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THE ECONOMIC SITUATION IN THE PHILIPPINES:

PHILIPPINE ECONOMY

YOCHANAN YAKOV A. GERVACIO

DE LA SALLE UNIVERSITY-DASMARI ÑAS

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BUILD, BUILD, BUILD

Under Philippine President Rodrigo Duterte, the Southeast Asian country is experiencing an

infrastructure boom unseen since the time of strongman Ferdinand Marcos.

Over the next decade, the government is set to embark on an ambitious $180 billion

infrastructure spending bonanza, set to transform the Philippines’ economy.

Philippine Department of Finance (DOF) chief economist Karl Chua said in an interview that the

government is looking at 75 flagship projects, which include six airports, nine railways, three bus

rapid transits, 32 roads and bridges, and four seaports that will help bring down the costs of

production, improve rural incomes, encourage countryside investments, make the movement of

goods and people more efficient, and create more jobs.

The government is also aiming to construct four energy facilities that will ensure stable power

supply at lower prices; ten water resource projects as well as irrigation systems that will raise

agricultural output; five flood control facilities that will help protect vulnerable communities as

well as boost their resilience against the impact of climate change; and three redevelopment

programs that will deliver sustainable solutions to best meet the needs of urban population.

If successful, Duterte could once and for all extinguish the Southeast Asian country’s reputation

as the “sick man of Asia”–and usher in an unprecedented era of inclusive economic

development.

Striking while the iron is hot

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To be fair, recent years have seen consistently high economic growth in the country. Since 2011,

the Philippines has broken out of its historically mediocre growth pattern to feature among

fastest growing nations in the region.

The World Bank expects the Philippine Gross Domestic Product (GDP) to grow by 6.7% in 2018

and 2019, the highest in Southeast Asia. The Duterte administration, however, is hoping to nudge

growth to the 7-8% territory.

But the country’s growth has been shallow and far from comprehensive, leaving high levels of

unemployment, poverty and hunger relatively untouched. And this is where the Dutertenomics’

“build, build, build” agenda comes into the picture, hoping to (literally) bridge the gap in

economic policies of past administrations. Infrastructure is clearly the country’s Achilles heel.

Poor infrastructure holding Pinoys back

On one hand, infrastructure has been a major source of concern for foreign investors, who have

been discouraged by the country’s weak infrastructure and heavy utility costs. Those investments

are crucial to create well-paying jobs for the millions of poor and unemployed Filipinos.

According to an authoritative study by the Japan International Cooperation Agency (JICA),

traffic congestion in Manila, caused by poor infrastructure, carried a daily price tag of P2.4

billion ($45 million) in 2012--a figure that is expected to almost triple by 2030.

According to the 2017 World Economic Forum’s competitiveness report, the Philippines ranked

97th in the world in terms of infrastructure. In a separate report by the United Nations, the

Philippines ranked 5th in Southeast Asia in terms of access to physical infrastructure.

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Duterte’s two immediate predecessors, Gloria Macapagal Arroyo and Benigno Aquino III,

oversaw a decade of sustained macroeconomic reform, anchored by fiscal tightening, moderate

inflation, expanding trade surplus and steady economic growth.

Yet, the cost of their disciplinary economic policies was lack of sufficient investment in basic

infrastructure. Under the Aquino administration, in particular, under-spending was a major

concern.

Both the Arroyo and Aquino administrations were also overly dependent on private-public-

partnership (PPP) schemes with local conglomerates, which lacked proper competencies.

Duterte, however, can now build on his predecessors’ legacy by diverting the Philippines’

expanding fiscal pie to address infrastructure woes. Leveraging his skyrocketing approval ratings

(80%), combined with a new foreign policy direction as well as a super-majority coalition in the

legislature, his administration is marshaling necessary funds to finance and sustain its ambitious

economic plan.

Who's footing the bill?

Unlike his predecessors, he is ditching the PPP modality in favor of larger reliance on

government revenues as well as Official Development Assistance (ODA), particularly from

Japan and China, as his main sources of infrastructure funding.

To support the new modality, Duterte has normalized relations with China, which has offered

$7.3 billion in infrastructure investments, and Japan, which has been a leading investor in the

Philippines for decades.

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Duterte also passed a new tax reform package, which is expected to raise sufficient revenues to

fund infrastructure spending. According to Mr. Chua, up to 70% of newly-raised revenues

(estimated to raise P786 billion over the next 5 years) are earmarked for supporting the “build,

build, build” campaign.

Communications Secretary Martin Andanar said that the government hopes the tax reform will

“not only solve our present infrastructure gaps, but also support the country’s future growth.”

Nonetheless, Duterte’s ambitious infrastructure vision could be hobbled by chronic challenges.

Experts have expressed doubts over absorption capacity of government agencies to undertake

projects competently and on time; risk of large-scale corruption and bidding anomalies affecting

foreign, especially Chinese-led, projects; lack of construction workers and skilled labor; as well

as growing pressure on Philippine peso and international reserves due to need for importing

intermediate goods and technology for infrastructure boom.

Supporters, however, claim that even if the government fails to achieve half of its ambitious

goals, Duterte could still go down in history as a harbinger of a golden age of infrastructure

buildup in the country. Infrastructure could very well be one of the Filipino president’s defining

legacies.

HIGH INFLATION

In hundreds of hours of speeches during his nearly two years in office, Philippine President

Rodrigo Duterte has rarely talked about the economy, something he says is best left to the

“clever guys” in his cabinet.So he raised a few eyebrows when he told central bank officials last
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month after the government announced an inflation spike to “remain vigilant in ensuring price

and financial stability”.

Duterte was speaking just days after the government said inflation rose for a fourth successive

month in April to hit a five-year high of 4.5 percent, affecting growth in what has for more than

six years been one of Asia’s fastest expanding economies.

What may have been of concern to Duterte was that many people have blamed rising prices on a

new tax bill his government has implemented to raise funds for a massive $180 billion

infrastructure building plan, a rare disapproval of the administration.“This year is all about the

poor’s rising cost of living, perceived to be triggered by the TRAIN law,” said Victor Manhit,

president of private think tank Stratbase ADR Institute.

TRAIN is the Tax Reform for Acceleration and Inclusion law, which took effect in January and

saw excise taxes raised on fuels, levies on sweetened beverages and lowered some personal

income taxes, among other measures.

A survey by Social Weather Stations published last month showed only six percent of Filipinos

approved of the government’s handling of inflation, a massive 18-point slump from the previous

quarter, and its first single-digit rating in any category.

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While Duterte has been condemned abroad for his indifference to thousands of deaths in his

brutal war on drugs, he has so far been enjoying consistently high ratings in opinion polls for

fighting crime, illegal drugs, terrorism and graft.

But a survey published by pollster Pulse Asia in April showed the most urgent issues for

Filipinos were wages, inflation and poverty.“Inflation has never been a direct factor in political

popularity. But if public perception is that the government is not doing anything about it, then it

becomes a problem, it becomes political,” said Ramon Casiple, a well-known political analyst.

ANXIETY BUT NO ANGER

There have been no signs of public anger about inflation, but some people are getting anxious.

“I hope Duterte can fix this. Inflation has eaten into our profit,” said Orlando Cristobal, 56, who

runs a food delivery business and had just bought a few kilograms of rice and fish at one of

Manila’s biggest markets.

His wife, Elizabeth, worries they’ll lose customers if they pass on their costs.
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“We used to earn 500 pesos ($9.50) a day,” she said. “Now we’d be lucky if we’d be left with

200.”

Inflation has exceeded the government’s 2-4 percent target range, and its impacts could be far-

reaching. First quarter growth fell short of the 7-8 percent goal after inflation weighed on

consumer spending, which makes up about seven-tenths of the economy.

The central bank raised interest rates for the first time in more than three years on May 10 to try

to head off climbs in inflation and oil prices.

Economic planning minister, Ernesto Pernia, said Duterte was aware that prices mattered most to

the public.

“He is worried”, he told Reuters. “He was concerned about inflation, because it affects the poor.”

Duterte’s ambitious economic agenda is geared towards the poor and at the heart of it is the

massive plan to overhaul roads, ports, railways and airports - which would create jobs, attract

more investment and boost competitiveness and domestic spending.

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The government calls it “Dutertenomics”, and the TRAIN law was intended to at least partially

fund the initiative.

Now, the big challenge for Duterte’s government is ensuring that a plan geared towards helping

his political base doesn’t end up alienating it.

“This is the greatest challenge to the president specifically since Dutertenomics is built around

the promise of inclusive growth,” said Manhit, from the Stratbase ADR Institute.

Some opposition lawmakers have started to call for the law to be repealed, or adjusted if inflation

gets too high.

Duterte’s economic managers have taken turns to defend TRAIN, insisting that while it may

have contributed to inflation, a jump in world oil prices, a weak peso currency and a shortage in

state-subsidised rice were the main culprits.

In a rare comment about TRAIN, Duterte on Wednesday accepted that it was driving inflation,

and that he might have to pursue alternative means of financing, and would settle for making a

“modest improvement on what we have now”.

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“I need money also to run the country, if you do not give it, fine,” he said in a speech.

“But with the limited resources of our country, there are many who are willing to help.”

PESO DEVALUATION

The Philippine peso depreciated to P52.12 against the United States dollar on Wednesday,

February 14, its weakest performance in over 11 years, as a surge in imports led to record trade

deficit.

The local currency shed 14 centavos on Wednesday, closing at P52.12 to $1. This was from the

previous day's P51.980 to $1.

The Philippine peso had opened at P52.03 against the greenback on Wednesday, and hit an

intraday high of P52.12.

It was on July 21, 2006 when the local currency hit the P52.16 to $1 territory. (READ: Peso

depreciation: Should we be worried?)

"Strong economic growth in the Philippines is fueling a surge in imports, resulting in record

trade deficits," Khoon Goh, head of Asia research at ANZ Banking Group (Singapore), said on

his Twitter account.

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"Further peso weakness [is] likely, as the current account balance, which was 4% of GDP (gross

domestic product) in surplus a couple of years back, slips further into deficit," he added.

'Not a weak economy'

The Philippines posted its largest trade deficit on record for a single month in December 2017

when it reached $4.017 billion.

This brought the gap to another record high of $29.8 billion in full-year 2017, from the $26.7

billion recorded in 2016.

The balance of trade impacts the currency exchange rates through supply and demand.

For instance, if the Philippines export more than it imports, there is a high demand for its goods

and for its currency.

But when it imports more than it exports, there is a relatively lower demand for its goods and

hence for its local unit.

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For Budget Secretary Benjamin Diokno, the Philippine peso's further depreciation does not

indicate a weak economy.

"Every currency is weakening vis-à-vis the dollar. In fact, relative to other countries, we are

okay. It is wrong to say that a strong peso means a strong economy. That's false," Diokno said in

a press conference.

"We need a competitive peso, not strong peso," Diokno told reporters.

RICE AND GALUNGGONG IMPORTATION

A consumer group claimed the country’s continuing dependence on rice importation as well as

the proposed rice tariff would only place the Filipino people’s food security in greater danger.

Bantay Bigas said imported rice will definitely displace farmers who would be plagued by

bankruptcy and huge debts and further hamper the much desired rice self-sufficiency and food

security.

At the same time, Bantay Bigas spokesperson Cathy Estavillo said prices of commercial rice

continue to increase, rendering it unaffordable for poor consumers.

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According to the Philippine Statistics Authority, rice prices increased 24 times from January to

June 2018 despite the arrival last month of rice imported from Vietnam.

“Given the present situation, there will only be little left of the meager household income earned

by a majority of Filipino families. There is also the negative effect of TRAIN (Tax Reform for

Acceleration and Inclusion) law starting January that resulted in increasing prices of basic

commodities thereby contributing to the worsening condition of Filipinos,” Estavillo

added.Bantay Bigas and the National Federation of Peasant Women (Amihan) also denounced

National Food Authority’s plan to import additional 500,000 metric tons on top of the 500,000

MT expected to arrive until August.

Amihan national chairperson Zenaida Soriano said NFA is acting like a victim standing for the

poor and for food security by pushing for rice importation when in fact the agency failed to

uphold its mandate of purchasing local palay.

The group said the government’s failure to address the current rice crisis that gravely hit the

Filipino people, especially those living below the poverty line, is a major contributing factor to

Duterte’s decreased satisfaction rating.

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Soriano said that the persistence of landlessness and land grabbing through land-use and crop

conversion coupled with the limited or absence of appropriate government support services and

subsidies are the primary reasons for the chronic crisis faced by the local rice industry.

The group said that in order to stop the government from importing rice, the NFA should have

sufficient budget to buy locally produced palay.

The government should support farmers’ agricultural production through irrigation services,

inputs, machinery and post-harvest services, Estavillo added.

The government's plan to import galunggong or round scad is "insulting" given that the country

has vast aquatic resources, a science advocate said Wednesday.

Agriculture Secretary Emmanuel Piñol has approved the importation of up to 17 metric tons of

galunggong between September and December to stabilize its price ahead of the fishing season's

closing.Some countries like China, however, allegedly use formalin to preserve fish harvests,

claimed fisherfolk group Pambansang Lakas ng Kilusang Mamamalakaya ng Pilipinas

(Pamalakaya)."Nakakainsulto naman po that we have wide inland bodies of water and a long

coastline tapos nag-iimport pa tayo na puwedeng mag-jeopardize ng ating mga mamamayan,"

said Raymund Fantonalgo of the group Advocates of Science & Technology for the People.
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(It's insulting that we have wide inland bodies of water and a long coastline, yet we have to

import fish products that may jeopardize our citizens.)

The government, he said, should maximize fish production by ramping up its defense of aquatic

territories like the West Philippine Sea, and investing in gear for local fishermen and aquaculture

or inland production.

The Philippines has long imported fish especially during closed fishing season, Agriculture

Secretary Emmanuel Piñol said Tuesday, responding to critics.

In 2017 alone, the country imported 130,000 metric tons of fish and "nobody complained," Piñol

told ANC's Headstart. This year, another 3 billion fingerlings will be bought from Indonesia, he

said.Piñol also allayed worries that galunggong currently available were laced with formalin or

embalming fluid. Traces of formaldehyde in fish, he said, did not necessarily mean that it had

formalin.

FOREIGN DEBT

The country’s external debt declined in the first quarter as more companies prepay their foreign

exchange obligations, according to the Bangko Sentral ng Pilipinas.

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BSP Governor Nestor Espenilla Jr. said the outstanding external debt stood at $73.2 billion as of

end-March, about $609 million or 0.8 percent lower than the previous year’s $73.8 billion.

The latest figure was also slightly higher compared to last year’s $73.1 billion.

Espenilla attributed the decline to net repayments amounting to $3.4 billion, primarily on the

private sector’s short-term non-trade accounts.

However, he said the downward impact on the debt stock was partly offset by previous periods’

adjustments worth $1.5 billion due to late reporting, the upward revaluation adjustments reaching

$713 million, and the transfer of Philippine debt papers from residents to non-residents

amounting to $618 million.

The BSP chief also said the slight increase in the debt stock during the first quarter was brought

about by the positive foreign exchange revaluation adjustments amounting to $621 million.

The adjustments were due largely from the weakening of the dollar against the yen that pushed

the debt stock higher by $655 million, but the peso depreciation decreased the debt level by $144

million as well as prior periods’ adjustments amounting to $685 million due to late reporting.

Espenilla said the upward pressure on the debt stock was partially mitigated by net principal

repayments worth $735 million, resulting mainly from the payments at maturity and

prepayments by the private sector as well as the transfer of holdings of Philippine debt papers

issued offshore amounting to $472 million by non-residents to residents.

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External debt refers to all types of borrowings by Philippine residents from non-residents,

following the residency criterion for international statistics.

The dollar-denominated multi-currency loans from the World Bank and the Asian Development

Bank represented 14.5 percent of total, while the 10.5 percent balance pertained to 17 other

currencies, including the peso with 5.9 percent, the International Monetary Fund with 2.1

percent, and the euro with 1.6 percent.

Espenilla said public sector debt reached $39.2 billion or 53.6 percent of the total debt stock in

March, higher than the end-2017 level of $37.5 billion due to the $2 billion dollar global bonds

issued by the national government in February followed by the $233 million panda bonds issued

in March.

On the other hand, he added private sector debt accounted for the remaining 46.4 percent or $34

billion.

Loans from official sources such as multilateral and bilateral creditors had the largest share with

33.6 percent, followed by foreign holders of bonds and notes with 30.2 percent, and obligations

to foreign banks and other financial institutions with 28.7 percent. The rest or 7.5 percent were

owed to other creditor types, mainly suppliers or exporters.

The BSP chief said the country’s key external debt indicators continued to improve in the first

quarter as the gross international reserves (GIR) stood at $80.5 billion as of end-March,

representing 6.3 times cover for short-term debt under the original maturity concept.
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THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

The circular flow of economic activity is a model showing the basic economic relationships

within a market economy. It illustrates the balance between injections and leakages in our

economy. Half of the model includes injections, and half of the model includes leakages. The

circular flow model shows where money goes and what it's exchanged for. The model includes

households, businesses and governments. We also have the banking system that facilitates the

exchange of money and, as we'll see in a minute, helps to productively turn savings into

investment in order to grow the economy. In the circular flow of the economy, money is used to

purchase goods and services. Goods and services flow through the economy in one direction

while money flows in the opposite direction.

The circular flow model shows the balance of economic injections and leakages

Circular Flow Model

The factors of production include land, labor, capital and entrepreneurship. The prices that

correspond to these factors of production are rent, wages and profit. People in households buy

goods and services from businesses in an attempt to satisfy their unlimited needs and wants.
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Households also sell their labor, land, and capital in exchange for income that they use to buy

goods and services that firms produce. Businesses sell goods and services to households, earning

revenue and generating profits. Businesses also pay wages, interest and profits to households in

return for the use of their factors of production. Governments levy taxes on households and

businesses in order to provide certain benefits to everyone.

THE INFLOWS AND THE OUTFLOWS

A Statement of Cash Flows (or Cash Flow Statement) shows the movement in the Cash account

of a company.

It presents cash inflows (receipts) and outflows (payments) in the three activities of business:

operating, investing, and financing.

Accountants follow the accrual basis in measuring income and expenses.

However, some users are particularly interested in the cash transactions of the company; hence

the need to present a Statement of Cash Flows.

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This lesson takes a look at the Statement of Cash Flows and provides some important points in

understanding it.

THE LAW OF SUPPLY AND DEMAND

The law of supply and demand is a theory that explains the interaction between the supply of a

resource and the demand for that resource. The theory defines the effect that the availability of a

particular product and the desire (or demand) for that product has on its price. Generally, low

supply and high demand increase price. In contrast, the greater the supply and the lower the

demand, the price tends to fall.

THE FOUR FACTORS OF PRODUCTION AND TO THE PHILIPPINE ECONOMY AS

A WHOLE

Identifying Factors of Production

You may have at some point in your life been part of or seen local neighborhood children

running a lemonade stand. Running a lemonade stand is probably the simplest example that

showcases one of the main goals of our economic system: to make a profit. In order to make a

profit, a person usually needs certain things, or certain economic inputs. The economic inputs

used to make a profit are called factors of production. According to traditional economic theory,

there are four main factors of production: land, labor, capital, and entrepreneurship.
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Land

In its simplest form, land is the physical place where economic activity takes place. In our

lemonade stand example, it could be the patch of lawn in front of your house. However, land also

includes all the natural resources found on it.

Resources can include timber, water, oil, livestock, and so forth. So if you used real lemons from

a tree in your yard to make that lemonade, you used part of the land. Land plays an important

part in production because land itself and the resources on it are usually limited. Political

regulations prevent a person from just going and claiming something for themselves, or there

may not be enough for everyone to have. Also, many of the natural resources are nonrenewable,

meaning that their amount is fixed, and they can't be used indefinitely. Thus, producers must

carefully manage land and its resources.

Labor

It seems obvious, but things can't be produced unless someone makes them. Your lemonade

won't make itself, and it won't sell itself if you aren't there to do it. Therefore, another important

factor of production is labor. Labor represents all of the people that are available to transform

resources into goods or services that can be purchased. This factor is somewhat flexible since

different people can be allocated to produce different things. Nobody has to produce everything

themselves. That would be impractical. It's also important that a labor force is well educated and

well trained to ensure that they can produce goods at peak efficiency and quality.
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Capital

Perhaps to get your lemonade stand up and running, you also needed money to make signs to

advertise your delicious drink. You may also have used a small table to set up your pitcher and

cups. Both of these things - money and equipment - are considered capital. More specifically,

capital can be the money that companies use to buy resources, as well as the physical assets

companies use when producing goods or services, such as factories and machinery.

Capital is an important factor of production because it's what allows labor and land to be

purchased. Steady streams of capital are often required in order to keep a business going.
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REFERENCES

RICE AND GALUNGGONG IMPORTATION

https://www.philstar.com/headlines/2018/07/22/1835695/rice-import-dependence-compromising-
philippine-food-security

https://news.abs-cbn.com/news/08/29/18/galunggong-importation-insulting-says-expert

HIGH INFLATION

https://www.reuters.com/article/us-philippines-economy-inflation-duterte/inflation-in-philippines-a-
faultline-for-dutertes-build-build-build-ambition-idUSKCN1IX3AH?il=0

BUILD, BUILD, BUILD

https://www.forbes.com/sites/outofasia/2018/02/28/dutertes-ambitious-build-build-build-project-to-
transform-the-philippines-could-become-his-legacy/#4e70a5731a7f

PESO DEVALUATION

https://www.rappler.com/business/196059-philippine-peso-weakest-p52-us-dollar

FOREIGN DEBT

https://www.philstar.com/business/2018/06/16/1824919/foreign-debt-eases-732-billion-q1-2018

THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

https://www.accountingverse.com/accounting-basics/cash-flow-statement.html

THE INFLOWS AND THE OUTFLOWS

https://www.accountingverse.com/accounting-basics/cash-flow-statement.html

THE LAW OF SUPPLY AND DEMAND

https://www.investopedia.com/terms/l/law-of-supply-demand.asp

THE FOUR FACTORS OF PRODUCTION

https://study.com/academy/lesson/four-factors-of-production-land-labor-capital-
entrepreneurship.html