Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 3.3 Table of Executive Water Security 3.1 3.2 Economic & Recent Global Output and Inflation & External Fiscal Employment Outlook & Growth Poverty and Risk and The way References Contents Summary for Resilent & Water Security as Understand Policy Dev Developments Demand Monetary Sector Sector and Poverty Risks outlook Shared Policy foward Exclusive Growth the cornerstone the WSS Gap Poverty Challenges Safe Water And Sanitation For All PHILIPPINES ECONOMIC UPDATE DECEMBER 2023 Philippines Economic Update December 2023 Contents Table of PREFACE Summary Executive The Philippines Economic Update (PEU) summarizes key economic and social developments, Economic & Policy Dev Recent 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 Developments Recent Global outlook. The update covers issues ranging from macroeconomic management and financial-market 1.1 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 leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Output and Demand 1.2 Philippines. The PEU is a biannual publication of the World Bank’s Macroeconomics, Trade and Investment (MTI) Inflation & Monetary Global Practice (GP), prepared in partnership with the Finance, Competitiveness and Innovation 1.3 (FCI); Poverty and Equity; Social Protection and Jobs (SPJ). Lars Christian Moller (Practice Manager for the MTI GP), Gonzalo Varela (Lead Economist and Program Leader), and Ralph van Doorn (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Cruz (Economist External Sector 1.4 and Task Team Leader), Karen Lazaro (Research Analyst), Ludigil Garces and Patrizia Benedicto (Consultants) from the MTI GP; Radu Tatucu (Senior Financial Sector Specialist) and Ou Nie (Financial Sector Economist) from the FCI GP; Nadia Belghith (Senior Economist) and Sharon Piza Sector Fiscal 1.5 (Economist) from the Poverty & Equity GP; Paula Cerutti (Senior Economist), Ruth Rodriguez (Senior Social Protection Specialist), Yoonyoung Cho (Senior Economist) and Ma. Laarni Revilla (Consultant) Employment and from the SPJ GP. A World Bank team from the Water GP, consisting of Ma. Fiorella Delos Reyes Poverty Fabella (Senior Economist), Aude-Sophie Rodella (Lead Water Economist), Georges Comair (Senior 1.6 Economist), and Annabella Simbulan (Consultant) prepared the Special Focus Note on Ensuring Sustainable Water Supply and Sanitation, under the guidance of Maria Angelica Sotomayor (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 Alief Aulia Rezza (Senior Economist), II Indira Maulani Hapsari (Senior Economist) and Fan Zhang, Lead Economist, SWADR. Logistics and publication support were provided by Geraldine Asi (Team Assistant). The External Communications outlook Growth Team, consisting of Clarissa David, David Llorito, Stephanie Margallo, and Moira Enerva (Consultant) 2.1 prepared the media release, dissemination plan, and web-based multimedia presentation. Philippines Economic Update December 2023 Poverty and Prosperity The team would like to thank Ndiame Diop (Country Director for Brunei, Malaysia, Philippines, and Shared 2.2 Thailand) for 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 Challenges Risk and Policy and perspectives. The findings, interpretations, and conclusions expressed in the PEU are those 2.3 of the authors and do not necessarily reflect the views of the World Bank’s executive board or any national government. If you wish to be included in the email distribution list for the PEU and related Exclusive Growth the cornerstone Water Security for Resilent & Water Security as publications, please contact Geraldine Asi (gasi@worldbank.org). For questions and comments regarding the content of this publication, please contact Kevin Cruz (kcruz@worldbank.org). Questions from the media should be addressed to David Llorito (dllorito@worldbank.org). For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. 3.1 and do not necessarily reflect the views of the World Bank’s executive board or any national government. the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of TABLE OF CONTENTS Summary Executive Economic & Policy Dev Recent Preface ii Table of Contents iii List of Figures iv Developments Recent Global List of Tables v 1.1 List of Boxes v Abbreviations and Acronyms vi Output and Demand 1.2 Executive Summary vii Part I. Recent Economic and Policy Developments 11 Inflation & Monetary 1.1 Recent Global Developments: Subdued Global Activity 11 1.3 1.2 Output and Demand: Outperforming Peers Despite Slower Growth Momentum 14 1.3 Inflation and Monetary Policy: Sustained Price Pressures 17 External Sector 1.4 External Sector: Recovering Tourism and Narrowing Trade Deficit 19 1.4 1.5 Fiscal Sector: Performing in Line with Consolidation Targets 22 1.6 Employment and Poverty: Slowing job creation 25 Sector Fiscal 1.5 Part II. Outlook and Risks 28 2.1 Growth Outlook 28 Employment and 2.2 Poverty and Shared Prosperity 38 Poverty 1.6 2.3 Risk and Policy Challenges 39 Part III. Water Security for Resilient and Inclusive Growth: Securing the Basics, Rising to the Challenges 44 Outlook & Risks III 3.1 Water Security as the Cornerstone of Resilient and Inclusive Development and Climate Adaptation 44 3.2 Understanding the WSS Gaps: Institutions, Incentives, and investments 53 outlook Growth 2.1 3.2.1 Institutions: Need for Greater Integration and Efficiency 55 3.2.2 Incentives: Need for Better Valuing Water and Regulation of WSS Services 57 Philippines Economic Update December 2023 Poverty and Prosperity 3.2.3 Investments: Need for Better-Leveraged Financing and Funding, Targeting Priority Areas 59 Shared 2.2 3.3 The Way Forward Scaling Up and Speeding Up Efforts on institutions, Incentives, and Investments for Universal Access to WSS 61 Challenges Risk and 3.3.1 Institutions: Strengthening Policies and Governance 61 Policy 2.3 3.3.2 Incentives: Focus on Service Providers 63 3.3.3 Investments: Focus on Prioriy areas, Tap the Private sector, and Implement a Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Programmed Approach 64 References 68 3.1 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of List of figures Summary Executive Figure 1. Global industrial production dampened in 2023H1. 12 Economic & Figure 2. Restrictive trade measures weighed on trade. 12 Policy Dev Recent Figure 3. Commodity prices have returned to levels before Russia’s invasion of Ukraine but remain elevated. 13 Developments Recent Global Figure 4. The unexpected 2023Q2 slowdown weighed on the Philippines’ economic recovery 1.1 momentum. 15 Figure 5. Services continued to primarily drive growth, supported by industry although to a lesser Output and Demand 1.2 extent, in Q1-Q3 2023. 16 Figure 6. Weak domestic activity pressed on private consumption and investment as subdued global Inflation & Monetary demand weighed on trade performance in Q1-Q3 2023. 16 1.3 Figure 7. Inflation remained elevated in the first ten months of 2023 due to persistently high food costs. 18 External Sector 1.4 Figure 8. Forward-looking indicators of the banking system’s health indicate resilience. 18 Figure 9. Imports declined amid the slowdown in domestic growth. 20 Sector Fiscal Figure 10. The BOP surplus was driven by the narrower CA deficit and higher financial inflows. 20 1.5 Figure 11. The Philippine peso, along with the currencies of regional peers, has depreciated since the Employment and beginning of 2023. 21 Poverty 1.6 Figure 12. Lower revenues and expenditures narrowed the fiscal deficit. 23 Figure 13. Public debt slightly eased while the fiscal deficit narrowed. 23 Outlook & Figure 14. Female labor force participation exhibited a downward trend in the last few months 26 Risks IV Figure 15. … while the unemployment rate gradually decreased. 26 Figure 16. Households’ perception of their welfare continues to improve. 27 outlook Growth 2.1 Figure 17. Growth prospects remain positive over the medium term. 31 Figure 18. Despite consolidation, public investment is projected to remain above 5.0 percent of GDP. 32 Philippines Economic Update December 2023 Poverty and Prosperity Shared Figure 19. National Government Expenditure by Sector, 2022–2024 (Obligation Basis). 34 2.2 Figure 20. The BSP’s liquidity facility remains elevated, albeit declining. 37 Figure 21. Lending to the private sector continues to fall as a share of GDP. 37 Challenges Risk and Policy 2.3 Figure 22. Actual and projected poverty rates ($3.65-a-day poverty line). 38 Figure 23. Current Health Expenditure by Source, 2000–2022. 43 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Figure 24. Total Health Expenditure by Country, 2020. 43 Figure 25. Four Pillars for Water Security and Climate Adaptation. 46 Figure 26. Quality of Water Access across Wealth Quintiles (2000-2020). 47 3.1 Figure 27. Safely managed water supply in Eastern and Southeastern Asia. 47 Figure 28. Levels of Water Supply Service per Region (2021). 48 the WSS Gap Understand Figure 29. Poverty and Safe Water Supply Access in the Philippines at the Local Government Unit 3.2 level. 49 Figure 30. Quality of Sanitation Access based on Wealth Quintiles (2000-2020). 50 The way foward 3.3 References Contents Table of Figure 31. Impacts of Water Pollution across Sectors. 51 Summary Executive Figure 32. The Extent and Composition of How Water is Consumed varies per Region. 53 Figure 33. The Fragmented Nature of the Philippines’ Water Sector. 56 Figure 34. Water Management towards Achieving Water Security. 58 Economic & Policy Dev Recent Figure 35. Simulation of LGU Investments to Achieve Universal Access to WSS services. 60 Figure 36. Water Service Providers by Management Type per Municipality. 62 Developments Recent Global Figure 37. Rate of Urbanization in NCR and CALABARZON. 65 1.1 Figure 38. Scaling up Finance for Water: The Roles of the Public and Private Sector. 66 Output and Demand 1.2 List of tables Inflation & Monetary Table 1. Fiscal Performance, Q1-Q3 2023. 24 1.3 Table 2. Economic Indicators for Baseline Projections. 29 Table 3. The Medium-Term Fiscal Framework. 36 Table 4. Three Key Priority Areas to Reach Universal Access to WSS. 67 External Sector 1.4 List of boxes Sector Fiscal 1.5 Box 1. The Proposed 2024 Budget for the Philippine National Government 33 Employment and Box 2. The Capacity of the Philippines’ Financial Markets to Finance Government Fiscal Poverty Needs 35 1.6 Box 3. Prioritizing Investments in Primary Health Care for Universal Health Coverage 41 Box 4. Seeing (and Measuring) the Unseen: Water Quality 51 Outlook & Risks V Box 5. Water Stress in Metro Manila and Metro Cebu 54 Box 6. LGU Investment Simulation to Meet Universal Access to WSS. 60 outlook Growth Box 7. Financial Viability from Efficiency Gains 64 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of ABBREVIATIONS AND ACRONYMS Summary Executive Economic & Policy Dev Recent ASEAN Association of Southeast Asian LICs Low-income countries Nations LWUA Local Water Utilities BARMM Bangsamoro Autonomous Region Administration Developments Recent Global in Muslim Mindanao MCM Million cubic meters 1.1 bbl One stock tank barrel MICS Multiple Indicators Cluster Survey BIR Bureau of Internal Revenue MLGU Municipal local government unit BOP Balance of payments MTFF Medium-term Fiscal Framework Output and Demand BPS Basis points NCDs Noncommunicable diseases 1.2 BSP Bangko Sentral ng Pilipinas NCR National Capital Region BTr Bureau of Treasury NGA National government agency Inflation & CA Current account NNS National Nutrition Survey Monetary 1.3 CCDR Country Climate Development NOWD Non-operational water districts Report NPL Non-performing loan DBM Department of Budget and ODA Output-based aid External Sector Management ODC Other depository corporations 1.4 DENR Department of the Environment OFs Overseas Filipinos and Natural Resources PDP Philippine Development Plan Sector Fiscal DHS Demographic Household Survey PHC Primary health care 1.5 DOF Department of Finance PhilHealth Philippine Health Insurance DWR Department of Water Resources Corporation Employment and EAP East Asia Pacific PHP Philippine Peso Poverty 1.6 EED Environmental enteric dysfunction PPP Purchasing power parity EMDEs Emerging Markets and ppts Percentage points Developing Economies PSA Philippine Statistics Authority Outlook & FCV Fragility, conflict, and violence PWSSMP Philippine Water Supply and Risks VI FDI Foreign Direct Investment Sanitation Masterplan FHSIS Field Health Services Information SDG Sustainable Development Goals System URAF Unified Resource Allocation outlook Growth 2.1 FOB Free on board Framework GDP Gross Domestic Product UNICEF United Nations International HWISE Household Water Insecurity Children’s Emergency Fund Philippines Economic Update December 2023 Poverty and Prosperity Shared VAT 2.2 Experiences Value-added tax IWMP Integrated Water Resources WASH Water, sanitation, and Management Plan handwashing Challenges Risk and IWRM Integrated Water Resource WD Water district Policy 2.3 Management WHO World Health Organization IT-BPO Information technology - business WRC Water Regulatory Commission Exclusive Growth the cornerstone Water Security process outsourcing WRMO Water Resources Management for Resilent & Water Security as LFPR Labor Force Participation Rate Office LFS Labor Force Survey WSP Water service provider LGC Local Government Code WSS Water supply and sanitation LGU Local government unit 3.1 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of EXECUTIVE SUMMARY Summary Executive Economic & Policy Dev Recent Recent Economic Developments trade deficit. Goods exports declined amid weaker global demand while goods imports Economic recovery slowed in the first shrank at a faster pace due to lower global oil Developments Recent Global three quarters of 2023 as domestic activity prices and the slowdown in domestic demand. 1.1 moderated, and weak external demand In addition, the narrower current account deficit persisted. GDP growth decreased from 7.7 was supported by the movement of global consumption towards services. In particular, the Output and percent in Q1-Q3 2022 to 5.5 percent in Q1-Q3 Demand recovery of tourism activities and robust growth 1.2 2023, mirroring the growth slowdown in the region. Services was the main growth engine, of the Information Technology – Business Process led by the recovery of tourism activities. The Outsourcing sector contributed to the lower trade Inflation & Monetary growth contribution of industry declined, as deficit. The current account deficit was financed 1.3 weak external demand weighed on trade and by external borrowing by the national government manufacturing activities. Meanwhile, agriculture’s and local banks. Gross international reserves rose to US$98.7 billion (7.3 months of imports). External growth contribution remained marginal due to Sector 1.4 the impact of weather-related disturbances, high input costs, and structural issues such In line with its fiscal consolidation agenda, as the underinvestment in irrigation and water the government reduced public spending, Sector Fiscal 1.5 security that have limited productivity growth narrowing the fiscal deficit. Public revenues in the sector. On the demand side, household remained above the government target at Employment and consumption continued to fuel growth, although 16.5 percent of GDP in Q1-Q3 2023 despite a Poverty weighed by high inflation and weakening pent-up reduction in tax collection. Public spending 1.6 demand. The contribution of investment to growth totaled 22.2 percent of GDP in Q1-Q3 2023 declined due to high interest rates. (below planned expenditure), owing to lower subnational transfers, and delays in budget Outlook & Risks Headline inflation has remained above the BSP execution in recurrent spending. While spending 7 on sectors such as water resources development 2–4 percent target, averaging 6.4 percent in the first ten months of 2023 from 5.4 percent a were maintained in 2023, its budget for 2024 is outlook Growth year ago. High food inflation contributed to nearly estimated to decline by 0.1 percent of GDP due 2.1 half of headline inflation, while transportation to ongoing fiscal consolidation. The fiscal deficit inflation has declined steadily since peaking in narrowed from 6.5 percent of GDP in Q1-Q3 2022 Philippines Economic Update December 2023 Poverty and Prosperity July 2022 due to lower global crude oil prices. to 5.7 percent of GDP in Q1-Q3 2023. Meanwhile, Shared 2.2 However, the increase in global commodity prices the national government debt slightly eased to such as fuel and rice since July and August has 60.2 percent of GDP as of end-September 2023. put additional pressure on headline inflation, Challenges Risk and Policy Labor market outcomes were uneven as 2.3 prompting the Bangko Sentral ng Pilipinas (BSP) to raise its key policy rate by an additional unemployment fell, but low-quality jobs and 25 basis points in October. To mitigate the underemployment are on the rise. The labor Exclusive Growth the cornerstone Water Security for Resilent & Water Security as impact of high inflation on vulnerable sectors, force participation rate (LFPR) decreased from 66 the government approved targeted assistance percent in March 2023 to 64.7 percent in August transfer programs such as the digital food stamp 2023, driven by fewer women participating in program to ‘food poor’ families, cash subsidies to the labor market. Meanwhile the unemployment rate declined from 4.7 percent in March to 4.4 3.1 farmers, and fuel subsidies to public utility vehicle operators. percent in August 2023, led by job creation in the agriculture, manufacturing, and construction the WSS Gap Understand The rebound in tourism and weaker sectors. However, low-quality jobs continue 3.2 merchandise imports narrowed the current to dominate the labor market. The share of account deficit from 6.1 percent of GDP in elementary occupations associated with low and irregular pay remained high at 30.1 percent The way 2022H1 to 4.0 percent of GDP in 2023H1. This foward 3.3 was driven in part by the decline in the goods of total employment in August 2023, relatively References Contents Table of unchanged from 29.9 percent in March 2023. The commodity prices. In major advanced economies, Summary Executive share of wage and salary workers among the still elevated core inflation could prompt central employed slipped back to 62.6 percent in August banks to keep interest rates higher for longer after temporarily reaching an annual peak of 67.2 than expected. On the domestic front, the threat percent in July 2023. The share of self-employed of weather-related shocks including the ongoing Economic & Policy Dev Recent (own account) and unpaid workers remained at episode of El Niño may impact the domestic food around 27 percent and 8 percent, respectively, supply and place upward pressure on food prices. during the same period, indicating the continuous The success of the government’s medium- Developments Recent Global dependence of workers on informal and low- term fiscal consolidation agenda hinges on its 1.1 productivity jobs. ability to pass key tax policy and administration reforms. While the government is currently on Outlook and Risks track to meet its fiscal consolidation target for Output and Demand 2023, challenges remain to ensure it can also 1.2 The growth projection for the Philippines meet targets over the medium term. While the remains unchanged from the October 2023 initial success in reaching its fiscal targets relied Inflation & Monetary East Asia Pacific (EAP) Economic Update. The primarily on reducing public spending, the 1.3 economy is projected to grow by 5.6 percent in government will have to generate additional tax 2023, following the growth rebound in 2023Q3 revenues from new tax policy and administration measures beginning in 2024 to remain on track. External and a pickup in government spending. Over Sector 1.4 the medium term, an improvement in domestic The timely passage of these revenue measures is demand is expected to drive a modest increase crucial to ensure that the authorities can protect in growth to an average of 5.8 percent in 2024- investment spending on infrastructure, human Sector Fiscal 1.5 25. Services are expected to drive growth due capital, and social protection—key drivers of long- to the ongoing recovery of the tourism sector term growth. Employment and and the consistent performance of the IT-BPO Poverty industry, which is likely to spur job creation, To improve the long-term growth potential, 1.6 increase household incomes, and benefit it is imperative to address low productivity consumption and tourism-adjacent industries. and structural challenges, including underinvestment in physical and human Outlook & A modest increase in global trade growth, along Risks with increased growth in the EAP region, would capital. Effective implementation of pro- 8 investment reforms in renewable energy contribute to stronger trade and manufacturing growth in 2024-25. On the expenditure side, and sectors like trade, transport, and outlook Growth private consumption is expected to remain the telecommunications would generate economy- 2.1 main growth engine, supported by a robust labor wide productivity gains, estimated at 3.2 percent market, steady remittance growth, and lower on average. Implementing reforms that encourage Philippines Economic Update December 2023 Poverty and Prosperity inflation. Investment growth is expected to slow private sector participation in investments Shared 2.2 in 2023, before picking up in 2024-25, in part due could enhance the growth potential, even to recent investment reforms and a commitment within the constraints of limited fiscal space. to public investment despite ongoing fiscal Effective public spending in agriculture could Challenges Risk and Policy also boost productivity and enhance the local 2.3 consolidation. food supply, thereby reducing the impact of The growth outlook is subject to downside food price shocks that disproportionately affect Exclusive Growth the cornerstone Water Security for Resilent & Water Security as risks. The threat of higher-than-expected global the poor. Finally, implementing reforms that inflation, escalating geopolitical tensions, and strengthen the resilience of water supply and tighter global financing conditions could dampen sanitation, education, human settlements, and global activity and increase risks of financial health care systems could mitigate the effects of climate change, public health crises, and natural 3.1 stress. On the external front, the escalation of geopolitical tensions could lead to additional food disasters in both the short and long term. Part and energy supply shocks, placing additional III of the PEU examines the Philippines’ water the WSS Gap Understand pressure on inflation. Moreover, trade restrictions supply and sanitation sector, offering policy 3.2 on agricultural products could cause supply recommendations for universal access to safe, disruptions and lead to increased volatility in sufficient, affordable, and sustainable services. The way foward 3.3 References Contents Table of Special Focus – Water Security for While all pillars are needed, the first is a building Summary Executive block for human capital, public health, and Resilient and Inclusive Growth poverty reduction. An integrated approach to water security is The impacts of climate change are mostly needed to adapt to climate change sustainably Economic & Policy Dev felt through water: too much, too little, or too Recent and inclusively. And securing adequate water polluted. The Philippines already confronts these and sanitation is its prerequisite. Recognizing three challenges in different spatial combinations the critical importance for its population and Developments Recent Global – floods, droughts, and heightening poverty development, the government has prioritized and inequality dynamics, notably through 1.1 universal access to water and sanitation. As of infrastructure and quality of service access gaps 2022, only 48 percent of the population receives in the water supply and sanitation (WSS) sector. safely managed water services and around 63 Output and Demand percent have access to safely managed sanitation 1.2 Due to its cross-sectoral impacts, water services. By 2030, existing service gaps will grow security is a socio-economic priority in on a business-as-usual scenario: close to 32 the Philippines. Climate change makes it Inflation & Monetary million people will need safe access to water and 1.3 urgent. By some estimates, the Philippines 35 million will need safe sanitation in urban areas. will experience an average annual economic decline of 0.7 percent in annual GDP in the years The Philippines will need to speed up and External Sector up to 2050 because of water risks. Water risks 1.4 scale up its efforts around the “three Is”– from flooding, droughts, and poor water quality Institutions, Incentives and Investments. also represent a threat to food security. It will These should help close the existing water and compound existing malnutrition and spatial Sector Fiscal 1.5 sanitation service gaps, address future access inequities in the country. Water, sanitation, and demand, and adapt to climate shocks. hygiene services are essential to households, Employment and industries, and the maintenance and development Poverty On institutions: It is important to have clear 1.6 of urban areas. More than 47 percent of the policies and institutional arrangements with population lives in rapidly growing urban areas. effective coordination, planning and management across sectors and levels of government, Outlook & Water security and climate adaptation depend Risks development, and enforcement of regulation. 9 on four pillars: Achieving universal access Given the current operating environment, to safe water supply and sanitation (pillar 1); policies and regulations for both water resource improving irrigation models and productivity outlook Growth management (WRM) and WSS need to be 2.1 (pillar 2); reducing flood and drought risks reviewed in order to improve sector coordination through sustainable water resource management and address its fragmented institutions. The goal (pillar 3); and enhancing water security in fragility, Philippines Economic Update December 2023 Poverty and Prosperity is to improve the sector’s performance and its Shared conflict, and violence (FCV) areas through a 2.2 readiness to adapt to climate change and any holistic development approach for peace (pillar 4). Challenges Four Pillars for Water Security and Climate Adaptation Risk and Policy 2.3 Strengthening water security and climate adaptation through systems change and Exclusive Growth the cornerstone Water Security investment in water and disaster risk reduction for Resilent & Water Security as Pillar 1 Pillar 2 Pillar 3 Pillar 4 3.1 Reducing flood and Enhance Water Security Applying a Achieving universal Improved irrigation drought risks thourgh in FCV: A holistic private access to safe models and sustainable water developement sector lens the WSS Gap Understand water supply and water productivity resources approach for peace sanitation management 3.2 The way foward 3.3 Source: Global Challenge Program, approach paper for water security (2023) – forthcoming. References Contents Table of future large-scale public health emergency. These (LGUs) need to support WSPs on the road to policies could include adoption of integrated creditworthiness. Summary Executive water resource management (IWRM) for efficient and sustainable planning and use of water On investments: Substantial investments, sector resources and a clear funding policy for the funding, and financing are needed to close the Economic & Policy Dev Recent sector, among others. Institutional and policy current gaps. It will also prepare the sector for reforms should also make the sector attractive for climate change and increased demand. Public much needed private sector investment. resources alone cannot meet those needs. Developments Recent Global Those resources need to be better leveraged 1.1 On incentives: Policy reforms need to be with a more systematic approach to scaling up combined with a push in terms of regulation to the water and sanitation sector financing. The better value and price water. The following may government needs to focus on: (1) working on Output and Demand be considered: (1) prices that accurately reflect priority areas such as cities where almost 50 1.2 the true costs of service provision, operations percent of the population lives, as well as poor and maintenance (O&M) and capital costs, as and lagging areas; (2) using scarce public funds Inflation & Monetary well as the environmental costs and subsidies more efficiently; (3) tapping the private sector; (3) 1.3 that protect the poor; (2) set clear standards adopting a programmed approach to investment and monitor compliance of service levels for rollout; and (5) increasing water storage capacity water service providers (WSPs); and (3) the for water source management. External Sector 1.4 national government and local government units Sector Fiscal 1.5 Employment and Poverty 1.6 Outlook & Risks 10 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward Photo by: MDV Edwards 3.3 References Contents Table of RECENT ECONOMIC AND Summary Executive PART POLICY DEVELOPMENTS Economic & Policy Dev Recent 1.1 Recent Global Developments: 1 Subdued Global Activity Developments Recent Global 1.1 Subdued global demand and a shift in consumption toward services weighed on global trade. Commodity prices have Output and Demand 1.2 eased considerably but remain above pre-pandemic levels, contributing to elevated global inflation. The resulting Inflation & Monetary restrictive financial conditions in addition to a weak external 1.3 environment dampened growth of several EMDEs including the Philippines. External Sector 1.4 Global goods trade slowed in the first half the back of China’s industrial deceleration and (H1) of 2023 while services trade continued decelerating demand in advanced economies, Sector Fiscal 1.5 to strengthen. Global industrial production Agricultural commodity prices have also eased dampened in 2023H1, reflecting subdued global in 2023 amid good production prospects for Employment and activity and a shift in demand from tradable most crops and favorable weather conditions. Poverty 1.6 goods to services (Figure 1). In addition, However, rice prices have surged due to India’s restrictive trade measures from increasing rice export ban implemented in July. Despite geopolitical tensions and inward-looking policies falling commodity prices, they remain above Outlook & hindered trade even further (Figure 2). As a pre-pandemic levels, constraining consumption, Risks 11 result, global supply chain pressures have abated, especially across low-income countries (LICs). and global shipping conditions have improved. However, the anemic demand for goods impeded Global inflation remains elevated, and global outlook Growth 2.1 the growth of several emerging markets and financial conditions remain restrictive. Global developing economies (EMDEs), including the inflation slowed in 2023H1 amid favorable Philippines. Meanwhile, services trade continued base effects from falling commodity prices, Philippines Economic Update December 2023 Poverty and Prosperity Shared to strengthen, driven by the sustained recovery of especially for energy. However, recent core 2.2 global tourism, which benefitted from the easing inflation measures suggest elevated inflationary of pandemic-induced mobility restrictions. expectations. In many EMDEs, including the Challenges Philippines, inflation has either stabilized at high Risk and Policy 2.3 While commodity prices have returned to levels or is increasing, in part due to a prolonged levels recorded before Russia’s invasion of period of high inflation and wage adjustments. Exclusive Growth the cornerstone Water Security Ukraine, they remain elevated (Figure 3). As a result, global financial conditions remain for Resilent & Water Security as Energy prices have eased significantly since their restrictive, prolonging costly external financing peak in 2022Q3 due to lower natural gas and for EMDEs. Some EMDEs have remained electricity consumption in Europe, benefitting resilient, mitigating market concerns by raising net commodity importers like the Philippines. policy rates earlier and more aggressively than 3.1 Oil prices declined to levels recorded before advanced economies. However, vulnerable February 2022, but they have been volatile EMDEs saw their risk premia increase following announcements of oil production substantially amid greater currency depreciation the WSS Gap Understand 3.2 cuts and uncertainties around global growth relative to other EMDEs, further limiting their prospects.1 Meanwhile, metal prices eased on fiscal options. The way foward 3.3 1 The average spot price of Brent crude oil declined from its peak of US$120/bbl in June 2022 to US$74.9/bbl in June 2023, the lowest price recorded in 2023. References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Jul-23 2023 2022 Apr-23 2021 2020 2019 Industrial production Jan-23 Liberalising 2018 Figure 1. Global industrial production dampened in 2023H1. 2017 Figure 2. Restrictive trade measures weighed on trade. Oct-22 2016 Sources: Global Economic Prospects, Global Trade Alert. 2015 Restricting 2014 Goods trade Jul-22 2013 2012 Apr-22 2011 2010 2009 Source: Haver Analytics. Jan-22 900 800 700 600 500 400 300 200 100 0 15 10 5 0 -5 -10 yoy growth, in percent Number of new policy measures 12 Philippines Economic Update December 2023 Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 3. Commodity prices have returned to levels before Russia’s invasion of Ukraine, but Sep-23 May-23 Jan-23 Sep-22 May-22 Metals Jan-22 Sep-21 Energy May-21 Jan-21 Sep-20 Agriculture May-20 Jan-20 Sep-19 May-19 Source: Haver Analytics. Jan-19 remain elevated. Photo by: All themes 230 180 130 80 30 Index, January 2019 = 100 13 Philippines Economic Update December 2023 Contents Table of 1.2 Output and Demand: Outperforming Peers Summary Executive Despite Slower Growth Momentum Economic & Policy Dev Recent The Philippines tracked the growth slowdown in the region but outperformed peers. Growth momentum lost steam as high inflation and tight fiscal and monetary policy Developments Recent Global dampened domestic demand. Meanwhile, exports and manufacturing activities 1.1 slowed due to persistent weakness in global growth. Output and Demand Despite the slower growth momentum, the as weakened external demand dampened 1.2 country outperformed regional peers in manufacturing. The mining industry contributed first three quarters of 2023 (Figure 4). GDP negatively to growth due to lower metal prices growth decreased from 7.7 percent in Q1-Q3 and supply-side cost challenges. Moreover, tight Inflation & Monetary 1.3 2022 to 5.5 percent in Q1-Q3 2023, mirroring the financing conditions weighed on private-sector growth slowdown in the region. On a seasonally construction. Agriculture’s contribution to growth adjusted basis, output continues to exceed remained marginal at 0.1 ppts in Q1-Q3 2023 due External Sector pre-pandemic levels in 2023Q3, but the pace of to weather disturbances, and a drop in fish output 1.4 recovery was disrupted by weaker-than-expected in part due to high input costs and the entry growth in 2023Q2. Tight fiscal and monetary of imported substitutes. Agriculture’s marginal Sector Fiscal policy settings, high inflation, and dissipating contribution to growth continue to indicate 1.5 pent-up demand weighed on domestic activity. enduring structural challenges in the sector, Public spending growth slowed due to ongoing resulting from decades of underinvestment such Employment and fiscal consolidation efforts, compounded as in irrigation and in water security that have Poverty 1.6 by the government’s low budget execution limited productivity growth in the sector. that dragged on 2023Q2 growth. Moreover, weakening external demand amid slowing High inflation, high borrowing costs, and Outlook & global activity and a shift in consumption toward dissipating pent-up demand reduced domestic Risks 14 services undermined merchandise exports and demand in the first three quarters of 2023 manufacturing. Structural challenges such as (Figure 6). Resilient household consumption costly and unreliable power supply, insufficient continued to drive growth, buoyed by steady outlook Growth 2.1 infrastructure, and cumbersome trade regulations remittances, strong household lending, and also contributed to the underperformance of favorable labor market conditions. The reduction merchandise exports and manufacturing. of its contribution to growth to 4.1 ppts in Q1- Philippines Economic Update December 2023 Poverty and Prosperity Shared Q3 2023 (6.3 ppts in Q1-Q3 2022) suggests a 2.2 Services were the primary growth driver in normalization to pre-pandemic contribution to the first three quarters of 2023, followed by growth (4.5 ppts on average in Q1-Q3 2016-2019) Challenges Risk and industry but to a lesser extent (Figure 5). albeit tempered by elevated inflation and easing Policy 2.3 Services were the main growth engine, fueled by pent-up demand. However, the contribution of the recovery of tourism and related industries. fixed investments to growth decreased from 2.5 Exclusive Growth the cornerstone Water Security The contribution of services to growth fell by 1.1 ppts in Q1-Q3 2022 to 1.7 ppts in Q1-Q3 2023 and for Resilent & Water Security as ppts of GDP in Q1-Q3 2023 due to fading pent- still below pre-pandemic average (2.3 ppts in Q1- up demand2 and high inflation, but it remained Q3 2016-2019), as elevated interest rates slowed above the pre-pandemic average (4.2 ppts in bank lending for most production activities, Q1-Q3 2016-2019). Moreover, the ongoing fiscal impacting private construction investments. 3.1 consolidation weighed on public administration Meanwhile, the government’s ongoing fiscal services. Meanwhile, the contribution of industry consolidation dampened the contribution to the WSS Gap to growth was halved to 1.1 ppts in Q1-Q3 2023, growth of government consumption. Understand 3.2 The way foward Growth in household spending related to revenge spending (i.e., the economic phenomenon of increased spending following a period of 3.3 2 challenges) such as recreation, restaurants and hotels, and miscellaneous goods and services slowed in Q1-Q3 2023 compared to Q1-Q3 2022. References Contents Table of Subdued global demand lowered the investment and lackluster export activity resulted Summary Executive contribution to the growth of exports, as in goods imports contraction particularly capital weak domestic demand reduced imports. The goods and raw materials and intermediate goods. contribution to growth of exports fell by 2 ppts This translated to a reversal of its contribution to of GDP in Q1-Q3 2023. Weak external demand growth to 1.5 ppts in Q1-Q3 2023 (-4.0 ppts in Q1- Economic & Policy Dev Recent weighed on electronics and agricultural exports, Q3 2022). Meanwhile, imported services growth resulting in a negative contribution to growth of remained at a double-digit high, suggesting merchandise exports (-0.1 ppts in Q1-Q3 2023). a general shift in consumption toward more Developments Recent Global The contribution of services exports to growth services, including tourism and travel-related 1.1 remained positive thanks to the continued activities. However, imported services recorded recovery of tourism and the resilient information a less negative contribution to growth, indicating technology - business process outsourcing (IT- the impact of overall weakness in domestic Output and Demand BPO) sector, but the overall subdued external demand. As a result, the contribution of total 1.2 demand lowered its contribution to growth by 0.5 imports to growth narrowed from -6.3 ppts in Q1- ppts to 1.8 ppts in Q1-Q3 2023. Weak domestic Q3 2023 to -0.5 ppts in Q1-Q3 2023. Inflation & Monetary 1.3 Figure 4. The unexpected 2023Q2 slowdown weighed on the Philippines’ economic recovery momentum. External Sector 1.4 Seasonally Adjusted Real GDP (2019 Q4 = 100) Sector Fiscal 1.5 120 115 Employment and Poverty 1.6 110 105 Outlook & Risks 15 100 95 outlook Growth 2.1 90 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 85 80 Challenges Risk and 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 Policy 2.3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Indonesia Malaysia Philippines Thailand Vietnam Index Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Source: Haver Analytics. 3.1 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of Figure 5. Services continued to primarily drive growth, supported by industry although to a Summary Executive lesser extent, in Q1-Q3 2023. Production-side contribution to growth Economic & 15 Policy Dev Recent 10 Developments Recent Global 5 1.1 Percentage point 0 Output and Demand 1.2 -5 Agri, Fishery, & Forestry -10 Manufacturing Inflation & Monetary Mining, Constructions, and Utilities 1.3 -15 Services Real GDP growth -20 External Sector 1.4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2020 2021 2022 2023 Sector Fiscal 1.5 Source: Philippine Statistics Authority (PSA). Employment and Poverty Figure 6. Weak domestic activity pressed on private consumption and investment as subdued 1.6 global demand weighed on trade performance in Q1-Q3 2023. Outlook & Expenditure-side contribution to growth Risks 16 30 outlook Growth 2.1 20 Philippines Economic Update December 2023 Poverty and 10 Prosperity Shared 2.2 0 Percent Challenges Risk and Policy 2.3 -10 Household Final Consumption Expenditure Government Consumption Exclusive Growth the cornerstone Water Security for Resilent & Water Security as -20 Capital Formation Exports Imports -30 Statistical discrepancy Real GDP growth 3.1 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 the WSS Gap Understand 3.2 2020 2021 2022 2023 The way foward Source: PSA. 3.3 References Contents Table of 1.3 Inflation and Monetary Policy: Sustained Price Summary Executive Pressures Economic & Policy Dev Recent Inflation remained elevated in the first ten months of 2023. Bangko Sentral ng Pilipinas (BSP) introduced an off-cycle rate hike to anchor inflation expectations as Developments Recent Global headline inflation reversed from its downward trend in August and September. 1.1 Nevertheless, the financial sector remains largely resilient and supportive of the economic recovery. Output and Demand High inflation persisted as elevated import fare and wage increases. As inflation began to 1.2 prices and local supply constraints raised food moderate, the monetary authorities maintained the costs (Figure 7). Headline inflation has remained key policy rate at 6.25 percent for four consecutive Inflation & Monetary above the BSP’s 2–4 percent target, averaging decision meetings. However, to further anchor 1.3 6.4 percent in the first ten months of 2023 (up inflation expectations after inflation increased in from 5.4 percent during the same period in 2022). August and September, the BSP raised the key The country registered the highest year-to-date policy rate by 25 basis points (bps) to 6.5 percent External Sector 1.4 inflation in the Association of Southeast Asian in October during an unscheduled monetary board Nations (ASEAN). Elevated global commodity meeting. Among ASEAN countries, the Philippines’ prices and local food supply constraints raised central bank’s 100 bps cumulative increases in the Sector Fiscal food costs. As a big net importer of rice, increased policy rate in the first ten months of 2023 were 1.5 import prices contributed to a large uptick in only topped by that of its counterpart in Thailand rice inflation, which reached a 14-year high in (150 bps). For example, the monetary authorities Employment and September (17.9 percent, year-on-year). Utilities in Indonesia and Malaysia increased their policy Poverty 1.6 and transport inflation rates were lower in the rate by a total of 50 bps, and the policy rate was first ten months of 2023 as global energy prices reduced by 150 bps in Vietnam. moderated. Core inflation, which excludes volatile Outlook & Risks food and energy items, climbed to 7.0 percent in The banking system remains generally resilient 17 the first ten months of 2023 (3.4 percent during the (Figure 8). Bank profitability continued to improve same period in 2022). The broad-based increase in 2023Q2 as the return-on-equity and return-on- in price pressures suggests a still positive output asset ratios rose to 12.8 percent and 1.6 percent, outlook Growth 2.1 gap. Nevertheless, core inflation continued to respectively, higher than their pre-pandemic decline from its peak in March. To mitigate the levels. The gross non-performing loan (NPL) impact of high inflation on vulnerable sectors, ratio was 3.4 percent in August 2023, higher than Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 the government approved targeted assistance the pre-pandemic level of 2 percent and slightly transfer programs such as the digital food stamp higher than the ASEAN average3, but lower than program to ‘food poor’ families, cash subsidies to levels recorded during the pandemic. Most loan Challenges Risk and farmers, and fuel subsidies to public utility vehicle forbearance measures have expired, and the Policy 2.3 operators. To help contain the surge in rice prices, remaining measures cover only a small part of the the government placed temporary price caps on total bank loan portfolio and are unlikely to have Exclusive Growth the cornerstone Water Security regular rice varieties in September, which was systemic implications. for Resilent & Water Security as complemented with cash support to affected rice retailers. The financial sector’s support for the economic recovery is strong after having fully recovered Amid sustained price pressures, the BSP from the impact of the pandemic. High 3.1 delivered an off-cycle rate hike, raising the key borrowing costs led to broad-based slowdown policy rate to 6.5 percent. The BSP increased in lending to productive activities in August 2023 the WSS Gap the key policy rate by a total of 75 basis points in (5.6 percent year-on-year) driven by the decline in Understand 3.2 2023Q1 to ease price pressures from the demand- credit to manufacturing sector. Mining, financial side and second-round effects from transport and insurance, real estate, professional, public The way foward 3 NPL ratio of the following select ASEAN countries averaged at 2.7 percent as of June 2023: Indonesia Thailand, Malaysia, Brunei, and 3.3 Cambodia. References Contents Table of administration, and entertainment businesses ability of banks to repay deposits and other short- recorded higher borrowing. Among regional peers, term liabilities, is also ample and comparable with Summary Executive the Philippine corporate sector experienced higher regional peers. In August 2023, the loan-to-deposit borrowing costs, with the growth in S&P corporate ratio was 72.4 percent, down from the 80.0 percent bond index of the Philippines only behind that recorded before the pandemic, and liquid assets Economic & Policy Dev Recent of Indonesia. Nevertheless, consumer loans represented 51.5 percent of deposits and short- continued to grow to support the increased cost of term funding, higher than pre-pandemic levels. living due to rising inflation. Funding liquidity, the Developments Recent Global Figure 7. Inflation remained elevated in the first ten months of 2023 due to persistently high food 1.1 costs. Contributi Contribu tion to in on to inflfla tion ati on Output and Demand 1.2 Food and Food non-alcoholic beverages and non-alcoholic beverages 10 10 beverages and Alcoholic beverages Alcoholic tobacco and tobacco tili Uti U ties liti es Inflation & Monetary 8 8 Transport Transport 1.3 non-food Other non-food Other Headline in Headline flation inflati on 6 6 Core in Core fla infl tion ati on point Percentage point External Sector 1.4 4 4 Percentage 2 2 Sector Fiscal 1.5 0 0 Employment and Poverty -2 1.6 -2 Jan Mar Jan Mar May Jul Sep May Jul Nov Jan Sep Nov Mar May Jan Mar May Jul Sep Nov Nov Jan Jul Sep Mar May Jan Mar Jul Sep May Jul Sep 2021 2021 2022 2022 2023 2023 Outlook & Risks 18 Sources: PSA and BSP. Figure 8. Forward-looking indicators of the banking system’s health indicate financial sector outlook Growth resilience. 2.1 20 120 Philippines Economic Update December 2023 Poverty and Prosperity 18 Shared 2.2 100 16 14 80 Challenges 12 Risk and Policy Percent Percent 2.3 10 60 8 40 Exclusive Growth the cornerstone Water Security 6 for Resilent & Water Security as 4 20 2 0 0 Apr-20 Jun-20 Jun-21 Apr-22 Jun-22 Apr-21 Apr-23 Jun-23 Dec-19 Feb-20 Dec-20 Oct-21 Dec-21 Aug-20 Feb-21 Feb-22 Aug-22 Dec-22 Aug-21 Feb-23 Aug-23 Oct-20 Oct-22 3.1 the WSS Gap Understand Gross Non-Performing Loan (NPL) (LHS) Capital adequacy ratio - solo (LHS) 3.2 Tier-1 Capital (LHS) Provision to NPL (RHS) The way foward 3.3 Source: BSP. References Contents Table of 1.4 External Sector: Recovering Tourism and Summary Executive Narrowing Trade Deficit Economic & Policy Dev Recent The current account (CA) deficit narrowed in 2023H1 due to higher services exports linked to the rebound in tourism and a narrowing merchandise trade deficit. Developments Recent Global Meanwhile, net financial inflows rose due to increased national government 1.1 borrowing from abroad. The smaller CA deficit and higher net financial inflows led to a balance-of-payments (BOP) surplus in 2023H1. Output and Demand 1.2 The rebound in tourism and weaker and tight global financial conditions weighed on merchandise imports narrowed the CA deficit investor sentiment. FDI inflows mainly consisted from 6.1 percent of GDP in 2022H1 to 4 percent of investments in manufacturing, real estate, and Inflation & Monetary of GDP in 2023H1. This was driven by the 40.6 financial and insurance. Portfolio investments 1.3 percent growth in net receipts from services trade recorded a marginal net outflow, a reversal from amid the recovery in tourism (409 percent, year- the previous year, due to the increase in residents’ on-year) and robust growth in IT-BPO exports net investments in foreign debt securities. The External Sector 1.4 (9.3 percent, year-on-year). Meanwhile, the narrower CA deficit and higher net financial merchandise trade deficit decreased from 17.7 inflows led to a BOP surplus of 1.1 percent of GDP percent of GDP in 2022H1 to 16 percent of GDP in in 2023H1, a reversal from a deficit of 1.6 percent of Sector Fiscal 1.5 2023H1 (Figure 9). During this period, merchandise GDP in 2022H1 (Figure 10). exports declined amid weaker global demand, but merchandise imports shrank at a faster pace The Philippine peso has slightly weakened Employment and due to lower global oil prices and lower imports since the beginning of 2023. Despite the BOP Poverty 1.6 of raw materials for manufacturing linked to the surplus and the steady inflow of foreign exchange slowdown in domestic growth. More recent data from OFs as well as IT-BPO and tourism-related based on export and import declarations also services exports, the Philippine peso depreciated Outlook & Risks support this trend, with the merchandise trade by 1.9 percent in the first ten months of 2023, amid 19 deficit further narrowing in 2023Q3. Remittances the continued hawkish stance of the US Federal grew at a relatively soft 3.1 percent in 2023H1, Reserve and the recent rise in global oil prices although the amount that overseas Filipinos (OFs) caused by the Organization of the Petroleum outlook Growth 2.1 sent home remained substantial at 6.5 percent of Exporting Countries’ supply cuts. The peso GDP in the same period. generally tracked the movements of its peers, as other regional currencies such as the Indonesian Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Net financial inflows grew from 3.9 percent rupiah, Thai baht, Malaysian ringgit, and to 4.0 percent of GDP between 2022H1 and Vietnamese dong have also weakened since the 2023H1 due to increased government borrowing start of the year (Figure 11). Despite the weakness Challenges Risk and from abroad. The increase was driven by 41.2 of the peso, the BSP reaffirmed its commitment to Policy 2.3 percent growth in other investment inflows, which a market-based approach for the exchange rate was fueled by external borrowing of the national and will only intervene during extreme volatility. Exclusive Growth the cornerstone Water Security government and local banks (67.8 percent, year- In real effective terms, the peso has appreciated for Resilent & Water Security as on-year),4 as well as net withdrawals of foreign by 1.8 percent against the basket of currencies currency and deposits by domestic residents (25 of its major trading partners.5 Meanwhile, gross percent, year-on-year). By contrast, net foreign international reserves grew by 2.6 percent in the direct investment (FDI) inflows declined from 2.5 first nine months of 2023, rising to US$98.7 billion 3.1 percent of GDP in 2022H1 to 1.9 percent of GDP (7.3 months of imports). in 2023H1, as the slowdown in global growth the WSS Gap Understand 3.2 4 National government borrowing includes the US$600 million Philippines Second Financial Sector Reform Development Policy from the International Bank for Reconstruction and Development as well as the US$500 million Competitive and Inclusive Agriculture Development Program (Subprogram 2) and the US$500 million Post-COVID-19 Business and Employment Recovery Program (Subprogram 1) from the The way foward Asian Development bank. 3.3 5 The basket includes the currencies of the following trading partners: Australia, European Union (euro area), U.S., Japan, Hong Kong, Taiwan, Thailand, Indonesia, Malaysia, Singapore, South Korea, China, Saudi Arabia, and the U.A.E. References Contents Table of Figure 9. Imports declined amid the slowdown in domestic growth. Summary Executive Exports and Imports, FOB (Percent of GDP) 50 Economic & Policy Dev 40 Recent 30 Developments Recent Global 20 1.1 10 Output and Demand 0 1.2 -10 Inflation & Monetary 1.3 -20 -30 External Sector Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1.4 2019 2020 2021 2022 2023 Sector Fiscal Trade Balance Exports Imports 1.5 Source: PSA. Note: The graph is based on exports and imports statistics from PSA (Free on board value), which can be Employment and different from trade data based on the BOP and national income accounts. FOB values are computed based Poverty 1.6 on export and import declarations collected by the Bureau of Customs. Figure 10. The BOP surplus was driven by the narrower CA deficit and higher financial inflows. Outlook & Risks 20 Balance of Payments Components 6.0 outlook Growth 2.1 4.0 Philippines Economic Update December 2023 Poverty and Prosperity 2.0 Shared 2.2 Percent of GDP 0.0 Challenges -2.0 Risk and Policy 2.3 -4.0 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as -6.0 -8.0 H1 2019 H1 2020 H1 2021 H1 2022 H1 2023 Current Account (export Financial Account Capital Account 3.1 Net Unclassified Items Overall BOP Position the WSS Gap Understand 3.2 Source: BSP. The way foward 3.3 References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 11. The Philippine peso, along with the currencies of regional peers, has depreciated Oct-23 Vietnam Sep-23 Aug-23 Thailand Jul-23 January 2023 = 100, end of period Jun-23 Philippines May-23 Sources: Haver Analytics, various central banks. Apr-23 Malaysia Mar-23 since the beginning of 2023. Feb-23 Photo by: mayura benjarattanapakee Indonesia Jan-23 103 101 99 97 95 93 91 89 87 85 21 Philippines Economic Update December 2023 Contents Table of 1.5 Fiscal Sector: Performing in Line with Summary Executive Consolidation Targets Economic & Policy Dev Recent The decline in public spending amid lower allotments to LGUs and national government disbursements narrowed the fiscal deficit in Q1-Q3 2023. As a result, Developments Recent Global the national government debt slightly eased to 60.2 percent of GDP by end- 1.1 September 2023. In line with its fiscal consolidation agenda, Output and the reduction in BIR collection is expected to be Demand 1.2 the government has reduced public spending, temporary. Meanwhile, import duties collected narrowing the fiscal deficit (Figure 12). by the Bureau of Customs slightly declined to 3.8 Public revenues remained above the target of percent of GDP in Q1-Q3 2023 (4.1 percent in Q1- Inflation & Monetary the government’s program at 16.5 percent of Q3 2022) due to the drop in goods imports (goods 1.3 GDP in Q1-Q3 2023 despite a reduction in tax imports contracted by 10.2 percent, year-on-year, collection, as non-tax revenues exceeded the in Q1-Q3 2023, a reversal from 24.7 percent growth program (Table 1). By contrast, public spending in Q1-Q3 2022). External Sector 1.4 totaled 22.2 percent of GDP in Q1-Q3 2023 (below planned expenditure), owing to the ongoing fiscal Public spending declined from 23.6 percent consolidation, lower national tax allotments (NTAs) to 22.2 percent of GDP between Q1-Q3 2022 Sector Fiscal 1.5 to Local Government Units (LGUs),6 and delays in and Q1-Q3 2023 due to lower allotments to budget execution. As a result, the fiscal deficit in LGUs and disbursements falling short of target. Employment and the first three quarters remained narrower than the National tax transfers to LGUs fell by 1.3 ppts to Poverty target for 2023. In line with the government’s fiscal 4.0 percent of GDP in Q1-Q3 2023 , due to the 1.6 consolidation program, the fiscal deficit fell from lower tax revenue base in 2020 that resulted 6.5 percent of GDP in Q1-Q3 2022 to 5.7 percent from the COVID-19 pandemic.8 Meanwhile, the of GDP in Q1-Q3 2023. Meanwhile, the national decline in public spending was also driven by the Outlook & Risks government debt slightly eased to 60.2 percent of implementation of the fiscal consolidation program 22 GDP as of end-September 2023 (Figure 13). Debt, and current operating expenditure falling short of mostly long-term (78.9 percent), domestic (68.2 the programmed target. Maintenance spending outlook percent), and peso-denominated (68.0 percent), and subsidies to government corporations Growth 2.1 remains sustainable. accounted for the largest share of the shortfall in recurrent spending due to delays in budget Philippines Economic Update December 2023 Poverty and Revenue collection marginally declined due execution as a result of implementation challenges Prosperity Shared 2.2 to slower GDP growth in Q1-Q3 2023. Revenue and delays due to procurement, billing, and collection declined by 0.6 ppts of GDP, mostly payment. However, the government continued due to the marginal decline in tax revenues from to support expansionary infrastructure spending, Challenges Risk and 15.3 percent of GDP in Q1-Q3 2022 to 14.7 percent as spending on capital outlays increased by 12.3 Policy 2.3 of GDP in the same period in 2023. Bureau of percent, year-on-year, in the first three quarters Internal Revenue (BIR) collection fell from 11.1 of the year. To further improve disbursement Exclusive Growth the cornerstone Water Security percent in Q1-Q3 2022 to 10.8 percent of GDP performance and facilitate budget execution for for Resilent & Water Security as in Q1-Q3 2023 due to a contraction in excise the rest of the year, the Department of Budget tax collections, and as value-added tax (VAT) and Management (DBM) has required agencies collection payments shifted from monthly to to implement catch-up plans to help attain the quarterly as mandated by the 2019 TRAIN Law.7 disbursement target of 21.3 percent of GDP for 3.1 As the deadline to make the shift was in early 2023, 2023. the WSS Gap Understand 3.2 6 The 2023 national tax allotment to LGUs was determined using tax collections in 2020, which saw revenues plummet due to the adverse impact of the COVID-19 pandemic on the economy. The way foward 3.3 7 The Q3 2023 VAT payments deadline to the BIR is October 2023. 8 National tax allotments to LGUs are computed based on tax collections three years prior to the current calendar year. References Contents Table of Figure 12. Lower revenues and expenditures narrowed the fiscal deficit. Summary Executive 25 20 Economic & Policy Dev Recent 15 Percent of GDP Developments Recent Global 10 1.1 5 0 Output and Demand 1.2 -5 Inflation & Monetary -10 1.3 2019 2020 2021 2022 Q1-Q3 2022 Q1-Q3 2023 External Sector 1.4 Revenues Expenditures Fiscal Balance Tax Revenues NG Disbursements Sector Fiscal 1.5 Source: Bureau of the Treasury (BTr). Employment and Poverty 1.6 Figure 13. Public debt slightly eased while the fiscal deficit narrowed. Outlook & 70 Risks 23 60.9 60.2 60 outlook Growth 2.1 50 Philippines Economic Update December 2023 Poverty and Prosperity Percent of GDP Shared 2.2 40 Challenges 30 Risk and Policy 2.3 20 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 10 0 3.1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q3 2023 the WSS Gap Understand Domestic External 3.2 Source: BTr. The way foward 3.3 References Contents Table of Table 1. Fiscal Performance, Q1-Q3 2023. Summary Executive Q1-Q3 2023 Particulars Program Actual Difference Percent Economic & Policy Dev Recent In percent of GDP, unless otherwise stated. REVENUES 16.0 16.5 0.5 3.0 Developments Recent Global Tax Revenue 15.1 14.7 -0.3 -2.1 1.1 Bureau of Internal Revenue 11.2 10.8 -0.4 -3.9 Bureau of Customs 3.7 3.8 0.1 2.5 Output and Demand Other Offices 0.1 0.1 0.0 26.5 1.2 Non-Tax Revenue 0.9 1.7 0.8 85.2 Bureau of Treasury 0.3 0.9 0.6 194.2 Inflation & Monetary 1.3 Other Offices 0.6 0.8 0.2 30.0 EXPENDITURES 22.4 22.2 -0.2 -1.1 External Sector 1.4 Current Operating Expenditures 17.5 17.0 -0.5 -2.9 Personnel Services 6.2 6.0 -0.2 -3.2 Maintenance and Other Operating Exp. 3.8 4.0 0.2 4.4 Sector Fiscal 1.5 Subsidy 0.8 1.1 0.3 36.7 Employment and Allotment to LGUs 4.0 3.1 -0.9 -21.9 Poverty 1.6 Interest Payments 2.6 2.8 0.2 8.3 Tax Expenditure 0.2 0.1 -0.1 -64.8 Outlook & Capital Outlays 5.9 5.3 -0.7 -11.1 Risks 24 Infrastructure/Other Capital Outlays 4.6 4.3 -0.3 -7.1 Net Lending 0.1 0.1 0.0 13.4 outlook Growth 2.1 Operating exp. 19.6 19.5 -0.1 -0.6 Interest Payments 2.8 2.7 -0.1 -4.0 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 SURPLUS/ (DEFICIT) -6.4 -5.7 0.7 -11.1 Sources: BTr and DBM. Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward 3.3 Photo by: Walter Eric Sy References Contents Table of 1.6 Employment and Poverty: Slowing Job Creation Summary Executive With slowing economic recovery, the labor market experienced a reduction in labor Economic & Policy Dev force participation and net job loss, particularly for women and youth. Recent The unemployment rate has declined in recent peak of rice planting and the start of the corn Developments Recent Global months despite the continued decline in labor harvesting season.12 Similarly, industrial activities 1.1 force participation. The labor force participation picked up, with manufacturing and construction rate (LFPR) decreased from 66 percent in March adding almost 0.5 million jobs during the same Output and 2023 to 64.7 percent in August 2023, driven by period. Despite the net job losses, the number Demand 1.2 fewer women participating in the labor market of unemployed Filipinos still dropped by 200 (from 55.9 to 52.9 percent in the same period) thousand. This is indicative of movements out of (Figure 14). Increasing women’s LFPR is one of the labor force or within the labor force (i.e., from Inflation & Monetary key targets under the Philippine Development employed to unemployed and vice versa). 1.3 Plan (PDP) 2023–2028, as women remain at a disadvantage in emerging sectors (e.g., digital Low-quality jobs continue to dominate the labor technology).9 Women’s labor supply decisions market. The share of elementary occupations External Sector 1.4 are also affected by household and childcare associated with low and irregular pay remained responsibilities.10 By contrast, men’s LFPR has been high at 30.1 percent of total employment in August consistent at around 76 percent. While the national 2023, relatively unchanged from 29.9 percent in Sector Fiscal 1.5 unemployment rate declined from 4.7 percent in March 2023. Meanwhile, the number of technical March to 4.4 percent in August 2023 (Figure 15), occupations, including managers, professionals, Employment and youth unemployment reached 14 percent in July, technicians, and associate professionals, declined. Poverty the highest level recorded so far in 2023. The underemployment rate slightly increased from 1.6 11.2 to 11.7 percent, indicating that more workers Between March and August 2023, there were express a desire for more hours of work or an significant job losses in the services sector, additional job amid net job losses across sectors Outlook & Risks slightly offset by jobs added by agriculture and persistently high inflation. The share of wage 25 and industry. Over the six-month period, net job and salary workers among the employed slipped losses totaled about half a million, a substantial back to 62.6 percent in August after temporarily outlook shift from the net creation of nearly 1 million reaching an annual peak of 67.2 percent in July Growth 2.1 jobs during the previous six-month period. The 2023. The trend of fewer wage and salary workers services sector, particularly wholesale and retail, has been observed since before the pandemic Philippines Economic Update December 2023 Poverty and public administration and defense, and other (January 2020). The share of self-employed (own Prosperity Shared 2.2 service activities, contributed to the decline in the account) and unpaid workers remained at around net number of jobs, amid increasing commodity 27 percent and 8 percent, respectively, during prices, a slowdown in government spending, the same period,13 indicating the continuous Challenges Risk and and weather-related disruptions.11 Nevertheless, dependence of workers on informal and low- Policy 2.3 the agriculture sector absorbed about 378,000 productivity jobs. jobs likely due to seasonal effects such as the Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 9 L. Desiderio, 2023, Government targets more women in labor force, April 2, Available online: https://www.philstar.com/ 3.1 business/2023/04/02/2256136/government-targets-more-women-labor-force 10 World Bank, 2023, Philippine Jobs Report: Shaping a Better Future for the Filipino Workforce. Available online: https://www.worldbank. org/en/country/philippines/publication/philippine-jobs-report-shaping-a-better-future-for-the-filipino-workforce the WSS Gap Understand 11 Department of Finance, 2023, Joint Statement by the Economic Managers on the Philippine Economic Performance for the Second 3.2 Quarter of 2023, August 10, Available online: https://www.dof.gov.ph/joint-statement-by-the-economic-managers-on-the-philippine- economic-performance-for-the-second-quarter-of-2023/ 12 Department of Finance, 2023, Diokno: Labor market remains strong and resilient as unemployment declines further to 4.4% in August, October 6, Available online: https://www.dof.gov.ph/diokno-labor-market-remains-strong-and-resilient-as-unemployment-declines-further- The way foward to-4-4-in-august/ 3.3 13 R. Rivas, 2023, Unemployment rate increases to 4.5% in June 2023, unpaid workers still rising, August 9, Available online: https://www. rappler.com/business/unemployment-rate-philippines-june-2023/ References Contents Table of Figure 14. Female labor force participation exhibited a downward trend … Summary Executive 1.2 Economic & Policy Dev Recent 1.1 Developments Recent Global 1.1 Percent 1 Output and Demand 1.2 0.9 Inflation & Monetary 1.3 0.8 External Sector 1.4 Jan July Jan July Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 2019 2020 2021 2022 2023 Sector Fiscal 1.5 MALE FEMALE Employment and Poverty Figure 15. … while the unemployment rate gradually decreased. 1.6 25 Outlook & Risks 26 20 outlook Growth 2.1 15 Percent Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 10 Challenges Risk and Policy 2.3 5 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 0 July Sep Apr Feb Apr May Aug Sep Nov Jan Feb Mar Apr May Aug Nov Jan Feb Mar Apr May Jan Jan Mar Aug Jul Jun Jul Oct Jun Dec Oct Dec Jun Jul Oct 2020 2021 2022 2023 3.1 Unemployment Rate Underemployment Rate the WSS Gap Understand 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 2020=1). The way foward 3.3 References Contents Table of While households remain optimistic about conveyed pessimism about their current Summary Executive their incomes, they also face financial financial situation, as the family situation pressures. Results from the 2023 Third index worsened from -8.7 to -12.7 in the Quarter Consumer Expectations Survey14 same period. This was likely due to lingering Economic & show that households’ perceptions of their pressures from rising food and fuel prices. Policy Dev Recent current welfare status continued to improve Survey results also show that higher-income (Figure 16). The index of family income households are recovering faster than other Developments Recent Global improved from -4.8 first quarter this year households in terms of households’ financial 1.1 to -2.5 in the third quarter, supported by (from 1.4 in the first quarter to 7.4 in the improving labor and employment conditions third quarter) and income (from 4.9 to 3.5) as the economy continued to recover, as well situation as estimates for these indices are Output and Demand as by more household members contributing now net positive compared to net negative 1.2 financially. However, more households estimates for the lower income groups. Inflation & Monetary Figure 16. Households’ perception of their welfare continues to improve. 1.3 10 External Sector 1.4 0 Sector Fiscal 1.5 -10 Employment and -20 Poverty 1.6 -30 Outlook & Risks -40 27 -50 outlook Growth 2.1 -60 Philippines Economic Update December 2023 Poverty and Prosperity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Shared 2.2 2018 2019 2020 2021 2022 2023 Family financial situation Family income Challenges Risk and Policy 2.3 Source: Third Quarter 2023 Consumer Expectations Survey, BSP. Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward 3.3 14 A quarterly survey by the BSP of a random sample of about 5,000 households in the Philippines. Survey results provide advance indication of consumer sentiments for the current and next quarters as well as the next 12 selected economic indicators. References Contents Table of OUTLOOK AND RISKS Summary Executive PART Economic & Policy Dev Recent 2.1 Growth Outlook 2 Developments Recent Global The country’s medium-term prospects are expected to 1.1 improve as the global economy rebounds, although growth in 2023 will continue to be dampened by persistently high Output and Demand inflation, subdued trade activity, tight financial conditions, 1.2 and geopolitical uncertainties as well as restrictive trade policies. A gradual decline in inflation beginning in 2024, Inflation & Monetary 1.3 along with continued public investment, is expected to help fuel growth over the forecast horizon. External Sector 1.4 Global growth is expected to rebound slowly while lower inflation, a healthy labor market, and over the forecast horizon as inflation gradually an expected increase in remittances over the moderates and the dampening effect of tight holidays will support robust private consumption Sector Fiscal 1.5 monetary policy on growth fades. Global growth. While the high-interest environment growth in 2023 is projected to decline to 2.1 has not slowed consumer borrowing, lending Employment and percent, before making a modest rebound to to the private sector continues to moderate, Poverty 2.4 percent in 2024. Widespread weaknesses contributing to softer private investment growth. 1.6 in economic activity in 2023 will be especially Services are expected to drive growth in 2023 pronounced in advanced economies, mainly due to the ongoing recovery of the tourism sector Outlook & driven in the short term by a combination of and the consistent performance of the IT-BPO Risks 28 elevated inflation and global monetary policy industry, which is likely to spur job creation, tightening. The impact of inflation and monetary increase household incomes, and benefit tightening is expected to peak this year, before consumption and tourism-adjacent industries outlook Growth 2.1 gradually dissipating—although several upside in the services sector. However, weak external risks to inflation remain. As a result, global trade demand and restrictive trade policies will dampen growth is expected to be hampered in 2023 manufacturing growth, while low productivity Philippines Economic Update December 2023 Poverty and Prosperity Shared by subdued global demand and the continued and natural disasters will continue to hinder 2.2 shift of consumption toward services. As global agricultural growth. consumption returns to its pre-pandemic mix Challenges between goods and services, trade is projected to Nevertheless, an improvement in domestic Risk and Policy 2.3 grow by 2.8 percent in 2024, only slightly stronger demand is expected to drive a modest than GDP growth. Meanwhile, fiscal policy is increase in growth to an average of 5.8 percent Exclusive Growth the cornerstone expected to have a limited net impact on global in 2024-25 (Figure 17). On the expenditure Water Security for Resilent & Water Security as growth over the forecast horizon, with modest side, private consumption is expected to remain fiscal tightening in EMDEs generally offsetting the country’s main growth engine. Private support in advanced economies. consumption growth is projected to increase to an average of 6.1 percent in 2024-25, supported 3.1 The 2023 growth outlook for the Philippines by a robust labor market, steady remittance remains unchanged from the October 2023 growth, and an expected return of inflation East Asia Pacific (EAP) Economic Update. to within the BSP’s target range in 2024-25. the WSS Gap Understand The economy is projected to grow by 5.6 percent However, a continuation of high-interest rates 3.2 in 2023, following the growth rebound in 2023Q3 may cap the growth potential of consumption, and a pickup in government spending. Growth discourage borrowing, and further postpone The way foward is expected to increase further in Q4 2023 as household spending. Meanwhile, an increase in 3.3 government spending continues to ramp up, fiscal transfers to LGUs due to a higher revenue References Contents Table of base, along with a modest increase in the growth Act and to the implementation rules and of current spending, will accelerate government regulations of the Renewable Energy Act, the Summary Executive consumption growth in 2024-25. Retail Trade Liberalization Act, and the Foreign Investment Act, are expected to encourage Investment growth is expected to slow in private investment in key sectors and strengthen Economic & Policy Dev Recent 2023, before picking up in 2024-25, in part the Philippines as an investment destination. due to recent investment reforms and a Effective implementation of pro-investment commitment to public investment despite reforms in renewable energy and sectors like Developments Recent Global ongoing fiscal consolidation. Public investment trade, transport, and telecommunications 1.1 will remain supportive of growth over the would generate economy-wide productivity medium term despite fiscal consolidation, with gains, estimated at 3.2 percent on average. public investment expected to reach above In addition, the enactment of the new Public- Output and Demand 5.0 percent of GDP in 2023–25. Moreover, the Private Partnership Code is expected to further 1.2 government remains committed to addressing strengthen private sector participation in the climate change impacts as climate expenditures government’s infrastructure investment agenda. Inflation & Monetary in both adaptation and mitigation are expected 1.3 to increase to 2.0 percent of GDP in 2024. On the supply side, the recovery of services In addition, an increase in fiscal transfers, will continue to drive growth, supported by beginning in 2024, is expected to support public the industry sector. Services will remain the External Sector 1.4 investment growth at the local government main growth engine in 2023–25 as the recovery level. While tight financial conditions, a of household incomes and a healthy labor market subdued global environment, and rising global continue to support domestic demand. Moreover, Sector Fiscal uncertainties amid geopolitical tensions, are while the tourism industry is on track to beat 1.5 expected to weigh on private investment growth the tourist arrival target in 2023, there are still in 2023, the implementation of key reforms significantly fewer tourists in the Philippines than Employment and Poverty and improving business sentiment will buoy before the pandemic, suggesting ample space for 1.6 private investment over the medium term. In a full recovery. The tourism industry’s recovery particular, the implementation of key reforms, would benefit from the continued increase in such as the amendments to the Public Services global tourism demand, resulting in stronger Outlook & Risks 29 Table 2. Economic Indicators for the Baseline Projections. outlook Growth 2020 2021 2022 2023f 2024f 2025f 2.1 Real GDP growth, at constant market prices -9.5 5.7 7.6 5.6 5.8 5.8 Private Consumption -5.8 3.1 6.0 4.1 4.3 4.5 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Government Consumption 1.3 1.1 0.7 0.4 0.4 0.5 Capital Formation -9.1 3.9 3.0 1.0 1.9 2.2 Challenges Risk and Exports, Goods and Services -4.7 2.2 3.0 0.9 1.2 1.3 Policy 2.3 Imports, Goods and Services -8.7 -4.5 -5.2 -0.8 -2.1 -2.7 Exclusive Growth the cornerstone Water Security Real GDP growth, at constat factor prices -9.5 5.7 7.6 5.6 5.8 5.8 for Resilent & Water Security as Agriculture 0.0 0.0 0.0 0.0 0.1 0.1 Industry -4.0 2.5 2.0 1.2 1.7 1.8 Services -5.5 3.3 5.6 4.3 3.9 4.0 3.1 Headline inflation 2.4 3.9 5.8 5.9 3.6 3.0 the WSS Gap Understand National government balance (% of GDP) -7.6 -8.6 -7.3 -6.0 -5.1 -4.1 3.2 National government debt (% of GDP) 54.6 60.4 60.9 60.6 60.5 60.2 Current account balance (% of GDP) 3.2 -1.5 -4.5 -2.9 -2.7 -3.0 The way foward 3.3 Sources: PSA, BTr, and World Bank staff estimates. References Contents Table of growth in tourism-adjacent industries such government remains committed to addressing as transportation, accommodation and food climate change impacts as climate expenditures Summary Executive services, and retail trade services. In addition, in both adaptation and mitigation are expected the country’s IT-BPO industry is likely to remain to increase to 2.0 percent of GDP in 2024. as among the sector’s main growth drivers, which global growth and trade activity improves. Economic & Policy Dev Recent in turn will benefit real estate services and the In addition, the recovery of services exports property sector. Meanwhile, a modest increase due to higher tourism demand and the strong in global trade growth, along with increased performance of the IT-BPO sector will help Developments Recent Global growth in the EAP region, would contribute narrow the current-account deficit over the 1.1 to stronger manufacturing growth in 2024-25. forecast horizon. Moreover, stable growth in The public investment agenda is also expected remittances from overseas Filipinos will continue to buoy construction growth and contribute to to support the current-account balance. As a Output and Demand rising industry growth over the medium term. result, the current-account deficit is projected 1.2 However, agricultural growth is projected to to narrow to 2.9 percent of GDP in 2023, before remain sluggish amid structural issues affecting narrowing further to an average of 2.8 percent Inflation & Monetary the sector’s productivity and the country’s in 2024-25 as external demand improves. The 1.3 vulnerability to weather-related events. deficit is expected to be financed primarily by net FDI inflows as well as net portfolio inflows While headline inflation is expected to remain and international bond issuances. External Sector 1.4 elevated in 2023, it is projected to decline to within the target range in 2024. Headline The continuation of fiscal consolidation inflation is expected to increase slightly from 5.8 is expected to reduce the fiscal deficit in Sector Fiscal percent in 2022 to 5.9 percent in 2023 due to an 2023–25 (Figure 18). Although the fiscal deficit 1.5 increase in global commodity prices in recent is projected to rise in Q4 2023, the increase will months, particularly for fuel and food, most not derail the government’s consolidation target Employment and Poverty notably for rice, which is a staple commodity for the year, as the deficit is currently 11 percent 1.6 in the country. However, headline inflation is below the programmed target. Moving forward, projected to fall to 3.6 percent in 2024 due to the fiscal deficit is projected to fall from 6.0 stable global commodity prices and an improved percent of GDP in 2023 to 4.1 percent in 2025, Outlook & Risks food supply, as well as in part due to high base supported by the continued economic recovery 30 effects over the past two years. Following a and the enactment of fiscal consolidation year and a half of tight monetary policy, the measures as outlined in the government’s outlook Growth return of headline inflation to within the target medium term fiscal framework (MTFF). Over 2.1 range in 2024Q1 is expected to keep the policy the forecast horizon, efforts to reduce the fiscal rate steady in the short term. Concerns over a deficit will be driven by policy measures to cut Philippines Economic Update December 2023 Poverty and possible resurgence of high inflation and tight public spending. To reduce public spending, the Prosperity Shared 2.2 monetary policies in advanced economies will authorities will focus on cutting current spending continue to weigh on the BSP’s decision to by over 1 ppt of GDP by 2025. Despite ongoing reduce interest rates. fiscal consolidation, the government remains Challenges Risk and Policy committed to a budget that supports its inclusive 2.3 The current-account deficit is projected growth agenda as social and economic services to fall over the forecast horizon, led by the will continue to receive the largest share of the Exclusive Growth the cornerstone Water Security for Resilent & Water Security as continued recovery in services exports, lower budget (Box 1). Meanwhile, public capital outlays commodity prices, and stable remittance are expected to remain above 5.0 percent of inflows. Merchandise exports are expected GDP in 2023–25, supported by increased private to moderate in 2023 due to the slowdown sector participation through public-private in global trade and the shift of consumption partnerships. In addition, robust revenue growth 3.1 toward services. External demand prospects is also expected to help narrow the fiscal deficit. are set to improve in 2023–25. Moreover, the Expenditure cuts will be complemented by the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of increasing revenues over the forecast horizon pre-pandemic levels. Currently, the country’s due to the continued economic recovery and as financial system may still be relatively deep Summary Executive the government strengthens revenue collection enough to accommodate the large financing through a series of tax policy and administration needs, although excess liquidity may diminish measures to help sustainably finance its inclusive over the medium term (Box 2). However, debt is Economic & Policy Dev Recent growth agenda.15 set to remain sustainable, as the debt-to-GDP ratio is expected to revert to a downward Both fiscal consolidation and the growth trajectory beginning in 2023 due to fiscal Developments Recent Global recovery will likely keep debt levels consolidation and robust growth. Moreover, the 1.1 sustainable over the medium term.16 The composition of debt is expected to remain stable, national government debt ratio is projected with low shares of short-term debt and foreign- to decline over the forecast horizon, reaching currency-denominated debt, in line with the Output and Demand around 60 percent of GDP by 2025, although government’s debt management strategy. 1.2 financing needs remain elevated compared to Inflation & Monetary 1.3 Figure 17. Growth prospects remain positive over the medium term. External Sector 1.4 Forecast 8.0 7.0 Sector Fiscal 1.5 6.0 Employment and 5.0 Poverty 1.6 4.0 3.0 Outlook & Risks 2.0 31 1.0 outlook Growth 0.0 2.1 Philippines Economic Update December 2023 Poverty and Actual GDP growth Prosperity Shared 2.2 June 2023 Forecast December 2023 Forecast Challenges Risk and Policy Sources: PSA, and World Bank staff calculations. 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 15 The proposed tax reform bills include: (i) the Passive Income and Financial Intermediary Taxation Act; (ii) a value-added tax on digital service providers; (iii) excise taxes on single-use plastics, pre-mixed alcohols, and sweetened beverages and junk food; (iv) a new mining fiscal regime; and (v) a motor vehicle road user tax. 16 In the debt sustainability analysis, national government debt comprises outstanding debt from domestic and external sources. Domestic The way foward borrowings are mainly in the form of Treasury bonds and Treasury bills, while external borrowings consist of bilateral and multilateral loans 3.3 as well as commercial bonds such as U.S. dollar bonds, Eurobonds, Yen bonds, and peso-denominated bonds. References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 18. Despite consolidation, public investment is projected to remain above 5.0 percent of 7 6 5 4 3 2 1 0 Infrastructure program (RHS) 2025 2024 2023 Public expenditure 2022 Sources: BTr, and World Bank staff calculations. 2021 Fiscal deficit 2020 -5 -10 -15 5 0 25 30 20 15 10 Percent of GDP GDP. 32 Philippines Economic Update December 2023 Contents Table of Box 1. The Proposed 2024 Budget for the Philippine Summary Executive National Government Economic & Policy Dev Recent The proposed 2024 national budget (21.7 prosperity, the Department of Education percent of GDP) represents only a small receives the largest share of the 2024 budget year-on-year increase (21.6 percent of GDP at 16 percent. Other social services also Developments Recent Global in 2023)17, as the government aims to make receive substantial allocations, as reflected 1.1 the economy future-proof and sustainable in the budget shares of the Department of while supporting its medium-term fiscal Health (5.3 percent) and the Department of Output and consolidation agenda. The budget supports Social Welfare and Development (3.6 percent). Demand 1.2 the implementation of the 2023–2028 PDP, Meanwhile, spending on infrastructure remains which focuses on infrastructure, education, a key government priority under the Build, and health spending. While the budget is Better, More infrastructure program. The Inflation & Monetary consistent with the government’s medium- budget of the Department of Public Works and 1.3 term fiscal consolidation agenda, it maintains Highways is expected to decline, but it still spending above 20 percent of GDP to support accounts for 14.3 percent of the 2024 budget. External the economic recovery and long-term economic To support the implementation of major railway, Sector 1.4 growth. To achieve both goals, the government airport, and road programs, the Department commits to improving public spending efficiency, of Transportation’s budget has doubled to 3.7 as reflected by the implementation of the percent of the 2024 budget. In line with the Sector Fiscal 1.5 Integrated Financial Management Information government’s focus on improving food security, System to streamline cash management and the budget of the Department of Agriculture Employment and transactions.18 is set to rise by 4.5 percent to account for 3.1 Poverty percent of the 2024 budget. 1.6 Social and economic services continue to receive the largest budget allocations in 2024 Maintenance and operating expenditures Outlook & (Figure 19). The government’s socioeconomic account for the biggest share of the 2024 Risks 33 agenda focuses on social spending, accounting budget, while spending on wages and for 37.9 percent of the budget and totaling benefits of government workers grows PHP2.2 trillion (8.2 percent of GDP). Spending the fastest. Maintenance and operating outlook Growth on social services will continue to prioritize expenditures, which represent spending to 2.1 programs on education, social security, and support the operations of government agencies, health. Meanwhile, economic services make total 8.1 percent of GDP—slightly down from 8.3 Philippines Economic Update December 2023 Poverty and Prosperity Shared up 29.6 percent of the budget, equivalent to percent of GDP in 2023. By contrast, spending 2.2 PHP1.7 trillion (6.4 percent of GDP). Spending on on personnel services increases from 6.1 percent economic services will be primarily related to the of GDP in 2023 to 6.4 percent of GDP in 2024, government’s Build Better More infrastructure driven by higher spending on benefits and Challenges Risk and Policy 2.3 program, with a focus on transportation, pensions of civilian and military personnel. communications, and agriculture. Compared Meanwhile, the government’s commitment to Exclusive Growth the cornerstone to the 2023 budget, the combined spending on infrastructure development is reflected in the Water Security for Resilent & Water Security as social and economic services in the 2024 budget 5.9 percent growth in capital outlays. However, declines by 0.2 percent of GDP amid the fiscal spending on capital outlays is projected to be consolidation agenda, while spending on general outpaced by GDP growth, resulting in a slight public services increases by 0.1 percent of GDP. decline of spending as a share of GDP from 4.8 3.1 percent in the 2023 budget to 4.7 percent in The budgets of line ministries reflect the 2024. Transfers to local government units will government’s socioeconomic agenda. remain unchanged at 2.9 percent of GDP. the WSS Gap Understand Amid the government’s push to boost shared 3.2 The way foward 17 Obligation basis 3.3 18 Executive Order No. 29 was signed by President Marcos on June 1, 2023. References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 19. National Government Expenditure by Sector, 2022–2024 (Obligation Basis). Debt-service-interest payments 2024 21.7 Defense 2023 21.6 Social Services Net Lending General Public Services 2022 23.5 Economic Services Photo by: junpinzon Source: DBM. 25 20 15 10 5 0 Percent of GDP 34 Philippines Economic Update December 2023 Contents Table of Box 2. The Capacity of the Philippines’ Financial Summary Executive Markets to Finance Government Fiscal Needs Economic & Policy Dev While the government is gradually narrowing Analysis of money supply numbers confirms Recent the fiscal deficit, it continues facing large these observations, as the use of BSP facilities financing needs, which could crowd out to park funds has fallen from its peak of 11.9 private investment. As a result of prioritizing percent of GDP in Q2 2021 to 6.7 percent of GDP Developments Recent Global social spending and COVID-19 support, the in Q2 2023. 1.1 fiscal deficit rose from an average of 2.0 percent of GDP in 2011–19 to 7.8 percent of GDP in Increased competition for funds between Output and 2020–22, expanding national government the public sector and private sector may Demand 1.2 debt to 60.9 percent of GDP in 2022 (up from slow down the recovery. Bank deposits (ODC 39.6 percent in 2019), the highest level since liabilities) are returning from their pandemic 2005 (Table 3). The government committed to peak to the pre-pandemic trend, which means Inflation & Monetary reducing the fiscal deficit to 3 percent by 2028 that the amount of funds that the domestic 1.3 by adopting an extended Medium-Term Fiscal banking sector can lend is declining relative Framework (MTFF) through 2028. However, to GDP (Figure 21). Once bank lending to the External with an average deficit of 4.2 percent of GDP private sector growth starts to pick up again, Sector 1.4 in 2023–28, this leads to public gross financing this will lead to increased competition for these needs at least three-times as high as in 2019. funds. This risks crowding out lending to the Moreover, to mitigate foreign exchange risk, private sector and may slow down private Sector Fiscal 1.5 at least 75 percent of it will come from the investment. domestic financial market. This could potentially Employment and crowd out financing for private investments To avoid this scenario, it is important to stay Poverty when private sector demand for credit recovers on track with the fiscal consolidation, to use 1.6 to its pre-pandemic trend. the available tools to ensure liquidity, and to develop the financial markets and provide Outlook & While there is currently ample liquidity in more financing options for firms. Continued Risks 35 domestic capital and financial markets, it has implementation of the medium-term fiscal been decreasing. At the start of the pandemic, consolidation plan will reduce fiscal financing lending to the public sector further increased as needs. It would be preferable to reduce the outlook Growth the government relied on the domestic market to deficit faster than the MTFF targets through 2.1 finance its fiscal needs, which was facilitated by well-designed tax reforms that minimize the excess availability of funds, which banks parking impact on growth and poverty. To ensure ample Philippines Economic Update December 2023 Poverty and Prosperity Shared a record amount of funds at the BSP (Figure market liquidity in the short term, the authorities 2.2 20). The interbank call rate has hovered close to may consider lowering the reserve requirements the lower bound of the policy rate corridor (BSP for banks, which remain the highest in the overnight deposit rate) between 2020 and early region, which would increase lending capacity, Challenges Risk and Policy 2.3 2023 suggesting ample liquidity in the market if the conditions allow. In the medium term, at the time. However, it has recently trended it will be important to further develop the Exclusive Growth the cornerstone towards to center of the corridor showing financial markets to attract more deposits into Water Security for Resilent & Water Security as liquidity is declining, although stable bid-cover the banking sector and to develop alternative ratios of government bonds suggest there is sources of financing for firms, such as the sufficient appetite for government bonds.19 corporate bond market. 3.1 the WSS Gap Understand 3.2 The way foward 19 The bid-to-cover ratio for Treasury bonds has increased since the pandemic, from to 2.05 in 2021 to 2.20 in 2023, and a higher bid-to- 3.3 cover ratio indicates strong demand for government securities. References Contents Table of Table 3. The Medium-Term Fiscal Framework. Summary Executive 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 in percent of GDP, unless otherwise stated. Economic & Policy Dev Recent Revenue 16.1 15.9 15.5 16.1 15.2 15.9 16.2 16.6 16.9 17.3 Developments Recent Global Expenditure 19.5 23.5 24.1 23.4 21.3 21.0 20.3 20.1 20.2 20.4 1.1 Surplus/Deficit -3.4 -7.6 -8.6 -7.3 -6.1 -5.1 -4.1 -3.5 -3.2 -3.0 Output and Demand Real GDP growth 1.2 6.1 -9.5 5.7 7.6 6.0-7.0 6.5-8.0 6.5-8.0 6.5-8.0 6.5-8.0 6.5-8.0 target (percent) Inflation & Monetary Inflation rate (percent) 2.4 2.4 3.9 5.8 5.0-6.0 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0 1.3 Sources: PSA, 185th Development Budget Coordination Committee (DBCC), and DBM. External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6 Outlook & Risks 36 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 Photo by: Wara1982 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of Figure 20. The BSP’s liquidity facility remains elevated, albeit declining. Summary Executive BSP Liquidity Facility (Percent of GDP) Economic & Policy Dev Recent 25 20 Developments Recent Global 1.1 15 Output and 10 Demand 1.2 5 Inflation & Monetary 1.3 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 External Sector 1.4 Reverse Repurchase Facility Overnight Deposit Facility Term Deposit Facility BSP Securities (Bills) BSP Liquiditiy Facility Sector Fiscal 1.5 Source: BSP. Employment and Figure 21. Lending to the private sector continues to fall. Poverty Figure 21. Lending to the private sector continues to fall as a share of GDP. 1.6 Outlook & Other Depository Corporations (ODCs) Risks Assets, Liabilities, and Use of BSP Liquidity Facilities 37 (Percent of GDP) 90 outlook Growth 80 2.1 70 60 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 50 40 Challenges 30 Risk and Policy 2.3 20 10 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Claims on private sector Claims on CG Other claims 3.1 Use of BSP liquidity facilities Total ODC assets ODC liabilities the WSS Gap Understand 3.2 Sources: BSP and World Bank staff calculations. The way foward 3.3 References Contents Table of 2.2 Poverty and Shared Prosperity Summary Executive Economic growth and labor market The implementation of proactive government improvements are likely to lead to an increase in measures is crucial to protect the purchasing Economic & Policy Dev household incomes. The projected growth of the power of poor and vulnerable households. Recent economy, coupled with job generation, is expected Given the incessant threat of inflation and climate to further improve household welfare. The poverty shocks, the authorities need to continue adopting Developments Recent Global incidence,20 using the World Bank’s poverty line policies and interventions to mitigate shocks and for lower-middle-income countries of US$3.65/ ensure a sufficient energy and food supply. In 1.1 day (2017 PPP), is projected to decrease from 17.8 September, the government approved the release percent in 2021 to 13.7 percent in 2023, before of a PHP3 billion for the Fuel Subsidy Program, Output and Demand falling further to 10.7 percent in 2025 (Figure 22). which aims to benefit 1.36 million qualified 1.2 However, these projections could be tempered by beneficiaries affected by escalating fuel prices. In elevated inflation and the escalation of perennial addition, the government recently piloted its food climate disturbances. Household income growth stamp program, Walang Gutom 2027, which aims to Inflation & Monetary 1.3 due to labor market gains are offset by these risk improve food security and reduce hunger among factors, with poor households being especially low-income households. The program provides affected. beneficiaries with monthly transfers of PHP3,000, External Sector which can be used to purchase selected food 1.4 items from accredited retailers. Sector Fiscal Figure 22. Actual and projected poverty rates ($3.65-a-day poverty line.) 1.5 Employment and Poverty 1.6 40.0% 35.0% Forecast Outlook & Risks 38 30.0% outlook Growth 25.0% 2.1 20.0% Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 15.0% Challenges 10.0% Risk and Policy 2.3 5.0% Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 0.0% 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 3.1 Source: World Bank staff estimates. the WSS Gap Understand 3.2 The way foward 3.3 20 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. References Contents Table of 2.3 Risks and Policy Challenges Summary Executive The threat of persistently high inflation amid volatility in global commodity prices, Economic & Policy Dev tighter financial conditions, and geopolitical uncertainty presents the most Recent challenging external risk to the Philippines. To mitigate this risk, the authorities must balance policies aimed at rebuilding economic buffers and strengthening the Developments Recent Global economic recovery with reforms aimed at enhancing long-term growth and 1.1 supporting the poor and vulnerable amid limited policy space. Output and Demand While several adverse risks have eased since central banks to ease monetary policy to support 1.2 the June 2023 Philippines Economic Update, economic activity. Debt levels also continue to rise risks to the global growth outlook remain tilted globally, increasing exposure to higher borrowing Inflation & Monetary to the downside. Since June 2023, episodes costs. 1.3 of global financial instability have been swiftly contained, and the resolution of the US debt Containing high inflation and providing ceiling standoff curbed potential spillovers to assistance to vulnerable sectors remains the External Sector 1.4 output, employment, and financial market stability. country’s main domestic policy challenge. However, concerns regarding slower global Although the baseline forecast assumes inflation economic activity and high global inflation remain. will moderate to within the BSP’s target range Sector Fiscal The risk of softer global demand, rising global in 2024, risks remain tilted to the upside. The 1.5 trade protectionism and policy uncertainty, and main upside risks to inflation include: (i) global an intensification of geopolitical tensions could commodity price volatility amid escalating Employment and dampen global growth and trade. Within the geopolitical tensions and increasing trade Poverty 1.6 region, a further slowdown of growth in China restrictions; (ii) the persistent threat of climate due to a sharper-than-expected downturn in shocks, including the current episode of El Nino, its property sector would weigh on trade, given to the domestic food supply; (iii) higher input Outlook & strong trade linkages between China and other costs owing to second-round price effects of Risks 39 regional economies, and could create negative higher energy and food prices on transportation, spillovers that would weigh on economic activity. wages, and rent; and (iv) currency depreciation. In addition, slower manufacturing growth in China Addressing inflationary pressure means outlook Growth would negatively impact regional processing continuing the government’s strategy of using 2.1 trade, including the Philippines’ electronics both monetary and non-monetary policy measures manufactures. such as increasing imports, lowering tariffs for Philippines Economic Update December 2023 Poverty and Prosperity key commodities, and ensuring better supply Shared 2.2 The threat of higher-than-expected global and demand management for food items. The inflation, escalating geopolitical tensions, government must also continue to help mitigate and tighter global financing conditions could the impact of high inflation on vulnerable sectors Challenges Risk and Policy dampen global activity and increase risks of through targeted social protection and transfer 2.3 financial stress. The escalation of geopolitical programs. Higher-than-expected inflation will tensions, including the conflict in the Middle East dampen private consumption and make it more Exclusive Growth the cornerstone Water Security for Resilent & Water Security as as well as Russia’s invasion of Ukraine, could lead difficult for the BSP to ease monetary policy to to additional food and energy supply shocks, support domestic activity. placing additional pressure on inflation. Moreover, trade restrictions on agricultural products could Effective communication and increased cause supply disruptions and lead to increased transparency related to setting monetary policy 3.1 volatility in commodity prices. In major advanced would help keep inflation expectations in check. economies, still elevated core inflation could The BSP’s data-driven approach to monetary the WSS Gap Understand prompt central banks to keep interest rates higher policy setting will continue to anchor inflation 3.2 for longer than expected. This would further expectations. The latest increase in the policy rate weaken external demand and weigh on exports. by 25 bps in late October is appropriate to maintain It would also add further downward pressure on price stability, given the recent spike in headline The way foward regional exchange rates, making it more difficult for inflation, and the downward trajectory in core 3.3 References Contents Table of inflation over the past half year. Moving forward, disasters in both the short and long term. Box 3 clear and effective communication of monetary discusses these issues in more detail. Summary Executive policy decisions would help limit the impact of further tightening on the economy. Ensuring access to quality and affordable primary health care (PHC) services is one of Economic & Policy Dev Recent The success of the government’s medium- the most cost-effective ways to enhance health term fiscal consolidation agenda hinges on its outcomes and increase the country’s long-term ability to pass key tax policy and administration growth potential. While Filipinos have become Developments Recent Global reforms. While the government is currently healthier in recent decades, the improvements 1.1 on track to meet its fiscal consolidation target are modest compared to regional peers and their for 2023, challenges remain to ensure it can counterparts in countries with similar income also meet targets over the medium term. While classifications. As a result, the Philippines will Output and Demand the initial success in reaching its fiscal targets likely fall short of meeting some of the Sustainable 1.2 relied primarily on reducing public spending, the Development Goals (SDGs). Amid limited government will have to generate additional tax fiscal space, prioritizing investments in primary revenues from new tax policy and administration health care has the potential to cost-effectively Inflation & Monetary measures beginning in 2024 to remain on track. improve health outcomes. Improving access to 1.3 The government expects an additional PHP120.5 and the quality of PHC services will require: (i) a billion in tax revenues beginning in 2024 from its commitment by national and local government External proposed revenue measures that are currently authorities to invest in building, upgrading, Sector 1.4 in the legislative pipeline. The timely passage of and equipping PHC facilities; (ii) an expansion these revenue measures is crucial to ensure that of Philippine Health Insurance Corporation’s the authorities can protect investment spending (PhilHealth) primary care benefits; and (iii) Sector Fiscal 1.5 on infrastructure, human capital, and social continuous capacity building, an expansion of protection—key drivers of long-term growth. In digital service delivery, and efforts to strengthen Employment and addition, the timely issuance of amendments to the monitoring of provider performance and Poverty Executive Order 138 on the full fiscal devolution of quality care. 1.6 functions to LGUs will increase fiscal transfers to local authorities over the forecast horizon and help Strengthening water security is the cornerstone reduce pressure on the national government to of resilient and inclusive development and Outlook & Risks financially assist LGUs. climate adaptation. Water resource cuts across 40 and supports sectors that are critical to the To improve the Philippines’ long-term economy – food security, energy production, growth potential, it is imperative to address and urban growth, among others. Moreover, outlook Growth 2.1 low productivity and structural challenges, climate change is making water security a socio- including underinvestment in physical and economic priority, with a global recognition of the human capital. Effective implementation costs of water risks for economic growth in low, Philippines Economic Update December 2023 Poverty and Prosperity Shared of pro-investment reforms in renewable middle, and high-income countries. While access 2.2 energy and sectors like trade, transport, and has improved at the national level, the poorest telecommunications would generate economy- who live in rural areas have the lowest quality Challenges wide productivity gains, estimated at 3.2 percent of service access to water, heightening spatial Risk and Policy 2.3 on average.21 Moreover, implementing reforms inequalities, and perpetuating the cycle of poverty. that encourage private sector participation in To address existing gaps in service delivery, Exclusive Growth the cornerstone Water Security physical and human capital investments could and strengthen long-term and inclusive growth, for Resilent & Water Security as enhance the country’s growth potential, even the Philippines will need to speed up and scale within the constraints of limited fiscal space. up its efforts around investments, institutions, Effective public spending in agriculture could also and incentives. Doing so will not only close the boost productivity and enhance the local food existing gaps, but also address future access 3.1 supply, thereby reducing the impact of food price demand, and adapt to climate threats. Part 3 of shocks that disproportionately affect the poor. the PEU investigates the state of the Philippines’ Finally, implementing reforms that strengthen the water supply and sanitation sector and provides the WSS Gap Understand resilience of education, human settlements, and policy recommendations to help achieve 3.2 health care systems could mitigate the effects of universal access to safe, sufficient, affordable, and climate change, public health crises, and natural sustainable water supply, hygiene, and sanitation. The way foward 3.3 21 World Bank (2023). References Contents Table of Box 3. Prioritizing Investments in Primary Health Summary Executive Care for Universal Health Coverage Economic & Policy Dev While Filipinos have seen modest coverage involves ensuring that all people have Recent improvements in their health, they also face access to a full range of quality health services a growing disease burden. Life expectancy when and where they need them, without at birth increased from 69 years in 2000 to 72 imposing a financial hardship. A strong PHC Developments Recent Global years in 2020, before it dropped back to 69 years system, as the foundation of universal health 1.1 in 2021 due to the COVID-19 pandemic. In the coverage, should have health facilities located Philippines, health outcomes have improved at a in communities that provide a comprehensive Output and slower pace than in other lower-middle-income list of essential health services (e.g., services Demand 1.2 and ASEAN countries, with large gaps remaining related to NCD management and immunization) relative to upper-middle-income countries. and address more than 80 percent of people’s The country also faces a growing burden common health needs throughout their lives. Inflation & Monetary of noncommunicable diseases (NCDs) and 1.3 communicable diseases. In 2019, 69.4 percent Furthermore, increasing accessibility, of deaths were caused by NCDs, a significant affordability, and the quality of PHC services External increase from 2000. Additionally, there has is important to efficiently improve health Sector 1.4 been a re-emergence of vaccine-preventable outcomes. Better and more accessible PHC diseases, with falling child immunization could avoid unnecessary procedures and rates due to governance challenges, missed reduce the use of costly hospital and emergency Sector Fiscal 1.5 opportunities, low demand, and disruptions resources through better preventive care. caused by COVID-19.22 Additionally, health systems with strong PHC Employment and may achieve higher levels of allocative efficiency, Poverty Despite a significant increase in total health as the unit costs for treating patients with the 1.6 expenditure in recent decades, the country same condition in PHC are lower than those is facing challenges due to relatively low observed in emergency departments and Outlook & public health spending, particularly by LGUs. hospitals. Therefore, improving access to quality Risks 41 The country’s total health expenditure as a and affordable PHC services could lead to better proportion of GDP increased from 4.0 percent health outcomes with less spending. Moreover, in 2014 to 4.6 percent in 2019, before reaching the PHC system should be capable of timely outlook Growth 6.3 percent in 2021 during the COVID-19 identifying outbreaks by maintaining a high level 2.1 pandemic. However, total health expenditure of monitoring based on clinical indicators and fell to 5.5 percent in 2022, mostly caused by the having access to precise and timely laboratory Philippines Economic Update December 2023 Poverty and Prosperity Shared reduction of public spending at the central level tests. Reporting promptly and comprehensively 2.2 (Figure 23 and Figure 24). Public spending on to public health authorities allows for the health has consistently been below 50 percent immediate monitoring of disease trends within of current health expenditures, which places a the community. This, in turn, enables public Challenges Risk and Policy 2.3 significant financial burden on the population, health authorities to inform healthcare providers and spending by LGUs has only accounted for about emerging trends and enhance the Exclusive Growth the cornerstone around 20 percent of total health spending. As detection of cases. Water Security for Resilent & Water Security as a result, a significant portion of public health expenditure is not being allocated by LGUs, The Philippines faces several challenges despite the mandated devolution of health in accessing quality and affordable PHC services to local authorities. services related to: 3.1 Improving access to quality and affordable • Accessibility: Approximately 50 percent PHC services is crucial for achieving universal of Filipinos have access to rural health units the WSS Gap Understand health coverage. Achieving universal health or health centers within a 30-minute travel 3.2 The way foward 3.3 22 UNICEF. 2022. “Philippines is top 5 country in the world with zero dose children.” https://www.unicef.org/philippines/press-releases/ philippines-top-5-country-world-zero-dose-children References Contents Table of time, with significant geographic variation. the implementation of the Konsulta package. Additionally, the country is facing challenges in This can be achieved by supporting health Summary Executive hiring and retaining quality health workers and providers to meet the service and human ensuring the availability of essential medicines, resource standards required for Konsulta vaccines, and diagnostics in primary care accreditation. Additionally, streamlining the Economic & Policy Dev Recent facilities, particularly in remote areas. process required for Konsulta registration and payment is essential. In the long term, PhilHealth • Affordability: Despite the PhilHealth’s efforts should develop and implement a more Developments Recent Global to expand primary care benefits over the past comprehensive primary care benefit package 1.1 two decades, the current primary care benefit that includes expanded coverage of essential package, Konsulta, faces several challenges. medicines. This will ensure that a wider range These include inadequate coverage of essential of healthcare needs are addressed and that Output and Demand health services, an insufficient number of individuals receive the necessary care for their 1.2 Konsulta-accredited providers (as many specific conditions. health providers struggle to meet the service Inflation & Monetary and human resource standards required for Improving the quality of PHC: A strong PHC 1.3 accreditation), and a cumbersome registration system should not only provide access to and payment process. services for the population but also ensure that these services are of sufficient quality to be External Sector 1.4 • Quality: Currently, there is no routine effective. The DOH should establish evidence- monitoring of provider performance and clinical based standards, indicators, and targets for quality in the Philippines. Additionally, evidence- PHC services. It is important to institutionalize Sector Fiscal based standards, performance indicators for the monitoring of the quality of care and 1.5 quality care, and corresponding targets have not promote continuous quality improvement. been established in PHC. Furthermore, the DOH should not only develop Employment and Poverty guidelines and implementation manuals but 1.6 To address these challenges, the national also provide support for their implementation government and LGUs should consider: at the subnational level. It is also crucial to strengthen capacity-building programs for Outlook & Risks • Enhancing community-based PHC services: PHC workers, which can be achieved by 42 To ensure equitable access to essential health improving the curriculums of these programs services, it is imperative for the national to ensure they address the specific challenges outlook Growth government and LGUs to invest in building, and requirements of PHC in the Philippines. 2.1 upgrading, and equipping primary care facilities. However, these reforms and interventions must Additionally, there should be a focus on ensuring be rigorously implemented to ensure their Philippines Economic Update December 2023 Poverty and the availability of quality health workers and desired impact. For example, local government Prosperity Shared 2.2 essential medicines. Even though LGUs are authorities could: (i) provide incentives to the responsible for the provision of PHC services, directors of health facilities to monitor the there is substantial variation in their technical, quality of care, which in turn could encourage Challenges Risk and Policy financial, and managerial capacity. Therefore, them to prioritize and improve the quality 2.3 the Department of Health (DOH) should of services provided; (ii) incentivize health continue to provide and enhance support for workers to actively engage in capacity building Exclusive Growth the cornerstone Water Security for Resilent & Water Security as underserved areas in the coming years, taking activities, which could enhance their skills and into consideration equity and ensuring a smooth knowledge; and (iii) introduce telemedicine and transition during the devolution process. tele-mentoring to connect different levels of health providers and improve overall health care • Expanding PhilHealth’s primary care capacity. 3.1 benefits: More efforts are needed to accelerate the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of Figure 23. Current Health Expenditure by Source, 2000–2022. Summary Executive 1,200,000 Economic & Policy Dev Recent 1,000,000 800,000 Developments Recent Global In million PhP 1.1 600,000 Output and Demand 400,000 1.2 200,000 Inflation & Monetary 1.3 - 2014 2015 2016 2017 2018 2019 2020 2021 2022 External Sector 1.4 Central government State/Regional/Local government PhilHealth Households Others Sector Fiscal Source: Philippines National Health Account. 2022. https://psa.gov.ph/statistics/pnha/tables. 1.5 Employment and Figure 24. Total Health Expenditure by Country, 2020. Poverty 1.6 25 Outlook & Risks 43 Total health expenditure as % of GDP 20 outlook Growth Philippines 2.1 Cambodia 15 Malaysia Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Vietnam 10 Challenges Risk and Policy 2.3 5 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Thailand Singapore Lao PDR Indonesia Brunei 0 100 1000 10000 100000 3.1 GNI per capita, Atlas method (current US$), log scale the WSS Gap Source: World Health Organization Global Health Expenditure Database. Understand 3.2 The way foward 3.3 References Contents Table of WATER SECURITY FOR Summary Executive RESILIENT AND INCLUSIVE GROWTH: SECURING THE Economic & Policy Dev Recent PART BASICS, RISING TO THE Developments Recent Global 3 CHALLENGES 1.1 Output and Water security is key to Philippine development and resilience. Demand 1.2 The impacts of climate change are mostly felt through water: too much, too little, or too polluted. The Philippines already Inflation & Monetary confronts these three challenges in different spatial 1.3 combinations – floods, droughts, and heightening poverty and inequality dynamics, notably through infrastructure and quality External Sector 1.4 of service access gaps in the water supply and sanitation (WSS) sector. Because of climate change, this issue is urgent Sector and demands attention. To adapt to climate change, an Fiscal 1.5 integrated approach is needed. Achieving universal access to Employment and safely managed water supply and sanitation, is important Poverty because it is key to human development, public health, and 1.6 poverty reduction. The Philippines needs to address the “three Is”: Institutions, Incentives, and Investments to close the water Outlook & Risks 44 and sanitation service gaps, address future demand, and build resilience against climate shocks. outlook Growth 2.1 3.1 Water Security as the Cornerstone of Resilient and Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Inclusive Development and Climate Adaptation Challenges Risk and Policy 2.3 Water underpins the development of the on water availability show the importance of the Philippines through its role in key sectors of sector – from labor markets to economic growth. Exclusive Growth the cornerstone Water Security the economy, with 42 percent of the country’s The biggest labor market in the country, crop and for Resilent & Water Security as jobs being in sectors that use water animal production, is dependent on water. intensively.23 Water resource cuts across and Economic growth drivers such as tourism and supports sectors that are critical to the economy semiconductors industries, which represent the – food security, energy production, and urban country’s leading export and are also known to 3.1 growth, among others. At 42 percent, lower be water-intensive24, need adequate and reliable bound estimates of jobs more directly depending water. This is to respond to service demand and the WSS Gap Understand 3.2 23 Among the top water dependent sectors that provide employment (42%) are crop and animal production, construction of buildings, food and beverage activities, fishing and aquaculture, manufacture of food products, human health activities, and manufacturing of wearing apparel. Other employment-generating sectors that are not as water dependent are retail trade, public administration and defense, land The way foward transport and transport via pipelines, education, and office administrative, among others. Data are based on FAO-AQUASTAT which obtains 3.3 water withdrawal values form national ministries or other governmental agencies. 24 Frost and Hua (2019). References Contents Table of to prevent social and environmental externalities universal access to safe water supply and on water quality for instance. Levels of water sanitation (pillar 1); improving irrigation models Summary Executive pollution are very high in many places due to the and productivity (pillar 2); reducing flood and lack of wastewater treatment25. This affects the drought risks through sustainable water health of communities and ecosystems. resource management (pillar 3); and enhancing Economic & Policy Dev Recent water security in fragility, conflict, and violence Climate change is making water security a (FCV) areas through a holistic development socio-economic priority, with a global approach for peace (pillar 4) (Figure 25). While Developments Recent Global recognition of the costs of water risks for all pillars are interconnected and need to be 1.1 economic growth in low, middle, and high- addressed simultaneously, the first is a building income countries.26 By some estimates, the block for human capital, public health, and Philippines will experience an average economic poverty reduction. Output and Demand decline of 0.7 percent in annual GDP in the years 1.2 up to 2050 because of water risks.27 The recent Growing evidence emphasizes that the Philippines Country Climate Development benefits of addressing water and sanitation Inflation & access and services gaps outweigh the Monetary Report (CCDR) also highlights the exposure of 1.3 the agriculture sector to climate shocks. By 2030, costs four to seven times. Various studies corn, followed by sugarcane and rice, can be have highlighted the costs of poor water supply expected to see the most significant decline in and sanitation in many countries (World Bank External Sector yield. Climatic changes will worsen water stress WASH Poverty Diagnostic, 2017). At the same 1.4 in regions such as Northwest Luzon, Central- time, different works looking at the benefit- Southern Luzon, and Cagayan, which are already cost analysis of investing in universal water, Sector Fiscal facing deficits in irrigation water.28 These sanitation, and handwashing (WASH) have 1.5 represent a threat to food security, urban growth, shown that the benefits exceed costs four to and health. seven times - even where key societal impacts Employment and such as on gender equality are not accounted Poverty 1.6 An integrated approach to water security is for.29 In the case of the Philippines, there is no needed to adapt to climate change updated information on GDP loss from poor sustainably and inclusively. An integrated water supply and sanitation but previous work Outlook & approach means a coordinated process in the estimated such loss at 1.3 percent (Hutton et al,. Risks 45 planning, development, and management of 2007). water, from water resource management to water uses such as water supply and irrigation. While access has improved at the national outlook Growth 2.1 Doing so addresses the problem of fragmented level, the poorest who live in rural areas institutional arrangements that contribute to have the lowest quality of service access to inadequate and uneven water-related services. water. The role of inadequate water supply and Philippines Economic Update December 2023 Poverty and Prosperity Shared This integrated approach is shown in Figure 25 2.2 sanitation in perpetuating the cycle of poverty which shows that water security and climate is well-known. This is why both are part of adaptation depend on four pillars: achieving the indicators measuring multi-dimensional Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 25 One well-known example is the Pasig River. A 2021 study (Lourens et al., 2021) found the river to be one of the leading contributors to ocean plastic pollution. The high level of waste and plastic pollution, is also an issue in case of torrential rains or typhoons, blocking flood pumping stations such as the Tripa de Gallina, the largest pumping station in Metro Manila the WSS Gap 26 See World Bank research on water shocks (wet and dry): Uncharted waters (Damania et al., 2017); Water quality: Unknown Quality Understand (Damania et al. 2019); The economics of groundwater: Hidden Wealth of Nations (Rodella et al, 2023); and the impacts of droughts on GDP: 3.2 Droughts and Deficits (Zaveri et al, 2023). 27 GHD and Cambridge Econometrics (2022): Aquanomics: The economics of water risk and future resilience. 28 One well-known example is the Pasig River. A 2021 study (Lourens et al. 2021) found the river to be one of the leading contributors to ocean plastic pollution. The high level of waste and plastic pollution, is also an issue in case of torrential rains or typhoons, blocking flood pumping The way foward 3.3 stations such as the Tripa de Gallina, the largest pumping station in Metro Manila. 29 OECD. (2011). References Contents Table of Figure 25. Four Pillars for Water Security and Climate Adaptation Summary Executive Strengthening water security and climate adaptation through systems change and investment in water and disaster risk reduction Economic & Policy Dev Recent Pillar 1 Pillar 2 Pillar 3 Pillar 4 Reducing flood and Enhance Water Security Applying a Developments Recent Global Achieving universal Improved irrigation drought risks thourgh in FCV: A holistic private access to safe models and sustainable water developement sector lens 1.1 water supply and water productivity resources approach for peace sanitation management Output and Demand 1.2 Source: Global Challenge Program, approach paper for water security (2023) – forthcoming. Inflation & Monetary poverty.30 But it is only when looking at the play: while over 80 percent of urban residents 1.3 coverage and quality of access across the have access, quality of service and efficiency to wealth distribution that the gaps become evident improved piped water, just a little over 50 percent and informative for policy and infrastructure of rural ones do.31 The persisting gaps in the External Sector 1.4 prioritization. While the situation has improved quality of access by those two quintiles is likely across wealth and income levels in the long-run to be driven by the difficulty of reaching those (2000-2020), the richest two quintiles have higher populations. This is the problem of the last mile, Sector Fiscal and better quality in their WSS access compared whereby the easiest population to cover have 1.5 to the poor and poorest (Figure 26). Looking already been covered. at piped water access hints at the dynamics at Employment and Poverty 1.6 Outlook & Risks 46 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 Photo by: Kiki Nugraha Indra S 30 The World Bank has developed its own multi-dimensional poverty indicator, building on the Multidimensional Poverty Index (MPI) the WSS Gap Understand developed by the United Nations Development Program (UNDP) and Oxford University. The Multidimensional Poverty Measure (MPM) 3.2 seeks to understand poverty beyond monetary deprivations (which remain the focal point of the World Bank’s monitoring of global poverty) by including access to education and basic infrastructure along with the monetary headcount ratio at the $2.15 international poverty line. The MPM and MPI differ in one important aspect: the MPM includes monetary poverty less than $2.15 per day, the New International Poverty Line at 2017 PPP (Purchasing Power Parity), as one of the dimensions. Under this broader definition of poverty, many more people The way foward come into view as poor. In the case of the Philippines, sanitation and water are the leading deprivations contributing to multi-dimensional 3.3 poverty. 31 JMP (2022). References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges ic bl pu Source: Global Challenge Program, approach paper for water security (2023) - forthcoming Re ia tic d ra bo Figure 27. Safely Managed Water Supply in Eastern and Southeastern Asia oc m Ca s ia Figure 26. Quality of Water Access across Wealth Quintiles (2000-2020) em e D 's d on le In op lia Pe go o on La M s ne pi ilip r Ph a nm ya M m Na et Vi a re Ko of a li c si ub lay e p Ma n sR pa le' Ja op Pe ea tic K or ra of oc ic re m bl po Source: JMP UNICEF/ WHO (2022) De pu ga Re S in R SA au a c AR M S a, g in on 20 40 90 50 60 80 30 0 70 10 100 Ch g K on H Coverage (%) a, in Ch 47 Philippines Economic Update December 2023 Contents Table of Figure 28. Levels of Water Supply Service per Region (2021) Summary Executive Level of Water Supply Service per Region as of 2021 100% 4% Economic & Policy Dev 13% Recent 90% 22% 22% 21% 20% 19% 21% 24% 27% 6% 29% 80% 44% 39% 45% Developments Recent Global 3% 56% 70% 60% 20% 58% 20% 22% 1.1 27% 31% 60% 34% 23% 28% 50% 19% Output and 96% 15% Demand 18% 1.2 40% 5% 81% 73% 11% 30% 58% 61% 56% 28% Inflation & 53% Monetary 50% 48% 45% 20% 43% 1.3 39% 41% 42% 37% 29% 10% 14% External 0% Sector 1.4 M A 0 1 R8 R3 R6 R5 2 R9 R1 R2 CR R R7 A B R1 R1 R1 G R4 R4 CA M N RA R Level 1- Point Source BA CA Level 2- Communal Faucet System Sector Fiscal Individual Household Connection 1.5 Employment and Source: Field Health Services Information System (FHSIS) (2021). Poverty 1.6 The water access divide also reflects and contrasts in terms of access. Municipal heightens spatial inequality. In some areas, local government units (MLGUs) that are Outlook & there are no water service providers (WSPs), considered ‘good’ (i.e., with poverty incidence Risks 48 or they are operating inefficiently. This below 20 percent and access to safe water situation results in areas having water access supply of more than 50 percent) are mostly outlook Growth for only a few hours a day and water quality in Luzon; most of the poor (i.e., with poverty 2.1 problems. According to the latest harmonized incidence higher than 20 percent) and data from the United Nations Children’s Fund both poor and lagging areas (i.e., poverty Philippines Economic Update December 2023 Poverty and Prosperity Shared (UNICEF) and World Health Organization incidence higher than 20 percent and access 2.2 (WHO) Joint Monitoring Programme (JMP, to safe water supply below 50 percent) are 2022), the baseline coverage for safely in the Visayas and Mindanao (Figure 29). Challenges managed water supply in the country is The total estimated population in poor and Risk and Policy 2.3 about 48 percent; this is substantially below lagging areas is around 4.3 million33; this the global and regional EAP average of excludes BARMM as well as cities. It is also Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 74 percent (Figure 27). The Bangsamoro important to underline that while access Autonomous Region in Muslim Mindanao gaps in urban areas may be smaller than in (BARMM) has the highest poverty rate at rural areas, they impact many people given 29.8 percent32 and the lowest access to piped the country’s high urbanization rate. More 3.1 water services at 14 percent (Figure 28). people need access to safe water to meet Even within provinces, there are important universal access. the WSS Gap Understand 3.2 The way foward 32 Preliminary Full Year 2021 Official Poverty Statistics, Philippine Statistics Authority, https://psa.gov.ph/system/files/phdsd/2023-01/ 3.3 Preliminary%25202021%2520Full%2520Year%2520Poverty%2520Statistics%2520Publication_25Aug2022.pdf. 33 Based on 2015 population data References Contents Table of Figure 29. Poverty and Safe Water Supply Access in the Philippines at the Local Government Unit level.34 Summary Executive Economic & Policy Dev Recent Developments Recent Global 1.1 Output and Demand 1.2 Inflation & Monetary 1.3 External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty Source: World Bank (2023). 1.6 Sanitation coverage in the country remains additionally, there is just about 50 percent Outlook & Risks low, especially among the poorest and using basic sanitation in both urban and 49 rural areas. This compounds the impacts rural areas. The situation of the second of unsafe water access. The baseline poorest wealth quintile (poor) stagnated the outlook Growth coverage on safely managed sanitation is most, even compared to the poorest wealth 2.1 about 63 percent.35 This is higher than the 54 quintile, with a slight erosion of the access to percent global average, but lower than the 69 basic sanitation. Moreover, pollution-related Philippines Economic Update December 2023 Poverty and Prosperity Shared percent regional average. Open defecation is issues abound because of poor sanitation in 2.2 still practiced by more than three and a half urban areas; this, in turn, affect limited water million people.36 Indeed, the water access resources (Box 4). By 2030, existing service Challenges level of the poorest households is mirrored gaps will grow with close to 32 million people Risk and Policy 2.3 and compounded by the lack of sanitation needing safe access to water, and 35 million (Figure 30). Similar to water access, while needing safe sanitation in urban areas.37 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as sanitation access has improved in aggregate, This is a silent public health emergency challenges remain for the poorest with 20 rendered more salient by the increased risk percent of rural households still relying on of contamination due to climate shocks, open defecation (11 percent in urban areas); particularly floods. 3.1 the WSS Gap Understand 34 Based on 2015 PSA poverty data and 2015 DILG database on water supply access per LGU. These are the latest available access numbers on a per LGU level 3.2 35 WHO/UNICEF Joint Monitoring Program for Water Supply, Sanitation and Hygiene, “Progress on household drinking water, sanitation and hygiene 2000‒2020: Five years into the SDGs”, page 119 and 139, https://www.who.int/publications/i/item/9789240030848. 36 The Philippine Approach to Sustainable Sanitation (PhATSS) program was developed by the DOH and UNICEF to help the LGUs move The way communities from open defecation status to sustainable sanitation status. foward 3.3 37 Estimates based on population without access to safely managed water and sanitation (JMP UNICEF/ WHO) and urban population estimates (UN SEA, 2018). References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 30. Quality of Sanitation Access based on Wealth Quintiles (2000-2020). Source: JMP (2022) using DHS data 50 Philippines Economic Update December 2023 Contents Table of Box 4. Seeing (and Measuring) the Unseen: Water Summary Executive Quality Economic & Policy Dev Water quality is a critical dimension of water of water access expansion.40 More focus is Recent security. There is growing awareness of the placed on the number of people served than the impacts and costs of poor water quality.38 While quality of service. More and more household Developments Recent Global water quality impacts many dimensions (Figure surveys such as the Demographic Health Survey 31), the importance of water quality for public (DHS) and the Multiple Indicators Cluster Survey 1.1 health cannot be overstated. This is the case (MICS/ UNICEF) now integrate a module testing of the recent study on undernutrition in the water quality for fecal contamination (E. coli) and Output and Philippines (World Bank, 2020). It is typically in some cases, other geogenic contaminants Demand 1.2 proxied by the access type. While a better level (ex. arsenic). Unfortunately, the latest DHS for of service can be expected to correlate to better the Philippines (2022) does not have such a water quality, this is not necessarily true in all water quality module. Beyond water quality Inflation & Monetary contexts, and piped access does not guarantee testing, other initiatives aimed at better capturing 1.3 that the water is not exposed to contamination.39 household water security have been developed. An example is the Household Water Insecurity External Sector There is growing recognition that the lack of Experiences (HWISE) which seeks to capture 1.4 water quality data at the household level has non-material dimensions of households’ water been an impediment to capturing the benefits insecurity through a few targeted questions. 41 Sector Fiscal 1.5 Figure 31. Impacts of Water Pollution across Sectors Employment and Poverty 1.6 Outlook & Risks 51 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 Source: OECD (2017) the WSS Gap Understand 38 Research by the World Bank shows that the impact of poor water quality of surface waters for downstream regions can translate into 3.2 reductions in economic growth between 0.8 and 2.0 percent of economic growth (Quality Unknown, 2019). 39 For instance, households relying on groundwater as their water source may be exposed to E. coli or other types of anthropogenic contamination without adequate sanitation and wastewater treatment. In the event of floods, particularly in urban areas, water sources are even more exposed to contamination, for instance, from urban waste and heavy metals (Rodella et al., 2023; Ravenscroft and Lytton et al., The way foward 2022). In the context of networked water, water quality is usually better and better monitored. Still, intermittent service or uneven pressure in 3.3 the system can contribute to the deterioration of its quality at the point of delivery. 40 Bain et al. (2021). 41 https://hwise-rcn.org/. References Contents Table of Poor WASH, which is prevalent in the highest prevalence of households that rely on country’s poorest areas, is linked to open defecation.44 The difference between what Summary Executive malnutrition. In the Philippines, one in every is considered basic access and safe access is four children under 5 years old is shorter for reflective of certain issues. Water quality and their age; moreover, the country ranks fifth other contamination from poor access and Economic & Policy Dev Recent with the highest stunting prevalence among service quality are not captured by indicators countries in the East Asia and Pacific Region.42 on improved and basic access to water and Growing literature has shown how poor WASH sanitation. Beyond households, safe access to Developments Recent Global contributes to malnutrition by transmitting health and school infrastructure also deserves 1.1 pathogens and infections that inhibit nutritional attention. The Philippines ranks low in the uptake through diarrhea, parasites, and enteric EAP region on access to basic drinking water inflammation and dysfunction (Cumming and in schools. Only 45 percent of schools in the Output and Demand Cairncross 2016; World Bank WASH Poverty Philippines enjoy basic access to drinking water. 1.2 Diagnostic, 2017).43 Health data in the country This places the country at the bottom of its show that areas with high stunting rates also peers. Also, over a quarter of schools have no Inflation & Monetary have the largest WASH access gaps and the water service (JMP). 1.3 External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6 Outlook & Risks 52 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Photo by: Kabir9698 42 As of 2023, the rate of stunting in children under five is at 26.7 percent (Philippines, Department of Health, 2023), above the regional and 3.1 global average (22.3% as of 2022 according to the WHO/UNICEF/ WB harmonized joint child malnutrition estimates). 43 A recent World Bank on undernutrition in the Philippines (2020) underlined the difficulty of analyzing in detail the role of WASH in malnutrition. It noted that healthy WASH conditions and behaviors in a young child’s feeding and play areas can prevent diarrhea and the WSS Gap infections and are likely to reduce environmental enteric dysfunction (EED). The latter is associated with (and a likely cause of) chronic Understand undernutrition. EED is a chronic infection of the small intestine caused by extended exposure to fecal pathogens. By reducing a child’s 3.2 ability to absorb nutrients, EED can lead to undernutrition and stunting of growth. It is greatly exacerbated by unhygienic environments in which infants and young children live and grow. See Mbuya et al. (2020). 44 The highest stunting rates based on the 2015 National Nutrition Survey (NNS) are found in the Autonomous Region in Muslim Mindanao (45%), Southwestern Tagalog Region (41%), Bicol Region (40%), Western Visayas (40%), Soccsargen (40%), Zamboanga Peninsula (38%), The way foward 3.3 and Central Visayas (37%). The COVID-19 crisis has been widely recognized to have worsened hunger and malnutrition in many countries, including the Philippines. References Contents Table of 3.2 Understanding the WSS Gaps: Institutions, Summary Executive Incentives, and Investments Economic & Policy Dev Recent Uneven distribution water resource National Capital Region (NCR). Water stress distribution and use will worsen due to already affects two key economic powerhouses climate impacts and increased water demand of the country, Metro Manila, and Metro Cebu Developments Recent Global in some areas of the country. Even if the (Box 5). Given this scenario, water use needs to 1.1 Philippines has overall ample water resources, be more efficient. For example, there are water the availability of water per person could be at utilities with high non-revenue water (NRW). high risk due to climate change and population Reducing these losses is critical to efficient Output and Demand increase in 2050.45 Agriculture is the largest resource utilization. 1.2 water user in the country; it accounts for 73 percent of total yearly withdrawals in 2018. The Philippines has made reaching universal Inflation & Monetary This is followed by industry at 17 percent, access to safely managed WSS services by 1.3 and municipal supply at 10 percent (FAO- 203047 a priority. To do this, the country will AQUASTAT). Hydrological regions46 that depend need to speed up and scale up its efforts around on surface water as part of their drinking water the three “Is” – Institutions, Incentives, and External Sector 1.4 supply are the urban areas. This includes Metro Investments. These will close the existing water Manila in Central Luzon and growing city and sanitation service gaps, address future centers in Cebu, Panay-Negros, and Agusan- access demand, and adapt to climate threats. Sector Fiscal 1.5 Davao regions (Figure 32). There are often The next section discusses the challenges in conflicts between competing uses especially in those three areas, and how to reach universal Employment and major urban areas. This is particularly true in the access to water and sanitation. Poverty Central-Southern Luzon basins supplying the 1.6 Figure 32. The Extent and Composition of How Water is Consumed varies per Region Outlook & Risks 53 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 Source: Country Climate and Development Report (2022) the WSS Gap Understand 3.2 45 Per capita water availability in 2050 computed population growth with the availability of water in 2050 (World Bank data; See https:// www.datawrapper.de/_/u2QXm/). 46 A hydrological region is a unit of division of the country that has similar climate, rock type, general land cover, other watershed char- The way foward acteristics, and water use profile. It is useful for collecting hydrologic data on the same basis from year to year, thus facilitating historical 3.3 analysis. 47 Sustainable Development Goal 6 References Contents Table of Box 5. Water Stress in Metro Manila and Metro Cebu Summary Executive Metro Manila (15 million inhabitants) a surplus will be available in 2025 when the Economic & Policy Dev Recent and Metro Cebu (2.9 million) are both Kaliwa Dam becomes operational. For Metro experiencing water stress, as demand has Cebu, the gap between water demand and outpaced available supply. In Metro Manila, supply has been a huge problem in the past Developments Recent Global based on the Metropolitan Waterworks and decades. In 2011, water demand was at 454 1.1 Sewerage System (MWSS) Water Source mld and water supply at 179 mld. The gap has Infrastructure Roadmap as of 2022, the total worsened to more than 300 mld in 2020. The water demand (maximum day demand plus a city is looking at various options: developing Output and Demand 15 percent buffer) exceeded the existing supply desalination water treatment systems in 1.2 by more than 600 million liters per day (mld) in different areas of its network; increasing 2020. Metro Manila water supply is targeting production from its existing supply systems; Inflation & Monetary more abstraction from outside sources such and exploring bulk supply from outside 1.3 as Laguna Lake, Kaliwa River, Wawa River, and sources (Metro Cebu Water District, Strategic Kanan/Agos River. The forecast is that supply Plan 2021-2030; Philippines: Country Climate will be equal to demand in 2024; Development Report, World Bank, 2022). External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6 Outlook & Risks 54 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward 3.3 Photo by: aldarinho References Contents Table of 3.2.1 Institutions: Need for Greater Integration and Summary Executive Efficiency Economic & The large investment rollout needed to This will help align plans, programs, and Policy Dev Recent achieve water security will require an projects. Providing efficient and sustainable integrated water sector – from water resource WSS services will require stronger partnerships management to water supply and sanitation. between the national agencies and local Developments Recent Global On the water resource management side, governments. 1.1 the sector fragmentation has hindered the implementation of an Integrated Water The authorities have already taken important Resource Management (IWRM) and river steps toward this goal. But they will need to Output and Demand step up implementation and match it with 1.2 basin approach48 to water resource planning. As a result, policy making is disjointed and has the corresponding needs for capacity and resulted to uncoordinated planning, allocation, funding. In April 2023, the Water Resources Inflation & Monetary and management of water resources. This Management Office (WRMO) was created 1.3 has led to siloed programs and projects and, under the Department of the Environment and in some cases, water disputes among the Natural Resources (DENR) to perform this LGUs. The IWRM at the river basin level is coordination responsibility. The WRMO serves External Sector 1.4 a precondition to ensuring WSS’ sustained as the interim coordinating body in the water availability, quality, and quantity of raw water sector pending the creation of the Department resources. This planning will ensure that of Water Resources (DWR) and Water Sector Fiscal 1.5 river sources are used and allocated properly Regulatory Commission (WRC)49. The WRMO among different uses in the long-term. It will is mandated to integrate and harmonize all also ensure the sustainability of the rivers and government efforts – plans, policies, investment Employment and the preparation for increased threat of climate programming, and regulatory activities to Poverty 1.6 hazards, from droughts to floods. The sector ensure the availability, efficient use, and fragmentation has also led to uncoordinated sustainable management of water resources. It investments with no national agency is expected to implement IWRM50 and embody Outlook & Risks responsible and accountable for achieving its operationalization in an Integrated Water 55 universal WSS coverage. There are more than Resources Management Plan (IWMP). The 30 water-related government agencies, with WRMO mandate could address the disjointed overlapping mandates and functions (Figure 33). nature of the sector with many overlaps, missing outlook Growth 2.1 The Philippines needs to effectively implement a or conflicting policies, and unclear institutional more unified approach from the national to the arrangements. local level, across the water sub-sectors. Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 48 A river basin approach considers all aspects of water resources within a river basin, including surface water, groundwater and land use. the WSS Gap Understand It facilitates the implementation of IWRM by involving downstream and upstream basin wide issues and incorporating environmental and 3.2 socio-economic aspects (UNESCO, 2009). 49 Pending in Congress 50 IWRM is a process which promotes the coordinated development and management of water, land, and related resources to maximize economic and social welfare in an equitable manner without compromising the sustainability of vital ecosystems and the environment. The way foward IWRM is a cross-sectoral policy approach designed to replace the traditional, fragmented sectoral approach to water resources and 3.3 management that has led to poor services and unsustainable resource use. (Global Water Partnership, 2011, https://www.gwp.org/en/ GWP-CEE/about/why/what-is-iwrm/). References Recent 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 Water Security 3.1 3.2 3.3 Table of Executive Economic & Recent Global Output and Inflation & External Fiscal Employment and Outlook & Growth Poverty and Risk and for Resilent & Water Security as Understand The way References Contents Summary Policy Dev Developments Demand Monetary Sector Sector Poverty Risks outlook Shared Policy Exclusive Growth the cornerstone the WSS Gap foward Prosperity Challenges Figure 33. The fragmented nature of the Philippines’ Water Sector Source: World Bank (2023). Photo by: ambient_pix 56 Philippines Economic Update December 2023 Contents Table of 3.2.2 Incentives: Need for Better Valuing Water and Summary Executive Regulating WSS Services Economic & Policy Dev At the national level, better valuing water contribute to inefficiency, threaten service Recent means reforming policies and subsidies that sustainability, and encourage overexploitation may be distorting the use of the resource; of water. Moreover, they frequently end up disproportionately benefiting upper-income Developments Recent Global also redeploying corresponding resources to achieve water security. Water can be an groups. This leaves poorer families without the 1.1 economic good – a critical input for nearly all needed support.53 forms of economic production. It is also a merit Output and good – a commodity that should be made Properly valuing and managing water is Demand 1.2 available based on need rather than willingness critical to achieving water security (Figure to pay, as it is vital to human health.51 A recent 34). It confronts the challenges of a resource study on repurposing environmentally harmful going from public to private “good” through Inflation & Monetary subsidies showed that across the world, its access and delivery systems. Currently, 1.3 governments are spending trillions on inefficient this is a problem in how local utilities and WSPs subsidies that are making climate change worse. operate. At its source, water is usually treated External as a public good, an open-access resource, Sector These resources could be better used to help 1.4 solve the problem.52 Situations of regressive or a common-pool resource. It is available for subsidies are common in the water supply sub- public use without exclusion – at the risk of sector. In the case of WSS service provision overuse, exploitation, and degradation. Costly Sector Fiscal 1.5 in the Philippines, LGUs have the mandate to investments in infrastructure like dams, pipes, set prices of water supply services through the and treatment systems are needed to benefit Employment and Local Government Code (LGC). But tariff setting cities, farms and households. In the case of Poverty is unclear and LGUs have varying tariff-setting water supply and sanitation infrastructure, these 1.6 mechanisms; it is also subject to political rather are generally private goods (or services, i.e., than economic constraints. LGU-run utilities the services are both excludable and rivalrous). Outlook & are generally subsidizing water tariffs. In a Other services like flood protection provided by Risks 57 World Bank 2023 survey of 47 LGU-run utilities, dams and levees, are public goods. And because 68 percent of respondents are operating at a these are public goods, no one can be excluded loss. Many LGU-run utilities are facing financial nor can user fees be easily collected. There is a outlook Growth need to rationalize institutional arrangements; 2.1 challenges due to high production costs and low revenue. This limits their ability to invest in get incentives right; and obtain the necessary infrastructure upgrades, improve service levels, financing to fund investments. Philippines Economic Update December 2023 Poverty and Prosperity Shared and extend service coverage. These subsidies 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand Photo by: MaryTraveller 3.2 51 This paragraph draws from Uncharted Waters (Damania et al., 2017), a description further refined in the 2021 World Water Development The way foward report on Valuing Water (UNESCO, 2021). 3.3 52 Damania, et al. (2023). Detox Development. World Bank. 53 Andres et al. (2019). Doing more with less: Smarter subsidies for water supply and sanitation. World Bank. References Contents Table of The utilities play an important role in These LGUs do not need to report on the expanding access and improving service quality of their services to any regulator. The Summary Executive delivery; their performance, however, is Local Water Utilities Administration (LWUA) uneven and largely unchecked. There has the oversight, regulatory, and financing are more than 618 out of 1,634 cities and responsibility over local Water Districts (WDs). It Economic & Policy Dev Recent municipalities outside of Metro Manila as of collects the performance data of more than 500 2022 that are primarily served by LGU‐run local WDs in the country. The WD performance utilities54; these have no clear service delivery data only becomes a factor during tariff Developments Recent Global or efficiency targets. Without targets, LGU- determinations by the LWUA; they are not used 1.1 run WSPs are not pushed to improve services. for benchmarking purposes. Output and Figure 34. Water Management towards Achieving Water Security Demand 1.2 Inflation & Monetary 1.3 External Sector 1.4 Sector Fiscal 1.5 Employment and Poverty 1.6 Outlook & Risks 58 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Source: Damania, R. et al. (2017) 3.1 the WSS Gap Understand 3.2 The way foward 3.3 54 Data from the Department of the Interior and Local Government (DILG) References Contents Table of 3.2.3 Investments: Need for Better-Leveraged Summary Executive Financing and Funding, Targeting Priority Areas Economic & Policy Dev Recent Projected resources for the sector are But this legislative-initiated ad hoc investment considerably lower than the target programming for WSS is not a strategic and investment to reach universal access. Given efficient use of the country’s resources for the Developments Recent Global current estimates, known resources flowing following reasons: (i) there is no prioritization 1.1 into the sector stand at only 15 percent of the process, so it is uncertain whether the funding target set in the WSS Masterplan in 2022.55 At goes to the most in need; (ii) there are no this current level of investment, the country will guidelines for the funding allocation, hence, Output and Demand not be able to meet its 2030 target of universal the its objective of gradually implementing 1.2 WSS coverage. Some of the most urgent and its devolution policy is potentially being capital-intensive investments include dams undermined; (iii) the available budget is not Inflation & Monetary for storage to ensure water source for supply, being used to catalyze finance, hence, the 1.3 bulk water supply systems, treatment facilities, opportunity to multiply available resources is transmission and distribution systems, and lost; (iv) the available budget is not being used safely managed sanitation facilities. to incentivize reforms at the LGU and utility External Sector 1.4 level; and (iv) there is no provision for the The lack of policy clarity on the funding of sustainability of services, so there is a risk that the water supply and sanitation sector at the the same beneficiaries will again require the Sector Fiscal national level is hindering its performance government’s financial support in the future. 1.5 The policy issue is whether the national government will continue to financially support There is a need to increase water storage Employment and the sector given that WSS is a devolved service. to increase the resilience of water supply Poverty 1.6 A 2022 World Bank study56 showed that the services. Increasing water storage will be sector needs continued fiscal support from the a huge step in securing water sources for national government to enable it to achieve sustainable water supply services, and other Outlook & universal WSS coverage (Box 6). While LGUs purposes such as flood management. Per Risks 59 are responsible for providing WSS services capita storage capacity in the Philippines was under the LGC, they will struggle to fund all the only 68 m3 as of 2017. It was well behind that activities devolved to them. The case studies of neighboring countries such as Vietnam (473 outlook Growth 2.1 show that the LGUs need assistance to deliver m3), Malaysia (722 m3), and Thailand (1,145 m3). WSS services. An analysis of water deficits and storage needs in water-stressed Central Luzon estimated that Philippines Economic Update December 2023 Poverty and Prosperity Shared The current ad hoc approach to the sector’s about 4,868 million cubic meters (MCM) will be 2.2 funding does not create self-sustaining and needed by 2050. This requires an investment creditworthy utilities capable of improving of about USD1.8 billion or 0.015 percent of GDP Challenges coverage and services; it also undermines over the period; this is a small amount given Risk and Policy 2.3 the efficiency of public resource allocation. the magnitude of potential benefits. While a full The lack of policy clarity on NG sector funding assessment of storage needs is required, the Exclusive Growth the cornerstone Water Security for WSS has resulted in a lack of programs need for additional storage is already evident in for Resilent & Water Security as and projects initiated by national government many areas. agencies (NGAs) for WSS. In the last few years, the LGUs have resorted to the legislative budget process to get the funding they need. 3.1 the WSS Gap Understand 3.2 The way foward 3.3 55 Excluding WSS investments in Metro Manila 56 World Bank. (2022). Advisory Services and Analytics – Strengthening PH Water Supply and Services. References Contents Table of Box 6. LGU Investment Simulation to Meet Universal Summary Executive Access to WSS Economic & Policy Dev In a 2022 World Bank study, six study areas of Level III or safely managed water services; Recent were selected to demonstrate possible scenario two assumes that 100 percent will be outcome scenarios given varying levels of provided with Level III services; and scenario Developments Recent Global required investments at specified targets three includes both 100 percent Level III and (Figure 35). The target areas were a mix of 100 percent safely managed sanitation. The 1.1 one LGU-run WSP, two non-operational water simulation demonstrates that the LGUs cannot districts (NOWD), and three functional WDs. undertake the levels of investment requirement Output and For each study area, three scenarios with on their own. Even with increased allocation Demand 1.2 different service targets were used as the basis from their NTAs because of the Mandanas for estimating investment cost requirements. Ruling, the LGUs cannot provide the required Scenario one provides for 60 percent coverage investments. Inflation & Monetary 1.3 Figure 35. Simulation of LGU Investments to Achieve Universal Access to WSS services External Sector 1.4 1400 Sector Fiscal 1200 1.5 1000 Employment and Poverty PHP M PhP 800 1.6 Million 600 Outlook & Risks 400 60 200 outlook Growth 2.1 0 1 2 3 4 5 6 Municipality Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Scenario 1 – limited WS coverage Scenario 2 – 100% WS coverage Challenges Risk and Policy Scenario 3 – 100% WS coverage + septage mgt 2.3 WSS budget based on NTA (assumed 30% of LDF) Exclusive Growth the cornerstone Water Security for Resilent & Water Security as Source: World Bank. (2022). Advisory Services and Analytics – Strengthening PH Water Supply and Services. 3.1 the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of 3.3 The way forward: Scaling Up and Speeding Up Summary Executive Efforts on Institutions, Incentives, and Investments for Universal Access to WSS. Economic & Policy Dev Recent The Philippines has taken the first critical country will need to scale up and speed up step by prioritizing reaching universal its ongoing efforts. This way, WSS access Developments Recent Global water and sanitation access by 2030. can be expanded and services can be 1.1 This is a crucial move toward water security improved, while working on the long-term with far-reaching cross-sectoral socio- reforms in the sector. This section discusses Output and economic impacts, especially for the poorest how securing the basics on Institutions, Demand 1.2 households whose access to both water and Incentives and Investments can help in the sanitation has not substantially improved country’s run to reach its 2030 goals. Inflation & over the last ten years. Less than a decade Monetary 1.3 away from the 2030 goalpost, the External Sector 1.4 3.3.1 Institutions: Strengthening Policies and Governance Sector Fiscal 1.5 Given the current operating environment, can be useful for decision-making on the water Employment and policies, institutions, and regulations for uses. Poverty both WRM and WSS need to be reviewed in 1.6 order to improve sector coordination. The WSS Services enabling environment is very critical to facilitate Outlook & the implementation of sustainable long-term A clear funding policy for the sector is Risks 61 programs. necessary and will allow the Philippines to prioritize programs while gradually Water Resources Management implementing WSS devolution. It will also outlook Growth enable the country to catalyze finance and use 2.1 WWRM would allow a more efficient the available resources to incentivize WSPs. A management and allocation of water across draft national government-LGU funding policy Philippines Economic Update December 2023 Poverty and Prosperity Shared various stakeholders and uses. Doing a river- has been prepared by the DBM and is currently 2.2 basin approach which considers all aspects of under review. The country may also consider the water resources within a river basin facilitates formal adoption of a Unified Resource Allocation Challenges IWRM implementation; it also ensures resilience Framework (URAF) as a guide to prioritize Risk and Policy 2.3 from climate risks. It will also help manage support in WSS support. The URAF was conflicting water source requirements that designed to ensure equity of investments and Exclusive Growth the cornerstone includes WSS and irrigation. This will help the use of scarce budget resources to catalyze Water Security for Resilent & Water Security as de-risk water projects, thus enabling greater finance, and attain universal WSS access. investor interest. The current River Basin Development and Management Plans provide Beyond coordination at the national level, very good baseline information on the individual achieving water security at the local level 3.1 river basins. But they lack important items requires working with local governments that are useful for decision-making. There is a and the private sector, with clear regulations. need to operationalize the goals by translating There is a need to strengthen vertical the WSS Gap Understand the plans into specific targets, indicators, and coordination in planning, financing, and 3.2 performance criteria, among others. The IWRM regulation. There is also a need to improve guidelines on a river basin approach exists and horizontal coordination among sector agencies The way foward 3.3 References Contents Table of and the Department of Finance (DOF). The these service providers is needed to ensure LGC clearly states that the LGUs are primarily affordable and sustainable WSS services. Summary Executive responsible for the provision of water supply and sanitation. Funding, financing, The Philippines could consider a holistic, and regulation of WSS, however, involve targeted, and well-coordinated approach Economic & Policy Dev Recent stakeholders at all government levels. There are to address the institutional fragmentation. various arrangements for WSS service delivery The WRMO has a key role to play in leading in LGUs. These include government-owned and the efforts to integrate the NGAs involved in Developments Recent Global controlled corporations (water districts), LGU- WSS. National government agencies need to 1.1 run utilities, community-based water groups, have clear roles in WSS which they should and private water companies. The regulation perform in a coordinated manner. This will of these various water service providers is not ensure the implementation of aligned projects Output and Demand consistent. There are differences in standards and the achievement of sector targets . The 1.2 and procedures for service level requirements WRMO also needs to support and enable the and tariff setting. Additionally, over a third of LGUs to improve WSS provision. As mentioned Inflation & Monetary the country’s population is now served by previously, sustainable reforms take time and 1.3 the private sector for water supply57 through long-term planning. Utilities and LGUs could partnerships with local WDs or LGUs. Joint implement programs using an iterative process Ventures (JVs) are the most prominent mode of – one where they tweak and improve based External Sector 1.4 private sector participation for WDs. Figure 36 on lessons learned from both successes and shows water service providers by management failures. type per municipality. Proper regulation of all Sector Fiscal 1.5 Figure 36. Water Service Providers by Management Type per Municipality (percent based on population coverage) Employment and Poverty 1.6 Outlook & Risks 62 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 Source: World Bank (2022). The way foward 3.3 57 A 2022 World Bank study estimated that about 36% of the country’s population is now served by the private sector. References Contents Table of 3.3.2 Incentives: Focus on Service Providers Summary Executive The tools of the box: tariffs, taxes, and integration of waterworks systems and transfers. Tariffs, taxes, and transfers are infrastructure for safe water use. A national Economic & Policy Dev the three major means for funding water regulatory body will ensure that service Recent investments. Tariffs are user-paid fees and standards and tariff setting mechanisms are typically increase with the amount of service properly defined and aligned across the country. Developments Recent Global used. Cost-recovery tariffs may be estimated Beyond pricing, the national regulatory body to cover the total costs of service provision must ensure that utilities adhere to quality of 1.1 (i.e., including the depreciation and the service, transparency, benchmarking and citizen profitability of the total capital employed), engagement. Output and Demand or some selected portions of these. Any 1.2 costs not recovered through tariffs must be Governance and regulation issues of LGUs/ covered through a combination of taxes and WSPs may be further improved by making transfers, with important differences across government support conditional on meeting Inflation & Monetary certain governance and performance 1.3 countries.58 Balancing the three “Ts” is crucial for governments to achieve water security requirements. The government could sustainably and inclusively, and provide incentivize the performance of service providers. External Sector universal access to WSS. It can make the size and type of fiscal transfers 1.4 dependent on their progress in improving access To price water right, there is a need for a to WSS and service efficiency. Key is setting national regulatory body that will clarify clear standards and monitoring compliance of Sector Fiscal 1.5 service level requirements; set tariff setting service levels for WSPs such as water service mechanisms; and monitor WSP performance. coverage, water quality, availability, pressure, Employment and The LWUA and the National Water Resources non-revenue water, customer service, and Poverty operating efficiency standards, among others. 1.6 Board have different service level obligations imposed on WSPs. JVs are regulated by their contracts which have different obligations. Aside from water pricing as discussed above, Outlook & LGUs have no clear performance standards. the LGUs need to support WSPs on the road Risks 63 All these differences lead to variable pricing to creditworthiness. This can be done by: (i) assumptions and methodologies. Ideally, the ringfencing their cashflows from the overall LGU pricing of water should take into consideration accounts and ensure tariffs can recover costs; outlook Growth 2.1 the following: capital recovery, reasonable rate (ii) undertaking technical capacity building of return, depreciation reserve fund of water program so utilities can sustainably manage utilities, automatic adjustment mechanism, and operate water systems; and (iii) providing Philippines Economic Update December 2023 Poverty and Prosperity Shared operating expenses, and other factors relevant viability gap funding to keep services affordable. 2.2 to the development, construction, installation, WSPs need to work on becoming efficient to commissioning, operation and maintenance, and provide sustainable services (Box 7). Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward 3.3 58 Andres et al., (2019). References Contents Table of Box 7. Financial Viability from Efficiency Gains Summary Executive Efficiency gains can enable a utility to With a 10 percent increase in revenue, become financially viable and help it achieve the proportion of financially viable utilities Economic & Policy Dev creditworthiness. A World Bank study (Goksu increased to 77 percent. The efficiency gains Recent et al., 2017) found that operational efficiency were achieved through measures to cut costs gains could make 65 percent of 690 utilities and increase revenue: collection rate increased Developments Recent Global included in the study financially viable – even to 100 percent; non-labor cost was reduced by prior to implementing tariff reforms. Financial 15 percent; NRW was reduced to 25 percent; 1.1 viability was defined in the study as the and revenue increased by 10 percent. recovery of 120 percent of operating costs. Output and Demand 1.2 Inflation & 3.3.3 Investments: Focus on priority areas; Tap Monetary 1.3 the private sector; and Implement a programmed External approach. Sector 1.4 There is a need to focus on cities where 114 municipal LGUs that have poverty incidence Sector Fiscal 1.5 almost 50 percent of the population lives, above 20 percent and with WSS service as well as in poor and lagging areas. Urban coverage of less than 50 percent. These are Employment and areas face water stress as populations and mostly rural areas that are poor and lagging in Poverty activities grow. The growth of the NCR and services, are badly impacted by disasters, and 1.6 CALABARZON59 is shown in Figure 37 below would need to be prioritized. as an example. These regions account for over 45 percent of the country’s GDP. In addition to There is room from the national to the local Outlook & Risks 64 addressing increasing demand, utilities with level to use their scarce budget resources high NRW must bring this down with much less more strategically to mobilize concessional water to go around in urban areas. The costs of output-based aid (ODA) financing and outlook Growth improved service delivery are much lower when private finance. Full public funding should be 2.1 undertaken through NRW reduction rather than the last resort in areas or projects where the through capital investment projects to augment country cannot mobilize financing. The situation Philippines Economic Update December 2023 Poverty and Prosperity supply (Frauendorfer and Liemberger, 2010). in the Philippines is common. Moreover, is a Shared 2.2 growing awareness by governments and their In addition to cities, WSS investment support partners of the need for a more systematic and needs to be focused on municipal LGUs integrated approach to the public and private Challenges Risk and Policy 2.3 that are poor, vulnerable to climate change financing of the sector (Figure 38). impacts, and are lagging in WSS service coverage. A 2023 World Bank study identified Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 the WSS Gap Understand 3.2 The way foward CALABARZON is an administrative region in the Philippines, designated as Region IV-A. The region comprises five provinces: 59 3.3 Batangas, Cavite, Laguna, Quezon and Rizal; and one highly urbanized city, Lucena. References Contents Table of Figure 37. Rate of Urbanization in NCR and CALABARZON. Summary Executive Economic & Policy Dev Recent Developments Recent Global 1.1 Output and Demand 1.2 Inflation & Monetary 1.3 External Sector 1.4 Sector Fiscal 1.5 Mobilizing private capital to scale up WSS Employment and investments would involve ensuring the Poverty 1.6 projects’ financial viability. The 2021 Philippine Water Supply and Sanitation Masterplan (PWSSMP) estimates that about half of Outlook & Risks the required investments to meet universal 65 coverage will come from the private sector. The government, both national and local, could outlook Growth look at providing viability gap funding, credit 2.1 enhancement, and blended finance. Another entry point in rural WSS is microfinancing. Philippines Economic Update December 2023 Poverty and This refers to the use of small loans to help Prosperity Shared 2.2 households and small businesses afford the cost of water and sanitation services. Microfinancing has been successful in sanitation projects Challenges Risk and Policy that provide small loans to households for 2.3 constructing or improving toilets.60Additionally, some ways to unlock private capital entail getting Exclusive Growth the cornerstone Water Security for Resilent & Water Security as incentives right. This is usually through reforms in policy and regulation. For example, a tariff policy that allows increases for improved services will provide a financing support mechanism to cover operational shortfall during the early years of Source: Tanganco, et al. (2019) 3.1 implementation.61 the WSS Gap Understand 3.2 60 An example of this is Water.org’s WaterCredit Initiative® loan program. The program operates in the following way: (i) Water.org partners with selected institutions (microfinance partners); (ii) The microfinance partners establish WSS loans in their portfolio of offerings, while Water.org provides technical assistance, connections, and resources to get them started; (iii) People in need access these small, affordable loans to put a tap or toilet in their homes and access local resources to do the work; (iv) Every repaid loan is re-lent to another family in The way foward 3.3 need of WSS. Source: Water.org. https://water.org/solutions/watercredit/. 61 IFC (2019). References Contents Table of The Philippines could consider a programmed support is given to those that are most in need. approach to roll out the required WSS Sustainable reforms will require time and long- Summary Executive investments. Such an approach would consist term planning. As such, implementation of the of horizontal integration or an institutional different initiatives may entail a series of forward mechanism for coordination across the NGAs. It movements. It will take time before the lessons Economic & Policy Dev Recent would also have vertical integration with LGUs learned from successful and unsuccessful for funding and capacity development assistance experiences are incorporated. for preparing and implementing projects and Developments Recent Global sustaining utility operations. This approach Investing on water storage will help ensure 1.1 recognizes the multi-level governance context water source for sustainable water supply of providing WSS services. A programmed services by increasing resilience to climate approach is one where public spending follows risks. During drought conditions, stored water Output and Demand a prioritization scheme with clear financing and augments the supply from the natural flow. 1.2 funding arrangements by the national and local During extreme rain events, dams and reservoirs governments (blended financing, viability gap can dampen flood heights downstream. This Inflation & Monetary financing, output-based aid). The programmed strategy could include maximizing current 1.3 approach can also be designed to attract private storage infrastructure by dredging to increase sector participation for WSS projects. Moreover, storage capacity, reoperating, rehabilitating, or it can provide a vehicle to consolidate support retrofitting existing storage. It could also include External Sector 1.4 from donors and development partners. This developing new storage to include natural, built, programmed approach should enable faster and hybrid storage types. Water sources must be rollout of investments for WSS and sustainable sustained to enable long-term water supply that Sector Fiscal service provision by WSPs. It would also allow is climate resilient. 1.5 project prioritization and ensure that government Employment and Figure 38. Scaling up Finance for Water: The Roles of the Public and Private Sector Poverty 1.6 Outlook & Risks 66 outlook Growth 2.1 Philippines Economic Update December 2023 Poverty and Prosperity Shared 2.2 Challenges Risk and Policy 2.3 Exclusive Growth the cornerstone Water Security for Resilent & Water Security as 3.1 Source: Scaling up finance for water (Khemkha et al., 2023). the WSS Gap Understand 3.2 The way foward 3.3 References Contents Table of The above recommendations are summarized below: Summary Executive Table 4. Three Key Priority Areas to Reach Universal Access to WSS. Economic & Policy Dev Recent Main challenges Key recommendations Developments Recent Global The country needs to continue • Clear policies and its reforms in terms of policy, institutional arrangements 1.1 institutions, governance, and with effective coordination, Institutions regulation, including better planning and management integration. Output and across sectors and levels of Demand 1.2 government, development, and enforcement of regulation. These policies Inflation & Monetary include adoption of IWRM 1.3 and a clear funding policy for the sector, among others. External Sector 1.4 The authorities should work • Prices have to accurately toward aligning stakeholders' reflect the true costs of incentives to address climate service provision, O&M, and Sector Fiscal risks sustainably. Climate risks capital costs, as well as the 1.5 Incentives undermine resource availability environmental costs and in both quantity and availability. subsidies that protect the Employment and They also, threaten infrastructures poor Poverty 1.6 not adequately built to sustain • Set clear standards and shocks. monitor compliance of service levels for WSPs. Outlook & • NG and LGUs need to Risks support WSPs on the road to 67 creditworthiness. outlook Growth 2.1 The country has a large • Focus on priority areas – Investments outstanding and projected cities and poor and lagging Philippines Economic Update December 2023 Poverty and infrastructure and sector funding areas. Prosperity Shared 2.2 and financing needs. • The country needs to use scarce public funds more efficiently. Challenges • Tap the private sector. Risk and Policy 2.3 • Adopt a programmed approach to investment rollout. 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