ECONOMY

Since the end of World War II, the Philippines has been on an unfortunate economic trajectory, going from one of the richest countries in Asia (following Japan) to one of the poorest. Growth after the war was rapid, but slowed as years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation and resulted in macroeconomic instability. A severe recession from 1984 through 1985 saw the economy shrink by more than 10%, and political instability during the Corazon Aquino administration further dampened economic activity.

During the 1990s, the Philippine Government introduced a broad range of economic reforms designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, although the Asian financial crisis in 1997 slowed Philippine economic development once again.

Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by inadequate infrastructure and education systems, and trade and investment barriers. International competitiveness rankings have slipped.

The service sector contributes more than half of overall Philippine economic output, followed by industry (about a third), and agriculture (less than 20%). Important industries include food processing; textiles and garments; electronics and automobile parts; and business process outsourcing. Most industries are concentrated in areas around metropolitan Manila. Mining has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant offshore hydrocarbon finds have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
The Philippine economy proved comparatively well-equipped to weather the recent global financial crisis in the short term, partly as a result of the efforts over the past few years to control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector--which includes 80% of total financial system resources--had limited direct exposure to distressed financial institutions overseas, while conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector. Although direct exposure to problematic investments and financial institutions was limited, the impact of external shocks to long-term economic growth, poverty alleviation, employment, credit availability, and overall investment prospects remains a concern.

Real year-on-year GDP growth slowed to 3.8% during 2008, and sputtered to 0.9% during 2009, though the economy showed clear signs of recovery in the first half of 2010, growing 7.9% year-on-year. Overseas workers’ remittances increased at a slower 5.6% pace in 2009, down from the double-digit growth rates of previous years, but were nevertheless better than expectations and rose to $17.3 billion (nearly 11% of GDP), helping the economy avoid recession and supporting the balance of payments and international reserves. Government spending, a looser monetary policy, and a relatively resilient business process outsourcing industry also helped support the economy. Annual GDP growth averaged 4.3% under the Arroyo administration, but it will take a higher, sustained economic growth path--at least 7%-8% per year by most estimates--to make progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 30% to 33% between 2003 and 2006, equivalent to an additional 3.8 million poor Filipinos. The food, fuel, and global financial shocks and severe typhoon-related damages of 2008-2009 are expected to have pushed more Filipinos into poverty. Drought brought by the El Nino weather phenomenon reduced agricultural and hydroelectric production in late 2009 and early 2010.

The Philippines’ business process outsourcing (BPO) industry currently accounts for about 15% of the global outsourcing market and has been the fastest-growing segment of the Philippine economy. Although industry revenues slowed from 40% growth during 2006 and 2007, the BPO sector has been relatively resilient amid the global financial turmoil, generating more than $6 billion in revenues in 2008 (up 26%) and $7.2 billion in 2009 (up 19% and equivalent to about 4.5% of Philippine GDP). The sector created about 70,000 new jobs in 2009, bringing total BPO employment as of end-2009 to more than 442,000.

The balance of payments surplus widened from $89 million in 2008 to $5.3 billion in 2009. A narrower merchandise trade deficit, higher overseas remittances, BPO revenues, and a modest expansion in foreign direct investments improved sentiment toward the end of 2009. Although showing signs of recovering, merchandise exports--which rely heavily on electronics shipments for more than 60% of sales--declined by nearly 22% year-on-year during 2009, pulled down by a 22% year-on-year decline in electronics export revenues. Although there has been some improvement over the years, the local value added of electronics exports remains relatively low. Exports contracted, but imports also dropped 20% year-on-year, resulting in a narrower $4.5 billion trade deficit relative to 2008 ($7.5 billion). Total U.S.-Philippines bilateral trade contracted from $17 billion in 2008, following the overall decline in global trade flows, but the United States remains the Philippines' largest trading partner with $12.6 billion in two-way trade during 2009, and is among the largest investors with $6 billion in total direct investments.

The Philippine stock market index--which closed 2008 down more than 48% year-on-year--closed 2009 63% higher from end-2008. The Philippine peso closed 2009 up 2.8% year-on-year. Gross international reserves rose to a new record high of nearly $45 billion as of end-2009, adequate for about 9 months of goods and services imports and equivalent to 4.2 times foreign debts maturing over the next 12 months.

Although still relatively high, the debt of the national government has declined to about 58% of GDP (from a 2004 peak of 78% of GDP); and the consolidated public sector debt has declined to about 75% of GDP (from a 2003 peak of 118% of GDP). The national government worked to reduce its fiscal deficits for 5 consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008 but opted instead for measured deficit spending to help stimulate the economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 and 2009 with deficits equivalent to 0.9% and 3.9% of GDP, respectively. The current medium-term goal is to reduce the deficit to 2% of GDP by 2013. Further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; it declined and stagnated at 14% in 2007 and 2008, however, and declined further to 12.8% in 2009, low relative to historical performance (i.e., 1997’s 17% peak ratio) and regional standards. The government has used privatization receipts to reduce the shortfall in targeted tax collections, but this is not a sustainable revenue source. Recent passage of additional revenue-eroding measures threatens to reduce government revenues further.

The Philippine Congress enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important concerns include the exclusion of casinos from the list of covered institutions and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. Legislation to address these deficiencies is pending in the Philippine Congress. The Philippines has taken steps to adopt Internationally Agreed Tax Standards (IATS) and has implemented legislation that allows and provides a framework for the exchange of tax-related information. In September 2010, as a result, the OECD upgraded the Philippines to its tax "white list."

Nine years after the Arroyo administration enacted legislation to rationalize the electric power sector, the state-owned transmission company (Transco) has been privatized and 70% of total generating assets in Luzon and the Visayas have been sold. This has triggered the opening of access to retail competition in the electric power sector. What remains for privatization is to transfer contracts of the National Power Corporation’s (NPC) Independent Power Producers (IPPs) to private IPP administrators, targeted for completion in 2010. Electricity is still relatively expensive in the Philippines, and the central and southern regions still suffer from inadequate and unreliable generating capacity. Continuing efforts to fast-track power sector privatization remain critical to the long-term stability of public sector finances, ensuring reliable electricity supply, and bringing down the cost of power. A Renewable Energy Act passed in 2008 has provided additional incentives for investment in this sector.

The U.S. Trade Representative removed the Philippines from its Special 301 Priority Watch List in 2006, reflecting improvement in its enforcement of intellectual property rights (IPR) protection. It maintained the Philippines on the Special 301 Watch List through 2010. Sustained effort and continuing progress on key IPR issues, however, will be essential to maintain this status.

Potential foreign investors, as well as tourists, remain concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying competition and the emergence of powerful regional economies also pose challenges. Competition from other economies for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, to lower costs of doing business, and to promote good public and private sector governance. Philippines anti-corruption efforts are ineffective and more needs to be done to improve its international image--an effort that will require strong political will.

Agriculture and Forestry
Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs more than one-third of the work force but provides less than a fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. Although the government has instituted conservation programs, deforestation remains a severe problem.

With its 7,107 islands, the Philippines owns a diverse range of fishing areas. Notwithstanding good prospects for marine fisheries, the industry continues to face a difficult future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. The sector grew only 0.1% in real terms during 2009, dragged down by a 2.8% decline in the fourth quarter because of the adverse effects of successive strong typhoons. The crops sector (which contributes over 45% of total agricultural production) contracted by 1.4% from 2008, offsetting the recovery of the livestock sector and gains from the fisheries and poultry sectors. In 2008, the agricultural sector’s slow growth of 3.9% was attributed to the negative growth in the livestock sector and lesser output in the crops and fisheries subsector.

Industry
Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber and plastic products, textiles and textile products, clothing and footwear, leather products, pharmaceuticals, paints, wood and wood products, paper and paper products, printing and publishing, furniture and fixtures, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass and glass products, industrial chemicals, fertilizers, iron and steel, fabricated metal products, mineral products, machinery and equipment, transport equipment, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones.

The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Mining
The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas.

GDP (2009): $160.6 billion.
Annual GDP growth rate (2009): 0.9% at constant prices.
GDP per capita (2009): $1,746.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, paper and paper products, tobacco products, beverage manufacturing, food processing, machinery and equipment, transport equipment, electronics and semiconductor assembly, mineral products, hydrocarbon products, fishing, business process outsourcing services.
Trade (2009): Exports--$38.3 billion. Imports--$42.8 billion.