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Philippines: ECONOMY

ECONOMY

Overview: The economy of the Philippines is an anomaly in the Asia-Pacific region in that it has lagged behind other economies, such as those of Singapore, South Korea, and Taiwan. From a position as one of the wealthiest countries in Asia after World War II, the Philippines is now one of the poorest. Since the 1970s, which were a relatively prosperous decade, the Philippines has failed to achieve a sustained period of rapid economic growth and has suffered from recurring economic crises. This persistent underperformance has occurred in spite of the Philippines’ rich natural and human resources.

The reasons are rooted partly in history, partly in policy. As a legacy of the U.S. colonial period, oligopolies have dominated the economy, particularly in agriculture, where farmland continues to be concentrated in large estates. In the post-World War II period, the Philippines pursued a strategy of import substitution industrialization, whereby domestic goods are substituted for imports. This strategy required protectionist measures, which led to inefficiencies and the misallocation of resources. Although some trade protectionist measures were relaxed in the early twenty-first century, the Supreme Court continues to support restrictions on foreign ownership of land and other assets in effect since the constitution of 1935. These restrictions, plus widespread graft and corruption, have suppressed inbound foreign direct investment. A historically low rate of taxation—only about 15 percent of gross domestic product (GDP), partly as a result of widespread tax evasion—has led to underinvestment in infrastructure and uneven economic development.

The National Capital Region around Manila, which produces about 36 percent of GDP with only 12 percent of the population, is much more prosperous than rural areas, where much of the population depends on subsistence living. The traditional lack of job opportunities has led many Filipinos to seek employment outside the country, notably in the Persian Gulf states. Remittances to family members back home—equivalent to 10 percent of GDP—have partially offset a relatively low national rate of savings of about 15 to 18 percent, about average for the Organization for Economic Cooperation and Development, but below average for the region. Current account and budget deficits exacerbate the impact of the low savings rate on growth.

Although trade barriers were scaled back, industrial cartels split up, and limited reform measures taken in the late twentieth century, political instability, continuing high levels of corruption, and resistance to reforms by entrenched interests have prevented the Philippines from pursuing a consistent and effective economic course. The industrial sector continues to decline relative to services, an economic bright spot in which the Philippines apparently enjoys a comparative advantage, although some argue that services represent an employer of last resort. In 2005 the services sector accounted for about 53.5 percent of GDP; industry, 31.7 percent; and agriculture, forestry, and fishing, 14.8 percent.

Poverty is a serious problem in the Philippines. In 2003 per capita gross national income was US$1,080, below the US$1,390 average for lower-middle-income countries. Reflecting regional disparities, in 2003 about 11 percent of Filipinos lived on less than US$1 per day and 40 percent on less than US$2 per day, according to the World Bank. The overall poverty rate declined from 33 percent (25.4 million people) in 2000 to 30.4 percent (23.5 million people) in 2003. Poverty is more concentrated in rural than in urban areas.

Gross Domestic Product (GDP): In 2004 the gross domestic product (GDP) was US$84.6 billion, or US$1,150 on a per capita basis. According to purchasing power parity (PPP), however, GDP in 2005 was estimated to be US$451.3 billion, or US$5,100 per capita. In 2004 the Philippines achieved real economic growth of 6 percent, up from 4.5 percent in 2003. However, with the population expanding by more than 2 percent annually—one of the highest rates in Asia—the actual improvement in living standards is modest.

GOVERNMENT Budget: The budget has shown a deficit every year since 1998, but trends in the early twenty-first century are encouraging. In 2004 the deficit was US$3.4 billion, or about 3.9 percent of gross domestic product (GDP), conforming to the government’s increasingly stringent targets for the second consecutive year. During 2005, the government expected to begin to close the revenue gap by introducing an expanded value-added tax. However, the tax’s introduction was delayed pending resolution of a dispute over its constitutionality, which came on October 18 in a ruling by the Supreme Court. Historically, the persistent budget deficit, the result of overspending and poor collection by the Bureau of Internal Revenue, has placed restraints on economic growth.

Inflation: In 2005 consumer price inflation was 7.6 percent, up from 5.5 percent in 2004 and 3.0 percent in 2003. The rise in inflation reflected the combined impact of a depreciating peso, rising petroleum prices, and tariffs on electric power to offset losses at the state-owned power utility. The introduction of an expanded value-added tax is expected to provide an additional spur to inflation in 2006. Still, inflation remains well below the peak levels approaching 12 percent registered during the Asian financial crisis of 1997–98.

Agriculture, Forestry, and Fishing: The agricultural sector in the Philippines is known for low productivity, as it employs about 36 percent of the labor force but accounts for only 14.8 percent of gross domestic product (GDP). From 1991 to 2002, both the total number of farms and the total area of farmland decreased, respectively, from 4.6 million to 4.5 million farms and from 9.9 million hectares to 9.2 million hectares of farmland. The average size of each farm decreased from 2.2 hectares to 2.0 hectares.

In the first three quarters of 2005, crops accounted for 46.4 percent of the value of all agricultural production, livestock and poultry for 28.8 percent, and fishing for 24.9 percent. Overall agricultural production rose 1.7 percent over the same period in 2004. In order of value, major agricultural products were rice, poultry, livestock, corn, bananas, and coconuts. The national diet consists mainly of rice, fish, and vegetables, with occasional chicken and pork.

Forestry accounts for less than 1 percent of the total labor force and a minuscule share of all agricultural production, but at 72,000 square kilometers, it accounts for about 45 percent of all agricultural lands and about 25 percent of the total national land area. Once a major industry and the leading earner of foreign exchange in the 1960s, forestry has declined sharply in importance as a result of rapid deforestation. From a position as the world’s leading exporter of tropical hardwoods in the 1970s, the Philippines became a net importer of forest products by the 1990s. In 1990 the Department of Environment and Natural Resources announced a 25-year plan for the sustainable development of the nation’s forests. The Congress of the Philippines is considering a nationwide ban on logging; such bans already have been introduced in several provinces.

Fishing consists of municipal fishing, which uses no boats at all, rafts, or boats less than three tons; commercial fishing, which uses boats of three tons or more; and aquaculture farms. In 2004 municipal fishing accounted for about 34 percent of the value of all fishing production, 31 percent of the volume, and 85 percent of the fishing labor force. Commercial fishing accounted for 36 percent of the value, 32 percent of the volume, but only 1 percent of the fishing labor force. Aquaculture accounted for 30 percent of the value, 37 percent of the volume, and 14 percent of the fishing labor force.

Mining and Minerals: The Philippines has substantial copper, chromite, and gold deposits, and the country also is rich in many other minerals, including coal, cobalt, gypsum, iron, nickel, silver, and sulfur. There are also lesser deposits, not currently being mined, of bauxite, lead, mercury, molybdenum, and zinc. The latest exploration by the Minerals and Geosciences Bureau in 1996 estimated that the Philippines had 7.1 billion tons of metallic mineral reserves and 51 billion tons of nonmetallic mineral reserves. Of the metallic reserves, copper accounted for 4.8 billion tons, and gold accounted for 110,000 tons. Of the nonmetallic mineral reserves, limestone accounted for 29 billion tons and marble for 8.5 billion tons. The U.S. Department of State estimates that the Philippines possesses untapped mineral wealth of US$840 billion.

One of the world’s top producers of chromite, copper, gold, and nickel in the 1970s and 1980s, the Philippines failed to rank in the top 10 worldwide for the production of any of these minerals or precious metals in 2002. With the closing of several major mines, mining has declined as a share of the gross domestic product (GDP) from a high of 30 percent in the industry’s heyday to 1 percent in 2003. Aging infrastructure, high production costs, low commodity prices, and environmental concerns contributed to the decline. In 2003 mining employed only 4 percent of the labor force and claimed a negligible part, about 9,000 hectares, of the total land area.

However, the fortunes of the mining industry may be looking up. In 2003 President Gloria Macapagal-Arroyo announced that the government was shifting its policy from “tolerance to promotion of mining.” Consistent with the president’s policy, in December 2004 the Supreme Court issued a decision upholding the constitutionality of the 1995 Mining Act, which permits foreign companies to obtain mining and energy service contracts with the Philippine government. Following this decision, the local subsidiary of an Australian mining company announced a gold and copper mining service contract. The government hopes that additional foreign investment in the mining industry will be forthcoming.

Industry and Manufacturing: The production of consumer goods dominates the manufacturing sector. The leading industries are processed foods, followed by electrical machinery (mainly semiconductors), petroleum products, coal, chemical products, and garments. Industry accounted for about 32 percent and the manufacturing subsector for 23–24 percent of gross domestic product (GDP) in 2005. The number of persons employed in manufacturing and construction was about 16 percent of the total labor force in 2004.

Energy: In 2004 the Philippines derived 42 percent of its energy from oil; 30 percent from biomass, solar, and wind; 12 percent from coal; 7 percent from geothermal; 5 percent from hydropower; and 4 percent from natural gas. The Energy Development Plan for 2005–14 calls for the country to work toward energy independence by boosting domestic production of oil, gas, and coal and doubling the use of renewable sources of energy.

The Philippines has 152 million barrels of oil reserves and 3.7 trillion cubic feet of natural gas reserves. In 2004 the Philippines produced 25,000 barrels of oil per day, but domestic consumption was about 338,000 barrels per day, which meant that the Philippines was dependent on imports for about 92.5 percent of its needs. Consumption of oil has remained relatively stable so far this decade as the Philippines has met growing energy demand with electricity generated from natural gas produced by the Malampaya field in the South China Sea beginning in 2001. The Malampaya field, which has about 2.6 trillion cubic feet of natural gas reserves, produces about 25,000 barrels per day of natural gas. A deep-water pipeline carries natural gas to an onshore power station. Eventually, three such stations will have a combined capacity of 2,700 megawatts. In 2003 the Philippines consumed 9.6 million short tons of coal, of which 7.4 million tons (77 percent) were imported. The Philippines is the second largest producer of geothermal power in the world after the United States, and geothermal power accounts for about 50 percent of domestic power generation, followed by hydropower, which accounts for about 33 percent. The development of hydropower through the construction of large dams, however, has been controversial. Its proponents argue that the dams provide flood control, irrigation, and more self-sufficiency in energy. Its opponents argue that the dams destroy valuable natural habitat and displace thousands of local people without adequate compensation. Other power sources are natural gas, coal, and oil. There are no operational nuclear power plants in the Philippines. The Bataan Nuclear Power Plant, completed in 1985, had its operations suspended in 1986 because of corruption charges, and in 1997 the government decided to convert the idle plant to a natural gas power plant. The Philippines continues to pursue the privatization of the state-owed National Power Company known as Napocor, but so far the initiative has been plagued by delays. Possible reasons include poor infrastructure and inflated valuations.

Services: The services sector, in which the Philippines apparently enjoys a comparative advantage, has grown steadily since 1985, when it accounted for about 40 percent of both gross domestic product (GDP) and the total number of persons employed. By 1999, services accounted for about 52 percent of GDP and about 45 percent of the total number of persons employed, and by 2004 those figures had risen to 53 percent and 48 percent, respectively. In the first half of 2005, the services sector grew more quickly (by 6.6. percent) than industry or agriculture. The fastest growing segments of the services sector were telecommunications, business outsourcing, and financial services.

Banking and Finance: The Central Bank of the Philippines supervises the nation’s banking system. Nonbank financial intermediaries such as private insurance companies are overseen by the Insurance Commission and the Securities and Exchange Commission. The largest domestic banks, in order of size, are Metropolitan Bank and Trust (Metrobank), Bank of the Philippine Islands, Equitable-PCI Banking Corporation, Land Bank of the Philippines, Philippine National Bank, Development Bank of the Philippines, Rizal Commercial Banking Corporation, Banco de Oro, Allied Banking Corporation, and China Banking Corporation. There also are 32 other universal and commercial banks. Four of the banks are owned or controlled by the government: the Land Bank of the Philippines, the Philippine National Bank, the Development Bank of the Philippines, and the Al-Amanah Islamic Bank. In addition, the banking sector includes 93 thrift banks (savings and mortgage banks, stock savings and loan associations, private development banks, and micro-finance institutions) and 771 rural banks. The universal and commercial banks and the largest thrift banks have licences to operate foreign-currency deposit units. Foreign banks provide competition to local banks and are active in investment banking, asset management, and foreign-exchange and derivatives trading. Although they have a small market share and branch networks are not extensive, the expertise and reputation of the foreign banks attract customers.

The banking sector was relatively undamaged by the Asian financial crisis of 1997–98, and since 2001 asset quality has improved. In July 2005, nonperforming loans declined into the single digits (9.3 percent), half the peak level (18.8 percent) recorded in October 2001. This progress reflects the positive impact of the Special Purpose Vehicle Act of 2002, which provided incentives to financial institutions to reduce non-performing assets. Another trend in commercial banking is toward consolidation and restructuring.

The capitalization of the stock market is still modest, but it is growing rapidly off a low base. At the end of 2005, total stock market capitalization reached US$113 billion, up 25 percent from the previous year. During 2005, initial public offerings reached their highest level since the Asian financial crisis in 1997–98: US$1.06 billion. However, fewer than 1 percent of Filipinos invest in the stock market. Filipino investors generally prefer the bond market, which they regard as safer, and foreign investors also lack confidence in the stock market. The most important index, the Philippine Composite Index (PHISIX), consists of 34 listed issues, representing the country’s most important companies. The main financial centers are in Manila, the location of the Philippine Stock Exchange, and in Cebu.

The Philippines had 34 life insurance firms in 2005; this number includes foreign insurers that dominate the industry. Three foreign-owned life insurers and four joint-venture (foreign and domestic) life insurers enjoyed a combined market share of about 60 percent. The Philippine American Life Insurance Company is the largest life insurance issuer with a market share of 23.6 percent.

Tourism: In 2005 about 2.6 million foreign tourists visited the Philippines—a record high. Tourists came from the following regions, listed in order of volume: East Asia, North America, Association of South East Asian Nations, and Australiasia/Pacific. Authorities were hopeful that visitors could reach 3 million in 2006. Tourism has grown significantly since the first three years of the decade, when about 1.9 million foreigners visited the country each year. The Department of Tourism has actively promoted tourism to take advantage of the fact that the indirect impact of tourism on the economy is 2.5 times the actual money spent by visitors, according to a study by economists at the University of Asia and the Pacific. Prior to 2005, tourism had failed to flourish as a result of political and economic instability, the terrorist threat in the southern provinces, and the perception that other countries in the region offer better attractions. The Philippines is seeking more investment in hotels, restaurants, and other tourism-related infrastructure.

Labor: In December 2005, the unemployment rate was 7.4 percent, much lower than the roughly 11 percent average typical since the mid-1980s. The improvement was attributable to electronics exports, the end of drought conditions for agriculture, and growth in business outsourcing, real estate, and tourism. Some 32.9 million people were employed out of a total workforce of 35.5 million. However, the underemployment rate was 21.2 percent. In 2004 about 48 percent were employed in services, 36 percent in agriculture, and 16 percent in industry. Reflecting the lack of satisfactory employment opportunities at home, an estimated 652,000 Filipinos obtained employment outside the country as contract workers. About 4 million workers belong to trade unions, which are particularly prevalent in manufacturing. Labor relations generally are good because of the strict enforcement of labor laws and the acceptance of collective bargaining. However, in 2003 some 38 new strikes, mostly attributable to unfair labor practices, led to the loss of 156,000 workdays, less than half the level in the previous year.

Foreign Economic Relations: The Philippines’ foreign economic relations revolve around its Asian neighbors, with which it conducts a majority of its trade, and the United States, which is a major trading partner. The Philippines helped to found the Association of Southeast Asian Nations (ASEAN) in 1967. The Philippines also belongs to the Asia-Pacific Economic Cooperation (APEC) forum. ASEAN’s goal of establishing a regional free-trade area has been only partially realized.

The Philippines has been a member of the World Trade Organization (WTO) since January 1, 1995. In 2001 the Philippine Bureau of International Trade Relations issued a positive assessment of the WTO’s impact on the country’s economic development. WTO membership has enabled the Philippines to adopt transparent trade rules regarding customs valuation, defenses against unfair trade, and protection of intellectual property rights. For example, in 1998 the government passed a law that improves the protection of intellectual property rights in the areas of copyrights, patents, and trademarks. However, the United States maintains that the intellectual property protections are inadequate and has taken initial steps toward imposing trade sanctions.

Imports: In 2004 the Philippines’ imports were valued at US$45.1 billion, up 10.6 percent from the previous year. Principal imports were telecommunications and electronics equipment (34 percent), chemicals (7 percent), and crude petroleum (6 percent). The main origins of imports were Japan (19.8 percent), the United States (13.7 percent), China (7.7 percent), Singapore (7.4 percent), Taiwan (7.0 percent), and South Korea (5.6 percent).

Exports: In 2004 the Philippines’ exports were valued at US$38.7 billion, up 9.6 percent from the previous year. Principal exports were electronic products (68.8 percent), clothing (5.6 percent), coconut oil (1.5 percent), and petroleum products (1.0 percent). Exported electronic products were primarily semiconductors. The main destinations of exports were Japan (20.1 percent), the United States (17.9 percent), the Netherlands (9.1 percent), Hong Kong (7.9 percent), China (6.7 percent), and Singapore (6.6 percent).

Trade Balance: In 2004 the Philippines incurred a merchandise trade deficit of US$6.4 billion, or 14 percent of imports. However, remittances of US$8.8 billion from Filipinos working overseas during 2004 more than offset the trade deficit. Such remittances surpassed US$10.8 billion in 2005. As recently as 2002, the Philippines had a slight trade surplus.

Balance of Payments: In 2004 the current account balance was US$2.1 billion. Since 1998, the Philippines has achieved a positive current account balance. Reflecting the sustained period of balance of payments surpluses, gross international reserves rose to a record US$18.6 billion in September 2005.

External Debt: In 2004 external debt amounted to US$61 billion, or 72.2 percent of gross domestic product (GDP).

Foreign Investment: In 2004 direct investment inflows were a modest US$57 million. Over the long term, direct and portfolio investment have been anemic, reflecting the relative unattractiveness of the economy, restrictions on foreign ownership, and the perception of political risk. The three top sources of foreign direct investment—ranked by amount—are the United States, Japan, and the Netherlands.

Currency and Exchange Rate: The currency is the Philippine peso (PHP). In mid-March 2006, the exchange rate was approximately PHP51 = US$1. The peso is made up of 100 centavos. Coins are issued in denominations of 1, 5, 10, and 25 centavos and 1, 5, and 10 pesos. Banknotes are issued in denominations ranging from 5 pesos to 1,000 pesos.

Fiscal Year: Calendar year.







PUBLISHER / AUTHOR: This series of profiles of foreign nations is part of the Country Studies Program, formerly the Army Area Handbook Program. The profiles offer brief, summarized information on a country's historical background, geography, society, economy, transportation and telecommunications, government and politics, and national security. In addition to being featured in the front matter of published Country Studies, they are now being prepared as stand-alone reference aides for all countries in the series, as well as for a number of additional countries of interest. The profiles offer reasonably current country information independent of the existence of a recently published Country Study and will be updated annually or more frequently as events warrant.




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