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Annual Report 2003


The Philippine economy sustained its growth momentum in 2003 on the strength of vibrant domestic demand. Economic growth was achieved in an environment of low and stable inflation even as domestic and international factors posed risks to price stability.

There were downside risks to inflation in the first three months of 2003 due to uncertainties arising from the US-Iraq conflict. This led the monetary authorities to one, raise the liquidity reserve requirement against peso deposit liabilities of banks and two, encourage greater bank placements with the Bangko Sentral ng Pilipinas (BSP) by removing the tiering scheme on such placements. With the downside risks to inflation tapering off due to the quick resolution of the US-Iraq conflict and subdued demand and cost-side pressures, the tiering scheme on placements of banks was restored on 5 June 2003 but was subsequently lifted beginning 28 August 2003. Policy interest rates were reduced on 2 July 2003 and were maintained for the rest of the year to ensure adequate liquidity for economic growth. With accommodative monetary policy, higher lending in 2003 was noted despite some upticks in interest rates, particularly during the first and last quarters of the year.

The banking system remained resilient, as policy reforms continued to focus on strengthening the system. The ratio of non-performing loans to total loans was reduced. With the passage of the Special Purpose Vehicle Act (SPVA) and the approval of its implementing rules and regulations, asset quality of banks is expected to improve.

Public finance improved as the rise in total revenues outpaced the increase in expenditures.

In the external front, the balance of payments remained in surplus but significantly lower than year-ago level as the unfavorable global environment weighed down on exports and as the net outflow in capital and financial accounts widened. This notwithstanding, gross international reserves remained at a healthy level.

Looking ahead, the challenge is to intensify structural reforms and upgrade the economy’s growth potential. Reform efforts at further strengthening the banking system, reducing public sector deficit and debt, and consolidating the energy infrastructure program in the country represented some of the major concerns that require continued attention to accelerate economic growth in the years to come.

Domestic factors boost economic growth. Real Gross Domestic Product (GDP) in 2003 grew by 4.5 percent, right within the Government’s 4.2–5.2 percent target growth rate. Real Gross National Product (GNP) rose by a higher 5.5 percent, following the increase in inflows of net factor income from abroad notably remittances of overseas Filipino workers (OFWs). On the demand side, strong private consumption expenditures and investments underpinned growth as exports continued to be weighed down by an unfavorable global environment. On the supply side, the economy expanded with the robust performance of the services sector and the growth of agriculture, fishery and forestry. The industry sector likewise remained strong owing to the favorable performance of the manufacturing, mining-quarrying, and electricity-gas-water sub-sectors.

Inflation remains low. The annual inflation in 2003 averaged 3.1 percent, or lower than the Government’s target of 4.5–5.5 percent. Despite robust consumption activity, demand-side pressures remained subdued due to the presence of excess capacity in the economy. Cost-push inflationary risks likewise eased with the abatement of the El Niño phenomenon and the downtrend in international oil prices from their peak levels in March 2003.

Inflation in food, beverage and tobacco remained at 2.0 percent in 2003. Meanwhile, non-food inflation was lower at 4.2 percent from 4.3 percent for the same period. There were significant increases, however, in the indices of fuel, light, and water and services due mainly to the series of domestic price increases of petroleum products, Meralco power rates and Manila Water Company’s tariff rates for Manila’s east zone.

Monetary policy stance remains cautious yet supportive of growth. Monetary authorities were faced with some downside risks to the attainment of the inflation target such as the impact of the El Niño on food prices, the possibility of significant adjustments in utility charges, ensuing rise in oil prices as a result of the US-Iraq war and the increased volatility in the foreign exchange market triggered by various factors. With the presence of some downside risks to inflation, monetary policy was essentially cautious but at the same time supportive of growth as the cost-push risks dissipated due to subdued demand conditions. Monetary policy was eased in the second semester with policy rates reduced to reach 6.75 percent for the overnight RRP and 9.0 percent for the overnight RP on 2 July 2003. Policy interest rates were maintained in the remaining months of the year.

Interest rates exhibit mixed trends. The average monthly interest rates on short-term Treasury bills reflected a rise from January to April 2003, followed by a declining trend in May to August, and then picked up slightly since September to November of the year. The auction season closed with the issuance of retail treasury bonds (RTBs) on 27 November 2003, raising demand for liquidity and exerted some pressure on market interest rates. Market concerns over the Middle East conflict, expectations of a higher inflation rate due to the rising price of oil in the world market, and the persistent fiscal deficit pushed interest rates higher. Against this background, the BSP policy rate reduction in July pulled down market interest rates. Nonetheless, the trend was again reversed in the last quarter owing to concerns over the domestic political front and fiscal uncertainty.

Following the general trend in the BSP policy interest rates and in the short-term Treasury bill rates, the interest rates on bank loans averaged to a slightly wider range of 8.918–10.754 percent in 2003 from 8.688–10.425 percent in 2002.

The banking system continues to be resilient. The country’s domestic financial system continued to hold its ground in 2003 with key financial indicators recording improvements despite local and international disturbances. Modest gains were posted in terms of the system’s assets, deposit base, lending activity, capitalization and profitability. Aggregate resources of the banking system rose in 2003. Lending by commercial banks showed modest improvement in 2003 as economic activity picked up amid the low interest rate environment.

Money market and stock market activities remain sluggish. Money market activity slowed down in 2003 with the decline in the volume of transactions in interbank loans. Meanwhile, trading in the Philippine stock exchange remained volatile throughout most of 2003. Domestic and external developments influenced significantly the activities in both the money and stock markets during the year.

National Government yields lower shortfall. A deficit of P199.9 billion, representing 4.6 percent of current GDP, was incurred by the NG in 2003. This level of deficit was P10.9 billion lower than the deficit in 2002, and P2.1 billion below the target for 2003. The rise in total revenues outpaced that of expenditures. The Bureau of Internal Revenue (BIR) and the Bureau of Customs (BoC) exceeded their goals for the year due to administrative reforms, technological enhancements and tax audit schemes. The deficit was financed through borrowings from both external and domestic sources.

The balance of payments continues to be in surplus. The balance of payments yielded a surplus amounting to US$111 million due to strong current account. This surplus, however, was lower than the year-ago level of US$663 million. The current account transactions, which posted a surplus of US$3.3 billion in 2003, came mainly from remittances of OFWs. [1] A major source of foreign exchange earnings, OFW remittances rose by 6.3 percent to US$7.6 billion relative to US$7.2 billion last year. Inflows from this source tempered the higher deficit in the trade-in-goods and services account due to the sluggish performance of exports and decline in net travel receipts. The net outflow in the capital and financial account widened from US$1.6 billion a year ago to US$5.3 billion in 2003. This arose from the significant decline in both direct and portfolio investments by non-residents combined with higher resident portfolio investments abroad due to weak investor confidence in the country.

The country’s gross international reserves (GIR) remain adequate. The BSP’s GIR, including the reserve position in the IMF, reached US$16.87 billion as of end-December 2003, higher by 4.3 percent than the end-2002 level. At this level, the GIR could cover 4.7 months’ worth of imports of goods and payment of services and income, or 2.9 times the amount of the country’s short-term foreign liabilities based on original maturity or 1.5 times based on all loans falling due in the next 12 months.

Foreign exchange market pressure leads to weaker peso. During the year, the peso depreciated against the US dollar by 4.8 percent to average P54.20/US$1 in 2003. The weakening of the peso was traced to war jitters in the Middle East during the first quarter, lingering concerns over the budget deficit, demand for US dollars to service end-year obligations, political and security concerns, and investor reaction over Moody’s Investors’ Service decision to place the country’s currency and debt ratings under review. [2] Notwithstanding these developments, the standard deviation of the daily exchange rates declined to P0.98 in 2003 from P1.13 in 2002.

In terms of its real effective exchange rate (REER) index relative to the currencies of the country’s major trading partners, the peso posted a real depreciation of 10.21 percent during the year as a result of the nominal weakening of the peso, reflecting gains in external competitiveness.

External debt remains manageable. The country’s outstanding external debt rose to US$57.4 billion as of end-2003, compared to US$53.6 billion as of end-2002. Accounting for the higher foreign exchange liabilities were foreign exchange revaluation losses due to the weakening of the US dollar against major currencies and net availments of foreign loans and bonds issuances. Foreign borrowings were used for budgetary support, refinancing of maturing obligations, and funding of development projects for power and energy, communication, transportation and other infrastructure projects.


[1] Refers to Filipino contract workers who work overseas for a fixed period of time but continue to maintain the Philippines as its center of economic interests and exclude Filipinos who have migrated and have taken permanent residency abroad.

[2] On 27 January 2004, Moody’s Investors Service downgraded the country’s long-term foreign and local currency debt