The combined effects of the Asian financial crisis and weather disturbances (for example, El Niño) pushed down the growth of gross domestic product by -0.5% in 1998. The GDP contraction was caused by a 6.6% drop in agricultural production and the decline in construction and construction-related manufacturing activities. The latter two sectors were disadvantaged by high interest rates and volatile exchange rates during the early part of 1998. The growth of the services sector remained steady with transportation and communications, private services and finance contributing to the expansion. The strong growth of net factor income from abroad pulled the overall output (gross national product) up by 0.1%.

On the expenditure side, the growth of personal and government consumption, though slower, remained positive. Investments as well as trade (exports and imports) in goods and services, however, shrank. Investors remained cautious despite some improvement in the macro-economic environment during the latter part of the year. Real merchandise exports and non-merchandise exports both declined by 1.01% and 35.6%, respectively.

The inflation rate reached double-digits in May 1998 at 10.1% and peaked at 11.2% in November 1998 as a result of supply shortages brought about by adverse weather conditions. Nonetheless, the average inflation rate for the year (9.7%) was contained at the single-digit level. While higher than the previous year’s average, this was still within the target set for the year at 9.25%-9.75%. From double-digit levels in January 1999 (11.5%), inflation rate has reverted back to single digit posting the lowest rate at 6.7% in May 1999.

The total number of people employed rose from 27.7 million in 1997 to 27.9 million in 1998. Following the structural transformation of the economy, labor shifted away from agriculture. The services sector absorbed 44% of the total employed while the agriculture sector hired 39.2%. The industrial sector only absorbed 16.4% of the total employed.

The economic slowdown led to a double digit average unemployment rate of 10.1% in 1998 as employment from the agriculture and industry sectors dropped. For the first quarter of 1999, the unemployment rate slightly improved to 9.0%.

The Philippine current account balance registered a surplus of US$1.3 billion in 1998 after posting deficits during the last seven years. Increased exports of goods and services to some extent benefited from the peso depreciation and global integration of the Philippines’ economy. Imports continued to decline. Merchandise exports have continued to outpace imports in terms of growth since 1996. In 1998, merchandise exports grew by 17% while imports fell by 19 %, and further narrowed down the trade deficit to only US$28 million. Demand for electronics and semi-conductors remained strong with the entry of new producers and the introduction of new product lines. Exports of machinery and transport equipment also grew substantially. A weaker peso and the Asian crisis further weakened import demand.

Merchandise exports maintained its growth momentum increasing by 15.2% in the first quarter of 1999 while imports continued on its downward trend declining by 7.5% during for the same period.

Net foreign investments also increased significantly (119.4%), a reversal from the previous year's decline of 78.3%. Foreign direct investments rose by 40.3% while portfolio investments rebounded from a 80.7% reduction in 1997 to a 165% increase in 1998. Thus, from an estimated US$3.3 billion deficit in 1997, the balance of payments recovered appreciably and posted a surplus of US$1.4 billion. This helped build up the gross international reserve position to US$10.8 billion by the end of 1998. The vulnerability of the balance payments situation to external shocks arising from external reversals in unpredictable sources of financing indicates the importance of further increasing exports and attracting higher levels of long-term investment.

Total foreign exchange liabilities was recorded at US$47.8 billion. The bulk of foreign exchange liabilities comprised of medium and long-term loans (85%). The public sector accounted for 51.2% of the total liabilities, followed by the private sector with 25.3% and the banking sector with 23.4%. More than half came from bilateral sources.

The country’s exchange rate policy continues to support a freely-floating exchange rate system. The exchange rate is determined by market forces with some scope for occasional action by the Philippine Central Bank [Bangko Sentral ng Pilipinas (BSP)]. On such occasions, the BSP enters the market largely to provide indicative guidance and to preserve orderly market conditions.

After the depreciation of the peso in July 1997, the BSP implemented a number of measures to stabilize the currency. Among these are the tightening of the overbought position of banks and relaxing of the oversold position; the requirement of prior approval for the sale of non-deliverable forwards, the introduction of a volatility band and the Currency Risk Protection Program (CRPP), among others. From a peak of P43.78 per US dollar in September 1998, the peso-dollar rate stabilized to about P39.07 per US dollar by December. The peso further strengthened during the first quarter of 1999 with an average exchange rate of P38.7 per US dollar.

In 1998, the fiscal policy was redirected to help contain the effects of the Asian financial crisis. The bulk of the funds were channeled to building farm-to-market roads, irrigation, low-cost housing projects and other capital expenditures. Total government expenditures reached P512.5 billion, an increase of 9% over the 1997 level of P470.3 billion.

The crisis affected revenue collection. Total revenues declined by 2.0% as a result of the decline in non-tax revenues by 23.1% which in turn offset the increase in tax revenue collection of 1.1%. Thus, the overall budget deficit for the year amounted to P50 billion equivalent to 2.1% of GDP.

The monetary policy was directed at restoring confidence in the peso. In the period following the Asian financial crisis, the Bangko Sentral ng Pilipinas (BSP) raised its overnight and borrowing rates to curb speculation in the foreign exchange market. Banking reserves were likewise increased. With stable prices, however, reserve requirements were gradually reduced. The containment of the budget deficit to a manageable level led to a gradual decline in interest rates to 13.4% by December 1998 from a peak of 19.1% in January 1998.

The priority for the Philippines’ economic policy is to attain economic recovery while consolidating stabilization measures and protecting the poor from the effects of the crisis. In the pursuit of these goals, the following measures shall be undertaken: adoption of a fiscal policy that will stimulate domestic demand and fund anti-poverty programs; continued focus of monetary policy on reducing inflation and preventing renewed pressure on the peso; and vigorous pursuit of a broadened structural reform agenda to underpin the recovery and sustain economic growth.

The stability of the foreign exchange market, improved outlook in agriculture production, continued infusion of capital, the institution of timely reforms in the financial and banking systems are expected to contribute to better prospects for economic recovery. The agriculture, fishery and forestry sectors are expected to grow between 3.0% and 3.5% in 1999; and 3.5% and 4.1% in 2000. Meanwhile, the industry sector is expected to grow between 1.4% and 2.0% in 1999; and 5.0% and 5.6% in 2000. Overall GDP growth is expected to be between 2.6% and 3.2% in 1999; and 4.8% and 5.4% in 2000. Meanwhile GNP is projected to increase by 3.0% and 3.7% in 1999; and 5.7% and 6.1% in 2000 (as of 19 February 1999). The inflation rate is expected to be maintained in single-digit levels in 1999 and 2000.

The Philippines continued to pursue trade and investment liberalization policies notwithstanding the crisis. Continuous rationalization of the tariff structure has been undertaken with the end-in-view of attaining a uniform 5% duty by 2004.

Moreover, investments continued to be encouraged with the passage of RA 8556, (Financing Company Act of 1998), increasing the foreign equity participation to 60% of the voting stock of a financing company; EO II (Third Regular Foreign Investment Negative List issued on 11 August 1998) delisted private domestic construction contracts from the Negative List allowing up to 100% foreign equity participation. Likewise, the downstream oil industry was liberalized with the passage of RA 8479 on 10 February 1998, (The Downstream Oil Industry Deregulation Act of 1998), which removed the restrictions on the importation/exportation of crude oil and refined petroleum products.

Moreover, reforms were put in place to further strengthen the banking sector. These included: (a) further capital increase ranging from 20 to 60% over 1998 minimum levels to be completed by year 2000; (b) a 2% general loan loss provisioning requirement; (c) a stricter specific loan loss provisioning requirement; (d) consolidated supervision of banking units and their affiliates; (e) enhanced disclosure requirements; and (f) more stringent bank licensing requirements.

In addition, a major restructuring of the tax system was undertaken with the passage of the Comprehensive Tax Reform Program (CTRP) on 11 December 1997. CTRP introduced changes in the area of corporate taxation and simplified the administration of taxes.

The liberalization of the retail trade sector is being deliberated by Congress. The deregulation of the power sector is also being considered. The privatization program has already covered hotels, banks, an airline, a steel firm, mining companies, and a petroleum refinery, among others.

Philippines: Overall Economic Performance

Source: Data are as submitted by member economies, unless otherwise specified.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999).