The Philippine Economy - PDF Free Download

The Philippine Economy From Building to Sustaining Resilience 1 st Monthly General Membership Meeting Bank Marketing Association of the Philippines 13 February 2018, Tower Club, Makati Director Zeno Ronald R. Abenoja Department of Economic Research Bangko Sentral ng Pilipinas

Megatrends transforming the operating environment Rebalancing of the world economy Changes in demographics Rapid urbanization Climate change Disruptive technologies Threats of retreat from multilateralism 2

PH remains in a position of strength Strong growth momentum Key Indicators 2005 2009 2010 2015 2016 2017 2018 Real GDP growth (%) 4.4 6.2 6.9 6.7 n.a. Benign inflation Headline inflation (%) 5.5 3.4 1.8 3.2 4.0 (Jan) Sustained fiscal discipline Ample liquidity and credit Sound and stable banking system Robust external payments position Fiscal balance (% of GDP) -1.7-1.8-2.4-1.9 (Jan-Sep) n.a. Domestic Liquidity (% of GDP) (% y-o-y change) Outstanding loans -U/KBs (% y-o-y change) Non-performing loans (% of total loans) - U/KBs* Capital Adequacy Ratio (consolidated basis) - U/KBs** Current Account Balance (US$ Bn) (% of GDP) Gross International Reserves (in months of imports of goods and services and primary income) * Data starting 2012 are computed as prescribed under BSP Circular No. 772. Gross NPL represents the actual level of NPL without any adjustment for loans treated as loss and fully provisioned. U/KBs stand for universal and commercial banks. **Computation based on the combined reports of parent bank (head office and branches) and its subsidiaries engaged in financial undertakings but excluding insurance; also excludes trust department; 2007-2013 figures are calculated under the Basel II regime while 2014-2016 figures are under Basel III framework. n.a. - not available 47.2 15.1 55.6 13.2 65.6 12.8 67.4 11.9 n.a. 8.9 15.7 17.3 19.0 n.a. 5.0 2.2 1.4 1.4 (end-nov) n.a. 16.7 17.2 15.1 15.7 (end-sep) n.a. 5.1 3.6 8.2 3.2-1.0-0.3 0.03 (Jan-Sep) 0.01 (Jan-Sep) n.a. 6.4 10.8 8.8 8.3 8.2 (end-jan) External debt (% of GDP) 46.1 30.9 24.5 23.4 (end-sep) n.a. External debt service ratio (% of exports of goods, receipts of services & income) 12.3 7.9 7.0 6.1 (Jan-Oct) n.a. 3

Growing contributions of investments and manufacturing reflect ongoing transformation of the economy Positive economic growth for 76 consecutive quarters Contribution to GDP Growth: Demand Side in percentage points 15 10 5 0-5 -10 8 7 6 5 4 3 2 1 0-1 Private Consumption Investment Government Consumption Net Exports 0.9 0.8 0.7 5.7 4.0 0.8 3.0 2.5 0.7 3.3 4.0 4.4 4.8 4.0-1.3-0.6-3.1-4.5 2000-2009 2010-2016 2015 2016 2017 Contributions to GDP Growth: Supply Side in percentage points 2.8 3.8 3.9 4.2 3.9 1.2 2.4 2.2 2.8 2.5 0.4 0.1 0.0-0.1 0.3 2000-2009 2010-2016 2015 2016 2017 Agriculture, Fishery, and Forestry Industry Services Components of Gross Capital Formation Contribution to GDP growth in percentage points 7 Construction 6 Durable Equipment 0.3 5 4 3 2 1 0 Others 0.2 0.1 0.4 2.4 1.7 1.9 0.0 0.8 1.0 1.4 0.5 0.2 0.6 2000-2009 2010-2016 2015 2016 2017 Industry Sub-Sectors Contribution to GDP growth in percentage points 3 2 1 0-1 Mining & Quarrying Manufacturing Construction 0.2 Utilities 0.5 0.2 0.8 1.7 0.2 0.7 1.3 0.1 0.1 0.0 0.0 0.0 4.3 0.3 0.1 0.8 0.3 2000-2009 2010-2016 2015 2016 2017 1.6 2.0 Source: Philippine Statistics Authority (PSA) 4

Rising investments boost growth and create jobs Rising investment pledges favorable for growth prospects Total Approved Investments* (PHP bn) Considerable foreign interest in the manufacturing sector Net FDI Average Percent Share to Net Equity by Industry, 2012-2016 542.7 747.1 697.7 754.0 755.9 686.9 686.0 +52.3% 626.2 Mining and Quarrying 4.24% Wholesale and Retail Trade 6.21% Construction 2.40% Others 4.00% Manufacturing 36.76% 411.2 Real Estate 8.46% Water Supply, Sewerage, and Waste Management 13.59% 2010 2011 2012 2013 2014 2015 2016 2016 Q1-3 2017 Q1-3 Arts, Enternainment and Recreation 10.66% Finance and Insurance 13.68% Source: PSA, NEDA, BSP, * Investment approved by the Philippines Investment Promotion Agencies Board of Investments (BOI), Clark Development Corporation (CDC), Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (AFAB), BOI-Autonomous Region of Muslim Mindanao (BOI-ARMM), and Cagayan Economic Zone Authority (CEZA) 5

Q4 2017 business outlook more upbeat due to expected seasonal demand; consumers remain optimistic 6 6

Positive alignment between growth and inflation lingers Low and stable inflation outturn Well-anchored inflation expectations 9 8 7 6 5 4 3 2 1 0 Headline and Core inflation (%), 2006=100 8.3 Headline Inflation Target Headline Inflation Core Inflation 4.6 5.8 4.2 4.1 3.8 4.0 3.7 3.0 3.2 2.9 4.2 4.3 3.9 3.6 3.2 2.1 2.9 2.9 3.0 1.9 2.9 1.4 1.8 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jan 18 Factors Driving Headline Inflation Contribution of Core and Non-Core Items to Inflation Note: Non-core items refer to: rice, corn, meat (fresh, chilled or frozen), fresh fruits, vegetables cultivated for their fruit, fresh or dried vegetables cultivated for their roots, fresh or dried, natural gas, liquefied or in the gaseous state, and gas oils for motor vehicles Sources: PSA, BSP 7

Some supply-side pressures pose risks to inflation path KEY FACTORS SHAPING INFLATION Weather developments and rice tarrification Prevailing weak La Niña conditions favorable to palay production But potential risks could emerge (e.g., Mt. Mayon eruption) Proposed reform in the rice industry involving the replacement of quantitative restrictions with tariffs could reduce rice prices Global oil supply and demand Crude oil prices rise in January 2018 while futures prices still show downward path over the medium-term Tax Reform for Acceleration and Inclusion (TRAIN) Price pressures could come from higher consumption taxes and increased demand (higher infrastructure spending and disposable income) Impact is transitory: 2018 inflation could be above the target but inflation is expected to average within target by 2019 8

Prevailing weak La Niña conditions favorable to palay production Forecast probabilities of ENSO events As of 11 January 2018 Forecast probabilities of ENSO events As of 14 December 2017 Season La Niña Neutral El Niño Season La Niña Neutral El Niño NDJ 2017 98% 2% 0% DJF 2018 97% 3% 0% DJF 2018 92% 8% 0% JFM 2018 85% 15% 0% JFM 2018 82% 17% 1% FMA 2018 63% 36% 1% FMA 2018 66% 32% 2% MAM 2018 46% 50% 4% MAM 2018 48% 48% 4% AMJ 2018 34% 58% 8% AMJ 2018 35% 56% 9% MJJ 2018 26% 58% 16% MJJ 2018 28% 55% 17% JJA 2018 25% 53% 22% JJA 2018 24% 54% 22% JAS 2018 22% 52% 26% JAS 2018 23% 51% 26% ASO 2018 23% 49% 28% Source: International Research Institute for Climate and Society and Climate Prediction Center 9

PAGASA: 4 to 8 tropical cyclones (TCs) expected from February to July 2018 Rainfall Forecast as of 13 December 2017 (Feb. June 2018) Rainfall Forecast as of 24 January 2018 (Feb. July 2018) 10 10

Crop production projected to increase in Q1 2018 Prospects are favorable for palay output given expectations of sufficient water supply and good weather conditions during the cropping period in Q1 2018. Palay Crop Estimates October December 2015-2017 Palay Crop Estimates January March 2016-2018 Source: PSA Rice and Corn Situation Outlook Report (January 2018) 11

Tariffication will benefit both consumers and producers Consumers, especially the poor, will benefit from lower prices:* Weight of rice in CPI is 8.9% Approximately 72% of all Philippine households and 34% of rice producing households are net consumers** BSP estimates of impact on headline inflation Estimated price gap of about 4.00/kg using weighted average of import parity price (Vietnam, Thailand, India and Pakistan) and domestic wholesale price of RMR*** Downward impact on inflation could potentially offset most of the transitory impact of TRAIN Source: *Briones, et. al (2017) projected that retail prices will decrease by about 6.97/kg after tariffication. **OECD Review: Agricultural Policies in the Philippines, 2017 *** Based on methodology used in the 2016 DA-PhilRice-IRRI study, Competitiveness of Philippine Rice in Asia 12

Oil prices could drop in the medium term based on Brent crude futures prices Expectations of higher US shale oil production (based on US EIA and IEA reports) Do you expect the number of U.S. rigs drilling for oil six months from now to be higher, lower or near current levels? Near current levels, 46% Higher, 51% no. of rigs Lower, 3% no. of rigs 13

Potential sources of second-round impact and mitigating social programs and other measures Potential second-round effects Minimum wage adjustment Transport fare hike Inflation expectations Mitigating Social Programs and Other Measures Unconditional cash transfers for the poorest households Subsidy for jeepney drivers (Pantawid-Pasada) and PUV modernization Subsidy for small power utilities group (Pantawid-Kuryente) Reform in the rice industry Close monitoring of prices 14

Credit growth consistent with expanding economic activity 40 30 20 10 0-10 2004 Source: BSP 2005 Supportive liquidity conditions and upbeat bank lending M3 and Outstanding Loans of U/KBs (year-on-year growth, in %) end-2017: Outstanding loans of U/KBs: 19.0% Domestic Liquidity (M3): 11.9% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Outstanding loans of U/KBs (Net of RRPs) Domestic Liquidity (M3) 2017 Solid demand for loans across key economic sectors Sectors Wholesale and Retail Trade, Repair of Motor Vehicles and Motorcycles; Transportation and Storage; and Information and Communication Share to Total KB Loans (Net of RRP) Contribution to KB Loan Growth (Net of RRP) 21.0 4.4 Real Estate Activities 17.5 3.4 Manufacturing 13.1 1.6 Electricity, Gas, Steam and Air conditioning Supply; and Water Supply, Sewerage and Waste Management Financial and Insurance Activities 12.5 2.9 8.4 1.4 Households 7.8 1.4 Agriculture, Forestry and Fishing 2.3-0.4 Other sectors 17.4 4.3 Growth of KB Loans (end-2017) 100.0 19.0 15

PH banks remain as effective intermediator of funds Quality of assets and loan portfolios sustains improvement. Philippine banks remain adequately capitalized providing buffers to mitigate shocks. 14 12 10 Non-Performing Loans (Gross) and Non- Performing Assets Ratios of UKBs (in percent) end-2017: GNPL ratio: 1.2 % NPA ratio: 1.3 % 25 20 Capital Adequacy Ratio of UKBs (in percent) Sep 2017: CAR (solo): 15.0 % CAR (consolidated): 15.7 % 8 15 6 4 10 2 0 Source: BSP 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 GNPL Ratio NPA Ratio 5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 CAR (consolidated basis) CAR (solo basis) 2014 2015 2016 Sep-17 16

PH has adequate buffer from global headwinds 9 8 7 6 5 4 3 2 1 0-1 Resilient foreign direct investments Non-Residents' direct investments, by instrument (US$ bn, net) Equity and investment fund shares Debt 4.6 3.3 30 25 20 15 10 5 Structural flows from remittances and BPOs Overseas Filipinos' cash remittances and BPO revenues (USD bn) 2017 Projections: BPO: USD24.5bn Remittances: USD28.0bn 26.9 22.9 20.8 16.9* 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan-Sep 17 BPO revenues Remittances * Jan-Sep 2017 BPO revenues based on BOP concept Ample cushion from external headwinds Improved debt profile 100 80 60 40 20 0 FX reserves (USD bn) and months of import cover 81.6 81.2 8.3 8.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jan-18 14 12 10 8 6 4 2 0 90 80 70 60 50 40 30 20 10 0 External debt (USD bn) and external debt/gdp, (%) 72.4 23.4 FX reserves Import cover Sources: BSP, IBPAP for BPO revenues (actual and projected) External Debt External Debt Ratio 17

Structural transformation of PH supported by decades of reforms Long track record of purposeful structural reforms contributed to PH strength and flexibility in dealing with challenges brought by globalization Selected Structural/Policy Reforms in the Philippine Economy (1993-present) 1993 Creation of the Bangko Sentral ng Pilipinas 1994-2001 Harmonization of the BSP s Business Expectations Survey (BES) with International Practices; Liberalization of foreign bank entry and the telecommunications industry; Privatization of water services (MWSS); Deregulation of the oil industry; Passage of the Philippine E-Commerce Act; Liberalization of the power sector; Introduction of Tariff Reform Program (TRP) III; Accession to the World Trade Organization (WTO) 2002 Adoption by BSP of Inflation Targeting Framework 2003-2009 Launch of the BSP s Consumer Expectations Survey (CES); Passage of the Securitization Act; Adoption of Basel II; Passage of expanded value-added tax; Establishment of the Wholesale Electricity Spot Market (WESM); Full implementation of risk-based bank supervision; Privatization of the National Transmission Corporation and National Power Corporation 2011-2015 2016-2017 Other Structural Reforms in the Pipeline for 2018-onwards Adoption of phased-in migration to Basel III; Liberalization of entry of foreign banks in the Philippines; Implementation of macroprudential measures on real estate exposure; Passage of the Philippine Competition Act Adoption by BSP of Interest Rate Corridor (IRC) Framework; Credit Card Industry Regulation Law; Amendment to Foreign Investment Restrictions; Economic and Financial Literacy Act; Freedom of Information; Further Liberalization of FX regulations; Implementation of Interest Rate Corridor; Financial Inclusion Steering Committee; Implementing Rules and Regulations of the Philippine Competition Act; Designated Casinos as Covered Persons under the Anti-Money Laundering Act Amendments to the Bangko Sentral ng Pilipinas Charter; Amendments to Bank Secrecy Laws; Comprehensive Tax Reform Package; and Rationalization of Fiscal Incentives Law, among others 18

BSP committed to pursue policies supportive of growth Policy Thrusts Conduct appropriate monetary policy stance (Monetary Sector) Strengthen resilience to external shocks (External Sector) Continue to initiate key financial reforms (Financial Sector) Initiatives Adoption of the inflation targeting framework Implementation of the interest rate corridor (IRC) system Conduct of expectations surveys (e.g., Business Expectations Survey, Consumer Expectations Survey, Private Sector Economists Survey) Liberalization of foreign exchange (FX) regulatory framework Adherence to market-determined exchange rate regime Accumulation of ample foreign exchange reserves Enhancement of the macroprudential toolkit, such as the introduction of the Real Estate Stress Test (REST), placement of a cap on real estate loans, and use of an Early Warning System (EWS) Liberalization of the Philippine banking system Implementation of risk-based bank supervision 19

Improved potential capacity to sustain growth trajectory Incremental Capital-Output Ratio Total Factor Productivity 10.0 2.5 8.0 2.0 6.0 4.0 2.0 0.0 9.5 6.4 4.2 3.7 1989-1992 1993-2001 2002-2009 2010-2017 1.5 1.0 0.5 0.0 0.0 0.5 2.0 2.1 1989-1992 1993-2001 2002-2009 2010-2017 Source: Latest BSP staff estimates Employment Share by Class of Workers Employment Share by Educational Attainment 4.4 3.7 32.3 27.8 6.0 12.3 26.5 25.8 4.7 38.1 41.4 51.1 62.5 33.4 26.6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Employer in Own Family Self-Employed Unpaid Worker Wage and Salary Workers Source: PSA 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 College Post Secondary High School Elementary (w/ SPED) No Grade Completed 20

Downside risks to growth EXTERNAL Political and policy uncertainty US Fed policy normalization China s economic rebalancing DOMESTIC Infrastructure gaps Shortfalls in TRAIN implementation 21

Prospects for the Philippine economy remain bright The Philippine economy is expected to sustain its growth momentum over the medium term, consistent with third-party assessments 6.9 % 6.7 % 6.5-7.5% 7.0 8.0 % 7.0 8.0 % 7.0 8.0 % 2016 2017 2018 2019 2020 6.6 % (IMF) 6.7 % (IMF) 6.7 % (WB) 6.7 % (WB) 6.7 % (ADB) 6.8 % (ADB) Sources: Macroeconomic Assumptions approved bythe DBCC on22 December 2017. International Monetary Fund (IMF) World Economic Outlook, October 2017. World Bank (WB) Global Economic Prospects, January 2018. Asian Development Bank (ADB) Asian Development Outlook Supplement, December 2017. 22

Philippine economy poised to sustain its growth momentum Robust monetary, financial, and external sectors are expected to continue to lend support to economic growth over the near and medium term Indicators Actual Projections 2016 2017 2018 2017 2018 GDP Growth (%, 2000=100) 6.9 6.7 n.a. 6.5 7.5 a/ 7.0 8.0 a/ Fiscal Balance (% of GDP) -2.4-1.9 (Jan-Sep) n.a. -3.0 a/ -3.0 a/ Headline Inflation (%, 2006=100) Merchandise Exports, per BPM6 concept (% growth rate) Merchandise Imports, per BPM6 concept (% growth rate) OF Remittances b/ Amount (USD bn) Growth Rate (%) 1.8 3.2 4.0 (Jan) 2.0 4.0 a/ 2.0 4.0 a/ -1.1 16.2 (Jan-Sep) n.a. 11.0 a/ c/ 9.0 17.7 13.3 (Jan-Sep) n.a. 10.0 a/ c/ 10.0 26.9 5.0 25.3 (Jan-Nov) 4.0 (Jan-Nov) a/ c/ a/ c/ n.a. 28.0 c/ 29.1 c/ 4.0 c/ 4.0 c/ Balance of Payments (USD bn) -0.4-0.9 n.a. -1.4 c/ -1.0 c/ Gross International Reserves (USD bn) 80.7 81.6 81.2 (end-jan) 80.7 c/ 80.0 c/ a/ Approved by the DBCC on 22 December 2017. b/ Cash remittances coursed through banks. c/ Approved by the Monetary Board on 28 November 2017. *Inflation forecasts as part of macroassumptions for the national budget. r revised; n.a. not available 23

Key take-aways The Philippine economy is in a position of strength to weather volatilities and uncertainties in the global environment. Domestic sources of resilience allow us to sustain the alignment between positive economic growth and low inflation. Amid external challenges, the current landscape provides plentiful opportunities for domestic and foreign investors alike. The Philippine economy offers sustainability and stability, hence continues to be a viable destination for business and investment. The BSP remains committed to staying the course: (a) maintaining price stability; (b) promoting financial sector soundness; (c) strengthening resilience against external shocks; and (d) advocating for inclusive growth. 24

Ample policy space, both on the monetary and fiscal side Inflation forecasts show higher outturns for 2018 and is expected to moderate to within target in 2019 Sufficient fiscal space allows the opportunity for increased spending while keeping debt sustainable. 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 National Government Outstanding Debt 52.4 51.0 51.5 49.2 45.4 44.7 42.1 41.7 4,718 4,951 5,437 5,681 5,735 5,955 6,090 6,444 2010 2011 2012 2013 2014 2015 2016 Q3 2017 Levels in billion pesos (LHS) as % of GDP (RHS) 60 50 40 30 20 10 0 7,800 7,600 7,400 7,200 7,000 6,800 6,600 6,400 6,200 6,000 Total Public Sector Debt 73.0 78.2 71.0 66.3 58.8 55.7 6,569 7,593 7,496 7,654 7,434 7,307 2010 2011 2012 2013 2014 Sep 2015 90 80 70 60 50 40 30 20 10 0 Source: BSP Levels in billion pesos (LHS) as % of GDP (RHS) 27

Risks to future inflation remain skewed to the upside Confidence Projection Ranges (%) 2018 2019 25% 4.0-4.6 3.0-4.0 50% 3.8-5.0 2.5-4.6 75% 3.4-5.5 1.9-5.4 90% 3.0-6.0 1.2-6.3 As of 5 December 2017 (14 December 2017 MB Meeting) As of 6 February 2018 (8 February 2018 MB Meeting) 28 28

Tax Reform Episodes: Experience from the RVAT Law Price pressures from previous tax reform episodes were viewed as temporary in nature and did not require a policy response from the BSP 1.4 1.2 Inflation (2006=100, in percent), RVAT Reform Implementation and BSP Policy Rate November 2005: Expansion of VAT base February 2006: VAT hike from 10% to 12% 9 8 1.0 7 0.8 6 0.6 5 0.4 4 0.2 3 0.0 2-0.2 1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 2005 2006 2007 M-o-M Inflation (LHS) RRP Rate (RHS) Y-o-Y Inflation (RHS) Source: BSP staff calculations 29

Tax Reform Episodes: Experience from the Sin Tax Reform Law Price pressures from previous tax reform episodes were viewed as temporary in nature and did not require a policy response from the BSP 14 12 January 2013: Implementation of Sin Tax Reform Law Inflation of Alcoholic Beverages and Tobacco, Sin Tax Reform Implementation and BSP Policy Rate 35 30 10 25 8 20 6 15 4 10 2 5 0 0 Feb Jan 12 Mar 12 Apr 12 12 May Jun 12 12 Aug Jul 12 Sep 12 12 Nov Oct 12 12 Dec Jan 13 12 Feb 13 Mar Apr 13 13 May Jun 13 13 Aug Jul 13 13 Sep Oct 13 Nov 13 13 Dec Jan 14 13 Feb 14 Mar Apr 14 14 May Jun 14 14 Aug Jul 14 14 Sep Oct 14 Nov 14 14 Dec Jan 15 14 Feb 15 Mar Apr 15 15 May Jun 15 15 Aug Jul 15 15 Sep Oct 15 Nov 15 15 Dec Jan 16 15 Feb 16 Mar Apr 16 16 May Jun 16 16 Aug Jul 16 16 Sep Oct 16 Nov 16 16 Dec Jan 17 16 Feb 17 Mar Apr 17 17 May Jun 17 17 Aug Jul 17 17 Sep Oct 17 Nov 17 Dec 17 17 M-o-M Alcohol and Tobacco Inflation Y-o-Y Headline Inflation Y-o-Y Alcohol and Tobacco Inflation (RHS) RRP Rate Source: BSP staff calculations 30

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Number of items with inflation rates above the threshold increased CPI Items Above Inflation Threshold 45 40 35 30 25 20 15 10 5 0 Weights No. of items 31 items 31.6% 31

but potential risks could emerge (e.g., Mayon eruption) 1. With the higher domestic oil prices due to TRAIN implementation, there have been reports of retailers passing on additional cost to consumers 2. Weather disturbances could affect harvest in February- March 2018 3. Damage from Mayon eruption could reduce overall domestic supply of rice; Bicol Region is the 5 th top palay producer in 2017 32

Nonetheless, there are possible mitigating factors that could temper price pressures 1. Strengthening price monitoring through joint efforts from the Department of Trade and Industry and the Department of Agriculture 2. Stabilization of rice prices through rice importation from the private sector (expected to arrive in Q1 2018) under MAV and by tapping the 250 TMT standby authority for NFA importation 3. Proposed rehabilitation plan from different banner programs for rice, corn, high value crops development, agriculture, livestock, and poultry 33

Rice Tariffication: Domestic versus Imported Rice Prices (in /kg) 50.00 45.00 Wholesale Price of Rice, by Country Wholesale price of rice in the Philippines* Domestic rice price** 40.00 34.73 35.00 30.00 29.25 31.51 32.92 32.14 25.00 20.00 15.00 10.00 5.00 16.93 16.84 19.66 0.00 Philippines (RMR) Vietnam (25% brokens) Thailand (25% brokens) India (25% brokens) Pakistan (25% brokens) **Source: FAO-GIEWS. No data available for Pakistan. Note: All rice prices (except the Philippines) were in US$. Prices were converted using the 50.4/US$ conversion rate (Source: BSP website, 2017 FX average). * Based on DER staff estimates sourced from different data and reports from PSA, FAO, BSP 34

Crude oil prices rose in January 2018 while futures prices still show downward path over the medium-term Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 OPEC compliance exceeds 100 pct in December 2017 Supply disruptions from OPEC and non-opec producers Declining US commercial crude oil inventory due to higher refinery demand OPEC and Non-OPEC Compliance Rate in percent OPEC Non-OPEC 126 129 130 125 111 115 110 105 100 91 95 97 101 96 86 87 90 82 77 75 70 74 68 70 47 51 50 37 30 10-10 Source: International Energy Agency, Oil Market Report 35

EIA expects supply to outstrip demand in 2018-2019 - Supply to come from OECD countries: US, Canada, Norway - Demand to come from Asia, specifically China and India Global Supply-Demand Balance (in million barrels) 106 3.0 World Supply Surplus/Deficit World Demand 104 2.5 102 2.0 100 1.5 98 1.0 96 0.5 94 0.0 92-0.5 90-1.0 88-1.5 86-2.0 '13 '14 '15 '16 '17 '18 '19 Source: US Energy Information Administration, Short-Term Energy Outlook, January 2018 Note: Supply includes production of crude oil (including lease condensates), natural gas plant 36liquids, biofuels, other liquids, and refinery processing gains. 36

Percentage point contribution to GDP growth (%) Philippine output growth slowed down in Q4 2017 but within potential; output gap remains below 1 percent - Domestic demand continues to drive output growth Gross Domestic Product At Constant 2000 Prices Growth Rate (%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Year-on-Year Growth Rate (%) Trend average growth (from Q1 1999) average growth (from Q1 2007) average growth since Q1 2007 = 5.7 average growth since Q1 1999 = 5.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015 2016 2017 Contribution to GDP: Domestic Demand and Net Exports 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0 Net Exports -10.0 Domestic Demand -12.0 RGDP Growth -14.0 2012 2013 2014 2015 2016 2017 37

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Percent Domestic growth remains within potential Consolidated potential output growth above 6.0 pct consistent with a slightly positive output gap in recent quarters Quarterly Potential Output Growth & Output Gap Estimates* 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 Output Gap Potential Output, average Actual Output, seasonally adjusted 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *Based on average of potential output estimates from six approaches: (1) Filters using data for 2000-2017; (2) HP filter using data for 2009-2017; (3) multivariate filter (MMPH); (4) productio function; (5) MUCM; and (6) structural vector autoregressive (SVAR) system. 38