The Philippines WT/TPR/S/59

Page 1

I. ECONOMIC ENVIRONMENT

(1) INTRODUCTION

1. The Philippine economy has experienced uneven growth and economic performance over the
last two decades. Following a decade of relative expansion, the 1980s were characterized by a series
of adverse weather conditions and natural disasters, political instability, and macroeconomic
imbalances, which slowed growth, confidence, and reforms. Between 1990 and 1993, the years
immediately preceding the period under review, per capita GDP fell. Chronic external current
account deficits kept the Philippines in a situation of dependence on external aid and of vulnerability
to external shocks.

2. The early part of the period under review - until the Asian financial crisis - marked the return
to economic growth. Between 1994 and 1997, real GDP grew at an average annual rate of 5%.
Disciplined macroeconomic policies contributed to fiscal balance and lower inflation, and trade and
investment liberalization shifted the pattern of growth to one led by exports; this fostered industrial
diversification and attracted foreign capital into manufacturing, which resulted in the modernization
of equipment. Standards of living and social indicators improved during this period, albeit unequally.
However, the current account, with a persistent domestic savings/investment imbalance, remained
weak, and private external debt grew in consequence. Against this background, the onset of the
financial crisis led to severe balance-of-payments difficulties and in July 1997 the Government floated
the peso, the national currency.

3. In further response to the financial crisis, the Government strengthened its on-going policies
of macroeconomic stabilization and structural reform. On the macroeconomic side, fiscal policy
supported domestic demand while monetary policy was tightened to contain inflation and support the
peso. On the structural side, the reform of the public sector and of the banking and tax systems was
accelerated, and the medium-term programme of trade and investment liberalization was firmly
implemented.

4. In many respects the Philippine economy withstood the financial crisis better than most of its
regional partners.1 While under stress, the reformed banking sector withstood much of the pressure,
limiting collateral damage to the real economy. Domestic investment weakened significantly, but
exports, which benefited from their wide geographical and product diversification, and private
consumption, which continued to be fuelled by workers' remittances, sustained economic activity. As
a result, real GDP grew over 5% in 1997 and contracted only modestly, by 0.5%, in 1998.2 Since
then, the inflationary impact of the depreciation of the peso has been contained, the peso has
stabilized, and interest rates have eased. Current forecasts predict a return to economic growth in
early 1999.

5. A summary of the basic features of the Philippine economy is shown in Table I.1, while
recent economic performance indicators are presented in Table I.2.

1
To a large extent, this owes much to stronger macroeconomic fundamentals, and to the adoption of
prudential measures and financial reform to discourage the banking system from excess lending in the face of
large capital inflows in the mid-1990s.
2
In 1998, the poor performance in agriculture, fisheries and forestry (which were affected by unusually
severe typhoons) and the decline in manufacturing activity more than offset the modest growth in services
(EIU 1999).
WT/TPR/S/59 Trade Policy Review
Page 2

Table I.1
Basic economic and social indicators, 1992-98
(Per cent and US$ billion, unless otherwise specified)
1992 1993 1994 1995 1996 1997 1998

Social indicators
Population (million) 64.3 65.7 67.0 68.4 70.0 71.5 73.5
Total labour force (million) 26.3 26.9 27.7 28.4 29.7 30.4 31.1
Unemployment rate (%) 9.8 9.3 9.5 9.5 8.6 8.7 10.1
Birth rate (%) 31.0 .. .. .. 29.0 .. ..
Life expectancy at birth (years) 65.0 .. .. 66.0 66.0 .. ..
Share in employment (%)
Agriculture 45.3 45.7 45.1 43.4 42.8 40.8 ..
Industry 16.1 15.6 15.8 16.1 16.3 16.7 ..
Mining and quarrying 0.6 0.6 0.4 0.4 0.4 0.5 ..
Manufacturing 10.6 10.1 10.1 10.2 9.9 9.9 ..
Construction 4.5 4.6 4.7 5.1 5.5 5.9 ..
Utilities 0.4 0.4 0.4 0.4 0.4 0.5 ..
Services 38.6 38.7 39.1 40.5 40.9 42.5 ..
Transport and communications 5.1 5.3 5.6 5.8 6.0 6.3 ..
Trade 13.8 13.9 14.1 14.7 14.8 14.9 ..
Finance 1.9 2.1 2.0 2.1 2.3 2.5 ..
Government services 17.7 17.4 17.5 17.9 17.8 18.7 ..
Others 0.1 0.1 .. .. .. .. ..
GDP at market prices (pesos billion)
Current prices 1,351.6 1,474.5 1,692.9 1,906.0 2,171.9 2,423.6 ..
Constant 1985 prices 718.9 734.2 766.4 802.2 849.1 893.0 888.7
GDP at market prices (US$ billion)
Current prices 55.6 60.7 69.6 78.4 89.3 99.7 ..
Constant 1985 prices 29.6 30.2 31.5 33.0 34.9 36.7 ..
GDP per capita (US$)
Current prices 850.9 905.5 1,014.9 1,115.7 1,242.6 1,355.9 ..
Constant 1985 prices 452.6 450.9 459.4 469.6 485.8 499.6 ..
Share in GDP (%)
Primary sector 21.8 21.6 22.0 21.6 20.6 18.7 ..
Agriculture and fishery 21.3 21.2 21.7 21.4 20.4 18.6 ..
Forestry 0.5 0.4 0.3 0.2 0.2 0.1 ..
Industry sector 32.8 32.7 32.5 32.1 32.1 32.2 ..
Mining and quarrying 1.2 1.1 1.0 0.9 0.8 0.7 ..
Manufacturing 24.2 23.7 23.3 23.0 22.8 22.3 ..
Construction 5.0 5.4 5.6 5.6 5.9 6.4 ..
Utilities (electricity, gas and water) 2.4 2.5 2.7 2.6 2.6 2.7 ..
Services sector 45.3 45.7 45.5 46.3 47.3 49.2 ..
Transport and communications 5.6 5.3 4.9 4.7 4.7 4.9 ..
Trade 14.3 14.1 13.6 13.7 13.6 13.1 ..
Banks and finance 3.9 4.0 4.0 4.1 4.4 4.7 ..
Dwellings and real estate 6.4 6.7 6.8 6.8 6.8 6.9 ..
Private services 8.2 8.6 8.7 8.9 9.2 9.6 ..
Government services 6.9 7.0 7.5 8.1 8.6 9.9 ..
GNP at market prices (US$ billion)
Current prices 53.9 55.3 65.7 76.2 86.3 85.7 ..
Constant 1985 prices 28.7 27.5 29.8 32.1 33.7 31.6 ..
GNP deflator (period average) 8.3 5.1 10.0 7.4 9.0 6.2 ..

.. Not available.

Source: National Statistical Coordination Board [Online]. Available at http://www.nscb.gov.ph; World Bank's WDI; IMF
International Financial Statistics (latest 1999).
The Philippines WT/TPR/S/59
Page 3

Table I.2
Economic performance, and selected economic indicators, 1992-98
(Per cent, unless otherwise specified)
1992 1993 1994 1995 1996 1997 1998

GNP and prices (% change)

Real GNP 1.6 2.1 5.3 5.0 7.2 5.3 0.1
Real GDP 0.3 2.1 4.4 4.8 5.8 5.2 -0.5
CPI (annual average) 8.9 7.6 9.1 8.1 8.4 5.1 ..
CPI (end year) 8.2 8.4 7.2 10.9 5.2 6.1 ..
Investment and savings (% GNP)
Gross investment 20.9 23.6 23.5 21.8 23.1 23.8 19.3
Public 4.8 5.7 4.8 4.5 4.4 4.8 ..
Private 16.2 17.9 18.7 17.1 18.9 19.1 ..
National saving 19.4 18.1 19.0 17.3 18.8 18.7 ..
Public 1.6 4.4 3.1 3.1 3.8 3.4 ..
Private 17.8 13.7 15.9 14.2 14.9 15.4 ..
Public finance (% GNP)
a -1.1 -1.6 -1.7 -1.3 -0.4 -0.9 ..
National government balance
Total revenue 17.6 17.2 18.4 17.9 18.0 18.5 ..
Total expenditure and net lending 18.7 18.8 20.1 19.2 18.6 19.4 ..
Consolidated public sector balance -1.9 -1.7 -0.5 -0.2 -0.3 -1.0 ..
Underlying consolidated public sector -3.0 -2.2 -2.3 -1.4 -0.6 -1.4 ..
b
balance
Monetary sector (% change, end of year)
Domestic liquidity (M3) 11.0 24.6 26.5 25.3 15.5 21.0 7.4
c 9.2 14.5 11.5 17.0 14.3 16.1 3.9
Base money
Interest rate (91-day Treasury bill, in 16.1 12.3 13.6 11.3 12.4 13.1 15.3
per cent)
Bank credit to the private sector 24.6 33.0 27.9 43.5 51.0 28.7 -5.1
Balance of payments (% change)
Export value 11.1 15.8 18.5 29.4 17.7 22.8 16.9
Import value 20.5 21.2 21.2 23.7 20.8 14.0 -18.8
Current account (% of GNP) -1.6 -5.4 -4.5 -4.3 -4.6 -5.1 1.9
Financial account (US$ billion) 1.8 2.8 4.5 3.4 11.1 6.6 1.0
Foreign direct investment (net) 0.7 0.9 1.3 1.4 1.3 1.1 1.6
Other 1.1 1.9 3.2 2.0 9.8 5.5 -0.6
Overall balance (US$ billion) 1.5 -0.2 1.8 0.6 4.1 -3.4 1.4
d 59.6 63.8 58.9 51.7 48.6 53.1 70.0
Monitored external liabilities (% GNP)
e 17.0 17.1 17.4 15.8 12.7 11.6 11.7
Debt service ratio
f 3.3 2.5 2.7 2.2 2.8 1.7 2.7
Reserves adjusted (months of imports)
Exchange rate
Nominal exchange rate (pesos per US$, 25.5 27.1 26.4 25.7 26.2 29.5 40.9
average)
Nominal effective exchange rate 103.8 101.3 116.3 105.8 109.2 84.7 ..
g
(1990=100)
Real effective exchange rate 115.4 111.3 127.0 125.0 132.3 106.9 ..
g
(1990=100)

.. Not available.
a Excludes privatization receipts of the National Government; and includes net deficit from restructuring the central bank.
b With all privatization receipts below the line.
c End of period, adjusted for changes in reserve requirement.
d Excludes unregistered debt loans imputed for imports under capital lease and branches of foreign banks' liabilities classified as
"due to head office/branches abroad".
e After rescheduling, as a percentage of goods and services.
f Gross reserves less gold and securities pledged as collateral against short-term liabilities.
g End year.

Source: The Philippine authorities; IMF (1998) Staff Country Report No. 98/50, and Statistical Appendix, May.
WT/TPR/S/59 Trade Policy Review
Page 4

(2) RECENT ECONOMIC DEVELOPMENTS

(i) Recent growth and employment trends

6. After four consecutive years of growth, the Philippine economy underwent an economic
downturn in late 1997 and 1998, linked to the eruption of the Asian financial crisis. However, in the
absence of major difficulties in the domestic financial system, it showed a relative resilience in 1998,
raising hope for a quick recovery.

7. From 1993 to 1997, economic activity had gradually gained strength, with real GDP growth
increasing from 2.1% in 1993 to 5.8% in 1996 (Table I.2). Growth was still at a robust pace when the
financial crisis hit the Philippines, with an annualized growth rate of 5.2%, in the first half of 1997.
The economy showed resistance to the currency turmoil in the second half of 1997, allowing GDP
growth to reach 5.2% for the year as a whole, and, unlike neighbouring countries, avoided a recession
in 1998. The latest estimates show a deepening contraction of GDP in the last three months of 1998,
after what had seemed to be an easing in the third quarter. For the first time since 1991, GDP for the
year as a whole contracted in 1998, by 0.5%.3 However, using GNP figures, which take full account
of the impact of overseas remittances on the domestic economy, the Philippine economy grew by
0.1% in 1998.

8. The manufacturing sector was the main engine of growth until the financial crisis, with an
annual average rate of growth of 5.3% between 1993 and 1997. This period was also marked by the
rapid expansion of the services sector which grew on average by 4.7% a year; agricultural output
grew at an annual average rate of 2.3%, under-performing the rest of the economy. Since 1997,
agriculture has been affected by particularly unfavourable climatic conditions, first the El Niño
drought, and later floods, which inflicted serious damage on production in 1998. Both agricultural
and manufacturing production declined in 1998, services being the only sector recording positive
growth.

9. Growth between 1994 and 1997 was led by high levels of investment, of both domestic and
foreign origin, and exports. The investment drive, with annual growth rates of 10% during this period
(12% for 1997 alone), is partly explained by the need to replace existing – and largely outdated –
equipment, after years of underinvestment.4 High demand for exports and strong private consumption
also played an important role. Inversely, the drop in investment, by around 10%, negatively affected
output performance in 1998. However, a larger decline in production was prevented by the sustained
dynamism of consumer spending and exports. Consumer demand was sustained by the extra
purchasing power of remittances from Filipino expatriates resulting from the depreciation of the peso
against the U.S. dollar.5 However, fears of unemployment could still dampen consumer confidence in
the coming months.

10. Until 1998, changes in the structure of employment reflected the modernization of the
Philippines' economic structure (Table I.1): the share of agriculture in total employment declined

3
While economic performance of the Philippines slowed from 1997 to 1998, it has remained relatively
more favourable compared with other similarly-affected economies in Asia. GDP fell by 15.3% in Indonesia,
8% in Thailand and 7.5% in Malaysia.
4
As described in the Secretariat report for the 1993 TPR, political and economic turmoil in the mid-
1980s had seriously curtailed investment, leaving manufacturing facilities and infrastructures seriously outdated
(GATT, 1993).
5
There are about 650,000 overseas Filipino workers, compared with a domestic labour force of
30.4 million.
The Philippines WT/TPR/S/59
Page 5

from 46% in 1993 to 41% in 1997; the share of manufacturing – excluding construction – remained
stable (at around 10% of the total) and the share of services, including construction, increased from
43% to 48%. Employment increased on average by 4% a year during the period of high growth, but
stagnated in 1997 and fell in 1998 as a result of the economic crisis. The rate of unemployment,
which stood at 8.7% at the end of 1997 was up to 10.1% in 1998, the highest level since the 1991-92
recession.6 As a result of falling agricultural production, the primary sector has been unable to absorb
the unemployed workers.

(ii) Macroeconomic policies

11. The Philippines benefited from favourable domestic and international economic conditions
until mid 1997 and achieved major progress in reducing its macroeconomic imbalances. As a result,
it entered the currency turmoil with a small budgetary surplus and an average inflation rate of
5.3% (January-June 1997). While export performance improved and the import coverage of foreign
reserves increased until mid 1997, the external position had nevertheless remained weak because of a
large current account deficit – about 4% of GNP at the onset of the currency crisis – and growing
private external borrowing. While the depreciation of the peso has put some pressure on domestic
prices, inflation was contained to an average of about 9.7% in 1998, despite a depreciation of almost
50% of the peso against the U.S. dollar since mid 1997, and high interest rates. In response to the
crisis, the Government slightly modified its policy mix, relaxing fiscal policy and strengthening
monetary policy. The current account adjusted fast and, for the first time in a quarter of a century,
moved into a surplus in 1998.

(b) Public finances

12. The Philippines has achieved substantial fiscal consolidation, bringing its deficit down during
the review period. This resulted from higher tax collection arising from a broader tax base, better
control of spending, the privatization of public enterprises, and the introduction in 1997 of the
Comprehensive Tax Reform Program (CTRP).7

13. Since 1997, fiscal policy has been more expansionary. In 1997, tax revenue fell as the
economy slowed down. Determined to reverse this slippage and return to the consolidation path in
1998, the Government had initially decided to offset the expected revenue shortfall by a cut in
spending.8 However, in light of the deeper-than-expected fall in activity, and hence a larger revenue
shortfall, the Government let the automatic fiscal stabilizers come into play to some extent. In

6
The National Statistical Office calculates an "underemployment rate", which increased from 20% in
1995 to 22.1% in 1997.
7
The CTRP is aimed at increasing tax revenues and removing distortions in the tax system. Revenue
raising measures included the restructuring of the excise tax on oil products (August 1996), a reform of the
excise taxation of beer and cigarettes (November 1996) and a substantial reform of income taxation
(December 1997). The latter simplified the rate structure of personal income taxes, with the introduction of
seven marginal tax rates ranging from 5% to 35%. Income tax rates for corporations were reduced to 33% for
1999 and to 32% thereafter. A proposed review of tax incentives was under consideration by Congress in mid-
1999. The CTRP also includes measures aimed at improving tax collection and administration (Government of
the Philippines, 1997).
8
At the onset of the Asian crisis, the Government adopted fiscal austerity measures, with the intent to
reduce the public sector's total expenditure for 1998 by at least 25% of authorized regular appropriations for
capital and other non-personnel service items. But, in line with efforts to spur economic growth, the
Government reoriented its macroeconomic policies by shifting to an expansionary fiscal policy to take up the
slack in private domestic demand and fund anti-poverty programmes.
WT/TPR/S/59 Trade Policy Review
Page 6

addition to the fall in revenue, increased spending resulted from social programmes, to cushion the
impact of rising unemployment and partially offset the slack in the construction sector.

14. The fiscal position incurred a deficit in 1998; assuming that the economy recovers, the
Government expects a lower fiscal deficit in 1999. The move to a narrower fiscal deficit will
continue, in line with the authorities' plans, in 2000.

(c) Monetary and exchange rate policies

15. The primary objectives of monetary and exchange rate policies in the Philippines remain the
control of inflation and the stabilization of the peso. Before the financial crisis, inflation was
contained to below 10% despite high domestic demand and credit; in comparison, in 1995 and 1996,
private sector credit grew at an average annual rate of close to 48%. The liberalization of the foreign
exchange regime and an underdeveloped domestic capital market played a role in encouraging private
agents to seek cheaper funds in international markets. As a result, borrowings in foreign currency by
Filipino residents increased rapidly during the review period (section (c) below). Recent efforts
aimed at controlling inflation and stabilizing the exchange rate have allowed a reduction in nominal
interest rates.9

16. Until recently, the Philippines operated a crawling-peg regime for the peso, allowing for
specified annual depreciations against the U.S. dollar. While this strategy ensured currency stability
for a long period of time, it had become increasingly difficult to operate in a fully convertible
environment. Already in 1996 and early 1997, monetary policy had been disturbed by large capital
inflows, attracted partly by high real domestic interest rates. These inflows had been partly sterilized
to prevent the nominal appreciation of the peso and an excessive increase in the domestic money
stock. In early 1997, the authorities sought further flexibility by widening bands and increasing
intervention spreads on the peso/U.S. dollar market.

17. The Philippines was among the first countries to be affected by the currency turmoil that
swept the region in the summer of 1997. On 11 July, after several days of heavy intervention in
response to heavy speculative activities, the monetary authorities let the peso float, to limit pressure
on the currency and preserve foreign exchange reserves. The crisis resulted in a nominal depreciation
against the U.S. dollar of over 50% between June and December 1997, and brought the real effective
exchange rate back to its level of late 1991. Between the autumn of 1997 and the end of 1998, the
peso experienced successive periods of calm and tension, reflecting unsettled market expectations vis-
à-vis domestic, regional, and global economic developments.10 In periods of pressure on the
exchange rate, monetary policy was strengthened.

18. Current exchange rate policy in the Philippines is aimed at supporting a floating rate system.
Intervention in the foreign exchange market is, according to the authorities, limited to smoothing
fluctuations and to achieving specified targets for net international reserves.11

9
From high levels of between 25.2% and 28.2% in October 1997, average prime lending rates of banks
fell to 16.2-19.7% in December 1998.
10
With an import (merchandise) to GDP ratio of over 40%, the depreciation of the peso could
potentially have had strong spillover effects on domestic prices. However, the inflation increase has been
moderated by a combination of factors, including the growing output gap and strict monetary policy.
11
Bangko Sentral ng Pilipinas (1999).
The Philippines WT/TPR/S/59
Page 7

(d) Balance of payments, competitiveness, and external debt

19. The Philippines had current account deficits equivalent to 4.3% of GNP in 1995, 4.6% in
1996 and 5.1% in 1997 (Table I.3). In 1998, the current account turned to a surplus of US$1.3 billion
(the equivalent of 1.9% of GNP), compared to a US$4.4 billion deficit one year earlier. In 1998,
growth of merchandise exports, at 16.9%, and a substantial contraction of imports, by 18.8%, resulted
in a narrowing of the merchandise trade deficit to its lowest level in almost three decades
(US$28 million, down from US$11.1 billion in 1997). The small trade gap combined with a surplus
in the services account to yield the current account surplus. The elimination of the current account
deficit meant that, in 1998, the overall balance of payments stayed comfortably in surplus, at close to
US$1.4 billion.

20. The Philippine current account deficits until 1997 derived from its very large merchandise
trade deficits, which, during the period under review, reached a peak of 13% of GDP in 1996 (11% of
GDP in 1997). Imports increased rapidly between 1993 and 1997 (section (3)(i)), as a result of strong
GDP and investment growth. Strong external demand led export growth despite the appreciation of
the real effective exchange rate between 1993 and 1996 (Chart I.1).12 As in the past, the merchandise
trade deficit had been partly offset by the large surplus on the invisible balance. This surplus is
essentially attributable to remittances from overseas workers, which appear in the current account as
service exports.13

21. From a structural point of view, the current account deficit reflects the persistence of a large
savings-investment gap, a traditional feature of the Philippine economy. During the period under
review the private savings rate increased slightly (from 13.7% of GNP in 1993 to 15.4% of GNP in
1997); this was not sufficient to increase significantly the national savings rate, at 19% of GNP
in 1997. Gross investment has remained stable at around 24% of GNP.

22. The current account deficits were readily financed by large capital inflows. Foreign direct
investment, borrowing from official sources, and long-term foreign aid traditionally accounted for the
bulk of capital inflows but in recent years private-sector finance, such as portfolio investment, short-
term capital and private bank lending, have emerged as major source of financing (Table I.3). In the
absence of sufficient domestic savings, the recourse to large amounts of capital in international
markets greatly contributed to meeting Philippine investment needs. At the same time, it exposed the
Philippines to the market's daily assessment of its policies, and hence to possible shifts in sentiment.
The balance of payments shows that in 1997, contrary to previous years, the current account deficit
was financed by a reduction in foreign exchange reserves and by an increase in foreign aid.

12
While the Philippines' real effective exchange rate appreciated by 42% between 1991 and 1996, it
depreciated by more than 30% in 1997 and 1998.
13
Estimates of these remittances vary between national and international statistics; they account for as
much as 8-9% of GDP.
WT/TPR/S/59 Trade Policy Review
Page 8

Chart I.1
Main indicators of macroeconomic performance, 1990-98
Export and import indices
1990=100
600

500 Exports Imports

400

300

200

100
1990 1991 1992 1993 1994 1995 1996 1997 1998

Balance of payments
US$ billion

-4

-8

-12
1990 1991 1992 1993 1994 1995 1996 1997 1998

Merchandise trade balance Balance on services Current account

Real effective exchange rate

1990 =100
140

130

120

110

100

90

80
1990 1991 1992 1993 1994 1995 1996 1997 1998

Source : IMF, International Financial Statistics (various issues), and JP Morgan (for REER 1998).
The Philippines WT/TPR/S/59
Page 9

23. As large current account financing requirements have been met, to a significant extent, met
both by private and public borrowing and official aid, Philippine foreign debt increased rapidly in the
period under review, from US$35.5 billion in 1993 to US$45.4 billion in 1997 (about half of GDP).
Total debt rose to US$47.8 billion as of December 1998.14 Until 1996, the rise in total debt was due
to the increase in official financing, reflecting major funding support granted by multilateral financial
institutions and bilateral donors. At the end of 1995, public debt accounted for as much as 77% of
total debt. Since then, borrowing in foreign currency by the private sector (in particular by
commercial banks), which took advantage of the difference between interest rates on U.S. dollar loans
and higher rates on the peso, led to a change in the composition of the Philippine external debt.15 At
the end of 1997, the share of private-sector debt had increased to 41% of total debt, up from 23% at
the end of 1995; at the end of 1998, that share had fallen back to 37%.

(iii) Structural and trade reforms

24. Committed to a long-term objective of improving resource allocation, successive

Governments have pursued a policy of economic reform, including trade liberalization, in the period
under review. This has covered, among other measures, the elimination of monopolies (such as in
electricity and telecommunications), the deregulation and privatization of corporate holdings and core
services (water supply, financial and aviation services), the opening of restricted sectors to foreign
investment, the gradual removal of tariff and non-tariff measures affecting imports, and the reform of
the tax system. Individual trade and trade-related measures, including investment and other structural
policies, are described in the rest of this report (in particular Chapters III and IV).

25. Since the onset of the financial crisis, in recognition of the structural dimension of the current
economic downturn, the Government, in cooperation with international financial institutions, has
announced its intention to further accelerate the implementation of its structural reform programme.
Priority is being given to the design of a comprehensive reform of the public sector; the
implementation of the Comprehensive Tax Reform Program, including a broad review of fiscal
incentives and the introduction of a medium-term expenditure framework; the preparation of a
revised bankruptcy law; policy reforms aimed at strengthening the regulatory framework of the
banking and financial sector and at improving its transparency; and the implementation of the
medium-term tariff reduction and simplification programme.

26. The implementation of these measures is likely to enhance the efficiency, competitiveness
and openness of the Philippine economy, hence contributing to the resumption of growth and the
reduction of its vulnerability to external shocks. At the same time, the Government has increased its
efforts to alleviate rising poverty. For example, the draft budget for 1999 has protected social
programmes and increased spending in favour of local government and the agriculture sector.

14
The debt service burden declined, although as a ratio to total exports of goods and services, it rose to
12.8% from 11.6% in 1997, due mainly to lower receipts from services. Short-term liabilities accounted for
about 17.2% of the total (Bangko Sentral ng Pilipinas, 1999b).
15
Unlike some neighbouring countries, most U.S. dollar-denominated borrowings by private banks
and firms were long term, rather than short term, and were intended to finance trade and infrastructure
development. Foreign currency borrowings have been, in the main, re-lent locally. However, the depreciation
of the peso against the U.S. dollar exposed borrowers with unhedged U.S. dollar loans to very severe currency
risk.
WT/TPR/S/59 Trade Policy Review
Page 10

Table I.3
Balance of payments, 1992-98
(US$ million, unless otherwise specified)
1992 1993 1994 1995 1996 1997 1998
Overall BOP position 1,492 -166 1,802 631 4,107 -3,363 1,359

Current account balance -858 -3,016 -2,950 -3,297 -3,953 -4,303 1,287
Merchandise trade -4,695 -6,222 -7,850 -8,944 -11,342 -11,127 -28
Exports 9,824 11,375 13,483 17,447 20,543 25,228 29,496
Imports 14,519 17,597 21,333 26,391 31,885 36,355 29,524
Services (net) 3,020 2,507 3,964 4,765 6,800 5,744 880
Inflow 7,443 7,497 10,550 14,374 19,006 22,835 13,917
Outflow 4,423 4,990 6,586 9,609 12,206 17,091 13,037
Transfers 817 699 936 882 589 1,080 435
Receipts 826 746 1,041 1,147 1,185 1,670 750
Payments 9 47 105 265 596 590 323
Capital account balance 1,850 2,820 4,547 3,393 11,072 6,460 956
Official capital (net) 666 2,105 1,313 1,276 2,841 4,688 2,850
Inflow 7,436 4,853 4,369 3,927 6,540 7,427 5,791
Outflow 6,770 2,748 3,056 2,651 3,699 2,739 2,941
Foreign investment 737 812 1,558 1,609 3,517 762 1,672
Inflow 931 2,135 2,492 2,944 3,621 847 2,016
Outflow 194 1,323 934 1,335 104 81 344
Short-term capital (net) 660 -148 1,002 -56 540 495 -1,521
Errors and omissions -360 84 160 -291 -1,302 .. -980
Memorandum items:
a
Official reserves (gross) 4,638 4,721 6,372 6,662 10,445 7,568 9,606
(in months of imports of goods 2.9 2.5 2.7 2.2 2.8 1.7 2.7
and services)
Net international reserves 3,662 3,496 5,297 5,928 10,035 6,672 8,030
Exports (% GNP) 18.2 20.6 20.5 22.9 23.6 29.0 43.2
Imports (% GNP) 26.9 31.8 32.5 34.6 36.6 42.1 43.2
Trade balance (% GNP) -8.7 -11.2 -11.9 -11.7 -13.0 -13.2 -0.04
Current account (% GNP) -1.6 -5.5 -4.5 -4.3 -4.6 -5.1 1.9
Export volume (% change) 5.1 23.7 13.7 16.0 20.1 23.7 b
19.3
Export unit value (% change) 5.8 -6.4 4.4 11.5 -2.0 -0.7 b
2.0
Import volume (% change) 19.4 19.5 17.4 13.3 20.9 17.4 b
12.5
Import unit value (% change) 1.0 1.4 3.2 9.2 -0.1 -2.0 b
7.2
Terms of trade (% change) 4.8 -7.7 1.0 2.2 -1.9 1.3 5.6

.. Not available.
a Less gold and securities pledged as collateral against short-term liabilities.
b Preliminary.
Source: Central Bank of the Philippines, except for memorandum items taken from IMF (1998) Staff Country Report, the
Philippines, No. 98/50, Statistical Appendix, May.

(3) TRADE AND INVESTMENT PERFORMANCE

(i) Trade patterns

27. Since the previous Review, in 1993, the expansion of trade has continued to be a main factor
in the transformation of the Philippine economy, as it has been since the early 1980s, from one based
The Philippines WT/TPR/S/59
Page 11

on natural resources to one geared to manufacturing. The capital intensity of exported products has
increased, as reflected in the changes in relative shares of primary and manufactured exports. The
rapid expansion of manufactured exports has been led by the development of the semi-conductors and
electronics industries. Since the outbreak of the crisis, the decline in imports has, however,
temporarily halted the expansion of total trade.

28. The value of merchandise trade grew at a sustained pace until the end of 1997. Between 1993
and 1996, total trade (imports and exports) increased by more than 25% a year, on average, in
U.S. dollar terms; in 1997, despite a slowdown in the second half of the year, trade growth remained
significant (at 18%). The effects of the financial crisis were felt on trade in 1998, with a significant
fall in imports and lower export growth.

29. The period 1993 to 1997 was marked by the good performance of exports, which expanded at
an annual average rate of 21%. The increase was mainly due to the expansion in exports of
manufactures, accounting for more than 80% of total exports. The main contributors to the increase
in manufactured exports were electronics, garments, and machinery and transport equipment. At
1985 constant prices, exports grew at an average annual rate of 14%. In 1998, despite the global
financial crisis, the value of exports continued to grow at a respectable rate of 16.9% (to
US$29.5 billion); in real terms, exports grew by 4.1%.16 Electronics, machinery and transport
equipment, and garments remained the top three export sectors, accounting for around 80% of the
total.

30. Imports also registered a good performance during the period 1993 to 1997, but declined
sharply in 1997 and 1998. Import growth, which in value terms was 21% in 1994, 24% in 1995 and
21% in 1996, fell to 11% in 1997. Imports, in particular of capital goods and raw materials, were
stimulated by the dynamism of the Philippine economy, including high levels of investment and rising
domestic consumption. In 1998, imports fell by 18.8% in U.S. dollar terms under the combined
effects of the large devaluation of the peso and the weakening of domestic activity, in particular of
private investment (Tables I.2 and I.3).

(a) Trade by country

31. The geographical structure of Philippine trade has turned more toward ASEAN since the last
review (Chart I.2). Between 1993 and 1997, the share of ASEAN in Philippine trade grew
considerably, reflecting economic expansion in the region and the progress in regional integration
under the AFTA scheme (Chapter II(2)(iii)(a)); the share of ASEAN in total exports doubled from
6.7% to 13.2% during this period, while its share in total Philippine imports increased slightly from
11% to almost 13% (Tables AI.1 and AI.2). However, the export trend was interrupted in 1998, as a
result of the regional financial crisis. The United States has remained the Philippines' largest
individual trading partner, accounting for 35% of exports and 20% of imports in 1997 (although its
share in Philippine exports has somewhat eroded compared to 1993). The shares of Japan and the
European Union, respectively the Philippines' second- and third-largest trading partners, have
remained relatively stable.

16
This good performance is attributable, in part, to Philippine strong export orientation to the
U.S. market and specialization in semi-conductors, for which international demand remained high; the currency
depreciation has probably also played a role in stimulating exports.
WT/TPR/S/59 Trade Policy Review
Page 12

Chart I.2
Merchandise trade by partner, 1993 and 1997

1993 1997
(a) Exports (f.o.b.)
Other
Chinese Other Chinese
7.8%
Taipei 10.6% Taipei
3.0% 4.6%
United States
Hong Kong, China United States Hong Kong, China 34.9%
4.8% 38.4% 4.6%
Singapore Singapore
3.3% 6.4%
Asia
Asia
&
Asia crisisb &
ASEAN
ASEAN
8.1% Asia crisisb 42.0%
34.1 %
8.7%

Japan
16.1% Japan European
European Uniona 16.6%
Uniona
15.7%
16.4%

Total: US$ 11,374.8 million Total: US$ 25,227.7 million

(b) Imports (c.i.f.)

United States
Other Other 19.8%
20.1% United States
20.0% 20.0%
Netherlands
3.2%
Netherlands
3.4%
Other Asia
7.3% Other Other Asia
Asia & ASEAN European 9.4%
Asia & ASEAN
Hong Kong, 50.2 %
Uniona 51.1 %
China 5.0% Hong-Kong,
5.4%
China Other
Chinese 5.9% European
Taipei Japan Uniona
Chinese
5.7% Singapore 22.8%
Taipei 6.0%
5.4% Korea Rep. of Singapore Japan
5.0%
5.9% 20.6%
4.9% Korea Rep. of
4.2%

Total: US$ 18,772.7 million Total: US$ 38,576.0 million

a Includes France, Germany, Italy, Netherlands and United Kingdom (excludes Netherlands for imports).
b Includes those countries most affected by the recent financial turmoil (Indonesia, Malaysia, Korea and Thailand).
Source : Philippine's National Statistical Coordination Board; and UNSD, Comtrade database (SITC Rev.1).
The Philippines WT/TPR/S/59
Page 13

(b) Trade by product

32. Manufactured products account for the bulk of Philippine total exports; their share has
continued to increase during the review period (from 79% in 1993 to 86% in 1997) (Chart I.3 and
Table AI.3). As already noted, the largest item and fastest growing exports have been electronics and
electrical equipment (their value increased nearly fourfold between 1993 and 1997, from
US$3.6 billion to US$13 billion, Table AI.4), reflecting the Philippines' growing export specialization
in this area, its success in attracting foreign direct investment, and its liberal trade and investment
policies. The machinery and transport equipment sector has become the second-largest exporter
(replacing the textiles and clothing sector) accounting for about 52% of total exports compared with
34% in 1993. Textiles, clothing and footwear products have grown only moderately since the
previous review; this results from the relatively poor performance of clothing exports, which
stagnated at around US$2.3 billion during the period. Exports of agricultural products increased
slightly from a total of US$1.6 billion in 1993 to US$2 billion in 1997, although their share in total
exports fell from 15% to 8%.

33. Imports remain essentially composed of manufactured products, which accounted for 61% of
total imports in 1997, the latest year for which data are available (Table AI.5). Reflecting the
electronics industries' high dependence on imported inputs, products such as transistors, valves, basic
telecommunications equipment used in assembly lines were the fastest growing imports in the period
under review. Capital equipment for these industries (heavy machinery and office equipment) also
account for a growing share of Philippine manufactured imports.

(c) Trade in services

34. The Philippines ran a large surplus in services trade throughout the period under review. In
1997, the surplus was nearly US$6 billion. The largest part of this surplus is explained by overseas
workers' remittances, which are counted as services receipts in the balance of payments (about
US$5 billion in 1997). The tourism industry is an important component in the Philippines' services
trade; it generated a surplus of about US$2 billion in 1997.

(ii) Investment trends

35. The period under review was marked by an unprecedented increase in inward foreign direct
investment (FDI), as measured by investment approvals. Between 1993 and 1997, the Philippines
approved a total of P209 billion of FDI, equivalent to twice the amount of approvals of the previous
17 years. FDI has been an essential part of the development and modernization of the manufacturing
and the services sectors. The FDI inflows followed the enactment of the 1991 Foreign Direct
Investment Act, allowing for 100% foreign equity ownership in a large number of sectors, except
where it was specifically restricted (to levels of between 25% and 40%) or banned (including in retail
trade and mass media (except recording)). The scope of restrictions, detailed in the Negative List of
Investment, was significantly reduced in the period under review (Chapter III(4)). As a result, while
in the previous period under review (1987-92) the total amount of FDI approvals averaged
P13.4 billion annually, the 1993-97 average was P41.9 billion.
WT/TPR/S/59 Trade Policy Review
Page 14

Chart I.3
Merchandise trade by product, 1993 and 1997
Per cent

1993 1997

(a) Exports (f.o.b.)

Food and agricultural
Food and agricultural raw materials
raw materials Other a 8.1% Mining
Other a 17.6% 2.8%
14.5%
26.7%

Mining
4.4% Garments
9.3%

Manufacturing Manufacturing
81.1% a 89.1% a
Garments Machinery and
20.0% transport equipment
10.6%

Elect.&elect'l
equipment/parts & Elect.&elect'l equipment/parts
Machinery and telecom & telecom
transport equipment 31.2% 51.6%
3.2%

Total: US$ 11,374.8 million Total: US$ 25,227.7 million

(b) Imports (c.i.f.)

Food & agricultural Food & agricultural
raw materials raw materials
Other 10.1% 9.2%
Other
19.1%
22.4% Fuels
8.4%
Fuels Other
11.4% mining
Textiles &
clothing 2.4%
Mining
Other mining Mining
4.1% Textiles & Iron &
14.3% 2.9% 10.8%
clothing steel
Manufacturing
Iron & steel
2.7% Manufacturing 3.7%
75.7% 4.9% 80.0%

Office machines & Chemicals Chemicals

telecommunications 9.6% Office machines & 8.0%
equipment telecommunications
equipment Other semi-
8.3% Other semi-
manufactures
Other machinery & manufactures 16.6% Other machinery &
4.5%
transport equipment 5.1% transport equipment
24.5% 22.1%

Total: US$ 18,772.7million Total: US$ 38,576.0 million

a Includes re-exports and special transactions.
Source : Philippine's National Statistical Coordination Board; and UNSD, Comtrade database (SITC Rev.1).
The Philippines WT/TPR/S/59
Page 15

36. Cumulative FDI statistics since 1976 indicate that Asia, as a region, accounts for the largest
share of approved investment in the Philippines, with 38% of the total. While Japan remains the
largest single investor from Asia, recent years have seen the emergence of Chinese Taipei,
Hong Kong, China, and the Republic of Korea as major investors. North America, essentially the
United States, accounts for close to 23% of total investment approved since 1976, followed closely by
the European Union (21%). While until the end of 1995 the manufacturing sector (in particular
electronics) had received the bulk of FDI, public utilities, infrastructure, and energy-related projects
attracted the largest amounts in 1996 and 1997.

(4) OUTLOOK

37. The Philippines' longer-term prospects remain favourable, provided reforms towards a more
open, market-based economy continue vigorously and the authorities pursue policies towards putting
government finances and the balance of payments on a sounder, longer-term footing.

38. As noted earlier, the 1998 decline was relatively small (and GNP growth remained positive)
notwithstanding the turmoil in regional and global financial markets as well as a major weather-
related decline in agriculture. Real GDP growth is expected to recover in 1999 to 1% to 3%,
reflecting the ongoing recovery in agriculture and signs of a bottoming-out in other sectors. The peso
has now stabilized, while inflation has been successfully contained and is projected to decline to 7.5%
by year-end.

39. The external current account is expected to continue to improve during 1999. The current
account is expected to register a surplus of about US$1.7 billion in 1999. The surplus will be based
on the strong export performance arising from the sustained growth of electronics, and machinery and
transport equipment. Export competitiveness is likely to be at least maintained, given the flexible
exchange rate, and declining interest and inflation rates. The capital and financial accounts should
benefit from increased foreign capital inflows. Foreign investment is forecast to build steadily with
the return of foreign capital due to renewed interest and confidence in the gradually recovering
economy.