The Philippine economy has experienced a resurgence in growth since 2010, with average growth of 6.3% from 2010-2014. This is the highest 5-year average growth in over 40 years. Private consumption and the services sector have driven growth, though investment and industry are becoming larger drivers. While growth has been strong, poverty and employment remain challenges. Deepening reforms are needed to sustain growth and make it more inclusive, such as increasing infrastructure spending, investing in human capital, improving disaster preparedness, and addressing conflicts.

1. The State of the
Philippine Economy
Sec. Arsenio M. Balisacan
National Economic and Development Authority
Ayala-UPSE Economic Forum
InterContinental Manila, Makati City
29 January 2015
1

2. Takeaway
• No longer the “sick man” of Asia
– 1970s to 2000s: Low economic growth in comparison with
Southeast & East Asian neighbors
– If boom occurred, it was soon followed by bust
• Resurgence beginning 2010
– “Structural break” to higher growth trajectory
– 2010-2014 average growth: 6.3%, highest 5-year average in
the past 40 years
– 2014: 6.1%, high by the standard of major developing
countries
– Supported by sound economic fundamentals
• Bright prospects in the near term: 2015 & 2016 growth to
remain among the fastest in Asia’s developing countries
• But big challenges remain: deepening reforms to sustain
growth and make it more inclusive
• Good governance plus good economics is key to good growth
(rapid, sustained, inclusive)
2

3. -
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
GDP in 2000 billion Php, 1960-2014
The Philippine economy is on a higher growth trajectory
since the beginning of the current decade.
Real GDP growth
6.3% (2010-2014)
6.1% (2014)
7.2% (2013)
6.8% (2012)
Source: PSA
Structural break of
potential real GDP
at around 2009
3

4. Average growth in 2010-2014 is the highest 5-year average
growth since the mid-1970s.
Source: Authors’ calculations
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Real GDP growth (5-year moving average)
5-year moving average 6.3% (2010-2014 ave.)
1973-1977 2010-2014
4

5. Philippine growth in 2010 to 2013 is among the highest in
Asia — no longer the “sick man” of Asia.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2010-2013
Average GDP growth (in %, 2005 prices)
China
Indonesia
Malaysia
Philippines
Thailand
Vietnam
Source: WB
5

6. What have driven recent growth?
• Private consumption, on the demand side, and
services, on the supply side, have been the
main drivers of growth
– Private consumption, fuelled partly by OFW
remittances: over two-thirds of GDP
– Services: over one-half of GDP
• Need for “rebalancing” to reduce vulnerability
to regional/global shocks and generate more
and higher-quality jobs
– Demand side: Driving investment and net exports
– Supply side: Driving resurgence of industry,
particularly manufacturing; revival of agribusiness
6

7. -1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Demand side
Consumption Government
Investment Net exports
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Supply side
Agriculture Industry Services
Structural changes in the economy are taking place.
Investment and industry are increasingly becoming major drivers
of GDP growth.
2.8%
4.5%
6.3%
2.8%
4.5%
6.3%
Source: NEDA
Ave. growth 6.1%6.1%
7

8. 2013 2014
Growth rate
(%)
Share to
GDP (%)
Growth rate
(%)
Share to
GDP (%)
Supply side
Agriculture 1.1 10.4 1.9 10.0
Industry 9.3 32.8 7.5 33.3
Manufacturing 10.3 22.7 8.1 23.2
Services 7.2 56.8 6.0 56.7
Demand side
Private consumption 5.7 69.4 5.4 68.9
Government
consumption
7.7 10.7 1.8 10.3
Fixed capital
formation
11.9 21.3 8.6 21.8
Exports -1.1 44.6 12.1 47.2
Imports 5.4 46.8 5.8 46.7
GDP 7.2 100 6.1 100
Source: PSA
Growth of GDP by component, 2013 & 2014
8

9. 0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011 2012 2013 Q3
2013
Q3
2014
Current account balance (% GDP)
Supporting this remarkable performance are sound
macroeconomic fundamentals.
Interest rate & CAR (rhs), %
Monetary side • Robust external position
• Low and stable inflation
• Favorable interest rate & sound banking system
Inflation rate (%)
Sources: PSA, BSP
9

10. 0
5
10
15
20
25
30
35
40
2007 2008 2009 2010 2011 2012 2013 Mar-13 Mar-14
External debt (% GDP)
Supporting this remarkable performance are sound
macroeconomic fundamentals.
Fiscal side • Declining external debt & interest payments
• Modest fiscal deficit
• Increasing reliance on domestic financing
• Result: wider fiscal space
10

11. Result: The country enjoys an unprecedented level of confidence among
the international business community — and has improved its global
competitiveness rankings.
2009
(181
economies)
2010
(183
economies)
2011
(183
economies)
2012
(183
economies)
2013
(185
economies)
2014
(189
economies)
2015
(189
economies)
Philippines (old
method.) 141 144 134 136 133 108
Philippines
(new method.) 86 95
BBB
Outlook: Stable
As of May 8, 2014
BBB-
Outlook: Stable
As of March 27, 2013
Baa2
Outlook: Stable
As of December 11, 2014
2009-10 2010-11 2011-12 2012-13 2013-14 2014-2015
Philippines 87 85 75 65 59 52
Source: The Global Competitiveness Report, World Economic Forum
Source: Doing Business Report, World Bank and International Finance Corporation
Global Competitiveness ranking, 2009-2015
Ease of Doing Business rankings, 2009-2014
Long-term sovereign credit ratings
11

12. But why has poverty been persistently high?
• Lesson of recent economic history: structural
transformation drives poverty reduction.
– From low-productivity areas/sectors to high-productivity
areas/sectors
• East Asia’s experience: Rapid & sustained growth (3
to 4 decades); shift of employment from agriculture
to industry and services, facilitated by robust
agricultural productivity growth.
• Philippines: Low growth for most of post- 1970s.
– Poorly performing agriculture
– Industry, particularly manufacturing, saddled by high
production costs (low productivity)
12

13. Weak performance in poverty reduction relative to the country’s
neighbors.
“Lost decade” in 2000s owing primarily to low income growth and to the
high inequality of access to employment & social development
opportunities.
Source: WB
0
10
20
30
40
50
60
70
80
90
Poverty headcount ratio at $1.25/day, PPP (% pop.)
EAP (developing only) Indonesia Philippines
Thailand Viet Nam China
13

14. Poverty reduction has been slow over time, though recent
gains have been made.
34.4
26.6 26.3
25.2
28.8 28.6 27.9
24.9
17.215
20
25
30
35
40
Poverty incidence among pop. (%)
Annual estimates First semester estimates MDG target
Response of poverty
to growth (elasticity)
has improved
(source: WB)
–2.02 (2012-2013)
–0.24 (2006-2012)
Source: PSANote: The 2014 1st Semester estimates will be released in March 2014. 14

15. Similarly, self-rated hunger has somehow abated in recent
years.
Source: SWS
0
5
10
15
20
25
Total hunger incidence, July 1998 to Dec 2014
(% of households)
15

16. Indicator
Ave
2010
Ave
2011
Ave
2012
Ave
2013
Ave
2014*
Oct
2013**
Oct
2014**
Labor force (‘000) 38,893 40,006 40,426 41,022 40,051 40,397 41,322
Employed (‘000) 36,035 37,192 37,600 38,118 37,309 37,793 38,839
Wage and salary workers
(% share to total employment)
54.5 55.2 57.2 58.4 57.9 57.7 58.1
Unemployment rate (%) 7.3 7.0 7.0 7.1 6.8 6.4 6.0
Underemployment rate
(%)
18.8 19.3 20.0 19.3 18.4 18.0 18.7
Source: Labor Force Survey, Philippine Statistics Authority
*The average estimates for 2014 exclude Region 8. Moreover, average estimates for wage and salary workers are computed
using the January 2014 data (which exclude Region 8) and April-October 2014 (which exclude Leyte).
**Due to Typhoon Yolanda’s devastation, estimates for Oct. 2014 exclude Leyte; for comparability purposes, Oct 2013
estimates less Leyte is also provided.
The other big challenge: EMPLOYMENT.
• Not a “jobless growth” – about 1 million new employment
generated between Oct 2013 & Oct 2014.
• Unemployment rate is decreasing, although underemployment
remains stubbornly high.
• Quality of jobs is improving – rising share of wage and salaried
workers in total employment.
16

17. 0
10
20
30
40
50
60
70
80
90
100
Wage and salaried workers (% of total employed)
Indonesia
Malaysia
Philippines
Singapore
Thailand
Source: WB
The other big challenge: EMPLOYMENT.
• Internationally, the share of wage & salaried workers in total
employment is a broad indicator of employment quality
• Rising in the Philippines, albeit slowly
17

18. Deepening reforms to sustain growth
& make it more inclusive
• Rapid growth in recent years is
the outcome of past and
ongoing governance and policy
reforms
– Broadly, reforms have been
evidence-based, focused on
most binding constraints to
growth
• Primacy of deepening reforms
to sustain growth and make it
more inclusive
– Learning from the lessons
of recent development
experience
– Deploying political capital
for reform & development
Lessons learned in first 3 years
of PDP implementation
– Good governance is an effective
platform for the strategies’
implementation
– Macroeconomic and political
stability fuel positive expectations
leading to growth
– Economic growth is necessary but
not sufficient for poverty
reduction
– Growth strategies need to have
spatial and sectoral dimensions to
ensure inclusivity
– Disasters can negate gains and
even push back development 18

19. Key
constraints
to growth
Huge backlog in
infrastructure & human
capital development
Conflicts & human
insecurity, especially
in Mindanao
High vulnerability to
natural disasters &
extreme events
Weak &
fragmented
regulatory
systems
Deepening reform efforts to address the key constraints to
growth and shared prosperity
19

20. Infrastructure:
There have been improvements in the overall quality of
infrastructure, but we’re still lagging far behind ASEAN
counterparts.
Overall quality of infrastructure (2010-2014 ranking)
2010
(139 economies)
2011
(142 economies)
2012
(144 economies)
2013
(148 economies)
2014
(144 economies)
Philippines 113 113 98 98 91
Malaysia 27 23 29 25 25
Thailand 46 47 49 61 48
Indonesia 90 82 92 82 56
Source: WEF Global Competitiveness Report 2010-2014
2012
2030 (w/o
intervention)
2030/2012
ratio
Economic cost of congestion (Php billion/day) 2.40 6.00 2.50
Inadequate infrastructure has contributed to the growing congestion problem in
Metro Manila.
Source: JICA Study Team 2014
20

21. Infrastructure:
Public infrastructure spending is targeted to rise from 2.2% of GDP
in 2012 to at least 5.0% in 2016.
1.6
2.2
2.7
3.4
4.1
5.1
1.6
2.2
2.5
3.5
4.0
5.1
0
1
2
3
4
5
6
2011 2012 2013 2014 2015 2016
Actual (2011-2013)/Projected (2014-2016)
Target
Public infrastructure spending as % of GDP
Source: DBM; note: 2011 to 2013 – Based on actual GDP and spending; 2014 – Based on General
Appropriations Act; 2015 – Based on National Expenditure Program; 2016 – Projected 21

22. Human capital:
Due to a wider fiscal space, spending in human capital
development and social protection have enjoyed increasing shares
in the national government budget.
Sector Share to total NG budget (%) Growth rate (%)
2011 2012 2013 2014 2012 2013 2014
Education 46.7 47.2 47.2 46.2 9.8 18.2 18.0
Health 7.4 8.9 8.3 10.5 29.4 10.2 53.0
Social protection 21.3 24.5 24.2 25.5 25.3 16.7 26.8
Source: BESF, DBM
0
1
2
3
4
5
6
0
10
20
30
40
50
60
70
2007 2008 2009 2010 2011 2012 2013 2014
Numberoffamilies(in
million)
Budget(inbillionPhp)
4Ps budget and beneficiary families
Budget allocation in the GAA
(billion Php)
Number of families in millions
(right axis)
The country’s CCT program (4Ps) has been scaled up rapidly.
Source: DSWD
22

23. Disaster preparedness:
Investment in disaster preparedness is crucial given the country’s
high vulnerability to natural disasters.
Climate Risk Index
Country
Deaths per
100,000
inhabitants
Absolute losses (in
million USD PPP)2013
Ranking
2012
Ranking
1 2 Philippines 6.65 24,538.56
2 65 Cambodia 1.22 1,495.52
3 46 India 0.60 15,147.02
6 3 Pakistan 0.16 5,419.77
8 32 Viet Nam 0.17 2,397.04
Source: Germanwatch
High rates of return to investment in disaster preparedness:
• Studies on the Philippines show $3 to $30 worth of benefits per $1 of
investment, depending on type of disaster or hazard. [Kelman & Shreve 2013]
Average annual loss for the Philippines is estimated to be Php 206B/year
(1.8% of GDP) in direct losses to private and public assets. [WB 2015]
23

24. Conflict:
ARMM’s underdevelopment is linked to its long history of armed
conflict. (Annual cost of around P5-7.5 billion [HDN 2005].)
Indicators ARMM
National
Average
Rest of
Mindanao
1. GDP per capita,
PHP in 2000 prices
(PSA 2013)
14,565 68,897 46,050
2. Poverty incidence
(%, PSA 2012)
55.8 25.2 39.1
3 Net enrollment
(%, SY 2012-13)
Primary
Secondary
(source: ARMM-RPDO/DepEd)
72.5
26.1
95.2
64.6
-
-
4. Access to safe water source
(% of HH, FIES 2012)
36.6 79.9 73.3
5. Seal of Good Housekeeping
(%, municipalities, DILG 2012)
6.6 76.6 59.7
6. Private armed groups
(PNP 2012)
Number of armed groups 43 86 3
Number per million pop. 12.3 0.91 0.13
Sources: PSA, Bangsamoro Development Plan [2014]
24

25. Regulation and corruption:
Remaining bottlenecks in sound regulation and corruption are
reflected in the country’s competitiveness rankings.
2013 rank 2014 rank
Change
(past 3-4 years)
ASEAN rank as of
2014*
WB - Ease of Doing Business 108/189 na 40 na
WB - Ease of Doing Business (new
method.)* 86/189 95/189 na 5 (10)
WEF - Global Competitiveness Report 59/148 52/144 33 5 (9)
IMD - World Competitiveness Report 38/60 42/60 -1 5 (5)
TI - Corruption Perception Index 94/177 85/175 49 3 (9)
HF - Economic Freedom Index** 97/177 76/178 (2015) 33 5 (9)
Source: National Competitiveness Council [2014]
*Rank of PH within ASEAN. Figures in parentheses are number of ASEAN countries covered.
Cost of starting a business (% GNI p.c.) Time to start a business (days)
2005 2013 Change 2005 2013 Change
Indonesia 101.7 20.5 -81.2 151 48 -103
Malaysia 26.6 7.6 -19.0 37 6 -31
Thailand 8.1 6.7 -1.4 33 28 -5
Viet Nam 27.6 7.7 -19.9 45 34 -11
Philippines 23.9 18.7 -5.2 47 35 -12
Source: ADB [2014]. 25

26. Priority legislative measures to sustain growth and make it
more inclusive.
• Bangsamoro Basic Law
• Competition Law
• Fiscal Incentives Rationalization
• Rationalization of Mining Revenues
• Removing investment restrictions in specific laws cited in the
Foreign Investment Negative List (FINL)
• Amendment to BOT Law
• Amendment to BSP Charter
• Customs and Tariff Modernization Act (CMTA)
• Water Sector Reform Act
• Amendment to Cabotage Law
• National Land Use Act
• Land Administration Reform Act
• Acquisition of Right-of-Way of Government Infrastructure
Projects
26

27. Growth targets & outlooks for 2015 & 2016
Sources: NEDA, DBM. *First semester estimate.
2015
(projected)
2016
(projected)
NEDA
Board-
DBCC
(as of Jan. 7,
2015)
GDP growth (%) 7.0-8.0 7.0-8.0
Inflation, CPI (%,
2006=100),
average
2.0-4.0 2.0-4.0
Exchange rate
(PhP/USD)
42-45 42-45
Budget deficit (%
GDP)
-0.9 -0.9
PDP
Update
(as of Jan.
2014)
Unemployment
rate (%)
6.7 6.6
Underemploy-
ment rate (%)
18.0 17.0
Poverty
incidence (%)
22.5 19.0
Drivers of growth in the near to
medium term
• Supply side
– Manufacturing
– Construction and logistics
including rehab. in disaster-
affected areas
– International and domestic
tourism
– Wholesale and retail trade
– Business Process Management
(BPM) fueling growth in the real
estate, renting, and business
activities sector
– Agribusiness
• Demand side
– Investment: public construction,
including infrastructure and
reconstruction; private
construction
– Household consumption:
remittance inflows, strong
consumer confidence
– Exports of services: good
prospects on BPM
– External trade conditions: low
world price of oil
27

28. International organizations’ outlooks for Philippine growth
remain optimistic (as of Jan. 2015).
2013 2014
2015
(forecast)
2016
(forecast)
Philippines
IMF 7.2 .. 6.6 6.4
WB 7.2 6.0 6.5 6.5
ASEAN-5 IMF 5.2 4.5 5.2 5.3
Emerging and
developing Asia
IMF
6.6 6.5 6.4 6.2
East Asia & Pacific WB 7.2 6.9 6.7 6.7
China
IMF 7.8 7.4 6.8 6.3
WB 7.7 7.4 7.1 7.0
World
IMF 3.3 3.3 3.5 3.7
WB 2.5 2.6 3.0 3.3
Sources: IMF’s WEO Update (Jan 2015); WB’s Global Economic Prospects (Jan 2015)
28

29. Good
governance
Good
economics
Good growth
• Rapid
• Sustained
• Inclusive
The 3Gs of Inclusive Development
29

30. Thank you!
Presentation can be downloaded from:
http://www.econ.upd.edu.ph/ayala-upse
30