ECONOMY
Since the end of the Second World War, the Philippine economy has had a mixed history of growth and
development. Over the years, the Philippines has gone from being one of the richest countries in Asia
(following Japan) to being one of the poorest. Growth immediately after the war was rapid, but slowed
over time. A severe recession in 1984-85 saw the economy shrink by more than 10%, and perceptions of
political instability during the Aquino administration further dampened economic activity. During his
administration, President Ramos introduced a broad range of economic reforms and initiatives designed
to spur business growth and foreign investment. As a result, the Philippines saw a period of higher
growth, but the Asian financial crisis triggered in 1997 slowed economic development in the Philippines
once again. President Estrada managed to continue some of the reforms begun by the Ramos
administration. Important laws to strengthen regulation and supervision of the banking system (General
Banking Act) and securities markets (Securities Regulation Code), to liberalize foreign participation in the
retail trade sector, and to promote and regulate electronic commerce were enacted during his
abbreviated term. Despite occasional challenges to her presidency and resistance to pro-liberalization
reforms by vested interests, President Gloria Macapagal-Arroyo has made considerable progress in
restoring macroeconomic stability with the help of a well-regarded economic team. However, despite
recent progress, fiscal problems remain one of the economy's weakest points and its biggest
vulnerability.
Important sectors of the Philippine economy include agriculture and industry, particularly food
processing, textiles and garments, and electronics and automobile parts. Most industries are
concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the
Philippines, which possesses significant reserves of chromite, nickel, and copper. Significant natural-gas
finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal
energy reserves.
Today's Economy
The Philippines was less severely affected by the Asian financial crisis than its neighbors, aided in part by
more than $7 billion in annual remittances from overseas Filipino workers. Except for 1998 -- when
drought and weather-related disturbances pulled down agricultural harvests, combining with the
contraction in industrial sector production -- real Gross Domestic Product (GDP) has recorded positive
growth year-on-year. From a 0.6% decline in 1998, GDP expansion picked up in 1999 (3.4%) and 2000
(4.4%) but slowed to barely 2% in 2001 in the context of a global economic slowdown, export slump,
and domestic as well as global political and security concerns. Year-on-year GDP growth accelerated to
4.3% in 2002, reflecting the continued resilience of the service sector, gains in industrial sector output,
and recovering exports. The economy exhibited resilience during 2003 with 4.7% GDP growth,
notwithstanding serious external and domestic shocks. (including the Iraq War, SARS, uncertainties over
global economic prospects, sovereign credit-rating downgrades, and resurgent law-and-order worries).It
will take a higher, sustained economic-growth path to make more appreciable progress in poverty
alleviation given the Philippines' high annual population growth rate of 2.36 percent -- one of the
highest in Asia.
Agriculture generally suffers from low productivity, low economies-of-scale, and inadequate
infrastructure support. Agricultural output fell in 1997 and 1998 due to an El Ni�o-related drought but
increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%)
and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.8%
year-on-year in 2002 and in 2003.
The global economic and electronics-demand slowdown combined with softer prices of resource-based
commodities to depress export performance in 2001. Full-year export receipts -- which last declined in
1985 -- contracted by 16.2% year-on-year, dragged down by a nearly 24% drop in revenues from
shipments of electronic and telecommunications parts and equipment (which comprise about 60% of
annual export revenues). Reflecting improved levels of intra-Asia trade, export receipts expanded from
April-December 2002, breaking from 14 consecutive months of negative year-on-year growth and
nudging up the full-year 2002 export growth rate to positive territory (10%). Weaker global demand saw
2003 export revenues sputter to 1.4% growth. Export receipts were up 5% year-on-year during the first
quarter of 2004.
Although less severely affected than its neighbors, the Philippines' banking sector was not spared from
high interest rates and non-performing loan (NPL) levels during the Asian financial crisis and its
aftermath. Increases in minimum capitalization requirements, increasing loan-loss provisions, and
generally healthy capital-adequacy ratios have helped temper systemic risk. Philippine banks' average
NPL ratio, which peaked at 18% in 2002, has since stabilized to between 14%-15%. However, this current
performance now lags most hard-hit neighboring countries that have moved more aggressively to
address their NPL problem The burden of non-performing assets has squeezed profit margins and
inhibited bank lending, posing risks to the longer-term viability and stability of the banking system.
As of end-December 2003, the Philippine peso (which closed at P55.50) had weakened by 4.7% year-on-
year and by more than 110% vis-�-vis the US dollar since mid-1997, reflecting uncertainties over export
and balance of payments prospects, resurgent peace-and-order worries, and political uncertainties in
the run-up to the May 2004 national elections. Elsewhere, there have been some recent, positive
developments in the Philippine economy. Year-on-year inflation, a perennial problem in the Philippines,
is under control. Year-on-year inflation averaged 3.1% during 2002 and 2003, the lowest since 1987,
tempered in part by generally stable food prices, under-utilized capacities, still high unemployment, and
government efforts to control utility-rate increases. The Government expects to contain average
inflation within a 4%-5% range during 2004 despite cost-push pressures from oil price increases and
public utility rate adjustments The monetary authority's adoption since January 2002 of an inflation-
targeting framework has enhanced price stability. Although under pressure due in part to higher
inflation expectations, domestic interest rates have tapered significantly in recent years, aided by
moderate inflation and a stable monetary policy. The Government -- which is targeting lower fiscal
deficits starting 2003 toward balancing the budget by 2009 -- contained the full-year 2003 budget deficit
to 4.6% of GDP, reflecting spending restraint and more vigorous efforts by tax collection agencies to
improve administration, enforcement, and governance.
The Aquino and Ramos administrations opened up the relatively closed Philippine economy and
provided a firmer base for sustainable economic growth. After a slow start, President Estrada and his
cabinet continued with, and expanded, liberalization and market-based policies and reforms. Efforts to
reform the constitution to encourage foreign investment, particularly foreign ownership of land, were
abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had
dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange,
and the President's close ties to certain businessmen, shook confidence of investors and the business
community and ultimately led to successful efforts to impeach and remove President Estrada.
President Macapagal-Arroyo is working to continue with economic reforms in areas beyond retail trade,
electronic commerce, banking reform, and securities regulation. Her administration enacted an anti-
money laundering law in September 2001 and followed through with amendments in March 2003 to
address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). While the
Philippines has avoided FATF countermeasures, effective implementation will be key to the Philippines'
removal from the FATF's watch list of "noncooperating countries and territories." Although
encountering implementation hitches, her administration also enacted legislation to rationalize and
privatize the electric power sector. In January 2003, President Macapagal-Arroyo signed into law two
priority initiatives to reform the government procurement system (the Government Procurement
Reform Act) and to help ease the burden of non-performing assets on the financial sector through the
establishment of private asset management companies (the Special Purpose Vehicle Act).
During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the
Philippines' convoluted documentary stamp tax system and encourage secondary trading of financial
instruments, as well as legislation (the Securitization Act) towards establishing the necessary
infrastructure and market environment for a wide range of asset-backed securities. She also signed
legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of
overburdened court dockets.
