Philippines - Debt Management Program Project

Document of The World Bank FOR OFFICIAL USE ONLY ,; A/ 3 / ZP7 P#- Report No. P-5 195-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$200 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A DEBT MANAGEMENT PROGRAM November 30, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Philippine Peso (P) US$1.00 = 21.5 (as of July, 1989) P 100 100 centavos FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOI - Board of Investments CODA - Committee on Official Development Assistance DOD - Disbursed and Outstanding Debt ERL - Economic Recovery Loan GDP - Gross Domestic Product GNP - Gross National Product ICOR - Incremental Capital-Output Ratio LIBOR - London Interbank Offered Rate MLT - Medium and Long Term MTPAP - Medium Term Public Assistance Program MTPIP - Medium Term Public Investment Program O&M - Operations and Maintenance Expenditures OPEC - Organization of Petroleum Exporting Countries SAL - Structural Adjustment Loan XGS - Exports of Goods and Services  FOR OMCIAL USE ONLY PHILIPPINES DEBT MANAGEMENT PROGRAM Loan and Pro7ect Summary Borrower: Republic of the Philippines Amount: US$200 million Terms: 20 year term, including 5 years of grace, at the standard variable interest rate. Description: The proposed loan is a stand-alone operation to finance, together with funds from the IMF and certain bilateral sources, the debt buyback portion of the Government's 1989-90 commercial bank financing and debt reduction package. The package provides an exit vehicle for low exposure com- mercial banks at a sizeable discount, while encouraging new flows from those banks with a long- term interest in the Philippines. The financial package is an integral part of the Government's medium-term program, which focusses on strengthened macroeconomic performance, the adequacy ar,d efficiency of investment, and improved mnuintenance of public assets. Conditionality is designed to help achieve these objectives and is a product of a clear Bank strategy and reflective of close coor- dination with the IMF. Benefits: The debt buyback portion of the financing package permits the Philippines to retire $1.3 billion of long-term debt at a 50Z discount through an opera- tion with an estimated economic rate of return of 23Z; however, its total benefit must be seer. in light of the improved environment which the financing package, along with macroeconomic strengthening and investment efficiency gains, will help bring about. Debt reduction is a critical step in the Philippine medium-term strategy of sus- taining growth by rebuilding confidence, attracting new investment, creating a more positive domestic environment in which to continue servicing its debt, and establishing a path towards full resump- tion of voluntary lending. Risks: The primary risk associated with the loan is that the anticipated improvements in investment ef- ficiency do not materialize, either because the macroeconomic environment deteriorates or because This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank &uthorization.  - ii - the proposed measures are ineffective in raising the quality of investments. The operation seeks to minimize those risks by including specific macro- economic conditions for tranche releases and tailoring the proposed measures to improve the quality of investment to specific difficulties which have emerged in recent years. Risks are also reduced by Government's strong commitmer., to those actions required. Estimated Disbursements: The proposed loan would be disbursed in two tranches, of $150 million and $50 million, respec- tively; the first tranche would be available upon effectiveness of the loan and the second tranche would be released upon completion of agreed actions, and is expected by late 1990. Economic Rate of Return: Not applicable. Appraisal Report: None. MUap: None.  PHILIPPINES DEBT MANAGEMENT PROGRAM Table of Contents Page No. Loan and Project Summary . . . . . . . i PART I - THE ECONOMY . . . . . . . . . . . . . . . 1 Origins of the Debt Problem . . . . . . . . . . . . . Stabilization and Adjustment . . . . . . . . . . . . . 3 The Government's Medium Term Program . . . . . . . . . 6 Growth Prospects and Financing Needs . . . . . . . . . 6 Official Sources .... . . . . . . . . . . . . . . . 9 PART II - THE COMMERCIAL BANK FINANCING PACKAGE . . . . . . 10 Structure of Commercial Bank Debt . . . . . . . . . . 10 Considerations that Shaped the Financing Package . . . 10 Benefits of the Financing Package for the Philippines 12 PART III - BANK STRATEGY AND OPERATIONAL PLANS . . . . . . 14 Bank Strategy . . ... . . 14 Proposed Bank Support . ... .15 Deliaeation of the Set-Aside . .. . . . . 15 The Choice of Vehicle . . .... . ..16 Conditionality . . . . . . . . . . . . . . . . . . . . 16 Macroeconomic Policies. .. . . . .... 17 Public Investment ........*. .17 Operation and Maintenance of Public Investment . . . . 19 Private Investment .... . . . . . . . . . . . ... 20 Disbursement .... . . . . . . 21 Justification for Bank Support . . . .... 21 Risks .... . . . . . . . . . . . . . . . . . . . . 22 PART IV -COORDINATION WITH THE IMP . .... ...... . 23 PART V -RECOMMENDATIONS ... . . . . .. ... . . . . . 23 ANNEXES Annex I - Letter of Development Policy . . . . . . . . 24 Annex II - Policy Matrix ..... ...... . .32 Annex III - Status of Bank Group Operations in the Philippines .. .... . . . . . . . . . . 35 Annex IV - Economic Indicators . . . . . . . . . . . . . 37  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A DEBT MANAGEMENT PROGRAM I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $200 million to support a debt buyback operation of its Debt Management Program. The loan would have a te.,m of 20 years, including five years of grace, at the Bank's standard variable interest rate. I. THE E O)NOMY 1. The Philippines has emerged from a period of stitbilization and adjustment with two years of strong growth. Indeed, its performance among the group of Highly Indebted Countries has been strong. Growth in GNP has averaged about 62 p.a. and inflation has been kept in check. Accompanying improvements in output have been major policy advances in trade liberalization, financial reform. privatization of public institutions, tax reform and generally responsible short term economic management. Nevertheless, the Philippines continues to be burdened by a high level of external debt, totalling US$29 billion or about 75? of GNP. Origins of the Debt Problem 2. While the Philippines experienced relatively rapid growth during the 1970s (about 6.52 per annum), the accumulation of various structural problems during the 1980s severely reduced overall economic performance and growth. The energy crisis of 1979-80 put a severe strain on the balance of payments, and the Government attempted to counter this problem with a substantial energy investment program financed from foreign borrowings. Other external events, including rising interest rates and declining commodity prices, also added to the country's balance of payments problems. At the same time, distortions in trade incentive. -and commodity prices had resulted in an inefficient pattern of investment. 2ublic sector financial intermediaries came under increas'ng political pressure to make ill-advised loans in the private sector. Many investments undertaken by the public sector also proved to be unecownic. The exchange rate was not adjusted to reflect changes in relative prices, and the overvalued exchange rate was financed by a reliance on relatively short-term commercial borrowings on variable rates, which commercial banks were then making available in an attempt to recycle the OPEC surpluses.  - 2 - Table 1: SELECTED MACRO-ECONOMIC INDICATORS Units 75-79 1980 1982 1984 1986 1987 1988 GDP growth rate X 6.5 5.3 2.9 -6.1 1.4 4.7 6.4 Investment growth X 9.5 4.3 -3.3 -43.2 -9.0 27.9 25.9 Inflatior. X 9.9 18.2 10.2 50.3 0.8 3.8 8.8 Investment/GDP X 30.3 28.7 26.6 15.1 11.1 13.8 15.7 Current Acct/GDP 2 -4.6 -4.9 -8.0 -3.9 3.2 -1.4 -1.0 Public Def/GDP 2 n.a. 1.3 4.& 1.8 4.9 2.8 2.8 External Debt $B 8.8 17.4 24.2 24.7 28.3 30.1 29.4 External Debt/GDP X n.a. 49 61 76 92 87 75 Debt Service/XGS S n.a. 27 42 33 34 39 33 3. All of these factors combined to produce an untenable situation. Total external debt, which was already high in the late 1970s, rose rapidly from about $13 billion in 1979 to $24.3 billion (70Z of GNP) in 1983. Interest payments rose from $626 million to about $2.0 billion in the same period, or to a level equal to 40Z of commodity exports. While investment rates remained high during this period, investment efficiency declined, and overall growth rates fell (see Table 1), while the current account deficit grew larger. Because of the economy's poor performance, and continued adverse external conditions including declining export prices for many Philippine exports, export earnings did not keep pace with rising debt service demands. The problem came to a head in 1983, when a growing crisis among the Latin American high debt countries, combined with political events in the Philippines, caused commercial banks to cut short-term credit lines to the Philippines. The Government was forced to request a moratorium on principal payments and to begin discussions with the IMF on a stabilization program. At the time of the crisis, the total external debt totaled $24.3 billion, of which close to $10 billion was short-term (see Table 2). Of the total debt approximately $15 billion was owed to commercial banks.  - 3 - Table 2: STRUCTURE OF EXTERNAL DEBT BY CREDITOR (S millions) 1983 1986 1988 Public & Publicly Guar. LT 10,466 19,285 23,475 Official Creditors 4,774 8,154 10,956 Multilateral 2,834 4,188 4,775 of which IBRD 2,047 3,017 3,408 of which IDA 61 92 102 Bilateral 1,341 3,966 6,181 Private Creditors 5,691 11,131 12,518 Suppliers 408 1,144 873 Commercial Bank 4,033 8,443 10,348 Other Private 1,250 1,543 1,297 Private Non-Guar. LT 3,125 2,294 1,093 Total Long-Term DOD 13,591 21,579 24,467 IMF Credit 1,095 1,266 1,093 Short-Term Debt 9,608 5,486 3,888 Total inc. IMF & Net ST 24,294 28,331 29,448 Stabilization and Adjustment 4. Since 1983, and particularly since the change in Government in 1986, a major effort has been made to remove past distortions and put the economy back on the path of efficient growth. Stabilization programs, supported by IMF Standby Agreements, reduced public sector and balance of payments deficits, reduced inflation, and restored the exchange rate to an equilibrium level. The Government's stabilization efforts have been supported by a series of debt reschedulings by both the official and private creditors. Two Paris Club reschedulings (1984 and 1986) provided about $1.2 billion in debt relief, for two eighteen month periods, including a substantial rescheduling of interest. An additional Paris Club agreement in May 1989 provides for rescheduling of 1002 principal, and interest, falling due over the next two years. Two agreements with the commercial banks (1985 and 1987) were concluded. The first, covered arrears from 1983 and amortization payments due in 1985 and 1986. It also provided for $925 million of new money from the banks and a $3 billion trade facility. The second agreement provided for debt relief of $9.3 billion (principal) over a six year period (1987-92), a renewal of the trade facility, and a slight improvement in the terms of the 1985 rescheduling. These agreements had the effect of temporarily smoothing the debt service schedule by postponing most principal repayments during the period, while the Philippines continued to meet interest obligations, including market-based interest charges on rescheduled debt. For 1988, for instance, total debt payments were reduced by $3.5 billion from original schedules, and the total service ratio was reduced from 542 before rescheduling to 30Z after.  5. Supported by a series of policy-based loans from the Bank (see Table 3), as well as assistance from the Fund, the Government has undertaken major reforms designed to restructure the productive side of the economy, reduce the level of government intervention in the economy, increase private sector participation, and enhance incentives for exports and production. The major actions under this program include: Tax Reform. The tax system has been adjusted to eliminate distortions caused by sales and excise taxes, and replace them by a value added tax, reduce taxation on the poor, improve collection and administrative efficiency, and lower marginal tax rates at the highest levels. Public Financial Institutions. The two major public financial institutions, which had become a serious drain on the budget, have been restructured, reduced in scope, and put on a sound financial footing; the privatization of one of these banks has also begun. Non-performing accounts of these banks have been taken over by a government disposal agency; about one-third of these have already been sold to the private sector. Furthermore, four of the six private banks acquired by the public sector have been wholly or partly sold to the private sector. Public Corporations. A reform program has been implemented in order to privatize or close public corporations not providing essential services, and to improve the financial performance of those that remain in the public sector; of 257 public corporations, 205 will be either privatized or closed. Trade Reform. A major reform of the tariff system had been implemented in the early 1980s as part of SAL-I; this has been supplemented in recent years by a program for the removal of quantitative import restrictions. This program has reduced the number of restricted imports from 401 to less than 1O and under the IMF's EFF, a program for further liberalization has been agreed for the bulk of the remaining items. Financial Sector Reforms. The Government is implementing a program designed to improve supervision and regulation of the private financial system, and reduce intermediation costs through improved depositor protection, reduced barriers to entry and branching, reduced taxation of bank services, and improved legal framework for financial contracts. Public Expenditures. A major refocusing of public investment has taken place, reducing the size of the program and reorienting expenditures to essential infrastructure; in addition, operating and maintenance expenditures have been increased, in order to insure that existing capital is maintained and that essential social services are preserved. Agriculture. Government restrictions and price controls on agricultural outputs and inputs have been eliminated, ine-luding government sponsored monopolies of the sugar and coconut trade, and government controls on fertilizer imports. In addition, an ambitious program of land reform has been started.  Table 3: WORLD BANK ADJUSTMENT LENDING SINCE 1983 Loan Date Amount Policy Focus ($ m) SAL-I 1980 200 Tariff reform. begin removal of quantitative restrictions on imports, improve export promotion. SAL-II 1983 302 Restructure of investment incentives, reduced sales and excise taxes on imports. Agricultural 1984 150 Removal of price and other controls on Inputs agricultural outputs and inputs and the break up of the Sugar and Coconut monopolies. Economic 1986 300 Reforms of public financial Recovery Loan institutions, trade restrictions, public investment, and tax system. Reform Program 1987 200 Restructured controls on public for Government corporations, implemented program Corporations of privatization and closure for over 200 corporations. Financial Sector 1989 300 Reformed Central Bank regulation and control of private banks, improved legal system, competition among banks, depositor protection, interest rates. 6. These reforms have had their expected effect on improving the performance of the economy. GDP growth was 4.72 in 1987 and 6.4Z in 1988. The balance of payments current account deficit was significantly reduced as a percentage of GNP and the public sector deficit has averaged less than 3Z. Inflation, which reached a peak of 502 in 1984, was held to less than 1O per year. Total investment remained low, at about 18Z of GNP, reflecting the gradual absorption of excess capacity. The sustainability of the growth effort, however, will necessitate raising the investment level, both in the private and public sectors. While foreign resource inflows, both official and private, will continue to play an important role, the magnitude of these investment requirements will necessitate an increasing reliance on domestic resource mobilization efforts. For this reason, the Government attaches high priority to efforts to reform the domestic financial system, improve tax collections in the public sector, and limit the negative net resource transfers caused by the debt burden.  - 6- The Government's Medium Term Program 7. Despite recent progress, the Philippine economy remains encumbered by many problems that limit the sustainability and depth of the recovery effort, and prevent the economy from reaching its full potential. In conjunction with the recent Consultative Group meeting (Tokyo, July, 1989), the Government restated its program and development objectives. This document, "The Philippine Agenda for Sustained Growth and Development", highlights the need to increase the overall efficiency of the economy, in agriculture, industry and the public sector, while ensuring that the benefits from growth are distributed more equitably within the population, and between regions. The main focus of Government efforts in the future will be directed at: (a) extending reforms which enhance and promote private investment, including further deregulation, improved incentives for investors, and improvements in financial sector; (b) improving efficiency in the public sector, both in terms of raising revenues and improving tax collection, and improving its capacity to provide essential infrastructure and services; (c) addressing in a meaningful way the deep-seated problems of poverty, population growth and unemployment, including the development of expanded programs in the social sectors, greater attention to natural resource management, and an effective program of land reform; (d) designing programs to increase production efficiency while limiting environmental degradation in the productive sectors, particularly agriculture, both to serve as a basis for exports and for increased employment; and (e) finding ways to alleviate the impact of the debt burden on the economy, and restoring the country's creditworthiness. Growth Prospects and Financing Needs 8. The Government's overall goal, as set forth in its Updated Philippine Development Plan, sets as a target a growth of output of 6.5Z per year for the period 1989-92. This growth rate, which equals the rate achieved in the late 1970s, would only be sufficient to restore per capita income to its 1982 level by the end of the Plan period. A growth rate of this magnitude would require an increase in the rate of investment to about 24Z of GDP, in order to rebuild the depleted capital stock, both in terms of public sector infrastructure and in the private sector (see Table 4, below). This rate of GDP growth is based on a substantial increase in investment efficiency over the past. The overall gross ICOR of 3.7 in the projection is lower than that achieved during the 1970s, when growth also averaged 6.5?, and the ICOR was 4.8. Nevertheless, this is considered reasonable in light of the considerable liberalizat.Lon of trade and factor markets since that time.  - 7 - Table 4: PHILIPPINES KEY MACROECONOMIC INDICATORS (percent) 1989 1990 1991-1994 1995-1998 (target) GDP Growth Rate 6.5 6.5 6.5 6.5 Consumption/Capita Growth Rate 0.6 3.8 4.0 4.0 Gross Investment/GDP 22.1 24.3 24.3 24.4 Domestic Savings/GDP 19.7 21.5 21.7 21.9 Current Account/GDP -2.8 -2.7 -2.7 -2.0 Export Growth Rate 10.8 10.3 9.9 10.2 Import Growth Rate 20.2 12.8 9.6 9.8 9. The current account deficit is kept within the range of 2-3? of GNP, reflecting limited net resource transfer from foreign borrowings in light of the high external debt and limited availability of concessionary lending. Domestic savings, therefore, must rise to about 202 of GNP (compared to about 16? in 1988). A more rapid rise in domestic savings is incompatible with the need to have a significant rise in per capita consumption. With population growth of 2.4? per annum, the present projection produces per capita consumption growth of approximately 42 per annum. This is considered the minimum necessary to make a serious dent in the pervasive poverty problem. 10. Attaining these goals for the economy will also depend on achieving a growth rate of exports of about 10? per year, with a growth of manufactured exports of about 13? per annum. Since manufactured exports are 65? of total commodity exports in the Philippines, the maintenance of a competitive trading environment, including a competitive exchange rate, is essential to the overall success of the program. Also important is the continued access of Philippine exports to markets in developed countries, and the maintenance of an open and competitive world trading environment. 11. As shown in Table 5, the capital required to finance even this modest current account deficit is quite large. The current account balance, at about $S.5-$2.0 billion per year, is still smaller than the interest payments on the debt, which run in the range of $2.3-3.0 billion. Thus, in net transfer terms, the Philippines will continue to experience a negative net transfer of resources from the rest of the world. The scenario assumes conservative increases in new long term disbursements, but does not include at present any new commercial money beyond 1990. The resulting gap averages about $300 million per year during the period 1990-92, and then rises sharply since the projections do not for the moment assume &ny additional rescheduling from either the Paris Club or the commercial banks. However, assuming that the Paris Club will reschedule in 1993 yields a revised gap of about $600 million per year in 1993-1995. Direct foreign investment flows are also conservatively estimated at $1 billion on average per year, but could be a larger source of capital inflows, if impediments to investment are alleviated and if the debt-equity scheme can be expanded.  Table 5: FINANCING REQUIREMENTS (; million) 1989 1990 1991 1992 1993 1994 1995 Imn'orts -10,005 -11,573 -13,224 -15,084 -17,184 -19,615 -22,394 Exports 7,960 9,328 10,981 12,892 15,081 17,663 20,707 Services, net 1,008 922 812 656 442 171 -208 Net Factor Payments X,086 1,020 1,216 1,560 1,603 1,650 1,677 (interest) 2,317 2,267 2,480 2,851 2,900 2,951 2,982 Net Transfers 866 935 1,011 1,097 1,194 1,301 1,420 Current Account -1,256 -1,408 -1,635 -2,000 -2,069 -2,130 -2,153 Direct Investment 757 891 1,021 1,077 1,133 1,321 1,421 Net LT Loans 814 624 1,351 1,503 256 -210 433 Disbursements 2,115 1,904 2,631 2,971 3,152 3,235 3,269 Repayments 1,301 1,280 1,281 1,467 2,896 3,446 2,837 Changes in Reserves IMF net 123 -137 -93 -50 -58 -93 -125 Official Reserves -621 -922 -955 -663 -661 -765 -880 Gap (net) 0 760 432 -269 1,013 1,577 1,367 After Paris Club resch. 348 857 630 Memo: DOD/GNP (Z) 67 61 57 53 48 44 41 Debt Service/XGS (Z) 30 27 25 24 28 27 22 Debt Outstanding ($b) 30.4 31.9 33.8 36.2 37.7 39.5 41.3 12. Even with these comparatively large, in nominal terms, capital inflows, the total stock of debt does not increase as rapidly as exports or GDP. Hence the debt service ratio declines gradually o er time, indicating a gradual return to creditworthiness. Likewise, the ratio of debt to GDP also declines gradually from 68Z in 1989 to 502 by 1995. Thus, this scenario suggests that it should be possible to sustain a fairly rapid growth of the economy, and ultimately restore creditworthiness, provided sufficient capital flows are made available. The cost of this adjustment must be shared between the Philippines, which must improve investment efficiency and raise domestic savings, and the external creditors, who must continue to provide adequate levels of new loans, and debt relief on existing commitments, in order to support the gradual reduction in the relative size of the debt burden. Rapid growth will increase the debt servicing capacity of the country, and provide for a more orderly return to voluntary lending arrangements. 13. To sum up, by 1988 the economy had attained a much stronger position than it had had since 1983: GDP was growing at 6.4Z per year, exports were rising sharply, inflation had been brought inder control, and investment had  recovered to about 182 of GDP. These positive developments were sustained into 1989. However, much of the growth had resulted from the effect of the policy reforms instituted and a better use of existing capacity. It was becoming increasingly clear that the prospects for continued growth were running into physical constraints. For the Philippine economy to move to the higher growth path on a more permanent basis will require a substantial increase in investment. In financing this investment, a significant effort will have to come from domestic sources; recent changes in the tax system and in its performance indicate that the authorities have started moving seriously in this direction. However, it is clear that a large part of the resources will have to be provided by external donors. The projections indicate that the Philippines can attain the target growth rate of 6.5Z annually (agreed to by the Government and the Fund) with sharply rising investment to the neighborhood of 242 of GDP. This is still considerably lower than the historical highs of 30Z recorded in the 1970s. 14. The Philippines therefore needs to confront two issues: (a) how to maintain the external support necessary for obtaining the required funds; and (b) how to ensure that the additional resources made available are directed into high quality investment. In order to achieve the former, the Philippines will have to tap both official and commercial sources. Official Sources 15. The Government has made progress in accelerating the level of commitments from official sources, and improving the utilization of existing loans. A Committee for Official Development Assistance composed of cabinet members and chaired by a full time chairman who has cabinet rank has been established to focus attention on efficient and timely implementation of projects, adequacy of project preparation efforts, and speedy resolution of issues which require inter-departmental coordination and adjudication. 16. A Consultative Group Meeting held in Tokyo in July, 1989 was convened to consider the Philippine financing needs. The Agenda document noted above (para. 7) had been specifically drawn up for this meeting and detailed the Philippine policy program and financing needs which had been endorsed by the Bank and the Fund. The donors noted the substantial progress during the past two years in achieving stabilization of the economy and progress on structural reform. They agreed with the overall thrust of the Government's development preogram (as outlined above), and particularly emphasized the need to address the deep-seated problems of poverty, population growth and the environment. Special measures would continue to be needed to improve the utilization of project assistance. Overall, the donors agreed to provide $3.5 billion of assistance during the next year, about double the level pledged during the previous (1987) meeting. Further support at this level in future years was also indicated, provided that the Philippines secured continued debt relief and new money commitments from the commercial banks and demonstrated a growing absorptive capacity by virtue of speedier implementation and development of a pipeline which could absorb the commitment levels requested.  - 10 - II. THE COMMERCIAL BANK FINANCING PACKAGE Structure of Commercial Bank Debt 17. As of end 1988, Philippine external debt was $29 billion. Of this total, $13.0 billion (47I), was held by commercial banks. The short-term trade credit component of this commercial bank debt is about $3 billion. Of the balance of $10.0 billion medium and long-term (MLT) debt, only $6.6 billion is owed by the public sector, either originally contracted/guaranteed by government or private sector debt folded into the public sector under the 1985 and 1987 rescheduling agreements. The Philippines has no interest in reducing or exchanging the short-term trade lines, which are being fully utilized. The private sector (financial and non-financial) medium and long- term debt are already subject to restructuring and debt swap deals on an individual transactions basis. This $6.6 billion eligible for debt and debt service reduction represents only 24? of Philippine debt. This contrasts for instance with Mexico, where the corresponding amount of $52.7 billion accounts for 52? of the total debt. 18. For all intents, this $6.6 billion public medium and long-term debt is the only amount suitable for debt and debt service reduction based on a general agreement between the Philippine government and its commercial banks. 19. Moreover, there is heavy concentration of public medium and long-term debt, as well as other debt, on a core group of banks. Ranking the 300 banks with public MLT debt according to exposure, the first 20 banks hold 52? of this debt; the first 50 hold 80?. At the other end, the smallest 100 banks hold only 3.5X of this debt. 20. This structure of the Philippine commercial bank debt, namely (i) a narrow base of debt which can be subject to debt or debt service reduction; and (ii) the high concentration of debt on a few banks and minimal exposure of a large number of banks sets the parameters for the Philippine debt package. Considerations that Shaped the Financing Package 21. To meet the financing objectives of the program (i.e., to close the 1989-90 financing gap), it was essential to have a substantial new money component in the package. The $1.4 billion financing target could not be met by debt reduction alone, even in the extreme and unrealistic case of wholesale forgiveness of total public MLT debt, which at $6.6 billion, would result in an immediate cash f1ow effect of less than $1.0 billion. 22. It was considered feasible to secure this new money on a largely voluntary basis from the relatively small zore group of banks who have a long- term interest in the Philippines. At the same time, maintaining relationships with such core group of banks best enhanced prospects of renewed access of the Philippines to the international credit market. 23. From the Philippine perspective, this also meant that the debt reduction and debt service reduction component of the package had to:  - 11 - (a) limit the erosion of such core group of banks; and (b) permit the large number of banks with small exposures, potential free-riders, to exit voluntarily and cleanly while bearing their share of the burden. 24. This pointed to debt buybacks at the prevailing secondary market price as the appropriate instrument. Through deeper discounts on a smaller part of the debt, buybacks can deliver equivalent present value reduction in debt as debt swaps without eroding the needed new money base. Moreover, because it is simple, certain (both in financial terms and accounting treatment) and allows banks to clean their balance sheets, buybacks target small exposure banks better than any debt swap. 25. It was determined on the basis of a pre-marketing survey that there was sufficient interest from the universe of banks to meet the Philippine financing needs from a package with two options--new money bonds and buybacks at the secondary discount rate. 26. On October 11, 1989 the Philippine authorities distributed the final term sheet for the country's 1989-90 commercial bank financing and debt reduction package. It included two principal features: (a) New moneX, in the form of either bonds or loans, with a 15 year final maturity, including eight years of grace, and a spread of 13116 of lZ over LIBOR. While commercial bank participation in new money is voluntary, the Philippine authorities had indicated that $1 billion over two years was desirable. This would have represented a 20Z increase in exposure for the banks holding the balance of the principal after debt buyback. Indications so far are that at least $600 million has been secured, and the authorities expect further commitments up to the date of signature of the agreement. (b) Buybacks. In conjunction with this operation, the Central Bank of the Philippines has offered to purchase for cash, up to $1.3 billion of certain categories of commercial debt at 502 of its face value. As of November 10, 1989, offers for $1.8 billion of buybacks had been received. The purchase is scheduled to take place on January 3, 1990. 27. In addition, the term sheet indicates that the existing agreements between the Philippines and the commercial banks will be amended to permlt the Philippines to use up to $1.5 billion directly and indirectly derived from official sources for cash buybacks or for credit support of debt exchanges for discount or par bonds. The Philippines would also be permitted to use up to $300 million a year from any source for such purposes, in certain circumstances. This allows the Philippines to undertake additional debt and debt service reduction operations in the future. In addition, the Philippines would be permitted to use up to $200 million a year of assets, revenues, or receivables for credit support for new money borrowings.  - 12 - 28. Other components and features of the package are: (i) a restructuring of the debt covered by the 1985 New Money Agreement on the same terms as the 1989 bonds. As of March 31, 1989 this amounted to $780 million, $200 million of which matures in 1990; (ii) amendments to each Public Sector Restructuring Agreement which, among other things, reduce the interest spread on these loans from 14/16th to 13/16th over LIBOR to conform to the 1989 New Money Bonds and Loans; and (iii) up to 202 of a bank's new money contr4bution can take the form of a relending facility. Half of such relending can go to the private sector, and half to the public sector. Benefits of the Financing Package for the Philippines 29. The debt buyback is part of an integrated financing package and hence the benefits to the Philippines must be evaluated in the context of the entire package. While there are tangible benefits for the Philippines from the improvement in terms on rescheduled debt, from the voluntary new money made available as well as from the debt reduction component itself, the larger benefit to the country stems from the improved environment which the proposed financing package will help bring about. 30. The financing package scenario, along with continuation of the package of adjustment programs and their deepening, would allow the economy to achieve a GDP growth of over 6?, consistent with its own aspirations. It would also permit a modest growth in per capita consumption; investment, both private and public, would continue to riae and hopefully achieve a level of 24? of GDP and permit the Philippines to achieve general market creditworthiness (as measured by commonly used indicators such as debt service to exports of below 20Z) by the end of the period. The share of commercial creditors in the overall debt portfolio is expected to rise to a point where net transfers would be largely neutral and the share of the official sector would remain at about current levels. 31. The impact on private domestic investment would be quite significant. The conclusion of the agreement and the confidence with which the Government could address the task of sustaining development would clearly buttress the high level of confidence already exhibited in the last two years. Direct foreign investment, which has also recorded a significant surge in the past two years, would be expected to pick up further momentum in this atmosphere of confidence and would contribute significantly to enhancing market accesb and export competitiveness. Finally, the reduction in the debt service burden, the improvement in the financing terms, and the rescheduling together with the adjustment program, should help reduce the pressure on the budget and hence its impact on domestic interest rates and its crowding out effects. 32. The successful conclusion of the proposed financing package with the commercial banks would essentially eliminate the financing gap in 1990, reduce it to an average of less than $400 million per year in 1991 and 1992 (see Table 5), and make the financing of the gap for later years more manageable  - 13 - through some combination of official rescheduling, second-stage debt operation, and continued amounts of new money. While the operation neither relieves the Philippines of its overall debt problem, nor assures it of automatic financing, it is a very large first-step affecting its immediate financing requirements and its medium-term prospects. 33. The debt buyback permits the Philippines to retire $1.3 billion worth of public and publicly-guaranteed long-term debt held by commercial banks (20% of the total of such debt) at a substantial discount of 502, which is slightly better than the prevailing market discount. The economic rate of return on this operation is estimated to be 23Z, based on the discounted net cash flow generated by this operation. Even this narrow and static view of the debt reduction operation indicates the return to be comparable or greater than the returns the Government would obtain if the resources devoted to the debt buyback were invested in the economy, or for that matter, in risk free investments of its reserves in the international market. 34. However, as stated earlier, the debt buyback is part of an integrated financing package and hence the benefits to the Philippines must be evaluated in the context of the entire package. This raises a sensitive issue. The entire debt management package has been under discussion with commercial banks for a considerable period of time, has been widely publicized, raised high expectations, and is seen as symbolic of the harmonious relations between the country and its commercial financiers. A failure of the deal to materialize at this late stage would thus signal a serious rupture in these relations and create a crisis of confidence. In other words, the financing environment in which the debt management package is aborted is likely to be very different from one in which the deal goes through. The former would be reflected in a drying-up of future commercial flows, a lower rate of direct investment, and very probably lower official lending as well, because these sources would hardly welcome the role of continuously being providers of large net inflows when the commercial banks were responsible for a substantial net outflow. The reduction in financing from all these sources would lead to a significant fall in the investment rate and the growth of production and exports. The shortage of foreign exchange can also be expected to adversely affect the growth of imports, resulting in a less efficient use of fixed capital. 35. The implications of such an adverse environment have been simulated, but given that many different assumptions could be made about how the disruption in confidence would likely affect the ultimate outcome, such scenarios can only be illustrative. The overriding feature of a negative qutcome on the debt financing package is an anticipated loss in confidence leading to a much lower growth rate over the 1990-94 period. Given the nature of the recent debate in Philippines, and the sharp cut back in living standards experienced by the country over the past six years, it is very unlikely that, from a socio-political perspective, an outcome in which per capita consumption stagnates is tenable. It is more likely that the Government under legislation passed by the Congress would put a cap on debt servicing which would give rise to arrears on commercial and official lending, create a sharp and immediate loss of confidence by private investors, both domestic and foreign, and fuel a resumption of capital flight. This would, in turn, lead to imposition of controls and restriction on imports and essentially disrupt the momentum the economy has gathered in recent years.  - 14 - For this reason, the first-stage debt reduction operation combined with the resumption of new money flows is a critical first-step in the Philippines medium-strategy to rebuild creditor confidence and set the country on a higher growth path based on enhanced investment prospects. 36. To summarize, the financing package proposed to the commercial banks, if successfully completed, will have a major Impact on Philippines' growth prospects by providing the resources necessary foi the growth in private investment, both domestic and foreign, creating a mJ3re positive domestic environment in which to continue servicing its deb., establishing a path towards full resumption of voluntary lending, and fostering measures which will help improve the efficiency of investment. III. BANK STRATEGY AND OPERATIONAL PLANS 37. The decision of Bank management to support the Government in its debt reduction program should be viewed against the backdrop of overall Bank involvement in the Philippines as well as the specifics of the operation. The Bank has taken the lead role in coordinating flows of official assistance to the Philippines, including recent actions under the Multilateral Assistance Initiative. Moreover, the Bank has shifted its emphasis from stabilization efforts and macroeconomic adjustment to sector-specific operations as part of a deliberate strategy. The highlights of that strategy are described below. Bank Strategy 38. The basic thrust of Bank strategy is to focus on four broad areas: (i) the continuation of economic policy reform to deepen the adjustment process and enhance the efficiency of resource allocation; (ii) the improvement of absorptive capacity through orderly investment planning and more effective implementation; (iii) assistance in meeting the country's critical needs in infrastructure, social services, and natural re;ource management; and (iv) cooperative efforts to address poverty alleviation issues tnrough effective policies and policy interventions. 39. In implementing this strategy, the Bank, working closely with the Fund, has over the past four years assieted the Philippines in the formulation and subsequent implementation of major policy actions. The gains made by the Philippines since 1987 are to a large extent the result of freeing the economy from the significant distortions built up during the previous decade. Nevertheless, further actions are needed to continue and deepen the adjustment process, to generate higher growth on a sustainable basis, and to bring about more widely distributed benefits from such growth. 40. The Bank's strategy has been to identify issues which need to be tackled through its economic and sector work. This has been done in a wide array of sectors including education, transport, environment, energy and agrarian reform. Further, work is either under way or planned in health, family planning, telecommunications, rural electrification, rural banking, and local government finance and administration. Sustainable growth in the Philippines requires that the private sector not only face a conducive  - 15 - enabling environment in terms of incentives, but that it also be fully supported by appropriate sectoral policies and investments in infrastructure, including energy, transport, and human resource development, complemented by an effective family planning program. 41. This strategy yields a sectorally focussed lending program as the core activities of the Bank in the Philippines at this time. Amongst the operations expected to be presented to the Executive Directors this fiscal year is a major energy sector operation which, in a sense, is the first in a series of what is hoped will be sectoral programs with strong sector specific policy underpinnings, incorporating rigorous review of sectoral plans and investments. It will also be a vehicle for attracting cofinancing from official sources as well as encouraging private sector involvement. Similar sectoral operations are under preparation in the fields of education, transport, telecommunications and natural resource management. Such operations will provide not only suitable vehicles for an intensive dialogue with the Government leading to an agreement on specific policy and institutional aspects, but will also ensure that the funding from the Bank and other official sources is directed at supporting specific high priority programs and investments. Therefore, the sectoral investment approach with requisite policy underpinnings which forms the core of the Bank's lending strategy seeks to (i) rebuild real assets in the economy; (ii) provide vehicles which significantly add to the country's absorptive capacity; and (iii) lead to early commitment of funds from interested donors who draw some comfort from the Bank's involvement and appraisal of the program. While there will be occasions both from a balance of payments perspective as well as financing ease that may favor a hybrid lending approach in some of these activities, the thrust and direction agreed with the Government is clearly to shift the balance towards investment lending. Proposed Bank Support 42. Within the context of the Bank's strategy towards the Philippines, management believes that its support for the debt reduction plan agreed to by the Government of the Philippines and its commercial creditors furthers the interest of the Philippines. The Bank support sought by the Government for its debt reduction program and proposed herein is in strict compliance with the Operational Guidelines and Procedures for Use of IBRD Resources to Support Debt and Debt Service Reductions (R89-104 of May 22, 1989) as approved by the Executive Directors. flelineation of the Set-Aside 43. As described in the previous section, it is a matter of deliberate Bank strategy to bring about a shift in emphasis towards supporting specific sectoral policy and investment programs, largely through investment and, in some cases, hybrid operations. The debt support issue arises at the end of a series of adjustment activities successfully undertaken in the Philippines, and there are no new adjustment operations at an advanced state of preparation. Therefore, in accordance with the guidelines, the set-aside amount was established equal to ten percent of the three year lending program FY90-92.  - 16 - 44. As agreed with the Philippine authorities and as indicated at the special Consultative Group Meeting in support of the Multilateral Aid Initiative, the Bank is actively working on a series of operations which would permit it to commit an amount of $2.1 billion during this period. Total adjustment lending during that same period was not programmed to exceed roughly $350 million either in the form of a full adjustment operation or a number of hybrid activities. Ten percent of the aggregate lending program yields the set-aside of $200 million as proposed. What this means is that by virtue of the proposed debt reduction support operation, the Bank will reduce its lending program in the remaining two years, so that the total for the three years FY90-92 will not exceed $2.1 billion. This will be accomplished either by dropping specific operations, or, more desirably, by reducing the Bank's share in future lending activities through enhanced cofir,ancing. The Choice of Vehicle 45. The vehicle proposed (i.e., a stand-alone debt reduction operation) is in keeping with the guidelines as they apply to specific country cases. By design, the "stand-alone" operation is entirely and specifically targeted to yield resources to assist the debt reduction activity and its conditionality is specifically germane to the sets of issues which must be addressed if the ability of the country to effectively utilize the additional financing is to be ensured and accomplishment of the ultimate objective of any debt reduction exercise--a return of general creditworthiness--is to be furthered. 46. Management has carefully examined the option of delivering the set- aside through advancing tranches under ongoing adjustment operations. There are two operations, the Public Corporate Reform Program (third tranche, $50 million) and the Financial Sector Adjustment Program (second tranche, $150 million) totalling $200 million which could technically have been advanced. However, it is Management's view that the substantial conditions associated with those tranches were far from being complied with, and in the Financial Sector Adjustment Operation in particular, legislative action which is time consuming but critical, has yet to be completed. It was therefore felt that advancing those tranches to allow delivery of the set-aside would have vitiated the tranche release conditions so critical to the successful outcome of those operations. The possibility of bringing forward a hybrid operation associated with a recently negotiated energy sector loan was also examined. While there are multiple sectoral policy underpinnings in that operation, it was considered ill-advised to associate a debt reduction operation with it. The reason quite simply was that the associated conditions, while very relevant for addressing issues in the energy sector, did not provide the overall umbrella for ensuring adequacy and efficiency of investment growth, both public and private, critical to the final outcome of the debt reduction plan. Conditionality 47. The proposed stand-alone operation to provide a debt management loan of $200 million focusses attention on continued macroeconomic performance, the adequacy and efficiency of public and private investment, and the maintenance of public assets. These are areas which the Bank and the Fund have addressed over the past three years through multiple activities, and in which  - 17 - significant and discernible progress has been achieved. However, reforms in these central areas need to be sustained and deepened, if the additional financing made available by official and commercial sources is to yield maximum benefits for the economy. For this reason, the Government is committed to a series of actions aimed at strengthening macroeconomic performance and improving the quality and level of investment. Macroeconomic Policies 48. The Government of the Philippines has agreed to pursue macroeconomic policies consistent with the attainment of real annual growth of over 62, single digit inflation, and an improved balance of payments. The 1989 objectives of the program sustained by the ERL and by the IMF Extended Arrangement have been broadly attained. However, monetary targets for base and broad money have been exceeded and inflation has been higher than projected. While this is largely the consequence of one time events, such as the minimum wage increase, Government recognizes that macroeconomic policies need to be strengthened. Therefore, agreement has been reached with the Fund on a program to bring about significant improvements in the public sector deficit, the current account, and inflation. Underpinning these objectives are explicit new revenue generation measures and public expenditure targets as well as performance criteria with respect to (a) public sector borrowing requirements, (b) ceilings on base money, (c) a floor for net international reserves, and (d) limits on both total and short-term foreign borrowing. The Government has also committed itself to maintaining a competitive exchange rate. 49. The Bank has made adherence to a strong program of macroeconomic management a condition for the debt management loan. In pursuance of this aim, Government is increasing the wholesale domestic price of petroleum, extending the program of monthly tariff increases by the National Power Corporation, and raising water tariff charges in line with inflation. A package of new revenue generation measures has been submitted to the Congress. This operation is being brought forward in tandem with the Fund's set-aside operation, which is proceeding in light of the Fund's view that the macroeconomic environment is suitable. A program of continued macroeconomic strengthening, as seen in improvements in the consolidated public sector and current account positions, as well as continued adherence to monetary targets consistent with those of the Fund's Extended Arrangement are conditions for second tranche release. Public Investment 50. The conditionality existing under the Economic Recovery Loan which requires maintenance of an adequate level of investment expenditures will be continued. In the context of "adequacy," the Philippine authorities had at the time indicated that they would aim for a target of 5 percent of GNP. Experience to date would indicate that while investment expenditures have picked up momentum, they have not yet reached that level. Bank and Fund data would indicate an average of 4.0 percent of GNP during the past year with a particularly sharp upturn in the first quarter of 1989. We believe a target of 5 percent is still appropriate and hence should be retained, recognizing that under Bank and Fund forecasts, given the overall resource picture, a  - 18 - level of 4.5-4.7 percent is more likely in the next year. Maintenance of an adequate level of investment is a condition for second tranche release. 51. Two significant reasons, which have contributed to a slower than anticipated build-up in investment levels, have been the paucity of well- prepared projects ready for commitment, and implementation delays, largely generated by administrative procedures. This is the primary area on which new conditionality will focus. Specific undertakings by the Government include actions to: (i) improve efficiency of procurement practices by amending the present directive which mandates negotiations with the lowest evaluated bidder where bid price exceeds agency estimates; while this provision has been removed in its application to international competitive bidding and removed in a limited fashion for local competitive bidding funded by official sources, it has created considerable confusion and delays, both amongst bidders as well as implementing agencies. Issuance of revised Implementing Rules and ReRulations or a new order from the Office of the President to effect this change is a first tranche condition: (ii) streamline overall procurement processes by greater delegation to and within implementing agencies, and introduce specific standards to shorten the elapsed time from bid opening to award to conform to standard bid validity periods (90 days). This should exert a major impact on the speed of implementation, as current experience would indicate that elapsed times in excess of one year are not uncommon. Completion of administrative action required to give effect to streamlininR is a second tranche condition: (iii) establish revised guidelines for retention of consultants which clarifies criteria for obtaining specialists and firms, delegates substantial authority to implementing agencies, and establishes specific time standards for the review process to ensure that selection and award of consulting contracts can be completed within 60 days. Completion of administrative action required to give effect to these changes is a second tranche condition; (iv) review control processes with the aim of reducing ex ante control and establishing ex post accountability; in particular, the scope and responsibility for the ongoing internal audits of agencies, annual audit of accounts, as well as a management audit, needs to be reviewed and clear demarkation lines established.l/ A detailed delineation of scope and responsibility for actions developed in 1/ In particular, the management audit function which is carried out on a transactional basis in conjunction with the internal audit function needs to be more programmatic. Transaction-by-transaction management audit dilutes managerial authority as well as accountability and is a major cause of delays when management judgment on design standards, technical specification and advisory needs are questioned.  - 19 - consultation with the Bank is a condition for second tranche release: (v) ensure timely and dependable release of allocated budgetary funds for public expenditures by simplifying administrative procedures; in particular given the growing scope of the investment program, specific provision needs to be nade to ensure the timeliness of decisions. A specific action plan is to be developed in consultation with the Bank to be implemented prior to second tranche release: (vi) update the Medium-Term Public Investment Program (MTPIP), and integrate that with the Medium-Term Technical Assistance Program (MTPAP) to ensure consistency and to direct technical assistance adequately towards specific project preparation activities. The provision of an updated and integrated MTPIP is a second tranche condition: (vii) establish: (a) a monitoring unit within the Committee on Official Development Assistance (CODA) and (b) a project preparation facility with simplified rules for agencies to seek project preparation funding for projects included in the MTPIP. The establishment of the monitoring unit is a first tranche condition. The establishment of the proiect preparation facility is a second tranche condition; and (viii) develop an overall financing plan consistent with the MTPIP to ensure coordination between project agencies and official donors on project preparation which in turn would facilitate timely commitment of funds and subsequent implementation. Operation and Maintenance of Public Investment 52. The ongoing Economic Recovery Loan had provided that Operations and Maintenance (O&M) expenditures would be maintained in real terms, at 1982 levels. This provision has been adhered to, and will be maintained in the proposed operation. In order to establish a maintenance regimen in the Philippines, there is need for developing a more systematic approach based on engineering and economic criteria. To do so, particularly for the major elements of public investment, specific agencies have been identified which account for well over 60 percent of the stock of public investment, with the view to undertake a comprehensive study (based on generally established engineering and economic criteria) to define the appropriate cycles and intensity of maintenance effort. This will lead to the improvement or preparation of maintenance manuals, adherence to which will provide for greater confidence in maintenance efforts as opposed to the current reliance on an aggregate level of O&M expenditures. The completion of the study and adoption of requisite maintenance manuals is a second tranche release condition. Furthermore, to overcome capacity limitations and improve efficiency, the Government will initiate a program for awarding O&M work to private contractors, as condition for first tranche release.  - 20 - Private Investment 53. In :he area of private investment, a number of policy actions which pertain to creating the appropriate 'enabling environment" for efficient allocation of private investment have already been established through: - the liberalization of the trade regime achieved through the Bank's ERL and now continued under the three year IMF EFF Program; - the efforts to open up the financial markets undertaken in the past and the specific measures for enhancing banking competition and reducing intermediation costs as provided in the Financial Sector Adjustment Loan; - the competitiveness of the exchange rate, being actively addressed and monitored by the Fund under its Extended Arrangement; and - the continued privatization efforts, supported by the Reform Program for Government Corporations. 54. While the Government is committed to continue to adhere to the respective provisions of these operations with the Bank and Fund, two specific areas will be addressed under this activity: - resumption of the debt-equity conversion program, under clear and transparent rules; and - a study of impediments to acceleration of private investment, both domestic and foreign, focussing in particular on the following issues: (a) Foreign Investment: (i) review proposals to liberalize and increase transparency of equity requirements of foreign investments; and (ii) review competitiveness of the Philippines from the perspective of labor costs, infrastructure adequacy and general environment rather than specific investment incentives alone. (b) Fiscal Incentives: review incentives provided under Omnibus Investment Code with a view to: (i) make eligibility less discretionary, and (ii) reflect a revised structure and level of incentives which are more cost effective from fiscal and corporate points of view; such review to investigate, inter alia, the benefits of loss carryover and income averaging facilities as compared to those of the present system of income tax holidays. (c) Regulatory Framework: (i) streamline registration procedures including strengthening the staffing and authority of the "one- stop-shop"; (ii) simplify and shorten the procedures for availment of incentives, particularly access to capital goods inputs; (iii) develop options for restructuring BOI to stress its promotional rather than discretionary role; (iv) review the  - 21 - current capacity restrictions in various industries; and (v) develop appropriate guidelines based on the aforementioned analysis. (d) Technology Transfer Arrangements: provide greater flexibility in setting royalty rates for technology transfer; transform the Technology Transfer Registry from a regulatory to a technical assistance and advisory unit. Resumption of the debt-equitX conversion Program, completion of the study and discussion of the recommendations with the Bank are second tranche conditions. Disbursement 55. It is proposed that the loan be available in two tranches. The first amounting to $150 million to be available upon effectiveness of the loan, would requires (a) promulgation of a revised directive on procurement referred to in para. 51(i) above; (b) creation of the monitoring unit referred to in para. 51(vii) above; (c) initiation of programs for awarding O&M work to private contractors, referred to in para. 52 above; and (d) submission of terms of reference regarding the studies referred to in paras. 52 and 54 above. 56. The second tranche of $50 million would be released when the specific actions in paras. 50 to 54 above are substantially carried out to satisfy the Bank regarding progress in two major areas: (a) maintenance of the levels of public investments and O&M expenditures at agreed levels and adoption of measures to improve their implementation; and (b) improvement in the "enabling enviL -.ent" for private investm.lAt, both domestic and foreign. The second tranche will also be subject to Government's adherence to the macroeconomic program detailed in paras. 48 and 49. While work on a number of areas incorporated in the conditionality has been started, it is management's expectation that compliance will take approximately 9-10 months. 57. Since the primary purpose of the loan is to finance the debt buyback, funds will be disbursed against evidence of being utilized for this specific purpose. Justification for Bank Support 58. As detailed in paras. 29-36 above, the benefits of the debt reduction component by itself, and more importantly the integrated financing package for  - 22 - the Philippines, are very significant. In terms of ensuring growth in public investment, enhancing prospects for enlarged private investment, domestic and foreign, ensuring support for maintaining the track record for diligent debt servicing, and by contributing to growth of incomes and exports, the operation will promote the return to general market creditworthiness. 59. The Ba,, participation in the financing of the debt reduction component. is justified on several scores: (a) The Bank's financina is regarded as critical foc Philippines to be able to undertake the debt reduction component and, hence the entire financing package. The commercial bank agreement clearly provides for the debt reduction component to precede new money and states that the financing must come directly or indirectly from official sources. The actions of the Fund and Bank, along with bilateral donors, will be critical in providing the US$650 million needed to repurchase the anticipated $1.3 billion of debt. (b) The Bank's involvement in this operation reinforces policy and institutional reform in relation to public and private investment, which is critical not only to ensure that the resources released by the operation are used effectively, but also that the quality of investment overall is enhanced. (c) The Bank's role in this endeavor is seen by the Government as essential support for actions aimed at the restoration of creditworthiness. The return to creditworthiness and the increasing share of commercial lenders serves to enhance the quality of the Bank's Philippine portfolio. (d) Bank support for this operation reinforces the close cooperation and the scope and depth of the Bank's dialogue with the Philippines. Risks 60. The primary risk is that the anticipated improvements in investment efficiency do not materialize, either because the macroeconomic environment deteriorates or because the proposed measures are ineffective in raising the quality of investments. By linking both first and second tranche releases to macroeconomic policies mirrored in the Fund's EFF, and given the authorities' commitment to macroeconomic stability, it is thought that these risks are acceptable. At the same time, the proposed measures to improve the quality of investment are quite specific and tailored to the economy's absorptive capacity. Recent policy initiatives, such as the establishment of the Project Facilitation Committee and the Committee on Official Development Assistance, are concrete expressions of the Government's resolve to improve the management of official assistance used for public investment. Similar reforms can be expected in regard to private investment once the required studies are completed. While the risk still exists that political developments in the Philippines could hamper policy implementation, the coordinated approach of the Bank and Fund and the donors reduces this risk.  - 23 - IV. COORDINATION WITH TH' IMF 61. The Government's program also continues to receive the financial support of the IMF. An initial Standby Agreement in 1985 was agreed in order to provide the basis of the stabilization program. After the change in Government in 1986, a new agreement was drawn up, superseding the prior agreement. and establishing new targets for monetary growth, fiscal and external balances. In addition, both the 1985 and 1986 agreements were closely coordinated with the World Bank, and supported reform programs in public corporations, agriculture, public investment and trade liberalization. In 1989, with the successful completion of the 1986 Standby, the Government reached agreement with the IMF on a new program. This program includes a $400 million Contingency Financing arrangement and a $900 million Extended Fund Facility, to be drawn over three years through 1991. The EFF program supports on-going reforms of public sector privatization, financial sector reforms, and extension of further trade liberalization. 62. In approving the EFF Program, the Fund Board approved a set aside equivalent of $210 million. The Fund management is concurrently putting forward proposals to its Board to advance the calendar 1990 tranche set aside to yield a total set-aside amount of $120 million to assist the Philippine in financing the debt buyback. 63. Bank-Fund Cooperation. There has been extensive cooperation between the Bank and the Fund at various stages, both in the development of the policy program, and in discussions on the current debt package. Various Fund agreements have supported programs initiated by the Bank, including reforms in the public corporate and financial sectors, and improvements in public investment and expenditure allocations. Likewise, Bank operations have supported reforms which have been primarily under the guidance of the Fund, including tax reform and the exchange rate. Some issues, such as trade liberalization and the removal of marketing monopolies in agriculture, have been jointly developed and supported. Bank staff participated in the Extended Fund Facility mission in February, 1989, and Fund staff participated in the Bank's Financial Sector Report mission in 1988, which developed the policy package for the Financial Sector Adjustment Loan. In addition, joint discussions were held between the Bank and Fund staffs, and the staffs of the Central Bank and Department of Finance in July, 1989, concerning the possible modalities of debt relief, and the support likely to be forthcoming from the multilateral organizations. V. RECOMMENDATION 64. I am satisfied that the proposed loan would comply with the Articles of Agreements of the Bank, and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments November 30, 1989 Washington, D.C.  - 24 - ANNEX I Page 1 of 8 PHILIPPINES DEBT MANJAGEMENT PROGRAM Mr. Barber Conable President World Bank Washington, D.C. Dear Mr. Conable: Re: Debt Management Program 1. The Government of the Republic of the Philippines is requesting assistance from the World Bank in connection with its 1989-90 financing package with the commercial banks. The Philippines continues to be heavily burdened by an external debt currently totalling US$27.2 billion of which US$13.2 billion is owed to commercial banks. The servicing of this debt burden and constraints on access to voluntary credits from commercial sources have been a major drag on the Philippine economy that threatens to undermine the successful stabilization and adjustment efforts undertaken in recent years. 2. The financial package presented to the commercial banks on October 11, 1989 aims to raise new money from these banks on a quasi voluntary basis and to obtain debt reduction through buy back operations at a sizeable discount. This package is designed to cover the financing needs of the Philippine economy, an essential ingredient for sustaining growth in the coming years. 3. The funds being sought from the World Bank will form, along with funds mdde available by the IMF and certain bilateral sources, a pool which will be used to finance the debt buy-back portion of the financing package. These buy-backs are part of a deliberate debt strategy designed by the Government in conjunction with commercial lenders to reduce the stock of outstanding debt, by allowing the Philippines to avail itself of the large discount for its debt seen in secondary markets, while at the same time fostering a flow of new funds to the country. 4. The Philippines has emerged from a period of stabilization and adjustment with three years of strong growth. Indeed, its performance among the group of highly indebted countries has been remarkably strong. Growth has averaged 6Z and inflation has been contained. Significant improvements in tax collections have been made during the course of the last year. The exchange  - 25 - ANNEX I Page 2 of 8 rate continues to be determined by market forces. Macroeconomic fundamentals remain sound and consistent with the economic policies supported by the IMF under the Extended Arrangement. The Government is committed to continue its prudent economic management of the economy in order to provide a stable environment in which investment can be increased, growth accelerated, and the repayment of external debt made more manageable. 5. It is clear that the size of the debt burden and the annual interest payments which the Philippines has diligently paid, have had significant fiscal and monetary repercussions on the economy. In particular, the Government has had to resort to a much higher level of domestic borrowing, which has had the effect of crowding out private sector investment due to the ensuing high levels of interest rates. At the same time the Philippines has been running a large net negative transfer of funds position, in particular vis-a-vis commercial lenders, a situation which the Government hopes eventually to reverse. Therefore, the debt reduction proposal in combination with the resumption of new commercial lending to the Philippines are critical to the country's medium-term growth and development strategy. 6. The Government is confident that with continued strong economic management it will be able to capitalize on the major structural reforms that have been put in place in the course of the last few years in collaboration with the World Bank. Major policy advances have been made with respect to trade liberalization, financial reform, privatization of public institutions, tax reform, and agrarian reform. While these policy reforms are beginning to bear fruit, with gradual recovery in per capita income towards the level of the early 1980s, the nature and extent of the poverty problem facing the country remains serious, particularly in terms of the number of people below the poverty line. It is, therefore, imperative that the Philippines continue to address its structural problems which have prevented it from joining the ranks of other East Asian countries exhibiting rapid export growth and large gains in income. In this context the Government reaffirms its commitment to continue to implement the policy reforms embedded in sector adjustment operations with the World Bank and those policies inherent in its program supported by the IMF. The Debt Strategy with Regard to Commercial Banks 7. The total external debt of the Philippines has marginally declined from US$28.6 billion in 1987 to US$27.2 billion, as of June 30, 1989, or around 70 percent of GNP. Of this total, about US$13.2 billion remains outstanding with commercial banks, of which US$6.6 billion is medium and long term debt owed by public or publicly guaranteed obligors to over 300 creditor banks, with 80 percent held by 50 banks. The cumulative negative net resource transfers to commercial banks totalled US$3.1 billion over the period from 1986 to 1988. The Government devised a strategy with respect to its commercial bank debt which addresses two categories of commercial creditors. The strategy features: (a) an exit option for the large number of banks with small exposures; and (b) a new money participation option aimed at a core group of banks that hold the bulk of outstanding debt and that have long term interest in the Philippines. The exit option would apply to public and publicly  - 26 - ANNEX I Page 3 of 8 guaranteed debt: with respect to unguaranteed private obligors, flexibility is provided them to work out arrangements appropriate to their circumstances. 8. The basic strategy of providing an exit vehicle for low exposure banks, while at the same time encouraging new flows, will not in and of itself appreciably reduce the absolute stock of debt. The inmediate benefits, however, are to be derived from (a) the improvement in repricing of restructured debts, (b) the creation of a more positive domestic environment for servicing the debt, and (c) the enhancement of investors confidence that will contribute to the restoratien of creditworthiness. At the same time, measures which can help improve the efficiency of investment will be implemented so that the debt service burden will eventually be reduced. The long-term objective is to reduce debt service to a more manageable level from the current 31 percent to about 26 percent of total exports of goods and services by 1992 and lower thereafter, in keeping with improved export performance that will strengthen our capacity to service debt and allow us to regain access to voluntary lending. 9. On October 11, 1989, the Philippine authorities distributed the final term sheet for the country's commercial bank financing and debt-reduction program. It indicates that the Philippine Government intends to raise new money in the form of bonds and loans. New money will have a 15 year tenor, eight years of grace, and a spread of 13/16 of 1 percent over LIBOR. While commercial bank participation in the provision of new money is voluntary, the Philippine authorities have indicated that a substantial amount of new money will be necessary for the successful conclusion of the deal. The term sheet also indicates that existing agreements between the Philippines and commercial banks will be amended to grant waivers that permit the Philippines to use over time up to US$1.5 billion derived directly and indirectly from official sources for debt or debt service reduction operations. The commercial banks will also give waivers that permit the Philippines, after the first buy-back, to use up to US$300 million a year from any source for such purposes, in certain circumstances. In conjunction with the current financing package, the Central Bank of the Philippines has offered to purchase, for cash, up to US$1.3 billion of certain categories of commercial debt at 50 percent of its face value. Such a purchase would generate a total cash requirement of up to US$650 million. The purchase is scheduled to take place on January 3, 1990. 10. In order to enhance business confidence and bolster the objective of attracting investments while providing for another opportunity to reduce the foreign debt stock and associated financing costs, the Government will reactivate the debt-equity conversion program. This program will be operated under a revised set of clear guidelines, while remaining consistent with the country's monetary and fiscal objectives.  - 27 - ANNEX I Page 4 of 8 Benefits to the Philippines 11. The immediate benefits to the Philippines of this operation include the closing of the unfilled financing gap and the provision of an exit vehicle for those commercial banks with no Interest in furtlher lending. Prospects for achieving a target of over 6% gro-rth for the first half of the decade are based on the availability of financing from official and commercial sources and from accompanying improvements in the efficiency of capital. A Project Facilitation Committee to increase the effective absorption of foreign capital has been 'n place since 1988, assisted more recently by a major reform in the administrative apparatus for foreign assistance management. The creation of the Committee On Development Assistance (CODA) shall provide more effective planning and programming of aid flows, through improved coordination with the central policy bodies and implementing agencies. Over time, increased growth will enhance our capacity to service debt and the prospect of regained creditworthiness. 12. The Government is aware that major improvements in the efficient use of capital, both public and ptivate, are necessary to realize those benefits. For this reason the Government commits itself to the following series of actions aimed at strengthening the macroeconomic performance and improving the quality and level of investment. Macroeconomic Policies 13. The Government will pursue macroeconomic policies consistent with the attainment of real annual growth of over 6 percent, single digit inflation, and an improved balance of payments. The macroeconomic framework in place represents the policy objectives of the Government and is supported by the IMF under the Extended Arrangement. It is understood that adherence to a strong program of macroeconomic management, such as that underpinning the Extended Arrangement, is necessary for all releases made under the proposed Debt Management Loan. In this context, it is understood that particular attention will be paid to the following policy variables: (a) fiscal revenue and expenditures, with the aim of ensuring that the current consolidated public sector deficit for 1990 expressed as a percentage of GNP is lower than its 1989 level; (b) monetary policies, consistent with growth and anti-inflation objectives as reflected in the performance criteria of the Extended Agreement; (c) a competitive exchange rate and external policies, with the aim of reducing the current account deficit for 1990 expressed as a percentage of GNP below its 1989 level.  - 28 - ANNEX I Page 5 of 8 Public Investment 14. In order to address some of the key infrastructural bottlenecks which have lowered the growth potential of the Philippine economy, the Government intends to retain the target of public investment at 5Z of GNP over the course of the projection period. Recognizing the need to improve the quality an'id quantity of projects in the pipeline, the Government commits itself to the following specific undertakings: (i) to issue a revision to the Implementing Rules and Regulations for PD 1594, or an order from the Office of the President, to waive the mandatory provision for negotiations with the lowest evaluated bidder, for projects supported, in whole or part, by foreign assistance. (ii) to take administrative action to streamline and accelerate procurement procedures through, amongst other measures. (a) greater delegation of authority to implementing agencies, and, as appropriate, within agencies to lower levels of authority; and (b) devising and applying specific standards which would shorten the elapsed time from bid opening to award in conformity with standard bid validity periods; (iii) to revise guidelines for the retention of consultants, delegating substantial authority to implementing agencies and establishing specific time standards for review processes, with the aim of awarding contracts within 60 days; (iv) to delineate the scope and responsibility for internal audits, with the aim of reducing ex-ante control and establishing ex-post accountability; a specific and detailed plan of action will be developed and implemented; (v) to develop and implement an action plan, consistent with the principles of prudent budget management, to simplify administrative procedures and ensure the more timely release of allocated budgetary funds; (vi) to update the Medium-Term Public Investment Program (MTPIP) and to integrate it with the Medium-Term Technical Assistance Program (MTTAP) to ensure consistency and to direct such technical assistance towards specific project preparation activities; (vii) (a) to establish a monitoring system within the Committee on Official Development Assistance (CODA) and (b) create a project preparation facility, within CODA, with clear and simple rules for agencies to seek project preparation funds for projects included in the MTPIP;  - 29 - ANNEX I Page 6 of 8 (viii) to develop an overall financing plan in support of, and consistent with the MTPIP, to ensure coordination between project agencies and official donors on project preparation activities. 15. With respect to the timing of these aforementioned undertakings, the Government expresses its intention to issue a revised directives, per para. 15 (item (i)), and to establish the monitcring system, as per para. 15 (item (vii)(a)), before drawing the initial proceeds of the loan. All actions and undertakings referred to above, includisig agreements and revised guidelines and procedures, will have been implemented or in the process of implementation prior to drawing of the remaining loan proceeds. Operation and Maintenance of Public Investment 16. The Government realizes the importance of providing for the adequate maintenance of the capital stock and the development of a more systematic approach to operation and maintenance (O & M), based on engineering standards and economic criteria. 0 & M expenditures will be maintained at the 1982 levels in real terms for the program period. In order to upgrade 0 & M, the Government (a) will initiate a program for awarding 0 & M to private contractors where appropriate, prior to initial withdrawal from the loan, and (b) prior to withdrawing the balance of the loan funds (i) will undertake a comprehensive study to define the appropriate timing and intensity of maintenance efforts for the major sectors, and (ii) will improve, update and when necessary develop and adopt maintenance manuals for these sectors. The Government will ensure the attainment of an adequate level of 0 & M expenditures within the framework of a progressively declining consolidated public sector deficit, expressed as a percentage of GNP. Private Investment 17. In the area of private investment the government has already taken a number of policy actions to create and maintain an appropriate environment for the efficient use of resources. These actions includes (i) the liberalization of the trade regime which was begun under the auspices of the Bank's Economic Recovery Loan and is now being continued under the program supported by IMF; (ii) and privatization efforts which were begun under the Government Corporations Reform Loan and are being continued; (iii) efforts to open up the financial sector to foster greater competition and to strengthen supervision and regulatory activities as provided in the Financial Sector Adjustment Loan. While the Government restates its commitment to adhere to the respective provisions of these operations, there are specific actions which the Government will take under the proposed Debt Management Loan. 18. Consistent with its debt strategy, the Government expects to reactivate the debt-equity conversion program in the first quarter of 1990. The operation of this program will be appropriately regulated, in a manner  - 30 - ANNEX I Page 7 of 8 consistent with monetary and fiscal objectives, in order to ensure that it enhances business confidence and bolsters the objective of attracting investment. 19. The Government will undertake a comprehensive study of the environment for private investment which will include: (a) a review of policies affecting foreign investment with the aim of increasing the transparency of equity requirements and liberalizing the rules affecting foreign investment; (b) a review of incentives provided under the Omnibus Investment Code with a view towards making eligibility less discretionary and revising the structure and level of incentives; (c) further streamlining of registration procedures for investors, and simplifying and shortening of procedures for the availment of incentives; (d) review of possible changes in BOI to stress its promotional rather than regulatory role with the objective of increasing private investment, both domestic and foreign, which is in the national interest and which will promote growth and employment; (e) a review of royalty rates for technology transfer and other reforms of the technology transfer registry system to increase the transfer of technology. The Government will submit the draft TOR for the study prior to initial drawing on the loan. The Government would like to request assistance from the Bank to undertake this study. Completion of the study according to agreed TOR and discussion of its recommendations with the Bank will be completed prior to. withdrawal of the balance of the loan. Conclusion 20. In the light of the Government's strong commitment to macroeconomic stability, its significant undertakings in the areas of structural reform, and its commitment to increase the quality and the level of investment in the Philippines, and in the light of the importance of the debt buy-back componnat of the debt financing plan for the Philippines, the Government would .ippreciate that favorable consideration be given to its request for a US$200 million Debt Management Loan to be made available in timely fashion. The Government of the Philippines will continue its close consultations with the World Bank throughout the program and will implement to the best of its ability the measures indicated in this letter. The Government expresses appreciation to the World Bank for its continued support of the country's reform program and for its critical role in the debt reduction operation currently under way with the commercial banks.  - 31 - ANNEX I Page 8 of 8 21. We believe that the debt reduction operation will contribute substantially to our continued efforts to bring about material improvements in the economic conditions of the Philippines and the living standards of its people. Yours sincerely, Vicente Jayme, Jose B. Fernandez, Jr. Secretary, Department of Finance Governor, Central Bank of the Philippines  ANNEX II Page 1 of 3 PHILIPPINES DEBT MANAGEMENT PROGRAM POLICY MATRIX Actions Required for Actions Required for Objectives First Tranche Second Tranche I. APPROPRIATE MACROECONOMIC POLICIES (a) Reduce size of Reduction of 1990 consolidated consolidated public sector public sector deficit, as a fraction deficit of GNP, below its 1989 level (b) Maintain monetary policies Contirsued adherence to base money consistent with growth and ceilings inflation targets (c) Reduce size of current Reduction of 1990 current account account deficit deficit, as a fraction of GNP, below its 1989 level II. IMPROVE PUBLIC INVESTMENT EFFICIENCY (a) Improve efficiency of Issuance of revised Implementing procurement practices by Rules and Regulations for PD 1594 or amending bid procedures order from the Office of the President  ANNEX II Page 2 of 3 Actions Required for Actions Required for Objectives First Tranche Second Tranche (b) Speed procurement process Completion of administrative action by establishing standard bid-to-award time limits (c) Revise guidelines to speed Completion of administrative action consultant hiring (d) Delineate scope and Completion of policy action in responsibility for consultation with the Bank internal audits (e) Simplify procedures to Specific Action Plan developed in speed the release of consultation with the Bank allocated budgetary funds (f) Update Medium-Term Public Completion of improved MTPIP Investment Plan (MTPIP) and integrate with Medium- Term Technical Assistance Program (MTTAP) (g) Improve monitoring of ODA- Establish monitoring unit within assisted projects Committee on Official Development Assistance (CODA) (h) Improve project Creation of Project Preparation preparation capacity Facility within CODA (i) Integrate MTPIP with Development of overall financing available donor financing plan for MTPIP  ANNEX II Page 3 of 3 Actions Required for Actions Required for Objectives First Tranche Second Tranche III. ADEOUACY OF PUBLIC INVESTMENT (a) Maintain adequate level of Retain target of public investment public investment at 5Z of GNP IV. OPERATIONS AND MAINTENANCE OF PUBLIC INVESTMENT (a) Maintain sufficient level Retain O&M expenditure at 1982 of O&M expenditure levels in real terms (b) Increase private sector Initiate a program for awarding of participation in O&M O&M works to private contractors activities (c) Institute a systematic Agreement on scope of comprehensive Completion of study according to approach to O&M in line O&M study agreed TOR and adoption of requisite agencies maintenance manuals V. PRIVATE INVESTMENT (a) Operate debt-equity Implement debt-equity conversion conversion program under program clear and transparent rules (b) Enhance environment for Submission of TOR for study to Completion of study and discussion private investment include: (i) foreign investment of recommendations with the Bank regime; (ii) fiscal incentives under Omnibus Investment Code; (iii) regulatory framework, including options for the restructuring of BOI; and (iv) technology transfer arrangements  ANNEX III 35 Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN THE PHILIPPINES A. STATEMENY OF SANK LOANS AND IDA CREDITS /a September a0, 1989 Loan or Credit Fiscal Amount (loe cancellotions) Number Year Borrower Purpose Oink IDA undisbursod Eighty-six loins and oix credita fully disbursed ,s,SO.ss 106.19 - 1809 1960 Rep. of the Philippines Medlur-Scale Irrigation 82.98 4.08 2040 1982 Rep. of the Philippines Agrlc. Support Service. 22.00 4.48 2165 1092 Rep. of the Philippine. National Fisheries Development 2.10 0.27 217Z 1992 Rep. of the Phillppinso Co_unal Irrigatlon 61.00 28.88 220 1968 Rep, of the Phillppines Education VIII 16.40 6.20 2206 1968 Rep. of the Philippines Water Supply and Sonitatlon 29.00 4.78 2267 1983 Rep, of the Phillppines Regiohal Citle, Development 47.00 28.79 2360 1994 Rep. of the Phillppine. Central Visayos Reglonal Development 24.97 xl.6a 2418 1964 Rep. of the Philippines Highways V 102.00 76.e0 2486 1994 Rep. of the Phillppine. Municipol Development 40.00 81.06 2496 1986 Rep. of the Philippines Telecom. Tech. Assistance 4.00 0.96 2570 1986 Central Bank of tho Phil. Agrlcultural Credit 100.00 9.71 2676 1966 Rep. of the Phillppinos Manila Water Distribution 88.00 20.90 2716 1988 Rep. of the Phillppines Rural Roads II 82.00 76.81 2767 1967 Rep. of the Philippine. Economic Recovery Loan 800.00 100.00 282a 1987 Rep. of the Philippines Provincial Ports 82.00 20.16 2948 1966 Rep. of the Philippines Irrigation Operations Support 28.60 20.31 2958 1986 Reap of the Philippines Progrom for Government Reform 200.00 125.00 26619 1969 Phillppine Nat'l ill Co. acon-Manito Geothermal Power 41.00 38.36 2969-1 1966 Phil. Nat'l Power Corp. Bacon-Manito Geothermal Power 59.00 69.00 2974 1966 Rep. of the Philippines Housing Sector 160.00 71.89 8086 1969 Rep. of the Philippines SMI IV 60.00 6e.00 8049 1969 Rep. of the Philippine. Financial Sector 800.00 250.00 8084 1969 Dev. Bank of the Phil. Manilo Power Distribution 66.50 65.60 3099 1969 Rep. of the Phillippines Health Development 70.10 70.10 Totai 5,068.83 106.18 1,169.76 Of which has been repald 1,269.69 2.68 Total Now Outstanding 8,768.69 102.66 Leeos Amount sold 81.85 - - Of which has been repaid 81.85 - - Total Now Held by Bank and IDA 8,788.69 106.49 Total Undisbureed 1,169.75 - 1,169.76 /a The status of the projecto listed In Part A Is described in o seperate report on oll Sank/IDA-financed projecte in execution, which Is updated twice yearly and circulated to the Executive Directors on April 80 and October 81.  - 36 - ANNEX III Page 2 of 2 F. STATEMENT OF IFC NUSTMENTS (A5 of 5eptme5r 50, Inv) Investnpent Fiscal Loan EquIty Total number year ObiIgor Typ, of buolno ---- (US2 millon) --- 67/283 1963/1973 Private Dov. Corp. of the Philppinp s Oevelopmnt finance 16.0 4.4 19.4 118/1098 19607/1989 Moraleo Socuritles Corporatlon Utilltloe 880. 4.0 40.8 157/899/1091 1970 Phil. Long Distance Tlephol Co. Utilitles C7.7 0.8 6586 158/218 1970/1972 Marlwass Manufacturing,o Inc Cemnt a constr. mt. 0.8 0.4 1.2 186 1970 Paper Industries Corp. of the Phil. Pulp a paper products - 2.2 2.2 188/389 1971/1977 Philippine Petroleum Corporation Chmiclels A petroche. 8.2 2.1 0.3 207 1972 Marinduque Mlning & Industrial Corp. Mining 16.0 - 16.0 241 1978 Victoria* Chemical Corporation Choicalo A petrochem. 1.9 0.8 2.2 267 1974 FPilpinao Synthetic Flbor Corp. textilas & fibers 1.6 - 1.6 272/464 1974/1979 Marie Christina Chm. Ind. Inc. Iron & steel 1.6 0.6 2.2 283 1974 Republic Flour Mills Corp. (RFM) Food a food procesting 1.2 - 1.2 800 1976 Phillppine Polynmids Industrial Corp. Textiles A fiber 7.0 - 7.0 329 1978/1980 Philagro Edible Oils, tnc. Coconut oIl A copra 2.6 0.2 2.8 379/768 1977/19U Acoje Mining Company, Inc. Mining 2.5 1.2 8.7 374 1977 Sormiento Industries, Inc. Plywood .sS - 386 423 1978 Cebu Shipyard A Eng. Works, Inc. Ship r a lring 2.1 - 2.1 489 1979 Oon*ral Milling Corporstlon Food food processing 4.0 1.1 6.1 481/886/ 180/88/ PIS0 Leasing Corp. (All Asia capital) Money A capital mrehot 11.1 0.5 11.6 1148 86/89 480 1980 Ventures In Industry & Susines Mony & capital msrket - 0.8 0.8 Enterprises, Inc. 519 1980 Consolidated Industrial Oases, Inc. Cheiolale A ptroehem. 4.8 - 4.5 682 1961 Loons to Seven Corp. for S!SE Money & capital market 16.6 0.6 19.1 553 1981 Phil. Assoc. Smelting A Refin. Corp. Mining - 6.0 5.0 672 1961 Davao Union Cemsnt Corp. Comnt A comstr. met. 16.0 - 16.0 827 1982 NDC-Guthrie Plantations Pals oil 11.0 - 11.0 841 1986 Pure Foods Food & food procesing - 1.4 1.4 946 1988 Opt Agricultural Development Bank Development finance - 1.0 1.0 1051 1986 Philifund Money & capital mark e - 4.2 4.2 1126 1969 Hmbrect and quiet Money & capital markets - 2.4 2.4 Total Oross Comitmonts 220.0 82.7 252.7 Lose cancellations, terminations, 118.7 16.8 185.6 repayments and *s l Total CoU ltunts ed( Hn ld by arc 101pt 16n9 117 2 Total Undisburs d (Including p rtClep nCt portion) e9.a 2.4 e88 7  ANNEX IV ~EIPPIP~ - KEY ~t%CR0~CIO4ZC XPOICATOE~ Page 1 of 5 Actual Pr lii Prel; Projections Key Indicators 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 COP C outa Rate 1.0 -6.1 -4.3 1.4 4.7 6.4 6.5 6.5 6.5 6.5 6.5 6.5 6.5 5 .6 6.6 GW Growth Rate 1.2 -7.2 -4.1 1.9 5.9 6.8 7.0 7.0 6.4 6.1 6.7 6.7 6.7 6.6 f.6 6.7 W/Capita GCoth Rote -1.3 -9.4 -t. 4 -0.5 3.6 4.5 4.S 6.2 3.9 3.7 4.2 4.2 4.2 4.1 4.2 4.3 Consumptin/Capita Crowtl Rate 1.5 -3.1 -6.9 -2.4 5.4 4.5 0.6 3.8 4.0 4.0 4.0 4.0 4.0 4.0 4.1 4.1 Total DM l1/ (in US) 24294 24745 26396 28331 30052 29448 30t80 31932 33785 36206 37747 39466 41272 42936 45CSW 47733 DDl/fS2/ 214 256 317 350 295 249 214.5 199.5 185.3 173.4 160.4 148.4 137.1 126.2 :;-- 109.5 \DID/QDP 70 76 s0 92 87 75 66.5 61.3 56.5 53.0 48.3 44.2 40.5 36.8 -z.e 31.3 bt Service (in USS) 3019 2687 2571 3027 3624 aS5? 3795 3864 4094 4459 85o3 6490 6096 6349 66f 6754 d<%t Service/IQS 26.6 27.8 30.9 37.4 35.6 30.0 26.8 24.1 22.1 21.4 24.9 24.4 20.2 18.7 17.2 15.5 Deb\ Service/CDP 8.7 8.3 7.8 9.8 10.5 9.1 8.3 7.4 6.7 6.5 7.5 7.3 6.0 5.4 5.0 4.4 In tAb 115 17.9 19.9 21.1 19.9 18.4 17.3 16.4 14.2 13.6 13.7 12.3 11.1 9.9 9.1 8.4 7.6 Interset/WP 5.1 5.6 5.4 4.9 6.1 6.0 5.1 4.4 4.2 4.2 3.7 3.3 2.9 2.7 2.4 2.2 Cross InXwstaent/QDP 25.0 15.1 12.4 11.1 13.8 15.7 22.1 24.3 24.4 24.3 24.3 24.3 24.3 24.4 24 4 24.4 Domestic Lovinga/WDP 19.4 15.0 15.0 16.9 14.6 16.9 19.7 21.5 21.6 21.7 21.7 21.9 21.9 21.9 21.9 21.9 Mational Sa'ings/CDP 18.7 12.9 13.2 15.8 14.8 17.8 19.2 21.3 21.2 20.9 21.1 21.4 21.6 21.6 21.6 21.8 Marginal Nletonal Savings Rate -95.9 93.1 6.7 154.8 -5.1 61.4 61.0 51.6 20.9 17.1 24.3 25.6 25.1 21.8 22.3 23.6 ICOR _3/ -1.5 -1.2 -1.3 -1.3 -5.8 4.8 2.8 2.9 3.0 3.7 3.7 3.7 3.7 Government Reven*e/QDP 11.9 10.5 11.3 12.6 14.3 13.6 16.6 16.7 16.7 16.6 16.6 16.5 16.4 16.3 1.2 16.2 Governmnt Expend tures/GDP 13.8 12.4 13.1 17.5 17.1 16.4 19.5 16.6 18.1 17.6 17.6 17.7 17.2 17.2 17.2 17.3 Deficit (-) or Surlua (+)/CDP -1.9 -1.8 -1.8 -4.9 -2.8 -2.8 -2.9 -2.0 -1.5 -1.0 -1.1 -1.2 -0.8 -0.9 -1.0 -1.1 Export Growth Rate 9.0 8.5 -7.4 21.8 -1.3 15.9 10.8 10.3 10.0 9.9 9.8 10.0 10.2 10.0 10.1 10.3 Expors/WDP 19.3 22.3 22.5 25.8 24.3 26.5 25.2 26.1 26.9 27.6 28.6 29.6 30.6 31.6 32.6 33.8 Import Crowth Rate 11.8 -16.5 -23.1 12.9 26.5 28.5 20.2 12.8 9.7 9.5 9.5 9.6 9.7 9.7 9.8 9.9 IS.ore/WP 21.8 19.4 15.5 17.3 20.9 25.3 27.3 28.9 29.7 30.6 31.4 32.3 33.3 34.3 35.3 36.5 Current Account (in US6) -2748 -1268 -18 971 -498 -406 -1256 -1408 -1635 -2000 -2069 -2130 -2153 -2424 -2694 -2887 1 Current AccountfaWP -8.0 -3.9 -0.1 3.2 -1.4 -1.0 -2.8 -2.7 -2.7 -2.9 -2.6 -2.4 -2.1 -2.1 -:: -i.; Term of Trade Index 144.6 125.2 135.8 132.5 155.6 98.6 99.8 100.1 100.4 100.7 101.0 101.2 101.0 100.7 100.4 .1/ Debt outrtxnding and disburoed. _2/ Iport. of goods and serviacA. _3/ Five-yar averase, one year log.  PHILIPPINES - BALNCE OF PAY01S (LIS11 milI ion at Current Pr,ces) ANNEX IV Page 2 of 5 Actual Prof im Prolim. Projections 1981 1984 19S5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 :997 1998 A. Exports af Goods A NS 7513 7033 6864 7702 8065 9486 10507 12071 13937 16076 13512 21868 24688 28162 32178 36824 1. Merchandise (FOB) 5722 5391 4629 4842 5720 7074 7960 9328 10981 12B92 16081 17663 20707 23922 27663 32015 2. Non-Factor Serv ces 1791 1642 2235 2860 2345 2422 2546 2743 2956 8184 3430 3695 3981 4240 4516 4809 B. Ioports of Goods A NS 9554 7222 5944 58S6 7861 9478 11543 13394 15367 17612 20172 2313V 26583 30328 34634 39593 1. Merchandise (FOB) 7946 6070 5111 5044 6737 8159 1ooo0 11573 13224 15064 17184 19615 22394 25405 28843 32771 2. Non-Factor Services 1606 1142 833 824 1124 1319 1538 1821 2144 2528 2988 3524 4189 4923 5792 6822 C. Resource Balance -2041 -179 920 1834 204 8 -1086 -1328 -1430 -1537 -1660 -1781 -1895 -2165 -2456 -2768 D. Net Factor Income -527 -1475 -1317 -1804 -221 -1208 -1086 -1020 -1216 -1560 -1603 -1650 -1677 -1811 -1936 -1981 1. Factor Receipts 1070 984 1058 931 1109 1194 1536 1595 1647 1711 1754 1798 1846 1889 1948 2014 2. Factor Pay_ente 1597 2459 2370 2235 2330 2397 2622 2615 2863 3271 3356 3446 3523 3700 3885 3994 (interest pay_mnts) 2186 1927 1755 1615 1873 2192 2317 2267 2480 2851 2900 2951 2982 3112 3244 3297 E. NMt Current Transfers 825 118 172 285 822 789 866 985 1011 1097 1194 1301 1420 1551 1698 1862 1. Current Recipts 828 119 181 239 324 791 870 940 1016 1102 1199 1506 1425 1556 1703 1867 a. workers' remittances 284 59 111 163 211 388 435 490 8S0 619 699 789 890 1003 1130 1273 b. other current tras. 74 60 70 76 113 403 435 450 463 488 499 517 535 554 573 593 2. Current Paymnts a 1 9 4 2 2 4 5 5 5 5 5 5 5 5 S F. Curret Account Balance -2061 -1268 -18 971 -496 -406 -1266 -1408 -1l85 -2000 -2069 -2130 -2153 -2424 -2694 -2887 0. Lang-Term Capital Inflow lS03 S80 3094 182 612 804 1571 2275 2804 2312 2402 2688 3068 2654 3017 3663 1. Direct Investment 172 9 12 127 807 986 757 891 10 1077 118l 1321 1421 1321 1424 1556 2. Official Capital Grant. 0 0 0 0 0 0 0 0 0 0 0 8. Net LT Loens (8 data) 1494 994 1014 402 -61 64 814 1384 1738 1I38 1269 1367 1647 1338 1593 2107 a. Diburemnta 2212 1613 1689 1511 iN 1372 2115 2664 6 2g2 4165 4812 4636 4434 4856 5428 b. Repa_ mentc 718 818 l26 1110 1401 1808 1301 1280 11 i 1467 2896 8446 2989 3101 3264 3321 4. Other LT Icie (net) -168 -495 2068 8e8 a86 -246 0 0 a 0 0 0 0 0 0 0 08  IILIPPD - 8ALAUCE OF PAYMB4TS (cnt'd) ANNEX IV (USI millions at Current Pries) Page 3 of 5 Actual Prelim Prelim. Proe;ctions 1981 1984 1985 1986 1987 1988 1989 1990 991 1992 1993 1994 1995 1996 1997 1998 H. .Total Other Item (net) 226 1144 -3824 -1172 -382 -196 1E8 192 -U2 482 a86 300 89 887 936 628 1. Not Short Term Capital 718 1105 -3867 -1163 -283 -205 22 o6 70 148 162 188 236 304 364 444 2. Capital Flew. N.E.I. 0 0 0 0 0 -479 161 136 -190 259 224 145 -147 583 572 184 8. Error. and Omissi.e -487 39 643 -9 -99 488 0 0 0 0 0 0 0 0 0 0 I. Chang" in Not eserves 332 -184 148 -2481 268 -202 -498 -1059 -1048 -713 -719 -858 -1005 -1116 -1259 -1403 1. NHt Credit from the Df 105 -185 279 137 21 -102 128 -187 -98 -50 -S8 -93 -125 -136 -136 -136 2. Other Reserve Change 227 1 -131 -1288 247 -100 -621 -922 -955 -663 -661 -765 -880 -980 -1123 -1267 (- indicates inereme) Shares of CDP (Current 153): 1. Reource Balanc -5.3 -0.6 2.8 6.0 0.6 0.0 -2.3 -2.5 -2.4 -2.2 -2.1 -2.0 -1.9 -1.9 -1.8 -1.8 2. Total Interest Paymnto 4.2 4.1 3.5 3.5 3.6 3.2 2.8 2.5 2.3 2.1 1.9 8. Curre-4 Acoc-- t Bblance -5.3 -3.9 -0.1 3.2 -1.4 -1.0 -2.8 -2.7 -2.7 -2.9 -2.6 -2.4 -2.1 -2.1 -2.0 -1.9 4. LT Capital Inflow (line 0) 3.9 1.0 9.4 4.3 1.8 2.1 3.4 4.4 4.7 3.4 3.1 3.0 3.0 2.3 2.3 2.4 S. Nat Credit from the DF 0.8 -0.6 0 8 0.4 0.1 -0.3 0.8 -0.S -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 Memorandum Item: CDP (Hi ll. of Current US3I) 88646 39883 34S63 32367 32928 39228 45654 52084 59766 68316 78075 39248 102002 116604 133325 152478 Foreign Exchunge Rerves: 1. Int'l. Reserves (IFS l1d) 2066 602 615 1728 968 1003 -- ---D8-- -- 2. Cold (end yr Landon price) 659 242 438 883 1344 1166 - 8. Cros Reserves inel. Cold 2725 844 1098 2611 2312 2169 - 4. Croo Res. in Months, Lort 3 1 2 4 3 2 - Exchane Rates LU/1.111): 1. Nam. Off. X-Rte (IFS rh) 8 17 19 20 21 21 - --- --- _ _ 2. Ra I Eff. X-Rate n 198D 10 69 98 76 70 68 - ---- -- 0 S. X-te for GW Conversion 8 17 19 20 21 21 - --- --- -  PHLIPPIIES - PRFJOT FOREIGN DOWKF R _iT A EX IV (USS millions at. Current Prices) Page 4 of 5 18-87 198890 1991-93 Crem Disbursesents M'ulti lateral 1137 25B9 3170 ef which: mmR 714 1732 1622 Bi lateral 1422 3047 8408 Privote 1467 -246 176 IMF Purchases 751 574 270 Financing Cap 0 760 1176 Total a 4776 6725 10200 Not Disbursemnts Mtulti lateral 516 l514 1910 of wh i ch: IBM 216 858 670 Bilateral 775 3008 4210 Privant8 32 -2695 -2642 DF Purchases -91 -116 -201 Financing Cap 0 760 1176 Total a 12 2472 448A a Total excludes private non-guaranteed LT and not short-term capital. 0  - i-5w tg5 Di laftrev: 6d.eduted 68? 1919 Projected 39 1197 Pei _t: sceduled fl a Projected 9889 1107 Totai Sded led SW 7339 Project" 356 27 in"erStPsasfito a lti lateral 1263 170? of adi: DD 912 112 I la"ral is15 1079 Pri wat. 8681 4076 Total S047 6661 1968 1989 1990 191 1992 199 1 1994 19S WAYRti;e - Interewt/XCS 0.14 0.15 0.1S 0.13 0.13 0.12 0.11 0.10 PMRD/)=S 8.47 3.16 2.88 2.64 2.46 2.20 1."9 1.81 Net Di-bur-eeunte/Inter-ut 0.02 0.683 1.05 1.01 0.63 0.65 0.67 0.75 Hot Traneferf/MP -0.04 -0.01 0.00 0.00 -0.01 -0.01 -0.01 -0.01 * Excluding private non-guaranteed lona term debt and short-ter, capital. me After rescheduling.