Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital PHILIPPINES ECONOMIC UPDATE December 2024 Edition FIRST STEPS MATTER: EMPOWERING Philippines Economic Update December 2024 EARLY YEARS WORKERS TO BUILD HUMAN CAPITAL Photo: World Bank/Jed Regala Films Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital PREFACE The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analyses, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Philippines. The PEU is a biannual publication of the World Bank’s Macroeconomics, Trade and Investment (MTI) Global Practice (GP), prepared in partnership with the Finance, Competitiveness and Innovation (FCI); Poverty and Equity; Health, Education, and Social Protection and Jobs (SPJ) GPs. Lars Christian Moller (Practice Manager for the MTI GP), Gonzalo Varela (Lead Economist and Program Leader), and Jaffar Al Rikabi (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Cruz (Economist and Task Team Leader), Remrick Patagan (Economist), Patrizia Benedicto (Research Analyst), and Ludigil Garces (Consultant) from the MTI GP; Ou Nie (Financial Sector Economist) from the FCI GP; Liliana D. Sousa (Senior Economist), and Sharon Piza (Economist), and Irene Arzadon (Consultant) from the Poverty & Equity GP; and Paula Maria Cerutti (Senior Economist), Ruth Rodriguez (Senior Social Protection Specialist), Monica Melchor (Consultant) from the SPJ GP. Tara Beteille and Toni Joe Lebbos led the drafting of the Special Focus Note on the Role of Local Government Units and Early Years Workers in Early Childhood Development. They were supported by a World Bank team from the People VPU for the Philippines, including Anna Melissa Guerrero, Ali Winoto Subandoro, Janssen Teixeira, Paula Cerutti, Wei Han, Vida Gomez, and Karthika Radhakrishnan. The work was carried out under the guidance of Caryn Bredenkamp, Cristian Aedo, Manuel Salazar, and Lars Christian Moller. The report was edited by Oscar Parlback (Consultant), and the graphic designer was Pol Villanueva (Consultant). Peer reviewers were Dhruv Sharma (Senior Economist), Ekaterine T. Vashakmadze (Senior Economist), and Elizabeth Ninan (Program Leader). Logistics and publication support were provided by Geraldine Asi (Team Assistant). The External Communications Team, consisting of David Llorito (External Affairs Officer), Stephanie Margallo (Program Assistant), and Moira Enerva (Consultant) prepared the media release, dissemination plan, and web-based multimedia presentation. The team would like to thank Zafer Mustafaoglu (Country Director for Philippines, Malaysia, and Brunei) 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 and perspectives. The findings, interpretations, and conclusions expressed in the PEU are those of the authors and do not necessarily reflect the views of the World Philippines Economic Update December 2024 Bank’s executive board or any national government. If you wish to be included in the email distribution list for the PEU and related publications, please contact Geraldine Asi (gasi@worldbank.org). For questions and comments regarding the content of this publication, please contact Kevin 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. II Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital TABLE OF CONTENTS Preface ii Table of Contents iii List of figures iv List of tables v List of boxes v Abbreviations and acronyms vi Executive Summary 9 Part I. Recent Economic and Policy Developments 12 1.1 Recent Global Developments: Uneven Economic Recovery 13 1.2 Output and Demand in the Philippines: Resilient Despite Headwinds 16 1.3 Inflation and Monetary Policy: Slowdown in Inflation and Monetary Easing 18 1.4 External Sector: Stronger Exports and Weaker Peso 21 1.5 Fiscal Sector: Outperforming Targets 24 1.6 Employment and Poverty: Progress amid Persistent Challenges 26 Part II. Outlook and Risks 30 2.1 Growth Outlook 31 2.2 Poverty Outlook 37 2.3 Risks and Policy Challenges 38 Part III. First Steps Matter: Empowering early year workers to Build Human Capital 45 3.1 Background 46 3.2 Early Years Investments are Crucial for Building Human Capital and Driving Economic Growth 49 3.3 High-quality community-level early year workers are Vital for Improving Early Years Outcomes 57 3.4 The Enabling Environment: National Government Oversight and LGU Initiative 65 3.5 Recommendations 70 Annex 1: Limiting Factors to Investments in Human Capital and the Early Years 75 References 76 Philippines Economic Update December 2024 III Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital LIST OF FIGURES Figure 1. The global composite PMI rose in September, buoyed by the expansion of output in services. 14 Figure 2. Global industrial production continued to expand. 14 Figure 3. Commodity prices moderated in the first eleven months of 2024 as energy prices declined. 15 Figure 4. A recovery in manufacturing and construction has increased the contribution of industry to output growth. 17 Figure 5. Healthy domestic demand continued to drive the expansion of the economy. 17 Figure 6. Slower food and utilities inflation led to a decline in headline inflation in the first eleven months of 2024. 19 Figure 7. The BSP reduced the key policy rate in August amid an improved inflation outlook. 20 Figure 8. Merchandise exports have increased, driven by higher electronics shipments. 22 Figure 9. The CA deficit narrowed while net financial inflows rose in 2024H1. 22 Figure 10. The peso and currencies of regional peers strengthened as the US Federal Reserve initiated monetary easing. 23 Figure 11. Higher public revenues narrowed the fiscal deficit. 26 Figure 12. Public debt marginally decreased as the fiscal deficit narrowed. 26 Figure 13. While unemployment continues to decline, the downward trend of underemployment has been more volatile. 28 Figure 14. Female labor force participation continues to trend slightly upward. 28 Figure 15. The poverty rate declined in 2023… 29 Figure 16. …and inequality is at an all-time low. 29 Figure 17. Actual and projected poverty rates using the LMIC poverty line ($3.65/day) 37 Figure 18. A steady decline in spending and marginal increases in tax revenues will help reduce the fiscal deficit over the medium-term. 40 Figure 19 . Lagging Growth in the Philippine Digital Economy 41 Figure 20. Underperformance of the Philippines in Digital Maturity and Readiness Indices 42 Figure 21. Fixed and mobile broadband access, speed, and cost, ASEAN countries 43 Figure 22. Proportion of adults with ICT skills, ASEAN countries 44 Figure 23. Correlation of Fixed Internet Access and Firm Outcomes in the Philippines 44 Figure 24: Predicted Share of Working Age Population, 2025–2055 47 Figure 25: Change in Per Capita Human Capital in Low-Income Countries, 1995–2018 48 Figure 26: Rate of Return to Investments in Human Capital 49 Figure 27: Prevalence of stunting in the Philippines, 2021 50 Figure 28: Percentage of children aged 3-4 attending school (public and private), 2011-2022 50 Figure 29: Percentage of Grade 5 students by ability to perform early learning tasks prior to primary education by ECE attendance 51 Philippines Economic Update December 2024 Figure 30: Percentage of Grade 5 students who repeated grades by ECE attendance 51 Figure 31: Percentage of children aged 3-4 years old attending school vs. per capita monthly income, by region 52 Figure 32: Human Capital Index Computed at the Subnational Provincial Level 53 Figure 33: Province level sub-national HCI and Income per capita 55 Figure 34: Coverage of Complete Prenatal Care and Tetanus Toxoid Vaccination for Mothers 59 Figure 35: Highest educational attainment of DCW/CDW, by age among municipalities and cities by income classification 61 Figure 36: Share of Spending on Human Capital (% of LGUs’ Total Expenditures), 2018 – 2022 67 IV Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital LIST OF TABLES Table 1. Fiscal performance, Q1–Q3 2023 and 2024 25 Table 2. Economic indicators for the baseline projections 33 Table 3. Contractual arrangements and compensation of early years workers 56 Table 4. Coordination of Community-Based early years workers in the Philippines: Roles and Interventions by Age Range 58 Table 5. Ratio of mean Daycare/Child Development Workers to enrolled children by LGU income class, 2023 59 Table 6. Summary of councils addressing the early years 65 LIST OF BOXES Box 1. The Impact of Policy Rate Cuts on Philippine Firms 34 Box 2. Philippine Digital Economy – Three Foundational Challenges 41 Box 3: International Evidence on the Impact of Early Years Workers 59 Box 4: Community Workforce Strengthening for the Early Years: Landmark Legislation 64 Box 5: San Antonio, Quezon’s PBG Tips the Scale Toward a Green Banner Award 71 Philippines Economic Update December 2024 V Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital ABBREVIATIONS AND ACRONYMS 4Ps Pantawid Pamilyang Pilipino Program DSWD Department of Social Welfare and Development ACPC Agricultural Credit Policy Council ECCD early childhood care and development AEs advanced economies ECD early childhood development AIP annual investment programs ECE early child education AKAP Ayuda sa Kapos ang Kita Program EDCOM 2 Second Congressional Commission on Education ASEAN Association of Southeast Asian Nations EFD External finance dependence ASPBI Annual Survey of Philippine Business EMDEs emerging market and developing and Industry economies bbl barrel FA Financial Account BHW Barangay health workers FDI foreign direct investment BIR Bureau of Internal Revenue FDSWs family development session workers BNAPs Barangay Nutrition Action Plans FIES Family Income and Expenditure Survey BNS Barangay nutrition scholars G2B Government-to-Business BOP balance-of-payments G2C Government-to-Citizen BSP Bangko Sentral ng Pilipinas G2G Government-to-Government BTr Bureau of the Treasury GDP gross domestic product CA current account GIR gross international reserves CDC child development center GNI gross national income CDPs comprehensive development plans GOCCs Government-owned and controlled corporation CDT child development teacher HCI Human Capital Index CDWs child development workers HCR Human Capital Review CHED Commission on Higher Education HCSC Household Convergence Scorecard CHT community health team HRH human resource for health CHWs community health workers HUCs highly urbanized cities CWC Council for the Welfare of Children ICT Information and Communication Philippines Economic Update December 2024 Technology DBM Department of Budget and Management ISP internet service provider DCC daycare center IT-BPO Information technology - business process outsourcing DCWs daycare workers ITED infant and toddler early education DepEd Department of Education IYCF infant and young child feeding DID Difference in differences LDIP local development investment programs DILG Department of the Interior and Local LEP local expenditure programs Government VI DOH Department of Health LFPR labor force participation rate Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital LFS Labor Force Survey PMI Purchasing Managers' Index LGUs local government units PMNP Philippines Multisectoral Nutrition Project LMIC Low and Middle Income Countries PPAs programs, projects, and activities MNAO Municipal Nutrition Action Officer PPPs public-private partnerships MNAP Municipal Nutrition Action Plans ppts percentage points NAC The 4Ps’ National Advisory Council PSA Philippine Statistics Authority NCR National Capital Region SBC social behavioral change NG National Government SDG Sustainable Development Goals NGAs national government agencies SHF special health fund NNC National Nutrition Council SURE Survival and Recovery NTA National Tax Allotment SWDI Social Welfare and Development Indicator OFWs overseas Filipino workers TESDA Technical Education and Skills Development Authority OPEC Organization of the Petroleum Exporting UMIC Upper middle income countries Countries OPT Operation Timbang UNICEF United Nations Children’s Fund PBGs performance-based grants US United States PCB Program Convergence Budgeting VAT Value-added tax PDP Philippine Development Plan WHO World Health Organization PFM Public financial management yoy year-on-year PHC primary health care YTD year to date PIDS Philippine Institute for Development Studies Philippines Economic Update December 2024 VII Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital EXECUTIVE SUMMARY Recent Economic and Policy Developments Q3 2023), as the government kept pace with its ongoing fiscal consolidation agenda. The lower Resilient growth despite ongoing challenges deficit was driven by increased revenue collection, particularly from non-tax revenues resulting from an The Philippines was one of the fastest-growing increase in mandatory dividend remittances from economies in EAP, with GDP growth increasing to government owned and controlled corporations. 5.8 percent in Q1-Q3 2024 (5.6 percent in Q1-Q3 The increase in public spending was driven by an 2023). Services continued to lead growth, particularly increase in public investment and higher operating financial services, wholesale and retail trade, and expenditures. Public debt remained stable at 61.3 business services. Industry growth increased as percent of GDP, with a favorable composition of long- manufacturing benefited from the slight recovery in term, peso-denominated, and domestically sourced goods exports and solid domestic demand. Increased debt, reducing vulnerability to external shocks. construction activity likewise bolstered industry and investment growth, due to strong public infrastructure The current account deficit narrowed to 3.2 spending. However, agriculture contracted due to percent of GDP in the first half of 2024. It was the impact of extreme weather events, highlighting supported by a modest recovery in merchandise the sector’s vulnerability to climate shocks and exports amid stabilizing global growth and external longstanding structural challenges resulting in low demand for electronics and chemicals. However, productivity. On the demand side, faster growth of services exports slowed due to moderating growth government spending supported growth, driven by in IT-BPO services and international tourist arrivals. improved program execution. Household consumption Higher remittances and portfolio investments growth, while still the main driver of growth, edged bolstered the financial account. In addition, net foreign down compared to a year ago, due to inflationary direct investment inched up alongside improving pressures in key staple commodities and tight global investor sentiment and easing global financial financing conditions. conditions. Gross international reserves increased to 8.1 months of imports. Growth was supported by an improvement in domestic conditions Robust growth led to gains in the job market and poverty reduction Inflation reached the target, facilitating the easing of monetary policy. Headline inflation averaged Unemployment fell to from 4.5 percent in 3.2 percent in the first eleven months of 2024, (6.2 September 2023 to 3.7 percent in September percent a year ago), amid lower food and utility prices. 2024, driven by the net-creation of 2.2 million However, rice inflation remained elevated at 17.8 jobs. Strong growth in the services sector drove percent, disproportionately affecting poor households. job creation, generating an additional 2.5 million To mitigate these pressures, the government reduced jobs. Part of the services sector job growth was on Philippines Economic Update December 2024 rice import tariffs and adjusted social assistance the back of productivity-enhancing reallocation of programs. The Bangko Sentral ng Pilipinas (BSP) workers away from agriculture. Agriculture declined reduced its policy rate by 50 basis points in 2024 in September, consistent with structural shifts in the and lowered the reserve requirement ratio for banks. economy over the past decade and weather-related Monetary easing supported liquidity and lowered disruptions. borrowing costs, aligning with global trends and contributing to improved financial conditions. Economic recovery and strong social protection programs resulted in a substantial reduction in The fiscal deficit fell to 5.1 percent of GDP in the poverty in 2023. Poverty fell to 15.5 percent in 2023, first three quarters of 2024 (5.7 percent in Q1- lower than the post-COVID rate of 18.1 percent in 9 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 2021 and the pre-pandemic level of 16.7 percent Addressing vulnerabilities through social protection in 2018. This improvement was supported by the and disaster risk management will be critical to economic recovery since 2021, which led to strong sustaining progress. job creation, a recovery in household incomes, and social protection programs that supported vulnerable Addressing gaps in human capital, particularly sectors. through early years investment, is vital for sustaining poverty reduction, boosting Outlook and Risks productivity, and achieving inclusive growth in the Philippines. Chapter 3 of the report examines the The economy is projected to grow at an average of urgent need to unlock the Philippines’ demographic 6.0 percent annually from 2024 to 2026, supported dividend and sustain inclusive growth. It underscores by robust domestic demand, sustained public the critical role of Local Government Units (LGUs) in investment, and a dynamic services sector. While enhancing early childhood development by improving the baseline growth forecast for 2024 was revised the performance of early years workers. Early years downward to 5.9 percent due to the intensification workers are essential for building the foundation of of climate-related events such as El Nino and La a productive and equitable society. By addressing Nina, the medium-term outlook remains strong. The critical needs during the early stages of life, they outlook will be anchored on improving conditions contribute to long-term economic development and for private domestic demand. These include: easing the reduction of poverty, making them key players in inflation, more accommodative monetary policy, and achieving sustainable and inclusive growth. the government’s commitment to sustained public investment. Altogether, these are expected to maintain Special Focus Chapter: First Steps Matter: investment rates at relatively high levels, increasing Empowering early year workers to build potential output. human capital The balance of risks, however, remains tilted The Philippines currently faces a significant human to the downside, led by increased uncertainty capital challenge. The Philippines’ Human Capital surrounding the external environment. On the Index (HCI)1 is estimated at 0.52, well below the HCI external front, there is an increase in uncertainty of neighboring upper-middle income countries, such with respect to trade distortive measures by large as Malaysia (0.62), Thailand (0.61), and Indonesia economies that may affect global trade and dampen (0.54). It is also lower than lower middle-income peers the global outlook. Additional external risks include such as Vietnam (0.69). Despite notable economic slower growth in China, and an intensification of progress, the level of HCI indicates that children conflict and geopolitical tensions that could disrupt are not reaching their full potential. This shortfall is trade and commodity markets further. Domestically, particularly evident in early years outcomes, with high persistent inflationary pressures, delays in monetary rates of stunting, low enrollment in early childhood policy easing and the implementation of investment education, and significant disparities across different reforms could weaken private consumption and regions. investment growth. Early years workers are crucial for delivering Poverty reduction is expected to accelerate, with Philippines Economic Update December 2024 essential health, nutrition, and early childhood the poverty rate expected to decline further until development services. However, they face numerous 2026. Poverty incidence (based on the lower-middle- challenges, including shortages, inadequate income country poverty line of US$3.65/day, 2017 qualifications, limited training, and low motivation. PPP) is projected to decrease from 15.5 percent in These challenges are further compounded by systemic 2023 to 13.6 percent to 11.3 percent by 2026. This issues at the LGU level, such as insufficient funding, reduction is projected to be supported by robust coordination failures, and weak public financial economic growth, rising real household incomes. management. As a result, up to 26 percentage points Climate-related shocks and inflationary pressures on in human capital potential could be lost due to LGU- food prices remain key risks to poverty alleviation. specific factors, including governance and service 1 The HCI, a key metric for the World Bank Group’s analysis of human capital formation is the which measures, the constraints to productivity of 10 the next generation of workers given the prevailing rates of mortality, schooling, and health in 174 countries. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital delivery inefficiencies. Addressing these challenges is services and leveraging mechanisms like Program essential for improving service delivery and outcomes. Convergence Budgeting (PCB) to pool resources across sectors. Additionally, it suggests improving A multifaceted approach is needed to address the enabling environment by harmonizing the roles these challenges, that will require bold policy of national and local governments, building local reforms. Reforms include building a strong foundation management capacity, enhancing monitoring and by addressing worker shortages, enhancing capacity, evaluation systems, and fostering community-level and motivating early years workers through targeted coordination. These measures intend to create a training programs, robust monitoring systems, and supportive environment that enables early years improved compensation and incentives. The report workers to perform more effectively and to achieve also recommends using performance-based grants improved early year outcomes among Filipino children. (PBGs) to encourage LGUs to prioritize early years Philippines Economic Update December 2024 Photo: Shutterstock/ Wirestock Creators 11 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1 Recent Economic and Policy Developments Philippines Economic Update December 2024 12 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.1 RECENT GLOBAL DEVELOPMENTS: UNEVEN ECONOMIC RECOVERY The global economy continued to stabilize in the first nine months of 2024, supported by resilient services trade and a pickup in consumer spending in advanced economies (AEs). Commodity prices eased considerably, contributing to the decline in global inflation. As a result, global financial conditions have eased, alleviating exchange rate pressures in several emerging market and developing economies (EMDEs) (World Bank 2024). Global economic activity steadied buoyed by pre-pandemic average (3.5 percent average growth in growth in the services sector. Global activity firmed 2010 – 2019). Meanwhile, new export services orders in the first nine months of 2024, despite elevated continued to expand in Q1-Q3 2024, driven by a financing costs and heightened geopolitical tensions sustained recovery in international tourism and strong that weighed on business confidence. Consequently, demand for financial services. As a result, services manufacturing activity in many emerging markets exports supported growth of several EMDEs, including and developing economies (EMDEs), including the the Philippines (World Bank 2024). Philippines, was buoyed by a rebound in global goods trade (World Bank 2024). Although the labor Commodity prices moderated in the first eleven market cooled, economic activity in the United months of 2024, and global financial conditions States (US) remained robust, driven by a pickup in have eased. Energy prices have declined since April consumer spending on both goods and services. 2024 amid ample supply. Brent crude oil prices Meanwhile, activity in the euro area was accompanied eased to an average of US$75.7/bbl in November by a moderation in inflation and rising consumer (down from US$91.1 in the same period last year), confidence. The global Purchasing Managers Index benefitting net oil importers such as the Philippines. (PMI) averaged 52.5 in Q1–Q3 2024, buoyed by new Meanwhile, the oversupply in oil became even business in the services sector (Figure 1).2 more pronounced in part due to weaker demand in China and its increase of take up of electric vehicles The recovery in global goods trade remained and trucks powered by liquified natural gas (World below pre-pandemic levels, although global Bank 2024). Similarly, natural gas prices in the US services trade continued to stabilize. Global and Europe eased in the same period despite the merchandise trade expanded by an average of 1.5 upcoming heating season, amid high inventories and percent, yoy, in Q1-Q3 2024 (-1.5 percent over the subdued industrial demand. Meanwhile, non-energy same period in 2023). Goods trade expanded despite commodity prices, including for agriculture, have elevated in the third quarter shipping costs due to the recorded a slight uptick since August. Nevertheless, frontloading of imports into the US in anticipation of both global headline and core inflation continued to potential trade disruptions. As a result, the growth in decline. Along with a softening American labor market, Philippines Economic Update December 2024 global industrial production more than doubled in Q1- this prompted the US Federal Reserve to cut the Q3 2024 compared to a year ago (Figure 2). However, policy rate by 75 basis points since September. the growth in global goods trade remained below 2 The Purchasing Managers’ Index (PMI) is an economic indicator derived from surveys, aiming to provide timely insights into business conditions within the manufacturing, services, and composite output sectors. It includes various sub-indices such as business output, new orders, employ- 13 ment, costs, selling prices, exports, purchasing activity, supplier performance, and backlogs of orders and inventories. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 1. The global composite PMI rose in September, buoyed by the expansion of output in services. 56 54 52 (+50 = expansion) 50 PMI 48 46 44 Ju 3 Ju 4 N 22 M 23 N 23 M 24 24 Ja 2 Ja 3 M 23 M 24 S e 23 S e 24 -2 -2 -2 -2 - - n- n- l- l- p- p- p- ay ay ar ar ov ov Se Services Manufacturing Composite Source: Haver Analytics. Figure 2. Global industrial production continued to expand. 7 6 5 4 3 Percent 2 1 0 -1 -2 -3 -4 Nov-22 Nov-23 May-23 May-22 Sep-22 Sep-23 May-24 Mar-22 Mar-23 Mar-24 Jan-22 Jan-23 Jan-24 Jul-22 Jul-23 Jul-24 Philippines Economic Update December 2024 Goods Trade Volume Industrial Production Source: Haver Analytics. 14 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 3. Commodity prices moderated in the first eleven months of 2024 as energy prices declined. 110 105 100 (January 2023 = 100) 95 Index 90 85 80 75 70 23 24 23 24 3 4 3 23 4 24 3 4 l-2 l-2 -2 -2 -2 -2 p- p- - - n- n- ov ov ay ay ar ar Ju Ju Ja Ja Se Se M M M M N N Energy Agriculture Metals and Minerals Source: Haver Analytics. Philippines Economic Update December 2024 Photo: Shutterstock/MDVEdwards 15 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.2 OUTPUT AND DEMAND IN THE PHILIPPINES: RESILIENT DESPITE HEADWINDS The Philippines remains among the fastest growing economies in the East Asia and Pacific region, underpinned by robust domestic demand. Stronger public consumption growth and investment offset a moderation in private consumption. On the production side, a recovery in construction activity and a modest expansion in manufacturing supported by economic activity. A series of weather disturbances also disrupted supply chains and limited domestic mobility. The Philippines outperformed most of its regional structural weaknesses in the broader economy such peers as of the third quarter of 2024 due to as underinvestment in infrastructure and support improved domestic demand conditions. GDP services.3 growth accelerated from 5.6 percent in Q1-Q3 2023 to 5.8 percent during the same period this year. This On the demand side, public consumption and year-on-year growth is behind only Viet Nam (6.8 investment picked up the slack in household percent) among peers in the ASEAN region. Along consumption. The growth contribution of public with Indonesia and Thailand, the Philippines has seen consumption rose from 0.2 ppt in Q1-Q3 2023 to moderating private consumption. However, the lower 1.0 ppt in the same period this year (Figure 5). This is growth contribution of private consumption has been due to faster disbursements and, to a lesser extent, more than offset by higher investment and public preparations for the 2025 mid-term elections. Public consumption spending. Monetary policy remained investment spending also drove up the growth tight in H1 2024 given elevated inflation, but sustained contribution of construction from 1.3 ppts in the same disinflation into Q3 2024 has allowed the Bangko period in 2023 to 1.7 ppts this year. This more than Sentral ng Pilipinas (BSP) to reduce interest rates. offset the decline in investment in durable equipment External demand remains weak notwithstanding a due to still muted external demand. High interest slight YTD rebound in goods exports, given the fragile rates also slowed lending for production activities. recovery in global goods trade. Household consumption continued to be the primary driver of domestic demand, underpinned by a strong On the production side, services remains the main labor market, steady remittance inflows, and resilient growth engine of the economy. Steady demand consumer lending. However, its contribution to growth for trade, financial activities, and business services declined from 4.1 ppts in 2023 to 3.5 ppts this year supported the growth contribution of services in due to cost-of-living pressures particularly from still- Q1-Q3 2024 (Figure 4). Meanwhile, the contribution elevated rice prices. In Q3, household consumption to growth of transportation, accommodation and spending accelerated for the first time this year food service activities, and other services have alongside a significant slowdown in inflation. Philippines Economic Update December 2024 moderated in part due to fading pent-up demand and lower growth in international arrivals. The growth Exports increased due to a modest improvement contribution of industry increased as manufacturing in global demand. The growth contribution of exports benefited from the slight recovery in goods exports rose from 0.8 ppt in Q1-Q3 2023 to 1.1 ppts this year. and solid domestic demand. Adverse impacts of a This was driven by modest growth in goods exports series of weather disturbances on crops and disease and services exports .The slowdown in services outbreaks on livestock led to a contraction in exports is due to moderating growth in information agriculture. Weather shocks also exacerbated technology–business process outsourcing (IT–BPO) 3 In recent years, the agriculture sector’s contribution to growth has been adversely affected by the increasing frequency and intensity of extreme weather events, posing a growing risk to productivity and resilience. Provinces with heightened agricultural activity are also those exhibiting higher incidence of extreme rainfall, amplifying vulnerabil ity to crop damage and soil erosion. Source: World Bank ETIIC Firms and Climate Adaptation Toolkit, and Philippine Statistics Authority. 16 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital services and international tourist arrivals. Goods Imports of rice increased in both volume and value imports have started to recover largely due to higher following reduced domestic production due to drought imports of raw materials and intermediate goods. For conditions in H1 2024 and the spike in international consumer goods, growth was driven by higher import prices caused by Indian export restrictions in August values of refined petroleum products and rice. 2023. Figure 4. A recovery in manufacturing and construction has increased the contribution of industry to output growth. Services Mining, Constructions, and Utilities Manufacturing Agri, Fishery, & Forestry 15 10 5 Percentage point 0 -5 -10 -15 -20 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2018 2019 2020 2021 2022 2023 2024 Source: Philippine Statistics Authority (PSA). Figure 5. Healthy domestic demand continued to drive the expansion of the economy. Private Consumption Government Consumption Capital Formation Exports Imports Statistical discrepancy Real GDP growth 30 20 10 Philippines Economic Update December 2024 0 Percent -10 -20 -30 -40 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2018 2019 2020 2021 2022 2023 2024 Source: PSA. 17 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.3 INFLATION AND MONETARY POLICY: SLOWDOWN IN INFLATION AND MONETARY EASING Inflation returned to the BSP’s target range as food and utilities price increases softened. However, the price of rice remains elevated, disproportionately impacting poor households. The BSP reduced its key policy rate in August and October as inflation declined and remained on a target-consistent path. Moderating food inflation and lower electricity 17.9 percent of the consumption basket of rates led to lower headline inflation in the first households in the bottom 30 percent of the income ten months of 2024 (Figure 6). Headline inflation distribution. As a result, average inflation for these averaged 3.2 percent between January and November households remained higher than the headline 2024, much lower than an average of 6.2 percent over inflation at 4.3 percent. In response, the government the same period in 2023 and within the BSP’s 2–4 reduced import tariffs on rice from 35 percent to 15 percent target range. Despite the slowdown, inflation percent in July.6 To ensure the affordability of food, remained higher than in Indonesia (2.4 percent), the government also plans to adjust the value of cash Malaysia (1.8 percent), and Thailand (0.3 percent). grants in the Pantawid Pamilyang Pilipino Program Except for rice, inflation for most food items declined (4Ps) to account for inflation. due to a stable supply and more favorable base effects. While the price of fish, sugar, and vegetables The BSP started its monetary easing cycle in declined, meat and milk recorded small price upticks. August (Figure 7), as inflation eases and is on a Meanwhile, utilities inflation slowed as the decline target-consistent path. The BSP cut its key policy in coal prices resulted in lower electricity rates.4 In rate by 25 bps on August 15, which was followed by addition, easing global crude oil prices weighed on another rate reduction of 25 bps on October 16. The fuel prices, contributing to lower headline inflation. BSP cited the improving inflation outlook due to the Core inflation, which excludes volatile food and energy government’s non-monetary interventions to combat items, fell to 3.0 percent in the first ten months of upward price pressures as a reason for loosening 2024, lower than 6.8 percent over the same period in its monetary stance. Moreover, the BSP noted that 2023. The slowdown in core inflation indicates waning inflation is following a target-consistent path and underlying price pressures. inflation expectations remain well-anchored. The BSP’s decision also reflected monetary easing by the However, rice inflation soared, disproportionately US Federal Reserve. In addition to cutting rates, the affecting the poorest Filipinos. Rice price inflation BSP also reduced banks’ reserve requirement ratio rose from 7.0 percent, on average, during the first ten by 250 bps to 7 percent in September. This move months of 2023 to 17.8 percent in the same period in aims to reduce distortions in the financial system, 2024. Export restrictions abroad, coupled with lower lower intermediation costs, and improve the pricing domestic production due to El Niño contributed to of financial services by decreasing the portion of Philippines Economic Update December 2024 rice price increases.5 Poor households are especially deposits that banks cannot lend out. vulnerable to the high price of rice, as rice constitutes 4 The price of coal averaged $136.18/mt between January and October 2024, lower than $180.47/mt recorded in the same period in 2023. 5 Global rice prices increased in in the first ten months of 2024, particularly the Vietnamese 5% variety, which comprises most of the country’s rice imports. The price of this variety climbed by 13 percent during this period to US$568.43/mt. Likewise, other rice varieties from Thailand increased by 12 percent. 6 President Ferdinand Marcos signed Executive Order No. 62 on June 20, 2024. The order lowered import tariffs on rice from 35 percent to 15 18 percent until 2029. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 6. Slower food and utilities inflation led to a decline in headline inflation in the first nine months of 2024 Contribution to inflation Ric e 9 Other non-food Tra nsport Util ities Alcohol ic beverages and t oba cco 7 Food a nd non-alcohol ic beverages exc l. rice Headline inflati on Core infla tion Percentage point 5 3 2.5 1 -1 Jun Jun Jul Jul Nov Nov Nov Dec Dec Mar Apr Mar Apr Feb Sep Feb Sep Jan Jan Aug Aug May May Oct Oct Oct 2022 2023 2024 Source: PSA. Philippines Economic Update December 2024 Photo: Shutterstock/Jill Gulles 19 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 7. The BSP reduced the key policy rate in August amid an improved inflation outlook. 12 10 8 Percent 6 4 2 - Jul Jul Jan Jan Nov Nov May Jan Jul Mar Mar Sep Sep May Mar Nov Sep May 2022 2023 2024 Headline inflation Food and non-alcoholic beverages Core infla tion BSP policy rate Sources: Bangko Sentral ng Pilipinas (BSP); PSA Philippines Economic Update December 2024 Photo: Shutterstock/MDVEdwards 20 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.4 EXTERNAL SECTOR: STRONGER EXPORTS AND WEAKER PESO The current-account (CA) deficit narrowed as the merchandise trade balance increased due to higher electronics exports in the first half of 2024. Meanwhile, net financial inflows rose amid higher foreign interest in domestic debt securities. The Philippine peso has weakened in the first ten months of 2024. The CA deficit narrowed from 4.1 percent of GDP financial conditions. FDI inflows continue to consist in 2023H1 to 3.2 percent in 2024H1, driven by of mainly investments in manufacturing, real estate, higher merchandise exports. Merchandise exports and construction. Meanwhile, other investments have benefited from stabilizing global activity, recorded lower net inflows (1.7 percent of GDP in expanding by 5.4 percent in H1 2024 due to solid 2024H1) due to lower withdrawals of currency and growth in exports of legacy electronics, coconut oil, deposits abroad by private corporations, as well as by and chemicals. By contrast, merchandise imports slower external borrowing by the national government. contracted by 0.5 percent due to lower prices of coal Despite the lower CA deficit and higher net FA inflows, and coke, as well as tepid private domestic demand the balance-of-payment (BOP) surplus declined for imported capital goods amid subdued investment from 1.1 percent of GDP in 2023H1 to 0.7 percent in demand as borrowing costs remained high.7 The 2024H1, as the BSP recorded a smaller amount of net merchandise trade deficit declined by 1.8 ppt of GDP unclassified items (Figure 9). in the same time period (Figure 8). However, net services trade receipts moderated by 0.8 ppt of GDP The Philippine peso weakened since early 2024. driven by the doubling of spending of Filipino tourists The peso initially depreciated against the US dollar abroad, and slower growth in receipts from inbound in the first half of 2024 due to fears of prolonged tourism and IT-BPO exports. Meanwhile, net receipts monetary policy tightening in the US, tracking the in the primary and secondary income accounts grew currency movements of its regional peers such as due to higher income from residents’ investments the Indonesian rupiah, Thai baht, Malaysian ringgit, abroad (8.7 percent, yoy) and sustained growth in and Vietnamese dong (Figure 10). Since July, the remittances (3 percent, yoy), respectively. peso partially recovered as the US Federal Reserve reduced the federal funds rate in September. The Higher foreign portfolio investments fueled the US rate cut resulted in wider interest differentials rise in net inflows in the financial account (FA) relative to emerging economies, making assets in from 3.0 percent of GDP in 2023H1 to 4.7 percent these economies more attractive to international in 2024H1. The portfolio investment account reversed investors. Between January and October, the peso to a net inflow (2.1 percent of GDP in 2024H1), driven depreciated by 7.5 percent in real effective terms by a tripling of foreign demand for debt securities against a basket of currencies from its major trading offered by private corporations and the national partners due to higher domestic inflation.8 Meanwhile, Philippines Economic Update December 2024 government. In addition, net foreign direct investment gross international reserves (GIR) rose by 8.8 percent (FDI) inched up by 0.3 ppt of GDP (2 percent of GDP during the same period, rising to US$112 billion as of in 2024H1) amid improving global investor sentiment October. The GIR remained adequate at 8.1 months’ and easing global worth of imports of goods and payments of services and primary income. 7 These capital goods include telecommunication equipment, electrical machinery, aircraft, and ships and boats. 8 The basket includes the currencies of the following trading partners: Australia, the European Union (euro area), US, Japan, Hong Kong, Taiwan, Thailand, Indonesia, Malaysia, Singapore, South Korea, China, Saudi Arabia, and the United Arab Emirates. 21 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 8. Merchandise exports have increased, driven by higher electronics shipments. Goods Trade 40 31.9 28.3 28.8 27.0 30 26.1 22.1 20 14.6 13.0 13.8 14.3 12.9 12.7 Percent of GDP 10 0 -10 -9.1 -13.7 -12.3 -14.2 -20 -16.0 -17.6 -30 H1 2019 H1 2020 H1 2021 H1 2022 H1 2023 H1 2024 Trade Balance Exports Imports Source: BSP. Figure 9. The CA deficit narrowed while net financial inflows rose in 2024H1. Balance of Payments Components 6 4 2 Percent of GDP 0 -2 -4 -6 -8 Philippines Economic Update December 2024 H1 2019 H1 2020 H1 2021 H1 2022 H1 2023 H1 2024 Current Account Financial Account Capital Account Ne t Unclassified Items Overall BOP Position Source: BSP. 22 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 10. The peso and currencies of regional peers strengthened as the US Federal Reserve initiated monetary easing. January 2024 = 100, end of period 114 109 104 99 94 24 24 4 4 4 4 24 24 4 4 l-2 -2 -2 2 -2 -2 n- p- n- r- g- b ar ct ay Ju Ap Ju Ja Au Fe Se M O M Indonesia Malaysia Philippines Thailand Vietnam Sources: Haver Analytics; various central banks. Philippines Economic Update December 2024 Photo: Shutterstock/ Wara1982 23 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.5 FISCAL SECTOR: OUTPERFORMING TARGETS Increased revenue collection amid higher dividend remittances from government-owned and controlled corporations (GOCCs) narrowed the fiscal deficit in the first three quarters of 2024. Meanwhile, the national government debt increased to 61.3 percent of GDP by end- September 2024. The fiscal deficit narrowed in the first three Public spending accelerated mainly due to quarters of 2024 as revenues surged (Figure 11). higher interest payments and capital outlays. Revenues remained above the government’s quarterly Disbursements increased from 22.1 percent of GDP program at 17.5 percent of GDP in Q1–Q3 2024, in Q1–Q3 2023 to 22.6 percent of GDP in the same led by the sharp increase in non-tax revenues (Table period in 2024. Current expenditures rose by 0.3 1). Public spending totaled 22.6 percent of GDP in ppt of GDP, driving the increase in disbursements. the same period (above planned expenditure) on Interest payments rose due to additional issuances the back of higher capital outlays. The fiscal deficit of government securities and fluctuating foreign narrowed from 5.7 percent of GDP in Q1–Q3 2023 to exchange rates. In addition, maintenance spending below the government’s target at 5.1 percent of GDP increased owing to the expansion in coverage of in the same period in 2024. Concurrently, national social protection programs and increased spending government debt increased to 61.3 percent of GDP on health programs. Furthermore, the expenses of by end-September 2024 as the government attained the Commission of Elections increased in preparation 89.5 percent of the full-year borrowing program and for the upcoming national and local elections in slowing growth for Q3 2024 (Figure 12). The country’s 2025. The increase in maintenance spending offset debt metrics remained sustainable, as most of public the reduction in personnel services expenditures, debt was long-term (79.9 percent), peso-denominated which were tempered by ongoing fiscal consolidation. (68.2 percent), and from domestic sources (68.8 Meanwhile, capital outlays increased by 0.3 ppt of percent). GDP due to higher infrastructure spending related to the implementation and completion of various road Public revenues increased driven by the growth of infrastructure programs. non-tax revenues from dividend remittances from GOCCs. Public revenues rose by 1.0 ppt of GDP in Q1-Q3 2024, of which 0.8 ppt of GDP was from non- tax revenues. Dividends and other non-tax revenues rose as the Department of Finance increased the mandatory dividend remittances of GOCCs in April 2024.9 Meanwhile, tax revenues increased by 0.2 ppt of GDP in Q1–Q3 2024, driven by the expansion in value-added tax (VAT) collections. VAT increased by 0.5 ppt of GDP consistent with still robust growth in private consumption. Higher VAT collections more Philippines Economic Update December 2024 than offset the slight decline in excise tax collections, which have fallen short of the government’s target. The underperformance of excise taxes was driven in part by illicit trade in tobacco products, eroding the revenue base. However, tax revenues from Photo: Shutterstock/Simon Roughneen international trade and transactions shrunk by 0.2 ppt of GDP, consistent with softer import growth in the first half of the year. 9 The Department of Finance increased the mandatory dividend remittances of GOCCs to the national government from 50 percent of their annual net 24 earnings (as stipulated in Republic Act No. 7656) to 75 percent in April 2024. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Table 1. Fiscal performance, Q1–Q3 2023 and 2024 Q1-Q3 FISCAL INDICATORS 2023 2024 Actual Program Actual Difference Percent REVENUES 16.4 16.7 17.55 1.0 6.2 Tax Revenues 14.7 15.0 14.9 0.2 1.3 Bureau of Internal Revenue 10.8 11.2 11.1 0.3 3.2 Bureau of Customs 3.8 3.7 3.7 -0.2 -4.2 Non-Tax Revenues 1.7 1.7 2.6 0.8 49.1 EXPENDITURES 22.1 22.4 22.6 0.5 2.2 Current Operating Expenditures 16.1 16.5 16.4 0.3 1.8 Personnel Services 5.8 5.5 5.5 -0.3 -4.4 Maintenance and Other Operating Exp. 3.7 3.9 4.0 0.3 9.2 Subsidy 0.8 0.8 0.6 -0.2 -29.8 Allotment to LGUs 3.1 3.1 3.0 0.0 -1.4 Interest Payments 2.7 3.1 3.1 0.4 16.0 Tax Expenditures 0.1 0.0 0.2 0.1 53.4 Capital Outlays 5.9 5.9 6.2 0.3 4.8 Infrastructure and Other Capital Outlays 5.0 4.7 5.2 0.2 4.9 Capital Transfers to LGUs 0.0 1.0 0.0 0.0 220.5 Equity 0.9 0.2 1.0 0.0 3.0 SURPLUS/(DEFICIT) -5.7 -5.7 -5.1 0.6 -9.7 Sources: Bureau of Treasury (BTr); Department of Budget and Management (DBM). Philippines Economic Update December 2024 Photo: Shutterstock/Stock Photos 2000 25 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 11. Higher public revenues narrowed the fiscal deficit. 25 20 15 Percent of GDP 10 5 0 -5 -10 2019 2020 2021 2022 2023 Q1-Q3 Q1-Q3 2023 2024 Revenues Expenditures Fiscal Balance Tax Revenues Non-tax revenues Source: BTr. Figure 12. Public debt marginally decreased as the fiscal deficit narrowed. 70 61.3 60 50 40 Percent 30 20 10 0 10 11 12 13 14 15 16 17 18 19 20 21 22 23 3 Q Philippines Economic Update December 2024 20 20 20 20 20 20 20 20 20 20 20 20 20 20 24 20 Domestic External Source: BTr. 26 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 1.6 EMPLOYMENT AND POVERTY: PROGRESS AMID PERSISTENT CHALLENGES Significant job creation and improvements in female labor force participation highlight the country’s healthy labor market. Meanwhile, latest poverty estimates reveal a significant reduction in poverty and inequality from 2021 to 2023 that coincided with the economic recovery and improved household incomes. Employment continued to improve, with more Despite continued improvements in the Philippine Filipinos securing jobs compared to a year ago. labor market, significant challenges persist. High The economy generated an additional 2.2 million jobs underemployment, the prevalence of low-quality in September 2024 compared to a year ago, bringing informal employment, and a relatively stagnant total employment to 49.9 million Filipinos despite youth LFPR threaten sustained advancements in softer GDP growth in Q3 2024. Increased job creation the labor market. Underemployment remains high, led to a decline in the unemployment rate to 3.7 accounting for over 1 in 10 workers in September percent in September 2024 (4.5 percent in September 2024. Vulnerable forms of employment are prevalent, 2023), reflecting healthy activity in the services sector with the proportion of workers who are self-employed (Figure 13). Youth unemployment similarly declined or working in family-operated farms or businesses from 13.1 to 10.1 percent from September 2023 to increasing from 35.3 percent in September 2023 to 2024. Moreover, the country continues to make gains 36.1 percent in September 2024. Meanwhile, labor in terms of the female labor force participation rate force participation among vulnerable groups has (LFPR). The female LFPR increased to 55.7 percent shown uneven progress, as the youth LFPR increased in September 2024 from 53.4 a year ago (Figure 14). only slightly to 33.9 percent in September 2024 from This places the FLPR above the target range of 51.5– 33.1 percent in September 2023. Addressing these 53.5 percent target range laid out in the Philippine issues is critical for sustained long-term poverty Development Plan (PDP) 2023–2028. reduction. Robust growth in the services sector fueled job In a positive sign of economic recovery, the creation, while agricultural employment declined. Philippines has made notable strides in reducing The number of employees in the services sector grew poverty following the COVID-19 pandemic. As of by 2.5 million from September 2023 to September 2023, an estimated 17.5 million Filipinos, or 15.5 2024, more than three times the amount of services percent of the country’s population, were living in jobs created a year ago. Strong job creation in the poverty (Figure 15). Among them, approximately sector reflects the pattern of structural change 4.8 million people, or 4.3 percent of the population, experienced in the labor market over the past decade could not afford the basic food basket. This marks a and growth of the economy.10 The number of people significant recovery from the economic impact of the employed in the agriculture and fishery sector COVID-19 pandemic, during which more than 2.2 Philippines Economic Update December 2024 continued to decline, falling by 0.3 million people over million people fell into poverty, raising the poverty rate the same period. This reflects both structural changes from 16.7 percent in 2018 to 18.1 percent in 2021. in the labor market and the impact of weather-related The combination of the economic recovery, continuous disturbances. Employment in industry posted a social protection programs, and the creation of 4.4 modest increase of around 50,000, as manufacturing million jobs between 2021 and 2023 helped drive generated an additional 200,000 jobs in September poverty reduction during the period. 2024, but was offset by job losses in the construction and utilities industries. Despite widespread poverty reduction, some disaster prone regions, have experienced increases 27 10 The Philippines is among the middle-income countries which have the highest contribution of services to growth. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital in poverty. Despite a reduction in inequality in 2023, has committed to enhancing disaster preparedness with the Gini index dropping below 40 for the first and improving flood control infrastructure in the time on record (Figure 16), the Philippines remains Philippines. President Marcos also emphasized the one of the most unequal countries in the region. In need to strengthen both national and local disaster some areas, particularly those affected by extreme risk reduction and response efforts, acknowledging the weather events, poverty rates increased between country’s high vulnerability to climate change impacts. 2021 and 2023. President Ferdinand Marcos Jr. impacts.11 Figure 13. While unemployment continues to decline, the downward trend of underemployment has been more volatile. 25 20 15 Percent 10 5 0 Jun Jun Jun Jun Dec Mar Oct Dec Dec Mar Mar Mar Sep Sep Sep Jan 20 20 20 21 20 22 20 23 20 24 Unemp loyment Rate Und eremplo yment Rate Expo n. ( Unemplo yment Rate) Expo n. ( Underemployment Rate) Figure 14. Female labor force participation continues to trend slightly upward. 1.2 1.1 Lorem ipsum Percent 1.0 0.9 0.8 Philippines Economic Update December 2024 Feb Feb Feb Aug Aug Aug Aug Nov Nov Nov July May May May May Oct Jan Feb 2019 2020 2021 2022 2023 2024 Mal e Female Sources: PSA, Labor Force Survey (LFS) (various rounds). Note: The LFS has been conducted monthly since February 2021 to produce more timely data. Data show a normalized LFPR (January 2020=1). 11 The Philippines is among the most disaster-prone countries in the world, and climate change is expected to intensify these risks, particularly for the 28 most vulnerable populations. An estimated 83 percent of the population is exposed to or at high risk from extreme weather and slow-onset climate events. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 15. The poverty rate declined in 2023… 25 25 No. of Individuals (in millions) Poverty Rate (%) 20 20 15 15 10 10 5 5 0 0 2015 2018 2021 2023 Poor Population Poverty I ncidence Source: Family Income and Expenditure Survey (FIES), 2015-2023 Figure 16. …and inequality is at an all-time low. 50 45 Gini Index 40 35 Philippines Economic Update December 2024 2015 2018 2021 2023 Source: Family Income and Expenditure Survey (FIES), 2015-2023 29 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 2 OUTLOOK AND RISKS Philippines Economic Update December 2024 30 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 2.1 GROWTH OUTLOOK Global Outlook12 This section summarizes the global outlook and its impact on the Philippines’ medium-term growth prospects through different channels such as trade, inflation, and macroeconomic policy. Global growth is expected to remain stable between 2024 and 2026, albeit under rising policy uncertainty surrounding global trade prospects. The reduction in commodity prices over the forecast horizon is expected to support global disinflation and facilitate the easing of monetary policy. Global growth is projected to stabilize between global demand. This improvement will coincide with 2024 and 2026, supported by less restrictive faster growth in the euro area and EMDEs (excluding financial conditions, lower headline inflation, and China). Meanwhile, services trade growth is projected improved consumer spending. In AEs, growth is to gradually return to its pre-pandemic pace, spurred projected to remain at 1.5 percent in 2024, before in part by the ongoing recovery in international inching up to 1.8 percent by 2026. This improvement tourism, which is on track to exceed pre-pandemic will be driven by the normalization of monetary policy, levels beginning in 2024. Despite the improvement, improved consumer spending amid lower inflation, there is substantial uncertainty with respect to trade and faster investment and export growth. While distortive measures introduced by large economies global trade volumes are projected to increase over that may affect global trade. As a result, global trade the medium-term, trade growth will remain subdued growth is expected to remain subdued, with both compared to its pre-pandemic level. Meanwhile, global growth and trade activities remaining below growth in EMDEs is projected to slow over the pre-pandemic levels in 2024–2026. forecast horizon, driven by lower growth prospects for China. Growth in China is projected to slow as A projected reduction in global commodity consumption moderates, impacted by a soft labor prices over the forecast horizon could support market, subdued consumer confidence, and impact global disinflation, supporting monetary policy of declining property prices on wealth. Excluding normalization. Global inflation is expected to China, growth in EMDEs is expected to pick up due to continue its downward trajectory, as commodity prices improvements in domestic demand. are set to decline through 2026. The expectation of global disinflation is projected to lead to further easing Although global trade growth is projected to of monetary policy in AEs. Easing financial conditions rebound over the forecast horizon, rising policy in AEs would help facilitate the normalization of uncertainty poses risks that could dampen the monetary policy in EMDEs. However, monetary policy trade momentum. Global trade is projected to normalization is likely to proceed at a measured pace, Philippines Economic Update December 2024 increase between 2024 and 2026, reflecting a pickup as policymakers remain committed to price stability in goods trade buoyed by increased and as the decline in core inflation slows. 12 This section draws from the June 2024 edition of the World Bank’s Global Economic Prospects (World Bank, 2024d), and was updated to reflect the latest views on the global economic outlook. 31 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Country Outlook This section provides an overview of the medium-term economic outlook, detailing projections for economic growth and the anticipated trends in key macroeconomic variables such as the current account balance, inflation, and fiscal policy. Growth is projected to improve over the forecast period, buoyed by improving conditions for private domestic demand due to lower inflation, easing financial conditions, and recent reforms that will liberalize investment activity. Medium-term economic growth is projected to trade distortive measures that may impact global trade. average 6.0 percent, year-on-year, in 2024–2026, supported by robust domestic demand, sustained On the expenditure side, private consumption is public investment, and a strong services sector expected to remain the main source of growth and (Table 2). The medium-term outlook remains is projected to expand at an average of 5.4 percent unchanged from the October 2024 East Asia and between 2024 and 2026. Private consumption Pacific Economic Update. However, the growth growth is projected to slow to 5.0 percent in 2024, forecast for 2024 has been revised downward from as inflation for key staple commodities such as 6.0 percent to 5.9 percent. The downward adjustment rice remains elevated and exacerbated by still tight for 2024 reflects the impact of climate events that led financial conditions. However, it is projected to to softer than expected growth in domestic activity, accelerate to an average of 5.6 percent in 2025- particularly in Q3 2024. In particular, the country was 2026, due to steady remittance inflows, low and subject to several typhoons that resulted in significant stable inflation, and strong labor market conditions. damages to personal property, public and private In addition, the continued expansion of credit infrastructure, and agriculture production. While these amid declining interest rates, will bolster private effects of El Niño, La Niña, and recent typhoons consumption growth. Meanwhile, government were disruptive in the short-term, they are unlikely consumption growth is expected to slow to an average to dampen the medium-term growth prospects due of 6.4 percent, year-on-year, between 2024 and 2026, to improving conditions that will support domestic in line with the government’s medium-term fiscal demand and improve the country’s resilience. consolidation agenda. The positive outlook depends on continuing Investment growth is expected to strengthen, disinflation, more accommodative monetary policy, buoyed by lower real interest rates, a commitment and the commitment to public investment. The to public investment and the implementation baseline forecast is anchored on stronger domestic of reforms that liberalized investment. Fixed demand over the forecast horizon, supported by low investment growth is projected to decline in 2024, and stable inflation, an improving job market that before increasing in 2025-2026. The government’s will bolster household incomes, and easing financial commitment to public investment, despite fiscal conditions. The government plans to sustain public consolidation, will support investment growth investment above 5.0 percent of GDP to support over the medium term. The execution of public- medium-term growth and enhance productivity. private partnership (PPPs) projects will also support Export growth is projected to firm up over the forecast investment spending.13 While private investment Philippines Economic Update December 2024 horizon, albeit at a softer pace than pre-pandemic growth is projected to remain weak in 2024, amid levels. Services exports are set to drive export growth, tight monetary policy and subdued global trade and alongside the full recovery in global tourism demand investment activity, it will likely gain steam in 2025 and steady growth in IT-BPO services. While the and 2026 as borrowing costs fall (Box 1). Moreover, forecast projects a pickup in global goods demand, investment growth is expected to benefit from the the recovery in merchandise export growth will be implementation of pro-investment reforms aimed at dampened by the uncertainty introduced by potential liberalizing foreign participation in key sectors.14 13 As of October 2024, the PPP center had a pipeline of 169 projects worth PHP 3.2 trillion, up from 117 projects worth PHP 2.5 trillion in Febru- ary 2024. 14 The implementation of key reforms, such as the adoption of amendments to the Public Services Act, implementation rules and regulations of 32 the Renewable Energy Act, the Retail Trade Liberalization Act, and the Foreign Investment Act, is expected to encourage private investment in key sectors and strengthen the Philippines as an investment destination. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Table 2. Economic indicators for the baseline projections 2021 2022 2023 2024F 2025F 2026F GDP growth, at constant market prices 5.7 7.6 5.5 5.9 6.1 6.0 Private consumption 3.1 6.0 4.1 3.7 4.1 4.1 Government consumption 1.1 0.8 0.1 1.0 0.9 0.8 Fixed capital formation 3.9 3.0 1.4 1.7 1.8 1.8 Exports, goods and services 2.2 3.0 0.4 1.1 1.2 1.3 Imports, goods and services -4.5 -5.2 -0.4 -1.7 -2.0 -1.9 GDP growth, at constant market prices 5.7 7.6 5.5 5.9 6.1 6.0 Agriculture 0.0 0.0 0.1 -0.1 0.1 0.1 Industry 2.5 2.0 1.1 1.6 1.7 1.7 Services 3.3 5.6 4.4 4.4 4.3 4.2 Headline inflation 3.9 5.8 6.0 3.2 3.1 3.0 National government balance (% of GDP) -8.6 -7.3 -6.2 -5.5 -5.3 -4.8 National government debt (% of GDP) 60.4 60.9 60.1 60.3 59.8 59.4 Current account balance (% of GDP) -1.5 -4.5 -2.6 -1.9 -1.7 -1.4 Sources: PSA, BTr, and World Bank staff projections Note: Components of growth are expressed in terms of their contribution to growth. Philippines Economic Update December 2024 Photo: Shutterstock/Michael Alabado 33 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook Outlook&&Risks Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital BOX 1. THE IMPACT OF POLICY RATE CUTS ON PHILIPPINE FIRMS This Box examines how Philippine firms’ investment and leverage respond to policy rate changes, finding that lower rates boost investment and leverage, with firms having higher leverage or operating in low external finance-dependent sectors responding more significantly to rate cuts. The global shift by central banks toward looser monetary policy has heightened expectations of increased investment. But the extent to which firms’ investment decisions respond to policy rate changes — and the role leverage plays — remains an open question. Understanding the direction and strength of these connections is crucial for policymaking, particularly in an emerging market like the Philippines, where financing constraints may make borrowing costs a major factor in shaping investment outcomes. This box addresses these questions empirically, relying on data for 389 publicly listed firms in the Philippines across non-financial economic sectors, from 2006 to 2023 Philippine Stock Exchange. First, the analysis examines the relationship between firm investment and leverage and the Bangko Sentral Pilipinas (BSP) policy rate, with the following firm-level regression: Yi,t= αi+βRt+γZi,t-1+θMacrot-1+ϵi,t where Y_(i,t) denotes the investment or leverage of firm i in year t.Macrot-1 controls for macroeconomic trend, e.g. real GDP growth and Zi,t-1 are lagged firm-level controls, e.g. size and profitability. We also include the firm-level fixed effects, that control for all time-invariant firm characteristics and cluster the standard errors at firm-year level. Average Effect (β) of Policy Rate on Firm Outcomes (1) (2) Asset Growth Leverage -0.627** -0.495** Policy rate (0.304) (0.234) Observations 2532 2556 Standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 On average, firm investment and leverage increase as the policy rate declines. As lower policy rates decrease borrowing costs, firms tend to boost their investment. In addition, the analysis finds a negative correlation Philippines Economic Update December 2024 between the policy rate and firm leverage. In terms of magnitude, a 100-basis point reduction in the policy rate is associated with an increase in asset growth for the average firm by 0.6pp from an average asset growth rate of 5.5%, and with an increase in leverage for the average firm by 0.5pp from an average leverage ratio of 52%15. The analysis also focuses on the role of leverage in the monetary policy transmission to firm investment. Leverage is commonly used as a measure of financial constraint16 and plays an important role in a firm’s investment decision. The following equation estimates how leverage matters for firm investment, focusing on the interaction of firm leverage and the policy rate. 15 The results are robust to adding controls, including log of net income, return on assets, and return on equity. 16 See the discussion by Farre-Mensa and Ljungqvist (2016). 34 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook Outlook&&Risks Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Asset Growthi,t= αi+αt+δ Leveragei,t-1×Rt+γZi,t-1×Rt+ϵi,t where we control for both time and firm fixed effects to capture macroeconomic trends and time-invariant firm characteristics, respectively. As usual, we cluster the standard errors at firm-year level. Firms with higher leverage tend to invest more when the policy rate decrease. The average firm increases investment when the policy rate decreases, but a firm with higher leverage increases investment more than a firm with lower leverage. A firm with relatively higher leverage by 1pp, will on average increase its investment by 0.06pp more when facing a 100 basis point reduction in the policy rate.17 DID Effect (δ) of Policy Rate on Firm Outcomes (1) Asset Growth Policy rate × Leverage -0.059*** (0.011) Observations 2504 Standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 The effects of rate cuts on firms’ leverage exhibit heterogeneity across sectors. A critical question arises: are firms operating in sectors more reliant on external financing more or less sensitive to changes in policy rates? On the one hand, firms in more external finance dependent sectors face greater cost increases when borrowing costs rise, which may make these firms more responsive to rate changes. Conversely, if these firms’ business model depends on external financing, their demand for borrowing could be relatively price inelastic. To assess which mechanism prevails, the analysis estimates the equation outlined below. Leveragei,t= αi+αt+ρ EFDs×Rt+γZi,t-1×Rt+ϵi,t where EFDs denotes the sector level external finance dependence (EFD) measure, defined as the median leverage ratio of each sector during 2006 – 2009.18 DID Effect (ρ) of Policy Rate on Firm Outcomes (1) Leverage Policy rate × EFD 0.032** (0.014) Observations 1858 Standard errors in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01 Philippines Economic Update December 2024 The leverage of firms in a highly EFD sector responds less to policy rate changes. The average firm increases its leverage in response to a policy rate cut, but a firm in high EFD sector increases its leverage by less than a firm in low EFD sector. For example, a firm in a sector of relatively lower external finance dependence (e.g. retail trade) will on average increase its leverage by 0.5pp when facing a 100-basis point reduction in the policy rate, while a firm of relatively high EFD (e.g. transportation and utilities) will increase it by 0.2pp.19 17 The results are robust to adding controls, including log of net income, return on assets, and return on equity, and their interactions with policy rate. 18 his regression is conducted in the sample of 2010-2023, to avoid overlapping period with EFD definition. 19 The results are robust to adding controls, including log of net income, return on assets, and return on equity, and their interactions with policy rate. 35 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital On the supply side, services will continue to drive risks from inflation stemming from geopolitical conflict growth, boosted by improved private domestic and heightened trade tensions. demand and the ongoing recovery of tourism. Services growth is projected to account for nearly The current account deficit is projected to narrow, 70 percent of growth between 2024 and 2026. It led by steady remittance inflows, declining global will remain anchored on the expansion of domestic commodity prices, and strong services exports growth. economic activity as household incomes improve. It is expected to decline from 1.9 percent of GDP in Services will also benefit from the ongoing recovery 2024 to an average of 1.5 percent in 2025-2026. This of inbound international tourism. International tourist trend will be driven by stable growth in remittances, arrivals in the Philippines are projected to reach the projected decline in commodity prices, and a their pre-pandemic levels beginning in 2025 and slightly lower trade balance. Services exports will will contribute to faster growth in transportation, continue to benefit from the projected increase in accommodation and food services, and retail tourism demand and robust performance in the trade. Despite potential challenges from artificial IT-BPO industry. While import growth is projected intelligence, the IT-BPO industry will continue to to increase due to robust domestic demand, falling support growth in real estate and information and global commodity prices will contribute to the slightly communication services. narrower trade deficit. The current account deficit is projected to be financed by net FDI and portfolio Meanwhile, the positive investment outlook and a inflows amid improving domestic conditions and rebound in global goods trade will drive industry stronger investor confidence. growth. Industry growth, which is projected to account for more than one-fourth of growth in 2024– The implementation of the medium-term fiscal 2026, will be led by the expansion of manufacturing consolidation program is projected to lead to a and construction activity. The improvements in steady decline in the fiscal deficit. The government global trade growth is expected to aid manufacturing, is expected to reduce the fiscal deficit from 6.2 particularly electronics exports. The semiconductor percent of GDP in 2023 to 4.8 percent by 2026. Fiscal industry is expected to rebound in 2025 as it consolidation will be mostly expenditure-driven, addresses inventory issues, expands capacity, and with both recurrent spending and public investment launches new products. The government’s robust projected to decline. Lower recurrent spending is public investment pipeline, aimed at improving expected to be supported by reforms that will lower Information and Communication Technology (ICT) personnel costs and improved spending efficiency. As infrastructure and transportation and logistics, will a result, total expenditure is projected to fall by 0.8 support growth in the construction sector. However, ppts of GDP between 2024 and 2026, in line with the the outlook for the agriculture sector is expected pace of reductions in recent years. Tax revenues will to remain tepid, dampened by the sector’s low inch up marginally in 2024–2026, in part driven by productivity and vulnerability to weather-related the passage of tax policy reforms20, improvements in shocks. revenue administration, and strong economic growth. Headline inflation is projected to remain within the The combination of fiscal consolidation and robust BSP’s target range, facilitating the continued shift growth set to reduce public debt over the medium toward more accommodative monetary policy. term. The national debt ratio is projected to shrink Philippines Economic Update December 2024 Headline inflation is expected to gradually decline to over the forecast horizon to around 59.4 percent of 3.0 percent by 2026, comfortably within the BSP’s GDP by 2026. While financing needs are expected inflation target range of 2–4 percent. The decline in to stay elevated due to the primary deficit remaining headline inflation will be bolstered by the reduction above pre-pandemic levels, debt sustainability will in commodity prices in 2025, as the global oil supply be bolstered by a favorable composition of debt. In is projected to exceed demand by an average of 1.2 particular, the country’s debt composition is expected million barrels per day in 2025. Global commodity to be characterized by a greater reliance on domestic prices are projected to fall by nearly 10 percent borrowing and an increased share of medium-to- from 2024 to 2026, benefitting net commodity long-term instruments, which reduce vulnerability to importers such as the Philippines. Better global supply external shocks and rollover risks. conditions will provide ample buffer against upside 36 20 The priority tax reforms include the VAT on Digital Service Providers, the proposed excise tax on single use plastics, excise tax on pick-up trucks, and the adjustment to the motor vehicles road user’s tax. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 2.2 POVERTY OUTLOOK While medium-term growth is expected to remain robust under the baseline forecast, the balance of external and domestic risks remains tilted to the downside. On the external front, the Philippines is exposed to risks emanating from rising policy uncertainty and conflict that could dampen global economic activity and reverse global disinflation. Domestically, persistently high inflation because of supply related shocks could erode purchasing power, delay monetary easing, and dampen growth prospects of private domestic demand. Progress in poverty reduction is expected to Proactive government measures are crucial continue, but recurrence of climate events and to protect poor and vulnerable households. vulnerability to food price shocks poses risks. For example, the combined impact of damages due Poverty incidence (based on the lower-middle-in- to typhoons Marce, Nika, and Super Typhoon Ofel come country poverty line of US$3.65/day, 2017 reached an estimate of Php926 million, nearly half PPP) is projected to decrease from 15.5 percent of which was damage to agriculture. In response in 2023 to 13.6 percent in 2024, before falling to ongoing inflation and climate-related threats, further to 11.3 percent by 2026 (Figure 17). The the authorities are actively adopting policies to anticipated increase in real household incomes will mitigate these shocks and ensure adequate ener- support the projected decline in poverty, anchored gy and food supplies. In response to high inflation on the continued improvement in the labor market in recent years, the Department of Social Welfare and easing inflation. However, household income and Development (DSWD) rolled out the Ayuda vulnerability, particularly high exposure and vul- sa Kapos ang Kita Program (AKAP) which aims to nerability to climate disasters, may undermine the protect minimum wage workers from the impact potential for continued poverty reduction. These of inflation. The government provides support to weather-related shocks have in the past damaged affected communities, including insurance indem- homes, infrastructure, and caused disruptions to nities to compensate farmers and zero-interest businesses and livelihood. Agricultural production loans available through the Agricultural Credit is particularly affected. Damages to rice, corn, and Policy Council’s (ACPC) Survival and Recovery high-value crops are likely to push food prices (SURE) Loan Program. Additionally, cash aid has higher, fueling inflation, and eroding real household been distributed to local government units to incomes that could weigh on poverty reduction. supply food packs and hygiene kits to households in typhoon-hit areas. The national government has also allocated funds for flood control, committing to effective mitigation and adaptation measures. Figure 17. Actual and projected poverty rates using the LMIC poverty line ($3.65/day) Poverty rate (%) 40 Philippines Economic Update December 2024 35 30 25 20 15 10 5 0 2009 2011 2013 2015 2017 2019 2021 2023 2025 Lower middle-income pov. rate Source: World Bank staff estimates. 37 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 2.3 RISKS AND POLICY CHALLENGES Risks and Policy Challenges While medium-term growth is expected to remain robust under the baseline forecast, the balance of external and domestic risks remains tilted to the downside. On the external front, the Philippines is exposed to risks emanating from rising policy uncertainty and conflict that could dampen global economic activity and reverse global disinflation. Domestically, persistently high inflation because of supply related shocks could erode purchasing power, delay monetary easing, and dampen growth prospects of private domestic demand. The risks to the global growth outlook remain Domestically, the main downside risks to tilted to the downside, stemming from growth center on the strength of private heightened policy uncertainty and geopolitical domestic demand. While the baseline forecast conflict, and existing weaknesses in China’s assumes inflation will remain low and stable economy. Heightened global policy uncertainty, between 2024 and 2026, risks are skewed to the most notably on trade, remains as a key downside upside. Key domestic upside risks to inflation risk for global growth. Election outcomes in include supply disruptions due to adverse weather the US are expected to contribute to further conditions. Higher-than-expected inflation fragmentation in trade policy and an increase in arising from these damages, particularly for food, protectionism. A potential tariff escalation could could erode growth of real disposable income lead to higher inflation in AEs, delay monetary and suppress private consumption growth. As policy easing, and cause potential disruptions in a net commodity importer, the Philippines is supply chains which would dampen global growth highly vulnerable to unexpected increases in prospects. Moreover, the intensification of conflict commodity prices. This could also delay monetary and geopolitical tensions could disrupt the supply policy easing, and lead to persistently higher of commodities, driving up food and energy prices. interest rates that could dampen the growth of China’sgrowth outlook continues to face downside private investment. Meanwhile, delays in the risks, with global economic implications. A implementation of key private investment reforms, protracted slump in China’s property sector could such as the amendments to the Public Services further weaken domestic demand, resulting in Act, could lead to lower-than-expected growth in negative spillovers to global trade, manufacturing, investment. and tourism in the region. Philippines Economic Update December 2024 Photo: Shutterstock/MDV Edwards 38 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Economic Policy Challenges On the macroeconomic policy front, achieving a high-quality fiscal consolidation remains as the top policy priority. Meanwhile, improving long-term inclusive growth requires addressing structural challenges in digitalization and early years human capital, as they enhance productivity, resilience, and competitiveness while unlocking the Philippines’ demographic dividend and fostering inclusive development. Medium-term Stabilization address structural weaknesses in the revenue system through a combination of base-broadening measures, The Government’s main policy challenge improved tax administration, and the introduction of is implementing its medium-term fiscal new taxes. consolidation program (Figure 18). Meeting consolidation targets will depend on the Unlocking Potential: The Structural Reform Government’s ability to sharply reduce public Agenda spending in the short term and raise additional tax revenues in the last two years of the Marcos Sustaining robust growth in the long-term administration. Between 2024 and 2026, the hinges on the country’s ability to address Government aims to reduce public spending by around structural challenges that constrain the growth 0.8 percent of GDP. To reduce spending, the potential. To boost growth beyond the current government could improve spending efficiency 6.0 percent potential, generate more and better through procurement, budgeting, and investment jobs for Filipinos, and reduce poverty, the country management reforms while further optimizing the must focus on increasing its potential growth. This budget. These reforms include the implementation of requires improved connectivity infrastructure, the Government Procurement Reform Act and the enhancing local governance and service delivery, passage of priority legislation, such as the Progressive and increasing productivity through innovation Budgeting for Better and Modernized Governance Bill policy and human capital investments. For and the National Government Rightsizing Program. example, a fully and effectively implemented PSA Moreover, reforming the pension system for military amendment is estimated to increase total factor and uniformed personnel remains critical to ensuring productivity by 3.2 percent on average, and up to long-term fiscal sustainability.21 6.4 percent in electrical machinery related sectors, that rely intensively on telecom and transport The increase in revenues needed to meet the input. government’s fiscal consolidation program will require additional tax policy measures beyond Accelerating the country’s digital transformation those currently planned. Improving revenue and strengthening the digital economy will be generation is essential to minimize potential cuts in essential to ensure sustainable long-term growth. public spending, rebuild fiscal buffers, and finance the Advancing the digital economy can expand the country’s development ambition. On the one hand, Philippines Economic Update December 2024 country’s growth potential, as increased digitalization the implementation of the government’s priority tax could provide expanded market access, build measures is projected to increase tax revenues by an resilience to economic shocks, while increasing the average of 0.2 percent of GDP between 2025 and country’s productivity, efficiency, and competitiveness. 2027. On the other hand, the government’s medium- However, progress in digital transformation has been term fiscal program aims to increase public revenues gradual, as key sectors of the digital economy have not by a total of 0.8 percent of GDP in 2027 and 2028. To kept pace with the broader economy. Moreover, the enable higher collection, the government needs to benefits from digitalization are not guaranteed. 39 21 In the absence of reforms, the pension budget for military and uniformed personnel could increase to around 1.6 percent of GDP by 2035. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital When transformation efforts are undertaken without ages significantly. However, to fully capitalize on essential foundations—such as robust infrastructure, this advantage, investments in human capital must enabling policies, skilled human resources, and begin early, even before birth. Maternal health and streamlined processes—digitalization risks exacerbating adequate nutrition are critical, as poor nutrition during existing inefficiencies and stalling growth (Box 2). pregnancy can lead to complications like anemia, which currently affects over a quarter of pregnant Investing in human capital is crucial for the women in the country. Despite these opportunities, Philippines to sustain its growth and seize the the Philippines faces challenges, with nearly one demographic dividend opportunity, which will only in three children stunted—significantly below last for the next 20–25 years. The Philippines stands expectations for its income level. Addressing these out as one of the few East Asian nations that can issues could unlock substantial long-term benefits for potentially achieve prosperity before its population the country’s growth and development. Figure 18. A steady decline in spending and marginal increases in tax revenues will help reduce the fiscal deficit over the medium-term. 25 7 20 6 Percent of GDP Percent of GDP 15 5 10 4 5 3 0 2 -5 1 -10 0 2020 2021 2022 2023 2024F 2025F 2026F Fiscal deficit Public expen diture Public r even ue Infrastructure progr am (RHS) Sources: BTr, DBM, World Bank staff calculations Philippines Economic Update December 2024 40 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital BOX 2. PHILIPPINE DIGITAL ECONOMY – THREE FOUNDATIONAL CHALLENGES The Philippines faces foundational challenges in its digital economy, including slow growth, inadequate digital connectivity, limited ICT skills, and fragmented data governance, necessitating reforms in connectivity, digital skills, and data utilization to accelerate transformation and enhance economic outcomes. Context In the Philippines, progress in digital Furthermore, in recent years, the Philippines has transformation has been gradual. In 2023, consistently and increasingly underperformed relative the digital economy, as officially defined by the to its peers across various indices measuring digital government, is estimated to have grown at a rate of maturity and readiness, affecting the government, only 2.9 percent22, less than half the growth economy, and society’s capacity to leverage digital rate of other economic sectors (PSA) (Figure 19). transformation effectively (Figure 20). 23 Figure 19 . Lagging Growth in the Philippine Digital Economy Philippines Digital economy growth and GDP growth, 2018-23 2019 2020 2021 2022 2023 GDP growth 6.1% -9.5% 5.7% 7.6% 5.5% Digital economy, %of GDP 8.8% -8.7% 9.0% 8.6% 8.4% Digital Economy Digital Economy Growth, digital 8.2 8.0 7.2 economy and the 6.0 5.5 5.8 rest of economy(%) 3.7 2.9 Philippines Economic Update December 2024 -10.2 -9.5 Source: World Bank staff calculation based on PSA Digital Economy Satellite Account. 22 2024 growth is likely to be higher, according to the 9th edition of the e-Conomy SEA Report by Google, Temasek and Bain, showing a 20 per- cent growth of the overall digital economy in 2024 the Philippines based on Gross Merchandise Value, which Department of Trade and Industry (DTI) attributed to strategic reforms such as the Internet Transaction Act and the value-added tax on non-resident digital services. 23 UN, ITU and Oxford indices assess 193 UN member states, Descartes Institute index assesses 124 countries, IMD indices assess 64 econo- mies and 142 cities (Kuala Lumpur, Bangkok, Hanoi, Jakarta and Manila represent respective countries in Smart City Index). Composite indices involve contestable methodological choices. This Box article cites indices underpinned by indicators relevant to digital government, economy and society to highlight trends over recent years, while not necessarily endorsing aggregation and weighting methodologies for each index. 41 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook Outlook&&Risks Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 20 . Underperformance of the Philippines in Digital Maturity and Readiness Indices Digital-related global ranking, ASEAN-5 Legend: Malaysia Thailand Viet Nam Indonesia Philippines E-Government Index Digital Competitiveness Smart CityIndex UN Index IMD IMD 70 50 20 70 90 90 40 110 60 110 130 2016 2024 2019 2024 2020 2024 Government AI Future Readiness Index Global Cybersecurity Readiness Index Oxford Descartes/Google Index ITU 20 40 1 50 40 60 40 60 70 80 80 80 2022 2023 2022 2023 2017 2024 Source: World Bank staff calculation based on UN, IMD, Oxford, Descartes and ITU. The Fundamental Challenges Digital connectivity, digital skills, and limited for data collection, sharing, and utilization across capacity to leverage data effectively are among the key sectors and institutions. While progress has primary barriers to digital transformation in the been made in data privacy protection, national ID and Philippines. The country’s fixed and mobile internet digital payment—advancing people data systems for services fall behind those of regional middle-income Government-to-Citizen (G2C) services—substantial peers in terms of access, speed, and affordability gaps remain in prosperity data (firm, farm and asset (Figure 21). Additionally, data traffic generated per registries; transactions and trade records) and planet internet user ranks among the lowest in ASEAN, data (geospatial data integration to broader data and data center capacity 24 is less than one-third of ecosystem), constraining inter-operable, efficient the average in Malaysia, Thailand, and Indonesia. In and transparent Government-to-Government (G2G) addition, Filipinos are by far the least skilled in terms and Government-to-Business (G2B) services. These of Information and Communication Technology (ICT) gaps limit the potential to improve economic and skills in the ASEAN region (Figure 22). Moreover, infrastructure policy planning and citizen experiences. Philippines Economic Update December 2024 weaknesses in the broader education system limit the Cybersecurity challenges persist, and inconsistent capacity to learn and adopt digital skills. The World open data policies, along with a lack of interoperability Bank reported a learning poverty rate25 of 91 percent standards, hamper the growth of public-private in 2022, with 9 out of 10 Filipino children aged 10 data ecosystems. The absence of a cohesive data- unable to understand age-appropriate content. enabling framework and reliance on a complex web of bilateral data sharing agreements prevent the creation The Philippines lacks a unified, whole-of- of a broad, secure data ecosystem that fosters government approach to data governance, leading collaboration, positive spillovers, and firms’ adoption to inconsistent policy frameworks and practices of data-driven, productivity-enhancing technology solutions. 24 Measured by colocation floor space or connected energy for computing 25 Learning Poverty, drawing on new data developed by the World Bank in coordination with the UNESCO Institute for Statistics, measures the ratio of children unable to read and understand a simple text by age 10. 42 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook Outlook&&Risks Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 21. Fixed and mobile broadband access, speed, and cost, ASEAN countries Access Speed Affordability Fixed broadband penetration Median download speed Fixed broadband basket (% of households, 2023, (Mbps, Sep 2024, Ookla) (% of GNI per capita, 2023, TeleGeography) ITU) Singapor e Singapor e 305 Singapor e 0.7 112 Br unei Br unei 76 Br unei 0.9 112 Viet Nam 153 Viet Nam 2.3 Viet Nam 81 Thailand Thailand 234 Thailand 3.3 51 Malaysia Malaysia 129 Malaysia 2.2 55 Philippines 94 Philippines 10.1 Philippines 30 Indonesia 32 Indonesia 4.9 Indonesia 21 Lao PDR 45 Lao PDR 12.7 Lao PDR 18 Cambodia Cambodia 39 Cambodia 6.1 21 Myan mar 22 Myan mar 6.3 Myan mar 8 Access Speed Active mobile Median download speed Affordability (Mbps, Sep 2024, Ookla) Data-only mobile broadband broadband subscribers (% of population, 2023, basket ITU) (% of GNI per capita, 2023, ITU) Singapor e 167 Singapor e 120 Singapor e 0.2 Br unei 119 Br unei 100 Br unei 0.2 Viet Nam 100 Viet Nam 54 Viet Nam 0.9 Thailand 124 Thailand 55 Thailand 1.3 Malaysia 129 Malaysia 106 Malaysia 0.2 Philippines 74 Philippines 35 Philippines 1.8 Indonesia 118 Indonesia 30 Indonesia 0.2 Lao PDR 60 Lao PDR 29 Lao PDR 1.7 Cambodia 99 Cambodia 30 Cambodia 2.1 Myan mar 109 Myan mar Myan mar 2.7 29 Note: For Mobile Access data, the latest available data for Cambodia and Lao is for 2022. investment, especially in underserved rural areas, Policy Response – The Way Forward by streamlining entry processes for a wider range While progress may take time, immediate actions of Internet Service Providers (ISPs) to build and Philippines Economic Update December 2024 can help bridge existing gaps and accelerate operate networks in communities that large improvements. Key initiatives include i) enacting telecommunications companies typically overlook. legislation to enhance connectivity, ii) promoting data Additionally, the bill promotes cost-effective utilization by businesses and government, and iii) and efficient network expansion by facilitating building digital skills within the workforce. infrastructure sharing, including for small providers and community networks. Evidence highlights the Foremost among these efforts is the prompt positive impact of improved connectivity on firm passage of the Konektadong Pinoy Bill, currently productivity and its broad contribution to inclusive growth. Access to the internet, especially fixed under Senate deliberation. It introduces a regulatory broadband, has a significant impact on business framework to foster broadband infrastructure 43 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital outcomes, enhancing firms’ sales, employment, and effectively, in line with the newly enacted Enterprise- productivity growth (Figure 23). Moreover, a reduction Based Education and Training Framework Act and the in fixed broadband cost, is expected to increase the Trabaho Para sa Bayan Master Plan. Key initiatives to purchasing power of the lowest-income households by utilize data include strengthening of trust environment Php 307 per household at 2024 prices26. such as through cybersecurity legislation and whole-of-government approach to data governance, Complementary reforms to boost digital skills and frameworks and platforms for interoperability across ability to utilize data are essential. Digital Workforce government services and public-private data sharing Competitiveness Act needs to be implemented and promoting investments in data infrastructure. Figure 22. Proportion of adults with ICT skills, ASEAN countries 70 60 50 40 30 20 10 0 Us ing bas ic Us ing copy and Sending e-mails Creating Find ing, Trans ferring files arithmetic paste to ols to with attached electronic dow nloading, between a formula in a duplicate or m ove files presentations installing and computer and sp readsheet info rmation with pres entation configuring other devices within a so ftware so ftware document Philippines Ca mbodia Viet N am Thai land Indonesia Mal aysia Sing apore Source: UN SDG Indicators Database (accessed Nov 8, 2024). Note: Data for all countries are 2019 values (the only data available for the Philippines), except for Cambodia and Indonesia, which are 2017 values. Figure 23. Correlation of Fixed Internet Access and Firm Outcomes in the Philippines With No Access Average Internet Download Speed Sales -0.20 0.002 Employment -0.02 0.0002 Value Added -0.19 0.001 Philippines Economic Update December 2024 Labor Productivity -0.17 0.001 TFP -0.17 0.001 Source: World Bank staff calculations based on PSA ASPBI and Ookla data. Note: Results are from a pooled cross-section OLS with controls on firm characteristics, sectors, regions, and year dummies. Bars in blue/orange are significant at the 10% level or better. 26 Simulation done with the 2021 Family Income and Expenditure Survey microdata, assuming reduction of fixed broadband price by 12.5% in levels, 25% as a share of GNI. 44 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3 First Steps Matter: Empowering early year workers to Build Human Capital This chapter underscores the urgency of early investments in human capital to unlock the Philippines’ demographic dividend and sustain inclusive growth. It highlights the pivotal role played by early years workers in improving early years outcome — and how Local Government Units (LGUs) can help enhance their performance. The analysis explores barriers faced by LGUs, such as fiscal constraints, coordination Philippines Economic Update December 2024 failures, and weak public financial management, offering targeted recommendations to address these gaps. The chapter concludes with a call to empower LGUs, enabling them to support early years workers and accelerate human capital development 45 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3.1 BACKGROUND Human capital encompasses health, knowledge, The Philippines can unlock its demographic skills, and experience acquired throughout one’s life dividend—but only with urgent investments in stages; it is one of the main drivers of broad-based human capital before this fleeting opportunity economic growth that translates into improvements closes. Investing in human capital is urgent as the in living standards (Wantchekon, Klašnja, and Novta country has about one generation (20–25 years) before 2015). Human capital represents the assets the window of opportunity to reap a demographic embedded within individuals. Beyond their intrinsic dividend closes (Figure 24). Not only is it beneficial in worth, these qualities significantly enhance people’s the immediate term for the country to catch up with productivity. Building human capital requires sustained regional peers on key indicators, the long-term payoff and coordinated investments along multiple for the Philippines is also immense. The Philippines is dimensions. one of the few countries in East Asia that can potentially become rich before getting old depending A child born in the Philippines today, however, will on the quality of its human capital and the resulting achieve only about half of their productive potential economic growth. While China, Vietnam, Thailand and by age 18, thereby depriving the Philippines of a Malaysia are aging fast, the proportion of the working significant amount of productivity. The Philippines’ age population in the total population of the Philippines Human Capital Index (HCI)27 is estimated at 0.52, well is projected to continue increasing for another below the HCI of neighboring upper-middle income generation, giving it a big advantage. countries, such as Malaysia (0.62), and Thailand (0.61). It is also lower than lower middle-income peers such as The process of building human capital is sequential Vietnam (0.69).28 The reasons forthis are highlighted in and cumulative, underscoring the need to start detail in the Philippines Human Capital Review (HCR) early (Heckman 2006). Although human capital can and include limitations in the delivery of human capital be acquired over an entire lifetime, it is built most services at the local level, where up to 26 percentage effectively when people are young. There are a variety points in human capital potential could be lost due to of reasons for this, including greater brain plasticity governance or service delivery inefficiencies (Lebbos et at early ages and the fact that younger people al. 2024). are generally expected to engage in activities that deliberately build skills (such as formal schooling). Investing in human capital in the Philippines is Good nutrition in the early years as well as positive crucial to sustain the economic growth achieved early experiences affect the quality of the brain’s over the past decade, capitalize on the Philippines’ architecture, laying the foundation for future learning, demographic dividend and build a solid middle health and development (Handryastuti et al. 2022). class. This objective aligns with the vision of the Investing in the first six years of a child’s life — AmBisyon Natin 2040, which seeks to ensure that by particularly the first 1,000 days between conception 2040, Filipinos enjoy a secure, comfortable, and and a child’s second birthday — have the highest return well-rooted life.29 Achieving this vision requires not on investment (Heckman and LaFontaine 2006). Any only increasing income per capita but also significantly disruption to the process of building human capital Philippines Economic Update December 2024 improving access to quality education, nutrition and can have long-lasting effects. The Philippines HCR affordable healthcare, quality jobs, and effective social highlights the importance of human capital investments protection—key drivers of productivity and human across the lifecycle and stresses an urgent need to capital. These objectives are clearly articulated in the focus on the early years. Philippines Development Plan, which emphasizes the need to enhance human capital as a critical foundation Effectively building human capital requires a for sustained growth and development. combination of coordinated interventions. Investments in the early years, particularly ages 0 to 27 The HCI, a key metric for the World Bank Group’s analysis of human capital formation is the which measures, the constraints to productivity of the next generation of workers given the prevailing rates of mortality, schooling, and health in 174 countries. 28 The World Bank. 2020. Human Capital Index. 46 29 For details, see: https://2040.neda.gov.ph/about-ambisyon-natin-2040/ Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 6, are required in nutrition, primary health care, early important coordination role in facilitating the childhood education, and social protection. These are implementation of national-level programs and best implemented from a multisectoral perspective as regulations, including early education programs. Yet, they are complementary. For instance, if children many are unable to implement their mandate effectively. are poorly nourished, they may not do well at school. Without social protection, poor families may pull This special topic examines early years workers in children out of school when they face shocks. In the LGUs—key actors who directly engage with families absence of adequate early childhood education, the and children to deliver services, playing a crucial future development of sophisticated cognitive and role in shaping early years outcomes. It draws upon socioemotional skills will be challenging. secondary data and key reports, including the World Bank’s HCR, The Second Congressional Commission on LGUs have an essential role to play in boosting Education (EDCOM 2) ‘s Behind the Slow Start, and human capital in the Philippines, as service delivery The United Nations Children’s Fund (UNICEF)’s is devolved to them. They have mandates, defined Delivering Essential Services through Community Action in under the 1991 Local Governance Code, to deliver the Philippines. It examines the balance between health care and nutrition services30 as well as to national oversight and policies on the one hand, and manage social welfare.31 They are also entrusted with local implementation and accountability on the other, delivering early childhood education services for with reference to how this impacts the availability, 3-4-year-old children, but not 5-year-olds, who are capacity and motivation of early years workers.32 It attended by the Department of Education. LGUs are concludes with recommendations on how to improve where interventions and programs from various sectors the performance of early years workers,leveraging the ultimately come together and are implemented on the potential of LGUs. ground. Consequently, they are expected to play an Figure 24: Predicted Share of Working Age Population, 2025–2055 70.0% 69.0% 68.7% Share of Working Age Population 68.0% 67.6% 67.0% 66.2% 66.0% 66.2% 65.9% 65.0% 64.0% 2025 2030 2035 2040 2045 2050 2055 PSA World Bank Philippines Economic Update December 2024 US Census UN DESA Medium Variant UN DESA Low Variant Sources: PSA, 2022b; World Bank Databank: Health, Nutrition and Population Statistics, Population Estimates and Projections; US Census Bureau International Database; UN DESA World Population Projections, medium and low fertility variants 30 Mandates health services include for example extension of medical and health services through provincial health office and district, municipal, and Medicare community hospitals; purchase of drugs and medicines; implementation of primary health care programs; field health services; aid to puericulture; construction, repair, rehabilitation, and renovation of provincial, district, municipal, and Medicare hospitals; provision for the operation of five-bed health infirmaries. 31 Mandates for social welfare includes for examples provisions for the operation of a day-care center in every barangay, provision for poverty alle- viation in low-income municipalities and depressed urban barangays. Municipalities are mandated services that include programs and projects on child and youth welfare, family and community welfare, women’s welfa 32 The term early years workers in this report is used to refer to community-based professionals and volunteers who deliver critical health, nutri- tion, and early childhood development services in the Philippines. Early years workers in the Philippines include barangay health workers, baran- gay nutrition scholars, child development workers, and family development session workers. re, welfare of the elderly and disabled persons. 47 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3.2 EARLY YEARS INVESTMENTS ARE CRUCIAL FOR BUILDING HUMAN CAPITAL AND DRIVING ECONOMIC GROWTH The economic future of the Philippines hinges on its people. Between 1995 and 2018, countries that moved remain lackluster compared to its peers. In contrast to from low- to middle-income status saw their its 0.52, Vietnam is at 0.69, followed by Malaysia and human capital per capita double (World Bank, Thailand at 0.61. In general, the Philippines performs 2021). Human capital is a key driver of sustainable lower than all its peers on the subcomponents of the economic progress (Wantchekon, Klašnja, and Novta HCI. For instance, while approximately 27 percent of 2015). Investments in human capital lead to higher 5-year olds are stunted in the Philippines, only 18 productivity, incomes, and living standards (Flabbi and percent in Indonesia and 11 percent in Thailand are Gatti 2018). Worldwide, the share of human capital in stunted. Learning outcomes also lag other countries. total wealth increases steadily with the level of For example, while the average student in the development; high-income countries have more Philippines and Vietnam spent roughly the same time human capital than their lower-income counterparts. in school (12.95 and 12.86 years respectively), Development, then, is intimately linked to building students in Vietnam learn much more (about 10.68 human capital (Figure 25). years of learning) than the average student in the Philippines (about 7.49 years) as indicated by test The Philippines is not fully harnessing its human scores. The Philippines’ low HCI warns of the capital potential – its HCI of 0.52 remains lower constraints to productivity of the next generation of than peers with similar economic status. The workers given the prevailing rates of mortality, nation’s human capital indicators that gauge schooling achievements, and health outcomes. sustainable development and people’s wellbeing Figure 25: Change in Per Capita Human Capital in Low-Income Countries, 1995–2018 30,000 Armenia Albania 25,000 Bosnia Lao PDR and Herzegovina Guyana 20,000 Nigeria Ghana Georgia Congo, Rep. Philippines Economic Update December 2024 15,000 Sir Lanka Zimbabwe Benin Cambodia 10,000 Ethopia Mauritania Rwanda 5,000 Mozambique 5,000 10,000 15,000 20,000 25,000 30,000 Per capita human capital, 1995(2018 US$) Low income, 1995-2018 Low income, 1995; upper-middle-income, 2018 Low income, 1995; upper-middle-income, 2018 48 Source: World Bank. 2021. The Changing Wealth of Nations 2021: Managing Assets for the Future. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 26: Rate of Return to Investments in Human Capital Rate of Return to investment in Human Capital -Programs targeted towards the earliest years -Preschool Programs -Schooling -Job Training 0-3 4-5 School Post-School Source: Heckmen and Lafontaine (2007) Early year investments are the most impactful early years outcomes. Undernutrition among Filipino for building human capital. children is alarmingly high. In 2021, about one in four children under the age of five was considered To be more effective, human capital investments stunted, or small in size for their age (Figure 27).34 That must start early, even before a child is born. Early same year, nearly one in five children was classified year interventions affect the quality of the brain’s as underweight and six percent were classified as architecture, laying the foundation for future learning, “wasted,” or underweight for their height.35 These health and development (Handryastuti, et al. 2022). rates have not markedly changed in the past 30 These investments also yield the highest return years, and they place the Philippines among the ten on investment (Figure 26). Investments begin with countries globally with the highest number of stunted mothers, given the crucial role of maternal health children. In contrast, Indonesia has been able to in ensuring the well-being of both the mother and reduce stunting rates from approximately 31 percent the child. For example, adequate nutrition during to 21 percent between 2018 and 2022. The impact of pregnancy is essential to prevent complications such undernutrition on the development of the young brain as anemia, which affects 26 percent of pregnant and body is profound. Additionally, while the under- women in the Philippines.33 Furthermore, adequate five child mortality rate has significantly fallen over nutrition and cognitive stimulation for children are the last three decades, neonatal mortality rate has foundational for physical growth, brain development minimally changed with 60 percent of deaths below and future learning potential. Programs that integrate five years of age occurring among newborns (UNICEF nutrition, health, and education contribute to the 2023). This points to the need to focus the delivery of formation of neural connections that enhance high-quality health and nutrition services during the cognitive and emotional growth, which in turn reduces first 1,000 days of life for both the mother and child. stunting and improves future learning potential (Black et al.2016). Enrollment in early childhood education remains Philippines Economic Update December 2024 low and stagnant, hindering the accumulation of foundational skills, despite most barangays Weak early years outcomes are jeopardizing having day care centers. In 2020-21, only 47 percent the development of human capital in the of three- and four-year-olds in the Philippines were Philippines enrolled in preschools and 66 percent of 5-year-olds were in kindergarten (UNICEF 2021). In contrast, in The Philippines underperforms significantly in Vietnam, early childhood education is near universal, 33 World Development Indicators. 2019. Prevalence of anemia among pregnant women (%) - Philippines 34 Food and Nutrition Research Institute. 2022. Expanded National Nutrition Survey 2021 Survey. Food and Nutrition Agenda: Let’s Talk. 35 World Development Indicators. 2021. Prevalence of stunting, height for age; Prevalence of underweight, weight for age; Prevalence of wasting, weight for height. Philippines. 49 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital and in Malaysia, nearly 90 percent of children attend and about 89% of municipalities and cities meet the some form of early childhood education. Participation DCC/CDC to barangay ratio requirement per Republic rates in the Philippines dipped during the COVID-19 Act No. 6972 (EDCOM2 2024).36 However, access pandemic, with only 20 percent of Filipino children to quality early childhood education is a big concern aged 3-4 years participating in pre-kindergarten among parents, discouraging greater enrolment of programs (Figure 28). A recent study found that children. Additionally, many parents hesitate to enroll access is not the most critical problem in the system 3- to 4-year-olds, believing they are too young for — almost all barangays in the Philippines have at such programs, leading to low demand (World Bank least one public daycare/child development center 2023). Figure 27: Prevalence of stunting in the Philippines, 2021 35 30 25 Prevalence (%) 20 15 10 5 0 0-5 9 m 0-5 m 6-11 m 12-23 m 24-25 m 36-47 m 48-59 m Source: Expanded National Nutrition Survey. 2021. Figure 28: Percentage of children aged 3-4 attending school (public and private), 2011-2022 100% 90% 80% 70% 60% 50% 40% 30% 20% Philippines Economic Update December 2024 10% 0% 2011 2013 2014 2016 2017 2019 2020 Public Private Source: Author’s analysis and visualization of 2012-2022 Annual Poverty Indicators Survey rounds (PSA 2022a 36 Republic Act No. 6972. (1990). An Act Establishing a Day Care Center in Every Barangay, Instituting Therein a Total Development and Protec- tion of Children Program, Appropriating Funds Therefor, and for Other Purposes. Official Gazette of the Republic of the Philippines. 50 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Low enrolment in early childhood education however, notes that even the best performing students programs impacts future learning outcomes in the with kindergarten had large gaps in conceptual Philippines, but quality is critical. Grade 5 students skills, underscoring the importance of the quality of in the Philippines who attended an early childhood preschool and kindergarten education (Cheng et al education (ECE) program performed better in reading, 2020). writing, and math (UNICEF 2021). The Philippine Early Childhood Longitudinal Study, which tracked a cohort Significant disparities in outcomes at the local of students from kindergarten through Grade 4 found level make the early years challenge worse that students with kindergarten performed better on a range of skills, beginning with preparedness for school. At the local level, spatial disparities in early These skills held students in good stead as they childhood education are significant. For progressed through school (Cheng et al 2020). Indeed, example, enrollment rates in pre-kindergarten in starting education at the right age gives a head start the Bangsamoro Autonomous Region in Muslim in learning and predicts greater success in schools. In Mindanao (BARMM) are eight times lower than in the the Philippines, 46 percent of children who attended Ilocos Region. Specifically, less than 5% of children in a 2-year ECE program and 40 percent with one year BARMM are enrolled in pre-kindergarten, compared joined school at age 6 compared with 14 percent to nearly 40% in Ilocos. Even in affluent areas like of their peers with no ECE (Figure 29). Students Region IV-A (CALABARZON) and the National Capital who started at the right age performed significantly Region (NCR), participation remains low (Figure 31). better in reading, writing and math relative to those who started later. Grade repetition is also higher These disparities challenge the assumption that among students without ECE (Figure 30). Given that higher regional income ensures better access to only 9 percent of Grade 5 students are proficient in early education, pointing to other barriers influencing reading an age-appropriate text, greater attention to enrollment. ECE is essential. The longitudinal study cited above, Figure 29: Percentage of Grade 5 students by Figure 30: Percentage of Grade 5 students who ability to perform early learning tasks prior to repeated grades by ECE attendance primary education by ECE attendance No ECE 1Year 2 Years + No ECE 1Year 2 Years + 100 100 Percentage 95 80 90 60 Percentage 85 44 40 31 20 30 Philippines Economic Update December 2024 0 Early Language Tasks Early Mathematical Tasks Source: UNICEF. 2021. Harness the potential of early childhood education for long-term benefits on children’s learning Philippines SEA-PLM 2019 51 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 31: Percentage of children aged 3-4 years old attending school vs. per capita monthly income, by region. 40 Percentage of children aged 3 -4 years old attending school (%) Region I Ilocos Region 35 CARAGA Region XII - SOCCSKSARGEN Region VI - Western Visayas Cordillera Administrative Region 30 Region VII - Central Visayas 25 Region V -Bicol Region IVB -MIMAROPA 20 Region X - Northern Mindanao Region II - Cagayan Valley Region XI - Davao Region VIII - Eastern Visayas 15 Region IV - CALABARZON Region III - Central Luzon National Capital Region 10 Region IX - Zamboanga Peninsula 5 BARMM 0 0 2000 4000 6000 8000 10000 12000 Per capita monthly income - proxy (Philippines Peso) Source: APIS 2022 Up to 26 percentage points in human capital in 11 regions have HCIs lower than the median potential could be lost due to LGU-specific of 60 percent for all HUCs. Early year outcomes factors, including governance and service delivery are driving these disparities; for instance, stunting inefficiencies. Sub-national HCI calculations reveal rates vary widely from 43.7 percent to 8.4 percent. significant disparities among provinces and Highly Education outcomes also show large disparities, Urbanized Cities (HUCs), with HCI estimates ranging with enrollment rates differing significantly across from 0.48 to 0.74 (Figure 32). Provinces with below- regions and socioeconomic groups. Looking at the median HCIs are scattered across the regions, but the subcomponents of the HCI, the disparities are starker largest number of the lowest performing provinces among provinces and HUCs in terms of health, are in the regions of Bicol, Central Luzon, Davao, especially for stunting and under-five mortality rates Soccsksargen, and Zamboanga Peninsula. HUCs than for education outcomes. Based on analysis of show relatively higher HCIs but these vary by city. budget data and qualitative case studies, governance The HUCs with the lowest HCI are in the regions of and service delivery inefficiencies stood out as key Zamboanga Peninsula and Soccsksargen in Mindanao drivers of the discrepancy. The chapter dives into these while the city with the highest HCI is in the National in the coming sections. Capital Region. Overall, 16 HUCs (out of 33 in total) Philippines Economic Update December 2024 52 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 32: Human Capital Index Computed at the Subnational Provincial Level Philippines Economic Update December 2024 53 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Philippines Economic Update December 2024 Source: Philippines HCR, 2024 54 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Differences in Gross National Income (GNI) per human capital outcomes, this relationship does not capita only partially explain the variation in HCI fully account for the observed disparities. Findings outcomes (Figure 33), with a significant portion from qualitative studies conducted with select LGUs of disparities likely attributable to the capacity of provide nuance to challenges faced at the LGU level early years workers to deliver essential services. and point to a significant portion of these differences While there is a correlation between GNI per capita being likely attributable to the capacity of early years and sub-national HCI of 0.53, indicating that higher workers to deliver essential services (discussed income levels are generally associated with better subsequently). Figure 33: Province level sub-national HCI and Income per capita 0.8 0.75 San Juan City Surigao del Norte Manila City 0.7 Batanes Makati City 0.65 HCI 0.6 Valenzuela City General Santos City HCI 0.55 Batangas Navotas City Linear ( HCI ) Palawan Zamboanga del Norte 0.5 Cotabato City Sultan Kudarat Isabela City 0.45 Tawi-Tawi Eastern Samar 0.4 0 50 100 150 200 250 300 Thousands Per Capita Income Source: Author’s computation of sub-national HCI and Philippines, Family Income and Expenditure data 2023 Philippines Economic Update December 2024 MDV Edwards 55 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3.3 High-quality community-level early year workers are Vital for Improving Early Years Outcomes Community-based workers are crucial for early doctors, midwives, nurses.). The shortage of medical years interventions. Globally, successful early years personnel discussed below puts serious blocks on interventions depend on high-quality early years their ability to direct families appropriately. workers (see Box 3). Their importance is difficult to match because they interface with families and Child development workers (CDWs) focus on children on a regular basis. In the Philippines there are early childhood development by helping parents four types of community-based early years workers strengthen their nurturing skills and providing in the Philippines (see Box 4 for legislation, Table children opportunities for early learning, 3 for contractual details and Table 4 for roles and socialization and supplemental feeding in daycare intervention details). Barangay health workers (BHW) centers. Family development session workers and barangay nutrition scholars (BNS) provide a (FDSWs) target poor and vulnerable households broad range of critical health and nutrition services in promoting positive mother and child health, for pregnant and lactating mothers as well as young nutrition and education behaviors through the children, especially during the critical first 1000 days Pantawid Pamilyang Pilipino Program (4Ps) of the of life. Together, they also form community health national government. They help promote positive teams which provide outreach preventive health and health-seeking behavior prompting First 1000 nutrition services to household unable to regularly Days households to avail services such as prenatal/ visit health facilities to avail of basic health services. postnatal visits, immunization, growth monitoring and They help mothers and children navigate the health nutrient supplementation delivered in primary care system and encourage them to go to primary health facilities (UNICEF 2024). Again, their effectiveness care facilities where they could receive facility-based depends on the availability of facilities and personnel critical interventions from formal health workers (i.e. at these facilities. Table 3: Contractual arrangements and compensation of early years workers BARANGAY HEALTH BARANGAY NUTRITION CHILD DEVELOPMENT FAMILY DEVELOPMENT WORKERS SCHOLARS WORKERS SESSION WORKERS Voluntary worker with a Voluntary worker with Majority are hired under Hired under contract of contract of service signed a contract of service contract of service by LGUs service by the DSWD as with the LGU signed with the LGU (30%); 22% hired as casual city/municipal links (seasonal) workers; few have *May qualify for first level *May qualify for first level permanent positions (11%) civil service eligibility civil service eligibility af- TYPE OF CONTRACT after two years of college ter two years of rendering *Day care worker I and Day education and five years satisfactory nutrition ser- care worker II are eligible for of continuous satisfactory vices in the community career service (Subprofes- service as an accredited sional) and have first level Philippines Economic Update December 2024 BHW to the community civil service eligibility under existing law Monthly honorarium or Receives monthly hon- Monthly salary varies across Receives monthly salary of stipend varies across LGUs orarium or stipend of at LGUs with average of Php Php 36,619 COMPENSATION but averages between Php least Php 2500 5000; in remote areas, 800- 1000 per month CDWs receive monthly hon- orarium of Php 1,000 No standard salary, tenure No standard salary, ten- No tenure and benefits if No tenure but with benefits and benefits ure and benefits under contract of service such as health insurance, social security and afford- Permanently employed able housing loan benefits BENEFITS CDWs receive benefits such as service insurance, health insurance, paid leaves, free legal assistance and over- time pay 56 Source: Author’s complilation. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Table 4: Coordination of Community-Based early years workers in the Philippines: Roles and Interventions BARANGAY HEALTH WORKERS BARANGAY NUTRITION CHILD DEVELOPMENT FAMILY DEVELOPMENT AGE RANGE (1:20 HOUSEHOLDS) SCHOLARS WORKERS SESSION WORKERS (1:20 HOUSEHOLDS) (1:10 CHILDREN) (1:500 HOUSEHOLDS) - Primary care services - OPT Plus Growth - Oversee child development - Conduct monthly sessions - Maternal and child monitoring centers in barangays on maternal and childcare, care (First 1000 days) - Feeding programs - Run infant and toddler early parenting skills, finan- - Family planning - Counseling on education (ITED) program cial and digital literacy, - Immunizations nutrition and IYCF accessing health and social 0-1 YEAR - Vitamin supplementation -Preparation of BNAPS services, livelihood - SBC activities on IYCF - conducts annual SWDI assessment of households - case management of 4Ps beneficiaries - Primary care services OPT Plus growth Monitoring - Run infant and toddler early Conduct monthly sessions - Maternal and child - Feeding programs education (ITED) program on maternal and childcare, care (First 1000 days) - Counseling on - Supplemental feeding parenting skills, financial and - Immunizations nutrition and IYCF digital literacy, accessing -- Vitamin - Preparation of BNAPS health and social services, 1-2 YEARS supplementation livelihood - SBC activities on IYCF - Conduct annual SWDI assessment of households - case management of 4Ps beneficiaries - Primary care services - OPT Plus growth - Oversee child development Conduct monthly sessions - Health monitoring Monitoring centers in barangays on maternal and childcare, - Health education on nutrition - Feeding programs - Supplemental feeding parenting skills, finan- and hygiene - Counseling on family - Run facility-based sessions cial and digital literacy, - Family planning - Preparation of BNAPS on ECD and enhancing par- accessing health and social - Mobilize mother support enting skills services, livelihood 2-3 YEARS groups - Some regions also imple- - Conduct annual SWDI ment home-based early child- assessment of households hood care and development - case management of 4Ps (ECCD) for children unable to beneficiaries visit daycare centers - Health monitoring - OPT Plus growth - Oversee child development Conduct monthly sessions - Health education on Monitoring centers in barangays on maternal and childcare, nutrition and hygiene - Feeding programs - Supplemental feeding parenting skills, financial - Family planning - Counseling on family - Run facility-based sessions and digital literacy, - Mobilize mother support nutrition on ECD and enhancing accessing health and social groups - Preparation of BNAPS parenting skills services, livelihood 3-6 YEARS - Some regions also - Conduct annual SWDI implement home-based assessment of households ECCD for children unable to - case management of 4Ps visit daycare centers beneficiaries Summary of acronyms in the table: 4Ps – Pantawid Pamilyang Pilipino Program; BNAPS – Barangay nutrition action plans; IYCF – infant and young child Philippines Economic Update December 2024 feeding; OPT – Operation Timbang; SBC – social behavioral change; SWDI – Social Welfare and Development Indicator Source: Author’s compilation based on existing regulations. The effectiveness of early years workers is compromised by three types of interrelated challenges: shortages; quality-related concerns; and motivation. Together, these impact how effectively LGUs can use early year workers. 57 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital BOX 3: INTERNATIONAL EVIDENCE ON THE IMPACT OF EARLY YEARS WORKERS The role of early years workers—such as community played a key role in reducing stunting by improving health workers (CHWs), preschool teachers, and other child nutrition through community-based programs local community-based professionals—is crucial and behavior change communication. in driving better outcomes in health, nutrition, and education. Research highlights that the quality and As with health, a well-prepared ECED workforce is availability of these workers significantly influence a pre-requisite for the provision of quality services, human capital development. as proved by a growing body of evidence. Teacher professional development has a significant impact on For example, CHWs are essential in delivering high- preschool attendance and early language and literacy impact interventions, with a return on investment of practices, which are foundational for later academic 10:1. These workers, often based in the communities success (Hanno and Gonzales 2022; Neuman and they serve, provide medical care, information, Cunningham 2009; Manning, Garvis, Fleming, and counseling, and referrals, connecting individuals with Wong 2017). broader community services. In Rwanda, CHWs have Shortages care fell below 80% for the first time in a decade with tetanus toxoid vaccinations not even reaching 50% The shortage of early years workers in the (Department of Health 2024). Philippines significantly hinders the delivery of essential services crucial for building human In addition to overall shortages in HRH availability, capital in the early years. In many regions of the there are considerable disparities. Less than 25% country, the limited availability of early years workers of LGUs reach the recommended HRH density ratio means that children and families do not receive the (Abrigo and Ortiz 2019). The HRH shortage is more consistent, high-quality support needed for optimal severe in rural areas because of the low capacity of development. These gaps in service delivery hinder the LGUs to hire, manage and retain staff as well as the nation’s ability to build human capital. The provision relatively lower pay and incentives and the lack of of health services provides a striking example of opportunities for professional development when these challenges. A strong primary health care (PHC) compared with health workers in cities and urban approach reliant on multidisciplinary teams of areas. At the municipality level where health and health workers at the community level remains the nutrition services are delivered through rural health foundation of effective service delivery for the first units, the low ratio also translates to a gap of 2,031 1000-day households (UNICEF, 2024). However, there physicians, 4,467 nurses and 3,966 midwives. are severe challenges with shortages of health workers, These disparities on HRH distribution are caused by Philippines Economic Update December 2024 uneven allocation, and inadequate capacity and several factors such as the varying income generation skills-mix necessary to deliver high-impact health and capacities of provinces and municipalities and the nutrition interventions. The country has considerable current limits on the proportion of local budgets gaps in terms of meeting the WHO recommended that could be allocated for personnel services which Human Resources for Health (HRH) density ratio of disadvantage the poorest LGUs in terms of their 44.5 HRH per 10,000 population with the current ability to hire, retain and compensate staff. Hence, density ratio only at 19.7. Inadequate HRH given a many LGUs rely often on community health volunteers growing population adversely affects the delivery of to deliver basic and essential health and nutrition primary MCH services (Figure 34). For instance, in interventions. 2023, the national coverage of complete antenatal 58 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital There is a similar shortage of Day Care Workers instance, in urban areas, this ratio can escalate to (DCWs) and CDWs, with the ratio of enrolled 30, exceeding the standard by threefold (see Table children to workers exceeding the standard set by 5 ). Given the low enrollment rate in early childhood the ECCD Council. The ECCD Council has established education, there is a need for strategies to boost the a ratio of 1 CDW per 10 children, a standard also supply of CDW in conjunction with efforts to enhance observed in countries with well-established early demand through universal access to early childhood childcare systems. However, in the Philippines, the education. The country’s current workers are short average ratio stands at 19 enrolled children per of around 90,000 to meet the 240,000 DCW/CDW CDW, with variations depending on the location. For required to meet 100% of the demand. Figure 34: Coverage of Complete Prenatal Care and Tetanus Toxoid Vaccination for Mothers 120 Women who gave birth and had at least 4 ANC check-ups 98.95 99.26 90 87.14 88 84.11 87.72 81.59 78.84 80.68 79.36 71.71 75.38 75.51 66.17 68.79 60 46.02 28.57 30 0 Td Vaccinations in women pregnant this time 120 Percentage 90 60 30 25.17 28.13 20.18 23.21 19.89 20.75 22.92 21.87 20.58 19.89 21.04 21.14 16.87 18.33 14.46 13.8 12.98 0 Td Vaccination in women with repeat prenancy 120 90 60 47.96 35.16 36.82 35.25 35.75 38.58 35.12 35.08 36.83 33.96 28.4 32.14 27.35 30 25.12 22.24 23.12 14.28 0 NCR CAR Region 1 Region 2 Region 3 Region 4A Region 4B Region 5 Region 6 Region 7 Region 8 Region 9 Region 10 Region 11 Region 12 CARAGA BARMM Antenatal Care Indicators, by Region, 2023 Source: DOH Field Health Services Information System (2023) Table 5: Ratio of mean Daycare/Child Development Workers to enrolled children by LGU income class, 2023 Income Class DCW / CDW to enrolled children ratio (%) Philippines 18 1st-2nd Class 16 3rd-6th Class 17 Component City, Highly Urbanized City and 30 Philippines Economic Update December 2024 Indigenous Cultural Communities Source: Authors’ compilation and calculation of 2023 ECCD-IS data (DSWD 2023a) and World Population Prospects data (UN 2022). Note: The completeness and veracity of data depend on the encoding capacity of each LGU 59 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Quality that undermine their professional status and effectiveness. Despite having their roles defined in In addition to shortages, many early years workers national policies, early years workers are yet to be lack mandated qualifications. In 2015, the ECCD fully professionalized. They struggle with unstable Council updated standards for center-based ECE compensation, expectations of voluntarism, resource- programs for children aged 0-4, with guidelines constrained environments, limited tools and high requiring CDWs to hold bachelor’s degrees, and turnover rates linked to political cycles. For instance, teacher aides needing at least complete secondary BHWs and BNSs face increasing workload often education. Ideally, each CDC should have one CDT overseeing as many as 150 households instead of the or CDW and a teacher aide (World Bank 2023). Department of Health (DOH) standard of one BHW/ However, due to limited resources, many CDCs rely BNS per 20 households. This compromises their ability on underqualified staff or unpaid parent volunteers. to deliver consistent early childhood development A report by the Philippine Institute for Development services across regions. Pay remains a challenge with Studies (PIDS) found that about half of the CDWs reports of early years workers often missing salaries. in the Philippines have only completed high school, The unregulated employment status of CDWs only while the other half are college graduates (PIDS allows for a small amount of compensation relative to 2024). The proportion of college-educated CDWs their workload. Career progression opportunities are varies across local governments and is influenced by weak. For instance, although BNSs enjoy the same income levels, with cities having a higher percentage eligibility for civil service access, training opportunities of college-educated daycare workers (Figure 35). are awarded to high performers but not necessarily Another study found that the number of accredited tracked and there is no formal career ladder. A review CDWs dropped from 72 percent in 2018 to 11 percent of practices pertaining to early years workers found in 2022, suggesting that many programs are handled little structured, supportive supervision for these by unqualified CDWs even in centers with valid cadres (BHW and BNS are part of a CHT and have an accreditation status (World Bank 2023). allocated supervisor, as do CDWs). Quality assurance was generally lacking across all programs. Early years workers are also not adequately trained. A UNICEF (2024) assessment highlighted Political interference impacts motivation as significant deficiencies in training programs. For early years workers are often replaced. Multiple example, BNSs are expected to undergo 10 days of studies point to the uncertainty associated with these classroom training followed by a 20-day practicum. appointments, with reports of these being politically However, due to limited funding and resources, this is determined (PIDS, 2024). Moreover, newly elected often reduced to just a 5-day course or an orientation local chief executives (can be Barangay Captains or with on-the-job training. The basic training provides even city/municipal mayors) sometimes allegedly minimal guidance on delivering nutrition services remove previously trained BHW/BNS (who may have focused on behavior change and excludes topics like been hired by the previous local chief executive) early childhood development (ECD) and nurturing and recruit new ones who belong to their political care. These gaps call for updates in line with the affiliations. Department of Health’s expanded scope of work introduced in 2021. BHWs have a vast scope of work Qualitative findings from case studies reveal but receive only three days of basic training delivered how local government constraints and systemic Philippines Economic Update December 2024 once, and a national curriculum is yet to be developed. challenges limit early years workers’ motivation There is little information on the training received by to provide essential services (Lebbos et al. FDSWs. There is also a lack of regular supervision, 2024). In Surigao City for example, CDWs face monitoring and mentoring programmes as part of resource shortages, forcing them to buy classroom a holistic human resource development strategy to supplies themselves, while social workers manage improve their performance. overwhelming workloads, often working from 10 a.m. to 4 a.m. due to staff shortages. In Villareal, Motivation Western Samar, low compensation and politicized appointments result in high turnover among CDWs, Early years workers, despite their roles being destabilizing early childhood programs. Cotabato City defined in national policies, face challenges similarly faces limited access to public health services 60 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital and personnel due to financial constraints, while in early years workers, exacerbate disparities in critical Surigao del Norte, barangay-level staff turnover tied to early years outcomes, such as stunting and under-five election cycles forces the constant retraining of new mortality rates and disproportionately affect lower- workers. These challenges, which invariably impact performing provinces and HUCs. Figure 35: Highest educational attainment of DCW/CDW, by age among municipalities and cities by income classification 1st to 2nd Class 1,000 800 600 400 200 0 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 High school graduate Senior High school graduate Vocational College graduate Above college graduate 3rd to 6th Class 1,000 800 600 400 200 Philippines Economic Update December 2024 0 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 High school graduate Senior High school graduate Vocational College graduate Above college graduate 61 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Cities 500 400 300 200 100 0 20 21 22 23 2425 26 27 28 29 30 31 32 33 3435 3637 38 39 40 41 42 43 4445 46 47 4849 50 5152 53 5455 56 57 58 5960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 High school graduate Senior High school graduate Vocational College graduate Above college graduate Source: PIDS. 2024. Behind the Slow Start: An Assessment of Early Childhood Care and Development in the Philippines. https://pidswebs.pids.gov.ph/CDN/document/pidsdps2404.pdf Philippines Economic Update December 2024 Photo: Shutterstock /Ulysses Nemeno 62 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital BOX 4: COMMUNITY WORKFORCE STRENGTHENING FOR THE EARLY YEARS: LANDMARK LEGISLATION In 2019, the Universal Health Care Act shifted The national government has also prioritized the the paradigm for delivering health and nutrition Basic Education and Early Childhood Education services through a strong primary health care Alignment Act (Senate Bill No. 2029) that seeks to approach.37 The law redirects investments towards advance the professional development of CDWs.39 managing and professionalizing frontline health The bill supports efforts to improve early learning workers through the development of a primary care systems through the creation of plantilla positions certification program which shall cover community and competency-based professional development health teams to equip them with essential primary that will address the current situation where a great care competencies as the first point-of-contact majority of daycare workers are hired on a contractual health service delivery in the communities. Currently, basis with minimal honoraria. A proposed bill of several bills are under deliberation pushing for the rights for day care workers (House Bill 10224) is assimilation of BHWs and BNS into the professional also under development that will provide incentives health workforce by granting them civil service and opportunities for continuing skills training and eligibility and providing opportunities for career knowledge enhancement programs to enable CDWs to advancement and enhancing their skills through provide high-quality ECE.4073 formalized trainings. The proposed bills also include other provisions which include: (1) setting minimum The national government is expected to finalize education standards of qualification for community the Trabaho Para sa Bayan Master Plan for early workers; (2) mandatory plantilla position in every years workers, which is a 10-year employment barangay; (3) minimum salary grade and government strategy launched under Republic Act No. 11962, and mandated incentives; (4) celebration of barangay signed into law in September 2023. This Plan will lay health workers day; and (5) creation of local training out key elements of a human resource development teams at the city/municipal levels.38 plan for early years workers. The workforce-related bills and policies are reinforced by the Mandanas-Garcia ruling effectively increasing the national tax allotment (NTA) transfers to local governments to supplement the special health fund (SHF) and the National Tax Allotment of LGUs. The increase in financial resources is envisioned to address the chronic underfinancing of health services at the local level giving LGUs a bigger fund pool to finance their needs which include salaries Philippines Economic Update December 2024 and incentives for hiring, training and retaining the workforce for early childhood development (Nuevo et al. 2022). 37 Republic Act No. 11223. (2019). An Act Instituting Universal Health Care for All Filipinos, Prescribing Reforms in the Health Care System, And Appropriating Funds Therefor, Rep. Act No. 11223. Official Gazette of the Republic of the Philippines. https://elibrary.judiciary.gov.ph/thebook- shelf/showdocs/2/86448 38 National Nutrition Council. (2024). Matrix of pending legislation on incentivizing and professionalizing community health workers. 39 Senate Bill No. 2029. (2023). Basic Education and Early Childhood Education Alignment Act. 40 House Bill No. 10224. (2024). An Act Granting Benefits to Child Development and Day Care Workers and Appropriating Funds Therefor. https:// www.congress.gov.ph/legislative-documents/ 63 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3.4 THE ENABLING ENVIRONMENT: NATIONAL GOVERNMENT OVERSIGHT AND LGU INITIATIVE The Philippines has established robust policies and frameworks to enhance early year outcomes, with national and local agencies playing key complementary roles At the national level, multiple entities are engaged DepEd is not decentralized. in the design and implementation of the early years agenda in the Philippines (see table 6). The The Department of Interior and Local Government Department of Education (DepEd), the Department of (DILG) at the national level plays a key role in the Health (DOH), and the Department of Social Welfare implementation of the early years agenda. DILG and Development (DSWD) are the key departments oversees LGUs, who as discussed below have the contributing to the technical design of early years mandate for implementing early years interventions strategies, policies, and interventions. The Technical (0-4 years), while coordinating with national Education and Skills Development Authority (TESDA) government agencies on the same. Its key functions provides technical and vocational education, including include ensuring: (1) vertical alignment between training programs for early years workers. Tertiary the key early years programs designed by national education is under the purview of the Commission on government agencies and councils and their Higher Education, and includes medical education. implementation at the local level by LGUs; (2) These agencies have developed policies or legal assessing and monitoring LGU performance; and frameworks that underpin the implementation of (3) training for LGUs. It is important to note that sectoral strategies to build human capital in the two of the main legislations governing the early early years covering important areas such as early years — the Early Years Act 2013 and the First 1000 childhood care and development, basic education, Days Law — identify who should be responsible for maternal, neonatal, child health and nutrition in the financing, delivery and standards and regulations, first 1000 days, universal health coverage, responsible but do not include DILG. This creates a fundamental parenthood and reproductive health, and social accountability problem. protection.41 Additional sectoral plans exist for guiding investments in nutrition, health, and education.42 LGUs are expected to play a key role in service delivery as defined by the Local Government Recognizing the multisectoral nature of Code of 1991. In recent years, the Philippines interventions, the national government has set up has passed and proposed landmark pieces of multisectoral councils at the national level. These legislation to strengthen systems for delivering councils are expected to ensure coordination across health, nutrition and early childhood interventions agencies (see Table 6). Together, the government with a focus on increasing resources and mandating agencies and multisectoral councils provide LGU level greater responsibilities to LGUs (see Box 4). The support through regional offices. In this context, it is Local Government Code of 1991 was designed to Philippines Economic Update December 2024 important to note that while DOH, DSWD, and DILG decentralize governance and empower LGUs by are national agencies, their service mandates are fully granting them greater autonomy and responsibility. decentralized to local-level counterparts. In contrast, This legislative framework aimed to enhance local 41 These include the Juvenile Justice and Welfare Act of 2006 (RA 9344); the Kindergarten Education Act of 2011 (RA 10157); the Enhanced Ba- sic Education Act of 2013 (RA 10533); the Early Years Act of 2013 (RA 10410); the RPRH Act of 2012 (RA 10354); the universal health coverage (UHC) Act of 2018 (RA 11223); the Kalusugan at Nutrisyon ng Mag-Nanay Act of 2018 for the first 1000 days of life (RA 11148); and the Act of 2019 institutionalizing the Pantawid Pamilyang Pilipino Program (4Ps) (RA 11310). 42 For example, the Philippine Plan of Action for Nutrition Action (PPAN 2023-28), the National Human Resource for Health Master Plan (NHRHMP 2020-2040), and the MATATAG Curriculum initiative. The MATATAG Curriculum initiative sets the government agenda for addressing challenges in basic education to improve on access, equity, resilience and well-being. An “Early Years First” National Strategic Plan for Early Child- hood Care and Development 2019-2030 has also been developed but is yet to be published. 64 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital governance by devolving functions and increasing LGUs additional financial resources. In 2022, the the share of national revenues allocated to LGUs. The ruling increased the IRA by for LGUs by approximately Mandanas-Garcia Ruling further reinforced this by 37.9%. LGUs are once again expected to receive a mandating a significant increase in the National substantial increase in NTA transfers in 2025, by Tax Allotment (NTA) transfers to LGUs,43 providing nearly 20 percent year-on-year. 44 Table 6: Summary of councils addressing the early years Council Objective / Role Members National Nutrition Council (NNC)45 The NNC is the country’s highest policy-making Chair: Department of Health and coordinating body ensuring the nutritional Vice Chair: Department of Interior and Local well-being of Filipinos. It is mandated to Government orchestrate government, private sector and Board Members: other relevant stakeholder efforts through policy Department of Agriculture and program formulation, resource mobilization, Department of Education capacity development, nutrition surveillance, Department of Labor and Employment promotion of good nutrition and fostering Department of Social Welfare and Development alliances and partnerships National Economic Development Authority Private sector representative Early Childhood Care and Development Council This council is responsible for establishing Chair: Department of Education (ECCD Council)46 national ECCD standards, developing policies Vice-Chair: Executive Director, ECCD Council and programs, providing technical assistance Board Members: and support to service providers, as well as Department of Health well as monitoring ECCD service benefits and Department of Social Welfare and Development outcomes National Nutrition Council Council for the Welfare of Children (CWC)47 The CWC is the focal inter-agency body Department of Social Welfare and Development promoting and advancing policies and measures Department of Agriculture to protect child rights. It aims to create child- Department of Health friendly and child-sensitive environments Department of Interior and Local Government through policy and program formulation Department of Justice and implementation; advocacy, resource Department of Labor and Employment mobilization, coordination and partnership- National Nutrition Council building National Economic Development Authority Private individuals (3) ECCD experts (3) Youth representative The 4Ps’ National Advisory Council (NAC)48 The 4Ps NAC serves as the policy-making and Chair: Department of Social Welfare and coordinating body for the Pantawid Pamilyang Development Pilipino Program (4Ps). It formulates and Members: recommends policies towards the enhancement Department of Education of the 4Ps program implementation. Department of Health Department of Labor and Employment Department of Budget and Management National Economic Development Authority National Nutrition Council Commission on Population National Commission on Indigenous People Council for the Welfare of Children Philippine Commission on Women National Anti-Poverty Commission Philippines Economic Update December 2024 Source: Author’s compilation. 43 Previously known as Internal Revenue Allotments (IRA). 44 National Tax Allotments are set to increase to Php 1.034 Trillion in 2025. 45 National Nutrition Council Official website (2024). https://nnc.gov.ph/ 46 Early Childhood Care and Development Council Official website. (2024). https://eccdcouncil.gov.ph/ 47 Council for the Welfare of Children Official Website. (2024). https://cwc.gov.ph/ 48 An Act Institutionalizing the Pantawid Pamilyang Pilipino Program. Rep. Act No. 11301. (July 23, 2018). https://legacy.senate.gov.ph/repub- lic_acts/ra%2011310.pdf 65 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital LGUs are uniquely placed to ensure convergence of an LGU to raise revenues depends on the dynamism of services at the household and individual level, of its local economy and its socio-demographic but many LGUs are unable to do so. The provision characteristics, but structural political economy of essential maternal and child development services factors also play a major role. For example, local particularly during the first 1000 days hinges on politicians are wary about updating their local taxation the adequacy of a multidisciplinary health team schedules because they may lose in the next elections composed of doctors, nurses and midwives supported (Atienza and Go 2023). Moreover, as the Mandanas by community health teams, CDWs and FDSWs. This Ruling increases NG transfers to LGUs, it may further in turn depends upon how LGUs manage early years create disincentives for LGUs to raise their revenues workers: all four types of early year workers depend from local sources. on the support and funding of local governments to ensure the adequacy, quality and sustainability of the In addition to funding, LGUs must also prioritize services they coordinate and deliver. human capital and thereby investment in early year workers. Despite a substantial increase in NG LGU ability to invest effectively in early years transfers between 2021 and 2022, LGUs’ spending on human capital did not increase commensurately workers is hindered by fundamental challenges (Figure 36). Most of the budget increase was directed to General Public Services, with 1.5 percentage Despite multiple efforts to strengthen LGUs, they points (ppt) of GDP out of 1.8 ppt going to Personnel continue to encounter numerous challenges that Services and Maintenance. Indeed, NG transfers impact the availability, capacity and motivation of covered about two-thirds of LGUs’ total expenditures early years workers and ultimately their ability to and one-third of their spending on human capital over deliver on their service mandates. The challenges the past five years. However, the share allocated to include (i) limited, dependent, and inefficient fiscal health, nutrition, and social welfare fell by five ppt. resources; (ii) coordination failures and unclear Qualitative insights from six LGUs highlight disparities accountability; and (iii) capacity challenges in public in budget prioritization, particularly pointing to the financial management (PFM). role of local political motives in influencing budget allocation decisions. For example, some LGUs may Inadequate fiscal resources and low favor short-term investments like infrastructure over prioritization of human capital human capital investments, which yields longer-term benefits. However, examples like Mabalacat City For LGUs to meet implement policies on early and Navotas City illustrate the success that can be years workers, they need adequate funding, but achieved when human capital investments, face numerous constraints. National government such as early childhood care and development, are (NG) transfers remain the primary source of revenues prioritized. (Lebbos et al. 2024). for LGUs relative to local tax and non-tax revenues (Diokno-Sicat, Adaro, and Maddawin 2020). In the last five years, NG transfers represented, on average, Coordination failures and unclear accountability 59 percent of the LGUs’ total revenues and receipts. Following the Mandanas-Garcia Supreme Court Ruling Limited coordination between national government of 2021, which resulted in an increase in the NG agencies (NGA) and LGUs results in the dilution Philippines Economic Update December 2024 transfers to the LGUs beginning in 2022, the transfers and duplication of efforts (Juco et al. 2023).49 For increased by 38 percent between 2021 and 2022. The example, DepEd is entrusted with ensuring universal Local Government Code of 1991 empowers LGUs to access to kindergarten (5-year-olds). However, to raise local revenues through taxes, fees, and charges, ensure students join at the right age and are prepared but various constraints keep LGUs dependent on NG for kindergarten, the DepEd needs to coordinate on transfers. Only about 40 percent of LGUs’ revenue is curriculum and quality assurance with LGUs as they generated from local sources. Generally, the capacity are mandated with providing preschool education 49 As of November 2024, LGUs are composed of 82 provinces, 148 cities, 1486 municipalities, and 42,027 barangays (villages). These LGUs are spread across the 17 regions of the country. Seven regions account more than 100 municipalities and 3,000 barangays each. In addition, some LGUs are isolated, that is the geographically isolated and disadvantaged areas or GIDAs. 66 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Figure 36: Share of Spending on Human Capital (% of LGUs’ Total Expenditures), 2018 – 2022 25% Share of spending on human capital (% of LGUs' total expenditures) 20% 15% 10% 5% 0% Education HNP SSSW Overall 2018 2019 2020 2021 2022 Source: Authors’ calculations using data from the COA’s annual financial reports for LGUs. HNP=Health Nutrition and Population, SSSW= Social Services and Social Welfare, Overall=Education + HNP + SSSW (3–4-year-olds). Without such coordination, the efforts governance of nutrition programs is siloed. Nutrition of LGUs — and early years workers — in preschool programs can, for instance, achieve greater impact education are likely diluted as they may teach material through multisectoral coordination involving the that does not help students transition effectively to relevant national councils, which are the NNC, kindergarten. ECCD Council, National Authority for Childcare, and potentially the CWC. Yet, such coordination rarely Lack of coordination between NGAs and LGUs on happens, potentially leading to an overburdening of the tools that are deployed at the local level often workers and reducing the ability to troubleshoot. As creates inefficiencies and unnecessary burden another example, considering the lack of regional for early years workers. For example, even though offices of the ECCD Council, the different councils can both the ECCD Council and NNC address early years strengthen their synergies at the LGU level to enable challenges, each has a separate and disconnected the delivery of all ECCD services (Silvestre et al. 2023). monitoring and evaluation system. The LGUs are also supposed to use different monitoring systems for Many local governments still rely heavily on NGAs social protection (i.e. Community-Based Monitoring for services that were intended to be decentralized System) and nutrition (Monitoring and Evaluation or devolved. This reliance persists due to unclear of Local Level Plan implementation) established by roles and responsibilities between NGAs and LGUs DWSD and NNC, respectively, even though they cover (Atienza and Go, 2023). While LGUs are tasked the same households. The fragmented nature of these with managing these services, NGAs continue to Philippines Economic Update December 2024 systems and lack of coordination between different hold significant control, often undermining the spirit institutions makes complying with these national of decentralization. For instance, while LGUs are directives and data requirements difficult for early accountable for health service delivery, DoH managed years workers. the national HRH deployment program, controls the Health Facilities Enhancement Program and The lack of horizontal coordination at the has medicines to distribute to LGUs. For the early subnational level also results in inefficiencies. A year worker, unless DOH and LGUs are perfectly review of the implementation of the Philippine Plan of synchronized, there is little accountability for health Action for Nutrition (PPAN) 2017-2022 finds that the outcomes, since, for example, vaccinations and medicines may not arrive on time.. This lack of clarity 67 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital in accountability contributes to several issues. First, it interventions or update these plans irregularly. This undermines the objective of decentralization, which is affects the planning and budgeting for adequate to better align spending with local needs. With NGAs human resources, including early years workers. Recent still making key decisions about service provision, COA reports confirm a previous study’s finding that resources may not be allocated in ways that reflect only 50 percent of LGUs had updated their CDPs in the unique priorities of each locality, potentially 2018. A recent DOH report indicated that in 2021, 11 contributing to regional disparities. Additionally, even provinces (out of 81) and one city (out of 38) lacked a when LGUs have the financial resources, they often validated AIP; additionally, 194 municipalities lacked prefer to defer responsibility for service delivery local investment plans for health (LIPHs).50 to NGAs, which prevents them from building the administrative and technical capacity needed for Even when LGUs effectively implement PFM, they effective governance. This results in a cycle where still face issues related to budget predictability, LGUs fail to develop the skills and systems necessary monitoring, and reporting. Qualitative assessments for managing services independently, ultimately undertaken as part of the Philippines HCR indicate stifling their growth and exacerbating capacity gaps. that LGUs were aware of and implemented the LGU PFM manual mandated by the NG. This led Capacity challenges in Public Financial to improvements in participatory budget planning Management through the involvement of all sectors, CSOs, and barangay captains in prioritizing the LGUs’ PPAs. LGUs face key challenges in public financial LGUs, however, pointed out delays in government management, including planning and connecting transfers of the National Tax Allotment, which affects plans to budgets. Key planning documents include the ability to disburse their budgets in accordance with local comprehensive development plans (CDPs), local their activity timeline (Lebbos et al. 2024). LGUs also development investment programs (LDIP), annual face deficiencies in monitoring and reporting financial investment programs (AIP), and annual budgets or information and inefficiencies in the collection of local local expenditure programs (LEP), along with a taxes. This impacts payments to early years workers. In list of programs, projects, and activities (PPAs). For addition, the devolution of additional functions such early years-related interventions, LGUs are expected as procurement adds financial and human resources to create domain-specific investment plans. However, burden of the LGUs, especially those with lower many LGUs lack some or all the essential capacities, often leading to ad hoc responses to early planning documents needed for early years-related years interventions and workers. Philippines Economic Update December 2024 50 Department of Health. 2022. 2021 LGU Health Scorecard Annual Report. Manila 68 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital 3.5 RECOMMENDATIONS Improving early years outcomes rests fundamentally Ensuring funding also involves leveraging the upon early years workers. Ensuring that these workers opportunities provided by decentralization. In can do their best requires two types of interventions. decentralized settings such as the Philippines, First, the Philippines must build the foundation by Performance-based grants (PBGs) present a promising addressing shortages in such workers, building their strategy to unlock additional resources by creating capacity to deliver services and motivating better financial incentives for local governments to prioritize performance. Second, it must secure the enabling and invest in early childhood development. This environment to ensure that early years workers can approach has been used in effective early years function effectively. programs worldwide, including in Brazil’s Auxilio Brasil, which incentivizes municipalities to invest in early Recommendation 1: Build the foundation childhood interventions, and Indonesia’s Dana Desa — address shortages, build capacity and system where villages demonstrating measurable improvements in nutrition-related outcomes receive motivate early years workers additional funding. Another mechanism for increasing funding involves using matching grants. In matching Ensure financing for early year workers grant programs, dedicated funding pools for early childhood development are established, and national- Increasing funding for early years workers level investments are matched by local contributions. requires a strategic approach that identifies how Such programs have been used effectively in South much is needed and leverages multiple financing Africa and Brazil. mechanisms. Early years workers are the foundation on which better service delivery rests. Building the The Philippines is piloting an innovative foundation means ensuring an adequate number of mechanism to encourage greater financing for well-trained and motivated early year workers. This early years outcomes. A PBG-based system is being requires greater and stable financing. The first step piloted in the Philippines currently, where PBGs not is to know how much financing is needed. This calls only provide direct funding but also encourage LGUs for an LGU-level costed plan for early childhood care to allocate more of their own budgets to critical and development, which lays out what is needed to early years services by linking financial rewards to implement the vision articulated in the Early Years Act demonstrable performance and outcomes. See Box 2013. 5 for an example from Quezon Province. To reiterate, linking funding mechanisms to clear performance The next step is to ensure the financing is indicators can help attract additional resources from available. This involves undertaking policy changes, both government and potential external donors, such as (i) revisiting current limits on the proportion including international development agencies and of LGU budgets to be spent on human resources that private sector partners interested in supporting hinder adequate compensation of barangay-level comprehensive early childhood interventions. service providers; (ii) and stipulating spending a fixed Philippines Economic Update December 2024 ratio of relevant funds (GAD, LCPC, Development PBG-type interventions work best when there Fund, SEF) on young children and early childhood are integrated data systems tracking how local care and development). Brazil and Indonesia provide governments are performing on early years good examples of how governments allocate a outcomes and inputs. DILG has important tools for defined amount of relevant funds to be used by local tracking progress, which it should continue refining governments for early childhood interventions. performance incentive tools like the Seal of Child- 69 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital Friendly Local Governance, linking financial rewards scorecard approach, developing more nuanced directly to the quality of early years interventions.51,52 performance indicators that capture the complexity The Child Friendly Local Government Audit provides of maternal and child health services, particularly in an opportunity to encourage LGUs to focus on early the context of the Universal Health Care Act. 53 By years outcomes. Currently, however, the audit only implementing robust monitoring and evaluation profiles early years workers. To be effective as a systems, LGUs can demonstrate the impact of their performance management tool, it is worth including early years programs, making a compelling case for data on how LGUs are performing in terms of the increased budget allocations and attracting additional quantity, quality and professionalization of early years funding from national government and external workers. Similarly, the DOH can expand its LGU sources. Philippines Economic Update December 2024 Photo: Shutterstock /Andrew Repp 51 Department of Interior and Local Government. (2024). Memorandum Circular No. 2024-064. 2024 Seal of Good Local Governance. https:// dilg.gov.ph/issuances/mc/2024-Seal-of-Good-Local-Governance-Pagkilala-sa-Katapatan-at-Kahusayan-ng-Pamahalaang-Lokal/3915 52 Department of Interior and Local Government. (2024). Memorandum Circular No. 2024-160. 2025 Child-Friendly Local Governance Audit (CFLGA) for all levels of Local Government. https://dilg.gov.ph/issuances/mc/2025-Child-Friendly-Local-Governance-Audit-CFLGA-for-all-levels- of-Local-Government/4007/ 70 53 Department of Health. 2024. Implementation of the 2023 Local Government Unit Health Scorecard (LGU HSC) Performance Results. Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risk 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital BOX 5: SAN ANTONIO, QUEZON’S PBG TIPS THE SCALE TOWARD A GREEN BANNER AWARD Located at the intersection of three of the A key factor in achieving their LNAP goals is the country’s largest provinces, San Antonio, Quezon multi-sectoral process used to develop the BNAPs, is a landlocked, primarily agricultural, 4th employing the community-driven approach of class municipality. It is surrounded by the major the DSWD’s Kalahi-CIDSS program. San Antonio is development hubs of Lipa City in Batangas, San among the first five PMNP LGUs selected to pioneer Pablo City in Laguna, and the highly urbanized City the Project’s Household Convergence Scorecard of Lucena, the provincial capital. Despite its modest (HCSC) due to its efficiency in completing and population of 35,891 (PSA, 2020) and annual updating its master list of F1kD households. Dr. Laroza income of P179 million (DTI, 2023), which contribute looks forward to using the HCSC results to identify only about 1% to Quezon’s totals, San Antonio has specific women and children who are not currently achieved a significant milestone in 2023. It stands tall covered by their programs, allowing for more targeted as one of only seven Green Banner Awardees in Region outreach. IVA, out of 122 municipalities, marking a first for the municipality. The municipality is already utilizing their first tranche of PBG funds to hire additional personnel Dr. Wilma Laroza, the Municipal Health Officer to facilitate the HCSC encoding process, which (MHO) and concurrent Municipal Nutrition will help them achieve their second tranche Action Officer (MNAO), credits their success deliverables. They plan to use about one-third of their to the Performance-Based Grants (PBGs) PBG funds to supplement their current health and from the Philippines Multisectoral Nutrition nutrition budget allocation (P800,000 for 2024) for Project (PMNP). These grants have motivated the the procurement of nutrition supplements. municipality to enhance their Local Nutrition Action Plans (LNAPs) at both the municipal (MNAP) and San Antonio’s experience with PBGs demonstrates barangay levels, a requirement for the first tranche the effectiveness of performance-based of PBGs. For the first time in her 30 years of service, incentives in decentralized settings, where there Dr. Laroza has seen Barangay Nutrition Action Plans is considerable variability in service delivery. PBGs (BNAPs) developed for all 20 barangays in the help bring LGUs up to standard and up to speed. municipality. These BNAPs provide detailed, ground- Equally important are parallel systems strengthening based problems and solutions that feed into the modalities to improve information systems on which MNAP. performance will be monitored and subsequently rewarded. Formulate a comprehensive competency As a first step, a Comprehensive Competency Philippines Economic Update December 2024 framework for early years workers and roll out Framework for early years workers should be developed. A robust competency framework for targeted training programs to equip them with early childhood care workers needs to be developed, essential skills. drawing on the Nurturing Care Framework endorsed by the World Bank, UNICEF, and WHO. Such a To be effective, early years workers require a framework should be created by an inter-agency task comprehensive competency framework, clear roles, force with representatives from relevant government targeted training programs, and robust monitoring departments including DILG, DOH, DepEd, and systems. Such an approach will ensure that early DSWD. The framework should define clear roles and years workers are equipped with the necessary skills, responsibilities for different cadres of early years qualifications, and ongoing support to deliver high- workers; specify required qualifications and skills; and quality services across different worker cadres. 71 define the parameters of professional development Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital programs that ensure workers can effectively support Skill-building opportunities, such as professional children’s holistic development. development workshops and training programs, not only improve the workers’ competencies but also Second, it is important to establish Targeted provide them with a sense of career progression. Training and Certification Programs. The inter- Singapore and Mexico provides credits/ stipends agency task force could collaborate with TESDA and to early years workers for skills development. CHED to create specialized certification programs Community recognition, through awards or for early years workers. This should involve creating public acknowledgment, can boost the workers’ distinct, role-specific training programs rather than a motivation by highlighting their contributions to one-size-fits-all curriculum, focusing on quality and early childhood development. Turkey provides specialization for each worker type. Such training public acknowledgement of outstanding early years should be continuous and not one-off. Countries with educators through awards. Financial incentives, robust early childhood development (ECD) systems such as stipends or bonuses, can also significantly have prioritized the creation of national technical enhance job satisfaction and reduce turnover rates but frameworks for early years workers. For instance, require careful fiscal considerations. Brazil, Colombia New Zealand developed a National Early Childhood and South Africa provide performance bonuses for Education Curriculum, which includes a certification outstanding performance. system for teachers that ensures alignment with the national standards for child development. Similarly, The Philippines is currently expected to finalize Rwanda introduced a Teacher Development and the Trabaho Para sa Bayan Master Plan for early Management Policy to improve the professional years workers, which is a 10-year employment capacity of early childhood educators. strategy launched under Republic Act No. 11962 and signed into law in September 2023. This Finally, it is important to develop to implement Plan will lay out key elements of a human resource robust monitoring and support systems. This development plan for early years workers. should include a dedicated supervision and mentoring system for early years workers, focusing Recommendation 2: Strengthen the on addressing the current lack of supervision and enabling environment – drive successful mentoring by creating a regular structured, supportive system that enhances service delivery and worker implementation by harmonizing national effectiveness. Implementing digital tools for real- government roles and building local time data tracking of performance can help provide management capacity, enhancing monitoring immediate feedback to early years workers. and evaluation, and fostering community- level coordination. Motivate and professionalize early years workers Successful implementation of early years programs and the performance of early years workers rests upon Beyond training and performance management, harmonizing national government roles and building ensuring timely salary payments and providing local management capacity, enhancing monitoring and adequate incentives is crucial for the retention evaluation, and fostering community-level coordination. Philippines Economic Update December 2024 and motivation of early years workers. Across the Philippines, early year workers often forgo pay. They First, elevating the oversight of the ECCD and NNC are seen as voluntary workers, even though they are Councils to the Office of the President will ensure expected to perform essential services. They also lack strong high-level commitment and coordination, clear career pathways. In contrast, in Brazil, most early leading to enhanced local capacity for delivering years workers are professionals. Countries such as and monitoring early years interventions. This Indonesia are focusing on professionalizing this cadre in move could secure high-level priority and attention, full, underlining the importance such professionalization fostering better coordination and accountability among plays in the performance of early years workers. government agencies. EdCom2’s recent report, Behind the Slow Start (2024), underscores the coordination Non-monetary rewards also play a vital role challenges faced within multisectoral councils. in maintaining high morale among workers. With a higher authority overseeing these councils, 72 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & Risks 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital alignment across health, nutrition, education, and can transform local nutrition planning. LGUs should social protection programs is likely to improve. This invest in similar capacity-building programs that authority could also clarify roles, financing sources, enable local authorities to understand their specific and key performance indicators (KPIs) for each agency, health and nutrition landscapes, directing resources addressing misaligned actions through a coordinated more strategically to reach previously underserved multisectoral approach. Additionally, it is crucial to households. Concerned national government agencies strengthen the secretariats of the NNC and ECCD, handholding LGUs in identifying and addressing their ensuring they are adequately staffed and technically gaps through tailored capacity-building will also exact equipped to set national directions and guide LGUs. In better local accountability and ensure they meet targets a decentralized system, it is also essential for the ECCD of performance. and NNC to track LGU budgeting and performance in delivering early years interventions through a timely Finally, Barangay-level coordination represents and harmonized monitoring system that informs policy, a critical opportunity for more effective service priority setting, and targeted actions to address service delivery. Learning from international best practices, gaps. such as Peru’s coordinated household visit model, local governments should develop protocols for early years By placing oversight of the ECCD and NNC Councils workers to provide integrated, comprehensive support. at the Office of the President, the move could This might involve creating standardized schedules complement the goals of Executive Order 138. By where health workers, nutrition specialists, and early ensuring a more coordinated, efficient, and high-priority childhood educators can simultaneously engage approach to the delivery of early years interventions with families, maximizing intervention efficiency. The across sectors, while maintaining alignment with the Quezon province’s experience with PBGs demonstrates broader devolution efforts. It could ensure that the how financial incentives can motivate barangays to devolution process does not result in fragmentation implement more transparent, accountable, and targeted but instead strengthens the capacity of LGUs to meet community programs, ultimately improving early the evolving needs of early childhood development, childhood development outcomes. particularly by providing clear leadership and direction at the national level. Indonesia, an exemplar in the East Empowering LGUs to support their early years Asia and Pacific region for reducing stunting in record workers and drive human capital growth will time, saw big improvements once the task of stunting require a bold rethinking of policies. These policies reduction was placed under the Office of the President need to carefully account for the intricate institutional and Vice President. Countries such as Peru and Rwanda setups already in place, leveraging them to meet have seen similar transformations with high-level the specific needs of LGUs rather than imposing a oversight. top-down approach. Key to this is ensuring robust horizontal coordination at the national level, coupled Next, empowering LGUs by building their capacity with strengthened vertical coordination with LGUs, to strengthen local management capacity for to empower and incentivize them effectively. Policies early years programs is crucial. Local governments also need to address implementation bottlenecks and need comprehensive, data-driven approaches to provide clear strategies to overcome them, ensuring training and resource allocation. The success of the practical and sustained support for early years workers. Philippines Multisectoral Nutrition Project (PMNP) Philippines Economic Update December 2024 provides a blueprint, demonstrating how training over 4,000 barangays in participatory situation analysis 73 Executive Recent GLOBAL 1.1 1.2 1.3 1.4 1.5 1.6 Outlook & RiskS 2.1 2.2 2.3 EMPOWERING LGUS TO 3.1 3.2 3.3 3.4 3.5 Summary DEVELOPMENTS Build Human Capital ANNEX 1: LIMITING FACTORS TO INVESTMENTS IN HUMAN CAPITAL AND THE EARLY YEARS Qualitative assessments in five cities across face higher costs and greater financial shortages that NCR, Caraga, Eastern Visayas, and BARMM reveal limit their investments in the Early Years. For example, multiple factors that limit LGU investments in a fourth-class municipality in Samar could not come human capital, particularly in the critical early up with enough funds to implement the Tatak Tangkad, years. These include geographical challenges, which was the first 1,000 Days program launched in financial constraints, and issues with public financial 2021 to address the high prevalence of stunting in management (PFM) and national government (NG) the province. Low-income LGUs that also have a large regulations, all of which undermine efforts to provide number of GIDAs could not afford the supplies and essential services for young children and their families. equipment for GIDA health facilities. They could not build the infrastructure each GIDA needs, including Barriers due to geography. Coastal LGUs and those roads; and the cost of outreach and information with geographically isolated and disadvantaged areas campaigns so people even in remote sitios can seek (GIDAs) may face land scarcity and accessibility out the health services and social protection services hurdles that limit their capacities to deliver adequate can also be prohibitive. Another coastal province in and quality education, health, nutrition, and social Mindanao had to allocate half of its budget to rebuild protection services to the local populations. A coastal public schools destroyed by a typhoon. When primary city in Metro Manila with a high population density and preventive health services are unavailable, gaps lacks land on which to build needed education and in human capital development outcomes can become health facilities. Its limited land also limits business greater because affected populations end up needing activities, and therefore revenues, too, that can finance the more costly curative services. more investments in human capital. Another city in the Visayas has eight percent of the population residing Issues with PFM and NG’s regulations. In many in five geographically isolated and disadvantaged LGUs, plans are either non-existent or they are not areas (GIDAs); because of the isolation, out-of-pocket binding. Investments in human capital and the early expenditures even just for regular preventive and years can be intermittent and are subject to the primary healthcare is very high, and it is burdensome discretion of the Mayor, the Congressman or the because of depressed economic conditions of Governor, who cannot but respond to the practicalities the residents. Similarly, a coastal component city of political contests and alliances. Even transfers in Mindanao with 21 island barangays requires and grants from national government agencies can transportation by sea for accessing health facilities. similarly become unpredictable. In that setting, NG- These barangays and their residents are also more mandated allocation of budget shares to specific vulnerable to natural hazards that also often destroy sectors such as the special education fund (SEF) and education and health facilities. These service delivery the Gender and Development (GAD), though frowned Philippines Economic Update December 2024 contexts services require targeted support from the by some for being too constricting, can sometimes NG. provide a measure of predictability that allows plans to be formulated and pursued consistently over time. Shortage of financial capacities. 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