Economy
of
Philippines
Since the end of World War II, the Philippines has been on an unfortunate economic trajectory, going from one of the richest countries in Asia (following Japan) to one of the poorest. Growth after the war was rapid, but slowed as years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation and resulted in macroeconomic instability. A severe recession from 1984 through 1985 saw the economy shrink by more than 10%, and political instability during the Corazon Aquino administration further dampened economic activity.
During the 1990s, the Philippine Government introduced a broad range of economic reforms designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, although the Asian financial crisis in 1997 slowed Philippine economic development once again.
Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by inadequate infrastructure and education systems, and trade and investment barriers. International competitiveness rankings have slipped.
The service sector contributes more than half of overall Philippine economic output, followed by industry (about a third), and agriculture (less than 20%). Important industries include food processing; textiles and garments; electronics and automobile parts; and business process outsourcing. Most industries are concentrated in areas around metropolitan Manila. Mining has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant offshore hydrocarbon finds have added to the country's substantial geothermal, hydro, and coal energy reserves.
Today's Economy
The Philippine economy proved comparatively well-equipped to weather the recent global financial crisis, partly as a result of the efforts over the past few years to control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector--which makes up 80% of total financial system resources--had limited direct exposure to distressed financial institutions overseas, while conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector.
After slowing to 3.8% growth during 2008, and sputtering to 1.1% during 2009, real year-on-year GDP growth rebounded to 7.3% during 2010, a 34-year high, fueled in part by election-related spending, optimism over the peaceful transition to a new government, and an accommodating monetary policy. Overseas workers’ remittances, which remained resilient during the global financial crisis, expanded by 8.2% in 2010 to $18.7 billion (nearly 10% of GDP) and helped support the balance of payments and international reserves. Annual GDP growth averaged 4.6% over the past decade, but it will take a higher, sustained economic growth path--at least 7%-8% per year by most estimates--to make progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 24.9% to 26.5% between 2003 and 2009, equivalent to an additional 3.3 million poor Filipinos.
The Philippines’ business process outsourcing (BPO) industry currently accounts for about 15% of the global outsourcing market and has been the fastest-growing segment of the Philippine economy. Although industry revenues slowed from 40% growth during 2006 and 2007, the BPO sector exhibited resilience amid the global financial turmoil, generating more than $6 billion in revenues in 2008 (up 26%) and $7.2 billion in 2009. BPO revenues rose 26% to nearly $9 billion in 2010. The sector created about 100,000 new jobs in 2010, bringing total BPO employment as of end-2010 to about 525,000.
The balance of payments surplus widened from $6.4 billion in 2009 to a record $14.4 billion in 2010. Surging foreign portfolio capital flows were a major factor and combined with an export rebound and the continued expansion in remittances and BPO revenues to more than double the Philippines’ balance of payments surplus. Merchandise exports--which rely heavily on electronics shipments for more than 60% of sales--grew by nearly 35% during 2010; electronics export revenues increased 38%, beating industry forecasts and recovering to pre-crisis levels. Although there has been some improvement over the years, the local value added of electronics exports remains relatively low.
The Philippine stock market index--which closed 2009 up by 63% after slumping in 2008--hit new highs during 2010 and closed 38% higher year-on-year. The Philippine peso closed 2010 up 5.1% year-on-year. From $44.2 billion as of end-2009, gross international reserves rose to a new record high of nearly $62.4 billion as of end-2010, adequate for nearly 10 months of goods and services imports and equivalent to 5.5 times foreign debts maturing over the next 12 months.
Although still relatively high, the debt of the national government has declined to under 56% of GDP (from a 2004 peak of 78% of GDP); and the consolidated public sector debt has declined to about 75% of GDP (from a 2003 peak of 118% of GDP). The national government worked to reduce its fiscal deficits for 5 consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008 but opted instead for measured deficit spending to help stimulate the economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 and 2009 with deficits equivalent to 0.9% and 3.9% of GDP, respectively. The deficit-to-GDP ratio declined to 3.7% of GDP in 2010, consistent with the Aquino administration’s medium-term goal to reduce the deficit to 2% of GDP by 2013. Further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; it declined and stagnated at 14% in 2007 and 2008, however, and declined further to 12.8% in 2009 and 2010, low relative to historical performance (i.e., 1997’s 17% peak ratio) and regional standards. The recent passage of revenue-eroding measures, partly to temper the impact on incomes of the global financial crisis, has exacerbated weaknesses in revenue administration. The government has used privatization receipts to reduce shortfalls in targeted tax collections, but this has not been a sustainable revenue source.
The Philippine Congress enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important concerns include the exclusion of casinos from the list of covered institutions, the non-criminalization of terrorist financing as a stand-alone crime, and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. Legislation to address these deficiencies is pending in the Philippine Congress. The Philippines has taken steps to adopt Internationally Agreed Tax Standards (IATS) and has enacted a law that allows and provides a framework for the exchange of tax-related information. In September 2010, as a result, the OECD upgraded the Philippines to its tax "white list."
A decade after the enactment of legislation to rationalize the electric power sector, the state-owned transmission company (Transco) has been privatized and 92% of total generating assets in Luzon and the Visayas have been sold. This has triggered the opening of access to retail competition in the electric power sector. What remains for privatization is to complete the transfer of contracts of the National Power Corporation’s (NPC) Independent Power Producers (IPPs) to private IPP administrators. NPC has transferred about two-thirds of these contracts to date but has postponed further action indefinitely due to concerns about the potential adverse effect on energy supply. Electricity is still relatively expensive in the Philippines, and the central and southern regions still suffer from inadequate and unreliable generating capacity. A Renewable Energy Act was passed in 2008 and provides additional incentives for investment in this sector as a means of ensuring reliable electricity supply and bringing down the cost of power. No new renewable energy investments have been implemented thus far under the act pending consultations on, and approval of, a Feed-in Tariff System (FITS), a major incentive mechanism that aims to accelerate renewable energy investments, and the results of a grid impact study.
The U.S. Trade Representative retained the Philippines on its Special 301 Watch List for 2010, citing inadequate protection of intellectual property rights.
Potential foreign investors, as well as tourists, remain concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying competition and the emergence of powerful regional economies also pose challenges. Competition from other economies for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, to lower costs of doing business, and to promote good public and private sector governance. Philippine anti-corruption efforts have been inadequate and inconsistent and more needs to be done to improve its international image--an effort that will require strong political will.
Agriculture and Forestry
Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs about one-third of the work force but contributes less than a fifth of GDP.
Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. Although the government has instituted conservation programs, deforestation remains a severe problem.
With its 7,107 islands, the Philippines owns a diverse range of fishing areas. Notwithstanding good prospects for marine fisheries, the industry continues to face a difficult future due to destructive fishing methods, a lack of funds, and inadequate government support.
Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. The sector barely grew in real terms during 2009, dragged down by the adverse effects of successive strong typhoons on the crops sector (which contributes over 45% of total agricultural production). Agricultural output declined by 0.5% during 2010 due to the adverse effects of drought during the first 9 months of the year.
Industry
Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber and plastic products, textiles and textile products, clothing and footwear, leather products, pharmaceuticals, paints, wood and wood products, paper and paper products, printing and publishing, furniture and fixtures, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass and glass products, industrial chemicals, fertilizers, iron and steel, fabricated metal products, mineral products, machinery and equipment, transport equipment, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones.
The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.
Mining
The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. Natural gas reserves discovered off Palawan have been brought on-line to generate electricity.
Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the 10 leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas. Some local government units have enacted mining bans in their territories.
GDP (2010): $188.7 billion.
Annual GDP growth rate (2010): 7.3% at constant prices.
GDP per capita (2010): $2,007.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, paper and paper products, tobacco products, beverage manufacturing, food processing, machinery and equipment, transport equipment, electronics and semiconductor assembly, mineral products, hydrocarbon products, fishing, business process outsourcing services.
Trade (2010): Exports--$50.7 billion. Imports--$61.1 billion.
Government
of
Philippines
The Philippines has a representative democracy modeled on the U.S. system. The 1987 constitution, adopted during the Corazon Aquino administration, reestablished a presidential system of government with a bicameral legislature and an independent judiciary. The president is limited to one 6-year term. Provision also was made in the constitution for autonomous regions in Muslim areas of Mindanao and in the Cordillera region of northern Luzon, where many aboriginal tribes still live.
The 24-member Philippine Senate is elected at large, and all senators serve 6-year terms. Half are elected every 3 years. There are currently 278 members in the House of Representatives, 226 of whom represent single-member districts. The remaining House seats are occupied by sectoral party representatives elected at large, called party list representatives. The Supreme Court approved the introduction of 31 additional party list seats in April 2009, in time for May 2010 national elections. All representatives serve 3-year terms, with a maximum of three consecutive terms.
The government continues to face threats from terrorist groups, including groups on the U.S. Government's Foreign Terrorist Organization list. The terrorist Abu Sayyaf Group (ASG), which gained international notoriety with its kidnappings of foreign tourists in the southern islands, remains a major problem for the government, along with members of the Indonesian-based Jemaah Islamiyah (JI). Efforts to track down and interdict ASG and JI members have met with some success, especially in Basilan and Jolo, where U.S. troops provide counterterrorism assistance and training to Philippine soldiers, along with conducting humanitarian activities. In August 2006, the Armed Forces of the Philippines began a major offensive against ASG and JI on the island of Jolo. This offensive was successful and resulted in the deaths of Abu Sayyaf leader Khadafy Janjalani and his deputy, Abu Solaiman. In 2010, Philippine forces killed ASG leaders Albader Parad and Dulmatin. The U.S. Government provided rewards to Philippine citizens whose information led to these deaths in the military operations, as well as to many other operations against terrorist leaders. The broad-based efforts to weaken terrorist organizations resulted in the death or capture of more than 200 terrorists since 2007.
An international monitoring team continues to watch over a cease-fire agreement between the government and the separatist Moro Islamic Liberation Front (MILF). In June 2003, the MILF issued a formal renunciation of terrorism. In August 2008, during peace talks mediated by the Government of Malaysia, the Philippine Government and the MILF reached agreement in principle on a territorial agreement. Intervention by the Philippine Supreme Court, however, and its subsequent October 14, 2008 ruling that the draft agreement was unconstitutional, forced both parties to seek new ways to reach a peace agreement. Fighting flared up after the agreement was struck down in court and continued sporadically in central Mindanao until both sides agreed to a cease-fire on July 29, 2009 and formally resumed the peace talks in December 2009. Following a hiatus in talks during the first months of the Aquino administration, the parties again pursued peace negotiations beginning in February 2011.
Principal Government Officials
President--Benigno S. Aquino III
Vice President--Jejomar C. Binay
Foreign Secretary--Albert F. Del Rosario
Ambassador to the United States--Jose L. Cuisia, Jr.
Permanent Representative to the UN--Libran N. Cabactulan
The Republic of the Philippines maintains an embassy in the United States at 1600 Massachusetts Avenue NW, Washington, DC 20036 (tel. 202-467-9300). Consulates general are in New York, Chicago, San Francisco, Los Angeles, Honolulu, and Agana (Guam).
Type: Republic.
Independence: 1946.
Constitution: February 11, 1987.
Branches: Executive--president and vice president. Legislative--bicameral legislature. Judicial--independent.
Administrative subdivisions: 16 regions and Metro Manila (National Capital Region), 80 provinces, 120 cities.
Political parties: Lakas-Christian Muslim Democrats/KAMPI, Nacionalista, Nationalist People's Coalition, Laban ng Demokratikong Pilipino, Liberal Party, Pwersa ng Masang Pilipino, Aksiyon Demokratiko, Partido Demokratikong Pilipino-Lakas ng Bayan, and other small parties.
Suffrage: Universal, but not compulsory, at age 18.