion, accidents, but also pollution which creates health hazards and environmental damages--the Philippines under-taxes (compared to the rest of the world) a major source of global warming and natural disasters to which the country is severely exposed; and (4) raise revenue from a source that it easy to administer provided an effective border control and anti-smuggling operation is in place. November 2009 PQU: Towards an Inclusive Recovery Comparing the cost and effectiveness of the NFA and the Pantawid Pamilyang Pilipino Program (4Ps or CCT) as social safety net instruments (Box 3): As a subsidy program for the poor, the NFA rice subsidy program suffers from serious deficiencies, not least: (1) limited assistance reaching the poor (the poor only get 16 percent of their rice consumption from the NFA; (2) high leakage to the non poor (about half of NFA rice is consumed by the 66 percent of the population which is not poor); (3) a very expensive program due to limited operational efficiency of NFA (in 2008, for every peso-equivalent given to the poor through the rice subsidy program, the Philippine taxpayers spent between 3 to 8.6 pesos). Reallocating NFA's fiscal support to the 4Ps/CCT would enable the government to cover 100 percent of the country's poor (against 25 percent with NFA), with each poor household receiving 7 times what it receives with the NFA. Refocusing the NFA outside of its rice subsidy operations and reallocating the NFA fiscal support to the 4Ps/CCT would generate major social protection gains for the Philippines, a drastic improvement of the welfare of the poor, and notable fiscal savings. July 2009 PQU: Sailing Through Stormy Waters Consumption and remittances during the global recession (Box 2): how extensive is the flight-to-safety motives in the observed resiliency of remittance inflows? Assessing and containing fiscal risks in the Philippines: a comprehensive assessment (Box 3) Risks to the Philippines banking sector during the global recession: an assessment (Box 5) 26 The Recovery Continues Despite Global Financial Turbulence Selected recent World Bank publications on the Philippines (for an exhaustive list, please go to: http://go.worldbank.org/BRHFJLLQD0) Title Publication Date Document Type Behind the veil of Conflict: Moving Towards Economic Integration for Sustained Development and Peace in Mindanao, Philippines 2010/06 Special Report Assessing Poverty and Distributional Impacts of the Global Crisis in the Philippines: a Microsimulation Approach 2010/04/01 Policy Research Working Paper The effect of school-based management in the Philippines: an initial assessment using administrative data 2010/03/01 Policy Research Working Paper Philippines Quarterly Update (PQU): Laying Out Exit Strategies 2010/02/28 Economic Monitoring Report Philippines - Integrated Persistent Organic Pollutants (POPs) Management Project: environmental and social assessment 2009/12/28 Board Report Philippines ­ Country environmental analysis 2009/12/01 Country Environmental Analysis Philippines Quarterly Update (PQU): Towards an Inclusive Recovery 2009/11/25 Economic Monitoring Report Philippines: Typhoons Ondoy and Pepeng: post-disaster needs assessment 2009/11/10 Special Report Disparities in labor market performance in the Philippines 2009/11/01 Policy Research Working Paper Education and wage differentials in the Philippines 2009/11/01 Policy Research Working Paper Philippines ­ Country environmental analysis 2009/10/29 Country Environmental Analysis Output-based aid in the Philippines: improved access to water services for poor households in Metro Manila 2009/07/01 Brief Philippines Quarterly Update (PQU): Sailing Through Stormy Waters 2009/07/01 Economic Monitoring Report The power of information: the impact of mobile phones on farmers' welfare in the Philippines 2009/07/01 Policy Research Working Paper Philippines - Transport for growth: an institutional assessment of transport infrastructure 2009/02/24 Public Expenditure Review Climate resilient cities: a primer on reducing vulnerabilities to disasters - Makati City, Philippines 2009/01/01 Working Paper Grand corruption in utilities 2008/12/01 Policy Research Working Paper Philippines - Country procurement assessment report 2008/10/03 Country Procurement Assessment Doing business 2009: country profile for Philippines 2008/09/29 Working Paper A road to trust 2008/09/01 Policy Research Working Paper Managing migration: lessons from the Philippines 2008/08/11 Brief Do community-driven development projects enhance social capital? Evidence from the Philippines 2008/07/01 Policy Research Working Paper Doing business in the Philippines 2008 2008/06/03 Working Paper Engaging local private operators in water supply and sanitation services 2008/06/01 Brief So you want to quit smoking: have you tried a mobile phone? 2008/06/01 Policy Research Working Paper Philippines - 2008 Development Forum: summary report 2008/04/29 Board Report Rising growth, declining investment: the puzzle of the Philippines 2008/01/01 Policy Research Working Paper Who's at the wheel when communities drive development? The case of the KALAHI CIDSS 2007/09/01 Working Paper Yield impact of irrigation management transfer: story from the Philippines 2007/08/01 Policy Research Working Paper Doing business 2008 Philippines 2007/06/01 Working Paper Economic results of CDD programs : evidence from Burkina Faso, Indonesia and the Philippines 2007/06/01 Brief Philippines: Agriculture Public Expenditure Review 2007/06/01 Working Paper Philippines - Invigorating growth, enhancing its impact 2007/05/18 Development Policy Review Inequality and relative wealth: do they matter for trust? Evidence from poor communities 2007/03/01 Working Paper Measuring the costs and benefits of community driven development : the KALAHI-CIDSS project 2007/01/01 Working Paper 27 PHILIPPINE QUARTERLY UPDATE - June 2010 Selected recent World Bank publications on the Philippines (for an exhaustive list, please go to: http://go.worldbank.org/BRHFJLLQD0) Copies of The Philippines Quarterly Update: Online copies of this publication can be downloaded in www.worldbank.org.ph Printed copies are also available in the following Knowledge for Development Centers (KDCs): 1. World Bank KDC Ground Floor The Taipan Place, Francisco Ortigas Jr. Road (former Emerald), Ortigas Business Center, Pasig City 1605 2. Asian Institute of Management KDC Joseph R. McMicking Campus, 123 Paseo de Roxas, Makati City 1226 3. Ateneo de Naga University KDC James O'Brien Library, Ateneo Avenue, Naga City 4400 4. Central Philippine University KDC Ground Floor Henry Luce III Library, Lopez Jaena Street, Jaro, Iloilo City 5000 5. House of Representatives KDC Congressional Planning and Budget Department, 2F R.v. Mitra Building, Batasang Pambansa Complex, Constitution Hills, 1126 Quezon City 6. Notre Dame University KDC Notre Dame University Library, Notre Dame Avenue, Cotabato City 9600 7. Palawan State University KDC Graduate School - Law Building, Manalo Campus, valencia St., Puerto Princesa City 5300 8. Saint Paul University Philippines KDC 3rd floor, Learning Resource Center, Mabini St., Tuguegarao City 3500 9. Silliman University KDC Silliman University Library, Dumaguete City 6200 10. University of San Carlos KDC University Library, P. Del Rosario Street, Cebu City 6000 11. University of Southeastern Philippines KDC Obrero, Davao City 8000 28 1818 H Street, NW Washington, DC 20043 USA Internet: www.worldbank.org World Bank Office Manila 23rd Floor, The Taipan Place F. Ortigas Jr. Road, Ortigas Center Pasig City, Philippines Telephone: (63-2) 637-5855 Internet: www.worldbank.org/ph/cas International Finance Corporation 11th Floor, Tower One Ayala Triangle, Ayala Avenue Makati City, Philippines Telephone: (63-2) 848-7333 Internet: www.ifc.org