2019 Budget Briefing Notes - FINAL

2019 BUDGET BRIEFER
CONGRESSIONAL POLICY AND BUDGET RESEARCH DEPARTMENT
BRIEFING NOTES FOR THE DBCC PRESENTATION

ON THE PROPOSED 2019 NATIONAL BUDGET
JULY 31,2018
On the day of his State of the Nation Address (SONA), President Rodrigo Roa Duterte submitted to
Congress the proposed 2019 cash budget amounting to P3.757 trillion. The proposed cash budget
which is equivalent to 19.3 percent of gross domestic product (GDP) is marginally higher compared
to the 18.9 percent in 2018 (Table 1). This is also 13.0 percent higher compared to the P3.324 trillion
cash-based appropriations this year, implying that more programs and projects (PAPs) will be
completed, delivered, inspected and accepted by the end of 2019.
TABLE 1
2017-2019 NATIONAL BUDGET
Obligations-Based Cash-Based
Particulars Actual Program Program Proposed
2017 2018 2018 2019
Budget (P trillion) 3.32 3.77 3.32 3.76
Growth Rate (%) 13.6 13.0
Ratio to GDP (%) 21.0 21.4 18.9 19.3
Source: 2018 Budget of Expenditures and Sources of Financing (BESF)
The proposed 2019 budget marks the transition to annual cash-based appropriations from the
obligations-based budget system to promote better designed, better coordinated projects and
programs and speed up the delivery of goods and services to the people. This is in line with the
objective of modernizing the budgeting system to meet international standards and adopt good
practices. Under the cash-based system, obligations or contracts for programs, activities and
projects (PAPs) for implementation during the fiscal year must be fully delivered, inspected and
accepted by the end of the year. This implies that the performance of national government agencies
will be evaluated based on their real outputs – the PAPs that have been delivered and paid for – and
not on the basis of obligations which are mere commitments. The system also aims to maintain the
government’s credibility with the private sector as payments for completed PAPs should be made
within the fiscal year, with an Extended Payment Period up to three months after the fiscal year.
The budget is anchored on the thrusts of the administration identified under the 10-point
Socioeconomic Agenda. It aims to “enable the Filipino people to experience the life that they aspire
Briefing Notes for the DBCC Presentation on the Proposed 2019 National Budget
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for, the life that they deserve” – “a better and more comfortable life in a peaceful and more
progressive nation.”
The budget plays a critical role in the achievement of the country’s development objectives. The
efficient and effective allocation and implementation of the budget ensures that sufficient resources
are available to support the programs and projects that facilitate the attainment of national
development goals. The Philippine Development Plan (PDP) 2017-2022 objective is to put in place a
strong foundation for inclusive growth, a high-trust society, and a globally-competitive knowledge
economy towards achieving the long-term vision of a matatag, maginhawa at panatag na buhay
(strongly rooted, comfortable, and secure life) by 2040.
Several targets were established to facilitate the achievement of the goals. Apart from targeting
faster economic expansion at 7.0 – 8.0 percent in the medium term, the growth is also expected to
be more inclusive with the poverty incidence declining to 14.0 percent in 2022 from 21.6 percent in
2015. Reflecting the thrust of the administration to bring growth to the countryside, poverty
incidence in the rural areas is targeted to decrease to 20.0 percent in 2022 from 30.0 percent in
2015.
This briefing notes on the 2019 National Government Budget examines the size and composition of
the government budget relative to important macroeconomic variables. The relationship between
the government budget and the economy is a two-way process. The level and growth of government
revenues and expenditures affect economic growth as measured by gross domestic product and
other macroeconomic variables such as inflation, interest rates, exchange rates and employment. In
turn, these macroeconomic variables affect government revenues and expenditures. Hence, the
annual national government budget is formulated based on a set of macroeconomic assumptions.
THE FY 2019 FISCAL PROGRAM
Total expenditure program for 2019 amounts to P3.76 trillion. This is about P433 billion or 13%
higher than its equivalent cash-based budget of P3.32 trillion for 2018. Although the cash-based
budget may not be directly comparable with the obligation-based budget, the difference of only P10
billion between the 2018 (obligation-based) and 2019 (cash-based) levels indicates that NG actually
intends to spend more given the shorter period of one year for agencies to implement and settle the
payments with the suppliers/contractors. Unless NG addresses the issues affecting its absorptive
capacity, a shorter period for implementation (and payment of obligations) can potentially result in
lower budget utilization rate.
Congressional Policy and Budget Research Department
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To finance the higher expenditures, revenues are expected to increase to P3.2 trillion, 12.7 percent
higher than the P2.8 trillion program for 2018. The balance of P624.4 billion which is the fiscal
deficit will be financed by both local and foreign borrowings.
Expenditure Program
The 2019 National Budget has placed great importance on—(1) infrastructure development through
the Administration’s “Build, Build, Build Program” and (2) human development through expanded
education and health services, and unconditional cash transfer programs. The DepEd budget alone
is expected to increase by P58.7 billion or 12.5%. Meanwhile, the proposed budget for OEO will be
higher in 2019 by P11.5 billion (17.3%)—the bulk of which (about 83.5%) is accounted for by CHED
and TESDA. Higher allocations for SUCS, CHED and TESDA support the flagship program of Universal
Access to Quality Tertiary Education (UAQTE), primarily to cover the cost of tertiary education. The
combined allocation for education (DepEd, SUCs, CHED and TESDA) in 2019 amounts to P659.3
billion (Table 2).
TABLE 2
TOP 10 DEPARTMENTS/AGENCIES, 2019
(AMOUNTS IN BILLION PESOS)
Amount Difference (2018-2019)
PARTICULARS 2018 2019 Amount

Percent
Obligation- Growth
Cash-Based
Based
Department of Public Works and Highways 650.9 441.8 555.7 113.8 25.8
Department of Education 580.6 470.1 528.8 58.7 12.5
Department of Interior & Local Government 172.4 172.4 225.6 53.3 30.9
Department of National Defense 150.0 136.5 183.4 46.9 34.4
Department of Social Welfare and
Development 141.9 139.9 136.8 (3.1) (2.2)
Other Executive Offices 77.5 66.7 78.2 11.5 17.3
Department of Transportation 68.1 40.2 76.1 35.9 89.4
Department of Health 109.8 99.6 74.1 (25.5) (25.6)
State Universities and Colleges 65.2 63.8 65.2 1.4 2.2
Department of Agriculture 55.7 50.7 49.8 (0.9) (1.7)
Others 288.2 261.3 286.5 25.2 9.7
TOTAL, All Departments 2,360.4 1,942.8 2,260.2 317.4 16.3
ADD: Special Purpose Funds 1,406.6 1,381.2 1,496.8 115.6 8.4
TOTAL Expenditure Program 3,767.0 3,324.0 3,757.0 433.0 13.0
Note: Agency level cash-equivalent levels for 2018 were taken from the DBM Briefer on the 2019 Proposed National Budget
particularly explaining the cash-based budget. The 2018 SPF figure (cash-based) was computed as the difference
between the given total expenditure program and the total for all departments.
Source of basic data: BESF 2019, NEP 2019 and DBM Briefer on the 2019 Proposed National Budget
While the proposed budget for DOH Proper is expected to decline in 2019, a separate allocation
(P67.4 billion) for the Philippine Health Insurance Corporation (PHIC) will ensure the health
insurance coverage of indigent individuals/families, senior citizens, and other targeted beneficiaries.
Similarly, the DSWD budget is going to be lower compared to its cash-equivalent budget in 2018,
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although a separate funding for unconditional cash subsidies (P36.5 billion) is lodged under the
Landbank of the Philippines primarily to mitigate effects of price increases on the bottom 50 percent
of the poorest households due to the enforcement of the comprehensive tax reform program.
Revenue Program
The National Government (NG) aims to raise P3.21 trillion in revenues to finance the projected P3.83
trillion expenditures in 2019. Ninety-four percent (94%) of this amount or P3.02 trillion will come
from taxes while 5.9 percent or P188.3 billion will be collected from non-tax sources. The remaining
0.06 percent or P2 billion will come from privatization (Table 3).
TABLE 3
NATIONAL GOVERNMENT FISCAL PROGRAM, 2017-2019
Amount (In Billion Pesos) Growth Rates (Percent)
Particulars Actual Program Projection Actual Program Projection
2017 2018 2019 2017 2018 2019
REVENUES 2,473.1 2,846.3 3,208.2 12.6 15.1 12.7
Tax Revenues 2,250.7 2,677.4 3,017.9 13.6 19.0 12.7
BIR 1,772.3 2,060.2 2,330.7 13.1 16.2 13.1
BOC 458.2 594.9 662.2 15.6 29.8 11.3
Other Offices 20.2 22.3 25.0 20.0 10.5 12.1
Non-Tax Revenues 221.6 166.8 188.3 3.1 (24.7) 12.9
Privatization 0.8 2.0 2.0 26.3 141.0 -
DISBURSEMENTS 2,823.8 3,370.0 3,832.6 10.8 19.3 13.7
Current Operating Expenditures 2,113.9 2,415.8 2,823.5 10.7 14.3 16.9
Capital Outlays 714.1 940.4 994.6 14.3 31.7 5.8
Net Lending (4.2) 13.8 14.5 (127.5) (428.6) 5.1
SURPLUS/(DEFICIT) (350.6) (523.7) (624.4) (0.8) 49.4 19.2
Source: Budget of Expenditures and Sources of Financing
Note: Numbers may not add up due to rounding.
The Bureau of Internal Revenue (BIR) remains the top source of taxes and is expected to collect
P2.33 trillion. This is 77.2 percent of all tax collections and 72.6 percent of all revenues. The second
main source of taxes is the Bureau of Customs (BOC), which is projected to raise P662.2 billion.
Other offices, including the Land Transportation Office (LTO) and the Bureau of Fire Protection (BFP),
are projected to generate P25 billion from the motor vehicle users tax and fire code tax, among
others.
Revenues are seen to increase by P361.9 billion or 12.7 percent in 2019 (Table 4). Package 1A of the
Comprehensive Tax Reform Program (CTRP), also known as the TRAIN Law (Republic Act No. 10963),
is projected to contribute P144.2 billion. Moreover, Package 1B or the tax amnesty measure is
expected to be passed in 2018 and, once implemented at the start of 2019, will result in incremental
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revenues of P37.2 billion. These two will bring the total 2019 CTRP-related incremental revenues to
P181.4 billion.
The 2019 growth rate in revenues is slower compared to that of 2018, which is the first year of
implementation of the TRAIN Law. Revenues in 2018 are projected to grow by 15.1 percent, with the
TRAIN Law raking in some P89.9 billion. Meanwhile, Package 1B (tax amnesty), which is expected to
get passed in 2018, is seen to add P37.2 billion to 2019 revenues; and Package 2+ (adjustments in
the alcohol and tobacco taxes, non-mineral reservations royalties, value-added tax, etc.) on the
CTRP, if passed into law in 2019, is projected to yield an additional P62.7 billion in 2020.
Collection performance of the NG, particularly of the BIR and BOC, in the first semester of 2018 is an
important indicator of the government’s revenue prospects in the subsequent periods. The first half
of 2018 coincided with the implementation of the TRAIN Law. Total NG revenues for the first
semester of 2018 is P1.41 trillion or 8.1 percent higher than the programmed amount (Table 4). The
government was able to collect P105.7 billion more than the target. Tax and non-tax collections
exceeded the programmed amounts by P33.8 billion and P57.6 billion, respectively. The two main
tax collecting agencies achieved their targets, with the BIR posting P25.8 billion more and the BOC
generating P9.1 billion above the programmed amount. On the other hand, other tax-collecting
offices fell short of the target by P1.1 billion, resulting in an accomplishment rate of 90.9 percent.
Meanwhile, non-tax revenues exceeded the program by P57.6 billion or 68.6 percent.
The NG collections during the first quarter were above expectations. A total of P619.8 billion, 15.5
percent higher than the programmed amount of P536.7 billion. The main tax collection agencies, the
BIR and BOC, exceeded their targets by 16.9 percent and 0.2 percent, respectively. Non-tax revenues
exceeded targets as well, by 55 percent.
TABLE 4
FIRST SEMESTER REVENUE PERFORMANCE, 2018
(IN BILLION PESOS)
Program Actual Accomplishment Rate (%)
Particulars
Q1 Q2 Total Q1 Q2 Total Q1 Q2 Total
Revenues 536.7 768.1 1,304.8 619.8 790.7 1,410.5 115.5 103.0 108.1
Tax Revenues 497.3 723.6 1,220.9 558.7 696.0 1,254.7 112.3 96.2 102.8
BIR 361.8 576.9 938.7 423.1 541.4 964.5 116.9 93.8 102.7
BOC 129.5 140.8 270.3 129.8 149.6 279.4 100.2 106.2 103.4
Other Offices 6.0 5.8 11.9 5.8 5.0 10.8 95.8 85.9 90.9
Non-tax Revenues 39.4 44.5 83.9 61.1 80.3 141.5 155.0 180.7 168.6
BTr* Income 12.4 19.1 31.5 22.8 43.4 66.1 183.2 227.7 210.1
Fees and Charges 11.4 10.9 22.3 12.4 10.4 22.8 108.2 95.7 102.1
Others (including 15.6 14.5 30.1 26.0 26.6 52.5 166.7 182.9 174.5
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Grants)
Privatization - - - 0.0 14.4 14.4 - - N/A

Source: National Government Quarterly Fiscal Program 2018; Cash Operations Report
* Bureau of the Treasury
The NG sustained its above-target revenue performance in the second quarter after it posted a 103
percent accomplishment rate or P22.6 billion higher than the programmed amount. However, a
closer look at the performance of the collection agencies is important. The NG missed the tax
collection target by P27.6 billion, or a 96.2 percent accomplishment rate. While the BOC continued
to exceed its targets, as it hit 106.2 percent, the BIR fell short of its goal by P35.5 billion in the
second quarter. The BIR’s collections in succeeding periods will determine the government’s tax
revenue performance as it is the country’s largest revenue-generating agency. The BIR collected
more than 75 percent of all taxes in the first two quarters of 2018; for the same period from 2015 to
2017, it collected on average 79 percent of the total taxes collected for the whole year.
Fiscal Deficit and Borrowings

Given the projected revenues and expenditures, the fiscal deficit will reach P624.4 billion in 2019
(Table 5). The amount is P100.7 billion or 19.2 percent higher compared to 2018 and 78.1 percent
higher than the 2017 figure. The larger deficit is mainly the result of a substantial increase of P407.7
billion or 16.9 percent growth in Current Operating Expenditures (COE). Meanwhile, 2019 Capital
Outlays (CO) is projected to grow at 5.8 percent. The 2019 Budget is expected to result in more
government consumption and less public investment compared to the 2018 Budget. Note that the
projected COE growth in the 2018 Budget is lower at 14.3%, while CO is projected to grow at a
higher rate of 31.7%.
The deficit in 2019 is estimated to reach 3.2 percent of GDP. This will increase the deficit-to-GDP
ratio by 0.2 percentage points, from an estimated 3.0 percent in 2018. Meanwhile, revenues are
seen to hit 16.5 percent of GDP. The expenditures-to-GDP ratio, on the other hand, is projected to
be 19.7 percent. Note that these assumptions are premised on the DBCC projection of 7-8 percent of
GDP growth rate in 2019.
TABLE 5
NATIONAL GOVERNMENT FINANCING, 2017-2019
(IN BILLION PESOS)
Particulars 2017 2018 2019
Gross Foreign Borrowings 168.1 331.8 282.7
Program Loans 35.1 84.2 87.3
Project Loans 33.4 21.2 33.4
Bonds and Other Inflows 99.6 226.3 162.0
Less: Amortization 140.5 114.3 142.7
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Net Foreign Borrowings 27.6 217.5 140.0

Gross Domestic Borrowings 733.6 640.1 906.2
Treasury Bills 26.4 15.7 54.5
Fixed Rate Treasury Bonds 707.1 624.5 851.7
Less: Net Amortization 2.2 3.4 3.5
Net Domestic Borrowings 731.4 636.8 902.6
Net Financing 758.9 854.2 1,042.6
Less: Total Net Financing
350.6 523.7 624.4
Requirement/Deficit
Change in Cash 408.3 330.6 418.3
Source: BESF
There is the danger that the budget deficit of the government in 2019 could be higher in light of the
recent decision of the Supreme Court in favor of the Mandanas petition to include both BIR and BOC
collections in the computation of the internal revenue allotment (IRA) to LGUs, which is
automatically appropriated. The SC decision, in fact, entitles the LGUs to a larger base for the
computation of the 40 percent share or IRA, citing that Section 6, Article X of the 1987 Constitution
textually commands the allocation to the LGUs of a just share in the national taxes (as opposed to
NIRT in RA 7160). Since the IRA partakes of an automatic appropriation, the implementation of the
SC decision will automatically increase the expenditure program of the government beyond the
planned amount in the 2019 budget.
Another challenge to containing the government expenditure in 2019 within the programmed
amount is the issue concerning the increase in base pay of military and uniformed personnel (MUPs)
which has budgetary impact on pension requirements. Joint Resolution No. 1 s. 2018 which
authorized the adjustment in salary base of active MUPs suspends the indexation of pension of
retired MUPs. Pension indexation is temporarily suspended this year, and will be lifted starting 2019
or upon effectivity of a pension reform law, whichever comes earlier. Proposed bills on pension
reform for MUPs are still pending at the committee level at both Houses of Congress. If not passed
by yearend, NG will have to pay about P33.9 billion in 2019 for pension arrearages incurred this year
(2018) as a result of JR No. 1, s. 2018.
The higher fiscal deficit will call for additional borrowings. Net Financing (borrowings less
amortization) in 2019 is estimated to reach P1.04 trillion. This is higher by P188.4 billion compared
to 2018 programmed deficit, and by P283.7 billion compared to the 2017 figure. Of the 2019 figure,
net foreign borrowings amount to P140 billion while net domestic borrowings equal P902.6 billion.
This translates to an 86.6 percent to 13.4 percent ratio in favor of domestic sources. Fixed Rate
Treasury Bonds are the largest source of borrowings at P851.7 billion. Meanwhile, foreign-
denominated bonds account for the second largest source at P162 billion. It is worth noting that
projected net foreign borrowings in 2019 is relatively smaller compared to the 2018 program.
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Considering the deficit and additional borrowings, total outstanding debt of the NG by the end of
2019 is seen to reach P8.12 trillion. The figure is 10.7 percent higher than the projected amount of
outstanding debt by the end of 2018. The additional P784.7 billion in 2019 is the total of new
borrowings net of principal payments. In terms of ratio to GDP, the 2019 figure is at 41.7 percent
and is not expected to vary from the 2018 ratio. However, the ratio can be higher if GDP fails to grow
by 7-8 percent as targeted by the government. The deficit to GDP ratio could also be higher if the
inflation, interest rate and the exchange rate exceed the official targets.
MACROECONOMIC ASSUMPTIONS
The proposed 2019 budget was drawn up based on a set of macroeconomic assumptions that affect
its viability, including the availability of resources that would finance the expenditure program.
Among the major macroeconomic parameters are the following: (i) real GDP growth rate, (ii)
inflation rate, (iii) interest rate (364-day Treasury Bill rate), (iv) foreign exchange rate, (v) Dubai oil
price, and (vi) unemployment rate (Table 6). Other parameters include the London Interbank Offered
Rate (LIBOR), population, exports and imports of goods, current account balance, and gross
international reserves.
The budget and the macroeconomic variables have a dynamic relationship wherein each impacts on
the other. For instance, Miral (2007) explained that the budget underpins government consumption
and public investment that constitute part of the gross domestic product, which, in turn, determines
the potential revenue and tax collection of the government.
TABLE 6
SELECTED MACROECONOMIC PARAMETERS
1
Particulars Actual Latest Available Adjusted Projections
2017 2018 2018 2019

Real GDP Growth (%) 6.7 6.8 (Jan-Mar) 7.0-8.0 7.0-8.0
2.0-4.0 (Target)
Inflation Rate, CPI (2012=100) 2.9 4.3 (Jan-Jun) 2.0-4.0
4.0-4.5 (Forecast)
364-Day T-bill Rate (%) 2.9 3.6 (Jan-Jun) 3.0 - 4.5 3.0 - 4.5
Foreign Exchange Rate (P:$) 50.4 52.0 (Jan-Jun) 50 - 53 50 - 53
Dubai Oil Price (US$/Barrel) 53.1 67.9 (Jan-Jun) 55 - 70 50 - 65
Unemployment Rate (%) 5.7 5.5 (Apr) 4.7 - 5.3 4.3 - 5.3
Exports of Goods
Level (in US$ Billion) 48.2 12.6 52.6 57.3
Growth Rate (%) 12.8 7.0 9.0 9.0
Imports of Goods
Growth Rate (%) 14.2 7.1 10.0 10.0
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Current Account Balance

Level (in US$ Billion) -2.5 -0.2 -3.1 -3.8
Percent of GDP -0.8 -0.3 -0.9 -1.0
Gross International Reserves
(Year-End)
Equivalent Months of
Imports of Goods, Services 8.0 7.5 7.2 6.6
and Income
Note: 1/ Adopted by the Development Budget Coordination Committee (DBCC) on 2 July 2018
Sources: 2019 BESF, PSA, BSP, New Zealand Ministry of Economic Development
On Economic Growth. The Philippines enjoyed an unprecedented economic growth for six
consecutive years from 2012 to 2017 (Chart 1), growing more than six percent annually and
recording an average of 6.6 percent. Per capita GDP also sustained its growth reaching P82,592 at
constant 2000 prices from P65,337 (Chart 2).
Economic expansion was sustained in the first quarter of 2018 with GDP growing by 6.8 percent
from 6.5 percent growth in the same period in 2017. The industry and services sectors continued to
be the main driver of growth on the supply side, expanding by 7.0 percent and 7.9 percent,
respectively. Meanwhile, the agriculture, hunting, forestry and fishing (AHFF) grew slower at 1.5
percent in the first quarter of 2018 from 4.9 percent due to significantly lower production in major
crops such as palay and corn. The weak performance of the agriculture sector has been identified as
one of the factors that are hampering the achievement of inclusive growth. The sector accounts for
less than 10 percent of GDP despite employing around 25 percent of the total labor force. Improving
the productivity of the sector should be among the priority areas of the government particularly now
that threats arising from the impact of climate change have become more frequent and more
severe.
CHART 1 CHART 2
GDP GROWTH RATE (%) GDP PER CAPITA
8.0 90.0 82.6 6.0
7.1 6.9 5.2
6.7 6.7 6.8 80.0 78.7
7.0 74.8
6.1 6.1 71.7 5.0 5.0
65.3 68.8 5.1
6.0
70.0
4.3 4.3
60.0 4.1 4.0
5.0
50.0
4.0 3.0
40.0
3.0
30.0 2.0
2.0 20.0
1.0
1.0 10.0
0.0 0.0 0.0

2012 2013 2014 2015 2016 2017 2018 Q1 2012 2013 2014 2015 2016 2017
Source of basic data: Philippine Statistics Authority website

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On the demand side, household consumption continued to be the major driver of growth
notwithstanding slightly slower expansion of 5.6 percent in the first quarter of 2018 from 5.9
percent in the same period in 2017 (Chart 3). Note, however, that there has been a declining trend
in the growth of quarterly household consumption from more than 7 percent growth in 2016 to 5.4
percent in the third quarter of 2017 before picking up again in the following quarters. This may also
reflect a structural rebalancing from being mainly consumption-driven to an investment-led growth
economy.
CHART 3
HOUSEHOLD CONSUMPTION, 2016-2018
GROWTH RATE (IN PERCENT)
Source: PSA
Government consumption grew sharply by 13.6 percent in the first quarter of 2018 from 0.1 percent,
with the PSA attributing this to the “increase in the base pay of civilian, military, and uniformed
personnel and the higher maintenance and other operating expenditures of various government
agencies”.
Investments in fixed capital grew by only 8.9 percent in the first quarter of 2018 from 13.8 percent in
the same period in 2017. Construction investments slowed down to 10.1 percent from 11.3 percent.
Private investments, which account for the bulk of total construction, grew slower by 6.8 percent
from 13.6 percent. Public construction rebounded to 25.1 percent from only 2.1 percent.
Economic Prospects. The first quarter economic performance is slightly below the low-end of the
official growth target of 7.0 – 8.0 percent for the whole of 2018 (Table 7). Projections of other
institutions show that the economic momentum is expected to be sustained this year and in 2019
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but will still be below the official growth targets with the average GDP growth expected at 6.7
percent.
The International Monetary Fund (IMF) stated that growth will be supported by strong consumption
and investment, including public investment. The risks to growth are rising inflation and external
developments such as the trade war between big economies. The IMF underscored the need to
adjust policies to reduce inflationary pressures and to continue structural reforms that support
inclusive growth.
TABLE 7
GDP GROWTH PROJECTIONS
2018 2019
Government Target 7.0 – 8.0 7.0 – 8.0
International Monetary Fund 6.7 6.7
World Bank 6.7 6.7
Asian Development Bank 6.8 6.9
World Economic and Financial
Surveys 6.75 6.75
UNDESA 6.9 6.9
OECD 6.4 6.4
KPMG 7.0
Fitch Ratings 6.5
S&P 6.5 6.5
HSBC 6.7
Average 6.7 6.7
Sources: ADB Asian Development Outlook (April, 2018); IMF World Economic Outlook Update (April 2018); World
Bank Philippine Economic Update (April 2018); various newspaper articles
The study of Felipe and Estrada (2018) showed that the economy is already operating above
potential. In 2017, the country grew by 6.7 percent against a “record-high” potential growth of 6.3
percent. So as not to waste the growth momentum, it was recommended that the government
must focus on further increasing potential growth which will enable the economy to achieve even
higher levels of growth without putting pressure on the inflation. The high economic growth in
recent years was attributed to the increase in potential growth rate due to the rise in labor
productivity growth arising mainly from manufacturing productivity growth.
The World Bank (2018) also noted that the country is currently growing at its potential, necessitating
additional investments in physical and human capital to enable the economy to grow along its
current growth trajectory. The World Bank stated that the Philippine economy is at risk of
overheating, citing indicators such as the rising core inflation, high capacity utilization, and the tight
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labor market. Core inflation, which excludes the volatile food and energy items, has been steadily
increasing since 2015 and has risen sharply, reaching 4.3 percent in June 2018 due to the pass-
through effect of a weaker peso, indicating increasing demand pressure as the economy is already
operating at its potential. Capacity utilization in the manufacturing sector has been above 80
percent in recent years. While the quality of employment remains a concern, the decrease in
unemployment rate from an average of 6.9 percent in 2010-2015 to 5.6 percent in 2016-2017 points
to the tightening of the labor market. As private investment is expected to weaken, the World Bank
(2018) noted that the Philippines’ growth prospects hinge on the effective and timely
implementation of the government’s infrastructure program, which plays a critical role in addressing
risks of overheating by building up the productive capacity of the country. However, infrastructure
spending is not expected to immediately increase productivity as it takes some time for the
infrastructure projects to be completed and serviceable.
The World Bank (2018) identified two major external risks to growth prospects of the country,
namely the monetary tightening in the United States and the trade war among the advanced
economies of the world. A major factor that has facilitated the growth in the recent years of many
emerging economies like the Philippines is the flow of foreign capital from advanced economies like
the United Sates arising from increased liquidity brought about by the monetary easing policy aimed
at jumpstarting their economies. But now, the US and other advanced economies have tightened up
their monetary policy, which has the effect of drawing back foreign capital from the emerging
economies. On the other hand, trade war among the advanced economies could heighten
protectionist measures and disrupt trade and investments.
To increase the country’s growth potential, investment growth needs to be sustained to raise the
productive capacity of the economy to support long-term growth. While the investment rate (gross
capital formation as a percentage of GDP) has gradually increased from 18.2 percent in 2012 to 25.0
percent in 2017, the investment rate of the Philippines at 25.0 percent has remained the second
smallest among ASEAN economies, just ahead of Cambodia’s 22.9 percent (Table 8).
TABLE 8
GROSS CAPITAL FORMATION, 2010-2017
(PERCENT OF GDP)
2010 2011 2012 2013 2014 2015 2016 2017
Brunei Darussalam 23.7 26.0 32.9 39.6 27.4 35.2 34.6 34.8
Indonesia 32.9 33.0 35.1 33.8 34.6 34.1 33.8 33.4
Cambodia 17.4 17.1 18.5 20.0 22.1 22.5 22.7 22.9
Lao PDR 27.5 28.1 32.5 30.6 29.8 31.6 29.0 29.0
Malaysia 23.4 23.2 25.7 25.9 25.0 25.1 25.9 25.5
Philippines 20.5 20.5 18.2 20.0 20.6 21.2 24.3 25.0
13
Singapore 28.2 27.1 29.9 30.7 30.2 27.1 27.0 27.6

Thailand 25.4 26.8 28.0 27.5 23.9 22.1 21.7
Vietnam 35.7 29.8 27.2 26.7 26.8 27.7 26.6 25.8
Source: World Bank Development Indicators
One positive development is that foreign direct investments (FDI) have started to pick up, reaching
double-digit for the first time in 2017 at $10.0 billion (Table 9). In the first four months of 2018, BSP
data show that FDI grew 24.2 percent to $3.2 billion from $2.6 billion in the same period in 2017.
While there was a marginal improvement in the Philippines’ competitiveness ranking to 56th place
from 57th place in the 2017 Global Competitiveness, a number of issues still needs to be addressed
to sustain growth and attain the levels of Indonesia and Vietnam. These issues include: (i) inefficient
government bureaucracy, (ii) inadequate supply of infrastructure; (iii) corruption; (iv) complex tax
regulations; and (v) high tax rates. The restrictive provisions of the Constitution on foreign
ownership are also cited as an impediment to FDI in the country, specifically in retail trade and
public utilities, i.e, telecommunications.
TABLE 9
NET FOREIGN DIRECT INVESTMENT, 2010-2017
(IN BILLION US DOLLARS)
2010 2011 2012 2013 2014 2015 2016 2017
Brunei Darussalam 0.5 0.7 0.9 0.8 0.6 0.2 -0.2
Indonesia 15.3 20.6 21.2 23.3 25.1 19.8 4.5 22.1
Cambodia 1.3 1.4 1.8 1.9 1.7 1.7 2.3
Lao PDR 0.3 0.3 0.3 0.4 0.9 1.4 1.0
Malaysia 10.9 15.1 8.9 11.3 10.6 9.9 13.5 9.5
Philippines 1.1 2.0 3.2 3.7 5.7 5.6 8.3 10.0
Singapore 55.1 49.2 56.2 64.5 69.5 70.6 74.3 63.6
Thailand 14.7 2.5 12.9 15.9 5.0 8.9 3.1 9.1
Vietnam 8.0 7.4 8.4 8.9 9.2 11.8 12.6 14.1
Source: World Bank Development Indicators
After China, Vietnam is emerging to become “Asia’s new industrial powerhouse.” Based on the latest
2018 report of US property services Jones Lang LaSalle, Vietnam has established itself as an export-
driven economy with numerous free trade agreements, vast lands dedicated as industrial and
economic zones, strong economic growth and young, plentiful, low-cost workforce. To increase its
competitiveness, Vietnam has significantly increased infrastructure spending, accounting for 5.8
percent of GDP which is the highest in the region according to the Asian Development Bank. Just
recently, it has been reported that Samsung invested more than $17 billion in Vietnam which has
given confidence to other foreign companies to invest in the country.
The Build Build Build Program of the government with a total cost of over P8 trillion over five years
will address the need for expanding the productive capacity and improving the overall
14
competitiveness of the country. De Dios (2018) pointed out, however, that only a few flagship
infrastructure projects have been started. He noted that the government continues to underspend
relative to its programmed infrastructure spending and deficit targets and argued that these weaken
the case for new taxes. Data from the Statement of Allotment, Obligations and Balances released by
the DBM indicate that two of the main agencies responsible for the Build, Build, Build Program
registered low utilization rates. The Department of Public Works and Highways (DPWH) recorded
disbursement rates (disbursement over total obligations) of 68.9 percent and 46.4 percent in 2017
and the first quarter of 2018, respectively. The Department of Transportation continued to perform
poorly with disbursement rates of only 39.2 percent in 2017 and 7.5 percent in the first quarter of
2018.
Further, De Dios stated that the government’s fiscal space and higher revenues, together with undue
delays in infrastructure spending, could result to unintended consequences such as funding populist
measures (e.g., universal health care improvement, free college tuition, unconditional cash
transfers). A major challenge with regard to these populist “safety nets” programs is that they tend
to create a sense of entitlements that makes them very difficult to withdraw even if conditions do
not warrant anymore their continued provision.
The government must address the following concerns about low absorptive capacity: (i) tedious
government procurement procedures; (ii) technical deficit among government personnel; (iii) supply
constraints on private contracting sector, e.g., shortage of qualified local firms for big projects; and
(iv) red tape even for official development assistance (ODA) projects. As of June 2018, the National
Economic and Development Authority (NEDA) reported that only 35 out of the 75 infrastructure
flagship projects have been approved by the NEDA Board. However, these projects would still have
to go through the remaining phases of the project cycle - budgeting and financing, detailed
engineering design, procurement and, finally, construction.
On Inflation Rate. The inflation rate in the last six years has been relatively stable, falling within
the government target (Chart 4). The favorable inflation environment was attributed to low
petroleum prices and ample food supply despite the El Niño phenomenon in 2015. Prices started to
pick up reaching 3.1 percent and 3.2 percent, respectively in March and April 2017 from a 0.4
percent deflation in September 2015. In the first semester of the year, the inflation rate registered
an average of 4.3 percent which is significantly higher than the 2.9 percent recorded in the same
period in 2017. This has also exceeded the upper limit of the 2.0 - 4.0 percent target for the rest of
the year. Based on the latest update of the DBCC macroeconomic assumption on 2 July 2018, the
inflation forecast for 2018 is 4.0 - 4.5 percent.
15
CHART 4
MONTHLY INFLATION RATES, JANUARY 2013 TO JUNE 2018
(2012=100)
Source: PSA
Inflation pressures in the first semester stemmed from higher prices of commodities in the
international market particularly oil, compounded by the depreciation of the peso. This was
aggravated by higher excise taxes on petroleum products, minerals, automobiles, and cigarettes
including sweetened beverages. Three major commodity food groups recorded higher inflation
rates compared to the overall inflation rate namely, food and non-alcoholic beverages, alcoholic
beverages and tobacco, and transport. The inflation rate of food and non-alcoholic beverages which
accounted for more than one-third of the inflation basket at 38.3 percent was 5.5 percent in the first
semester, higher than the 3.0 percent recorded in the same period in 2017. Meanwhile, the inflation
rate for alcoholic beverages and tobacco which accounted for 1.6 percent of the inflation basket
surged to 20.8 percent in June 2018, recording an average of 18.2 percent from 7.2 percent. The
effect on alcoholic beverages and tobacco was reminiscent of the impact of the Sin Tax Reform Act
of 2012 where inflation rate for this commodity group increased by an average of 28.0 percent in
2013 during its initial year of implementation. Meanwhile, the inflation rate of the transport services
and operation of personal transport equipment which accounted for 8.1 percent of the inflation
basket recorded an average of 5.5 percent from 3.8 percent.
The reduction in personal income tax rates as provided for under the TRAIN law which increased the
disposable income of the majority of taxpayers and tended to increase demand could have also
contributed to inflationary pressures. It should be noted here that that even those who did not
16
benefit from the tax cuts or those who were initially exempted from income tax payments had to
contend with higher prices.
Issues have also been raised that the two cuts in the BSP’s reserve requirement ratio (RRR) are
inconsistent with the increase in interest rate to counter inflationary pressures. The RRR cuts
brought down the ratio to 18 percent from 20 percent and increase in liquidity in the market of
about P200 billion also contributed to inflationary pressures. According to BSP Governor Nestor
Espenilla, the additional liquidity that was released was more than offset by the impact of the open
market operations and foreign exchange operations to manage excessive peso volatility amidst
external uncertainties. The RRR cut was made in response to the growing needs of the economy for
more efficient financial intermediation. It is also seen to help control shadow banking especially
with rising challenges arising from the proliferation of financing alternatives such as those provided
by financial technology companies.
Prospects for inflation rate for the rest of the year remain elevated. The BSP Inflation Report for the
period April-June 2018 noted that inflation expectations for 2018 are slanted upwards and that the
risk of possible second-round effects from ongoing price pressures has risen. The main upside risks
to the inflation outlook are the recently approved transport fare increase and the clamor for wage
hikes. The adverse impact of the recent typhoons and monsoon rains would also put additional
upward pressure on food prices. Average inflation forecast for 2018 is higher than the 2.0 – 4.0
target but within the forecast of 4.0 – 4.5 (Table 10). For 2019, inflation rate is expected to slow
down to 3.8 percent as the one-off impact of the first tranche of the tax reform package will
dissipate.
The risks of possible wage-price spiral should also be monitored. Explaining the cause-and-effect
relationship between rising wages and inflation, the wage-price spiral suggests that rising wages
which increase disposable income increases the demand for goods and causes prices to rise. The
increase in prices would again give rise to demand for higher wages, which leads to higher
production costs and further puts upward pressure on prices, creating a conceptual spiral.
(https://www.investopedia.com/terms/w/wage-price-spiral.asp)
T ABLE 10
INFLATION PROJECTIONS
2018 2019
Government
Target 2.0 – 4.0 2.0 – 4.0
Forecast 4.0 – 4.5
International Monetary Fund 4.2 3.8
Asian Development Bank 4.0 3.9
17
Average of BSP’s Private

Sector Forecasts* 4.2 3.8
Average 4.2 3.8
*The BSP survey involving 24 respondents was conducted from 13 to 18 June 2018.
Sources: ADB Asian Development Outlook (April, 2018); IMF World Economic Outlook
Update (April 2018); BSP Inflation Report Q2 2018
It should also be noted that the impact of inflation pressure is not always in the form of increased
prices. Mendoza and Torres (2018) raised the issue of shrinkflation wherein producers of goods and
services resort to other adjustments other than prices to protect their market base to accommodate
the higher cost of production. The adjustments can be in the form of reducing ingredients, altering
the packaging, or downsizing the product itself. Shrinkflation can also affect the provision of
government services and implementation of government projects. Thus, strict monitoring and
evaluation of critical government projects must be given attention.
On Interest Rate. The 364-day T-Bill bill rate recorded an average of 2.9 percent in 2017, higher than
the 1.8 percent in 2016. The rate continued its upward movement this year, reaching 4.3 percent in
June or 1.5 percentage points higher than the 2.9 percent in January (Chart 5). For the first six
months of the year, the 364-day T-Bill rate recorded an average of 3.6 percent within the 3.0 - 4.5
target range of the DBCC for 2018 and 2019. The upward movement follows the rate hikes of foreign
central banks particularly the US Federal Reserve which already raised the rate twice this year
reaching 1.75 percent to 2.0 percent. Two more rate hikes are projected for the rest of the year as
the US economy is expected to strengthen and as employment prospects continue to improve.
CHART 5
AVERAGE 364-DAY TREASURY BILL RATES, 2010-2018
Source: Bangko Sentral ng Pilipinas
On Exchange Rate. The peso has depreciated by 6.7 percent from the average daily rate of
P49.958:$ in January 3, 2018 to P53.524:$ in July 13, 2018. This is so far the lowest rate of the peso
18
since the P53.545:$ in December 15, 2005. The US dollar has generally been strengthening against
most currencies due to US interest rate hikes and which is still expected to increase two more times
this year. Nonetheless, it should be noted that the country had the largest currency depreciation
among the ASEAN-5 economies for the period January - June 2018 (Chart 7).
CHART 6. FOREIGN EXCHANGE RATE (PHP/US$) CHART 7. DEPRECIATION RATE OF SELECTED

ASEAN COUNTRIES
For the first semester of 2018, the average exchange rate has reached P52.09:$, still within the P50-
53:$ adjusted projection for 2018. The same rate is projected for 2019. The depreciation of the peso
can also be traced to the weakening of the country’s external position. In the first semester of 2018,
the country incurred a balance of payment deficit of $3.3 billion, nearly five times the $706 million
deficit in the same period in 2017. The BSP attributed the higher deficit partly to the widening
merchandise trade deficit brought about by the sustained rise in imports of raw materials and capital
goods to support domestic economic expansion. The World Bank (2018) noted that "a faster-than-
expected pace of policy rate normalization in advanced economies could further adversely impact
capital flows and weaken the peso which in turn can pass through higher domestic prices, and
increase inflationary pressure at a time when global commodity prices are rising."
The depreciation of the peso has its advantages and disadvantages. It increases the competitiveness
of exports and increases the peso value of remittances of Filipinos. However, as imports become
more expensive with the weaker peso, the advantage to exporters is diluted due to the high import
content of most exported manufactured goods. On the other hand, the positive impact to
beneficiaries of remittances is also tempered by rising prices of goods and services.
On Exports and Imports. The growth in Imports of goods in 2016 and 2017 at 17.7 percent and 14.2
percent, respectively, outperformed that of exports of goods which contracted by 1.1 percent in
2016, then recovered with a 12.8 percent in 2017 (Chart 8). Imports of goods generally
19
strengthened in recent years owing to the rise in capital goods which include machineries,
equipment and transport items in line with the government’s massive infrastructure program.
Importation of other goods such as raw materials and intermediate goods, mineral fuels and
lubricant and consumer goods also grew in tandem with the strong expansion of manufacturing.
On the other hand, exports of goods have remained sluggish with the $48.2 billion receipts in 2017,
still lower than its most recent peak of $49.8 billion in 2014. The growth in exports of goods in 2017
was primarily driven by higher shipments of manufactured goods and mineral products which grew
by 10.3 percent and 72.4 percent, respectively. In the first quarter of 2018, exports and imports of
good grew by 7.0 percent and 7.1 percent, respectively. Even while the global economy is expected
to continue its recovery, risks remain heightened by the prospective impact of trade wars.
The targets for exports and imports were revised downwards for the period 2018-2022 to 9.0
percent and 10.0 percent from the previous targets of 10.0 percent and 11.0 percent, respectively,
on account of the risks of the trade tension between the US and China. While the country may not
be directly affected by the trade tension, there will be indirect effects as the two countries are
among the Philippine’s top trading partners.
CHART 8. EXPORTS AND IMPORTS OF GOODS, 2006-2017

100.0 30.0
90.0
20.0
80.0
70.0
10.0
60.0
50.0 -
40.0
(10.0)
30.0
20.0
(20.0)
10.0
- (30.0)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exports ($Bn) Imports ($Bn)
Exports Growth Imports Growth
On Current Account Balance. The current account balance is the sum of the net of trade in goods
and services, primary income and secondary income (Chart 9). Its movement is primarily driven by
the deficit in trade in goods which is not compensated for by the increase in the net receipts in the
trade-in-services, and secondary and primary income accounts. After posting current account
surpluses for thirteen years, the country recorded a current account deficit in 2016 amounting to
20
$1.2 billion which more than doubled to $2.5 billion in 2017. In the first quarter of 2018, the current
account deficit narrowed down to $208 from $860 million in the first quarter of 2017. Higher net
receipts in the trade-in-services, primary and secondary income accounts partially offset the deficit
in the trade-in-goods account.
CHART 9.
COMPONENTS OF THE CURRENT ACCOUNT BALANCE, 2005-2017
IN BILLION DOLLARS
As a result of the downward revision in trade targets, the BSP revised upwards its projection of the
current account deficit to $3.1 billion from the $700 million estimate in December 2017 as growth in
imports of goods is expected to outpace the growth exports of goods. The current account deficit
will continue to be supported by steady inflows of remittances as well as business process
outsourcing (BPO) and tourism receipts. The BSP explained that the revision reflects latest available
data and recent and prospective domestic and global economic developments.
The reversal of the current account from a surplus to a deficit has put downward pressure on the
BOP position. In 2017, the BOP recorded a deficit of $863 million, more than double the S$420
million deficit recorded in 2016. The reversal in the financial account to net inflows amounting to
$2.2 billion in 2017 from $175 million in net outflows in 2016 was not enough to offset the increase
in the current account deficit.
On Gross International Reserves. The performance of the BOP will affect the level of the gross
international reserves (GIR) which, in turn, impacts the movement of the exchange rate. As a result
of the current account deficit, the outflow of dollars has been greater compared to the inflow and
this has been reflected in the GIR. Based on preliminary estimates by the BSP, the GIR level has been
declining since January 2018, reaching $77.7 billion as of end-June 2018, equivalent to 7.7 months’
21
worth of imports of goods and payments of services and primary income (Chart 10). This level is
already lower than the 2018 target of $80.0 billion target for 2018. The BSP attributed the lower GIR
to outflows from the foreign exchange operations of the BSP, revaluation adjustments on the BSP’s
gold holdings resulting from the decrease in the price of gold in the international market, and
government payments for its maturing foreign exchange obligations.
Notwithstanding the decline, the BSP stated that the GIR continues to serve as an ample external
liquidity buffer. The GIR is equivalent to 7.5 months’ worth of imports of goods and payments of
services and primary income and six times the country’s short-term external debt based on original
maturity and 4.1 times based on residual maturity or those outstanding external debt with original
maturity of one year or less, plus principal payments on medium- and long-term loans of the public
and private sectors falling due within the next 12 months.
CHART 10. GROSS INTERNATIONAL RESERVES

IN BILLION DOLLARS
On Dubai Oil Price. The increase in the price of oil this year has been identified as one of the factors
that contributed to the spike inflation. For the first half of 2018, the price of Dubai crude oil has
steadily increased from an average price of $66.1 in January to $73.8 in June (Chart 11). The average
price of Dubai crude oil for the first semester of 2017 was $67.9 per barrel which is 33.6 percent
higher compared to the average price of $50.8 in 2017. This is still within the range of the adjusted
DBCC assumption of $55 - $70 per barrel for 2018. BSP (2018) identified the following factors
contributing to international oil price hike: (i) geopolitical tensions between the United States and
key oil producers Iran and Venezuela; (ii) declining oil production from Venezuela; (iii)
announcements from major producers like Saudi Arabia and Russia that they would evaluate
possibly increasing production given output declines from Venezuela and uncertainty surrounding
Iran production.
22
The DBCC forecast for 2019 is lower at $50- $65 per barrel. In the June 2018 Organization of the
Petroleum Exporting Countries (OPEC) and non-OPEC ministerial meeting in Vienna, Austria, oil
production was agreed to be increased but there was no specific figure given. This bodes well to the
expected increase in demand arising from improving global economic conditions. However, it should
be noted that there are continuing geopolitical tensions that bring uncertainties in the market.
CHART 11. Dubai Crude Oil Price

In US$/Barrel
Source of basic data: New Zealand’s Ministry of Business, Innovation and Employment
On unemployment. Both the unemployment and underemployment rates have steadily declined in
recent years which have been reflected in the significant decline of 3.6 percentage points in poverty
incidence to 21.6 percent in 2015 from 25.2 percent in 2012. While unemployment rate inched up
to 5.7 percent in 2017 from 5.5 percent in 2016, there was a significant decline in underemployment
to 16.1 percent from 18.3 percent (Chart 12). In January 2018, the unemployment rate dropped to
5.3 percent, the lowest in all the previous January rounds of the LFS since 2009, then increased to
5.5 percent in April 2018.
CHART 12
UNEMPLOYMENT RATE AND UNDEREMPLOYMENT RATE (%)
23
Source: PSA
Notwithstanding the improvement in labor indicators , the country remains having among the
highest unemployment and poverty incidence rates among the ASEAN-5, indicating that much still
needs to be done to make growth more inclusive. The quality of jobs should also be improved. The
number of underemployed persons or those employed who express the desire to have additional
hours of work in their present job, or to have additional job, or to have a new job with longer
working hours remains high at nearly 7 million in April 2018.
On Poverty Indicators. The sustained economic growth in recent years clearly helped in reducing
poverty incidence. In 2015, poverty incidence among population declined by three percentage
points to 21.6 percent from 25.2 percent in 2012. This is equivalent to a decline of about 1.8 million
in the number of poor Filipinos. Notwithstanding the improvement, the poverty rate remains high
as shown in the World Bank (2018) poverty data of selected East Asian countries (Table 11).
Moreover, the pace of poverty reduction in the Philippines is slow. From 2006 to 2015, that
country’s poverty rate based on the international poverty line $1.90 per day, declined by an average
of only 0.9 percentage point per year, behind Vietnam (2.1 percentage points), Indonesia (2.2
percentage points) and China (2.4 percentage points). The same trend can be seen when using the
$3.20/day lower middle income class poverty level. Thailand has zero poverty rate at $0.90/day
poverty line and only 1.1 at the $3.20/day lower middle income class poverty level.
T ABLE 11
POVERTY RATE IN SELECTED EAST ASIAN COUNTRIES
$3.20/day
$.90/day (lower middle income class
(international poverty line) poverty level)
2006 2015 Decline 2006 2015 Decline

Per Year Per Year
Thailand 0.7 0 0.10 6.2 1.1 0.7
China 18.8 1.9 2.4 43.5 20.2 3.3
Vietnam 19.5 2.8 2.1 51.3 11.6 5.0
24
Indonesia 27.5 7.5 2.2 65.6 34.0 3.5

Philippines 14.5 6.6 0.9 38.4 27.0 1.3
Notes: Data for Thailand are for 2006 and 2013; 2005 and 2012 for China; and 2006 and 2014 for Vietnam.
The Philippines uses income as the welfare measure while other countries use consumption.
Source: The World Bank (2018l). Philippines Economic Update: Investing in the Future.
The World Bank (2018) also pointed out that increases in inflation rate could slightly weaken the
pace of poverty reduction in the country. A Social Weather Station (SWS) survey conducted on June
27 to 30, 2018 among 1,200 adult heads of households nationwide showed that the number of
Filipino families who considered themselves poor has increased in the second quarter to 48 percent
at around 11.1 million families from 42 percent or 9.8 million families in March 2018 (Chart 13).
According to SWS, the median Self-Rated Poverty Threshold (SRPT) or the monthly budget that a
poor household needs for home expenses in order not to consider itself poor in general is P15,000.
By area, the median SRPT for Metro Manila was P20,000, P15,000 in Balance Luzon, P11,000 in the
Visayas, and P15,000 in Mindanao.
CHART 13
Source: Social Weather Stations
The World Bank (2018) also noted that the high income inequality in the country with a GINI
coefficient of 44.39 has limited the responsiveness of poverty reduction to economic growth.
Regional data validates this argument (Table 12). The National Capital Region (NCR) which recorded
the highest per capita GRDP in 2017 at P244,453 at constant 2000 prices was nearly three times the
national average of P82,592. Two other regions – CALABARZON and CAR – recorded per capita GDP
that were higher than the national average at P99,328 and P83,044, respectively. On the other
hand, the three regions that posted the lowest per capita GRDP were ARMM (P13,989), Bicol
25
(P27,504), and Eastern Visayas (P37,125). The per capita GDP of the Philippines was nearly six times
higher than that of the ARMM.
T ABLE 12
SELECTED REGIONAL INDICATORS
2017 2015 2015
Per Capita Income GINI Coefficient Poverty Incidence
PHILIPPINES 82,592 44.39 21.6

NCR 244,453 39.09 3.9
Region IV-A - CALABARZON 99,328 40.12 9.1
CAR 83,044 42.11 19.7
Region III – Central Luzon 73,921 39.7 11.2
Region XI – Davao Region 71,762 42.95 22.0
Region VII – Central Visayas 71,677 46.47 27.6
Region X – Northern Mindanao 66,499 46.36 36.6
Region I – Ilocos 51,728 39.79 13.1
Region XII - SOCCSKSARGEN 48,240 46.26 37.3
Region VI – Western Visayas 44,296 43.62 22.4
Region IX – Zamboanga Peninsula 43,300 43.62 33.9
Region II – Cagayan Valley 41,600 40.65 15.8
Region IV-B - MIMAROPA 41,421 45.68 24.4
Region VIII – Eastern Visayas 37,125 46.49 38.7
Region XIII - Caraga 36,308 43.38 39.1
Region V – Bicol 27,504 39.61 36.0
ARMM 13,989 28.01 53.7
Source: PSA
To a large extent, the economic performance of each region has an impact on its poverty situation.
The regions with the highest GDP per capita generally have the lowest poverty incidence and vice
versa. The NCR and CALABARZON which have the highest per capita GDP have the lowest poverty
incidence at 3.9 percent and 9.1 percent, respectively. On the other hand, ARMM and CARAGA
which are the regions with the lowest GRDP are among those with the highest poverty incidence.
There is also a high variation in the income inequality in the regions as indicated by the GINI index
which measures the extent to which the distribution of income or consumption expenditure among
individuals or households within an economy deviates from a perfectly equal distribution. A Gini
index of 0 represents perfect equality, while an index of 100 implies perfect inequality. Among the
regions, Central and Eastern Visayas as well as SOCCSKSARGEN have the highest inequality while
ARMM had the lowest level of inequality.
26
To reduce the glaring disparity in the regions, the shift to a federal system of government is being
considered to considerably improve development in the countryside by giving more powers to the
region. Even with the noble intentions, concerns have risen over this major policy reform measure.
Socioeconomic Planning Secretary Ernesto Pernia has expressed reservation, stating that the
government must be cautious about this proposal as it may deplete government resources, disrupt
the infrastructure program and could also spell disaster for those regions that are not prepared for
the transition. He suggested a thorough study of the proposal and to properly prepare the country
for the transition.
Moody's Investors Service also raised concern that the shift to federalism would likely expand the
aggregate size of the government and, consequently, public expenditure. The adverse impact on the
fiscal balance may affect the country’s investment grade credit rating.
The Philippine Business Groups consisting of Financial Executives Institute of the Philippines (FINEX),
Makati Business Club (MBC), Management Association of the Philippines (MAP), Philippine Chamber
of Commerce and Industry (PCCI), Semiconductor and Electronics Industries of the Philippines
Foundation Inc. (SEIPI), Cebu Business Club (CBC) have also released a position paper on the
proposed shift to a federal form of government. The group did not articulate support nor opposition
to the measure but suggested the following: (i) conduct comprehensive studies on the budgetary
and economic implications of a shift to a federal system and to present the findings to the
Consultative Committee, Congress and the public; (ii) increase public consultation; (iii) design and
implement a program to expand the capabilities of local governments and local government
officials, to prepare them for added responsibilities whether or not there will be a shift to a federal
system; and (iv) review the objectives of the shift to a federal system, and determine which of these
can be addressed immediately and substantially by amending the Local Government Code and other
laws, or by enacting new laws and administrative measures, while deliberating on whether to
change the Constitution. The group stated that they are ready to support the government in
developing strategies that aim to strengthen the regional economies.
SUMMARY AND CONCLUDING OBSERVATIONS
The country is poised to sustain its economic growth momentum this year and next year. However,
analysis of the macroeconomic assumptions indicates potential risks that could disrupt the growth
momentum. The inflation rate which has already exceeded the high-end of the target may put
additional upward pressure on the interest rate, spark capital outflows, and further weaken the
peso. External factors such as the additional rate increases by the US Federal Reserve and
international oil price hikes are additional burdens. The government must be able to address these
immediate and short-term risks.
27
With the administration targeting GDP to grow by at least 7.0 percent in the medium-term, it is
imperative that the government increase the productive capacity of the country. The Build, Build,
Build infrastructure program could eventually address the enduring investor concern about the
country’s poor infrastructure system. However, the expansionary stance of the administration
should be prudently observed as this could lead to challenges on fiscal sustainability particularly if
revenue collection fell short of the targets. Issues causing delay of the implementation of major
flagship projects must also be looked into. And populist safety nets spending that tends to create a
sense of entitlements among its recipients should be carefully managed. In addition, the
government must continue to address the other concerns of investors to provide a conducive
environment for businesses to flourish and generate the much-needed employment. And while
there has been improvement in reducing poverty, there is still much room for improvement as
shown in the experience of Indonesia and Vietnam. Specifically, the big disparity across the regions
should be addressed.
REFERENCES:
Asian Development Bank. Asian Development Outlook 2018

Bangko Sentral ng Pilipinas. Report on Economic and Financial Developments. First Quarter 2018.
________________. Inflation Report Q2 2018
________________. Bangko Sentral ng Pilipinas website for various economic indicators.
________________. (2018, July 19) Media Releases. Overall BOP Position Posts US$1.18 Billion Deficit in June
2018
Bureau of the Treasury. Cash Operation Report. Various years.
Congressional Policy and Budget Research Department. Budget Briefer.Various years.
Department of Budget and Management. Budget of Expenditures and Sources of Financing. Various years.
________________.DBM: Gov’t ready to Transition to Annual Cash-Based Budgeting in FY 2019
https://www.dbm.gov.ph/index.php/secretary-s-corner/press-releases/list-of-press-releases/696-dbm-
gov-t-ready-to-transition-to-annual-cash-based-budgeting-in-fy-2019
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2019 BUDGET BRIEFER

CONGRESSIONAL POLICY AND BUDGET RESEARCH DEPARTMENT

BRIEFING NOTES FOR THE DBCC PRESENTATION

THE FY 2019 FISCAL PROGRAM

PARTICULARS 2018 2019 Amount

Privatization - - - 0.0 14.4 14.4 - - N/A

Fiscal Deficit and Borrowings

Net Foreign Borrowings 27.6 217.5 140.0

2017 2018 2018 2019

Current Account Balance

0.0 0.0 0.0

Source of basic data: Philippine Statistics Authority website

Singapore 28.2 27.1 29.9 30.7 30.2 27.1 27.0 27.6

Average of BSP’s Private

Source: Bangko Sentral ng Pilipinas

CHART 6. FOREIGN EXCHANGE RATE (PHP/US$) CHART 7. DEPRECIATION RATE OF SELECTED

Source: Bangko Sentral ng Pilipinas

CHART 8. EXPORTS AND IMPORTS OF GOODS, 2006-2017

Source: Bangko Sentral ng Pilipinas

Source: Bangko Sentral ng Pilipinas

CHART 10. GROSS INTERNATIONAL RESERVES

Source: Bangko Sentral ng Pilipinas

CHART 11. Dubai Crude Oil Price

2006 2015 Decline 2006 2015 Decline

Indonesia 27.5 7.5 2.2 65.6 34.0 3.5

Source: Social Weather Stations

PHILIPPINES 82,592 44.39 21.6

SUMMARY AND CONCLUDING OBSERVATIONS

Asian Development Bank. Asian Development Outlook 2018

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