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Annual Report 2001

Overview

The Philippine economy turned in a strong performance in 2001 despite generally weak global conditions and challenges in the domestic front, including a political transition and concerns about the peace and order situation. The economy grew by 3.4 percent, surpassing the 3.3 percent target for the year. The average inflation of 6.1 percent was at the lower end of the 6.0-7.0 percent target range. The benign inflation environment and outlook paved the way for cautious monetary easing, providing broad support to the economy’s growth objectives. The Philippine financial system remained resilient, in spite of the challenging environment, drawing strength from the sustained efforts of the Bangko Sentral ng Pilipinas (BSP) to push forward key reform initiatives and to implement pre-emptive policy measures to address critical problems. On the external front, the current account remained in surplus despite lower exports. The overall balance of payments (BOP) deficit of US$192.0 million was only 37.4 percent of the previous year’s level. Reserves were maintained at comfortable levels in terms of import cover and as a ratio to short-term debt. Meanwhile, the peso remained broadly stable even as it experienced depreciation pressures in 2001 due to domestic and external factors.

Stronger macroeconomic fundamentals—including lower inflation, a generally improved fiscal position, and a more flexible exchange rate—increased the room for policy maneuver and resilience to external shocks. Moreover, the sustained implementation of structural reforms enabled the Government to continue laying solid foundations for broad-based economic growth.

Economic growth on track. Real Gross National Product (GNP) grew by 3.7 percent in 2001, on track relative to the target of 3.7 percent for the year. Meanwhile, the country’s real Gross Domestic Product (GDP) growth rate was 3.4 percent, stronger than the 2001 target of 3.3 percent. The services and the agricultural sectors led the expansion in output growth. The services sector was supported by the growth in telecommunications, trade and private services while agriculture was buoyed up by favorable weather conditions and the Government’s intensified programs for the rehabilitation of irrigation facilities and more efficient distribution of high-yielding varieties of seeds. On the demand side, increased personal spending and investments took up the slack in exports following the decline in external demand. Higher spending on food, household operations, transportation/communication and miscellaneous expenditures drove up personal spending while more robust construction activity fueled the growth in investments.

In tandem with the better-than-expected growth of the economy, the number of employed persons increased by 6.2 percent during the period due mainly to the upturn in the services sector, particularly the wholesale and retail sub-sectors, along with the growth in agriculture. The increase in job creation brought down the unemployment rate to 11.1 percent in 2001 from 11.2 percent during the previous year.

Inflation at low end of 2001 target. The combination of prudent monetary policy and favorable supply-side factors helped temper inflationary pressures. The downtrend in the major prices of food items such as rice and corn and the drop in international oil prices in the middle part of the year brought the overall inflation to an average of 6.1 percent for the year, close to the low end of the 6.0-7.0 percent target set by the Government. The BSP’s monetary policy stance during the year was generally accommodative. The reductions in key policy rates were calibrated carefully both in terms of timing and amount, with the ultimate objective of maintaining price stability conducive to a sustainable economic growth. At the same time, the BSP ensured that adequate liquidity was provided to support economic activity. For 2001, the cash operations of the National Government (NG) posted a deficit of P147.0 billion, P12.8 billion or 9.6 percent higher than the P134.2 billion deficit recorded during the previous year. This developed as the growth in expenditures slightly outpaced the increase in revenues. Compared to the program, the deficit during the year was only higher by P2.0 billion relative to the programmed deficit of P145.0 billion. This favorable development has restored the Government’s credibility in promoting fiscal discipline.

The banking system remained broadly sound and stable. Episodes of exchange rate volatility, weak corporate prospects and heightened tensions in financial markets following the 11 September attacks strained the balance sheets of banks as demonstrated by the uptrend in their non-performing loans. However, amid the stressful economic environment, the banking system continued to draw strength from the sustained efforts of the Bangko Sentral to adopt key reforms and implement timely measures to address critical problems. The banking system’s strength was reflected in the continued growth of resources, comfortable capitalization levels and increased loan loss provisioning. In addition, banks managed to be profitable as indicated by the modest gains posted in returns on both equity and assets.

Current account surplus retained. The current account netted a surplus of US$4.5 billion in 2001, albeit lower by 46.8 percent than last year’s level. The marked drop in the current account surplus was due mainly to the weak external demand, which led to a contraction in exports and the decline in services and income receipts.

Gains in investments posted. Despite the challenging economic environment, direct investments posted a net inflow of US$2.0 billion, 44.9 percent higher than the US$1.4 billion net inflow recorded in 2000. The bulk of foreign investments—which came mostly from the U.S., Japan, France and Singapore—was channeled to the manufacturing, telecommunication and services sector as well as to banks and financial institutions. Meanwhile, portfolio investments posted a significant turnaround from a net outflow of US$113.0 million in 2000 to a net inflow of US$1.4 billion in 2001. Net placements by non-residents in equity securities and a reduction in residents’ investments abroad contributed to the reversal in the trend.

Lower Balance of Payments deficit. Due to the net inflows of portfolio and direct investments and reduced net outflows of other investments, the BOP deficit fell sharply from US$513.0 million in 2000 to US$192.0 million during the review period. The expansion in investment inflows significantly reduced the net outflows in the capital and financial account and cushioned the impact of the narrower current account surplus on the country’s external payments position.

Higher Gross International Reserves recorded. The BSP’s gross international reserves (GIR), including the reserve position in the International Monetary Fund (IMF), rose to US$15.7 billion as of end-December 2001 from US$15.0 billion in the previous year. The end-2001 level of reserves was equivalent to 5.0 months’ worth of imports of goods and payment of services and income. Using other reserve coverage measures, the level of reserves was 2.6 times the amount of the country’s short-term foreign liabilities based on original maturity or alternatively, 1.3 times the amount of the country’s short-term obligations based on residual maturity.

Relative peso stability toward year-end. Toward the last quarter of the year, the peso showed signs of stability compared to the volatility episodes observed during the early and middle part of the year. The peso averaged at P50.99/US$1 in 2001. This represented a 13.3 percent depreciation from the average peso-dollar rate recorded in 2000, which was P44.19/US$1.[1] The exchange rate experienced depreciation pressures during the year due to the volatility in regional currencies as well as concerns about the peace and order situation. The slowdown in the major industrialized economies and heightened uncertainty after the 11 September terrorist attacks in the U.S. also contributed to the peso’s volatility.

External debt remained manageable. As of end-September 2001, the country’s outstanding external debt stood at US$52.4 billion, slightly higher by 0.7 percent from the end-2000 level of US$52.1 billion. The maturity profile of outstanding debt remained favorable and essentially unchanged compared with the end-2000 level, with medium and long-term borrowing comprising 88.9 percent of the total.

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[1] Dollar rates or reciprocal of the peso-dollar rates were used to compute for the percent changes. For 2000, the peso-dollar exchange rate averaged P44.19/US$1.