DRAFT AS OF 28 FEBRUARY 2011

Daylight in the Philippines: Accelerating Progress

Year-End Philippine Economic Briefing

March 4, 2011
L. Fisher Hotel, Bacolod City

1
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

2
 Executive Summary
Philippines to sustain strong economic performance in 2011

 The Philippines, one of the few countries worldwide that avoided a recession in 2009, staged a strong recovery in 2010 as
the economy grew 7.3%
 Healthy economic growth is expected to be sustained in the medium term
A Resilient and Fast-  Better conditions in the global economy and economic outperformance in the Philippines’ key export markets in North Asia
Growing Economy (36% of total exports) and ASEAN (16% of total exports) should pave the way for sustainable growth performance
 The structure of the ROP economy is similar to those of advanced economies, with consumption accounting for more than
70% of GDP; this is the structure investment-led economies like China are trying to emulate

 The new administration has made fiscal sustainability the cornerstone of its effective governance agenda
 Intense focus has been placed on improving tax collection and the results are starting to show: the country was recently
removed from the OECD “grey list”, a recognition that it is now compliant with accepted tax standards; it also received a
A Clear Political US$434mn Millennium Challenge Corporation grant to provide additional funding for tax administration efforts and other
Commitment to Fiscal initiatives such as infrastructure
Sustainability  Additionally, the Philippines was successful in containing the damage of the global financial crisis with respect to its fiscal
accounts; deficits are manageable and debt levels are sustainable
 Proactive debt management has reduced rollover risk and increased debt carrying capacity while minimizing foreign
exchange risk and increasing self-sufficiency of funding

 Over the last decade, the Philippines has transformed itself into a country with sustained structural current account surpluses
and rapid reserve accumulation
 Gross international reserves expanded to a record US$63.5 billion at end-January 2011. This large stockpile of international
reserves provides a healthy buffer against external shocks – reserve holdings can cover 11x the country’s short-term
A Fortified External
external debt on original maturity
Position and a Sound
 Remittances continue to contribute greatly to the Philippine current account and are up by 8.2% in 2010. Additionally, the
Banking System
Business Process Outsourcing (BPO) industry which is growing at an average of 20% annually is one of the Philippines’
most promising sectors and is one of the driving factors behind the improving net services trade balance annually
 The Philippine banking system is sound and characterized by low NPLs and very strong prudential ratios

A More Stable Political  The uncontested outcome of the last elections was widely regarded as a positive development for the Philippines and could
and Institutional signal a structural change in political dynamics ushering in more stable political transitions
Environment

3
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

4
 Economic Resiliency and Sustained Dynamism
The strength of the Philippine economy is evident not only from how well it withstood the last downturn but also in
how rapidly economic recovery has been over the last twelve months
The economy grew at sustained strong levels over the last decade

GDP Growth (%)

Average: 4.7%

Growth in 2010 was broad-based supported by the industry and services sectors and consumption and investments

Full Year GDP Growth (%)

200 201
200 201 9 0
9 0

Source: National Statistical Coordination Board

5
 Economic Resiliency and Sustained Dynamism
The strength of the Philippine economy is evident not only from how well it withstood the last downturn but also in
how rapidly economic recovery has been over the last twelve months

The economy grew at sustained levels over the last decade posting in Q4 2010 its 48thth quarter of positive economic growth since 1999

Quarterly GDP Growth (in %)

6
 Robust Economic Outlook for 2011
High levels of economic growth are viewed as sustainable in the medium term

Economic Growth Projections

2011

Official Targets 7.0 - 8.0%

Poll of Forecasters 4.8%

IMF 5.0%

World Bank 5.0%

ADB 4.6%

Source: Official Projections are based on targets adopted by the Development Budget Coordination Committee (DBCC) ;
Asian Development Outlook 2010 Update; Philippines Quarterly Update, World Bank Manila, October 2010; IMF Post Program Monitoring Discussion – Staff Report
7
 Growth Drivers for 2011 and Risks and Challenges to Growth
The Aquino Administration’s thrust to improve governance and the implementation of right policies will provide impetus
for high sustained economic growth
 Agriculture, Fishery and Forestry
– Expected to benefit from the government’s modernization program
 Industry
Supply Side – Anticipated expansion in mining and acceleration in construction and full recovery of housing, biofuels and the Halal
food market
 Services
– Expected to continually improve driven by retail trade, finance and private services

 Private consumption
– Remittances to provide momentum for increase in household spending
 Government Expenditure
– 2011 National Expenditure Program increased by 6.8 percent due to the expansion of coverage of the conditional cash
transfer program
 Investments
– Total cumulative investments of all investment promotion agencies to reach PhP3.8 trillion from 2011 to 2016
Demand Side
– Expected boost from construction, agro-industry, electronics and semiconductors, tourism and Business Process
Outsourcing
 Exports
– Total exports expected to grow by 13% per year in 2011 - 2013 and 14% per year in 2014-2016
– For 2016 , merchandise and services exports are expected to reach US$92 billion and US25 billion, respectively

 Uncertainty of external demand: slow recovery scenario for global growth

 Surge in capital inflows: large capital inflows could pose challenges to liquidity and exchange rate management
 Commodity price pressures: strong recovery of private demand and large capital inflows pressures; increases in toll and
transport fare in the short term; petitions for cost recovery in electricity prices; and wage hikes could exert domestic price
Risks and Challenges
 Natural calamities may dampen economic growth
to Growth  Narrowing sources of investment
 Protracted resolution of European debt crisis

8
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

9
 Fiscal Sustainability: An Integral Part of the Effective Governance
Agenda
The Aquino administration has identified fiscal sustainability as a top priority
The administration has a clear fiscal strategy for the medium term

 Rigorously implement RATEs, RATS and RIPS programs to go after evaders, smugglers and corrupt officials, respectively
Stringent Tax
 Establish a tax registry that includes all taxpayers
Enforcement to Achieve
National Government  Complement tax collection agencies with competent and adequately trained staff
Tax Effort of 18.1% by  Establish appropriate performance standards and evaluations for collection officials
2016  Strengthen Lateral Attrition Law by instituting a more effective system of rewards and penalties

 Zero-based budgeting: across-the-board review of all budgets to cut waste

Tight Expenditure  Focused targeting of social programs making sure funds go to those truly in need
Discipline to Use Public  Advancing Pay-Go legislation: A requirement that all new expenditure and revenue-eroding legislation would be matched
Resources in the Most with revenue-increasing measures
Efficient Manner  Tighter implementation of procurement laws allowing greater scrutiny of all public procurement to cut waste

 Target budget deficit of 2% of GDP by 2013

 Achieve gradual reduction in Gross and Net Debt / GDP
 Provide capital for priority investments in infrastructure to accelerate economic growth
Sustainable Deficits and  Push for rationalization of fiscal incentives bill to make sure they are used only where necessary and channel them to win
Healthy Public Finances strategic, important investments
 Push for the GOCCs Reform Bill
 Push for the Amendments to the Build-Operate-Transfer (BOT) Law

 Reduce the debt stock and debt service payments and lengthen the maturity profile where feasible through debt swaps and
Prudent Debt exchanges
Management  Continue with various initiatives to diversify the capital structure: examples already implemented include the Retail Treasury
bond, Japanese Yen issue, Global Peso bond issues

10
 Fiscal Sustainability: An Integral Part of the Effective Governance
Agenda
The hands-on approach to increasing tax revenues is on track
In just a few months, the current administration’s commitment to enforce tax collection is paying dividends

 In late September 2010, the Philippines was removed from the OECD tax haven grey list
• The OECD moved the Philippines from its tax haven “grey list” to the “white list” after agreeing that the country
had “substantially implemented the internationally-agreed tax standards” with the implementation of Republic
Act (RA) 10021, or The Exchange of Information on Tax Matters Act.
 In October 2010, the Philippines signed the first Capacity-Building Partnership Agreement with the IMF and
the MCC to help reform tax administration
• Under the agreement, MCC will contribute US$4.6 million for technical assistance from the IMF’s Fiscal Affairs
Department to help the Philippines’ Bureau of Internal Revenue (BIR) improve its revenue administration
policies and procedures
• The 40-month project will bolster the effectiveness of revenue collection and reduce opportunities for
corruption. The project’s design was based on the work the IMF has done over the past several years with the
BIR
 Several tax evasion, smuggling and corruption cases have already been filed
• Under its Run Against Tax Smugglers (RATS), the Bureau of Customs (BOC) has filed 144 cases as of Feb
17, o.w. 27 cases were filed under the Aquino administration
• Under its Run Against Tax Evaders (RATE), the Bureau of Internal Revenue (BIR) has filed 157 as of Feb.
10 , o.w. 28 cases were filed under the Aquino administration
• Under the Revenue Integrity Protection Services (RIPS), the DOF has filed 80 cases with 120 respondents, 17
personnel dismissed and 35 suspended as of Feb. 23, o.w. 6 cases were filed, 3 personnel dismissed and 5
suspended under the Aquino administration

11
 Fiscal Sustainability: An Integral Part of the Effective Governance
Agenda
Keeping the deficit within manageable levels is a fundamental goal for the new administration
2011 NG Fiscal Program
In Billion Pesos 2009 2010 2010 2011 Growth Rate
Actual Jan-Nov Program Program (2011/2010)
Total Revenues 1,123.2 1,104.8 1,294.4 1,410.0 8.9%
% of GDP 14.6% 15.6% 15.6%

Tax Revenues 981.6 998.5 1,153.2 1,273.0 10.4%

% of GDP 12.8% 13.9% 14.1%

BIR 750.3 753.3 860.4 940.0 9.2%

BOC 220.3 233.5 280.7 320.0 14.0%
Other Offices 11.0 11.7 12.1 13.0 7.4%

Non-Tax Revenues 141.6 106.3 141.2 137.0 -3.0%

% of GDP 1.8% 1.7% 1.5%

BTr Income 69.9 52.4 60.1 50.0 -16.8%

Fees and Charges 70.1 52.9 79.1 81.0 2.4%
Privatization 1.4 0.6 2.0 6.0 200.0%
Grants 0.2 0.4 0.0 0.0 0.0%

1,374.6 1,619.4 1,700.0 5.0%

Expenditure 1,421.7 19.5% 18.8%
% of GDP 18.5%
Surplus / (Deficit) (298.5) (325.0) (290.0) -10.8%
% of GDP -3.9% (269.8) -3.9% -3.2%

Source:
Source: Department
Department of
of Finance
Finance
12
 Fiscal Sustainability: An Integral Part of the Effective Governance
Agenda
Keeping the deficit within manageable levels is a fundamental goal for the new administration

Closing the gap between revenues and expenditures and controlling the fiscal deficit

Proposed Medium-Term Fiscal Program 2010-2016 (% of GDP)

Source: Department of Finance 13

 Fiscal Sustainability: An Integral Part of the Effective Governance
Agenda
Debt has stabilized and should come down further
Manageable deficits will translate to a sustainable path for the government debt

Php Bn NG Debt 2008-2011 % of GDP

Program Actual Program

end-Oct

Debt is on a clear path of stabilization

Proposed Medium-Term Debt Path 2010-2016 (% of GDP)

Source:
Source: Department
Department of
of Finance
Finance 14
 Maintaining Long-Term Financial Health
Proactively managing the liability profile
The Philippines takes advantage of sufficient domestic liquidity and gradually veers towards domestic financing

Share of Domestic and Foreign Debt by Creditor (as % of Total National Government Debt)

Source: Bureau of the Treasury 15

 Maintaining Long-Term Financial Health
Proactively managing the liability profile

Prudent financing strategies minimize foreign exchange risk and increase funding’ self-sufficiency

Domestic and Foreign Financing

Progra Actual Program

m Jan-Nov

Sources: Department of Finance 16

 Improving Domestic Debt Profile
Increased depth and liquidity of the domestic government securities market have provided for longer maturities
and reduced local interest rates
Lengthening domestic debt maturities Declining local borrowing rates

18%

1 0 0%
1 6%
90%
3 3% 33% 3 5%
8 0%
44% 1 4%
52 %
7 0%

12%
60 %

50 % 3 6% 3 4%
3 9% 1 0%
40 % 3 1%
2 8%
3 0% 8%

2 0%
3 1% 2 8% 32% 2 5% 6%
6 .1
1 0% 2 0%
4.63
0% 4%
2006 2 007 2008 2009 Jan-Nov 2010 2 001 2 003 2 005 2 007 2 009

Lo n g-term Med ium-term Sh o rt- term 5 year borrowing rate 1 0 year borrowing rate 2 5 year borrowing rate

Note:
Note: Weighted
Weighted average
average annual
annual yields
yields of
of Philippine
Philippine government
government securities
securities
Source:
Source: Bureau
Bureau of
of the
the Treasury
Treasury

Source:
Source: Bureau
Bureau of
of the
the Treasury
Treasury

17
11
 Accomplishments in Liability Management
The ROP successfully diversified its capital structure through pursuit of various initiatives

 Issuance of 25-year Global Peso Notes (GPN)

• Improves currency composition of NG debt and reduces foreign exchange risk

• Priced at a 23% discount to the local benchmark thereby reduces borrowing cost

• Further builds the GPN yield curve in support of other borrowers particularly for infrastructure projects
 Bond Exchange

• Achieved a maturity and duration extension of 9.1 years and 5.3 years respectively

• Generated NPV savings of about US$5.6M and cash interest savings of US$69.6M per annum

• Approx. US$1.7M of bonds maturing from 2011-2017 were retired in the exchange

18
 The Reform Budget of 2011
Enforcing good governance principles; Ensuring spending that is driven by strategic priorities

2009 2010 NEP* 2010 GAA** 2011 GAA**

Actual

Php Bn 1,434.1 1,541.0 1,540.6 1,645.0

% of GDP 18.7 18.5 18.5 18.2

Growth Rate 6.8

(gross)

* National Expenditure Program

** General Appropriations Act

Governance Principles in 2011 and Beyond

 Zero-Based Budgeting Approach
 Bias for the Poor and Vulnerable
 Private-Public Partnerships
 Fiscal Responsibility
 Transparency, Accountability and Good Governance

Source:
Source: Department
Department of
of Budget
Budget and
and Management
Management 19
 The Reform Budget of 2011
Enforcing good governance principles; Ensuring spending that is driven by strategic priorities

Disbursements by Expense Class Allocation by Sector

FY 2011 FY 2011

Source:
Source: Department
Department of
of Budget
Budget and
and Management
Management 20
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

21
 Effective Monetary Policy – Supportive and Stable
The Philippines strikes a delicate but effective policy balance between policy accommodation in support of economic
growth and controlling inflation

 Well calibrated monetary policy kept inflation rate in 2010 at 3.8% well-within the target range of 3.5-5.5%
 Favorable inflation outlook and benign inflation environment has given the BSP some flexibility to keep policy rates steady
 Latest BSP projections show inflation staying within the target range of 3.0-5.0% for 2011
 Upside risks to inflation include a potential rebound in oil prices, additional increase in rice prices, potential increase in the
price of other non-oil commodities, the impact of adverse weather conditions on agriculture, petitions for electricity rate
adjustments, and a stronger-than-expected domestic economic recovery that could induce demand-side price pressures

Inflation remains well-contained within targets

Inflation (%)
14

12

10

2
3.5%
0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Headline Target (LE) Target (HE)

Sources: Bangko Sentral ng Pilipinas, Asian Development Bank “Asian Development Outlook 2010 Update” 22
 Inflation Outlook for 2011
Viewed to be moderate and easily manageable by leading organizations

Inflation Projections

2011
3.0-5.0%

Official Targets
4.4%

4.0%

4.5%

Sources: Bangko Sentral ng Pilippinas, Asian Development Bank “Asian Development Outlook 2010 Update”, International Monetary Fund “World Economic Outlook” October 2010,
World Bank “Philippines Quarterly Update, Sept 2010, ”Moody’s “Asia-Pacific Sovereign Mid-Year Outlook 2010” 23
 Money Supply and Credit Remain Supportive
With inflation well under control, the Republic has the capacity to keep domestic interest rates and money
supply supportive of further economic growth

 The Philippines is able to keep domestic interest rates and money supply broadly accommodative with respect to growth,
illustrative of the degree of financial flexibility the Republic enjoys due to its sound management of inflation
 Credit extended by commercial banks is growing at a healthy pace and is conducive to the further expansion of business
activities

Liquidity and interest rates remain supportive of growth Healthy but prudent banking sector credit expansion
M3 in Billions PHP Commercial Bank Loan Growth (net, y-o-y)
Dec 2010:
5,000 P4,396.8 13.0%
4,500
4,000 11.0%
3,500
Dec 2010:
3,000 7.7% 9.0%
2,500
2,000 7.0%
B
H
P
n

1,500
Dec 2010:
1,000 4.00% 5.0%
500
0 3.0%
0
2

3
0
2

4
0
2

5
0
2

6
0
2

7
0
2

8
0
2

9
0
2

1
0
2

M3 Bank Lending Rates Reverse Repurchase Rate

Sources: Bangko Sentral ng Pilipinas 24

 Maturing Banking Sector Has Performed Well In Crisis
The risk of a banking crisis is minimal due to demonstrated resilience during the recent downturn as well as healthy
levels of growth and capitalization

Solid asset growth in line with economic expansion

Total Asset Size and Asset Growth

Strong capitalization above international norms Continuously strong profitability

Capital Adequacy Ratio ROE
14%
20%
11.2%
12%
18%
16.2% 10%
16%
8%
14%
15.2% 6%
12%
4%
BSP Regulatory Requirement of 10%
10%
International Standard of 8% 2%
8% 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 Jun-10
-
2001 2002 2003 2004 2005 2006 2007 2008 2009 Jun-10
Solo Consolidated

Source: Bangko Sentral ng Pilipinas 25

 Improving Asset Quality Underpins the Soundness of the
Philippine Banking System The proportion of loans past due has decreased substantially

Billions PHP (LHS) and Percentage (RHS)

 The resilience demonstrated by the Philippine banking system
is highlighted by the decrease in system-wide NPL and NPA
levels even at the heart of the global financial crisis
 Improving asset quality has minimized the risk of a potential
banking-system led crisis
 NPL coverage ratios have strengthened as insurance against
potential future asset deterioration, and underpin the
conservative nature of the banking system

System-wide NPL level has shown sustained improvement even

through the crisis While NPLs have shrunk, NPL coverage ratios have strengthened

Billions PHP (LHS) and Percentage (RHS) NPL coverage ratio (%)
200 10%
190
180
8%
170
160
122.3
150 6%
140
4.4%
130 3.9% 4%
120
110
100 2%
Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09
Mar-06

Mar-07

Mar-08

Mar-09

Mar-10
Jun-10
Sep-06

Sep-07

Sep-08

Sep-09

Non-PerformingLoans (lhs) NPL Ratio (rhs) NPA Ratio (rhs)

Source: Bangko Sentral ng Pilipinas 26

Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

27
 Sound External Payments Position
Balance of Payments and external dynamics have remained key credit assets as the economy rebounds from global
crisis on the back of rapid export growth and robust remittances and BPO receipts
Balance of Payments
(Billions USD)

** BOP
BOP grew
grew to
to aa surplus
surplus of
of US$14.4
US$14.4 billion
billion as
as of
of end-December
end-December 2010
2010
*

GDP growth in 2010 boosted by swift export growth Balance of Trade improving as exports become more competitive
Total Exports (Billions USD) Balance of Trade (Billions USD)
0
6 43% 44% 46% 50%
43% 37% 37% -1
5 34% 36% 30% 40%
-2
4 24% 28% 25% 30%
-3
3
11% 20% -4 -3.3
2
6% 10% -5
1
-6
0 0%
-7
Nov-10
Nov-09

Jan-10

Jun-10

Jul-10
Dec-09

Feb-10

Mar-10

Apr-10

May-10

Aug-10

Sep-10

Oct-10

Dec-10

-8
2002

2003

2004

2005

2006

2007

2008

2009

2010
Total Exports FOB (lhs) YoY Growth (rhs)

*Others includes “Net unclassified items,” an offsetting account to the overstatement or understatement in either receipts or payments of the recorded BOP components vis-à-vis the overall BOP position
Source: Bangko Sentral ng Pilipinas, National Statistical Coordination Board 28
 External Debt Service Ratios Improving
External debt service and interest payments becoming more manageable

Improving external debt service and foreign interest payments metrics underscore the strengthening of external finances
Debt Service as % of Exports of Goods and Receipts from Services and Income
23
21
19
17
15
13
11
9 9.6
7
5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F
External Debt Service Burden

External debt ratios have been cut by half in less than six years

External Debt / GDP (%)

Source: Bangko Sentral ng Pilipinas “Selected Economic and Financial Indicators” October 8, 2010, Moody’s Country Credit Statistics Workbook – Country Statistics Excel Data 29
 International Reserves at Record Levels
Supported by strong and sustained remittance growth

 Gross international reserves expanded to a record US$62.4bn in 2010. GIR grew to US$63.5bn as end-January 2011.
 Large stockpile of international reserves provide a healthy buffer against external shocks – reserve holdings can cover
11 x the country’s short-term external debt on original maturity
 Growing international reserves are structural in nature and are supported by strong remittance flows as well as a
booming business process outsourcing (BPO) industry

External resiliency fortified by soaring FX reserves Reserve holdings more than cover debt payments
Gross International Reserves, Billions USD International Reserves / External ST Debt
70
62.4 63.5
1200% 1,106.6
60
1000%
50 44.2
37.6 800%
40
33.8

30
600%
23.0
18.5 400%
20 15.7 16.4 17.1 16.2

10 200%

0 0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 end- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 end-
Jan'11 Jan'11

Source: Bangko Sentral ng Pilipinas 30

 Robust Remittances and Booming BPO Sector Structurally
Support the Current Account
Service sector is becoming a positive net contributor to CA
 Remittances continue to contribute greatly to the Philippines’ Contributions to CA in Billions USD
current account and are up by 8.2% in 2010
 The Business Process Outsourcing (BPO) industry is one of
the Philippines’ most promising sectors and is one of the
driving factors behind the improving net services trade
balance
 Global trend of outsourcing is expected to accelerate and will
benefit the Philippines disproportionately given the Republic’s
well-established competitive advantages in the BPO sector

Remittances have tripled in a decade and provide a

tremendous external financing cushion BPO sector has grown quicker than the net services trade balance
Billions USD Billions USD

Source: Bangko Sentral ng Pilipinas 31

 Improving International Investment Position
International assets have nearly doubled in five years while the net international investment position has trended
towards a more sustainable equilibrium

International assets and investment position have steadily increased over the past decade, demonstrating the
Philippines’ increasing international stature

Billions USD

Source: Bangko Sentral ng Pilipinas 32

 Strengthening and Stable Currency
Reduced likelihood of destabilizing depreciation suggests lower default probability

The Peso has strengthened both vis-à-vis the USD

and on a real effective exchange rate basis Peso substantially more stable compared to peer currencies

PhP per USD and REER* Annual Standard Deviation of % change of daily FX rates
6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%
97 98 99 00 01 02 03 04 05 06 07 08 09 10

Indonesian Rupiah South African Rand Turkish Lira

Latvian Lats Guatemalan Quetzal Philippine Peso

* Effective exchange rate based on Bank for International Settlement (BIS) figures
Source: Bangko Sentral ng Pilipinas, Bank for International Settlements; Bloomberg 33
 Philippines’ CDS Levels are Tighter than Higher Rated Peers
Market validation of the country’s credit strengths

1400 bps

25 Feb 2011 Closing 5-Yr CDS

• PHL’s CDS curve is historically below that of Levels and Ratings (M/S&P/F):
1200 bps Indonesia despite being rated two notches
Vietnam, B1/BB-/B+, 366.3
lower by Moody’s
India, Baa3/BBB-/BBB-, 191.9
1000 bps • S&P upgraded PHL sovereign credit rating to Turkey, Ba2/BB/BB+, 175.7
BB from BB- in November 2010 Indonesia, Ba1/BB/BB+, 148.2

• Moody’s also changed PHL’s credit outlook to Philippines, Ba3/BB/BB, 141.2

800 bps
Spread (bps)

Positive from Stable in January 2011 Brazil, Baa3/BBB-/BBB-, 118.0

Peru, Baa3/BBB-/BBB-, 113.8
600 bps

400 bps

200 bps

0 bps
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

Source: Bloomberg. Note: State Bank of India used as a proxy for the Indian sovereign 34
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

35
 Clear Mandate from the Filipino People
A stable political environment resulting in improved investor confidence

A clean victory for Aquino bolstered his administration’s legitimacy and paves the way for a stable political environment

Philippines’ 2010 Presidential Elections Results

Candidate Party Results

Votes %
Benigno "Noynoy" Aquino Liberal 9,564,943 42.49
Joseph Estrada PMP 5,927,990 26.33
Manny Villar Nacionalista 3,333,558 14.81
Gilberto Teodoro Lakas Kampi CMD 2,480,185 11.02
Eddie Villanueva Bangon Pilipinas 722,857 3.21
Richard Gordon Bagumbayan-VNP 270,981 1.20
Nicanor Perlas Independent 33,730 0.15
Jamby Madrigal Independent 30,533 0.14
John Carlos de los Reyes Ang Kapatiran 28,297 0.13
The markets were not affected before or after the elections

Philippines’ 5 Year Sovereign CDS

600

500

400

300 Election day

200

100

0
2-Mar-09 2-May-09 2-Jul-09 2-Sep-09 2-Nov-09 2-Jan-10 2-Mar-10 2-May-10

Source: Bloomberg 36
Agenda

1 Executive Summary: A Strong Positive Growth Story

2 A Resilient and Fast-Growing Economy

3 Fiscal Sustainability: An Integral Part of the Effective Governance Agenda

4 Supportive and Stable Monetary Policy and a Sound Banking System

5 A Fortified External Position

6 An Enhanced Political and Institutional Framework

7 Policy Directions for 2011

37
 BSP Policies Supportive of Economic Growth
Further strengthening price stability objective, enhancing stability of the banking system, further deepening the domestic
capital market

 Inflation is expected to fall within the Government’s target range of 3% to 5% for 2011 and 2012
 Closely monitor emerging price pressures and coordinate as necessary with concerned government agencies on possible
measures to address supply-side concerns
Monetary Policy
 Keep track of domestic liquidity conditions given the prospect of strong foreign exchange inflows
 Pursue economic modeling and research initiatives to further develop the BSP’s forecasting and policy analysis capability
 Provide an adequate and timely supply of currency to meet consumption and production needs of the economy

 Implement other innovative modes of asset cleanup to facilitate a more vigorous unloading of bad assets in the banking system
 Implement revised risk-based capital adequacy framework in line with the provisions of Basel II in 2011
 Implement a time-bound prompt corrective action (PCA) framework to provide a comprehensive approach to problem bank
resolution in close coordination with other financial regulators such as the Philippine Deposit Insurance Corporation (PDIC)
 Harmonize corporate governance standards with other financial regulators
Financial Sector Policy
 Enhance existing risk-based supervision technologies in line with internationally accepted standards and best practices
 Improve existing regulatory framework particularly the issuance of amendatory rules on liquidity risk management and
outsourcing frameworks
 Enact key legislations such as the BSP Charter Amendment, Collective Investments Schemes Law (CISL), Payments Systems
Act (PSA), Financial Sector Taxation and Pre-Need Code of the Philippines
 Pursue initiatives to promote a deep domestic capital market that will complement the presence of a resilient banking system

38
 BSP Policies Supportive of Economic Growth
Fortifying the country’s external payments position, creating an environment of equal opportunities

 Continue to benchmark BSP systems and processes against international best practices to ensure
confidence in the country’s payments and settlements systems.

External Sector Policy  Maintain a market-determined exchange rate

 Build-up comfortable level of reserves for self-insurance against external shocks
 Ensure the continued effective management of the country’s external debt

 Facilitate greater access to credit and other financial services for micro, small and medium enterprises
(MSMEs)
Social Advocacies  Promote greater public awareness of basic economic and financial issues and financial empowerment
(e.g. Economic and Financial Learning Program –”EFLP”)
 Promote broad-based financial literacy, particularly for OFWs and their family beneficiaries

39
 Strengthening the Government’s Balance Sheet
Increase revenues and widen tax base while pursuing parallel efforts to reinforce tax administration and ensure efficient
expenditure management program

Administrative Measures
 Restructure and strengthen the Large Taxpayer Service
 Set-up BIR key performance indicators and public actual results
 Improve VAT refund mechanism and enhance risk-based audit on such refund
 Revitalize the RATE, RATS and RIPS programs of government
 Establish appropriate performance standards and evaluations
 Maintain a transparent and productive tax audit program
Legislative Reforms
Commitment to Fiscal  Push for the enactment of Deficit-Neutral (PAYGO) Bill; Seeks to establish deficit-neutral rules towards responsible financial
Consolidation management, and a burden sharing framework between the executive and legislative branches of government
 Finalize proposed Fiscal Incentives Rationalization Bill; Seeks to remove redundant incentives to reduce the fiscal costs and
ensure that incentives will be given only to those who need them
 Push for GOCCs Reform Bill; Promotes financial viability and fiscal discipline in GOCCs and strengthens the role of the State in
Revenue Enhancement
its governance and management
and Debt Management
Reforms  Push for Amendments to the Build-Operate-Transfer (BOT) Law; Seeks to remove the maximum 60-day period for competitive
bidding for unsolicited proposals; allow s the government to reimburse proponents of unsolicited proposals in exchange for
government bidding out projects proposed by proponents on an unsolicited basis without the right to match
Debt Management
 Create a Debt and Risk Management Unit at the Department of Finance to conduct more aggressive options to optimize
savings
 Set up comprehensive debt management system including contingent liabilities and PPP-related fiscal risks
 Diversify modes, instruments and currency mix and introduce innovative terms and features
 Subject to rigid test of project viability and procurement processes projects funded out of borrowing whether or not government-
to-government, automatically guaranteed under GOCC charters and under BOT or PPP arrangements

40
 Strengthening the Government’s Balance Sheet
Raise revenues and widen tax base while pursuing parallel efforts to reinforce tax administration and ensure efficient
expenditure management program

 Continue adoption of the multi-year budgeting system to improve predictability of funding and integrate policy
with resource allocation.
 Continue adoption of Organizational Performance Indicator Framework to enable channeling resources to
where it best produces desired results and outcome
 Implement functionalities in the Philippine Government Electronic Procurement System such as a) virtual store
for electronic purchasing; b) expanded supplier registry as a centralized electronic database of all
manufacturers, suppliers, distributors, contractors and consultants registered in the system; c) introduction of
fees and charges to sustain operations and maintenance of the system; d) e-payment system to enhance the
functionality of the virtual store; e) e-bid facility for electronic bid evaluation of all types of procurement; and f)
uploading of the Annual Procurement Plan for every government procuring entity.
Commitment to Fiscal
Consolidation  Strengthening of the internal control system; finalize the Philippine Government Internal Audit Manual
 Continue adoption of Zero-Based Budgeting Approach; to ascertain whether the program objectives/outcomes
are being achieved
Expenditure  Promote transparency and accountability safeguards in the budget process; Require the posting of details of
Management Reforms program beneficiaries and location of projects in agency websites- approved budgets, performance measures
and targets, annual procurement plan, contracts awarded, name of contractors/suppliers/ consultants, targeted
and actual beneficiaries, utilization of funds, status of implementation and program/project
evaluation/assessment reports
 Strengthen Contingent Liability Management (CLM) through the preparation of the CLM Plan
 Implement Public Financial Management and the Government Integrated Financial Management Information
System to harmonize and integrate the budgeting, accounting and auditing systems of the government to make
it more transparent, accountable and performance-oriented
 Continue implementation of the Government Rationalization Program which aims to build a smaller bureaucracy
and improve public service delivery

Source:
Source: Draft
Draft Medium
Medium Term
Term Philippine
Philippine Development
Development Plan
Plan (MTPDP)
(MTPDP) 2011-2016
2011-2016 41
 Ensuring Enabling Business Environment Reforms
Empowering the private sector

 Make the business environment ever more predictable, reliable and efficient
• Upgrade the Business Name Registration System (BNRS); Simplify business registration requirements
and procedures; Review of procedures being undertaken by SEC, BIR, League of Cities and
Municipalities, and DILG
• Streamline Business Permits and Licensing System (BPLS); Simplify the minimum standards which the
LGUs will be required to implement
• Implement the Philippine Business Registry; Provide single window online transaction processing system
• Strengthen the National Economic Research and Business Assistance Center (NERBAC); Reduce
processing time for business licensing and registration
 Increase merchandise exports
• Organize massive information campaign on the benefits of trade agreements
Continued Efforts to • Pursue productive collaboration with PCCI and other non-governmental organizations supportive of DTIs’
Improve the Business international trade agenda
Environment • Implement sector specific focused interventions; more inbound less outbound missions; selective trade
fair participation
 Protect consumer rights
• Increase enforcement activities
• Stricter implementation of product testing and compliance standards; database sharing with BOC and
Bureau of Product Standards to ensure monitoring of incoming shipments that require an Import
Commodity Clearance
• Enhance consumer education and advocacy
• Pursue enactment of consumer-related laws
 Develop SMEs
• Capacitate SMES by rewarding performers; make available training courses
• Formulate of the National SME Development Plan 2011-2016
• Implement Rural Micro-Enterprise Promotion Program

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 Focus on Infrastructure
Mainstream access to reliable energy services and fuel and achieve greater energy supply security

Luzon grid needs a total additional capacity of 11,900 MW onwards to 2030

Visayas grid needs a total additional capacity of 2,150 MW onwards to 2030

Mindanao grid needs a total additional capacity of 2,500 MW onwards to 2030

Investment Requirements (2010-2030)

Sector Total
in Billion Php in Billion US $
Fossil Fuel Resources 543.93 12.09
Renewable Energy Resources 902.48 20.05
Alternative Transport Fuels 41.37 0.92
Power and Transmission Development 342.54 7.61
Downstream 59.61 1.32
Sub-Total 1,889.93 41.99
Cost of power plant construction included in the Investment Cost of Renewable Energy 62.74 1.39
Projects
Total 1,827.19 40.60

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 Focus on Infrastructure
Mainstream access to reliable energy services and fuel and achieve greater energy supply security

Power Sector
■ Infrastructures in power generation, Greenfield generation projects, possible JVs with proponents of indicative projects, NPC plants and NPC-
IPP contracts for privatization, Competitive power market, Electricity trading in the WESM, transition from a government-supervised Market
Operator to an Independent Market Operator, Supply/aggregation business, Metering service provider, Missionary electrification, New Power
Providers

Oil and Gas

■ Twelve (12) petroleum contract areas in shallow to deep waters with total hectarage of 7,920,000, possible JVs with existing service
contractors

Coal
Investment ■ Three (3) available contract areas for exploration and development, possible JVs with existing service contractors
Opportunities Renewable Energy
■ Possible JVs with existing Geothermal Service Contractors for exploration, Hydro frontier areas available for pre-development phase,
possible JVs with the existing service contractors for hydro

Alternative Fuels
■ Bio-ethanol production capacities for transport

Natural Gas
■ Strategic infrastructure in Luzon, LNG terminals in Southern Mindanao

Energy Efficiency & Conservation

■ Promotion and utilization of EE & C Technologies

■ Accelerate the exploration and development of oil, gas and coal resources
■ Aggressively develop renewable energy potential
Strategies ■ Intensify development and utilization of environment-friendly alternative energy resources/technologies
■ Strengthen and enhance energy efficiency and conservation program

■ Conduct of Open and Competitive Selection Process (OCSP) and direct negotiation for frontier areas in awarding RE Service Contracts
■ Conduct of Philippine Energy Contracting Round (PECR)
■ Develop/Institute optimal price setting in the energy industries
Programs ■ Promote transparency in pricing of refined petroleum products
■ Public Private Partnership
■ Conduct of Energy Investment Forum

44
 FROM DRAFT FITCH
Focus on Infrastructure PRESENTATION

Public-private partnership program to help provide the foundations for growth

Executive Order No. 8: “Reorganizing and Renaming the Build-Operate and Transfer (BOT) Center to the Public-Private
Partnership (PPP) Center of the Philippines and Transferring its Attachment from the Department of Trade and Industry to the
National Economic and Development Authority and for other Purposes” (9 September 2010)

 Focus on infrastructure to support facilities for tourism, agriculture, social services, and growth centers
 Provide incentives to stimulate private resources
 Ensure competition, fairness and transparency
PPP Development  Provide assistance in preparation of business cases, pre-FS, full FS, detailed engineering, tender document, etc
Strategies
 Fast-track project approval process
 Protect public interest
 Create the PPP Center

Projects ready for 2011

Priority PPP Projects

(2010 Prices in PhP Million)

MRT/LRT Expansion Program: Privatization of LRT 1 Operation and Maintenance (DOTC/LRTA) 7,700.0
MRT/LRT Expansion Program: Privatization of MRT 3 Operation and Maintenance (DOTC/LRTA) 6,300.0
MRT/LRT Expansion Program: LRT 1 South Extension Project (DOTC/LRTA) 70,000.0
New Bohol Airport Development (DOTC/MIAA/CAAP) 7,600.0
Puerto Princesa Airport Development (DOTC/MIAA/CAAP) 7,600.0
New Legaspi (DARAGA) Airport Development (DOTC/CAAP) 3,200.0
Privatization of Laguindingan Airport Operation and Maintenance (DOTC/MIAA/CAAP) 1,500.0
NAIA Expressway (Phase 2)(DPWH) 10,590.0
CALA Expressway-Cavite side section (27.5 km) (DPWH) 11,790.0
Daang Hari/SLEX Road Project (4 km) (DPWH) 325.8
Total 126,605.8

Source: Public-Private Partnerships (PPP) Brochure, November 2010 Edition 45

Developments in the PPP Program
Daylight in the Philippines: Accelerating Progress

Year-End Philippine Economic Briefing

March 4, 2011
L. Fisher Hotel, Bacolod City

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