From Stability to Prosperity for All March 2012 PQU Press Presentation Rogier van den Brink, Lead Economist Karl Kendrick Chua, Country Economist Poverty Reduction and Economic Management (PREM) Unit World Bank Manila Office 19 March 2012
Recent Economic Developments
Percent The Philippine economy grew by 3.7 percent in 2011, broadly in line with its neighbors... 20 Regional GDP Growth Rates (%) 15 10 5 0-5 -10-15 China Indonesia Malaysia Philippines Thailand Vietnam Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 Source: Haver Analytics
Percentage point Percentage point however it was slower than expected. Weaker public spending and external demand Only consumption was strong Investment growth artificial 15 10 5 0-5 Demand Side: Contribution to YoY GDP Growth 8 6 4 2 0 Supply Side: Contribution to Growth -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4-2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 2009 2010 2011 Discrepancy Investment Private Consumption Net Exports Govt Consumption GDP growth Agriculture Industry Services Source: National Statistical Coordination Board (NSCB)
Millions Percent New jobs were largely driven by falling income and not by new demand 2.5 2.0 Labor Force and Job Creation 60 58 1.5 1.0 0.5 56 54 52 0.0 Oct 07 Oct 08 Oct 09 Oct 10 Oct 11 Change in actual labor force Job Creation Share of formal employment (rhs) 50 Source: National Statistics Office (NSO). 5
Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 Percent Percent The country s external position remains resilient, amid weak exports Exports performance deteriorated further Robust remittances and portfolio investment inflows continue to buoy BOP 70 60 50 40 30 20 10 0-10 -20-30 -40 Electronics imports, book-to-bill ratio & VOPI Electronics imports growth Book-to-bill Volume of production index (rhs) 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 25 20 15 10 5 0-5 -10 Remittance Growth, 3 mma Nominal USD Nominal Php Real Php Source: BSP, NSO and semi.org 6
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 PHP billion Philippine bonds and equity markets are Riding on the country s positive outlook. Standard & Poor s raised its outlook from stable to positive in December 2011 Net foreign buying of Philippine stocks driving growth in the PSEi 6,000 5,000 4,000 3,000 2,000 1,000 - Philippine Stock Market Performance Net Foreign Buy (rhs) PSEi 30 25 20 15 10 5 - (5) (10) (15) Source: Philippine Stock Exchange (PSE) 7
Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Percent Lower food prices resulted in a benign inflation environment, allowing space for monetary policy 6 Contribution to YoY Inflation Others Transport Fuel, Light and Water Inflation Rate Food and Beverage 4 2 0 Source: Bangko Sentral ng Pilipinas 8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 but the fiscal sector remains structurally weak. 14 12 10 8 6 4 2 0 Tax effort (percent of GDP) 2011 Q1 Q2 Q3 Q4 Year GAP 1 (PHP, billions) Total Revenues 3.8-8.6-18.9-27.6-51.4 Total Expenditure -82.0-57.7-65.4 51.5-153.6 Interest Payment -10.5-9.5-9.1-13.5-42.7 Primary Spending -71.5-48.2-56.3 65.0-110.9 Capital Outlays -25.0-48.1-29.0 32.7-69.4 Net Gap (fiscal balance) 85.8 49.1 46.5-79.1 102.2 GAP (% of Annual GDP) Total Revenues 0.0-0.1-0.2-0.3-0.5 Total Expenditure -0.8-0.6-0.7 0.5-1.6 Interest Payment -0.1-0.1-0.1-0.1-0.4 Primary Spending -0.7-0.5-0.6 0.7-1.1 Capital Outlays -0.3-0.5-0.3 0.3-0.7 Others BOC BIR Net Gap (fiscal balance) 0.9 0.5 0.5-0.8 1.1 Source: Department of Finance, Bureau of Treasury, and Department of Budget and Management, and WB staff calculations. 1/ Actual less programmed. Government spending in 2011 was lower than programmed despite accelerated spending in Q4. Modest improvement in tax effort to 12.3 percent of GDP, largely on account of improved tax administration but still below target. 9
Prospects
Latest growth projections downgraded Forecast Change from October 2011 2011 1/ 2012 2013 2011 2012 2013 USA 1.7 2.2 2.4 0.2 0.4-0.3 EU 1.6-0.3 1.1 0.0-1.4-0.6 Japan -0.9 1.9 1.6-0.4-0.4-1.9 China 9.1 8.4 8.3-0.4-0.6-5.2 Asean 5.2 5.5 5.6-0.1-0.1-2.8 World 3.7 3.4 4.0 0.1-0.3-1.6 1/Estimated full year growth Source: World Bank's Global Economic Prospects January 2012 China s growth is expected to decelerate further growth projection was lowered in early March to 7.5 percent, down from the GEP projection of 8.3 percent. 11
Preliminary base case Philippine macroeconomic framework Historical Prel. Acct. Forecast Key variables 1/ 2008 2009 2010 2011 2012 2013 GDP growth 4.2 1.1 7.6 3.7 4.2 5.0 Inflation 9.3 3.2 4.8 4.8 3.5 4.0 Investment 19.3 16.6 20.5 21.8 22.5 23.6 Tax effort 13.6 12.2 12.1 12.3 12.8 13.4 NG spending 16.5 17.7 16.9 16.0 16.9 17.3 NG balance -0.9-3.7-3.5-2.0-2.9-2.7 NG debt 54.7 54.8 52.4 51.1 49.0 48.0 Currant account balance 2.2 5.6 4.2 1.2 1.7 2.5 Exports goods growth 2/ -2.5-22.1 34.8-6.9 3.5 7.3 Import goods growth 2/ 5.6-24.0 31.5 9.5 5.0 7.0 Remittance growth 13.7 5.6 8.2 7.2 5.0 5.5 Source: World Bank staff estimates for projections, official sources for historical 1/ In percent of GDP unless otherwise stated, 2/BOP for historical, NSO for 2011 preliminary accounts 12
Estimated impact of government spending on GDP growth in 2012 Fiscal accounts Actual spending as % of total appropriations Government spending growth (%) National income accounts Contribution to GDP growth (ppt) 75 0.4 0.0 2.9 80 5.8 0.7 3.6 85 11.3 1.3 4.2 90 16.7 1.9 4.8 95 22.2 2.5 5.4 100 27.6 3.1 6.0 Source: Bureau of Treasury (BTr), DBM, NSCB, World Bank staff estimates GDP growth (%) 13
Debt broadly sustainable but faces vulnerabilities Using one-half SD shock to interest rate, growth rate and primary balance Combined shock 2/ 80 80 Using one SD shock to interest rate, growth rate and primary balance Combined shock 2/ 70 70 60 combined shock 51 60 combined shock 55 50 50 40 Baseline 46 40 Baseline 46 30 2005 2007 2009 2011 2013 2015 30 2005 2007 2009 2011 2013 2015 Sources: World Bank staff estimates. 1/ Shaded areas represent actual data. Figures represent average projections for the respective variables in the baseline and scenario being presented. 2/ Permanent standard deviation shocks applied to real interest rate, growth rate, and primary balance;. 14
Medium to Long-term Agenda Begins Today
Percent Average per capita growth has been very low at 1.4 percent in the last 50 years. GDP per Capita Growth Rate 8 6 4 2 0-2 -4-6 -8-10 1961 1968 1975 1982 1989 1996 2003 2010 HP Filtered GDP per Capita GR GDP per Capita GR 16
Real income drastically fell after 1983 crisis and narrowly averted in 2005. 15000 Real income 12500 10000 7500 5000 1966 1976 1986 1996 2006 Real income per capita BACK 17
Investment are very low and indicates lower growth prospects in the years ahead. Investment as share of GDP 30 25 20 15 10 5 0 1946 1956 1966 1976 1986 1996 2006 18
Manufacturing share to GDP largely flat since 1958 Share in Production 60 50 40 30 20 10 0 1946 1956 1966 1976 1986 1996 2006 Agriculture Manufacturing Industry Service 19
Constraints to growth largely structural.
Incidence (% of Population) These have resulted in slower poverty reduction Official 1992 Methodology Official 2011 Methodology WB $2/day 2005 PPP (% of popn) Official 2003 Methodology WB $1.25/day 2005 PPP (% of popn) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 33.1 24.9 26.4 26.5 16.6 0.0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2015 Goal 21
1961 1966 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 and weaker labor market outcomes. 30 25 Underemployment rate Unemployment rate 20 15 10 5 0 22
Labor Market Dynamics Current quarter Previous quarter Employed Unemployed Out of Labor Force Total % Employed 94 2 4 100 Unemployed 50 27 23 100 Out of Labor Force 24 6 70 100 Improved Deteriorated Same
Many workers work for micro and small
Majority have no social insurance Employed Worked for private establishment/corporation Agriculture Traders and related workers
Mismatch in education and work sector among college graduates FIELD Rank 1 2 3 General Programs Public Administration Whole Sale and Retail Trade Education 27.2% 18.7% 16.1% Education Education Whole Sale and Retail Trade Public Administration Humanities, Religion and Theology Social and Behavior Science, Business, and Law Natural Science, Pure Science, Computer Science Medicine and Health Sciences; Trade, Craft & Industry; Architecture 63.6% 11.4% 7.2% Others Education; Public Administration Whole Sale and Retail Trade 25.1% 15.9%; 15.7% 14.2% Whole Sale and Retail Trade Public Administration Finance 25.3% 18.4% 13.6% Whole Sale and Retail Trade Finance, Real Estate and Other related business activities Manufacturing 21.3% 18.2% 12.4% Whole Sale and Retail Trade; Medical and Social Work Manufacturing; Public Adminsitration Construction; Finance, Real Estate and Other related business activities 17.2%; 17.9% 12.4%; 12.0% 7.4%; 7.3% Agriculture, Forestry and Fisheries; Home Economics Public Administration Whole Sale and Retail Trade Agriculture 25.60% 19.10% 17.30% Services and Trade Others Whole Sale and Retail Trade Medical and Social Work 77.1% 16.5% 13.3% Mass Communication and other programs Public Administration Whole Sale and Retail Trade Transporation and Communication 27.0% 15.9% 11.3%
In summary The global recovery is at a difficult juncture with significant downside risks. Slow growth in large middle-income countries and financial turmoil and recession in Europe are generating headwinds. Developing countries need to prepare. A sharp deterioration in conditions could imply a cycle as large as the 2008/09 crisis potentially longer lasting because of reduced policy space. Developing countries activity will be vulnerable to varying degrees to: A further decline in international capital flows Reduced exports Falling commodity prices or remittance levels A reduction in international aid 27
Policy implications for Philippines Short-term: growth can be supported by adequate fiscal policy. Public spending needs a lot of catching up relative to 2011 at higher quality. Urgency of passing excise tax and fiscal incentives rationalization bills. Tax expenditure and fiscal risk reporting as integral part of the Budget. Medium-term: growth above 5 percent can be sustained by addressing structural bottlenecks to raise overall competitiveness. Strengthening public financial management Raising tax revenues efficiently and equitably Enhancing competitiveness to attract more investments Urgency of getting reforms properly sequenced and started today Window of opportunity narrowing (political and economic opportunities are here). 28
End notes A stronger structural underpinning would allow the country to deal with shocks more effectively, achieve more inclusive growth, and reduce poverty at a faster rate. Thank you. 29