BUILDING A RESILIENT RECOVERY PHILIPPINES ECONOMIC UPDATE ● DECEMBER 2020 EDITION 2 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org Cover photo credits: Ezra Acayan and Ditsi Carolino 3 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 Global Practice (MTI), prepared in partnership with the Finance, Competitiveness & Innovation; Poverty & Equity; and Social Protection & Labor Global Practices (GPs). Lars Christian Moller (Practice Manager for the MTI GP), Souleymane Coulibaly (Lead Economist and Program Leader for MTI), Madhu Raghunath (Sector Leader for Sustainable Development), and Olivier Mahul (Practice Manager for FCI Risk Finance) guided the preparation of this edition. The team consisted of Rong Qian (Senior Economist), Kevin Chua (Economist), Kevin Cruz (Research Analyst), and Karen Lazaro, Zidni Marohombsar, and Eduard Santos (Consultants) from the MTI GP, Isaku Endo (Senior Financial Sector Specialist), Heejin Lee (Private Sector Specialist) from the Finance, Competitiveness & Innovation GP, Nadia Belhaj Hassine Belghith (Senior Economist) and Sharon Faye Alariao Piza (Economist) from the Poverty & Equity GP, and Yoonyoung Cho (Senior Economist), Ruth Rodriguez (Social Protection Specialist), Yasuhiro Kawasoe (Social Protection Specialist), and Arianna Zapanta (Consultant) from the Social Protection and Jobs GP, and Benedikt Lukas Signer (Program Coordinator), Lesley Cordero (Senior Disaster Risk Management Specialist), Tatiana Skalon (Disaster Risk Finance Specialist), Zidni Marohombsar (Public Financial Management Consultant), and Fides Barbara Babiera Borja (Consultant) prepared the Special Focus Note on Disaster Risk Management and Financing. The report was edited by Oscar Parlback (Consultant), and the graphic designer was Christopher Carlos (Consultant). Peer reviewers were Hans Beck (Lead Economist) and Marc S. Forni (Lead Disaster Risk Management Specialist). Logistics and publication support were provided by Elysse Dominguez Miranda (Team Assistant) and Kristiana Gizelle Torres Rosario (Team Assistant). The Manila External Communications Team, consisting of Clarissa David (Senior Communications Officer) and David Llorito (Communications Officer), prepared the media release and web-based multimedia presentation, and Stephanie Margallo provided team assistance. The team would like to thank Ndiame Diop (Country Director for Brunei, Malaysia, Philippines, and Thailand) for his advice and support. The report benefited from the recommendations and feedback of various stakeholders in the World Bank as well as from the government, the business community, labor associations, academic institutions, and civil society. The team is grateful for their contributions 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 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 Elysse Miranda (emiranda2@worldbank.org). For questions and comments regarding the content of this publication, please contact Ms. Rong Qian (rqian@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. 4 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION TABLE OF CONTENTS PREFACE 3 ABBREVIATIONS AND ACRONYMS 7 EXECUTIVE SUMMARY 8 1 RECENT DEVELOPMENTS 13 1.1. Economic Growth: Devastating Impact from the Triple Shock of COVID-19 13 1.2. Exchange Rate and the External Sector: Steady Appreciation 20 1.3. Fiscal Policy: Risking Fiscal Pressure 23 1.4. Inflation and Monetary Policy: Low Inflation Amid Subdued Demand 28 1.5. Employment and Poverty: Household Income Loss Risking Reversals of Gains 31 2 OUTLOOK AND RISKS 37 2.1. Growth Outlook 38 2.2. Poverty and Shared Prosperity 44 2.3. Risks and Policy Challenges 45 3 BUILDING A RESILIENT DISASTER RECOVERY 50 3.1. Disaster Risk in the Philippines 51 3.2. The State of Disaster Risk Management 53 3.3. Public Spending After Disasters 60 3.4. Challenges in Building Disaster Resilience 62 3.5. Policy Recommendations 66 3.6. Area for Further Studies 73 5 LIST OF FIGURES Figure 1. The Philippines experienced a recession in over three decades. 15 Figure 2. Industry and services sector contracted sharply. 15 Figure 3. Forty percent of firms reported temporary suspension of operations in July. 16 Figure 4. Economic activity has picked up since April 2020, but it is showing signs of slowing down. 17 Figure 5. Global economic sentiment has improved since April, but remains weak overall. 17 Figure 6. Global new export orders have rebounded from its April trough... 18 Figure 7. …although global trade remains weak overall. 18 Figure 8. The Balance of Payments remained in surplus, as the current account swung into surplus in H1 2020. 21 Figure 9. Since March 2020, imports have been significantly contracting... 21 Figure 10. …which partly contributed to the appreciation of the Philippine peso. 21 Figure 11. The fiscal balance widened significantly as public expenditures rose sharply. 25 Figure 12. Resources were shifted towards recurrent spending in response to COVID-19. 25 Figure 13. The government continues to finance its deficit mainly through domestic borrowing. 25 Figure 14. The overall debt-to-GDP ratio rose to its highest level in nearly a decade in H1 2020. 25 Figure 15. The distribution of the 2021 national government budget is similar to previous years. 27 Figure 16. The government remains committed to fiscal consolidation over the medium term. 27 Figure 17. Inflation remained subdued in Q1-Q3 2020. 30 Figure 18. During the pandemic, domestic liquidity has increased rapidly… 30 Figure 19. …while credit to production and household consumption has declined… 30 Figure 20. …and the past due loans ratio and the rate of non-performing loans have increased. 30 Figure 21. Unemployment and underemployment remain elevated, despite rebound in July 32 Figure 22. Wage employment has been on the decrease until its rebound in October.... 32 Figure 23. …also, the share of high skilled occupations declined in recent months until bouncing back in October. 32 Figure 24. Labor force participation returned to pre-pandemic levels in July 2020 but declined in October 2020. 33 Figure 25. …similar patterns in LFPR were observed across gender. 33 Figure 26. Job losses mounted in both industry and services. 34 Figure 27. Prior to the pandemic, there was a trend of increasing wages contributing to increases in household incomes... 34 Figure 28. …but a large share of households experienced decreases in income. 34 Figure 29. Significant job losses were reported across all sectors… 36 Figure 30. …forcing households to resort to various coping mechanisms. 36 Figure 31. Consumer and business sentiments worsened in the third quarter of 2020. 39 Figure 32. Economic growth is expected to rebound in 2021. 39 Figure 33. Global economic growth is expected to contract by 5.2 percent yoy in 2020. 43 Figure 34. Global trade is expected to register its worst contraction in post-war history. 43 Figure 35. Poverty is expected to rise as a result of the COVID-19 pandemic. 44 Figure 36. Infrastructure Outlays and Buildings and Other Structures, FY2019-21. 49 Figure 37. There is a wide disparity in the allocation of the infrastructure budget across regions. 49 Figure 38. Overview of the Philippine Legal and Institutional DRM Framework 53 Figure 39. The Philippines’ Risk-Layering Strategy 55 Figure 40. Post-disaster Related Appropriations by Funding Source, FY2015-18 60 6 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION LIST OF TABLES Table 1. Balance of Payments, H1 2018-H1 2020B 22 Table 2. National Government Disbursements 24 Table 3. Economic Indicators for the Baseline Projections 40 Table 4. Real Growth Projections 43 Table 5. Public Infrastructure Budget, FY2019-21 48 Table 6. Challenges and Policy Recommendations 74 LIST OF BOXES Box 1. Recent Global Developments 17 Box 2. The proposed 2021 national government budget and medium-term fiscal program 26 Box 3. One in four breadwinners have lost their jobs due to the pandemic. 36 Box 4. The Global Economic Outlook 42 Box 5. Proposed 2021 National Government Infrastructure Budget 48 Box 6. Strengthening Private Sector Engagement in DRM 59 Box 7. Best Practices on Coordination across All Levels of Government and Communities in Japan 67 Box 8. Best Practices on Inter-Agency Coordination for Response and Recovery in Japan 68 Box 9. Best Practices on Fiscal Risk Management of Disasters 69 Box 10. Best Practices on Risk Layering and Linking Funds to Implementation in Mexico 71 7 ABBREVIATIONS AND ACRONYMS 4P Pantawid Pamilyang Pilipino Program LFPR Labor force participation rate AIIB Asian Infrastructure Investment Bank LFS Labor force survey ARMM Autonomous Region in Muslim Mindanao LGU Local government unit ASP Adaptive Social Protection LGSF Local Government Support Fund BARMM Bangsamoro Autonomous Region in MECQ Modified enhanced community quarantine Muslim Mindanao MGCQ Modified general community quarantine bbl Barrel MSME Medium, small, and micro enterprises bps Basis points MYS Malaysia BIR Bureau of Internal Revenue NARS National Asset Registry System BOC Bureau of Customs NCDDP National Community-Driven BOP Balance of Payments Development Program BPO Business process outsourcing NCR National Capital Region BSP Bangko Sentral ng Pilipinas NDRRM National Disaster Risk Reduction BTr Bureau of the Treasury and Management CALABARZON Region IV-A (Cavite Laguna Batangas Rizal NDRRMC National Disaster Risk Reduction and and Quezon Provinces) Management Council Cat bond Catastrophe-linked bond NDRRMF National Disaster Risk Reduction and CMI Centrally-managed items Management Fund COVID Coronavirus disease NEDA National Economic and Development Authority COA Commission on Audit NEP National Expenditure Program CPI Consumer price index NG National government CQ Community quarantine NGO Non-government organization DBCC Development Budget Coordination Committee NHTO National Household Targeting Office DBM Department of Budget and Management NIIP National Indemnity Insurance Program DILG Department of Interior and Local Government NPL Nonperforming loan DOH Department of Health OCD Office of Civil Defense DOST Department of Science and Technology OECD Organization of Economic Cooperation DOTr Department of Transportation and Development DPWH Department of Public Works and Highways PCIC Philippine Crop Insurance Commission DRFI Disaster Risk Financing and Insurance PCIF Philippine Catastrophe Insurance Facility DROM Disaster response operation modality PDRF Philippine Disaster Recovery Foundation DRRM Disaster risk reduction and management PER Public Expenditure Review ECQ Enhanced community quarantine PEU Philippines Economic Update ECT Emergency cash transfer PGAMP Philippine Government Asset Management Policy EMDE Emerging market and developing economies PHL Philippines EWS Early warning system Php Philippine Peso FY Fiscal year PMI Purchasing managers’ index GCQ General community quarantine PSA Philippine Statistics Authority GDP Gross domestic product QRF Quick Response Fund GOCC Government owned and controlled corporations READI Rapid Emergency Action on Disaster Incidence GPPB Government Procurement Policy Board SAP Social amelioration program GVC Global value chain THA Thailand ICT Information and communications technology TLP Total loan portfolio IDN Indonesia US United States IMF International Monetary Fund USD United States dollar IRA Internal revenue allotment VNM Vietnam KYC Know-your-customer WB World Bank LCU Local currency units WGI Worldwide Governance Indicators LDRRMF Local Disaster Risk Reduction and YOY Year-over-year Management Fund 8 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION EXECUTIVE SUMMARY The Philippine economy contracted by 10.0 percent, resulted in a collapse in domestic tourism expenditures, year-on-year, in the first three quarters of 2020 , given 1 which make up a fifth of private consumption. the triple shock brought by the Coronavirus disease (COVID-19) pandemic. COVID-19 delivered a triple shock of The collapse in private consumption was compounded a health crisis, strict containment measures, and a global by the sharp decline in external demand and exports, recession of unprecedented scale. The sharp contraction in due to significant disruptions in domestic and global the second quarter was driven by the steep dive in private supply chains and international travel restrictions. domestic demand, deep contraction in public investment Exports fell by 18.7 percent due to contractions in both activities, and the collapse of trade due to the impact of services and merchandise exports. Transport and travel strict containment measures domestically and globally. services were hit the hardest among services exports, as Most of the country entered a more relaxed community the global tourism industry suffered from strict travel and quarantine in mid-August with a gradual opening of mobility restrictions. Foreign tourist arrivals contracted businesses and government operations. Yet, the economy by 72 percent in the first seven months of 2020, resulting further contracted in the third quarter, albeit a modest in a 73 percent contraction in inbound tourism revenue. improvement from the peak of the outbreak. Moreover, Merchandise exports contracted by 12.2 percent across all the country was hit by a series of strong typhoons which major product categories, a reversal from the 1.8 percent may cause delay on the pace of the recovery as economic growth recorded in the same period in 2019. The decline activities were affected in some areas. This report will in trade activity was caused by disruptions in source feature disaster risk management (DRM) challenges the countries and a contraction in consumption in destination country faces and policy recommendations to strengthen countries amid the escalating global recession. its fiscal, physical, and social resilience. The severe recession has impacted positively the Balance The severity of the recession can be explained, first of Payment (BOP), but this gain is likely to reverse with and foremost, by the collapse in private consumption, the recovery in 2021. Contraction in private consumption, as containment measures led to a fall in employment deterioration in private investment activities, and a shift and incomes. Private consumption contracted by 8.2 of public resources from public investment spending percent, its worst performance on record. This was in toward immediate COVID-19 response, resulted in a 27.8 large part due to a combination of factors that crippled percent goods import contraction in the first half of 2020, domestic demand, including record-high unemployment, a reversal from the 2.3 percent growth in the same period declining incomes (including remittances), movement in 2019. As a result, current account turned into a surplus restrictions that suppressed consumption, and a historic of US$4.4 billion (2.6 percent of GDP) in the first half of decline in consumer confidence. The deepest contraction 2020 outpacing net capital outflow leading to a balance of was registered in the consumption of non-essential payment surplus of US$4.1 billion (2.4 percent of GDP). The goods and services and those that were affected by the significant contraction in imports lessened the demand implementation of strict containment measures, while for U.S. dollars contributing to the appreciation of the essential goods such as food registered small positive Philippine peso in the first nine months of 2020 and record growth. In particular, the combination of travel restrictions high foreign reserve accumulation. and weak consumer confidence which weighed on demand, 1 All growth analyses are annual growth of the first three quarters of 2020 unless otherwise stated. EXECUTIVE SUMMARY 9 To mitigate the negative impact of COVID-19 on the China’s early recovery, alongside the expected rebound economy, the government responded swiftly by in the global economy in 2021, which will allow for expanding public spending amid falling revenues. As export growth to recover, and larger remittance inflows a result, the fiscal deficit widened to 6.9 percent of GDP to stimulate domestic demand. With a further relaxation from 2.1 percent over the same period in 2019. This is the of community quarantine restrictions, more industries result of a shrinking tax base amid a slumping global and and services will be allowed to operate, creating jobs domestic economy while public spending increased rapidly and income, and supporting private consumption growth. to mitigate the effects of the crisis. Total public revenues The government is expected to ramp up its infrastructure fell by 7.9 percent in nominal terms as a result of a 11.3 spending starting in the fourth quarter of 2020, creating percent decline in tax revenues. Public spending increased jobs in the construction sector. Base effect will come into by 15.1 percent driven by the implementation of the play and contribute to growth in 2021 considering the Bayanihan to Heal as One Act. The government prioritized deep contraction in 2020. The rollout of vaccines in 2021 spending in social protection and health to help mitigate constitutes an upside risk to this baseline projection, the impact of COVID-19 on poor and vulnerable households accelerating the pace of the recovery. and firms. The sharp increase in the fiscal deficit resulted in the public debt ratio reaching its highest level in nearly While labor market conditions gradually improved a decade. Yet, the country’s long-term fiscal sustainability since the peak of the pandemic, it remains weak. remains manageable, benefitting from years of prudent Unemployment rate fell from 17.6 percent in April to 10.0 fiscal management by the government. percent in July 2020 when the country gradually eased community quarantine measures. The latest estimate of Amid a benign inflation environment, the Bangko Sentral the unemployment rate in October 2020 suggests that ng Pilipinas (BSP) has adopted an accommodative policy it further decreased to 8.7 percent. However, it remains stance since the onset of the crisis, and it has taken almost double the rate of those recorded in the same extraordinary measures to support the government’s period of 2019 (5.4 percent in July and 4.6 percent in COVID-19 response. Headline inflation averaged 2.5 October). Net job losses reached nearly 2.7 million between percent in the first nine months of 2020 as elevated October 2019 and October 2020, most pronounced among unemployment, anemic consumer confidence, and the youth. Job losses were concentrated in the services reduced remittances led to lower price pressures. The and industry sectors shedding 1.9 million and 827,000 benign inflation environment has rendered the BSP ample jobs, respectively, given operational capacity limitations space to implement an accommodative monetary policy imposed in certain industries. Among subsectors that lost to mitigate the impact of the crisis. Since the beginning the most jobs were accommodations and food services of the year, the BSP has reduced the key policy rate by (-667,000), transportation and storage (-657,000), and a cumulative 200 basis points (bps) to 2.0 percent and manufacturing (-618,000). By contrast, the agriculture the reserve requirement by 200 bps to 12.0 percent. In sector created 70,000 additional jobs as the sector was addition, the BSP has taken unconventional measures allowed to operate in full capacity, even during enhanced to help the government finance its COVID-19 response community quarantine. This was despite a 1.1 million job program by approving a reverse repurchase agreement loss between July and October 2020, likely due to the with the Bureau of the Treasury (BTr) worth Php300 billion consecutive typhoons that struck the country in October (1.6 percent of GDP) and a subsequent provisional advance 2020. of Php540 billion (2.9 percent of GDP). The COVID-19 pandemic threatens to reverse the trend of The Philippine economy is expected to rebound in 2021- a steady decline in poverty in recent years, resulting in an 22 assuming the infection curve would be flattened in additional 2.7 million poor people. Due to significant job 2021. The economy is expected to contract by 8.1 percent losses and reduced labor supply, many households have in 2020 before it rebounds to 5.9 percent and 6.0 percent reported income losses. The results of a high-frequency in 2021 and 2022, respectively. These projections hinge on monitoring survey on the impact of COVID-19, conducted 10 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION in August 2020, show about 40 percent of households year for all of the storms; however, the country reverted reporting a fall in income. Among the sources of income, immediately in the following year due to strong macro entrepreneurial income reportedly fell, particularly among fundamentals. In addition, climate change could have a households engaged in non-farm business. Remittances significant negative effect in agriculture through rising from abroad, which have been a constant source of income temperature and frequency of natural disasters. Therefore, for most Filipino households, were reported to have fallen natural disaster shocks could lead to higher fiscal deficits for two in five households that receive remittances. As a and debt, depending on their size and frequency result, poverty is estimated to increase from 20.5 percent climate change. in 2019 to 22.6 percent in 2020 (measured against the lower middle-income poverty line of US$3.2/day). To build a resilient recovery, the government needs to protect the poor, improve preparedness and post-disaster Further waves of COVID-19 in the Philippines and response effectiveness while continuing the effort to globally, in addition to natural disaster shocks, are the flatten the infection curve in the short term. While there most significant downside risks to the country’s growth are signs that the management of the pandemic may be outlook. The path to economic recovery will be influenced improving, testing, contact tracing, and isolating efforts by the government’s effectiveness in flattening the need to be sustained to prevent a second wave. Meanwhile infection curve. New bouts of infection cases may lead to effective social protection measures can mitigate the reversal to stricter containment measures, which could impact of the pandemic and natural disasters on human dampen economic activities, lower consumption growth, capital by providing food and subsistence conditions and and delay the implementation of public infrastructure encourage continued participation education. Given the projects. New waves of outbreak in advanced economies compounding risk of the pandemic and natural disasters, and in regional trade partners would negatively impact improving the preparedness for natural disasters is Philippine exports, foreign direct investments, and particularly important to minimize the impact of the remittances. Moreover, disruptions in supply chains due disasters in the economy and added fiscal pressure. Having to supply and air and sea logistics challenges will ripple contingent plans, identified funding source, and improved through the domestic economy, especially the electronics coordination of national and local government authorities exports industry. Finally, increased international financial would help to ensure the timely and efficient volatility can affect the local economy through the equity, post-disaster response. bond, and credit markets that could lead to episodes of capital outflows or a rise in the cost of credit. In the medium term, the government must remain focused on pursuing medium-term structural reforms. In Apart from the uncertain course of the virus domestically addition to accommodative monetary policies, structural and globally, natural disaster shocks could derail the reforms that facilitate private investment and private government targets and upset our growth and fiscal sector confidence will be critical to drive growth when outlook projections. The International Disaster Database fiscal policy unwinds. COVID-19 has disrupted key sectors shows that during 2011−2018 a total of 72 storms occurred of the economy but has created opportunities in others in the country. They affected about 68 million people, with (e-commerce, digital solutions). As the economy recovers a total estimated damage of US$15 billion. The economic from the pandemic, long-overdue reforms that address impact of disasters has been sizable, lowering real GDP, limited market competition and high trade costs need worsening current account balances, and putting pressure to be prioritized to protect the poor and vulnerable, on the fiscal sector. It is estimated that each year, the and small and medium enterprises (SMEs) that are less Philippines incurs an average asset loss of US$3.5 billion resilient to shocks. Similarly, reforms that can support (approximately 1.1 percent of GDP) because of typhoons adaptive business solutions such as digitization of and earthquakes.2 Real GDP growth rate fell in the disaster business operations can enhance their resilience. Finally, 2 World Bank (2017). Press Release. EXECUTIVE SUMMARY 11 fiscal agility should be maintained to continue protecting Disaster risk management reforms have thus become the poor and vulnerable against non-health an even more urgent concern. Natural and manmade natural shocks. disasters can cause severe economic and fiscal shocks by generating unplanned expenditures that drain Building a Resilient Disaster Recovery public finances and lead to budget volatility. They are contingent liabilities for the government which tend to The Philippines is among the most disaster-prone shoulder a significant share of the cost for response countries in the world. At least 60 percent of its total and recovery. A proactive risk management approach land area and close to 74 percent of its population are with built-in resilience strategy will help address exposed to multiple natural hazards, including typhoons, the risk and impact of disasters and climate change. earthquakes, floods, storm surges, tsunamis, volcanic Disaster risk financing is an important instrument to eruptions, and landslides. In the past thirty years, 33,000 prop up financial resilience by making funding more people have died, and 120 million people have been predictable and effective for disaster-related measures. adversely affected by disasters. It is estimated that In addition, investing in green and resilient infrastructure earthquakes and typhoons cause, on average, US$3.5 and communities would reduce the future contingent billion (over 1.0 percent of GDP) per year in direct losses liabilities caused by disasters and climate change, to public and private assets. The 2013 Super Typhoon making growth more inclusive and sustainable. Yolanda resulted in over 6,000 loss of lives and more than 16 million people affected, with 2.3 million people The government has achieved remarkable progress falling below the poverty line. Damages to public in strengthening policies on financial, physical, and infrastructure were estimated at Php571.1 billion (US$12.9 social resilience to disasters and climate shocks – but billion), or 4.6 percent of GDP. It was a tragic reminder of challenges remain in the implementation of these the devastating impact natural disasters can have in policies. Over the past decade, the government has the Philippines. implemented policy reforms to transition from reactive to proactive risk management as mandated by the The impact of COVID-19 is exacerbating the country’s Philippine Disaster Risk Reduction and Management Law risk from natural disasters. As the government focuses in 2010. On financial resilience, the government adopted on strengthening the capacity of the healthcare system the Disaster Risk Financing and Insurance Strategy in and protecting vulnerable households, the Philippines 2015 and since then focused on building out its menu continues to suffer from various disasters. Since May of risk financing instruments. On physical resilience, the 2020, the country has experienced typhoons, floods, government has developed early warning systems (EWS) and earthquakes, and the pandemic has made it employing technology to enhance risk identification. It more difficult for the government to prepare for and has mainstreamed disaster risk reduction in key sectors, effectively respond to these types of events. Disasters such as agriculture, housing, and public infrastructure, are contingent liabilities for governments, as they tend and for vulnerable Local Government Units (LGUs) – to shoulder a significant share of the cost for response making it a key consideration in development planning. and recovery. Unexpected public spending can have On social resilience, the government has developed severe fiscal consequences, as unplanned expenditures adaptive social protection programs through the can drain public finances, leading to budget volatilities establishment of an emergency cash transfer (ECT) and inefficient budget allocation. Since the outbreak program to support vulnerable households and the of COVID-19, the measures implemented to contain National Community Driven Development Program – and address the pandemic have significantly affected Disaster Response Operation Modality (NCDDP-DROM) for government resources, decreasing revenues and disaster-affected communities. increasing expenditures, while leaving the population more vulnerable to further income or asset losses caused by natural disasters. 12 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION While the country’s exposure to disasters is increasing, management constraints. First, there is a need to the national government spending on disaster has been strengthen the integration of disaster risks in fiscal relatively stable over the years. Between 2015 and 2018, strategy and develop pre-disaster rehabilitation and post-disaster public expenditure remained flat at around recovery plans of national government agencies for 0.6 percent of GDP while overall government expenditure ready implementation. Second, risk considerations and increased from 16.0 percent of GDP to 18.7 percent. disaster risk reduction measures need to be integrated About one-third of post-disaster spending comes from in government overall planning to ensure adequate the two pre-arranged budgetary funding sources (i) budget allocation. In addition, contingent liabilities national government agencies’ quick response funds related to disasters need to be fully integrated in the (QRF) for immediate response activities, and (ii) the management of fiscal risk. Third, the fragmentation National Disaster Risk Reduction and Management Fund and capacity constraints in the implementation and (NDRRMF), a dedicated budget line for risk mitigation, oversight of DRM program needs to be addressed. Past response, and reconstruction efforts. Although these are experiences have shown that the current structure lacks pre-arranged funds, access to and execution of these the necessary authority, resources, and staff capacity funds are often delayed. The rest of the spending was to efficiently mitigate the effects of adverse events and financed through reallocation of other budget lines and address rapidly evolving disaster risk management (DRM) the use of unprogrammed and contingent funds. Most challenges. Fourth, increase transparency and efficiency costs related to disaster response activities are covered of post-disaster spending of local government units. It is by the national government despite local government crucial to clarify the cost-sharing for disaster response units having the Local Disaster Risk Reduction and and recovery interventions between the national and Management Funds (LDRRMF) - dedicated funds for local governments. And fifth, promote “Green Recovery” disaster response. by investing in resilience and integrating resilience as a pillar in recovery planning and spending. Part III of To further strengthen the country’s resilience to this report will give an overview of the state of DRM and natural disasters and climate change, the government provide policy recommendations to address needs to address key institutional and public financial remaining challenges. 1 Strengthen integration of disaster risks in fiscal strategy and develop agency contingency recovery plans for ready implementation 2 Mainstream risk reduction in development planning, infrastructure investments, and ensure adequate budget allocation 3 Address fragmentation and capacity constraints in the implementation and oversight of disaster risk management (DRM) programs BUILDING A RESILIENT 4 Increase transparency and efficiency of LGU post-disaster spending and clarify RECOVERY cost-sharing between the national and local governments 5 Promote “Green Recovery” by investing in resilience and integrating resilience as a POLICY pillar in recovery planning and spending RECOMMENDATIONS PART 1 RECENT DEVELOPMENTS 13 1 RECENT DEVELOPMENTS The Philippine economy entered a recession in the first half of 2020 as the COVID-19 pandemic delivered a triple shock of a health crisis, strict containment measures, and a global recession of unprecedented scale. Economic activities contracted sharply in the first three quarters of 2020 amid the demand and supply shocks brought by the pandemic. This is the first recession since 1991 and is driven by a sharp dive in domestic demand. Owing to the country’s strong macroeconomic fundamentals heading into the crisis, the government has actively supported the economy by increasing public expenditures, including social transfers, and pursuing an accommodative monetary policy and other regulatory measures to minimize the economic fallout of the pandemic. The weak domestic demand has translated into lower imports, lowering the trade deficit and resulting in a balance of payments surplus in the first half of 2020. This has contributed to an appreciation of the Philippine peso and an increase in foreign reserves to an all-time high. While the labor market has rebounded in July, it remains bleak, with a significant share of the population remaining jobless or underemployed. This, together with the economic contraction and income losses, has hampered the steady decline in poverty seen in recent years. Photo: Jed Regala 14 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 1.1 ECONOMIC GROWTH: DEVASTATING IMPACT FROM THE TRIPLE SHOCK OF COVID-19 The economy slipped into recession in the first half of 2020 for the first time since 1991 caused by the COVID-19 outbreak in March and the strict lockdown measures that limited movement. The economy further contracted in the third quarter albeit at a slower pace as the economy gradually reopened. Yet, the recovery remains fragile, uneven, and incomplete. Among the high COVID-19 case countries in Southeast third quarter of 2020, but a temporary reversion to strict Asia, the Philippines faces the brunt of the pandemic lockdown measures in August amid rising COVID-19 through external and domestic channels. Indonesia, the cases slowed down the pace of recovery. GDP growth Philippines, and Myanmar are among the high COVID-19 contracted by 11.5 percent in the third quarter of 2020, a case countries in Southeast Asia. Cumulative cases sharp deterioration compared to the 6.3 percent growth have reached about 512,000 in Indonesia, 423,000 in the a year ago, albeit a modest improvement from the 16.9 Philippines, and 84,000 in Myanmar in the last week of percent contraction in the second quarter of 2020. November. This has greatly hampered people’s mobility and economic activities, especially in the Philippines The economy contracted by 10.0 percent in the first with the imposition of stricter lockdown measures. three quarters of 2020, the deepest contraction since The impact of COVID-19 is transmitting into the local the 1985 debt crisis.3,4 The contraction was driven by economy through two channels: (i) external, initially the sharp dive in private domestic demand and the through supply chain disruptions, followed by demand collapse of trade due to the impact of strict containment disruption on merchandise trade, tourism, remittances, measures domestically and on the global stage (Figure and investment; and (ii) domestic, through lockdown 1). Government consumption ramped up to mitigate the measures, alteration of people’s behavior, and income health and socioeconomic impact of COVID-19, driving loss dampening demand. growth on the demand side. On the supply side, strong containment measures disrupted business activities The country continues to reel from the effects of the resulting in a deep contraction in the industry and COVID-19 pandemic. The country registered its worst services sectors while agriculture stagnated (Figure growth contraction in its post-war history in the second 2). In July 2020, 40 percent of firms reported the quarter of 2020, as economic activity was brought to a temporary suspension of their operations – 20 percent virtual standstill amid strict lockdown measures and by government mandate and 20 percent voluntarily a deterioration of consumer and business confidence (Figure 3).5 Nevertheless, recent progress in flattening to among its worst levels in history. Preliminary data the infection curve6 led to signs of improvements in suggested an improvement in economic activity in the employment, trade, manufacturing activities and revenue. 3 All growth analyses are annual growth of the first three quarters of 2020 unless otherwise stated. 4 The Philippine economy contracted by 9.9 percent, year-on-year, in the first half of 1985, as the Philippines experienced its worst debt crisis in its history following years of debt-driven growth and mismanagement of the country’s macro-fiscal fundamentals. 5 World Bank (2020). “Impacts of COVID-19 on firms in the Philippines: Results from the Philippines COVID-19 Firm Survey conducted in July 2020.” 6 The 7-day moving average for confirmed COVID cases has declined to around 1,900 as of November 8, 2020, a significant improvement compared to the peak of 4,500 in August 2020. PART 1 RECENT DEVELOPMENTS 15 Figure 1. The Philippines experienced its worst recession in over Figure 2. Industry and services sector contracted sharply. three decades. 10 15 8 10 6 5 4 0 2 PERCENTAGE POINT 0 -5 -2 PERCENTAGE POINT -10 -4 -15 -6 -20 -8 -25 -10 -30 -12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -14 2017 2018 2019 2020 -16 -18 -20 Net exports Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2016 2017 2018 2019 2020 Investments Government Consumption Agriculture Other Industries Household Final Consumption Expenditure Manufacturing Services GDP Growth GDP Growth Source: Philippine Statistics Authority (PSA). Note: Other industries are mining and quarrying, construction, electricity, gas, and water. Source: PSA. These suggest that as the country has turned the corner -54.5 percent in the third quarter, its lowest since the in managing the COVID-19 infection curve, economic central bank started the Consumer Expectation Survey activity continues to gradually pick up. However, the in 2007. Among major consumption categories, only the surge in new cases in highly urbanized areas such as consumption of essential items such as food, housing Davao City, Makati City, and Baguio City suggest that this and utilities, and communications products registered recovery remains fragile and contingent on the sustained small positive growth. Meanwhile, the consumption of progress in managing the COVID-19 pandemic. non-essential goods and services and those affected by the implementation of strict containment measures The severity of the recession can be explained, first experienced deep contractions. In particular, the and foremost, by the collapse in private consumption, combination of travel restrictions and weak consumer as containment measures led to a fall in employment confidence, resulted in a collapse in domestic tourism and incomes. Private consumption registered its worst expenditures (-33.5 percent with transportation goods performance on record, contracting by 8.2 percent and services; -43.1 percent with recreation and culture; (5.9 percent growth over the same period in 2019). and -42.5 percent with restaurant and hotel), which make This was in large part due to a combination of factors up a fifth of private consumption. that crippled domestic demand, including record- high unemployment, declining incomes (including Investment activity has been repressed by the recession, remittances which contracted by 1.4 percent as of elevated levels of uncertainty, and a deterioration in September 2020 to reach US$24.3 billion), movement business confidence. Fixed capital formation growth restrictions that suppressed consumption, and a historic contracted by 22.3 percent, a further decline from the decline in consumer confidence which dropped to tepid investment growth registered over the same period 16 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Figure 3. Forty percent of firms reported temporary suspension of operations in July. OPERATING STATUS OF FIRMS (% OF FIRMS) 100% 15% 90% 80% 70% 77% 40% 60% 50% 40% 30% 40% 20% 21% 10% 0% 2% H1 2018 5% April July Open Partially open Closed Permanently Closed Source: World Bank, Philippines COVID-19 firm survey, July 2020. in 2019 (3.2 percent).7 This was driven in large part by the exports, as external demand suffered from a deepening deterioration in private investment activity, as business global recession amid the COVID-19 pandemic (Box confidence plunged to -5.3 percent in the third quarter, 1). In particular, transport and travel services were the first time confidence turned pessimistic since the hit the hardest among services exports, as the global second quarter of 2009. In particular, durable equipment tourism industry suffered from strict travel and mobility investments contracted by 33.5 percent due to the restrictions. The implementation of strict cross-border negative effects of uncertainty on investment growth, travel restrictions resulted in a 73 percent drop in foreign income losses and firm closures, and balance sheet tourist arrivals through the first seven months of 2020, weaknesses. Meanwhile, investments in construction resulting in a 72 percent decline in inbound tourism activities, which account for roughly two-thirds of fixed revenues. In addition, merchandise exports experienced investments, contracted by 28.0 percent as both firms a sharp broad-based contraction of 12.2 percent across and households opted to delay investments. Likewise, all major product categories (1.8 percent growth over public investment fell as resources shifted toward the same period in 2019). The decline in trade activity immediate COVID-19 response measures and was caused by a combination of production disruptions containment efforts. in source countries and a contraction in consumption in destination countries, amid the escalating global The collapse in private domestic demand was recession. Imports contracted by 23.0 percent, a sharp compounded by the sharp decline in external demand reversal from the 2.7 percent growth in the same period and exports, due to significant disruptions in domestic in 2019, as a result of tepid domestic demand, most and global supply chains and international travel notably in private consumption and investment, and restrictions. Export growth fell by 18.7 percent due widespread disruptions in global supply chains.8 to contractions in both services and merchandise 7 Fixed capital investment growth was sluggish in the first six months of 2019, as investment growth softened to its lowest rate since 2011. Fixed investments were weakened by a contraction in public investment spending and dampened investment growth in the private sector due to policy uncertainty around the government’s proposed corporate tax-reform package. 8 The fall in imports reflected weaker consumption activity during the first three quarters of 2020, the fall in capital goods imports as investment contracted, and a contraction in raw materials and imports of intermediate goods due to disruptions in global value chains caused by the COVID-19 pandemic. PART 1 RECENT DEVELOPMENTS 17 Box 1. Recent Global Developments The global pandemic continues to weigh heavily on in output, although the recovery is losing steam amid the economic recovery. The number of confirmed persistently high COVID-19 cases in the United States cases of COVID-19 has reached more than 60 million and the resurgence of COVID-19 in the Euro Area and globally, with more than 1.4 million deaths as of end- Japan. In the United States, output fell by 9.0 percent, November 2020. The accelerating spread of new daily year-on-year, in the second quarter of 2020, the worst COVID-19 cases in many parts of the world, including contraction on record, amid a virtual shutdown of the countries where the spread of the virus had previously U.S. economy for a significant part of the second quarter. been partly brought under control, has hampered the Meanwhile, the rebound in economic activity, which global economic recovery. Combined with renewed began in May, is quickly running out of steam. Growth in lockdowns of varying degrees, this has contributed to a retail sales inched up by 1.9 percent, month-on-month, slowdown in the pace of the recovery in many countries, in September, down from a peak of 18.3 percent in May, with the global composite Purchasing Managers’ Index weighed down by persistently high daily COVID-19 cases (PMI) sliding 0.3 point to 52.1 in September, ending four and the expiry of several emergency income-support consecutive months of increase. Furthermore, the Sentix programs at end-July. The pace of improvement in the global economic sentiment index remains in negative labor market has also slowed, with initial jobless claims territory, despite rising from its trough of -32.2 in April to averaging nearly one million over the four weeks leading -2.9 in September. These improvements notwithstanding, up to September 12th—well above its peak during the high-frequency data suggest that the recovery is far from global financial crisis, though lower than the peak of 6.9 complete and remains both fragile and uneven. million in late March. In the Euro Area, output collapsed by 14.8 percent, year-on-year, in the second quarter, Advanced economies have experienced a swift rebound driven by a 16.0 percent decline in private consumption. in economic activity following an historic contraction Still, the rebound in consumer activity since April has Figure 4. Economic activity has picked up since April 2020, but it is Figure 5. Global economic sentiment has improved since April, showing signs of slowing down. but remains weak overall. 60 55 15 GLOBAL: SENTRIX OVERALL ECONOMIC INDEX 10 50 5 INDEX, 50+ = EXPANSION 45 0 40 -5 -10 INDEX 35 -15 30 -20 25 -25 20 -30 JAN-16 MAY-16 SEP-16 JAN-17 MAY-17 SEP-17 JAN-18 MAY-18 SEP-18 JAN-19 MAY-19 SEP-19 JAN-20 MAY-20 SEP-20 -35 Global Composite PMI DEC-19 MAR-20 JUN-19 SEP-20 Philippines: Manufacturing PMI Source: Haver Analytics. Source: Sentix Global Economic Indices. 18 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Figure 6. Global new export orders have rebounded from its Figure 7. …although global trade remains weak overall. April trough... 60 NEW EXPORT ORDERS 10 GLOBAL GOODS TRADE 50 5 40 0 INDEX, 50+ = EXPANSION PERCENT, YEAR-ON-YEAR 30 -5 20 -10 10 -15 0 -20 JUN-18 NOV-18 APR-19 SEP-19 FEB-20 DEC-19 JAN-20 FEB-20 MAR-20 APR-20 MAY-20 JUN-20 JUL-20 AUG-20 SEP-20 OCT-20 Source: Haver Analytics. Global: Manufacturing Global: Services Philippines: Manufacturing Source: Haver Analytics. been remarkably swift, with real retail sales returning to activity in several large economies. Similarly, China’s positive year-over-year growth in many countries by June. economic recovery continued into the third quarter of More recently, however, economic activity is showing 2020, as GDP growth accelerated from 3.2 percent in Q2 signs of stalling due in large part to a resurgence of 2020 to 4.9 percent, although it remained below the 6.0 COVID-19 cases across several large Eurozone members, percent growth registered in Q3 2019. The recovery in including France and Spain. In Japan, GDP shrank by 10.1 China is led by robust growth in industry, driven by strong percent, year-on-year, in the second quarter of 2020, growth in exports and investment. However, the country’s reflecting weak consumption, exports, and investment. recovery remains uneven, as private consumption is The nationwide resurgence of COVID-19 cases dampened sluggish, with retail sales far below pre-pandemic levels, the recovery of private consumption, offsetting better- and imports continue to trail exports. than-expected manufacturing-related indicators. Following a double-digit contraction in the first half Emerging market and developing economies (EMDEs) of 2020, global trade improved in the third quarter face an uneven rebound in economic activity. After but remained weak. Global goods trade continues to output fell by an estimated 10.4 percent, year-on- recover, while trade in services is lagging. The global new year, across EMDE commodity exporters in the second export orders PMI for manufacturing increased to 51.7 in quarter of 2020, new data suggest an improvement in September —its highest value since 2018. Global shipping the third quarter. However, the recovery is uneven, with volumes now exceed pre-pandemic levels—led by China, the manufacturing PMI increasing in August in some where both exports and imports have picked up sharply economies (e.g., Brazil, Indonesia, and Russia) while in recent months. However, services activity remains remaining subdued in others (e.g., Nigeria and Saudi weak, weighed down by a continuing depression in Arabia). Output contracted across EMDE commodity tourism activity as international tourist arrivals continue importers by an estimated 4.9 percent, year-on-year, to be more than 90 percent below last year’s levels in in the second quarter of 2020 (excluding China, output many countries. While the number of global commercial declined by an estimated 16.4 percent), reflecting a flights more than tripled between April and August, it pandemic-driven double-digit collapse in economic remained around 20 percent below the pre-crisis level. Source: World Bank, Global Monthly Economic Monitor, October 2020. PART 1 RECENT DEVELOPMENTS 19 Photo: Ezra Acayan The implementation of strict containment measures services was particularly deep for tourism, transport, and and the sharp decline in global and domestic demand leisure and recreation services, as restrictions particularly resulted in the worst contraction in the industry sector affected these industries. The financial and insurance in over three decades. Soft demand and disruptions in industry as well as information and communication production caused by tight supply conditions, mobility industries have shown some resilience. In particular, constraints affecting manpower, and logistics restrictions, the information and communication industry expanded led to the contraction of industry output by 14.3 percent by 5.3 percent benefitting from increased demand for (4.2 percent growth over the same period in 2019). The information and communication technologies (ICT) contraction was broad-based, with mining and quarrying services amid the transition to home-based work for contracting by 20.6 percent, construction by 26.4 percent, many workers and an increasing shift toward digital and manufacturing by 11.5 percent. Meanwhile, gross commerce and payments. value added in the electricity, gas, and water supply sectors registered a marginal contraction of 0.7 percent, The agriculture sector was the main growth driver on as non-essential private establishments were temporarily the supply side, despite structural weaknesses and its closed at the height of the enhanced community continued vulnerability to natural disasters. Growth quarantine (ECQ). in the agriculture sector remained stagnant, as output increased marginally by 0.8 percent, slightly less than The implementation of social distancing measures and the 1.4 percent growth over the same period in 2019. The mobility restrictions has led to a similarly strong decline tepid growth was the result of the sector’s perennially in the services sector, which accounts for roughly 60 low productivity and the impact of natural disasters percent of total output. The services sector contracted by on agricultural output, such as the eruption of the Taal 9.5 percent, a sharp reversal from the 7.3 percent growth Volcano and typhoons Ursula and Ambo.9 registered over the same period in 2019. The impact on 9 Natural disasters in the first half of 2020 resulted in agricultural damages worth Php7.2 billion. Source: Department of Agriculture and National Disaster Risk Reduction and Management Council. 20 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 1.2 EXCHANGE RATE AND THE EXTERNAL SECTOR: STEADY APPRECIATION A significantly lower trade deficit led to a balance-of-payments surplus in the first half of 2020, which contributed to the appreciation of the Philippine peso and an increase in foreign reserves to an all-time high. The current account swung to a surplus in the first half The capital and financial accounts registered combined of 2020, driven by a lower trade deficit. The current net outflows of US$3.9 billion (2.3 percent of GDP) in account improved from a deficit of US$2.6 billion (1.5 the first half of 2020, reversing the US$5.5 billion (3.1 percent of GDP) in the first half of 2019 to a surplus of percent of GDP) in net inflows registered in the first half US$4.4 billion (2.6 percent of GDP) in the same period of 2019. Portfolio investments registered US$1.5 billion in in 2020 (Figure 8). The positive position was driven by a net outflows in the same period (compared with US$4.9 significantly lower goods trade deficit (Figure 9), which billion in net inflows same period last year), partly driven compensated for the decline in remittances and net by the exit of foreign funds through the equity market. services exports. In particular, goods imports contracted This is in spite of the inflow of foreign currency through by 27.8 percent in the first half of 2020, reversing the 2.3 the government’s foreign borrowings during the first half percent growth in the same period in 2019, as the imports of the year. Meanwhile, foreign direct investment declined of capital goods, raw materials and intermediate goods by 10.9 percent to US$3.8 billion in the first seven months slowed. Meanwhile, goods exports contracted by 20.4 of 2020 due to increased uncertainty. Other investments, percent in the first half of 2020, from the 0.2 percent consisting mainly of domestic deposits in foreign banks growth in 2019, driven by weakness in global demand10. and non-resident net loans from local banks, contributed Foreign remittance inflows fell by 4.2 percent in the to US$4.8 billion in net outflows. Nevertheless, with first half of 2020, a sharp reversal from the 2.9 percent the current-account surplus, the balance-of-payments growth in the same period last year, given the significant surplus reached US$4.1 billion (2.4 percent of GDP) in the decline of remittances from countries in Europe and first half of 2020. the Middle East. Nonetheless, the contraction was lower than the initially expected double-digit contraction by The significant contraction of imports lessened the analysts back in July.11 Finally, net services exports also demand for U.S. dollars, contributing to the appreciation declined, marked by inactivity in the tourism sector and of the Philippine peso in the first nine months of 2020 disruptions in the business process outsourcing industry. (Figure 9 and Figure 10). In the first three quarters of 2020, the Philippine peso appreciated by 3.9 percent. The The rise in current-account surplus outpaced net capital appreciation happened at a time when other regional outflows, leading to a balance-of-payments surplus. currencies such as the Indonesian Rupiah and Thai 10 The net exports discussion in section 1.1 pertains to values at constant 2018 prices as reported by PSA, which is different from the net exports discussion in this section which pertains to values at current prices as reported by BSP. 11 For instance, the Institute of International Finance forecasted a decline of 15 percent in remittance flows to the Philippines as overseas workers lose their jobs or see their wages reduced. US-based credit rating agency Moody’s Investor Service reported a decline by around 10 percent this year. PART 1 RECENT DEVELOPMENTS 21 Baht depreciated. The peso nominal effective exchange appreciation was accompanied by a spike in foreign rate appreciated by 4.7 percent during the same period, reserves from US$85.6 billion in September 2019 (7.4 while the real effective exchange rate appreciated by months worth of imports) to an all-time high of 6.1 percent. The latter was indicative of a reduced price US$100.5 billion (10.0 months’ worth of imports) in competitiveness in the country’s exports. The currency September 2020. Figure 8. The Balance of Payments remained in surplus, as the current account swung into surplus in H1 2020. 6 5 4 3 PERCENTAGE OF GDP 2 1 0 -1 -2 -3 -4 2017 H1 2017 H2 2018 H1 2018 H2 2019 H1 2019 H2 2020 H1 Current account Capital and Financial accounts Net unclassified items Overall BOP position Source: BSP. Note: Net unclassified items is an offsetting account to the overstatement or understatement in either receipts or payments of the recorded BOP components vis-à-vis the overall BOP position. Figure 9. Since March 2020, imports have been Figure 10. …which partly contributed to the appreciation of the significantly contracting... Philippine peso. AUG-20 110 JUL-20 JUN-20 MAY-20 105 INDEX OF USD/LCU (MAY 1, 2019=100) APR-20 MAR-20 100 FEB-20 IN PERCENT JAN-20 95 DEC-19 NOV-19 90 OCT-19 SEP-19 AUG-19 85 JUL-19 MAY-19 JUL-19 OCT-19 JAN-20 APR-20 JUN-20 SEP-20 JUN-19 MYS Ringgit PHL Peso -120 -100 -80 -60 -40 -20 0 20 VNM Dong THA Baht Exports Imports IDN Rupiah Source: PSA. Source: WSJ Markets. Note: Percentage refers to growth rates. Note: Decrease denotes depreciation. 22 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Table 1. Balance of Payments, H1 2018-H1 2020B In percentage of GDP H1 2018 H2 2018 H1 2019 H2 2019 H1 2020 Current account (2.4) (2.7) (1.5) (0.4) 2.6 Goods (14.0) (15.4) (13.7) (12.5) (9.3) Exports 15.6 14.5 14.6 13.8 12.2 Imports 29.6 29.8 28.4 26.3 21.5 Services 2.8 3.9 3.3 3.5 3.1 Primary Income 0.8 1.3 1.4 1.4 1.3 Secondary Income 7.9 7.6 7.5 7.2 7.5 Capital and Financial accounts 1.4 3.9 3.1 0.9 (2.3) Capital account 0.0 0.0 0.0 0.0 0.0 Financial account (1.4) (3.9) (3.1) (0.9) 2.3 Direct Investment (2.1) (1.3) (1.0) (1.3) (1.3) Net acquisition of financial assets 1.4 1.0 1.1 0.7 0.5 Net incurrence of liabilities 1/ 3.5 2.3 2.1 2.0 1.8 Portfolio investment 1.6 (0.7) (2.8) 0.7 0.9 Financial derivatives (0.0) (0.0) (0.0) (0.0) (0.1) Other investments (0.8) (1.9) 0.7 (0.2) 2.8 Net unclassified items2/ (1.0) (0.7) 1.0 1.0 2.2 Overall BOP position (2.0) 0.5 2.7 1.5 2.4 Memo: Basic Balance (0.3) (1.4) (0.5) 0.9 3.8 Gross International Reserves (in billions USD) 77.5 79.2 84.9 87.8 93.5 Import Coverage (in months) 7.1 6.9 7.3 7.6 9.3 1/ Net incurrence of liabilities refers to net foreign direct investment to the Philippines. 2/ The term “Net unclassified items” is a balancing figure. There are two methods of computing the BOP position: the first approach uses the change in net international reserves due to transactions, while the second approach computes the sum balances of the current account, capital account less financial account. The two measures do not necessarily tally. The BSP uses the first approach to determine the overall BOP position. Note: Following the BSP presentation, the BOP balance = Current Account Balance + Capital Account Balance - Financial Account Balance + Net Unclassified Items. PART 1 RECENT DEVELOPMENTS 23 1.3 FISCAL POLICY: RISING FISCAL PRESSURE 12, 13 The government fiscal response to mitigate the impact of the COVID-19 pandemic coupled with revenue shortfall amid a slumping global and domestic economy led to a rapid increase in fiscal balance. As a result, the public debt ratio has increased to its highest level in nearly a decade. , 12 13 To mitigate the impact of the COVID-19 pandemic, the which relies heavily on indirect taxation, declined by government responded by expanding public spending 9.9 percent in nominal terms, driven by lower domestic amid sharp decline in tax revenues. The fiscal deficit demand. Tax revenues from the Bureau of Customs widened to 6.9 percent of GDP in the first three quarters (BOC) fell by 15.3 percent as a result of lower import of 2020 from 2.1 percent of GDP over the same period in volumes due to the impact of COVID-19 on global supply 2019. The deficit is within the government’s revised deficit chains, external demand, and the precipitous decline target of 10.1 percent of GDP for the period, providing in investment activities. The loss in tax revenues was additional fiscal space to respond to the health and cushioned by the increase in non-tax revenues by 21.6 socioeconomic impact of the COVID-19 pandemic. The percent (10 percent growth over the same period in 2019) smaller-than-programmed deficit14 was due to delays to reach 2.3 percent of GDP, as a result of early dividend in the implementation of government’s infrastructure remittances from government-owned and controlled program (as a result of complying with community corporations (GOCCs). quarantine restrictions), the limited operating capacity of public agencies, and challenges to implementing various Public spending rose sharply as the government COVID-19 response programs. adopted measures to mitigate the health and socioeconomic impact of the pandemic, reallocating Tax revenues declined amid a sharp deterioration in budgets from the public infrastructure program. the country’s tax base as both the global and domestic Government spending increased by 15.1 percent (5.5 economy were ravaged by the pandemic. Total public percent growth over the same period in 2019) to reach revenues fell by 7.9 percent (10.2 percent growth over the 23.6 percent of GDP. The substantial increase was driven same period in 2019) to 16.7 percent of GDP, driven by by the sharp pickup in recurrent expenditures due to the a sharp erosion in the tax revenue base. Tax revenues implementation of the Bayanihan to Heal as One Act.15 declined by 11.3 percent (10.3 percent growth over The government prioritized spending in social protection the same period in 2019) to 14.5 percent of GDP. Tax and health to help mitigate the impact of COVID-19 on collections by the Bureau of Internal Revenue (BIR), poor and vulnerable households and firms – trends 12 Growth rates are expressed in nominal terms unless stated otherwise. 13 All fiscal analyses are annual growth of the first three quarters of 2020 unless otherwise stated. 14 The national government’s fiscal deficit of Php 879 billion was 22.3 percent short of the programmed deficit of Php 1.3 trillion for the first three quarters of 2020, as public spending fell short of its target by 7.5 percent. 15 Current operating expenditures increased by 25.8, year-on-year, in nominal terms to 17.6 percent of GDP in the first three quarters of 2020 (from 14.6 percent in the previous year). The sharp increase in recurrent spending was driven by a substantial increase in maintenance and operating expenditures (65.0 percent), allocations to local government units (36.9 percent), and subsidies to GOCCs (27.1 percent). 24 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION that are expected to continue into the 2021 national level since 2010 (50.2 percent of GDP). While publicly government budget (Box 2). Resources were shifted guaranteed debt remained low at 2.4 percent of GDP, the toward maintenance and operating expenditures , 16 sharp downturn of activities and consecutive episodes subsidies to GOCCs, and transfers to local government of strong typhoons in November this year may lead to units. The reallocation of resources came at the expense elevated risks of a rise in contingent liabilities. Despite of the government’s infrastructure program for 2020, the significant increase in the public debt, debt metrics which was revised downward from Php1.1 trillion (6.0 suggest that the country’s long-term fiscal sustainability percent of GDP) to Php785.5 billion (4.2 percent of GDP) in remains manageable, benefitting from years of prudent 2020. As a result, public investment spending continued fiscal management by the government. To keep debt to contract by 16.5 percent, a substantial deterioration levels sustainable, the government is pursuing fiscal compared to the same period in 2019 (-4.3 percent consolidation over the medium term by tempering of GDP).17 the growth of public expenditures and increasing tax revenues (Box 2). Moreover, though a portion of the The sharp increase in the fiscal deficit resulted in the debt mix relies on external funding, nearly 70 percent public debt ratio reaching its highest level in nearly of outstanding debts are from domestic lenders, while a decade. The national government’s public debt as long-term debt accounts for 93.6 percent of the percent of GDP increased from 39.6 percent in end-2019 external portfolio. to 51.1 percent as of end-September 2020—its highest Table 2. National Government Disbursements (% of GDP) 2018 2019 2020 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Current operating objectives 14.8 13.2 14.8 13.3 13.4 13.7 16.8 14.9 13.5 22.2 17.4 Personnel Services 5.3 5.8 5.3 6.1 5.2 6.2 5.4 7.0 4.9 7.1 5.4 Maintenance and other operating expenditures 2.8 3.0 3.0 3.1 2.6 2.9 3.3 3.4 2.3 6.6 5.1 Subsidy 1.2 0.5 1.4 0.2 0.2 0.4 2.8 0.8 0.7 3.0 0.7 Allotment to Local Government Units 2.7 2.4 2.5 2.1 2.7 2.5 2.6 2.2 3.0 4.0 3.2 Interest Payments 2.7 1.3 2.5 1.6 2.6 1.6 2.5 1.3 2.4 1.5 2.7 Tax Expenditures 0.1 0.1 0.1 0.2 0.1 0.2 0.2 0.1 0.0 0.1 0.3 Capital outlays 5.2 5.6 6.0 5.3 5.1 3.6 6.3 7.3 4.0 4.1 4.5 Infrastructure and other capital outlays 4.0 4.5 5.2 4.7 4.2 2.9 5.2 6.5 3.2 3.1 3.3 Equity 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capital transfers to local government units 1.1 1.1 0.8 0.6 0.8 0.7 1.1 0.8 0.8 0.9 1.1 Total 20.0 18.9 21.0 18.6 18.5 17.6 23.0 22.2 17.3 25.8 22.0 Source: Department of Budget and Management (DBM), PSA. 16 Spending on the country’s various cash transfer programs can be found in maintenance and operating expenditures. 17 After experiencing significant delays in 2019 due to the delayed passage of the 2019 budget, the implementation of the public infrastructure program was expected to accelerate in 2020. PART 1 RECENT DEVELOPMENTS 25 Figure 11. The fiscal balance widened significantly as Figure 12. Resources were shifted towards recurrent spending in public expenditures rose sharply. response to COVID-19. 25.0 3.5 25.0 1.5 20.0 0.0 0.1 0.1 4.2 20.0 0.1 0.1 5.5 5.4 5.0 4.4 FISCAL BALANCE (PERCENT OF GDP) -0.5 15.0 4.2 15.0 -2.1 PERCENT OF GDP PERCENT OF GDP -2.1 -3.1 -2.5 10.0 17.5 -3.4 10.0 14.0 14.0 13.6 13.3 13.4 -4.5 5.0 5.0 -6.5 0.0 -6.9 -0.2 0.0 -8.5 -5.0 2017 2018 2019 Q1-Q3 Q1-Q3 2016 2017 2018 2019 Q1-Q3 Q1-Q3 2019 2020 2019 2020 Revenues Net lending Expenditure Capital outlays Fiscal Balance (RHS) Current operating expenditures Source: DBM, PSA. Source: DBM, PSA. Figure 13. The government continues to finance its deficit Figure 14. The overall debt-to-GDP ratio rose to its highest level mainly through domestic borrowing. in nearly a decade in H1 2020. 600 60.0 4.0 500 3.4 3.5 50.0 400 2.9 3.0 300 2.7 40.0 2.5 200 2.4 2.5 IN BILLION PESOS IN PERCENT OF GDP 100 30.0 2.0 - (100) 1.5 20.0 (200) 1.0 (300) 10.0 0.5 (400) JAN JULY JAN JULY JAN JULY 0.0 0.0 2018 2019 2020 2016 2017 2018 2019 Q1-Q3 2020 Net Foreign Financing External debt Net Domestic Financing Domestic debt Budget Surplus/Deficit NG Guranteed debt (RHS) Source: BTr. Source: BTr, PSA. 26 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION PART 1 RECENT DEVELOPMENTS Box 2. The proposed 2021 national government budget and medium-term fiscal program Photo: Ditsi Carolino The proposed 2021 national budget of Php4.5 trillion increase by 14.5 percent to Php212.4 billion (1.0 percent (21.8 percent of GDP) supports the government’s of GDP), of which around 70 percent is earmarked for efforts to achieve a sustainable and resilient economic the government’s health response19,20 to the COVID-19 recovery.18 Funding to social services, which traditionally pandemic. With an allocation of Php754.4 billion (3.7 receives the largest share of the budget, would increase percent of GDP), funding to the education sector by 11.3 percent, year-on-year, to Php1.7 trillion (8.1 percent remains the largest component of the national budget. of GDP) (Figure 15). The increase in the social services In addition, the social protection sector will receive an budget is consistent with the government’s medium- allocation of Php454.2 billion (2.2 percent of GDP) to help term investment agenda focused on accelerating human address new challenges brought by the pandemic. capital investments. In addition, the budget will fund government efforts to address long-standing issues The proposed budget for the economic services sector related to health and nutrition, which are at risk of reached PhP1.4 trillion (6.5 percent of GDP), anchored worsening amid the COVID-19 pandemic. In particular, on the continued push for strategic infrastructure the proposed budget for the health sector is expected to development. The government is planning to help spur 18 It represents a 3.9 percent increase over the 2020 revised expenditure program of Php4.3 trillion (23.0 percent of GDP). 19 Php134.8 billion (0.7 percent of GDP) is earmarked for the government’s COVID-19 response programs in 2021. 20 The government’s COVID-19 health response budget is divided into the continued implementation of the Universal Health Care Program (Php71.4 billion) and Php63.4 billion in specific COVID-19 response programs built on the government’s “Test, Trace, and Treat” strategy. PART 1 RECENT DEVELOPMENTS 27 the country’s medium-term recovery21 while raising Despite a substantial rise in the fiscal deficit, the long-term productivity. This would be supported by a 41.1 government is committed to fiscal consolidation in the percent increase in the infrastructure budget relative medium term. The country’s fiscal resilience will be put to the downward-revised infrastructure program of to the test in the short term amid a historic recession. Php785.5 billion (4.1 percent of GDP) in 2020. A large As a result, the government has adjusted the medium- share of the country’s infrastructure program focuses on term fiscal program appropriately, as the disbursement improving logistics connectivity by upgrading the road, program is expected to grow by an average of 3.9 percent, air, and sea transport networks, as well as creating a year-on-year, in nominal terms between 2021 and 2022, more efficient public transportation system. Investments significantly slower than the 10.9 percent growth in in physical infrastructure will be complemented by public spending recorded prior to the COVID-19 pandemic ramping up strategic investments in digital infrastructure (Figure 16). This would allow the government to contain and e-government service delivery, which is crucial to 22 the fiscal deficit at manageable levels and keep debt prepare the country for the anticipated shift toward a within the 60 percent debt-to-GDP threshold by end-2022 more dynamic and resilient digital economy. as the economy recovers in the short term. Moreover, the government remains committed to pursue key tax policy and administration reforms, which are central to the government’s efforts to maintain fiscal discipline. 37+30+16125D Figure 15. The distribution of the 2021 national government budget Figure 16. The government remains committed to fiscal is similar to previous years. consolidation over the medium term. 5% 25 23 21.6 Defense 20.5 12% 19.5 Debt Burden 20 15 16.1 37% 10 16% Social Services 13.4 13.2 13.3 General Public PERCENT Services 5 0 -5 -3.4 30% -10 -7.2 Economic Services -8.4 -9.6 -15 2019 2020 2021 2022 Source: DBM. Revenues Disbursement Deficit Source: DBM. 21 The government expects to generate 1.1 million direct and indirect jobs from its Build, Build, Build infrastructure program. 22 A total of Php21.4 billion will be allocated towards the Medium-Term Information and Communications Technology Harmonization Initiative in 2021, focusing on improving the telecommunications infrastructure and accelerating investments in online information systems in the education, health, social protection sector. 28 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 1.4 INFLATION AND MONETARY POLICY: LOW INFLATION AMID SUBDUED DEMAND Inflationary pressures remained weak as domestic demand was subdued due to the COVID-19 pandemic. The benign inflation environment has provided enough room for an accommodative monetary policy to mitigate the adverse impact of the pandemic on the economy. The BSP has further reduced the key policy rate to a new record low in November after a brief pause since end of June, in part due to the economy’s poor performance in the third quarter of 2020 and as global economic prospects dampened with the resurgence of COVID-19 cases worldwide. Inflation remained muted in the first three quarters of extraordinary measures to support the government’s 2020 as overall demand weakened amid the pandemic. COVID-19 response. The relatively benign inflation The headline consumer price index (CPI) inflation environment has rendered the BSP ample space to averaged 2.5 percent, lower than the 2.8 percent during implement an accommodative monetary policy to the same period in 2019, and within BSP’s target range mitigate the impact of the crisis. Since the beginning of 2-4 percent (Figure 17). Harsh economic conditions of the year, the BSP has reduced the key policy rate by such as elevated unemployment, anemic consumer a cumulative 200 basis points (bps) to 2.0 percent and confidence, and reduced remittances have contributed the reserve requirement by 200 bps to 12.0 percent, as to lower price pressures. Although the heavily weighted of November 2020.24 The BSP has also adopted other food and non-alcoholic beverages inflation spiked when regulatory measures to minimize the economic fallout the ECQ was imposed in Luzon in March, it has since of the COVID-19 pandemic.25 In addition, the BSP has slowed due to the gradual reopening of the economy taken unconventional measures to help the government in May. A stable food supply, supported by unimpeded finance its COVID-19 response program by approving growth in the agriculture sector and a liberalized rice a reverse repurchase agreement with the BTr worth sector,23 also contributed to stable food prices. Php300 billion26 (1.6 percent of GDP) and the approval of a provisional advance of Php540 billion to be settled by The BSP has adopted an accommodative policy December 29, 2020 (2.9 percent of GDP). stance since the onset of the crisis, and it has taken 23 The rice tariffication law, implemented in 2019, liberalized the rice sector, removed the monopolized quota system, and allowed for the virtually unlimited importation of rice, resulting in affordable rice prices for Filipino consumers, as indicated by 17 consecutive months of negative rice inflation since May 2019. 24 The BSP further lowered the key policy rate by 25 bps on its November 20, 2020 Monetary Board meeting following a ‘prudent pause’ since June 2020. The rate cut was driven by the continued poor performance of the economy in Q3 and the moderation of global economic prospects following a resurgence in COVID-19 cases throughout the world. 25 The BSP: (i) relaxed know-your-customer (KYC) requirements to facilitate the delivery of social protection programs; (ii) digitized some operations and waived some penalties and fees for foreign exchange transactions; (iii) suspended charges on electronic payment and financial services fees for six months; and (iv) provided relief measures to micro, small, and medium enterprises by temporary reducing the credit risks assigned to their loans and assigning a 0 percent risk weight for their guaranteed loans, among others measures. 26 The full amount has since been settled on September 29, 2020. PART 1 RECENT DEVELOPMENTS 29 Photo: Ezra Acayan The financial system has maintained a high level of in August 2019. It reached 69.5 percent of GDP in April liquidity, but the impact of the pandemic has been felt and has remained high (Figure 18). The financial system, on the asset quality of banks. The crisis and related however, faces uncertainty, as the pandemic has affected lockdown measures have sharply slowed the growth the quality of assets in the banking system. Gross non- of credit available for production and household performing loans (NPLs) increased to 2.8 percent in consumption since March. Growth of outstanding loans August 2020, growing by 29.3 percent, year-on-year, and to household consumption sharply declined from the past due loan ratio surpassed 5.3 percent in the same 23.5 percent, year-on-year, in January, to 8.7 percent month, growing by 79.7 percent (Figure 20). Moreover, the in August 2020, while growth of outstanding loans to profitability of the banking sector began to decline in production activities declined from 7.8 percent year- the second quarter of 2020, as the return on equity fell on-year in January to 3.2 percent in August 2020 (Figure from 9.8 percent in June 2019 to 9.0 percent in June 2020. 19). Meanwhile, domestic liquidity (M3) reached Php13.6 Similarly, the return on assets fell from 1.24 percent to trillion pesos in August, accelerating growth to 14.2 1.15 percent in the same period. percent, year-on-year, in August 2020 from 6.3 percent 30 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Figure 17. Inflation remained subdued in Q1-Q3 2020. Figure 18. During the pandemic, domestic liquidity has increased rapidly… 12 M3 % OF GDP 10 72% 8 70% 6 PERCENT 68% 4 66% 2 64% 0 62% -2 60% SEP-18 NOV-18 JAN-19 MAR-19 MAY-19 JUL-19 SEP-19 NOV-19 JAN-20 MAR-20 MAY-20 JUL-20 SEP-20 58% Core inflation Headline inflation 56% Food & Non-alcoholic beverage BSP Key policy rate 54% Source: PSA and BSP. 52% JAN-19 MAR-19 MAY-19 JUL-19 SEP-19 NOV-19 JAN-20 MAR-20 MAY-20 JUL-20 Source: BSP Figure 19. …while credit to production and household Figure 20. …and the past due loans ratio and the rate of consumption has declined… non-performing loans have increased. 25% PERCENT 6 20% 5 15% 4 3 10% 2 5% 1 0% 0 JAN-19 MAR-19 MAY-19 JUL-19 SEP-19 NOV-19 JAN-20 MAR-20 MAY-20 JUL-20 JAN-19 MAR-19 MAY-19 JUL-19 SEP-19 NOV-19 JAN-20 MAR-20 MAY-20 JUL-20 Production Household Consumption Past Due Loan NPL Source: BSP Source: BSP PART 1 RECENT DEVELOPMENTS 31 1.5 EMPLOYMENT AND POVERTY: HOUSEHOLD INCOME LOSS RISKING REVERSALS OF GAINS While conditions in the labor market have improved, the overall market remains bleak. As a result of containment and social distancing measures, a significant share of the population is either jobless or underemployed. Reduced labor incomes along with a drop in remittances are likely to reverse some of the gains made in poverty reduction in recent years. The unemployment rate declined since the peak of the 40 hours a week was variable working time/nature of pandemic, yet it remains high. As the country gradually work, followed by ECQ/COVID-19 pandemic. In April 2020, eased community quarantines introduced in March close to two-thirds of workers cited the ECQ/COVID-19 2020, the unemployment rate fell from 17.6 percent in pandemic as the reason for working less than full time. April to 10.0 percent in July. The latest estimate of the Other labor market outcomes suggest a compositional unemployment rate in October 2020 suggests that it change of the status of employment and occupations further decreased to 8.7 percent. However, it remains during the pandemic. Up until July 2020, the share of almost double the rate of those recorded in the same wage and salaried workers fell while the share of self- period of 2019 -- 5.4 percent in July and 4.6 percent in employed or non-paid workers increased (Figure 22). October (Figure 21). Joblessness is most pronounced Similarly, the share of managers fell while the share of among the youth aged 15-24, who comprise about 35 elementary workers increased (Figure 23). In October percent of the unemployed population. The youth 2020, in part due to the consecutive typhoons that hit the unemployment rate surged from 12.9 percent in October country27 and agricultural employment, a slight rebound 2019 to 19.4 percent in October 2020—one-fifth of the in the share of wage and salaried workers and reductions economically active youth. In October 2020, the highest in the share of unpaid workers and elementary unemployment rates were recorded in the National occupations were observed compared to July 2020. Capital Region (NCR) (12.4 percent), Ilocos (11.5 percent), and CALABARZON (11 percent), most of which have highly The labor force participation rate (LFPR) rebounded urbanized areas that have had to comply with more strict to its pre-pandemic level in July 2020 but reversed to community quarantine. a lower level in October 2020. After falling from 61.7 percent in January to 55.7 percent in April 2020, the Underemployment also declined gradually from its peak LFPR, representing the size of the workforce engaged in in April and continued its downward trend in July and or available for work, rose to 61.9 percent in July 2020, October 2020. The number of underemployed workers a similar level a year ago (62.1 percent recorded in July who wish to work more hours or have an additional 2019) (Figure 24). Moreover, a reported 918,000 persons job was about 7.1 million in July 2020, equivalent to entered the labor market in July, tailing the pre-pandemic 17.3 percent of all workers, lower than 18.9 percent in number of 929,000 in January 2020. However, the latest April 2020. Recent estimates in October 2020 showed estimates in October suggest that LFPR reversed to 58.7 improvement as it further declined to 14.4 percent. Of percent, equivalent to 2.2 million persons exiting the the underemployed, half were in the services sector labor force between July and October 2020. No significant and nearly two thirds were working less than 40 hours gender differences were observed in the fluctuation of a week. The most common reason for working less than LFPR (Figure 25). 27 A series of typhoons hit the Philippines in October 2020: Nika (October 11 to 12), Ofel (October 13 to 15), Pepito (October 18 to 20), and Quinta (October 24 to 27). 32 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Figure 21. Unemployment and underemployment remain elevated, despite rebound in July 25 20 15 PERCENT 10 5 0 JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN/A APR/A JUL/A OCT/A JAN/A APR/A JUL/A OCT/A 2015 2016 2017 2018 2019 2020 Unemployment Rate Underemployment Rate Expon. (Unemployment Rate) Expon. (Underemployment Rate) Source: Labor Force Survey (various rounds), PSA. Note: Population projections based on the 2015 population census were used to generate the labor force statistics. Figure 22. Wage employment has been on the decrease until its Figure 23. …also, the share of high skilled occupations declined rebound in October... in recent months until bouncing back in October. SHARE OF EMPLOYMENT BY TYPE OF WORKER, APRIL-JULY 2020 70 30 60 25 50 20 40 PERCENT PERCENT 15 30 10 20 10 5 0 0 Wage and salary Self-employed Employer in own Worked without Clerical support Service and sales workers Skilled agricultural, forestry, and fishery workers Craft and related trades workers Plant and machine operators and assemblers Elementary occupations Managers Professionals Technicians and associate professionals workers without any paid family-operated farm pay in own family- employee or business operated farm or business (Unpaid family worker Oct-19 Apr-20 Oct-19 Apr-20 Jul-20 Oct-20 Jul-20 Oct-20 Source: PSA -LFS Labor Force Survey (various rounds). Source: PSA -LFS Labor Force Survey (various rounds). PART 1 RECENT DEVELOPMENTS 33 Job losses between October 2019 and October 2020 were Overall household income has declined. Prior to the a staggering 2.7 million and were mostly concentrated COVID-19 pandemic, there was a steady increase in in the services and industry sectors. The services household income, driven in part by the increase in real and industry sectors shed 1.9 million and 827,000 daily wages. In January 2020, the daily wage averaged jobs, respectively, as they were especially affected by Php406 (in 2012 prices), a 3.5 percent increase from the economic shock associated with the community the same period in 2019 (Figure 26). However, due quarantine as well as operational capacity requirements to significant job losses, underemployment, and job imposed on certain industries.28 The subsectors that lost changes to low paying sectors and occupations, many the most jobs in October 2020 were accommodation households have reported income losses. The results and food services (-667,000), transportation and of a high-frequency monitoring survey on the impact storage (-657,000), and manufacturing (-618,000) (Figure of COVID-19, conducted in August 2020 for a nationally 26). During the community quarantines, no hotels representative sample of households, shows a significant or accommodation establishments were allowed to share (about 40 percent) of households reporting a fall in operate, except under special circumstances (e.g., to income (Figure 28). For example, entrepreneurial income host repatriated/distressed overseas Filipino workers). reportedly fell, particularly among households engaged Compared to services and industry, the agriculture sector in non-farm business. Remittances, which have been a jobs were less affected by the pandemic, as agriculture, constant source of income for most Filipino households, forestry, and fishery were some of the few industries were likewise affected, as two in five households that allowed to operate at full capacity, even during the ECQ. receive remittances reported a fall in the amount sent The agriculture sector added about 70,000 jobs between from abroad. October 2019 and October 2020. This was despite a 1.1 million job loss between July and October 2020, likely associated with the series of typhoons. Figure 24. Labor force participation returned to pre-pandemic levels Figure 25. …similar patterns in LFPR were observed in July 2020 but declined in October 2020. across gender. QUARTERLY LABOR FORCE PARTICIPATION RATES, JANUARY 2015- – JULY 2020 LABOR FORCE PARTICIPATION BY GENDER 80 74.9 75.3 66 69.8 72.3 64 60 47.8 48.5 62 45.0 41.5 40 PERCENT 60 58 20 56 0 54 OCT-19 APR-20 JUL-20 OCT-20 JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN/A APR/A JUL/A OCT/A JAN/A APR/A JUL/A OCT/A 2015 2016 2017 2018 2019 2020 Male Labor Force Particiation Rate (%) LFPR Linear (LFPR) Female Labor Force Particiation Rate (%) Source: PSA -LFS Labor Force Survey (various rounds). Note: (a) The population projections based on the 2015 Population Census has been adopted to Source: PSA – LFS (various rounds). generate the labor force statistics. 28 Based on the Omnibus Guidelines on Community Quarantine as of June 2020, category II industries such as mining and other manufacturing, electronic commerce companies, and other delivery, repair and maintenance, and housing and office services are allowed to operate at anywhere between 50 percent to full capacity. Category III industries such as financial services, legal and accounting, and auditing services, professional, scientific, technical, and other non-leisure services, barbershops, and salons are allowed to operate with either skeletal workforce or at 50 percent capacity. 34 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Services Figure 26. Job losses mounted in both industry and services. Industry (JOB LOSSES BY SUBSECTOR, OCTOBER 2019-OCTOBER 2020, IN THOUSANDS) Services Services Industry Public administrati on and defense; compulsory Transportation and storage, social Public administration and defense; compulsory 657 Transportation and storage, 657 security, 312 social security, 312 Manufacturing, Manufacturing, 618 618 Real estate activities, 61 Financial and insurance Other Arts, repair of motor vehicles..., 63 Wh Real Fin Wholesale and retail trade; entertainm oles estat an E Electricity... 12 Accommodation service activities, 43 and food service activities, ent and ale e… ci… l Accommodation and food Other service Arts, entertainment activities, activites, 667 667 134 activities, 134 recreatio… and recreation, 132 an… Construction, 205 service Construction, 205 M Mining... 5 Professi… Professional, scientific... 21 Services Industry Source: PSA-LFS October 2019 and October 2020 rounds. Figure 27. Prior to the pandemic, there was a trend of increasing Figure 28.…but a large share of households experienced wages contributing to increases in household incomes... decreases in income. AVERAGE DAILY REAL WAGE HOUSEHOLD INCOME, AUGUST 2020 440 100% 420 80% 400 Php (constant 2012 prices) 60% 380 360 40% 340 20% 320 0% HH head Farm Non-farm Remittances 300 income business business JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR JUL Increase Remain the same 2012 2013 2014 2015 2016 2017 2018 2019 2020 Decrease No income Source: Staff estimates using data from the Labor Force Survey (various rounds); and PSA. Source: Staff estimates based on data from the August round of a high-frequency monitoring survey on the impact of COVID-19, World Bank. PART 1 RECENT DEVELOPMENTS 35 Photo: Ezra Acayan The government has created an extensive package second tranche transfer from the SAP targeted 5 million of intervention to protect households and firms from waitlisted families and about 8 million low-income the pandemic and the short-term economic costs of families still in ECQ in May 2020. mitigation measures. In March 2020, it adopted the Bayanihan to Heal as One Act (Bayanihan 1), which The adoption of the Bayanihan to Recover as One Act in focuses on increasing funding for the health sector, September 2020 (Bayanihan 2) extended the national safety nets for poor and vulnerable groups, and emergency. This allowed the government to continue measures to financially support micro, small, and its activities under Bayanihan 1 and introduce new medium enterprises (MSMEs) and jobs. About 18 million measures. For example, the government has continued Filipino families were supported through the first tranche to provide targeted financial support to MSMEs and the of transfers from the Social Amelioration Program (SAP) agriculture and tourism sectors to protect vulnerable for ECQ-affected workers and businesses, including affected firms. It also added new supports for overseas top-up assistance for the beneficiaries of the country’s Filipino workers and implemented other social assistance flagship safety net program—the Pantawid Pamilyang programs, although these new programs were not as Pilipino Program (4Ps). A survey that measured the extensive as the measures taken under Bayanihan 1. With welfare of low-income beneficiary households, conducted the implementation of the SAP and additional measures, in April-May 2020, shows that the SAP reached 4Ps it is estimated that the negative impact of COVID-19 has beneficiaries first, helping them to mitigate the shock in been somewhat mitigated. a timely manner compared to non-4Ps beneficiaries. The 36 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Box 3. One in four breadwinners have lost their jobs due to the pandemic. 29 About one-quarter of household heads who worked in with many transitioning out of sectors severely affected February prior to the COVID-19 pandemic were reported by the pandemic (e.g., accommodation and food services, to no longer be working in August. This is not surprising construction, and trade). Moreover, over half of those given the soaring unemployment rates in April (17.7 who were working in August were not able to work as percent) and July (10.0 percent). However, a large share of usual, among whom two in five were working from home. breadwinners remains jobless even after the government Home-based work arrangements were more prevalent started easing community quarantines (CQ). The job (60 percent) among workers involved in ICT, educational, losses among household heads were more pronounced professional, scientific, and technical activities. Close to in the National Capital Region and neighboring regions half of all household heads reported a decline in income of central and southern Luzon— one-third of household between February and August 2020. heads reported job losses here—where case infections were widespread and stricter CQs were enforced. Disruptions in livelihood have driven households to Sectors that lost the most jobs include construction resort to various coping mechanisms. Fortunately, a (31.3 percent), food services and accommodation (25.6 large share of households were able to receive assistance percent), and trade (25.4 percent) (Figure 29). In August, from the government (Figure 30). Nonetheless, most about half of all households cited the forced closure of households had to reduce consumption, as over three businesses as the primary reason for not working. in four households reduced their food consumption or shifted to cheaper alternatives. Many households delayed Many workers who were able to retain employment their payment obligations (three in five) and resorted to had to go through changes in jobs and adjustments in borrowing, mainly from relatives and friends, and close working conditions. About 11 percent of those working to 60 percent of households used their savings to cope both before and during the pandemic had to change jobs, with the shock caused by the pandemic. Figure 29. Significant job losses were reported across all sectors… Figure 30. …forcing households to resort to various coping mechanisms. JOB LOSSES BY SECTOR COPING MECHANISMS (SHARE OF HOUSEHOLDS) Agriculture Assistance: Government Assistance: Family & friends Construction Assistance: NGO/church Manufacturing Reduced food consumption Other industry Reduced non-food... Trade Delayed payment... Accommodation and food services Relied on savings Transportation, storage & Borrow: Family & friends communication Borrow: Credited purchases Other Services Borrow: Financial institution 0% 10% 20% 30% 40% 0% 20% 40% 60% 80% 100% 29 These key findings are based on a high-frequency survey of firms, households, and communities to monitor the impact of COVID-19. This is the first of a series of surveys that were implemented in August 1-14, 2020, in close collaboration with the National Economic and Development Authority and the Department of Finance. The household survey with 26,953 respondents was implemented through self-administered web links and complemented with phone interviews to ensure households without internet access were also covered. PART 2 OUTLOOK AND RISKS 37 2 OUTLOOK AND RISKS The Philippine economy is expected to rebound in 2021-22 assuming the infection curve is flattened in 2021. Domestic demand is expected to recover as consumer and business confidence return, supported by a moderate pick-up in public infrastructure investment. An improvement in the external environment is expected to benefit exports and remittances inflows. Monetary policy is expected to remain accommodative while the large fiscal deficit in 2020 is likely to consolidate in the medium term. The growth outlook, however, faces significant downside risks, primarily from a potential resurgence in COVID-19 cases exacerbated by the negative impact of frequent natural disasters on economic activities. In addition, COVID-19 could potentially hurt the country’s productivity and long-term growth. More importantly, the country’s recent gains in poverty reduction have likely been reversed, requiring intensified government efforts to support poor, unemployed, and vulnerable households. Photo: Ditsi Carolino 38 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 2.1 GROWTH OUTLOOK: GRADUAL REBOUND IN 2021-22 Following an expected deep economic contraction in 2020, the Philippine economy is expected to rebound gradually in 2021, driven by the return to more robust economic activities assuming the infection curve flattens domestically. The authorities are likely to continue to support growth with an accommodative monetary policy and the implementation of infrastructure projects. As the external environment improves, the growth prospects of exports, remittances, and tourism will also improve. The country’s growth prospects hinge on its ability percent in 2020, before growing by 5.9 percent and 6.0 to effectively manage the COVID-19 pandemic. percent in 2021 and 2022, respectively (Figure 32). The Consumer and business confidence levels plunged to downward revision compared to EAP update October negative territory in the third quarter of 2020 after a edition derives from a larger than expected contraction reversion to strict lockdown restrictions in early August, in Q3 and the expected damages caused by a series foreshadowing a difficult recovery in the remaining of typhoons in November. These projections hinge on quarter (Figure 31). Nonetheless, there are signs that the China’s early recovery, among the Philippines’ main management of the pandemic is improving resulting in 30 export destinations, alongside the expected rebound the decline of seven-day moving average of around 4,500 in the global economy in 2021 (Box 4). With further cases in mid-August to below 2,000 in mid-November. relaxation of CQs,32 more industries and services will be The decline is even faster for Metro Manila, from a seven- allowed to operate creating jobs and income, supporting day moving average of 2,000 in mid-August to 350 in private consumption growth. As the government ramps mid-November.31 With the steady decline in daily cases up its infrastructure spending in the fourth quarter of despite the gradual re-opening of industries including 2020 and even more in 2021, the construction sector will consumer facing services sectors, the risk of reversing rebound contributing to job creation as well. Finally, pre- to stricter quarantine restrictions is likely reduced. If the election activities in the run-up to the national election positive trend persists, the infection curve is likely to in 2022 will give an additional boost to demand as early flatten in the first half of 2021, which will help pave the as in the second half of 2021. Base effects will also come way for a sustainable economic recovery in 2021-222. into play and contribute to growth in 2021 considering the deep contraction in 2020. Following a deep recession in 2020, the Philippine economy is expected to rebound in 2021-22. The World Bank projects the Philippine economy to contract by 8.1 30 The government continues to enforce minimum health and safety standards to help contain the transmission of COVID-19. This includes mandatory use of face masks in public areas, the mandatory use of face shields in public markets, malls, public transportation, and government offices, and the limited operation of public transportation with strict guidelines on social distancing. 31 Hospital bed occupancy declined from 48.0 percent (mid-August) to 37.9 percent (mid-November). For Metro Manila, hospital bed occupancy declined from 73.7 percent to 38.1 percent over the same period. Similarly, daily positive rates (number of individuals tested positive as percent of total individuals tested) declined from 14.4 percent to 5.9 percent. 32 Nonetheless, the authorities have to be careful in further relaxing containment measures and strengthen the monitoring of cases, and continue to promote social distancing, and the use of masks and face shields. PART 2 OUTLOOK AND RISKS 39 Figure 31. Consumer and business sentiments worsened in the Figure 32. Economic growth is expected to rebound in 2021. third quarter of 2020. 9 80 FORECAST 7 60 5 40 3 20 1 PERCENT PERCENT 0 -1 2008 2010 2012 2014 2016 2018 2020 2022 -20 -3 -40 -5 -60 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1 2017 Q4 2018 Q3 2019 Q2 2020 Q1 2020 Q3 -7 -9 Overall Consumer Confidence Index (Current quarter) October 2020 projections Actual growth Overall Business Confidence Index (Current quarter) December 2020 projections Source: BSP. Source: PSA, World Bank staff estimates. The fiscal deficit is expected to significantly widen in 2020 but will consolidate in the medium term as the economy recovers. The fiscal deficit is projected to widen to 8.7 percent in 2020 from 3.4 percent of GDP in 2019. The larger deficit is the result of increased public spending in response to the pandemic and lower revenue collection due to weak economic activities. In the medium term, however, the fiscal balances will likely consolidate, as public revenue is estimated to increase due to a recovering economy and the adoption of various tax policy measures, including a sin tax on alcoholic beverages and e-cigarettes that became effective in early Photo: Ditsi Carolino 2020. Moreover, the government is expected to soften the pace of public expenditure growth, with the disbursement program to grow by an average of 3.9 percent in nominal to ease rates. Furthermore, the BSP could further lower terms in 2021 and 2022,33 significantly lower than 10.9 the reserve requirement ratio in response to weakened percent prior to the pandemic. economic activity or if additional downside external risks materialize. BSP could also provide additional resources to the Treasury under the Bayanihan 234. Monetary policy Monetary policy is expected to be supportive of growth accommodation in advanced economies is expected as inflation remains stable and within the target range. to continue, especially as the U.S. Federal Reserve has The headline inflation rate is expected to settle at indicated that interest rates will be kept near zero in the 2.5 percent in 2020 as commodity prices weaken and near term. consumption demand remains subdued. The subdued inflation outlook provides additional space for the BSP 33 Growth rates are computed relative to the revised 2020 national budget. 34 Bayanihan 2 law raises the cap on the amount the central bank can advance to the national government from Php540 billionn to Php812 billion. 40 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Table 3. Economic Indicators for the Baseline Projections 2017 2018 2019 2020f 2021f 2022f Real GDP growth, at constant market prices 6.9 6.3 6 -8.1 5.9 6 Private Consumption 6 5.8 5.9 -8 8.8 6.2 Government Consumption 6.5 13.4 9.6 12 3.1 10.5 Gross Fixed Capital Investment 10.6 12.9 3.9 -28.7 23.1 13.2 Exports, Goods and Services 17.4 11.8 2.4 -16.5 11.6 7.2 Imports, Goods and Services 15.1 14.6 1.8 -21.5 25.7 13.3 Inflation (period average) 2.9 5.2 2.5 2.5 2.8 3 National government balance (% of GDP) -2.1 -3.1 -3.4 -8.7 -7.2 -6.6 National government debt (% of GDP) 40.2 39.9 39.6 50.3 54.3 57.1 Current account balance -0.7 -2.6 -0.9 1.4 -1.7 -1.8 Source: PSA; and WB staff estimates. An improvement in the external environment will make to contract by 8.0 percent in 2020 due to income losses, a it more likely that goods and services exports recover decline in foreign remittances, and depressed consumer next year. While the global economy is expected to confidence. As domestic and external economic fall into a deep recession this year, a moderate growth conditions improve in 2021, consumption growth is rebound is expected in 2021, driven by a recovery in expected to rebound to 8.8 percent and 6.2 percent in economic activities in both advanced economies and 2021 and 2022, respectively. The anticipated full opening EMDEs (Box 4). Annual growth in advanced economies of the economy is expected to revitalize business is estimated to reach 3.9 percent in 2021, a significant activities, which would help to generate jobs and mitigate improvement from an expected 7.0 percent contraction in the loss in income. Furthermore, a recovery in foreign 2020. This economic expansion in advanced economies markets is expected to return the demand for overseas would contribute to increased demand for Philippine Filipino workers, resulting in growth in remittances. goods exports, as roughly 70 percent of the country’s Similar to past election cycles, pre-election activities will exports are destined for high-income economies. likely increase consumption starting in the second half Services exports would also benefit from the reopening of 2021. of the tourism industry and a recovery of the BPO sector due to sustained demand.35 Meanwhile, import growth Following a significant contraction in 2020, capital will likely accelerate next year as the government formation is projected to recover moderately in the accelerates the implementation of infrastructure projects, next two years. Fixed capital formation, which is with renewed demand for capital goods, especially estimated to contract by 28.7 percent in 2020, is expected construction materials. As a result, the expected current to make a modest recovery in the next two years. account surplus in 2020 is likely to be followed by a The expansion of private investments is likely to be current-account deficit in 2021 (Table 3). dampened by weakness in the balance sheets of some large corporations that have been severely impacted Private consumption is expected to rebound in 2021 as by the pandemic. Moreover, the fall in foreign direct economic conditions improve. Household consumption investment (10.9 percent contraction, year-on-year, in that represents more than two-thirds of GDP is projected the first seven months of 2020), alongside the decline 35 In spite of the pandemic and strict CQ measures, two services subsectors—information and communication technologies and finance and insurance—continued to expand in the first half of 2020. Industry sources reveal that certain sectors such as healthcare, technology, media, and entertainment are enjoying increased demand for call center services. PART 2 OUTLOOK AND RISKS 41 Photo: Ditsi Carolino in bank lending for production activities (average of 1.0 to contract by 7.3 percent in 2020, the re-opening of percent, month-on-month, contraction between April and face-to-face service sectors bodes well for tourism, the August), preclude full access to externally sourced funds transportation industry, restaurant and food services, to finance investment plans. While the implementation of and wholesale and retail trade. However, as some social public infrastructure projects may have resumed in the distancing measures will likely remain, the service last quarter of 2020, project delivery may face operational sector is expected to grow by 5.8 percent in 2021—lower delays due to supply disruptions, capacity constraints, than pre-COVID levels. Domestic tourism is more likely and typhoon season. Nevertheless, the government to resume sooner than international tourism given remains committed to pursuing its infrastructure constraints to international travel. In 2021, the industry investment agenda, as ramping up investment spending sector is expected to expand, construction activities will contribute to an improvement in business confidence will gain momentum, and manufacturing activities will and the overall economic recovery. gather steam as domestic and external demand return. Agriculture is expected to be the only sector to grow in The services sector is expected to drive the economic 2020, but the government needs to address unresolved recovery in 2021. Commanding roughly 60 percent of GDP, productivity challenges and vulnerabilities to weather- the services sector is expected to be the main growth related shocks to accelerate growth in the medium term. driver in 2021. While the services sector is anticipated 42 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Box 4. The Global Economic Outlook Photo: Ezra Acayan As a result of the COVID-19 pandemic, the global social distancing measures remain. The large and sudden economy is expected to contract by 5.2 percent, year- loss of household income in 2020 has increased the on-year in 2020. This contraction will constitute the unemployment rate and forced many companies into deepest recession in the post-war period (Figure 33). bankruptcy, destroying valuable economic relationships The implementation of lockdowns and social distancing and denting human capital that will take time to rebuild. measures in many countries have been accompanied by Lower spending and continued uncertainty will likely lead a sharp reduction in economic activities. Major advanced to persistent weakness in investment and innovation, economies, especially in the Euro Area, are expected with potential adverse effects on growth and productivity. to contract significantly. Meanwhile, some large EMDEs, particularly China, are projected to expand but at a much In 2020, global trade is expected to suffer from one slower pace than in 2019. In 2020, advanced economies of the worst contractions in post-war history (Figure are expected to contract by 7.0 percent, year-on-year, 34). Trade is typically more volatile than production while EMDEs are expected to contract by 2.5 percent and tends to fall sharply in times of crisis. The (Table 4). current pandemic has caused disruptions to trade logistics, international travel, and GVCs. The spread Driven by an economic recovery in both advanced of the pandemic has disrupted the supply of key economies and EMDEs, moderate global growth is intermediate inputs and threatened the viability of many expected in 2021. Global economic growth is expected transportation companies, with potential adverse effects to recover to 4.2 percent, year-on-year, in 2021, driven on the trade of goods across regions. Moreover, GVCs by growth in both advanced economies (3.9 percent) have come under pressure from renewed trade tensions, and EMDEs (4.6 percent). Aggregate output, however, is which could trigger a rise in uncertainty and a further not expected to return to its previous expected levels fall in trade flows at a time when the global economy is due to a slow rebound in economic activities as some already fragile. PART 2 OUTLOOK AND RISKS 43 Authorities across the world continue to face the that are expected to suffer from an economic contraction challenge of containing the pandemic while addressing this year, with many millions of people falling into the economic fallout from containment measures. poverty. This crisis highlights, therefore, the urgent need Monetary authorities in advanced economies are to protect poor households and vulnerable populations. using quantitative easing on an enormous scale and Furthermore, countries need to improve their capacity developing new tools to bolster demand and financial to prevent and cope with similar events in the future. markets. In addition, large-scale fiscal policy responses As EMDEs are particularly vulnerable, it is critical to have been implemented to support economic activity and strengthen public healthcare systems, expand social enhance social safety nets. The strengthening of safety safety nets, and implement structural reforms to achieve nets is especially pertinent to a large majority of EMDEs strong, inclusive, and sustainable economic growth. Figure 33. Global economic growth is expected to contract by Figure 34. Global trade is expected to register its worst contraction 5.2 percent yoy in 2020. in post-war history. PERCENT PERCENT 8 10 5 4 0 0 -5 -4 -10 -8 -15 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 World Advanced economies Lowest in post-WWII history (2009) EMDEs Source: Global Economic Prospect June 2020. Source: Global Economic Prospect June 2020. Table 4. Real Growth Projections 2017 2018 2019e 2020f 2021f World 3.3 3.0 2.4 -5.2 4.2 Advanced economies 2.5 2.1 1.6 -7.0 3.9 Emerging market and developing Economies 4.5 4.3 3.5 -2.5 4.6 Developing East Asia & Pacific 6.5 6.3 5.8 0.9 7.4 Philippines 6.9 6.3 6.0 -6.9 5.3 Note: Developing East Asia & Pacific includes Cambodia, China, Fiji, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Solomon Islands, Thailand, Timor-Leste, and Vietnam. Source: Global Economic Prospects June 2020; East Asia and Pacific Economic Update October 2020. 44 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 2.2 POVERTY AND SHARED PROSPERITY: TEMPORARY POVERTY REDUCTION TREND REVERSED Poverty in the Philippines is likely to increase in the short term given the negative impact of the pandemic on employment and household income. The COVID-19 pandemic threatens to partly reverse the The expected growth contraction in 2020, along with the gains made in poverty reduction and shared prosperity subsequent pressure on household income, is likely to in recent years. The extended CQs have disrupted increase poverty in the short term. With the economy economic activities, resulting in job losses, a decline in contracting and household income declining, poverty is wage incomes, a slowdown in entrepreneurial activities, estimated to increase from 20.5 percent in 2019 to 22.6 and a fall in remittances. The poor and vulnerable, many percent in 2020 (measured against the lower middle- of whom work in the informal sector, are especially income poverty line of US$3.2/day), reversing the trend of likely to experience significant welfare losses, given their a steady decline in poverty in recent years, resulting in an limited capacity to manage risks. Household perceptions additional 2.7 million poor people in 2020 compared to regarding their finances are bleak. According to the 2019 estimates (Figure 35). As the threat of the COVID-19 Word Bank’s household survey in August, 88.6 percent of pandemic dissipates and business activities gradually households expressed concerns over their finances. return to normal, the economic recovery is expected to contribute to poverty reduction. The poverty rate is projected to fall to its 2018 level in 2021 and keep falling throughout 2022. Figure 35. Poverty is expected to rise as a result of the COVID-19 pandemic. ACTUAL AND PROJECTED $3.20-A-DAY POVERTY RATES 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2006 2009 2012 2015 2018 2021 Source: WB staff estimates PART 2 OUTLOOK AND RISKS 45 2.3 RISKS AND POLICY CHALLENGES The impact of the COVID-19 pandemic remains the most significant downside risk to the growth outlook. While the pandemic could result in lower productivity growth, it could also increase the digitalization momentum. The government needs to remain committed to structural reforms that promote competition, improve the business environment, support private sector growth, and enhance resilience to natural disasters and climate change. A potential resurgence of COVID-19 is the most Additional domestic downside risks come from significant downside risk to the country’s growth country’s ability to respond to natural disasters in outlook. The growth trajectory will be decisively addition to the COVID-19 pandemic. The Philippines is influenced by the government’s effectiveness in flattening exposed to multiple natural hazards including typhoons, the infection curve and ensuring that progress is earthquakes, floods, volcano eruptions, storm surges, sustained as more quarantine restrictions are relaxed. tsunamis, and landslides.36 In early January 2020, the Sporadic cases of infections may lead to stricter eruption of Taal Volcano caused severe disruptions containment measures, which could dampen economic in tourism, agricultural, and manufacturing activities. activities, lower consumption growth, and delay the Since May 2020, the country has experienced typhoons, implementation of public infrastructure projects. Despite floods, and earthquakes, and the pandemic has made the country’s recent success in flattening the infection it more difficult for the government to prepare for an curve, the surge of COVID-19 cases in a number of highly effective response to these types of events. More recently, urbanized cities such as Baguio City, Davao City, and the country was hit by a series of strong typhoons in Makati City shows that the health situation remains November with damages to physical infrastructure fluid. Should a second wave of infections materialize and agriculture amounted to preliminary estimates of and remain unchecked, a reversal to strict lockdown Php24 billion37 (0.1 percent of GDP) to agriculture and measures would lead to the closure of more businesses infrastructure while causing further disruptions to and a spike in unemployment, lowering business and economic activity. The extent of the impact of these consumer confidence and investment levels, which could natural events on the pace of economic recovery is push the economy into a deeper recession in 2020 and highly uncertain as government post-disaster response is lead to a more protracted recovery in the medium term. hampered by its effort to manage the pandemic. On the other hand, an earlier than anticipated successful vaccine rollout in the Philippines would constitute an Subsequent waves of COVID-19 infections globally upward risk to the baseline growth projections as it amplify the downside risks from the external would boost private confidence and accelerate private environment. Social distancing and lockdown measures consumption and capital formation growth. implemented in advanced economies have also had an adverse impact on the Philippine economy. A number of 36 GFDRR (Global Facility for Disaster Reduction and Recovery), and World Bank. 2011. “Climate Risk and Adaptation Country Profile: Philippines,” World Bank, Washington DC. 37 Preliminary estimates on damages to both agriculture and infrastructure have thus far amounted to an estimated Php24 billion from typhoons Ulysses, Rolly, Quinta, and Pepito. 46 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION these economies, such as the United States, the United decade by 0.7 percentage points. That is to increase from Kingdom, and a number of countries in the European 5.5 percent on average during 2010-19 to an average Union, are battling new waves of the outbreak that may rate of 6.2 percent during 2020-29. In this scenario, the worsen during the winter months and cause an increase increase would have resulted from an accelerating in restrictions to economic activity. In an interconnected capital accumulation despite modest slowing of labor world, the fate of the Philippine economy is tied to supply growth. However, factoring the potential negative developments in high-income economies, many of which impact of COVID-19 through its effects on investment are major destinations for Philippine exports and a growth, education outcomes prospects, and productivity source of foreign investment, remittances, and tourism growth, the potential growth would decline below the revenues. Moreover, disruptions in supply chains due pre-pandemic scenario by 0.4 percentage points to 5.7 to tight supply conditions, and air and sea logistics percent over the next decade (2020-29). This assumes challenges, will ripple through the domestic economy, no policy reforms would be implemented to boost especially the electronics exports industry, if not investment and productivity growth post-pandemic. appropriately addressed. Finally, increased international financial volatility can affect the local economy through Sustaining the government’s infrastructure investment the equity, bond, and credit markets that could lead to program will be crucial to support the economic episodes of capital outflows or a rise in the cost of credit. recovery and increase growth potential. A key government priority is to boost the Philippines’ growth The crisis is likely to have an adverse impact on the potential by investing in human and physical capital. country’s productivity growth. About 15 percent of Before the COVID-19 outbreak, the government planned firms in the Philippines have had to close permanently to steadily increase public infrastructure spending because of the pandemic, and a majority of remaining from 4.1 percent of GDP in 2016 to 7.3 percent of GDP by firms have had to temporary suspend their operations 2022. Despite the pandemic, the government remains or reduce payments to employees. The exit of firms 38 committed to pursue the infrastructure investment will mean the loss of intangible assets—business agenda, with infrastructure spending representing relationships and management practices—that are vital nearly one-quarter of the proposed 2021 budget (Box for productivity and difficult to rebuild. Firms that are 5). While the implementation of infrastructure projects still operating may also face prolonged uncertainty and has been delayed due to the pandemic and more be saddled with debt, reducing their future productivity- recently consecutive episodes of strong typhoons, the enhancing investments. Nonetheless, the pandemic 39 government’s commitment to ramping up infrastructure has accelerated the digitalization of some firms, which spending in the medium term will help accelerate the may translate to faster but likely unequal productivity recovery through job creation. Furthermore, narrowing growth. The challenge is for the government to support the country’s infrastructure gap will help to boost the digitalization momentum to enable greater and wider productivity growth and expand growth potential in the participation by the private sector, and to democratize long term. digital access to ensure an inclusive recovery. 40 To mitigate the impact of the pandemic and natural The impact of COVID-19 on investment and productivity disasters on the poor and vulnerable, social protection growth could harm the country’s potential growth programs can help to ensure that crises do not lead without mitigating measures. The World bank estimates to long-term deterioration of human capital. Shocks show that before the pandemic, the Philippines potential related to the COVID-19 pandemic can have an impact growth would have been expected to rise in the coming on child malnutrition and stunting as well as student 38 World Bank (2020). “Impacts of COVID-19 on firms in the Philippines: Results from the Philippines COVID-19 Firm Survey conducted in July 2020.” 39 World Bank (2020). “East Asia and Pacific Economic Update: From Containment to Recovery.” Washington DC: The World Bank Group. October. 40 World Bank Philippines Digital Economy Report 2020 includes a list of policy recommendations. PART 2 OUTLOOK AND RISKS 47 learning, especially among poor households. If left As one of the most disaster-prone countries in the unmitigated, these shocks may have a persistent world, the Philippines is vulnerable to the increasing impact on people’s wellbeing and future economic impact of climate change. The 2018 World Risk Report opportunities. Similarly, natural disasters affect the ranks the Philippines third globally in terms of natural poor and vulnerable disproportionally more as they are disaster risk. At least 60 percent of the country’s land less resilient. Social programs, including cash transfers, area and 74 percent of its population are vulnerable to can help improve food and sustenance conditions, and natural hazards, such as typhoons, flooding, earthquakes, encourage continued participation in education. However, and volcanic eruptions. A higher intensity and frequency moving swiftly to provide transfers and other support of catastrophes results in losses to both public and to poor households will necessitate improvements in private assets, and it increases fiscal pressure by the government’s delivery and implementation capacity. potentially raising the government debt-to-GDP ratio National and local government authorities need to by up to 1 percentage point in the medium term.41 coordinate their efforts to ensure the timely and efficient Effectively addressing the increase in fiscal pressure disaster response. requires an understanding of the efficiency, transparency, and inclusive use of public resources in mitigating and While there is urgency in addressing the current crisis, responding to disasters. the government must remain focused on pursuing the medium-term structural reform agenda including Disaster risk financing has become a compelling the DRM agenda. Accelerating structural reforms that instrument for financial resilience as the COVID-19 shock improve the business environment, foster competition, is exacerbated by the country’s proneness to disasters. and strengthen resilience toward natural disasters, Natural and manmade disasters can cause severe remains critical amid the COVID-19 pandemic. These economic and fiscal shocks by generating unplanned reforms are especially important given that SMEs are expenditures that drain public finances and lead to being disproportionally affected by the current crisis budget volatility. They are contingent liabilities for the and the increasing frequency of natural disasters. government which tend to shoulder a significant share Addressing these long-standing challenges will support of the cost for response and recovery. A proactive risk the economic recovery and boost productivity growth management approach with built-in resilience strategy in the long term. In addition, the government needs will help address the risk and impact of disasters. to strengthen private sector development, which can Disaster risk financing is an important instrument to be done by reducing regulatory restrictiveness in prop up financial resilience by making funding more key markets. Reducing regulatory restrictiveness will predictable and effective for disaster-related measures, require the authorities to, among other measures, improving the financial position of national and address ownership caps on foreign investments through subnational governments, and protecting the fiscal the passage of revisions to the Public Services Act, balance when disasters strike. The focus chapter of this implementation of pro-competition reforms mandated PEU will discuss government’s overall strategy on disaster in the National Competition Policy, minimize the scope risk management, progress made, remaining challenges, of controlled prices, and streamline and automate and policy recommendations (Table 6). administrative procedures as required by the Ease of Doing Business Act. 41 IMF Selected Issues: Philippines Vulnerability to Climate Change and Natural Disaster. 48 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Box 5. Proposed 2021 National Government Infrastructure Budget Public infrastructure development in the Philippines A large share of the infrastructure budget is allocated continues to be driven by the government’s flagship to investments in transportation, logistics, and flood Build, Build, Build program. The program seeks to control projects. Appropriations for the national accelerate productivity-enhancing investments logistics, government’s (NG) and GOCC infrastructure outlays42 agriculture, tourism development, and transport and road and buildings and other structures43 accounted for 77 infrastructure to ensure long-term inclusive growth. Prior percent of the total infrastructure budget in 2021). In to the COVID-19 pandemic, the government ramped up particular, public investments in road networks, flood its investments in infrastructure, which increased from control, and railway systems account for 60 percent of 4.1 percent of GDP in 2016 to an expected 5.2 percent the 2021 infrastructure budget (Figure 36). As a result, of GDP in 2020 (Table 5). The national government is the Department of Public Works and Highways (DPWH) expected to accelerate infrastructure investments even and the Department of Transportation (DOTr) received 65 further in 2021, as the public infrastructure budget is set percent of the total infrastructure budget between FY2019 to increase by 12 percent, year-on-year, in nominal terms and FY2021— despite their low budget execution. to Php1.1 trillion (5.4 percent of GDP) in 2021. However, the proposed infrastructure budget is lower than the From 2019 to 2021, 60 percent of the NG public projections of investment requirements prepared in 2019, infrastructure budget consists of centrally-managed as the government has had to adjust its expenditure items44 (CMI) (CMI) or lump-sum appropriations, with program to pursue fiscal consolidation due to expected nationwide and regional allocations representing 40 lower revenue collections amid the pandemic. percent of the budget. There is a clear disparity in the Table 5. Public Infrastructure Budget, FY2019-21 (IN PHP BILLION) FY2019 (Actual) FY2020 (Program) FY2021 (Proposed) Total infrastructure budget (2021 National Expenditure Program) 785.6 989.3 1,107.3 % of GDP 4.0% 5.2% 5.4% Total infrastructure budget (2019 National Expenditure Program) * 909.7 1,044.8 1,549.6 % of GDP 4.7% 5.5% 6.6% Note: *Consistent with pre-pandemic macroeconomic assumptions and fiscal targets pre-pandemic. The infrastructure development target is to reach around Php1.8 trillion or 6.9 percent of GDP by 2022. 42 Includes water supply systems, sewer systems, seaport systems, road networks, right-of way, railway systems, power supply systems, other infrastructure assets, flood control systems, communication networks, airport systems, irrigation systems, housing and community, subsidy support to GOCC operations, and parks, plazas and monuments. 43 Includes school buildings, other structures, hostels and dormitories, hospitals and health centers, buildings, ground water monitoring stations, and markets. 44 Centrally-managed items are defined as items in the budget of agencies for which the operating units and the specific amounts allocated for each have not been identified in the General Appropriations Act (GAA). These are also referred to as lump-sum appropriations. PART 2 OUTLOOK AND RISKS 49 Figure 36. Infrastructure Outlays and Buildings and Other Structures, FY2019-21 INFRASTRUCTURE OUTLAYS AND BUILDINGS AND OTHER STRUCTURES, FY 2019-2021 (SHARE OF THE ANNUAL INFRASTRUCTURE BUDGET) 40% 35% 30% 25% 20% 15% 10% 5% 0% Road Networks Flood Control Railway Buildings Irrigation School Other Infrastucture Right-of-Way Others Systems Systems Systems Buildings Assets FY2019 FY2020 FY2021 Note: Includes spending from the national government and government-owned and controlled corporations. Source: DBM. allocation of infrastructure outlays between the NCR Regional allocations also include the budget for the Local and other regions, as the NCR receives a larger share Government Support Fund (LGSF), or financial assistance of the budget for flood control systems and buildings, to local government units (except for Bangsamoro including NG subsidies to GOCCs, except subsidies for Autonomous Region in Muslim Mindanao, BARMM) irrigation systems, which are regionally distributed. The intended for development and infrastructure projects, NCR receives an average of 23 percent of all nationwide and the 20% IRA Development Fund. The increase in and regional budget allocations, much higher than 3 to 8 the budget allocation to BARMM is attributable to the percent for the other regions (Figure 37). However, actual Bangsamoro Government Annual Block Grant capital spending could vary, as CMIs related to road networks, outlay allotment, the Special Development Fund45, and flood control systems, and school and other buildings existing internal revenue allotments for local government could subsequently be spent in the regions. units within its jurisdiction. Figure 37. There is a wide disparity in the allocation of the infrastructure budget across regions. DISTRIBUTION OF NATIONWIDE AND REGIONAL ALLOCATIONS, FY2019-21 30% 25% 20% 15% 10% 5% 0% NCR CAR RI RII RIII RIV-A RIV-B RV RVI RVII RVIII RIX RX RXI RXII CARAGA BARMM Nationwide FY2019 FY2020 FY2021 Note: Regions IX and CARAGA include the B/ARMM IRA 20% Development Fund, and nationwide includes NDRRMF and LGSF, or financial assistance to LGUs, in FY2021. Source: DBM. 45 The special development fund earmarks Php5.0 billion annually for ten years for the rebuilding, rehabilitation, and development of conflict- affected communities beginning in FY2020 50 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 3 BUILDING A RESILIENT DISASTER RECOVERY Photo: Ditsi Carolino PART 3 BUILDING A RESILIENT DISASTER RECOVERY 51 3.1 DISASTER RISK IN THE PHILIPPINES The impact of COVID-19 is further exacerbating the are contingent liabilities for governments, as they tend country’s risk from natural disasters. As of November to shoulder a significant share of the cost for response 18, 2020, the Department of Health (DOH) reported over and recovery. Unexpected public spending can have 410,000 confirmed cases of the disease, 7,861 related severe fiscal consequences, as unplanned expenditures deaths, and 375,000 people who had recovered. The can drain public finances, which can lead to budget measures implemented to contain and address the volatility and even threaten countries’ fiscal position and pandemic have significantly impacted government overall debt sustainability, particularly in countries with limited fiscal balance, decreasing revenues and increasing financing options. expenditures. The containment measures are impacting the poor and near-poor disproportionately who have The Philippines is among the most disaster-prone limited incomes and limited assets to buffer themselves countries in the world. At least 60 percent of its total from future events including natural disasters. As the land area and close to 74 percent of its population are government focuses on strengthening the capacity of the exposed to multiple natural hazards, including typhoons, healthcare system and protecting vulnerable households, earthquakes, floods, storm surges, tsunamis, volcanic the Philippines continues to suffer from various disasters. eruptions, and landslides.46 In the past thirty years, Since May 2020, the country has experienced typhoons, 33,000 people have died and 120 million people have floods, and earthquakes, and the pandemic has made been adversely affected by disasters.47 It is estimated it more difficult for the government to prepare for and that earthquakes and typhoons cause, on average, effectively respond to these types of events. US$3.5 billion (over 1.0 percent of GDP) per year in direct losses to public and private assets in the Philippines.48 Natural and manmade disasters can threaten a Climate change is expected to increase the frequency and country’s socioeconomic development and cause severity of hydrometeorological events in the country.49 severe economic and fiscal shocks that often affect Recent estimates from climate modeling exercises show vulnerable households the most. Disaster events can that climate change could increase emergency response destroy physical assets and livelihoods, adversely affect costs from typhoons by over 50 percent for severe people’s wellbeing, and lead to a loss in lives. Major events.50,51 Disaster-related risk is heavily concentrated disasters can also cause severe economic disruption in the Metro Manila Region due to population and even economic contractions that threaten efforts concentration.52,53 to reduce poverty and build shared prosperity. Disasters 46 GFDRR (Global Facility for Disaster Reduction and Recovery), and World Bank. 2011. “Climate Risk and Adaptation Country Profile: Philippines,” World Bank, Washington DC. 47 World Bank (2019). Country Partnership Framework for the Republic of the Philippines 2019-2023 48 In the next fifty years, the Philippines is estimated to have a 40 percent chance of experiencing losses from natural disasters that will exceed US$33 billion, and a 20 percent chance of losses that will exceed US$53 billion. Private losses are expected to account for 96 percent of annual total losses. 49 WBG. 2013. “Getting a Grip on Climate Change in the Philippines.” 50 The expected cost incurred from events of various ‘return periods,’ such as a 1-in-100-year event, which is expected to occur, on average, once every 100 years, or with a 1 percent probability in a given year. 51 World Bank. 2019. “Impacts of Climate Change on Typhoon Risk in the Philippines.” 52 World Bank, GFDRR, UK Aid, Philippines Catastrophe Risk Assessment and Modeling, January 2018. 53 With a 2 percent urbanization rate per year in 2010-19 (World Bank data), and an associated expansion of the asset base, the Philippines needs to prepare for disasters that can have an even greater adverse impact on the economy and wellbeing. 52 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Photo credit: Ezra Acayan The 2013 Super Typhoon Yolanda (Haiyan)—the Ulysses affected 3.5 million people and caused the strongest typhoon to ever make landfall in the world— worst flooding in Metro Manila and Cagayan Province was a tragic reminder of the devastating impact natural to date. The combined cost of damage to infrastructure disasters can have in the Philippines. Over 6,000 people and agriculture of these three typhoons is estimated at lost their lives and more than 16 million were affected, Php30.76 billion.56,57,58 with 2.3 million people falling below the poverty line. Over 1.1 million houses were damaged or destroyed. The Philippines is also exposed to multiple hazards. The typhoon also had a devastating impact on public Besides Typhoon, the Greater Metro Manila Area infrastructure, including roads, bridges, water and power Risk Assessment study59 estimates that a magnitude utilities, hospitals and schools, government buildings, 7.2 earthquake on the West Valley Fault (a probable and agricultural and irrigation facilities. Damages were maximum scenario called ‘The Big One’) would result estimated at Php571.1 billion (US$12.9 billion), or 4.6 in an estimated 48,000 fatalities and US$48 billion percent of GDP.54 This event set in motion the momentum in economic losses, with a catastrophic impact on within Philippines to focus more on preparedness and government continuity and service provision. The country financing. As of October 2020, out of a planned 135,772 was hit by a series of major disasters between October houses for Western Visayas, 88,804 units have already 2019 and January 2020, including three earthquakes, two been completed.55 Towards the end of October to mid- typhoons, and the phreatic eruption of the Taal Volcano November 2020, Luzon was hit by three successive near Manila. The combined damage to infrastructure and destructive typhoons in a span of three weeks, Typhoons agriculture from these events was estimated at Quinta, Rolly, and Ulysses. The most recent, Typhoon US$245 million. 54 National Economic and Development Authority (NEDA). 2013. Reconstruction Assistance on Yolanda (RAY): Build-Back-Better 55 https://newsinfo.inquirer.net/1358086/govt-turns-over-2500-houses-to-yolanda-survivors 56 NDRRMC Situation Report No. 08, November 18, 2020 57 NDRRMC Situation Report No. 12, November 11, 2020 58 NDRRMC Situation Report No. 11, November 9, 2020 59 Philvolcs (Philippine Institute of Volcanology and Seismology). 2018. “The Greater Metro Manila Area Risk Assessment Program.” PART 3 BUILDING A RESILIENT DISASTER RECOVERY 53 3.2 THE STATE OF DISASTER RISK MANAGEMENT To address the growing risk and impact of disasters, a per-hazard response guide for all government agencies; the government is implementing policy reforms to the National Disaster Preparedness Plan in 2015,61 an transition from reactive to proactive risk management. overall preparedness protocol for local governments; the Key milestones in the evolution of the Philippines’ legal National Disaster Risk Finance Strategy in 2015, a financial and institutional framework for managing disaster risk resilience strategy for the national, local, and individual include the passage into law of the 2010 Philippines level; and the Disaster Rehabilitation and Recovery DRRM Act and the subsequent adoption of the National Planning Guide in 2019, a guide to prepare national DRRM Framework and Plan. These policies served as the and local governments for rehabilitation and recovery foundation for the development and approval of the interventions (Figure 38). country’s National Disaster Response Plan in 2014,60 Figure 38. Overview of the Philippine Legal and Institutional DRM Framework Key legal reforms and major disasters PD 1566 National Disaster Coordinating Typhoon Sendong flood in Cagayan de Oro Guinsaugon Landslide; Typhoon Reming Super Typhoon Omponh “Mangkhut” Super Typhoon Lawin; Typhoon Nina National Disaster Preparedness National DRRM Framework and National DRF Strategy Adopted Joins Southeast Asia Disaster RA 10121 Philippine DRRM Act Habagat Flood & Typhoon Pablo RA 9729 Climate Change Act National Disaster Response Disaster Rehabilitation and Ondoy Flood in Metro Manila Typhoon Frank flood in Iloilo Typhoon Yolanda “Haiyan” recovery Guide Aopted Typhoons Vinta & Urduja Risk Insurance Faility Bohol Earthquake M7.2 Typhoon Usman Plan Adopted Plan Adopted Plan Adopted and Iligan City Typhoon Ruby Council 2008 2006 2009 2009 1968 2010 2018 2018 2016 2019 2019 2013 2015 2015 2014 2014 2012 2017 2011 2011 2000 2010 2019 Source: World Bank staff 60 The DSWD developed the response plans for hydro-meteorological hazards, terrorism-related incidents, and earthquakes and tsunamis. 61 Operation LISTO was developed by the DILG and is a major component of the National Disaster Preparedness Plan that provides a comprehensive preparations checklist for local governments, communities, and households. 54 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION This policy shift is taking place across financial, physical, • Social resilience helps households, especially the and social resilience. These three mutually reinforcing poor and vulnerable, mitigate the adverse effects and closely interlinked policy areas are critical to of disasters. In times of major disaster, affected building and improving a country’s financial, physical, people need access to food and non-food items, and social resilience. This is reflecting international 62 medicines, healthcare, supplies to repair damaged good practice. Progress by the government in each policy shelters, and general livelihood assistance. Programs area is discussed in turn in this section, followed by a aimed at building social resilience involve creating discussion on where implementation of these policies a capacity for the authorities to quickly respond to needs to be strengthened. the immediate needs of the affected population and provide support for early recovery and rehabilitation • Financial resilience protects the fiscal balance when in the aftermath of disasters. Cash assistance is disasters strike through a suite of policies and increasingly being used to complement in-kind financial instruments to secure access to financing assistance during emergencies and can empower before a shock. This approach ensures timely and households to address their own needs by using sufficient access to funds and that funds are linked available local resources. to pre-arranged disbursement channels to support the implementation of disaster-related measures. Financial Resilience Financial resilience makes funding more predictable and effective, improving the financial position of A key milestone in the Philippines’ efforts to increase national and subnational governments, households, financial resilience was the adoption of the National and businesses. Disaster Risk Financing and Insurance (DRFI) strategy in 2015. The strategy aims to: (i) maintain the sound • Physical resilience avoids or reduces the underlying fiscal health of the national government; (ii) develop risk of a natural hazard becoming a disaster and sustainable financing mechanisms for LGUs; and (iii) improves preparedness for shocks that cannot be reduce the impact of disasters on poor and vulnerable avoided. The United Nations’ Sendai Framework households while also shielding the near-poor from for Disaster Risk Reduction calls on countries to 63 falling back into poverty. invest in risk reduction and preparedness through structural and nonstructural measures. Structural To strengthen the fiscal resilience of the national measures, such as physical risk-reduction measures government, the Department of Finance (DOF) and the and the adoption of enhanced-engineering BTr are gradually building out the menu of risk financing technologies, entail building resilient infrastructure instruments. This follows a risk-layering approach to to reduce damages and subsequent reconstruction minimize the cost and optimize the timing of the post- costs, reducing disaster-related contingent liabilities. disaster response (Figure 39). This includes: (i) annual Moreover, non-structural measures, such as early- budget allocations to the NDRRMF, including agencies’ warning mechanisms and business continuity QRFs; (ii) contingent financing from development planning, can reduce the potential impact of a shock partners as pre-arranged loans that can be accessed in by improving a country’s preparedness and resilience times of financial crisis;64 (iii) a catastrophe-linked bond to disasters. (Cat Bond), which is a financial instrument that transfers catastrophe risk to international capital markets and provides quick funding in case of pre-determined severe 62 http://documents1.worldbank.org/curated/en/239311559902020973/pdf/Boosting-Financial-Resilience-to-Disaster-Shocks-Good-Practices-and- New-Frontiers-World-Bank-Technical-Contribution-to-the-2019-G20-Finance-Ministers-and-Central-Bank-Governors-Meeting.pdf. 63 The Sendai Framework for Disaster Risk Reduction 2015-2030 was adopted at the Third United Nations World Conference on Disaster Risk Reduction by member states, including the Philippines, in Sendai, Japan, in March 2015. https://www.undrr.org/implementing-sf. 64 The government has mobilized close to US$2 billion in contingent financing from development partners (World Bank Cat DDO in 2011 and 2015; JICA SECURE in 2014; and Asian Development Bank in 2020). PART 3 BUILDING A RESILIENT DISASTER RECOVERY 55 disaster events occurring;65 and (iv) a new National Policy (PGAMP)66 in September 2020 and established Indemnity Insurance Program (NIIP), which is under the first comprehensive National Asset Registry System preparation, to improve insurance protection for strategic (NARS), which has already brought together information high-risk national government assets. on over 400,000 assets.67 These efforts will not only improve financial risk management but also enhance The government has embarked on an ambitious reform service delivery and risk reduction for sustainable asset program to strengthen the financial risk management management in the long term. of public assets. The program aims to move away from ad-hoc resource mobilization for reconstruction toward To improve the financial resilience of LGUs, the pre-arranging the required funding for the rehabilitation government is investing in financial mechanisms and of assets and restoration of services through the NIIP. To improved planning. The LDRRMF, established by the implement the program, the government adopted the 2010 Philippines DRM Act, is the main source of disaster first Philippine Government Asset Management financing at the local government level. LGUs are required to set aside no less than 5 percent of their Figure 39. The Philippines’ Risk-Layering Strategy Donor assistance Low Frequency/ Sovereign Risk Transfer High Severity Public asset insurance (Catastrophe bond) Insurance for households, farmers (limited penetration) Contingent Financing (Asian Development Bank, Japan International Cooperation Agency, World Bank) Unprogrammed and Contingency Funds; Budget Reallocations High Frequency/ Low Severity National / Local Disaster Risk Reduction and Management Funds Quick Response Funds Emergency Funding Rehabilition and Reconstruction Source: World Bank staff 65 In 2019, the Philippines worked with the World Bank to issue the first catastrophe-linked bonds (Cat Bonds) sponsored by a government in an Asian country, providing US$225 million to protect against earthquakes and typhoons. https://www.worldbank.org/en/news/feature/2020/04/09/the- philippines-transferring-the-cost-of-severe-natural-disasters-to-capital-markets and http://pubdocs.worldbank.org/en/752771575392782540/case-study- Philippines-CAT-bond-final-12-3-2019.pdf. 66 https://www.dbm.gov.ph/index.php/265-latest-issuances/joint-memorandum-circular/joint-memorandum-circular-2020/1727-joint- memorandum-circular-no-2020-001-dof-dbm-neda 67 https://www.treasury.gov.ph/?page_id=11992 56 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION estimated revenues from regular sources in the LDRRMF, To improve the resilience of homeowners and small and 30 percent of the LDRRMF is to be allocated as businesses to natural disasters, the government is QRFs, or standby funds, for relief and recovery programs. developing a sustainable domestic insurance market. There were a total of 43,594 LGUs and LDRRMFs (from A strong domestic insurance market helps protect the provincial down to the barangay level) in 2018. To homeowners and small businesses by providing support complement the LDRRMF, the government, with support if a disaster damages their home or business. This is in from the World Bank, set up a parametric catastrophe line with the third objective of the National DRFI strategy. risk insurance program in 2017 and 2018 for national It also helps to reduce the government’s contingent government agencies and twenty-five individual liabilities by reducing the need for public support provinces in the Philippines. The insurance program after disasters. The use of catastrophe risk insurance provided financial protection against losses from major in the country however remains quite limited, facing typhoon and earthquake events, with a total coverage of both supply and demand challenges. The Insurance US$600 million for the two years. A major component 68 Commission is working with the insurance industry to of the Philippine Disaster Rehabilitation and Recovery establish the Philippines Catastrophe Insurance Facility Planning Guide concerns the need for LGUs to prepare (PCIF) by the first half of 2021.69 This will support the their local disaster risk financing strategy prior to a growth of a sustainable domestic catastrophe risk natural disaster. Integrated into the government’s Local insurance market by pooling catastrophe risk into an Disaster Rehabilitation and Recovery Plans, the strategy industry-wide aggregate portfolio to make reinsurance will pre-identify sources of post-disaster funding and link more efficient and ensure adequate premium rates. them to preparedness and recovery plans. The government has significantly increased public The government has significantly increased public subsidies to agricultural insurance to improve the subsidies to agricultural insurance to improve the resilience of smallholder farmers and the agricultural resilience of smallholder farmers and the agricultural sector. The agriculture sector is critical to the sector. This includes directly accessing private financial government’s efforts to ensure both food-security markets, for example through the Cat Bond placed and poverty reduction.70 Small semi-commercial and in 2018, which transferred risk from the government subsistence farmers with less than 3 hectares of land balance sheet to international capital markets. The account for 98 percent of the country’s 5.6 million national indemnity insurance program for public assets farmers. Transforming the sector will require measures under preparation will also transfer risk to international to protect farmers against disasters and climate-induced insurance markets. In addition, in the preparation of income shocks. Risk financing and insurance for the these and similar programs the government leverages agricultural sector should provide farmers with certainty private sector expertise on insurance placement, that they will be reimbursed following crop losses from reinsurance, and financial planning. For example, the first disasters, allowing investment in inputs and equipment national probabilistic earthquake and tropical cyclone and protecting their income source. On behalf of the risk model for the Philippines was prepared, with World government, the Philippines Crop Insurance Corporation Bank support, by an international risk modelling firm. (PCIC) administrates several special insurance programs This informed the design of insurance triggers and the that are targeted at subsistence and smallholder farmers structuring of the Cat Bond. to provide support in case of crop loss from a disaster. Due to very high public premium subsidies available 68 https://www.financialprotectionforum.org/publication/philippines-parametric-catastrophe-risk-insurance-program%C2%A0frequently-asked- questions; World Bank (2020) Philippines Parametric Insurance Program - Lessons Learned Evaluation (forthcoming); http://documents1.worldbank.org/ curated/en/799241548872273775/Insuring-the-Philippines-against-Natural-Disasters-Case-Study.pdf 69 https://www.nat-re.com/2020/02/24/nat-re-ic-and-pira-sign-mou-on-philippine-catastrophe-insurance-facility/ 70 World Bank. 2020. “Transforming Philippine Agriculture: During COVID-19 and Beyond.” https://openknowledge.worldbank.org/ handle/10986/34012. PART 3 BUILDING A RESILIENT DISASTER RECOVERY 57 only to PCIC (90% average premium subsidy rate), it faces advanced technology and EWS infrastructure. To mitigate practically no viable competition. Very significant recent flood risks, it also developed high resolution hazard scale up of premium subsidy allowed a massive increase maps and installed automated rain gauges and water in policies and penetration, reaching 33 percent of all level measuring stations for the country’s eighteen major farming households. But significant challenges remain river basins. In 2019, DOST launched geospatial tools for with current products offered by PCIC and decision-making, development planning, and investment consumer protection. programming. Together with forecasting and mapping agencies, DOST also developed GeoRiskPH,74 an integrated Physical Resilience data system with an analytical interface to share multi- hazard, exposure, and risk information to assist national The 2010 Philippine Disaster Risk Reduction and and local authorities accurately assess risk. Management Law was a landmark legislation that mandated a shift from disaster response to disaster risk The national government has mainstreamed disaster reduction and preparedness. The law sets out multi- risk reduction in key sectors, such as agriculture, sectoral coordination and active participation at the local housing, and public infrastructure, and for vulnerable level for holistic risk management, including: (i) DRRM; (ii) LGUs. This means disaster risk is looked at as a core good governance; (iii) risk assessment and early warning consideration in planning. For example, the government systems; (iv) knowledge and awareness raising; (v) risk- has developed tools to enhance the socioeconomic transfer instruments; and (iv) preparedness for effective resilience of all provinces through better planning and response and recovery. Building on this law, the National investment programming. This includes the prioritization DRRM Framework and Plan (2011-2028) articulated an 71 72 of more resilient infrastructure investments and adaptive all-hazard, multi-sectoral, inter-agency approach to DRM. social protection measures to assist vulnerable LGUs. For Both documents span across the DRM cycle. The National key sectors such as agriculture, disaster risk reduction Disaster Risk Reduction and Management Council measures are integrated into the provinces’ investment (NDRRMC) has adopted the Enhanced National DRRM plans for commodities. For housing, a policy framework Framework and Plan (2020-2030) to include new types 73 was created for post-disaster shelter recovery that of risks, global best practices in DRM, and climate change adopted resilient standards and designs for temporary adaptation principles and lessons learned from recent and permanent shelters, and a multi-hazard vulnerability natural and human-induced disasters. The adoption of assessment tool for cultural heritage assets was also these legal frameworks led to a series of DRM initiatives developed. More importantly, the DPWH has improved at the national, local, and community level. the country’s outdated national building regulations to include disaster risk reduction and climate resilience Disaster prevention and mitigation in the Philippines measures, designs, and standards for has evolved from just forecasting to the development public infrastructure. of early warning systems (EWS) that utilize technology to enhance risk identification. In 2015, the Department To address the threat of a potentially catastrophic of Science and Technology (DOST) started providing earthquake, the government has operationalized an weather-related models, multi-hazard maps, and earthquake resiliency program for the Greater Metro exposure data to key agencies and LGUs. It invested in Manila Area. Through the issuance of a presidential 71 Government of the Philippines. 2011. The National Disaster Risk Reduction and Management Framework, http://www.ndrrmc.gov.ph/attachments/ article/227/NDRRMFramework.pdf. 72 Government of the Philippines. National Disaster Risk Reduction and Management Plan 2011‐2028, http://www.ndrrmc.gov.ph/attachments/ article/41/NDRRM_Plan_2011-2028.pdf. 73 NDRRMC Full Council Meeting approved the new and enhanced National DRRM Framework and Plan (2020-2030) on October 30, 2020. 74 The integrated database system of DOST’s GeoRiskPH was developed under the Geospatial Information Management and Analysis Project for Hazards and Risk Assessment in the Philippines (GeoRiskPhilippines). 58 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION executive order and the DPWH’s department orders,75 specific guide for post-disaster and post-conflict seismic resilience interventions for public infrastructure reconstruction to be used at the national, regional, and have been fast-tracked to make schools, hospitals, and local government level, and it complements the DSWD’s other public buildings safer to earthquakes, floods, and National Disaster Response Plan and the Department of typhoons. With World Bank financing, the government is Interior and Local Government’s (DILG) National Disaster preparing a US$300 million program76 to invest in seismic Preparedness Plan adopted by the NDRRMC. Additionally, risk reduction and resilience in Metro Manila to enhance the DILG developed an LGU preparedness manual for the the safety and seismic resilience of selected public management of emerging infectious diseases following buildings including schools and hospitals. The project the COVID-19 outbreak.78 will also strengthen the capacity of DPWH for disaster preparedness and emergency response. The private sector and civil society are key partners in the whole-of-society approach to resilience. They To address the recurring problem of urban flooding, have complemented government efforts by supporting the government prepared the Metro Manila Flood disaster response, recovery, and risk reduction projects, Management Master Plan in 2012. Frequent floods in including efforts related to: (i) improving the utility Metro Manila damage houses, properties, and businesses sector; (ii) introducing business continuity planning; (iii) and prevent people from going to work or school during strengthening resilience in infrastructure; (iv) bolstering flood events. The poor are especially affected because the economy by supporting micro, small, and medium they often live in high-risk locations, have lower quality enterprises and industries after disasters; and (iv) houses, and are less able to prepare for floods. To reduce generating new jobs. Box 6 outlines efforts by the private flooding in urban areas, the government is implementing sector in DRM. a US$500 million Metro Manila flood project , with 77 financing from the World Bank and Asian Infrastructure Social Resilience Investment Bank (AIIB), to construct new pumping stations and improve drainage systems and solid waste The government has developed adaptive social management practices in select areas in Metro Manila. protection programs (ASP) that are among the most Additional initiatives to address urban flooding are under advanced in Asia. The DSWD established an Emergency preparation, including an investment project under the Cash Transfer (ECT) program in 2019, building on the proposed World Bank-supported Pasig-Marikina River 4Ps, a nationwide conditional cash-transfer program Basin Flood Management Project. aimed at alleviating poverty. The ECT program provides post-disaster support to vulnerable households. The government has prioritized disaster preparedness It complements the provision of food and in-kind and forward planning after experiencing several large- assistance during emergencies and empowers the scale typhoons, earthquakes, and human-induced affected population to decide on their own in addressing disasters. In 2019, the NDRRMC adopted a Disaster their needs using available local resources. Anchored Rehabilitation and Recovery Planning Guide for timely on the DSWD’s existing social registry and delivery and effective disaster recovery and reconstruction. mechanisms, the ECT can quickly provide additional The purpose of the guide is to assist the authorities assistance to affected 4Ps beneficiary households, and in post-disaster management and institutionalize the at the same time expand support to non-4Ps vulnerable government’s recovery policies. This is the first country- families who may become poor due to a disaster. 75 EO No. 52 and the Two-pronged Strategy Toward an Earthquake-Resilient GMMA, the DPWH issued Department Order No. 75 series of 2019 and Special Order No. 83 s.2019. 76 Philippines Seismic Risk Reduction and Resilience Project. 77 Metro Manila Flood Management Project. 78 This supplements the Operation LISTO, a major component of the National Disaster Preparedness Plan that provides a comprehensive natural disaster preparations checklist for local governments, communities, and households. PART 3 BUILDING A RESILIENT DISASTER RECOVERY 59 Box 6. Strengthening Private Sector Engagement in DRM In 2009, following tropical storm Ketsana (Ondoy), the (a) shelter, (b) livelihood, (c) education, (d) environment, Office of the President issued Executive Order No. 838 and (e) water, infrastructure, sanitation, and health. to create the Special National Public Reconstruction In 2015, its name was formally changed to Philippine Commission. The commission was mandated to Disaster Resilience Foundation, which captures the entire spearhead effective reconstruction measures that disaster risk reduction and management framework. address the needs of disaster-stricken communities. It The PDRF established an emergency operations center also engaged the private sector to channel more support to complement the NDRRMC’s operation center. Other for its reconstruction programs, resulting in the country’s private sector and civil society organizations complement largest private corporations and non-government the government’s initiatives at the national and organizations (NGOs) establishing the Philippine Disaster local level. Recovery Foundation (PDRF). There are currently several umbrella organizations for the In 2013, the PDRF was reorganized as the umbrella private sector organized based on their sector-specific organization of the private sector for disaster core business competency and geographic location.79 preparedness, relief, and recovery, following the civil This approach facilitates faster and more effective unrest in Zamboanga, the 7.2 magnitude earthquake in coordination between and among government partners, Bohol and Cebu, and Typhoon Yolanda. Post-disaster the private sector, and local communities before, during, recovery programs were created in five key sectors: and after disasters. 80 The program builds on the experience of similar support (barangay and municipal) to choose, design, and provided through ad-hoc measures during previous implement development projects. It directly provides disasters. For example, after Typhoon Yolanda, the DSWD funds to community-identified service delivery and was able to provide immediate cash assistance (Php550.5 development initiatives such as small infrastructure and million, approximately US$12.5 million) to affected 4Ps livelihood projects. The DROM is a built-in component families using 4Ps’ system and structure of beneficiary of the NCDDP that already covers procedures specific to identification and disbursement of assistance. The same disaster response, early recovery, and rehabilitation. It modality is being used now in the government’s COVID-19 was designed to simplify procedures in case of disaster, response through SAP. triggered by the government’s declaration of a state of calamity. On October 14, 2020, the DSWD issued its The DSWD is also institutionalizing the National updated implementation guidelines to include public Community Driven Development Program – Disaster health emergencies. Currently, there is a pending bill Response Operation Modality (NCDDP-DROM) for in the House of Representatives to institutionalize the disaster-affected communities. The NCDDP engages NCDDP and incorporate the DROM, which would be used communities to work with their local governments in times of disaster. 79 For example, the Philippine Business for Social Progress has a strong presence in Visayas and Mindanao; the League of Corporate Foundation consolidates DRM-related corporate social responsibility interventions; the National Resilience Council brings key government agencies and companies together for DRM programs; and ARISE Philippines is a member of the Private Sector Alliance for Disaster Resilient Societies, which is affiliated with the United Nations Office for Disaster Risk Reduction. 80 Bowen, T. 2014. Social Protection and Disaster Risk Management in the Philippines (The Case of Typhoon Haiyan), World Bank 60 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 3.3 PUBLIC SPENDING AFTER DISASTERS Between 2015 and 2018, post-disaster public which is consistent with the government’s focus on expenditure remained flat while overall government ramping up public investment in physical and human expenditure steadily increased. In 2020, the World Bank 81 capital. Yet, while the country’s exposure to disasters completed its first Public Expenditure Review (PER) on is increasing, the national government’s post-disaster Disaster Response and Rehabilitation in the Philippines. spending has been relatively stable at around 0.6 percent According to the findings of the PER, national government of GDP, or 4.3 percent of the total national budget (Figure spending increased from 16.0 percent of GDP in 2015 40). Moreover, one-third of post-disaster spending comes to 18.7 percent in 2018, with the highest increase in from pre-arranged funding sources, although access to education (from 2.7 percent of GDP in 2015 to 3.2 percent and execution of these funds is often delayed. The rest in 2018),82 health (from 0.7 percent of GDP in 2015 to 0.9 was financed through reallocation of other budget lines, percent of GDP in 2018), and physical infrastructure (from causing inefficiencies and possibly delayed response. 3.1 percent of GDP in 2015 to 5.3 percent in 2018), Figure 40. Post-disaster Related Appropriations by Funding Source, FY2015-18 (PHP MILLION) 135,000 120,000 105,000 30.7% 16.8% 6.5% 90,000 4.9% 75,000 19.8% 19.6% 60,000 31.4% 8.8% 55.5% 45,000 37.3% 60.7% 30,000 6.5% 25.2% 6.2% 15,000 8.8% 12.5% 27.8% 0.2% 7.5% 5.7% 5.0% 2.5% 0 FY2015 FY2016 FY2017 FY2018 NDRMM Fund Agency specific budgets National Government program subsidies to government corporations QRF Unprogrammed contingent funds Augmentation to NDRMM Fund Source: Authors’ calculations based on the GAA FY2015-FY2018. Note: In FY2016, the NDRRM Fund received allocations for Yolanda Rehabilitation and Reconstruction Program (RRP) to cover remaining unfunded programs and incomplete activities. 81 Public Expenditure Review forthcoming. 82 Health, education, and infrastructure spending represented 4.5 percent, 15.4 percent, and 25.5 percent, respectively, of the total budget in 2018. PART 3 BUILDING A RESILIENT DISASTER RECOVERY 61 Photo credit: Ezra Acayan Post-disaster spending is financed through several Most costs related to disaster response activities are budget sources. Pre-arranged budget mechanisms covered by the national government. Case studies reveal include: (i) national government agencies’ QRFs for that the national government contributed between 66 immediate response activities, averaging 0.03 percent and 100 percent of total post-disaster expenditures of GDP in 2015-18; and (ii) the NDRRM Fund, which is a in 2015-18, with the rest financed by LGUs.83 In the separate budget line for risk mitigation, response, and same period, 37 percent of NDRRM Fund releases went reconstruction efforts, averaging 0.17 percent of GDP to the DPWH for public infrastructure repairs and over the same period. Government agencies can also reconstruction, while 25 percent went to the DSWD to reallocate budget for response and recovery. Data on augment its QRF and provide relief assistance. This total reallocation are not recorded and generally not was followed by spending on agriculture and irrigation available. When agencies’ budgets or pre-arranged activities (11 percent) and housing and shelter projects funding are exhausted, the government can use (9 percent). In the reviewed period, no NDRRM Fund unprogrammed and general contingency funds. After expenditures were approved for LGUs, and only negligible disasters, government agencies can request budget amounts were approved for preparedness and risk allocations or subsidies or use savings. For instance, reduction activities, even though both are permissible. Php16.4 billion in augmentation to the NDRRM Fund in While the Bayanihan I and II laws have increased the FY2016-18 came from savings by the DPWH and was used ceiling in the use of the QRF to more than 30 percent for by other agencies. Subsidies to government-owned and activities related to COVID-19 response, this flexibility has controlled corporations for disaster-related activities depleted the LGUs’ overall LDRRM Fund. This has caused amounted to Php51 billion over this four-year period. a shortfall for LGUs to respond to other disasters as in the recent cases of Typhoons Quinta and Rolly. 83 This may not account for all spending by LGUs, as this is often underreported. 62 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 3.4 CHALLENGES IN BUILDING DISASTER RESILIENCE Despite progress in building financial, physical, and the necessary authority, resources, and staff capacity social resilience, the Philippines still faces challenges in to efficiently mitigate the effects of adverse events and efficiently managing the growing economic, social, and address rapidly evolving DRM challenges. The COVID-19 fiscal impact of disasters. The three destructive typhoons inter-agency and national task forces are experiencing that hit Luzon recently, highlighted the coordination similar challenges. challenges that national and local governments continue to experience for the timely delivery of The institutions involved in DRM have limited response and recovery interventions. This is on top of coordination protocols, guidelines, and mechanisms the ongoing coordination concerns encountered by to address the increasing magnitude and frequency the inter-agency task force for COVID-19. To ensure the of disasters. Disaster response and recovery efforts efficient management of disaster risks, the authorities are made more challenging by overlapping functions need to address key institutional and public financial and responsibilities, duplication of interventions, and management issues. incoherent policy application, resulting in delays in reconstruction efforts. For large-scale disasters, the Institutional Challenges government usually designates task forces and special commissions to manage recovery and reconstruction The management and implementation of DRM policies efforts. These ad-hoc measures often result in confusion and programs is fragmented. The NDRRMC is composed and delays among the institutions involved in response of forty-two members from different implementing and recovery activities, and this was the case after agencies that develop policies and coordinate the Typhoon Yolanda and the Marawi Siege and has been country’s overall DRM agenda. The NDRRMC is chaired by the case during the current pandemic. With the series the secretary of national defense and co-chaired by the of destructive typhoons that recently struck Luzon, the secretaries of: (i) DILG for disaster preparedness; (ii) DOST Government through Executive has established the Build for prevention and mitigation; (iii) DSWD for disaster Back Better Task Force to strengthen rehabilitation and response; and (iv) National Economic and Development recovery efforts in areas affected by typhoons. Authority (NEDA) for rehabilitation and recovery. The Office of Civil Defense (OCD) acts as the Secretariat of There are also coordination challenges between the NDRRMC. The NDRRMC endorses and recommends to and among national and sub-national government the Office of the President key policies and access to the authorities during the disaster response and recovery National DRRM Fund for the approval of the president. phases. The lack of communication between and However, the implementation of DRM programs and among national government agencies and LGUs and projects is still the responsibility of various implementing no clear delineation of roles and responsibilities often agencies and subject to their respective mandates. As result in delays in response interventions, overlapping a result, response, risk reduction, and recovery projects interventions, and inconsistent recovery policies. Some often lack integration and cohesiveness. Several major agencies are too focused on implementing their own disasters have shown that the current structure lacks mandates that they forget to consult LGUs and affected PART 3 BUILDING A RESILIENT DISASTER RECOVERY 63 communities. This results in unresponsive interventions, agencies lack sufficient capacity to implement their conflicting issuances and orders, and duplication mandates following a disaster. For instance, national of assistance in some areas. This is common during government agencies were tasked with implementing disasters that involve several provinces, cities, and most of the recovery projects following Typhoon Yolanda municipalities, such as Typhoon Yolanda and the current and the Marawi Siege, but they had no additional staff COVID-19 pandemic. and limited funding. Their disaster-related activities were on top of their regular mandates and deliverables, which The recent establishment of the Bangsamoro caused implementation delays. Similar challenges are Autonomous Region in Muslim Mindanao (BARMM) facing agencies in charge of implementation COVID-19- highlights challenges related to devolution, autonomy, related programs. and the institutional capacity of subnational governments. To manage disasters and crises, the Incomplete data on assets and disaster damages hinder regional government created the BARMM Rapid efficient decision-making related to both financial and Emergency Action on Disaster Incidence (BARMM-READI). physical risk management. Despite the adoption of the Since LGUs under BARMM are vulnerable to both natural PGAMP and the establishment of NARS, the government and human-induced disasters, the NDRRMC and other lacks access to complete data on all assets owned by national government agencies need to coordinate with national government agencies. Incomplete information BARMM and help enhance its capacity to respond to on the location, condition, maintenance, and valuation of and recover from disasters. For large-scale disasters, assets makes it harder for the authorities to effectively where the national government leads response and manage public assets to ensure efficient service delivery, recovery efforts, the NDRRMC needs to establish a clear create risk management plans, and perform adequate coordination mechanism to ensure timely assistance maintenance. Accurate information is also critical for while upholding the principles of autonomy. financial planning, as it is important to assess contingent liabilities, make project-appropriate allocations to Public procurement during emergencies has been disaster funds, and purchase cost-efficient insurance. In challenging due to a lack of basic guidelines on how to times of crisis, insufficient data make it difficult to carry apply emergency procurement procedures. Efficient and out rapid damage assessments and guide response and fast-tracked procurement is critical for enabling a rapid reconstruction efforts. disaster response. The Philippine Procurement Act, along with its implementing rules and regulations, provides Public Financial Management Challenges a general framework for negotiated procurement or emergency procurement in times of crisis. However, Contingent liabilities related to disasters, climate risks, national and local government agencies have been and other shocks are currently not fully integrated cautious in applying this mode of procurement in the in the management of fiscal risk in the Philippines. absence of specific guidelines for fear of sanctions Disasters translate into contingent liabilities for the and disallowance by the Commission on Audit (COA). government – this means cost that may materialize in On March 2020, in response to the pandemic, the the future depending on a specific event occurring. Most Government Procurement Policy Board (GPPB) issued of the costs related to managing national disasters are guidelines to simplify the government procurement covered by the national government. The BTr, the DOF, process through the use of Negotiated Procurement and the DBM all play key roles in financial planning for during a state of calamity. A similar issuance is necessary disasters. Yet, disaster-related public spending is not for disaster-related procurement projects. integrated into comprehensive fiscal risk management. While the Development Budget Coordination Committee The national government usually leads the (DBCC) prepares an annual report on fiscal risk, the implementation of post-disaster activities, but report only includes qualitative descriptions of disasters insufficient resources limit their effectiveness. Some or climate risks. To inform fiscal plans, fiscal risk reports 64 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Photo credit: Ezra Acayan need to also quantify contingent liabilities. Disasters, Complex approval processes often delay the approval climate risks, and other shocks (e.g., pandemics) could, and disbursement of funding, even from pre-arranged therefore, be more systematically integrated into the mechanisms, leading to delays in disaster response. government’s fiscal risk planning, quantifying contingent Most funding sources require specific requests and liabilities and ensuring sufficient resources to cover approvals by different agencies and levels of government, disaster-related costs. delaying the release of funding and, subsequently, response and recovery. This is especially a concern Budget allocations for pre-arranged funding for pre-arranged funds, where a streamlined approval mechanisms are not evidence-based and often process is critical to achieve the stated objectives. For insufficient. Budget allocations to both QRFs and the instance, requests for funding from the NDRRM Fund NDRRM Fund are not driven by expected needs or require complex documentation and an evaluation by actual past spending. Instead, they are primarily based several agencies before being approved by the Office of on the previous year’s allocation or already known the President. This process can be lengthy, with delays of reconstruction costs. As a result, QRF allocations are up to one year or more (against the prescribed timeline often insufficient, relying on replenishments and for national government agencies of fifteen to thirty delaying immediate response activities. In addition, due days). To cope with delays, implementing agencies have to its nature as a budget line, the NDRRM Fund cannot to delay projects or source funds internally and then efficiently leverage its budget allocation through financial repurpose support from the NDRRM Fund once released. instruments to provide funding for catastrophic events through, for example, insurance or other Incomplete financial data make it difficult for the risk-transfer mechanisms. government to assess the efficiency and adequacy of PART 3 BUILDING A RESILIENT DISASTER RECOVERY 65 public spending by comparing public expenditure with less than 16 percent of total commercial and industrial the socioeconomic impact of disasters. Estimates of exposures were insured against typhoon and flood in disaster damages and losses are incomplete, and data 2018. Domestic insurance markets face challenges ahead on the use of different funding sources are fragmented. to strengthen domestic markets for catastrophe risk. For example, reports from government agencies do This includes demand challenges such as low awareness not include detailed information on disaster-related by the public and a weak culture of insurance. This also expenditures, and the COA’s annual consolidated reports includes supply side challenge including data, insufficient on the use of disaster-related funds only cover the underwriting rates which disincentivizes insurance current year, while funds are often used across multiple companies from promoting catastrophe insurance, years. This is made more complex by multi-year budget efficient access to reinsurance markets, and effective appropriations. There is a significant challenge with regulation and supervision. transparency on the use of the LDRRMFs, which are not strictly monitored. For example, a considerable amount Post-disaster financial support to the agriculture of disaster-related funds at the local level seems to sector does not sufficiently leverage appropriate have been used for non-disaster-related activities, risk financing and insurance to ensure it efficiently and utilization is low, although some spending may go targets the poorest subsistence farmers. The PCIC unreported since no comprehensive information exists. offers agricultural insurance solutions, with significant and growing government support, but these do not Local governments face constraints in the allocation, adequately address the needs of smallholder subsistence management, utilization, and transparency of disaster farmers. Micro-level indemnity-based crop insurance response funding. The national government finances the for individual smallholders, as currently offered by the majority of disaster response activities, and coordination PCIC, often cannot be cost-effectively implemented. with LGUs is often inefficient. At the local level, there are Even when farmers are covered, current programs often currently more than 43,000 separate LDRRMFs, with total face implementation challenges, including farmers allocation equivalent to over 1 percent of the annual not being aware that they are covered (if subsidized) national budget, or more than 0.15 percent of GDP. Yet, and payouts not reaching covered farmers after crop there is limited transparency on actual allocations. COA losses. This means the government’s premium subsidies reports show low utilization rates, utilization of funds for may not translate into actual protection of farmers non-designated purposes, and a lack of transparency of following a disaster shock, leaving them exposed to crop unutilized funds carried over in the special trust fund. In losses. Moreover, PCIC is not regulated by the Insurance addition, having 43,000 standalone contingency funds is Commission and are not adequately using reinsurance financially inefficient, as it ties up unused resources. markets to protect against severe shocks. This means that if a severe event would require payouts to many Domestic catastrophe risk insurance penetration farmers at the same time, PCIC may not be able to meet remains low. Strong insurance markets are critical to all claims, leaving farmers unsupported and requiring the strengthen resilience of homeowners and SMEs. Yet government to step in. less than 6 percent of total residential exposures and 66 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION 3.5 POLICY RECOMMENDATIONS The government has achieved remarkable progress in This would be a dedicated agency responsible for the strengthening financial, physical, and social resilience management and implementation of DRM programs, to disasters and climate shocks, yet challenges remain. it would mainstream disaster risk reduction in Over the past decade, the government has made strong public spending, and improve disaster response and progress in proactively manage risks and protect the recovery at the national, regional, and local level. A population and economy. The Philippines is often looked single agency mandated to coordinate, plan, finance, to by other countries as a leader in building resilience to implement, and monitor all DRM interventions should disasters. Yet, as one of the most disaster-prone countries ensure that policies and programs across sectors are in the world with a fast-growing population and is highly developed and implemented in a cohesive manner. exposed to climate change, it is vital to further improve its resilience to disasters. This section provides key policy • Strengthen horizontal and vertical coordination recommendations to further increase disaster resilience mechanisms and clarify the roles of national, at both the national and local government level. The regional (BARMM), and local government authorities government should consider these recommendations and other stakeholders. The roles and responsibilities together and work to strengthen linkages to reap the of key stakeholders involved in DRM should be benefits and synergies from a holistic approach. For revisited to clearly define coordination mechanisms example, increased investment in prevention is critical in advance of disasters. This should be clearly for sustainable risk financing. At the same time, financial communicated through policy issuances to effectively resilience programs can better quantify risk and drive manage the contributions and interventions of various budget allocation in risk reduction. stakeholders. For non-governmental stakeholders, pre-agreements should clearly define the roles Institutional Strengthening: and contributions of the private sector, academia, civil society organizations, and development • Address fragmentation and capacity constraints in partners. The government should consider defining the implementation and oversight of DRM programs. how a whole-of-society approach to DRM can be Fragmentation, lack of coordination, and insufficient operationalized at the national, regional, and local capacity in implementing DRM programs is a challenge level. A seamless coordination mechanism would help across all government agencies. The government’s maintain coherence across response, risk reduction, proposed national DRM agency, the Department of and reconstruction programs implemented by the Disaster Resilience, could address these challenges. government and non-governmental partners. PART 3 SPECIAL FOCUS NOTE: ACHIEVING FASTER AND PART 3 BUILDING MORE APART AFFORDABLE 1 RECENT RESILIENT INTERNETDISASTER SERVICES FOR ALL DEVELOPMENTS RECOVERY 67 Box 7. Best Practices on Coordination across All Levels of Government and Communities in Japan Japan’s DRM system addresses all phases of disaster preparedness, emergency response, and recovery and reconstruction. Its comprehensive legal framework specifies the roles and responsibilities of national and local governments and enlists the participation of relevant stakeholders in both the public and private sector. National and local government authorities in Japan have different but complementary roles in disaster preparedness and response. The national government oversees the definition of the overall DRM strategy and is responsible for coordination and legislation as well as budget allocations. By contrast, local governments, which have the primary responsibility for disaster Photo credit: Ezra Acayan management, focus on the coordination of administrative and operational functions, including preventive measures Japan are rescued by relatives and neighbors within such as disaster education, execution of disaster drills, the first 24 hours—before professional responders can issuance and transmission of communications and early get to affected areas. Evidence from the aftermath of warnings, and evacuation and rescue activities, among the Kobe Earthquake shows that 80 percent of those others. Having clear roles and responsibilities assigned to rescued were saved by their neighbors. So, while local each tier of government regarding preventive measures, and national authorities have key responsibilities for civil emergency response, recovery, and reconstruction is protection during disasters, communities are usually the crucial for developing countries as they strengthen their first responders and should be empowered. The trend disaster preparedness. in Japan of legislative evolution toward decentralization demonstrates the importance of emphasizing A country needs to cultivate, reinforce, and maintain a community-based DRM. In addition to providing financial culture of community-based organizations involved in resources, local and national policymakers need to DRM activities based on mutual assistance at the local legislate and institutionalize the role of community- level. Community members need to be empowered to based organizations in emergency preparedness assist each other during disaster events. For example, and response. most people who are saved from major disasters in Source: Emergency Preparedness & Response (EP&R): Case Study of Japan. World Bank DRM Hub Technical Note (December release). 68 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Box 8. Best Practices on Inter-Agency Coordination for Response and Recovery in Japan In Japan, relief and rescue professionals from the with the central government (vertical)—and conduct national government and specialized agencies, such disaster drills to develop the local response capacity. as police and fire departments, public works, and In addition, the authorities establish intra-municipality hospitals, prepare for the mobilization of response coordination mechanisms or agreements in times of teams in the aftermath of disasters. For example, they disaster among jurisdictions. Finally, information systems clarify the chain of command, determine a roster of with complementary mechanisms that link local and emergency teams—including request and dispatch national authorities help in facilitating collaboration for mechanisms among municipalities (horizontal) and comprehensive DRM. Source: Emergency Preparedness & Response (EP&R): Case Study of Japan. World Bank DRM Hub Technical Note (forthcoming). • Strengthen preparedness for disaster rehabilitation groups in key government agencies, enhancing and recovery. Establishing a culture of preparedness capacity building, and scaling up the National Asset for future disasters would facilitate effective Registry by requiring all asset-owning agencies to recovery. Training national government agencies and regularly submit their data. LGUs on the use of the Disaster Recovery Planning Guide will help them prepare baseline data, establish • Include climate and disaster risk in a dedicated coordination mechanisms, and identify recovery fiscal-risk management function and a clear interventions and financing options that could be mandate for risk finance management. To further used when a disaster happens. By simulating the strengthen the implementation of reforms to build recovery process, national government agencies fiscal resilience and inform public finance decisions and LGUs can pre-define commonly encountered (e.g., the efficient allocation of resources to risk challenges and issues and develop appropriate reduction and response activities), the government solutions and guidelines on working with various should consider improving the coverage of disaster- stakeholders in their localities. As first responders related risk in the fiscal risk statement. The fiscal to disasters, the BARMM and LGUs need to be risk statement, prepared under the DBCC, is mostly regularly updated on the latest DRM plans and best descriptive in its coverage of disaster and climate practices. Similarly, key government agencies can risks. Instead, this should quantify and include better support LGUs in implementing recovery and contingent liabilities from disasters, climate change, reconstruction projects when contingency plans and and other exogenous shocks such as pandemics pre-disaster recovery strategies are in place. to inform the implementation of the government’s risk-layering strategy and support efficient allocation • Implement the PGAMP to improve asset information of resources for risk reduction. The government may and drive investments in adequate maintenance want to nominate or establish a dedicated unit with and risk management for resilient assets. Adopted a fiscal risk management function and mandate in September 2020, the PGAMP is a key step to to include risks associated with disasters, climate improve the management of public assets, including change, and other exogenous shocks. Risk financing (financial) risk management in relation to disasters. should also be institutionalized in the proper units The government should ensure that the policy is in oversight agencies (e.g. with oversight under fully rolled out, including establishing implementing a coordinating body such as DBCC). This should PART 3 SPECIAL FOCUS NOTE: ACHIEVING FASTER AND PART 3 BUILDING MORE APART AFFORDABLE 1 RECENT RESILIENT INTERNETDISASTER SERVICES FOR ALL DEVELOPMENTS RECOVERY 69 Box 9. Best Practices on Fiscal Risk Management of Disasters A joint 2019 World Bank-OECD review of best practices would also support a whole-of-government approach to in the management of fiscal risks related to disasters building resilience to climate and disaster-related shocks, in both emerging markets and OECD countries including efforts to reduce risks in the first place. recommended that fiscal risk management frameworks include an assessment of disaster-related contingent A growing number of countries, including Colombia, liabilities. This would raise the visibility of the fiscal risks Jamaica, Peru, Serbia and the UK, have set up dedicated associated with disaster-related contingent liabilities and fiscal risk management units or mandated the creation of ensure they are considered in public financial planning. It such dedicated functions within larger units. Source: OECD and World Bank. 2019. Fiscal Resilience to Natural Disasters: Lessons from Country Experiences. OECD: Paris. © OECD and World Bank. https://openknowledge.worldbank.org/handle/10986/32341 License: CC BY-NC-ND 3.0 IGO. coordinate overall risk financing activities and analytics. All national government agencies formulate annual risk financing plans that set out and LGUs should be mandated to use and share how the government will finance disaster related information through the platform to ensure that all contingent liabilities (as identified in the fiscal risk future plans, programs, and investments consider statement). their exposure to risks. This would also address the limited availability and access to integrated hazard Disaster Risk Reduction and Preparedness: and risk assessment data. Aside from existing risks, the inclusion of health-related information in the • Mainstream the integration of risk consideration GeoRiskPH platform could provide the government and disaster risk reduction measures in with the necessary data to anticipate, better prepare development planning, infrastructure investments, for, and respond faster to future disasters and public and ensure adequate budget allocation. The health emergencies. Government could mandate the integration of disaster risk reduction and climate resilience in • The Government should promote “Green Recovery” national, regional, and local development planning by investing in resilience. As part of the broader and investment programming through issuance of DRM reform agenda, investment in green and technical guidelines considering climate change resilient infrastructure and communities would forecasts. The government should increase reduce the future contingent liability caused by investment in green and resilient infrastructure (i.e., disasters and climate change. The infrastructure schools, hospitals, bridges, transport, and public investment to reduce existing disaster risks and to buildings) and allocate funds to risk reduction avoid the creation of new risks, would provide a and preparedness projects. Building resilient double benefit. This approach would help to restart infrastructures would help to reduce the impact and growth through the civil works and second it would cost of future disasters and climate change. reduce the damages and losses of future events. The proposed green recovery has to integrate • Mandate the use of the government’s GeoRiskPH resilience with environmental protection, promotion integrated database for the national government, of renewables, access to energy, improved transport, BARMM, and LGUs, and expand the system to and improved service delivery at the national, sub- include health-related information and data national and community levels. 70 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION • Improve the capacity to assess, record, and planning for disaster response by making risk report the impact and damages of disasters to ownership explicit. This will also enhance incentives inform planning and fiscal assessments. Damage for risk management and financial preparedness at reporting is essential to accurately capture the all levels of government. extent of the damage to public assets and other losses to inform public finance decisions and • Improve the process to monitor, report on, and reconstruction planning. The process to record control public disaster spending. A uniform damages and losses related to disasters should monitoring and reporting mechanism at the local include collecting and storing detailed asset loss and national level should be developed to track and reports and not just aggregate data, as this would capture post-disaster spending from various sources, provide the government with a better understanding monitor delays in the approval and release of funds, of actual needs. To share the data with all relevant and improve controls. The use of standardized tools agencies, the government should develop an open and templates for national and local response and and collaborative platform that is linked to existing recovery programs will promote transparency and relevant data systems such as NARS and GeoRiskPH. accountability in the implementation of disaster response and recovery activities, especially in the • Enhance interoperability of disaster data with the allocation and use of public funds. The government social registry to promote early warning and early could also: (i) strengthen existing audit reports action for ASP programs. Regular social assistance to cover all funding sources, disaster events, and programs of DSWD rely on the national household spending categories (response, recovery, and targeting system (NHTS – Listahanan or social reconstruction); and (ii) explore an appropriate registry) which includes socio-economic information methodology for tracking disaster-related of households covering over 70 percent of the budget expenditures. population. However, the NHTS is not adequate to inform disaster-vulnerable or affected households • Strengthen pre-arranged funding by improving the for ASP programs. Disaster data such as early NDRRM Fund and LDRRMFs. The existing policies warning information and damage data can fill this on the use and management of these funds should information gap. Thus, dynamically updated NHTS be reassessed and streamlined to make them more made interoperable with disaster monitoring data responsive to evolving DRM needs and compounding can greatly enhance the government’s ability to risks, including pandemics. This could include: (i) identify families who are vulnerable (ex-ante) as streamlining the procedures of the NDRRM Fund; (ii) well as who are affected by a disaster (ex-post) ensuring that the QRF is available for all agencies and assess their needs. This will enable timely involved in disaster response activities, including disbursement of cash assistance to disaster affected for immediate funding of smaller disasters; and families in the time of crisis. (iii) improving the reporting and transparency of LDRRMFs. The authorities should also consider Financial Resilience: allocating funds based on probabilistic estimates of funding needs. Moreover, streamlined processes • Clarify cost-sharing between the national and local to minimize approval delays could be done by governments. Currently the national government issuing guidelines on pre-approved expenditures covers most disaster response costs, even though and contracting; reviewing the level of reviews local governments have dedicated resources and approvals required to make allocations; and available which often seem not to be used. Clear making decisions solely on technical considerations. and credible rules on which costs the national Recognizing the inefficiency of having 43,000 government will shoulder and which fall with local standalone contingency funds, the government governments should help to improve financial should consider creating a joint structure for LGUs PART 3 BUILDING A RESILIENT DISASTER RECOVERY 71 to coordinate their efforts and pool all or part of disaster and public health emergency interventions. their LDRRMFs to increase the transparency and The guidelines would help the authorities address effectiveness of public resources. The national delays in projects delivery and allow pre-arranged government could provide incentives for LGUs to agreements and framework contracts before participate in such a joint structure, for example disasters happen. through a reinsurance program that protects this joint fund against more severe events, by channeling • Link financing to pre-arranged disbursement additional national government support to LGUs mechanisms for more efficient disaster response through this arrangement more rapidly with pre- and recovery. Explicitly linking the NDRRM Fund to agreed technical decision protocols for approving existing ASP and disaster response mechanisms, and disbursing funds, or by systematically co- such as the DSWD’s Emergency Cash Transfer and financing recovery costs through an explicit cost- NCDDP-DROM programs, or the DPWH’s emergency sharing formula. infrastructure maintenance and rehabilitation programs, could reduce delays in disaster response. • Develop emergency procurement guidelines to This requires a clear ASP and disaster response reduce delays. The guidelines should simplify the strategy with an agreement in advance on standard procurement of essential goods and services through operating procedures, eligible expenditures and an umbrella framework that facilitates the quick beneficiaries, amounts to be disbursed, triggers and implementation of disaster response and recovery approval processes for additional funding, and clear projects. This could include provisions that allow pre-established fund-flow arrangements. the use of alternative procurement methods for Box 10. Best Practices on Risk Layering and Linking Funds to Implementation in Mexico The Government of Mexico established the Fund for risk indemnity insurance, an ‘excess-of-loss’ indemnity Natural Disasters (Fondo de Desastres Naturales, insurance program to protect FONDEN against large FONDEN) to administer a comprehensive, layered aggregate losses, and parametric catastrophe bonds approach to disaster risk financing, which includes against the most severe earthquakes and hurricanes. provisions for sharing reconstruction costs across all levels of government and early recovery funding With FONDEN, the federal government established a clear made available during national emergencies. Under cost-sharing agreement with states to limit its obligation Mexico’s Federal Budget and the Fiscal Responsibility to provide post-disaster support. FONDEN also integrates Law, a minimum of 0.4 percent of programmable federal incentives for risk reduction. It covers up to 50 percent spending (about US$800 million) must be available to of the reconstruction cost when a sub-nationally owned FONDEN and its sub-programs. This is used to pay for asset is damaged for the first time, which is reduced to frequently occurring losses and for the purchase of 25 percent the second time if no insurance has been risk-financing instruments to safeguard public finances purchased, and it provides no funding for from disasters, ensuring that the government can meet subsequent requests. its obligations. This includes sector-specific catastrophe Source: OECD and World Bank. 2019. Fiscal Resilience to Natural Disasters: Lessons from Country Experiences. OECD: Paris. © OECD and World Bank. https://openknowledge.worldbank.org/handle/10986/32341. 72 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION • Scale up the financial risk management of public insurance solutions, potentially exploring mandatory assets. The establishment of the NIIP is a key reform cover for certain risks, building on international to ensure the effective financial risk management of experience. The government could further explore critical infrastructure and public assets (e.g., roads leveraging existing financial mechanisms, such as and bridges as well as schools). The government PhilGuarantee, to provide new financial solutions to should continue to bring strategic high-risk public protect SMEs against catastrophe shocks. assets (e.g., energy infrastructure and hospitals) under this program to ensure sufficient access to • Further develop agricultural risk financing and funding for asset reconstruction and reduce the insurance solutions, with a special focus on government’s contingent liabilities. As a further step, protecting smallholder subsistence farmers. One the program could explore ways to move beyond key area of the National DRFI Strategy involves the insurance of physical assets to also ensure the the protection of the poorest and most vulnerable continuity of services. For example, it could provide households, including farmers. The administration’s rapid-response financing for temporary measures flagship economic recovery plan (“We Recover as to restore services, such as funding for temporary One”) includes expanding agricultural insurance classrooms or mobile transformers. The NIIP should in priority programs. This should include revisiting be closely coordinated with potential reforms to the current system of providing support and the the NDRRM Fund to ensure the efficient financial role of the PCIC. To protect semi-commercial protection of assets. and subsistence farmers, the government could implement a macro-level parametric crop insurance • Increase financial protection of homeowners and program, co-financed by the government and SMEs through deepening catastrophe insurance LGUs on behalf of subsistence farmers, providing markets and exploring new financial solutions. This quick post-disaster support. This could build on includes establishing the PCIF as well as exploring international experience from countries such as further measures to strengthen the demand for India and Mexico. Insurance can leverage capital property insurance among both households and from financial markets to provide more rapid support SMEs. A key step towards this will be revision of to affected farmers than under current ex-post catastrophe rates and adequate supervision to disaster relief programs. Investing in technologies ensure industry compliance. This is aligned with such as tools that allow electronic payments to government efforts to revise the Insurance Code be transferred directly to individual farmers using and strengthen the Insurance Commission. At the mobile phones could further reduce the time and same time government should continue to invest in cost of distributing payments to strengthening awareness and demand for subsistence farmers.84 84 World Bank, 2020, Philippines: Options for strengthening agricultural disaster risk finance and insurance to protect subsistence farmers, note prepared for Department of Agriculture and Bureau of Treasury PART 3 BUILDING A RESILIENT DISASTER RECOVERY 73 3.6 AREA FOR FURTHER STUDIES A further analysis of key issues would help to inform future reforms aimed at strengthening resilience in the Philippines, including: • The impact of compounding risks such as pandemics (e.g., COVID-19) interacting with typhoons, floods, earthquakes, volcanic eruptions, etc. and associated policy reforms to recalibrate the country’s risk management, financial planning, preparedness, and response and recovery measures; • Good practices and examples of coordination mechanisms and institutional arrangements from Photo credit: Ezra Acayan other countries that could be used in enhancing the proposed national DRM agency; • The impact of disasters on LGU finances and ways to • Information on post-disaster spending, including strengthen financial planning at the provincial and information on budget reallocations, spending on risk municipal level to increase the efficiency of public reduction, and investments in preparedness to help spending; and the authorities ensure an adequate allocation of funds; • The impact of the Mandanas ruling on the government’s DRRM program and how this would • The identification of additional measures with more affect the overall disaster preparedness of LGUs, systematic approach to improve ASP and disaster considering that transfers to local governments are response interventions for poor and vulnerable expected to increase following a recent Supreme Court households, building on initial studies on the impact ruling85 that states that all national taxes will be used of disasters on the welfare and wellbeing of the poor; to compute transfers to local governments starting in 2022.. 85 In the case of Mandanas vs. Ochoa, GR No. 199802 directing National Government to transfer a bigger IRA share to LGUs. 74 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION Table 6. Challenges and Policy Recommendations # Challenges Policy Recommendations 1 The management and implementation of DRM policies and programs is Address fragmentation and capacity constraints in the implementation and fragmented. NDRRMC is composed of forty-two members from different oversight of DRM programs. The government’s proposed national DRM agency, government agencies that develop policies and coordinate the country’s the Department of Disaster Resilience, could address these challenges. overall DRM agenda. Implementation of DRM programs and projects is still the This would be a dedicated agency responsible for the management and responsibility of various implementing agencies and subject to their implementation of DRM programs. respective mandates. 2 The institutions involved in DRM have limited coordination protocols, guidelines, and mechanisms to address the increasing magnitude and frequency of disasters. 3 There are also coordination challenges between and among national and • Strengthen horizontal and vertical coordination mechanisms and clarify sub-national government authorities during the disaster response and recovery the roles of national, regional (BARMM), and local government authorities phases. The lack of communication between and among national government and other stakeholders. agencies and LGUs and no clear delineation of roles and responsibilities often result in delays in response interventions, overlapping interventions, and • Strengthen preparedness for disaster rehabilitation and recovery. inconsistent recovery policies. Establishing a culture of preparedness for future disasters would facilitate effective recovery. By simulating the recovery process, national 4 The recent establishment of the Bangsamoro Autonomous Region in Muslim government agencies and LGUs can pre-define commonly encountered Mindanao (BARMM) highlights challenges related to devolution, autonomy, and challenges and issues and develop appropriate solutions and guidelines the institutional capacity of subnational governments. on working with various stakeholders in their localities. • Mandate the use of the government’s GeoRiskPH integrated database for the national government, BARMM, and LGUs, and expand the system to include health-related information and data analytics. 5 Public procurement during emergencies has been challenging due to a lack of Develop emergency procurement guidelines to reduce delays. The guidelines basic guidelines on how to apply emergency procurement procedures. should simplify the procurement of essential goods and services through an umbrella framework that facilitates the quick implementation of disaster response and recovery projects. 6 The national government usually leads the implementation of post-disaster Clarify cost-sharing between the national and local governments. Currently activities, but insufficient resources limit their effectiveness. National the national government covers most disaster response costs, even though government agencies were tasked with implementing most of the recovery local governments have dedicated resources available which often seem not to projects following Typhoon Yolanda and the Marawi Siege, but they had no be used. Clear and credible rules on which costs the national government will additional staff and limited funding. Their disaster-related activities were on shoulder and which fall with local governments should help to improve financial top of their regular mandates and deliverables, which caused planning for disaster response by making risk ownership explicit. implementation delays. Mainstream the integration of risk consideration and disaster risk reduction measures in development planning, infrastructure investments, and ensure adequate budget allocation. The Government could mandate the integration of disaster risk reduction and climate resilience in national, regional, and local development planning and investment programming through issuance of technical guidelines considering climate change forecasts. Building resilient infrastructures would help to reduce the impact and cost of future disasters and climate change. Link financing to pre-arranged disbursement mechanisms for more efficient disaster response and recovery. Explicitly linking the NDRRM Fund to existing ASP and disaster response mechanisms, such as the DSWD’s Emergency Cash Transfer and NCDDP-DROM programs, or the DPWH’s emergency infrastructure maintenance and rehabilitation programs, could reduce delays in disaster response. Enhance interoperability of disaster data with the social registry to promote early warning and early action for ASP programs. dynamically updated NHTS made interoperable with disaster monitoring data can greatly enhance the government’s ability to identify families who are vulnerable (ex-ante) as well as who are affected by a disaster (ex-post) and assess their needs. This will enable timely disbursement of cash assistance to disaster affected families in the time of crisis. PART 3 BUILDING A RESILIENT DISASTER RECOVERY 75 # Challenges Policy Recommendations 7 Incomplete data on assets and disaster damages hinder efficient decision- Implement the PGAMP to improve asset information and drive investments making related to both financial and physical risk management. The government in adequate maintenance and risk management for resilient assets. The lacks access to complete data on all assets owned by national government government should ensure that the policy is fully rolled out, including agencies making it harder for the authorities to effectively manage public establishing implementing groups in key government agencies, enhancing assets to ensure efficient service delivery, create risk management plans, and capacity building, and scaling up the National Asset Registry by requiring all perform adequate maintenance asset-owning agencies to regularly submit their data. Scale up the financial risk management of public assets. The establishment of the NIIP is a key reform to ensure the effective financial risk management of critical infrastructure and public assetstime of crisis. 8 Contingent liabilities related to disasters, climate risks, and other shocks are Include climate and disaster risk in a dedicated fiscal-risk management function currently not fully integrated in the management of fiscal risk in the Philippines. and a clear mandate for risk finance management. The government should Most of the costs related to managing national disasters are covered by the consider improving the coverage of disaster-related risk in the fiscal risk national government. Yet, disaster-related public spending is not integrated into statement. comprehensive fiscal risk management. The Government should promote “Green Recovery” by investing in resilience. As part of the broader DRM reform agenda, investment in green and resilient infrastructure and communities would reduce the future contingent liability caused by disasters and climate change. The infrastructure investment to reduce existing disaster risks and to avoid the creation of new risks, would provide a double benefit. 9 Budget allocations for pre-arranged funding mechanisms are not evidence- • Improve the capacity to assess, record, and report the impact and based and often insufficient. Budget allocations to both QRFs and the NDRRM damages of disasters to inform planning and fiscal assessments. The Fund are not driven by expected needs or actual past spending. Instead, process to record damages and losses related to disasters should include they are primarily based on the previous year’s allocation or already known collecting and storing detailed asset loss reports and not just aggregate reconstruction costs. data, as this would provide the government with a better understanding of actual needs. 10 Incomplete financial data make it difficult for the government to assess the efficiency and adequacy of public spending by comparing public expenditure • Strengthen pre-arranged funding by improving the NDRRM Fund and with the socioeconomic impact of disasters. Estimates of disaster damages and LDRRMFs. The existing policies on the use and management of these funds losses are incomplete, and data on the use of different funding sources should be reassessed and streamlined to make them more responsive to are fragmented. evolving DRM needs and compounding risks, including pandemics. The authorities should also consider allocating funds based on probabilistic 11 Complex approval processes often delay the approval and disbursement of estimates of funding needs. Moreover, streamlined processes to minimize funding, even from pre-arranged mechanisms, leading to delays in disaster approval delays could be done by issuing guidelines on pre-approved response. Most funding sources require specific requests and approvals by expenditures and contracting; reviewing the level of reviews and different agencies and levels of government, delaying the release of funding approvals required to make allocations; and making decisions solely on and, subsequently, response and recovery. technical considerations. 12 Local governments face constraints in the allocation, management, utilization, • Improve the process to monitor, report on, and control public disaster and transparency of disaster response funding. spending. A uniform monitoring and reporting mechanism at the local and national level should be developed to track and capture post-disaster spending from various sources, monitor delays in the approval and release of funds, and improve controls. 13 Domestic catastrophe risk insurance penetration remains low. Less than Increase financial protection of homeowners and SMEs through deepening 6 percent of total residential exposures and less than 16 percent of total catastrophe insurance markets and exploring new financial solutions. This commercial and industrial exposures were insured against typhoon and includes establishing the PCIF as well as exploring further measures to flood in 2018. strengthen the demand for property insurance among both households and SMEs. 14 Post-disaster financial support to the agriculture sector does not sufficiently Further develop agricultural risk financing and insurance solutions, with a leverage appropriate risk financing and insurance to ensure it efficiently special focus on protecting smallholder subsistence farmers. This should targets the poorest subsistence farmers. include revisiting the current system of providing support and the role of the PCIC. To protect semi-commercial and subsistence farmers, the government could implement a macro-level parametric crop insurance program, co-financed by the government and LGUs on behalf of subsistence farmers, providing quick post-disaster support. 76 PHILIPPINES ECONOMIC UPDATE DECEMBER 2020 EDITION REFERENCES Bowen, Thomas. 2015. 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