Lyndon L.

Zabala
ECON 1

1. Calculate the GDP using the expenditures and income approach by using the
actual data below to do so.
2009 National Income Accounting Data provided by the US Government
Household Consumption
Corporate Profits
Investment Expenditures
Indirect Business taxes
Depreciation
Government Expenditures
Net Foreign Factor Income
Net Exports
Wages
Proprietors Income
Rents
Interest Income

10,001.30
1,066.00
1,589.20
1,001.10
1,861.10
2,914.90
146.20
-386.40
7,954.70
1,030.70
292.70
765.90

A. Expenditure Approach
Formula: GDP = Household Consumption + Gross Private Investment +
Government Spending+ Net Exports (Exports Imports)
10,001.30 + 1,589.20 + 2,914.90 + (-386.40- 146.20)
GDP = 13,972.80
B. Income Approach
Formula: GDP = National Income + Depreciation + (Indirect Taxes
Subsidies)
NI = Wages + Rents + Interest + Business Profits
1,066.00 + 7,954.70 + 1,030.70 + 292.70 + 765.90 + 1,861.10 + 1001.10
GDP = 13,972.20
2. Briefly Explain the comparative Nominal and Real GDP for 1960 and 1990.
The Real GDP in 1990 (using 1960 prices as the base year) was approximately
804 Billion Dollars So we can see, in real terms, the economy did not even
double between these two years, whereas in nominal terms it appeared to go up
by over ten times! This should illustrate the importance of looking at the real GDP

when calculating growth in an economy, so as not to be misled into thinking an

economy is growing when it is actually just experiencing large increases in
prices.

3.Current
products:
Lets
assume
pineapples,
we
have
snorkels,
a$106,000
very
simple
beach
economy
that
only
The produces
prices
three
outputs
of
these
items
Period
in$10.00
Base
the
current
Period
andand
base
years
are
as
follows:
ITEM
Pineapples
Output
4,240
Price
$1.30
Expenditures
$5,512
$1.00
Price
$4,240
Expenditures
Snorkels
Umbrellas
5,000
1,060
$100.00
$50,000
$8.00
$100.00
$40,000
$106,000
current
a.
Determine
years
the
prices:
Nominal
GDP
value
of
theumbrellas.
current
years
outputand
using
the
3. Lets assume we have a very simple economy that only produces three
products: pineapples, snorkels, and beach umbrellas. The prices and
outputs of these items in the current and base years are as follows:
Current Period

Base Period

ITEM

Output

Price

Expenditures

Price

Expenditures

Pineapples

4,240

$1.30

$5,512

$1.00

$4,240

Snorkels

5,000

$10.00

$50,000

$8.00

$40,000

Umbrellas

1,060

$100.00

$106,000

$100.00

$106,000

a. Determine the Nominal GDP value of the current years output using the current
years prices:
Nominal GDP in the Current Period = (4,240 X $1.30) + (5,000 X $10.00) +
(1,060 X $100.00) = $156,512
The Real GDP value of the current years output using the base years prices:
Real GDP in the Current Period = (4,240 X $1.00) + (5,000 X $8.00) + (1,060 X
$100.00) = $150,240
GDP Deflator = (Nominal GDP/Real GDP) X 100
($156,512 / $150,240) X 100 = 104.175
4. Closing the GDP Gap
Given: C= 200 + 0.75 Yd , I = 125 , G =300 , X = 75 , M = 100 , FE
GDP : Yd = 3,000
Where : C = Consumption Function
I = Investment Expenditure
G = Government Spending
X = Export Receipts
M = Import Payments
FE GDP = Full Employment GDP

a. Determine the Equilibrium GDP: Yd = C + I + G + (X-M ) =

200+125+300+(75-100) = 600
b. Show the Equilibrium GDP Graphically : C+I+G+ (X-M)
c. If the economy decides to use Monetary Policy tools to attain FE GDP at
3,000, how much should be the additional spending? Show supporting
computations.
d. Compute / Show the new GDP Equilibrium
e. Superimpose the new C+I+G + (X-M) Line to your existing graph

PART II
A. INTRODUCTION: MACROECONOMIC OBJECTIVE OF THE ECONOMY
Growing output and employment are the preconditions for progress in almost
all social and economic aspects of development. Productive employment and
rising incomes for the vast majority over a long period can do more to combat
poverty decisively than any direct assistance government can ever provide. It
is private actors from the smallest self-employed entrepreneurs to the
largest conglomerates that create productive jobs and incomes.
Governments responsibility however through fiscal and monetary policies
is to create an environment for vigorous economic activity, as well as to
ensure that enough gains from growth are set aside for larger social purposes
or channeled into social investments that facilitate future growth. These
objectives are achieved by government decisions regarding the size and
direction of public spending and taxation (fiscal policy) and by decisions
regarding the control of the nations money supply (monetary policy).
B. ECONOMIC POLICIES
B.1 MONETARY POLICY OF THE PHILIPPINES
With the Monetary Policy set by the Banko Sentral ng Pilipinas focusing on
targeting INFLATION, the BSP came up with four strategies to make sure that
there is a proper control of money supply in the Philippines. It is to note that
the inflation is very much monitored and controlled through the different
strategies. In reality, not all of the strategies are really being used by the
Central Bank. Most of the prominent use in targeting inflation are actually the
setting of Legal Reserve requirements and through Repurchase Agreements,
thus; these mentioned strategies are directed to the transaction between the

BSP and the Financial Institutions like Banks, Investment house and all
others.
Inflation Targeting: The BSP's Approach to Monetary Policy

The primary objective of the BSP's monetary policy is to promote price

stability conducive to a balanced and sustainable growth of the economy
(Republic Act 7653). The adoption of inflation targeting framework of
monetary policy in January 2002 is aimed at achieving this objective.

Inflation targeting is focused mainly on achieving a low and stable inflation,

supportive of the economys growth objective. This approach entails the
announcement of an explicit inflation target that the BSP promises to achieve
over a given time period.
o The Inflation Target
The governments inflation target is defined in terms of the average yearon-year change in the consumer price index (CPI) over the calendar
year. In line with the inflation targeting approach to the conduct of
monetary policy, the Development Budget Coordination Committee
(DBCC) through its Resolution No. 2015 7 dated 29 December 2015,
maintained the current inflation target at 3.0 percent 1.0 percentage
point for 2016 2018.
Consistent with the inflation targeting framework, the Monetary Board
announced in July 2010 the BSPs shift to a fixed inflation target for the
medium term of 4.0 percent 1 percentage point for 2012-2014. The shift
to a fixed medium-term inflation target from a variable annual inflation
target was approved by the Development Budget Coordination Committee
(DBCC) on 9 July 2010 under DBCC Resolution No. 2010-3.

To achieve the inflation target, the BSP uses a suite of monetary policy
instruments in implementing the desired monetary policy stance. The reverse
repurchase (RRP) or borrowing rate is the primary monetary policy
instrument of the BSP. Other monetary policy instruments include (a)
increasing/decreasing the reserve requirement; (b) encouraging/discouraging
deposits in the special deposit account (SDA) facility by banks and trust
entities of BSP-supervised fnancial institutions; (c) adjusting the residscount
rate on loans extended to banking institutions on a short-term basis against
eligible collateral of banks' borrowers; and (d) outright sales/purchases of the
BSP's holding of government securities.
1. Open Market Operations

Repurchase and reverse repurchase transactions are carried out through

the reverse repurchase (RRP) facility and the repurchase (RP) facility of the BSP. In
a repurchase or repo transaction, the BSP buys government securities (GS) from a
bank with a commitment to sell it back at a specified future date at a predetermined
rate. The BSPs payment to the bank for the GS increases the latters reserve
balances and has an expansionary effect on liquidity. Conversely, in a reverse repo,
the BSP acts as the seller of GS and the banks payment to the BSP has a
contractionary effect on liquidity. RP and RRP transactions have maturities ranging
from overnight up to two weeks to one month. The interest rates for the overnight
RRP and RP facilities signal the monetary policy stance and serve as the BSPs
primary monetary policy instruments.
Outright transactions refer to the direct purchase/sale by the BSP of its holdings of
government securities from/to banking institutions. In an outright transaction, the
parties do not commit to reverse the transaction in the future, creating a more
permanent effect on money supply. The transactions are conducted using the BSPs
holdings of government securities. When the BSP buys securities, it pays for them
by directly crediting its counterpartys demand deposit account (DDA) with the BSP.
The transaction thus increases the buyers holdings of central bank reserves and
expands the money supply. Conversely, when the BSP sells securities, the buyers
payment (made by direct debit against his DDA with the BSP) causes the money
supply to contract.
Foreign exchange swaps refer to transactions involving the actual exchange of two
currencies (principal amount only) on a specific date at a rate agreed on the deal
date (the first leg), and a reverse exchange of the same two currencies at a date
further in the future (the second leg) at a rate (different from the rate applied to the
first leg) agreed on deal date.
2. Acceptance of fixed-term deposits
The BSP also accepts deposits from banks and trust entities. The Special Deposit
Accounts (SDA) facility consists of fixed-term deposits by banks and by trust
entities of banks and non-bank financial institutions with the BSP. It was introduced
in November 1998 to enable the BSP to expand its toolkit in liquidity management.
In April 2007, the BSP expanded access to the SDA facility by allowing trust entities
to deposit in the SDA facility in order to better manage liquidity in the face of strong
foreign exchange inflows.
Subsequently, the BSP implemented various adjustments in its SDA facility. In July
2012, funds from foreign sources were prohibited from being placed in banks' SDA
facility to help avoid the situation where BSP's instruments for OMO become the
recipient of capital inflows. 1 Also, the spread on SDA rate over RRP rate was
reduced to 1/32nd of a percent to fine-tune insrtruments' pricing consistent with the
decline in global interest rates. Further fine-tuning of the operation of BSP's
monetary policy tools involved the removal of the term premium in the SDA facility in

January 2013 and the cumulative reduction in SDA rate (total of 150-bps) from
January to April 2013. Finally, in May 2013, the BSP decided to limit the access to
the SDA facility to legitimate trust arrangements. 2
3. Rediscounting
The BSP extends discounts, loans and advances to banking institutions in order to
influence
the
volume
of
credit
in
the
financial
system.
The
rediscounting facility allows a financial institution to borrow money from the BSP
using promissory notes and other loan papers of its borrowers as collateral. In
August 2013, the BSP restructured the rediscounting window to align it further with
the BSP's market-based monetary operations framework and with the international
central banking practice of scaling down directed credit operations. 3
Under Circular No. 806 series of 2013, two separate rediscounting windows were
established, namely: (1) the Rediscounting Window I (RW I) for universal and
commercial banks (U/KBs); and (2) the Rediscounting Window (II) for thrift banks
(TBs), cooperative banks (coop banks), and rural banks (RBs). Banks will be able to
access RWs I and II on an open-volume basis consistent with the objective of
reorienting the BSP rediscounting window as a regular liquidity standing facility. In
the RW I, the rediscount rate was aligned with the lending rate under the BSP RP
facility plus the appropriate term premium to encourage banks to exhaust other
possible sources of funding before trying to access the central bak rediscounting
window. Meanwhile the interesrtrate in the RW II is pegged to the overnight RRP
rate plus a term premium. TBs will have access to the RW II until November 2018,
while coop banks and RBs will have access to the RW II until November 2023. By
November 2023, the RW II will no longer be operational and all banks shall have
access only to RW I.
4.

Reserve

requirements

Reserve requirements refer to the percentage of bank deposits and deposit

substitute liabilities that banks must set aside in deposits with the BSP which they
cannot lend out, or where available through reserve-eligible government securities.
Changes in reserve requirements have a significant effect on money supply in the
banking system, making them a powerful means of liquidity management by the
BSP.
Reserve requirements are imposed on the peso liabilities of universal/commercial
banks (UBs/KBs), thrift banks (TBs), rural banks (RBs) and cooperative banks
(Coop Banks), and non-bank financial institutions with quasi-banking functions
(NBQBs). Reservable liabilities include demand, savings, time deposit and
deposit substitutes (including long-term non-negotiable tax-exempt certificates of
time deposit or LTNCTDs)

The existing reserve requirement ratios vary across bank types and liabilities. The
current headline reserve requirement ratio of 20 percent is imposed on certain
liabilities of UBs/KBs and NBQBs. Previously, the eligible forms of compliance to the
reserve requirements included banks' deposits in their demand deposit account
(DDA) with the BSP, reserve-eligible government securities, and vault cash. Effective
on the reserve week beginning on 6 April 2012, the BSP excluded vault cash (for
banks) and demand deposits (NBQBs) as eligible forms of reserve requirement
compliance. 4 At the same time, the BSP unified the existing statutory reserve
requirement and liquidity reserve requirement into a single set of reserve
requirement as well as discontinued the renumeration of the unified reserve
requirements.
With the above monetary policies set by Banko Sentral ng Pilipinas, below are the
reports derived from the strategies used by the BSP in control of the money supply.
MONETARY AND EXTERNAL SECTORS
Monetary and External Sectors Prices Inflation in the Consumer Price Index (CPI)
averaged 5.6 percent for the period 2004-2010 with a declining trend, averaging 3.8
percent in 2010. From 2004 to 2006, much of the inflation pressure was due to
supply shocks, including increases in global oil prices that led to higher domestic
pump prices, minimum wage adjustments throughout the country, hikes in transport
fares and utility charges, and weather-related disturbances. Meanwhile, with good
weather conditions and a relatively firm peso, inflation declined to 2.8 percent in
2007, the lowest annual average in 21 years. The steady decline in inflation was
interrupted by sharp increases in world commodity prices, which fed into a 9.3percent inflation rate in 2008. Monetary authorities responded by raising the policy
rate by 100 basis points for June-August 2008. By late 2008, the balance of risks to
the inflation outlook had shifted downwards following the easing of commodity
prices, the moderation in inflation expectations, and the slowdown in economic
activity. These developments provided latitude for monetary easing to support
growth amidst the global financial crisis in 2008-2009, including the 200-basis point
reduction in policy interest rates. Monetary authorities also adopted other crisis
intervention measures at the height of the global financial crisis and smoothly
disengaged from these when financial conditions began to normalize. 4 The
monetary policy stance remains supportive of noninflationary growth. Credit remains
adequate in supporting economic activity. This is evident in the steady uptrend in
bank lending and smooth functioning of domestic financial markets. Low and stable
inflation has also contributed to lower costs of funds in the market, supporting
investment and consumption expenditures by firms and households. External Sector

The current account balance as a ratio of GDP has increased from 1.9 percent in
2004 to 4.5 percent in 2010. The current account position has shifted to structural
surpluses in large part due to the resilience of overseas remittances, increased
services receipts from business process outsourcing, and steady tourism receipts.
These sources of foreign exchange inflows have been more stable than investment
flows. Driven by the surplus in the current account and the improvement in capital
and financial account, the balance of payments has also registered surpluses since
2005. However, merchandise exports growth performance was relatively volatile,
reflecting the countrys vulnerability to global developments. The annual average
export growth for 2004-2010 was 6.5 percent, which was pulled up by the 34.8percent growth in 2010 as the global economy began to recover. Meanwhile, the
exports of services have been on an uptrend, mainly on account of transportation,
travel, and other business, technical, and professional services. Merchandise
imports outpaced exports, with more than 60 percent of total imports consisting of
raw materials and intermediate goods, and capital goods. Overseas Filipino (OF)
remittances have been steadily growing even when the global financial crisis broke
out. In 2010, remittances coursed through banks amounted to US$18.8 billion, an
increase by 8.2 percent from the level recorded in previous year. The countrys
favorable external position has also been supported by the continued improvement
in the countrys external debt profile. The Philippine external debt-to-GDP ratio was
63.3 percent in 2004. As of September 2010, this ratio was down to 33.1 percent.
The long-dated maturity structure of the countrys foreign currency debt has helped
to limit rollover and foreign exchange risks. With the strong external payments
performance, international reserves have risen, providing strong coverage for both
imports and short-term external debt. At end-December 2010, the gross international
reserves (GIR) stood at US$62.4 billion, based on preliminary data. This level of GIR
could cover 10.3 months of imports of goods and services, and was equivalent to
10.8 times the countrys short-term external debt based on original maturity and 5.7
times based on residual maturity. The comfortable level of foreign exchange
reserves provides a strong cushion that helps the economy withstand external
shocks. As a result of the strong external liquidity position, the Philippine peso has
remained broadly stable. The trends in the real effective exchange rate (REER)
show that the peso has lost some competitiveness against major trading partners
compared to six years ago. In the last two years, however, the peso gained
competitiveness against baskets of competitor currencies (both broad and narrow)
owing to the narrowing of the inflation differential, which offset the nominal
appreciation of the peso. Challenges The Philippine economy nonetheless faces a
number of issues and challenges that may warrant monetary policy actions. Capital
Inflows Bright prospects for emerging economies combined with the prolonged
accommodative monetary policies in advanced economies have driven large capital

inflows into emerging economies, including the Philippines. Foreign capital inflows
can be an important source of funds for investment expenditures but also entail risks
that need to be closely monitored and addressed when warranted. Huge capital
inflows can contribute to excessive liquidity growth, cause asset market imbalances,
and lead to inflation pressures that can complicate monetary policy. Asset Market
Imbalances Asset price dynamics are an important consideration in the pursuit of
price stability by monetary authorities. The build-up of asset market imbalances
contributes to financial stability risks that can harm economic activity, and in turn
affect the outlook for price developments. The recent global financial crisis resulted
in a deep economic downturn which became a major source of downside risk for the
inflation outlook in advanced economies. Furthermore, financial markets provide an
avenue through which monetary policy actions are transmitted to the real economy.
Vulnerabilities stemming from the financial sector as a result of asset price bubbles
can complicate and reduce the effectiveness of monetary, fiscal, and regulatory
policies. While monetary authorities remain focused on achieving low and stable
inflation, they will continue to be highly attentive and alert to credit growth, asset
price developments, and financial imbalances which can have implications on
financial stability and ultimately, on price stability. Monetary authorities will also
continue to employ macroprudential tools to help prevent overheating and undue
risktaking in asset markets. Macroprudential regulations already in place have thus
far helped make the economy less prone to asset price escalations. These
regulations include the statutory limit on the share of real estate loans to banks total
loan portfolio and the maximum loan-tovalue ratio for real estate loans. Global
Commodity Prices Volatile and rising global prices of key commodities can have
significant impact on domestic prices. While these are mainly supply shocks in
nature, they may lead to second round effects that could result in elevated inflation
expectations. Monetary authorities will continue to coordinate with other government
agencies to temper the impact of global commodity price shocks on domestic prices.
Monetary authorities will remain vigilant and ready to implement timely policy
adjustments in response to the emergence of second-round effects on inflation.
Strategic Framework to achieve the overarching goal of inclusive growth,
government lays down the conditions for a stable macroeconomic environment that
is conducive to sustaining a higher growth path. For fiscal policy, the main task is to
expand the narrow fiscal space and to get on a sustainable revenue-and-spending
path. For monetary sector and external sector policies, this means commitment to
low and stable inflation conducive to balanced and sustainable growth and reduced
external vulnerabilities.
REFORMS IN MONETARY POLICY AND EXTERNAL SECTOR

Monetary Policy and External Sector Reforms Monetary policy will remain committed
to the achievement of low and stable inflation that is conducive to a balanced and
sustainable growth of output and employment. Monetary authorities will be alert to
signs of emerging inflation pressures to consolidate the hard-won price stability that
has contributed to policy predictability and enabled households and businesses to
make better informed decisions. This stance entails continuous macroeconomic
surveillance efforts for a more effective management of risks. At the same time,
monetary authorities will continue to improve their communication of policy intentions
and actions. In recent years, monetary authorities have implemented a number of
reforms to enhance the effectiveness of the monetary policy framework. In 2006, the
way the inflation target was arrived at was changed from specifying a range to
specifying a point with a tolerance interval which effectively widened the BSPs
target band. A broader target band provides added flexibility to monetary authorities
in steering inflation, particularly in the domestic setting where consumer prices are
subject to large supply shocks because of the sizeable share of food items in the
consumer basket. The economic policymakers also announced in 2010 the shift to a
fixed medium term inflation target from a variable annual inflation target. The
adoption of a fixed medium-term inflation target aims to promote a long-term view of
inflation, help better anchor inflation expectations, and support consumption and
investment by fostering greater predictability in economic decisions (Table 2.5). The
monetary authoritys reform agenda will focus on improving the institutional set-up
and fine-tuning the procedures of inflation targeting. Key measures to be pursued for
more effective inflation management include the following: a. Given the
interdependent real and financial markets across the globe and the risks involved,
the BSP shall pursue the expansion of its monetary policy toolkit to enhance the
flexibility and efficiency of its monetary operations with a view to safeguarding both
price and financial stability. b. Pursuant to the provisions of RA 7653, the monetary
authorities will request the full capitalization of the BSP to ensure that financial
losses from time to time do not deter the BSP from fulfilling its mandate of
maintaining price stability. A bigger capital base will enhance the BSPs financial
autonomy and credibility, giving more confidence to the market. Enhancing the link
to financial stability. The economic downturn resulting from the recent global financial
crisis brought to light the importance of policy coordination in promoting
macroeconomic stability. The close coordination of monetary, regulatory, and fiscal
policies was critical to the restoration of global financial stability. This, in turn, paved
the way for business confidence to improve and ultimately, for economic recovery to
take root. Interaction of different policies is likely to remain the new modus operandi
for economic policy markers. In this regard, promoting closer coordination of
macroeconomic and financial sector policies could be explored, including through a
wider representation in the Financial Sector Forum (FSF) . 6 On the external sector,

policymakers will continue to adopt appropriate measures that will cushion the
economy from external shocks as well as ensure the health of the countrys external
payments position and the sustainability of its external debt over the medium-term.
The monetary authorities will continue to adopt a flexible exhange rate policy to help
the economy to be better insulated against external shocks. The foreign exchange
regulatory framework will be further reviewed to keep it responsive to the needs of
an expanding and increasingly integrated economy. Since 2007, the monetary
authorities have undertaken four major phases of foreign exchange reforms. The
reforms brought greater access to foreign exchange resources for trade, investment
and other foreign transactions. The measures also facilitate the diversification of
investment portfolios and help reduce the economys vulnerability to shocks. The
countrys external debt shall be maintained at more manageable and sustainable
levels. This shall entail appropriately designing the external debt structure to
minimize risks emanating from currency and maturity mismatches. With respect to
the NG, it will review the countrys sovereign bonds and debt profile to identify which
instruments shall be eligible for its bond exchange program. This program aims to
boost liquidity sourced from longer-dated securities and to provide long-term
financing for government initiatives promoting PPP for infrastructure and economic
development. The monetary authorities will also endeavour to maintain the external
debt stock and the external debt service burden at sustainable levels. This will entail
continuing the comprehensive and regular monitoring of the level and maturity profile
of the countrys external debt and the conduct of debt sustainability assessments.
Complementing the sound management of external debt level, the monetary
authorities will also build cushions against shocks by promoting an adequate level of
international reserves. Furthermore, policymakers will need to focus on leveraging
remittances as a tool for economic development. While remittances are private
transfers, the government can ensure that the policy environment is conducive to the
use of remittances for investment in well-considered financial products, in productive
activities such as entrepreneurial undertaking as well as in better housing,
education, and healthcare for remitters and their beneficiaries. Improving the
financial education of the overseas Filipino community and implementing measures
to further promote the flow of remittances through the financial system would help
catalyze the developmental role of remittances.
MONETARY POLICY DECISIONS
2015
The Monetary Board decided to maintain the BSP's key policy rates at 4.00 percent
for the overnight borrowing or reverse repurchase (RRP) facility and 6.00 percent for
the overnight lending or repurchase (RP) facility. The interest rates on term RRPs,

RPs and special deposit accounts (SDA) were also kept steady. The reserve
requirement ratios were likewise left unchanged.
FEBRUARY 12, 2015
At its meeting today, the Monetary Board decided to maintain the BSP's key policy
rates at 4.0 percent for the overnight borrowing or reverse repurchase (RRP) facility
and 6.0 percent for the overnight lending or repurchase (RP) facility. The interest
rates on term RRPs, RPs and special deposit accounts (SDA) were also kept steady.
The reserve requirement ratios were left unchanged as well.
The Monetary Boards decision is based on its assessment that prevailing monetary
policy settings remain appropriate. Latest baseline forecasts show a lower inflation
path within the target range of 3.0 percent 1 percentage point for both 2015 and
2016, while inflation expectations remain firmly anchored. Inflation pressures have
moderated further since the previous monetary policy meeting, reflecting mainly the
significant decline in international oil prices. At the same time, the Monetary Board
observed that prospects for domestic activity continue to be firm, and positive growth
dynamics are expected to be supported by buoyant private demand, sustained bank
lending growth, and upbeat business sentiment.
The Monetary Board also noted that the risks to the baseline inflation forecast
remain broadly balanced, with potential price pressures emanating from pending
petitions for adjustments in utility rates and possible power shortages. Meanwhile,
downside risks could arise from possible slower-than-expected global economic
activity.
Given these considerations, the Monetary Board is of the view that the within-target
inflation outlook and robust domestic growth support keeping policy settings steady.
Going forward, the BSP will continue to monitor developments affecting the inflation
outlook to ensure that the monetary policy stance remains consistent with its price
and financial stability objectives.

B.2 FISCAL POLICY

A sustainable fiscal balance helps the country avoid boom-bust cycles that
disrupt the pace of economic growth. Appropriate levels of fiscal deficits also
allow the government to continuously support critical social programs and
infrastructure projects. Prudent and responsible monetary policy that achieves
low and stable inflation, in turn, gives both consumers and businesses a chance

to plan over a longer time horizon. At the same time, it helps ensure that financial
markets are stable and credit conditions are appropriate to support the
continuous expansion of economy. This section thus addresses the issues of
macroeconomic stabilization. Performance and challenges in the fiscal and the
monetary or external sectors are first addressed. Strategies that need to be
adopted to achieve macroeconomic stabilization are then outlined. Assessment
and Challenges Fiscal Sector In 2004-2009, the government implemented
reforms to place the fiscal house on a sounder footing. Major reforms to improve
the revenue situation during the early part of the period included the revisions of
the excise tax on alcohol and tobacco, an expansion of the scope and an
increase in the rate of the value-added tax (VAT), as well as the enactment of the
Lateral Attrition Law. As a result, tax effort rose from 12.5 percent in 2004 to 14.2
percent in 2008. The National Government (NG) reduced its deficit from an
average of 3.9 percent of GDP in 2000-2004 to a more manageable 2.7 percent
of GDP in 2005. This was further reduced to 1.1 percent in 2006 and was almost
balanced in 2007 at 0.2 percent of GDP. The improved fiscal positions of the NG,
the social security institutions, local governments, and the GFIs translated into a
surplus in the countrys consolidated public sector financial position amounting to
PhP21.3 billion or 0.3 percent of GDP in 2007, from a deficit of PhP235.9 billion
or 5.0 percent of GDP in 2004. As economic activities slowed down owing to the
recent global financial crisis, however, revenue collection weakened. Revenue
effort dropped from 16.2 percent in 2008 to 14.6 percent in 2009, back to
prereform levels. Tax effort dipped to 12.8 percent in 2009, the lowest in the
ASEAN region, where it averaged 14.9 percent. In addition, several tax eroding
measures were enacted in 2009 and 2010, which granted tax relief to various
sectors, but depleting the revenues gained from earlier tax reforms. Revenues
from taxes with specific rates also either remained flat or failed to rise in
proportion with GDP because of the failure to index them. The share of excise
taxes on sin products and petroleum barely changed during the period, from 21
percent of total revenues in 2004 to 22 percent in 2009. Governments ability to
raise additional revenues from nontax sources has remained weak as well. Part
of the problem lies in the governance challenges faced by GOCCs in their
operations. Foremost of these are the multiple and often conflicting mandates;
the various levels of oversight bodies; the need to update government ownership
policy; the need to improve board governance; and the need to strengthen
transparency and disclosure. The exemption of some GOCCs, including GFIs,
from the Salary Standardization Law (SSL) granted by Congress, has provided
authority to the boards of government corporations to adjust the compensation of
their officials without restraint. Certain GOCCs also have mandates that are
inconsistent with prudent fiscal behavior (e.g., they are used as subsidy providers

and conduits for social services which were not compensated by the NG), while
others have managed to exist only on the back of government subsidies. In
addition, many fees and charges for services have not been appropriately
adjusted and in some cases, have even been lowered on request of the private
sector (e.g., some fees and charges which affect exporters have been lowered to
accommodate them). Collections from this source have not risen in line with the
costs of providing the said services.

As the revenue position weakened and given the need to for a stimulus to counter the
continuing recessionary pressure, the NG deficit in 2009 reached 3.9 percent of GDP
while the consolidated public sector deficit was 3.3 percent of GDP in the same year. In
2010, the NG deficit to GDP ratio dropped to 3.7 percent from 3.9 percent in 2009 while
the consolidated public sector deficit improved to 1.6 percent of GDP. Some recent
developments have been encouraging, however. Total revenues in 2010 rose by 7.5
percent from the previous year. Tax revenues were up by 11.4 percent due to improved
performances by the Bureau of Internal Revenue (BIR) and Bureau of Customs (BoC)
which had higher collections by 9.6 and 17.7 percent, respectively. Notwithstanding
these, the revenue position still remains precarious as both the BIR and the BOC fell
short of their respective targets in 2010. The postponement of privatization efforts, in the
expectation of better terms and conditions, has reduced nontax revenues relative to the
same period in 2009. Dividends and interest income have not increased sufficiently to
offset the lack of proceeds from sale of assets. Meanwhile, disbursements grew at a
slower pace than revenues, increasing by 6.7 percent from the 2009 level compared to
the 7.5 percent expansion in revenues. The increase can be attributed to the higher
personal services requirements (13%) due to the continuing implementation of the SSL
3, the increased provision for the CCTs and the automated national and barangay

elections, the carry-over disbursements from last years rehabilitation and reconstruction
projects, and the higher provision for Internal Revenue Allotment (IRA) and interest
payments. Government spending contracted from 18.3 percent of GDP in 2004 to 17.2
percent of GDP in 2008 but has since increased to 18.5 percent of GDP as of 2009
given the governments economic resiliency program (ERP). As a share to GDP,
disbursements dropped to 17.9 percent in 2010. The year 2010 was notable for the
expenditure controls brought back by government, which enabled an orderly transition
from two years of fiscal stimulus in response to the global economic crisis back to
fiscal consolidation mode as the global economic situation normalized. The tighter
prioritization of expenditures with the application of the ZBB approach, and the
calibration of allotment and cash releases in anticipation of revenue inflows were
particularly helpful in this transition. But as the composition of expenditures and the
quality of services improve, the absorptive capacity of the agencies and their capability
to implement projects must be strengthened to spur economic activity and help create
employment particularly in the countryside. The early approval of the Fiscal Year (FY)
2011 budget, the release of 100 percent of agency budgets in January 2011, as well as
measures facilitating the procurement process were all intended to provide this
spending jumpstart for the year. The closer monitoring of the rate of agency spending
and absorption issues during the year should facilitate the identification of needed
measures. For the period 2004-2010, infrastructure outlays were given an increasing
share of the budget, rising to 15.2 percent (2009), and remarkably higher by 4.7
percentage points than that in 2004. In 2010, infrastructure spending was 14.7 percent
of total government expenditure. Similarly, the budget share of regular expenditure
items necessary for more efficient operations of government increased by 2.6
percentage points from 9.4 percent in 2004 to 12 percent in 2010. Meanwhile, the
budgetary requirement for interest payments was reduced from 29.2 percent of the The
year 2010 was notable for the expenditure controls brought back by government, which
enabled an orderly transition from two years of fiscal stimulus in response to the
global economic crisis back to fiscal consolidation mode as the global economic
situation normalized. Macroeconomic Policy 49 budget in 2004 to 20.7 percent in 2010.
As a result, greater fiscal space was created for capital outlays and other productive
expenditures. For 2010, infrastructure and other capital spending grew more slowly by
PhP6.5 billion or 3 percent yearon-year, given the lower obligation program for
infrastructure and other capital outlays in 2010 compared to 2009. The growth is largely
attributed to the carry-over disbursements for rehabilitation and reconstruction activities
due to typhoon Ondoy in the latter part of 2009, and for other completed projects.
Disbursements were expanded in 2009 to counter the effects of the global economic
slowdown and to provide additional relief, rehabilitation and reconstruction efforts
prompted by the destructive calamities that hit the country. In 2010, total national
government spending for the first three quarters amounted to PhP1.15 trillion, a 7.2percent increase over that in 2009. The increase stemmed largely from spending on
personal services, in compliance with mandated salary adjustments, and larger
maintenance outlays. However, interest payments increased its share of the total

budget from 19.6 percent to 21.2 percent after higher fiscal deficits reappeared. This
higher deficit scenario, coupled with the weaker revenue effort, has constrained
budgetary allocations to the economic and social sectors, which are vital for the
achievement of faster and more inclusive economic growth over the medium term. Low
levels of spending on education, health and infrastructure largely and generally reflected
the low level of government public expenditure3 . Low spending for social sectors
caused poor outcomes in these areas and meant higher costs for the population who
must spend for what government ought to have provided. NG spending on social
services sector as a share of the budget declined from 28.9 percent to 27 percent in
2004 to 2007, recovering to 28.7 percent in 2009, and to 31.9 percent in 2010. Although
spending on social services has gone up, the government still needs to increase its
spending on priority sectors and reduce nonpriority expenditures if it is to keep pace
with neighboring countries and close the gap in public spending. Thus, generating
sufficient revenues to support growth in the medium term remains the greatest
challenge for the fiscal sector. More effort in revenue collection is needed so that an
expenditure program more responsive to growth can be undertaken without bloating the
countrys deficit and while still keeping the debt ratio at sustainable levels. Proactive
debt management should also continue in order to reduce the debt service burden and
to free up resources that could otherwise be channelled to more productive spending.
While the rules governing the contracting of debt and debt guarantees by agencies have
recently been streamlined, some have failed to adhere to best practice and have
contributed to the bloating of deficits. These instances include projects under buildtransfer contracts whose fees and charges were kept unduly low for political reasons,
those implemented and funded from government-to-government arrangements where
accusations of overpricing are still being investigated, and automatic guarantees
provided under the charters of some GOCCs. GOCCs continue to be a large source of
fiscal risk. As of end of 2008, their total liabilities (excluding those of the BSP) amounted
to 36.9 percent of GDP. GOCCs are frequently directed to bear the cost of social
programs that should ideally be funded out of the budget. A case in point is the NFA,
which operates on a buy-high-sell-low policy. NFAs mandate to maintain floors for
farm gate prices while keeping retail rice prices at reasonable levels virtually prevents
the agency from recovering its cost. Public utilities like the Light Rail Transit Authority
(LRTA) also face considerable financial constraints because user charges are
maintained at levels that can only be maintained through heavy public subsidies.
Despite the power tariff increase in 2005 and the privatization of the generating assets
and the offloading of the operation and investment responsibilities for both the power
plants and transmission assets to the private sector, the National Power Corporation
(NPC) and the Power Sector Assets and Liabilities Management Corporation (PSALM)
remain sources of fiscal risk. The full implementation of the universal levies, provided for
under the Electric Power Industry Reform Act (EPIRA) will play a major role in mitigating
the fiscal risks from the power sector.
ON THE NOTE OF PRESIDENT AQUINO

Explaining President Aquinos Conservative Fiscal Policy Read PART 1. Why has
President Aquino III allocated very little for public infrastructure in the face of the huge
public infrastructure gap between the Philippines and its ASEAN-5 neighbors? What
explains this fiscal conservatism? Was the fiscal conservatism due to the desire to have
investment grade upgrade? Or was it due to the blind confidence that the public-private
partnership
(PPP)
projects
will
take
off
with
little
delay?

If it was the first, modest public infrastructure to show low deficits, then its a myopic
policy of sacrificing the long term for the short term. Given the present state of

infrastructure, it is hard to imagine that the Philippine can sustain a growth of 7 percent
in the next 10 years. But having an investment upgrade and making up the huge
deficiencies in public infrastructure does not have to be mutually exclusive. We can
have both. First, the Philippines does not have to borrow from abroad, BSP is sitting on
hefty gross international reserves and Philippine banks are awash with cash. Second,
the economy is assured of some $20 to $25 billion in remittances from Filipinos abroad.
If it was the second, that is, the extreme confidence that PPP projects would pick up
significantly and complement the public-financed public infrastructure, then its a case of
monumental miscalculation. By any standard, the PPP initiative is a major failure. The
Aquino administration has to confront another harsh reality: its incompetence. The
Executive Department has failed to spend what little has been proposed by the
President and authorized by Congress. From July to December 2010, one may blame
the delay on the review process, the desire to clean up the mess left by the previous
administration, and process of learning-by-doing. But below par performance starting
January
2011
may
rightfully
be
blamed
on
pure
incompetence.
On the reconstruction efforts, rehabilitation czar Panfilo Lacson should go. The Yolanda
victims have turned against him because of delays and inactions. The peoples high
expectations that he will succeed, where the Aquino III administration failed, were
dashed with poor performance. The dissatisfaction with Lacson was not necessarily his
fault. The Liberal Party cabal made sure that Lacson would fail. They cannot allow a
non-party member to inherit the presidential throne. They dilly-dallied, temporized and
held back the preparation of the rehabilitation master plan. They made sure that he
would have no control on the financing of the plan. Remember the Golden Rulehe,
who holds the gold, makes the rule. Mr. Lacsons replacement should come from the
private sector, preferably a retired, successful businessman, with no political ambition to
run for any national position (president, vice president, senator). It goes without saying
that the new rehabilitation czar should enjoy the trust and confidence of President
Aquino III. But he should be a real czar: with great responsibility, he should be given
adequate authority. He should have control of the P100-billion rehabilitation budget and
the authority to bid out and award major contracts related to the rehabilitation work in
accordance with the Procurement Reform Act. This new arrangement has a better
chance of success, in making sure that the P100-billion rehabilitation fund will be
implemented with a greater sense of urgency, that it will be spent well and not end up in
the pockets of unscrupulous politicians.

STRATEGIC FRAMEWORK
To achieve the overarching goal of inclusive growth, government lays down the
conditions for a stable macroeconomic environment that is conducive to sustaining a
higher growth path. For fiscal policy, the main task is to expand the narrow fiscal space
and to get on a sustainable revenue-and-spending path. For monetary sector and

external sector policies, this means commitment to low and stable inflation conducive to
balanced and sustainable growth and reduced external vulnerabilities. Fiscal Reforms
One of the most important tasks that need to be addressed in order to achieve
macroeconomic stabilization is to put order in the fiscal house. The large budget deficits
incurred as a result of the fiscal stimulus during the global economic and financial crisis
resulted in the need for fiscal consolidation. At the same time, the reduction of spending
for infrastructure and social services as a result of the governments expenditure
compression efforts in 2002 to 2006, has resulted in large financing gaps in these
areas. These financing gaps, in turn, not only Bright prospects for emerging economies
combined with the prolonged accommodative monetary policies in advanced economies
have driven large capital inflows into emerging economies, including the Philippines.
Macroeconomic Policy 53 constrained the countrys economic growth, but also limited
the access of the poor to the economic gains the country has achieved. The challenge
in the medium term, therefore, is one of achieving fiscal consolidation, while at the same
time substantially increasing the countrys investments in infrastructure, health, and
education. The overall strategy in the fiscal sector in the medium term is to increase tax
effort to 15.6 percent of GDP. This is to be achieved through an annual incremental 0.3
percentage point annual rise in the collection effort of BIR, and 0.1 percentage pointfor
the BOC. At the same time, nontax revenue collection would be increasing equivalent to
an average of 1.2 percent of GDP through governance reforms. Correspondingly, the
NG deficit should decline to a level of 2 percent of GDP by 2013 and must be
maintained at this level until 2016. Also, beginning 2013, the consolidated public sector
deficit must be brought down to 1.5 percent of GDP. The specific strategies and
programs designed at achieving the abovementioned targets are detailed below. Tax
Administration Reforms Before even attempting to introduce structural reforms into the
countrys tax system, administrative reforms must be given priority. Numerous reform
measures are being lined up to improve tax administration. These measures include the
following: 1. Establishing a tax registry comprehending all taxpayers; 2. Using
comprehensive thirdparty data to determine the potential tax base; 3. Maintaining a
transparent and productive tax audit program; 4. Fully staffing the BIR and BOC with
competent and adequately trained personnel; 5. Formulating transparent and consistent
tax rulings; 6. Revitalizing the RATE, RATS and RIPS programs of government; 7.
Establishing appropriate performance standards and evaluation; and 8. Instituting a
more effective system of rewards and penalties under the Lateral Attrition Law backed
up by performance standards. Tax Policy Reforms To complement the efforts to improve
tax administration and to ensure that revenues are adequately protected, priority policy
reforms need to be instituted, namely: the rationalization of the fiscal incentives system
and the enactment of a fiscal responsibility law. The rationalization of fiscal incentives
will save revenues for the government by doing away with redundant incentives (e.g.,
those directed at investments that would have taken place even with the absence of
such incentives). At the same time, rationalization will allow the government to direct the
incentive system at the export sector so that its full potential can be realized. A fiscal
responsibility law is necessary to hasten the fiscal consolidation process and enforce

fiscal discipline at all levels of government. The fiscal position of government should be
kept on an agreed deficit path. Such a law is also necessary to keep the countrys debt
at a manageable level. With proper timing, other tax reforms need to be undertaken in
order to improve the revenue take of the tax system while promoting equity and a level
playing field for all stakeholders. Priority must be given to adjustments in the excise tax
on alcohol and tobacco products, as well as the excise tax on petroleum. The use of the
so-called PAYGO system as a collection handle must also be maximized. The
distortions of the tax system caused by the enactment of piecemeal exemption laws
must be corrected. A reversal of these unnecessary tax exemptions must be pursued in
order to restore the integrity of revenues and make the tax system more efficient and
equitable. Nontax Revenue Reforms Fees and charges collected by government
agencies have not been adjusted since a decade ago. Consistent with the sound
principle of cost recovery, these fees must be adjusted to cover the cost of
administering government services. Government must aggessively pursue the
auctioning of its assets such as air frequencies and permits to develop renewable
energy resources. GOCCs must also be made to contribute their fair share to the
revenue effort by, among others, promptly remitting dividends. Expenditure Policy
Reforms The key challenge in the area of expenditure policy is how to substantially
increase productive expenditures, such as those for infrastructure and social services
(e.g., education and health) and catch up with the accumulated investment deficits in
these areas while at the same time aggressively reducing wasteful and inefficient
expenditures. Public expenditure on infrastructure, as a share of GDP, went down from
an average of 2.4 percent in 1995-2000, to an average of 1.8 percent in 2001-2011. By
comparison, China, Vietnam, and Thailand spent upwards of 7 percent, 8 percent, and
14 percent of GDP, respectively, on public infrastructure during the last decade.
Similarly, public spending on basic education was 3.4 percent of GDP in 1998, but
decreased to 2.9 percent in 2002 and continued to slip reaching 2.2 percent in 2008. In
other East Asian countries, public expenditure on education averaged 3.9 percent of
GDP in 2007.5 In order to address this challenge, the Plan envisions the
implementation of several major public expenditure management reforms not only to
help narrow the fiscal deficit over the medium term but also ensure that resources are
allocated to priority investments, such as human capital and infrastructure. Toward this
end, expenditure reforms that have been introduced in the recent years will be
strengthened and in some cases, revitalized, in order to improve resource allocation
and build resultsorientation into the government service. Among these reforms are the
following: 1. Medium-Term Expenditure Framework (MTEF). The continued adoption of
the multiyear budgeting system (the MTEF) will improve the predictability of funding,
and integrate policy with resource allocation. The main components of the MTEF are
the Paper on Budget Strategy (PBS) and the Forward Estimates (FEs). The Paper on
Budget Strategy will link budget allocation with the national agenda of the government
to identify the priority areas for spending, and to incorporate the sectoral and regional
implications in the dimension and distribution of the budget; and Forward Estimates
(FEs) are the estimated annual costs of ongoing programs and projects. These will help

ensure the continuous funding of program requirements beyond a given fiscal year, and
help provide a sound basis of future years budget trends. In order to adopt more rigid
and realistic FEs, the government will pursue automation that is linked to existing
budget application systems and to the PDP and PIP. 2. Organizational Performance
Indicator Framework (OPIF). This enables the channelling of resources to where it best
produces the desired results and outcomes, as indicated by agreed upon performance
indicators. The implementation of the OPIF will be cascaded to the operating units of
the agency, in order to sustain the restructuring of government expenditures to the
priority sectors. The linking of the OPIF and Performance Management System-Office
Performance Evaluation System (PMS-OPES) being spearheaded by the Civil Service
Commission, will allow the institution of a performance-based compensation system. 3.
Fiscal Responsibility Bill (FRB). The DBM and DOF shall work together to revive the
FRB initiative dating back to 2004 and shall push for its approval. The bill aims to
strengthen fiscal discipline in the public sector by prescribing principles of responsible
fiscal management, establishing control mechanisms on spending, and adopting
preventive measures against the erosion of the tax base of the government. One of its
prominent features is ensuring that proposals to grant fiscal incentives or permanent
increases in national government expenditures must be offset by permanent increases
in revenue or permanent reductions in other expenditures. 4. Government
Rationalization Program (RP). Executive Order (EO) No. 366 issued on October 4, 2004
aims to build a smaller bureaucracy and improve public service delivery through the
strategic review of the mandates, operations, organizational structures, functions,
programs and activities of national government agencies; the elimination of overlapping
or duplicating functions; and the focusing of government efforts and resources towards
its core or vital functions. Given the current progress in rationalizing half of the agencies
in the Executive Branch, its continuation is expected to lead to the elimination of 12,549
regular positions, saving the government some PhP2.4 billion in annual salaries and
compensation. 5. Procurement Reforms. Significant progress was made in reforming
the procurement system through the passage in 2003 of Republic Act (RA) No. 9184 or
the Government Procurement Reform Act. Aside from standardizing and modernizing
the procedures in government purchasing, the law also requires the use of the
Philippine Government Electronic Procurement System (PhilGEPS) by all government
entities, which serves as the sole portal hosting sources of information on all
government procurement. From 2011, the following functionalities in the PhilGEPS will
be implemented: (a) virtual store for electronic purchasing; (b) expanded supplier
registry as a centralized electronic database of all manufacturers, suppliers, distributors,
contractors and consultants registered in the system; (c) introduction of charges and
fees to sustain operations and maintenance of the system; (d) e-payment system to
enhance the functionality of the virtual store; (e) e-bid facility for electronic bid
evaluation of all types of procurement for goods, infrastructure projects and consulting
services; and (f ) uploading of the individual Annual Procurement Plan (APP) of each
government procuring entity. Public procurement in the country shall continue to adapt
to improvements in modern technology through introduction of future functionalities in

the PhilGEPS that will facilitate service delivery, transparency and competitiveness in
the public procurement system 6. Stronger Internal Control System (ICS). Along with
procurement reforms, the internal control system of government entities is being
strengthened to reduce waste and corruption. The DBM, in partnership with the Office of
the President-Internal Audit Office has issued the National Guidelines on Internal
Control System (NGICS). The NGICS serves as a guide to departments/agencies in
redesigning, installing, implementing and monitoring their respective ICS, taking into
consideration the requirements of their organization and operations. A government
Internal Audit Manual (PGIAM), consistent with the NGICS, will soon be finalized in
order to assist the government in establishing fully functioning internal audit offices in
the public sector. The government will find more ways to further strengthen public
expenditure management with the following expenditure reforms and initiatives: 7. ZeroBased Budgeting (ZBB) Approach. Anchored on the good governance thrust of the
Aquino administration, the Department of Budget and Management (DBM) led the
review and evaluation of ongoing programs and projects through the ZBB approach in
preparing the 2011 Budget. Complementing the MTEF and the OPIF, the ZBB approach
is geared towards assessing the continued relevance and priority of programs;
ascertaining whether the program objectives and outcomes are being achieved;
identifying alternative or more effective and efficient ways of achieving the objectives;
and guiding decisions whether the resources for the program or project should continue
to be provided at present levels, increased, reduced, or discontinued. Initial findings and
recommendations from the conduct of ZBB exercises during the preparation of the 2011
Budget include: Termination of programs no longer delivering intended outputs and
outcomes; Holding of the funding for some programs pending removal of bottlenecks
in project implementation and procurement; Expansion of well-performing programs to
alleviate or mitigate critical gaps in social and economic services; Recommendation on
the implementation of difficult reforms in GOCCs; Stricter controls in the use of lumpsum funds following master plans and government priorities; and Deactivation of
selected agencies and GOCCs. In succeeding budget processes, the government shall
widen the scope of the evaluation of the major programs/projects under the ZBB
approach to build up capacity, and to institutionalize program evaluation in the
government. 8. Transparency and Accountability Safeguards in the Budget Process.
The overarching goal is to enhance transparency and enforce accountability in
government operations by incorporating general and special provisions in the General
Appropriations Act (GAA). Under the 2011 GAA, all departments and agencies,
including those enjoying fiscal autonomy, are required to post their approved budgets on
their websites and the status of their programs/projects starting 2011. Special provisions
in the budgets of agencies and GOCCs with key programs and projects require the
posting of the details of program beneficiaries and locations of projects on their
websites for better information and appreciation of the public. This practice also allows
the public to verify agency outputs vis--vis targets. 9. Public Financial Management
(PFM) and the Government Integrated Financial Management Information System
(GIFMIS). This initiative aims to harmonize and integrate the budgeting, accounting, and

auditing systems of the government. Reforms in the PFM system will make it more
transparent, accountable, and performance-oriented. A Memorandum of Agreement
(MOA) has been executed between the DBM, Commission on Audit (COA) and BTr to
develop the GIFMIS. 10. Contingent Liability Management (CLM). Considering the fiscal
impact of realized contingent liabilities (CL) from existing BOT and GOCC projects that
are guaranteed by NG, a joint ICC-DBCC resolution will be issued to strengthen CLM
through the preparation of the CLM Plan by implementing agencies, training for value
analysis/value engineering and CL assessment, evaluation by the DOF of CL for every
financing/procurement option, and full disclosure of required budget for CL that will
become real liabilities and will thereby need funding. 11. Timely Approval of the Annual
Budget. Addressing the urgent needs of agencies in a timely and predictable manner is
the main reason that the government pushes for the passage and approval of the GAA
before the fiscal year starts. To be able to do this, the government revised its budget
schedule in anticipation of early budget preparation activities to

give ample time for the DBM and the agencies to conduct consultations with sectoral
groups, civil society organizations (CSOs), and Regional Development Councils
(RDCs). The new schedule, coupled with improved budget documents submitted to
Congress, will facilitate the budget legislation process, hence ensure timely enactment
of the annual budget. 12. Rationalization of GOCCs and GFIs. To better streamline the
budgetary support given to GOCCs/ GFIs, the government has embarked on instituting
reforms to reduce their financial vulnerability and improve service delivery. The DOF
and the DBM are collaborating in the passage of a law to strengthen oversight functions
on GOCCs/GFIs, and to create a Government Corporate Council that will effectively
manage and supervise the operations of these entities. Administrative and legislative
measures will also be proposed to amend or restructure GOCC charters. A review of the
compensation granted to board members, officers, and employees of GOCCs and GFIs
will also be undertaken to control costs of personal services in GOCCs and make
compensation equitable relative to that in the National Government. Debt Management

Reforms Reforms in the management of debt must also be implemented. A dedicated

unit in the DOF needs to be set up to consider more aggressive options such as debt
exchanges and swaps at the most opportune times to optimize savings. There needs to
be a greater diversification of modes, instruments used, and currency mix, as well as
more innovative terms and features. Likewise, all types of projects funded from
borrowing, whether these are government-to-government arrangements, automatically
guaranteed under GOCC charters, and under BOT or PPP arrangements, should be
subject to the rigid test of project viability and procurement processes and conducted
with the highest standards of transparency. During the project evaluation process, the
extent of contingent public exposure to liability should be clearly identified and
appropriate allocations in the budget should be made in future years.

B.3 TRADE POLICY

TRADE POLICY REVIEW
Report by the Secretariat

THE PHILIPPINES

This report, prepared for the fourth Trade Policy Review of the
Philippines, has been drawn up by the WTO Secretariat on its own
responsibility. The Secretariat has, as required by the Agreement
establishing the Trade Policy Review Mechanism (Annex 3 of the
Marrakesh Agreement Establishing the World Trade Organization),
sought clarification from the Philippines on its trade policies and
practices.
Any technical questions arising from this report may be addressed

to Mr. Ricardo Barba (tel: 022 739 5088) and Ms. Katie Waters (tel:
022 739 5067).
Document WT/TPR/G/261 contains the policy statement submitted
by the Philippines.

SUMMARY

1.
The Philippines economy has performed well since its third TPR in 2005, based
on a relatively open trade regime. Nonetheless, the economy is operating below
potential due to the slow pace of reform while some of the key constraints on overall
growth remain (e.g. inadequate infrastructure, low investment, and governance issues).
Improved productivity is essential for the Philippines to compete with low-cost
neighbouring economies, and additional steps are needed to promote more competition,
improve human capital, eliminate limitations on foreign investment, reduce incentives,
and reform state-owned institutions. It is also hoped that the Government's recently
launched public-private partnerships initiative will encourage investment in major
infrastructure projects.
2.
During 2005-11, the Philippines had an annual real GDP growth rate of 5%,
moderate inflation (5% on average during the period), and a surplus in its external
account in part due to high remittances inflows (about 10% of GDP). Growth has been
broad-based across private consumption, investment, and exports, and was helped by
fiscal stimulus implemented in 2008 and 2011 in response to the global economic crisis.
Persistent fiscal deficits and the resulting large public debt continue to pose the greatest
risk to macro-stability.
3.
The Philippines was the world's 37 th largest exporter and the 29 th importer of
goods in 2010. In services trade, it ranked 27 th among exporters and 36th among
importers. The Philippines' outward-orientation makes it vulnerable to external shocks
but has also contributed to the resilience of the economy in adapting to challenges.
Greater trade diversification would help the Philippines, since it relies heavily on
manufactured products (85% of exports and 67% of imports).
4.
The Philippines continues to encourage investment in "preferred" areas, which
are listed in the Investment Priority Plan (IPP). Tax and other incentives, often
contingent on export performance and Filipino ownership, are still provided in an effort
to attract investment. Additional incentives have recently been introduced, e.g. to
support biofuel production and organic agriculture. The authorities acknowledge the
need to rationalize the incentives system and a bill is being considered in Congress.
5.
Measures have been taken over the review period to improve the business
environment but there remains considerable scope for improvement. Moreover, the

Philippines maintains its overall policy of ensuring that key sectors are effectively
controlled by Filipinos and remain restricted for foreign investors, notably agriculture,
fisheries, and a large number of services. As a result, FDI inflows are low compared
with other countries in the region. While the Government has expressed concern, no
concrete changes are foreseen to open up these sectors to foreign investment.
6.
Foreign investment is encouraged in some sectors, particularly manufacturing,
which mainly takes place within export processing zones (EPZs), where substantial
fiscal incentives are offered.
While this policy has supported manufacturing
employment and exports, it adds pressure on the budget deficit and discourages
efficiency.
7.
The Philippines ratified the Fourth Protocol to the GATS on basic
telecommunications in 2006 and the Fifth Protocol on financial services in 2011. Its
record on making notifications to the WTO has been solid, except in agriculture. Over
the review period the Philippines was involved in two WTO disputes, one as
complainant and one as defendant.
8.
As a member of ASEAN, the Philippines is committed to deepening economic
integration among members, including removing obstacles to trade and improving trade
facilitation. The Philippines, both unilaterally and through ASEAN, has continued to
pursue a policy of negotiating regional trade agreements (RTAs) of varying scope with
the focus on Asia-Pacific.
9.
Over the review period, new RTAs have entered into force between ASEAN and:
Australia and New Zealand; China (services); India; Japan; and Korea. In addition, a
bilateral agreement between the Philippines and Japan entered into effect, bringing the
total number of the Philippines' preferential partners to 15. Only under ASEAN has tariff
liberalization been fully implemented, and this is putting pressure on the noncompetitive sectors of the Philippine economy, particularly sugar. Most of these RTAs
contain services commitments, which are much more extensive than those taken by the
Philippines under the GATS.
10.
Trade policy has not undergone major changes since 2005; the tariff remains the
main policy instrument. With the adoption of the 2007 ASEAN Harmonized Tariff
Nomenclature, the Philippines' tariff was simplified and now comprises 8,299 lines at the
HS eight-digit level (compared with 10,688 in 2004). The simple average MFN applied
tariff (6.4%) is 19.3 percentage points lower than the simple average bound rate
(25.7%), giving the authorities ample scope to raise applied tariffs. Tariffs average
10.2% (10.3% in 2004) on agriculture (WTO definition), and 5.8% on non-agricultural
products (7% in 2004). All tariff lines, applied and bound, are ad valorem. About 40%
of tariff lines are unbound.
11.
On aggregate, the tariff displays mixed escalation, negative from first-stage
processed products (average tariff rate of 6.7%), to semi-finished goods (average rate
of 4.9%), and positive from semi-finished to fully processed products (average 7%). At
a more disaggregate level, positive tariff escalation is most pronounced in textiles and

leather, followed by wood and furniture, paper and printing, chemicals, and non-metallic
mineral products, thereby providing higher levels of effective protection to those
industries than that reflected by the nominal rates.
12.
Customs procedures have been automated through the Electronic-to-Mobile
(E2M) system to streamline the payment and clearance processes at the Bureau of
Customs. Under ASEAN, the Philippines is in the process of finalizing a "national single
window" in order to expedite intra- and extra-ASEAN trade.
13.
The Philippines' import licencing system remains complex, with fees varying by
product. Imports of some goods are prohibited and a few very sensitive goods, notably
rice, are subject to import quotas. The rice quota was to be phased out by 2005, but the
Philippines obtained a seven-year extension (until 30 June 2012) within the WTO.
14.
National standards and technical regulations appear to follow international
guidelines whenever possible, and the number of national standards that correspond to
international standards has increased since 2005. SPS regulations appear to be
stringent.
15.
Since 2005, the Philippines has initiated three anti-dumping investigations (13
cases during 1999-2003), with one definitive measure applied against clear float glass
from Indonesia. It has not initiated any countervailing actions since 1999. The
Philippines has seven definitive safeguard measures in force, and a special safeguard
measure is on frozen chicken.
16.
Prohibited and regulated exports include endangered wildlife species and live
animals. Only plantation (non-native) logs are subject to an export tax (20% f.o.b).
17.
Participation by foreigners in the government procurement regime remains
restricted, and seems to depend upon the source of the funds for the project and the
domestic availability of the procured goods and services. The Philippines is neither a
signatory nor an observer to the plurilateral Government Procurement Agreement.
18.
The Philippines does not have a general competition law, but several laws deal
with competition. The Department of Justice has recently been designated as the
Competition Authority. Legislation on IPRs is comprehensive and steps have been
taken to improve its enforcement.
19.
The Philippines' agriculture sector is dominated by small farms with low
mechanization. This was largely the result of a major on-going land distribution
programme, and poses a significant barrier to competitiveness. In value terms, the
Philippines' main crops are rice, banana, coconut, corn, and sugarcane. While coconut
oil is exported, rice, sugar, and corn are largely produced for domestic consumption,
and a variety of measures are in place to protect and achieve self-sufficiency in these
products. These include price support for rice and corn (which has been highly costly),
high tariffs, rice import quotas, as well as import and export restrictions. Initiatives to
assist agricultural producers include: various incentives; a new requirement that all

banking institutions (government and private) must set aside at least 25% of their total
loanable funds to agriculture and fisheries credit; and to assist sugar producers, a
requirement for a 10% locally sourced bioethanol blend in gasoline, and 2% in diesel.
20.
The Philippines fisheries sector comprises commercial fisheries, municipal
fisheries, and aquaculture. Commercial fishing is allowed in waters that are 16 km or
more from the shoreline: foreign equity in deep-sea-fishing vessels is capped at 40%,
and all fishermen must be Filipino citizens. Imports of fresh, chilled or frozen fish
(except when imported for canning and processing) are allowed only when deemed
"necessary", and a certificate of necessity is required. Fish exports require a permit.
21.
The Philippines' banking system was resilient in the face of the global financial
crisis: the major banks remained well capitalized and liquid. Initiatives are being
undertaken to encourage weaker rural banks to merge with stronger ones. Foreign
participation in the banking sector is subject to significant restrictions: 70% of the
banking system's assets must be held by domestic banks that are majority Filipinoowned. Foreign direct investment in the banking sector may in practice only take the
form of investment of up to 60% of the voting stock of an existing domestic bank.
22.
The insurance sector in the Philippines is small, with deposits amounting to just
over 1% of GDP. There are no limits on foreign equity participation, and foreign
insurance companies may operate as branches, subsidiaries or joint ventures, provided
they have been ranked among the world's 200 largest foreign companies for the past
ten years. However, new minimum paid-up capital requirements serve to keep lower
value companies either fully or substantially owned by Filipinos. Reinsurance services
may be obtained from abroad upon the authorization of the Insurance Commission.
However, 10% of outward reinsurance placements must be ceded to the partly
Government-owned National Reinsurance Corporation.
23.
The legal and regulatory environment for telecommunications remains the same
as at the time of the Philippines previous Review. However, there are a number of ICTrelated Bills pending in Congress. Foreign equity in telecom companies, both basic and
value-added, is limited to 40%. A Congressional franchise is required in order to
provide basic telecom service. No entity is permitted to have a franchise in both
telecommunications and broadcasting. Foreign equity in private radio communications
networks is limited to 20%, and broadcasting and TV are reserved for Filipinos. The
fixed-line market remains dominated by the Philippine Long Distance Telephone
Company (PLDT); there are two main mobile providers. The review period has seen a
massive surge in cellular use, and tariffs have gone down. However, prices for fixed
and broadband services are relatively high.
24.
The main change to the Philippines' maritime transport sector over the review
period was the completion of a nautical highway roll-on-roll-off transport system, which
allows for the continuous movement of cargo using land and water transport. According
to the authorities, this has reduced freight costs, which were reported as high in the
previous TPR. Ownership restrictions on maritime transport remain in place. Nationally
registered ships must be at least 60% Filipino-owned with 100% Filipino crew. In

addition, while there is some flexibility in their application, other requirements include
Government cargo reservation; a requirement that cabotage be provided by Philippine
ships registered to provide domestic shipping; and a rule that Philippine registered
vessels must be repaired, altered, and dry docked at domestic shipyards. The
Philippines allows private ownership and operation of ports, although foreign equity in
port ownership is limited to 40%. Some state-owned ports, including the Philippines
principal port in Manila, are operated by private companies under concession
agreements: these companies must be at least 60% Filipino-owned. Customs brokers
must also be Filipinos.
25.
In air transport, there has been a steady increase in passenger movements over
the review period. Fourteen new air services agreements have entered into force since
2005, most of which have mainly restrictive features. However, in 2011, flexibility was
given to negotiating entities to pursue a more liberal approach. Cargo and passenger
transport is also being liberalized within ASEAN. Foreign equity in domestically licenced
airlines is still capped at 40%, and cabotage is restricted to domestic airlines. Philippine
Airlines (PAL) remains the dominant Filipino carrier for international passenger
transport, while the market share for domestic services is more evenly distributed. A
major challenge facing the Philippines has been its downgrading or blacklisting on
security grounds by the United States, EU, and ICAO. While the recently created Civil
Aviation Authority of the Philippines is responsible for operating most airports, private
management of one secondary airport has been concessioned to the private sector, and
another is foreseen. Self, mutual and third-party handling at airports are permitted.
26.
The Philippines tourism sector is considered to be central to its social and
economic development, and the Government's objective is to double tourist arrivals by
2016. Infrastructural weaknesses, particularly highways, hotels, and tourist facilities,
have been identified as the main bottlenecks to tourism development. Taxes on airlines
are also considered to be a disincentive for long-haul carriers. In order to promote the
hotel industry, the Government enacted a Tourism Act in 2009. This develops the
concept of the Tourism Enterprise Zone for which special incentives are offered,
including a tax credit for locally sourced goods.
27.
The Philippines Professional Regulation Commission (PRC) is responsible for
regulating and licensing 46 professions, through sector-specific professional regulatory
boards and the respective profession-specific laws. Law, the only profession not
regulated by the PRC, is the responsibility of the Supreme Court. The Constitution
limits the practice of professional services to Filipinos, except in cases prescribed by
law, and there is flexibility under the Labour Code and under the PRC Modernization Act
to enable foreign professionals to practice in the Philippines. A notable recent
development has been the inclusion of specific commitments on professional services in
the Philippines' RTAs. Negotiations to implement these commitments have only
advanced between ASEAN countries who have concluded framework agreements to
facilitate mutual recognition agreements for seven professional services.

(2)

TRADE PERFORMANCE AND INVESTMENT

(i)

Trade in goods and services

During the last few years, the Philippines has improved its external position significantly,
in part due to remittance inflows, which increased from US$10.7 billion in 2005 to
US$18.8 billion in 2010 and offset the trade deficit which went from US$7.8 billion to
US$11 billion during the period (Table I.2). As a result, gross international reserves
reached a record high of US$62.4 billion in 2010 (equivalent to 12.26 months of imports,
compared with US$18.5 billion in 2005 or 3.82 months of imports). With gross national
saving exceeding gross domestic investment, the current account balance has recorded
surpluses since 2003, peaking at 5.6% of GDP in 2009 and estimated at 4.2% for 2010
and 1.7% for 2011 (Table I.1).
The ratio of merchandise trade (exports and imports) to GDP averaged 67.8% during
2008-10. In 2010, the Philippines ranked 37 th among world merchandise exporters and
29th among importers (considering the countries of the EU together and excluding intraEU trade). In services trade, the Philippines ranked 27 th among exporters and 36th
among importers.1

Table I.2
Balance of payments, 2005-10
(US$ million)

Current account

Goods and services balance

Trade balancea
Exports
Imports
Services balance

2005

2006

2007

2008

2009

2010

1,980

5,341

7,112

3,627
11,72
-9,113 -6,595 -6,142 5
12,88
-7,773 -6,732 -8,391 5

9,358

8,924

-6,728

-8,027
10,96
6

40,26
3
48,03
6
-1,340

46,52
6
53,25
8
137

49,51
2
57,90
3
2,249

48,25
3
61,13
8
1,160

-8,842
37,610
46,452
2,114

1 WTO Statistics database, "Trade Profiles: Philippines". Viewed at:

http://stat.wto.org/Country Profile/PH_e.htm.

50,74
8
61,71
4
2,939

2005
Receipts
Payments
Income balance
Credit
Debit
Current transfers
Credit
Debit
Capital and financial account
Capital account
Financial account
Direct investment
Direct investment in the
Philippines
Philippines' direct
investment abroad
Portfolio investment
Assets
Liabilities
Financial derivatives
Assets
Liabilities
Other investment
Assets
Liabilities
Net unclassified items
Overall balance of payments

2006

2007

2008

2009

2010

4,525

6,444

9,766

9,717

11,014

5,865
-298
3,937
4,235
11,39
1
11,71
1
320
2,229
40
2,189
1,665

6,307
-1,261
4,388
5,649
13,19
7
13,51
1
314
20
138
-118
2,818

7,517
-899
5,351
6,250
14,15
3
14,57
3
420
3,527
24
3,503
-620

8,557
105
5,973
5,868
15,24
7
15,78
0
533
-1,649
53
-1,702
1,285

8,900
-193
5,712
5,905

16,910
631
-1,627
104
-1,731
1,604

14,35
8
11,41
9
347
6,093
5,746
16,60
4
17,43
4
830
7,344
98
7,246
1,226

1,854

2,921

2,916

1,544

1,963

1,713

-189
3,475
-146
3,621
-43
98
-141
-2,908
-4,791
1,883
-1,799

-103
3,043
-1,567
4,610
-138
159
-297
-5,841
-3,512
-2,329
-1,592

-3,536
4,623
834
3,789
-288
170
-458
-212
-4,840
4,628
-2,082

-259
-3,627
789
-4,416
-113
541
-654
753
4,305
-3,552
-1,889

-359
-625
-2,715
2,090
32
403
-371
-2,742
-1,967
-775
-1,310

2,410

3,769

8,557

89

6,421

-487
4,100
-3,460
7,560
-191
429
-620
2,111
-2,979
5,090
-1,960
14,30
8

16,279

aAdjustments in the general merchandise exports/imports data under the fifth edition of
the Balance-of-Payments Manual (BPM5) include valuation adjustments to the
National Statistics Office's raw material imports for electronics and garments, as well
as conceptual and coverage adjustments.
Source:

Information provided by the BSP (figures are based on the BPM5).

The Philippines continues to rely heavily on manufactured exports (Table AI.1 and Chart
I.1), which accounted for 85.1% of total merchandise exports in 2010. They mainly
comprise machinery and transport equipment (70.1% of the total), e.g. electronic
integrated circuits, other electrical machines, and automotive products. Textiles and
clothing exports represented 3.8% of total merchandise exports in 2010. The share of
agricultural exports rose to 8%, while the share of mining exports, led by non-ferrous
metals, rose to 6.2%. Manufactured products accounted for 66.8% of merchandise
imports in 2010, including office machines and telecommunications equipment, and
chemicals. The share of agricultural imports increased to 11.7% over the period, while
that of mining, mainly fuels, rose to 20.7% (Table AI.2).
The United States and the EU are the Philippines' main export markets of merchandise
exports (Table AI.3 and Chart I.2). Nonetheless, in both cases their shares dropped
during the review period, while that of Asia, led by Japan and Singapore, increased.
The share of exports to ASEAN markets rose between 205 and 2010. In 2010, the
Philippines' main sources of imports continued to be Japan, the United States, and
Singapore (Table AI.4). The EU's share fell during the period, while the share of ASEAN
members rose.
Balance of payments data indicate that the Philippines became a net exporter of
services in 2006 with a surplus averaging US$1,210 million during 2005-10 (Table I.3).
"Other business services" (e.g. professional and technical services, and other
miscellaneous business) accounted for more than half of total services exported in
2010, followed by travel, computer and information, and transportation. The main
services imports in 2010 were transportation, travel, and "other business services".
Table I.3
Trade in services, 2005-10
(US$ million and %)

Services balance (US$

million)
Exports of services
of which:
Other
business
services
Travel
Computer
&
information
Transportation
Communication
Construction

2005

2006

2007

2008

2009

2010

-1,340
4,525

137
6,444

2,249
9,766

1,160
9,717

2,114
11,014

2,939
14,358

11.6
50.1

13.9
54.3

25.0
50.5

43.0
25.7

47.1
21.2

57.7
18.3

2.0
21.3
11.5
1.5

1.5
17.9
8.9
1.1

3.1
13.5
5.3
1.2

11.8
13.3
4.2
0.9

15.9
10.5
3.2
0.7

10.5
9.4
2.1
0.8

Insurance
Financial
Personal, cultural &
recreational
Royalties
and
license fees
Government
Imports of services
of which:
Transportation
Travel
Other
business
services
Royalties
and
license fees
Insurance
Government
Communication
Computer
&
information
Financial
Personal, cultural &
recreational
Construction
Source:

2005

2006

2007

2008

2009

2010

0.4
1.2

0.3
1.6

0.2
0.9

0.2
0.6

0.5
0.6

0.5
0.3

0.4

0.4

0.2

0.2

0.3

0.3

0.1
0.0

0.1
0.0

0.1
0.0

0.0
0.0

0.0
0.0

0.0
0.0

5,865
6,307
7,517
(% of total imports)
53.3
54.7
51.1
21.8
19.5
22.1

8,557

8,900

11,297

49.2
24.0

41.1
30.3

43.5
30.4

10.9

10.1

11.1

12.5

14.2

13.8

4.5
3.5
1.2
2.0

5.5
3.6
1.5
1.6

5.1
3.3
1.7
1.3

4.5
3.1
2.4
1.7

4.7
2.6
2.5
1.4

3.9
2.7
2.0
1.3

1.1
1.6

1.1
2.0

0.8
2.8

0.9
1.0

1.0
1.4

1.0
0.6

0.2
0.1

0.1
0.2

0.3
0.3

0.3
0.4

0.5
0.2

0.5
0.2

Information provided by the BSP.

C. OF THE STRATEGIES USED

The Philippine economy maintained its position of relative strength in 2014
amid a challenging external operating environment, aided by manageable
inflation dynamics, a favorable external payments position, and a sound,
stable, and liquid banking system. Global growth prospects have remained
uneven, with economic momentum in the US taking root, while recovery in the
euro area and Japan has struggled for traction. The divergent growth paths of
major economies in the world fueled concerns that monetary authorities in
these countries would pursue correspondingly asynchronous monetary policy
paths. Economic activity in key emerging markets (EMs), including China and
India, also appears to have softened owing in part to structural bottlenecks
and relatively tight financial conditions. These developments, along with the
steep decline in global oil prices, underpinned the shifts in market sentiment
and risk aversion during the year, leading to capital flow volatility and financial
market turbulence, particularly for EMs, including the Philippines. The
Philippines current growth trajectory appears to be broad-based, providing
the basis for a more durable and sustainable expansion over the medium
term. Real GDP increased by 6.1 percent in 2014 from 7.2 percent in 2013, in
line with the revised Development Budget Coordinating Committee (DBCC)
target range of 6.07.0 percent. On the supply side, growth in 2014 was
supported by services and industry, particularly manufacturing, reflecting the

widening output base in the economy. On the demand side, economic activity
was driven by private spending, given robust household consumption and
strong fixed capital formation, amid generally low and stable inflation
alongside gradual improvements in employment conditions. External trade
likewise recovered, supported by the gradual strengthening of global demand
alongside improvements in intra-regional trade in Asia. Over the coming
months, domestic demand is likely to receive a further boost from the
governments commitment to ramp up public spending as well as anticipated
spending in preparation for the 2016 elections. Lower oil prices are likewise
seen as a favorable factor for the countrys growth prospects. The decline in
oil prices could lessen production costs of firms, improving returns and
inducing greater investment spending. Lower cost of fuel and other
energyrelated consumer items can also boost household real income,
enhancing further domestic consumption. Monetary policy adjustments were
implemented to help safeguard the price and financial stability objectives of
the BSP. The BSP increased the interest rates on its reverse repurchase
facility (RRP) and special deposit accounts (SDA) by a total of 50 basis points
(bps) in 2014 on the assessment that the 2015 inflation target could be at risk,
with the projected inflation path and inflation expectations settling near the
high end of the 2015 inflation target range, amid continued favorable
prospects for domestic demand. The said policy actions were also deemed
necessary to preempt the potential second-round effects of supply-side price
pressures. In addition, the BSP raised the reserve requirements (RR) by two
percentage points (ppts) to help guard against potential risks to financial
stability that could arise from continued strong liquidity growth and rapid credit
expansion. Consequently, headline inflation averaged 4.1 percent in 2014
from 3.0 percent in 2013, within the governments target range of 4.0 percent
1.0 ppt. This was the sixth consecutive year that the announced inflation
target was achieved. As with most EMs in Asia, the impact of uncertainty on
the global front was evident in Philippine financial markets. On a year-to-date
(ytd) basis, the peso weakened against the US dollar by 4.4 percent from the
2013 average of P42.45/US$1, while demand for Philippine debt papers
declined on perception of heightened risk for EM debt instruments, including
those of the iv Philippines. Local stock trading however improved, fueled by
the strong Q2 and Q3 2014 rally on the back of the robust Philippine
economic performance, reports of strong local corporate earnings, and the
continued affirmation of the countrys investment grade status by major credit
rating agencies, including Standard and Poors (S&P), Japans Rating and
Investment Information Inc. (R&I), and Moodys. Nonetheless, disciplined
macroeconomic policies and previous investments on meaningful structural
reforms aimed at enhancing the countrys productive capacity, as well as
narrowing imbalances in the economy allowed the Philippines to weather the
volatility in cross-border flows. The countrys external payments position

continued to be healthy in 2014, supported by the sustained surplus in the

countrys current account, the comfortable level of international reserves, and
the favorable external debt dynamics. The current account remained in
surplus, buoyed by sustained OF remittances, tourism receipts, and business
process outsourcing (BPO) revenues. Nonetheless, the 2014 balance of
payments (BOP) position was in deficit amounting to US$2.9 billion, due
mainly to capital outflows recorded in Q1 2014 following the tapering of US
Federal Reserves (US Fed) bond purchases under its quantitative easing
(QE) program. While foreign portfolio capital returned to the economy in Q2
2014, the inflows were not enough to offset the outflows seen in the early part
of the year. Consequently, the countrys international reserves declined, but
remained ample at US$79.5 billion as of end-2014. At this level, the gross
international reserves (GIR) were enough to cover 10.4 months worth of
imports of goods and payments of services and income. This level of reserves
was also sufficient to cover the countrys short-term debt more than eight
times over (if debt is reckoned on the basis of original maturity) and more
than six times over (if debt is reckoned on the basis of residual maturity). The
countrys external debt dynamics remained manageable, with the debt stock
as a percentage of GDP at 27.3 percent in end-2014 based on the enhanced
framework for reporting external debt statistics, compared to 28.8 percent a
year ago. More importantly, the maturity profile of the countrys external debt
remained heavily biased towards medium- and long-term (MLT) accounts,
thus limiting rollover and refinancing risk. Moreover, the cost of debt servicing
(as a percentage of exports of goods and services) has remained low at 6.4
percent in December 2014, well below the international benchmark range of
20-25 percent, indicating that more resources are available to support
domestic economic activity. The Philippine banking system remained
fundamentally resilient and able to intermediate funds to the productive
sectors of the economy, while maintaining good credit standards. Philippine
banks maintained their track record of stability despite the slower economic
growth during the year. Healthy growth rates were seen in lending, deposits,
and profitability, while the non-performing loans (NPL) ratio continued to
improve and fall below pre-Asian crisis levels. Moreover, the systems capital
adequacy ratio (CAR) of over 15.0 percent remained comfortably above the
BSPs and the Bank for International Settlements (BIS) prescribed levels.
Lending activity was also robust, with the bulk of credit being directed toward
production sectors with strong multiplier effects on the rest of the economy.
Nonetheless, credit standards remained broadly unchanged, attesting to the
prudent risk-taking of the banking system. The banking system was therefore
well-placed to deploy the credit necessary to support the economys growth
momentum. v The BSP as the operator of the Philippine Payments and
Settlements System (PhilPaSS) continued to provide safe, sound, and
efficient payment and settlement of financial transactions in real time. The

volume and value of transactions coursed through the PhilPaSS however

decreased in 2014. This reflected lower Electronic Fund Transfer Instruction
System (EFTIS) transactions, sales and purchases of government securities
via delivery-versus-payment, and the maturity of RRP/SDA placements. While
the Philippine growth story remains fundamentally intact amid the challenging
external operating environment, there are risks that could impact the countrys
growth prospects going forward. The likelihood of an extended period of
monetary accommodation in Japan and the euro area could provide some
counterbalance to the potential decline in global liquidity as a result of
increased interest rates in the US. Nonetheless, EMs, including the
Philippines, remain vulnerable to a potential tightening of external financing
conditions as a result of surprises in the monetary policy paths of major
central banks. The uncertainty in the future policy actions in advanced
economies (AEs) will likely complicate the maintenance of macroeconomic
stability. The challenge for the government is to enhance domestic sources of
durable growth, while reinforcing policies that could help cushion the
economy against potential capital flow reversals related with the normalization
of accommodative monetary policies in AEs, particularly by the US Fed. The
decline in international oil prices on the whole is expected to support global
growth prospects. Like most oil-importing countries, the Philippines stands to
benefit from the significant decline in oil prices. As the country shifts to a
lower inflation target band for 2015-2016, lower oil prices are deemed to be
favorable for inflation as they are likely to dampen inflationary pressures.
Nonetheless, monetary authorities cannot afford to be complacent. Despite
the recent pullback in oil prices, there is still considerable uncertainty about
the oil price path and the sustainability of the oil price decline. There is still the
possibility that oil prices could rebound earlier or by more than expected if the
supply response of oil revenue-dependent producers to lower prices proves to
be stronger than expected. At the same time, the continued robustness of the
domestic economy suggests that disinflationary impulses coming from the
demand side are limited. Moreover, existing wage rigidities, upside inflation
risks from pending petitions for utility rate adjustments (electricity) and
potential power shortages, in addition to well-anchored inflation expectations
also support the assessment that the risk of deflation in the Philippines
appears to be minimal. The considerable progress thus far in reforming the
economy has provided the economy with buffers and cushions against the
challenges of the present global and domestic economic landscapes. The
BSP, for its part, remains committed to maintaining the predictable
macroeconomic environment and a stable banking system as well as a safe
and effective payments system. Towards this end, safeguarding the price and
financial stability objectives of the BSP will continue to be at the top of the
BSPs policy priorities. The BSPs monetary policy remains focused on
achieving the inflation target of 3.0 percent 1.0 ppt for 2015-2016. The BSP

is also committed to provide timely and calibrated responses, using its

enhanced tool set, to unfolding events in the external front to ensure that
liquidity conditions do not become overly tight and interest rates do not get
excessively volatile. On the external front, the BSP will continue to adhere to
a flexible exchange rate system, with scope for occasional presence to
maintain orderly conditions in the foreign exchange market. It will continue to
maintain an appropriate level of reserves to serve as a buffer against external
shocks as vi well as promote external debt sustainability to help ensure that
the economy is able to meet its external debt obligations. In 2014, the BSP
continued to pursue a broad set of reform initiatives aimed at promoting a
financial system that is stable, efficient, resilient, and responsive to the needs
of stakeholders. Policy and regulatory issuances for the year were geared
toward aligning the BSPs domestic regulatory and supervisory frameworks
with international reforms and global standards, fostering sound credit
management practices, and strengthening prudential regulations. Going
forward, the BSP remains committed to sustaining key reforms that will
strengthen the regulatory and supervisory framework to guard against
potential systemic risks and keep financial market exuberance at bay, further
aligning regulations with current Basel requirements. Beyond the preservation
of monetary and financial stability, the BSPs reform agenda shall include the
promotion of a more inclusive financial system that fosters broad-based
growth, strengthen consumer protection, forestall emerging risks, and ensure
financial stability at all times. The BSPs current consumer protection
framework is underpinned by the fundamental tenets of consumer
empowerment, market conduct, and collective responsibility. Looking ahead,
the BSP will further ramp up its efforts to promote financial inclusion through
well-targeted programs on microfinance, consumer protection, and financial
education. The BSP will also fulfill its financial advocacies through
strengthening policies on corporate governance. The BSP will also continue
to work toward the passage of the amendments to its Charter. The passage of
these proposed amendments will strengthen the central banks institutional
framework in meeting its mandates and responsibilities, while ensuring its
corporate viability. These enhancements are also expected to solidify the
BSPs role as the guardian of price and financial stability, preserving and
consolidating macroeconomic gains achieved thus far so that economic
progress can be sustained and made more meaningful for every Filipino.

THE PHILIPPINE ECONOMY Domestic Economy The countrys real gross

domestic product (GDP) expanded by 6.1 percent in 2014, from 7.2 percent in 2013,
surpassing market expectations of 5.8 percent.1 On the expenditure side, strong
household consumption along with the recovery in external trade contributed to output
growth. On the production side, broad-based growth in all three major sectors

services, industry, and agriculture helped drive the expansion. Construction and
manufacturing in the industry sector posted notable increases along with real estate,
renting, and business activities in the services sector. Meanwhile, growth in real gross
national income (GNI) decelerated to 6.3 percent in 2014 from 7.5 percent in 2013, as
net primary income growth slowed down to 7.3 percent from 9.0 percent in the previous
year due to weaker increase in the compensation of overseas Filipino workers.
Aggregate Output and Demand Supply side While the services sector continued to
account for half of the countrys output, the robust growth posted by the industry sector
in recent quarters suggests its potential of becoming a major growth engine. Output in
the industry sector, which accounted for 33.3 percent of the 2014 real GDP, registered
the highest growth rate among the three major sectors at 7.5 percent, boosted by the
notable 9.2-percent expansion in Q4 2014. The solid growth of the manufacturing and
construction sub-sectors lifted the industry sector during the year. The manufacturing
sub-sector increased by 8.1 percent in 2014 on the back of the continued expansion of
the top five performing manufacturing industries, namely: food manufactures (which
grew by 6.8 percent); radio, television and communication equipment and apparatus 1
Statement of National Economic Development Authority (NEDA) Secretary Arsenio M.
Balisacan during the Press Conference on the Q4 2014 and Annual Performance of the
Philippine Economy, delivered on 29 January 2015. Available: http://www.neda.gov.ph/?
p=4767 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 2010 2011 2012 2013 2014 Real GNI and
Real GDP Annual Growth, in Percent Philippine economy maintains growth momentum
Industry sector is on the way to becoming a major growth engine 2 (5.3 percent);
chemical and chemical products (3.3 percent); furniture and fixtures (24.8 percent); and
beverage industries (25.1 percent). Meanwhile, the expansion in the construction of 8.5
percent was buoyed largely by the double-digit growth rates in private construction over
the last three quarters of 2014 amid continued strong demand for office, retail, and
residential spaces. Public construction likewise supported growth during the first and the
last quarters of 2014, but it registered contractions in Q2 and Q3 2014 owing to
bottlenecks in government spending. The services sector, which accounted for 56.7
percent of the 2014 GDP, rose by 6.0 percent and contributed 3.4 ppts to the 2014
output growth. Providing stability to the services sector were the positive performance of
its major sub-sectors, such as the trade and repair of motor vehicles, motorcycles,
personal and household goods (which grew by 6.0 percent); real estate, renting, and
business activities (8.1 percent); transport, storage and communication (6.6 percent);
and financial intermediation (6.7 percent). The sector also received support from the
generally bullish consumer and business sentiment during the year. Meanwhile, output
in the agriculture, hunting, forestry and fishing sector (AHFF) increased by 1.9 percent
in 2014, faster from the yearago growth of 1.1 percent. The sector, which represented
10.0 percent of real GDP in 2014, contributed 0.2 ppt to this years expansion. The
higher agriculture sub-sector growth of 2.3 percent from 0.9 percent in 2013
underpinned the output expansion. This was largely on account of the increase in palay
and corn production, which grew by 2.8 percent and 5.1 percent, respectively, owing to
generally favorable weather conditions in Q4 2014 and increased utilization of high-

yielding seed varieties. Demand side On the demand side, the main drivers of the 2014
real GDP growth were the resilience of household spending and the recovery of
external trade. The generally favorable inflation environment, particularly towards the
latter part of the year, along with overall improvements in labor conditions supported the
5.4-percent growth in household consumption. These were reflected in the higher
purchases recorded in major items such as food and non-alcoholic beverages (which
expanded by 4.5 percent); housing, water, electricity, gas and other fuels (5.4 percent);
health expenditure (10.5 percent); and transportrelated expenditure (10.0 percent).
Meanwhile, exports grew by 12.1 percent during the year, reversing the 1.1-percent
contraction in 2013 on the back of improving external demand, specifically growing
intra-regional trade among Asian economies. Meanwhile, higher government
expenditure in Q4 2014 (increasing by 9.8 percent) pushed government consumption
growth to 1.8 percent for 2014, making up for the slow pace of public spending during
the first three quarters of the year. Household spending and external trade underpin
expansion 3 Moving forward, the Philippine economy is expected to continue to pursue
a higher growth trajectory despite lingering domestic and global challenges. Domestic
expansion is expected to capitalize on existing macroeconomic buffers that have been
the source of resilience of the Philippine economy in the face of various crisis episodes
in the past. The continued positive alignment of strong growth and inflation,
wellanchored inflation expectations, firm domestic demand conditions supported by
bullish consumer and investor sentiments, broadening growth drivers, higher budget
allocation for infrastructure spending, and the improvements in the countrys labor
market condition coinciding with the countrys entry to the demographic window, are
expected to steer the economy to a higher growth potential. In addition, the countrys
sound and stable domestic financial system, ample liquidity, dynamic credit growth,
robust external payments dynamics, ample fiscal space, significant strides in global
competitiveness and governance rankings, and commitment toward sustaining
structural reforms, are also anticipated to bolster further Philippine economic growth by
providing it adequate cushion and room to deal with potential external shocks. Labor,
Employment, and Wages Notable gains in employment conditions were observed in
2014.2 The unemployment rate declined to 6.8 percent in 2014 from 7.2 percent in the
previous year, its lowest level since 2006, while the labor force participation rate (LFPR)
increased to 64.4 percent from 63.9 percent in 2013. Employment expanded by 2.8
percent to 37.3 million in 2014, with new employment generated exceeding 1.0 million.
Employment grew fastest in the industry sector at 4.1 percent (equivalent to 237,000
employed persons) due to strong growth in construction and manufacturing.
Employment in services increased by 3.1 percent (or by 603,000), with the biggest
increment observed in wholesale and retail trade. Agriculture meanwhile posted a
modest growth of 1.7 percent (184,000). Despite said considerable gains in employment
levels, quality remains a challenge. The increase occurred largely in self-employed
persons (4.1 percent, or equivalent to 407,000 employed persons) and unpaid family
workers (8.0 percent, or 292,000). The share of self-employed and unpaid family
workerscollectively referred to as vulnerable employment, a Millennium

Development Goal indicatorto total employment increased to 38.6 percent from 37.8
percent. Meanwhile, the growth in wage and salary employment slowed to 1.5 percent
(329,000) compared to the 3.0 percent growth (644,000) in 2013. Parttime employment
surged by 9.1 percent to 13.6 million from 12.4 million, while persons in full-time
employment decreased by 1.0 percent to 23.2 million from 23.5 million. 2 Figures refer
to the average of the four rounds (January, April, July and October) of the Labor Force
Survey conducted by the Philippine Statistics Authority. The estimates exclude Region
VIII (Eastern Visayas). Employment conditions improve but challenges remain
Philippine economy is poised for higher growth 4 The underemployment rate fell slightly
to 18.4 percent in 2014 from 19.0 percent a year ago, resulting in a decline of
underemployed persons by 42,000 to 6.9 million. Of the total underemployed persons,
the agriculture and services sectors accounted for 41.3 percent each, while the industry
sector accounted for 17.4 percent. Prices Year-on-year (y-o-y) headline inflation
averaged 4.1 percent in 2014, higher than the 3.0 percent average in the previous year
and remained within the Governments 2014 inflation target range of 4.0 percent 1.0
ppt (Table 3) for the year. This was the sixth consecutive year that the average inflation
rate was within the government target. Inflation increased in 2014 due largely to higher
food inflation. The average food inflation accelerated to 7.0 percent in 2014 from 2.8
percent in 2013 as all food itemsparticularly rice, meat, fish, and vegetablesposted
higher prices owing to some tightness in domestic supply conditions due, in turn, to
weather-related production disruptions, delays in supply-side responses (e.g., failed
bidding in rice imports), and bottlenecks in the supply chain (e.g., port congestion and
changing transportation policies) during the first three quarters of the year. Similarly,
non-food inflation rose slightly to 2.2 percent in 2014 from 2.1 percent in the previous
year on higher inflation for housing, water, electricity, gas, and other fuels (2.3 percent in
2014 from 1.7 percent in 2013), transport (0.9 percent from 0.6 percent), health (3.3
percent from 3.0 percent), and education (4.9 percent from 4.5 percent). Higher prices
of electricity, domestic petroleum products (e.g., diesel, gasoline, LGP, and kerosene),
and hospital services, as well as tuition fee hikes for primary and secondary schools,
contributed to the slight uptick in nonfood inflation during the year. Average inflation in
the National Capital Region (NCR) and areas outside NCR (AONCR) also went up to
3.2 percent and 4.5 percent, respectively, in 2014 from year-ago rates of 1.6 percent
and 3.3 percent. Core inflation, which excludes some food and energy items to measure
underlying price pressures, increased slightly to 3.0 percent in 2014 from 2.9 percent a
year ago. Two out of three alternative measures of core inflation estimated by the BSP
the trimmed mean and weighted median measureslikewise edged higher relative to
the rates registered in the preceding year.
D. EFFECT ON UNEMPLOYMENT AND INFLATION
Employment and Poverty Increased globalization and faster economic growth
have provided opportunities for Filipinos entering the labor market. Using the old
concept of unemployment on which the Plan targets were based, unemployment
rate improved from 11.9 percent in 2004 to 11.4, 11.1 and 10.8 percent in 2005,

2006 and 2007, respectively, lower than the Plan targets. Using the new
International Labor Organization (ILO)-based methodology recently adopted by
the country, unemployment stood at 8 percent in 2006, 7.3 percent in 2007 and
7.4 percent in 2008(Figure 2.5)1 . Despite these improvements, however,
unemployment remains high in comparison with the countrys Asian neighbors
(Figure 2.6) and meeting job creation targets continued to be a challenge.
The economic slowdown in 2008 affected the manufacturing sector and resulted
in a net employment generation of only 530,000 net compared to the 771,000
yearly average for the period 2005-2007. The manufacturing sector in particular
registered a negative net employment generation of about 134,000. In 2009,
employment in both agriculture and manufacturing sectors remained sluggish.
During that year, the services sector accounted for about 94 percent of the total
972,000 new jobs generated. (Figure 2.7). With strong export and industrial
performance in 2010, the economy showed some improvement on the labor
front. In the October round of the 2010 LFS, the unemployment rate stayed at 7.1
percent, bringing the 2010 full-year average unemployment rate to 7.3 percent,
lower than the 7.5 percent recorded in 2009. New jobs generated for the year
were estimated at around 983,000, slightly more than in the previous year.
Average underemployment in 2010 likewise improved to 18.7 percent from the
previous 19.1 percent. While the LFS results indicated an improved employment
situation, underemployment was still relatively high. In addition, the employment
share of unpaid family workers and part-time workers stood at 11.5 percent and
35.2 percent, respectively, which suggests there is great room for improving
employment conditions in the country. Given the high underemployment rate of
about 20 percent, it is not surprising to find a relatively high percentage of ownaccount workers (averaging 35.7%) among Filipinos. This partly reflects the
difficulty of gaining employment in the formal labor market and implies a high
incidence of informal sector work. In addition, the 43.2-percent educated
unemployed out of the total unemployed labor force is also very high, a
symptom of the labor mismatch in the country and a factor contributing to the
growing deployment of Filipino workers overseas, averaging about 1.1 million per
year. In the labor and employment sector, therefore, the policy challenge is to
increase decent and productive employment and to enhance inclusive job-rich
growth. To achieve this goal, the country can pursue supply-side strategies (such
as enhancing the human resource base), as well as demand-side approaches
(such as enhancing the returns to human and physical or entrepreneurial capital).
Supply-side measures Working people are not simply the beneficiaries of growth
but also its creators and drivers. Just as increases in employment and labor
productivity contribute to economic growth, so too investments in the
development of human resources help provide a foundation for a job-rich growth
and development strategy. Qualities such as education, skills, health, and
cognitive abilities help determine an individuals ability to obtain productive

employment, as well as expand the scope of labor productivity and pace of

technological advancement of the country. Inclusive growth thus requires a
special focus on the working poor and the unemployed, who comprise a
significant portion (43%) of the labor force. Demand-side approaches Earnings
and employment will depend on the rate, quality, and distributional aspects of
economic growth. The rate of economic growth determines the extent of
employment opportunities. Inclusive growth, in particular, must mean a higher
and broad-based demand for labor and therefore more employment
opportunities. This is important, considering the persistent unemployment and
underemployment levels in the country. The sheer volume of workers working
temporarily overseas2 indicates the lack of employment opportunities and
suggests that domestic investments and entrepreneurship are being held back.
These constraints need to be addressed along with strategies formulated to
ensure that the working poor and the unemployed can participate and benefit
from the development process. A lack of gainful and quality employment
opportunities is an important reason why poverty incidence in 2006 went up to
21.1 percent from 20.0 percent in 2003 (Table 2.2) and essentially stagnated
between 2006 and 2009. Disaggregated data also shows that across the different
regions of the country, poverty incidence among families generally increased,
with Regions Caraga, 9 and 8 posting more than 2 percentage points increases
between 2006-2009. The regions of Caraga (39.8%), ARMM (38.1%), Bicol
(36.0%), Eastern Visayas (33.2%), Northern Mindanao (32.8%), and Central
Visayas (30.2%) also registered more than 30 percent poverty incidence while
NCR had the lowest estimated poverty incidence of 2.6 percent. For the period
2003-2009, the geographical distribution of poverty remained unchanged being
consistent in Caraga, Zamboanga Peninsula, Bicol and ARMM (Figure 2.9). The
regional distribution poverty also highlights the large variations in family income
across the country. Most of the regions in Luzon had relatively lower proportion of
families living below the poverty threshold than those living in Mimaropa, Bicol,
Visayas and Mindanao regions. The lower poverty incidence in NCR and
Regions 1, 2, 3 and 4-A can be attributed to higher access to employment
opportunities and basic social services, while armed conflict and peace and order
problems resulted in higher poverty incidence in Mindanao.

E. IMPACT ON ECONOMIC PERFORMANCE

GDP growth averaged 5.6 percent for the period 20042006, while average
GNP growth was higher at 5.9 percent, boosted by transfers from overseas
workers. On the demand side, private consumption (which comprises about
70% of GDP), grew an annual average of 5.4 percent. Merchandise exports
grew at an average of 9.4 percent, while exports of non-factor services (which

included BPOs such as back office payroll or accounting and call centers)
registered an average of 20.6 percent.

Capital formation, on the other hand, averaged 1.1 percent growth per year during the
period (Table 2.1). Overall, consumption fuelled by remittances is the largest and most
stable source of growth from the demand side. The contribution of net exports (including
BPO), although volatile, was also positive. Investment made a small positive
contribution in 2004 and 2006, but contributed negatively in 2005. The contribution of
public consumption to growth has been marginal (Figure 2.1). On the supply side, the
largest contribution to growth consistently came from the services sector, followed by
the industry sector. The agriculture sector, which is vulnerable to changes in weather
patterns, managed to make a small positive contribution to growth during the period
(Figure 2.2). Average growth was relatively modest, owing to the economys
vulnerability to a number of domestic and external shocks. The continued US-led war on
terrorism, accompanied by the escalating prices of petroleum and sluggish demand for
electronics dragged down economic activities in 2005. Domestically, political factors
were partly responsible for compelling the government to run under reenacted budgets.
The relatively low inflation in 2002-2003 was followed by upward price pressures in
2004 due to geopolitical tensions in the Middle East and growing resource demands
from China and India, all of which contributed to a surge in world oil prices. The
economy expanded at its fastest rate in three decades in 2007, with GDP growing at 7.1
percent (and GNP growing at 7.4 %). With greater fiscal space from the previous years
tax reforms , and with spending ahead of national elections, public construction rose
29.1 percent. Private construction likewise grew 13.3 percent, boosted by
remittancefuelled residential construction as well as the need for more supply of office
space. Overall, capital formation grew 12.4 percent, up from the 5.1-percent growth of a
year ago and the 8.8- percent contraction two years previously. Likewise, private
consumption, which constitutes the largest proportion of GDP on the expenditure side,
continued its stable growth at 5.9 percent, fuelled by remittances from overseas workers
(Table 2.1). On the production side, the services sector continued to be the largest
contributor to growth. The industry sector, with unprecedented growth rates from mining
(at 26.1%) and construction (21%) sectors, contributed higher more to GDP growth as
compared with the previous three years (Table 2.1 and Figure 2.2). Agriculture, with
help from the better weather compared to the past two years, also had a higher

contribution to GDP than in the past two years (Figure 2.2). Price pressures toward the
middle part of 2008 (Figure 2.10) - on account of rising world prices of grains and
petroleum, as well as the global recession affecting the country through the trade
channel towards the later part of the year, contributed to the slowdown of GDP growth
to 3.7 percent (GNP growth was 6.4% for the year). As early as the start of 2008, it was
clear the US would experience a recession and that the impact would reach the
Philippines (in fact the Philippine stock index already fell 9.8% month-on-month in
January 2008 and electronic exports contracted 6.5% in August 2008). It was not until
close to the bottom of the crisis that policy rates were cut (on December 18, 2008) and
the fiscal stimulus bared (in January 2009 )This, although the inflation had been headed
down since September 2008. Monetary and fiscal stimuli came somewhat late. Overall,
there was a noticeable slowdown in private consumption, and in government
construction and consumption, and a contraction in exports during the year. On the
production side, agriculture, industry, and services all slowed down. The brunt of the
global crisis was felt in the first half of 2009 when merchandise exports registered an
average decline of 23.4 percent per quarter, caused largely by the contraction of
electronics and garments exports. Furthermore, although government consumption and
construction increased in the second quarter, the effects of the fiscal stimulus were
blunted by the impact of two typhoons that hit the country in September-October 2009.
Notwithstanding the effects of the global financial crisis, GDP in 2009 rose by 1.1
percent, a figure within the target of 0.8- 1.8 percent, making the Philippines one of the
few economies in the region to register positive performance amidst the recession. GNP
on the other hand, grew by 4 percent, fuelled by robust inflows of overseas remittances.
In 2010, coming from a low base and boosted by the rebound in world trade, quarterly
GDP grew 7.3 percent. Remittance-driven consumption and the pick-up in investments
and net exports (from significant negative contributions in 2009) boosted growth (Figure
2.3). On the supply side, the strong reversal of industrial performance (from negative
contributions to growth in 2009), and the continued significant contribution of the
services sector, drove the growth (Figure 2.4). Higher growth, however, was constrained
by the negative impact of El Nio on agriculture and fisheries. Meanwhile, real GNP
expanded by 7.9 percent as growth in net factor income from abroad eased to 10.3
percent from 31.6 percent in the same period in 2009. A significant part of the high
growth in 2010 was clearly due to a recovery from a low base, implying that these
growth rates cannot be expected to continue in 2011 and beyond without structural
changes in the economy. Such structural changes are needed even more to achieve
this Plans goal of a 7 to 8-percent annual growth rate in GDP.

F. REFERENCES
http://www.bsp.gov.ph/monetary/targeting.asp
http://www.neda.gov.ph/wp-content/uploads/2013/09/CHAPTER-2.pdf

http://www.manilaspeak.com/ben-diokno/explaining-president-aquinosconservative-fiscal-policy/