Statement by F. Enrico R. Alfiler on behalf of Mr. M. Portugal at the meeting of May 4, 1999

International Bank for Reconstruction and Development 87500 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICL\L USE O.'I"LY CONFIDENTIAL EDS99-108 May 3, 1999 - ------------- t"\11 -. 'f~tPtT\Pnt . - -,~ .-. - ------- . - .. -· ... nr11"n 1< - . .,.. -·,.. ····· ·-·- ----·-· -·· --··-·· Ill LliT11Prnn KPn~ur .. , . " 1\/lr '"' .- . ..... -·--c-· .... nrnuro... • Date of Meeting: May 4, 1999 Philippine CAS On behalf of my Philippine Authorities, I would like first of all to thank management and staff for a very well prepared paper for on the Bank's country assistance strategy for the Philippines. The paper, I think, portrays faithfully the recent developments in the country, the events in the region that have led to the policy actions of the authorities, the remaining external and internal risks to sustainable development, and the plans and programs of the authorities over the medium term to mitigate these risks. No doubt the presence of a Manila field office with a motivated staff helped to provide a clear and well balanced accounting of these events. The paper, on balance, projects a positive tone of the developments and prospects for the Philippines moving forward. And this reflects, to my mind, the confidence of management and staff in the ability of my Philippine authorities to remain on track of their macro-economic program, as well as of their structural reform objectives and development priorities. This confidence is well founded on the record of performance of the authorities. particularly during the Asian crisis in the recent two year period. During this period. the authorities responded remarkably well to the external pressures by anticipating and making pre-emptive moves. for example. in the banking sector by increasing minimum capital requirement of banks. lowering the ceiling on real estate loans. etc. On the fiscal side. the authorities implemented a forced reduction in total expenditures. maintaining only the program levels of expenditures for social services and focused these services expenditures on the rural areas. Indeed, as the paper indicated, the Philippines has earned admiration for its resiliency amidst adversity. The Philippines, like any other country in the region has undoubtedly been adversely affected by the crisis. But the structural reforms implemented much earlier and the responsible macro-economic management have resulted in a much more resilient economy. While the other crisis-affected countries in the region recorded significant declines in real GOP in 1998. the iThis document has a restricted distribution and may be used by recipients only in the •oerformmce of their official duties. Its contents mav not other.~;ise be disclosed without I • " : \V,)rld B::wJc authorization. Philippines registered only a 0.1% decline (real GNP grew by 0.5% ) during the same period. The decline was a result of the significant drop in agricultural production, which suffered from the El Nino-induced drought. Counteracting the drop in agriculture were the strong growths in the exports and services sectors. Even during the period of currency volatility and the drop in agricultural output, prudent monetary and fiscal policies kept inflation below double digit levels. Inflation averaged 9.7% in 1998, originating mainly from the currency adjustments and agriculture supply bottlenecks during the year. Developments in the external accounts were also positive. High exports growth combined . resulted in a current account surolus with the decline in imoorts - for the first time in five years, and the overall balance of payments ratio to GNP reversed from minus 3.9% to positive 1.6%. Fiscal performance reflected mainly the efforts of government to pick up the slack from the reluctant private sector which was being stymied by the crisis of confidence afflicting the region and the country. The government budget deficit widened to 1.8% of GNP as social expenditures were maintained amid revenue shortfalls resulting from lack of private sector· activity. The CAS paper enumerates some of the other important strengths that account for the Philippines' greater resiliency, e.g. its stable democratic government. its pro-market policy reforms, policies that encourage private sector participation in infrastructure development, highly skilled labor force, steady overseas workers remittances, and greater focus of the Estrada government on poverty alleviation. All of these can be substantiated, but for brevity's sake, I will just take the staffs word on them for now. Prospects for 1999 appear reasonably favorable, given the remaining uncertainties in the region. A bottoming out is expected, as agriculture rebounds and the services and export sectors are expected to maintain their growths. Recent developments indicate that pre-crisis conditions are beginning to re-emerge. The stock market is reviving, interest rates are at pre-crisis levels, the exchange rate appears to be stabilizing at a more realistic level which, at PhP38.00/US$1.00, is "much improved from its lowest point ( PhP43.00/US$1.00) during the crisis. The ongoing review of the Philippine program v,:ith the IMF is expected to confirm that the macro-economic growth and inflation targets under the program remain valid. Beyond 1999. the economy should be able to get back to its gro,,·th momentum that was picking up before it was interrupted by the regional crisis. As the CAS document rightly indicated. this is possible because the new administration is continuing the structural reform agenda initiated during the Aquino administration. implemented by the Ramos administration. and now adopted and further strengthened by the Estrada administration. In addition to the structural reforms, prudent monetary and fiscal policies are also expected to be maintained. This policy continuity should reassure those of you in the Board who have expressed apprehension regarding this matter during the March 1998 discussion of the old Philippine CAS review two months before the national election.  Perhaps one notable important qualitative difference between the previous administration and the present one is the greater emphasis accorded by the present administration to social sector reforms and poverty alleviation. Indeed, the present administration obtained a record mandate on the basis of its pro-poor/pro-market agenda. This pro-poor/pro-market agenda ( also known as economic growth with social equity) is elaborated on in the draft Medium Term Philippine Development Plan ( MTPDP ). The MTPDP priorities and targets are spelled out clearly in the CAS document (pp. 7-11 ), so I will not repeat them here. In brief, the MTPDP emphasizes pro-market, gro\\1h oriented reforms aimed at enhancing incomes of people in the rural and agricultural sectors. where most of the poor are situated. Enhancing delivery of basic services in the social sectors like nutrition. education, housing, etc. are emphasized, with target improvement rates specified. In addition, the MTPDP recognizes that poor governance is a major source of inefficiency in social service delivery, and therefore gives governance reform special priority. The CAS, I think, rightly views the MTPDP as its starting point and accordingly tailors the Bank Group's assistance in support of it. I and my Philippine authorities share the view that the package of loans and technical assistance included in the base case scenario in the CAS is appropriate. My Philippine authorities find the Bank Group assistance specified in the CAS as consistent with their overall financing requirement and sufficiently complementary with the other sources of funding for the MTPDP, including from the ADB, the IMF, bilateral donors ( especially Japan) and the private bond markets. Needless to say, where there are opportunities for accelerating progress, my authorities expect that greater assistance from the Bank Group will be forthcoming, as in the high case scenario. My authorities also share the concerns expressed in the CAS regarding the downside risks to the recovery scenario posed by the still uncertain external environment, e.g. reduced capital flows, deceleration of growth in the major markets of Philippine exports, and resumption of currency volatility in the region. On capital flows, my authorities are aggressively pursuing foreign direct investments. and are always eager for opportunities to tell the good story about the country to the capital markets. Efforts in this area include the broadening of the country's investor base through issuance, for example in the Euro market. The Philippines. by the way. was the first Asian sovereign to issue its bonds in the Euro market. In this regard. my Philippine authorities are awaiting the guidelines on the new policy based guaranty instrument, with the expectation that the risk premium on Philippine paper \Viii be reduced by the instrument. On the developments in the major export markets, my authorities' trade policy reform agenda includes diversification of export markets and products, as well as ensuring compliance with international standards. In the meantime. they are praying that the US market will continue to be open and friendly to Philippine exports. and that Japan will be able to strongly revitalize its domestic economy.  On regional currency fluctuations, my authorities are in regular dialogues with its neighbor economies through various forums regarding this risk, and continue to explore with them possibilities of financing intra-regional trade with currencies in the region. Nonetheless, they are watching developments very closely, beefing up reserves, and strengthening prudential requirements on currency exposure of financial institutions. On internal risks, my authorities are mindful of these and are committed to pursuing faithfully their reform agenda to mitigate them. They view the recent indications of resumption of lending by banks to the production sector as positive and can be sustained. They are mindful that policy slippage can derail this momentum, and are therefore committed to stay the course. Finally, my authorities would like to reiterate that they value the collective wisdom of the Bank Board, and are keen to hear from Executive DirectOrs their aiways usefui comments on Philippine developments.