EXCHANGE RATE

The Philippine peso exhibited greater stability in 1999, trading in a narrower range against the dollar compared to the previous year. The exchange rate averaged at P 39.09/US$, appreciating by 4.4 percent from the 1998 average of P 40.89/US$. The appreciation was mainly due to foreign exchange inflows through the equities market, especially in the first half of the year, as well as the slack corporate dollar demand from restrained industrial activity. Net direct investments and net portfolio investments in the first half of 1999 grew by 32.6 percent and 71.2 percent, respectively. For the first half of 2000, the Philippine peso averaged P 41.26/US$, a depreciation of around 7.6 percent as against P 38.34/US$ of the first half of 1999.

FISCAL POLICY

Government spending rose by 15.2 percent to P 590.16 billion in 1999 resulting in a deficit in the governments cash operations by P 111.66 billion. The government¡¯s pump-priming activities caused government expenditures to exceed the target level of P 576 billion by P 14.2 billion. Meanwhile, the slow growth in manufacturing and other industrial sectors contributed to a narrower tax base and lower collection performance. Consequently, revenue collection only increased by 3.5 percent in 1999 (P 478.5 billion), lower by P 12.2 billion than the 1999 target level of P 490.7 billion.

Government expenditures exceeded total government revenue collection by P 47.69 billion in the first half of 2000 as government tax revenues increased by only 5.5 percent from P215.95 billion in the first half of 1999 to P 227.87 billion. The total revenue collection was likewise below the programmed level of P 268.26 billion for year 2000. The lower revenue collection was caused by the shortfall in privatization proceeds which only amounted to P 1.36 billion against the programmed P 15.45 billion, as well as reduced collections by the Bureau of Internal Revenue which grew by only 2.9 percent during the first semester. Sixty percent of total government¡¯s expenditure was allocated for the use of the national government, 20 percent for interest payments and 18 percent for allotment to local government units.

MONETARY POLICY

Domestic liquidity grew by 19.3 percent in 1999. A more accommodative monetary policy through a low interest rate environment helped achieve the better than expected inflation rate in 1999 at 6.6 percent. Measures to reduce intermediation cost and to spur bank lending by the private/business sector were implemented. The reserve requirements were reduced from 17 percent in October 1998 to 12 percent in July 1999. The overnight borrowing rate by the central monetary authority (Bangko Sentral ng Pilipinas ¨C BSP) was also cut to 8.75 percent in November 1999 from 13.5 percent as of December 1998, and its lending rate to 11.8 percent in December 1999 from 15.4 percent in December 1998. Further, the application of the 2 percent general loan-loss provision was relaxed, while the Exporters¡¯ Dollar Facility was expanded to include yen-denominated loans.

New regulatory guidelines enhanced the stability of the banking system. Disclosure requirements for banks, entailing quarterly information on non-performing loans, amount of specific and general loan-loss reserves, return on equity, and loans to insiders, have been widened to include even those that are unlisted at the Philippine Stock Exchange. Banks were also required to increase their capitalization in 2000 with accompanying remedial actions and sanctions for banks with capital deficiencies. The Philippine Central Bank (BSP) has completed its first-generation early warning system for commercial banks which can predict a bank¡¯s capitalization ration or solvency one year ahead. To promote consolidation, the BSP imposed an indefinite moratorium on the establishment of new banks except in cities and municipalities where there are no existing banking offices and under other special conditions.

In 2000, the government¡¯s monetary policy continued to aim for a decline in inflation and broad stability in foreign exchange while ensuring that interest rates are reasonably low to support economic growth. The exchange rate continued to be market determined and build up of foreign reserves was pursued to the extent allowed by monetary and foreign exchange market conditions.

Likewise, the policies which were instrumental in supporting the country through the crisis of 1997 continued to be followed including implementation of prudent fiscal and monetary policies, liberalization and privatization of the banking sector, proactive management of external debt and progressive development of capital markets.

MEDIUM-TERM OUTLOOK

A fairly strong performance in GDP in 1999 highlighted by a robust growth in merchandise exports, expansion in output of the production sectors, i.e., agriculture, industry and services as well as a low inflation rate showed that the economy is well on track to achieve the government¡¯s growth and inflation targets. Further, based on a strong performance in the first half 2000, the Philippines is likely to achieve the target of at least 4 per cent growth in GDP for the whole of 2000. Agriculture, fishery and forestry is predicated to grow by 2.5 percent, industry by 4 percent, and services by 4.1 percent in 2000. The inflation rate is expected to be kept within single digit level at 5 percent.

For 2001, the GDP growth target will range from 4 percent to 5 percent. The growth for next year hinges on strong export growth, higher fiscal spending on capital outlays especially for foreign-assisted projects, and recovery of bank lending. Inflation is expected to increase in 2001 to 6 ¨C 6.5 percent due to lagged effects of the increase in oil prices and the weaker peso in 2000, and the impact of the El Nino on food prices.

However, the government will continue to assess the impact of the peso-dollar rate, oil prices, and world interest rates on the economy and on the growth and inflation targets.

PHILIPPINES: OVERALL ECONOMIC PERFORMANCE