PHILIPPINES ECONOMIC UPDATE: OCTOBER 2019 EDITION RESUMING PUBLIC INVESTMENT, FAST TRACKING IMPLEMENTATION PHILIPPINES ECONOMIC UPDATE: OCTOBER 2019 EDITION RESUMING PUBLIC INVESTMENT, FAST TRACKING IMPLEMENTATION ii © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION iii preface The Philippines Economic Update summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analysis, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Philippines. The Philippines Economic Update is a biannual publication of the World Bank’s Macroeconomics, Trade, and Investment Global Practice (MTI), prepared in partnership with the Finance, Competitiveness, & Innovation Global Practice, the Poverty & Equity, Finance, Competitiveness & Innovation, and Social Protection & Labor Global Practices (GPs). Ndiame Diop (Practice Manager for the MTI GP) and Souleymane Coulibaly (Lead Economist and Program Leader) guided the preparation of this edition. The team consisted of Rong Qian (Senior Economist), Kevin Chua (Economist), Kevin Cruz (Research Analyst), Karen Lazaro (Consultant), and Ray Gomez (Consultant) from the MTI GP, Isaku Endo (Senior Financial Sector Specialist) from the Finance, Competitiveness and Innovation GP, Gabriel Demombynes (Program Leader), Xubei Luo (Senior Economist) and Sharon Faye Alariao Piza (Economist) from the Poverty & Equity GP, and Ruth Rodriguez (Social Protection Specialist) and Arianna Zapanta (Consultant) from the Social Protection GP, Roberto Galang (Senior Private Sector Specialist), Graciela Miralles. (Senior Economist) from Investment and Competitiveness, and Karen Lazaro (MT GP) prepared the Special Focus Note on competition. The report was edited by Oscar Parlback (Сonsultant), and the graphic designer was Christopher Carlos (Сonsultant). Peer reviewers were Eduardo Olaberria (Senior Economist) and Pedro Miguel Gaspar Martins (Senior Economist). Logistics and publication support were provided by Yvette Camba (Team Assistant). The Manila External Communications Team, consisting of Clarissa David (Senior Communications Officer) and David Llorito (Communications Officer) prepared the media release, dissemination plan, and web-based multimedia presentation, Stephanie Margallo provided team assistance. The team would like to thank Mara Warwick (Country Director for Brunei, Malaysia, Philippines and Thailand) for her advice and support. The report benefited from the recommendations and feedback of various stakeholders in the World Bank as well as from the government, the business community, labor associations, academic institutions, and civil society. The team is very grateful for their contributions and perspectives. The findings, interpretations, and conclusions expressed in the Philippines Economic Update are those of the World Bank and do not necessarily reflect the views of the World Bank’s executive board or any national government. If you wish to be included in the email distribution list for the Philippines Economic Update and related publications, please contact Yvette Camba (ycamba@worldbank.org). For questions and comments regarding the content of this publication, please contact Ms. Rong Qian (rqian@worldbank.org). Questions from the media should be addressed to David Llorito (dllorito@worldbank.org). For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. iv Abbreviations and Acronyms 4Ps Pantawid Pamilyang Pilipino Program LLU Local-loop unbundling AfCFTA African Continental Free Trade Agreement LTFRB Land Transportation Franchising and Regulatory Board AFP Armed Forces of the Philippines LTO Land Transportation Office ARMM Autonomous Region of Muslim Mindanao MAV Minimum Access Volume ASEAN Association of Southeast Asian Nations MCPAT Market and Competition Policy BIR Bureau of Internal Revenue Assessment Tool BOC Bureau of Customs MIMAROPA Mindoro (Oriental and Occidental), Marinduque, Romblon, and BSP Bangko Sentral ng Pilipinas Palawan provinces. BTE Barriers to entrepreneurship MUP Military and uniformed personnel BTI Barriers to trade and investment NBQBs Non-bank financial institutions with quasi-banking functions BTr Bureau of Treasury NCR National Capital Region CAB Civil Aviation Board NEDA National Economic CALABARZON Cavite, Laguna, Batangas, Rizal, and Development Authority Quezon provinces. NG National Government CIA Central Intelligence Agency NHA National Housing Authority CIT Corporate income tax NHMFC National Home Mortgage CITIRA Corporate Income Tax and Incentives Finance Corporation Rationalization Act NIA National Irrigation Administration CPBI Census of Philippine Business and Industry NTC National Telecommunications Commission CPI Consumer Price Index OECD Organisation for Economic Co-operation DBM Department of Budget and Management and Development DND Department of National Defense PCAB Philippine Contractors Accreditation Board DOE Department of Energy PCC Philippine Competition Commission DOF Department of Finance PCM Price-cost margin DOH Department of Health PMI Purchasing Managers’ Index DOTr Department of Transportation PMR Product Market Regulation DPWH Department of Public Works and Highways PPA Philippine Ports Authority DTI Department of Trade and Industry PSA Philippine Statistics Authority EAP East Asia and Pacific RATE Run after tax evaders EMBI Emerging market bond index RMR Regular-milled rice EMDEs Emerging market and RRP Overnight reserve repurchase developing economies RRR Reserve requirement ratio (RRR) EPIRA Electric Power Industry Reform Act SC State control ERC Energy Regulatory Commission SEIPI Semiconductor and Electronics Industry of EU European Union the Philippines Inc. FDI Foreign direct investment SHFC Social Housing Finance Corporation GAB General Appropriations Bill SHS Senior high school GCG Governance Commission For GOCCs SOCCSKSARGEN Sarangani, South Cotabato, Sultan Kudarat provinces GDP Gross Domestic Product SOE State-owned enterprise GOCCs Government-owned and controlled corporations SRP Suggested retail price HHI Herfindahl–Hirschman Index TPA Third-party access I-O Input-output TRABAHO Tax Reform for Attracting Better and Higher-quality Opportunities IRR Implementing rules and regulations TRAIN The Tax Reform for Acceleration and IT-BPO Information technology-business Inclusion Act process outsourcing TRO Temporary restraining order LE List of Establishments U.S. United States of America LFPR Labor force participation rate UCT Unconditional cash-transfer LGSF Local Government Support Fund WBG World Bank Group LGU Local Government Unit WMR Well-milled rice PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION v table of contents PREFACE iii ABBREVIATIONS AND ACRONYMS iv EXECUTIVE SUMMARY 1 01 RECENT DEVELOPMENTS 4 Slowing Growth Momentum Amid External and Domestic Challenges 5 Positive External Position 15 Declining Inflation Has Resulted in a More Accommodative Monetary Policy 18 A Pause in Fiscal Expansion 21 Improving Labor Market Conditions Led to Progress on Poverty Reduction 25 02 OUTLOOK AND RISKS 30 Gradual Economic Growth Recovery 31 Continued Progress on Poverty Reduction 37 Stepping up Domestic Policy Support Amid Intensified External Risks 38 FOSTERING COMPETITION IN THE PHILIPPINES: 03 THE CHALLENGE OF RESTRICTIVE REGULATIONS 46 REFERENCES 66 vi list of figures Figure 1 Private consumption fueled yoy growth in the first half of 2019, as investment spending and net-exports weakened… 6 Figure 2 …while services remained the main engine of growth on the production side. 6 Figure 3 Growth in developing EAP and China moderated in the first quarter of 2019… 8 Figure 4 ...and manufacturing activity softened in line with the slowdown in global demand. 8 Figure 5 Global manufacturing and trade growth continued to decelerate in early 2019. 11 Figure 6 Business confidence has worsened amid renewed trade tensions. 11 Figure 7 Investment growth in EMDEs has remained sluggish. 11 Figure 8 Global policy uncertainties have persisted. 11 Figure 9 Global trade growth slowed between 2018 and early 2019. 14 Figure 10 Philippine exports to the U.S. grew slightly faster as exports to China expanded more slowly in H1 2019. 14 Figure 11 The Philippines’ total trade contracted in H1 2019. 14 Figure 12 Exports growth contracted while import growth decelerated. 16 Figure 13 The Philippine peso appreciated in real terms in the first half of 2019. 16 Figure 14 Philippines export basket (in percent of GDP) 16 Figure 15 Composition of the Philippines’ Overall Balance of Payment Position 16 Figure 16 Sustained inflation easing was observed in H1 2019. 20 Figure 17 The price of rice peaked in 2018 but continued to subside in H1 2019 as rice imports increased. 20 Figure 18 The Philippines’ Money-Supply Growth 20 Figure 19 National Government Fiscal Balance, 2013-H1 2019 23 Figure 20 National Government Expenditure by Component (% of GDP) 24 Figure 21 National Government Tax Collection by Type (% of GDP) 24 Figure 22 The government continues to finance its deficit mainly through domestic borrowing. 24 Figure 23 The overall debt-to-GDP ratio increased slightly in H1 2019. 24 Figure 24 Unemployment and underemployment rate (Percent) 25 Figure 25 Job Creation Growth by Subsector (%) 27 Figure 26 Top 10 Subsectors with Most New Jobs (100,000s) 27 Figure 27 Labor Force Participation Rate 28 Figure 28 Reason for Not looking for Work among Youth (15-24) Not in the Labor Force (%) 28 Figure 29 Average Daily Real Wage (Measured in Constant 2012 Php) 29 Figure 30 Components of Household Income (Households in the Bottom Income Quintile) 29 Figure 31 Poverty Incidence in the First Semester, 2015 and 2018 (%) 29 Figure 32 Real GDP is expected to grow at 5.8 percent in 2019, before accelerating in 2020-21. 31 Figure 33 Confidence has improved since the significant drop in the last quarter of 2018. 31 Figure 34 Global GDP Growth Outlook 34 Figure 35 U.S. Federal Reserve Rate Expectations 35 Figure 36 Production of Capital Goods and Semiconductor Sales Growth in the G20 35 Figure 37 Actual and Projected Poverty Rates in the Philippines, 2006-21 37 Figure 38 Projected IRA increase as a result of the Mandanas Ruling 39 Figure 39 NG and LGU contributions to public expenditures per sector in 2018 (%) 39 Figure 40 Infrastructure Capital Outlays 41 PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION vii list of figures Figure 41 Market Concentration in Manufacturing in the Philippines and Selected EAP Countries 48 Figure 42 Evolution of Market Concentration in Manufacturing in the Philippines 48 Figure 43 Manufacturing Markets in the Top Deciles of HHI and PCM Distributions 49 Figure 44 Agricultural Markets in the Top Deciles of HHI and PCM Distributions 49 Figure 45 Wholesale/retail markets in the Top Deciles of HHI and PCM distributions 49 Figure 46 Transport/storage markets in the Top Deciles of HHI and PCM distributions 49 Figure 47 The Philippine electricity sector is associated with relatively higher electricity prices… 50 Figure 48 …and limited capacity relatively to regional peers. 50 Figure 49 Economy-Wide PMR Score, 2017 53 Figure 50 Decomposition of PMR Score for the Philippines 53 Figure 51 Economy-wide PMR Methodology 54 Figure 52 Number of Subsectors with SOEs by Country 56 Figure 53 Share of countries with Quota Restriction in Professional Services, OECD and Non-OECD Countries 59 Figure 54 Philippines lawyers and accountants are granted more than the average number of exclusive or shared exclusive rights 59 Figure 55 Share of countries that discriminate against foreign firms in procurement in PMR sample 60 Figure 56 Distribution of Specific Restrictions by The World Bank’s Market and Competition Policy Assessment Tool (MCPAT) Category and PMR Pillar Classification 61 list of tables Table 1 Contribution to Growth, Expenditure Side (Percentage Points) 9 Table 2 Contribution to Growth, Supply Side (Percentage Points) 9 Table 3 Balance of Payments, Q1 2017 to Q1 2019 17 Table 4 Economic Indicators for Baseline Projections 33 Table 5 Breakdown of Actual Obligated Infrastructure Outlays, 2016 and 2017 42 Table 6 Number of National Markets with Only One Firm Operating by Sector 48 Table 7 Expected Impact of Reforms in Key Sectors on GDP 62 Table 8 Summary of Potential Policy Options for Reducing Regulatory Restrictions in Key Markets 63 list of boxes Box 1 Recent Global Developments 10 Box 2 The Impact of Softening Global Trade and Escalating Trade War on Philippine Foreign Trade 12 Box 3 The Impact of the Budget Delay on Utilization and Disbursement in 2019 22 Box 4 Global Outlook 34 Box 5 The Mandanas Ruling 39 Box 6 Infrastructure Spending 48 Box 7 The CITIRA Bill and the Government’s Comprehensive Tax Reform Program 44 Box 8 PMR Methodology: Economy-wide score 54 1 executive summary Philippine economic growth slowed to its lowest electronic exports growth also moderated owing to level in eight years, driven by a rapid deceleration the softening in global trade, manufacturing, and in investment growth in the first half of 2019. GDP investment activities. The weakness in services export growth slowed from 6.3 percent year-on-year growth reflected slower growth in the information (yoy) in the first half of 2018 to 5.5 percent in the technology business process outsourcing industry. In same period in 2019, below government’s growth response to the weaker pace of investment and weak target of 6-7 percent for 2019. The slowdown was manufacturing output, import growth registered a primarily driven by a contraction in nominal public sharp deceleration in the first half of 2019, reflecting investment due to the delayed passage of the 2019 a substantial slowdown in capital goods imports national government budget and the spending and a contraction of imports of raw material and ban on new projects before the May election. Public intermediate goods. infrastructure spending shrunk by 15.7 percent yoy in nominal terms, from 5.4 percent of GDP in The fiscal deficit narrowed due to robust revenue the first half of 2018 to 4.3 percent of GDP in the collection and delays in public spending. The same period in 2019. In addition, private investment national government incurred a fiscal deficit of 0.5 activities also slowed due to uncertainties around the percent of GDP in the first half of 2019, significantly government’s ongoing tax reform program and the smaller compared to 2.3 percent in the same period external environment. in 2018. Despite slower GDP growth, revenue collection remained robust thanks to the second In this context, private consumption, which round of increases in excise taxes rates under the Tax regained momentum thanks to declining inflation Reform for Acceleration and Inclusion (TRAIN) law and improving labor market conditions, was the and tax administration improvements. At the same main driver of growth. Amid declining inflation since time, the delay in the approval of the 2019 national the start of 2019, private consumption accelerated budget coupled with the spending ban prior to from 5.3 percent yoy in the second half of 2018 to 5.8 the May election led to underspending across all percent in the first half of 2019, contributing nearly spending categories. Although public spending is three fourths to economic growth. The recovery expected to accelerate in the second half of the year, in private consumption was also supported by the for the whole 2019, the fiscal deficit is likely to hover continued improvement in labor market conditions below the Government target of 3.2 percent of GDP. in 2019, steady flows of remittances and continued expansion of credit. The unemployment rate reached Amid weak fiscal spending and declining inflation, its lowest level in over a decade in April 2019 and job the Bangko Sentral ng Pilipinas (BSP) adopted quality improved as underemployment rate also fell a more accommodative monetary policy stance to its lowest in over a decade. Job creation exceeded in the first half of 2019. Inflation declined steadily the Government target despite the budget delay so far in 2019, returning to the BSP’s 2-4 percent thanks to robust job creation in the non-construction target, thanks to stabilizing food and energy prices. services sectors. In particular, the domestic price of rice registered only a small increase in the first half of 2019, despite a Export activities decelerated significantly amid reduction in the local production, due to an influx of escalating trade tensions and weakness in global private rice imports. Energy prices were lower, driven economic activity. Philippine exports slowed to its by lower international crude oil prices and downward weakest growth rate since 2013 in both merchandise adjustment of local electricity prices. Falling price and service exports. The substantial slowdown in pressures prompted the BSP to reduce key policy merchandise exports was driven in large part by rate by 25 basis points in May and another 25 basis the continued slowdown in electronic exports, likely points in August 2019 to reach 4.25 percent, a gradual influenced by the U.S.-China trade war, while non- reversal from the 175 basis points increase since May PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 2 2018. In addition, to further expand domestic liquidity Despite a temporary slowdown in economic and boost credit growth, the BSP reduced the reserve growth in the first half of 2019, progress on requirement ratio by 200 basis points incrementally. poverty reduction and shared prosperity is likely to continue. Given the continuous expansion of non- Improvements in external financing conditions led agricultural wage employment, the recent rising real to portfolio inflows in the Philippines, contributing wage, continuation of social programs, and stabilizing to the appreciation of the Philippine peso and inflation, the declining trend in poverty is likely to rebuilding of its foreign reserves. The more dovish continue in 2019-21. Moreover, preliminary estimates stance of the U.S. Federal Reserve since the start showed that household incomes of the poor grew of the year contributed to an inflow of capital at a much faster pace than the average household. to the emerging economies. As one of the fast- The continued expansion of non-agriculture wage growing economies with strong macroeconomic and salary employment together with the recent fundamentals, the Philippines benefitted from institutionalization of the Pantawid Pamilyang the global capital flow through the local stock Pilipino Program (4Ps) will help to sustain progress market and long-term borrowing by the national on shared prosperity in 2019-21. government. Although FDI contracted, portfolio inflow more than compensate the current account External risks have intensified which could be deficit resulting in the balance of payment turning exacerbated by a slow recovery in domestic into a surplus in the first half of 2019, reversing the investment growth. The Philippines faces deficit recorded in the same period in 2018. Moreover, heightened external risks due to the slowdown in the Philippine peso appreciated in the first seven global growth and demand as well as rising global months of 2019 as a result of the increasing capital protectionism. In addition, the prolonged unresolved inflows, leading to an increase of foreign reserves to trade dispute between the U.S. and China strains cover 7.4 months’ worth of imports and payment of the regional value chain that the Philippines is part services and primary income in June 2019, from 7.1 of. On the domestic front, a slow pick up in the pace months’ worth in June 2018. of public spending and limited absorptive capacity and procurement difficulties, pose downside risks The Philippines’ growth outlook is weakened given to the baseline forecast. As such, ensuring the the unfavorable external environment and domestic timely passage of the 2020 budget will be critical to challenges. The World Bank revised down the continue the public investment momentum in the country’s economic growth for 2019 from 6.4 percent medium term. to 5.8 percent, before recovering to 6.1 percent in 2020 and 6.2 percent in 2021. The downward revision In the short term, fast tracking the implementation considers the expected slower investment growth for of recently approved game-changing reforms 2019 relative to 2018 given the weak performance of would help to achieve inclusive growth. As part the first half of 2019, and gradual recovery in the pace of the 10-point socioeconomic agenda of the of public spending in the second half of 2019. Given government, various game changing reforms have weak external environment, net exports will remain been passed in 2018 such as the Ease of Doing subdued throughout the rest of 2019. In the medium Business Law, the rice tariffication law, the creation term, as global growth moderately recovers while the of a foundational ID, the national payment system government resumes its expansionary fiscal policy act, and the move towards cash-based budgeting, by accelerating infrastructure spending, economic among others. These are transformational policy growth is expected to surpass 6.0 percent in 2020-21. changes that have the potential to accelerate This assumes, however, the timely passage of 2020 inclusive growth. Given the heightened external national budget and resolution of uncertainties risks, fast tracking the implementation of these around the passage of the Corporate Income Tax and reform will not only protect market confidence in Incentives Rationalization (CITIRA) bill. the government’s development agenda, but more importantly boost private investment to sustain and accelerate inclusive growth. 3 EXECUTIVE SUMMARY Furthermore, continued prudence in managing fiscal than comparator countries, with a heavier weight and current account balances is needed to preserve on restrictions related to state control, barriers business confidence. Fiscal and current account to entrepreneurship, and barriers to trade and deficits are expected to widen as the government investment. This has translated into relatively poor resumes the fast pace of public investment growth service delivery and higher prices for goods and to address country’s infrastructure gap and stimulate services paid by households and firms compared to the economy amid weak global demand. To preserve other countries, particularly in key sectors such as business confidence, the twin deficits need to be telecommunications, transportation and logistics, managed carefully. The swift passage of remaining and power. Clearly, reducing regulatory restrictions tax reforms will help preserve fiscal sustainability in key markets would significantly support firms’ and prevent crowding out of private investment. competitiveness and household welfare in the Moreover, as electronics exports are expected to Philippines as argued in Part III of this report. continue facing the headwinds brought about by the trade war, diversifying the country’s export market Implementing a set of reforms will be critical in through boosting non-electronics exports sales will reducing regulatory restrictiveness in key markets. be crucial in financing growing imports needs. First, tackling unclear or restrictive regulations in infrastructure sectors and professional services to In the long term, promoting competition to foster create more competitive conditions would have quality job creation will enhance the impact of positive effects on downstream markets. Second, economic growth on poverty reduction and shared eliminating restrictions on foreign as well as domestic prosperity. Philippine markets, including those with investors could help level the playing field. Third, low natural entry barriers, are highly concentrated, minimizing the scope of controlled prices would suggesting a lack of competition in many sectors. incentivize firms to compete. Fourth, lessening More specifically, markets in manufacturing, the involvement of the state through state-owned wholesale/retail, agriculture, and transport/storage enterprises (SOEs) and other operations in typically that are usually prone to open competition, competitive markets and ensuring competitive appear to be highly concentrated, suggesting that neutrality among public and private operators would market rules and regulations and the behavior of promote a more effective use of public funds. Finally, dominant players hinder competition. According streamlining burdensome administrative procedures to Product Market Regulation (PMR) indicators, for businesses could facilitate easy market entry. markets are more restrictive in the Philippines PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 4 01 RECENT DEVELOPMENTS 5 PART 01 RECENT DEVELOPMENTS SLOWING GROWTH MOMENTUM AMID EXTERNAL AND DOMESTIC CHALLENGES Economic growth slowed to 5.5 percent, year-on-year (yoy), in the first half of 2019, as investment activity moderated significantly. Private consumption growth rebounded and was the economy’s main growth driver, supported by improving conditions for robust private domestic demand – such as lower inflation. In the first half of 2019, economic growth slowed to quarters of the year. Meanwhile, public consumption its slowest level in eight years amid a challenging growth slowed compared to the previous year, as external environment and a slowdown in the reenacted budget,3 which was in effect for most investment growth. Philippine economic growth of the first half of 2019, caused significant delay in decelerated from 6.3 percent, yoy, in the first six the implementation of new programs and projects, months of 2018 to 5.5 percent in the same period in including the implementation of the fourth tranche 2019—below the government’s growth target of 6-7 of the government’s salary standardization law.4 percent for 2019. The poor growth performance was primarily driven by the substantial slowdown in fixed Private consumption recovered in the first half investment growth, expanding at its slowest pace of 2019, amid a more supportive environment since 2011, as public investment was tempered by from robust domestic demand. Amid declining the reenactment of the 2019 national government inflation since the start of 2019, private consumption budget for the first four months of the year and accelerated from 5.3 percent, yoy, in the second spending ban for new projects before May election. half of 2018 to 5.8 percent in the first half of 2019, Private investment activities also slowed due to contributing nearly three fourths to economic uncertainties around the government’s ongoing growth. Sustained growth in private household tax-reform program and the external environment. demand was the result of a combination of factors External demand remained weak, as the country’s that created a robust environment for improved net-exports performed poorly amid slow global domestic demand. In particular, inflation, which growth and uncertainties in the global trade policy contributed negatively to consumption growth environment. Private consumption was the main particularly during the second half of 2018, growth driver (Figure 1), supported by a significant moderated to 3.4 percent, yoy, in the first half of moderation in inflation, a healthy labor market, 2019, much lower than the 4.3 percent recorded in boost from pre-election spending activities,1 and the same period a year ago and within the BSP’s steady growth in remittances,2 albeit dampened 2-4 percent inflation target. Private consumption by worsening consumer confidence in the first two was further bolstered by the steady growth in 1 The May 2013 Philippine Economic Update details the transmission mechanisms by which election related activities spill over into improved domestic activity. The increased domestic activity during an election year may result in an increase in growth of up to 2.0 percentage points in the first half of the year due to election related spending, which significantly bolsters domestic activity in fixed investment, particularly on construction, and the services sector, which benefit from higher employment. These in turn result in improved employment during this period, which translates into potentially higher consumption spending. Source: https://www.worldbank.org/content/ dam/Worldbank/document/EAP/Philippines/Philippine_Economic_Update_May2013.pdf 2 Cash remittances from overseas Filipinos grew by 4.5 percent, yoy, during the first five months of 2019, consistent with historical averages. 3 The 2019 national government budget was signed into law on April 15, 2019, after a more than four-month long delay due to an impasse between both houses of Congress. The delayed passage resulted in the national government operating under thethe 2018 budget (reenacted budget) for the first four months of 2019. This resulted in the delayed implementation of new programs and projects under the 2019 budget, as no new programs and projects would receive funding under a reenacted budget. 4 This is the fourth in a series of adjustment to public wages based on Executive Order No. 201, series of 2016 which modifies the salary schedule for civilian government personnel and authorizing the grant of additional benefits to both civilian and military and uniformed personnel. The public wage and benefits adjustments began in 2016, and were adjusted each year thereafter until 2019, the fourth and final tranche of the salary adjustment. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 6 Figure 1. Figure 2. Private consumption fueled yoy growth in the first half of 2019, as …while services remained the main engine of growth on the investment spending and net-exports weakened… production side. 15 7.5 10 8 10 7.0 6 Contribution to growth (ppt) 5 6.5 GDP growth (percent) Percentage point 4 0 6.0 2 -5 5.5 0 -10 5.0 -2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2016 2017 2018 2019 2015 2016 2017 2018 2019 Net exports Discrepancy Agriculture Manufacturing Investments Government consumption Other industries Services Private consumption GDP Growth GDP Growth Note: Other industries are mining and quarrying, construction, electricity, Source: Philippines Statistics Authority (PSA). gas, and water. Source: PSA. remittances from overseas Filipinos,5 the continued growth recorded a year ago. The significant decline expansion of credit, an improving job market,6 and in public construction investments was primarily the an increase in economic activity from election- result of the stalled implementation of the national related spending. government’s sizable infrastructure outlay program due to the delayed budget approval. Meanwhile, Fixed capital investment growth was sluggish investments in durable equipment declined in the first six months of 2019, weakened by a by 2.9 percent, yoy, in the first half of 2019, after contraction in public investment spending and expanding by double-digits in the past four years. moderation in private investment growth. Fixed The contraction was driven by fewer investments investment growth softened to its lowest level since in specialized machinery and transport equipment, 2011, fueled by an abrupt slowdown in the growth accounting for around two-thirds of total durable of construction investments,7 and a contraction in investments, as manufacturing activity and exports durable equipment investment growth. Construction slumped in the first half of 2019 due to weakness investment growth decelerated from 11.5 percent, in external demand. In addition, policy uncertainty yoy, in the first half of 2018 to 4.2 percent in the same around the government’s proposed corporate tax- period in 2019, as public construction investment reform package has dampened investment growth growth contracted by 22.1 percent, yoy, in the first in the private sector. half of 2019—a sharp reversal from the 21.4 percent 5 Cash remittances expanded by 4.5 percent yoy in the first five months of 2019 compared to 4.2 percent a year ago, to reach US$12.3 billion. 6 Labor market conditions improved until April, latest data available. 7 Fixed capital investment growth fell from 13.5 percent, yoy, in the first half of 2018 to 0.8 percent in the same period in 2019—the slowest rate since the second half of 2011 (-2.1 percent). 7 PART 01 RECENT DEVELOPMENTS on regional trade. Meanwhile, import growth sharply decelerated to 4.2 percent, in the first half of 2019 from 16.1 percent a year ago, driven by the substantial slowdown in the growth of capital goods due to the slower pace of investment spending. In addition, the import of raw materials and intermediate goods also contracted as the country’s manufacturing industry continued to struggle. As trade tensions among major economies intensify, policymakers need to find ways to shelter the domestic economy to preserve the poverty reduction gains from the steady growth of the past decade. Fostering competition in key backbone services would be a first start (cf. Part III of this report). On the production side, services fueled growth in the first half of 2019, while the agriculture sector barely grew for the second consecutive year. The services sector grew by 7.0 percent, yoy, in the first Export activities significantly decelerated during six months of 2019, up from 6.7 percent in the same the first half of 2019, reflecting softer external period in 2018 (Figure 2). The uptick in growth was demand amid weakness in global economic led by faster growth in finance, wholesale and activity (Box 1). Philippine export growth slowed to retail trade, and the transport, communication, and its weakest level since 2013, growing by 5.0 percent, storage subsectors, which benefitted from improved yoy, in the first half of 2019, less than half of the private domestic demand. Meanwhile, the country’s 12.6 percent registered a year ago, as the growth in agriculture sector barely grew for the second both merchandise and services exports decelerated consecutive year, as the crops subsector contracted to single-digits. The substantial slowdown in by 2.1 percent, yoy, in the first six months of 2019, merchandise exports was driven in large part by compared to a mere 0.4 percent contraction a year the continued slowdown in electronics exports,8 as ago. The poor performance of the crops subsector semiconductor exports registered a sharp growth was due to a substantial decline in both palay and deceleration,9 likely due to sluggish demand for corn production,11,12 which was in large part the result smartphone parts and the impact of the U.S.-China of the widespread drought that impacted several trade war (Box 2).10 Likewise, exports of other major regions in the Philippines because of El Niño.13 The commodity groups also registered a significant country’s agriculture sector remains vulnerable to slowdown in growth, owing to the softening in global weather-related phenomenon due to the absence of trade, manufacturing, and investment activities adequate support infrastructure and services such (Figure 3 and Figure 4). This was partly due to higher as a well-developed irrigation system. tariffs between China and the U.S., which weighed 8 Electronics exports accounted for nearly half of the country’s total merchandise exports, and its growth decelerated from 15.8 percent, year-on-year, in the first half of 2018 to 5.3 percent in the same period in 2019. 9 Semiconductor exports, which account for 30 percent of total goods exports, expanded by 4.7 percent, year-on-year, in the first half of 2019, down from 13.5 percent a year ago. 10 The Semiconductor and Electronics Industry of the Philippines Inc. (SEIPI) predict flat growth for semiconductors in 2019 due in large part to the “heavy decline in demand for smart phones” and the likely effect of an “extended trade war.” Source: https://business.mb.com.ph/2019/05/15/electronics-sector-lowers-2019-export-growth-target/ 11 Palay and corn contracted by 4.5 percent year-on-year and 2.1 percent, respectively, and accounted for around 52 percent of total crop output in the first half of 2019. 12 In addition, notable crops such as banana, coffee, cassava, sugarcane, and coconut registered a decline in output in the first half of the year. 13 In the first quarter of 2019, the total value of crop damage reached Php4.4 billion (https://www.rappler.com/business/230020-farm-output- growth-q1-2019), as the dry spell impacted farm output in Cagayan Valley, CALABARZON, MIMAROPA, Western Visayas, Central Visayas, Zamboanga Peninsula, Northern Mindanao, and SOCCSKSARGEN. Source: 2019. Philippine Statistics Authority. Performance of Philippine Agriculture. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 8 Figure 3. Figure 4. Growth in developing East Asia Pacific (EAP) and China moderated in the …and manufacturing activity softened in line with the slowdown in first quarter of 2019... global demand. Real GDP Growth Purchasing Manager’s Index (manufacturing; seasonally adjusted, 50+ = expansion), Percent 3 months moving average 7.0 57 56 6.5 55 6.0 54 53 5.5 52 51 5.0 50 4.5 49 48 4.0 47 2017 Q1 - 2018 Q2 - 2018 Q3 - 2018 Q14- 2018 Q1 - 2019 Q2 - 2019 Jan - 18 Feb - 18 Mar - 18 Apr - 18 May - 18 Jun - 18 Jul - 18 Aug - 18 Sep - 18 Oct - 18 Nov - 18 Dec - 18 Jan - 19 Feb - 19 Mar - 19 Apr - 19 May - 19 Jun - 19 Jul - 19 Developing EAP and China China Indonesia China Malaysia Vietnam Developing EAP Thailand 50+ expansion Philippines Source: Haver Analytics; World Development Indicators; Source: Haver Analytics; World Bank Staff calculations. World Bank Staff calculations. The industry sector grew at its slowest pace in steep decline in the growth of radio, television, nearly eight years, as both the manufacturing and and communication equipment apparatus (which construction sectors struggled in the first half of includes electronics production) manufactures, 2019. Industry sector growth decelerated from 7.1 in line with the tepid performance of the country’s percent, yoy, in the first six months of 2018 to 4.2 electronics exports in the first half of the year.15 percent in the same period in 2019—the slowest rate Growth in most other manufacturing subsectors since the second half of 2011 (1.4 percent). Weaker also slowed as external demand softened16 and growth was driven by a slowdown in manufacturing investment activity weakened in the first half of and construction output, which make up nearly 90 2019.17 Growth in the construction sector, after four percent of total industrial output. Manufacturing consecutive quarters of double-digit growth, growth decelerated from 6.5 percent, yoy, in the first fell from 11.6 percent, yoy, in the first six months of half of 2018 to 4.4 percent in the same period in 2019, 2018 to 3.9 percent in the same period in 2019, as despite robust growth in food manufactures, which public construction spending contracted due to the accounted for more than half of all manufacturing delayed passage of the national budget. output.14 The slowdown in growth was led by the 14 Growth in food manufactures expanded by 8.6 percent, year-on-year, in the first half of 2019, up from an average of 6.3 percent a year ago, benefitting from healthy domestic demand and private consumption. 15 Manufactures of radio, television, and communication equipment apparatus, which account for around 15 percent of total manufacturing output, contracted by 0.3 percent, year-on-year, in the first half of 2019, a steep decline from 13.5 percent growth registered a year ago. 16 Exports of manufactured goods contracted by 1.5 percent, year-on-year, in the first half of 2019, led by a 12.9 percent decline in machinery and transport equipment. Moreover, electronic products, which account for two-thirds of the country’s manufactured goods exports, registered nearly flat growth as the country’s semiconductors exports slowed in the first half of 2019. 17 Sectors that experienced a slowdown in growth include petroleum, rubber, and plastic products; machinery and equipment (except electrical); office, accounting, and computer machinery; transport equipment; and furniture and fixtures. 9 PART 01 RECENT DEVELOPMENTS Table 1. Contribution to Growth, Expenditure Side (Percentage Points) 2016 H1 2017 H1 2018 H1 2019 H1 Private Consumption 5.0 4.1 4.0 3.9 Government Consumption 1.5 0.4 1.4 0.9 Capital Formation 7.0 2.7 4.2 0.0 Fixed Capital Formation 6.8 2.7 3.8 0.2 Construction 1.3 0.6 1.1 0.4 Durable Equipment 5.2 1.7 2.5 -0.5 Net Exports -6.7 -0.9 -3.3 0.0 Exports 5.7 10.0 7.3 3.1 Merchandise Exports 3.7 8.8 5.6 2.5 Services Exports 2.0 1.1 1.6 0.5 Imports -12.3 -10.9 -10.5 -3.0 Merchandise Imports -11.2 -10.1 -9.4 -2.5 Services Imports -1.1 -0.8 -1.1 -0.5 Gross Domestic Product 6.9 6.5 6.3 5.5 Source: PSA. Table 2. Contribution to Growth, Supply Side (Percentage Points) 2016 H1 2017 H1 2018 H1 2019 H1 Agriculture, Fishery, & Forestry -0.3 0.5 0.1 0.1 Agriculture & Forestry -0.2 0.5 0.1 0.0 Fishery -0.1 0.0 0.0 0.0 Industry 2.7 2.2 2.4 1.5 Mining & Quarrying 0.0 0.0 0.0 0.1 Manufacturing 1.6 1.8 1.5 1.0 Construction 0.7 0.3 0.7 0.1 Electricity, Gas, & Water 0.3 0.1 0.2 0.2 Services 4.5 3.8 3.9 4.0 Transport, Communication, & Storage 0.5 0.3 0.5 0.5 Trade 1.3 1.0 1.0 1.2 Finance 0.6 0.6 0.6 0.7 Real Estate, Renting and Business Activities 1.0 0.9 0.5 0.4 Government Services 0.2 0.3 0.6 0.4 Other Services 0.9 0.7 0.8 0.7 Gross Domestic Product 6.9 6.5 6.3 5.5 Source: PSA. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 10 Box 1. Recent Global Developments Weaker investment growth and declining trade and further due to a recent hike in the country’s value-added manufacturing activity contributed to continued subdued tax.19 Recent data suggest that the U.K. economy has global growth in the first half of 2019 (Figure 5). The been fragile in Q2 2019 amid uncertainty over Brexit and global real GDP growth rate was estimated at 2.6 percent as retail sales dipped in both April and May, and both the in 2019—lower than the 3.0 percent recorded in 2018 and manufacturing PMI and economic sentiment fell to their a downgrade of 0.3 percentage points from the growth lowest readings since 2013. forecast in January 2019. Incoming data even suggest that global activity will remain subdued going into the third Economic growth in EMDEs softened in the beginning quarter of 2019. Renewed trade tensions involving major of 2019, influenced by weaker external demand economies have triggered a rise in policy uncertainty, and investment amid continued global trade policy dampening business confidence and investment growth uncertainties. Investment growth is expected to continue (Figure 6). Due to a dimmer economic outlook and below to soften in EMDEs, which will slow the growth of imports target inflation in advanced economies, key central banks (Figure 7). EMDEs under pressure20 are especially have signaled a more accommodative monetary policy, vulnerable, including many commodity exporters such easing global financing conditions and increasing capital as Argentina and Iran that have recently suffered severe flows to emerging market and developing economies financial market stress and economic sanctions. Moreover, (EMDEs). However, this has not been enough to outweigh the economies of some large commodity exporters have the effect of weaker global demand on EMDEs’ export had slow recoveries due to global oil production cuts, performance, resulting in slower growth in many EMDEs. magnified by domestic policy uncertainties. In other EMDEs, including commodity importers, economic growth Activity in major economies decelerated to 2.1 percent has been impeded by capacity constraints and softer in Q2 2019 but remained resilient. The U.S. economy has external demand. Subdued growth in EMDEs has also been been expanding for 121 months, the longest period of due to lackluster investment spending, which has been uninterrupted growth on record. In light of muted inflation held back by sluggish global growth, limited fiscal space, and rising risks from the external environment, the Federal and structural constraints that misallocate or discourage Reserve lowered the target range for the federal funds rate investment, such as a poor business environment, labor to 2-2.25 percent in July, the first rate cut since the 2008 and product market controls, and weak governance. Slower financial crisis. In the euro area, economic conditions have economic activity in some European EMDEs was attributed remained weak, driven by moderating manufacturing to close ties with the euro area, which has suffered slower- and industrial activity amid sharply declining exports. The than-expected growth, as well as ongoing domestic subpar growth performance, along with easing inflation challenges and financial headwinds. While several Asian and lingering downside risks, has prompted major EMDEs, including the Philippines, have demonstrated European countries to facilitate fiscal and monetary policy robust growth, averaging 6-7 percent, their growth support.18 In Japan, consumer confidence has dropped in momentum is waning. Meanwhile, China’s economic recent months to its lowest level since 2014 while inflation growth decelerated to 6.2 percent yoy in Q2 2019 amid its excluding fresh food and energy remains low—it stood weak manufacturing sector, trade dispute with the U.S., at 0.3 percent in May, unchanged since the beginning and the global growth slowdown continue to hamper its of the year. Japan’s economic activity has likewise been foreign trade. dampened by weak external demand and will likely soften 18 Germany, France, and Italy have announced plans for limited tax cuts and spending increases, equivalent to a combined 0.2 percent of euro area GDP per year during 2019-21. In addition, the European Central Bank has announced it will provide banks with additional low-cost credit, starting in September. Source: World Bank, Global Economic Prospects, June 2019 and Global Monthly (July 2019).. 19 A value-added tax hike in October is likely to further dampen economic growth. Source: World Bank, Global Economic Prospects, June 2019, and Global Monthly (July 2019). 20 EMDEs under recent pressure include: a) countries that have had an increase in their J.P. Morgan EMBI credit spread of at least one standard deviation above the 2010-19 average at any time since April 2018 (Argentina, Brazil, Egypt, Gabon, Jordan, Lebanon, Mexico, Nigeria, South Africa, Sri Lanka, Tunisia, Turkey); or b) countries that have been subject to recent sanctions (Iran, Russia). Source: World Bank, Global Economic Prospects, June 2019 and Global Monthly (July 2019). 11 PART 01 RECENT DEVELOPMENTS Worsening trade policy uncertainty (Figure 8) and of MERCOSUR countries (Argentina, Brazil, Paraguay, and slowing investment growth have contributed to the Uruguay) may also be delayed by policy disagreements. slowdown in global trade. Along with slowing investment Moreover, amid heightened trade policy uncertainty, the growth, a series of protectionist and retaliatory trade demand for heavily traded capital goods in global value measures between major economies such as the U.S., chains has declined, resulting in slower industrial growth. China, and other major trading partners (Box 2) have partly Worse outcomes are likely to be observed if trade tensions disrupted normal trade flows, as the growth in traded further escalate. Despite growing protectionism, recently- goods and new export orders fell considerably in the concluded trade agreements (e.g. AfCFTA, EU-Vietnam) beginning of 2019. Tensions have also escalated elsewhere, could help boost trade and foster regional integration such as between Japan and South Korea. The ratification among signatory countries. Figure 5. Figure 6. Global manufacturing and trade growth continued to decelerate Business confidence has worsened amid renewed trade tensions. in early 2019. Index, 50+=expansion Index, 100=2000-18 102 55 54 53 101 52 51 100 50 49 48 99 Jan - 16 Apr - 16 Jul - 16 Oct - 16 Jan - 17 Apr - 17 Jul - 17 Oct - 17 Jan - 18 Apr - 18 Jul - 18 Oct - 18 Jan - 19 Apr - 19 Jan - 16 Apr - 16 Jul - 16 Oct - 16 Jan - 17 Apr - 17 Jul - 17 Oct - 17 Jan - 18 Apr - 18 Jul - 18 Oct - 18 Jan - 19 Apr - 19 Manufacturing New export orders Global business confidence Source: Global Economic Prospects, June 2019. Source: Global Economic Prospects, June 2019. Figure 7. Figure 8. Investment growth in EMDEs has remained sluggish. Global policy uncertainties have persisted. Percent Index, 6-month moving average 8 275 6 225 4 175 2 0 125 -2 75 2018 2019 2020 2021 2018 2019 2020 2021 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 EMDEs EMDEs under Others excluding recent pressure China Global policy uncertainty 2000-18 average 1997-2018 average Source: Global Economic Prospects, June 2019. Source: Global Economic Prospects, June 2019. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 12 Box 2. The Impact of Softening Global Trade and Escalating Trade War on Philippine Foreign Trade The Philippines’ export performance has mirrored the to procure more farm goods from the U.S. Nonetheless, decline in global trade growth since 2018, worsened doubts persisted because no timeline was agreed upon by uncertainties surrounding trade tensions between regarding the trade deals, and recently imposed tariffs major economies. Heightened policy uncertainty from remained in place. In August 2019, uncertainties intensified the ongoing trade war between the U.S. and China has as the trade dispute deepened due to the U.S. threat undermined business confidence and investment and to impose 10 percent tariffs on the remaining un-levied contributed to the slowdown in global trade (Figure 9). Chinese imports worth over US$300 billion, which partially Furthermore, the tariffs implemented by the U.S. and took effect in September 2019 on the US$125 billion Chinese China against each other in 2018 affected 2.0 percent of imports, and the rest is due to hit in December 2019. In world merchandise trade in 2018, or more than half of the retaliation, China imposed additional US$75 billion tariffs 3.8 percent of world merchandise trade affected by tariffs. on U.S goods. The first batch of U.S. goods will be taxed at However, available data show a limited impact on each 5 percent effective September 2019 and the second at 10 country’s aggregate trade volumes and prices of targeted percent in December 2019. China also earlier responded by commodities.21,22 As of June 2019, the global trade growth allowing its currency, the yuan, to depreciate to mitigate, if projection for 2019 has been downgraded to 2.6 percent, not to offset the impact of the higher cost of trading with a considerable reduction from the 4.1 percent growth U.S., which led the latter to designate China as a posted in 2018. Softening capital goods trade, including currency manipulator. electronic components such as semiconductors that are tightly linked with global production chains, has particularly Furthermore, looming trade tensions between the U.S. contributed to the widespread deceleration in global trade and other major trading partners are expected to weigh growth.23 Global trade dynamics have been mirrored in the on already weakening global demand. On July 1, 2019, the Philippines: the country’s goods trade growth decelerated U.S. threatened to impose new tariffs on US$4 billion worth from 5.4 percent, yoy, in January 2018 to 0.4 percent in April of European products, in addition to the US$21 billion worth 2019, with negative growth rates recorded twice in 2019. of goods announced in April 2019, over European subsidies Meanwhile, there was a contraction in new export orders in to aircraft manufacturers. Moreover, India’s eligibility for Q4 2018 through Q1 2019. preferential market access to the U.S. was removed in early June 2019 because of alleged local market restrictiveness Despite agreeing to restart trade talks two months prior, against U.S. firms, resulting in import levies on US$6 billion the U.S-China trade conflict escalated in August 2019 as worth of Indian products exported to the U.S. In retaliation, the U.S. threatened to impose tariffs on the remaining India imposed higher tariffs on twenty-eight U.S. products. untaxed Chinese products which partially took effect in France’s plans to impose a digital-services tax of 3 percent September 2019. Since July 2018, a series of protectionist on technology firms, including large U.S. companies like policies and retaliatory responses between the U.S. and Amazon, Apple, Google, and Facebook, has also prompted China resulted in US$550 billion worth of Chinese products the U.S. to threaten protectionist policies similar to the imposed with U.S. tariffs, and a total of US$185 billion tariffs against Chinese and European products. Meanwhile, worth of U.S. goods exclusively taxed with Chinese tariffs. bilateral tensions are escalating in East Asia, as Japan Following a brief truce before meeting at the G20 Summit and South Korea have also resorted to protectionist trade in Japan in June 2019, the two countries agreed to restart measures as relations turned sour after the South Korean trade discussions, suggesting a pause in the extended Supreme Court challenged a 1965 diplomatic treaty that tariff exchanges. Amid the renewed trade dialogue, the U.S. considered all reparations for offensive acts committed relaxed restrictions on Huawei, a Chinese telecom giant, to during the Japanese occupation of the Korean Peninsula six purchase from American tech companies as China agreed decades ago complete and final. 21 Constantinescu, I., A. Mattoo, and M. Ruta. 2019. Trade Amid Tensions. Global Trade Watch 2018. Washington, DC: World Bank Group. and Fajgelbaum, P. D., P. K. Goldberg, P. J. Kennedy, and A. K. Khandelwal. 2019. “The Return to Protectionism.” NBER Working Paper 25638, National Bureau of Economic Research, Cambridge, MA. 22 World Bank, Global Economic Prospects, June 2019. 23 The slowdown in international trade has been widespread, as countries with industrial production suffering from technical recession reached 25 percent in early 2019, up from less than 9 percent in 2018. 13 PART 01 RECENT DEVELOPMENTS The impact of the ensuing import substitution on Supply-chain shifts accelerated by the U.S.-China trade Philippine foreign trade appears to have so far been war may have weighed on Philippine exports. Before modest. Given the ongoing U.S-China trade dispute, U.S. the trade dispute, several export manufacturers based in imports of Chinese goods declined by 12.4 percent between China had considered relocating to other countries, mainly January and June 2019, reversing the 8.8 percent growth due to rising labor costs. However, these plans may have posted over the same period in 2017-18. Imported U.S. goods been fast-tracked to avoid U.S. tariffs. It was expected in China also contracted by 29.9 percent between January that reduction in U.S. imports of Chinese products could and June 2019. As the cost of importing goods between the adversely affect EAP countries linked to the Chinese-led U.S. and China increases due to the newly imposed tariffs, production-chain, including the Philippines. Although neighboring countries are expected to benefit as the two Philippine exports to China grew by 9.2 percent, yoy, in the major economies look for cheaper substitutes. However, first half of 2019, it was notably slower than the 66.5 percent because of few similarities between the Philippine export and 14.6 percent growth rates logged in the first half of basket and Chinese products affected by U.S. tariffs,24 2017 and 2018, respectively (Figure 10). The Philippines’ trade diversion seemed to have had a modest impact on export basket to China largely contains intermediate Philippine foreign trade. Yet, Philippine exports to the U.S. goods such as electronic products, and China remains one expanded by 10.3 percent in January-June 2019, faster than of the Philippines’ major trading partners. Nevertheless, the 9.4 percent growth recorded during the same period the electronics downcycling, the overall easing of China’s in 2018, indicating that the Philippines has partly absorbed economy, and the ongoing U.S.-China trade dispute have U.S. imports of easily substitutable electronic goods like contributed to the lethargic state of Philippine exports. hard-disk-drive units (Figure 10).25 However, the Philippines’ U.S. export growth performed poorly compared to that of Vietnam, which grew by 27 percent in January-June 2019, three times the growth registered in 2018. 24 Of the 1,153 products targeted against China, only 362 of the Philippines’ export product lines are similar, compared with Malaysia’s 590, Thailand’s 553, and Vietnam’s 415 product lines. Source: World Bank, Philippine Economic Update, October 2018. 25 World Bank. Global Trade Watch 2018. May 29, 2019 http://documents.worldbank.org/curated/en/549841559120768022/pdf/Trade-Amid- Tensions.pdf PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 14 Figure 9. Figure 10. Global trade growth slowed between 2018 and early 2019. Philippine exports to the U.S. grew slightly faster as exports to China expanded more slowly in H1 2019. Percent, 3m-on-3m saar Index, 50+=expansion Philippine Exports Growth (January-June) 12 54 9 66.5 47.8 51.2 6 52 47.5 44.5 3 14.6 0 50 8.0 9.4 10.3 9.2 2.4 2.1 0.3 -3 -1.2 -4.2 US China Vietnam Other countries Total Exports -6 48 Jan- 16 Jul - 16 Jan - 17 Jul - 17 Jan - 18 Jul - 18 Jan - 19 Jun - 19 Goods trade 2016-17 New export orders (RHS) 2017-18 2018-19 Source: East Asia and Pacific Economic Update, October 2019 Source: PSA. Note: New export orders measured by Purchasing Managers’ Index (PMI). PMI readings above 50 indicate expansion in economic activity; readings below 50 indicate contraction. Last observation is April 2019 for goods trade, and June 2019 for new export orders. Saar refers to seasonally adjusted annualized data. Figure 11. The Philippines’ total trade contracted in H1 2019. Philippines Trade in January-June (H1) FOB Value in Billion US Dollars 88.0 87.2 79.8 67.7 39% 39% 61.9 43% 40% 47% 61% 61% 57% 60% 53% 2015 2016 2017 2018 2019 Imports Exports Source: PSA. 15 PART 01 RECENT DEVELOPMENTS POSITIVE EXTERNAL POSITION While weak global demand and heightened trade tensions have dampened the country’s net exports, more benign external financing conditions have led to an increase in capital inflows, contributing to a positive external balance, along with the re-accumulation of foreign reserves, in the first half of 2019. A slowdown in imports amid softer external helped improve confidence in the domestic demand resulted in a narrower current-account economy. The country’s level of portfolio investments deficit in the first half of 2019. Weak global demand reached 2.6 percent of GDP in the first half of 2019, and heightened trade tensions dampened the reversing an outflow of 1.7 percent of GDP in the Philippines’ merchandise export growth, which first half of 2018 (Figure 15). The inflow of portfolio contracted by 0.8 percent, yoy, in the first half of investments was channeled through the local stock 2019 reversing the 1.1 percent growth registered market and long-term borrowing by the national a year ago, continuing the downtrend in export government, indicating strong foreign demand for performance which began in early 2018 (Figure 12). domestic debt papers. Foreign direct investment The contraction was mainly due to subdued global (FDI), however, contracted by 38.8 percent, yoy, demand for electronics, the country’s main exports, from totaling US$5.8 billion in the first half of 2018 and a slowdown in the electronics cycle. Moreover, to US$3.6 billion in the same period in 2019, likely merchandise imports contracted by 1.0 percent yoy, impacted by uncertainties derived from corporate a steep reversal compared to the 17.1 percent growth tax reform CITIRA.27 Overall, the performance of the in the first half of 2018 driven by a fall in the import of Philippines’ capital and financial accounts made up raw materials and intermediate goods, an indication for the deterioration in its current account, leading of lackluster trading activity across the regional value to a larger balance of payment surplus of US$4.8 chain, and a significant deceleration in imports of billion (2.8 percent of GDP) in the first half of 2019—a capital goods. Meanwhile, net services export growth significant improvement compared to the deficit of decelerated in line with reports of slower growth US$3.3 billion (-2.1 percent of GDP) in the first half of in the information technology-business process 2018 (Table 3). outsourcing (IT-BPO) industry.26 Growth in personal remittances inched up slightly to 2.9 percent, yoy, The large capital inflows have resulted in the in the first half of 2019 from 2.8 percent in the first appreciation of the Philippines’ currency and half of 2018. As a result, the current-account deficit rebuilding of its foreign reserves. The Philippine declined to US$0.8 billion (-1.0 percent of GDP) from peso appreciated by 0.2 percent in nominal terms US$3.8 billion (-2.4 percent of GDP) in the first half in the first seven months of 2019 relative to the of 2018. same period in 2018, reaching Php/US$51 in June 2019, compared to Php/US$54 in the third quarter of More benign external financing conditions have 2018. In real terms, the Philippine peso appreciated led to capital inflows in the Philippines more than by 5.1 percent, yoy, in the first half of 2019 (Figure offsetting the substantial contraction in direct 13). The appreciating currency was accompanied investments and the current account deficit, by an increase in foreign reserves, which reached contributing to a balance of payment surplus. US$84.9 billion in June 2019, up from US$77.5 billion The more dovish stance of the U.S. Federal Reserve in June 2018. The country’s foreign reserves currently since the start of the year contributed to an inflow cover 7.4 months’ worth of imports and payment of of capital to emerging markets, including the services and primary income, an improvement from Philippines where declining inflationary pressure 7.1 months’ worth in June 2018. 26 In 2018, actual industry growth of 5.1 percent was lower than the 8.0 percent annual projection based on the industry roadmap 2022. See https://cebudailynews.inquirer.net/247083/rp-remains-leader-in-global-contact-center-industry. While tourism receipts are not yet available, tourism arrivals rose by 9.8 percent year-on-year in the first five months of 2019 from 10.3 percent in the same period last year. 27 Equity other than reinvestment of earnings contracted in key industries such as manufacturing (85.9 percent), finance and insurance (64.0 percent), real estate activities (26.5 percent), and arts, entertainment and recreation (96.1 percent). PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 16 Figure 12. Figure 13. Exports growth contracted while import growth decelerated. The Philippine peso appreciated in real terms in the first half of 2019. 104 Jul - 19 102 US Federal Reserve Rate Hikes Jun - 19 100 98 May - 19 96 Apr - 19 94 92 Mar - 19 90 Feb - 19 88 Index in percent Jan - 19 86 84 Dec - 18 82 Nov - 18 80 78 Oct - 18 76 Sep - 18 74 72 Aug - 18 70 Jul - 18 Jun - 14 Sep - 14 Dec - 14 Mar - 15 Jun - 15 Sep - 15 Dec - 15 Mar - 16 Jun - 16 Sep - 16 Dec - 16 Mar - 17 Jun - 17 Sep - 17 Dec - 17 Mar - 18 Jun - 18 Sep - 18 Dec - 18 Mar - 19 Jun - 19 (30.0) (20.0) (10.0) - 10.0 20.0 30.0 40.0 50.0 Exports Nominal Exchange Rate (January 2014: indexed to 100) Imports Real Effective Exchange Rate Source: PSA. Note: Decrease denotes depreciation. Source: BSP. Figure 14. Figure 15. Philippines export basket (in percent of GDP) Composition of the Philippines’ Overall Balance of Payment Position 25% 8.0 6.0 20% 9% 9% 10% 9% 8% 9% 4.0 7% 8% 7% Percentage to GDP 15% 7% 1% 2.0 1% 2% 1% 1% 1% 1% 1% 1% 10% 1% - (2.0) 11% 11% 13% 11% 12% 12% 13% 10% 11% 11% 5% (4.0) 0% (6.0) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2018 2019 2017 2018 2019 Other exports Other Manufactured Goods Current account Net unclassified items Electronic Products Capital and Financial Accounts Overall BOP position Total Export Source: BSP. Source: PSA 17 PART 01 RECENT DEVELOPMENTS Table 3. Balance of Payments, H1 2017 to H1 2019 In percentage of GDP H1 2017 H2 2017 H1 2018 H2 2018 H1 2019 Current account -0.7 -0.6 -2.4 -2.9 -1.0 Goods -12.2 -13.5 -14.7 -16.1 -13.9 Exports 17.1 16.0 16.3 15.1 15.3 Imports 29.2 29.5 31.0 31.2 29.2 Services 1.8 3.7 3.1 3.9 3.5 Primary Income 1.1 1.0 0.9 1.3 1.5 Secondary Income 8.5 8.2 8.3 7.9 7.9 Capital and Financial accounts 0.3 1.5 1.6 3.6 3.4 Capital account 0.0 0.0 0.0 0.0 0.0 Financial account -0.3 -1.4 -1.6 -3.5 -3.4 Direct investment -2.1 -2.4 -2.3 -1.3 -1.0 Net acquisition of financial assets 0.7 1.4 1.3 1.1 1.1 Net incurrence of liabilities1/ 2.7 3.8 3.7 2.3 2.1 Portfolio investment 1.9 -0.3 1.7 -0.7 -2.6 Financial derivatives -0.1 0.1 0.0 0.0 -0.1 Other investments -0.1 1.1 -0.9 -1.5 -0.3 Net unclassified items2/ -0.1 -0.9 -1.3 -0.1 0.5 Overall BOP position -0.5 -0.1 -2.1 0.6 2.8 Memo: Basic Balance 1.3 1.7 0.0 -1.6 0.0 Gross International Reserves (in billions USD) 81.3 81.6 77.5 79.2 84.9 Import coverage (in months) 8.4 7.8 7.1 7.0 7.4 1/ Net incurrence of liabilities refers to net foreign direct investment to the Philippines. 2/ The term “Net unclassified items” is a balancing figure. There are two methods of computing the BOP position: the first approach uses the change in net international reserves due to transactions, while the second approach computes the sum balances of the current account, capital account less financial account. The two measures do not necessarily tally. The BSP uses the first approach to determine the overall BOP position. Note: Following the BSP presentation, the BOP balance = Current Account Balance + Capital Account Balance - Financial Account Balance + Net Unclassified Items. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 18 DECLINING INFLATION HAS RESULTED IN A MORE ACCOMMODATIVE MONETARY POLICY Inflation declined driven by stabilizing prices of food and energy, prompting the BSP to adopt a more accommodative policy stand in 2019. Domestic inflation declined in the first half of increase in the first half of 2019 despite a reduction 2019, driven by stabilizing food and energy prices. in the local production of palay or unmilled rice28 The Philippines’ headline inflation rate fell from due to an influx of private rice imports (Figure 17).29 an average of 4.7 percent, yoy, in the first eight Energy prices in the first eight months of 2019 were months of 2018 to an average of 3.1 percent in the also lower than in the same period in 2018, driven by same period in 2019 (Figure 16). From a nine-year lower international crude oil prices30 and downward high of 6.7 percent in September 2018, the country’s adjustments of local electricity prices. Core inflation, inflation rate fell to 1.7 percent in August 2019—its which excludes volatile food and energy items, lowest in almost three years. Stabilizing prices of averaged 3.5 percent in the first eight months of heavily-weighted food and energy items drove the 2019, lower than the 3.7 percent seen in the first eight moderation. Food prices declined significantly in months of 2018—an indication of a latent upward the first eight months of 2019 as yoy food inflation inflationary pressure from aggregate demand. Both averaged 2.9 percent, lower than the 5.9 percent year-to-date headline and core inflation remained recorded in the same period in 2018. In particular, within the BSP’s target range of 2-4 percent. the domestic price of rice registered only a small 28 PSA attributes the estimated 6.5 percent, year-on-year, decline in local palay production to the continuing impact of El Nino. Source: https://www.bworldonline.com/psa-projects-6-5-decline-in-2nd-quarter-palay-output/ 29 The rice liberalization law took effect in March 2019. Self-executory provisions include the application of 35 percent tariff rates on rice imported from members of ASEAN, 40 percent if within the minimum access volume (MAV) of 350,000 for rice imported from non-ASEAN countries, and 180 percent if beyond the MAV and from a non-ASEAN country. 30 Average monthly price of crude oil (Brent) in the first five months of 2019 was US$66.31/bbl, down from US$69.83/bbl in the same period in 2018. Source: WBG “Pink Sheet” Data http://www.worldbank.org/en/research/commodity-markets 19 PART 01 RECENT DEVELOPMENTS The BSP adopted a softer monetary policy31 stance requirement ratio (RRR) faced by universal and in the first half of 2019, prompted mainly by falling commercial banks, bringing it to 16 percent by end- price pressure. The BSP’s Monetary Board reduced July 2019.32 Likewise, the RRR faced by thrift banks the overnight reserve repurchase (RRP) by 25-basis- and non-bank financial institutions with quasi- points to 4.5 percent in May 2019, reversing a series banking functions (NBQBs) underwent a total of of rate increases totaling 175-basis-points since May 200-basis-point-phased reduction. 2018. After opting for a pause in monetary loosening in June 2019 to observe and assess the impact of The country’s money-supply growth slowed the last policy easing measure, the BSP once again as demand for credit moderated. The country’s trimmed its key policy rate by 25-basis points to 4.25 domestic liquidity (M3) reached Php11.7 trillion pesos percent in August 2019. This was done on the back of and grew by 6.4 percent, yoy, in June 2019, down sustained inflation easing, moderating inflationary from 11.8 percent in June 2018 (Figure 18). The slower expectations, and below-target growth rates in liquidity growth was driven by rapid policy rate the first two quarters of 2019. In addition, given the increases adopted by BSP in the second half of 2018 continued downtrend in domestic inflation and to amid higher inflation. Credit to firms grew at 9.4 mitigate domestic liquidity tightness brought about percent, yoy, in June 2019, substantially lower than by limited public spending following the delayed 16.7 percent in June 2018. Similarly, the growth of budget approval, a total of 200 basis points were household loans decelerated from 17.7 percent, yoy, incrementally deducted from the 18 percent reserve in June 2018 to 11.9 percent in June 2019. The sectoral composition of firms’ loan portfolios remained broadly unchanged in the past year. The Philippines’ financial system remains stable and resilient. Philippine banks are well capitalized, with a total capital adequacy ratio of 15.3 percent in March 2019, an improvement compared to 14.7 percent in March 2018, and well above the 10 percent regulatory minimum. The share of non-performing loans remains low at an average of 2.0 percent between June 2018 and June 2019, although it has been recently increasing, reaching 2.1 percent in June 2019. The banking sector is highly profitable, with return on equity at an average of 9.6 percent and return on asset at an average of 1.2 percent between July 2018 and June 2019. While these levels are similar those in 2017-18, banks’ return on equity has increased and reached 9.8 percent in June 2019. The share of interest income to total operating income averaged 77.1 percent between March and June 2019, and it reached 77.5 percent in June 2019— an indication that lending continues to be banks’ core business rather than other fee-based activities. 31 The BSP’s approach to monetary policy is based on inflation targeting based as per its mandate to ‘promote price stability conducive to a balanced and sustainable growth of the economy.’ The BSP uses monetary policy tools such as the reverse repurchase facility, the reserve requirement ratio, acceptance of term deposits, among other monetary policy instruments. The current inflation target for the Philippines is 2 to 4 percent. For a more detailed discussion on the BSP’s approach to monetary policy, please refer to: http://www.bsp.gov.ph/monetary/ targeting.asp 32 This is also part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs. Source: BSP, “Monetary Board Reduces Reserve Requirements”, Media Release, May 17, 2019. Link: http://www.bsp.gov. ph/publications/media.asp?id=5017&yr=2019 PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 20 Figure 16. Figure 17. Sustained inflation easing was observed in H1 2019. The price of rice peaked in 2018 but continued to subside in H1 2019 as rice imports increased. 12 50 48 10 46 44 8 42 Php per kg Percent, year-on-year 40 6 38 36 4 34 32 2 30 Aug - 16 Oct - 16 Dec - 16 Feb - 17 Apr - 17 Jun - 17 Aug - 17 Oct - 17 Dec - 17 Feb - 18 Apr - 18 Jun - 18 Aug - 18 Oct - 18 Dec - 18 Feb - 19 Apr - 19 Jun - 19 Aug - 19 0 Aug - 16 Nov - 16 Feb - 17 May - 17 Aug - 17 Nov - 17 Feb - 18 May - 18 Aug - 18 Nov - 18 Feb - 19 May - 19 Aug - 19 Core Inflation Well Milled Rice (WMR) - Wholesale Headline Inflation Well Milled Rice (WMR) - Retail Food & Non-alcoholic beverage Regular Milled Rice (WMR) - Wholesale BSP Key policy rate Regular Milled Rice (RMR) – Retail Source: PSA. Source: PSA. Figure 18. The Philippines’ Money-Supply Growth M1-3 YoY Groth Rates July 2014-June 2019 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 - Jul - 14 Sep - 14 Nov - 14 Jan - 15 Mar - 15 May - 15 Jul - 15 Sep - 15 Nov - 15 Jan - 16 Mar - 16 May - 16 Jul - 16 Sep - 16 Nov - 16 Jan - 17 Mar - 17 May - 17 Jul - 17 Sep - 17 Nov - 17 Jan - 18 Mar - 18 May - 18 Jul - 18 Sep - 18 Nov - 18 Jan - 19 Mar - 19 May - 19 M3 M2 M1 Source: BSP. 21 PART 01 RECENT DEVELOPMENTS A PAUSE IN FISCAL EXPANSION The Philippine government’s expansionary fiscal policies for 2019 was put on hold as the delayed passage of the 2019 public budget impacted the pace of public spending significantly in the first half of the year, resulting in substantial underspending. Nevertheless, the implementation of previous tax-policy reforms led to robust revenue. As a result, the fiscal deficit was significantly below the programmed target for the first six months of the year. The fiscal deficit was well below the government’s half of 2019, falling short of the programmed programmed target in the first half of 2019, as target by 7.3 percent (Figure 20). As a result, public authorities struggled to disburse public funds expenditure fell from 19.4 percent of GDP in the while revenue growth remained robust. Despite first half of 2018 to 18.0 percent of GDP in the same the government’s expansionary fiscal policy stance period in 2019, as disbursements fell short of the in the medium-term, the Philippines’ fiscal deficit programmed spending target across all spending narrowed from 2.3 percent of GDP in the first six categories. The decline in public spending was months of 2018 to 0.5 percent of GDP in the same driven by a significant contraction in capital outlays, period in 2019—well below the 3.2 percent target for from constituting 5.4 percent of GDP in the first 2019 (Figure 19). The decline in the spending gap was half of 2018 to 4.3 percent of GDP in the same primarily a result of substantial underspending in the period in 2019. In particular, public infrastructure first half of the year and continued strong revenue and other outlays contracted by 11.7 percent, yoy, in growth. Revenue growth remained robust, albeit at nominal terms in the first half of 2019 (compared a slower pace compared to the first half of 2018, as to 41.6 percent growth registered a year ago) and tax collections continued to expand at a healthy rate falling to 3.5 percent of GDP (4.3 percent of GDP due in part to the second round of increases in excise recorded a year ago) in the same period.34 Likewise, tax rates under the TRAIN law and supported by tax capital transfers to local government units (LGUs)35 administration efforts.33 The government continued contracted by 29.0 percent, in nominal terms, from to finance its deficit primarily through domestic constituting 1.1 percent of GDP in the first half of 2018 borrowing (84 percent) in the first half of the year to 0.7 percent of GDP in the same period in 2019.36 By (Figure 22). contrast, public expenditure on personnel services increased from 5.6 percent of GDP in the first half of The failure to pass the budget in a timely manner 2018 to 5.8 percent of GDP in the first half of 2019, in resulted in a substantial slowdown in the pace of large part due to the implementation of the fourth public spending, leading to underspending in the tranche of the adjustment related to the salary first half of 2019 (Box 3). Despite the government’s standardization law,37 the second round of base pay commitment to maintain an expansionary fiscal increases for active military and uniformed personnel policy stance in 2019, public expenditure contracted (MUP), and adjustments of pension payments for by 0.8 percent, yoy, in nominal terms in the first retired MUPs. 33 The Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) continued to strengthen existing tax administration efforts such as the BIR’s program to run after tax evaders (RATE), updating the zonal value schedule, enhanced implementation of Centralized Arrears Management in regional offices, and the BOC’s program to strengthen anti-smuggling efforts. 34 The government typically frontloads disbursements during an election year to avoid delays stemming from the spending ban on public works during the election period. For example, infrastructure outlays expanded by 52.3 percent, year-on-year, and 41.4 percent in nominal terms during the past two election years in 2016 and 2013, respectively. 35 Capital transfers to LGUs are automatic appropriations based on shares from national tax collections and are expected to increase in the second half of 2019. 36 Releases made from the Local Government Support Fund (LGSF), which are part of capital transfers to LGUs, are covered by the election ban since funds from the LGSF are used primarily to finance infrastructure outlay projects. 37 The implementation of the fourth tranche of the salary standardization adjustments began in April 2019 after the national government budget was passed into law. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 22 Box 3. The Impact of the Budget Delay on Utilization and Disbursement in 2019 The Philippine government operated under a reenacted budget for nearly four months in 2019, severely dampening the government’s disbursement program. For the first time in nearly a decade, the Philippine government operated under a reenacted budget,38 in the beginning of 2019 because the Php3.7 trillion 2019 budget was only signed into law on April 15, 2019. No new public programs or projects under the 2019 budget received funding under the reenacted budget, resulting in total public disbursements contracting by 0.8 percent, yoy, in nominal terms in the first half of 2019. In addition, the spending ban39 on the construction of public works and the non-disbursement of public funds to specific agencies during the 2019 mid-term elections (from March 29 to May 12, 2019) also contributed to the fall in public spending. This resulted in a steep decline in infrastructure outlays (11.7 percent) and capital transfers to LGUs (29.0 percent). As a result, the government is significantly behind its programmed spending target for the year. The Government of the Philippines has so far disbursed only government’s infrastructure and socioeconomic programs. 42.2 percent of its Php3.769 trillion spending program for In terms of infrastructure outlays, the success of the 2019, compared to the disbursement rate 47.6 percent government’s catch-up plan hinges on the ability of the in the first half of 2018, with spending on infrastructure Department of Public Works and Highways (DPWH) and outlays posing the most significant challenge for the the Department of Transportation (DOTr) to implement rest of the year. In the first half of 2019, the government their combined Php803.1 billion spending program for the underspent its programmed target for capital outlays by year.40 In addition, infrastructure spending by other key 21.1 percent (Php 101.2 billion), as infrastructure outlays and line agencies are expected to contribute to disbursement capital transfers to LGUs fell short of their programmed growth in the second half of the year, provided that targets by 20.8 percent and 23.2 percent, respectively. agencies are able to accelerate the implementation In terms of the full-year budget, only 37.7 percent of the of their proposed capital outlay projects.41 Meanwhile, total infrastructure program has been disbursed, with an the government has committed to accelerate the estimated Php623 billion (an estimated 3.3 percent of GDP) implementation of priority socioeconomic programs such remaining for the rest of the year. as the National ID Program, the Pantawid Pamilyang Pilipino Program, and the fuel marking program. In order The government has set a spending catch-up plan in to support the timely execution of the government’s cash- motion, which aims to reverse the slow pace of public based budget for the remainder of 2019, the Department disbursements in the first half of 2019. The plan is of Budget and Management (DBM) already processed the centered around fast-tracking the implementation of the release of cash allocations to line agencies on July 1, 2019. 38 In 2019, the Government of the Philippines operated under a reenacted budget until April 15, 2019 when the president signed Republic Act No. 11260, or the General Appropriations Act for Fiscal Year 2019. Under the 1987 Constitution, if the Philippine government is unable to pass the General Appropriations Bill (GAB) by the end of the year, the Philippine government will operate under the previous year’s budget until the government passes the GAB. 39 Based on Commission on Elections Resolution No. 10511. 40 This represents around 80 percent of the total infrastructure program for the year and 21.3 percent of the year’s total disbursement program. 41 For example, the Department of Finance cites disbursements from the Department of National Defense on the Armed Forces of the Philippines’ Modernization Program, the school building programs of the Department of Education, and the health facilities enhancement program of the Department of Health. Source: https://business.inquirer.net/271193/govt-launches-bold-spending-catch-up-plan-to-reverse- slow-q1-growth 23 PART 01 RECENT DEVELOPMENTS Figure 19. National Government Fiscal Balance, 2013-H1 2019 25.0 3.5 2.5 19.6 19.4 20.0 17.9 17.7 1.5 17.6 17.1 17.5 18.0 16.3 16.7 16.4 15.7 15.8 15.7 15.7 14.9 15.1 15.2 Fiscal balance (Percent of GDP) 0.5 15.0 Percent of GDP -0.6 -0.5 -0.5 -0.9 10.0 -1.4 -1.5 -2.1 -2.2 -2.3 -2.5 -2.4 5.0 -3.2 -3.5 0.0 -4.5 2013 2014 2015 2016 2017 2018 2017 2018 2019 H1 H1 H1 Revenues Expenditure Fiscal Balance (RHS) Source: Bureau of the Treasury. Public revenue growth continued its strong The Philippines’ overall fiscal health remains momentum in the first half of 2019, slightly sound, although the public debt ratio increased exceeding the government’s programmed target. compared to the previous year. The government’s The government registered robust revenue growth commitment toward implementing an expansionary in the first half of 2019, reaching 17.5 percent of fiscal policy and slower pace of nominal GDP growth GDP—slightly exceeding its programmed target has resulted in a modest increase in the national by 0.3 percent (Figure 21). Strong public revenue government public debt ratio, from 42.5 percent of growth was fueled by the continued improvement GDP in 2017 and 2018 to 43.7 percent of GDP in the in tax collection, which rose by 10.0 percent, yoy, in first half of 2019 (Figure 23). Despite the increase, nominal terms in the first half of 2019, benefitting debt metrics remain favorable toward maintaining from the second round of excise tax hikes under the long-term fiscal sustainability. The country’s debt TRAIN law and continued efforts by the government portfolio is composed largely of long-term debt (76.0 to improve the tax administration. As a result, the percent), while around two-thirds of the country’s tax ratio improved slightly from 15.2 percent of total debt is composed of peso-denominated debt.42 GDP in the first half of 2018 to 15.6 percent of GDP in the same period in 2019—a substantial increase compared to the pre-reform tax ratio of 14.2 percent of GDP. 42 The Philippine government’s domestic debt accounts for around 67.3 percent of the total debt stock, around two-thirds of which are long-term in nature. 97.5 percent of the country’s external debt is long-term in nature. As a whole, 8.3 percent of the country’s total debt stock is short-term in nature. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 24 Figure 20. Figure 21. National Government Expenditure by Component (% of GDP) National Government Tax Collection by Type (% of GDP) 25.0 16 14 20.0 0.0 2.9 3.4 3.4 0.1 0.2 2.9 2.8 2.7 0.1 12 2.6 0.1 0.1 0.1 4.4 5.4 4.2 0.7 0.8 0.9 1.0 15.0 4.2 10 0.7 0.7 0.7 3.0 2.8 3.3 2.7 2.7 2.6 2.7 2.8 2.6 3.0 8 10.0 1.2 1.1 1.3 1.0 1.1 1.7 6 2.0 13.1 12.8 13.4 13.3 13.4 14.0 13.3 5.0 4 6.2 6.2 6.4 6.4 6.5 5.9 5.1 2 0.0 0 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 H1 Q1 Net lending Net Income & Profits Excise Tax Capital outlays Sales Taxes & Licenses Other Taxes Current operating expenditures Customs Duties Source: DBM, PSA. Source: DBM, PSA. Figure 22. Figure 23. The government continues to finance its deficit mainly through The overall debt-to-GDP ratio increased slightly in H1 2019. domestic borrowing. 50.0 340 45.0 320 2.9 3.4 300 2.8 2.7 280 40.0 260 15.2 240 15.5 14.2 220 35.0 14.9 14.0 14.4 200 In percent of GDP 180 30.0 160 140 In Billion Pesos 120 25.0 100 80 60 20.0 40 20 15.0 - 30.2 29.2 29.2 (20) 27.2 28.1 27.4 (40) 10.0 (60) (80) (100) 5.0 (120) July Jan July Jan (140) 2017 2018 2019 0.0 2014 2015 2016 2017 2018 2019 H1 Net Foreign Financing Domestic debt Net Domestic Financing External debt Budget Surplus/Deficit Source: Bureau of Treasury, PSA. Source: Bureau of Treasury. 25 PART 01 RECENT DEVELOPMENTS IMPROVING LABOR MARKET CONDITIONS LED TO PROGRESS ON POVERTY REDUCTION The labor market of the Philippines continued to be vibrant, as unemployment and underemployment rates recorded their lowest levels in over a decade. Sustained growth in real household income among the poor over the past 3 years have resulted in lower poverty rate in the first half of 2019. Figure 24. Unemployment and underemployment rate (Percent) 25.0 Underemployment rate 20.0 15.0 10.0 Unemployment rate 5.0 0.0 Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July Oct Jan Apr July 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Labor Force Survey (various rounds), PSA The Philippines maintained its low unemployment Underemployment rates dropped, particularly in in July 2019, indicating continued labor market regions outside of the NCR. Underemployment, tightness. Unemployment rate was at 5.4 percent or the proportion of employed persons who desire in July 2019 (2.4 million people) — its lowest in to work more hours or an additional job, has over a decade (based on July rounds of the labor persisted to be double the unemployment rate, but force surveys). This is slightly below the 5.5 percent it has declined over time. The underemployment average in 2015-18, but moderately above the rate averaged 16.9 percent 2015-18, before falling government’s target of 4.3-5.3 percent for 2019 considerably to 13.9 percent in July 2019 (6.0 (Figure 24). While the country’s low unemployment million people)— equivalent to about 1 million less rate signals a tight labor market, unemployment underemployed workers from last year’s 7 million. remains a major concern among the youth (aged As the NCR has continuously recorded the lowest 15-24), as the youth unemployment rate reached underemployment rates, the government has 14.4 percent, or approximately thrice the national prioritized curbing underemployment in regions rate, early in the third quarter of 2019. By region, the outside the capital. Government efforts to reduce highest unemployment rates were recorded in the underemployment such as emergency employment more urbanized areas, such as the CALABARZON and livelihood programs, yielded results early in the (7.2 percent), the National Capital Region (NCR) third quarter of 2019, as underemployment in non- (6.1 percent), and the Central Visayas (6.0 percent). NCR regions reached 15.8 percent, below the annual government target of 17.4-19.4 percent for 2019. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 26 Nonetheless, the government needs to intensify its recorded for the same period last year. While the job efforts to develop the industry sector and reduce creation was broad-based, the main growth drivers vulnerable work in order to sustain recent progress were the agriculture and services sectors, which in improving underemployment. The share of grew at 8 percent (10.1 million) and 6 percent (24.8 employment in the services sector, mostly low- million) yoy respectively (Figure 25). The industry end service jobs, expanded slightly to 57.8 percent sector trailed behind with 2 percent growth (8.0 in July 2019. By contrast, the share of the industry million) yoy. Within the services sector, the highest sector, which on average has higher paid jobs than job growth in absolute terms was recorded in the services sector, contracted from 19.4 percent wholesale and retail trade, accommodation and food in July 2018 to 18.7 percent in July 2019. In addition, service activities, transportation and storage, and the share of vulnerable workers, comprised of self- public administration and defense, and compulsory employed and unpaid family workers, considerably social security (Figure 26), which may be attributed increased from 31 percent in July 2018 to 34 percent to the transition period of those who recently in July 2019. assumed office as a result of the Philippine midterm elections as well as the increased consumer demand Despite the budget deadlock in the Congress of the during the summer period.43 Meanwhile, after a Philippines early this year, job creation expanded sluggish employment growth in the first quarter of in July 2019, mainly driven by the agriculture and 2019, the construction sector moderately picked up. services sectors. After recording job losses of 379,000 207,000 jobs and 140,000 jobs were added in April in the beginning of 2019, job creation picked up in and July 2019, compared to same period last year, the succeeding period. In July 2019, 2.3 million jobs respectively. The slowdown was expected, as the were created, yoy, which exceeded the government four-month budget impasse in Congress at the start target of 900,000 to 1.1 million jobs for 2019 and of the year severely held back public spending on approximately five times the 480,000 additional jobs infrastructure and social services.44 43 4.1 million foreigners have visited the country from January to June 2019, indicating an 11.4% increase from 2018. The tourism industry has generated 245 billion pesos in receipts from international visitors for the same period. Source: Department of Tourism 44 Based on the National Income Accounts of the PSA, government final consumption expenditure grew by only 6.9 percent in the second quarter of 2019, down significantly from 11.9 percent in the same period in 2018. Growth in public construction contracted by 27.2 percent in the same period. 27 PART 01 RECENT DEVELOPMENTS Figure 25. Job Creation Growth by Subsector (%) Agriculture Agriculture, hunting and forestry 6% Fishing aquaculture 16% Industry Manufacturing 1% Mining and quarrying 2% Electicity, gas steam, and air-conditioning supply 3% Construction 4% Services Transportation and storage 1% Information and communication 2% Education 4% Administrative and support service activities 7% Professional, scientific and technical activities 8% Public administration and defense; compulsory social security 9% Wholesale and retail trade; repair of motor vehicles and motorcycles 11% Real estate activities 16% Accommodation and food service activities 17% Arts, entertainment and recreation 22% Source: Labor Force Survey (July 2018 and July 2019 rounds), PSA. Figure 26. Top 10 Subsectors with Most New Jobs (100,000s) Real estate activities 35 Education 51 Arts, entertainment and recreation 76 Administrative and support service activities 106 Construction 140 Fishing and aquaculture 201 Public administration and defense; compulsory social security 241 Accommodation and food service activities 292 Agriculture, hunting and forestry 514 Wholesale and retail trade; repair of motor vehicles and motorcycles 820 Source: Labor Force Survey (April 2018 and April 2019 rounds), PSA. On the supply side, the country’s labor force in their prime workforce age of 35-44, followed by participation rate (LFPR) increased as more people people aged 24-34. Meanwhile, the anticipated LFPR in their prime workforce age and women become impact of the two cohort graduations of the Senior economically active. After a persistent decline High School (SHS) program, which meant that some during the past 2 years, the LFPR, representing the HS graduates may start to work, is noticeable but workforce engaged in work or available for work, seems only partial. The LFPR of the 15-24 age group has started to pick up, increasing from 60.1 percent increased from 36.8 percent in July 2018 to 38.3 in July 2018 to 62.1 percent in July 2019—equivalent percent in July 2019, equivalent to 230,000 youth. to 2.4 million labor market entrants (Figure 27). This suggests that bulk of SHS graduates may have More women entered the labor force, as the LFPR pursued further studies, particularly to avail of the among women increased from 46.5 percent in July benefits from the Universal Access to Quality Tertiary 2018 to 47.4 percent in July 2019. By age group, the Education Act.45 In 2016, a few months before SHS highest increase in the LFPR came from people was first implemented, about 65.9 percent of the 45 Republic Act 10931 also provides free tuition in state-run technical-vocational institutions, establishes tertiary education subsidies and student loan programs, and strengthens the unified student financial assistance system for tertiary education. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 28 country’s youth not in the labor force cited schooling 22.2 percent, about 4-percentage point drop from as the reason for not looking for work. This has the estimated share in 2015. significantly increased to 77.8 by 2019 (Figure 28). The incidence of poverty declined significantly in Real wage reached highest level over the past the first half of 2018. The latest official estimates decade boosting household incomes in early 2019. from the PSA show that the country’s poverty rate The real daily wage has increased over time, peaking declined from 27.6 percent in the first six months in the first quarter of 2019. In January 2019, the daily of 2015 to 21 percent in the same period in 2018. wage averaged Php392 (in 2012 prices), a 4.5 percent Almost all regions, except for the NCR and ARMM, increase from the same period in 2018 (Figure 29). experienced a reduction in poverty (Figure 31). This was likely due to regional wage hikes enforced in The Ilocos Region showed the largest decline, as the last quarter of 2018.46 Meanwhile, the movement its poverty rate fell by more than half, from 25.8 of workers from agricultural employment to non- percent in 2015 to 11.8 percent in 2018. Other regions agricultural jobs has continued, reflected in the that experienced a substantial reduction in the structure of household income. During the first half incidence of poverty (at least 30 percent) include of 2018, wages accounted for 49.5 percent of total CALABARZON, CAR, Bicol, MIMAROPA, Western household income from 46.6 percent share in the Visayas, and Central Luzon. While these initial same period in 2015. This has been especially evident estimates are promising, the high rate of inflation among households in the bottom quintile, where the recorded in the second half of 2018 especially share of wages in total income increased from 32.5 affected lower income households and may have percent in 2015 to 36.9 percent in 2018 (Figure 30). dampened the poverty-reducing gains from higher Consequently, the share of entrepreneurial incomes wage and salary incomes.47 (mostly agriculture based) contracted to Figure 27. Figure 28. Labor Force Participation Rate Reason for Not looking for Work among Youth (15-24) Not in the 66.0 Labor Force (%) 65.0 7.4% 7.7% 9.1% 7.8% 64.0 20.0% 17.5% 15.6% 13.8% 63.0 62.0 61.0 60.0 72.7% 74.8% 75.3% 78.3% 59.0 58.0 57.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul July 2016 July 2017 July 2018 July 2019 2012 2013 2014 2015 2016 2017 2018 2019 Schooling Household/family duties Others Source: Labor Force Survey (various rounds), PSA. Note: ‘Others’ include tired/believe no work is available, awaiting results of previous job application, temporary illness/ disability, bad weather, waiting for rehire/job recall, too young/old, or retired/ permanent visa. Source: Labor Force Survey (various rounds), PSA. 46 Wage hikes were effective in NCR, Region II, Region IV-B, Region 10 during the last quarter of 2018. In April 2019, a wage hike was effective in Region I. Source: Minimum wage data from the National Wages and Productivity Commission. 47 In the last decade, the incidence of poverty in the second semester has been consistently lower than in the first, which has compensated for the higher estimates for the first semester. The government’s full-year poverty incidence target for 2018 was between 17.3 and 19.3 percent. 29 PART 01 RECENT DEVELOPMENTS Figure 29. Figure 30. Average Daily Real Wage (Measured in Constant 2012 Php) Components of Household Income (Households in the Bottom Income Quintile) 400 100% 390 90% 24.4% 22.6% 380 80% 370 70% 15.3% 15.2% 360 60% 3.0% 2.2% 350 50% 25.7% 22.2% 340 40% 330 30% 320 20% 36.9% 310 32.5% 10% 300 0% Jan Apr Jun Oct Jan Apr Jun Oct Jan Apr Jun Oct Jan Apr Jun Oct Jan Apr Jun Oct Jan Apr Jun Oct Jan Apr Jun Oct Jan 2015 2018 2012 2013 2014 2015 2016 2017 2018 2019 Wages & Salaries Remittances: domestic Source: Staff estimates using Labor Force Survey (various rounds), PSA. Entreprenuerial Others Remittances: abroad Source: PSA and WB Staff Calculations. Figure 31. Poverty Incidence in the First Semester, 2015 and 2018 (%) 70 60 50 40 30 20 10 0 Philippines NCR CAR Ilocos Cagayan Valley Central Luzon CALABARZON MIMAROPA Bicol Western Visayas Central Visayas Eastern Visayas Zamboanga Peninsula Northern Mindanao Davao SOCCSKSARGEN Caraga ARMM 2015 2018 Source: PSA. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 30 02 OUTLOOK AND RISKS 31 PART 02 OUTLOOK AND RISKS GRADUAL ECONOMIC GROWTH RECOVERY The Philippine economy is projected to grow at a slower pace in 2019 compared with 2018 amid a weak external environment and domestic challenges. Economic growth will be driven by robust private consumption and recovering public investment growth, although it will be hampered by weak export performance. The Philippines’ growth outlook is weakened by well as heightened uncertainty from escalating trade a difficult external environment and domestic tensions. The domestic drivers of growth, especially challenges. The World Bank projects the country’s capital formation, are expected to grow at a lower real GDP growth at 5.8 percent in 2019, before rate in 2019 relative to 2018, hampered by the effects recovering to 6.1 percent in 2020 and 6.2 percent of the budget delay and the May election spending in 2021 (Figure 32). These estimates are lower than ban. Private consumption growth, despite recording the previous growth projections of 6.4 percent in a mild slowdown in the second quarter, is expected 2019 and 6.5 percent in 2020 and 2021, reflected to accelerate in 2019 compared with 2018. Given in the June 2019 edition of the Global Economic the weak external environment, net exports will Prospects. The downward revisions incorporate remain subdued. Nevertheless, economic growth downside risks that have materialized since the is expected to surpass 6.0 percent in 2020-21 as April 2019 edition of the Philippines Economic global growth is expected to moderately improve in Update, such as the slowdown in public spending, the next two years, the impact of this year’s public particularly on infrastructure, prevailing market expenditure slowdown dissipates, and assuming anxiety about the impact of global economic the uncertainty around the passage of the developments on the Philippine economy, including Corporate Income Tax and Incentives Rationalization weak global manufacturing activity and trade, as bill is resolved. Figure 32. Figure 33. Real GDP is expected to grow at 5.8 percent in 2019, Confidence has improved since the significant drop in the before accelerating in 2020-21. last quarter of 2018. 9.0 80 Forecast 8.0 60 7.0 40 6.0 5.0 20 Percent Percent 4.0 0 3.0 -20 2.0 1.0 -40 0.0 -60 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 October 2019 projections Overall Consumer Confidence Index (Current quarter) June 2019 projections Overall Business Confidence Index (All sectors) Actual growth Source: PSA, World Bank staff calculation. Source: BSP. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 32 The government’s fiscal policy will remain The growth forecast assumes a loosening of the supportive of growth, as public expenditure growth BSP’s monetary stance. With inflationary pressure is anchored in the acceleration of investment steadily diminishing since October of last year, the spending. The Philippine government is expected to BSP started to pursue a more accommodative continue its expansionary fiscal policy in the medium monetary stance in 2019. The declining inflation term, as public disbursements are set to expand trajectory is expected to continue in succeeding by 10.6 percent in nominal terms in 2019 and reach months due to base effects, coupled with lower food Php4.2 trillion and Php4.7 trillion in 2020 and 2021, and energy prices.49 Rice inflation is expected to respectively. The sustained rise in public spending decline further as continued private-sector imports will be anchored in the government’s investments in augment the domestic supply. Global crude oil prices infrastructure and human capital development. In are expected to moderate as well, barring significant particular, infrastructure outlays are set to expand by turmoil in oil-producing countries, as trade tensions 12.3 percent (to reach Php1.1 trillion, or 5.3 percent of are expected to have a direct impact on the demand GDP) and 26.8 percent (to reach Php1.4 trillion, or 6.1 for oil. As a result, oil prices are projected to fall percent of GDP), yoy, in 2020 and 2021, respectively. from US$68.00/barrel (bbl) in 2018 to US$66.00/bbl Current operating expenditures meanwhile are and US$65.00/bbl in in 2019 and 2020, respectively. expected to increase slightly to 14.5 percent of Given the declining inflation trajectory, along with GDP in 2020 from 14.2 percent of GDP in 2019, as temporary weaker growth, and the 175 basis points the government implements the fifth tranche of increase adopted in 2018, the BSP has the policy the public-wage adjustments under the salary space to adopt a more accommodative monetary standardization law. policy in the medium term. Furthermore, an interest rate cut of 25 basis points by the U.S. Federal Reserve However, underspending due to the delayed in July 2019 affords the BSP more space to pursue passage of the 2019 budget and concerns over additional rate cuts. project-delivery constraints will likely result in a lower fiscal deficit relative to the government’s With declining inflation and improving labor target. While authorities plan to accelerate the market conditions, household consumption pace of infrastructure spending to compensate growth is expected to accelerate in 2019. Private for underspending in the first half of the year, consumption is estimated to accelerate from 5.6 the World Bank forecasts a lower deficit for percent, yoy, in 2018 to 5.9 percent in 2019, driven 2019, as disbursements will likely fall short of the by lower inflation, which improves households’ programmed target despite the government’s purchasing power and increases consumption efforts to implement a catch-up spending plan in demand, and improving labor market conditions, the second half of the year. The pace of spending supported by the implementation of infrastructure will likely pick up in succeeding years under the projects that will generate job opportunities. This will assumption that future budgets are passed in contribute to improved consumer confidence, which a timely manner. While the government has recovered in the first two quarters of 2019 after falling maintained its fiscal deficit target for 2020 and significantly in the last two quarters of 2018 (Figure 2021 at 3.2 percent of GDP, implementing capacity 33). The 2019 confidence index, despite marginally constraints coupled with cash basis budget will likely lower in the first half of year, remains positive, challenge the government to reach the target.48 signifying more optimism than pessimism in the Philippine economy. Meanwhile, remittance inflows, 48 As the government shortens the grace period for cash budget implementation in 2020 and 2021 that allows disbursement beyond the budget year, and that the number of previous years projects reduces as they get implemented, the government needs to resolve procurement and implementing challenges so new projects can be procured and implemented within the budget allowed period. Between 2017-2018 disbursement performance of DPWH and DOTr has not improved much. Disbursement rate of DPWH increase slightly from 34.1 percent in 2017 to 39.2 percent in 2018 while DOTr’s disbursement rate has declined from 25.6 percent in 2017 to 20.6 percent in 2018, both due to absorptive capacity constraints given rapid increase in budget allocation since 2017. 49 As of Q2 2019, inflation in commodity prices in 2019 are expected by both consumers and businesses to remain within but at the upper bound of the 2-4 percent target of the government. Firms expect inflation to rise in Q3 2019 to 4 percent, while consumers anticipate a 4 percent inflation rate over the course of the next 12 months. 33 PART 02 OUTLOOK AND RISKS Table 4. Economic Indicators for Baseline Projections 2016 2017 2018 2019f 2020f 2021f Real GDP growth, at constant market prices 6.9 6.7 6.2 5.8 6.1 6.2 Private Consumption 7.1 5.9 5.6 5.9 5.9 6.0 Government Consumption 9.0 7.0 13.0 7.4 10.6 10.2 Gross Fixed Capital Investment 26.1 9.5 12.9 6.1 13.6 13.7 Exports, Goods and Services 11.6 19.5 13.4 5.9 8.0 8.3 Imports, Goods and Services 20.2 18.1 16.0 6.5 11.3 11.7 Inflation (period average) 1.3 2.9 5.2 2.9 3.0 3.0 National government balance (% of GDP) -2.4 -2.2 -3.3 -2.0 -2.7 -2.8 Current account balance -0.4 -0.7 -2.7 -2.0 -2.5 -2.7 riding on the sustained deployment of overseas with new opportunities in advanced economies like Filipinos, remains steady, although at lower rates Japan and Germany, future growth in remittances compared to previous years. will be modest due to an already high base. Beyond external demand, export competitiveness remains Weak external demand will likely continue to a challenge, as the country has not progressed in weigh on the country’s export growth. Global diversifying its export goods. growth is projected to decline from 3.0 percent in 2018 to 2.5 percent in 2019-2020, before rising to 2.6 The current account is expected to remain in percent in 2021 (Box 4). Growth among advanced deficit during the forecast horizon, driven primarily economies will be substantially lower at 1.6 percent by a large merchandise trade deficit and import in 2019 and 1.4 percent in 2020-21, which will soften acceleration. The large trade deficit will not be the demand for Philippine goods, as roughly 70 offset by the growth of net services exports and percent of the country’s exports are destined for net factor income from abroad. Imports will likely high-income economies. In addition, a prolonged intensify, outpacing export growth but at a slower global technology downturn will hurt the Philippines’ pace compared to 2018 before eventually rising in export performance since electronics components 2020-21, trailing domestic demand. Acceleration constitute nearly half of the value of its exports.50 . in the implementation the government’s public Net services exports will be supported by the tourism infrastructure program will increase the import of and BPO sectors, although their growth will likely be capital goods while steady household demand will modest given the weak external demand. While the drive consumer goods imports. demand for overseas Filipinos remains strong, 50 A prolonged technology downturn is anticipated in view of the escalating U.S.-China trade war and brewing trade tensions between Japan and Korea. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 34 Box 4. Global Outlook Global economic growth is expected to slow due Global financial conditions are projected to be to weakness in international trade and investment accommodative to growth as central banks in major performance. Global growth is expected to decelerate economies adopt dovish monetary policy stances. The from 3.0 percent in 2018 to 2.5 percent in 2019 (Figure 34). sluggish growth outlook and low inflation expectations in Weaknesses in both trade and investment are observed advanced economies are expected to prompt the adoption in both advanced economies and EMDEs, driven by an of accommodative monetary policies. For example, the escalation of trade disputes between major economies, U.S. Federal Reserve cut its policy rate by 25 basis points in as well as increased policy uncertainty51 that weigh on July 2019—its first rate cut since 2008, while the European business confidence and delay investment and export Central Bank has delayed ending its negative interest rate decisions. Economic activity in major economies is policy. This is expected to relieve some financial stress in expected to slow down as the effect of the U.S. fiscal EMDEs previously hampered by tight financial conditions, stimulus begins to wane, China’s rebalancing and especially in countries with elevated debt levels. The deceleration are projected to persist, and manufacturing change in expectations about interest rates (Figure 35) has and export sectors in major European countries continue already contributed to a drop in long-term yields, which to deteriorate amid a worsening global trade environment. has improved many EMDEs’ external financial conditions Meanwhile, growth in EMDEs is expected to soften in 2019 and portfolio flows. On the other hand, heightened due to below-average investment growth, dragged down uncertainties brought about by the on-and-off escalation by contractions in economies under financial stress52 and of the trade war between the U.S. and China, emerging sanctions.53 Economic growth in many Asian countries will disputes between Japan and Korea, and geopolitical likely remain robust, albeit with gradual deceleration, as tensions in the Middle East have translated to considerable countries such as China, India, Cambodia, and Vietnam will volatility in financial markets.54 Although supportive global register 6-7 percent growth in 2020-21. financial conditions are projected to persist in the near term, the eventual tightening of monetary policies in advanced economies in the medium term pose negative risks to EMDE capital flows. Figure 34. Global GDP Growth Outlook 8 6 Percent 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 World Advanced economies EMDEs Source: EAP Economic Update October 2019 51 Uncertainties include the lack of clarity regarding future trade rules following the deterioration in trade relationships between major countries, the rising support for protectionist policies, the risk of a disorderly Brexit, and a divided political landscape in countries holding general or parliamentary elections. 52 Countries such as Argentina, Brazil, Nigeria, South Africa, and Turkey face emerging market bond index (EMBI) credit spreads above one standard deviation of the 2010-19 average. 53 On June 2019, the European Union agreed to extend their sanctions that target Russia’s energy, financial, and defense sectors until the end of January 2020. Meanwhile, Iran continues to face U.S. economic sanctions targeting its oil sector. 54 Yields fell to 10-year lows while the offshore yuan depreciated to its weakest level in 11 years on the day the U.S. government announced additional 10 percent tariffs on US$300 billion worth of Chinese goods. Equity markets in advanced economies in EAP also registered losses due to the trade war escalation. 35 PART 02 OUTLOOK AND RISKS Figure 35. U.S. Federal Reserve Rate Expectations 2.6 2.4 2.2 2.0 Percent 1.8 1.6 1.4 1.2 1M 3M 6M 1Y 2Y 3Y Current Mar-18 Jun-18 Sep-18 Source: Global Economic Prospects June 2019 Global trade is expected to slow substantially in 2019, capital goods such as electronic components (e.g., mainly driven by the re-escalation of trade tensions semiconductors), which are deeply embedded in global between the U.S. and China. Global trade growth is value chains (Figure 36). While the negative impacts are expected to decelerate from 4.1 percent in 2018 to 2.6 widespread, affecting the international trading community percent in 2019—the lowest level since the global financial at large, they are especially felt in China and across crisis in 2008. Trade tensions between the U.S. and Asia. Aside from the U.S.-China trade war, the expected China have recently escalated, with the U.S. announcing economic slowdown in China and advanced economies will additional tariffs on Chinese goods in August 2019.55 These likely weigh on external demand in the rest of the world tensions will likely have a severe economic impact on trade in the medium term. On the upside, a cyclical recovery and further contribute to already heighted trade-policy in a number of commodity exporters and EMDEs may uncertainties that dampen industrial activity. The effects of provide partial offsetting effects, assuming global financial slowing global trade are most apparent in heavily traded conditions remain accommodative. Figure 36. Production of Capital Goods and Semiconductor Sales Growth in the G20 6 22 Percent, year-on-year 3 10 0 -2 -3 -14 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Mar-19 Capital goods Semiconductors (RHS) Source: Global Economic Prospects June 2019 55 On August 2019, the U.S. government announced additional tariffs of 10 percent on US$300 billion worth of Chinese imports, on top of the existing 25 percent currently levied on US$250 billion worth of Chinese goods, effectively levying tariffs on all Chinese importation by September 2019. China retaliated by halting the importation of agricultural goods from the U.S., followed by the depreciation of the Chinese Yuan below RMB7.00 per USD for the first time since the 2008 financial crisis. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 36 The global investment outlook remains subdued amid Downside risks to the global economic outlook dominate, heightened trade and policy uncertainties. Global driven by elevated trade and policy uncertainties, the investment growth is projected to slow from 3.7 percent possibility of a sharper-than-expected slowdown in major in 2018 to 2.3 percent in 2019, derailed by escalated trade economies, and narrow policy space. Trade negotiations tensions and policy uncertainties, which have prompted between major economies remain fragile and could further firms to postpone long-term investment plans in both deteriorate, resulting in added negative effects on trade advanced economies and EMDEs.56 China’s economic and investment. Political uncertainties are heighted, as rebalancing toward a more consumption-driven economy countries holding general or parliamentary elections in is also expected to contribute to the bleak investment 2019-22 account for 35 percent of global GDP.57 A sharper outlook, while export-related investments in other EMDEs economic downturn in the U.S., China, and the euro will likely ease against the backdrop of a growth slowdown area (which collectively contribute 50 percent of global in major economies (e.g., in China, the euro area, and GDP) would yield unfavorable spillover effects on other the U.S.) and commodity price weakening in 2019-21. countries, especially EMDEs. In addition, conventional Monetary easing in advanced economies may stimulate counter-cyclical responses to slow growth are limited, as some recovery in the short-to-medium term, although most advanced economies (except for the U.S.) have near elevated government and corporate debt levels in EMDEs zero, if not negative, interest rates that constrain monetary may prevent them from taking advantage of cheaper policy actions, while EMDEs struggle with elevated debt borrowing costs brought about by improved global levels that limit space for fiscal stimulus. As such, prudent financial conditions. public investments that prioritize high-impact projects while keeping fiscal balances in check, as well as structural policies that enhance productivity and promote private- sector investments will be crucial in weathering risks. 56 The private sector’s 10-year-ahead growth outlook for long-term investments have steadily deteriorated over the past decade, from 6.3 percent in 2010 to 2.7 percent in 2019. 57 Includes countries such as Afghanistan, Argentina, India, Sri Lanka, Philippines, and at least 20 nations in Africa. While the industry and agriculture sectors will in the same period last year. Meanwhile, the continue to face challenges, the services sector agriculture sector is not expected to significantly is set to grow. The industry sector is expected recover in 2019, as output in the crops subsector to weaken in 2019 relative to 2018, given weaker contracted in the first half of the year, mainly due performance in the construction and manufacturing to the El Niño phenomenon. In the medium term, sectors. Construction activities were negatively agricultural growth will continue to be hampered by impacted by the slower implementation of public the sector’s unresolved productivity challenges and construction projects in the first half of the year, and vulnerability to weather-related shocks. By contrast, they will likely be tempered in the second half as the outlook for the services sector remains positive, the wet season begins. Additionally, manufacturing as demand for real estate is expected to continue, growth is hampered by the slowdown in global fueled by a growing middle class and a steady flow trade and the electronics industry. Foreign direct of remittances. Similarly, the demand for financial investments to the sector contracted by 86.0 services is expected to grow, supporting economy- percent in the first half of 2019 to US$107.0 million— wide growth. The tourism sector is also growing, on considerably less than US$767.0 million recorded track to surpass the number of visitors last year. 37 PART 02 OUTLOOK AND RISKS CONTINUED PROGRESS ON POVERTY REDUCTION Despite a temporary economic growth slowdown financial support. Moreover, the country’s in the first half of 2019, progress on shared unconditional cash-transfer (UCT) program provides prosperity is likely to continue. Partial estimates households with Php2,400 in annual benefits to from the 2018 Family Income and Expenditure mitigate the impact of higher excise taxes. In 2018, Survey showed that household incomes in lower UCT grants were rolled out to payout modalities of income deciles grew at a much faster pace than 4Ps and social pension for indigent senior citizens. that of the average household, and the continued The UCT program will continue in 2019, with annual expansion of non-agriculture wage and salary benefits increasing to Php3,600. employment will help sustain recent household income growth. Meanwhile, the government’s Similarly, poverty reduction is also expected cash-transfer schemes will continue to help cushion to continue based on the current economic the impact of negative shocks. The enactment outlook. Given the continuous expansion of non- of Republic Act 11310, or the Pantawid Pamilyang agricultural wage employment, the rising real wage, Pilipino Program (4Ps) Act, on April 17, 2019 continuation of social programs, and stabilizing guarantees the continuity and sustainability of inflation, the declining trend in poverty is likely the 4Ps program, which provides up to Php6,900 to continue in 2019-21. Medium-term poverty (approximately US$130) every two months to projections based on the middle-income poverty line compliant households with three children in high of $3.20/day show the poverty rate declining from 26 school. The 4Ps Act aims to improve the health, percent in 201558 to 20.8 percent in 2019, 19.7 percent nutrition, and education outcomes of children from in 2020, and 18.7 percent in 2021 (Figure 37). poor households by providing regular public Figure 37. Actual and Projected Poverty Rates in the Philippines, 2006-21 Actual and projected $3.20-a-day poverty rates 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2009 2012 2015 2018 2021 Source: PSA, World Bank staff calculation. 58 Actual estimates are slightly different from previous publications due to updates in the Consumer Price Index (CPI). PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 38 STEPPING UP DOMESTIC POLICY SUPPORT AMID INTENSIFIED EXTERNAL RISKS External risks have intensified, marked by a slowdown in global growth and demand. Domestic risks include slower-than-expected growth in public investment spending and prolonged uncertainty surrounding the passage of the remaining reform program. Prudent public expenditure and investment management is needed as the government pursues its expansionary fiscal agenda. Pursuing structural reforms and following through on the implementation of recently passed reforms will help strengthen market confidence. External risks have intensified while the threat investments would be crucial to achieve the baseline of capital outflows has abated. The Philippines growth outlook. The need to judiciously expedite faces heightened external risks due to the public expenditures, which have fallen short of slowdown in global growth and demand, weaker their desired target so far for the year, is not only global manufacturing activity, and rising global important to increase economic growth but also protectionism59. The unresolved trade dispute to addresses the country’s physical infrastructure between the U.S. and China, coupled with a newly and human capital needs. In particular, several emerged trade conflict between Japan and Korea, national government agencies continue to face strains the regional value chain that the Philippines implementation bottlenecks which have prevented is a part of. This darkens the prospect of the country’s line agencies from fully executing their budgets, export performance, which has already been reeling with issues relating to absorptive capacity, from the decline in electronics export growth due procurement difficulties, and right-of-way issues.60 to the downturn in the electronics production cycle. In the long-term, addressing capacity constraints While the likelihood of intensified capital outflows at the LGU level will play a more important role, has subsided, given the more dovish stance of as LGUs are expected to receive a larger share of central banks in advanced economies, episodes of national government transfers in 2022 as a result of abrupt volatility in the financial market remain a the recent Supreme Court ruling which increases possibility, driven by the re-escalation of trade wars the share LGUs receive from national government and geopolitical disturbances. taxes (Box 5). Moreover, ensuring the timely passage of the 2020 budget will be critical to continue the A slow recovery in public investments constitutes public investment momentum. Other domestic risks the main domestic downward risk. While some include the prolonged uncertainty surrounding the domestic risks have subsided, including the threat of passage of the corporate income tax bill, which has high inflation, accelerating the roll-out of public tempered private investment growth since 2018. 59 Rising global protectionism is a risk to global growth and trade at large, which translates to the risks of weak external demand to the Philippines 60 For example, according to audit reports by the Commission on Audit, DOTr and DPWH, disbursed only 20.6 percent and 39.2 percent of their budgets in 2018. Both the DOTr and the DPWH will continue to play an integral role in the government’s infrastructure investment program, and addressing these implementation bottlenecks, which have plagued line agencies for years is crucial in order to ensure that the pace of the public investment program ramps up over the medium-term. 39 PART 02 OUTLOOK AND RISKS Box 5. The Mandanas Ruling Earlier this year, the Supreme Court finalized its ruling The Mandanas ruling will significantly increase local which grants LGUs a larger portion of the taxes collected government resources to deliver public service. Under by the national government, starting in 2022. On the current scheme, LGUs have been receiving around January 2012, former Batangas 2nd District Representative 3.0 percent of GDP annually from the IRA transfers, Hermilando Mandanas filed a petition to the Supreme constituting some two thirds of local government Court, arguing that the Internal Revenue Allotment (IRA) – revenue sources. IRA transfers are estimated to reach the share of national government tax collections provided about 4.5 percent of GDP by 2022 (Figure 38) due to the to LGUs – should be equal to 40 percent of the revenues of implementation of the Mandanas Ruling – significantly both the Bureau of Internal Revenue (BIR) and the Bureau augmenting LGU budgets, especially those of non-city of Customs (BOC), as opposed to the current scheme which government units which have less capacity to generate is based on BIR collections only. On April 2019, the Supreme tax revenues from local sources.61 As a result, LGUs will Court rendered final its decision in agreement with be expected to play a larger role in the delivery of public Mandanas and specifically mandated the corresponding services. Currently, the national government is responsible increase in the IRA to begin during the 2022 budget cycle. for 82 percent of public service spending (Figure 39). Figure 38. Figure 39. Projected IRA increase as a result of the Mandanas Ruling NG and LGU contributions to public expenditures per sector in 2018 (%) 5.0 4.5 Total public services 82 18 4.0 Defense 100 3.4 3.0 3.1 3.0 3.0 3.1 Economic services 84 16 3.0 Housing and community development 42 58 Percent of GDP Labor and social welfare 88 12 2.0 Health and nutrition 72 28 1.0 Education and manpower development 96 4 General services 63 37 0.0 0 50 100 2016 2017 2018 2019 2020 2021 2022 National government Local government Source: : DBM, BTr, World Bank Staff calculations Note: Due to data constraints, LGU capital outlays were assumed to be spent on economic services while barangay expenditures were assumed to be purely based on their IRA shares and follow the same distribution across sectors as provinces, cities, and municipalities. Source: DBM, BLGF, WB staff estimates. 61 City governments are less reliant on the IRA for as they are able to generate significant revenues from local taxes, due to the higher levels of economic activity and real estate valuations in their jurisdictions. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 40 Meanwhile, the passage of investment-friendly before 2022. Actual obligations data suggest the reforms would improve the country’s growth recent ramp-up in infrastructure spending financed outlook. Passing investment-friendly reforms such smaller-scale public works, government-owned as the Public Service Act amendment, which would and controlled corporations (GOCCs) projects, and lift foreign ownership limits in key sectors including increases in defense spending (Box 6). Anecdotal in telecommunication and transportation services, evidence suggests that these smaller scale projects and the Retail Trade Liberalization Act, which would do not undergo the same scrutiny as the larger reduce the required minimum paid-up capital for scale infrastructure projects identified in the Build, foreign entrants in the retail sector, would contribute Build, Build program, and might thus provide to higher levels of FDI. Evidence shows that higher less value-for-money to the government and the FDI helps to boost local productivity, therefore the economy as their economy wide productivity- timely passage of investment friendly reforms serves enhancing effects are likely to be smaller than the as an upside risk to growth. flagship projects’, while still costing large sums that put pressure on fiscal and current account In addition, accelerating the implementation balances.62 As such, hastening the implementation high-impact flagship projects would be critical of the higher-impact 75 flagship projects will be key in expanding Philippine’s growth potential in the to optimizing the returns of public infrastructure medium term. So far, only 11 out of the 75 flagship investment, efficiently closing the infrastructure gap, projects have reached the construction phase after and expanding the Philippine economy’s long-term three years into the administration and only 25 are growth potential. expected by the government to be completed 62 For example, some smaller scale road projects in the Philippines were implemented without going through proper scrutiny resulting in incomplete projects, while costing the government valuable resources. Source: https://opinion.inquirer.net/114494/infra-spending-goes- nowhere. 41 PART 02 OUTLOOK AND RISKS Box 6. Infrastructure Spending The government has ramped up infrastructure spending almost doubled from an average of 1.1 percent of GDP despite delays in the implementation of flagship projects. per year between 2013-15, to 2.0 percent of GDP in 2016- Infrastructure cash outlays have been steadily increasing 18, accounting for the largest share of the infrastructure from an average of 2.4 percent of GDP in the three years outlays (42.5 percent). These have resulted in faster preceding 2016, to 4.6 percent of GDP in 2018 (Figure 38). expansion the national road network and improvement Most notably, infrastructure spending rose sharply by 41.2 in road quality.64 Flood control systems (13.1 percent) and percent in 2018, and is expected by the government to school buildings (11.8) are the next largest infrastructure breach 6 percent GDP by 2021, as it continues to pursue its priorities, with their allocations increasing by three and Build, Build, Build agenda.63 However, these expenditures six times, respectively, as a percentage of GDP. The have not been used for the highest-impact investments, Department of Transportation’s (DOTr) participation (4.5 as the implementation of government’s 75 flagship percent) in infrastructure spending improved slightly projects has been slow, with only 11 projects reaching during the past three years, although still lagging the construction phase as of April 2019. According to the significantly behind DPWH despite also being a lead National Economic Development Authority (NEDA), only implementing agency for the Build, Build, Build program. 25 projects with investment costs amounting to Php263.2 billion are expected to be completed before 2022, while the GOCCs are key drivers in rolling out the government’s remaining 50 projects worth some Php1.9 trillion may still infrastructure plan. Infrastructure obligations of the commence implementation during the administration. GOCC sector in the first half of the Duterte administration matched the levels during the last half of the previous government at 0.4 percent of GDP, although significantly Public works account for most of infrastructure declining as share of the total infrastructure budget. These obligations made during the first three years of the were led by the irrigation system projects of the National administration. DPWH accounted for 73.0 percent of Irrigation Administration (NIA) which averaged at 0.2 the infrastructure budget, a significant increase from its percent of GDP per year in 2016-18, double compared to its average share during the last three years of the previous obligations in 2013-15, followed by the projects of the various administration (55.3 percent). Obligations for road projects Figure 40. Infrastructure Capital Outlays 1,000 4.6 5.0 800 3.6 4.0 3.4 600 2.6 3.0 Php billions 2.3 2.2 Percent 400 2.0 200 1.0 0 0.0 2013 2014 2015 2016 2017 2018 Cash disburements Share of GDP (RHS) Source: DBM. 63 National Government Fiscal Program, 2017-2021 64 The total length of national roads grew by an average of 2.1 percent per year between 2016-18, a significant improvement from the -0.1 percent average in 2010-15. Road conditions also improved, with paved roads accounting for 96 percent of the total national road length by 2018, increasing significantly from 88.4 percent in 2015. Data from DPWH infrastructure statistics. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 42 housing authorities (0.1 percent of GDP). However, the share GDP per year in 2013-15 to 0.12 percent of GDP per year in of the infrastructure program allocated to GOCCs has been 2016-18. The sharp increase was mostly driven by spending halved from 15.6 percent of infrastructure budget in 2013-15 on machinery and equipment which accounted for 85 to only 7.9 percent in 2016-18 as increases in the budgets of percent of the DND’s infrastructure spending during certain national government agencies (e.g. DPWH, DND, the past three years. As a result, the share of defense and DOTr) were prioritized. infrastructure spending almost doubled from 1.2 percent to 2.3 percent, nearly matching the Department of Health’s Defense infrastructure spending increased considerably (DOH) share of the infrastructure budget (2.5 percent) in the past three years. DND infrastructure obligations which is mostly spent on hospitals and health centers. more than quadrupled from an average of 0.03 percent of Table 5. Breakdown of Actual Obligated Infrastructure Outlays, 2016 and 2017 Percent of GDP % Share of infra budget 2013-15 2016-18 2013-15 2016-18 DPWH 1.5 3.5 55.3 73.0 Road networks 1.1 2.0 41.4 42.5 Flood control systems 0.2 0.6 8.0 13.1 School buildings 0.1 0.6 3.5 11.8 Others 0.1 0.3 2.4 5.6 Budget support to GOCCs 0.4 0.4 15.6 7.9 Irrigation systems (NIA) 0.1 0.2 2.0 3.7 Housing-related infrastructure assets (NHMFC, NHA, SHFC) 0.2 0.1 8.6 2.8 Others 0.1 0.1 5.1 1.4 DOTr 0.1 0.2 4.0 4.5 Airport systems 0.0 0.1 1.7 1.9 Seaport systems 0.0 0.0 0.3 0.2 Others 0.1 0.1 2.1 2.3 DOH 0.1 0.1 2.4 2.5 Hospital and health centers 0.1 0.1 2.3 2.3 Others 0.0 0.0 0.0 0.2 DND 0.0 0.1 1.2 2.3 Machinery and equipment 0.0 0.1 1.2 1.9 Others 0.0 0.0 0.0 0.3 Other NG agencies 0.6 0.5 21.5 9.8 Total NG infrastructure outlays 2.7 4.7 100 100 Source: DBM 43 PART 02 OUTLOOK AND RISKS Although the country’s debt metrics and fiscal would ensure that the government is able to keep balance remain favorable, prudent management its deficit within its programmed target. Moreover, of public expenditure is needed to ensure the swift passage of the corporate tax reform will be long-term fiscal sustainability. The Philippines’ important to temper uncertainties on the private investment outlook is anchored on the successful sector, as the delay has already had an impact on the implementation of the government’s infrastructure pace of private investment growth. program. By 2021, government disbursements are set to increase by an estimated 142.4 percent in nominal Judiciously using the regained monetary space terms since 2014, with infrastructure spending and foreign reserves can help support growth increasing by nearly five-times over the same period. and buffer external shocks. Heightened global As the government continues to ramp-up spending, uncertainty, strong capital outflows, and rising evaluating the quality of public expenditure is domestic inflation in 2018 eroded the country’s important to ensure that resources are spent international reserves and chipped away monetary effectively and efficiently which requires ensuring policy space. The Philippines’ market conditions, that all remaining challenges to implementation and however, have become more benign since the budget execution are addressed. beginning of 2019, marked by a sustained decline in domestic inflationary pressure and favorably The successful and timely passage of the influenced by the more dovish stance by the U.S. remaining packages of the government’s Federal Reserve. With capital flowing back to comprehensive tax reform program is needed to emerging markets like the Philippines, the country’s ensure the health of the country’s long-term fiscal foreign exchange rate has strengthened, and balances (Box 7). The remaining packages are part international reserves have increased from US$77.5 of the government’s medium-term fiscal program billion in June 2018 to US$85.4 billion in June 2019. and have been filed in the House of Representatives Maintaining the flexibility of the exchange rate under the 19th Congress of the Philippines. However, regime and ensuring ample foreign exchange a number of these proposed tax reform packages reserves will help the country buffer terms-of-trade have met stiff resistance in the legislative branch shocks at a time of re-escalating trade tensions. such as mining taxation, and corporate tax regime Additionally, inflation has declined and expected reform which are more challenging politically. As to fall, on average, to within the BSP’s 2-4 percent the administration enters the second half of its term, target range in 2019. This will enable the BSP ensuring that the reform momentum is sustained to maneuver its key policy rate to help address is crucial towards locking in the recent successes weakened economic growth prospects. in fiscal policy made. Their successful passage PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 44 Box 7. The CITIRA Bill and the Government’s Comprehensive Tax Reform Program The government’s efforts to implement its comprehensive tax reform program continues in the 18th Congress of the Philippines with corporate income tax (CIT) and incentives reforms. The Philippine government was able to pass the previous version of the proposed Corporate Income Tax and Incentive Rationalization Act (CITIRA) – then known as the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill – in the House of Representatives under the 17th Congress of the Philippines but was unable to move forward in the Senate. President Duterte urged members of the Congress to pass the CITIRA bill during his fourth State of the Nation Address. The proposed bill aims to improve the Philippines’ competitiveness by improving the fairness, efficiency, and equity of the country’s tax system. The bill (Package 2) aims to improve the Philippines’ competitiveness on a global scale by gradually reducing the CIT rate from 30 percent, which is among the highest in ASEAN, to 20 percent over the course of ten years. Lowering the CIT gradually to reach 20 percent will make the Philippines’ setting up an implementation plan. In the case of the rate among the lowest in the region, which will contribute Philippines, it is essential that the government continuously toward attracting more foreign and local investment. There communicates the progress and details of the proposed are currently fourteen government agencies granting tax reform to reduce uncertainties within the business incentives with discretion and over 300 special laws that community. In addition, to achieve the goal of simplifying create incentives for firms to arbitrage. The proposed bill and making tax incentives more transparent and improve also aims to reduce leakages and distortions by simplifying governance, the government should create a set of clearly and unifying the country’s tax incentive regime. The defined implementing regulations to reduce discretion by Department of Finance estimated Php441.1 billion in tax implementing agencies and regulators. incentives in 2017, benefitting around 3,000 companies. The government aims to modernize the country’s incentive All other proposed tax reform bills have been filed in the system to ensure that fiscal incentives are performance- 18th Congress of the Philippines. The remaining tax reform based, targeted, time-bound, and more transparent. The packages have been filed in the House of Representatives. proposed incentive regime requires that firms that want to In particular, Package 1C aims to hike the motor vehicle benefit from fiscal incentives invest in industries that are user’s charge in order to finance the government’s various aligned with the Philippines’ development agenda, help infrastructure projects. Meanwhile, Package 2-plus seeks spur investment growth in lagging regions, and encourage to introduce adjustments to sin taxes, particularly on the accumulation of human capital through worker alcohol products, which will help finance the government’s upskilling and training. universal health care program. Package 3 aims to reform the country’s property valuation system by improving the While the approval of the government’s proposed reforms quality of valuations by local governments. The government will help create a more competitive business environment aims to do this by increasing the frequency of revisions in the long term, ensuring a smooth transition in the and making the process more efficient, transparent, short term is crucial to maintain business confidence. and reflective of the latest market developments. Lastly, International experience demonstrates that corporate tax Package 4 aims to make taxation of passive income and reforms are complex, and governments often face strong financial taxes simpler, fairer, more efficient, and more opposition when implementing reforms, as changes competitive by unifying tax rates on passive income, usually involve winners and losers. Countries that have reducing the number of final withholding tax rates, and successfully managed to introduce tax reforms tend to pay harmonizing business taxes on financial intermediaries, special attention to clearly communicating the process and among others. content of the reform, as well as carefully 45 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS In the short term, fast tracking implementation the improvement in firm-level productivity, and of recently approved game-changing reforms second, the labor re-allocation to more productive would help to achieve inclusive growth. As part firms within an industry. Through firm entry and of the 10-point socioeconomic agenda of the exit, competition encourages the disappearance government, various game changing reforms have of low-productivity jobs and the creation of more been passed in 2018 such as the Ease of Doing productive jobs, along with the reduction in “labor Business Law,65 the Rice Tariffication Law, the hoarding” for firms that previously enjoyed strong creation of a foundational ID, the National Payment market power. Productive firms, in a bid to stay System Act, the cash budgeting, among others, ahead of competition, tend to invest in education, are transformational policy changes that have the training, and skills development for workers to keep potential to accelerate inclusive growth. However, them apace in the changing work environment. progress on the implementation of these reform The delivery of quality jobs and human capital is has been slow. For instance, it took about a year for especially relevant for the Philippines where an the implementing rules and regulations (IRR) of the above 6 percent average growth since 2010, has not Ease of Doing Business law to be released, while the fully translated into faster poverty reduction and IRR for the National Payment Systems Act has yet shared prosperity. Hence, a robust competition policy to be finished. Meanwhile, a proposal for new price- that leads to quality job creation will help increase control measures through the implementation of a the growth impact on poverty and inequality. suggested retail price (SRP) on rice may dilute the ability of the Rice Modernization law to lower prices. Structural reforms that aim to reduce regulatory In addition, the timely and effective implementation restrictiveness in key markets and encourage of the Rice Competitiveness Enhancement Fund market competition should be prioritized to is crucial to protect farmers during the transition strengthen private-sector development. Evidence period from the quota to tariff system on rice and suggests that removing the restrictiveness of help them increase rice productivity, diversify to regulations in selected sectors has a positive effect high-yield crops and sustain progress on poverty on value added, productivity, and export growth reduction. Therefore, fast tracking the effective beyond these sectors. Estimates for the Philippines implementation of these game-changing reforms reveal that the removal of restrictive product market would be critical to set the country to a higher path regulations in the professional services, energy, and toward inclusive growth. transport sectors would increase economic growth by an additional US$0.6 billion, or lead to an increase In the long term, promoting competition to foster of 0.2 percentage point in the annual GDP growth quality job creation will enhance the impact rate in sectors that use these services intensively.66 of economic growth on poverty reduction and Reducing regulatory restrictiveness require, among shared prosperity. The lack of competition in others, implementing a number of reforms aimed key sectors remains as one of the key binding at eliminating restrictions on foreign as well as constraints towards achieving a more inclusive domestic investors in sectors where such restrictions growth path – the type that creates more and create an uneven playing field; minimizing the scope better jobs and reduces poverty. Unequal and of controlled prices to incentivize firms to compete; discretionary application of policies and overly- and streamlining burdensome administrative restrictive regulations weaken market competition procedures for businesses in order to facilitate easy in sectors critical for firms to enter and thrive. market entry. (See Part III: Special Focus Note Making markets more open to competition will help on Competition). guide labor towards more productive employment. This can be achieved through two channels: first, 65 The “Ease of Doing Business Law” strengthens the “Anti-Red Tape Law” which aims to cut down processing time for government permits, transactions, and applications. It aims to reduce the cost of doing business in the Philippines, and limit bureaucratic red tape, from government institutions. 66 World Bank (2018), “Fostering Competition in the Philippines: The Challenge of Restrictive Regulations,” Washington DC: World Bank. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 46 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Compared to regional peers, Philippine markets are relatively more concentrated, with a higher proportion of monopoly, duopoly, and oligopoly markets. This has translated into relatively poor service delivery for Filipino firms and higher prices for goods and services paid by households and firms compared to other countries. Furthermore, limited competition in key economic sectors has been consistently identified as a constraint to the creation of more and better jobs and faster poverty alleviation. Unequal and discretionary application of policies and overly-restrictive regulations weaken market competition in sectors critical for firms to enter and thrive. These restrictions are linked to the participation of the state in key markets, including state ownership and involvement in business operations of SOEs; the existence of barriers to entry and rivalry, such as complex regulatory procedures and administrative burdens on start-up businesses; and barriers to trade and investments, including foreign equity investments. Reducing restrictions to market competition would yield significant payoffs for households and firms in the Philippines and boost the economy’s overall competitiveness. 47 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Philippine markets are concentrated limiting market competition in key sectors Markets in the Philippines are relatively Another measure for degree of competition in a concentrated, limiting competition in key sectors. market is the price cost margin (PCM)71, which in a Philippine manufacturing markets appear to be competitive setting, should move towards a value of more concentrated than those of regional peers,67 zero as firms adjust their prices downwards. In the with a higher (Figure 41) and increasing (Figure 42) Philippines, more than 70 percent of agricultural proportion of monopoly, duopoly, and oligopoly markets, 60 percent of manufacturing markets, 80 markets. Moreover, close to 50 percent of markets in percent of wholesale/retail markets, and 90 percent the wholesale/retail sector, more than 70 percent in of transport/storage markets have an average PCM agriculture, and more than 95 percent in transport/ of more than 40 percent, suggesting the existence storage68 could be classified as highly concentrated, of market power by firms. In some cases, such according to standard Herfindahl–Hirschman Index outcomes can be facilitated by market rules and (HHI)69 thresholds used by competition agencies.70 regulations such as price controls. 67 Regional peers were selected among those countries with available information from the World Bank’s Enterprise Survey. 68 While transport and storage markets tend to be highly concentrated, given their market characteristics, (and accordingly these markets are often subject to regulation), concentration levels in the Philippines appear to be relatively high even in transport and storage markets where competition should be viable such as local bus, cargo handling, and freight forwarding services. 69 The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. Source: https://www.justice.gov/atr/herfindahl-hirschman-index 70 Data source: 2012 Census of Philippine Business and Industry (CPBI), a nationwide census conducted by the Philippine Statistics Authority. The statistics are only based on data from the formal sector of the economy, including corporations and partnerships, cooperatives and foundations, single establishment with ten or more employees, and single proprietorship with branches. The initial count of the 2012 List of Establishments (LE), the frame used to draw the sample establishments for the 2012 CPBI, registered a total of 945,000 establishments in operation nationwide in 2012. Out of this, 680,400 establishments, 72 percent, belong to the informal sector and only 262,800 establishments, or 28 percent, made up the formal sector. Source: Philippine Statistics Authority. 71 The PCMs are calculated by considering the firm’s direct costs of sales and labor costs as the firm’s total variable costs. The PCM for each firm is obtained by first, getting the difference between the firm’s total sales (revenue from its main activity plus sales of its products/ by-products) less the firm’s total variable costs from the firm’s total sales, and then the ratio of this difference and the firm’s total sales. The average PCM per market is estimated from the firm-level PCMs. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 48 Figure 41. Figure 42. Market Concentration in Manufacturing in the Philippines Evolution of Market Concentration in Manufacturing in the Philippines and Selected EAP Countries 100% 20% 90% 18% 80% 16% 70% 14% 60% 12% 50% 10% 40% 8% 30% 6% 20% 4% 10% 2% 0% 0% Philippines Indonesia Malaysia Cambodia Monopoly Duopoly Oligopoly (3-6) Monopoly Philippines 2009 Duopoly Philippines 2015 Oligopoly (3-6) Many Source: World Bank’s Enterprise Survey, 2009 and 2015. Source: World Bank’s Enterprise Survey, 2009 and 2015. High concentration in markets with low competition would typically be considered viable natural barriers to entry further suggest lack in the majority of these single-firm markets. of competition in many sectors due to market Figure 43 through Figure 46 show the HHI and rules and regulations. In environments where PCMs for markets that are in the top decile of competition would usually be considered viable, both distributions. Even in the transport/storage there are a number of markets in the Philippines sector, which tends to be more naturally prone to with only one formal sector firm in operation.72 In concentration, the markets captured here are those agriculture, there are 15 national markets that have which would usually be considered contestable – only one firm operating, 16 in manufacturing, 5 in including road freight transport, grain warehousing, wholesale/retail, and 15 in transport/storage (Table 6). and inland freight water transport. Markets with high With the exception of a small number of transport concentration and PCMs may indicate that market markets where monopolies are more common (such rules and regulations hinder competition. as railway transport and postal activities), Table 6. Number of National Markets with Only One Firm Operating by Sector Sector Number of markets with only one firm operating Agriculture 15 Manufacturing 16 Transport/storage 15 Wholesale/retail 5 Source: WBG Markets and Competition Policy team calculations based on Census 2012 of the Philippines Business and Industry 72 This does not take into account the existence of informal firms. 49 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Figure 43. Figure 44. Manufacturing Markets in the Top Deciles of HHI and PCM Distributions Agricultural Markets in the Top Deciles of HHI and PCM Distributions 10000 100 10000 100 95 95 9750 9750 90 90 PCM (%) PCM (%) 9500 9500 HHI HHI 85 85 9250 9250 80 80 9000 75 9000 75 Parts of engines Metal sections Wheeled toys Calculating Musical organs Mayonnaise, Seaweeds farming Growing of papaya Apiary (bee culture Chemical and mechanical and turbines, for shipd and machines, adding (all types) salad dressing, for the production weed control, disease except for barges machines, sandwich spread of honey) and pest control services aircraft, vehicle cash registers, and similar and cycle calculators products engines HHI PCM HHI PCM Source: WBG Markets and Competition Policy team calculations based on Source: WBG Markets and Competition Policy team calculations based on Census 2012 of the Philippines Business and Industry Census 2012 of the Philippines Business and Industry Figure 45. Figure 46. Wholesale/retail markets in the Top Deciles of HHI and PCM distributions Transport/storage markets in the Top Deciles of HHI and PCM distributions 10000 100 10000 100 95 95 9750 9750 90 90 PCM (%) PCM (%) 9500 9500 HHI HHI 85 85 9250 9250 80 80 9000 75 9000 75 Radio and television including Rice, corn and other cereals Inland freight water General bonded Freight transport parts and accessories transport warehouses except grain operation, by road, n.e.c. warehouse HHI PCM HHI PCM Source: WBG Markets and Competition Policy team calculations based on Source: WBG Markets and Competition Policy team calculations based on Census 2012 of the Philippines Business and Industry Census 2012 of the Philippines Business and Industry PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 50 The lack of competition in key sectors has negatively impacted Philippine firms and consumers While the Philippines’ electricity sector has separation of different market segments. The undergone significant changes in recent ERC recently ordered the separation of operators years due to a new regulatory framework, the in distribution and supply markets to foster implementation of key reforms is still pending. The competition in retail,73 but this decision was Electric Power Industry Reform Act (EPIRA) of 2001 appealed before the Supreme Court.74 Unbundling fully restructured the sector’s legal and institutional concerns and the overall limitation on FDI in utilities, framework. However, there are concerns regarding which prevents the development of much needed the speed of implementing the reforms mandated electricity infrastructure, have resulted in limited by EPIRA, especially related to complying with the capacity and high prices in the Philippines compared Energy Regulatory Commission’s (ERC) provisions for with regional peers (Figure 47 and Figure 48). open access and competition in retail as well as the Figure 47. Figure 48. The Philippine electricity sector is associated with relatively higher …and limited capacity compared to regional peers. electricity prices... Electricity prices (U.S. dollar per kilowatt hour) Installed capacity (kilowatt per thousand population) 0.6 3000 0.5 2500 0.4 2000 0.3 1500 0.2 1000 0.1 500 0 0 Australia Brazil Jordan Philippines Germany Italy Japan Chile France UK Mexico United States South Africa Canada India Thailand China UAE Saudi Arabia Australia Brazil New Zealand Singapore South Korea Hong Kong China Malaysia Thailand Laos Vietnam Indonesia Philippines Cambodia Source: Electricity prices by country in 2015 https://www.statista.com/ Source: Installed capacity, CIA World Factbook; Population, statistics/477995/global-prices-of-electricity-by-select-country World Bank Development Indicators 73 The Retail Competition and Open Access was established by the Department of Energy Circular DC 2015-06-0010 and Resolutions 10 and 11 (year 2016). 74 The Supreme Court-issued temporary restraining order (TRO) remains unresolved as of May 2019. https://www.bworldonline.com/erc- studying-way-forward-with-licenses-expiring-amid-supreme-court-tro/ 51 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS In the telecommunications sector, the National Concentrated market structures in domestic Telecommunications Commission’s (NTC) lack of shipping contribute to relatively higher shipping regulatory power to foster competitive market costs in the Philippines. The average port-to-port conditions has resulted in suboptimal market cost per nautical mile in the Philippines is US$1.47— outcomes. The price of mobile phone services in the higher than Indonesia’s US$0.77 and Malaysia’s Philippines is among the highest in the region and US$1.36. Barriers to market competition appear four times higher than average of Organisation for to be among the causes of the poor state of the Economic Co-operation and Development (OECD) domestic shipping industry. Few operators serve countries. The NTC’s limited regulatory capacity most shipping routes, with more than 40 percent has prevented it from implementing important of routes served by a single operator. While some pro-competition reforms, such as unbundling of market concentration is likely due to market factors, the local loop. Ownership is highly concentrated such as economies of scale in shipping operations, between two companies, which is largely due to FDI the threat of potential entry of competitors is often restrictions. Such restrictions have not only insulated the major force driving market behavior in the Philippine telecoms from foreign competition but industry. Moreover, prior to 2015, incumbents had to also restricted investment in infrastructure, which give their consent for new entry in the routes they has likely perpetuated market concentration. were serving.79 Regulatory restrictions in the transport sector Professional service providers in the Philippines appear to impair logistics in the Philippines. Road face regulatory restrictions that may reduce transport accounts for 58 percent of the country’s their incentives to offer high-quality services at cargo traffic.75 While road cargo is characterized competitive prices. Burdensome accreditation by a large number of small firms providing basic requirements apply across regulated professions. transportation services, there are several regulatory Advertising is restricted for accountants, architects, restrictions, mainly related to entry barriers. Trucking and engineers, even though the ability of firms companies need to acquire licenses to operate in the to advertise can help improve service quality and market, which requires them to interact with eight overcome the information asymmetries inherent government agencies.76 Philippine citizenship and in the professional services industry. There are hauling contracts are also required to establish a also pricing guidelines for lawyers, engineers, business in national road freight services.77 Moreover, and architects. Since the market effects of these participation of foreign firms in public transport practices are similar to those of cartel agreements, tenders is restricted to cases where (1) a treaty or competition policy reforms in professional services executive agreement allows them to participate; have been consistently targeted by policymakers (2) reciprocity rights exist; and (3) goods are not across countries as a way to accelerate economic available locally.78 growth by boosting productivity without affecting service quality or professional standards. 75 Asian Development Bank 2012, Philippines: Transport Sector Assessment, Strategy, and Road Map, Mandaluyong City, Philippines, p. 1. 76 License involves applications to: the Land Transportation Franchising and Regulatory Board (LTFRB), the Department of Transportation (DOTr), the Department of Trade and Industry (DTI), the Land Transportation Office (LTO), the Bureau of Internal Revenue (BIR), the Local Government Unit of Principal Address of the Corporation or Partnership, the SEC, and the Barangay of the Principal Address of the Corporation or Partnership. 77 See the information on the Land Transportation Franchising and Regulatory Board, available at http://www.ltfrb.gov.ph/media/Truck_ FAQs.pdf 78 See Section 5.2 of Procurement of Goods, http://www.dotc.gov.ph/images/Public_Bidding/Goods/2015/road/LTODriversLicenseCards/ BidDocs_LTO-DLC_Final.pdf 79 See the WBG Trade & Competitiveness Project Brief “Paving the Way for Competitive Domestic Shipping in the Philippines.” PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 52 Significant regulatory restrictions play an important role in limiting competition in key sectors of the Philippine economy In the Philippines, regulatory restrictions might be including India, China, and Indonesia, it is more limiting competition in key sectors of the economy restrictive than the average of all countries surveyed thus affecting the country’s ability to maximize its (1.86) and other countries in the region such as Korea growth potential. Product Market Regulation (PMR) and Japan (Figure 49). Overall, the three areas of indicators80 find markets are more restrictive in the PMR that seem to significantly restrict competition Philippines than in comparator countries. While in the Philippines are: 1) public ownership; 2) the Philippines’ PMR score of 2.12 (out of 6) in 2017 administrative burdens on start-ups; and 3) non- indicates a less restrictive regulatory environment explicit barriers to trade and investment (Figure 50).81 in the Philippines than in some regional peers, 80 The PMR indicators assess the extent to which restrictive regulations related to state control, barriers to entrepreneurship or market entry, and barriers to trade and investment promote or inhibit market forces. State control pertains to direct government involvement in the market through the establishment of SOEs in sectors where private provision is possible and economically viable and/or the implementation of restrictive market and price regulations that may stifle competition. Regulations that create barriers to entrepreneurship are those that raise unnecessary costs which limit market entry and rivalry. These include administrative burdens such as complex license and permit systems coupled with redundant rules and regulations, barriers in services sectors which are key inputs for doing business, legal barriers, antitrust exemptions, and regulations protecting incumbent market players. Lastly, barriers to trade and investment may arise due to explicit prohibitions on foreign participation and investment in certain sectors such as utilities, retail, and regulated professional services. These restrictions can affect the capacity of key sectors to attract the necessary capital, especially for large infrastructure projects, and may trigger SOE presence in most of these sectors. 81 PMR-based restrictions can be divided between three typologies according to their impact on the ability and incentives of firms to compete: (i) rules that reinforce dominance or limit entry, which include entry barriers to monopolized markets, barriers that hinder market expansion, and legal barriers related to licenses and permits; (ii) rules that are conducive to collusive outcomes or increase costs to compete in the market, which include existing restrictions that may facilitate agreements, price controls, and measures that restrict the type of goods/ services or location; and (iii) rules that discriminate and protect vested interests, including interventions that distort the level playing field and provide undue advantages to certain firms. 53 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Figure 49. Economy-Wide PMR Score, 2017 (A higher score indicates greater restrictiveness to competition) 3.50 3.00 2.50 2.12 PMR Average: 1.86 2.00 1.69 1.65 BTI: 0.49 1.51 1.50 BTE: 0.76 1.00 0.50 State Control: 0.87 0.00 Bolivia Argentina India Honduras China Indonesia Egypt Ecuador Kenya Brazil Uruguay Turkey Jamaica Costa Rica Dominican Republic Paraguay Rwanda Russia South Africa Guatemala Israel Philippines Croatia El Salvador Panama Nicaragua Mexico Korea Colombia Greece Slovenia Romania Peru Cyprus Poland Latvia Bulgaria Malta Sweden Lithuania Chile Switzerland Iceland France Norway Luxembourg Ireland Spain Canada Japan Czech Republic Belgium Hungary Portugal Finland Estonia Italy Slovak Republic Germany Australia New Zealand Denmark Austria OECD Top 5 United Kingdom Netherlands Note: a/ BTI: barriers to trade and investment; BTE: barriers to entrepreneurship. b/ Comparator countries within the PMR database are marked in black. Source: The Philippines Product Market Regulation (PMR) questionnaire, OECD PMR database, and OECD-World Bank Group PMR database for non-OECD countries. { Figure 50. Decomposition of PMR Score for the Philippines 3.00 Other barriers 2.50 2.12 Explicit barriers Barriers to trade 37% 23% and investment 2.00 24% Regulatory protection of incumbents 1.50 Barriers to 36% entrepreneurship 47% Administrative burdens on startups 1.00 75% 63% Complexity of regulatory procedures State control 0.50 41% 28% Involvement in business operation 25% 0.00 State Control Barriers to Barriers to trade and Public ownership Philippines entrepreneurship investment Note: The sub-indicator Barriers to Trade and Investment reflects the value of the Organisation for Economic Co-operation and Development’s (OECD) Foreign Direct Investment (FDI) Restrictiveness Indicator (https://data.oecd.org/fdi/fdi-restrictiveness.htm#indicator-chart) for all countries with available data when the indicator was calculated. Given that this index was not available for the Philippines, the database uses an average of the FDI index for the other countries for which such Index was available. The qualitative data underlying this sub-indicator reveals significant restrictions to trade and investment. Source: The Philippines PMR questionnaire. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 54 Box 8. PMR Methodology: Economy-wide score Product Market Regulation (PMR) indicators form a Initially built by the OECD for their members and the OECD comprehensive and internationally comparable set of plus countries (47 countries total), in partnership with the indicators that measure the degree to which policies WBG, the dataset has since been extended to 20 additional promote or inhibit competition in areas of the product countries, including the Philippines. market where competition is viable. PMR indicators are useful to monitor the regulatory achievements of The PMR indicators are designed to reflect regulations monitored countries and to evaluate the effectiveness of that have the potential to restrict competition in areas policies introduced over the years. Moreover, they have where competition is viable. They have a number of been widely used to help policymakers create a clear features which make them useful not only for analysis, picture of regulations in different countries, with the but, more importantly, for policy advice, since they allow objective of identifying gaps in regulations and/or room for to pinpoint specific policies that hamper competition. The improvements. PMR indicators are focused on enacted policies and not on outcomes, implying that they are ‘objective’, in that they The indicators rely on information collected through the are not based on opinion surveys. Finally, PMR indicators OECD’s regulatory indicators questionnaires. Figure 51 focus on regulatory measures that affect the economy at summarizes how the economy-wide score is calculated large and can therefore be considered as comprehensive (number in parentheses represent weights). First, the measures of regulatory restrictiveness. PMR indicators are answers are coded into objective information (scores range not designed to capture informal regulatory practices nor from 0 to 6, with 6 being the worst). Second, scores of the effective enforcement of regulations, since they are only individual regulations are aggregated into subsequently concerned with formal compliance with a number broader regulatory areas from “Lower-level indicators” (18 of criteria. areas) to “Intermediate indicators” (7 areas), and finally the three “Sub-indicator”. The three sub-indicators are averaged to calculate the overall PMR score. Figure 51. Economy-wide PMR Methodology Product market regulation Main Indicator State control (1/3) Barriers to entrepreneurship (1/3) Barriers to trade and investment (1/3) Sub-indicator Public ownership Involvement Complexity Administrative Regulatory Explicit barriers Other barriers (1/2) in business of regulatory burdens on protection of to trade and to trade and operations (1/2) procedures (1/3) start-ups (1/3) incumbents (1/3) investment (1/2) investment (1/2) Intermediate Indicators Scope of SOEs Price controls Licenses and Admin. burdens for Legal barriers Barriers to FDI Differential (1/4) (1/2) permits system corporations (1/3) to entry (1/3) (1/2) treatment of (1/2) foreign suppliers Gov’t involvement Command and Admin. burdens Antitrust Tariff barriers (1/2) in network control regulation Communication for sole proprietor exemptions (1/3) (1/2) sectors (1/4) (1/2) and simplification firms (1/3) Barriers to trade Lower-level Indicator of rules and Barriers in facilitation (1/2) Direct control procedures (1/2) Barriers in network sectors over enterprises services sectors (1/3) (1/4) (1/3) Governance of SOEs (1/4) Individual Questions Source: OECD 2013 Schemata and Koske et al. (2015) 55 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS State involvement in business operations and public ownership is significant and hinders private-sector participation Although the Government of the Philippines presence questions the subsidiary role of the state, has adopted key reforms to rationalize state i.e. as provider of those goods and services that the participation in the economy, SOEs are still private sector cannot provide by itself. In addition, present in a number of non-infrastructure restrictions on FDI in most sectors with SOEs further sectors where private participation is typically exacerbate the effects of state participation. possible and economically viable. Of 27 sectors included in the PMR study, SOEs are present in In addition, the lack of a regulatory framework 18 in the Philippines,82 while the average of all to control state support measures may result countries surveyed is 14 (Figure 52). Although the in market distortions, favoring SOEs or specific presence of SOEs in infrastructure sectors is not private firms over private competitors. Statistics unusual across countries, especially in sectors from the 2012 CPBI show that fifty-six product that require capital-intensive investments such as markets across sectors, including manufacturing, electricity transmission and road infrastructure, the agriculture, wholesale/retail, and transport/storage, Government of the Philippines controls at least one reported at least one firm receiving a subsidy, which firm in 11 out of the 17 non-infrastructure sectors is equivalent to 9 percent of all markets in those surveyed. These include insurance, financial services, sectors. However, in many cases, subsidies do not construction, fabricated metal products, wholesale appear to have been granted equally to all firms and retail trade, and human health activities, as well within the market. In twenty-two industries, only one as restaurants and hotels. While these SOEs may be firm received subsidies when more than one firm relatively small in terms of their market share, their operated in the market. 82 According to the PMR questionnaire, an SOE is defined as a company in which state or provincial governments (not including local governments or municipalities) hold, either directly or indirectly through a government-controlled company, the largest single share of the firm’s equity capital. Public ownership is measured by the extent to which the government participates and intervenes in markets through the scope and scale of its SOEs. Publicly controlled firms also include government entities that are not organized as companies but operate in business or market activities. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 56 Figure 52. Number of Subsectors with SOEs by Country 30 25 20 18 15 10 5 0 Egypt Poland India China Croatia Romania Turkey Venezuela Ecuador Indonesia Norway Philippines Biolivia France Italy Spain Sweden Argentina Russia Slovenia South Africa Hungary Israel Lithuania Switzwerland Colombia Czech Republic Dominican Republic Greece Namibia Australia Finland Kenya New Zealand Austria Belgium Portugal Brazil Chile Costa Rica Jamaica Peru Bulgaria Canada Germany Iceland Nicaragua Paraguay Slovak Republic Uruguay Denmark Guatemala Japan Korea Rwanda United States El Salvador Ireland Cyprus Estonia Latvia Malta Netherlands Honduras United Kingdom Panama Source: The Philippines PMR questionnaire, OECD PMR database, and OECD-World Bank Group PMR database for non-OECD countries. Moreover, the existence of undue price controls for certain products may distort the incentives of market operators and affect their ability to compete and provide better quality goods and services.83 Building on the 1991 Price Act, the Government of the Philippines has enacted broad price controls across sectors. The law enables the Department of Trade and Industry (DTI) to issue guidelines for suggested retail prices covering thirty- one products.84 Also, recommended prices exist for some regulated professional services such as architects and engineers, and domestic airfares can be fixed by the Civil Aviation Board (CAB). Meanwhile, important price mechanisms to foster competition through ex ante price regulation are not being applied in network industries. For instance, in telecommunications, the power of the NTC to issue efficiency-based pricing mechanisms retail prices of international roaming are required to in segments where price regulation is typically be approved by the NTC, in practice, the regulator desirable for competition has been challenged, does not impose a price ceiling on retail and resulting in a lack of regulation of international wholesale access charges. wholesale/retail roaming rates.85 In fact, although 83 See Nicoletti, Giuseppe and Scarpetta, Stefano, Product Market Reforms: Macro Linkages and Effects on Growth (A Partial Survey), 2004. 84 See DTI suggested retail prices at http://www.dti.gov.ph/consumers/e-presyo#price-reports 85 The NTC does not set prices for local loop unbundling. 57 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Barriers to market entry and rivalry in services and network sectors, and excessive burdens to start-up businesses, limit private sector development High administrative burdens on start-ups make number of competitors allowed in the market are it costly for firms to enter the market. In 2019, the pervasive across transport sub-sectors, including Philippines ranked 166th out of 190 economies on road freight,93 maritime transport,94 operation of air the ease of starting a business in the World Bank’s transport infrastructure,95 and railways Doing Business report—an improvement of seven places in relation to 2018 (173rd)86. According to PMR While the Competition Act applies to all firms indicators, the absence of key simplifying tools in across sectors, including SOEs, the potential to the system of licenses and permits, such as the grant broad exclusions may be used to favor “silence is consent rule,” increases the complexity of market incumbents. Laws regulating competition regulatory procedures.87 Barriers in service sectors should apply to all sectors and firms engaged in also contribute to the high administrative burden economic activity. The absence of exemptions in on firms operating in the Philippines. These include the Philippines’ Competition Act is key to avoid entry and behavioral restrictions on regulated regulatory insulation of incumbents. However, a services (i.e. accountants, lawyers, architects, and forbearance clause that enables the Philippines engineers),88 road freight transport,89 and Competition Commission (PCC) to exempt specific retail distribution. practices or even sectors from the law for a given period of time may pose a risk. While the Act and Moreover, incumbent firms are protected by high its implementing rules and regulations establish barriers in network sectors at the expense of new limitations on the use of the forbearance clause, entrants. In telecommunications, unbundling of the notably the need to substantiate the granting local loop is not required (even though it is relevant of exemptions on the basis of economic analysis for broadband access)90; entry is franchised to a and their limitation to a one-year term, the mere single firm in the railway sector (there is no vertical existence of the clause may increase the risk of anti- separation between the operation of infrastructure competitive behavior and economic distortions.96 and the provision of services in the railway sector)91; Therefore, the drafting of secondary legislation to and there are no legal restrictions to ensure the clarify the procedures and analytical steps to be separation of generating, distributing, and supplying followed during its implementation would be key to electricity.92 In addition, legal barriers restricting the minimizing potential market distortions. 86 Philippines’ ‘starting a business’ score improved by 3.09 points from 68.88 in 2018 to 71.97 in 2019. 87 The general rule is that a written approval/license must be issued. There is no specific law allowing implicit consent by the administration in case legal deadlines expire. 88 Section 3 will describe the restrictions in professional services in detail. 89 In order to establish a national road freight business, all trucks require a franchise from the Land Transport and Road Franchising Board (more information at http://www.ltfrb.gov.ph/media/Truck_FAQs.pdf). 90 See Broadband Policy Brief Number 4: “Philippine Broadband: A Policy Brief”, table 3, p. 10 at http://www.investphilippines.info/arangkada/ wp-content/uploads/2016/02/BROADBAND-POLICY-BRIEF-as-printed.pdf 91 In the railway market, ownership and operation are restricted to the government due to Section 1 of Republic Act No. 4156 (year 1964), which was recently extended by fifty years by Republic Act No. 10638 (2014). See http://www.gov.ph/1964/06/20/republic-act-no-4156/ and http://www.gov.ph/2014/06/16/republic-act-no-10638/ 92 Meralco is the Philippines’ largest distributor of electrical power and engaged in electricity generation and supply. See http://www. meralco.com.ph/about-us/corporate-profile 93 The number of franchises allowed by the government are limited due to road capacity. 94 Port operation is under the authority of the Philippine Ports Authority, as established in Presidential Decree No. 505 of year 1994 (amended by Presidential Decree No. 857, year 1975). See http://www.lawphil.net/statutes/presdecs/pd1974/pd_505_1974.html 95 For example, the Manila International Airport Authority oversees the operation of air transport and infrastructure of Manila Airport, as established by Executive Order No 778 (year 1982). 96 OECD, Competition Assessment Toolkit, Version 2.0, Volume I: Principles, p. 65. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 58 Broad limitations on foreign participation in key sectors of the economy, including utilities and regulated services, thwart trade and investment Barriers to FDI due to constitutional and legislative limitations on foreign participation in key sectors and economic activities limit competition and could raise input costs for Philippine firms. Entry to all four regulated professions reviewed in the PMR questionnaire—accountants, architects, engineers, and lawyers—is restricted for non-Filipino nationals (Figure 53). The Philippines Foreign Investment Act also limits foreign investment in several industries typically open to FDI, including utilities, retail, restaurants, and hotels. These restrictions, based on the country’s Constitution,97 have affected the capacity of key sectors to attract necessary capital, especially for large infrastructure projects, and led to the presence of SOEs in many of these sectors, making their development dependent on the government’s resources. Entry restrictions affect competition conditions in professional services. Burdensome accreditation and architects101. Meanwhile, advertising is restricted requirements apply across the four regulated for accountants, architects and engineers in the professions surveyed in the PMR study. The practice Philippines. In contrast, the majority of countries of regulated professions is only allowed to Filipino in the PMR database do not regulate advertising citizens, except for limited cases prescribed by law in the engineering and architecture professions (e.g. reciprocity and qualification procedures).98 and only regulate (rather than prohibit) advertising All four professional services surveyed by the PMR in the accounting profession. Lastly, lawyers and require licensing by the state or a public authority99 accountants are granted a number of exclusive or following a compulsory professional examination.100 shared exclusive rights to certain professional tasks Furthermore, membership of professional above the average of the PMR dataset (Figure 54). associations is required for lawyers, accountants 97 See Section 1 of Article XII of the Constitution that informs the prohibition for non-Filipino companies to participate in certain sectors or provide regulated professional services. 98 Section 14, Article XII, of the 1987 Philippine Constitution. 99 In the accountancy profession, established by Republic Act No. 9294 (Philippine Accountancy Act of 2004); in the legal profession established by Section 5 of the Rule of Court 138 (Attorneys and Admission to Bar); in the engineering profession established by Republic Act No. 544, as amended by Republic Act No. 1582 (Civil Engineering Law); in the architecture profession established by Republic Act No. 9266 (the Architecture Act of 2004). 100 In the accountancy profession, established by the Republic Act No. 9294 (Philippine Accountancy Act of 2004); in the legal profession established by Section 9 of the Rule of Court 138 (Attorneys and Admission to Bar); in the engineering profession established by Republic Act No. 544, as amended by Republic Act No. 1582 (Civil Engineering Law); in the architecture profession established by Section 12 of Republic Act No. 9266 (The Architecture Act of 2004). 101 In the accountancy profession, established by the Professional Regulatory Commission Resolution No. 106 (July 1984) as amended by Resolution No. 142 (March 1987); in the legal profession established by Section 1 of the Rule of Court 138 (Attorneys and Admission to Bar); in the architecture profession membership to the Professional Regulatory Board of Architecture is required by Section 3 of Republic Act No. 9266 (The Architecture Act of 2004). 59 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Figure 53. Share of countries with Quota Restriction in Professional Services, OECD and Non-OECD Countries (restrictive countries in blue) Architecture Accountancy Legal Engineering 12% 11% 9% 28% 72% 88% 89% 91% With quota restrictoons (including the Philippines) Without quota restrictoons Source: OECD PMR data for OECD countries for 2013 and WBG/OECD PMR data for non-OECD countries 2013-2016. Note: The Philippines belongs to the share of countries with quota restrictions in professional services. Figure 54. Philippines lawyers and accountants are granted more than the average number of exclusive or shared exclusive rights Number of tasks with exclusive or shared exclusive rights 10.0 9.0 9.0 9.0 8.0 7.1 7.0 6.3 6.0 6.0 5.9 6.0 5.3 5.0 5.0 4.0 4.0 3.0 2.6 2.4 2.0 1.0 - Accounting Legal Architects Engineers Philippines PMR Average countries Top OECD Countries Source: OECD PMR Database 2013, OECD-WBG, PMR indicators 2013-2016. The five main OECD countries regarding sector regulations are: Austria, Australia, Germany, Netherlands and the United Kingdom. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 60 There are also constitutional provisions that lead framework103 restricts tenders in public utilities to to the differential treatment of foreign suppliers companies with at least 60 percent national capital. in public tenders.102 Allowing national and foreign Additionally, in markets where foreign companies are firms to compete only on the merits—without allowed to participate, domestic bidders are given favoring one over the other—typically has a positive an advantage by the government as they could still impact on public expenses through lower costs and/ win over foreign competitors despite bidding prices or improved quality. Therefore, many countries have up to 15 percent higher than the lowest foreign bid.104 implemented reforms that limit the discrimination of According to PMR results, these benefits are the foreign participants in public tenders. However, the exception rather than the rule (Figure 55). Philippines’ public procurement regulatory Figure 55. Share of countries that discriminate against foreign firms in procurement in PMR sample Does the following apply to public procurement tenders Does the following apply to public procurement tenders for for construction services? - There is explicit access construction services? - Technical specifications affect the discrimination in favour of local firms. conditions of competition in favour of local providers. Yes 5% Yes 31% Philippines No No 69% 95% Are foreign suppliers of computer services discriminated Are foreign telecommunication firms discriminated in the in the application of financial or technical criteria when application of financial or technical criteria when participating in participating in public procurement tenders? public procurement tenders? Yes Yes 11% 11% Philippines No No 89% 89% Source: OECD PMR data for OECD countries for 2013 and WBG/OECD PMR data for non-OECD countries 2013-2016. Note: The pie charts indicate the shares of countries which answered ‘yes’ or ‘no’ to the specified PMR questions. The Philippines belongs to the number of countries which answered ‘yes’ to the specified PMR questions. 102 See Section 12 of Article XII of the Constitution of the Philippines. 103 See Section 43 of Government Procurement Reform Act (Republic Act No. 9184, year 2002). 104 See The 2016 Revised Implementing Rules and Regulations of the Republic Act No. 9184 at Section 43.1.2. 61 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Removing key regulatory restraints to competition may have a significant impact on the overall economy Almost half of the restrictions identified in the PMR the cost to compete in the market, and 21 percent analysis are related to regulations that discriminate relate to rules that reinforce dominance or limit and protect vested interests. 45 percent of the entry (Figure 56). However, the long list of restrictions restrictions identified to the PMR study belong to needs to be contextualized within the market the category of rules that discriminate and protect dynamics of each industry in order to map potential vested interests, 34 percent are related to rules that pro-competition reforms according to their impact are conducive to collusive outcomes or increase as well as their feasibility. Figure 56. Distribution of Specific Restrictions by The World Bank’s Market and Competition Policy Assessment Tool (MCPAT) Category and PMR Pillar Classification 7% Pillar III: Barriers to 20% trade & Invt; 6; Pillar I: State Control; 18; 15% Pillar II: Barriers to entry and rivalry; 15; 21.3% Rules that reinforce dominance or limit entry 33.7% 1% Rules that are Pillar II: Barriers to entry conducive to and rivalry; 1; collusive outcomes or increase costs to compete in the 89 restrictions market 12% Pillar III: Barriers to trade & Invt; 11; 22% Pillar III: Barriers to 44.9% trade & Invt; 20; Rules that discriminate and protect vested interests 17% 6% Pillar I: State Control; 15; Pillar II: Barriers to entry and rivalry; 5; Source: World Bank. Fostering Competition in the Philippines, November 2018. Note: The inner disc shows that out of the 89 restrictions identified by the PMR, 45 percent of the restrictions belong to the category rules that discriminate and protect vested interests, 34 percent are related to the rules that are conducive to collusive outcomes or increase costs to compete in the market, and 21 percent of the restrictions relate to the rules that reinforce dominance or limit entry. The outer disc depicts how the restrictions are categorized according to the three PMR pillars: state control, barriers to entry and rivalry, and barriers to trade and investment. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 62 Reducing regulatory restrictiveness in key markets Empirical evidence confirms a significant would require the implementation of a number relationship between the degree of regulation in of reforms. First, tackling unclear or restrictive the service sector and growth in productivity and regulations in infrastructure sectors and professional value added. A study of OECD countries based on services to create more competitive conditions PMR data shows that lowering the restrictiveness would have positive effects on downstream markets. of regulations in the service sector has significant Second, eliminating restrictions on foreign as well positive effects on value added, productivity, as domestic investors could help level the playing and export growth in service-intensive sectors. field. Third, minimizing the scope of controlled A significant reduction in the restrictiveness of prices would incentivize firms to compete. Fourth, regulation across professional services, energy, lessening the involvement of the state through transport, and telecommunications sectors SOEs and other operations in typically competitive could lead to an increase of 0.75 percentage markets and ensuring competitive neutrality among points in annual value-added growth in service- public and private operators would promote a more intensive sectors.105 effective use of public funds. Finally, streamlining burdensome administrative procedures for Removal of PMRs in certain sectors could businesses could facilitate easy market entry. Table accelerate economic growth in the Philippines. 8 presents a summary of potential policy options for The removal of restrictive PMRs in the professional reducing regulatory restrictions in key markets. The services, energy, transport and telecommunications next step in this analysis would be to sequence a sectors could lead to an additional growth of US$0.6 package of these reforms according to their impact billion in sectors that use those services intensively, and feasibility. which is equivalent to an increase in the annual GDP growth rate of 0.2 percentage points (Table 7). Table 7. Expected Impact of Reforms in Key Sectors on GDP Effect of reform on growth in downstream industries with above average service intensity Sector for reform Estimated impact on annual Expected impact on GDP measured at market Number of service intensive value added1/ prices 20152/ markets (bill. PHP) (bill. USD) Across energy, professional services, 0.20% 26.8 0.6 91 transport, and telecommunications3/ Note: 1/ Calculations based on the Input-Output (I-O) table 2006, which includes information on 240 specific markets. Impact calculations are the additional value added as percentage of the GDP at current local prices of 2006, generated by improvements in a specific sector. 2/ We assume the structure of the economy remain constant, meaning that the estimated impact of changes in selected sectors on GDP 2006 were the same in 2015. The official exchange rate of 45.5 PHP/USD is used. 3/ Following the results of Barone and Cingano (2011), the estimate assumes a multiplier effect of 0.75pp in downstream sectors which have above average intensity across all named service sectors due to reforms across these selected sectors. 105 A significant decrease in relative regulatory restrictiveness is defined as an improvement of at least two quartiles in the distribution of countries according to their restrictiveness (i.e. a country that moves from the 75th percentile to the 25th percentile in the respective sectoral or lower level indicators). Source: Barone and Cingano (2011) 63 PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Table 8. Summary of Potential Policy Options for Reducing Regulatory Restrictions in Key Markets Rules That Reinforce Dominance Rules That Are Conducive to Rules That Discriminate and Responsible or Limit Entry Collusive Outcomes or Increase Protect vested Interests Institution Costs to Compete in the Market Sector-specific Electricity industry • Regulate the terms and conditions Department of Energy, of third-party access (TPA) to the ERC, and PCC electricity transmission grid, which is currently being negotiated. • Promote regulatory changes that explicitly require at least legal separation between the generation, supply, and distribution of electricity. Telecommunications • Require local-loop unbundling (LLU) • Regulate international wholesale and • Eliminate any discriminatory practice Congress, NTC, industry for telecommunications operators. retail roaming rates. in the application of financial or and PCC technical criteria against foreign- owned firms when evaluating public procurement tenders. • Regulate local-loop unbundling prices. Rail transport industry • Adopt a clear policy direction for the Department of PNR on how to improve the quality Transportation, of services at competitive prices Regulatory agency, for users by allowing private-sector and PCC operators. • Support regulatory changes to prohibit cross-ownership between the management of railroad infrastructure and the provision of railway services (transport of passengers or freight). Road freight transport • Minimize the power of the regulator • Improve accountability and Department of industry to limit industry capacity. transparency when approving new Transportation, operators by restricting the decision Regulatory agency, • Reform the permits required to criteria only to technical and financial and PCC operate nationally and sub-nationally fitness and compliance with public so that licenses cover the country’s safety requirements. entire road network. • Promote competition in the freight market by allowing foreign firms to participate in the procurement process. Air transport industry • Support open-sky agreements that • Liberalize prices of domestic air fares. Department of include cabotage rights to foreign Transportation, CAB, carriers of signatory countries. and PCC PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 64 Table 8. Summary of Potential Policy Options for Reducing Regulatory Restrictions in Key Markets Rules That Reinforce Dominance Rules That Are Conducive to Rules That Discriminate and Responsible or Limit Entry Collusive Outcomes or Increase Protect vested Interests Institution Costs to Compete in the Market Sector-specific Maritime transport • Ensure competitive neutrality PPA, Department of industry between public and private firms in Transportation, the freight and passenger markets. and PCC • Review legislation to separate the PPA’s regulatory responsibilities from its development and operations functions to level the playing field and ensure fair competition for investors. Regulated professions • Support the elimination of • Promote equal treatment of local and Congress, PRC, advertising and marketing restrictions foreign suppliers of business services and PCC for regulated professional services in all four regulated professions by (i.e., lawyers, accountants, engineers, ensuring regulations are enforced and architects). under the same principles (not only for those related to public procurement • Improve the ability of regulated and taxes and subsidies) and by professionals to associate/cooperate providing the same access to appeal with each other. procedures to regulatory decisions. • Eliminate price restrictions, • Allow foreign business professionals in particular for engineers and to freely practice by minimizing or architects. eliminating any economic needs tests or quotas. • Support the elimination of any ban on foreign business professionals from supplying their services to the government, and any preferential treatment to local suppliers. Retail distribution • Minimize limitations on promotions/ Congress and PCC industry discounts that are not predatory pricing practices. Construction services • Support transparency policies in • Promote equal treatment among local Congress, PCAB, public procurement for construction and foreign firms by removing any and PCC services, procurement laws, access preference (such as technical regulations, and procedures. specifications) given to local firms in public procurement. Public procurement • Eliminate domestic requirements in Congress and PCC public procurement. PART 03 FOSTERING COMPETITION IN THE PHILIPPINES: THE CHALLENGE OF RESTRICTIVE REGULATIONS Table 8. Summary of Potential Policy Options for Reducing Regulatory Restrictions in Key Markets Rules That Reinforce Dominance Rules That Are Conducive to Rules That Discriminate and Responsible or Limit Entry Collusive Outcomes or Increase Protect vested Interests Institution Costs to Compete in the Market Economy-wide Competitive neutrality • Minimize government intervention • Limit privileges in access to financing Congress, Governance (at any level) in the strategic decisions for public firms that compete with Commission of GOCC, of publicly controlled firms. private operators. and PCC Business regulation Congress and the institution in • Streamline burdensome charge of public administrative procedures for administrative businesses to facilitate easy simplification policies market entry. • Reduce the administrative burden and unnecessary lengthy procedures by implementing the ‘silence is consent’ rule. Congress FDI • Eliminate FDI restrictions in key Congress, DTI, and PCC sectors Price controls • Improve market conditions and competition by removing price controls in the retail segment of products such as certain staples (e.g., milk and bread), pharmaceuticals, cellular communication (except international retail roaming), and other products (e.g., books, taxi services, and liquified petroleum gas). Source: World Bank Group. PHILIPPINES ECONOMIC UPDATE OCTOBER 2019 EDITION 66 References American Chamber of Commerce of the Philippines (2016), Koske, I., I.Wanner, R. Bitetti and O. Barbiero (2015), “The “The Arangkada Philippines Project (TAPP): Philippine 2013 update of the OECD product market regulation Broadband: A Policy Brief”. http://www.investphilippines. indicators: policy insights for OECD and non-OECD info/arangkada/wp-content/uploads/2016/02/ countries”, OECD Economics Department Working Papers, BROADBAND-POLICY-BRIEF-as-printed.pdf No. 1200. 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