development report of philippine

7/28/2019 Development Report of philippine

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Submitted To

Submitted To,

Submitted By

Submitted By,

Course Name: Finance and Development

Course Code: F- 402

Dr. M. Masud Rahman

Chairman

Department of Finance

Faculty of Business Studies

University of Dhaka

Farhana Rahman 16- 004

Farha Farzana 16-006

Md. Rasel Miah 16-068

Sadia Kamal 16-070

Marufa Akter 16-132

Rajon Saha 16- 158

16th Batch, Section: B

Date of Submission: June O5, 2013


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LETTER OF TRANSMITTAL

June 05, 2013

Dr. M. Masud RahmanChairmanDepartment of FinanceFaculty of Business StudiesUniversity of Dhaka

Dear Sir,It is an immense pleasure for us to submit the term report on, Development Experience of

Philippine which is prepared as a partial fulfillment of the requirement of course - Finance& Development of BBA program under Department of Finance of the Faculty of BusinessStudies, University of Dhaka.

This study has given us the opportunity to learn the development policy & its practices in thepractical field, indeed.

We would like to convey our special thanks and gratitude to you for patronizing our effort &giving us proper guidance. We have tried our best to cover all the relevant fields. Weearnestly request you to call us if you think any further work should be done on the topic ofthe report.

Sincerely yours,

Name ID

FARHANA RAHMAN 16-04

FARHA FARZANA 16-06

MD. RASEL MIAH 16-68

SADIA KAMAL SANCHITA 16-70

MARUFA AKTER 16-132RAJON SAHA 16-158

16th

Batch, Sec: BDepartment of Finance, Faculty of Business Studies,

University of Dhaka


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Table of ContentsChapter

Number

Chapter Name Page Number

Executive Summary 4

1 1.1 Highlights of the Philippines Performance 7

1.2 Overview of the Economy & Responsible Policiesfor Situation

8

2 Evolution of Philippines Development Policy 9

2.1 Policy Before 1986 9

2.2 Policy After 1986 102.3 The 2008 Global Financial & Economic Crisis 11

3 Economic Indicator Analysis 13

3.1 Growth Assessment 13

3.2 Poverty & Inequality 15

3.3 Human Development Index 19

3.4 Infrastructure 21

4 Financial Indicator Analysis 23

4.1 Money and Credit 23

4.2 Financial Sector 28

4.3 Agriculture and Rural Finance 324.4 Public Finance 34

5 Policy Implication 36

Appendix A 30

Appendix B 42

Appendix C 47


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Executive Summary

The Philippines development performance during the past several decades has been lessimpressive than that of many of its East and Southeast Asian neighbors. In the 1950s and1960s, the country had one of the highest per capita gross domestic products (GDPs) in the

regionhigher than the Peoples Republic of China, Indonesia, and Thailand. However, thePhilippines have now fallen behind. Its growth has not only been slow but also erraticwithfrequent booms and busts. A wide spectrum of economic policies has been implementedduring the past five decades. Yet the boom-bust cycle has remained a constant feature of theeconomy along with relatively high poverty incidence.Compared with other economies inEast Asia, the Philippines economic growth record has been disappointing. On the otherhand, Philippines have also been a laggard in East Asia in terms of poverty alleviation.Economic benefits have not been equitably shared in Philippines and recent studies haveargued that an inequitable distribution of wealth is a constraint to economic growth anddevelopment.Mainstream economists attributed this situation largely to economic

protectionism and the import-substitution policy, a policy taken after World WarII.ThePhilippines is therefore in a relatively unique position wherein a whole range of policieswhere implemented without much success. Long term structural and institutional problem can

be attributed to this predicament.

In 1986, the Philippine economy emerged from the martial law rule with serious imbalances.consolidated public sector deficit-6% ,external debt was close to 100% of GNP, Real GDPrecorded 2 consecutive years of negative growth at 7%, unemployment was high and

poverty was pervasive, The central bank was saddled with massive liabilities. Key policies ofthe administrations since 1986 were mostly documented In the Medium-Term PhilippineDevelopment Plans. These policies and reforms are embodied in a number of well-

publicized initiatives or programs implemented since 1986, including trade liberalization,tariff reduction and accession to the World Trade Organization (WTO); fiscal consolidationand tax reform; creation of an independent central bank with inflation targeting as a key

policy tool; privatization of several government owned and -controlled corporations such asthe Philippine National Bank and Petron (a petroleum refining and distribution company);

power sector restructuring and reform; comprehensive agrarian reform; banking sector reformand capital market development; devolution of public services delivery to local governmentunits; and declaration of poverty reduction as the overarching development goal andcommitment to social programs for poverty alleviation and achieving MDGs.

The Philippine economy slowed down considerably in 2008. GDP growth rate fell to 3.8%,compared to 7.1 % in 2007.The slowdown was a result of the surge in inflation triggered bythe sharp rise in food and fuel prices and to a lesser extent the US recession. Inflation jumpedto 9.3% after averaging only 2.8 percent in 2007. The global crisis left an impact over theasset prices, financial sector, real sector and various other aspects. A fiscal package known asthe Economic Resiliency Plan (ERP) was taken up to respond to the global crisis. The ERPwas geared towards stimulating the economy through a mix of government spending, tax cutsand public-private partnership projects. The more vulnerable sectors expected to beadversely affected by the crisis were:

OFWs vulnerable to displacement including OFWs who work in the US under temporaryworking visas;


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Commodity exports jobs related to i) garments ; ii) electronics ; iii)wiring and harness ; andiv) coconut oil

Infrastructure spending in the Philippines was one of the lowest amongst its neighbors, and

the trend as a percentage of GDP has been declining since the 1980s. This was certainly oneof the key factors why the countrys economic growth had been slow.

The Philippine economy was among the slowest-growing in Asia. The slow pace of growth

has been attributed to several factors, but if one indicator is to summarize all these, it would

be the low level and growth of investment. The investment performance, in turn, was

constrained by the low domestic savings ratethe lowest in Asia and, worse, it has declined

even as it rose in other countries. Rapid population growth had also been a drag on economic

progress, and was partly a reason for the low domestic savings rate.

Though Philippines lagged behind in terms of growth, it showed and still has been showingsome remarkable improvement in terms of Human Development Index (HDI). Philippines

2012 HDI of 0.654 is above the average of 0.64 for countries in the medium human

development group. But there exist a crucial problem with HDI- it masks inequality in the

distribution of human development across the population at the country level. For this, the 2010 HDR

introduced the Inequality Adjusted HDI (IHDI), which takes into account inequality in all three

dimensions of the HDI.

In Philippine, the quality of infrastructure has been improving but is still a serious deterrent to

investment. The rating of overall infrastructure quality of Philippine is 2.7 on a scale of 1(for

poor) to 7 (for excellent). The main reason is, infrastructure spending in the Philippines wasone of the lowest amongst its neighbors. So it is clearly visible that the quality of

infrastructure is a serious impediment to investment.

Addressing the widespread poverty problem is the single most important policy challenge

faced by the Philippines. Not only poverty is high in compare to other country of East Asia

but also its reduction is too slow.

What is causing poverty in the Philippines and why has it been persistent over the years?

Answer to this question may be low to moderate economic growth for the past four decade or

unemployment or failure to manage population growth or all of them. The main reason

behind the slow poverty reduction is the failure of the economy to grow rapidly and generate

quality employment in sectors with large numbers of poor. The Philippines has a relatively

high level of inequality compared with most of its regional neighbors. Income inequality has

been a long lasting development challenge for the Philippines. . It is noted that the income of

the Philippines richest ten percent of the population was in fact twenty times the income of

the poorest ten percent

Recently government has taken some program to reduce poverty. They are known as:

Pantwid Pamilyang Pilipino Programs (4Ps), Community Mortgage Program, Asset Reformsor Agrarian reform.


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We have also analyzed Philippines economic sector covering 4 variables taken from Bangladesh

Bank annual report. The variables are Money and credit, Financial markets, Agricultural and rural

finance and Public Finance. Through these variables we examined the contribution of Govt. , private

and other overseas fund in the economic circle of Philippine and the increase or decline in the growth

of various sectors.


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Chapter 11.1 Highlights of the Philippines Performance

Economic Growth Real GDP has grown by 6.8 percent and have a positive rate ofgrowth since 2000, despite a low investment rate. Investment

productivity, however, has been very good.

Poverty The incidence of poverty is high compared to those of other lower-middle income countries, but the most serious problem is severeinequality.

Economic Structure The service sector accounts for 53.7 percent of GDP, with industryand agriculture generating 32.1 percent and 14.2 percent,respectively. But more than one-third of the labor force still depends

on agricultureat very low levels of productivity.Fiscal and MonetaryPolicy

The fiscal reform program shows strong signs of progress, through acombination of expenditure restraint and revenue enhancement. Butthe revenue yield is still low, which constrains the governmentsability to deliver critical services and public investments.

BusinessEnvironment

On most business environment indicators, the Philippines is aboutaverage compared to the benchmarks. By global standards, however,the private sector faces major impediments to doing business. Theforemost problem is corruption.

Financial Sector Financial sector indicators are mixed. There are notable weaknessesin the banking sector, including very low levels of credit to the

private sector. But stock market capitalization is strong, signalinginvestor confidence.

External Sector The economy is open; export growth is solid, if unspectacular; andremittances are high. The current account is in surplus, and there is

pressure for strengthening of the peso.

EconomicInfrastructure

Infrastructure quality is generally poor, constituting a seriousconstraint for investors and a drag on competitiveness. Roads and

ports, in particular, need attention.

Health Although life expectancy is now more than 70 years, there are seriousproblems with maternal health care, child nutrition, and child

inoculation. These problems reflect low public expenditure on healthas well as poverty and income inequality.

Education Enrollment rates and youth literacy are high. But indicators such asthe pupilteacher ratio and expenditure per pupil suggest that thequality of education may be inadequate to meet the challenges ofdoing business in a competitive global economy.

Employment andWorkforce

Unemployment is high but declining, while underemployment ishigh, and nearly eight million Filipinos have left the country for

better job opportunities. Job creation is therefore a critical need. Yetlabor market rigidities appear to hinder investment.


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1.2 Overview of Economy and Responsible Polices for Situation

Sustainable economic development continues to be elusive for the Philippines. A wide

spectrum of economic policies has been implemented during the past five decades. Yet theboom-bust cycle has remained a constant feature of the economy along with relatively highpoverty incidence.Compared with other economies in East Asia, the Philippines economic growth record has

been disappointing. While the regions middle and high income economies experienced atleast two per cent average growth of real per capital Gross Domestic Product (GDP) duringthe past 50 years, the Philippines recorded only a 1.9 per cent average (Table 1). As a result,the Philippines was not even described as a high-performing economy by the World Bankin its 1993 study of the East Asian Miracle while Thailand, Malaysia and Indonesia wereincluded in this select group.

Meanwhile, the Philippines is also a laggard in East Asia in terms of poverty alleviation.Absolute poverty incidencebased on the one dollar a day threshold applied to recent datais 13.2 per cent in the Philippines, higher than Indonesia (7.7 percent) and Viet Nam (8.40

percent). In stark contrast, Malaysia and Thailand have virtually eliminated absolute poverty(Table 2). At 0.44, the Philippines Gini coefficient per capita income is highest among all

middle income countries in Southeast Asia (Table 2). This is evidence that economic benefitshave not been equitably shared and recent studies have argued that an inequitable distributionof wealth is a constraint to economic growth and development.

Mainstream economists attr ibu te thi s situation largely toeconomic protectioni sm and the

import-substitution policythat were fol lowed after World War I I up to the 1970s.

Protection of selected sectors led to the misallocation of the countrys resources, i.e. sectorsin which the Phi li ppines did not have a comparative advantage benefi ted fr om this policy

stance. Moreover, the lack of competi tion removed the incenti ve of protected f irms to

become innovative and adopt modern technology. Thi s resul ted in monopoli stic f irms

producing poor qual ity goods and services at relati vely h igh cost, the burden of wh ich was

passed on to the F il ipino consumer.

I n response to thi s analysis, the Phi l ippineslike many other developing countries

adopted theopenness model. This reform package began modestly in the earl y 1970s and

was interrupted by the debt crisis in 1983-85. The reform program, however, was

accelerated in the late 1980s and has been the government mantra since. The general

thr ust of the reforms was closer global economic in tegrati on underpinned by li berali zation,

deregulation and privatization. At the same timesimilar again to other developing

countriesthe Philippines adopted measures to strengthen the supply capacity of its

economy with a view to building competitive industries which would be the main

benefi ciar ies of i ncreased access to world markets. More attention was given to

macroeconomic stability and exchange rate movements; appropriate sequencing of

li berali zation of the trade, financial and capital account regimes, supported by prudential

regulation and f inancial sector reform; strengthening domestic instituti onal capacity; and

attracting f oreign direct investment (UNCTAD, 2004).

Un fortunately, these poli cies did not generate the desired resul ts and the Phi li ppinescontinued to lag behi nd i ts neighbors. As seen f rom Table 1, per capita GDP growth in


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2001- 06 were sti ll below the peak reached in 1951-60 and were also lower than that of

other East-Asian economies. Moreover, the openness model did not generate the

structural tr ansformation that it was supposed to.

The Philippines is therefore in a relatively unique position wherein a whole range of policies

where implemented without much success. Long term structural and institutional problem canbe attributed to this predicament.

Chapter 2Evolution of the Philippines Development Policy

In the last 5.5 decades the Philippines experienced not only dramatic economic ups anddowns, but also political upheavals. The country was under martial law rule for 13 yearsstarting in1972. In 1986, a people power revolution restored democracy. Since then,

successive democratically elected administrations have initiated various policy and structuralreforms aimed at accelerating the pace of economic growth and poverty reduction

2.1 Development Pol icy before 1986:

In the 1950s, the countrys development policy was centered around an industrializationstrategy based on import substitution. The strategy allowed GDP to grow by about 6.4%annually during the decade. Import substitution, however, soon lost steam and, during 19601970, GDP growth slowed to an annual average of 4.9%. The Philippines adhered to importsubstitution well into the 1970s and the first half of the 1980s, long after the four Asian NIEshad shifted to export-led industrialization

Import substitution rested on protectionist trade barriers, including high tariffs andquantitative restrictions against imports, and on foreign exchange controls. From theelaborate system of trade protection and foreign exchange controls emerged favored domesticindustries, mostly heavy and upstream, that absorbed a good deal of official foreign reserves

and contributed to persistent balance-of-payments difficulties. In addition, smuggling ofimported goods, abetted by corrupt officials, became pervasive. The restrictive foreign traderegime benefited mostly the owners and employees of industries the Government chose to

promote based on policies that were later consolidated under the Investment Incentives Act of1967. The investment and industrial promotion policies, consisting mainly of tax and customsduties exemptions, did little to bring sustainable growth and poverty reduction.

Associated with the import substitution strategy was a fixed or managed exchange rateregime, which periodically collapsed from the weight of countercyclical fiscal and monetary

policies. Each of the peso collapses was generally accompanied by a balance-of-payments

crisis, forcing the Government to seek liquidity support from the International MonetaryFund (IMF). The countercyclical policies had resulted in large and persistent deficits in the


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current account and in the national Government budget. To finance the twin deficits, theGovernment borrowed abroad, thereby enlarging its foreign debt. The fiscal deficits wereautomatically accommodated by the central bank. Because the central bank was notindependent from the Government, its monetary management was inconsistent, inflationincreased, and official foreign reserves were eroded. In the early 1980s, the Philippines was

forced to declare a moratorium on foreign debt servicing, after the oil price shocks brought inhigh interest rates worldwide.

The dismal economic performance could also be traced to poor governance during the 1970s.A good deal of the foreign debt, it turned out later, consisted of loans that financed projects of

political cronies of the then president. Most of the projects failed, and because the loans werecoursed through Government financial institutions, they were eventually assumed by theGovernment.

2.2 Development Poli cy after 1986

In 1986, the Philippine economy emerged from the martial law rule with serious imbalances.The consolidated public sector deficit reached about 6% and external debt was close to 100%of gross national product. Foreign reserves fell to a level equivalent to less than 1 month ofimports. Inflation hit 50% in 1984 before falling to 23% in 1985. Real GDP recorded 2consecutive years of negative growth, at 7% (in 1984 and 1985). The central bank wassaddled with massive liabilities, and the finance sector was plagued by huge nonperformingloans of the two Government financial institutionsthe Development Bank of thePhilippines and the Philippine National Bank. Social indicators were just as disappointing:unemployment was high and poverty was pervasive.

Key policies and reform agendas of the administrations since 1986 were mostly documentedin the Medium-Term Philippine Development Plans (MTPDPs)1. A review of the MTPDPsreveals that policies and reforms pursued since the restoration of democracy broadly fall intothe following areas: monetary and fiscal reforms for restoring and maintainingmacroeconomic stability; trade, industrial, and financial reforms for improving economicefficiency and competitiveness; governance reform and decentralization for improving theeffectiveness of the national and local governments; and social policies and programs forfighting poverty, improving income distribution, and achieving the Millennium DevelopmentGoals (MDGs). These policies and reforms are embodied in a number of well-publicizedinitiatives or programs implemented since 1986, including trade liberalization, tariffreduction and accession to the World Trade Organization (WTO); fiscal consolidation and tax

reform; creation of an independent central bank with inflation targeting as a key policy tool;privatization of several government owned and -controlled corporations such as thePhilippine National Bank and Petron (a petroleum refining and distribution company); powersector restructuring and reform; comprehensive agrarian reform; banking sector reform andcapital market development; devolution of public services delivery to local government units;and declaration of poverty reduction as the overarching development goal and commitment tosocial programs for poverty alleviation and achieving MDGs.

Policies and reforms initiated and implemented so far have had some visible impact on thePhilippine economy. However, the Philippines policy and structural reform is by no means

1

The Medium-Term Philippine Development Plan (MTPDP) is the most important planning document of theGovernment of the Philippines. It spells out the strategic framework to guide the Governments policies,

normally for the coming 6 years.


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complete. The list of unfinished reform programs remains long and, arguably, more difficultreforms are yet to be implemented. The strongest evidence is the fact that the countrysdomestic investment remains sluggish and its share in GDP has continued to decline.Moreover, the reduction in poverty incidence has been slow and the Ginicoefficient of percapita income remains very high, suggesting that the fruits of economic growth have not been

widely shared among Filipinos.

2.3 The 2008 Global Financial and Economic Crisis

On September 15, 2008 the global investment bank Lehman Brothers filed for bankruptcyprotection, sending shock waves across the international financial system. This was soonfollowed by other bankruptcies, bailouts and takeovers of financial institutions in the US andEurope. Subsequently many economiesGermany, Japan, Singapore and Hong Kong amongotherswere declared to be in recession. The high point came when the National Bureau ofEconomic Research announced on December 1, 2008 that the US economy was in recessionsince December 2007.

Like many other emerging markets, the Philippine economy slowed down considerably in2008.Latest data show that GDP growth rate in 2008 fell to 3.8 percent, compared to 7.1

percent in 2007 (Table 3). However, also like many other emerging markets, the slowdownwas not primarily a result of the global financial crisis. Rather, the deceleration in thePhilippine economy was largely brought about by a surge in inflation triggered by the sharp

rise in food and fuel prices and to a lesser extent the US recession

2

. Inflation jumped to 9.3percent in 2008 after averaging only 2.8 percent in 2007. The negative effect of high inflationcame through various channels: households postponed consumption expenditures,

particularly durable goods; the high cost of fuel scaled back services in the transportationsector; and higher prices caused an increase in the cost of production. The global crisis left animpact over the asset prices, financial sector, real sector and various other aspects.

Policy responses:The Philippine Government, through the Department of Finance andNational Economic and Development Authority (NEDA), crafted a PhP330-billion fiscalpackage, formally known as the Economic Resiliency Plan (ERP) to respond to the globalcrisis. The ERP was geared towards stimulating the economy through a mix of government

spending, tax cuts, and public-private partnership projects.

The more vulnerable sectors expected to be adversely affected by the crisis were:

OFWs vulnerable to displacement including OFWs who work in the USundertemporary working visas;

2The subprime mortgage crisis, surge in fuel and food prices, and even the current global financialcrisis have a

common root cause: global excess liquidity caused by the unipolar financial system. Meanwhile, primarilybecause of historical low correlations between US and Philippine GDP growth rates, it has been argued that theUS recession will have minimal impact on the Philippine economy


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Commodity exports jobs related to i) garments ; ii) electronics ; iii)wiring and harness; and iv) coconut oil

The ERP initially involved an increase in the capital outlay in 2009 amounting to PhP275billion or 3.3 percent of GDP. This is higher than the amount in 2008 which was PhP225

billion. Subsequently, the ERP was announced as a P330 billion package that would prioritize"easy to implement projects" like repair and rehabilitation of roads, hospitals, bridges andirrigation facilities, school and government buildings.The breakdown of funding has beenidentified as follows:3

PhP160 billion is the increase in the 2009 budget compared to the 2008 budget. Thisfunds small, community-level infrastructure projects and social protection measures.

PhP40 billion is the combined tax cuts for low and middle income earners and thescheduled cut in corporate income taxes as provided in the Revised Value Added TaxLaw.

PhP100 billion is outside the budget. Part of the fund will be provided by governmentfinancial institutions and social security institutions to finance large infrastructure

projects.

PhP30 billion is the additional benefits to members by social security institutions.This will be taken from the gap between contributions and claims/benefits.

3Economic Resiliency Plan Frequently Asked Questions in

http://www.neda.gov.ph/erp/downloads_/Q&A%20on%20ERP.pdf


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Chapter 3Economic Indicator Analysis

3.1 Growth Assessment

Following the Philippines political independence in 1946, in the 1950s the country embarked on an

industrialization drive. Between 1950 and 2010, the Philippine gross domestic product (GDP),

expressed in 1985 prices, expanded 11.2 timesan average growth of 4.4% each year. But the growth

rate was never smooth. The economy, for instance, contracted in 19841985, 1990, and 1998. It is

important to point out that these serious stagflationary periods 1984-5, 1991 and 1998 were

all periods when the Philippines was employing monetary targeting.

Why Phi l ippines economy col lapsed in 1984-85?

In 1983, five commercial banks failed, followed by the closure of the then largest thrift bankin 1984. Those commercial banks failed on account of their fast and loose assessments of thedefault risks of borrowers. One reason was the projects were associated with the directors,officials and related interests of the failed banks, in violation of existing DOSRI rules. Theaverage share of the non-performing loans of these banks reached more than 20%.The collapse of these banks was hastened by a balance-of-payment crisis in 1983, the year thegovernment declared a moratorium on repayment of its foreign debts. The government hadengaged in counter-cyclical fiscal and monetary policies following the oil-price shocks in the

1970s. These moves led to large and persistent deficits in the national government budget, thefinancing of which led to excess liquidity. At that time, the exchange-rate system in placewas to a great extent fixed. The central bank ran out of official foreign reserve assets and hadto turn to the International Monetary Fund for standby drawing rights (SDR). To get theneeded liquidity, the government submitted to the policy conditionalities imposed by the IMFon client countries with serious balance-of-payments problems. These included a sharpdevaluation of the peso against the US dollar. The devaluation made it more difficult for the

banks to service their foreign loans. Loaned up to domestic projects that were also bankrupt,the banks became insolvent and had to be taken over by the central bank. Prior to central

bank takeover, the deposit bases of these banks had been impaired from massive withdrawals.The 1983 financial crisis was largely the offshoot of inconsistent fiscal, monetary andexchange-rate policies. Inflationary fiscal and monetary policies under a fixed exchange-rateregime created incentives for excessive risk taking. Viewed against a setting where bankswere undercapitalized and loans were in nature of request (behest) loans to bank owners andmanagers, the bank failures and the financial crisis that was generated seemed inevitable.


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What was the reason for 90s recession?The development of Philippines hindered again as the economy entered the 1990s. In 199091 the islands suffered the triple blow of earthquake, super-typhoon, and volcanic eruption.The destruction caused by the natural disasters was severe enough to cause a contraction in90s.

The Asian cr isis per iod 1998

In 1998, Joseph Estrada was elected president. Even with its strong economic team, the

Estrada administration failed to capitalize on the gains of the previous administration. His

administration was severely criticized for cronyism, incompetence, and corruption, causing it

to lose the confidence of foreign investors. Foreign investors' confidence was further

damaged when, in his second year, Estrada was accused of exerting influence in an

investigation of a friend's involvement in stock market manipulation. Social unrest brought

about by numerous bombing threats, actual bombings, kidnappings, and other criminal

activities contributed to the economy's troubles. Economic performance was also hurt by

climatic disturbance that caused extremes of dry and wet weather. Toward the end of

Estrada's administration, the fiscal deficit had doubled to more than P100 billion from a low

of P49 billion in 1998. Despite such setbacks, the rate of GNP in 1999 increased to 3.6

percent from 0.1 percent in 1998, and the GDP posted a 3.2 percent growth rate, up from a

low of-0.5 percent in 1998. Debt reached P2.1 trillion in 1999. Domestic debt amounted to

P986.7 billion while foreign debt stood at US$52.2 billion. In January 2001 Estrada was

removed from office by a second peaceful "People Power" revolution engineered primarily

by youth, non-governmental organizations, and the business sector. President Estrada was the

first Philippine president to be impeached by Congress, and his vice-president, GloriaMacapagal-Arroyo, became the fourteenth President of the Republic.

Accounti ng for Sources of Growth

The key drivers of and reasons behind the slow and erratic growth of Philippines ishighlighted in this segment.

On the supply side, the three major sectors (agriculture, industry, and services) grew steadilyduring the 1950s, 1960s, and 1970s (Table 4). But the economic crises in the mid-1980s,early 1990s, and late 1990s slowed growth considerably. During the recession in the early1980s, industry was the hardest hit as the growth rate for the period slipped to 0.6% from ahigh 7.9% in the previous decade.Industry recovered in the 1990s and stabilized in the 2000s, but services proved to be themain contributor to growth starting in the 1980s. In the 1990s, agriculture contributed 12.9%to GDP growth; industry, 35.3%; and services, 51.9%. During 20012010, agriculturesaverage contribution to GDP growth increased to 15.9%; that of industry decreased to about22.6%, while that of services increased to almost 61.5%.


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Graph 2 depicts the output share of the major sectors. Agriculture, including fishery andforestry, was a major source of income and employment from the 1950s to 1980s. In 1986,agricultures share of real GDP was about 25%. In 2006, this had declined to about 19 %. The

biggest subsector in agriculture is crops and, during 19862006, its share of real GDP fellfrom 23.0% to 18.6%. Forestrys share declined from 1.7% in 1986 to 0.1% in 2006,

reflecting the rapid rate of deforestation that had taken place.

In the course of economic development, the share of agriculture to real GDP is expected todecline. Industry is normally expected to pick up the slack. This did not happen in thePhilippines. The share of industry was highest in the 1960s and 1970s as import substitution

policies, which were oriented mainly toward the domestic market, extended high rates ofeffective protection to local industries against imports. In the 1980s, industrys share began to

decline. In 1986, industrys share to real GDP was 35%; in 2006, the share had dropped to32.5%. The biggest subsector in industry is manufacturing. In 1986, manufacturings share of

real GDP was 24.7%; this fell to 24% in 2006. Food processing is the most importantmanufacturing subsector.

On the demand side, the share of private consumption in GDP in the Philippines averagedaround 75% during the 1950s and 1960s, and declined to just below 70% in 1970s. Since thenit has been on a rising trend, and reached 78% during 20012010 (Table 5). Consequently,

private consumption has been the most important driver of GDP growth, averaging at 89.0%of GDP growth in the 1990s and slightly declining to 81.9% afterward (Table 6). Meanwhile,the contributions of investment to GDP growth have stayed below one third that of privateconsumption in most periods, and average contribution has fallen to 7.2% during 20012006. As for government spending, its share in GDP has continued to be below that ofcomparator countriesand has consistently been less than 10% of GDP. The dominant roleof private consumption in driving GDP growth in the Philippines is also in sharp contrastwith many of its ASEAN neighbors, where the role of private consumption is much lesssignificant and the contributions of investment and net exports are more important.

3.2 Poverty & I nequali ty

Addressing the widespread poverty problem is the single most important policy challengefaced by the Philippines. Not only poverty is high in compare to other country of East Asia

but also its reduction is too slow.

Philippines poverty line marks a per capita of 16,841 peso per year. According to the data

from the national Statistical Co-ordination Board 27.9% of the population fell below the

poverty line in the first semester of 2012.

What is causing poverty in the Philippines and why has it been persistent over the years?

Poverty in the Philippines has persisted for almost three decades even as Malaysia &

Thailand, which had similar economies in the 1960s, have almost eradicated it. There aresome well known reasons behind this. Reasons are as follows:


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Low to moderate economic growth for the past four decades

The main reason behind the slow poverty reduction is the failure of the economy to grow

rapidly and generate quality employment in sectors with large numbers of poor. While the

Philippines was on the upturn during 1960s and 1970s with a 5%-6% growth rate, in the

1980s and mid 1990s the average real GDP growth was around 2%. Only recently the

Philippines have returned to its moderate expansion trend of around 5%. Which is still lower

than other comparable countries.

Unemployment:

The failure to sustain a high level of economic growth also explains the unavailability of the

jobs in Philippines. Without job opportunities people will not be able to earn income and are

exposed to poverty. Since last few years, on an average 1 million new people entrants into the

labor force. This is not only due to high population growth but also to the steady increase in

the participation of women in the workforce.

Since access to quality employment is one of the most sustainable paths out of poverty, it is

important to point out that quality jobs generally come from the manufacturing sector. In the

case of the nearby countries such as Vietnam and India, structural changes saw movement

from the agriculture sector to manufacturing and other sectors. Indeed, the labor-intensive

nature of the manufacturing sector has high employment potential, including for the less-

skilled workers. Yet, a look at the structure of the Philippine economy point to a shrinking

agriculture sector (from 25.1% of GDP in 1980, to 13.1% in 2009 to 12.8% in 2011), a

declining manufacturing sector (from 25.7% of GDP in 1980, to 21.3% in 2009, and 19.4% in

2011) and a burgeoning services sector (from 36.1% of GDP in 1980 to 55.2% in 2009, and

55.7% in 2011) (See Table 7, Graph 3). This shows that there has been a lack of sustainable

income opportunities, especially in the rural areas where most of the poor are found. Service

sector is absorbing more and more employee in the last few decades.

Failure to Manage Population Growth

Population growth remains rapid by Asian standards and has decreased slowly compared to

other countries over the last three decades. Various studies have shown that larger family size

is associated with higher poverty incidence, gap, and severity. Larger family size has also

been associated with higher vulnerability to poverty. Moreover, the high population growth

rates exacerbated the poor performance of the economy because of the rapid expansion of the

labor force, which increased more than 2.0% annually in the past 10 years. This resulted in

double-digit unemployment and underemployment rates during that period resulting in more

poverty.


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Income Inequality

The Philippines has a relatively high level of inequality compared with most of its regional

neighbors. Income inequality has been a long lasting development challenge for the

Philippines. Data spanning across 1980-2010 in the Philippines have shown that income

inequality has been prevalent throughout her history, despite signs of economic growth. In a

statement released by the National Statistical Coordination Board in 2005, it was recognized

that the income gap between the rich and the poor was wider in the Philippines than in

Indonesia and Thailand, indicating serious inequality in the distribution of the countrys

economic gains. It is noted that the income of the Philippines richest ten percent of the

population was in fact twenty times the income of the poorest ten percent (See Table 8,

Graph 4).

Recent government taken poverty related program:

Pantwid Pamilyang Pilipino Programs (4Ps)

The 4ps is a conditional Cash Transfer Program (CCT) aimed at addressing poverty and

supporting improved health and education outcomes of poor children and pregnant women.

The 4Ps provides cash grant to poor households subject to their meeting certain conditions in

health and education. These include parents ensuring that their children attend school at least

85% of the time and receive vaccinations and health care.CCT programs implemented in

some Latin American countries have been touted as relatively successful (e.g., in Brazil and

in Mexico).

The lions share of social protection spending in the national budget is devoted to Pantawid

Pamilya, whose allocation has been dramatically increasing every year since the programstarted in 2007, while the budget for other pro-poor programs has suffered by comparison.Since the implementation of CCT in the Philippines, self-rated poverty and hunger incidencehas decreased as recorded by the Social Weather Stations in areas where it was implemented.

But a small study conducted among Pantawid Pamilya beneficiaries reveal that while thelatter are grateful for the conditional cash grants, they believe that what will generally getthem out of poverty is access to jobs. Thats why though Pantawid Pamilya is de-linked from

job provision, program planners are currently linking it up with livelihood programs. Programplanners of the Pantawid Pamilya admit that they have yet to finalize a clear exit strategy tothis five year program. But for as long as access to sustained employment in general is not

part of the equation of Pantawid Pamilya, public uncertainty abounds about its effectivenessas a pro-poor program.

Community Mortgage Program

The Community Mortgage Program (CMP) is a highly innovative program for the urbanpoor. From 1989 to 2003, the CMP has financed 1,109 projects nationwide, benefiting

138,871 households. The total loanreleased in mortgage take-out amounted to P4.3 billionand the average loan size per household is about P30,000. The overall collection efficiency


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ratio of the CMP was 80.2% at the end 2002. In 2004, the government created the SocialHousing Finance Corporation to be the agency mandated to implement the communitymortgage program.CMP marked its 20th year of operation in 2008.With around P7.4 billionworth of loans madeavailable to organized urban poor communities.However, the key issues that continually harass the program are insufficient funding

requirements, delays in the processing of CMP projects, the needto establish and strengthencollective action andjoint liability in CMP community organizations,and the need to resolveland issues in grouplending for housing.

Asset Reforms

Agrarian reform has proven to be an effective tool for poverty reduction as confirmed byseveral evaluation studies. These studies found that agrarian reform has some importantimpacts including significant increase in the number of owner cultivator, agrarian reform

beneficiaries (ARBs) invest more in on-farm assets compared with non- ARBs; ARBs have

better perceptions Of their economic and social conditionsand are more optimistic abouttheir future.

Between 1990 and 2000, poverty incidence among ARBs declined from 47.6% to 45.2%,while it increased among non-ARBs from 55.1% to 56.4%. While the intention was thatinequitable land distribution would be corrected through the full implementation of theComprehensive Agrarian Reform Program (CARP), delays overwhelmed its implementation.In Phase I of land redistribution, about 1 million hectares including rice and corn lands, idlelands, and certain agricultural lands held by the government were transferred to privateowners. Phase II implemented only 23% of the targeted 7.66 million hectares including other

public agricultural lands and all private agricultural holdings in excess of 50 hectares. The

third and final phase of the program (5 to 50 hectares of private lands) is yet to be fullyimplemented.Governance weaknesses, including weak coordination, overlapping mandates, conflictinglaws, lack of clear accountability, and poor interagency communication have been the typicalhurdles to implementing the program effectively.

Besides, to ensure long term sustainability of poverty reduction government should take

necessary steps. At the core of people's participation is building their potentials and capacities

whether they are children, youth or adults. Therefore, ensuring the right to education and

health are keys in empowering people with knowledge, skills, critical thinking, participationabilities and well-being to enable them in their productive and political life.

To address long-standing inequalities in the country, redistribution and affirmation action

must take center stage. This includes the long-standing quest for social justice by completing

the agrarian reform program. Unfortunately, this quest is beyond reach more than ever as the

newly created Save Agrarian Reform Alliance (SARA), charging that it has the worst

implementation rate and which is accompanied by uncontrolled land conversion from

agricultural to commercial lands. Asset reform, including the need to reform the tax system to

make it more progressive, are urgently needed. Financing these reforms must come from

revenues generated from more progressive taxation systemmeaning prioritizing direct overindirect taxation.


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Consistent with the demand of poor women and men for sustained access to civilized jobs,

there is an urgent need to make job creation central in the development agenda and to

regenerate the manufacturing sector. This underscores the need for structural change in favor

of the more dynamic sectors and that will help ensure the creation of quality jobs.

Furthermore, the majority of poor women and men are in the agricultural sector. As such,

considerable investments must be made to increase the incomes and productivity of small

producers in this sector through credit facilities, irrigation, farm to market roads.

3.3 Human Development Index (HDI )

The Human Development Index (HDI) is a composite statistic of life expectancy, education,

and income indices used to rank countries into four tiers of human development. It wascreated by the Pakistani economist Mahbub ul Haq and the Indian economist Amartya Sen in

1990.

HDI is a tool to measure and rank countries' levels of social and economic development

based on four criteria:

I. Life expectancy at birth,II. Mean years of schooling,

III. Expected years of schooling andIV. Gross national income per capita.The HDI makes it possible to track changes in development levels over time and to compare

development levels in different countries.

Philippines HDI value for 2012 is 0.654in the medium human development categorypositioning the country at 114 out of 187 countries and territories. The rank is shared withUzbekistan. Between 1980 and 2012, Philippines HDI value increased from 0.561 to 0.654,an increase of 17 percent or average annual increase of about 0.5 percent.The rank of Philippines HDI for 2011 based on data available in 2012 and methods used in

2012 was114 out of 187 countries. In the 2011 HDR, Philippines was ranked 112 out of

187 countries. However, it is misleading to compare values and rankings with those of

previously published reports, because the underlying data and methods have changed.
http://en.wikipedia.org/wiki/Index_%28economics%29http://en.wikipedia.org/wiki/Human_development_%28humanity%29http://en.wikipedia.org/wiki/Mahbub_ul_Haqhttp://en.wikipedia.org/wiki/Amartya_Senhttp://en.wikipedia.org/wiki/Amartya_Senhttp://en.wikipedia.org/wiki/Mahbub_ul_Haqhttp://en.wikipedia.org/wiki/Human_development_%28humanity%29http://en.wikipedia.org/wiki/Index_%28economics%29


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Assessing progress relative to other countr ies

Long-term progress can be usefully assessed relative to other countriesboth in terms ofgeographical location and HDI value. For instance, during the period between 1980 and 2012Philippines, Malaysia and Fiji

experienced different degrees ofprogress toward increasing their HDIs.Assessing progress relative to othercountries Long-term progress can beusefully assessed relative to othercountries both in terms ofgeographical location and HDI value.For instance, during the period between1980 and 2012 Philippines, Malaysiaand Fiji experienced different degreesof progress toward increasing their

HDIs.1980-2012 Philippines 2012 HDI of0.654 is above the average of 0.64 forcountries in the medium humandevelopment group and below theaverage of 0.683 for countries in EastAsia and the Pacific. From East Asiaand the Pacific,countries which are close to Philippinesin 2012 HDI rank and population size

are Thailand and Indonesia, which have HDIs ranked 103and 121 respectively.

Inequality-adjusted HDI (IHDI)

The HDI is an average measure of basic human development achievements in a country. Likeall averages, the HDI masks inequality in the distribution of human development across the

population at the country level. The 2010 HDR introduced the Inequality Adjusted HDI(IHDI), which takes into account inequality in all three dimensions of the HDI by

discounting each dimensions average value according to its level of inequality. The HDIcan be viewed as an index of 'potential' human development and the IHDI as an index ofactual human development. The loss in potential human development due to inequality isgiven by the difference between the HDI and the IHDI, and can be used as a percentage.

Philippines HDI for2012 is 0.654. However, when the value is discounted for inequality,the

HDI falls to 0.524, a loss of 19.9 percent due to inequality in the distribution of the dimension

indices. Thailand and Indonesia, show losses due to inequality of 21.3 percent and 18.3

percent respectively. The average loss due to inequality for medium HDI countries is 24.2

percent and for East Asia and the Pacific it is 21.3 percent.

Figure : Trends in Philippines HDI component indices 1980-2012


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3.4 Economic I nf rastructure

Reliable physical infrastructurefor transportation, communications, power, and informationtechnologyis the backbone for improving competitiveness and expanding productive

capacity. For the Philippines, the quality of infrastructure has been improving but is still aserious deterrent to investment. The World Economic Forum (WEF) compiles an annualindex of overall infrastructure quality based on a survey of executive opinion in each country.In the last two WEF Global CompetitivenessReports, among the ASEAN-6 economies, thecountrys overall infrastructure quality ranked below Singapore, Malaysia, and Thailand and

about the same as Indonesia and Vietnam (See figure 2)For 2006, the Philippines received arating of 2.7 on a scale of 1(for poor) to 7 (for excellent). This is a low score in absoluteterms. The low levels of investment and poor conditions of infrastructure in the Philippineshave increased the cost of doing business in the country and had significant adverse impacton the perceived competitiveness and attractiveness of the Philippines as an investmentdestination. Increased cost of doing business and the inability to attract more foreigninvestment has constrained growth at both national and sub-national levels. Because of therapid growth of the mobile phone industry, the Philippines is performing very well intelecommunications infrastructure.

Table 10 shows a similar pattern of the Philippines in comparison to the ASEAN-6 countriesfor measures of power quality, telecommunications, access to water and sanitation, androads. The Philippines is ranked the lowest for fixed telephone lines per 100 inhabitants and

percentage of total road network paved.

Infrastructure spending in the Philippines was one of the lowest amongst its neighbors, and

the trend as a percentage of GDP has been declining since the 1980s. This was certainly oneof the key factors why the countrys economic growth had been slow, as World Bank studieshave established a direct correlation between public investment and economic growtheach1%-point share of infrastructure spending to GDP more or less generates a 1%-point growthin real per capita GDP. Recent studies by the Asian Development Bank,the World Bank, andother agencies indicate that expensive and unreliable electricity supply and inefficienttransport network are the two mostcritical constraints in the infrastructure sector togrowth inthe Philippines.The administration of former President Macapagal-Arroyo in 2003 began a policy initiativeto improve inter-island connectivity through the RORO Road Terminal System (RRTS). Inher 2006 SONA former President Macapagal-Arroyo highlighted more than 400 projects

(mostly related to air, ground, and marine transport) targeted for completion before the end ofher term in 2010. Some of the projects were criticized as politically motivated to dissuadecongressmen from supporting an impeachment motion against the president. The overallinfrastructure record of the outgoing administration is weak, considering it had almost tenyears to complete projects. It neglected to start many major projects and to utilize severalwhich were completed. The administration expropriated the privately-owned international

passenger terminal at the national gateway airport in December 2004. The Philippine-German joint venture that built the terminal has not been compensated after more than fiveyears, despite the assurances of the Philippine government that all issues would be settledexpeditiously. There are new ports in Batangas and Subic which are hardly used. TheDepartment of Transportation took seven years to approve a US$1 billion light rail project in

Metro Manila. For ten years it was unable to decide how to bid and award another largelight rail project. Manila residents paid a terrible price in lives and property when one


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typhoons torrential rains proved the high risk of neglecting flood controlinfrastructure and unregulated urban sprawl. Maritime safety remains a major issue,highlighted by many small and several large disasters. Power blackouts became frequent inthe Visayas and Mindanao in 2010. The Philippines faces urgent infrastructure challenges.The most urgent is assuring an adequate supply of power, eventually reducing its cost

through increased competition among generators. The second is improving the efficiency oftransportation, by air, land, and sea, which is too crowded for a population growing in sizeand spending power. A third is the water supply, which is not enough for drinking andfarming and too much during typhoon season, as well as poor sanitation and solid wastedisposal systems. By contrast, telecommunications services, in the hands of competing

private sector providers, are much improved following reforms initiated by PresidentRamos in the 1990s.The quality of infrastructure in the Philippines is therefore a serious impediment toinvestment and a drag on competitiveness. The government of the Philippines has rightlyidentified infrastructure development as a priority in the 20042010 Medium-TermDevelopment Program. There is no doubt that donors should strongly support the government

in this endeavor, particularly in roads, ports, and ICT development.


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Chapter 4Financial I ndicators Analysis

4.1 Money and credit

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25percent of GNP, about 5 percentage points less than annual gross domestic capital formation.This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving asa proportion of GNP declined on the average by a third, initially because of the impact of theeconomic crisis on personal savings and later more because of negative government saving.Investment also declined, so that for three of these years, domestic savings actually exceededgross investment.

From the time it began operations until the early 1980s, the Central Bank intervenedextensively in the country's financial life. It set interest rates on both bank deposits and loans,often at rates that were, when adjusted for inflation, negative. Central Bank credit wasextended to commercial banks through an extensive system of rediscounting. In the 1970s,the banking system resorted, with the Central Bank's assistance, to foreign credit on termsthat generally ignored foreign-exchange risk. The combination of these factors mitigatedagainst the development of financial intermediation in the economy, particularly the growthof long-term saving. The dependence of the banking system on funds from the Central Bankat low interest rates, in conjunction with the discretionary authority of the bank, has beencited as a contributing factor to the financial chaos that occurred in the 1980s. For example,

the proportion of Central Bank loans and advances to government-owned financialinstitutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82.Borrowings of the government-owned Development Bank of the Philippines from the CentralBank increased almost 100-fold during this period. Access to resources of this sort, inconjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and thelater bailouts that contributed to the financial chaos.

.

Money supply

Money supply growth has been highly variable, expanding during economic and politicalturmoil and then contracting when the Philippines tried to meet IMF requirements .Before the1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economywith money prior to the 1986 elections was one reason why the newly installed Aquinoadministration chose to scrap the existing standby arrangement with the IMF in early 1986and negotiate a new agreement. The Central Bank released funds to stabilize the financialsituation following a financial scandal in early 1981, after the onset of an economic crisis inlate 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasuryand the Central Bank--the so-called Jobo bills, named after then Central Bank Governor JoseFernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were

approaching 35 percent in late 1990. The interest paid on this debt necessitated even greaterborrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the


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growth rate of the money supply was very tight. IMF dictates were met, very high inflationabated, and the current account (see Glossary) was in surplus. Success, however, wasobtained at the expense of a steep fall in output and high unemployment.

F iscal Policy

Historically, the government has taken a rather conservative stance on fiscal activities. Untilthe 1970s, national government expenditures and taxation generally were each less than 10

percent of GNP. (Total expenditures of provincial, city, and municipal governments weresmall, between 5 and 10 percent of national government expenditures in the 1980s.) Underthe Marcos regime, national government activity increased to between 15 and 17 percent ofGNP, largely because of increased capital expenditures and, later, growing debt-service

payments. In 1987 and 1988, the ratio of government expenditure to GNP rose above 20percent. Tax revenue, however, remained relatively stable, seldom rising above 12 percent ofGNP. Chronic government budget deficits were covered by international borrowing duringthe Marcos era and mainly by domestic borrowing during the Aquino administration. Both

approaches contributed to the vicious circle of deficits generating the need for borrowing, andthe debt service on those loans creating greater deficits and the need to borrow even more. At5.2 percent of GNP, the 1990 government deficit was a major consideration in the 1991standby agreement between Manila and the IMF.

Over time, the apportionment of government spending has changed considerably. In 1989 thelargest portion of the national government budget (43.9 percent) went for debt servicing.Most of the rest covered economic services and social services, including education. Only 9.1

percent of the budget was allocated for defense. The Philippines devoted a smaller proportionof GNP to defense than did any other country in Southeast Asia.

The Aquino government formulated a tax reform program in 1986 that contained some thirtynew measures. Most export taxes were eliminated; income taxes were simplified and mademore progressive; the investment incentives system was revised; luxury taxes were imposed;and, beginning in 1988, a variety of sales taxes were replaced by a 10 percent value-addedtax--the central feature of the administration's tax reform effort. Some administrativeimprovements also were made. The changes, however, did not effect an appreciable rise inthe tax revenue as a proportion of GNP.

Problems with the Philippine tax system appear to have more to do with collections than withthe rates. Estimates of individual income tax compliance in the late 1980s ranged between 13

and 27 percent. Assessments of the magnitude of tax evasion by corporate income tax payersin 1984 and 1985 varied from as low as P1.7 billion to as high as P13 billion. The latterfigure was based on the fact that only 38 percent of registered firms in the country actuallyfiled a tax return in 1985. Although collections in 1989 were P10.1 billion, a 70 percentincrease over 1988, they remained P1.4 billion below expectations. Tax evasion wascompounded by mismanagement and corruption. A 1987 government study determined that25 percent of the national budget was lost to graft and corruption.

Low collection rates also reinforced the regressive structure of the tax system. The WorldBank calculated that effective tax rates (taxes paid as a proportion of income) of low-incomefamilies were about 50 percent greater than those of high-income families in the mid-1980s.

Middle-income families paid the largest percentage. This situation was caused in part by thegovernment's heavy reliance on indirect taxes. Individual income taxes accounted for only 8.9


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percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxeson goods and services and duties on international transactions made up 70 percent of taxrevenue in 1989, about the same as in 1960.

The consolidated public sector deficit--the combined deficit of national government, local

government, and public-sector enterprise budgets--which had been greatly reduced in the firsttwo years of the Aquino administration, rose to 5.2 of GNP by the end of 1990. In June 1990,the government proposed a comprehensive new tax reform package in an attempt to controlthe public sector deficit. About that time, the IMF, World Bank, and Japanese governmentfroze loan disbursements because the Philippines was not complying with targets in thestandby agreement with the IMF. As a result of the 1990-91 Persian Gulf crisis, petroleum

prices increased and the Oil Price Stabilization Fund put an additional strain on the budget.The sudden cessation of dollar remittances from contract workers in Kuwait and Iraq andincreased interest rates on domestic debt of the government also contributed to the deficit.

Negotiations between the Aquino administration and Congress on the administration's tax

proposals fell through in October 1990, with the two sides agreeing to focus on improved taxcollections, faster privatization of government-owned and government-controlledcorporations, and the imposition of a temporary import levy. A new standby agreement

between the government and the IMF in early 1991 committed the government to raise taxesand energy prices. Although the provisions of the agreement were necessary in order tosecure fresh loans, the action increased the administration's already fractious relations withCongress.

Monetary Poli cy

The Central Bank of the Philippines was established in June 1948 and began operation thefollowing January. It was charged with maintaining monetary stability; preserving the valueand covertibility of the peso; and fostering monetary, credit, and exchange conditionsconducive to the economic growth of the country. In 1991 the policy-making body of theCentral Bank was the Monetary Board, composed of the governor of the Central Bank aschairman, the secretary of finance, the director general of the National Economic andDevelopment Authority, the chairman of the Board of Investment, and three members fromthe private sector. In carrying out its functions, the Central Bank supervised the commercial

banking system and managed the country's foreign currency system.

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25percent of GNP, about 5 percentage points less than annual gross domestic capital formation.This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving asa proportion of GNP declined on the average by a third, initially because of the impact of theeconomic crisis on personal savings and later more because of negative government saving.Investment also declined, so that for three of these years, domestic savings actually exceededgross investment.

From the time it began operations until the early 1980s, the Central Bank intervenedextensively in the country's financial life. It set interest rates on both bank deposits and loans,

often at rates that were, when adjusted for inflation, negative. Central Bank credit wasextended to commercial banks through an extensive system of rediscounting. In the 1970s,


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the banking system resorted, with the Central Bank's assistance, to foreign credit on termsthat generally ignored foreign-exchange risk. The combination of these factors mitigatedagainst the development of financial intermediation in the economy, particularly the growthof long-term saving. The dependence of the banking system on funds from the Central Bankat low interest rates, in conjunction with the discretionary authority of the bank, has been

cited as a contributing factor to the financial chaos that occurred in the 1980s. For example,the proportion of Central Bank loans and advances to government-owned financialinstitutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82.Borrowings of the government-owned Development Bank of the Philippines from the CentralBank increased almost 100-fold during this period. Access to resources of this sort, inconjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and thelater bailouts that contributed to the financial chaos.

At the start of the 1980s, the government introduced a number of monetary measures built on1972 reforms to enhance the banking industry's ability to provide adequate amounts of long-term finance. Efforts were made to broaden the capital base of banks through encouraging

mergers and consolidations. A new class of banks, referred to as "expanded commercialbanks" or "unibanks," was created to enhance competition and the efficiency of the bankingindustry and to increase the flow of long-term saving. Qualifying banks--those with a capital

base in excess of P500 million--were allowed to expand their operations into a range of newactivities, combining commercial banking with activities of investment houses. Thefunctional division among other categories of banks was reduced, and that between rural

banks and thrift banks eliminated.

Interest rates were deregulated during the same period, so that by January 1983 all interestrate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rateswere set in relation to the cost of competing funds. Although the short-term response seemedfavorable, there was little long-term change. The ratio of the country's money supply, broadlydefined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowestin Southeast Asia.

Monetary and fiscal policies that were set by the government in the early 1980s, contributedto large intermediation margins, the difference between lending and borrowing rates. In 1988,for example, loan rates averaged 16.8 percent, whereas rates on savings deposits were onlyslightly more than 4 percent. The Central Bank traditionally maintained relatively highreserve requirements (the proportion of deposits that must remain in reserve), in excess of 20

percent. In 1990 the reserve requirement was revised upward twice, going from 21 percent to25 percent. In addition, the government levied both a 5 percent gross tax on bank receipts anda 20 percent tax on deposit earnings, and borrowed extensively to cover budget deficits and toabsorb excess growth in the money supply.

In addition to large intermediation margins, Philippine banks offered significantly differentrates for deposits of different amounts. For instance, in 1988 interest rates on six-month timedeposits of large depositors averaged almost 13 percent, whereas small savers earned only 4

percent on their savings. Rates offered on six-month and twelve-month time deposits differedby only 1 percentage point, and the rate differential for foreign currency deposits of allavailable maturities was within a single percentage point range. Because savings deposits

accounted for approximately 60 percent of total bank deposits and alternatives for smallsavers were few, the probability of interest rate discrimination by the commercial banking


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industry between small, less-informed depositors and more affluent savers, was quite high.Interest rates of time deposits also were bid up to reduce capital flight. This discriminationcoupled with the large intermediation margins, gave rise to charges by Philippine economistsand the World Bank that the Philippine commercial banking industry was highlyoligopolistic.

Money supply growth has been highly variable, expanding during economic and politicalturmoil and then contracting when the Philippines tried to meet IMF requirements .Before the1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economywith money prior to the 1986 elections was one reason why the newly installed Aquinoadministration chose to scrap the existing standby arrangement with the IMF in early 1986and negotiate a new agreement. The Central Bank released funds to stabilize the financialsituation following a financial scandal in early 1981, after the onset of an economic crisis inlate 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasuryand the Central Bank--the so-called Jobo bills, named after then Central Bank Governor JoseFernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were

approaching 35 percent in late 1990. The interest paid on this debt necessitated even greaterborrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, thegrowth rate of the money supply was very tight. IMF dictates were met, very high inflationabated, and the current account (see Glossary) was in surplus. Success, however, wasobtained at the expense of a steep fall in output and high unemployment.

Bank deposit Growth rate :-

At the start of the 1980s, the government introduced a number of monetary measures built on1972 reforms to enhance the banking industry's ability to provide adequate amounts of long-term finance. Efforts were made to broaden the capital base of banks through encouragingmergers and consolidations. A new class of banks, referred to as "expanded commercial

banks" or "unibanks," was created to enhance competition and the efficiency of the bankingindustry and to increase the flow of long-term saving. Qualifying banks--those with a capital

base in excess of P500 million--were allowed to expand their operations into a range of newactivities, combining commercial banking with activities of investment houses. Thefunctional division among other categories of banks was reduced, and that between rural

banks and thrift banks eliminated

TOTAL DEPOSITS*Deposits grew 8.9 percent to P5.0 trillion for the period March 2010 to March 2011 slower

than the 9.0 percent deposit growth for March 2009 to March 2010.

PROFILE OF DEPOSITS:-

By Bank TypeDeposit growth for KBs was lower at 8.9 percent from the 9.2 percent growth in the previous

period. TBs experienced accelerated growth at 10.0 percent from 6.77 percent. Deposits inRBs grew slower at 6.2 percent from 12.2 percent in the previous period. Commercial banks

(KBs) continue to hold the largest share of deposit liabilities of the Philippine BankingSystem (PBS) as of quarter-end. KBs share of deposits held at 88.21 percent of total deposits


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slightly lower from the 88.24 percent share last year. The share of Thrift banks (TBs)marginally increased to 9.30 percent from 9.22 percent while Rural banks (RBs) share to totaldeposits was a hairline lower at 2.48 percent from 2.55 percent.

By Deposit TypeSavings deposits still account for the biggest share of deposits at 47.2 percent. Followed byTime and LTNCD deposits at 33.7 percent and Demand & NOW deposits at 19.1 percent oftotal. Savings deposits grew most at 12.6 percent followed by Demand & NOW deposits at10.7 percent, and by Time deposits growing by 3.4 percent after contracting by 1.0 percentlast year.

Interest rates:-

Interest rates were deregulated during the same period, so that by January 1983 all interestrate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rateswere set in relation to the cost of competing funds. Although the short-term response seemedfavorable, there was little long-term change. The ratio of the country's money supply, broadlydefined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowestin Southeast Asia.

The benchmark interest rate in Philippines was last recorded at 3.50 percent. Interest Rate inPhilippines is reported by the The Bangko Sentral ng Pilipinas (BSP). Historically, from 1985until 2013, Philippines Interest Rate averaged 10 Percent reaching an all time high of 56.60Percent in December of 1990 and a record low of 3.50 Percent in September of 2012. InPhilippines, interest rate decisions are taken by The Monetary Board of The Bangko Sentralng Pilipinas (BSP). The official interest rate is the reverse repo rate (RR/P) which is theovernight borrowing rate. The central bank of the Republic of the Philippines is committed to

promote and maintain price stability and provide proactive leadership in bringing about astrong financial system conducive to a balanced and sustainable growth of the economy.

4. 2 Financial Market

The Philippine banking system continued to gain ground during the quarter, marked bysustained loan growth, improving asset quality, and increasing capital adequacy ratios. Thesystems CAR of over 16 percent remained comfortably above the BSPs and the BISsminimum requirements. The total resources of the banking system rose by 4.8 percent y-o-yto P7.5 trillion as of end-March 2012. The increase could be traced to the growth in currencyand deposits, indicative of the publics continued trust in the banking system. U/KBsaccounted for nearly 90 percent of the total resources of the banking system.


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Performance of the Banking System

Market Size

The number of banking institutions (head offices) fell further to 723 as of end-March 2012

from the quarter- and year-ago levels of 726 and 746 respectively, denoting the continuedconsolidation of banks as well as the exit of weaker players in the banking system.The banking system continues to gain ground. Number of banks declines but operatingnetwork continues to expand. By banking classification, banks (head offices) consisted of 38U/KBs, 71 TBs, and 614 RBs. Meanwhile, the operating network (including branches) of the

banking system increased to 9,186 in Q1 2012 from 9,050 in Q4 2011 and 8,870 during thesame period last year, due mainly to the increase in the branches/agencies of TBs.

Savings Mobilization

Savings and time deposits remained the primary sources of funds for banks. Banks total

deposits as of end-March 2012 amounted to P4.0 trillion, 5.3 percent higher than the year-ago

level of P3.8 trillion. The continued growth in depositsreflected depositors sustainedconfidence in the banking system. Savings deposits grew by9.4 percent growth and continuedto account for nearly half of the funding base. Meanwhile, demand deposits expanded by 12.1

percent y-o-y, while time deposits declined by 6.9 percent fromthe level posted a year ago.

Bank Lending Operations

Outstanding loans of commercial banks, net of banks' RRP placements with the BSP as ofend- March 2012, grew by 18.7 percent y-o-y and by 0.9 percent compared to the level as ofend- December 2011. Likewise, outstanding loans of commercial banks, inclusive of RRPs,expanded by 17.7 percent y-o-y and 0.7 percent q-o-q. Commercial banks' loans have beengrowing steadily at double-digit growth rates since January 2011, providing support to thedomestic economy amid subdued global growth prospects. Loans for production activities,which comprised more than four-fifths of commercial banks totalloan portfolio, grew by 19.3 percent as of end- March 2012, higher than the 15.6 percentgrowth registered in March 2011. The growth of production loans was driven mainly byincreased lending to wholesale and retail trade (58.0 percent); public administration anddefense (41.2 percent); construction (38.4 percent); manufacturing (35.0 percent); financialintermediation (32.1 percent); real estate, renting, and business services (25.1 percent);electricity, gas, and water (21.6 percent); and transportation, storage, and communication(16.9 percent).Similarly, the growth in consumer loans also increased to 18.5 percent from

12.3 percent, reflecting the rise in lending across all types of consumer loans.Loans Outstanding of Universal/

Auto Loans

The combined auto loans (ALs) of U/KBs and TBs, inclusive of non-bank subsidiaries,increased by 4.8 percent to P139.2 billion as of end-December 2011 from the previousquarters P132.7 billion and by 18.3 percent from P117.6 billion a year ago. Consumers

continued confidence in the economy, as well as the aggressive marketing strategies of Credit

card receivables increase. Consumers continued confidence in the economy helps sustaindemand for auto mobiles, banks and other car financing firms, underpinned the rise in


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automobile purchases. The proportion of total ALs to TLP, exclusive of interbank loans(IBL), was slightly lower at 4.0 percent as of December 2011 than the previous quarters ratio

of 4.1 percent. The ratio of non-performing ALs to total ALs also improved to 4.3 percentfrom 4.4 percent, while the ratio of non-performing ALs to TLP was stable at 0.2 percent.

Residential Real Estate LoansAs of end-December 2011, the combined residential real estate loans (RRELs) of U/KBs andTBs rose by 6.5 percent to P220.8 billion from P207.4 billion in the previous quarter and by17.3 percent from P188.3 billion in the previous year. The sustained favorable outlook for thereal estate market, as indicated by the increase in the number of projects unveiled by realestate developers as well as banks intensified promotional campaigns in terms of offeringlower interest rates, supported increased real estate purchases during the period. The ratio ofRRELs to TLP was generally unchanged at 6.4 percent as total loans grew at a faster pacethan RRELs. By industry, U/KBs held a bigger slice of the total residential real-estateexposure at 56.1 percent (P123.9 billion), while TBs accounted for the remaining 43.9

percent (P97.0 billion). In terms of loan quality, the ratio of Sustained favorable outlook for

the property sector supports real estate purchases. non-performing RRELs to total RRELs ofU/KBs and TBs eased to 4.3 percent in December 2011 from 4.7 percent in the previousquarter and 6.9 percent a year ago.

Banking Policies

Banking policies implemented during the quarter were aimed at strengthening regulations onthe:1) capital adequacy framework;2) risk weighting of guaranteed bank loans;3) strengthening corporate governance in BSP supervised financial institutions;4) provision of micro-agri loans

Capital Market ReformsCapital market policy reforms continued to gain ground during the period as the BSPmaintained an active collaboration with other government agencies and the private sector forthe development of the Philippine capital market. The reforms focused on the following:enhancing transparency and corporate governance, and using the latest technology to enhancemarket infrastructure BSP maintains active collaboration with government agencies and the

private sector in developing the capital market. Banking policies implemented aim to

strengthen and enhance existing regulations.

Stock MarketIn Q1 2012, the Philippine Stock Exchange index (PSEi) trended upwards to average 4,820.7index points, higher by 13.7 percent than the 4,239.2- index point average posted in Q4 2011.The stock market index rose as steady improvements in the US economy, combined withfavorable manufacturing data from Germany and China, raised investors risk appetite during

the period. The upbeat local response was reinforced by the two policy rate cuts of the BSPdue to favorable inflation environment, the NGs plans to increase its spending to spur

growth, easing domestic unemployment, and an optimistic outlook on local corporate

earnings. However, equity gains were tempered by worries about the global economy afterthe World Bank and the International Monetary Fund cut their global growth forecasts in


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early 2012. Lingering concerns about the euro area sovereign debt crisis amid the increasedrisk of a Greek default and the successive credit rating downgrades on several euro areaeconomies also dampened trading sentiment. The composite index closed at 5,107.7 index

points on 30 March 2012, higher by 17.7 percent year-to-date (ytd). A new historic high wasalso set in Q1 2012 when the index closed at 5,145.9 index points on 16 March 2012. Local

stocks trend upwards on optimismabout the recovery of the US economy .All six sub-indicesof the PSEi advanced during the quarter. Driven by optimism over the performance of the

banking system, the financial sector led all sectors and rose by 21.7 percent q-o-q to average1,165.3 index points. The property sector and holding firms sector also posted gains, rising by20.8 percent and 16.6 percent, respectively. The services, mining and oil, and industrialsectors likewise increased by 11.9 percent, 10.5 percent, and 6.5 percent, respectively

Bond Market

Size and CompositionLocal currency (LCY) bonds issued by both public and private sectors amounted to P350.3

billion int he first three months of 2012, up by 30 percent from the P269.5 billion registeredin the same period in 2011 and by 57.2 percent from the P222.8 billion posted in the previousquarter. Public sector issuances aggregated P322.8 billion, rising by 31.2 percent y-o-y. Theincrease can be traced to higher public sector issuances of benchmark and retail treasury

bonds. The private sector also continued to tap the local funding markets, issuing P27.5billion worth of LCY bonds, 16.6 percent higher relative to year-ago level. Both sectors tookadvantage of the very liquid domestic financial markets in sourcing funds for fresh capitaland refinancing needs. In terms of market share, the public sector continued to dominate thedomestic bond market, accounting for 92 percent of total bond issuances. The private sectorcomprised the remaining 8 percent.

#) Bonds issued by the Bureau of the Treasury (BTr) accounted for the bulk of total publicissuances, which were mostly in the form of Fixed-Rate Treasury bonds (T-bonds) andTreasury bills (T-bills).

#) Private sector bond issuances consisted largely of bonds and notes, with issuances mademostly by real estate and financial firms.

Local Currency Bond Market Issuances

By Issuer

(January - March 2012)

Primary Market

In Q1 2012, demand for Philippine T-bills and T-bonds in primary auctions conducted duringthe review period remained robust. Investors tendered more than twice the NGs programmedborrowings for both short- and long-dated securities. The amount of tenders reached P249.7billion against the NGs total offerings of P108.0 billion. The NG accepted P82.0 billion

worth of T-bills and T-bonds but rejected bids amounting to P167.7 billion. Apart from theregular T-bill and T-bond issuances, the NG also issued 15- and 20-year fixed rate RTBs inFebruary 2012, raising an aggregate amount of P179.8 billion RTBs (P44.1 billion 15-yr andP135.7 billion 20-year tenured RTBs). Of the said amount, P49.6 billion were sold togovernment securities eligible dealers (GSEDs) through Dutch auction.

Secondary Market

At the secondary market, liquidity for both government and corporate bonds increased as thevolume of trade at the fixed income exchange (FIE) climbed to P1,199.5 billion in the first


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three months of 2012, up by 84 percent y-o-y and by 13.9 percent q-o-q. Following therelatively quiet activity in the previous quarter, trading at the FIE picked up in January andFebruary as improvements in global growth prospects lifted market sentiment. Trading wasalso buoyed by investors search for higher yields given the US Feds announcement to keep

interest rates low through 2014, increasing the demand for higher-yielding Philippine debt

papers. However, trading slowed down in March on persisten

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