Annual Report 2000
Overview
After emerging relatively unscathed from the Asian financial crisis, the Philippines was tested on the political and economic fronts in the year 2000. Domestic concerns included the hostilities in Mindanao and questions raised on public governance. These were compounded by external disturbances, as world oil prices shot up to decade-high levels, and as the United States Federal Reserve Board tightened monetary policy beginning February. The latter development contributed to the narrowing of interest rate differentials and induced a weakening of the peso and other regional currencies.
Nonetheless, the economy managed to pull off a respectable performance. Even as the foregoing factors contributed to a slowdown in growth in the last quarter of 2000, the economy posted a full-year expansion of 4.2 percent; the lowest inflation rate since 1987 was experienced—despite oil price increases and a weaker currency; a current account surplus of US$9.3 billion was achieved; and the soundness of the financial system was maintained. Against this backdrop, net foreign direct investments rose relative to the 1999 level, reflecting the market’s positive overall assessment of the long-term growth potentials of the Philippine economy.
While the underlying strength of the economy helped the country to pull through the challenges of the year, re-launching of the economy into a high growth path necessitates the continued and enhanced commitment of the government to structural reform. As in the previous year, the immediate challenge for the Philippine economy lies in its ability to strengthen its fiscal position by increasing revenues and streamlining expenditures. Reduction of the budget deficit will free additional funds to finance private investment, and thus strengthen the economy’s prospects of maintaining sustainable growth.
Output Growth Was Broad-Based and Robust. Real Gross National Product (GNP) rose by 4.2 percent in 2000, up from 3.7 percent in 1999. Industry grew by 3.6 percent in 2000, considerably higher than last year’s growth of 0.9 percent. In particular, manufacturing growth accelerated to 5.6 percent from 1.6 percent in 1999. Growth was broad-based, and reflected strong performance in services and industry as well as continued, though slower, growth in agriculture. On the demand side, strong exports and personal consumption were the main engines of growth. Investment grew by less than one percent; nevertheless, this represented a significant break from the contraction experienced during the two previous years.
Job creation was, however, not proportionate to the economy’s sound growth rate. The rate of unemployment increased from an average of 9.8 percent in 1999 to 11.2 percent in 2000. This development signals to the government the need to promote labor-intensive industries and efficiency in resource allocation as well as to maintain the commitment to, and accelerate the implementation of, structural reforms in the economy.
Prices Were Broadly Stable. Inflation for the whole year averaged 4.4 percent, well below the government’s target of 5-6 percent. The inflation rate for 2000 also compared favorably with the 6.7 percent recorded in 1999. Moderate inflation was achieved notwithstanding the pick-up in economic activity and despite inflationary pressures arising from wage adjustments and increases in oil prices and transport fares. Favorable weather conditions, which supported the recovery of agriculture and kept food prices generally stable, helped to moderate movements in the general price level. However, the pass-through impact of largely supply-side factors contributed to a rising rate of inflation beginning about the second half of 2000.
NG Deficit Exceeded Programmed Level. For the year 2000, the cash operations of the National Government (NG) registered a P136.1 billion deficit, which was 21.8 percent higher than the previous year’s deficit of P111.7 billion. The annual deficit exceeded the programmed level by P73.6 billion, or more than double the program, as revenues fell short of the target by P61.2 billion, while expenditures overshot the target by P12.4 billion.
Prudent Monetary Stance Was Implemented. In support of its primary mandate, the Bangko Sentral ng Pilipinas (BSP) implemented a monetary policy framework that was directed towards containing inflationary pressures, while ensuring that the level of liquidity in the economy was consistent with the requirements for growth. For most of the year, monetary aggregates were kept below program ceilings.
The BSP increased its key policy interest rates in May, September, and October 2000, by a total of 625 basis points, to address the narrowing interest rate differential between peso- and dollar-denominated assets, as well as the inflationary pressures arising from the pass-through effects of the exchange rate depreciation and adjustments in domestic oil prices, transport fares and wage rates. The BSP also raised the liquidity reserve requirements against peso demand, savings and time deposits and deposit substitute liabilities of universal banks, commercial banks and non-banks with quasi-banking functions.
Monetary authorities took care to ensure that the increases in policy rates and the liquidity reserve requirement in 2000 were calibrated carefully to address underlying price pressures without unduly restricting the pace of economic recovery.
With the expectation of an improved inflation picture in the second half of 2001 and relative stability in the foreign exchange market, the BSP reduced policy interest rates by as much as 150 basis points in December 2000, in order to help sustain the momentum of economic activity. Further decreases in BSP policy rates were forthcoming, with the extent of the cuts calibrated depending on the developments in the financial and fiscal sectors and the risk coming from possible inflationary pressures.
The Banking System Displayed Continued Resiliency. Strengthened prudential measures and the policy of encouraging bank consolidations likewise enabled the banking system to hold its ground in spite of the difficult environment. Thus, the total resources of the banking sector continued to climb, capitalization was maintained at levels more than adequate relative to international standards and to the statutory floor, and the non-performing loan ratio dropped in December 2000, after peaking during the previous month.
Current Account Registered a Surplus. The current account surplus climbed to US$9.3 billion due mainly to the strong performance of goods exports, which grew by 9.0 percent in 2000. Machinery and transport equipment, electronics and garments continued to be the top three export gainers. Meanwhile, imports of goods were higher by 3.9 percent due to increased imports of capital goods as well as mineral fuels and lubricants.
Foreign Investment Position Remained Strong. Net foreign direct investments increased to US$1.6 billion in 2000. Direct investment inflows were channeled to the telecommunication, banking, electronics and automotive industries as well as oil exploration, fuel and chemical manufacturing, and construction activities. Meanwhile, portfolio investments during the period posted a net inflow of US$45 million due mainly to non-residents’ purchases of government bonds issued in March and in August as well as the yen-denominated private note placements in November.
Net Outflow in the Financial Account Weakened the Overall Balance of Payments Position. Notwithstanding the net inflows of direct and portfolio investments during the review period, the financial account recorded a deficit of US$6.8 billion, due mainly to a net outflow of short-term trade credits. Thus, despite the sustained favorable current account balance, the overall BOP position posted a deficit of US$512 million.
The Level of Gross International Reserves Remained Comfortable. Despite the uncertainties in the economy during the year, the BSP’s gross international reserves (GIR), including the reserve position in the IMF, reached US$15.02 billion as of end-December. This was US$82 million lower than the end-December 1999 level of US$15.1 billion.[1] The end-2000 level of reserves was equivalent to 4.5 months’ worth of imports of goods, services and income and more than twice the amount of short-term debt as of end-December 2000. Meanwhile, the level of net international reserves amounted to US$11.3 billion during the year 2000, or 3.4 percent lower than the previous year’s US$11.8 billion.
The Peso Weakened. Heightened pressures on the peso for the greater part of 2000 resulted in a weakening of the currency, which averaged P44.19/US$1 for the year. This represented a depreciation of 11.5 percent from the 1999 average.[2] The peso reached a record average low of P51.68/US$1 on 31 October 2000.
The weakness of the Philippine peso in 2000 may be attributed to a host of factors, including the rise in US interest rates, which reduced the interest rate differential between domestic and international interest rates; concerns over the rising fiscal deficit; and some domestic, non-economic factors, which included the tension in Mindanao, some issues pertaining to public governance, and the ensuing political uncertainties surrounding the impeachment trial.
External Debt Declined. The total external debt of the country as of end-2000 declined slightly to US$52.1 billion from US$52.2 billion as of end-1999. The US$150 million decrease in external obligations was due largely to the rise in residents’ holdings of Philippine debt papers denominated in foreign currency, gains from foreign exchange revaluation, and the decline in commercial banks’ foreign liabilities. However, the debt-reducing impact of these factors was offset partially by net availments of medium- and long-term (MLT) loans by the public sector and by private corporations. The share of MLT loans remained substantial at 88.6 percent of total external debt as of end-2000, even as this was slightly lower than the 89.0 percent share as of end-1999. Meanwhile, the ratio of the debt service burden to exports of goods, services and income improved from 13.3 percent in 1999 to 12.3 percent in 2000.
--------------------------------------------------------------------------------
[1] The new system for computing the GIR adopted in January 2000 resulted in the upward adjustment of the end-December 1999 GIR level to US$15.107 billion due to the revised treatment of monetary gold under the swap arrangement. The adjusted figure allows comparability with 2000 data.
[2] Dollar rates or reciprocals of the peso-dollar rates were used to compute for the annual percent changes.
