PERFORMANCE OF THE PHILIPPINE ECONOMY

Gross Domestic Product (GDP)

Philippines is a major player in the ASEAN region after recording strong growth in 2012 and
2013 (Table 1). For the first half of 2014 (H1 2014), GDP grew by 6.0%, relatively slower than
7.8% reported in the H1 2013 5.7% due to the haunting effect of Typhoon Yolanda that hit the
country during the fourth quarter of 2013 (Q4 2013) and the lingering weakness of the global
economy. GDP growth remained private consumption-led, while investments provided some
support despite the contraction in private construction. The key drivers of investment were
public infrastructure and durable equipment spending, with significant purchases of vehicles,
airplanes, and machineries. On the supply side, the services sector continued to be the main
driver of growth while agriculture sector remained weak. Government consumption declined
sharply due to the slowdown of major government expenditures for salaries and wages as well
as Maintenance and Other Operating Expenditures (MOOE) for the implementation of programs
and projects amid concerns on the misuse of government funds. Meanwhile, net exports
recovered after 5 quarters of contraction in line with the robust performance of service exports,
which includes the fast growing business process outsourcing (BPO) industry.
Table 1. GDP Growth Rates in the ASEAN 5 (2010-2013)

*Source: Ateneo

Poverty and Job Creation

Poverty incidence declined by 3 percentage points from 2012 to 2013, elating 2.5 Million
Filipinos out of poverty. Poverty reduction in 2013 seemed to be driven by non-job income,
given slower job creation in the period covered by the household survey. In January 2013, job
creation was moderate and in April 2013, job destruction was observed. This suggests that the
decline in poverty might be largely driven by other sources of income, such as foreign and
domestic remittances, subsidies like the Conditional Cash Transfers or election-related
transfers. Job creation recovered in H1 2014, suggesting that faster poverty reduction is

expected to continue. In April, there was net job creation of 1.65 Million, driven by the services
sector, followed by almost equal contributions from agriculture and industry.
Table 2. Job Creation in the Philippines

Source: World Bank

Inflation
Inflation fast tracked in the first 8 months of 2014 and started to decelerate in September (Table
3). In July, inflation accelerated to 4.9%, the highest since November 2011. Food inflation
reached 8.2% and was driven by increasing rice prices. Since June 2013, retail rice prices have
risen by 24% due to tight supply, weather-related disturbances and deferments in rice
importation that was meant to fill production gaps. Meanwhile, non-food inflation was driven by
higher electricity prices due to the simultaneous shutdown of several generation plants and
weak reserve capacity. Prices of imported products, such as petroleum products, also increased

due to the Philippine Peso (Php) depreciation and higher commodity prices. Although inflation
has been higher, the BSP presumes it to stay within range. Policy tightening measures were
enacted between January and August 2014. To help mitigate risks from strong liquidity growth,
both the reserve requirement and the special deposit account rate were increased.
Table 3. Consumer Price Index and Headline Inflation Rates

Source: National Statistical Coordination Board

Financial Market
Large capital outflows were discerned in Q1 2014, causing a large balance of payments (BOP)
deficit and a decline in reserves. The U.S. tapering monetary policy and developments in
emerging markets, comprising of slower growth and default risk in China, the devaluation of the
Argentine Peso, and augmenting political tensions in middle-income economies, resulted in a
substantial outflow of portfolio investments in Q1 2014 especially in January. Net foreign selling
of bonds was generous (Table 4), causing the BOP to reach a deficit of USD 4.5 Billion, the
highest since the 2008 Global Financial Crisis. Also, the outflow of capital resulted to a decline

of gross international reserves (GIR) by USD 3.2 Billion since the Bangko Sentral ng Pilipinas
(BSP) intervened to smooth out excessive currency fluctuations. Nevertheless, the level of GIR
at USD 80 Billion remains at comfortable levels. With strong capital outflow, the Php depreciated
by roughly 10% between Q1 2013 and Q1 2014 before regaining its strength in Q2 2014.
Despite recent depreciations, the Php remains as one of the strongest currencies in real
effective terms among East Asian countries (Table 5).
Table 4. Portfolio Investments Inflow

Source: BSP

Table 5. Real Effective Exchange Rate Index in East Asian Countries

Source: International Monetary Fund

Monetary Policy
After 10 consecutive months of over 30% growth, Money Supply 3 dipped below 30% in May
2014 and remained to ease through June 2014 at 23% (Table 6). Strong credit expansion in the
real estate sector continued to drive lending growth in Q1 2014. Given the increasing real estate
exposure, the BSP has required all banks to undergo stress tests to ensure that they have
sufficient capital to absorb any possible shock on their credit exposures.

Table 6. Money Supply Growth

Source: BSP

Fiscal Policy
Total tax collection amounted to Php 355 Billion in Q1 2014, 12.2% higher than the same period
last year. In the absence of tax policy reform, the presence of built-in erosion from excise taxes
and fiscal incentives, and slower GDP growth in Q1 2014, the increase in tax effort can be
largely attributed to improvements in tax administration. National Government (NG) has stepped
up its regular media campaign against industries suspected of evading taxes. Moreover, the
reorganization in the Bureau of Customs as well as more stringent requirements for import
accreditation appear to be a generating result, as its collection improved by 25.7%. Higher tax
revenue collection offered more fiscal space for NG to increase overall spending, particularly in
infrastructure.

ECONOMIC PROSPECTS
GDP
The Philippines growth projections were revised downwards from 6.6% to 6.4% for 2014 and
from 6.9% to 6.7% for 2015 given the slow start in Q1 2014, lower public spending in Q2 2014,
and tightened monetary policy. These revised growth projections are contingent on the ability of

the NG to fully implement planned spending for typhoon rehabilitation and expenditure
programs. As in previous years, strong domestic demand would continue to drive overall growth.
Private consumption is anticipated to contribute more than half of the Philippines growth,
supported by strong inflow of remittances. Global recovery is expected to aid exports recuperate
in the short run, but long-term export growth lies on the competency of the Philippine. Global
growth is projected to accelerate to 2.4% in 2014 and 3.1% in 2015, led by high-income
countries. However, internal and external factors could pose risks to economic growth. The main
sources of internal risk are slow reconstruction spending and domestic reform lags. The planned
infrastructure investments are ambitious and will require sustained growth in revenues. External
risks could come from unmanageable policy normalization in high-income countries, disorderly
adjustment in Chinas property market, political tensions in Middle East and Eastern Europe,
and territorial disputes with China.
Poverty and Job Creation
The NG needs to give more consideration in generating more inclusive growth by creating
additional and better jobs to reduce poverty. With stronger economic reforms such as efficient
government spending, increased tax revenues from new tax policies, and improved
administrative measures, the private sector will have the encouragement to invest more and
create jobs, and the Philippines can attract more investments from within and outside the
country.
Inflation
Controlled inflationary pressures will continue coming from strong credit expansion and rising
food and fuel prices. Food supply could remain rigid throughout 2014 due to meagre harvests
on account of weather-related disturbances. Moreover, mistiming of importation of rice, which is
controlled by the NG, could result in sharp increase in rice prices even in the presence of
relatively small production shortfall since rice is a basic consumption necessity with inelastic
demand.
Financial Market
Philippines remains susceptible to headwinds from global financial sector corrections. Tighter
global financial conditions are inevitable given monetary policy normalization in high-income
economies. This implies weaker financial flows and rising costs of capital for developing
countries. Moreover, political tensions can cause capital volatility for the Philippines.
Fiscal and Monetary Policies
Sound fiscal and monetary policies would continue to support economic growth. Fiscal reforms
to broaden the tax base and reduce tax rates to make the tax system simpler, more efficient,
and more equitable would yield additional tax revenues to create the fiscal space needed to
enhance growth in 2014 and beyond.
Pa-add na lang prospects about monetary policies like interest rates, liquidity..
Thanks