Philippines Economic Update December 2022 PDF

PHILIPPINES ECONOMIC UPDATE Bracing for Headwinds, Advancing Food Security PHILIPPINES ECONOMIC UPDATE Bracing for Headwinds, Advancing Food Security Ralph van Doorn Senior Economist World Bank Philippines Download report at: www.worldbank.org/peu  K...

PHILIPPINES ECONOMIC UPDATE Bracing for Headwinds, Advancing Food Security PHILIPPINES ECONOMIC UPDATE Bracing for Headwinds, Advancing Food Security Ralph van Doorn Senior Economist World Bank Philippines Download report at: www.worldbank.org/peu  Key Messages The Philippine economy has remained resilient despite a challenging global 1 environment. The deteriorating global environment is spilling into the domestic economy 2 and tempering the country’s growth prospects in 2023. Addressing the immediate challenge of elevated inflation, staying the course 3 on fiscal consolidation, sustaining investments in health and education, and reversing the low agriculture productivity will be key to safeguard growth and achieve long term development goals.  1 Recent Economic and 1 Policy Developments The Philippine economy has remained resilient despite a challenging global environment.  The post-pandemic recovery is underway, driven by strong domestic demand. Supply Side: Contribution to GDP growth Demand Side: Contribution to GDP growth 16 20 12 7.6 7.6 8 10 4 0 0 Percentage point -4 -10 Percentage point -8 -20 -12 -16 -30 -20 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2019 2020 2021 2021 2019 2020 2021 2022 Net exports Agriculture Manufacturing Investments Other industries Services Government Consumption Household Final Consumption Expenditure GDP growth GDP Growth  The Balance of Payments deficit widened, and the peso has depreciated. Balance of Payments Components (% of GDP) Regional Currency Movements 20 Current account 6 Financial account (January 2022=100) Positive = inflow 3.6 4 104 10 2 100 0 0 96 -6.1 -2 -10 92 -4 88 -20 -6 87 H1 H1 H1 H1 H1 84 H1 H1 H1 H1 H1 Mar-22 Feb-22 Sep-22 Jun-22 Apr-22 May-22 Jan-22 Aug-22 Jul-22 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Secondary Income Other investments Including Primary Income Financial derivatives Indonesia Malaysia remittances Net services exports Portfolio investment Net goods exports Direct investment Philippines Thailand Net CA Balance Net inflows Vietnam Inflationary pressure has intensified, and monetary policy has tightened. Inflation and Key Policy Rate (%) Contribution to Headline Inflation (percentage points) 10 Core Inflation Headline Inflation Transport: Fuels and lubricants for personal transport Food & Non-alcoholic beverage Food and non-alcoholic beverages 8 Utilities: Electricity, gas, and other fuels Non-Food 8 Alcoholic beverages and tobacco 7.7 BSP Key policy rate 5.9 Other non-food, non-energy items 6 Headline inflation 6 Core Inflation 5.9 5.0 4 4 2 2 0 0 May-20 May-21 May-22 Sep-20 Jan-21 Sep-21 Jan-22 Sep-22 Mar-20 Mar-21 Mar-22 Jul-20 Nov-20 Jul-21 Nov-21 Jul-22 Nov-22 -2 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep 2021 2022 Higher revenue generation and lower-than-target public spending lowered the fiscal deficit in Q1-Q3 2022. National Government Fiscal Balance National Government Debt (percent of GDP) (percent of GDP) 30 0 External debt Domestic debt 63.7 25 70 7 -2 NG Guaranteed debt (RHS) 20 60 6 -4 15 50 5 -6 10 -6.5 40 4 5 -8.3 -8 -8.6 30 3 0 -10 20 2 2019 2020 2021 Q1- Q1- Q3 Q3 10 1 2021 2022 0 0 Q3… Revenues 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Expenditure Fiscal Balance (RHS) The banking sector shows signs of improvements as the share of NPLs and restructured loans decline, while bank lending growth picked up. Non-Performing Loans (NPLs) and Restructured Loans (% of portfolio) 5 4 3.4 3 2.8 NPL 2 1 Restructured Loans to Total Loan Portfolio 0 Mar-22 Sep-20 Jun-21 Mar-20 Mar-21 Dec-19 Dec-20 Jun-20 Sep-21 Dec-21 Jun-22 Sep-22  2 Outlook and Risk The deteriorating global environment is spilling into the domestic economy and tempering the country’s growth prospects in 2023. The growth outlook is positive but faces risks. Projected growth trajectory (percentage points contribution of components) 15 10 Net exports 5 0 Capital Formation -5 Government Consumption -10 -15 Household Final Consumption -20 2022e Expenditure 2023f 2024f 2025f 2016 2017 2018 2019 2020 2021 Gross Domestic Product Downside risks come from external and domestic environment. The synchronous monetary tightening in many central banks could produce larger impacts than intended, both in tightening financial conditions and deepening the growth slowdown. An escalation of geopolitical tensions and supply chain bottlenecks could further disrupt commodity markets and international trade. Prolonged and elevated domestic inflation may dampen household consumption. As the pandemic has yet to be declared over, the risk of another COVID-19 wave hangs over the outlook. The recovering labor market and improving incomes will contribute to the decline in the poverty rate. Unemployment and Underemployment Poverty Rate (%, using US$3.65/day PPP) Rates (%) 25 45% 20 40% 35% 15 15.4 30% 10 25% 20% 5 20% 5.0 15% 0 10% July Feb Feb Jan Aug Oct Aug May Nov May 5% 2019 2020 2021 2022 0% 2006 2008 2010 2012 2014 2016 2020 2022 2024 2018 Unemployment Rate Underemployment Rate  3 Policy Recommendations Addressing the immediate challenge of elevated inflation, staying the course on fiscal consolidation, sustaining investments in health and education, and reversing the low agriculture productivity will be key to safeguard growth and achieve long term development goals.  Policy Recommendations Addressing the inflationary pressure means employing both monetary and non-monetary measures, including near-term monetary tightening to prevent the de-anchoring of inflation expectations. Staying the course on fiscal consolidation signals commitment to fiscal sustainability. Sustaining investments in health (including nutrition, see Box 5 in the report) and education to reduce vulnerabilities from the scarring impact of the pandemic remains important. Over the medium term, improving the effectiveness of public spending on agriculture will help address low agriculture productivity and alleviate the challenge of food security in the country.  Key Messages The Philippine economy has remained resilient despite a challenging global 1 environment. The deteriorating global environment is spilling into the domestic economy 2 and tempering the country’s growth prospects in 2023. Addressing the immediate challenge of elevated inflation, staying the course 3 on fiscal consolidation, sustaining investments in health and education, and reversing the low agriculture productivity will be key to safeguard growth and achieve long term development goals. Maraming Salamat! Download the interactive report at: www.worldbank.org/peu Ensuring Food Security for All: Repurposing Public Investments in the Philippines Anuja Kar, Senior Agriculture Economist, The World Bank Group December 7, 2022 Transforming the Philippine Agriculture Sector: Opportunities and Challenges  Sectoral share (%) of employment, 2002-2019. Agriculture remains critically important in the Philippines for: Food Security Livelihoods and Incomes Jobs Source: The Jobs Group Jobs Structure Tool  High incidence of Poverty and Food Security Remains a Challenge Incidence of poverty among population groups, Prevalence of moderate or severe food insecurity in 2006 – 18 (%) (%) (3-year average) 45 41.2 41.3 39.2 40.84 60 40 38.5 38 38.3 36.85 50 35 31.6 30 26.6 40 26.3 25.2 26.2 25 23.3 30 20 16.6 20 15 10 10 5 0 0 2017-2019 2018-2020 2019-2021 2006 2009 2012 2015 2018 The total population Incidence and magnitude of poverty among Male adult population population groups, 2006 - 18 Female adult population Farmers Fisherfolk Population Source: Briones (2021), FAO  Russia – Ukraine war has been a shock to international food markets with continuing repercussions A major breadbasket for the World: Market reaction most pronounced for wheat Large exporters of key food commodities and fertilizers Rice among least affected Share of Ukraine and Russia in World Exports (in Cereal price indexes (Jan 2020=100), up to March 22, 2022 value terms, average 2018-2020) Maize Wheat Rice Ukraine Russia 55.8 25.2 22.6 20.5 14.5 14.1 Wheat and Barley Sunflo Other Fertiliz Maize/Corn wer edibl meslin seed/ e oils ers oil Source: WB staff estimates using COMTRADE data. Immediate risks: Source: World Bank Commodity Price Data Wheat and vegetable oil prices spiked with the outbreak of the war; have moderated a bit but remain high and volatile Countries with high outstanding share of imports from these countries need to source from other exporters/suppliers Medium-longer term risks: Global fertilizer prices have risen steeply and would likely remain expensive 4 Energy and food markets are tightly linked through input and output markets Enhancing the efficiency of public spending in agriculture  Declining spending vis-à-vis Continued Focus on Commodity Based Spending Agriculture share to the total budget ratio (%) Allocation to the Commodity Based Banner Programs, 2015–2019, in Php Millions. 16,000 3.0 14,000 12,000 2.5 10,000 2.0 8,000 6,000 1.5 4,000 2,000 1.0 0 0.5 0.0 2015 2016 2017 2018 2019 DA % to total budget ratio 2015 2016 2017 2018 2019 Department of Agriculture (DA) budget as share of total government budget declined from 2.6 % in 2015 to 1.3 percent in 2019. Commodity-based banner programs account for major share of DA budget (38 %) National Rice Program dominates banner commodity programs, in 2022  Despite Public Spending: Philippine Agriculture Falling Behind Other Countries Agriculture TFP Growth: Philippines vs Rice yields around the world, 2020–2020 (ton/ha) Neighboring Countries % (1990-2020) 9 8 7 6 5 4 3 2 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Brazil Cambodia China Malaysia Myanmar Peru Philippines Thailand Vietnam World Source: USDA Source: FAO stats Total factor productivity (TFP) growth in agriculture increased 23% over two decades; but has been below that of regional neighbors such as Indonesia, China, and Vietnam. Slower growth in rice yields, a major reason why domestic rice production cannot compete with imports  Effectiveness of Spending on Agriculture: Regional Dynamics Agriculture Public Spending by Region, PhP Regional Ranking by GVA and Poverty, 2018 Billion, 2022 14 12 10 8 6 4 2 0 Source: DA GVA rank Poverty rank Heterogeneity in spending allocation across regions Allocation of public spending not fully reflective of regional poverty and gross value added (GVA) DA allocation can be better aligned to the size of the regional agricultural economy and poverty incidence in most regions.  Implications for Financial and Functional Devolution Resulting from the Mandanas Ruling  LGU Spending in Agriculture Remains Limited 10 Allocations for Agriculture by Center and LGUs, ₱ Billions 2.5 8 2.0 LGU’s spending allocation for agriculture 6 1.5 is small relative to the DA. 4 1.0 Agriculture spending by LGUs needs to 2 0.5 be prioritized. 0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Devolution Transition Plan (DTP): a powerful instrument to improve Total Agriculture prioritization, efficiency, accountability, City and impact of LGU’s spending on Municipality agriculture. Province Agriculture as a share in total LGU allocation (%) Way Forward for DA Way Forward for DA  Critical Goals Agricultural public expenditure policies must address three critical challenges: Improving sectoral competitiveness and resilience to ensure food security for all. Improving the effectiveness of the current spending. Dealing effectively with public expenditure issues related to devolution.  Key Actions to Achieve Food Security for All Greater balance in sectoral priority-setting and budget allocation to support agriculture diversification Scaling up Climate Smart Agriculture (CSA) policies and programs to foster increased resilience of the agri-food system Promote affordability of nutritious foods by adjusting fiscal and other policies that subsidize “calorie production” (e.g., rice, grains, sugar) rather than the production of more nutritious foods. Key Actions to Improve the Effectiveness of the Current Spending Shifting from protecting a specific product (e.g., rice) to improving the overall resilience, competitiveness, and sustainability of the sector. Focusing on programs that fund public goods that are currently underfunded (e.g., agricultural research and extension, Farm-to-Market Roads). Improve budget priority to programs that overcome barriers to farm consolidation and achievement of economies of scale.  Key Actions for Achieving Efficient Devolution Ensuring procedural improvements on government budgeting institutions Improving evidence- and results-based monitoring and evaluation through enhanced and targeted capacity development for LGUs. Investing on extension services ensuring greater thrust on capacity development for LGUs  Key Actions to Promote Climate Resilience and Green Agriculture Promote climate-smart rice cultivation Adopting a package of improved irrigation methods (e.g., “alternative wetting and drying”), improved seeds and cultivation practices - to lower GHG emissions, reduce irrigation water use and fertilizer costs, to increase yields and incomes for rice farmers. Foster sustainable livestock production: increase productivity and reduce agricultural emissions through improved breeding and nutrition and animal health services, pasture management and husbandry practices Support development of green agriculture value chains, through sustainable sourcing, traceability, and certification of agricultural products and establishment of necessary infrastructure and regulatory standards 27 Maraming Salamat! Download the interactive report at: www.worldbank.org/peu