philippines recent macroeconomic developments recent macroeconomic developments and reform efforts

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  • Report No. 13109-PH

    PhilippinesRecent Macroeconomic Developmentsand Reform EffortsJune 30, 1994

    Country Operations DivisionCountry Department IEast Asia and the Pacific Region

    FOR OFFICIAL USE ONLY

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    Document of the World Bank

    This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization

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  • CURRENCY EOUIVALENT

    Currency Unit - Peso (P)USS - P27.5

    (as of December 1993)

    ABBREVIATIONS AND ACRONYMS

    ASEAN - Association of Southeast Asian NationsBOI - Board of InvestmentsBOT - Build-Operate-TransferBSP - Bangko Sentral ng PilipinasCARP - Comprehensive Agrarian Reform ProgramCPIP - Core Public Investment ProgramzO - Executive OrderIRB - Energy Regulatory BoardmRP - Effective Rate of ProtectionSOCC - Government Owned and Controlled CorporationHCV - Home Consumption ValueIMF - International Monetary FundLIBOR - London Inter-Bank Offer RateMITI - Ministry of International Trade and IndustryNFDA - National Economic and Development AuthorityNPC - National Power CorporationNSCB - National Statistical Coordination BoardOPS? - Oil Price Stabilization FundPLDT - Philippine Long Distance Telephone CompanyQRS - Quantitative RestrictionsRA - Republic ActVAT - Value Added Tax

    FISCAL YEAR

    January 1 - December 31

  • FOR OFFICIAL USE ONLY

    PHILIPPINES

    RECENT MACROECONOMIC DEVELOPMENTS & REFORM EFFORTS

    Country Economic Memorandum

    Table of Contents

    Paae No,

    Executive Summary .j.. . . . . . . . . . . . . . . . . . . . .

    I. RECENT MACROECONOMIC DEVELOPMENTS . . . . . . . . . . . . . . .1

    Overall Growth Performance ... . . . .. 1Investment and Savings ... . . . . .. 5The Labor Market, the Exchange Rate, and Competitiveness . . . 7

    Fiscal and Monetary Developments . . . . . . . . . . . . . . . 11

    The External Sector ... . . . . . ..... . . . . . . . . . 18

    II. CONTINUING STRUCTURAL REFORMS . . . . . . . . . . . . . . . . . 25

    Revenue Generation and Fiscal Improvements .. .... . . . . 25

    Economic Liberalization ... . . . . ..... . . . . . . . . 28

    III. MEDIUM TERM PROJECTIONS AND AID REOUIREMENTS . . . . . . . . . 37

    Assumptions Behind the Projections .. 37

    Projected Outcomes . . . . . . . . . . . . . . . . . . . . . . 39Financing Requirements. 41

    Text Tables

    1.1 Macroeconomic Indicators (1970-93). 21.2 Real Output Growth (1986-93). 41.3 Investment and Savings (1988-93). 61.4 Employment, Wages and the Exchange Rate (1988-93). 81.5 Structure of the Labor Force in 1980 and 1993. 91.6 National Government Cash Budget (1990-93) .14

    1.7 Consolidated Public Sector Deficit (1986-93). 151.8 Monetary Indicators (1986-93) .17

    1.9 Current Account Indicators (1986-93) .19

    1.10 Capital Account Indicators (1989-93) .20

    2.1 Main Revenue Generation Measures (1993-94) .26

    2.2 Trade Policy Indicators (1980-95) .32

    3.1 Macroeconomic Indicators (1992-97) .40

    3.2 Financing Requirements (1992-97) .42

    3.3 Official Development Assistance (1986-93) .43

    Tlhis document has a resticted distribution and may be used by recipients only in the performance of their|official duties. Its contents may not otherwise be disclosed without WoTld Bank authorization.l

  • Text Figures

    1 Real Income Growth (1950-93) . . . . . . . . .1

    2 Power Shortages in Luzon, (1992-93) . . . . . .53 Real Effective Exchange Rate (1979-93) . . . .104 Import Content of Exports . . . . . . . . . . .22

    STATISTICAL APPENDIX . . . . . . . . . . . .45

    IBRD MAP No. 24105R1

    This report was prepared by Erika Jorgensen (Task Manager) with the assistanceof Nam Pham (statistics), Lani Azarcon (background data), and Dharshani deSilva (formatting and editing).

  • THE PHILIPPINESt RECENT MACROECONOMIC DEVELOPMENTSAND REFORM EFFORTS

    EXECUTIVE SUMMARY

    i. After 10 years of stagnation or minimal growth--so that real percapita income in 1993 was lower than in 1977--the Philippine economy started asignificant upward trajectory in 1993. An increased rate of investment andcontinued capital inflows from abroad signal strengthening private sectorconfidence. Moreover, new efforts to raise revenue have resolved much of theuncertainty over fiscal balances. The indications are that the economic policyreforms that the country has instituted together with the decisive beginning oninfrastructure improvemento (particularly in power) could have significanteffects in sustaining growth in the medium term. However, this will dependcrucially on continuing measures to keep public finances sound, to stimulatecapital formation, to maintain competitiveness by liberalizing the economy, andto secure necessary financial support from international donors.

    Economic Performance in 1993

    ii. While the economy has generally seemed poised for growth for well overa year, persistent power shortages through 1992 and most of 1993 and continuinguncertainty engendered by a decade of "stop and start" implementation of policyreform undermined economic performance until mid-1993. output and income begana gentle recovery in 1993, ending the year 2.4 percent higher. Investmentstrengthened to almost 24 percent of GNP, as capital spending by both the publicand private sectors on power generation soared. Exports of manufactures boomedby 20 percent in dollar terms, fostering total merchandise export growth of 16percent. Import volume surged by 21 percent, driven by a 40 percent increase inimported capital equipment, especially power generators. The consequentdeterioration of the current account was financed by new borrowing. ininternational capital markets and increases in portfolio and direct foreigninvestment inflows.

    iii. Capital spending by the public sector, especially because of heavyoutlays by the National Power Corporation on power generation capacity, pumpedup public investment to 6.0 percent of GNP in 1993. As a result, while theNational Government held its deficit to 1.4 percent of GNP, despite higherallotments to local governments, the deficit of the consolidated public sectorrose to 2.7 percent of GNP (from 1.9 percent in 1992). As a complement to the"pump-priming" impact of greater public investment, the Government also usedmonetary policy to spur growth through the first half of the year, but theauthorities reasserted stability when increased liquidity began to feedinflationary expectations and interest rates began to rise again.

    iv. Overall, 1993 witnessed a number of positive developments withimplications for medium-term growth. The electricity shortages that have plaguedthe country for years appear to have been brought under control. Significant newrevenue measures have been put in place. Inflation remains reasonably low; andan autonomous Central Bank has been established. After a decade of exclusion,the country obtained an international credit rating and returned to borrow ininternational credit markets. Capital inflows continue, although foreign direct

  • - ii -

    investment has not yet responded strongly as in other East Asian countries; andstock market performance in 1993 was the best in Asia, signalling private sectorconfidence that a sustained recovery is under way.

    v. Sustained higher growth will require that competitiveness of theeconomy be the centerpiece of economic policy making, with due attention paid tocoordination of policy. For example, appreciation of the real exchange rate andincreases in the minimum wage are gradually pricing the Philippines out ofunskilled labor intensive manufactures, despite historically high levels ofliteracy and educational attainment relative to its per capita income. Anotherpolicy area important for long term competitiveness is external debt management,which needs to be especially prudent now that access to international markets hasbeen reestablished, balancing investment needs today against possible threats tothe public purse in the future. Sustainability of growth will also require thedevelopment of the rural sector and more robust performance of agriculture aswell as further diversification of exports. Thus, despite the clear improvementsln economic performance in 1993, and the indications of strong outcomes so farin 1994, some caution about prospects is still warranted.

    Continuing Structural Reforms

    vi. The severe power outages in 1993 were the most immediate cause of slowrecovery in that year; but hesitation by domestic and foreign investors to commitsufficient resources to the economy could threaten growth prospects for the restof 1994 and beyond. The improvement in investment rates in 1993 is fullyaccounted for by power sector projects alone. For the recovery to strengthen,investors must commit to projects spread across the economy. The bolstering ofprivate sector confidence by continuing the program of macroeconomic stabilityand economic liberalization is therefore crucial.

    vii. The Government's recent efforts to complete the missing elements ofits program of structural reforms should go a consid

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