Document of The World Bank FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUPPLEMENTAL FINANCING DOCUMENT FOR

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No PH INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUPPLEMENTAL FINANCING DOCUMENT FOR A PROPOSED SUPPLEMENTAL FINANCING IN THE AMOUNT OF US$250 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR FOOD CRISIS RESPONSE DEVELOPMENT POLICY OPERATION: SUPPLEMENTAL SUPPORT FOR POST-TYPHOON RECOVERY Human Development Sector Unit East Asia and the Pacific Region April 16, 2010 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 5, 2009) Currency Unit: US $1 = PHP (Philippine Peso) GOVERNMENT FISCAL YEAR January 1 to December 31 ADB AFP AO BPO CAR CAS CAT-DDO CCT CDS CEA CFAA COA DBM DEPED DILG DOF DOH DPL DPO DSWD EA EC EIA ERL FSP GAA GDP GFRP GIFMIS GOP IAS IASC ICR IMF IP IREP JICA LGU MFI MTEF NCR Asian Development Bank Armed Forces of the Philippines Administrative Order Business Process Outsourcing Cordillera Administrative Region Country Assistance Strategy Catastrophe Deferred Draw Down Option Conditional Cash Transfer City Development Strategy Country Environmental Analysis Country Financial Accountability Assessment Commission on Audit Department of Budget and Management Department of Education Department of the Interior and Local Government Department of Finance Department of Health Development Policy Loan Development Policy Operation Department of Social Welfare and Development Environmental Assessment European Commission Environmental Impact Assessment Emergency Recovery Loan Food for School Program General Appropriations Act Gross Domestic Product Global Food Response Program Government Integration Financial Management Information Systems Government of the Philippines Internal Audit Service Inter-Agency Standing Committee Implementation Completion Report International Monetary Fund Indigenous People Indicative Reconstruction and Expenditure Plan Japan International Cooperation Agency Local Government Unit Microfinance Institution Medium-Term Expenditure Framework National Capital Region

3 NDCC NFA NHTS-PR NGICS NGO NSCB NSO OFW OPIF PAGASA PDNA PEFA PFM PGIAM PHILHEALTH PMT PNP RMES RRP SDC SIL SME SNPRC UN VAT 4Ps National Disaster Coordinating Council National Food Authority National Household Targeting System for Poverty Reduction National Guidelines on Internal Control Systems Non-Government Organization National Statistical Coordination Board National Statistics Office Overseas Filipino Worker Organizational Performance Indicators Framework Philippine Atmospheric, Geophysical and Astronomical Services Administration Post-Disaster Needs Assessment Public Expenditure & Financial Accountability Public Financial Management Philippine Government Internal Audit Manual Philippine Health Insurance Corporation Proxy Means Test Philippine National Police Reconstruction Monitoring and Evaluation System Reverse Repurchase Agreement Social Development Committee Specific Investment Loan Small and Medium Enterprise Special National Public Reconstruction Commission United Nations Value-added Tax Pantawid Pamilyang Pilipino Program Vice President: James W. Adams (EAPVP) Country Director: Bert Hofman (EACPF) Sector Director: Emmanuel Jimenez (EASHD) Sector Manager: Xiaoqing Yu (EASHS) Task Team Leader: Jehan Arulpragasam (EASHS)

4 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FOOD CRISIS RESPONSE DEVELOPMENT POLICY OPERATION: SUPPLEMENTAL SUPPORT FOR POST-TYPHOON RECOVERY TABLE OF CONTENTS I. BACKGROUND 1 II. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 2 III. THE TYPHOONS AND THE GOVERNMENT S RESPONSE 4 A. The Typhoons and the Human Toll 4 B. Immediate Response 7 C. Reconstruction Plan and Monitoring System 8 IV. OVERALL DAMAGE, LOSSES, AND NEEDS ESTIMATES 9 V. ECONOMIC AND SOCIAL IMPACTS 10 A. Economic Impacts 10 i. Pre-Disaster Situation 10 ii. Post-Disaster Impact 11 B. Poverty and Social Impact 13 VI. THE BANK S RESPONSE 16 VII. THE FOOD CRISIS RESPONSE DPO: AN UPDATE 17 A. Pillar I: Emergency Social Protection Measures 17 B. Pillar II: Improving Policy Coordination in Social Protection 19 C. Pillar III: Improving Targeting 19 D. Pillar IV: Establishing a Conditional Cash Transfer Program 20 E. Lessons Learned 20 VIII. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING 21 IX. IMPLEMENTATION ARRANGEMENTS 22 A. Terms of the Supplemental Financing 22 B. Fiduciary Arrangement 23 C. Funds Flow and Auditing Requirements for the Supplemental Financing 24 D. Environmental Aspects 24 E. Risk and Risk Mitigation 25 ANNEX 1. IMF PUBLIC INFORMATION NOTICE 26 ANNEX 2. PHILIPPINES AT A GLANCE 30 ANNEX 3. MAP NUMBER IBRD 33466R4 31

5 List of Tables and Figures Table 1: Philippines: Selected Economic Indicators, Table 2: Affected People and Casualties 7 Table 3: Summary of Disaster Effects and Needs by Sector (in US$ million) 9 Figure 1: Storm Path of Ketsana and Cumulative Rainfall 5 Figure 2: Typhoon Path of Parma and Cumulative Rainfall 6 Figure 3: Sector Share of Income Losses 15 Figure 4: Sector Share of Workday Losses 15 The Philippine Food Crisis Response DPO: Supplemental Support for Post-Typhoon Recovery has been prepared by a team task managed by Jehan Arulpragasam (EASHS) and consisting of John Factora (EAPVP), Matthew James Keir Stephens, Annalyn M. Sevilla (EACPF), Eric Le Borgne, Yasuhiko Matsuda (EASPR), Agnes Albert-Loth, Tomas A. Sta. Maria (EAPFM), Minneh M. Kane (LEGES), Thao Le Nguyen (CTRFC), Junko Onishi, Rashiel Besana Velarde (EASHS), Kristine May B. San Juan- Ante, Lilian Loza San Gabriel (EACPF), Rosechin Olfindo, Rowena J. Martinez (Consultants). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

6 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTFOOD CRISIS RESPONSE DEVELOPMENT POLICY OPERATION: SUPPLEMENTAL SUPPORT FOR POST-TYPHOON RECOVERY Borrower Implementing Agencies Amount Terms Tranching Description Partnerships Risk Operation ID Republic of the Philippines The Department of Finance is the primary liaison with the World Bank on budget support operations but policy dialogue, implementation, and monitoring and evaluation of social protection measures supported by the Food Crisis DPO has been undertaken with the Department of Social Welfare and Development US $250 million IBRD Flexible Loan in US dollars with variable-spread, level repayments, total maturity of 25 years including a grace period of 10 years. The operation is a single tranche operation that will fully disburse upon effectiveness The proposed Supplemental Financing will support the Government to address the human and economic impacts of recent typhoons and will provide quick disbursing budget support to bridge the financing gap caused by unbudgeted expenditures and revenue loss due to the disaster and disaster response. In so doing, it helps to ensure follow through of the social protection measures and programs supported by the original Food Crisis Response DPO. The World Bank and Government coordinated a post-disaster needs assessment (PDNA) in collaboration with the ADB, EC, UN agencies, and bilateral partners. The PDNA serves as an important input to Government reconstruction planning and as a basis for donor coordinated assistance. The operation and the Government s reform program are subject to disruption based on several risks: Fiduciary and reputation risks remain despite improvements in the overall fiduciary environment in recent years. With regard to the reconstruction effort, key mitigating measures are the development of an Indicative Reconstruction Expenditure Plan that will be subject to a Reconstruction Monitoring and Evaluation System that has been established by an Executive Order signed by the President. Weak institutional framework and coordination problems could pose delays in implementing the Government s post-disaster reconstruction efforts. The establishment of a Special National Public Reconstruction Commission with the mandate to coordinate and monitor the reconstruction effort mitigates this risk. P120564

7 I. BACKGROUND 1. Over the past two years, the Philippines has had to weather the effects of high food and fuel prices, the global economic crisis and, most recently, typhoons that caused substantial loss and damage in some of the country s most economically vibrant regions. Within a space of two weeks, typhoons Ketsana and Parma, locally known as Ondoy and Pepeng, claimed close to 1,000 lives with an almost equal number of injuries. Over 9.3 million people were severely affected out of an estimated population of 43.2 million living in the affected areas. The confluence of these adverse shocks has dampened hopes for a quick return to the strong economic growth experienced during much of the decade. From , economic growth averaged 5.0 percent, peaking at 7.1 percent in 2007 the highest growth in three decades. However, with the combined impacts of the food and fuel price hikes and the global economic crisis, GDP growth decelerated to 3.8 percent in Pre-typhoon projections for 2009 showed growth at 1.4 percent, which is both a testament of the economy s resiliency and also its slow recovery prospects. With the typhoons damage and losses estimated at 2.7 percent of GDP, their impact on the economy will likely exacerbate the slow pace of expansion in the near term, especially if financing for recovery and reconstruction is delayed or partial. 2. The Bank s response during the past two years focused on support for social protection to help mitigate the impacts of exogenous shocks. The Food Crisis Response Development Policy Operation (DPO) 1 for $200 million sought to bridge the financing gap resulting in part from expanded safety net programs to vulnerable populations in the short-term. The DPO also sought to accelerate dialogue and technical assistance as part of a medium-term effort to overhaul the country s social protection system. It supported the adoption of a more reliable and standardized household targeting system; establishment of an institutional framework to improve coordination of social protection policies and programs; and establishing a conditional cash transfer (CCT) program which would eventually be the lynchpin of the new social protection framework. A year on, these reforms have come to fruition, with additional support from the Bank s Social Welfare and Development Reform Project 2 and the roll out of the national CCT program. 3. The proposed Supplemental Financing to the Food Crisis Response DPO aims to cushion the social and economic impacts of the recent typhoons. It is underpinned by a comprehensive Post-Disaster Needs Assessment (PDNA) which, by request of Government, was led by the Bank in collaboration with the ADB, EC, UN agencies, and other development partners. It seeks to help provide the fiscal space 3 to begin immediate reconstruction and is premised on Government s commitment to a transparent expenditure tracking system that will monitor and report on overall reconstruction spending. The proposed Supplemental Financing conforms to Bank policy as provided under OP Specifically, the government remains committed to the 1 Food Crisis Response Development Policy Operation (P113492) was prepared under the Global Food Response Program (GFRP) and approved by the Board of Directors on December 10, The Social Welfare and Development Reform Project (P082144) was approved by the Board of Directors on November 17, A proposal for the 2010 National Government budget includes Php 50 billion (USD 1.06 billion) in contingent, unallocated expenditure. The release of these allocations is contingent on either revenue over performance (against budget targets) or the identification of additional financing. The approval of the proposed Supplemental Financing to the Food Crisis Response DPO would immediately allow for the release of about a quarter of this contingency budgetary allocation. 1

8 program supported by the original Food Crisis Response DPO; the Supplemental Financing will allow Government to begin needed reconstruction without foregoing planned development expenditures, including those related to social protection. Despite the magnitude and devastation of the typhoons, the macroeconomic framework remains sound. The need to begin reconstruction is immediate and Supplemental Financing was deemed the manner in which the Bank could most quickly address the Government s reconstruction financing needs. II. RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 4 4. The economy avoided a recession in Real GDP growth reached 0.9 percent in 2009, though it contracted by 1 percent on a per capita basis (Table 1). On the demand side, private consumption partly driven by strong remittance inflows and robust public resulting from the Government s Economic Resiliency Plan have been the key growth drivers. Investment and net exports continue to be a drag on growth, but at a decelerating rate. On the supply-side, while industry is gradually recovering, typhoons Ondoy and Pepeng profoundly impacted the agricultural sector in the fourth quarter of In particular, rice production, which account for 17 percent of the total agricultural production, contracted on a year-on-year basis by 14 percent in the last quarter of This contraction accounts for almost the entire agricultural sector s 2.8 percent decline (year-on-year basis) in that quarter and dragged down the full year growth to 0.1 percent from 2.9 percent in January to September Amid bright spots, social and labor market indicators remain weak reflecting the series of crises that have hit the country. Unemployment and underemployment are both rising, as is the labor force participation rate as household seek additional income in response to falling real wages and hours worked. Overseas Filipino Workers (OFW) deployment remained strong despite rapidly rising global unemployment, reflecting the high demand for and supply of Filipino workers in the global labor market, particularly in the sea-faring industry. However, the incidence of hunger reached record highs in the fourth quarter of 2009, with Metro Manila particularly hard hit. This partly results from the hardship that typhoon Ondoy brought to the capital region s poor. 6. Despite a series of diverse global shocks, the balance of payments remained strong throughout the past two years, thanks to strongly counter-cyclical workers remittance inflows. The country s robust current account and balance of payments surpluses have permitted the Bangko Sentral ng Pilipinas (BSP; the central bank) to accumulate substantial foreign exchange reserves in 2009 (US$20 billion), providing ample support to the country s trade and external payments needs. Trade recovered in late 2009 but exports are still at only 2005 levels. As expected, remittances accelerated in the fourth quarter, in part due to transfers to typhoonaffected relatives. The countercyclical nature of real peso remittances has been remarkable in the past three years; as the economy recovers, the strength of these remittances is projected to wane in The central bank has begun to implement an exit strategy from the extraordinary crisisrelated liquidity-support and monetary easing. As concerns about the liquidity and stability of the 4 For further details, please refer to the February 2010 issue of the Philippines Quarterly Update which is available at 2

9 financial system have abated, and inflation measures are rising moderately, the BSP signaled in January a measured implementation of its exit strategy by realigning its rediscounting facility rate to the overnight Reverse Repurchase Agreement (RRP). Subject to fulfilling its inflation target, the BSP is expected to link the pace the monetary policy normalization to the strength of the economic recovery. Table 1: Philippines: Selected Economic Indicators, Actual Prel. Act. Projection Growth, inflation and unemployment (in percent of GDP, unless otherwise indicated) Gross domestic product (% change) Inflation (period average) Savings and investment Gross national savings Gross domestic investment Public sector National government balance (GFS basis) 1/ National government balance (Govt Definition) Total revenue (Govt Definition) Tax revenue (Govt Definition) Total spending (Govt Definition) National government debt Consolidated non-financial public sector debt Balance of payments Merchandise exports (% change) Merchandise imports (% change) Remittances (% change of US$ remittance) Current account balance FDI (billions of dollars) Portfolio Investment (billions of dollars) International reserves Gross official reserves 2/ (billions of dollars) Gross official reserves (months of imports) External debt Total 3/ Sovereign Spreads (EMBI plus, in basis points) Source: Government of the Philippines and World Bank staff. 1/ Excludes privatization receipts (these are treated as financing items, in accordance with GFSM) and includes CB- BOL restructuring revenues and expenditures. 2/ Includes gold. 3/ World Bank definition. 8. The largest fiscal easing in over two decades weakened the structural fiscal balance; a clear and credible exit strategy is crucial to enabling a measured unwinding of the fiscal stimulus. Thanks to previous fiscal consolidation efforts, for the first time in recent economic downturns, the Government was able to undertake a counter-cyclical fiscal policy. The 2½ percent of GDP in fiscal easing was the largest since 1986 and clearly helped buffer the economy 3

10 during the global recession. However, it generated a National Government overall fiscal deficit of 4.1 percent of GDP in 2009 (GFS basis). This was mostly of a structural nature as permanent revenue-eroding and expenditure-increasing measures were introduced, but also reflected the one-off shocks to both revenue and expenditure stemming from typhoons Ondoy and Pepeng. To enable a measured unwinding of this fiscal expansion so as to protect the nascent recovery laying out a specific medium-term plan that takes into account the country s inclusive growth agenda is warranted. Notwithstanding the current fiscal deficit, he Philippines continues to be current on its sovereign debt payments and on its payments to the World Bank, while Standard & Poor s Ratings Service retained its stable outlook for the Philippines and affirmed its BBlong-term and B short-term foreign currency sovereign credit ratings in July Real GDP growth is projected to reach 3.5 percent in 2010 and 3.8 percent in 2011 (Table 1). The projection takes into account the global recovery path projected in the January 2010 Global Economic Prospects, continued strong deployment of overseas Filipino workers in 2009, and a looser fiscal stance in 2010 than anticipated earlier, in part reflecting post-typhoon reconstruction activities. So far, the size and pace of the peak-to-trough and the projected recovery in 2010 is closely aligned with past recessions in the Philippines. However, unless reforms address long-standing growth bottlenecks, the recovery s shape over the medium-term is projected to move from V to \ / ----, that is, stabilize at a lower equilibrium growth rate. As concluded by the IMF during its 2009 Article IV consultation, external debt dynamics are generally benign but the public sector debt is broadly stable. Overall, macro-economic fundamentals are projected to remain acceptable for the loan operation. III. THE TYPHOONS AND THE GOVERNMENT S RESPONSE A. The Typhoons and the Human Toll 10. The Philippines is widely regarded as one of the world s most disaster-prone countries. Geological forces make the country prone to earthquakes and volcanic eruptions, both major causes of landslides. However, typhoons and tropical storms represent by far the deadliest natural disasters in the Philippines. The country is situated along the belt of highest frequency of typhoons in the world with an annual mean of 22 typhoons, of which six are typically large enough to cause major destruction. An average of 1,009 lives is lost every year to natural disasters, with typhoons accounting for 74 percent of the fatalities, 62 percent of the total damages, and 70 percent of the agricultural damages. 11. Within the space of two weeks in September and October 2009, the Luzon region of the Philippines was hit by two severe typhoons. On September 26, 2009, typhoon Ketsana (local name Ondoy) which was classified as a Category 1 storm brought a record-high rainfall to Metro Manila and nearby provinces in central Luzon, causing massive floods which were the worst in over 40 years. (Figure 1). The unprecedented amount of rain caused dam reservoirs to fill up. The elevation of Laguna Lake, which borders Metro Manila, increased by 1.2 meters in 2 days causing the lake s already high volume to increase so that the excess water volume reached about 2.5 billion m 3. The high rainfall caused rivers downstream to overflow their banks and flood surrounding areas. Shantytowns located on these banks aggravated the flooding as they encroached on river and canal flows and their garbage chocked off pumping stations. One month after Ketsana, 21 municipalities remained flooded with water of at least 50 cm deep. 4

11 Figure 1: Storm Path of Ketsana and Cumulative Rainfall Note: The smaller map in the upper left corner shows the storm path of Ondoy. The larger map shows the cumulative amount of rain that fell as Ondoy passed over the Philippines. Source: PAGASA, A few days later, on October 3, 2009, typhoon Parma (local name Pepeng) hit the northern part of Luzon (Figure 2). A Category 3 storm, Parma brought maximum sustained winds of about 195 km per hour and gusts of up to 230 km per hour, as well as heavy rains, causing extensive damages and flooding in predominantly agricultural areas that already had fully saturated soil. 5 The highest cumulative rainfall amounts (exceeding 1,000 mm) were experienced along the west coast of Northern Luzon. Parma left the shores of the country for 5 days but then turned back to hit Northern Luzon again, making a total of three landfalls and leading to protracted rainfall. The flooding caused by Parma is estimated to have a return period of around 50 years. 5 Tropical storms may cause disasters in view of their three components: very high winds, heavy rainfall that may cause flooding, and the corresponding storm surge that may bring sea water in waves over the coastal areas. In the present case, the winds and storm surge did not produce much damage; it was the heavy rainfall from both storms that produced the disaster. 5

12 Figure 2: Typhoon Path of Parma and Cumulative Rainfall Note: The smaller map in the upper left corner shows the path of typhoon Pepeng. The larger map shows the cumulative amount of rain that fell as Pepeng passed over the Philippines. Source: PAGASA, As of October 20, 2009, the official death toll of the two typhoons combined stood at 929 persons with 84 persons still missing and 736 injured. (Table 2) While the majority of deaths caused by tropical storm Ketsana were due to drowning, reported deaths during typhoon Parma were also caused by landslides, especially in the Cordillera Administrative Region (CAR). Assessment data shows that some 9.3 million people were severely affected out of an estimated population of 43.2 million living in the affected regions. 6 About 530 evacuation camps were set up in the aftermath of the typhoons, which provided accommodation for as many as half a million people during the peak of the disaster. 6 NDCC, Situation Report 45, October 30, 2009, and 2007 National Census of Population, 6

13 Table 2: Affected People and Casualties (as of October 30, 2009) Affected Group Ketsana Parma Total Families 986, ,087 1,940,912 People 4.8 million 4.5 million 9.3 million Provinces Cities Municipalities Evacuated Families 16,233 3,258 19,491 People 72,575 14,892 87,467 Evacuation Centers Casualties 1, ,749 Deaths Injured Missing Source: NDCC, Situation Report 45, October 30, 2009 B. Immediate Response 14. The Government of the Philippines (GoP) declared a state of national calamity in view of the tremendous damage to lives and properties and massive displacement caused by Typhoon Ketsana and devastations of Typhoon Parma. The Armed Forces of the Philippines (AFP) deployed 1,672 personnel to help with search-and-rescue and relief efforts, and, along with other government agencies, rescued about 150,000 people. The Philippine National Police (PNP) and AFP also conducted joint clean-up operations in major disaster affected areas. The Philippines National Red Cross (PNRC) and the Philippines Coast Guard deployed rescue teams in the flood-affected areas. There was also a counterpart private-sector effort among companies and non-government organizations (NGOs) to provide and coordinate relief activities in various areas. The Government agencies, which include National Disaster Coordinating Council (NDCC), Department of Social Welfare and Development (DSWD), Department of Health (DoH), local government units (LGUs), and NGOs provided food (rice, canned goods, biscuits) and non-food (mats, blankets, clothing) assistance for affected people in the immediate aftermath of the disasters. In addition, the NDCC provided some 50,000 sacks of rice respectively for the people affected by Ketsana and Parma. 15. The GoP requested international assistance on September 28, 2009, and asked the UN Resident Coordinator to coordinate an international Flash Appeal. The NDCC and the Inter- Agency Standing Committee (IASC) Country Teams conducted joint rapid needs assessments. Immediately following the typhoons, the government asked the Bank to lead a post-disaster needs assessment (PDNA), to be undertaken jointly with UN, ADB, EC and other partners. The PDNA provides a comprehensive assessment of the human and economic impacts of the typhoons, as well as recommendations for recovery and reconstructions based on global best practices. The PDNA is serving as the basis of the Government s reconstruction plan. 7

14 C. Reconstruction Plan and Monitoring System 16. Given the magnitude of devastation, the President issued directives to coordinate postdisaster responses, including fund raising and activity monitoring. On October 22, 2009, an Executive Order was issued creating the Special National Public Reconstruction Commission (SNPRC) to spearhead, implement, and adopt urgent and effective measures to bring about the reconstruction of affected areas in the country and to address the needs of the affected population. 7 As mandated, the SNPRC is tasked with assisting the raising of needed reconstruction financing from the private sector and international development partners. 8 The Government took further steps to strengthen the role of SNPRC when the President issued an Administrative Order on November 9, 2009 that mandates SNPRC to draft a disaster reconstruction and recovery plan that lays out the priority projects to be funded by the Government and Government-administered financial resources under the SNPRC s oversight The SNPRC has led the formulation of a reconstruction and recovery plan. The plan draws on the initial efforts of key national government agencies and LGUs that identified priority projects and activities to address needs for reconstruction as reported in the PDNA. The SNPRC requested the line agencies to come up with a list of priority programs, activities, and projects to be funded as part of the reconstruction plan. On February 5, 2010, the SNPRC conducted a work-shop to consolidate inputs from line agencies as a basis for the formulation of the Indicative Reconstruction and Expenditure Plan (IREP) for the country. 18. The SNPRC is also mandated to monitor and evaluate projects as well as to provide transparency and accountability on the sourcing and disbursement of funds. The SNPRC has worked on the development of a Reconstruction Monitoring and Evaluation System (RMES), with technical assistance from the Bank which highlighted international best practice. The RMES would serve as a tracking system to monitor funding, expenditure and implementation of reconstruction programs and projects. The monitoring mechanism would track funds from all sources donors, NGOs, private sector, and government. The tracking of on-budget reconstruction expenditures would require the indicative reconstruction expenditure plan as a basis, as well as the tagging of government expenditures that go toward activities detailed in the plan (whether they are incremental to the budget or reallocations within the budget). The system would also include third-party monitoring from local NGO networks. On March 16, 2010, the President issued Executive Order 870 to formally establish the RMES. 7 This refers to Executive Order 838 creating the Special National Public Reconstruction Commission to undertake a study of the causes, costs, and actions to be taken in the wake of typhoons Ondoy, Pepeng, and Frank, to seek aid to fund the reconstruction, and to enter into a partnership with the private sector for the foregoing purposes. (Typhoon Frank hit the country in June 2008.) 8 In this regard, SNPRC formed partnership with the private sector-led Philippine Disaster Recovery Foundation (PDRF) on October 23, 2009 to enhance and facilitate the cooperation and coordination between the GoP and the private sector in formulating and implementing a reconstruction strategy. SNPRC is also envisioned to serve as the clearinghouse for international assistance implemented by the donors. 9 This refers to Administrative Order 271 providing for the composition and additional functions of the SNPRC created under EO 838 and establishing its Secretariat. 8

15 IV. OVERALL DAMAGE, LOSSES, AND NEEDS ESTIMATES 19. The PDNA estimated that damage and losses from Ketsana and Parma amount to about US$4.38 billion (Table 3). The PDNA found that damage to physical assets in the affected areas amounts to an estimated US$1.45 billion. Associated losses in production and other flows of the economy were estimated at nearly US$2.93 billion, equivalent to two-thirds of the total disaster effects. While the destruction or damage to assets occurred at the time of the storms, the associated changes in economic flows will last beyond Table 3: Summary of Disaster Effects and Needs by Sector (in US$ million) 20. The private sector has borne most of the impact of the disasters. The share of private sector damage and losses is equivalent to 90 per cent of the total, while that of the public sector constitutes the remaining 10 percent. It should be noted that in contrast to other disasters in which destruction of infrastructure is predominant, nearly 95 percent of total damage and losses were sustained by the productive and social sectors. 21. A total of US$942.9 million is required to meet recovery needs, and a total of US$3.48 billion is required for the reconstruction efforts (Table 3) over the short- ( ) to mediumterm ( ). Larger investments, particularly in flood control and housing, may need to be considered in the longer term. The share of the public sector in implementing the recovery and reconstruction program is estimated at 55 percent (US$2.44 billion), whereas private sector execution amounts to 45 percent (US$1.99 billion). 9

16 V. ECONOMIC AND SOCIAL IMPACTS A. Economic Impacts i. Pre-Disaster Situation 22. The combination of the food and fuel crisis in 2008, along with the onset of the global economic crisis brought an end to five years of good economic growth. In 2008, GDP growth decelerated to 3.8 percent as these external shocks reduced real incomes and slowed the growth of private consumption, investments, and exports. In the first half of 2008, public sector spending lagged, and contracted in real terms. In May 2008, the Government announced that, in response to the increases in oil and food prices, it intended to postpone its balanced budget goal to allow for higher spending on infrastructure, social protection, and subsidies to the poor. Public spending, in particular infrastructure spending, accelerated in the second half and buoyed overall growth. The relatively weak demand has resulted in slower growth of the services sector. 23. Inflation had been falling over the past few years and averaged only 2.8 percent in 2007, However, it rose sharply to 9.3 percent in 2008 but receded almost as quickly, reaching 0.1 percent in August The higher oil and food prices in 2008 increased the import bill, while the global slowdown began to take its toll on exports. Remittances, however, still remained resilient in 2008 and 2009, keeping the current account in moderate surplus. Direct investment inflows diminished but remained positive. Portfolio investment was more adversely affected by the financial market turmoil and global risk aversion. Nonetheless, the overall balance of payments remained in surplus in both 2008 and 2009 and enabled the country to continue to accumulate international reserves. 24. As in other emerging markets during the peak of the global financial crisis, the Philippines witnessed a decline in stock market and asset prices, higher spreads on its international bonds, and a depreciation of the currency against the US dollar. Following the strong appreciation of the peso in 2007, the currency depreciated by about 15 percent against the US dollar during 2008 and was broadly stable in Stock market prices nearly halved during the crisis before recovering, in line with other East Asian markets. Spreads on global sovereign bonds surged by around 500 basis points, before returning to their pre-global financial crisis level in late Nevertheless, access to international markets remained open for the sovereign, as the January, July and October 2009 global bond issuances totaling US$ 3.25 billion revealed, and this has continued to be the case in early All in all, the impact of the global financial turmoil on domestic financial markets has been relatively contained and temporary. The Philippines direct exposure to distressed credit products was limited. Overall exposure to structured products was estimated at about 2 percent of banking sector assets; this has been further reduced since the onset of the crisis. Nonetheless, the country remains vulnerable to potential global financial markets turmoil due to its relatively 10 In 2010, the Philippines was the first Asian countries to tap global bonds with a January issuance of US$ 1.5 billion in durations of 10 and 25 years at spreads of 184 and 195 basis points over US Treasuries, respectively. In February, the country issued US$ 1.1 billion worth of Samurai bonds. 10

17 high stock of public sector debt (above 60 percent of GDP). 11 About one-third of Philippines foreign currency denominated debt is held by domestic banks, which makes them vulnerable to global re-pricing of risks and interest rate increases. However, the domestic banking system is able to weather shocks due to high liquidity (with a large pool of remittance-driven deposits), high capital adequacy ratios (in excess of 14 percent, of which most consists of tier 1 capital), low non-performing loan ratios (below 4 percent), and high provisioning. 26. The impact of the global economic crisis on GDP has been moderate. While the economy contracted by 2.1 percent in the first quarter of 2009 the sharpest contraction since the mid-1980s it partly recovered thereafter thus avoiding an official recession. The modest recovery was driven by renewed consumer and government spending. The limited decline in GDP primarily reflected the limited reliance on foreign markets, as a result of the modest contribution of exports and export-oriented manufacturing to GDP, the small share of employment in manufacturing and export-related companies, and the conservative behavior of domestic banks. The renewed growth in private consumption and the beneficial impact of the fiscal stimulus were the two contributors to GDP growth in the rest of Private consumption recovered from the collapse it experienced earlier in 2009, but net exports remained weak. The quarter-on-quarter contraction in personal consumption expenditure in the first quarter of 2009 the first in over two decades and its rebound in the second quarter were important drivers of the swing in GDP growth as private consumption accounts for more than 70 of GDP. The recovery of consumption was mostly driven by remittance inflows, declining inflation, and an improving global outlook. Merchandise exports started expanding in late 2009, but from a low base. Exports of services, however, have remained robust thanks to continued strong growth in the business process outsourcing industry. Implementation of the fiscal stimulus plan led to a sharp increase in government spending in the second and third quarter of ii. Post-Disaster Impact 28. As a result of the disaster, without intervention to recover losses and damages, full-year GDP growth is expected to decline by 1.3 and 0.4 percentage points in 2009 and 2010, respectively. The typhoons caused substantial damages and losses of about 2.7 percent of GDP (Php 206 billion). The estimate takes into account the large share of metropolitan Manila (38 percent) in the country s total GDP, and the impact on agriculture, as Central and Northern Luzon contribute to over half the country s rice production. In fact, disaster-affected Luzon accounts for 60 percent of GDP. In Manila, companies faced drastically reduced capacity as a large share of employees was unable to report to work for days. A large number of small businesses was significantly hit, including the traditional sari-sari family stores. 29. Parma had a large impact on agriculture since it hit Northern Luzon, the region s main source of crops; Ketsana hit predominantly urban areas. The two typhoons hit the Philippines during the wet season (May to October). As a result, almost all the wet season crops have been destroyed in the affected areas. The dry season runs from November to April, but unless 11 The recent debt-event risk in Dubai which pushed up CDS spreads on the Philippines, revealed that the country, with its high public sector gross financing requirement (estimated at about 20 percent of GDP for 2010), remains exposed to sudden shift in risk appetite towards emerging markets. 11

18 rehabilitation work (e.g., irrigation systems) in the affected areas begins immediately, the dry season crop production could be significantly and negatively impacted and would lower overall agriculture production in It would also result in larger rice imports and a larger increase in the National Food Authorities (already significant) deficit as it imports rice at a higher cost than it resells domestically. 30. Commerce and trade incurred heavy losses, particularly due to damaged stocks. The subsector suffered losses totaling Php 89.3 billion, of which the largest share was incurred by large and medium enterprises due to lost inventories. The timing of the calamities heightened the impacts, as the floods hit at a time of year when production and inventory buildup are at their highest. Wholesalers and retailers had stocked up in preparation for the Christmas season, making the subsequent losses inordinately high, which in turn translated into forgone sales for the trade sector. Almost all of these losses occurred in Regions IV-A, III, and the National Capital Region (NCR), where warehouses are co-located with industrial sites and small retailers are also numerous. 31. Manufacturing was also adversely affected, as some plants in Metro Manila and nearby regions were flooded. Although most flooded factories were small and medium enterprises (SMEs), some large enterprises also experienced the impacts for example, steel and glass processors located along the Pasig River and several larger factories. As mentioned above, damaged machinery and premises, difficulty of employers and suppliers in accessing the factories, and electricity shortages contributed to reduced productivity. The halt in production resulted in lost orders, further weakening the financial balances of export-oriented SMEs which were still reeling from the collapse in exports from the global recession. Losses of stocks and inventories of raw materials during the flooding have stopped or delayed the resumption of production. 32. The services sector is expected to be moderately and temporarily impacted, with trade, transportation and personal services most affected. Airport and port disruptions were temporary; road transportation was materially affected for weeks. With key transport and supply arteries cut off, vegetable prices in Metro Manila soared as vegetables are sourced from Northern Luzon. Some, especially small, retailers in Metro Manila, have suffered large losses in working stocks and inventories; for the large part these are uninsured. Certain property markets most seriously affected by floods would likely see prices collapse, creating large negative wealth effects to their owners. Companies were significantly affected by the unavailability of staff in the few days immediately after Ketsana s impact; this limited their output (e.g., the BPO sector reported that less than half of its staff was present for work on Monday September 28, 2009). 33. On the demand side, consumption is expected to slow down temporarily due to negative wealth and possibly income effects. While the poor have been disproportionately hit by the floods, middle class households seem to have been significantly affected and have lost cars and expensive household goods that could take time to be replaced (refrigerators, A/C units, etc). Most of these households do not hold flood insurance, or at least, not insurance that covers for acts of god. Past natural disasters, however, point to a partial offset as additional remittance are sent to cope with the crisis; middle class households account for a large share of remittances in normal times. Reconstruction efforts and the need to replace lost furniture and household goods are expected to offset a projected decrease in discretionary consumption purchases. 12

19 34. The impact on the fiscal balance could be noticeable, both due to higher spending needs and weaknesses in revenue. Over the three years of the PDNA horizon, the typhoons are projected to worsen the public sector fiscal position by at least US$2.7 billion. Of this amount, about 90 percent will be due to recovery and reconstruction spending over three years, and the remaining 10 percent (some US$221 million, or about 0.1 percent of GDP) are accounted for by lost revenue (principally over 2009 and 2010), mostly related to lower corporate income tax and VAT refunds. Initial claims for VAT tax rebate and income tax reduction due to typhoon damage received by the Bureau of Internal Revenue suggest that this preliminary estimate of the revenue impact may be on the low side. Revenue collection is expected to be affected both directly and indirectly. The direct impact will arise due to damages and losses that will reduce corporate and income tax collections and value added tax, while the indirect impact will mostly stem from lower consumption and profits. 35. Fiscal space has been sharply reduced following the series of shocks affecting the Philippines since As noted by the November 2009 IMF s Article IV consultation mission, the 2009 fiscal stimulus, while effective in supporting the economy and fight the global recession, has reduced fiscal space to the point where fiscal consolidation is required over the medium-term (Annex 1). B. Poverty and Social Impact 36. While the impacts of exogenous shocks over the past two years has slowed the pace of poverty reduction, data reveals that poverty remains an intractable challenge even during times of economic growth. While the incidence of poverty has fallen from about half of the population two decades ago to about 30 percent today, the pace of poverty reduction has slowed. Factors include growing inequality and a declining growth elasticity of poverty: while poverty declined by about 2.2 percent annually from when economic growth averaged 3 percent per year, poverty reduction slowed to 0.1 percent per year from when annual growth averaged 5 percent. High population growth, averaging 2.2 percent (compared to less than 2 percent in neighboring Indonesia, Vietnam, and Thailand), may have also contributed to slow poverty reduction efforts. 37. Moreover, vulnerability to poverty affects a large portion of the population. Government estimates reveal that 45 percent of Filipinos are vulnerable to falling into poverty caused by income shocks, while for the poor, such shocks increase the severity of poverty and reduce the likelihood of escaping it. 12 Vulnerability is manifest in household spending patterns: average and poor households spend 41 and 60 percent of their incomes, respectively, on food. Hence, income shocks resulting from sudden food price hikes, loss of employment, deteriorating health of the main bread earner, and natural calamities have an immediate and severe impact on the poor and near-poor The food and fuel crisis of 2008 and the successive typhoons that struck Luzon in September 2009 represent income shocks that have compounded the social and economic impacts of the global economic crisis. Considered to be the largest rice importer in the world, 12 National Anti-Poverty Commission and National Statistical Coordination Board (September 2005) Assessment of Vulnerability to Poverty in the Philippines. 13 World Bank (2001) Philippines: Poverty Assessment. Volume 1: Main Report. 13

20 the Philippines was badly hit by the sharp increases in international rice prices in mid-2008, which translated into an 18 percent increase in domestic food inflation in July 2008 and a 57 percent increase in retail prices of rice. Fuel prices also peaked in October 2008 at 10.7 percent. While food prices have since stabilized, they remain much higher than before the crisis began. In the months after the height of the food and fuel crises, the impacts of the global economic crisis began to emerge as labor-intensive industries relied upon by the majority of low-skilled workers for their livelihoods contracted. Overseas remittances also declined in 2009 from a year earlier. Simulations show that the combined effects of food and fuel inflation that peaked in July 2008 increased poverty incidence in 2008 by 0.9 percentage points, pushing an additional 900,000 people into poverty The typhoons hit the Philippines at a time when the Philippines was just recovering from the impacts of the food, fuel, and global economic crises. As a result of the losses in incomes due to lower economic activity, the number of poor people in the Philippines is estimated in the PDNA to increase by 480,000 in It is estimated that the disaster resulted in about 172 million work-days lost and about Php 50.3 billion worth of lost livelihoods in the affected areas. This translates into a reduction in income of about Php 24,000 per affected household, which is equivalent to 12 percent of the average household income in these regions. On a national scale, the disaster was estimated to have increased the incidence of poverty by 0.5 percentage points. These estimated impacts do not account for any increase in social protection or benefits from job creation during reconstruction activities. 40. Although the national-level impact of the disaster is relatively contained, the most affected regions in Luzon could have experienced an increase of as much as 3 percentage points in the poverty rate in The six regions in Luzon that were heavily affected by the disasters also have the highest concentration of the poor. The increase in poverty is highest in Region 1, where the poverty rate is estimated to have increased by 2.8 percentage points in Although income losses were found to be highest in the NCR and Central Luzon in Peso terms, the estimated impact of the disaster as a share of what would have been the region s GDP in 2009 is highest in Region 1. With less production, the ability of the region to generate enough employment and income is constrained, ultimately affecting household welfare. Since the impact of the disasters will continue to weigh on family incomes in 2010, poverty incidence in Region 1 is likely to increase by 3.5 percentage points in It is estimated that about 172 million workdays, equivalent to about 664,000 one-year jobs, were lost due to the impacts of the disasters on livelihoods. This represents about 4 percent of total employment prior to the disaster in the affected six regions in Luzon. Total income lost due to the disaster amounted to Php 50.3 billion, which particularly affected informal workers with family-based livelihoods. Results of interviews with microfinance institutions around Luzon confirm huge livelihood income losses in their localities: the Microfinance Council of the Philippines reported that 164,588 clients across 20 microfinance institutions (MFIs) were affected by the disasters. 14 Simulations undertaken during the peak of the food and fuel crises in July 2008 suggested that about 3.3 million people immediately succumbed into poverty because of the 18 percent increase in food prices alone. Food and fuel prices quickly slipped back to their pre-crisis levels towards the end of 2008, in part due to the actions supported by the Food Crisis DPO, which allowed many Filipino families to revert to their old standard of living. 15 These estimates are based on the Post-Disaster Needs Assessment. 14

21 Figure 3: Sector Share of Income Losses (Php million) Figure 4: Sector Share of Workday Losses (No. of days) Agriculture, 3,722 Fisheries, 1,025 Agriculture, 26,053,150 Fisheries, 4,900,824 Commerce, 32,644 Industry, 12,962 Commerce, 100,217,130 Industry, 39,141,040 Source: PDNA Source: PDNA 42. Across the sectors, commerce sustained the biggest losses in employment and incomes in 2009 (Figures 3 and 4). Commerce represents about 64 percent of total lost income, amounting to Php 32.6 billion. The temporary closedown of some firms and home-based enterprises due to flooding and damage to property and equipment reduced production in the wholesale and retail trade subsector by about 4 percent of its gross value added in The manufacturing industry is estimated to have incurred the second biggest losses in incomes and employment, losing about 150,000 work-years due to the disaster and about Php 13.0 billion in incomes. Income losses in the agriculture sector are estimated at about Php 3.7 billion, equivalent to about 10 percent of total income losses and 16 percent of workers lost incomes in the commercial sector. Income losses in the agriculture sector in 2009 resulted from flooded and silted farms (part of which will recover in the next season and part of which are now unproductive), fish ponds that overflowed, and livestock that drowned in the flood. If left unaddressed, the impact of damages to agricultural lands is expected to cause additional employment and income losses in the sector in In terms of regional impacts, the biggest loss in incomes has been concentrated in the NCR and Region III. Total income losses were estimated at Php 22.9 billion for the NCR and Php 12.9 billion for Region III. These two regions command 33 percent of national output and about 28 percent of total employment in wholesale and retail trade. Together, they also account for about half of affected wholesale and retail trade establishments, most of which are workers in home-based and small or micro enterprises. This suggests that workers in the trade-related sector in these two regions suffered the biggest livelihoods losses. 44. Informal sector workers have been affected the most. Workers and micro-employers in the informal sector are the most vulnerable to shocks from natural disasters, especially small traders and vendors, food-related producers, service providers, self-employed agricultural workers, and those relying on survival livelihood activities. The post-disaster socio-economic situation further increased their vulnerability in terms of limited opportunities. In commerce, which incurred the biggest income losses, about 60 percent are self-employed. 45. The social impact assessment found that typhoons severely disrupted livelihoods, particularly for farmers and agricultural laborers. A near total loss of crops and livestock was reported across all sites visited, and land has become temporarily and in some cases, permanently unusable. More diversified livelihood strategies in urban areas indicate a greater 15

22 potential for households to recover, particularly in cases where families have varied sources of income. The most severely affected households in urban areas were those that relied on a single home-based business, since both equipment and inventory were often lost. VI. THE BANK S RESPONSE 46. The Bank-led PDNA was undertaken jointly with government counterparts, the UN, ADB, EC and other partners. Beyond providing an assessment of the human and economic impacts of the typhoons, the PDNA also provided recommendations for recovery and reconstructions based on global best practices. Furthermore, the PDNA discussed the importance of the government adopting a disaster risk management strategy, including an identification of risks and mitigating measures, a plan for institutional capacity building to respond to disasters, and options for risk financing. The PDNA was the basis for a December 2, 2009, meeting convened by Government and consisting of development partners and the private sector. The meeting resulted in indications by partners of their readiness to support recovery and reconstruction efforts, and an agreement to put in place an expenditure tracking system that would monitor and report on reconstruction-related expenditures. 47. The Bank s support following the typhoons in pulling together a PDNA and providing technical support to move toward a reconstruction plan and a reconstruction expenditure monitoring system provides further impetus to its support to the broader agenda on disaster risk reduction and management in the Philippines. With support from the Global Facility for Disaster Reduction and Recovery, the Bank is implementing a comprehensive program that aims to integrate disaster risk reduction into development policies, plans, programs and budgets, especially among local governments that are considered at high risk. Special focus has also been accorded on formulating a risk-sensitive urban renewal and redevelopment framework for Metro Manila, given its economic and political importance, with the recent disaster increasing the attention to agendas such as urban upgrading and flood management. The Bank is also supporting the formulation of a risk finance strategy that seeks to reduce the fiscal burden incurred from ever-increasing disaster impacts, offer affordable pre and post-disaster financing for local governments, and allow private sector role in risk financing. 48. The Bank has also responded to the Government s request for immediate disaster financing following the typhoons. Besides the proposed Supplemental Financing, the Bank has also identified up to $300 million in commitments from existing projects, or projects under preparation, that could be partially reallocated to address disaster-related needs. As of now, the design of two new loans has already been adjusted to address reconstruction needs. The two new loans are LISCOP Additional Financing and Regional Infrastructure for Growth Project. Both are planned for Board approval in June Over the medium- to long-term, there may be opportunities for the Bank to engage in new areas stemming from discussions on reconstruction and disaster risk mitigation. 49. Importantly, the Bank has provided just-in-time technical assistance to SNPRC in spearheading the formulation of the IREP and in developing the RMES. Two missions composed of public sector specialists and international expert on expenditure tracking system were fielded in December 2009 to assess the context and lay out the preliminary design for a monitoring system. This was followed by series of consultative meetings between the Bank and the SNPRC 16

23 as well as key stakeholders (government agencies, LGUs, private sector, international donors). As part of this assistance the Bank also provided SNPRC technical assistance on developing expenditure monitoring templates for line agencies, as well as providing technical input on expenditure tracking during the IREP work-shop in February The proposed Supplemental Financing operation seeks to support the Government s response to the loss and damages inflicted by Typhoons Ketsana and Parma. The proposed $250 million commitment will help alleviate the budgetary pressures resulting from both increased expenditure on recovery and reconstruction activities, as well as from decreased revenues. The operation does not support specific policy actions and activities, aiming instead to more generally provide the government with quick disbursing resources to respond to disaster-related needs in a timely manner. At the same time, the operation seeks to ensure that the reforms and programs supported by the Food Crisis Response DPO (e.g., the CCT program) remain on track and are implemented without risk of delay due to insufficient or competing budgetary priorities arising from post-disaster reconstruction. VII. THE FOOD CRISIS RESPONSE DPO: AN UPDATE 51. The Philippines GFRP DPO aimed to support the Government of the Philippines address the challenges of high food prices in the short and medium term, particularly by supporting measures to strengthen social protection and safety nets to protect poor and vulnerable households. The DPO was approved by the Bank on December 10, 2008 and provided US$200 million in program assistance. Over a year since its preparation, the DPO can be assessed to have achieved and in most instances exceeded all its stated short-term outcomes, while also catalyzing progress on the longer-term social protection agenda. A. Pillar I: Emergency Social Protection Measures 52. The government achieved the short-term outcome of reducing the domestic retail price of rice from June to October 2008 by taking decisive measures to stabilize domestic rice prices. As a prior action, the government stopped resorting to large rice tenders to increase domestic stocks a policy that drove global and domestic rice prices to record highs. As a temporary measure, it instead sought out bilateral deals to increase its imports and stocks and made quick, albeit temporary, changes to its rice importation regime, including the issuance of guidelines allowing larger quotas for private importers and temporarily rescinding the tariff on rice for private import. The National Food Authority (NFA) also released its buffer stock in the domestic market to contain domestic prices. It accelerated its stock release in the lean season after June 2008, which resulted in the gradual decline of domestic retail prices and even mitigated the seasonal increase in rice prices that is normally associated with the lean season. Between June and October 2008, targeted short-term outcomes were achieved, with domestic rice prices decreasing from Php 38.40/kilo to Php 33.54/kilo, or by 13 percent. Prices continued to decline to Php in December 2008 and to this date, the NFA continues to release the stocks it accumulated in 2008 into the domestic market. 16 Rice prices in 2009 remained stable between January and May, albeit at a level higher than the same period in 2008, before the onset of the increase in 16 Regular consumers access the NFA low-priced rice through accredited distributors while poor households access them through Family Access Cards (Metro Manila) and Rice Allocation Ledgers (in the provinces). 17

24 global rice prices (Php vs. Php 29.08) reflecting the step increase in longer-term global rice prices in The government likewise achieved the short-term outcome of mitigating the impact of high food (and fuel) prices to households as measured by increased budget and off-budget allocation in 2008 for social assistance programs (a prior action). The year 2008 saw the highest share of the national budget allocated to social assistance programs. Prior to the food and fuel crisis of 2008, the government allocated only 2.4 percent of its national budget to social protection programs. To mitigate the short-term impacts of escalating prices to households, the government scaled-up subsidies and transfers to poor households in 2008 to 6.2 percent (including off-budget spending). Key elements include increased spending on the NFA rice subsidy (mostly off-budget) which increased by nearly 4 times, as well as (on-budget) increases in the national government s contribution to the PhilHealth Indigent Program and to the government s new Conditional Cash Transfer (CCT) program, Pantawid Pamilyang Pilipino Program (4Ps), allowing increased coverage of poor households under each program. The Government has reflected its continued budgetary commitment to the social protection agenda beyond the crisis by adopting a Medium-Term Expenditure Plan ( ) for DSWD that reflects a tripling of the annual budget for this period relative to its budget in The government also achieved the short-term outcome of improving the targeting of the Food for School Program (FSP), one of the government s bigger subsidy programs, to increase coverage of children from vulnerable and poor households. The FSP, launched in 2005, delivers a daily ration of 1 kilogram of rice per family for those with a child in first grade in public schools and government-run daycare centers. The program, however, was found to have a high leakage rate to non-poor households because of its bias towards including areas in the National Capital Region (NCR). Based on the original targeting mechanism of the FSP, program leakage was estimated at 54 percent. 17 Reflecting the government s commitment to improving effectiveness and efficiency of its social protection programs, the Operational Guidelines of the FSP were revised in 2008 to improve its geographic targeting to the poor (a prior action). The government adopted a new targeting mechanism that prioritizes all municipalities in the 20 foodpoorest provinces, based on the results of the latest poverty estimates (2006); the 100 poorest municipalities exclusive of those in the 20 poorest provinces, based on the latest small area estimates of poverty (2003); and depressed areas in NCR as identified by DSWD and Department of the Interior and Local Government (DILG). It is estimated that this change in the targeting design of the program has reduced leakage to non-poor students from 54 percent to 22 percent, thereby dramatically reducing the program cost of delivering a kilo of rice to poor children. While actual budget outlays to the FSP program did not occur as planned in 2009, for SY the government has announced an increased budget allocation of Php 3.3 billion to this program with the new targeting rules. This would imply expanded coverage of poor children from 0.62 million in SY to some 1.1 million in SY In October 2009, a cabinet action was issued for aligning DepEd s list of beneficiaries for the FSP with that of the 1 million poor households identified by DSWD Manasan, R. (2009) Assessment of Social Protection Programs in the Philippines. 18 Using estimated incidence rates. 19 Joint National Disaster Coordinating Council (NDCC) and NEDA cabinet group meeting. October 27,

25 B. Pillar II: Improving Policy Coordination in Social Protection 55. The government has achieved the short-term outcome of putting in place an institutional framework for enhanced coordination and delivery of social protection programs. To improve policy coordination and institutional arrangements for social protection, the President issued an Administrative Order in July 2008 establishing the National Social Protection and Welfare Program (NSPWP) cluster and assigning coordination responsibilities to DSWD (a prior action). 20 Going beyond achieving this short-term outcome, the cluster conducted a study that covers a quick assessment of the existing social protection programs in the country with a view to scale up and reallocate resources to the most effective and efficient ones. In July 2009, the cluster presented to the Cabinet the proposal for the consolidation of the social protection programs and the latter has recommended creating a new social protection framework -- with the DSWD s CCT program, the Pantawid Pamilyang Pilipino Program (4Ps), as the core social protection program. This framework was adopted by the Social Development Committee (SDC) on October Discussions are underway in creating an SDC Sub-Committee on Social Protection to provide the institutional structure for implementing the social protection strategy with a view to further improve policy coordination among key stakeholders, C. Pillar III: Improving Targeting 56. The short-term outcome of establishing a standardized database of poor households and using the database to select the beneficiaries of a national social protection program has been achieved. To improve the targeting of poor households, DSWD issued a Department Order in September 2008 adopting the National Household Targeting System for Poverty Reduction (NHTS-PR), a PMT-based targeting mechanism that includes a standardized database of poor households (a prior action). 21 By November 2008, the government had already established a standardized database containing over 200,000 poor households covering 83 municipalities and had included in the 2009 budget adequate funding for the expansion of the database to the 20 poorest provinces (a prior action). Meanwhile, DSWD has been using the NHTS-PR to select the beneficiaries of its CCT program. Since undertaking these prior actions and achieving the shortterm outcome, the government has made further dramatic progress on this agenda. First, the government has now decided to roll out the NHTS-PR nation-wide. Second, the government has allocated more funds in 2009 for the expansion of the database in addition to the existing budget under the 2009 General Appropriations Act (GAA). 22 Third, by December 2009 DSWD had already surveyed 5.9 million households, of which around 2.5 million had been assessed, increasing the number of poor households in the database to 1.2 million poor households. Fourth, in December 2009, a memorandum of agreement was signed between DSWD and the Philippine Health Insurance Corporation (PhilHealth) to use the NHTS-PR for the selection of the beneficiaries of its Indigent Program, reflecting the government s commitment to improve 20 The Administrative Order (AO) No. 232 was issued by the President on 8 July 2008, which provided for the clustering of government agencies dealing with social welfare into a National Social Welfare Program. The President later issued another AO on 28 July 2008 (AO No. 232-A), which provided for further strengthening of the cluster to include more agencies and assigning coordination responsibilities to DSWD. 21 The Department Order No. 1 Series of 2008 was issued by DSWD Secretary on 30 September 2008, which adopted the NHTS-PR for DSWD social protection programs and services. 22 The GAA of 2009 allocated P650 million for NHTS-PR and the government has allocated an additional funds amounting to P406 million by mid-2009 to cover the expansion of the database. 19

26 targeting of its key social protection and transfer programs to the poor. Also in December 2009, The National Statistical Coordination Board (NSCB) issued a resolution supporting the use of the NHTS-PR as a tool to identify beneficiaries of social protection programs. 23 D. Pillar IV: Establishing a Conditional Cash Transfer Program 57. The government launched the CCT program (a prior action) and subsequently achieved the stated short-term outcome of covering 320,000 poor household beneficiaries. Recognizing the need to improve impact, efficiency, and efficacy of social protection programs, the government launched the CCT program in January 2008, following the successful implementation of the program in other developing countries and the encouraging results from a pilot-test conducted in the Philippines in As the program had been expanded from the initial target of 20,000 household beneficiaries, the government included in the 2009 GAA the budget for scaling up and sustaining the program for the 320,000 household beneficiaries (a prior action). Since then, the government has tripled its commitment and efforts to this agenda. In the beginning of 2009, the government decided to increase the coverage of the CCT program beyond the 320,000 households that, by August 2009, there were about 700,000 households that receive income support in the form of conditional cash transfer. Subsequently, the government has decided to increase the number of beneficiaries to one million households to cover around 21 percent of the country s poor population. The government had also significantly increased the budget for the CCT program in the 2009 GAA compared to that of 2008 budget and allocated additional funds in 2009 for the expansion of the program. 24 E. Lessons Learned 58. There are several lessons to be learned from the results of this policy-based loan in delivering financing assistance in the context of a social emergency. Some reflect already known lessons of good practice for policy-based lending. (i) This Development Policy Operations (DPO) was effective because it built upon a pre-existing government or countryowned agenda. (ii) The effectiveness of this DPO as an emergency operation was its ability to catalyze a nascent reform agenda in social protection and further it due to the circumstances and exigencies of the crisis. (iii) The DPO benefitted from a pre-existing policy dialogue by the Bank on the social protection agenda, but was useful in broadening this policy dialogue from one about specific Departmental reforms (at DSWD) to broader cross-sectoral reforms in social protection. (iv) There are important potential synergies between DPOs and SILs that were exploited in this case. First, the DPO capitalized on the policy dialogue in the context of the ongoing preparation of a Sector Investment Loan (the Social Welfare and Development Reform Project) while broadening the social protection dialogue beyond the one implementing agency of the SIL. Second, the SIL (approved on November 17, 2009) will serve as an important vehicle that will both allow a deepening of reforms and support toward operational implementation while also ensuring a sustained engagement of the reform agenda catalyzed by the DPO. (v) There is potential to leverage reforms in one sector, such as social protection, to achieve reforms in another, such as agricultural reform. While the timing of this emergency operation did not 23 NSCB resolution No. 18. Series of The GAA of 2009 allocated P5 billion for 4Ps (GAA of 2008 allocated P298.6 million) and the government has allocated an additional funds amounting to P10 billion by mid-2009 to cover the increase in the number of beneficiary households. 20

27 allow reform champions in government to secure reforms in agricultural marketing and subsidy policy, the DPO has helped to further the policy dialogue in these areas. In particular, the successful achievement of an improved targeting system and the roll-out of a cash transfer scheme could open up options in the future to replace poorly targeted commodity subsidies, such as that for rice, which distorts domestic agricultural markets, with a more cost effective social safety net scheme. VIII. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING 59. Unanticipated financing need. The request for supplemental financing is consistent with the provisions of OP8.60. The impacts of the recent typhoons have created an unanticipated gap in financing which could jeopardize the implementation of the CCT program (due to competing budgetary needs). The loss and damage caused by the typhoons, as well as the recovery and reconstruction needs, exceed US$4 billion and will thus have a sizeable impact on the overall financing needs of the Government. The economic impact of the typhoon has compounded the effects of global economic crisis which had resulted in diminished tax revenues and augmented the fiscal deficit target from 0.4 percent of GDP to 3.9 percent of GDP for Sustained implementation of and commitment to the program. While the ICR for the Food Crisis DPO was being drafted (and subsequently stopped after the typhoons), the assessment of the team was that the DPO should be rated highly satisfactory in terms of outcome and likely sustainability. This assessment is based on the short-term mitigation of high food prices on vulnerable populations, including as a result of the expansion of safety net programs and measures supported by the DPO. In addition, sustained implementation and commitment to the program is reflected by reforms progressing beyond the envisioned short-term outcomes of the DPO -- in the area of social protection policy coordination, establishment and use of a targeting system, and roll-out of a conditional cash transfer program. Some of these reforms are now being further supported by the Social Welfare and Development Reform Project (P082144) approved by the Board on November 17, Inability to obtain sufficient funds on reasonable terms or in reasonable time. Because of the global recession, the government introduced a large fiscal stimulus package for 2009 and postponed its balanced budget goal from 2010 to While the fiscal stimulus helped the Philippine economy avoid a recession in 2009, the program's tax cuts and expenditure increases have increased budgetary pressures and reduced revenue buoyancy, weakening the structural fiscal balance even before the disasters struck. Following the disasters, the Philippines could be among the few emerging market countries with a worsening fiscal balance from 2009 to The proposed Supplemental Financing would be the first significant financing package to help the Government address immediate reconstruction needs. As the Supplemental Financing did not constitute part of the financing plan of the regular 2010 budget, it can be used for Government to access some of an appropriated Php50 billion (US$1.06 billion) in contingent, unallocated budgetary spending in the 2010 budget. These funds can be released against additional, previously unprogrammed funding. In so doing, the Supplemental Financing can enable Government to increase expenditures against priority recovery and reconstruction expenditures as laid out in its Indicative Reconstruction Expenditure Plan. 21

28 63. The Government hosted a meeting with development partners in early-december and while some grant financing was provided by a few donors, it remained limited compared to the needs. Development partners such as the ADB offered redirected loan financing from their existing program. 25 The proposed Supplemental Financing would help the Government address immediate budgetary needs. The World Bank has also offered to reallocate its existing portfolio for reconstruction needs as well as redirection of its lending pipeline towards this end. 64. Given its large financing needs even before the disaster, the Government s financing plan has also called upon substantial commercial financing of the pre-disaster budget. While the Government has been rightly opportunistic in tapping global bond markets at a time when appetite for East Asian emerging market bonds is strong from international investors partly due to sovereign risk concerns in other parts of the world and partly reflecting declining issuances from the region the Government remains concerned that access to market on reasonable terms could evaporate quickly. Accessing the proposed Supplemental Financing supports Government in its plan to mitigate this risk and diversify its financing sources. Moreover, the Supplemental Financing offers terms that are well below market rates. For debt management purposes, the Government is also keen to improve both the maturity structure of public debt and reduce gross financing needs over the short-term. The proposed DPO loan, with its 25 year horizon and 10 year grace period addresses both points. 65. Insufficient time to prepare a free-standing loan. The use of a Supplemental Financing option can enable the Bank to deliver quick disbursing budget support in a timely manner to respond to urgent financial needs stemming from the typhoons. The Government has already obtained a Congressional resolution calling for additional spending of Php12 billion (US$255 million), while Government, with Congress, intend to include an additional Php50 billion (US$1,064 million) of un-programmed funds in the 2010 budget that would be designated for relief and reconstruction spending. The Bank is discussing other types of financing beyond the proposed Supplemental, including a CAT-DDO which will take significant time to prepare. The proposed support is half of what the Government requested, and the Bank has informed the government that it could consider further budget support, if a program of disaster risk management policy reforms emerges and budget pressures continue. IX. IMPLEMENTATION ARRANGEMENTS A. Terms of the Supplemental Financing 66. The borrower is the Republic of the Philippines and this Supplemental Financing is a single-tranche loan for $250 million that would be made available upon loan effectiveness, as all policy actions supported by the loan were completed prior to the original Food Crisis DPO. No conditions, except for the standard requirement for a legal opinion will apply to this Supplemental Financing. There will be an overall requirement that the government continues to maintain an appropriate macroeconomic policy framework as was required for the original Food Crisis Response DPO. The closing date for the Supplemental Financing is December 31, ADB has provided more than US$1 billion in budget support during 2009 to finance the government s fiscal stimulus plan. 22

29 B. Fiduciary Arrangement 67. The fiduciary arrangement outlined in the Food Crisis Response Development Policy Opertation still applies. 68. The Government has a Public Financial Management (PFM) reform program in place, which is focused on enhancing the policy base and performance orientation of budgeting through the introduction of a Medium-Term Expenditure Framework (MTEF) and the Organizational Performance Indicators Framework (OPIF) as part of the budget documentation. On budget execution, the efforts have been concentrated in three main areas: (i) Developing Government Integration Financial Management Information Systems (GIFMIS); (ii) Developing National Guidelines on Internal Control Systems (NGICS); and (iii) Developing an Internal Audit Manual (PGIAM), for piloting in selected line departments with an effort to strengthen the internal audit function at the agency level. 69. With regard to GIFMIS, a Joint Memorandum of Agreement was signed between the Commission on Audit, Department of Budget and Management and Department of Finance Bureau of Treasury to establish an inter-agency Steering Committee to oversee and develop the integration and harmonization of the government s financial management information systems that will cover all financial transactions of government. A meeting was organized by the GIFMIS Steering Committee with the donor community to introduce the government s PFM reform roadmap, highlighting the need to collaborate with the donor community for the development of the GIFMIS. 70. With regard to internal controls, particular areas of concern from the fiduciary point of view are the adequacy of the internal control standards and the effectiveness of the internal audit functions in the public sector. The PEFA assessment report noted the current weaknesses in these areas. The Government has already begun addressing these weaknesses by preparing National Guidelines on Internal Control Standard (NGICS) to be piloted in selected agencies. 71. In particular with regard to internal audit, the development of the Philippines Government Internal Audit Manual (PGIAM) which aims to operationalize and support the implementation of the National Guidelines on Internal Control System (NGICS) demonstrated a strong desire from the Government to strengthen the systems of internal control. Currently, the approach and methodologies used in PGIAM are not yet fully reflective of those used in modern practice apparently due to constraint faced by the Government in shifting to the modern internal audit practice without violating certain Philippines laws. While facing the challenge of reconciling the above difference, the Government, with the support of development partners, is focused on addressing the issue of the absence of the Internal Audit Service (IAS) in most Agencies and their weak capacities in cases where IAS exist. The World Bank and the AusAID are working toward assisting the Government in meeting the professional standards observed by the internal audit profession through the following: (1) piloting IAS strengthening initially in two Agencies using the PGIAM; (2) evaluating the results of the IAS strengthening after 18 months; and (3) determining how can the PGIAM be aligned to the professional standards observed by the internal audit profession without violating Philippine laws. 23

30 72. Overall, progress has been made in implementing the key PFM reform agenda, impacting positively on the fiduciary risks. The government has indicated its willingness to pursue further PFM reforms. The Bank will continue to support this agenda and monitor progress. C. Funds Flow and Auditing Requirements for the Supplemental Financing 73. Supplemental Financing proceeds will be deposited into a deposit account in US dollars at the Central Bank (Bangko Sentral ng Pilipinas) that forms part of the Philippines official foreign exchange reserves. Prior to disbursement, the Government of the Philippines would provide to the Bank a copy of written instructions issued to the Bangko Sentral ng Pilipinas for conversion of the foreign exchange amount of the loan into local currency and that an equivalent amount be credited to an account of the Government available to finance budgeted expenditures. After disbursement of the loan, the Government would ensure that the equivalent Peso amount of this loan amount is promptly accounted for (in Philippine Pesos) in the Borrower s budget system in the General Fund, and thereby be available to finance budget expenditures. The Borrower would provide to the Bank a written confirmation within 30 days of disbursement of the loan that this accounting has been completed, with supporting details. 74. Disbursement of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied. The proceeds of the operation would not be used to finance expenditures excluded under the Loan Agreement. If, after being deposited in a government account, the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, the Bank will require the Recipient to refund the amount directly to the Bank. The amount refunded to the Bank shall be cancelled. The Bank will retain the right to seek an independent audit of the Deposit Account by an auditor acceptable to the Bank, to seek reassurance on the accuracy of the information relating to transactions from this account that was provided by the Borrower, and that funds in this account were not used to finance expenditures excluded under the Loan Agreement. 75. The 2008 annual financial statements of the Bangko Sentral ng Pilipinas are audited by the Commission on Audit (COA) and are available on COA website. COA issued an unqualified audit opinion for 2008 financial statements of BSP. D. Environmental Aspects 76. The supplemental financing seeks to help bridge the financing gap resulting, in part, from the impact of the typhoons. The operation does not support specific policies or activities apart from those underpinning the original Food Crisis Response DPO, e.g., efforts to strengthen the country s social protection system and social safety net programs, none of which entails any significant environmental impacts. 77. The Government has in place reasonable environmental safeguard systems. The country has extensive laws on environmental management, one of which is the Philippine Environmental Impact Assessment (EIA) Act which requires the conduct of Environmental Assessment and securing an Environmental Compliance Certificate for new projects. The Bank has recently conducted a country safeguards systems review which indicates that country s policies on Environmental Assessment (EA) and Indigenous Peoples (IP) are comprehensive and 24

31 reasonable compared to internationally-accepted standards, including the Bank s operational policies on safeguards. E. Risk and Risk Mitigation 78. Fiduciary weaknesses remain substantial in the Philippines and there is a significant risk of budgetary resources being misused or diverted. This risk is heightened in the current political environment, with national elections scheduled for May This risk is mitigated by the existence of a reconstruction expenditure plan and monitoring system. Moreover, during the December 2, 2009, meeting with development partners, the GoP expressed a commitment to the principle of implementing a reconstruction program that is transparent, accountable, and resultsbased. This entails a comprehensive system for monitoring activities, tracking funds and physical progress, and evaluating projects and programs. As discussed, the GoP has taken the critical initial steps in setting up the institutional arrangements and building-blocks to implement a reconstruction plan and to monitor it. The especially established SNPRC has coordinated work on the development of a recovery and reconstruction master-plan as well as on the arrangements for monitoring reconstruction spending. An Indicative Reconstruction Expenditure Plan (IREP) has been developed and a Reconstruction Monitoring and Evaluation System (RMES) has been designed and formalized through the issuance of an Executive Order signed by the President. These results will be tracked and reported to the public and development partners through regular meetings, through media, and through a dedicated recovery and reconstruction website. An important component to mitigating the risk of misused funds is community participation, an approach that Government has endorsed. Local community engagement in the decision-making, implementation, and monitoring of activities will be important to increase the quality and speed of reconstruction, align projects with real needs, and lower the fiduciary risks. 79. The country, moreover, has made important progress in improving its fiduciary environment in the last several years. While the CFAA and the PEFA reports have identified important weaknesses in budget management and accounting, the Bank is working on mitigating some of these risks through its continued work and technical assistance to the Department of Finance, Department of Budget Management and the Commission of Audit, as noted in previous section. The Bank, through policy-based lending, has continued to support this agenda, including procurement reform, as have the Bank s sector reform projects (National Programs of Support) that work directly with line agencies in improving country systems. 25

32 ANNEX 1. IMF PUBLIC INFORMATION NOTICE IMF Executive Board Concludes 2009 Article IV Consultation with the Philippines Public Information Notice (PIN) No. 10/26 February 18, 2010 On January 29, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines. 26 Background Following the adverse impact from the global economic and financial crisis, there are signs of a nascent recovery. The Philippine economy avoided a technical recession as second and third quarter GDP in 2009 rebounded by 1.7 percent and 1.0 percent (quarter-on-quarter), respectively, following the 2.1 percent contraction during the first quarter. Inflation has trended down during the year, reaching 3¼ percent during January November, in the middle of the Bangko Sentral ng Pilipinas (BSP s) target range. Following the post-lehman financial market stress in late 2008, market conditions are normalizing and equity prices have returned to precrisis levels. The current account has held up well, with the decline in exports cushioned by waning imports of commodities and resilient remittances. With the return of risk appetite, the exchange rate has appreciated and capital inflows have resumed, although so far primarily into the corporate and government bond market. Growth is expected at ¾ percent in 2009 and to recover to around 3¼ percent in The recovery will likely be led by private consumption as confidence strengthens and remittances pick up further. Investments and exports are also expected to benefit from the global recovery. Risks to the near-term outlook are broadly balanced and sensitive to the global growth outturn. On the domestic side, the output losses from the devastation caused by the two recent typhoons could turn out to be larger than currently estimated, and fiscal slippage could raise investor concerns. On the upside, the post-typhoon rebuilding efforts could spur higher investment. The financial sector has weathered the global financial crisis relatively well and generally remains sound. Bank earnings have improved during the first half of 2009 as global economic and financial conditions have stabilized. The capital adequacy ratio remains high at around 15 percent and nonperforming loans are also generally low (around 4 percent of loans), although they are relatively high for thrift and rural banks. Bank exposures are often concentrated on few large corporate borrowers due to the prevalence of big conglomerates. However, they are reportedly well monitored and financially sound. 26 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: 26

33 Fiscal policy was loosened in response to the crisis, but poor revenue performance will likely lead to a breach of the widened deficit target in The deficit is now estimated at 4½ percent, overshooting the budget target of 3¾ percent of GDP (IMF definition). This deficit implies a positive fiscal impulse of around 2¼ percent of GDP and an estimated growth impact of around 1 percentage point. The BSP took proactive steps to lessen the adverse impact of the global financial crisis. Policy rates have been cut by 200 basis points since end 2008, which had a significant impact on lending rates. Moreover, the reserve requirement rate on bank deposits and deposit substitutes was lowered by 2 percentage points (to 19 percent for universal/ commercial banks) in late 2008 and the rediscount window was tripled to pesos 60 billion. Executive Board Assessment Executive Directors commended the authorities for their implementation of sound economic policies in recent years. Supportive macroeconomic policies, together with resilient remittances, cushioned the impact in 2009 of the global economic crisis. Recovery is expected in 2010, led by private demand as confidence and remittances improve. A timely return toward a sustainable fiscal path while avoiding a premature exit from a supportive monetary policy will be important, along with continued reforms to ensure sustained growth in the medium-term. Directors concurred that the fiscal stimulus in 2009 proved to be an effective response to the weak economic environment. Given the limited fiscal space, they supported a measured fiscal withdrawal in Public debt remains relatively high, and tax collections have weakened beyond cyclical factors. Directors welcomed the authorities commitment to fiscal deficit reduction starting this year. They stressed that this will require new revenue measures as well as expenditure restraint focused on non-priority current spending. To further strengthen public finances, bolster market confidence, and create fiscal space for pro-poor spending and growth-enhancing public investment, Directors encouraged the authorities to introduce a credible medium-term consolidation plan, building on revenue raising measures. They supported the authorities request for technical assistance in this area. The introduction of a formalized fiscal framework would further underscore the commitment to fiscal prudence. Directors welcomed the BSP s proactive easing steps in response to the crisis. In view of the still negative output gap and the planned tightening of fiscal policy, they concurred that monetary policy should remain accommodative until a sustained economic recovery is assured, while ensuring that inflation expectations remain well-anchored. Directors noted the staff s assessment that the exchange rate appears aligned with fundamentals. They recommended that foreign exchange interventions remain limited to smoothing operations, while allowing the exchange rate to adjust to market pressures. Directors commended the authorities good progress in implementing the recommendations of the 2002 Financial Sector Assessment Program (FSAP), noting that the financial sector weathered the crisis well, with banks remaining well capitalized and 27

34 nonperforming loan (NPL) ratios low. While the moderate economic growth expected over the near term could dampen the banks earnings and potentially lead to a deterioration in asset quality, stress tests conducted in the context of the FSAP update suggest that banks are quite resilient to adverse shocks. At the same time, concentration risks are more elevated due to the exposure to large conglomerates. Directors supported additional steps to further strengthen financial sector supervision and the regulatory framework, including through early adoption of the proposed amendments to the New Central Banking Act. The latter would also provide supervisory staff with adequate protection from litigation. Directors suggested that capital requirements could be more riskbased, and welcomed the authorities planned introduction in 2011 of the internal capital adequacy assessment process as an important first step. Directors also recommended further steps to strengthen the prompt corrective action and resolution frameworks. To sustain the recovery and raise growth, Directors encouraged the authorities to make further efforts to strengthen governance and the business environment and improve basic infrastructure. This will be important to raise domestic demand, including through increased investment, and allow businesses to tap into new export markets. Philippines: Selected Economic Indicators, Proj. Growth and prices Real GDP CPI (annual average) Public finances (percent of GDP) National government balance (authorities definition) National government balance 1/ Nonfinancial public sector balance 2/ Revenue and grants 3/ Expenditure Nonfinancial public sector debt Monetary sector (percent change, end of period) Broad money (M3) / Interest rate (91-day Treasury bill, end of / period, in percent) 4/ Credit to the private sector / External Sector Current account (percent of GDP) Reserves, adjusted (US$ billions) 7/ Reserves/Short-term liabilities, adjusted 8/ Pesos per U.S. dollar / 28

35 Sources: Philippines authorities; and IMF staff projections. 1/ Fund s definition. Excludes privatization receipts and includes deficit from restructuring of the central bank (Central Bank-Board of Liquidators. 2/ Includes the national government, Central Bank-Board of Liquidators, 14 monitored government-owned enterprises, social security institutions, and local governments. 3/ Excludes public financial institutions and privatization receipts. 4/ Secondary market rate. 5/ September 2009 (year-on-year). 6/ November / Adjusted for gold and securities pledged as collateral against short-term liabilities. 8/ Short-term liabilities include medium- and long-term debt due in the following year. 9/ Average for January to October

36 ANNEX 2. PHILIPPINES AT A GLANCE East Lower Key Development Indicators Asia & middle Philippines Pacific income (2008) Population, mid-year (millions) ,912 3,435 Surface area (thousand sq. km) ,299 35,510 Population growth (%) Urban population (% of total population) GNI (Atlas method, US$ billions) ,173 6,543 GNI per capita (Atlas method, US$) 1,890 2,182 1,905 GNI per capita (PPP, international $) 3,710 4,969 4,585 Age distribution, 2007 Male Female GDP growth (%) GDP per capita growth (%) percent of total population (most recent estimate, ) Poverty headcount ratio at $1.25 a day (PPP,%) Poverty headcount ratio at $2.00 a day (PPP,%) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Adult literacy, male (% of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group) Access to an improved water source (% of population) Access to improved sanitation facilities (% of population) Under-5 mortality rate (per 1,000) Philippines East Asia & Pacific Net Aid Flows a (US$ millions) Net ODA and official aid 299 1, Top 3 donors (in 2007): Japan United States Norway Aid (% of GNI) Aid per capita (US$) Growth of GDP and GDP per capita (%) Long-Term Economic Trends Consumer prices (annual % change) GDP implicit deflator (annual % change) GDP GDP per capita Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100) (average annual growth %) Population, mid-year (millions) GDP (US$ millions) 32,450 44,312 75, , (% o f GDP) Agriculture Industry M anufacturing Services Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Exports of goods and services Imports of goods and services Gross savings Note: Figures in italics are for years other than those specified data are preliminary... indicates data are not available. a. Aid data are for Development Economics, Development Data Group (DECDG). 30

37 ANNEX 3. MAP NUMBER IBRD 33466R4 31