Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 1 CLEAN ENERGY SECURING A PHILIPPINES ECONOMIC UPDATE FUTURE Photo by: palidachan / Shutterstock JUNE 2023 ToC Philippines Economic Update June 2023 Contents Table of PREFACE Executive Summary Economic & Recent Global Policy Dev Developments Recent The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analyses, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from 1.1 macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business Output and leaders, private firms and investors, and analysts and professionals engaged in the social and economic Demand 1.2 development of the Philippines. The PEU is a biannual publication of the World Bank’s Macroeconomics, Trade and Investment (MTI) Global Inflation & Monetary Practice (GP), prepared in partnership with the Finance, Competitiveness and Innovation (FCI); Poverty and 1.3 Equity; Social Protection and Jobs (SPJ); and Governance Global Practices. Lars Christian Moller (Practice Manager for the MTI GP), Souleymane Coulibaly (Lead Economist and Program Leader), and Ralph van Doorn (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Chua (Senior External Sector 1.4 Economist), Kevin Cruz (Economist), Ruijie Cheng (Young Professional), Karen Lazaro (Research Analyst), Eduard Santos, Ludigil Garces and Patrizia Benedicto (Consultants) from the MTI GP; Radu Tatucu (Senior Financial Sector Specialist) and Uzma Khalil (Senior Financial Sector Specialist) from the FCI GP; Nadia Belghith (Senior Sector Fiscal Economist) and Sharon Piza (Economist) from the Poverty & Equity GP; Paula Cerutti (Senior Economist), Ruth 1.5 Rodriguez (Senior Social Protection Specialist), Yoonyoung Cho (Senior Economist) and Ma. Laarni Revilla (Consultant) from the SPJ GP; and Anuja Kar (Senior Agriculture Economist) and Mio Takada (Senior Agriculture Employment and Poverty Economist) from the Agriculture GP. A World Bank team from the Energy and MTI GPs, consisting of Feng Liu 1.6 (Program Leader and Senior Energy Specialist) and Kevin Chua, prepared the Special Focus Note on Philippine Energy Transition: Towards a Secure, Affordable, and Clean Energy Future, under the guidance of Jie Tang (Practice Manager) and Lars Moller. The report was edited by Oscar Parlback (Consultant), and the graphic Outlook & Risks designer was Pol Villanueva (Consultant). Peer reviewers were Samuel Christopher Hill (Senior Economist) and Arvind Nair (Senior Economist). Logistics and publication support were provided by Geraldine Asi (Team Assistant), Teresita Victoria (Program Assistant), and Hunter Tiro (Consultant). The External Communications outlook Growth Team, consisting of Clarissa David, David Llorito and Stephanie Margallo, and Justine Letargo (Consultant) 2.1 Philippines Economic Update June 2023 prepared the media release, dissemination plan, and web-based multimedia presentation. Poverty and The team would like to thank Ndiame Diop (Country Director for Brunei, Malaysia, Philippines, and Thailand) for Poverty Shared 2.2 his advice and support. The report benefited from the recommendations and feedback of various stakeholders in the World Bank as well as from the government, the business community, labor associations, academic institutions, and civil society. The team is grateful for their contributions and perspectives. The findings, Challenges Risk and Policy interpretations, and conclusions expressed in the PEU are those of the authors and do not necessarily reflect the 2.3 views of the World Bank’s executive board or any national government. Philippine Transition Energy If you wish to be included in the email distribution list for the PEU and related publications, please contact Geraldine Asi (gasi@worldbank.org). For questions and comments regarding the content of this publication, please contact Kevin Chua (kchua1@worldbank.org). Questions from the media should be addressed to Energy Sector Country and David Llorito (dllorito@worldbank.org). 3.1 For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. Outlook Energy 3.2 Sector Power 3.3 II Policies ToC 3.4 Contents Table of TABLE OF CONTENTS Executive Summary Economic & Recent Global Policy Dev Developments Recent Preface ii 1.1 Table of Contents iii List of Figures iv Output and Demand List of Tables v 1.2 List of Boxes v Inflation & Monetary Abbreviations and Acronyms vi 1.3 Executive Summary vii Part I. Recent Economic and Policy Developments 11 External Sector 1.4 1.1 Recent Global Developments: Subdued Global Enviroment 12 1.2 Output and Demand: Robust Domestic Demand 14 Sector Fiscal 1.5 1.3 Inflation and Monetary Policy: Sticky Core Inflation 16 1.4 External Sector: Wider Trade Deficit 19 Employment and Poverty 1.5 Fiscal Sector: Narrowing Fiscal Deficit 22 1.6 1.6 Employment and Poverty: Concerns of Low-Quality Jobs 26 Part II. Outlook and Risks 29 Outlook & Risks 2.1 Growth Outlook 29 2.2 Poverty and Shared Prosperity 34 outlook Growth 2.1 2.3 Risk and Policy Challenges 35 Philippines Economic Update June 2023 Part III. Philippine Energy Transition: Towards a Secure, Affordable Poverty and Poverty and Clean Energy Future 38 Shared 2.2 3.1 Country and Energy Sector Context 39 3.2 The Philippine Energy Outlook and Decarbonization Challenges 44 Challenges Risk and Policy 2.3 3.3 Power Sector Decarbonization Pathways and Implications 51 3.4 Policies for a Secure, Affordable and Clean Energy Future 62 Philippine Transition Energy Annex: Power Sector Decarbonization Analysis 65 Energy Sector Country and 3.1 NOTE: CLICK THE SIDE BUTTONS TO GO TO THE SECTION YOU WANT TO READ OR GO TO THE TABLE OF CONTENTS (TOC). CLICK HOME BUTTON TO GO BACK TO TOC PAGE Outlook Energy 3.2 Sector Power 3.3 III Policies ToC 3.4 Contents Table of Executive Summary List of Figures Figure 1. Growth in EMDE industrial production (3-month on 3-month) Economic & Recent Global Policy Dev Developments Recent has decelerated since September 2022. 13 Figure 2. Moderating commodity prices helped reduce headline global inflation. 13 1.1 Figure 3. Resilient domestic demand drove growth in Q1 2023. 15 Figure 4. The services sector mainly supported growth in Q1 2023. 15 Output and Demand 1.2 Figure 5. Headline inflation averaged 7.9 percent in the first four months 17 of 2023, … Inflation & Monetary Figure 6. … which, was the highest among ASEAN peers. 17 1.3 Figure 7. Forward-looking asset quality indicators improved amid the eco- nomic reopening. 18 External Sector 1.4 Figure 8. Higher imports widened the goods trade deficit. 20 Figure 9. The BOP shortfall was driven by a larger CA deficit. 20 Sector Fiscal 1.5 Figure 10. Regional currencies have strengthened since October 2022. 21 Figure 11. Lower expenditures caused the fiscal deficit to narrow. 23 Employment and Poverty Figure 12. Public debt growth has been flat while the fiscal deficit has nar- 1.6 rowed. 23 Figure 13. Poor households suffer more than the average household from Outlook & Risks high food prices. 25 Figure 14. Female labor force participation has trended upward … 27 outlook Growth Figure 15. … while the unemployment rate has gradually decreased. 27 2.1 Philippines Economic Update June 2023 Figure 16. Households’ perception of their finances and incomes is im- Poverty and proving. 28 Poverty Shared 2.2 Figure 17. Growth prospects remain positive over the medium term. 32 Figure 18. Despite consolidation, public investment is projected to remain Challenges Risk and Policy above 5.0 percent of GDP. 32 2.3 Figure 19. Consumer and business confidence continues to improve. 33 Philippine Transition Figure 20. Actual and projected US$3.65-a-day poverty rates. 34 Energy Figure 21. Power generation and transport have been driving the increase in fossil fuel consumption. 40 Energy Sector Country and 3.1 Figure 22. Coal has become the dominant source of power generation over the last decade. 42 Figure 23. Energy demand is projected to grow rapidly, particularly in Outlook Energy 3.2 transport, industry, and services. 45 Sector Power 3.3 IV Policies ToC 3.4 Contents Table of Executive Summary Figure 24. The primary energy supply is expected to rely more on fossil fuels, driven by power generation and transport. 46 Economic & Recent Global Policy Dev Developments Recent Figure 25. Decarbonization efforts need to focus on power generation and transport. 47 Figure 26. The share of coal in power generation is expected to fall signifi- 1.1 cantly 48 Figure 27. An energy transition would result in substantial changes in the Output and Demand mix of power generation technologies and energy sources. 52 1.2 Figure 28. The cumulative investment cost of the ADS would be twice that of the CPS. 54 Inflation & Monetary 1.3 Figure 29. The power system’s levelized cost of electricity is projected to decline. 55 External Sector 1.4 Figure 30. The ADS pathway would lead to a substantial reduction of CO2 emissions and air pollutants. 57 Sector Fiscal 1.5 List of Tables Employment and Poverty 1.6 Table 1. Economic Indicators for Baseline Projections 31 Table 2. Comparing the Cost of the ADS and CPS, 2022–2040 59 Outlook & Risks List of Boxes outlook Growth 2.1 Philippines Economic Update June 2023 Box 1. Addressing Challenges to Food Security in the Philippines 24 Box 2. The Economywide Impact of Climate Change 37 Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Sector Power 3.3 V Policies ToC 3.4 Contents Table of ABBREVIATIONS AND ACRONYMS Executive Summary Economic & Recent Global Policy Dev Developments Recent AC Air Conditioner FDI Foreign Direct Investment ADS Accelerated Decarbonization FIT Feed-in-Tariff Scenario FMRs Farm-to-Market Roads ASEAN Association of Southeast Asian GBC Green Building Code 1.1 Nations GEAP Green Energy Auction Program BAU Business-As-Usual GHG Greenhouse Gas BBL One Stock Tank Barrel IT-BPO Information Technology - Business Output and Demand BIR Bureau of Internal Revenue Process Outsourcing 1.2 BOP Balance of Payments JETP Just Energy Transition Partnership BPS Basis Points LCOE Levelized Cost of Electricity BSP Bangko Sentral ng Pilipinas LFPR Labor Force Participation Rate Inflation & Monetary 1.3 BTr Bureau of The Treasury LFS Labor Force Survey CA Current Account LGUs Local Government Units CCDR Country Climate And Development LNG Liquified Natural Gas External Sector Report MDS Moderate Decarbonization Scenario 1.4 CES Clean Energy Scenario NDCs Nationally Determined Contributions CFPPs Coal-Fired Power Plants NPL Non-Performing Loan CPS Current Policy Scenario NREP National Renewable Energy Program Sector Fiscal 1.5 DOE Department of Energy PEP Philippine Energy Plan DTI Department of Trade And Industry PPP Purchasing Power Parity Employment and Poverty EE Energy Efficiency PPTs Percentage Points 1.6 EECA Energy Efficiency and Conservation PSA Philippine Statistics Authority Act RE Renewable Energy EMDEs Emerging Market and Developing REF Reference Scenario Outlook & Economies RPS Renewable Portfolio Standard Risks EPIRA Electric Power Industry Reform Act TRAIN Tax Reform for Acceleration and EVOSS Energy Virtual One-Stop-Shop Inclusion EVs Electric Vehicles VAT Value-Added Tax outlook Growth 2.1 FAO Food and Agriculture organization VRE Variable Renewable Energy Philippines Economic Update June 2023 of The United Nations YOY Year-on-Year Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Sector Power 3.3 VI Policies ToC 3.4 Contents Table of EXECUTIVE SUMMARY Executive Summary Economic & Recent Global Policy Dev Developments Robust domestic demand fueled growth, trade grew along with the recovery in tourism and Recent countering a weaker global demand in the first resilience in the information technology-business quarter of 2023. The economy expanded by 6.4 process outsourcing (IT-BPO) sector, while remittance percent year-on-year (yoy) in Q1 2023, higher than growth softened to 3.8 percent in 2022. The current 1.1 the growth of regional peers such as Malaysia (5.6 account deficit was financed by financial inflows, percent), Indonesia (5.0 percent), Vietnam (3.3 especially portfolio investment. With the wider percent), and Thailand (2.7 percent). The continued current account deficit, the balance-of-payments Output and Demand release of pent-up demand, improved employment, (BOP) reversed to a deficit of 1.8 percent of GDP in 1.2 and steady remittances supported domestic activity. 2022 from a 0.3 percent of GDP surplus in 2021. The services sector fueled growth, underpinned In Q1 2023, the BOP position reversed to a surplus by the revival of tourism and consumer spending (3.4 percent of GDP) due to higher remittances, Inflation & Monetary 1.3 on domestic services. Meanwhile, the industry global bond issuance of the national government, sector was hampered by weak external demand and other inflows of foreign portfolio investments. which weighed on manufacturing and mining. This contributed to a 6.0 percent peso appreciation External Sector Favorable weather conditions and the rebound in between October 2022 and April 2023, and higher 1.4 livestock production led to better performance in international reserves of 7.6 months of import by April the agriculture sector. On the expenditure side, 2023. household consumption and fixed capital investment Sector Fiscal 1.5 drove growth, anchored on upbeat domestic activity, The fiscal deficit narrowed owing to reduced and improved household and business confidence, spending despite a decline in fiscal revenues. Employment and Poverty and despite the higher inflation and interest rate Public revenues declined to 14.6 percent of GDP in 1.6 environment. Weaker external demand, however, Q1 2023 (15.9 percent in Q1 2022) as tax collections weighed on net exports. moderated amid slower GDP growth relative to last year’s, and temporary effects due to the periodicity Outlook & Headline inflation has declined since the start of of VAT filings by firms. However, public expenditures Risks the year, but remained elevated at an average fell to 19.5 percent of Q1 2023 GDP (22.3 percent of 7.9 percent in the first four months of 2023. in Q1 2022) due to lower current expenditures and It exceeded the target range of 2-4 percent, driven national tax allotments to LGUs. As a result, the fiscal outlook Growth 2.1 by food inflation (9.7 percent) and utilities inflation deficit fell to 4.8 percent of GDP in Q1 2023 from 6.4 Philippines Economic Update June 2023 (7.8 percent). Transportation inflation has steadily percent in Q1 2022. This helped temper the growth declined to 0.2 percent since their peak in July 2022 of national government (NG) debt by 1.2 percent Poverty and Poverty Shared due to lower global crude oil prices. Core inflation, yoy as of Q1 2023, from 13.7 percent growth in the 2.2 which excludes volatile food and energy commodity year prior. NG debt stood at 61.0 percent of GDP items, rose to 7.9 percent in April, a reflection of in March 2023, up marginally from 60.9 percent of Challenges underlying price pressure. To combat high inflation, GDP in 2022. The debt profile remains favorable, Risk and Policy 2.3 the government lowered tariffs on key agricultural consisting mainly of long-term, domestic, and peso- commodities and approved a targeted cash transfer denominated debt. program to mitigate the impact of inflation on the Philippine Transition Energy poor. The Bangko Sentral ng Pilipinas (BSP) has also Labor market outcomes were mixed: Labor force raised the key policy rate by 75 bps since January participation increased and unemployment 2023 on the back of possible second-round effects fell, but low-quality jobs are on the rise. The Energy Sector Country and from additional transport fare increases and wage labor force participation rate (LFPR) rose from 65.2 3.1 adjustments. percent in September 2022 to 66.0 percent in March 2023 driven by increased participation by women. The strong domestic demand, along with higher Unemployment fell from 5.0 percent to 4.7 percent Outlook Energy 3.2 commodity prices, led to a wider current account during the same period. Between September 2022 deficit in 2022. The current account deficit widened and March 2023, net jobs creation was about a from 1.5 percent of GDP in 2021 to 4.4 percent of million, primarily in the agriculture and services Sector Power GDP in 2022. This was due to a larger trade deficit sectors. Nonetheless, the share of elementary 3.3 where imports of goods outpaced exports. Services occupations associated with low and irregular VII Policies ToC 3.4 Contents Table of pay remained high at almost 30 percent of total in goods exports and manufacturing activity. Executive Summary employment in March 2023 and the share of part- Meanwhile, the contact-intensive services sector will time workers increased above pre-pandemic levels. support growth buoyed by spillovers from China’s Moreover, the share of self-employed (own account) reopening, the recovery of international tourism, Economic & Recent Global and unpaid workers increased above pre-pandemic and robust domestic activity. The implementation Policy Dev Developments Recent levels, indicating growth in the informal labor market of recently passed reforms will encourage private and a shift to low-productivity jobs. investment and attract more FDI, accelerating investment growth over the forecast horizon. Outlook and Risks Medium-term growth will gradually approach its 1.1 potential rate at 5.7 percent as the output gap closes Global growth is expected to slow substantially in line with the cyclical recovery. Output and in 2023 before modestly recovering in 2024- Demand 1.2 25. The growth slowdown happens amid a weak The growth outlook is subject to downside risks. environment characterized by subdued global From the external front, the possibility of higher-than- demand, persistent inflationary pressure, and tighter expected global inflation, tighter global financing Inflation & Monetary financial conditions. Nonetheless, global growth conditions and an escalation of geopolitical tensions 1.3 is expected to slow at a softer pace than initially could further disrupt global activity and cause a projected in the January 2023 Global Economic sharper-than-expected global slowdown, which in turn will further temper external demand. Sticky External Prospects to reflect better-than-expected growth Sector 1.4 in the United States and the Euro Area in late 2022 core inflation due to tight labor markets and resilient and early 2023, China’s economic reopening, and demand could lead to larger-than-anticipated improved global sentiment.1 Meanwhile, monetary monetary tightening in many countries. Recent Sector Fiscal banking turmoil in advanced economies raises the 1.5 tightening and restrictive credit conditions are tempering interest rate-sensitive activities such as possibility of additional bank failures that can unnerve private investments and construction. In advanced the global financial markets. From the domestic front, Employment and Poverty economies, policy rate hikes due to persistent the threat of El Niño and supply chain bottlenecks 1.6 inflationary pressures and recent bank failures have may yet again raise food supply challenges and place led to tighter financial conditions and a slowdown upward pressure on food prices. Over the long term, climate change and the increasing severity of Outlook & in bank lending. In EMDEs excluding China, tighter Risks fiscal and monetary policies are likely to dampen natural disasters risk food security and magnify the economic activity. EMDEs with weak credit profiles vulnerability in the agriculture sector. are expected to experience the most subdued outlook Growth growth amid tight financial conditions. Pursuing revenue-enhancing policies can 2.1 Philippines Economic Update June 2023 enhance fiscal consolidation efforts and support Despite weak external conditions, strong growth. The Government has a political window Poverty and of opportunity to implement challenging reforms Poverty Shared domestic demand will drive the Philippine 2.2 economy to grow at 6.0 percent in 2023 and early in its 6-year term. Revenue-enhancing policies gradually decline over the medium term. This could be more growth-friendly if delivered through appropriate reforms. For example, the impact of the Challenges upward revision reflects the latest global growth Risk and Policy TRAIN law on growth and poverty crucially relies on 2.3 upgrade for 2023 and the continued strength in domestic demand. Private consumption growth will the efficient use of the additional revenues towards be supported by improved employment, steady productivity-enhancing infrastructure and human Philippine Transition Energy remittances, and better consumer sentiments, capital investments. With politically challenging amid an expected decline in headline inflation and reforms, early preparation and engagement with winding down of pent-up demand. Investment the legislative body can help generate support and Energy Sector Country and growth is expected to soften amid ongoing fiscal ensure that the government is well-placed for the 3.1 consolidation that will impact public investment and timely implementation of reforms. Highlighting tightening financial conditions that will weigh on the successes of recent tax reform initiatives in private investment. Softer global growth and the shift strengthening resilience and achieving inclusive Outlook Energy in global consumption towards more services will growth beyond its impact on fiscal sustainability can 3.2 temper external demand, leading to a moderation help improve public acceptance. Sector Power 3.3 1 World Bank. 2023. June 2023 Global Economic Prospects. Washington, DC. VIII Policies ToC 3.4 Contents Table of Improving public spending efficiency through between 2020 and 2040. Compared with ASEAN Executive Summary better targeting of social protection measures countries with significantly higher per capita GDP is essential to protect the poor and vulnerable in 2019, the Philippines has substantially lower per from economic shocks amid limited fiscal capita electricity consumption at 0.9 MWh, vs. Economic & Recent Global space. An efficient social protection targeting, 2.8 MWh of Thailand and 5.2 MWh of Malaysia. Policy Dev Developments Recent and delivery system would help protect poor and The energy sector needs to overcome the dual vulnerable households amid the government’s challenges of meeting fast-growing demand and efforts to rebuild fiscal buffers. During the pandemic, transforming its fossil-fuel-based infrastructure while the country demonstrated the capacity to scale up keeping the energy supply secure, reliable, and 1.1 social protection programs but was hindered by affordable. implementation challenges, delays, and the sheer Output and magnitude of the pandemic shock. Ensuring a The Philippines would benefit from an energy Demand 1.2 resilient delivery of social protection measures would transition toward low- and zero-carbon require the: (i) adoption of the national ID system alternatives. A clean energy transition would for social protection delivery; (ii) enhancement of substantially increase the use of indigenous and Inflation & Monetary the targeting system; (iii) development of digital renewable energy (RE) resources while reducing the 1.3 platforms and tools; (iv) continued innovation of country’s reliance on imported fossil fuels, thereby digital government-to-person payment methods; enhancing energy security. A cleaner energy future and (v) strengthening of contingency financing is expected to be more affordable, given the global External Sector 1.4 mechanisms and readiness for disaster response. trends of declining costs related to deploying and integrating solar and wind power. Reducing fossil Strengthening the economic recovery fuel consumption, particularly by electrifying urban Sector Fiscal and achieving the country’s long-term transport and reducing the use of coal in power 1.5 growth ambition would require an increase generation, would reduce ambient air pollution in in investments. Prior to the pandemic, the urban areas, improving public health. Given that an Employment and Poverty contribution of capital accumulation to economic increasing number of multinational firms are setting 1.6 growth increased substantially because of the their own net-zero targets and examining their government’s commitment to public investment, supply chains to achieve their climate commitments, while fast growth, solid macro-fiscal fundamentals, greening the power supply through an energy Outlook & Risks and structural reforms led to an increase in private transition would help the Philippines stay competitive investment. However, capital accumulation in the and attract foreign investments. Philippines was still lower than in regional peers. In outlook Growth addition, COVID-19 caused a significant decline in The government is embarking on a substantial 2.1 Philippines Economic Update June 2023 both public and private investment, from an average energy transition agenda. It recognizes that of 25.9 percent of GDP in 2016–19 to 19.3 percent of continuing historical trends in the energy sector Poverty and GDP in 2020-21. Returning to the pre-pandemic level would reduce energy security and deteriorate the Poverty Shared 2.2 of investment spending will require a commitment Philippines’ external economic competitiveness. to promote investment, including Foreign Direct The country’s nationally determined contributions Investment (FDI), and facilitate stronger partnerships (NDCs) include reducing cumulative GHG emissions: Challenges Risk and Policy with the private sector. an unconditional target of 2.71 percent and a 2.3 conditional target of 75 percent below the business- Special Focus – Philippine Energy as-usual baseline by 2030. The government’s energy Philippine Transition Energy strategy includes: (1) scaling up the deployment of Transition: Towards a Secure, RE, particularly solar and onshore and offshore wind Affordable, and Clean Energy Future power; (2) setting a cap on the growth of coal-fired Energy Sector Country and power (cap on capacity by 2025 and generation by The Philippine energy sector needs to grow 3.1 2030); (3) ramping up liquified natural gas (LNG) rapidly to support the country’s ambition of to power investments; (4) promoting demand-side ending poverty and becoming a prosperous energy efficiency (EE) and electrification of transport; middle-class society by 2040. The government Outlook Energy and (5) exploring the development of other low- or 3.2 projects that the final energy demand will triple zero-carbon technologies such as nuclear power. Sector Power 3.3 IX Policies ToC 3.4 Contents Table of In building a solid foundation for the country’s energy transition, and accelerating the energy Executive Summary transition, the authorities should consider the following: Recommendations Descriptions Increase the implementation Focus should be on speeding up implementation by removing constraints Economic & Recent Global Policy Dev Developments Recent of utility-scale solar and wind to procuring, financing, and delivering solar and wind projects. Short- to power projects to bring medium-term measures include: variable renewable energy • Scaling up the Green Energy Auction Program (GEAP) with demand pull sources to a tipping point in of the Renewable Portfolio Standards (RPS). 1.1 power generation • Streamlining the permitting process through speeding up the full operationalization of EVOSS to cover all concerned national agencies and local government units. Output and • Removing barriers to financing, particularly in high-risk projects such as Demand 1.2 offshore wind and floating solar projects. Prioritize planning and The transmission development plan should be efficiently aligned with investments in transmission load growth patterns and generation capacity procured through GEAP. Inflation & Monetary capacity and grid flexibility Government intervention is needed to keep transmission projects procured 1.3 and delivered on time. The provision of ancillary services and investments in grid flexibility (e.g., energy storage systems) needs to be incentivized through proper pricing mechanisms. External Sector 1.4 Prudently pursue the LNG- Due to the anticipated depletion of the Malampaya gas field, it is critical for to-power program to secure the Philippines to complete its current Liquified Natural Gas (LNG)-to-power reliable power supply and program as planned. Additional LNG capacity should be carefully assessed Sector Fiscal increase the system flexibility based on the needs for maintaining the reliability of the power system, given 1.5 for integrating variable the VRE capacity target for 2040, including potentially large addition of renewable energy (VRE) offshore wind capacity and the early retirement of coal-fired power plants Employment and Poverty (CFPPs). 1.6 Prioritize Energy Efficiency Improving EE in residential, commercial, and public buildings through (EE) and demand-side regulations (e.g., enforcing energy efficient building codes and minimum management for buildings energy performance standards for air conditioners and major appliances) Outlook & and industries and incentives (e.g., rebates for purchasing high-efficiency appliances and Risks accelerated permitting process for high-class green buildings) would help moderate future electricity demand. Demand-side management and demand response should be incentivized through time-of-use tariffs and interruptible outlook Growth supply contracts. 2.1 Philippines Economic Update June 2023 Improve power system Least-cost planning tools need to consider the costs of carbon and local air planning to better guide pollution as well as stranded assets. The authorities should keep a dynamic Poverty and Poverty Shared energy transition investment view of technological changes and enhance the government’s capability to 2.2 decisions assess the viability of emerging technologies, such as hydrogen and carbon capture and storage, and maximize RE while managing the cost of services. Challenges Risk and Policy 2.3 Consider the use of an For example, setting a moderate price on carbon of up to US$5/tCO2 appropriate carbon pricing could incentivize firms and individuals to adopt low carbon technologies instrument to level the while raising revenues of up to 0.4 percent of GDP. The revenues could be Philippine Transition Energy playing field between used to mitigate the short-term negative poverty impact of introducing a RE and fossil fuels while carbon tax through income support and reskilling of workers affected by generating revenues decarbonization. Energy Sector Country and Establish a framework The authorities will need to emphasize the principles of competition and 3.1 for addressing the early transparency in discovering the price for the early closure of CFPPs to minimize retirement of coal-fired cost. A comprehensive cross-sectoral approach will be required to properly power plants and ensuring a prepare a framework for a just energy transition process in the Philippines, just energy transition and key stakeholders need to be involved early in the consultative planning Outlook Energy 3.2 process. The just transition process should include three focus areas: (i) institutional governance; (ii) people and communities; and (iii) environmental remediation. Sector Power 3.3 Part 3 of the PEU investigates the state of the Philippines’ energy transition, the challenges to decarbonization, and policies for a secure, affordable, and clean energy future. X Policies ToC 3.4 Contents Table of Executive Summary Economic & Recent Global Policy Dev Developments Recent 1.1 Output and Demand 1.2 Inflation & Monetary 1.3 External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6Outlook & Risks Photo by: KieferPix / Shutterstock outlook Growth 2.1 Philippines Economic Update June 2023 PART 1 Poverty and Poverty Shared 2.2 RECENT ECONOMIC AND POLICY Challenges Risk and Policy 2.3 DEVELOPMENTS Philippine Transition Energy The Philippine economy outperformed its regional peers, expanding by 6.4 percent in the first quarter of 2023. The continued release of pent-up demand as well as recovering labor Energy Sector market, steady remittances, and tourism rebound supported domestic activity. Weak global Country and 3.1 conditions, however, tempered external demand, which weighed on manufacturing and net exports. Domestic demand remained robust despite elevated inflation. To address inflationary pressure and anchor inflation expectations, the Bangko Sentral ng Pilipinas (BSP) has raised Outlook Energy 3.2 the key policy rate by an additional 75 bps since January 2023. Meanwhile, a decline in public spending led to a narrower fiscal deficit. With robust economic growth, unemployment declined despite higher labor force participation, but the quality of jobs remains a concern. Sector Power 3.3 11 Policies ToC 3.4 Contents Table of 1.1 Recent Global Developments: Subdued Global Executive Summary Environment Economic & Recent Global Policy Dev Developments Market challenges continue to weigh on the global economy despite higher-than-expected Recent growth in advanced economies and emerging market and developing economies (EMDEs) in early 2023. Subdued global demand and the shift of consumption toward services are dampening global trade. Global inflation has decelerated from its peak in July 2022, but core 1.1 inflation in many EMDEs has either accelerated or stabilized at elevated levels. Output and Although advanced economies and EMDEs 2023, which contributed to the easing of global Demand 1.2 posted higher-than-expected growth in early supply chain pressures. As of April 2023, freight 2023, market challenges continue to weigh shipping prices have declined to their lowest level on economic activity. Advanced economies since 2020, and suppliers’ delivery times have fallen Inflation & Monetary avoided a sharper economic slowdown than initially to their lowest levels in almost four years. Meanwhile, 1.3 expected in 2022, benefitting from resilient labor services trade strengthened as demand shifted away markets, which supported robust wage growth from tradable goods and into services. The weaker and prevented a sharper decline in consumption. demand for tradable goods adversely affected External Sector 1.4 Warm winter weather and lower natural gas prices, Philippine merchandise exports, tempering growth especially in the United States and the Euro area, in the first quarter of 2023. Nonetheless, recovering also contributed to economic activity and further international tourism and travel markets bode well to Sector Fiscal buoyed consumption. However, substantial policy services exports in the Philippines. 1.5 rate increases, tightening credit conditions following recent banking sector stress, and high inflation are Global inflation remained above target in Employment and Poverty weighing on economic activity into 2023. Similarly, most inflation-targeting economies, albeit 1.6 growth in EMDEs slightly accelerated amid the decelerating from its July 2022 peak. Median rebound of economic activity in China, unexpected headline global inflation decelerated from a peak resilience in advanced economies, and improved of 9.4 percent, yoy, in July 2022 to 8.7 percent Outlook & Risks domestic demand. EMDEs were generally resilient in February 2023, on the back of easing supply to the banking stress in advanced economies. chain pressures and moderating commodity prices Nonetheless, industrial production has decelerated (Figure 2). Amid filled inventories and warmer-than- outlook Growth since September 2022 (Figure 1), while tight usual winter weather, the price of European natural 2.1 Philippines Economic Update June 2023 domestic monetary policy, fiscal consolidation, and gas has fallen back from its record high in August weak external demand are curbing growth in many 2022 toward levels seen before Russia’s invasion Poverty and EMDEs. of Ukraine. Oil prices have also declined from their Poverty Shared 2.2 peak in Q3 2022,2 which contributed to the steady Subdued global goods demand and the shift decline in fuel price inflation in the Philippines so far of consumption away from tradable goods and this year. Nonetheless, global financial conditions Challenges Risk and Policy toward services weighed on global trade. Amid remain restrictive due to further global monetary 2.3 weak global demand and limited positive trade policy tightening and bouts of financial instability spillovers from China’s services-led rebound this year, amid banking stress in advanced economies. The Philippine Transition Energy global industrial production growth softened from majority of EMDEs proved to withstand these 5.4 percent, year-on-year (yoy), in February 2022 to financial conditions, incurring only muted increases in 0.6 percent in the same period in 2023. This resulted risk premia on external debt. Energy Sector Country and in the weakening of global merchandise trade in early 3.1 Outlook Energy 3.2 Sector Power 3.3 2 The average spot price of Brent crude oil declined from its peak of US$120/bbl in June 2022 to US$78/bbl in March 2023. 12 Policies ToC 3.4 Contents Table of Figure 1. Growth in EMDE industrial production (3-month on 3-month) has decelerated since Executive Summary September 2022. 8 Economic & Recent Global Policy Dev Developments Recent 7 6 5 1.1 4 Percent Output and 3 Demand 1.2 2 1 Inflation & Monetary 1.3 0 -1 External Sector 1.4 -2 N 2 M 2 22 Au 2 Ap 2 O 2 2 2 Se 2 D 2 Fe 2 Fe 3 M 2 23 -2 -2 -2 2 -2 r-2 2 2 l -2 -2 2 2 n- n- n- p- b- b- g- ct ov ay ar ec Sector Ju Fiscal Ju Ja Ja 1.5 World [ex US] AEs [ex US] EMDEs USA Employment and Poverty Figure 2. Moderating commodity prices helped reduce headline global inflation. 1.6 Index, 100 = December 2019 Outlook & Risks 300 250 outlook Growth 2.1 Philippines Economic Update June 2023 200 Poverty and Poverty Shared 2.2 150 Challenges Risk and Policy 2.3 100 Philippine Transition 50 Energy 0 Energy Sector Country and 1 20 22 21 19 0 2 3 20 22 21 3.1 r-2 r-2 r-2 r-2 - g- - g- - g- - ec ec ec ec Ap Ap Ap Ap Au Au Au D D D D Agriculture Energy Metals Outlook Energy 3.2 Sources: Haver Analytics, World Bank Global Monthlies, and Global Economic Prospects January 2023. Sector Power 3.3 13 Policies ToC 3.4 Contents Table of 1.2 Output and Demand: Robust Domestic Demand Executive Summary The Philippines’ economic growth remained robust despite elevated inflation in Q1 2023. Domestic activity was supported by lingering pent-up demand, a rebound in tourism, and better Economic & Recent Global Policy Dev Developments Recent labor market outcomes. However, weaker global conditions are weighing on manufacturing and merchandise exports. Robust domestic demand fueled growth in the remittances, and a healthy labor market. More than 1.1 first quarter of 2023 amid a subdued global 75 percent of the increase in household spending environment. The economy expanded by 6.4 can be attributed to higher spending on non-essential percent, yoy, in Q1 2023, higher than the level of items and the tourism recovery, suggesting lingering Output and Demand growth posted by regional peers such as Malaysia pent-up demand.5 However, rising inflation took a toll 1.2 (5.6 percent), Indonesia (5.0 percent), Vietnam (3.3 on household spending on food and non-alcoholic percent), and Thailand (2.7 percent). While lower beverages, moderating consumption growth in Q1 Inflation & Monetary than 8.0 percent growth in Q1 2022, the economy 2023.6 Public consumption contributed 0.9 ppts 1.3 grew by 1.1 percent from the previous quarter on a to growth, driven by higher maintenance and other seasonally adjusted basis. The continued release of operating expenditure. Meanwhile, gross fixed pent-up demand as well as the strong labor market, capital investment registered double-digit growth in External Sector 1.4 steady remittances, and tourism rebound supported Q1 2023, driven in part by increased public works.7 domestic activity. Nevertheless, slowing global Private investment remained upbeat, supported demand for goods exports, particularly electronics, by strong domestic activity, improved business Sector undermined the country’s merchandise export and confidence, and ample market liquidity, despite Fiscal 1.5 manufacturing sector performance. higher borrowing costs. Employment and Poverty The services sector drove growth while The slowdown in external demand weighed 1.6 industry activity slowed and agriculture activity on net exports. Merchandise exports posted a recovered. The services sector fueled growth and significant contraction in Q1 2023 due to weaker contributed 5.0 percentage points (ppts) to growth global demand, reversing its contribution to growth Outlook & in Q1 2023. The sector’s performance was driven from 1.0 ppt in Q1 2022 to -2.5 ppts in Q1 2023. In Risks by the continued economic reopening3, which contrast, services exports performed strongly, fueled supported the revival of tourism and consumer by the recovery in tourism services and the pivot spending on domestic services.4 Meanwhile, the from the consumption of goods toward services. outlook Growth 2.1 growth contribution of industry fell from 3.0 ppts of This led to an increase in the growth contribution Philippines Economic Update June 2023 GDP in Q1 2022 to 1.2 ppts of GDP in Q1 2023, as of services exports from 2.1 ppts in Q1 2022 to 2.6 weak external demand weighed heavily on exports, ppts in Q1 2023. As a result, the growth contribution Poverty and Poverty Shared manufacturing, and mining. Favorable weather of total exports fell to 0.1 ppts in Q1 2023. Likewise, 2.2 conditions and the rebound in livestock production total imports’ contribution to growth reduced to 1.7 following bouts of African Swine Fever improved the ppts in Q1 2023 from 5.5 ppts in Q1 2022, as both Challenges agriculture sector’s contribution to growth. imported goods and services growth moderated Risk and Policy 2.3 amid the slower consumption growth. The Domestic demand remained strong despite consumption slowdown reduced consumer goods high inflation and interest rates. Household imports, while the exports slowdown weighed on Philippine Transition Energy consumption drove growth on the expenditure side raw materials and intermediate imports, although this in Q1 2023, contributing 4.8 ppts to growth. It was was partly offset by higher capital goods imports due supported by improving consumer confidence, to the resilience of investments This resulted in net Energy Sector Country and increased bank lending to households, steady exports reducing growth by 1.6 ppts in Q1 2023. 3.1 3 The gradual re-opening started in February 2022 with the removal of quarantine restrictions from foreign tourists and returning Filipinos. In October 2022, mask-wearing in indoor and outdoor settings became voluntary. Health and safety restrictions on tourism establishments have also been relaxed. Outlook Moreover, proof of vaccination is no longer required in tourist spots. In November 2022, full in-person classes resumed. Energy 3.2 4 Tourism-related services such as transport, accommodation and food, and arts, entertainment, and recreation collectively contributed 2.3 ppts to ser- vices sector growth (8.4 percent yoy). Trade and other services contributed 1.9 ppts and 3.1 ppts, respectively. Meanwhile, IT-BPO-related services such as communication and professional and business services, contributed 1.0 ppts. 5 Spending on transport (1.3 ppts), recreation and culture (0.4 ppts), restaurants and hotels (1.9 ppts), and miscellaneous goods and services (1.2 ppts) Sector Power drove the 77.5 percent growth in household consumption recorded in Q1 2023 (6.3 percent yoy). 3.3 6 Consumption growth slowed to 6.3 percent yoy in Q1 2023 from 10.0 percent yoy in Q1 2022. 7 Infrastructure and other capital outlays surged by 36.1 percent, yoy, in Jan-Feb 2023. 14 Policies ToC 3.4 Contents Table of Figure 3. Resilient domestic demand drove growth in Q1 2023. Executive Summary Statistical discrepancy Net exports Economic & Recent Global Capital Formation Policy Dev Developments Recent Government Consumption 25 Household Final Consumption Expenditure 20 Real GDP growth 15 1.1 Percentage point 10 5 Output and Demand 0 1.2 -5 -10 Inflation & Monetary -15 1.3 -20 -25 External -30 Sector 1.4 Q1 Q1 Q1 Q1 Q1 Q1 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 2018 2019 2020 2021 2022 2023 Sector Fiscal Source: Philippine Statistics Authority (PSA). 1.5 Figure 4. The services sector mainly supported growth in Q1 2023. Employment and Poverty 1.6 Services Mining, Constructions, and Utilities Outlook & Manufacturing Risks Agri, Fishery, & Forestry 15 Real GDP growth outlook 10 Growth 2.1 Philippines Economic Update June 2023 5 Percentage point Poverty and Poverty Shared 0 2.2 -5 Challenges Risk and Policy 2.3 -10 -15 Philippine Transition Energy -20 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q1 Q1 Q1 Q1 Q1 Q1 Energy Sector Country and 2018 2019 2020 2021 2022 2023 3.1 Source: PSA. Outlook Energy 3.2 Sector Power 3.3 15 Policies ToC 3.4 Contents Table of 1.3 Inflation and Monetary Policy: Sticky Core Inflation Executive Summary Headline inflation peaked in early 2023, but core inflation continued to rise. The BSP has raised the policy rate by an additional 75 bps since January 2023 to combat inflationary pressures. Economic & Recent Global Policy Dev Developments Recent Headline inflation has steadily declined since the impact of tighter global financial conditions. January 2023. It averaged 7.9 percent in the first Despite the higher interest rates, business loans four months of 2023, more than double the 3.7 expanded at 9.0 percent in the first three months of 1.1 percent in the same period in 2022. It exceeded 2023 from 6.9 percent in the same period in 2022, the BSP’s target range of 2–4 percent (Figure 5) and while loans for household consumption rose by 24.8 remained the highest among regional peers (Figure percent from a contraction of 4.5 percent.9 Output and Demand 6). Food inflation (9.7 percent) and utilities inflation 1.2 (7.8 percent) were fueled by shortfalls in the domestic The financial system remained resilient with well- food supply (Box 1), elevated power and water capitalized banks and no material exposure to rates, and higher rent. Transportation inflation also recently failed banking institutions abroad. Asset Inflation & Monetary 1.3 remained elevated but has declined to 0.2 percent quality continued to improve, as evidenced by the due to lower global crude oil prices. To combat high decline in the gross non-performing loan (NPL) ratio, inflation, the government has lowered tariffs on key from 4.2 percent in February 2022 to 3.3 percent External Sector agricultural commodities and approved a targeted in the same period this year, amid robust domestic 1.4 cash transfer program to mitigate the impact on the demand (Figure 7). In addition, the restructured poor.8 While headline inflation peaked in January at loans to total loans ratio declined from 3.1 percent 8.7 percent and declined to 6.6 percent in April, in February 2022 to 2.6 percent in February 2023, Sector Fiscal 1.5 core inflation, which excludes volatile food and indicating an improvement in borrowers’ ability to energy commodity items, rose further to 8.0 percent service their debt. Meanwhile, the NPL coverage ratio Employment in March and 7.9 percent in April, a reflection of is adequate at 104.9 percent, which is higher than and Poverty 1.6 underlying price pressure driven by recent wage pre-pandemic levels, showing the stability of financial adjustments and strong domestic demand. buffers in the banking sector. Bank profitability continued to show considerable improvement, Outlook & The BSP has continued to hike its key policy rate surpassing pre-pandemic levels as the return on Risks to address high inflation and anchor inflation asset and return of equity ratios reached 1.4 and 11.9 expectations. The BSP has raised the key policy percent, respectively (compared to 1.3 and 10.5 rate by 75 bps to 6.25 percent since January 2023 percent, respectively, in December 2019). However, outlook Growth 2.1 to manage the possible second-round effects given the policy rate hikes both domestically and Philippines Economic Update June 2023 from additional transport fare increases and wage abroad, regulators should focus on transparency, adjustments. The rate hikes also aimed to curb conduct regular stress testing, and ensure constant Poverty and Poverty Shared rising demand-side pressures, as domestic demand communication between the central bank and 2.2 remained robust and labor market conditions showed financial market. strength at the beginning of 2023 while cushioning Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and Photo by: MDVEdwards/Shutterstock 3.1 8 To combat high inflation, the government has extended Executive Order 171, which lowers tariffs on key agricultural commodities, until end-2023. In addition, the government has increased food imports to address supply shortages. In response to the increase in fuel prices and the price of other com- Outlook Energy modities in early 2022, the government launched a targeted cash transfer program worth Php18.3 billion, providing cash assistance to the bottom 50 3.2 percent of households (total of Php3,000 per household) for a six-month period until December 31, 2022. In February 2023, the government extended the program, providing an additional Php9.3 billion worth of cash assistance (Php1,000 per household) to vulnerable households after headline inflation reached 8.7 percent, which was higher than expected and the highest since November 2008, in January. 9 Monetary policy lag is estimated at 12-15 months based on the interest rate channel of monetary policy in the Philippines. A transmission lag of one to Sector Power 3.3 two years typically corresponds to a central bank’s policy horizon. See J. Dacio and C. Cruz, 2012, “Tenets of Effective Monetary Policy in the Philippines,” Bangko Sentral ng Pilipinas Review 2012. 16 Policies ToC 3.4 Contents Table of Figure 5. Headline inflation averaged 7.9 percent in the first four months of 2023, … Executive Summary Alcoholic beverages and tobacco Transport: Fuels and lubricants for personal transport Utilities: Electricity, gas, and other fuels Economic & Recent Global Policy Dev Developments Other non-food items 8.7 Recent 9 Food and non-alcoholic beverages 8.1 8.6 8.0 Headline inflation 7.7 7.6 Core Inflation 6.9 6.6 7 BSP policy rate 6.4 6.1 6.3 1.1 5.4 Percent 4.9 5 Output and Demand 4.0 1.2 3.03.0 3 Inflation & Monetary 1.3 1 External Sector 1.4 -1 Nov Nov May May Jan Jan Jan Feb Feb Sep Feb Sep Mar Mar Apr Mar Apr Apr Aug Aug Dec Dec Oct Oct Jun Jun Jul Jul Sector Fiscal 1.5 2021 2022 2023 Source: PSA. Employment and Poverty 1.6 Figure 6. … which, was the highest among ASEAN peers. Outlook & Thailand Philippines Vietnam Risks Malaysia Indonesia 10 outlook Growth 2.1 Philippines Economic Update June 2023 8 Poverty and Poverty Shared 2.2 6 Percent Challenges 4 Risk and Policy 2.3 2 Philippine Transition Energy 0 Energy Sector Country and -2 3.1 Sep Sep Mar Apr Mar Apr Mar Apr Nov Nov May May Jan Jan Jan Jun Jun Feb Jul Feb Jul Feb Aug Aug Dec Dec Oct Oct 2021 2022 2023 Outlook Energy 3.2 Source: BSP. Sector Power 3.3 17 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 18 Figure 7. Forward-looking asset quality indicators improved amid the economic reopening. Percent 120 100 80 60 40 20 0 23 n- Ja 2 -2 ct O Restructured Loans to Total Loan Portfolio 2 l -2 Ju 2 r-2 Ap 22 n- Ja NPL coverage ratio (RHS) 1 Non- Performing Loans -2 ct O 1 l -2 Ju 1 r-2 Ap 21 n- Ja 0 -2 ct O 0 l -2 Ju Photo by: Matyas Rehak/Shutterstock 0 r-2 Ap 20 n- 5 4 3 2 1 0 Ja Percent Source: BSP. ToC Philippines Economic Update June 2023 Contents Table of 1.4 External Sector: Wider Trade Deficit Executive Summary The Philippines recorded a balance-of-payments (BOP) deficit of 1.8 percent of GDP in 2022, a reversal from a 0.3 percent of GDP surplus in 2021. Higher commodity prices and the recovery Economic & Recent Global Policy Dev Developments Recent of domestic demand led to higher merchandise imports, widening the trade deficit and fueling a depreciation of the peso in 2022. In the first four months of 2023, the Philippine peso appreciated against the US dollar as the BOP returned to a surplus. 1.1 The current account (CA) deficit widened in percent of GDP in 2021 to 2.3 percent of GDP in 2022 due to a surge in merchandise imports. 2022. Similarly, the net inflow of other investments Output and Demand It widened from 1.5 percent of GDP in 2021 to 4.4 declined from 1.8 percent of GDP in 2021 to 1.5 1.2 percent of GDP in 2022 as the merchandise trade percent of GDP in 2022, amid lower inflows of deficit worsened (Figure 8). Merchandise imports special drawing rights.10 Despite higher financial rose by 18.5 percent due to elevated commodity inflows, the CA deficit widened in 2022, resulting in Inflation & Monetary 1.3 prices and the recovery of domestic demand, while a higher BOP deficit (Figure 9). In Q1 2023, the BOP merchandise exports grew at a slower rate of 5.9 position reversed to a surplus (3.4 percent of GDP) percent, dragged by a slowdown in global activity. due to higher remittances, the national government’s External Sector The surge in imports was due to more expensive global bond issuance, and other inflows of foreign 1.4 mineral fuels and lubricants as well as higher import portfolio investments. demand for consumer goods, raw materials, and intermediate goods last year. In contrast to The Philippine peso has gained strength against Sector Fiscal 1.5 merchandise trade, net receipts from services trade the US dollar since late 2022. Between October grew by 11.3 percent due to the recovery in the 2022 and April 2023, the peso appreciated by 6 Employment and Poverty tourism sector and resilience in the information percent due to BOP surplus and market anticipation 1.6 technology-business process outsourcing (IT-BPO) of slower monetary tightening by the Federal Reserve sector. Meanwhile, the growth of remittances amid signs of cooling US inflation. In 2022, a softened to 3.8 percent in 2022 due to the global shortfall in the BOP and monetary tightening abroad Outlook & economic slowdown. led to a 9.6 percent depreciation of the Philippine Risks peso against the US dollar. The Philippine peso has Net financial inflows financed the CA deficit in depreciated the most against the US dollar relative 2022. The financial account registered a net inflow to the currencies of regional peers, although most outlook Growth 2.1 of 3.1 percent of GDP in 2022, up from 1.6 percent of currencies have rebounded since late 2022 (Figure Philippines Economic Update June 2023 GDP in 2021. This was driven by portfolio investment, 10). In real effective terms, the peso depreciated by which reversed from a net outflow of 2.6 percent of 1.9 percent, yoy, in 2022. The resulting external price Poverty and Poverty Shared GDP in 2021 to a net inflow of 0.3 percent of GDP competitiveness of the peso against the basket of 2.2 in 2022, due to residents’ lower demand for foreign currencies of major trading partners could help boost debt securities and higher investment of national the country’s trade competitiveness. Meanwhile, Challenges Risk and government-issued debt securities by non-residents. gross international reserves dropped by 11.6 percent Policy 2.3 Direct investments registered lower net inflows in to US$96.1 billion by end-2022, before recovering to 2022, as net foreign direct investment (FDI), which US$101.5 billion (7.6 months of import coverage) by mainly consisted of investments in manufacturing, April 2023. Philippine Transition Energy real estate, and financial industry, declined from 3.0 Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: joshimerbin/Shutterstock Sector Power 3.3 10 In August 2021, the IMF increased the allocation of special drawing rights to member countries in a bid to boost foreign reserves and increase global liquidity amid the pandemic. 19 Policies ToC 3.4 Contents Table of Figure 8. Higher imports widened the goods trade deficit. Executive Summary Goods Trade 40 (Percent of GDP) Economic & Recent Global Policy Dev Developments Recent 30 20 1.1 10 Output and Demand 0 1.2 -10 Inflation & Monetary 1.3 -20 -30 External Sector 1.4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 Sector Fiscal 1.5 Trade Balance Exports Imports Employment and Poverty Source: BSP. 1.6 Figure 9. The BOP shortfall was driven by a larger CA deficit. Outlook & Balance of Payments Components Risks 6 outlook Growth 2.1 4 Philippines Economic Update June 2023 Poverty and 2 Percent of GDP Poverty Shared 2.2 0 Challenges Risk and Policy 2.3 -2 Philippine Transition Energy -4 -6 Energy Sector Country and 2019 2020 2021 2022 3.1 Current Account Financial Account Capital Account Net Unclassified Items Outlook Energy 3.2 Overall BOP Position Source: BSP. Sector Power 3.3 20 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 21 Figure 10. Regional currencies have strengthened since October 2022. Vietnam 3 -2 ar M 3 2 b- Fe 3 2 n- Thailand Ja 2 -2 ec D 2 January 2022 = 100, End of Period -2 ov N 2 -2 ct Philippines O 2 2 p- Se 2 2 g- Au 2 l -2 Ju 22 Malaysia n- Ju 2 -2 ay M 2 r-2 Ap 2 -2 Indonesia ar M 2 Photo by: ambient_pix/Shutterstock 2 b- Fe 2 2 n- Source: Haver Analytics. Ja 105 103 101 99 97 95 93 91 89 87 85 ToC Philippines Economic Update June 2023 Contents Table of 1.5 Fiscal Sector: Narrowing Fiscal Deficit Executive Summary A large decline in public spending due to lower local government unit (LGU) allotments and national government disbursements narrowed the fiscal deficit in the first quarter of 2023. This Economic & Recent Global Policy Dev Developments Recent contributed to a marginal increase in national government debt to 61 percent of GDP in end- March 2023. Despite a reduction in public revenues, a larger accounted for most of the decline in total revenue 1.1 decline in disbursements caused the fiscal deficit collection (1.2 ppts out of the 1.3 ppts decline in to narrow, tempering national government public revenues). Meanwhile, import duties collected Output and (NG) debt growth. Public revenues declined to by the Bureau of Customs was flat at 3.8 percent Demand 1.2 14.6 percent of GDP in Q1 2023, as tax collections of GDP, given the tempered foreign demand for moderated and authorities’ changed the timing of imported goods. value-added tax (VAT) payments. Public expenditures Inflation & Monetary fell to 19.5 percent in Q1 2023, due to lower Public spending declined from 22.3 percent of 1.3 national tax allotments to LGUs11 and lower current GDP in Q1 2022 to 19.5 percent of GDP in Q1 expenditures. As a result, the fiscal deficit narrowed 2023, amid the implementation of the fiscal External to 4.8 percent of GDP in Q1 2023 (Figure 11), which consolidation agenda and reduced national Sector 1.4 caused national government debt to grow by 1.2 government transfers to LGUs. The decline in percent, yoy, as of March 2023 . NG debt stood at public spending was driven by the fall in national tax 61.0 percent of GDP as of March 2023, up marginally transfers to LGUs, from 5.4 percent of GDP in Q1 Sector Fiscal 1.5 from 60.9 percent of GDP by end-2022 (Figure 12). 2022 to 4.1 percent of GDP in Q1 2023, as a result of The debt profile remains favorable, consisting of the lower tax revenue base in 2020.13 Disbursements long-term (78.0 percent), domestic (68.7 percent), of national government agencies fell from 13.2 Employment and Poverty and peso-denominated (68.2 percent) debt. percent of GDP in Q1 2022 to 12.3 percent of GDP 1.6 in Q1 2023, primarily through a reduction in current Revenue collection declined from 15.9 percent operating expenditures. The government continued Outlook & of GDP in Q1 2022 to 14.6 percent of GDP in to support expansionary infrastructure spending, Risks Q1 2023, in part due to lower GDP growth and as spending on capital outlays increased by 19.7 a change in the timing of VAT payments. Tax percent, yoy, in the first two months of the year. revenues declined to 12.8 percent of GDP in Q1 Seasonal spending, such as expenditures related outlook Growth 2023, primarily due to lower tax collection by the to free tuition at state universities and colleges, also 2.1 Philippines Economic Update June 2023 Bureau of Internal Revenue (BIR) and the shift from propped up national government disbursements monthly to quarterly VAT collection payments.12 in Q1 2023. Disbursements fell short of the Poverty and Poverty Shared Reduced BIR tax collection (9.0 percent of GDP in government’s first quarter target of 21.3 percent of 2.2 Q1 2023, compared to 10.2 percent in Q1 2022) GDP. Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Photo by: Jed Regala Energy 3.2 11 The 2023 national tax allotment to LGUs was determined using 2020 tax collections, which saw revenues plummet as COVID-19 took a toll on the economy. Sector Power 12 The Q1 2023 VAT payment deadline to the BIR was April 2023. The shift from monthly to quarterly VAT payment was mandated under the 2019 TRAIN 3.3 law. 13 National tax allotments to LGUs are computed based on the tax collections three years prior to the current calendar year. 22 Policies ToC 3.4 Contents Table of Figure 11. Lower expenditures caused the fiscal deficit to narrow. Executive Summary 25 Economic & Recent Global Policy Dev Developments 20 Recent Percent of GDP 15 1.1 10 5 Output and Demand 1.2 0 2019 2020 2021 2022 Q1 2022 Q1 2023 Inflation & Monetary -5 1.3 -10 External Sector 1.4 Revenues Expenditures Fiscal Deficit Tax Revenues NG Disbursements Sector Fiscal 1.5 Source: Bureau of the Treasury (BTr). Employment and Poverty Figure 12. NG debt growth has been flat while the fiscal deficit has narrowed. 1.6 70 Outlook & 60.4 60.9 61.0 Risks 60 54.6 50 outlook Growth 2.1 Philippines Economic Update June 2023 Percent of GDP 40 Poverty and Poverty Shared 2.2 30 Challenges Risk and 20 Policy 2.3 10 Philippine Transition Energy 0 3 0 12 13 14 15 16 17 18 19 11 20 Q 22 21 Energy Sector 02 1 Country and 20 20 20 20 20 20 20 20 20 20 20 20 20 12 3.1 Domestic External Outlook Energy 3.2 Source: BTr. Sector Power 3.3 23 Policies ToC 3.4 Contents Table of Box 1. Addressing Challenges to Food Security in the Executive Summary Philippines Economic & Recent Global Policy Dev Developments Recent The sharp increase in food inflation was which means that the country must have a reflective of the pass-through effects of vibrant, productive, and resilient food system. international price increases and tight domestic Food and nutrition security exists when all people, food supplies. First, the disruptions brought at all times, have physical and economic access to 1.1 on by Russia’s invasion of Ukraine pushed global sufficient, safe, and nutritious food that meets their commodity prices to record levels, raising the dietary needs and food preferences for an active Output and price of food imports and agricultural inputs such and healthy life. It has four dimensions: availability, Demand 1.2 as animal feed, fuel, and fertilizer. Second, weather access, utilization, and stability.15 In the Philippines, disturbances such as typhoons and heavy monsoon food and nutrition security challenges fall into three rain led to agricultural production losses. Third, main areas: energy deficiency (hunger), micronutrient Inflation & Monetary local meat production continued to slump due to deficiency (hidden hunger), excessive net energy 1.3 flare-ups of African Swine Fever and higher cost intake and unhealthy diet (overweight/obesity). of animal feed. Fourth, currency depreciation and Malnutrition imposes large human, economic, fiscal, External import delays likely exacerbated food supply issues and social costs. It contributes to maternal and child Sector 1.4 and exerted upward pressure on imported inflation. mortality, child stunting, poor learning capacity, Lastly, inadequate transport and logistics,14 especially lost productivity and incomes for adults, high the lack of and poor state of farm-to-market roads health costs, and slower economic growth. In the Sector Fiscal 1.5 (FMRs), has restricted the expansion of agricultural Philippines, lower productivity due to malnutrition value chains, adding to supply-side woes and is estimated to cost between 1.5 percent of GDP exacerbating food inflation. (UNICEF, 2017) to 2.93 percent of GDP (Save the Employment and Poverty Children, 2016). 1.6 High food prices disproportionately affect the poor. In 2018, food accounted for more than half of Over the short term, the government has Outlook & household expenditures for the poorest 60 percent approved several measures in response to high Risks of Filipinos. As a result, high food prices have a big food prices and alleviated concerns around impact on the poor, with food items fueling inflation rising food insecurity. On the production side, the more for the bottom 30 percent of households than previous administration initially approved fertilizer outlook Growth for households with higher income levels (Figure 13). grants worth Php20 billion and fuel subsidies 2.1 Philippines Economic Update June 2023 Moreover, the Food and Agriculture Organization worth Php0.5 billion to cushion the impact of high (FAO) estimates that an average Filipino needed commodity prices on farmers. Despite these initial Poverty and Poverty Shared to spend at least US$4.1 per day in 2020 to have a measures, input costs remained high, prompting the 2.2 healthy diet. This means that the recent rise in food new administration to expand fertilizer subsidies by prices threatens the gains the country has made Php13.3 billion and extend another Php1.0 billion Challenges in combatting malnutrition and stunting, with 5.2 worth of fuel subsidies to farmers and fishermen in Risk and Policy 2.3 percent of the population undernourished and 27 2023. The government has also signed cooperation percent of children under the age of 5 suffering from agreements with Chinese firms for a steady supply stunting. of fertilizers at reasonable prices. To augment the Philippine Transition Energy local food supply, tariff rates on swine, corn, and To ensure food and nutrition security in the rice have been temporarily reduced until December Philippines, people need to have access to a 2023, while easing some non-tariff measures such as Energy Sector Country and daily diet that is safe, nutritious, and affordable, phytosanitary import permits were being considered. 3.1 14 Given that the country is an archipelago, logistics is more challenging for the Philippines than for many other countries. At the national level, the Philippines performs worse than regional neighbors on various measures of logistics effectiveness. The country ranks lower than Thailand and Vietnam in Outlook Energy terms of trading across borders and has the lowest liner shipping connectivity compared with these countries and Indonesia. The Philippines also has the 3.2 lowest regional ranking in terms of overall logistics performance. 15 Availability relates to the supply of food through production, distribution, and exchange; Access refers to the affordability and allocation of food as well as the preferences of individuals and households; Utilization relates to a variety of factors that affect the quantity and quality of food that reaches household members, such as adequate diet, preparation, processing, and cooking of food, clean water, sanitation, and health care; Stability refers to the Sector Power 3.3 ability to obtain food over time without losing access to food as a consequence of sudden shocks (e.g., an economic or climatic crisis) or cyclical events (e.g., seasonal food insecurity). 24 Policies ToC 3.4 Contents Table of On the consumption side, to cope with higher cost type of farmer to improving the overall resilience, Executive Summary of living, a Php500 monthly cash transfer program competitiveness, and sustainability of the agriculture worth Php18.3 billion was also implemented for the sector. Also, the process of agricultural transformation poorest 50 percent of the population from June to requires policies and other interventions that extend Economic & Recent Global December 2022. Such cash transfers were proven to beyond the scope and mandate of the Department Policy Dev Developments Recent be effective in the country, with similar policies like of Agriculture and its affiliated agencies. Changes in the Pantawid Pamilyang Pilipino Program successfully the structure and focus of agriculture are intertwined reducing poverty. Collectively, these measures with parallel developments in the management amount to 0.3 percent of GDP. of water and other natural resources (Department 1.1 of Environment and Natural Resources), agri-food Over the long term, policy space to address logistics (Department of Transport), small and larger Output and inflation and food insecurity needs to be industry development (Department of Trade and Demand 1.2 broadened or rebalanced, as food policy is Industry), and nutrition and food safety (Department intrinsically multi-sectoral and requires long- of Health). In addition, policies and programs to scale term structural changes. Successfully addressing up climate-smart agriculture are expected to increase Inflation & Monetary inflation and food insecurity requires a shift from the resilience of the agri-food system to weather 1.3 protecting a specific product (e.g., rice) and shocks and reduce GHG emissions. Figure 13. Poor households suffer more than the average household from high food prices. External Sector 1.4 Contributions to inflation (Poorest 30 percent) Sector Fiscal 1.5 Food and non-alcoholic beverages Energy-related Employment and Poverty 1.6 Other Expenditures 12 Headline inflation Outlook & Core Inflation Risks 9.4 9.7 9.7 10 9.2 8.9 8.1 outlook Growth 2.1 8 7.2 7.3 Philippines Economic Update June 2023 6.5 Percent Poverty and 5.6 Poverty Shared 6 2.2 5.0 4.0 4.2 4 3.5 Challenges Risk and Policy 2.3 5.3 5.4 5.6 5.7 5.0 2 3.8 3.7 4.1 3.2 Philippine Transition 2.6 Energy 2.1 1.8 2.2 1.5 - Sep Mar Apr Aug Nov May Jan Jan Jun Feb Jul Feb Dec Oct Energy Sector Country and 3.1 2022 2023 Source: PSA. Outlook Energy 3.2 Sector Power 3.3 25 Policies ToC 3.4 Contents Table of 1.6 Employment and Poverty: Concerns Of Low-Quality Executive Summary Jobs Economic & Recent Global Policy Dev Developments Higher labor force participation and net job creation mask the persistence of low-quality jobs. Recent While households’ perception of their financial situation and incomes continues to improve, elevated inflation and labor market fluctuations remain a threat to poverty reduction. 1.1 Labor force participation gradually increased September 2022 and March 2023, in line with the and unemployment fell in recent months. The large share of investments in the sub-sector in 2022.16 labor force participation rate (LFPR) marginally rose Yet, job losses came from a slowdown in industrial Output and Demand from 65.2 percent in September 2022 to 66.0 activity, with manufacturing losing about 1 million jobs 1.2 percent in March 2023, driven by an increase in due to supply chain issues related to higher costs and women’s participation at a faster rate than that of weather disturbances.17 Inflation & Monetary men in the post-pandemic period (Figure 14). The 1.3 national unemployment rate fell from 5.0 percent Low-quality jobs are on a rise, even surpassing to 4.7 percent during the same period, although pre-pandemic levels. The share of elementary at a slower pace than previous years, indicating occupations associated with low and irregular External Sector 1.4 that the labor market continued to accommodate pay remained high at almost 30 percent of total jobseekers in some sectors (Figure 15). Youth employment in March 2023, higher than the pre- unemployment dropped from 11.5 percent in pandemic level of 27 percent in January 2020. The Sector Fiscal September 2022 to 10.2 percent in March 2023, rise in elementary jobs was related to the increasing 1.5 while underemployment, which fluctuated during the number of jobs in the services sector associated with pandemic, exhibited a downward trend in the same accommodation, food, administrative services, and Employment and Poverty period. wholesale and retail trade. The share of part-time 1.6 workers—those working less than 40 hours a week— While new jobs have been created, they have also increased between January 2020 and March primarily been in the agriculture and services 2023 (31.6 vs. 34.4 percent). Furthermore, the share Outlook & Risks sectors. Between September 2022 and March of wage and salary workers among the employed 2023, net jobs gain totaled about 998,000, slipped to 61.6 percent in March 2023, about 4 ppts down from nearly 2 million jobs between April lower than the pre-pandemic level. In turn, there outlook Growth and September 2022. Jobs were created in the has been an increase in the share of self-employed 2.1 Philippines Economic Update June 2023 agriculture sector, which may be attributed to the (own account) workers of about 1.4 ppts and unpaid return of farm activities after the typhoon season. workers of about 2.7 ppts, during the same period18, Poverty and The services sector, particularly in accommodation, indicating growth in the informal labor market and Poverty Shared 2.2 food, administrative, and other services activities, shift to low-productivity jobs. Job losses in the formal also contributed to net job gains, signaling the return labor market during the pandemic and interest in of workers to the largest sector in the economy. Jobs flexible work arrangements may have contributed to Challenges Risk and Policy in the electricity, gas, steam, and air conditioning the increase in low-quality jobs. 2.3 industries grew by almost 64 percent between Philippine Transition Energy Energy Sector Country and 3.1 Photo by: MDVEdwards/Shutterstock Outlook Energy 3.2 16 Philippine Statistics Authority, 2023, Approved Investment, Fourth Quarter 2022, February 15, Available online: https://psa.gov.ph/sites/default/files/Publication_Approved%20Investments_Q4%202022_0.pdf 17 A. Yraola, 2023, Manufacturing growth cools in Dec., Business World, February 10, Available online: https://www.bworldonline.com/top- Sector Power stories/2023/02/10/504117/manufacturing-growth-cools-in-dec/ 3.3 18 R. Rivas, 2023, Philippines mutes rise of unpaid workers, highlights rosy jobs figures, April 11, Available online: https://www.rappler.com/business/ philippines-highlights-jobs-figures-mutes-unpaid-workers-unemployment-report-february-2023/ 26 Policies ToC 3.4 Contents Table of Figure 14. Female labor force participation has trended upward … Executive Summary 1.2 Economic & Recent Global Policy Dev Developments Recent Indexed to January 2020=1 1.1 1.1 1 Output and Demand 1.2 0.9 Inflation & Monetary 1.3 0.8 External Sector Nov Nov May July July May Jan Jan Jan Jan Jan Jul Sep Jul Mar Sep Mar Mar 1.4 2019 2020 2021 2022 2023 Sector Fiscal 1.5 MALE FEMALE Employment and Poverty Figure 15. … while the unemployment rate has gradually decreased. 1.6 25 Outlook & Risks 20 outlook Growth 2.1 Philippines Economic Update June 2023 15 Percent Poverty and Poverty Shared 2.2 10 Challenges Risk and Policy 2.3 5 Philippine Transition Energy 0 Nov Nov May May Jan Jan Jan Jan Sep Sep Mar Mar Mar July Jul Jul Energy Sector Country and 2020 2021 2022 2023 3.1 Unemployment Rate Underemployment Rate Outlook Energy Expon. (Unemployment Rate) 3.2 Source: PSA-Labor Force Survey (LFS) (various rounds). Note: Starting February 2021, the LFS is conducted monthly to produce more timely data. Data show a normalized LFPR (January Sector Power 3.3 2020=1). 27 Policies ToC 3.4 Contents Table of Inflation and labor market fluctuations remain a Households’ perception of their current finances Executive Summary threat to poverty reduction. Household incomes and incomes continues to improve. Results from are expected to continue to recover as more house- 2023 First Quarter Consumer Expectations Survey20 hold members gain employment. However, the show that households are less pessimistic about their Economic & Recent Global growth in household income may be slower than be- current welfare status (Figure 16). The index of family Policy Dev Developments Recent fore the pandemic given the proliferation of low-qual- income inched up from -6.3 to -4.8, while the index ity jobs and increase in self-employment. Moreover, for family financial situation improved from -19.2 to the high cost of basic commodities and utilities easily -8.7. These changes in perception are influenced by offset the gains in household income. The average improving labor and employment conditions as the 1.1 non-agriculture daily minimum wage19 increased economy continues to recover. There are, however, between 2020 and 2023 across all regions, with re- still more households that are pessimistic about their Output and gions 1, 6, and 8 exhibiting the highest increase (24, current situation than those that feel better off, and Demand 1.2 23, and 19 percent, respectively). The increase in this is likely due to the lingering pressures from rising NCR was relatively lower at 6 percent. Cognizant of food and fuel prices. Details from the survey also the impact on household incomes, the government show that higher income households are recovering Inflation & Monetary has taken proactive measures to support poor and faster than their less well-off counterparts, as their 1.3 vulnerable households (Box 1). indices on both financial and income situation are positive at 1.4 and 4.9, respectively (from -2.1 and -4.0, respectively, in the previous quarter). External Sector 1.4 Figure 16. Households’ perception of their finances and incomes is improving. Sector Fiscal 1.5 10 Employment and Poverty 0 1.6 -10 Outlook & Risks -20 Percent outlook Growth -30 2.1 Philippines Economic Update June 2023 -40 Poverty and Poverty Shared 2.2 -50 Challenges Risk and Policy 2.3 -60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2018 2019 2020 2021 2022 2023 Philippine Transition Energy Family financial situation Family income Energy Sector Country and 3.1 Outlook Energy Source: First Quarter 2023 Consumer Expectations Survey, BSP. 3.2 19 Refers to the average of the upper and lower limit of the regional daily minimum wage, as reported by the National Wages and Productivity Commission: https://nwpc.dole.gov.ph/stats/summary-of-daily-minimum-wage-rates-per-wage-order-by-region-non-agriculture-1989-present/; https://nwpc.dole. Sector Power gov.ph/stats/summary-of-current-regional-daily-minimum-wage-rates-by-region-non-agriculture-and-agriculture/ 3.3 20 A quarterly survey by the BSP of a random sample of about 5,000 households in the Philippines. Results of the Consumer Expectations Survey provide advance indication of consumer sentiments in the current and next quarters and the next 12 selected economic indicators. 28 Policies ToC 3.4 Contents Table of Executive Summary Economic & Recent Global Policy Dev Developments Recent Photo by: chunyawut_stock/Shutterstock 1.1 Output and PART 2 Demand 1.2 OUTLOOK AND RISKS Inflation & Monetary 1.3 2.1 Growth outlook External Sector 1.4 Resilient domestic demand will drive growth in 2023 despite high inflation and tight financial conditions. Over the medium-term, growth will be supported by the implementation of Sector Fiscal 1.5 investment reforms, the government’s commitment to public investment despite fiscal consolidation, and an anticipated improvement in global conditions. Employment and Poverty 1.6 Global growth is expected to slow substantially growth is expected to modestly recover in 2024- in 2023 amid subdued global demand, 25 due to an anticipated improvement in global persistent inflationary pressure, and tighter conditions and global trade. Outlook & Risks financial conditions.21 Global growth is expected to slow this year, albeit at a softer pace than initially Strong domestic demand is projected to drive projected in the January 2023 Global Economic growth in the Philippines to 6.0 percent in outlook Growth Prospects to reflect better-than-expected growth 2023, before moderating to an average of 5.9 2.1 Philippines Economic Update June 2023 in the United States and the Euro Area in late 2022 percent in 2024-25 (Figure 17). Along with the and early 2023, China’s economic reopening, and global growth upgrade in 202322, the better-than- Poverty and an improved global sentiment. From 3.1 percent expected resilience of private domestic demand Poverty Shared 2.2 in 2022, global growth is projected to moderate despite high inflation and tight financial conditions to 2.1 percent in 2023 (1.7 percent in the January early in the year, led to the country’s growth upgrade forecast), before rising to 2.4 percent in 2024. for 2023 compared to the projection in the EAP Challenges Risk and Policy 2.3 Monetary tightening and restrictive credit conditions Update April 2023 . On the expenditure side, private are tempering interest rate-sensitive activities such as consumption growth is expected to remain robust private investments and construction. In advanced at 6.1 percent in 2023, supported by recovering Philippine Transition Energy economies, policy rate hikes due to persistent employment, improving consumer sentiment inflationary pressures and recent bank failures have (Figure 19), a reduction of personal income tax led to tighter financial conditions and a slowdown rates beginning in 2023, and a steady inflow of Energy Sector Country and in bank lending. Meanwhile, in EMDEs excluding remittances. Moreover, private consumption growth 3.1 China, growth is anticipated to slow as both is projected to average 6.0 percent in 2024-25, on fiscal and monetary policies are likely to dampen the strength of domestic demand as inflation returns economic activity. EMDEs with weak credit profiles to within the target range. However, elevated Outlook Energy are expected to experience the most subdued inflation will temper consumption growth as pent- 3.2 growth amid tight financial conditions. Global up demand fades amid a drawdown in savings.23 Sector Power 21 World Bank. 2023. June 2023 Global Economic Prospects. Washington, DC. 3.3 22 Compared to the January 2023 edition of the Global Economic Prospects. 23 Data from the BSP’s Consumer Expectations Survey suggest that the strong recovery in spending in 2022 was likely funded by a drawdown in savings. 29 Policies ToC 3.4 Contents Table of In addition, higher interest rates may incentivize structural issues that lower productivity, will lead to Executive Summary an increase in savings and discourage private tepid growth in the agriculture sector. borrowings. Meanwhile, the reduction in fiscal transfers to local government, and ongoing fiscal Headline inflation is projected to remain above Economic & Recent Global consolidation efforts will lead to slower government target in 2023 as food prices remain elevated Policy Dev Developments Recent consumption growth in 2023. and as robust demand fuels underlying price pressures. While global commodity prices for Capital formation growth will likely moderate energy and agriculture are expected to moderate in 2023, but investment reforms and the in 2023,24 domestic food supply challenges have 1.1 government’s commitment to public investment kept food prices elevated early in the year, which will support capital formation growth over will weigh on headline inflation in 2023. In addition, Output and the medium term. Although the government second-round effects of high commodity prices on Demand 1.2 will reduce public investments amid fiscal wages, rent, and transport prices will contribute consolidation, disbursements of public capital to high core inflation in 2023. Headline inflation is outlays are programmed to remain above 5.0 projected to remain above the BSP’s target range Inflation & Monetary percent of GDP in 2023–25, albeit lower than the of 2–4 percent and average 5.7 percent in 2023. 1.3 5.9 percent recorded in 2022. High interest rates Meanwhile, core inflation is expected to moderate in and a subdued global environment are expected the second half of 2023, as demand side pressures to dampen private investment growth in 2023. As subside alongside fading pent-up demand and External Sector 1.4 a result, capital formation growth is expected to the impact of policy tightening. Following a year slow from 13.8 percent in 2022 to 8.6 percent in of monetary policy tightening, the BSP is expected 2023. Still, improving business sentiment and the to temper policy tightening, as headline inflation is Sector Fiscal implementation of recently passed reforms, such as expected to fall within the target range by the fourth 1.5 the amendment to the Public Service Act, Foreign quarter of 2023. Inflation is forecast to return to Investment Act, and Retail Trade Liberalization within the target range in 2024-25 as the BSP adjusts Employment and Poverty law, will encourage private investment and attract its policy rate and the authorities resolve domestic 1.6 more FDI, accelerating investment growth over the food supply challenges. forecast horizon. The CA balance will narrow over the medium- Outlook & Risks On the supply side, the post-pandemic term amid the recovery in services exports, recovery will drive services and industry steady remittance inflows, and lower global growth. Services will continue to drive growth as commodity prices. External demand for outlook Growth the economic reopening will remain supportive merchandise exports is expected to moderate in 2.1 Philippines Economic Update June 2023 of robust domestic demand, while improving 2023 amid a sharp slowdown in global activity, prospects for the tourism industry will buoy contact- with better prospects in 2024-25, as global growth Poverty and intensive services industries. The tourism sector will steadily improves. However, robust growth in Poverty Shared 2.2 benefit from China’s reopening and the recovery services exports is expected to robust due to of global tourism demand, leading to growth in the recovery of international tourism and strong transportation services, accommodation and food growth in the Business Process Outsourcing sector. Challenges Risk and Policy services, and wholesale and retail trade services. Meanwhile, import growth is expected to decelerate 2.3 Services growth will continue to be supported in 2023 due to slower growth in investments and by the country’s IT-BPO industry, which in turn private consumption, and the reduction in global Philippine Transition Energy will benefit from cost-cutting initiatives from firms commodity prices. Despite the global slowdown, abroad. Despite slower growth, the continuation of remittance inflows are projected to steady at around the public investment agenda will support growth in 3.0 percent in the medium term. As a result, the CA Energy Sector Country and the construction sector and drive industry growth. deficit is projected to narrow to 3.8 percent of GDP 3.1 However, manufacturing growth will moderate, in 2023 and decline further to an average of 3.3 as the global growth deceleration and the shift in percent in 2024-25 as external demand improves. global consumption toward more services weigh The CA deficit is expected to be financed primarily Outlook Energy on external demand. Meanwhile, the country’s by net FDI inflows as well as net portfolio inflows and 3.2 vulnerability to weather-related events, along with international bond issuances. Sector Power 3.3 24 Global energy prices are expected to decline by 25.8 percent in 2023, while global agricultural prices are expected to decline by 7.2 percent in 2023. See World Bank Commodity Markets Outlook, April 2023. 30 Policies ToC 3.4 Contents Table of The fiscal deficit is expected to narrow in 2023– and lower personal income tax collections due to the Executive Summary 25, contingent on the successful implementation implementation of the Tax Reform for Acceleration of the government’s medium term fiscal and Inclusion (TRAIN) law. Nevertheless, revenues consolidation agenda (Figure 18). The deficit is are expected to recover to pre-pandemic levels by Economic & Recent Global projected to fall from 7.3 percent of GDP in 2022 2025, supported by faster growth and the passage Policy Dev Developments Recent to 6.0 percent in 2023. The reduction in the deficit of several tax reform bills.25 will be driven by an expected decline in public spending by nearly 2.0 percentage points of GDP The combination of fiscal consolidation and to 21.8 percent of GDP, in part due to a reduction the growth recovery will keep debt levels 1.1 in national tax allotments to LGUs in 2023 and the sustainable over the medium-term.26 The national implementation of the government’s medium-term government debt ratio is projected to continue to Output and fiscal consolidation agenda. While public capital increase in the short term and peak at 61.7 percent of Demand 1.2 outlays are set to decline from 5.9 percent of GDP in 2024 as financing needs will remain elevated. GDP in 2022 to 5.0 percent of GDP in 2023, it is However, debt remains sustainable as the debt- expected to remain above 5.0 percent of GDP over to-GDP ratio is expected to revert to a downward Inflation & Monetary the forecast horizon. Moreover, the administration trajectory beginning in 2025 owing to robust growth 1.3 will continue to support public investment, and the successful implementation of the medium- complemented by increased private sector term fiscal consolidation agenda. Moreover, the participation through Public-Private Partnerships. debt composition is expected to remain stable with External Sector 1.4 Recurrent spending is projected to fall from 17.4 low shares of short-term debt and foreign-currency- percent of GDP in 2022 to 16.8 percent in 2023. denominated debt, in line with the government’s Revenue growth is expected to moderate in 2023 debt management strategy. Sector Fiscal amid softer GDP growth, falling commodity prices, 1.5 Table 1. Economic Indicators for the Baseline Projections. Employment and Poverty 1.6 2020 2021 2022e 2023f 2024f 2025f Real GDP growth, at constant market prices -9.5 5.7 7.6 6.0 5.9 5.9 Outlook & Risks Private Consumption -5.8 3.1 6.0 4.4 4.4 4.4 Government Consumption 1.3 1.1 0.7 0.7 0.7 0.8 outlook Growth Capital Formation -9.1 3.9 3.0 2.0 2.2 2.4 2.1 Philippines Economic Update June 2023 Exports, Goods and Services -4.7 2.2 3.0 1.4 2.3 2.6 Poverty and Imports, Goods and Services -8.7 4.5 5.2 2.6 3.8 4.4 Poverty Shared 2.2 Real GDP growth, at constat factor prices -9.5 5.7 7.6 6.0 5.9 5.9 Agriculture 0.0 0.0 0.0 0.1 0.1 0.1 Challenges Risk and Policy 2.3 Industry -4.0 2.5 2.0 1.3 1.4 1.5 Services -5.5 3.3 5.6 4.5 4.4 4.3 Philippine Transition Inflation (period average) 2.4 3.9 5.8 5.7 3.6 3.0 Energy National government balance (% of GDP) -7.6 -8.6 -7.3 -6.0 -5.1 -4.1 National government debt (% of GDP) 54.6 60.4 60.9 61.0 61.7 61.2 Energy Sector Country and 3.1 Current account balance 3.2 -1.5 -5.4 -3.8 -3.5 -3.0 Source: PSA; BTr World Bank staff estimates. Note: Growth subcomponents show contributions to growth. Outlook Energy 3.2 25 The proposed tax reform bills include: (i) the Passive Income and Financial Intermediary Taxation Act; (ii) a value-added tax on digital service providers; and (iii) excise taxes on single-use plastics and pre-mixed alcohols. The government is also considering additional tax reform measures such as additional excise taxes on sweetened beverages, a motor vehicle user’s tax, and a new mining fiscal regime. Sector Power In the debt sustainability analysis, national government debt comprises the national government’s outstanding debt from domestic and external 3.3 26 sources. Domestic borrowings are mainly in the form of treasury bonds and treasury bills, while external borrowings are bilateral and multilateral loans, and commercial bonds such as U.S. dollar bonds, Eurobonds, Yen bonds, and peso-denominated bonds. 31 Policies ToC 3.4 Contents Table of Figure 17. Growth prospects remain positive over the medium term. Executive Summary 10 Economic & Recent Global 8 Policy Dev Developments 6.0 Recent 5.9 5.9 6 4 2 1.1 0 Percent Output and -2 Demand 1.2 -4 -6 Inflation & Monetary 1.3 -8 -10 External Sector -12 1.4 16 17 18 19 20 21 22 23 24 25 20 20 20 20 20 20 20 20 20 20 Sector Fiscal 1.5 Actual GDP growth December 2022 Forecast June 2023 Forecast Source: PSA, and World Bank staff calculations. Employment and Poverty 1.6 Figure 18. Despite consolidation, public investment is projected to remain above 5.0 percent of GDP. Outlook & Risks 30 7 23.5 24.1 23.4 25 21.8 21 20.1 6 outlook Growth 2.1 20 Philippines Economic Update June 2023 5 15 Poverty and Percent of GDP Percent of GDP Poverty Shared 4 2.2 10 5 3 Challenges Risk and Policy 2.3 0 2 -5 -5.1 -4.1 Philippine Transition -7.3 -6 1 Energy -10 -7.6 -8.6 -15 0 Energy Sector 2020 2021 2022 2023 2024 2025 Country and 3.1 Fiscal deficit Public expenditure Infrastructure program (RHS) Outlook Energy 3.2 Source: BTr, World Bank staff calculations. Sector Power 3.3 32 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 33 2023 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Business Confidence Index 2022 Figure 19. Consumer and business confidence continues to improve. 2021 Consumer Confidence Index 2020 2019 Photo by: everything possible/Shutterstock 0 60 40 20 -20 -40 -60 Percent Source: BSP. ToC Philippines Economic Update June 2023 Contents Table of 2.2 Poverty and Shared Prosperity Executive Summary The labor market recovery will support poverty reduction, but persistent high food and energy inflation will disproportionately impact the poor and vulnerable. Economic & Recent Global Policy Dev Developments Recent Economic and labor market recovery will Proactive measures implemented by the support poverty reduction. As the economy government are crucial to protect the regains momentum and more jobs are expected to purchasing power of the poor and vulnerable. 1.1 spur growth in household incomes, poverty is Given the threat of inflation and climate shocks, projected to decline faster over the forecast horizon. government needs to continue pursuing policies and Poverty incidence27 using the World Bank’s poverty interventions to mitigate the risks and ensure Output and Demand line for lower-middle income countries of US$3.65/ sufficient energy and food supply. The creation of the 1.2 day, 2017 purchasing power parity (PPP) is projected Interagency Committee on Inflation and Market to decrease from 17.8 percent in 2021 to 13.5 Outlook28 is an indication of the government’s percent in 2023 and further to 10.5 percent in 2025 commitment to addressing these threats. This Inflation & Monetary (Figure 20). However, these projections could be advisory body provides policy advice and 1.3 tempered by higher-than-expected inflation anticipatory recommendations to manage inflation especially as higher food and energy prices can and protect the purchasing power of Filipino offset the increase in household incomes brought by households. External Sector 1.4 the gains in the labor market especially among poor households. Figure 20. Actual and projected US$3.65-a-day poverty rates. Sector Fiscal 1.5 Employment and Poverty 40 1.6 35 Outlook & 30 Risks 25 outlook Growth Percent 2.1 Philippines Economic Update June 2023 20 Poverty and 15 Poverty Shared 2.2 10 Challenges Risk and Policy 5 2.3 0 Philippine Transition Energy 11 10 12 13 14 15 16 17 18 19 09 20 22 23 24 25 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Energy Sector Country and Source: World Bank staff estimates 3.1 Outlook Energy 3.2 27 Calculations based on EAPPOV harmonization, using 2021-FIES. Actual data: 2021. Nowcast: 2022. Forecasts are from 2023 to 2025. Projection using neutral distribution (2021) with pass-through = 1 based on GDP per capita in constant LCU. This advisory body convened in March 2023 is cochaired by NEDA and DOF with DBM as vice chair and the line agencies DA, DTI, DOE, DOST and Sector Power 28 3.3 DILG as members. The committee functions as an advisory body on strategies to alleviate inflation and ensure food and energy security, while balancing the interests of domestic food producers, consumers, and the broader economy. 34 Policies ToC 3.4 Contents Table of 2.3 Risks and Policy Challenges Executive Summary Increased uncertainty in the global financial sector, tighter financial conditions, and persistently high inflation present the most challenging external risks. The authorities must pursue challeng- Economic & Recent Global Policy Dev Developments Recent ing yet impactful reforms while strengthening economic growth and protecting the poor and vulnerable amid limited policy space. Risks to the global growth outlook remain costs amid supply disruptions or robust global 1.1 tilted to the downside. The possibility of higher- demand; and (iii) currency depreciation. Higher- than-expected global inflation, tighter global than-expected inflation will continue to weigh on Output and Demand financing conditions, and escalating geopolitical household consumption and could lead to even 1.2 tensions could cause a sharper-than-expected more aggressive tightening of monetary policy, growth slowdown. Although headline inflation which could dampen investment spending and continues to decelerate in most countries due delay household spending. While the BSP has Inflation & Monetary to falling commodity prices, core inflation has been responsive in its use of monetary policy to 1.3 remained above central bank targets. Sticky core tame inflation, the continued implementation of inflation, due to tight labor markets and resilient non-monetary measures will be crucial to mitigate External Sector demand, could lead to further monetary tightening. supply-side inflationary pressure. A welcome 1.4 A faster-than-expected and synchronous policy development was the formation of the Interagency tightening globally could raise the cost of global Committee on Inflation and Market Outlook financing, and could result in capital outflows from as an advisory body looking into measures to Sector Fiscal 1.5 and currency depreciation in EMDEs. Meanwhile, mitigate inflation and ensure food and energy an escalation of geopolitical tensions, mainly security while balancing the interests of local on Russia’s invasion of Ukraine, could lead to food producers, consumers, and the economy. Employment and Poverty additional food and energy supply shocks, while 1.6 an intensification of US-China tensions including Over the long term, the government must adopt through the trade channel could result in increased a multi-sectoral approach to manage inflation Outlook & protectionism and may dampen external demand. and address food security. While short-term Risks measures can bring transitory relief, there needs to The threat of financial market turmoil presents be a broader emphasis on mitigating inflationary a significant risk to the global outlook. Recent pressure and improving food security. Therefore, outlook Growth 2.1 episodes of financial market instability, including the the authorities need to ensure that the agri-food Philippines Economic Update June 2023 collapse of certain commercial banks in advanced system is: (i) resilient in the face of risks; (ii) inclusive economies, raise concerns over potential spillovers in terms of the opportunities it provides and the Poverty and Poverty Shared to the global financial system. Recent banking turmoil consumers it services; (iii) competitive in domestic 2.2 raises the possibility of additional bank failures, which and international markets; and (iv) environmentally could result in banking crises with global spillovers. sustainable from farm to fork.29 In addition, investing Challenges In turn, the deterioration in global financing in climate adaptation and mitigation measures could Risk and Policy 2.3 conditions could increase the Philippines’ borrowing help minimize the economic impact of climate costs and pressure on its public debt burden. change (Box 1), particularly in the highly vulnerable agriculture sector. Achieving these objectives will Philippine Transition Energy On the domestic front, the main short-term require reforms across different sectors beyond challenge remains containing high inflation. the agriculture sector, including infrastructure, Although the baseline forecast assumes inflation logistics, and natural resource management. Energy Sector Country and will gradually moderate domestically, the risks to 3.1 the inflation outlook remain tilted to the upside. The The BSP is expected to continue the main upside risks to inflation include: (i) domestic implementation of prudential measures and food supply disruptions due to natural disasters, data-driven monetary policy to withstand Outlook Energy the threat of El Niño, and logistics challenges; (ii) external shocks to the financial system. The 3.2 elevated global commodity prices and higher input removal of temporary relief measures introduced Sector Power 3.3 29 The December 2022 Philippines Economic Update Special Focus on agriculture and the recently released Public Expenditure Review on Agriculture discusses these issues in more detail. 35 Policies ToC 3.4 Contents Table of during the COVID-19 pandemic is expected to and (v) strengthening of contingency financing Executive Summary strengthen financial sector stability. Moreover, mechanisms and readiness for disaster response. domestic banks have capital and liquidity ratios exceeding the prudential regulatory measures set Strengthening the economic recovery and Economic & Recent Global by the BSP, providing sufficient buffers to mitigate achieving the country’s long-term growth Policy Dev Developments Recent external financial sector stress. To ensure financial ambition would require an increase in sector stability amid financial sector stress abroad, investments. Prior to the pandemic, the contribution the BSP must remain vigilant as it closely monitors of capital accumulation to economic growth asset quality within the domestic financial system. increased substantially because of the government’s 1.1 Moving forward, the continuation of data-driven commitment to public investment, while fast growth, monetary policy adjustments will help anchor solid macro-fiscal fundamentals, and structural Output and inflation expectations and reinforce the BSP’s reforms led to an increase in private investment. Demand 1.2 commitment to its price stability mandate. However, capital accumulation in the Philippines was still lower than in regional peers. In addition, Pursuing revenue-enhancing policies can COVID-19 caused a significant decline in both public Inflation & Monetary enhance fiscal consolidation efforts and support and private investment from an average of 25.9 1.3 growth. The Government has a political window percent of GDP in 2016–19 to 19.3 percent of GDP in of opportunity to implement challenging reforms 2020-21. As a result, the country’s long-term growth early on its 6-year term. Revenue-enhancing policies potential fell to a projected 5.7 percent, on average, External Sector 1.4 could be more growth friendly if delivered through between 2020–29, below the pre-pandemic appropriate reforms. For example, the impact of the estimate of more than 6.0 percent. Returning to TRAIN law on growth and poverty crucially relies on the pre-pandemic level of investment spending Sector Fiscal the efficient use of the additional revenues towards will require a commitment to promote investment, 1.5 productivity-enhancing infrastructure and human including FDI, and facilitate stronger partnerships capital investments. With politically challenging with the private sector. For example, the authorities Employment and Poverty reforms, early preparation and engagement with could strengthen and facilitate public-private 1.6 the legislative body can help generate support partnerships to upgrade infrastructure and maintain and ensure that the government is well placed for infrastructure investment at 5-6 percent of GDP. timely implementation of reforms. Highlighting Outlook & Risks the successes of recent tax reform initiatives in An energy transition toward low- and zero- strengthening resilience and achieving inclusive carbon alternatives will help address the growth beyond its impact on fiscal sustainability energy demand to power the country’s long- outlook Growth can help improve public acceptance. term growth. A cleaner energy future is expected 2.1 Philippines Economic Update June 2023 to be more affordable, given the global trend of Improving public spending efficiency through declining costs of deploying and integrating solar Poverty and better targeting of social protection is essential and wind power, and enhance the competitiveness Poverty Shared 2.2 to protect the poor and vulnerable from of the economy. Moreover, reducing fossil fuel economic shocks amid limited fiscal space. consumption would reduce ambient air pollution A more efficient social protection targeting and in urban areas, improving public health. The Challenges Risk and Policy delivery system would help protect poor and priorities in building a solid foundation for an energy 2.3 vulnerable households from the government’s efforts transition in the Philippines are: (i) accelerating to rebuild fiscal buffers. During the pandemic, the the implementation of utility-scale solar and wind Philippine Transition Energy country demonstrated the capacity to scale up projects; (ii) addressing bottlenecks in transmission social protection programs but was hindered by and grid capacity; (iii) increasing the reliability of implementation challenges, delays, and the sheer energy infrastructure through liquefied natural Energy Sector Country and magnitude of the pandemic shock. Ensuring a gas-to-power investments; and (iv) intensifying 3.1 resilient delivery of social protection measures would efforts to improve energy efficiency and demand- require the: (i) adoption of the national ID system side management. Part 3 of the PEU investigates for social protection delivery; (ii) enhancement of the state of the Philippines’ energy transition, the Outlook Energy the targeting system; (iii) development of digital challenges to decarbonization, and policies for 3.2 platforms and tools; (iv) continued innovation of a secure, affordable, and clean energy future. digital government-to-person payment methods; Sector Power 3.3 36 Policies ToC 3.4 Contents Table of Box 2. The Economywide Impact of Climate Change Executive Summary Climate change will undermine the country’s could reduce economic losses by around two- development, necessitating policy actions to thirds. The most important adaptation measures Economic & Recent Global Policy Dev Developments Recent reduce substantial economic and human costs. are in agriculture and climate-proof infrastructure. If Both severe weather disturbances (e.g., typhoons more infrastructure is robust against typhoons, the and floods) and slow onset trends (e.g., sea level mean impact of economic damages is projected rise and increase in temperatures) not only hamper to fall to 1.2 percent by 2030 and 3.8 percent 1.1 economic activities but also damage infrastructure by 2050 compared to the previously mentioned and induce social disruptions, resulting in mean scenario. Such adaptation actions do, however, incur economic damages projected at 3.7 percent of GDP substantial costs and could displace other productive Output and Demand by 2030 and 11.0 percent of GDP by 2050.30 The investments.34 Assuming such displacement of 1.2 poorest households will be affected the most, as productive investments to other sectors could be climatic shocks can damage their productive assets, avoided (e.g., through borrowing), GDP could increase their health expenditures, and reduce increase by 0.7 percent relative to the case without Inflation & Monetary 1.3 agricultural yields and their access to economic investments. opportunities.31 Furthermore, the gradual increase in temperature, flood and hurricane risks, and Mitigation measures, especially investments External Sector worsening air pollution pose direct health risks, in the energy sector, could marginally increase 1.4 including disease or death. national output. In the Philippines, climate mitigation measures could increase GDP by about Although the country is a relatively low emitter 0.5 percent, offsetting any crowding-out effects. Sector Fiscal 1.5 of greenhouse gas (GHG) emissions, it would Employment could be boosted by generating nearly still benefit from an energy transition. The 80,000 jobs by 2030, with positive effects on efforts Employment and Poverty concentration of harmful air pollutants, such as to reduce poverty and economic insecurity. While 1.6 GHG emissions, is affected by adverse weather the energy transition will have a muted impact on and worsens the risk of adverse health and most of the economy’s main sectors, it will greatly socioeconomic conditions. The Philippines would benefit industries involved in producing goods Outlook & therefore benefit from measures that limit activities to transition to a low-carbon economy, including Risks that produce GHG emissions. Even though the advanced manufacturing and construction. It could country is significantly less dependent on coal also facilitate future access to export markets should and less energy intensive than its regional peers, more countries start penalizing emissions-intensive outlook Growth 2.1 the energy sector is still the largest contributor to trade.35 In addition, using carbon tax revenues to Philippines Economic Update June 2023 these emissions, although GHG emissions from the increase investments in the energy sector allows transport sector are also rapidly increasing.32 Shifting for higher production through an expansion of the Poverty and Poverty Shared away from fossil fuels for energy generation and capital stock and could result in other domestic 2.2 transport could both contribute to global climate benefits such as lower electricity prices, reduced air mitigation efforts and improve domestic energy pollution, and increased agricultural productivity. Challenges Risk and security.33 Policy 2.3 Source: World Bank. 2022. Philippines: Country Climate While investing in climate adaptation would Development Report. be challenging due to high investment costs, it Philippine Transition Energy Energy Sector Country and 30 Current annual losses from typhoons are estimated between 1.2 and 4.6 percent of GDP, the latter from extreme cases such as Super Typhoon Yolanda (Haiyan) in 2013. The possible range of economic damages is wide and could reach up to 7.6 percent of GDP by 2030 and 13.6 percent of GDP by 2040. 3.1 31 Poor households are particularly vulnerable since they not only tend to live in riskier areas and have fewer safety nets, but also often depend on agriculture and fishing. In addition, rising food prices from lower agricultural yields due to climate shocks would affect the poor the most, as food contributes a higher share of their overall consumption. Furthermore, their access to economic opportunities will also be affected, as they would be more likely to be forced to migrate due to the negative effects of climate change. Outlook Energy 3.2 32 It is expected that there will be a more than four-fold increase in GHG emissions from land transport owing to a more than five-fold increase in the number of vehicles by 2050. 33 Electrifying transport would bring the largest benefits, especially if the power grid becomes carbon neutral. 34 New climate-resilient infrastructure and agricultural measures to boost climate resilience are estimated to cost about 0.6 and 0.06 percent of GDP, Sector Power respectively, bringing the total costs to about 0.7 percent of GDP. 3.3 35 For example, the EU’s Carbon Price Adjustment Mechanism, although its currently proposed design would only have a minimal impact on the Philippines. 37 Policies ToC 3.4 Contents Table of PART 3 Executive Summary Economic & Recent Global Policy Dev Developments Recent PHILIPPINE ENERGY TRANSITION: TOWARDS A SECURE, AFFORDABLE 1.1 AND CLEAN ENERGY FUTURE Output and Demand 1.2 The Philippine energy sector needs to grow rapidly in the next two decades to support the country’s Inflation & Monetary ambition of ending poverty and becoming a prosperous middle-class society by 2040. The 1.3 government projects that final energy demand will triple between 2020 and 2040. Compared with ASEAN countries with significantly higher per capita GDP in 2019, the Philippines has substantially lower per capita electricity consumption at 0.9 MWh, vs. 2.8 MWh of Thailand and 5.2 MWh of External Sector 1.4 Malaysia. The energy sector needs to overcome the dual challenges of meeting fast growing demand and transforming its fossil-fuel-based infrastructure while keeping energy supply secure, reliable and affordable. Sector Fiscal 1.5 The Philippines will benefit significantly from pursuing low-carbon economic growth. Transitioning the Employment and Poverty energy supply and consumption to low- or zero-carbon sources and technologies is at the core of low- 1.6 carbon growth and global climate mitigation efforts. This would entail rapidly increasing the share of renewable energy (RE) in the energy mix and phasing down fossil fuels over time, which in turn would improve energy security, air quality, affordability, and competitiveness. For the Philippines, the focus Outlook & Risks is on decarbonizing power generation and transport, which together account for over 80 percent of greenhouse gas (GHG) emissions related to energy production and use. outlook Growth 2.1 The government is embarking on a substantial energy transition agenda. It recognizes that continuing Philippines Economic Update June 2023 historical trends in the energy sector would reduce energy security and deteriorate the Philippines’ Poverty and external economic competitiveness. The country’s nationally determined contributions (NDCs) include Poverty Shared 2.2 reducing cumulative GHG emissions: unconditional target of 2.71 percent and conditional target of 75 percent below the business-as-usual baseline by 2030. The government’s energy strategy includes: (1) scaling up the deployment of RE, particularly solar and onshore and offshore wind power; (2) Challenges Risk and Policy 2.3 setting a cap on the growth of coal-fired power (cap on capacity by 2025 and generation by 2030); (3) ramping up liquified natural gas (LNG) to power investments; (4) promoting demand-side energy efficiency (EE) and electrification of transport; and (5) exploring the development of other low- or zero- Philippine Transition Energy carbon technologies such as nuclear power. This chapter describes the country’s energy outlook and decarbonization challenges. It explores Energy Sector Country and decarbonization pathways in the power sector and their implications for an energy transition. Building 3.1 a solid foundation for an energy transition in the Philippines over the medium term will be critical. The priorities include accelerating the implementation of utility-scale solar and wind projects; addressing Outlook Energy bottlenecks in transmission and grid capacity; shoring up system reliability through LNG-to-power 3.2 investments; and intensifying efforts in EE and demand-side management. The Philippines is uniquely positioned to deliver an energy transition toward an RE-dominated power system that will not only Sector Power improve energy security but also enhance affordability. 3.3 38 Policies ToC 3.4 Contents Table of 3.1 Country and Energy Sector Context Executive Summary Climate change poses major risks to the in large part to the removal of energy subsidies, Economic & Recent Global Policy Dev Developments Philippines, which is assessed as the most energy prices in the Philippines are also among the Recent vulnerable country in the World to natural highest in Southeast Asia, putting pressure on the disasters and calamities.36 According to the country’s external competitiveness. estimate of the Philippines Country Climate and 1.1 Development Report (CCDR) of the World Bank The Philippine economy is significantly less Group,37 the economic damages of climate change energy intensive and less dependent on coal in the Philippines could reach 7.6 percent of gross than that of regional peers. The primary energy Output and Demand domestic product (GDP) by 2030 and 13.6 percent intensity of the Philippines’ GDP, which has been 1.2 of GDP by 2040, affecting all sectors, particularly falling since 2000, was 6.5 GJ/thousand 2015 USD capital-intensive sectors and agriculture. in 2019, lower than 9.6 in Indonesia and 15.2 in Vietnam. The share of coal in the primary energy Inflation & Monetary 1.3 The Philippine government prioritizes climate supply, which has been steadily increasing, was 29 resilience in its climate actions while also percent in 2019, compared with 29 in Indonesia and pursues a deliberate energy transition agenda. 51 percent in Vietnam. Nevertheless, coal is used External Sector The government has put in place policies and much less in final energy consumption, averaging 6 1.4 regulations to increase RE share in power generation percent in 2019, much lower than 15 and 26 percent from 21 percent in 2020 to 35 percent in 2030 and in Indonesia and Vietnam, respectively.38 Still, final 50 percent in 2040, while pushing down the share of energy consumption has a significantly higher share Sector Fiscal 1.5 coal-based generation from 57 to 45 and 23 percent of oil products and biomass in the Philippines than during the same period. As a result, power sector those in both Indonesia and Vietnam, underscoring Employment GHG emissions will begin to level off by 2030, but the outsized role of transport in fossil fuel demand and Poverty without abating toward 2040. This is ambitious given and the large rural population, which still relies on 1.6 the growth patterns of the energy sector in the past biomass. decade or so. Outlook & There has been a marked shift toward fossil fuels Risks While the energy sector has anchored economic in the primary energy mix over the past decade. growth through improved energy productivity, it The share of fossil fuels in the primary energy supply has also posed challenges due to high energy increased from 60 percent in 2010 to 67 percent in outlook Growth 2.1 costs. Between 2010 and 2019, the primary energy 2020, due to a large increase in coal-fired power Philippines Economic Update June 2023 supply increased by 1.5 times, with GDP growth generation and sustained growth in oil demand from increasing by 1.7 times, and the total electricity the transport sector (Figure 21). This trend highlights Poverty and Poverty Shared supply expanded by 1.6 times. In broad terms, the the fast-growing carbon footprint of energy 2.2 Philippine economy has expanded with the help of production and consumption, which is the largest improved energy productivity, as reflected by the contributor to GHG emissions in the Philippines, Challenges smaller increment of both primary energy and accounting for 59 percent of total GHG emissions in Risk and Policy 2.3 electricity than that of GDP from 2010 to 2019. Due the country in 2019, up from 50 percent in 2010.39 Philippine Transition Energy Energy Sector Country and 3.1 Photo by: BELL KA PANG/Shutterstock Outlook Energy 3.2 36 World Risk Report 2022. Bündnis Entwicklung Hilft, Ruhr University Bochum – Institute for International Law of Peace and Conflict 2022. https://wel- trisikobericht.de/weltrisikobericht-2022-e. 37 Philippines Country Climate and Development Report, the World Bank Group, 2022. https://www.worldbank.org/en/country/philippines/publica- tion/philippines-country-climate-and-development-report Sector Power 38 Data are from the International Energy Agency, Energy Statistics Data Browser. Values for 2019 are used for benchmarking because 2020 values are 3.3 abnormal due to the economic contraction caused by the COVID-19 pandemic. 39 Climate Watch 2020. 39 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 40 Figure 21. Power generation and transport have been driving the increase in fossil fuel consumption. 20 20 9 1 20 8 Natural Gas 1 20 7 Biomass Biofuel 1 20 6 1 2019 20 5 1 Primary Energy Supply, 2000 - 2020 20 4 1 20 3 1 20 2 Coal Consumption 1 Geothermal 20 1 1 20 0 1 20 9 Oil PV Power Generation 0 Source: Philippine Energy Statistics, Department of Energy (DOE). 20 8 0 20 7 0 20 6 2010 Industry Hydroelectric 0 20 5 0 20 4 0 20 3 Wind Coal 0 20 2 0 20 1 0 20 0 18 16 14 12 10 8 6 4 2 0 20 0 10 0 70 20 60 50 40 30 20 Million tons of oil equivalent Million tons of oil equivalent ToC Philippines Economic Update June 2023 Contents Table of The energy supply in the Philippines is highly The Philippine power sector has undergone Executive Summary reliant on imported oil and coal, and it will soon important institutional reforms and technological be reliant on imported LNG due to dwindling changes in the past 20 years. Following severe domestic gas production. The Philippines is almost energy supply shortages in the late 1980s and the Economic & Recent Global fully dependent on imported oil, while it imports Asian Financial crisis of 1997, the government Policy Dev Developments Recent about 80 percent of its coal consumption, enacted the Electric Power Industry Reform Act predominantly for power generation. Natural gas, (EPIRA) in 2001 to improve the quality of service and which accounts for about 6 percent of the primary reduce electricity costs by introducing private energy supply and predominantly used for power participation and competition in wholesale and retail 1.1 generation, comes almost exclusively from the markets. The EPIRA reforms were mostly completed Malampaya gas field, which is rapidly approaching its by 2013, making the Philippine power market one of Output and end of life (92 percent of proven reserves are the freest in the region. These reforms unleashed a Demand 1.2 depleted) and may cease production by 2027. Until period of strong growth in private financing of power additional domestic gas production is developed, generation assets, lifting the total installed generation imported LNG is necessary for the country’s gas-fired capacity from 16GW in 2010 to over 26GW in 2020. Inflation & Monetary power generation. Given such reliance on imported Boosted by the government’s ‘technology neutral’ 1.3 fossil fuels and the recurrent volatility of the policy, coal-fired power increased from 30 percent of international energy market, energy security figures total installed generation capacity in 2010 to about prominently in the government’s energy strategy. 42 percent in 2020, and from 34 percent of total External Sector 1.4 electricity produced in 2010 to 57 percent in 2020 The Philippines is a rarity among developing (Figure 22). Solar and onshore wind energy also economies in having an energy sector generally made inroads, accounting for 15 percent of the Sector Fiscal free of market-distorting subsidies. The energy capacity installed in the same period, growing from 1.5 sector reforms started in the 1990s had eliminated zero in 2010 to about 1.5 GW in 2020. But the overall most of energy subsidies within a decade, except for share of renewables (consisting primarily of hydro and Employment and Poverty a few targeted social subsidies such as lifeline geothermal power) in electricity generation shrank 1.6 subsidies for low-income households and price from 26 percent in 2010 to 21 percent in 2020 due to subsidies for households relying on diesel-powered the rapid growth of coal-fired power. mini grids on remote islands. Such social subsidies Outlook & Risks are generally financed by those who pay the non- subsidized rate. outlook Growth Figure 22. Coal has become the dominant source of power generation over the last decade. 2.1 Philippines Economic Update June 2023 Mix of installed capacity by technology Poverty and Poverty Shared 2.2 16.36 GW 26.25 GW 100% Challenges Risk and Policy 2.3 90% Wind 80% Solar Philippine Transition Energy 70% Biomass 60% Geothermal Energy Sector Country and 50% Hydro 3.1 40% Natural gas 30% Oil Outlook Energy 3.2 20% Coal 10% Sector Power 0% 3.3 2010 2020 41 Policies ToC 3.4 Contents Table of Executive Summary Mix of generation by technology Economic & Recent Global 101.76 TWh Policy Dev Developments 67.74 TWh Recent 100% 90% Wind 80% Solar 1.1 70% Biomass Output and 60% Demand Geothermal 1.2 50% Hydro 40% Natural gas Inflation & Monetary 1.3 30% Oil 20% Coal External Sector 10% 1.4 0% 2010 2020 Sector Fiscal 1.5 Source: Philippine Energy Statistics, DOE. Retail electricity tariffs in the Philippines remain December 2020, the country’s overall electrification Employment and Poverty among the highest in the Association of rate stood at 94.5 percent. While Luzon has almost 1.6 Southeast Asian Nations, constraining economic achieved full electrification at 98.4 percent, competitiveness. Reforms in the power sector did Mindanao lags significantly behind at 83.6 percent, Outlook & not lead to reduction in electricity tariffs, as initially with the poorest parts of Mindanao having an access Risks hoped. The average retail tariff in the Philippines in rate of around 40 percent. There are still over 1 early 2021 was US¢15/kWh, higher than US¢8/kWh million households without access to electricity in the in Indonesia and US¢11/kWh in Thailand.40 While Philippines, and about two-thirds of them are in outlook Growth subsidies (or lack thereof) explain much of the Mindanao. The government has adopted a 2.1 Philippines Economic Update June 2023 difference, studies also point to factors such as customized approach for last mile electrification that domestic taxation, limited competition in power involves both off-grid (primarily based on RE) and Poverty and Poverty Shared generation lack of competition at the retail level, and grid-extension (when economically viable) solutions. 2.2 other inefficiencies in the sector. They also suggest that the sustained high cost of electricity in the The Philippines has substantial RE resources, Challenges Philippines may have contributed to the premature particularly solar and wind, but they are Risk and Policy 2.3 decline in the share of industry in the economy and underdeveloped and underutilized. Out of the suppressed the growth of industries, for which 26.25 GW total installed generation capacity in electricity is an important production factor.41 An 2020, hydro, geothermal, biomass, and solar/wind Philippine Transition Energy important challenge to any energy transition is to accounted for 3.78, 1.93, 0.45, and 1.46 GW, avoid harming the competitiveness of the economy respectively, of the combined share of 29 percent. by further increasing the cost of energy. There is total untapped hydro power of 13.1 GW in Energy Sector Country and the country,42 while the estimated geothermal 3.1 Last mile rural electrification remains a short-to- potential is 4.4 GW. Wind and solar have the greatest medium-term priority of the government. As of potential but so far are the least developed. The total Outlook Energy 3.2 40 Philippine Energy Plan 2020-2040, Department of Energy 41 Ravago, M.V., J. Roumasset, and R. Danao. 2018, “Electricity Policy in the Philippines: Overview and Synthesis,” in M.V Ravago, J. Roumasset, and R. Danao (eds.), Powering the Philippine Economy: Electricity Economics and Policy. Quezon City: University of the Philippines Press; and Ravago, M.-L.V., Sector Power A.Z. Brucal, J. Roumasset, and J.C. Punongbayand. 2019, “The role of power prices in structural transformation: Evidence from the Philippines.” Journal of 3.3 Asian Economics, 61:20-33. 42 https://www.doe.gov.ph/hydropower?withshield=1 42 Policies ToC 3.4 Contents Table of onshore wind electric potential from areas with good wide spectrum of EE requirements, such as minimum Executive Summary to excellent wind is estimated at 76 GW of technical energy performance standards, energy reporting of potential,43 while the technical potential of offshore significant energy consumers, and the government wind is estimated at 178 GW.44 Average solar radiation energy management program, and includes support Economic & Recent Global ranges from 128 to 203 watts per square meter, which for energy service companies. While the energy Policy Dev Developments Recent translates to potential power generating capacity of intensity of GDP in the Philippines is low compared to 4.5–5.5 kWh per square meter per day.45 Despite its peers (in part due to its service-oriented economy having introduced the Renewable Energy Act in and relatively small manufacturing sector), some key 2008, the country lags behind regional leaders such energy end-uses remain inefficient despite high 1.1 as Vietnam and Thailand in installed solar and wind energy prices. For example, over 80 percent of new capacity by a significant margin due to a relatively window air conditioner (AC) units and 20 percent of Output and small and cautious feed-in-tariff (FiT) program out of new split AC units sold in the market in 2019 were still Demand 1.2 cost concerns and the complicated and lengthy using fixed speed compressors, which usually have an permitting process. The recently launched Green energy efficiency ratio 25–40 percent lower than Energy Auction Program (GEAP), along with the those using inverter technology, which allows Inflation & Monetary implementation of the Renewable Portfolio Standard compressors to operate at variable speed.47 Another 1.3 (RPS), is expected to unlock significant private area of significant energy saving potential is the financing for scaling up grid-connected solar and incorporation and enforcement of energy efficiency wind while reducing cost through competitive codes in the permitting and construction inspection External Sector 1.4 bidding. The complex permitting process is being process. While having a Green Building Code (GBC) streamlined by the introduction of the Energy Virtual as a referral code of the National Building Code, as One-Stop-Shop (EVOSS) online system in 2019, well as guidelines for energy conserving design of Sector Fiscal although it may take some time to see its effects in buildings and utility systems issued by the DOE, there 1.5 practice.46 is insufficient evidence about the actual enforcement of the GBC in the Philppines, especially in residential Employment and Poverty Transmission development has become a buildings. 1.6 bottleneck to the government’s RE ambition. The existing grid infrastructure is already strained to ensure The government is actively engaged with the reliable supply of electricity and has limited spare international community on climate change and Outlook & Risks capacity to absorb the expected large increase in RE energy transition discussions, although it has not generation in the next few years. Delays in grid announced a timeline for achieving carbon expansion projects have already caused stranding of neutrality or phasing down coal-fired power. The outlook Growth new RE generation assets. The criticality of timely first nationally determined contribution (NDC) was 2.1 Philippines Economic Update June 2023 investments in transmission capacity is well submitted on April 15, 2021, committing the recognized. But the existing arrangements for Philippines to a 75 percent reduction in cumulative Poverty and transmission development planning and investments emissions (excluding land-use change and forestry) in Poverty Shared 2.2 have not demonstrated effectiveness in addressing 2020–2030, relative to projected business as usual the expansion needs. cumulative emissions of 3,340 MtCO2e. However, only 2.71 percent of this proposed reduction is Challenges Risk and Policy The government has also demonstrated a strong unconditional. In October 2020, the DOE announced 2.3 commitment to EE. The Energy Efficiency and a moratorium on endorsing new greenfield coal-fired Conservation Act (EECA) was made effective in April power plants. At COP26, the Philippines partially Philippine Transition Energy 2019, followed by the issuance of its implementation endorsed the Global Coal to Clean Power Transition rules and regulations in November 2019, and Statement aiming to phase down the use of coal for provides the legal and regulatory underpinnings for a power generation.48 Energy Sector Country and 3.1 43 https://www.nrel.gov/docs/fy01osti/28903.pdf 44 https://documents1.worldbank.org/curated/en/099225004192234223/pdf/P1750040b777da0c30935a0e2aa346f4e26.pdf Outlook Energy 3.2 45 GIZ, It’s More Sun in the Philippines, https://www.doe.gov.ph/sites/default/files/pdf/netmeter/policy-brief-its-more-sun-in-the-philippines-V3.pdf 46 https://www.evoss.ph/Home/DisplayFaq/6 47 https://www.clasp.ngo/research/all/philippines-rac-market-assessment-and-policy-options-analysis-2019/ 48 The Philippines has endorsed clause 1 (rapidly scaling up clean power generation and EE) and partially endorsed clauses 2 (rapidly scaling up tech- Sector Power nologies and policies to transition away from coal power generation) and 4 (strengthening efforts for a just and inclusive transition away from coal). 3.3 43 Policies ToC 3.4 Contents Table of 3.2 The Philippine Energy Outlook and Decarbonization Executive Summary Challenges Economic & Recent Global Policy Dev Developments Recent The government projects sustained strong Malaysia and Singapore in 2019 (Figure 24, right growth in energy demand in the next two panel). decades as a result of expected strong economic growth and significant population growth.49 Final The economy’s carbon footprint is projected to 1.1 energy demand (i.e., the aggregate energy triple under the REF, driven by the consumption consumption of all economic sectors and households) of fossil fuels in transport and power generation. Output and is projected to triple in the baseline reference Future increases in GHG emissions will be dominated Demand 1.2 scenario (REF) of the Philippine Energy Plan (PEP) by power generation and transport, while industrial 2020–2040, while it is expected to moderate slightly emissions will also increase (Figure 25). Given their in the clean energy scenario (CES), which assumes emissions reduction impact and technology readiness Inflation & Monetary greater economy-wide EE improvements (Figure 23, decarbonization efforts should focus on power 1.3 left panel). With a moderate penetration of electric generation and transport. vehicles (EVs), demand for oil products will soar, while increased cement production will drive up coal In the PEP 2020–2040, installed coal-fired power External Sector 1.4 demand significantly (Figure 23, right panel). capacity will levels off after 2025 under both the REF and CES (Figure 26). The capping of coal-fired The primary energy supply is expected to power capacity not only reflects the government’s Sector Fiscal 1.5 become more reliant on fossil fuels while per intention to stay firm on the moratorium on the capita energy consumption will remain low. The approval of green-field coal-fired power plants share of coal in the primary energy supply is projected (CFPPs), it also implies that a significant number of Employment and Poverty to decrease under both the REF and CES, but the projects in the pipeline have been shelved. Additional 1.6 overall share of fossil fuels is expected to grow due to CFPPS worth 2.64 GW only include projects that are increased shares of oil and natural gas (Figure 24, left already at different stages of implementation. The PEP panel). The large increase in natural gas consumption 2020–2040 does not envision a phase-down of Outlook & Risks is due to the switching of power generation fuel, as coal-fired generation capacity, although the CES the government intends to cap coal-fired power envisions coal-fired generation peaking by 2030. The generation capacity after 2025. The Philippines starts leveling-off of coal-fired generation is expected to be outlook Growth from a low level of energy consumption: the counterbalanced by the expansion of natural gas-fired 2.1 Philippines Economic Update June 2023 Philippines’ projected primary energy supply per power and RE sources, particularly solar and capita in 2040 will still be far lower than that of hydropower. Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: MintImages/Shutterstock Sector Power 3.3 49 Philippine Energy Plan 2020-2040. Real GDP growth is projected to average 7.2 percent per annum in 2020–2040. 44 Policies ToC 3.4 Contents Table of Figure 23. Energy demand is projected to grow rapidly, particularly in transport, industry, Executive Summary and services. Final Energy Demand by Sector Economic & Recent Global Policy Dev Developments Recent 120 100 1.1 Million tons of oil equivalent Feedstock 80 Output and Demand Agriculture 1.2 60 Households Inflation & Monetary 1.3 Services 40 Transport External Sector 1.4 Industry 20 Sector Fiscal 1.5 0 2020 2040 REF 2040 CES Employment and Poverty 1.6 Final Energy Demand by Energy Source Outlook & 120 Risks outlook Growth 100 2.1 Philippines Economic Update June 2023 Million tons of oil equivalent Poverty and 80 Poverty Shared 2.2 Electricity 60 Bio Fuels Challenges Risk and Policy 2.3 Natural Gas 40 Oil Products Philippine Transition Energy Coal 20 Energy Sector Country and 3.1 0 2020 2040 REF 2040 CES Outlook Energy 3.2 Source: Philippine Energy Plan (PEP) 2020–2040, DOE. Sector Power 3.3 45 Policies ToC 3.4 Contents Table of Figure 24. The primary energy supply is expected to rely more on fossil fuels, driven by pow- Executive Summary er generation and transport. Primary Energy Supply by Source Economic & Recent Global Policy Dev Developments Recent 180 160 1.1 140 Solar&Wind Million tons of oil equivalent Output and 120 Geothermal Demand 1.2 Hydro 100 Biofuel Inflation & Monetary 80 Biomass 1.3 Natural gas 60 Oil External Sector 1.4 40 Coal 20 Sector Fiscal 1.5 0 Employment 2020 2040 REF 2040 CES and Poverty 1.6 Primary Energy Supply per Capita, International Comparison 300 Outlook & Risks 250 outlook Growth 2.1 Philippines Economic Update June 2023 200 Poverty and Poverty Shared 2.2 GJ per capita 150 Challenges Risk and Policy 2.3 100 Philippine Transition Energy 50 Energy Sector Country and 3.1 0 PH 2019 PH 2040 REF Vietnam 2019 Malaysia 2019 Singapore 2019 Outlook Energy 3.2 Source: PEP 2020-2040, DOE International Energy Agency.50 Sector Power 3.3 50 https://www.iea.org/countries. 46 Policies ToC 3.4 Contents Table of Figure 25. Decarbonization efforts need to focus on power generation and transport. Executive Summary CO2 Emissions from Energy Production and Use Economic & Recent Global Policy Dev Developments 400 Recent 350 Million tons of CO2 equivalent 1.1 300 Output and 250 Demand 1.2 Others 200 Industry Inflation & Monetary 1.3 150 Transport Transformation* External 100 Sector 1.4 50 Sector Fiscal 1.5 0 2020 2040 REF 2040 CES Employment and Poverty 1.6 CO2 Emissions from Energy Production and Use 100% Outlook & Risks 90% 80% outlook Growth 2.1 Philippines Economic Update June 2023 70% Poverty and 60% Poverty Shared 2.2 Others 50% Industry Challenges Transport Risk and 40% Policy 2.3 Transformation* 30% Philippine Transition Energy 20% 10% Energy Sector Country and 3.1 0% 2020 2040 REF 2040 CES Outlook Energy Source: PEP 2020-2040, DOE. 3.2 Note: *Energy transformation is predominantly power generation. Other sectors include services,households, and agriculture. Sector Power 3.3 47 Policies ToC 3.4 Contents Table of Figure 26. The share of coal in power generation is expected to fall significantly. Executive Summary Power Generation by Fuel Source 400 Economic & Recent Global Policy Dev Developments Recent 350 1.1 300 Wind 250 Solar Output and Demand Biomass 1.2 TWh 200 Geothermal Hydro Inflation & Monetary 1.3 150 Natural gas Oil 100 Coal External Sector 1.4 50 Sector Fiscal 1.5 0 2020 2040 REF 2040 CES Employment and Poverty 1.6 Installed Generation Capacity by Fuel Source 140 Outlook & Risks 120 outlook Growth 100 Wind 2.1 Philippines Economic Update June 2023 Solar Poverty and 80 Biomass Poverty Shared 2.2 Geothermal GW 60 Hydro Challenges Risk and Natural gas Policy 2.3 40 Oil Coal Philippine Transition Energy 20 Energy Sector Country and 0 3.1 2020 2040 REF 2040 CES Source: PEP 2020-2040, DOE, International Energy Agency. Outlook Energy 3.2 Sector Power 3.3 48 Policies ToC 3.4 Contents Table of The Philippines is pivoting toward natural gas resources. Despite being at a very early phase of Executive Summary for power generation in a time when domestic development, local and international investors have production is dwindling and international already obtained service contracts for developing market prices for LNG have skyrocketed.The about 50 GW of offshore wind power as of April Economic & Recent Global government has approved six LNG terminal and 2023. Policy Dev Developments Recent regasification projects to be financed by domestic and international private investors. Three of them, This note addresses whether the Philippines with a combined capacity of 11.26 million ton per should adopt a more ambitious energy transition annum (equivalent to 15.5 billion cubic meter per agenda, with more RE and less coal in power 1.1 annum natural gas capacity), are expected to be generation than what the government has completed in 2023, providing ample capacity for planned for. It evaluates what this increased Output and existing power plants relying on the Malampaya gas ambition would entail in terms of costs, benefits, Demand 1.2 field. The additional terminals are at different stages financing, and implementation challenges, and how of development and will be able to accommodate these issues could be addressed. For the the planned increase in gas-fired power capacity up government, the choice of pathways toward a clean Inflation & Monetary to 2035. The main short-term challenge for the energy future and the pace of energy transition are 1.3 Philippines is securing LNG supplies at reasonable bound by the following key concerns: prices in a tightening global LNG market. Although the LNG benchmark price (Japan/Korea Marker) for • Ensuring energy security and affordability. External Sector 1.4 spot cargoes has come down substantially from the These are the two fundamental principles August 2022 high, it remains elevated compared underlying the government’s energy transition with pre-pandemic levels. An inability to source LNG strategy. While energy transition promotes Sector Fiscal at competitive prices and in sufficient quantity could national energy security and affordability in the 1.5 result in significantly higher electricity rates or long term, achieving these outcomes, especially potential shortfalls in generation. in the short to medium term, requires the Employment and Poverty convergence of multiple supporting factors, 1.6 The government’s ambition to scale up RE most crucial among them a stable and benign deployment is reflected in the CES, in which the external environment and sustained economic share of electricity generation from RE sources is growth, which are essential for reducing Outlook & Risks expected to grow from 21 percent in 2020 to 50 technology and capital costs. percent by 2040. This target was made official in the updated National Renewable Energy Program • Mobilizing adequate and timely financing. outlook Growth (NREP) 2020–2040. To give the target a firm backing, Financing the process to scale up RE will become 2.1 Philippines Economic Update June 2023 the NREP also increased the mandatory RE market more challenging due to the high level of share in the RPS from a minimum annual increment of necessary investments and the need to increase Poverty and 1.0 to 2.52 percent by 2023 and onwards. The GEAP the participation of both small developers and Poverty Shared 2.2 successfully auctioned about 1.6 GW of solar and international investors. RE investment has so far onshore wind power in June 2022 at significantly been financed by large investors. The country’s lower prices than the prevailing FiT, a major step largest banks have mostly financed RE projects of Challenges Risk and Policy forward in moving to competitive bidding for large- major developers linked with conglomerates 2.3 scale grid-connected solar and wind power projects. while continuing to shun smaller independent The private sector has shown great interest in power producers due to perceived risks. Philippine Transition Energy developing RE projects. According to the DOE, Historical foreign ownership restrictions also indicative solar and onshore wind projects for constrain international capital for solar and wind 2022–2027 top 13 and 6 GW, respectively, on pace projects. Energy Sector Country and with the CES trajectory for solar and far more than 3.1 what the CES expected for onshore wind.51 • Expediting implementation and project Moreover, with World Bank Group assistance, the delivery. An inability to deliver procured RE DOE launched the Philippine Offshore Wind capacity at the expected time will seriously affect Outlook Energy Roadmap in April 2022, setting in motion efforts to the achievement of the RE target and potentially 3.2 develop the Philippines’ large offshore wind cause supply constraints. The development Sector Power 3.3 51 https://www.doe.gov.ph/sites/default/files/pdf/electric_power/private_sector_initiated_power_projects/%5Bb-04%5D_summary_indicative_lop- sipp_31-july-2022.pdf 49 Policies ToC 3.4 Contents Table of period of solar and wind projects in the is a major challenge to the energy transition, as it Executive Summary Philippines has been historically long due to the may force difficult trade-offs between growth and lengthy permitting process. The transition and lead to suboptimal solutions. For operationalization of EVOSS is an ongoing example, short-term security decisions may lead Economic & Recent Global process and its effect in reducing the time for to overinvesting in fossil fuel assets. Sustained and Policy Dev Developments Recent obtaining a construction permit remains to be intensified EE and conservation efforts would help seen. moderate electricity demand across sectors and reduce potential needs to expand power supply • Maintaining the capacity and reliability of the capacity. 1.1 power grid. With the rapid expansion of on-grid variable renewable energy (VRE), constraints in • Managing the socioeconomic risks of the coal Output and transmission and lack of energy storage systems, transition. The phasing down of coal-fired power Demand 1.2 as well as the need for technological interventions requires long-term planning and coordinated to improve grid flexibility, must be addressed to efforts across various government agencies. to avoid curtailment of VRE and ensure the While the Philippines does not have a large coal Inflation & Monetary reliability of the power supply. Existing grid mining sector, and current coal mining operations 1.3 infrastructure has limited capacity to dispatch are largely concentrated on one island, the value newly built solar and wind farms due to delays in chain of CFPPs is still extensive and highly critical needed grid expansion projects. Despite the because of its foundational contribution to the External Sector 1.4 current small footprint of solar and wind power, economy. Efforts to lessen the dependence on there are already reports of curtailments. coal-fired power are transformational, in terms of not only technology but also socioeconomic Sector Fiscal • Managing strong and sustained demand development. 1.5 growth. The fast-growing demand for electricity Employment and Poverty 1.6Outlook & Risks outlook Growth 2.1 Philippines Economic Update June 2023 Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Sector Power 3.3 Photo by: jennagenio/Shutterstock 50 Policies ToC 3.4 Contents Table of 3.3 Power Sector Decarbonization Pathways and Executive Summary Implications Economic & Recent Global Policy Dev Developments Decarbonizing the power sector holds the key to rate). This scenario includes the cap on coal-fired Recent a successful clean energy transition in the generation capacity from 2026 onwards but does Philippines. Power generation is the largest source not have an explicit emissions reduction target. of GHG emissions. The transi tion to low- or zero- 1.1 carbon technologies also enables the • Current policy scenario (CPS), which is similar to decarbonization of transport through electrification the CES in the PEP 2020–2040 but adjusted to a and green hydrogen in the longer term. This would lower GDP growth rate. It represents the Output and Demand effectively address most of the GHG emissions from government’s current ambition to improve EE and 1.2 energy production and consumption (80 percent in develop e-mobility on the demand side and scale 2020 and 70 percent in 2040 under the CES in the up RE on the supply side. The emissions reduction PEP 2020–2040). target is implicit in efforts to peak coal Inflation & Monetary 1.3 consumption in power generation by 2030 The World Bank conducted an exploratory (supply side) as well as in the energy savings target analysis of decarbonization in the power sector (demand side). External Sector to inform the discussion on clean energy 1.4 transition pathways. PLEXOS, a power system • Accelerated decarbonization scenario (ADS), least-cost planning software, was used to analyze the which analyzes how the expansion of the power impact of different levels of emissions reductions on system needs to adapt to reach the goal of Sector Fiscal 1.5 the expansion of the power system, given reducing annual CO2 emissions by 80 percent by assumptions about demand growth and available 2040, compared with the BAU, in response to the Employment and Poverty technologies. The results, while not plans or forecasts, same electricity demand growth as in CPS. The 1.6 are indicative projections of the scale and speed of ADS, which includes an ambitious emissions interventions needed to achieve certain reduction target by 2040, provides useful decarbonization objectives while ensuring energy analytical insights for achieving net zero emissions Outlook & security and affordability. The analysis included four in the power sector beyond 2040. Risks scenarios, two of them replicating the REF and CES in the PEP 2020–2040 using the World Bank’s long-term • Moderate decarbonization scenario (MDS), projection of GDP growth.52 which targets reducing annual CO2 emissions by outlook Growth 2.1 40 percent by 2040. This scenario is analyzed but Philippines Economic Update June 2023 • Business-as-usual (BAU) scenario, which is the not discussed in this note to simplify the baseline, similar to the REF in the PEP 2020–2040 presentation and highlight the key shifts under the Poverty and Poverty Shared but assumes a lower GDP growth rate (with a ADS. The MDS would bring annual emissions 2.2 corresponding lower power demand growth back to the level of 2020 by 2040. 53 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy Photo by: ShernielynDelaCruz/Shutterstock 3.2 52 The World Bank has a more conservative projection of long-term GDP growth than the Government of the Philippines. While the short- to medi- um-term outlook (next 3 years) is similar to that of the government, long-term growth is more conservative but still robust in World Bank projections, with Sector Power 3.3 GDP growth averaging 5.4 percent per year in 2022–040, lower than 7.2 percent used in the PEP 2020–2040. 53 The annex on power sector modeling includes the results of the MDS. 51 Policies ToC 3.4 Contents Table of Pursuing accelerated decarbonization envisioned peak at about 78 TWh in 2025, before falling to Executive Summary in the ADS would require substantially more and 12 TWh by 2040 (Figure 27). Under the ADS, a faster shift toward RE, particularly solar, wind, Solar photovoltaics would become the dominant and hydropower, resulting in an RE-dominated technology, accounting for 56 percent of total Economic & Recent Global power system by 2040. A comparison of the installed capacity and 41 percent of total generation Policy Dev Developments Recent projected mix of installed capacity and energy by 2040,54 compared to 44 and 21 percent, generation between the CPS and ADS reveals that respectively, under the CPS. Other RE technologies, coal-fired power generation under the ADS would including onshore and offshore wind and 1.1 Figure 27. An energy transition would result in substantial changes in the mix of power generation technologies and energy sources. Output and Demand Installed Generation Capacity under CPS 1.2 140000 Inflation & Monetary 120000 Battery storage 1.3 100000 Biomass Solar External Sector 80000 1.4 Wind_offshore MW 60000 Wind Hydro Sector Fiscal 1.5 40000 Geothermal Fuel oil Employment and Poverty 20000 1.6 Natural gas 0 Coal 2031 2022 2023 2024 2025 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2037 2038 2039 2040 Outlook & Risks Installed Generation Capacity under ADS outlook Growth 140000 2.1 Philippines Economic Update June 2023 120000 Battery storage Poverty and Poverty Shared Biomass 2.2 100000 Solar 80000 Wind_offshore Challenges Risk and Policy MW 2.3 Wind 60000 Hydro Philippine Transition Energy 40000 Geothermal Fuel oil 20000 Natural gas Energy Sector Country and Coal 3.1 0 2022 2023 2024 2025 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2037 2038 2039 2040 2031 Outlook Energy 3.2 Source: World Bank staff estimates. 54 Availability of land is the main constraint to the large-scale deployment of solar power in the Philippines. The land area needed for solar power instal- Sector Power lation by 2040 under the ADS is estimated at about 0.5 percent of the land area of the Philippines and less than 3 percent of arable land area, assuming 3.3 2 hectares per 1 MW peak power (information from existing projects in the Philippines indicate about 2 hectares per 1 MW peak power). Large-scale deployment of floating solar and rooftop solar can significantly cut the demand for land. 52 Policies ToC 3.4 Contents Table of hydropower, are expected to grow substantially, as would reach 83 percent by 2040, compared with Executive Summary would the battery storage needed for the integration 42 percent under the CPS.55 Continuing on the ADS of VRE. Natural gas would still play an important role pathway, with the help of new technologies that in supporting the integration of VRE and firm power will become cost-effective (e.g. carbon capture and Economic & Recent Global supply, and as a transition fuel until other clean storage for gas-fired power plants), could lead to a Policy Dev Developments Recent technologies for firm power become cost efficient. carbon-neutral power sector by 2050. Under the ADS, the share of RE in power generation 1.1 Power Generation under CPS 300000 Output and Demand 1.2 250000 Battery storage 200000 Biomass Inflation & Monetary 1.3 Solar Wind_offshore GWh 150000 Wind External Sector 1.4 100000 Hydro Geothermal Sector Fiscal 50000 Fuel oil 1.5 Natural gas Employment Coal and Poverty 0 1.6 2031 2022 2023 2024 2025 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2037 2038 2039 2040 Outlook & Risks Power Generation under ADS 300000 outlook Growth 2.1 Philippines Economic Update June 2023 250000 Battery storage Poverty and Biomass Poverty Shared 200000 2.2 Solar Wind_offshore GWh 150000 Challenges Risk and Wind Policy 2.3 Hydro 100000 Geothermal Philippine Transition Energy 50000 Fuel oil Natural gas Energy Sector Country and 0 Coal 3.1 2022 2023 2024 2025 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2037 2038 2039 2040 2031 Outlook Energy 3.2 Source: World Bank staff estimates. Sector Power Under the CES in the PEP 2020–2040, which the CPS resembles, the share of RE would reach 50 percent. The lower RE share under the CPS is due 3.3 55 to the lower growth rate of power demand assumed in the World Bank modeling. Thus, other things being equal, it would take a few more years for the CPS to reach an RE share of 50 percent. 53 Policies ToC 3.4 Contents Table of The ADS would require a substantial increase net increase in cumulative investment in the ADS vis- Executive Summary in capital spending to scale up and integrate à-vis the CPS is entirely accounted for by increased RE compared to the CPS. The present value of investment in RE. Solar, battery storage, and offshore cumulative capital investments required for the ADS wind have the highest increments, followed by hydro Economic & Recent Global by 2040 would be double that of the CPS based on and onshore wind (Figure 28). Policy Dev Developments Recent current estimates of cost trends of technologies. The Figure 28. The cumulative investment cost of the ADS would be twice that of the CPS. 1.1 Present Value of Cumulative Investment 70 Output and Demand 62 1.2 60 Inflation & Monetary 50 1.3 +31 40 US$ billion External Sector 31 1.4 29 30 +2 +100% Sector Fiscal 1.5 20 +7% Employment and Poverty 10 1.6 0 BAU CPS ADS Outlook & Risks Cumulative Investment by Technology 70 outlook Growth 2.1 Philippines Economic Update June 2023 60 Poverty and Poverty Shared T&D 2.2 US$ billion Present Value 50 Battery storage Biomass Challenges Risk and 40 Solar Policy 2.3 Wind_offshore 30 Wind Philippine Transition Hydro Energy 20 Geothermal Natural gas Energy Sector Country and Coal 10 3.1 0 BAU CPS ADS Outlook Energy 3.2 Source: World Bank staff estimates. Sector Power 3.3 54 Policies ToC 3.4 Contents Table of Phasing down coal-fired power would result in modeling period due to savings of fossil fuel Executive Summary substantial stranded assets. Less than 3 GW of costs, the expected long-term stabilization of CFPPs would be in operation in 2040 under the ADS, fossil fuel prices, and the expected declining compared with about 14 GW under the CPS. The cost of deploying and integrating VRE. While Economic & Recent Global present value of the financial losses due to stranded accelerated decarbonization will lead to higher LCOE Policy Dev Developments Recent CFPPs is about US$10 billion under the ADS.56 than under the BAU and CPS, there is general decline Current CFPPs (11 GW in 2020) in the Philippines in LCOE under all three scenarios relative to 2021 are relatively young, most of them having been (Figure 29). The LCOE starts to increase again under commissioned no early than 2010. Phasing down the the ADS toward the end of the period due to the 1.1 country’s coal-fired power capacity would take place uptake of more costly technologies such as offshore from 2028 to 2040 under the ADS, requiring effective wind and battery storage. The power system’s LCOE Output and solutions to address the financial cost of the stranded reflects the core of the overall cost of electricity and Demand 1.2 assets of privately owned CFPPs. could be considered as indicative of the potential trend in the level of average tariff in present value The power system’s levelized cost of electricity terms. Inflation & Monetary (LCOE) is projected to decline during most of 1.3 Figure 29. The power system’s levelized cost of electricity is projected to decline. External Sector 1.4 System Levelized Cost of Energy 120 Sector Fiscal 1.5 100 Employment and Poverty 80 1.6 US$/MWh 60 BAU CPS Outlook & Risks 40 ADS 20 outlook Growth 2.1 Philippines Economic Update June 2023 0 Poverty and 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 40 20 1 20 1 Poverty Shared 2 3 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 2.2 20 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: Jed Regala Sector Power The cost of stranded coal-fired power generation assets is estimated based on the discounted net revenue drop compared with the CPS level and 3.3 56 applies estimated market prices. The retirement schedule is based on power system least cost planning to achieve the desired emission reduction goal and predefined techno-economic parameters for retirement. 55 Policies ToC 3.4 Contents Table of Figure: System Levelized Cost of Energy by Component Executive Summary 90 Economic & Recent Global 80 Policy Dev Developments Recent 70 60 1.1 T&D US$/MWh 50 Fuel Output and Demand VOM 1.2 40 FOM 30 CAPEX Inflation & Monetary 1.3 20 External Sector 10 1.4 0 2021 2040 BAU 2040 CPS 2040 ADS Sector Fiscal 1.5 Source: World Bank staff estimates. Note: CAPEX = capital expenditure, FOM = fixed operation and maintenance, VOM = variable operation and maintenance, T&D = Employment and Poverty transmission and distribution. 1.6 The transition to a RE-dominated power system of global fossil fuel subsidies,57 the present value of would result in significant national benefits such the annual air pollution damage costs under the ADS Outlook & Risks as reduced air pollution as well as global bene- is estimated at US$9.8 billion, lower than US$14.5 fits such as reduced GHG emissions (Figure 30). billion under the CPS, representing a US$4.7 billion The phasing down of coal-fired power and reduced (or 32 percent) damage reduction. Using the World outlook Growth need for natural gas-fired power in the ADS will Bank’s lower-bound of the shadow price for CO2,58 2.1 Philippines Economic Update June 2023 significantly reduce the emissions of SO, NO, and the ADS would generate global benefits through PM2.5, which are main ambient air pollutants. Using the avoidance of CO2 emissions worth an estimated Poverty and the air pollution damage assessment values adopted US$16 billion compared to the CPS. Poverty Shared 2.2 by the International Monetary Fund in its assessment Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: Jed Regala Sector Power 3.3 57 https://www.imf.org/en/Topics/climate-change/energy-subsidies 58 https://documents1.worldbank.org/curated/en/621721519940107694/pdf/2017-Shadow-Price-of-Carbon-Guidance-Note.pdf 56 Policies ToC 3.4 Contents Table of Figure 30. The ADS pathway would lead to a substantial reduction of CO2 emissions and air Executive Summary pollutants. Annual Emissions of Air Pollutants under the CPS 600 Economic & Recent Global Policy Dev Developments Recent 500 SOx 1.1 Annual Emissions (MT) 400 Output and Demand 1.2 300 NOx Inflation & Monetary 1.3 200 External Sector 1.4 100 PM 2.5 Sector Fiscal 1.5 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 40 20 1 20 1 2 3 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 Employment and Poverty 20 1.6 Annual Emissions of Air Pollutants under the ADS Outlook & 600 Risks 500 outlook Growth SOx 2.1 Philippines Economic Update June 2023 Annual Emissions (MT) Poverty and 400 Poverty Shared 2.2 300 Challenges Risk and NOx Policy 2.3 200 Philippine Transition Energy 100 Energy Sector Country and PM 2.5 3.1 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 40 20 1 Outlook 3 Energy 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3.2 20 SOx – sulfur oxides; NOx – nitrogen oxides; PM2.5 – particulate mater 2.5 microns or less in diameter Sector Power 3.3 57 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 58 EMISS IONS EMISS IONS EMISS IONS EMISS IONS Cumulative Cumulative Ann ual Ann ual Cumulative Emissions (MT) Cumulative Emissions (MT) 2000 1800 1600 1400 1200 1000 2000 1800 1600 1400 1200 1000 800 600 400 200 800 600 400 200 0 0 2040 2040 2039 2039 2038 CO2 Emissions under the ADS CO2 Emissions under the CPS 2038 2037 2037 2036 2036 2035 2035 2034 2034 2033 2033 2032 2032 2031 2031 2030 2030 2029 2029 2028 2028 2027 2027 2026 2026 Source: World Bank staff estimates. 2025 2025 2024 2024 2023 2023 2022 2022 0 0 120 100 120 100 80 60 40 20 80 60 40 20 Annual Emissions (MT) Annual Emissions (MT) ToC Philippines Economic Update June 2023 Contents Table of Pursuing an accelerated decarbonization environmental damages do not have a market-based Executive Summary pathway like the ADS could benefit both the monetary value, reduced global environmental Philippines and the global community if a proper damages could be monetized through the sale of cost-sharing mechanism could be devised to carbon credits. Therefore, there is potential that the Economic & Recent Global defuse the national burden of elevated costs cost of stranded assets due to the early retirement of Policy Dev Developments Recent while capturing the additional global benefit CFPPs could at least be partially addressed through of reduced GHG emissions. From a lifetime international purchases of carbon credits. If local and system cost perspective, the ADS is only 6 percent global environmental benefits are included, the ADS more expensive than the CPS. While reduced local would have a net advantage over the CPS (Table 2).59 1.1 Table 2. Comparing the Cost of the ADS and CPS, 2022–2040 Output and Demand (US$ billion Present Value) 1.2 CPS ADS Deviation Change Capital costs for new generation and storage 23.5 53.9 30.4 129% Inflation & Monetary 1.3 Grid network expansion and upgrade costs 7.1 7.8 0.7 10% Capital costs of existing generation and grid assets * 23.7 5.3 -18.4 -78% External Sector Variable operational and maintenance costs 0.6 0.9 0.3 50% 1.4 Fixed operational and maintenance costs 14.2 17.3 3.1 22% Fuel costs 56.3 47.8 -8.5 -15% Sector Fiscal 1.5 TOTAL SYSTEM COST 125.4 133 7.6 6% Cost of stranded assets 0 10 10 NA Employment and Poverty Local environmental damage costs 14.5 9.8 -4.7 -32% 1.6 Global environmental damage costs 51 35 -16 -31% NET COST 190.9 187.8 -3.1 -2% Outlook & Risks Source: World Bank staff estimates Note: NA = Not applicable. * The large reduction of capital expenditure from existing generation and grid assets under the ADS is due to the decommissioning of CFPPs. outlook Growth 2.1 Philippines Economic Update June 2023 Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Photo by: Jed Regala Outlook Energy 3.2 59 A sensitivity analysis of key variables suggests that the broad trends and directions revealed by this power system decarbonization analysis are gener- Sector Power ally robust. Also, this analysis did not consider the full spectrum of potential technology choices, in part to limit the higher uncertainties of technologies 3.3 that are still early stages of development, such as carbon capture and storage and green hydrogen, and in part to maintain consistency with the govern- ment’s current energy plan (e.g., nuclear power is not included in the PEP 2020–2040). 59 Policies ToC 3.4 Contents Table of Raising the ambition of the Philippines’ solar and wind power. Large-scale solar and Executive Summary decarbonization efforts and bringing about wind plants are usually located far from urban additional local and global environmental areas, and transmission lines are subject to benefits would require commensurate interruptions. Nevertheless, the wide distribution Economic & Recent Global international assistance and cost-sharing of solar and wind plants could reduce the portion Policy Dev Developments Recent arrangements. Without monetizing the global of total power generation affected by a given benefits of reduced GHG emissions, pursuing storm. Distributed solar power with battery accelerated decarbonization appears suboptimal storage could partially maintain the local power from a national perspective. Recent international supply if transmission lines are interrupted. 1.1 efforts through the Just Energy Transition Partnership Greater understanding of the geo-spatial nature (JETP) in Indonesia and Vietnam show that a more of climate risks and their impact on efforts to Output and ambitious decarbonization agenda for fast growing expand the power system as well as the costs Demand 1.2 developing economies is possible with concerted and benefits of strengthening resilience would support from development partners. help enhance power system planning and implement appropriate risk-mitigation measures. Inflation & Monetary The following are areas in need of additional Climate resilience planning needs to cover a 1.3 assessment to inform decarbonization policies broad set of climate impacts on power system and actions: expansion planning, from extreme weather events to temperature changes and sea level rise. External Sector 1.4 • Impact of accelerated electrification of the transport sector. The pace of electrification • Understanding the requisite financing needs in the road transport sector could have a for an energy transition and the allocation of Sector Fiscal significant impact on overall power demand and risks between the private and public sector.60 1.5 system operations. While the CES includes a 10 Insights into the different sources of capital with percent EV penetration rate by 2040, transport- differing degrees of concessionality would help Employment and Poverty related decarbonization and the accelerated avoid unnecessary delays and costs of inaction 1.6 shift of the global auto industry toward EVs by informing: (i) the government of the necessary could significantly increase EV penetration interventions to remove barriers to private in the Philippines, which presents a risk and financing and where concessional funding could Outlook & Risks opportunity that need to be analyzed in terms be used most efficiently; and (ii) the international of long-term power system planning. A higher community of the Philippines’ capital needs to share of EVs could significantly raise the demand complete its energy transition. outlook Growth for electricity, and require extensive rehabilitation 2.1 Philippines Economic Update June 2023 of power distribution networks increasing • Analytics that could help improve the investment needs in power supply. For example, planning and execution of RE and EE Poverty and 15 percent higher electricity demand by 2040 initiatives. It would be useful to undertake Poverty Shared 2.2 would increase the present value of cumulative an assessment of the needs and gaps for capital investments by 20 percent under the implementing the National Renewable ADS. Still, a significant increase in EVs would Energy Program to identify critical bottlenecks Challenges Risk and Policy create opportunities for innovative energy (transmission capacity and grid flexibility, land 2.3 storage solutions. use, permits, labor, and skills needs, equipment standards, procurement rules, financing Philippine Transition Energy • The impact of an energy transition on constraints, etc.). Given the importance of resilience. Some aspects of the transition seem maintaining a reliable electricity supply while likely to increase resilience, while others may planning the retirement of some CFPPs, Energy Sector Country and reduce it. Given the frequency and strength of the authorities need to urgently identify 3.1 tropical storms in the Philippines, investment specific measures to increase EE and energy in the storm-hardening of solar and wind conservation. farms need to be mainstreamed, which could Outlook Energy significantly increase the investment cost of • Carbon pricing as an instrument for 3.2 60 The World Bank recently published Scaling Up to Phase Down: Financing Energy Transition in Developing Countries (https://www.worldbank.org/en/ Sector Power 3.3 topic/energy/publication/scaling-up-to-phase-down), which provides a useful guidance for developing countries to identify financing challenges and develop a comprehensive financing approach. 60 Policies ToC 3.4 Contents Table of supporting the energy transition. Introducing as the existing 30 or so CFPPs will need to be Executive Summary carbon pricing, either through a carbon tax or gradually retired to achieve the net-zero goal. an emissions trading system, could incentivize CFPPs directly employ relatively few people, firms and individuals to adopt low-carbon but more people indirectly rely on them for Economic & Recent Global technologies while raising revenues, which their livelihood (including across the supply Policy Dev Developments Recent could be used to support the energy transition. chain and service sector), resulting in the larger The World Bank assisted the government in community being potentially adversely impacted assessing carbon pricing instruments in 2019. by their closing. While RE production will result Carbon pricing may be worth revisiting in a future in employment opportunities, labor market 1.1 evaluation of potential financing instruments to misalignments will likely arise (e.g., temporary support the energy transition. job losses from closing CFPPs). Moreover, labor Output and gains from RE may not happen in parallel. RE jobs Demand 1.2 • The socioeconomic impact of phasing down may be created in different areas of the country, coal-fired power in the Philippines. The and the existing labor force may not move with authorities need conduct a better assessment the new jobs. Retraining efforts can help people Inflation & Monetary of the economic, social, and financial risks of transition into RE jobs, but skills from vanishing 1.3 stranded assets (not only coal but also natural gas jobs do not necessarily match the occupational infrastructure). While the Philippines has limited needs of new job opportunities.61 domestic production of coal, coal mines as well External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6Outlook & Risks outlook Growth 2.1 Philippines Economic Update June 2023 Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: Antonio V. Oquias/Shutterstock Sector Power 3.3 61 Measuring the Socio-economics of Transition: Focus on Jobs, International Renewable Energy Agency 2020. 61 Policies ToC 3.4 Contents Table of 3.4 Policies for a Secure, Affordable and Clean Energy Executive Summary Future Economic & Recent Global Policy Dev Developments The Philippines would benefit from an energy To accelerate the energy transition, the Recent transition toward low- and zero-carbon authorities should consider: alternatives. A clean energy transition would substantially increase the use of indigenous and RE • Increasing the implementation of utility- 1.1 resources such as hydropower, solar, and wind while scale solar and wind power projects to bring reducing the country’s reliance on imported fossil VRE sources to a tipping point in power fuels, thereby enhancing energy security. A cleaner generation.63 It took 17 years for solar and Output and Demand energy future is expected to be more affordable, wind to reach a 2.5 percent share of power 1.2 given the savings and in fuel costs and the global generation in the Philippines in 2021. This trends of declining costs related to deploying and share needs to be quadrupled by 2025 to help integrating solar and wind power, enhancing the achieve the government’s goal of increasing Inflation & Monetary 1.3 competitiveness of the economy. Reducing fossil the share of RE in power generation to 35 fuel consumption, particularly by electrifying urban percent in 2030. Since all new generation transport and reducing the use of coal in power assets are financed by the private sector, there External Sector generation, would reduce ambient air pollution in is a robust pipeline of solar and on-shore wind 1.4 urban areas, improving public health. Given that an projects in the country, and key policies are increasing number of multinational firms are setting already in place. The government’s focus should their own net-zero targets and examining their therefore be on speeding up implementation Sector Fiscal 1.5 supply chains to achieve their climate commitments, by removing constraints to procuring, financing, greening the power supply through an energy and delivering solar and wind projects. Short- to Employment and Poverty transition would help the Philippines stay competitive medium-term measures include: 1.6 and attract foreign investments. An energy transition could also help the country meet its commitments o Scaling up the Green Energy Auction under the Paris Agreement. Program (GEAP) with demand pull of the Outlook & Renewable Portfolio Standards (RPS). The first Risks The government has a keen interest in GEAP was successfully held in June 2022, with leveraging a clean energy transition for 1.43 GW of solar and wind auctioned, marking sustainable and inclusive economic the transition from a FiT-based to a competitive outlook Growth 2.1 development. In his first State of the Nation procurement program. An estimated 18 GW of Philippines Economic Update June 2023 Address, President Marcos Jr. called for the grid-connected solar and wind capacity will need transformation of the energy sector to achieve energy to be procured between 2023 and 2028 to meet Poverty and Poverty Shared security and affordability and take advantage of the the 2030 target. GEAP needs to be planned 2.2 best available technologies, especially related to out over a multi-year period and conducted RE.62 on an annual basis with rigorous qualification Challenges requirements to ensure project delivery is Risk and Policy 2.3 Building a solid foundation for the country’s predictable and reliable. The government also energy transition, regardless of which pathway raised the mandatory market share of RE for is pursued, will be critical over the medium term. distribution utilities through the updated RPS Philippine Transition Energy The priorities are: (1) accelerating the implementation in 2022 to ensure the Philippines can reach the of utility-scale solar and wind projects; (2) addressing 2030 RE target. This would require, however, bottlenecks in transmission and grid capacity; (3) that the RPS scheme is complied with and Energy Sector Country and shoring up system reliability through LNG-to-power effective in securing power supply agreements. 3.1 investments; and (4) intensifying efforts in EE and demand-side management. Outlook Energy 3.2 https://pia.gov.ph/publications/2022/07/25/transcript-president-ferdinand-r-marcos-jrs-first-state-of-the-nation-address-speech-as-delivered 62 Sector Power Based on international experience, the tipping point for solar and wind power is when their share in power generation reaches 5 percent, beyond 63 3.3 which their deployment accelerates (https://www.bloomberg.com/graphics/2022-clean-energy-electric-cars-tipping-points/). 62 Policies ToC 3.4 Contents Table of o Streamlining the permitting process. energy storage systems) needs to be incentivized Executive Summary With the expected dramatic increase of projects through proper pricing mechanisms. awarded under GEAP in the coming years, it will be critical to streamline the permitting process. • Prudently pursuing the LNG-to-power Economic & Recent Global The process for issuing permits, which involves program to ensure the reliability of the Policy Dev Developments Recent hundreds of reviews and approvals, has been power system and greater flexibility in a main impediment to the implementation and integrating solar and wind power. Due to delivery of RE projects in the Philippines. The the anticipated depletion of the Malampaya gas EVOSS Act was signed into law in 2019, but its field, it is critical for the Philippines to complete 1.1 implementation has been limited to processes its current LNG-to-power program as planned, handled by the DOE. The full operationalization which will provide more than enough LNG Output and of EVOSS needs to be sped up to cover for the existing fleet of gas-fired power plants. Demand 1.2 all concerned national agencies and local Additional LNG capacity should be carefully government units and will require all parties’ assessed based on the needs for maintaining commitment to enforceable and shortened the reliability of the power system, given the VRE Inflation & Monetary permitting timeframes. capacity target for 2040, including potentially 1.3 large additional offshore wind capacity and the o Removing barriers to financing, early retirement of CFPPs. Under the ADS, gas- particularly in high-risk projects such as fired generation capacity would double between External Sector 1.4 offshore wind and floating solar projects. The 2021 and 2040. government has removed restrictions on foreign ownership in all renewable energy projects, a • Prioritizing EE and demand-side Sector Fiscal long-standing constraint to RE financing in the management for buildings and industries. 1.5 Philippines, by issuing an amendment to the Improving EE in residential, commercial, and Implementation Rules and Regulations of the public buildings through regulations (e.g., Employment and Poverty Renewable Energy Act in November 2022. enforcing energy efficient building codes and 1.6 This is expected to attract increased foreign minimum energy performance standards for investment in solar and wind projects. Still, air conditioners and major appliances) and more needs to be done to de-risk investments incentives (e.g., rebates for purchasing high- Outlook & Risks in offshore wind and floating solar projects, as efficiency appliances and accelerated permitting they reduce the need for arable or forest land for process for high-class green buildings) would land-based solar and wind. For example, offshore help moderate future electricity demand. outlook Growth wind would need a specially designed auction Demand-side management and demand 2.1 Philippines Economic Update June 2023 program to address its distinctive development response should be incentivized through time- challenges and financial risks. of-use tariffs and interruptible supply contracts to Poverty and further enhance grid flexibility. Poverty Shared 2.2 • Prioritizing planning and investments in transmission capacity and grid flexibility. The • Improving power system planning to Philippines need firm- plans for and investments better guide energy transition investment Challenges Risk and Policy in upgrading and modernizing the power grid decisions. To align future investments with 2.3 and new transmission lines and substations to decarbonization and energy security and not only accommodate the anticipated large affordability goals in the power sector, the Philippine Transition Energy increase in VRE generation capacity by 2030, but commonly used least-cost planning tools also to de-risk investments in generation assets. need to consider the costs of carbon and Given past delays in transmission investments, local air pollution as well as stranded assets. Energy Sector Country and the government will need to intervene to The authorities need keep a dynamic view 3.1 ensure the preparation and execution of the of technological changes and enhance the transmission development plan is efficiently government’s capability to assess the viability aligned with load growth patterns and of emerging technologies, such as hydrogen Outlook Energy generation capacity procured through GEAP. and carbon capture and storage, and maximize 3.2 Government intervention is also needed to keep RE while managing the cost of services. This transmission projects procured and delivered approach could help the Philippines avoid a on time. In addition, the provision of ancillary costly long-term carbon lock-in that is not aligned Sector Power 3.3 services and investments in grid flexibility (e.g., with climate and development objectives. 63 Policies ToC 3.4 Contents Table of • Considering the use of an appropriate areas: (i) institutional governance; (ii) people Executive Summary carbon pricing instrument to level the and communities; and (iii) environmental playing field between RE and fossil fuels remediation. The Philippines is a pilot country while generating revenues. For example, under the Accelerating Coal Transition Program Economic & Recent Global setting a moderate price on carbon of up of the Climate Investment Funds, supported by Policy Dev Developments Recent to US$5/tCO2 could incentivize firms and the Asian Development Bank, World Bank, and individuals to adopt low carbon technologies International Finance Corporation. This pilot while raising revenues of up to 0.4 percent of could be used to help design a just transition GDP. The revenues could be used to mitigate framework for phasing down CFPPs. 1.1 the short-term negative poverty impact of introducing a carbon tax on income as well as The Philippines is uniquely positioned to Output and reskill workers affected by decarbonization.64 transition toward an RE-dominated power Demand 1.2 system that will not only improve energy • Establishing a framework for addressing security but also enhance affordability through the retirement of coal-fired power plants primarily private financing. This will, however, Inflation & Monetary and ensuring a just energy transition. Based require overcoming unprecedented challenges 1.3 on the ADS analysis, the Philippines needs to in capital mobilization, implementation, and start phasing down coal-fired generation by the ensuring a just transition. Although the Philippines late 2020s to move toward net-zero carbon has important policies and institutions in place to External Sector 1.4 alternatives by mid-century. The early retirement support an energy transition, the government will of CFPPs could result in significant stranded need to adjust strategies, devise new policies, and assets. The authorities will need to emphasize strengthen planning and execution capacity across Sector Fiscal the principles of competition and transparency sectors and jurisdictions. The private sector, which 1.5 in discovering the price for the early closure has been driving developments and investments of CFPPs to minimize cost. Moreover, a in the energy sector over the past decade, will Employment and Poverty comprehensive cross-sectoral approach will need to take on more risks and hasten the pace 1.6 be required to properly prepare a framework of adoption of new technologies and innovations for a just energy transition process in the as the power system pivots to VRE sources. The Philippines, and key stakeholders, including the Philippines’ development partners will also be Outlook & Risks government, private sector, and communities called upon to do more, especially in facilitating the in affected areas, need to be involved early flow of concessional climate investment funds and in the consultative planning process. The just technology transfers. outlook Growth transition process should include three focus 2.1 Philippines Economic Update June 2023 Poverty and Poverty Shared 2.2 Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Photo by: cpaulfell/Shutterstock Sector Power 3.3 64 Philippines Country Climate and Development Report, the World Bank Group, 2022 64 Policies ToC 3.4 Contents Table of Annex: Power Sector Decarbonization Analysis Executive Summary Decarbonization pathways in the power sector were an economic basis, leaving a cost of stranded assets. Economic & Recent Global Policy Dev Developments Recent analyzed to assess the impact of sector-specific policies and technology choices as well as their Accelerated Decarbonization Scenario (ADS). The implications for power system expansion, reliability, ADS, which assumes the same demand as in CPS, investment needs, and electricity affordability. models a target of 80 percent abatement of annual 1.1 emissions by 2040 relative to the BAU and scaled PLEXOS, a power system least-cost planning software linearly starting in 2025. Existing plants may retire on platform, was used to understand the impact of an economic basis, leaving a cost of stranded assets. Output and Demand different levels of emissions reductions on the capacity 1.2 and generation mix given assumptions about demand Energy demand was forecasted by a simple linear growth and available technologies. The results should model, with assumed intensity, elasticity factor from Inflation & Monetary not be interpreted as forecasts but as projections of the PEP 2020–2040, and World Bank GDP growth 1.3 the scale and speed of necessary interventions. rate projections. The peak demand forecast was Four power system expansion scenarios were derived from electricity demand as sold and is based analyzed, each corresponding to a different electricity on 70.25 percent historical load factor for Luzon, 72 External Sector 1.4 demand scenario: percent for Visayas, and 67.69 percent for Mindanao. Adjustments for technical losses assumptions were Business As Usual (BAU). The BAU is used as a made based on the PEP: 8.63 percent in Luzon, 10.63 Sector Fiscal baseline, which corresponds to the REF of the PEP percent in Visayas, and 12.14 percent in Mindanao. 1.5 2020–2040, but it is re-timed to match an adjusted demand projection due to a lower GDP growth rate The assumed capital expenditure values of different Employment and Poverty assumed by the CCDR. generation technologies for 2021 are based on the 1.6 World Energy Outlook 2021 and the 2021 Vietnam Clean Policy Scenario (CPS). The CPS, which Technology. corresponds to the CES of the PEP 2020–2040, is also Outlook & Risks re-timed to match the adjusted demand projection of Fuel prices are expressed in 2019 USD, as delivered the CCDR. fuel prices and are based on the World Bank commodity forecast from April 11, 2022. The figure outlook Growth Moderate Decarbonization Scenario (MDS). The below shows a short term spike in coal, fuel oil, and 2.1 Philippines Economic Update June 2023 MDS, which assumes the same demand as in the CPS, gas in 2021–2024, followed by a gradual reduction models a target of 40 percent abatement of annual until the end of the period. Gas averaged US$7.04/GJ Poverty and emissions by 2040 relative to the BAU and scaled and coal US$2.98/GJ between 2024 and 2040. Poverty Shared 2.2 linearly starting in 2025. Existing plants may retire on Challenges Risk and Policy 2.3 Philippine Transition Energy Energy Sector Country and 3.1 Outlook Energy 3.2 Sector Power 3.3 Photo by: aldarinho/Shutterstock 65 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 66 2040 2040 2035 2035 A. Electricity Demand B. Peak Demand 2030 2030 Current Policy Scenario (CPS) Current Policy Scenario (CPS) Business as usual (BAU) Business as usual (BAU) 2025 2025 2020 2020 275 250 225 200 175 150 125 100 15 40 35 30 25 20 Demand (TWh) Peak demand (GW) ToC Philippines Economic Update June 2023 Contents Table of A. Capital cost of generation technologies Executive Summary 100% CO AL CC GT Economic & Recent Global Policy Dev Developments Recent 90% CC GT_CCS FUEL_OIL WATER 80% 1.1 % of CAPEX in 2021 GEO BIO MASS Output and Demand 70% PV 1.2 WI ND WI ND _OFF Inflation & Monetary 60% 1.3 NUCLEAR BESS External 50% BESS_2 HR Sector 1.4 BESS_4 HR BESS_8 HR 40% Sector Fiscal 1.5 2022 2023 2024 2025 2026 2027 2028 2029 2030 2032 2033 2034 2035 2036 2037 2038 2039 2040 2021 2031 Employment and Poverty B. Fuel prices 1.6 14 FUEL OIL COAL GAS Outlook & Risks 12 outlook Growth 10 2.1 Philippines Economic Update June 2023 8 Poverty and Poverty Shared $/GJ 2.2 6 Challenges Risk and Policy 2.3 4 2 Philippine Transition Energy 0 Energy Sector Country and 22 23 24 25 26 27 28 29 30 32 33 34 35 36 37 38 39 40 21 31 3.1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 NOTE: CCGT: Combined cycle gas turbine; CCS: Carbon capture and storage; Water: Hydropower; Geo: Geothermal; PV: Outlook Energy 3.2 Photovoltaic/Solar; WIND: Onshore wind; WIND_OFF: Offshore wind; BESS: Battery energy storage system; xhr: duration, in hours Sources: See text. Sector Power 3.3 67 Policies ToC 3.4 Contents Table of Select Modeling Results: Executive Summary Comparison of installed generation capacity Economic & Recent Global Policy Dev Developments 160 STO RAGE Recent 140 BIO MASS 13.1 PV 120 1.1 Installed Capacity (GW) 6.3 WI ND OFF 100 Output and Demand WI ND 1.2 77.4 80 0.1 54.0 WATER 60 35.2 Inflation & Monetary 26.9 GEO 1.3 24.4 1.6 3.0 6.7 5.2 40 10.4 9.2 16.5 9.7 11.2 8.9 FUEL OIL 0.0 2.3 16.6 5.3 5.4 5.1 1.9 4.6 2.2 External 2.3 2.2 5.6 4.6 Sector 4.6 4.6 2.5 2.5 16.6 20 2.5 1.4 4.6 4.6 13.3 9.4 4.6 CC GT 6.5 6.5 6.5 2.5 6.5 6.5 4.6 13.7 13.7 11.6 9.8 13.7 13.7 9.2 6.5 0 3.0 CO AL BAU CPS MER ADS BAU CPS MER ADS Sector Fiscal 1.5 2030 2040 Employment and Poverty 1.6 Comparison of generation mix Outlook & 300 Risks STO RAGE 17.2 6.0 outlook Growth BIO MASS 250 42.9 2.1 Philippines Economic Update June 2023 55.9 4.5 82.2 PV Poverty and Energy Generation (TWh) 28.2 112.9 8.5 Poverty Shared 200 2.2 WI ND OFF 15.0 32.9 18.8 16.7 14.9 26.4 14.3 WI ND Challenges 2.9 3.0 Risk and 150 38.1 Policy 12.7 12.9 2.3 4.8 15.8 15.0 14.3 12.1 81.7 50.9 5.2 WATER 16.3 13.5 56.6 24.9 31.9 31.9 16.3 Philippine Transition 16.3 Energy 100 31.9 GEO 31.9 50.9 32.0 FUEL OIL Energy Sector Country and 50 16.3 94.8 95.6 96.5 96.5 3.1 81.2 CC GT 67.0 64.4 33.7 12.0 CO AL 0 Outlook Energy 3.2 BAU CPS MER ADS BAU CPS MER ADS 2030 2040 Sector Power 3.3 68 Policies ToC 3.4 Contents Table of Comparison of system levelized cost of electricity Executive Summary 120 109.3 Economic & Recent Global Policy Dev Developments 109.3 Recent 100 83.6 84.0 80 74.1 71.6 84.0 System LCOE ($/MWh) 83.6 69.9 68.6 1.1 66.5 64.9 63.6 63.3 62.7 62.3 62.2 62.0 62.7 63.2 63.5 63.4 63.5 74.0 71.5 69.5 60 67.6 65.0 Output and 62.7 61.1 Demand 59.6 58.2 1.2 56.6 55.3 54.1 54.2 54.2 54.1 54.1 54.1 40 Inflation & Monetary 1.3 20 External Sector 1.4 0 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 30 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 40 20 1 20 1 2 3 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 20 20 Sector Fiscal 1.5 BAU CPS MER ADS Employment and Poverty Annual CO2 emissions 1.6 140 Outlook & 122 Risks 116 118 BAU 120 111 114 109 103 104 105 107 101 101 outlook Growth 97 2.1 100 Philippines Economic Update June 2023 90 Annual Emissions (MT) 86 82 CPS 81 81 77 79 78 78 Poverty and 80 75 Poverty Shared 2.2 70 65 61 60 56 Challenges 51 Risk and MER Policy 46 2.3 41 40 35 30 Philippine Transition 24 Energy 20 ADS Energy Sector Country and 0 3.1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 30 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 40 20 1 3 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 20 20 Outlook Energy 3.2 Sector Power 3.3 69 Policies ToC 3.4 Recent 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & 2.1 2.2 2.3 Philippine 3.1 3.2 3.3 3.4 Table of Executive Poverty and Risk and Contents Economic & Recent Global Output and Inflation & External Fiscal Employment Risks Growth Energy Country and Energy Power Policies Summary outlook Shared Policy Transition Energy Sector Outlook Sector Policy Dev Developments Demand Monetary Sector Sector and Poverty Poverty Challenges 70 26th Floor, One Global Place 5th Ave. corner 25th St. Bonifacio Global City, Taguig City Philippines 1634 facebook.com/WorldBankPhilippines twitter.com/WB_AsiaPacific www.worldbank.org/ph The World Bank Philippines instagram/worldbank +63 2 8465 2500 +63 2 8465 2505 W: F: T: ToC Philippines Economic Update June 2023