The Republic of the Philippines - Good Governance is Good Economics

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The Republic of the Philippines - Good Governance is Good Economics

  1. 1. The Republic of the Philippines Good Governance is Good Economics October 2013
  2. 2. Table of Contents I. Executive Summary.................................................................. 3 II. Institutionalizing Good Governance…………………………….. 8 III. Robust Improvements in Economic and Financial Metrics Healthy, Sustained and Inclusive Growth…………………………… Rapidly Strengthening Public Finances and Debt Dynamics…….. Supportive and Stable Monetary Conditions and Healthy Banking Sector………………………………………………………………....... Strong External Position……………………………………………… 15 19 27 IV. Improving Investment Climate…………………………………… 40 Mindanao - Peace Leading towards Progress……………....... 45 VI. Outlook…………………………………………………………….. 50 - V. 36 2
  3. 3. Contents I. Executive Summary 3
  4. 4. Executive Summary Pushing forward on all fronts Improving Governance and Effective Policymaking Rapid and Resilient Economic Growth  Steep change in economic growth with a 6.8% increase in GDP in 2012, and 7.6% in 1H2013   Broad-based quality of growth with increases across consumption, public spending, and investments   Upward revisions of 2013 growth forecast for the Philippines by World Bank from 6.2% to 7%; ADB from 6% to 7%  The Philippine economy is on track to meet the Philippine Development Plan average growth target of 7- 8% for the medium term  Focus on improved governance is paying off with notable improvements in the ROP’s ranking in 3rd party indicators Passage of sin tax and reproductive health laws, etc. demonstrate improved government effectiveness and firm commitment to implement difficult reforms Three years into office, the Aquino Administration’s net satisfactory rating remains in the very good territory at +66%*  ROP has run a primary surplus since 2011  Aug 2013 fiscal surplus of PhP 21.9 bn reflects the Republic’s  ability to raise revenues amid robust, strategic and high-impact spending. . Jan-Aug 2013 deficit of Php82.6 bn is within the Q1-Q3 program  Jan-Aug 2013 revenue grew 12%  yoy to Php1,139.2bn indicative of continued revenue buoyancy along with accelerated spending growth of 13% yoy to Php1,221.8bn    Much improved debt dynamics with declining NG debt ratio of 49.5% of  GDP as of 1H2013, longer maturities and increased share of PHP-denominated debt  ROP is now a net external creditor with foreign exchange reserves exceeding gross external debt  *2nd Quarter 2013 SWS Survey Progress in Investments and Infrastructure Development Stronger Fiscal and Government Finances The portion of the budget that is spent on interest servicing will decline to 15.5% of total budget in 2014 from 17.1% in 2012 and a high of 31.6% in 2005 and 33.2% in 1988 Investors beginning to take note of improving investment climate and governance in the ROP Infrastructure development is accelerating with private and public construction increasing 22.1% in the 1H 2013 Budgetary allocation for public infrastructure increased by 17.7% in 2013 Philippines posted the highest FDI growth rate of 54% in ASEAN in 2012 BOI-PEZA approved investments increased 36.6% to Php285.6bn in 1H 2013, led by electricity, gas, steam & air conditioning supply (55.9%) followed by real estate activities (22.2%) 4
  5. 5. Executive Summary Sharp increase in economic growth Recent Economic Performance Reflects ROP’s Strong Economic Base Contribution to GDP Growth, in percentage points  Strong economic growth in 2012 thru 1H2013 has been broad-based in nature and supported by all components of GDP  Private consumption is robust and remains a major contributor to GDP growth, highlighting healthy consumer confidence in the economy  Capital formation increased significantly at the end of 2012 and the 1H2013, particularly in the construction sector, as investment and infrastructure development began to take off  2Q2013 growth of 7.5% yoy outperformed market consensus of 7.2% yoy. The growth trend demonstrates the nation’s robust growth momentum GROSS DOMESTIC PRODUCT By Origin 1. Agri., Hunting, Forestry and Fishing Agriculture and Forestry Fishing 2. Industry Mining and Quarrying Manufacturing Construction Electricity, Gas and Water Supply 3. Services Transport, Comm., Storage Trade & Repair of Motor Vehicles, Motorcycles, Personal and Household Goods Financial Intermediation Real Estate, Renting and Business Activities Public Administration and Defense; Compulsory Social Security Other Services 2012 6.8 1H2013 7.6 0.3 0.3 0.0 2.2 0.0 1.2 0.8 0.2 4.3 0.6 0.2 0.1 0.1 3.4 (0.0) 2.2 1.1 0.1 4.1 0.3 1.3 1.0 0.5 0.8 0.3 0.8 1.0 0.8 0.3 0.7 Strong Economic Fundamentals to position the economy to adjust smoothly to effects of QE tapering and slow down in regional growth  On 23 September 2013, the IMF mission led by Rachel van Elkan noted that the Philippines is “expected to remain strong at 6.75% in 2013 and 6% in 2014  In the first half of 2013, growth of 7.6% was underpinned by dynamic private and public demand such as robust consumption and investment  On the impact of Fed’s prospective tapering of asset purchase, IMF states that “when tapering does eventually begin, the Philippines’ strong fundamentals—including strong current account receipts, its net creditor status, steady reductions in public debt, and low foreign participation in government securities markets—position the economy to adjust smoothly to the accompanying capital flow reversal and slow down in regional growth.” 5 Philippine National Statistical Coordination Board (NSCB)
  6. 6. Executive Summary Government financial strength continues to improve ROP’s Debt Story Reflects Prudent Fiscal Management ROP’s debt stock has shown consistent improvement in recent years and the government has several tools to manage amortization   As of 2012 the Bond Sinking Fund amounted to Php825bn General Government Consolidated Debt Adjustment GG Debt vs. National Debt (as % to GDP) 56 3 June Moody's Data (Nat'l Govt Debt) 25 July Moody's Data (Gen Govt Debt) 54 52  The debt amortization schedule is front-loaded with domestic debt, which the government has been able to easily refinance owing to deep, captive domestic markets 50 48 46.6 46 44 42 2009 Foreign Currency Debt Exposure Has Been Reduced GG Debt as % to GDP 80 Foreign 70 Domestic 60 50 21.8 40 30 20 10 Q1 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 16.7 1998 0 40.7 40 2010 2011 2012 2013F 2014F Amortization Schedule is Manageable 500 450 400 350 300 250 200 150 100 50 0 GG Debt vs. National Debt (in Php bn) H2 2012 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038-…  General government consolidated figures are now published and available publicly. GG figures significantly benefit ROP in view of offsetting of intragovernmental holdings External Domestic 6 Source: Moody’s
  7. 7. ROP Achieves Investment Grade from Fitch, S&P and Moody's Improved credit metrics across the board over the past 7 years 2005 vs. 2012 2005 2012 Fitch Ratings BB BBB- (Mar 2013) Standard and Poor’s BB- BBB- (May 2013) Moody’s Investors Service B1 Baa3 (Oct 2013) 4.8 6.8 GDP Per Capita1 (USD), PPP concept 3,061 4,431 GNI Per Capita1 (USD), PPP concept 3,855 5,834 National Government Interest (% of Revenue) 36.7 20.4 Fiscal Balance (% of GDP) (2.6) (2.3) General Government Debt (% of GDP) 59.2 40.6 Gross International Reserves (US$ billions) 18.5 83.8 OFW Remittances (US$ billions) 10.7 21.4 Gross External Debt (% of CAR) 89.9 65.3 Import Cover (months) 3.8 12.0 Current Account (% of GDP) 1.9 Change 2.8 Sovereign Credit Ratings GDP Growth Rate Source: Bangko Sentral ng Pilipinas (BSP), National Economic and Development Authority (NEDA), Department of Finance (DOF) 1/ At current prices 7
  8. 8. Contents II. Institutionalizing Good Governance 8
  9. 9. Pipeline Developmental Reforms and Programs Accelerating reforms to achieve sustainable and inclusive growth 2013 and Beyond: Tax Incentives Management and Transparency Act 2013 and Beyond: Rationalization of Fiscal Incentives Law 2013 and Beyond: Amendments to the Bangko Sentral ng Pilipinas Charter 2013 and Beyond: Customs Modernization and Tariff Act (CMTA) 2013 and Beyond: Amendments to the Cabotage Law 2013 and Beyond: Amendments to RA8974 or the Act to Facilitate the Acquisition of Right-ofWay 2013 and Beyond 2013 and Beyond: Amendments to the Build Operate Transfer Law or RA 7718 2013 and Beyond: Rationalization of the Mining Fiscal Regime 2013 and Beyond: Amendments to the Anti-Money Laundering Act 2013 and Beyond: Removal of Investment Restrictions in Specific Laws cited in the Foreign Investment Negative List (FINL) 2013 and Beyond: Site or Location for National Government Infrastructure Projects and For Other Purposes January 2014: Implementation of Basel III 2013 and Beyond: Full implementation of the Government Integrated Financial Management Information Systems (GIFMIS) in 2013 9
  10. 10. Widespread Support of the Aquino Administration Strong mandate by the public to improve governance The Aquino Administration attains record-high very good net satisfaction rating Net Satisfaction with General Performance of the National Administration (%), February 1989-June 2013 C.AQUINO RAMOS ESTRADA ARROYO B.AQUINO 80 +66 60 40 20 0 -20 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -40 -60 Administration has strong national mandate and viewed as sincere in fighting graft and corruption Real progress being made in helping the poor Net Satisfaction with the National Administration on Eradicating Graft and Corruption (%), March 1987-June 2013 Net Satisfaction with the National Administration on Helping the Poor (%), December 1993-June 2013 10 Source: The 2013 SWS Survey Review, 23 September 2013, Social Weather Station National Surveys Net figures (% Satisfied minus % Dissatisfied) correctly rounded.
  11. 11. Results are Significant - Good Governance is Winning Out ROP has shown improvements in governance and competitiveness indicators The sustained high trust ratings of the President provide the impetus to drive the governance reform agenda. The reforms that the Republic have been implementing in past years are already bearing fruit as confirmed by improved rankings of the country from third party assessors • Zero Based Budgeting to improve expenditure management Strong political will to pursue and implement difficult reforms • Pocket Open Skies to support tourism potential • Peace Agreement to unleash Mindanao’s potential • Sin Tax Law to further strengthen the fiscal position • Reproductive Health Act to improve family health planning • Judicial Reform to enhance the regulatory environment and ensure level playing field Third Party Report Transparency International 2012 Corruption Perception Index World Bank 2013 Worldwide Governance Indicators’ Government Effectiveness* IMD 2013 World Competitiveness Report Heritage Foundation 2013 Economic Freedom Index Thomson Reuters/INSEAD Asia Business Sentiment Survey** (Q3 2013 vs Q2 2013) Grant Thornton 2013 Global Dynamism Index Latest Previous Change 105/179 129/183 up 24 58 57 up 1 38/60 43/59 up 5 97/177 107/179 up 10 100 94 up 6 21/60 46/50 up 25 * Percentile Ranking * * % of Respondents with positive outlook on the Philippines 11
  12. 12. A Structurally More Competitive Nation Improvements in competitiveness to support long-term growth prospects Consistent improvements for the Republic in the World Economic Forum Global Competitiveness Rankings Global Competitiveness Rankings 2010 - 2011 2013 -2014  The Philippines has improved by 26 spots in the WEF Global Competitiveness Rankings since 2010 Overall Rank 85 26 59 Institutions 125 46 79  Ranking of #59 (out of 148 countries) places the ROP in the upper 40% percentile rank Infrastructure 104 8 96  Macroeconomic Environment 68 28 40 Health and Primary Education 90 -6 96 Sub-rankings in Institutions, Macroeconomic Environment and Financial Market Development have in particular improved dramatically, improving 46, 28, and 27 places, respectively Higher Education and Training 73 6 67 Goods Market Efficiency 97 15 82 Financial Market Development 75 27 48 Labor Market Efficiency 111 11 100 Technological Readiness 95 18 77 Market Size 37 4 33 Business Sophistication 60 11 49 Innovation 111 42 69  Improving governance and the economy have been key areas of focus for the Aquino Administration  Supports the notion that good governance is indeed good economics and the two are inextricably linked  Proof that ROP is making real progress in improving governance and institutions 12 Source: World Economic Forum Global Competitiveness Rankings
  13. 13. Progress Made in Reaching Development Plan Targets 2011-16 Philippine Development Plan goals now closer to reality Notable progress being made in the ROP’s five major guide posts for the PDP Target1 Progress  Average GDP growth of 7- 8% Rapid, Inclusive and Sustained Economic Growth  Step-up change in GDP growth in 1H2013 to 7.6% yoy  Increase investment/GDP to 22% by 2016  Preliminary BSP study estimates potential output is now 6-7%  Improved government finances with reduced fiscal deficit-to-GDP ratio to 2.0% by 2016  Significant uptick in public investment in 1H2013 with construction and fixed capital formation growing in double-digits  Investment /GDP ratio of 20.5%* in 1H2013 Anti-Corruption and Transparent, Accountable Government Poverty Reduction and Empowerment of the Poor Just and Lasting Peace and the Rule of Law Integrity of the Environment and Climate Change Mitigation 1 Based 2 United on Philippine Development Plan 2011-2016 Nations Office for Disaster Risk Reduction *current prices  Improve institutions and governance  Increase government transparency and public access to information  Improve public’s trust in the government  Ensure equitable and inclusive growth  Reduce poverty incidence to 16.6%  Effective social protection and strengthen social safety nets for the poor  Reach negotiated settlement to all armed conflicts  Increased internal stability  Improve the Philippines ability to adapt and mitigate climate change and capacity to deal with natural disasters  Improve air quality and water quality  Closer performance monitoring of agencies with Account Management Teams deployed to 9 major departments in 2013  Open Data initiatives, including Freedom of Information Bill (under discussion) to provide wider access to data  Bottoms-up Budgeting prioritizing the Local Poverty Reduction Action Plans of the poorest municipalities  Sin tax revenues to help enroll the poor in universal healthcare  Conditional cash transfer program to the poor to benefit 3.8 million households in 2013  Breakthrough peace settlement agreement reached with Moro Islamic Liberation Front (MILF)  Stable political environment with the Administration sustaining a net satisfaction rating of +66% as of Q2 2013 SWS Survey  Philippines’ disaster preparedness lauded by the UNISDR2 and EU  Progress made in mainstreaming climate change adaptation and mitigation initiatives in agriculture  Launched Project NOAH which provides more accurate, integrated, and responsive disaster prevention and mitigation system, especially in highrisk areas throughout the Philippines. 13
  14. 14. Passage of Landmark Sin Tax Law Sin tax to improve general health outcomes and boost government revenues “Today, we are again making history: for the past 15 years, we have been trying to reform the tax structure of imposing excise tax on tobacco and alcohol products. After 15 long years, we have finally succeeded.” President Aquino, December 20, 2012 Key Provisions Passage of the Sin Tax  Republic Act No. 10351 (“sin tax law ”) was approved by the legislature and finally signed into law in December 2012 after being first introduced over 15 years ago in 1997  Introduces higher taxes on tobacco and alcohol product based on a revised tiering system and will gradually increase over the next several years  Sin tax is expected to generate an additional Php248.5 bn revenues in the first 5 years from 2013 to 2017 of which Php34 bn is expected to be realized in 2013  An estimated 69% of sin tax collections is expected to come from tobacco products in the first year Highlights the Strength and Resolve of the Aquino Administration  Passage of the sin tax after being held-up for 15 years demonstrates the strength of this Administration’s mandate and ability to push through tough legislation  Provides additional impetus and momentum to push through other tough legislation Significant Additional Revenue Generation Projected Incremental Revenues (Php bn) 2013 33.96 2014 42.82 2015 50.63 2016 56.86 2017 64.18 2013-2017* 248.49 * May not add up due to rounding Aligned with Objective of Equitable and Inclusive Economic Growth  Majority of incremental revenues will be earmarked for health programs, including enrolling the poor into the universal healthcare program and upgrading of hospitals and other healthcare facilities 14
  15. 15. Contents III. Robust Improvements in Economic and Financial Metrics - Healthy, Sustained and Inclusive Growth 15
  16. 16. Sharp Increase in Economic Growth Broad-based growth highlights overall health of the economy Decade of rapid and sustained economic growth is set to continue Real GDP Growth (% yoy) 6.7 7 5 4 3 Average:5.0 4.8% 3.6 2.9 The IMF expects the Philippines to grow 6.75% and 6% in 2013 and 2014, respectively and maintain growth at 5.5% in the medium term  Philippines growth is increasingly broad based with particular strength coming from the services and the resurgence of the industry sector led by construction and manufacturing. The government’s focus on promoting investment and infrastructure coupled with the nation’s favorable demographics will help propel economic growth in the long term 7.6 6.8 6.6 4.8 2Q2013 growth of 7.5% yoy outperformed market consensus of 7.2% yoy. This brought 1H2013 GDP growth to 7.6%. The growth trend demonstrates the nation’s ability to grow in spite of external pressures.  7.6 8 6  5.2 4.2 2 3.6 1.1 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1H 2013 Strong performance across all components of GDP underscore overall strength and resilience of the economy Real GDP Growth by Expenditure Component (% contribution to growth) 15.0% 6.5 8.4 10.0% 5.0% 1.0 1.6 8.9 7.3 6.1 4.6 3.0 7.7 6.3 3.8 7.3 Q3 Q4 7.5 7.1 3.2 0.5 1.4 0.0% -5.0% -10.0% 2009 Q1 Q2 Q3 Q4 2010 Q1 Private Consumption Q2 Q3 Q4 Govt. Consumption 2011 Q1 Q2 Q3 Fixed Capital Q4 2012 Q1 Net Exports Q2 2013 Q1 Q2 GDP Growth 16 Philippine National Statistical Coordination Board (NSCB)
  17. 17. Sheltered from External Trade Shocks ROP is well-positioned to withstand a slowdown in global demand  The Republic remains less trade and export dependent than most countries in Asia and therefore less exposed to the lower consumption and slower growth experienced in much of Europe, a slowing China and the rest of the world  In addition to being less trade dependent, exports to both China and Europe account for only a small portion of total exports for the ROP, further insulating the economy from growth uncertainties emanating from those two regions  Despite European exports declining marginally in 2012, the total volumes of exports have actually increased highlighting its resiliency Europe and China exports account for only a small portion of the total Exports by Destination (USD bn) 80.00 60 70.00 50.5 48.3 47.4 60.00 51.5 49.1 41.3 38.3 50.00 40.00 26.8 26.7 30.00 20.00 - 4.10 7.10 4.6 5.70 5.5 8.80 8.7 2.9 8.10 5.7 8.9 2005 10.00 2006 2007 2008 2009 Others China 7.6 6.1 6.40 6.2 5.9 2010 2011 2012 4.3 4.2 4.1 4.1 Jan-Aug 2012 Jan-Aug 2013 Europe 17 Source: NSO
  18. 18. Rising Employment and Wealth Create Inclusive Growth Economic growth is generating opportunities for all The Philippines is expected to reach the World Bank’s Upper Middle Income threshold in 2016 GDP per Capita Projections (USD) 4200 4000 3800 4,032.2 World Bank’s Upper Middle Income Threshold: US$4,035 3600 3,621.4 3400 3200 3,254.0 3000 2,909.7 2800 2013P 2014P 2015P 2016P Compared to Regional Baa3 Peers, Philippines Wealth Levels are Comparable GDP per Capita (USD; 2013) 18 Source: National Economic and Development Authority (NEDA), IMF WEO
  19. 19. Contents III. Robust Improvements in Economic and Financial Metrics - Rapidly Strengthening Public Finances and Debt Dynamics 19
  20. 20. Rapidly Strengthening Public Finances and Debt Dynamics Strong framework in place to guarantee ability to meet debt obligations  1  Sound debt management strategy has reduced rollover risks and increased debt carrying capacity 2 Sound Debt Management Strategy The Republic’s ability to meet its debt obligations has been strengthened even further due to improving macroeconomic fundamentals Strengthening Fiscal Framework  Improving fiscal metrics make this ability ever stronger  Government financing is shifting towards being domestically funded and denominated in Peso Ability to Meet Debt Obligations Bond Sinking Fund 4 Automatic Appropriation for Public Debt Service 3  The national government’s willingness to service its debt obligations is enshrined in the legal system  Bond Sinking Fund which necessitates consistent cash allocations to ensure debt servicing of maturing principal – Presidential Decree 1177 or the Budget Reform Decree of 1977 which provides for the automatic appropriation of principal and interest payments on public debt 20
  21. 21. Bond Sinking Fund Enhancing Debt Management Improving public finances and debt management Bond Sinking Fund is reflective of the Republic’s prudent management of public debt  The Bond Sinking Fund was established in 1954 for the sole purpose of holding funds for the retirement of local currency bonds issued by the Government of the Philippines  Bond Issued Payments to the Bond Sinking Fund are structured by making annual payments to gradually retire the debt, rather than make a single payment at maturity  Any investment returns are reinvested into the Bond Sinking Fund balance  AMS calculates annual payment required to cover principal payment The Asset Management Service (AMS), an office in the Bureau of the Treasury, ensures matching of fund maturities to that of debt issues that are being provisioned for  Annual contribution made over the life of the bond until retirement The AMS manages the maturity profile and ensures that there is always complete alignment with debt issues 21
  22. 22. Improved Fiscal Metrics Across the ROP Creating a sustainable fiscal revenue and spending path Better governance bearing fruit as fiscal finances continue to strengthen (in Billion Pesos) Total Revenues % of GDP Tax Revenues % of GDP BIR BOC Other Offices Non-Tax Revenues % of GDP o.w. BTr Income Others incl. Fees & Charges Privatization Expenditure % of GDP Surplus/(Deficit) % of GDP Jan-Aug 2013 Actual 1,139.2 1,021.2 811.9 198.9 10.4 117.9 60.9 56.8 .3 1,221.8 (82.6) - Jan-Aug 2012 Actual 1,013.6 901.4 701.4 190.4 9.5 112.2 60.9 51.3 0 1,084.7 (71.1) % Growth 2012 v. 2013 12.4 13.3 15.7 4.5 9.5 5.1 0 10.7 0 12.6 16.2 FY 2013 Adjusted Program 1,745.9 14.7 1,607.9 13.5 1,253.7 340.0 14.2 136.0 1.1 57.7 78.3 2.0 1,983.9 16.7 (238.0) (2.0) 2012 Actual 1,534.9 14.5 1,361.1 12.9 1,057.9 289.9 13.3 165.5 1.6 84.1 81.3 8.3 1,777.8 16.8 (242.8) (2.3)  Firm administrative measures (i.e. RATE, RATS and RIPS) have resulted in higher tax revenue s and manageable deficits  Tax elasticity of BIR collection increased to 1.7 in 2012 from 0.8 in 2004, indicating effective tax administrative measures  1H 2013 revenue and tax effort of 15.3% and 13.6%, respectively exceeded the program for the year on stronger tax compliance  Jan-Aug 2013 fiscal deficit of Php82.6bn is 42.8% lower than Q1-Q3 program of Php144.5bn reflecting the Republic’s ability to raise revenues along with a more focused, faster and higher spending  Jan-Aug 2013 spending of Php1,221.8bn is nearly 61.6% of total disbursement program for the year.  Aug 2013 revenue of Php155.1bn is 20% higher than Aug 2012 with BIR, BOC and BTr revenue growth of 22% (Php118.1bn), 15% (Php26.1bn) and 15% (Php3.4bn), respectively Sources: Bureau of the Treasury (BTr), Department of Budget and Management (DBM) *Note: Some values may not sum up to exact figure due to rounding off 22
  23. 23. Improved Efficiency in Revenues and Expenditures Fiscal consolidation on track despite accelerated spending Firm tax administration pushes revenues higher Expenditures disbursed more efficiently helping to drive the development agenda Revenues (Php mn) Expenditures (Php mn) 220,000 260,000 200,000 240,000 242,102 220,000 180,000 155,100 160,000 211,670 200,000 180,000 140,000 126,357 120,000 110,170 100,000 103,172 80,000 160,000 147,810 133,200 140,000 120,000 100,000 80,000 60,000 60,000 40,000 40,000 20,000 20,000 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 2011 2012 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2010 2013  2011 2012 2013 Government’s continued effort to implement measures to  Relentless tax campaign has resulted in greater taxpayer compliance  Revenue collection continues to gain strength growing by 12.6% and facilitate budget execution and program/project implementation 12.9% in 2011 and 2012, respectively from 7.6% and -6.6% in 2010 has resulted to ramped up spending and 2009, respectively  Collection continues to gain traction as a result of improved collection  Total disbursements for January to August reached P1,221.8 billion, 13% higher than comparable disbursements in 2012. efforts from both BIR and BOC 23 Source: BTr
  24. 24. Increased Flexibility to Service Obligations Ensuring long-term debt sustainability Improving revenue buoyancy due to rapid revenue growth Growing revenue base will improve debt servicing ability Revenue and GDP Growth (% yoy) Revenue / GDP Projections (%) 20 18.0 18.4 16.9 17.8 18 16.1 17.0 15.6 16 12.6 14 12.9 12.6 12 11.8 11.3 11.3 7.8 8 15.0 14.5 14.7 14.0 14.0 8.8 10 15.1 16.0 13.7 13.0 6 12.0 2011 2012 2013A Revenue Growth 2014Pr 2015P 2016P 2011 2012 2013A 2014Pr 2015P 2016P Nominal GDP Growth  The Administration’s focus on fiscal reforms has permanently increased the revenue base and over the medium term will bolster the government’s ability to service external and domestic debt obligations  Revenue growth is expected to continuously outpace nominal GDP growth, thereby increasing revenue buoyancy  Through a combination of liability management exercises and fiscal reforms, the cost of existing debt stock has been lowered while simultaneously increasing government’s revenue take  The result will be a significant decline in debt servicing cost over the coming years Note: A- Adjusted; Pr- Proposed; P- Projections Projections, subject to revision based on changes in macroeconomic assumptions and other factors Source: 2014 BESF, DBM 24
  25. 25. ROP Funding Becoming Increasingly Domestic Increasing reliance on domestic financing sources Actual Program Revised 2012 2012 2013 Total Net Financing (PHP mn) 242,827 279,106 238,028 250,071 Gross External Borrowings 156,621 181,435 104,340 27,000 Gross Domestic Borowings Budgetary Change in Cash Financing Mix (%) Foreign Domestic Share of external debt to national government debt has been gradually declining over the years Actual Jan-Aug 2013 798,527 535,074 630,691 419,281 295,345 54,234 61,817 167,460 25 75 14 86 16 84 National Government Debt Breakdown (% of total) 100 90 80 70 60 50 40 30 20 10 0 6 94 49 48 44 51 52 56 44 54 32 2008 25 2009 Long-term: >10yrs Source: DBCC as of Feb 2013, BTr 70 78 26 20 19 2010 10 2011 Medium-term: 1yr to 10yr 79 14 12 9 8 2012 44 42 42 56 59 57 56 58 58 36 36 64 64 External Debt Breakdown (% of total) 35 31 43 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanJul External Domestic 2013 Domestic Debt Breakdown (% of total) 34 41 External debt is all long-dated with maturity profiles exceeding 10 years Domestic debt mix has become longer dated 100 90 80 70 60 50 40 30 20 10 0 44 Jan-Jul 2013 Short-term: <1yr 100 90 80 70 60 50 40 30 20 10 0 90 10 2003 100 96 100 100 2010 2011 2012 100 4 2005 Long-term: >10yrs Medium-term: 1yr to 10yr Short-term: <1yr Jan-Jul 2013 25
  26. 26. Fiscal Reforms and Programs for 2013 and Beyond Focus to ensure that positive momentum in government finances continue Update on Key Fiscal Policy Reforms Fiscal Incentives Rationalization  Intended to remove redundant incentives to reduce fiscal costs and ensure incentives will only be given to those who need them Review of the Fiscal Regime of the Mining Sector  New mineral agreements are suspended until legislation rationalizing existing revenue sharing schemes mechanisms has been implemented Tax Incentives Management and Transparency Act  Aims to foster transparency and accountability in granting fiscal incentives Focus on leveraging technology in 2013 to improve effectiveness of major public finance departments  Re-engineering of business processes Bureau of Internal Revenue  Expansion of ISO Certification to other districts  Electronic Letter of Authority Monitoring System (eLAMS)  Procurement, Payment and Distribution Monitoring System  Re-registration of Taxpayers through Taxpayer  Electronic Certificate Authorizing Registration (eCAR) Registration Information Update (TRIU) Project  On-line System for Transfer Tax Transactions (OSSTTT)  Electronic Tax Information Systems (eTIS) Project  Centralization of Data Processing to regional offices  Collection Reconciliation System  Mobile Revenue Collection Officers System (MRCOS)   Bureau of Customs Source: DOF, BIR and BOC      Cleansing of the List of Accredited Importers and Consignees by the Interim Customs Accreditation and Registration unit (ICARE) Integrate National Single Window (NSW) with Electronic to Mobile System (E2M) and Other Government Agencies automated permit/licensing systems The Codification of Customs Memorandum Orders (CMOs) and Customs Administrative Orders (CAOs) Implementation of cargo electronic tracking via Global Positioning Satellite systems The Customs Modernization and Tariff Bill Intensive utilization of the Post Entry Audit Group (PEAG) Strengthening the Valuation Reference Information System 26
  27. 27. Contents III. Robust Improvements in Economic and Financial Metrics - Supportive and Stable Monetary Conditions and Healthy Banking Sector 27
  28. 28. Sound and Stable Inflation Environment Refinements in inflation targeting mechanism have allowed BSP to tame inflation and meet the target for four consecutive years Firm control over inflation has proven the effectiveness and credibility of monetary policy Headline Inflation (%) 15.0% Headline < Lower bound of target Upper bound of target Global inflationary cycle 10.0% September 2013 - 2.7% 201 3 201 2 201 1 201 0 200 9 200 8 200 7 200 6 200 5 200 4 200 3 0.0% 200 2 5.0% Monetary policy remains supportive of healthy economic growth Money Supply and Interest Rates (Php bn, %) < 7,000 August 2013: P6,028,250 14% 6,000 12% 5,000 10% 4,000 Jan-August 2013: 5.81% 8% 3,000 6% 2,000 4% 1,000 M3 (LHS) Source: BSP Bank lending rates (RHS) 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 August 2013: 3.50% 2% 0% Reverse repurchase rate (RHS) 28
  29. 29. Peso Performance Supports Macroeconomic Stability Effective monetary policy contributes to low PHP volatility Movement broadly in line with regional currencies Peso remains one of the most stable currencies compared to peers USD/PHP Exchange Rate 1 Month Volatility 10% 46 21 Oct 2013 43.22 45 9% 8% 44 7% 43 6% 5% 42 4% 41 3% 40 2% 39 1% Philippine Peso Indonesian Rupiah Turkish Lira Sources: BSP, Bloomberg as of 21 October 2013 Oct-13 Oct-12 Oct-11 Oct-10 Oct-09 Oct-08 Oct-07 Oct-06 Oct-05 Oct-04 Oct-03 Oct-02 Oct-01 Oct-00 Oct-99 0% Oct-98 Oct-13 Aug-13 Jun-13 Apr-13 Feb-13 Dec-12 Oct-12 Aug-12 Jun-12 Apr-12 Feb-12 Dec-11 Oct-11 Aug-11 Jun-11 38 Brazilian Real South African Rand Thai Baht 29
  30. 30. Strong Fundamentals Provide Buffer Against Market Volatility Yields have risen less than peers while CDS levels continue to trade tightly ROP’s CDS spreads trade tighter than Thailand and Malaysia Sovereign 5Y CDS Spreads (bps) 320 CDS spread (bps) 21-Oct 1-Jan 280 change (bps) 100 106 Indonesia 197 136 61 115 95 20 Malaysia 112 78 34 Korea 65 68 7 -6 Thailand 200 Government Bond Yields (%) 8 Philippines 240 Yields have outperformed peers due to strong onshore bid -3 6 5 197 Philippines Sri Lanka Vietnam Indonesia Malaysia Generic UST 10Y 114.50 111.5 100 80 4.821 4.61 3.674 3.062 2.6032 1 2 40 Jan-13 Feb-13Mar-13 Apr-13 May- Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 13 PHILIP THAI MALAYS KOREA INDON 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Philippines 2021 Indonesia 2023 Normal correction in equities after record rise in 1H 2013 c Hi Low Last Peak-Trough Phil 127 99 114 28 Indon 121 92 106 29 Malay 107 100 107 7 Thai 118 92 104 26 Japan 150 120 141 31 UK 116 102 113 14 Sri Lanka 2022 US Generic 10Y Vietnam 2020 Malaysia 2021 Sukuk Relatively high P/E ratio shows confidence in Philippines 2013 Rebased Stock Exchange Performance (Jan 2013 = 100) 140 6.354 3 65 120 150 change (bps) 80 151 54 133 105 84 4 160 160 Yield (%) 21-Oct 1-Jan 3.06 2.27 6.35 4.84 4.82 4.29 4.61 3.28 3.67 2.62 2.60 1.76 Price to Earnings Ratio (x) S&P 120 110 122 10 Current (21-Oct-13) FY 2012 25 20 130 19.4 18.1 18.9 16.9 15.8 16.2 16.9 Thailand Malaysia 15.0 15 120 114 10 110 100 5 90 80 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Philippines Japan Indonesia UK Malaysia US (S&P) 0 Philippines Indonesia Thailand Sources: Bloomberg as of 21 October 2013; current P/E ratio is price divided by trailing 12 months earnings 30
  31. 31. Macroprudential Measures Introduced as Safeguards Prudent and forward-thinking policymaking to preserve stability BSP remains ahead of the curve in protecting the economy from potential threats  Policymakers in the Philippines have been proactive in managing risks and have introduced several prudent macro-prudential measures over the past year as additional safeguards to protect against potentially destabilizing “hot money” flows and to strengthen the financial sector  Raising Capital Charges on NDFs –  Imposed higher capital charges on bank holdings of non-deliverable forwards (NDFs) from 10% to 15% Imposed strict restrictions on foreign funds flowing into the central bank’s Special Deposit Accounts – Reduces unstable fund flows and promotes the stability of the Peso Increased Monitoring of Bank Real Estate Exposure – Provided a more comprehensive measure of a bank’s real estate exposure to include loans as well as related investments in debt and equity securities –  Consistent with sound risk management practices as bank real estate exposure will be referenced against its adjusted capital Enhancing Corporate Governance –  SDA Investment Restrictions Restrictions on Investments in Special Deposit Accounts –  Increased FX Capital Charges Revised existing regulations on corporate governance in line with international best practices such as the “Principles for Enhancing Corporate Governance” issued by the Basel Committee on Banking Supervision, strengthened Increased Monitoring of Bank Real Estate Exposure Stability Further Liberalization of FX Policies Enhanced Governance Standards for Banks Further Liberalization of FX Policies – To keep FX policies responsive to current economic conditions, new rules on FX transactions were adopted which includes among others increased limits for OTC FX purchase 31
  32. 32. Healthy Banking System - Key IG Credential ROP exhibits an exceptionally healthy and resilient banking system    Banks are continuing to fortify their balance sheets with increased capitalization, well above international norms Unlike much of the world today, the Philippines’ banking system remains healthy and exudes health across all relevant financial metrics. Capital Adequacy Ratio of U/KBs (%) 18.9% 19% The banking system continues to improve its asset quality, with the universal and commercial banks’ NPL ratio settling at 2.7% as of 1H 2013, while fortifying bank balance sheet through increased capitalization and high loan-loss reserves Banks remain funded predominately through domestic deposits and not through wholesale channels, reducing liquidity and funding risk and minimizing potential contagion from the lingering uncertainty in the Euro-zone 17% 17.8% 15% 13% BSP Regulatory Requirement: 10% 11% 9% International Standard: 8% 7% 5% 2004 2005 2006 2007 2008 CAR, solo 2009 2010 2011 2012 1Q2013 CAR, consolidated Asset quality of the universal and commercial banks remains extremely strong with an NPL of ratio of only 2.7% Prudent NPL coverage ratios will ensure that the banking system is well–prepared for any unforeseen shocks Gross Loans (PHP bn) and NPL Ratios (%) NPL Coverage Ratio of U/KBs (%) 4,000 20 150 16 130 3,344 3,000 12 2,000 130.1 110 90 8 2.7 1,000 70 4 50 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Jun 2013 Loans outstanding of U/KBs (net of RRPs)… NPL ratio (RHS) (%) Source: Bangko Sentral ng Pilipinas 2005 2006 2007 2008 2009 2010 2011 2012 June 2013 NPL Coverage Ratio of U/KBs (%) 32
  33. 33. Banking System Poses Minimal Risk Relatively smaller banking system limits potential contingent liabilities Strong deposit base supports banking sector funding Potential contingent liabilities of the banking sector is smaller than peers given relatively smaller size Gross Loans-to-Deposits Ratio (%) Domestic Credit to Private Sector (% of GDP)1 76 74 72.7 72 Indonesia 34.9 Philippines 73.5 33.4 71.8 70 68.2 69.2 68.4 68 68 66.6 Korea 148.0 66 64 Malaysia 62.6 118.2 62 China 60 58 133.7 Thailand 56 2004 2005 2006 2007 2008 2009 2010 2011 2012 147.9 0 50 100 150 200 Loans-to-Deposit Ratio  Banking sector remains well-funded through domestic deposits – prudent and conservative underwriting standards and credit have kept system loans-to-deposit ratio low at 73.5%  Reduces the probability of banks seeking emergency funding from the sovereign in times of stress  Minimal risk of credit-fueled asset bubbles that threaten many other Asian nations with high growth rates  Banking system assets remain small relative to the total size of the economy compared to major peers - even in the extremely unlikely scenario that a banking system crisis were to occur, potential government contingent liabilities for the ROP would still be lower than for peers Source: BSP, World Bank 1Based on 2012 World Bank data 33
  34. 34. Real Estate Exposure Risks are Muted Moderate banking sector exposure to real estate mitigates price risks Higher Real Estate Loan Levels Are Manageable     Real estate loans (REL) of universal, commercial banks and thrift banks was 17.9% of the total loan portfolio as of end March 2013. This exposure is within the BSP’s regulatory limitations which caps RELs at 20% of total loans. In line with its proactive approach to ensure financial stability, the BSP expanded its reporting system on real estate exposure (REE) of banks which now also includes banks’ investments in debt & equity securities as well as social housing. REE as of end March 2013 remains manageable at 21.4% of total loan portfolio, slightly higher than the 20.8% ratio as of end 2012. The latest data on real estate exposure of banks reflect the health of the banking sector vis-à-vis the real estate sector. The REE report noted:  The non-performing real estate loans (NPREL) ratio remains stable at only 3.5% as of March 2013 data  Internal simulations on credit impairment using March 2013 data indicated that the industry’s CAR will remain well above the 10% regulatory minimum even with a simulated 50% write down in REEs. In a comment to media, Moody’s Financial Institutions Analyst JeanFrancois Tremblay commented in May 2013 on banks’ exposure to the housing sector.  He noted that exposure figures were affected by the inclusion of the low-cost and socialized housing segments that “tend[s] to be less susceptible to speculation”  He further commented that “trends in [prudential measures] have remained within reasonable limits,” making reference to “factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms” Demand Continues to Outstrip Supply  Housing data shows that demand for new housing remains high, a trend that will continue through the long term Units per Year No. of Years Total Units Current Housing Backlog 3,919,566 New Housing Need 2012-2030 345,941 18 6,226,940 Housing Production Capacity 200,000 18 (3,600,000) Backlog by 2030 6,546,506 Source: Subdivision and Housing Developers Association and Housing & Urban Development Coordinating Council Demand Continues to Meet Supply in the High-Cost Sector Metro Manila Condo Market 30,000 26,692 25,000 20,000 25,514 26,757 24,998 26,432 26,103 22,182 21,267 19,757 19,285 15,000 10,000 5,000 0 2H10 1H11 New Launches 2H11 1H12 2H12 Take -up 34 Source: Colliers International 1Q 2013 Market Overview
  35. 35. Real Estate Exposure Risks are Muted The real estate sector remains in balance Market Indicators Do Not Suggest Overheating Price Increases are Justifiable in Real Terms Secondary Market Condo Prices  Increased supply in the real estate market reflects increased housing demand in line with growth and investment opportunities, especially in Manila  Real estate price increases are moderate and do not resemble the overheating witnessed prior to the Asian Financial Crisis. In real terms, price increases are quite modest  Increasing supply is being absorbed by the market, as evidenced by high levels of real estate pre-sales and consistent, low vacancy rates in both the commercial and residential sectors Vacancy Rates Remain Low, Demonstrating Demand is Sufficient to Meet Growing Supply Office Vacancy Rates (Makati CBD) 16 Residential Vacancy Rates (Makati CBD) 20 18 16 14 12 10 8 6 4 2 0 12 8 4 0 Premium Grade B & Below Source: Colliers International 2Q 2013 Market Overview Grade A All Grades Luxury Others All Grades 35
  36. 36. Contents III. Robust Improvements in Economic and Financial Metrics - Strong External Position 36
  37. 37. Robust External Profile – A Key Sovereign Strength Structurally strong balance of payments bolsters external finances The Philippines enjoys a structurally positive BOP Balance of Payments (Components, USD mn) BOP Statistics for 2001 to 2010 are based on IMF’s BPM5 BOP Statistics beginning in 2011 are based on IMF’s BPM6 Capital and Financial Accounts Financial Account 20,000 Current Account Capital Account 14,308 11,400 Net Unclassified Items 15,000 Balance of Payments Current Account 9,236 8,557 Overall BOP Position 6,421 10,000 3,769 1,316 2,410 5,000 -202 810 115 2002 2003 Net Unclassified Items 2,577 89 -280 0 -5,000 2011 2001 2004 2005 2006 2007 2008 2009 2012 1H 2012 1H 2013 p/ 2010  ROP’s current account continues to be in surplus supported by robust remittances from overseas Filipino workers (“OFWs”), substantial BPO revenues and increasing tourism receipts  BOP surplus sustained at US$3.8 bn as of end-Sep 2013  While exports remain relatively subdued due to the global economic environment, the Philippines nonetheless posted a 7.6% yoy growth of total exports in 2012, highlighting relative resiliency of exports despite the global uncertainty  In 2012, FDIs grew 54% to US$2.8 bn from US$1.8 bn in 2011, the sharpest rise among ASEAN countries Source: BSP, National Statistical Coordination Board (NSCB) 37
  38. 38. Robust External Profile – A Key Sovereign Strength International reserves provide strong buffers to any BOP problems ROP is effectively protected against any balance of payment shocks through adequate international reserves FX Reserves (USD bn) and Months of Import Cover  90.0 83.8 80.0 83.5 The Republic currently enjoys a healthy level of international reserves of USD 83.5 billion as of end-September 2013, enough to cover 11.9 months of total imports  Since 2010, ROP’s FX reserves have exceeded its gross external debt  Strong reserve buildup is a prudent measure to guard against external shocks and underscores the ability of ROP to pay back any foreign currency denominated debt 20x 18x 75.3 16x 70.0 62.4 14x 60.0 12x 50.0 12.1x 44.2 11.9x 11.9x 33.8 9.5x 8x 8.7x 30.0 6x 23.0 20.0 10.0 0. 0 10x 37.6 40.0 17.1 4.0x 2003 16.2 18.5 3.6x 3.8x 2004 2005 5.8x 6.0x 4x 4.2x 2x 2006 2007 FX r eserves (lhs) 2008 2009 2010 2011 2012 Sep-13 – Impor t co ver (r hs) Source: BSP Import Cover = Number of months of average imports of goods and payment of services and income that can be financed by reserves. 38
  39. 39. Current Account in Surplus Despite External Challenges Strong structural support provided by remittances, tourism, and BPO Strong and stable rise in remittances over the years Tourism is a key area of national growth Overseas Filipinos’ Remittances (USD bn) International Visitor Receipts (USD bn) 12 10.8 10 8.3 8 6.4 6 25.0 20.0 16.4 14.5 15.0 12.8 17.3 18.8 20.1 4 21.4 3.0 2.5 3.8 13.7 14.5 8.6 0 2010 2011 2012 Q1 2012 Q1 2013 2013P 2015P 2016P BPO Employment and Revenues (in USD bn) 13.4 800 11.0 700 500 6.1 400 200 100 8 6 3.2 1.5 14 10 7.1 4.8 300 16 12 8.9 600 0.0 2014P BPO – a strong driver of employment and revenues 900 5.0 1.3 1.2 2 10.7 10.0 4.9 4 2.4 2 - 0 2004 2005 2006 2007 2008 Revenues (in USD bn) RHS 2009 2010 2011 2012 Employment ('000) LHS 39 Source: BSP, Department of Tourism , Information Technology and Business Processing Association of the Philippines
  40. 40. Contents IV. Improving Investment Climate
  41. 41. Improving Investment Climate National focus on making the ROP an enhanced investment destination Investment level is slowly but surely trending higher Continued increase in foreign investment inflows into the PH Investment Levels and Investment / GDP (%) 1,200 1,000 800 21.5 918 21.1 945 17.0 802 18.8 985 15.9 BOI-PEZA Approved Investments 20.8 20.4 18.5 1,184 1,207 1,168 1,400 17.0 899 25.0 Year 18.5 20.0 798 15.0 Amount of Approved Foreign Investments % Share of Foreign Investments % Growth in Foreign Investments 612 600 10.0 2011 657.27 218.91 33.31% 5.0 2012 672.30 282.45 42.01% H1 2012 209.13 38.49 18.40% H1 2013 285.59 91.91 32.18% 400 200 - 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Gross Capital Formation (constant)  Value (Php Bn) 1H 2013 Capital Formation as % of GDP (constant) Infrastructure development remains a key national priority. Capital outlays to GDP ratio is targeted to reach 5.2% by 2016.  DPWH 2013 budget for capital outlays is Php144.3 bn*. Capital outlays as ratio to GDP is expected to reach 3.1% in 2013 under the GAA.  Public spending will remain at the forefront of infrastructure development – the 2013 budget’s allocation for public infrastructure is 17.7% larger than 2012  Importantly, the Department of Public Works and Highways (DPWH) has been designated as the principal infrastructure agency and will be held responsible for timely implementation of infrastructure projects – this appointment will accelerate the completion of projects in addition to creating an expert agency to warehouse knowledge and best practices for procurement processes, project standards, and cost structures * Based on General Appropriations Act (GAA) Source: NEDA, BESF DBM, Department of Trade and Industry (DTI)  29.03% 138.79% Notable foreign investments in 2012 and 2013 include Del Monte Corporation’s (USA) US$60mn in Maguindanao for its 3,000-hectare banana plantation, Holcim’s additional investment of US$400-US$450mn for a new cement plant An upward trend in the number of registered Regional Operating Headquarters (ROHQ)/Regional Headquarters (RHQ) No. of Registered ROHQs/RHQs and its Growth (%) Year Number of Registered ROHQs/RHQs % Growth 2010 20 2011 25 25% 2012 37 48% 41
  42. 42. Infrastructure Development a Key Priority to Improve Competitiveness Sustaining the growth momentum through systematic and coordinated pipeline development 2007-2014 DPWH Investment Program DPWH Strategic Convergence Program Partner with other concerned agencies to harmonize national infrastructure development strategies (Php bn) Php184.9 bn 200.0 180.0 Tourism Convergence Program: • Infrastructure support to designated strategic Tourism Destinations • A total amount of Php25.34 bn was released from FY 2011-FY 2013 for the initial 202 identified tourism infrastructure projects • Of the Php25.34 bn, Php16.44bn were funded under the DOTDPWH Convergence Program, while the remaining Php8.90 bn were releases from other DPWH programs. An additional amount of Php14.25 bn is included in the proposed DPWH FY 2014 Budget Convergence for Agriculture Infrastructure: • Construct Farm to Market Roads to access food production and processing sites • Water impounding projects to optimize water resources for irrigation and flood management Flood Management Program: • Implement priority projects under the Flood Management Master Plan for Metro Manila and Surrounding areas • Clear waterways of Metro Manila and address drainage capacity constraints 160.0 140.0 120.0 100.0 80.0 PDAF (Pork Barrel) 60.0 40.0 20.0 2005 2008 2009 2010 2011 2012 2013 2014 2011-2013 Tourism Infrastructure Program (Php bn) 20.0 15.0 10.0 Integrated Transport System: • Support for access to major airports, seaports and RORO ports • Infrastructure support in preparation for APEC 2015 by improving access to designated airports, convention sites, tourism destinations 2007 5.0 13.28 Php25.34 bn (FY 2011-FY 2013) 8.81 3.25 0.0 2011 2012 2013 42
  43. 43. Infrastructure Development a Key Priority to Improve Competitiveness Keen investor support will complement government’s infrastructure development program High Standard Highway Network in Metro Manila & its 200 km sphere Proposed Mass Transit Systems & Airports Ongoing: 119.39 km Project Name Est. Cost (USDmn) Tarlac-Pangasinan-La Union Expressway 269.53 Daang Hari-SLEx Link 46.74 Southern Tagalog Arterial Road (STAR), Lipa City – Batangas City, Phase II NAIA Expressway Project Integrated Luzon Railway Est. Cost (USDmn) TBD Line 2 East Extension 223.26 53.95 MRT 3 Capacity Expansion 104.65 360.93 Line 1 Cavite Extension 1,376.70 MRT 7 Phase I 1,546.51 NEDA Approved: 91.20 km Mactan-Cebu Int’l Airport Project Name Est. Cost (USDmn) NLEx-SLEx Connector Road 594.42 Cavite and Laguna Side Expressway 827.44 Central Luzon Link Expressway, Phase I 347.44 395.35 Puerto Princesa Airport Expansion Project 103.72 New Bohol Airport Development Project 166.05 Bicol International Airport Project 111.63 Makati – Manila – Pasay – Parañaque Mass Transit System TBD Pipeline / Proposed: 117.82 km Project Name C-6 Expressway and Global Link (South Section) Est. Cost (USDmn) 1,036.98 C-6 Extension (Flood Control Dike Expressway 985.58 Calamba-Los Baňos Expressway 241.40 43
  44. 44. Revitalizing mining to promote economic development and social growth Resource rich sector to attract investments The Philippines has substantial mineral capacity Mining will bring in significant revenue for the government  A June 2012 IMF study noted that the mining sector will provide ~$1bn revenue per year under the current largely employed MPSA tax regime  The Philippines has 5.56 million hectares of land with mineral potential that is available for applications  Metallic: 3.96mm ha  Non-metallic: 1.60mm ha Action to Date: EO 79 passed in July 2012 demonstrates the government’s commitment to action within the mining sector and paves the way for further action Planned Legislation: Rationalization of the Mining Fiscal Regime is one of the nine key initiatives the government will prioritize once the 16th Congress begins in late July. At a cabinet meeting on July 15 Secretary Purisima stated the government’s intention to prioritize this legislation Heat Map of Philippines Mineral Potential  Metallic Non-metallic MPSA: Mining Production Sharing Agreement 44
  45. 45. Contents V. Mindanao - Peace Leading towards Progress 45
  46. 46. Mindanao: Background and Key Facts Major agricultural contributor with strong potential for accelerated growth Mindanao: The 2nd largest island in the Philippines ARMM Mindanao Metro Manila Philippines 1.2 8.2 7.3 6.8 93.3 1,565.4 3,830.8 10,564.9 27,819 68,659 312,137 110,314 Population (m) 3.35 22.80 12.27 95.8 Labor force April 2013 (m) 1.3 8.4 5.0 40.9 Unemployment Apr 2013 (%) 3.3 5.7 10.4 7.5 2012  Mindanao: 104,530 sq km  Northern Luzon: 104,668 sq km GRDP growth  2012 Gross Regional Domestic (constant)        Product in current prices: Php1,565.4 bn, approximately 15% of Philippines GDP 2012 GRDP at 2000 constant prices Php 911.3 bn, 14% share to Philippines GDP Mindanao supplies over 35% of the country’s food output Population: 22.8m, 23.8% of Philippines Consists of 6 regions, 26 provinces, 33 cities Largest city is Davao (population 1.45m) Mindanao is a major source of globally competitive agri-based products such as canned sardines, pineapple, oil palm, seaweed, tuna and banana Mineral deposits valued at USD312bn (c. 40% of the country’s total USD840bn) GRDP, Php bn (current) GDP per capita, Php Room for ARMM to grow with Mindanao Per Capita Gross Regional Domestic Product current Php prices (2012) ARMM 27,819 CARAGA 48,954 SOCKSARGEN 69,663 Davao Region 91,312 Northern Mindanao 91,654 Zamboanga Peninsula 61,324 - 50,000 100,000 46 Source: Mindanao Development Authority; NEDA Source: Mindanao Development Authority; NEDA
  47. 47. Mindanao: From Conflict to Peace and Prosperity Ushering in peace after over four decades of conflict Background to the conflict in the southern Philippines  Islam spread to Mindanao in the 13th century and the Spanish called the population “Moros” after the Moors in Spain  Historically, Moro and native Lumad populations were politically and economically excluded, leading to poverty and unrest  Insurgent groups formed in the late 1960s, and violence ensued. Timeline to peace Formation of MNLF with goal of fighting for an independent Moro nation. Violence ensued… 1968 The Jeddah Accord was signed by the Philippine government and the MNLF to continue implementation of a regional autonomy 1976 The Organization of Islamic Conference was invited to facilitate the negotiations leading to the signing of Tripoli Agreement, however it does not stop the fighting 1987 President Fidel Ramos signed a peace agreement with the MNLF. The Final Peace Agreement led to the establishment of the SPCPD* and the election of MNLF Chair Nur Misuari as Governor of the ARMM. 1989 In hopes of achieving peace, President Corazon Aquino RA 6734 providing for the creation of the Autonomous Region in Muslim Mindanao (ARMM) 1996 President Gloria Arroyo ratified the plebiscite of RA 9054 expanding the ARMM, this proved unsatisfactory to both MNLF and MILF. 2000 Violence continues, and President Joseph Estrada’s “All Out War” strategy leads to the displacement of more than 930,000 people 2001 President Benigno Aquino and MILF begin peace negotiations 2008 The MOA-AD was drafted and later deemed unconstitutional by the Supreme Court. Negotiations broke down with the MILF FAB Annexes on Transitional Arrangements and Modalities and Wealth Sharing were signed in April and July, respectively 2011 2012 2013 October 15 2012 to present The Framework Agreement on the Bangsamoro (FAB) is signed by Atty. Marvic Leonen and Mohaguier Iqbal, Chairs of the government and MILF panels respectively Annex on Transitional Arrangements and Modalities (TAM) have been signed Two main Moro insurgent groups Moro Islamic Liberation Front (MILF) Moro National Liberation Front (MNLF)  Formed in 1984 after Salamat Hashim split from MNLF to form the country’s  Founded by Nurallaj Misuari (b. 1942) in 1971 to fight for largest Muslim rebel group independence from the Philippine state. The MNLF was a united front and a strong insurgent group  The MILF initially aimed for independence from the Republic, but pursued peace negotiations and in 2010 abandoned quest for independence, current  A peace agreement was signed in 1996, but Misuari led an negotiations are for genuine autonomy uprising in 2001 and since then, the MNLF has become weak and divided; recently staged attacks in Zamboanga; but conflict has been resolved; rehabilitation of affected areas ongoing * SPCPD – Southern Philippines Council for Peace and Development Source: Mindanao Development Authority; NEDA; 47
  48. 48. Mindanao is Integral to the Philippines economy Established peace and investment will pave the way for further growth Mindanao’s stable growth paves the way for a bright future Agriculture dominates, but industry and services have witnessed rapid growth in recent years Gross Regional Domestic Product Growth Rate 2002-2012 GRDP Composition by Sector (constant, Php mn) (constant prices, in percent)  Industry and services sectors have grown steadily accounting for 31% and 44% of GRDP, respectively in 2012 1,000,000 9 8 800,000 6.8 400,000 5.4 5.0 6.0 5.3 4.8 5.2 4.7 4.2 4.3 3.6 235,301 248,726 281,888 226,468 229,968 2011 2012 200,000 4.2 - 4 4.3 367,396 225,650 600,000 6.6 5 3 399,475 348,811 2010 7.6 6.7 7 6 8.2 7.2 4.0 3.7 Services Industry AFF Mindanao’s share to total government budget 3.6 Regional Share of Budget (%) 2  1.1 1 The government has prioritized infrastructure spending for the whole of Mindanao over spending on other regions Sector 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GRDP, Mindanao GDP, Philippines 2008 2009 2010 NCR 4.1 3.7 3.4 3.6 6.6 6.5 Luzon 0 2011 2012 2013 16.3 16.9 15.7 16.3 19.4 20.1 Visayas 7.9 8.1 7.6 7.7 9.2 9.6 Mindanao 10.1 10.7 9.6 10.0 12.5 12.7 Mindanao GDP Share n.a.1 14.5 14.2 14.1 n.a.2 n.a.2 48 Source: Mindanao Development Authority; NEDA
  49. 49. Mindanao to Receive Largest Per Capita Budget Allocation Focus on developing Mindanao reflected in the 2013 budgetary allocations Regional Per Capita Budget Allocation (FY 2012) Regional Per Capita Budget Allocation (FY 2013) (in Php) (in Php) NCR Luzon 10,040 8,299 Visayas 8,437 9,478 Visayas 9,000 9,500 10,000 9,689 Mindanao 9,769 8,500 10,761 Luzon Mindanao 8,000 NCR 10,500 11,000 8,000 10,990 8,500 9,000 9,500 10,000 10,500 2013 Regionalized Budget (Php bn) Population (mm) 996.23 99.24 10,038 NCR Luzon 131.22 410.47 12.19 43.31 10,761 9,478 2 4 Visayas 194.88 20.11 9,689 3 Mindanao 259.66 23.63 10,990 11,000 1 Total Source: DBM Allocation Per Capita Amount (Php) Rank 49
  50. 50. Contents VI. Outlook 50
  51. 51. 2013-2016 Macroeconomic Parameters ROP expects another year of robust growth in 2013 Healthy macroeconomic fundamentals expected to continue this year 2012 2013 Actual Adjusted 2014 2015 2016 GNI Growth (%) 6.5 5.9-6.9 6.2-7.2 6.6-7.5 7.0-8.0 Real GDP Growth (%) 6.8 6.0-7.0 6.5-7.5 7.0-8.0 7.5-8.0 Inflation (%) 3.2 3.0 – 5.0 3.0-5.0 2.0-4.0 2.0-4.0 364-Day T-bill Rate (%) 2.0 1.0-3.0 2.0-4.0 2.0-4.0 2.0-4.0 42.25 41-43 41-43 41-43 41-43 Imports Growth (%) 11.3 13.0 14.0 14.0 14.0 Exports Growth (%) 20.9 11.0 14.0 16.0 16.0 109.08 90-110 90-110 90-110 90-110 Exchange Rate (Php/USD) Dubai Oil Price (USD/barrel) Projections Source: 2014 BESF (Proposed), Department of Budget and Management 51
  52. 52. 2013-2014 Fiscal Program Increasing revenues by 15.6% in 2014 to realize fiscal consolidation goals Levels Particulars Percent of GDP Revenues Tax BIR BOC Non-Tax BTR Income Privatization 2013 Program 1,745.90 1,607.90 1,253.70 340 136 57.7 2.0 2014 Proposed 2,018.10 1,879.90 1,456.30 408.1 136.1 56.2 2.0 Disbursements Current Operating Exp. Interest Payments Capital Outlays (CO) Infrastructure Net Lending 1,983.90 1,558.50 332.2 410.9 299.4 14.5 (238.0) Surplus/(Deficit) Memo Item: GDP Source: 2014 BESF (Proposed), Department of Budget and Management Growth 2013 2014 2013-2014 14.7 13.5 10.5 2.9 1.1 0.5 0 15.1 14.1 10.9 3.1 1.0 0.4 0 15.6 16.9 16.2 20.0 0.1 (2.6) - 2,284.30 1,736.50 352.7 522.9 418.2 25.0 16.7 13.1 2.8 3.4 2.5 0.1 17.1 13 2.6 3.9 3.1 0.2 15.1 11.4 6.2 27.3 39.7 72.1 (266.2) (2.0) (2.0) 11.9 11,914.50 13,336.70 52
  53. 53. Empowerment Budget Priorities Social spending and public investments to promote inclusive growth Percent Share of Total Budget GAA (Php bn) 2013 Social Services Proposed (Php bn) Change 2013-2014 2014 2013 2014 Amount Percent 699.4 842.8 34.9 37.2 143.4 20.5 Social Services continue to be the largest component of the budget to ensure equitable and inclusive growth Social Services Outlay in the 2013 and 2014 Budgets (Php bn) 509.2 590.2 25.4 26.0 81.0 15.9 General Public Services 347.3 364.5 17.3 16.1 17.2 5.0 Debt Service 333.9 352.7 16.6 15.5 18.8 5.6 Defense 89.5 92.9 4.5 4.1 3.3 3.7 Net Lending 26.5 25.0 1.3 1.1 (1.6) (5.8) 2,005.9 2,268.0 100.0 100.0 262.1 13.1 Total 20.5% 1000 Economic Services 800 842.8 699.4 600 400 200 0 2013 2014Pr Social Services  Conditional cash transfer program is a helping hand to Filipino families through cash grants for the health and education of children and the health of expecting mothers. The more than USD 1bn budget for 2013 is expected to benefit 3.8 mn households  The National Health Insurance Program makes universal health insurance coverage a reality. Philhealth provides around 40 mn of the poorest Filipino households full coverage of expenses for medical procedures, including maternity and newborn care packages and treatment of selected catastrophic diseases. For 2014, 14.7 million poor, near poor families will receive health insurance coverage  The K TO 12 Program is raising the standard of Filipino education. Adding two more years to the basic education curriculum puts it at par with the education cycles around the world. Through programs like the Training for Work Scholarships, skills learned by students will meet the demands of the labor market, encouraging innovation and industry, and ultimately opening more doors of possibility for our nation Source: Budget Expenditures and Sources of Financing, Department of Budget Management (DBM), Presidential Communications Development and Strategic Planning Office (PCDSPO) 53
  54. 54. 2014 Proposed Budget for Inclusive Development Tighter prioritization of the P2.268 trillion proposed budget for greater impact Increasing share in the budget for Social Services sector to ensure inclusive growth Budget by Sector, Share to Total Budget (in percent) Debt Service 16.6% Gen. Public Service 17.3% Economic Service 25.4% Social Service 34.9% 2013 Defense 4.5% Debt Service 15.5% Gen. Public Service 16.1% Economic Service 26% Defense 4.1% Social Service 37.2% 2014  The 2014 proposed budget reflects the “voice and voice” for citizens – through the involvement of communities and local governments in crafting the Budget  Increased outlay in 2014 will go to investments in Infrastructure, in Good Governance and Anti-Corruption, in Building Human Capabilities especially of the poor, through quality education, public healthcare and housing, and in Climate Change Adaptation Measures – all fundamental requirements for the country’s competitiveness and development 54
  55. 55. The Republic of the Philippines Good Governance is Good Economics October 2013

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