Philippines Economic Update Philippines EDITION Update JUNE 2022Economic JUNE 2022 EDITION Strengthening the Digital transformation Digital Economy to Boost infrastructure Domestic Recovery Photo: thinkhubstudio PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 1 Preface The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy changes, and the evolution of external conditions over the past six months. It also presents findings from recent World Bank analyses, situating them in the context of the country’s long-term development trends and assessing their implications for the country’s medium-term economic outlook. The update covers issues ranging from macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction and social development. It is intended to serve the needs of a wide audience, including policymakers, business leaders, private firms and investors, and analysts and professionals engaged in the social and economic development of the Philippines. The PEU is a biannual publication of the World Bank’s Macroeconomics, Trade, and Investment (MTI) Global Practice (GP), prepared in partnership with the Finance, Competitiveness and Innovation (FCI); Poverty and Equity; Social Protection and Jobs (SPJ); and Governance Global Practices. Lars Christian Moller (Practice Manager for the MTI GP), Souleymane Coulibaly (Lead Economist and Program Leader), and Rong Qian (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Chua (Senior Economist), Kevin Cruz (Economist), Karen Lazaro (Research Analyst), Eduard Santos and Ludigil Garces (Consultants) from the MTI GP; Isaku Endo (Senior Financial Sector Specialist), Uzma Khalil (Senior Financial Sector Specialist) and Ou Nie (Financial Sector Specialist) from the FCI GP; Nadia Belghith (Senior Economist) and Karl Jandoc (Consultant) from the Poverty & Equity GP; Yoonyoung Cho (Senior Economist), Ruth Rodriguez (Social Protection Specialist) and Ma. Laarni Revilla (Consultant) from the SPJ GP; Lesley Jeanne Cordero (Senior Disaster Risk Management Specialist) and Marilyn Martinez (Senior Disaster Risk Management Specialist) from the Urban, Resilience & Land GP; and Reem Hafez (Senior Economist), Melissa Ouellet (Consultant), Gandham Ramana (Consultant), and Vida Gomez (Consultant) from the Health, Nutrition & Population GP. A World Bank team from the MTI, FCI, SPJ, Digital Development, ID4D, and Education GPs, consisting of Jaime Frias, Kevin Chua, Roberto Galang, Uzma Khalil, Isaku Endo, Natasha Beschorner, Jonathan Marskell, Yoonyoung Cho, Sachiko Kataoka, Elena Gasol Ramos, Juni Zhu, Philip Grinsted, Kimberly Baltao-Chanda, Smita Kuriakose, Xavier Cirera and Alvaro Gonzalez prepared the Special Focus Note on Improving digital enablers in the Philippines: bridging the digital divide and accelerating recovery through reforms, under the guidance of Cecile Thioro Niang (Practice Manager) and Lars Moller. The report was edited by Oscar Parlback (Consultant), and the graphic designer was Pol Villanueva (Consultant). Peer reviewers were Dorsati Madani (Senior Economist), Ekaterina Vashakmadze (Senior Economist), Harish Natarajan (Lead Financial Sector Specialist), Sara Nyman (Consultant), Ana Cusolito (Senior Economist) and Massimiliano Cali (Senior Economist). Logistics and publication support were provided by Geraldine Asi and Kristiana Rosario (Team Assistant), and Hunter Tiro (Consultant). The External Communications Team, consisting of Clarissa David, David Llorito and Stephanie Margallo, and Moira Enerva (Consultant) prepared the media release, dissemination plan, and web-based multimedia presentation. 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 Geraldine Asi (gasi@worldbank.org). For questions and comments regarding the content of this publication, please contact Kevin Chua (kchua1@worldbank.org). Questions from the media should be addressed to David Llorito (dllorito@worldbank.org). For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION II Table of Contents Preface II Table of Contents III List of figures IV List of tables IV List of boxes IV Abbreviations and acronyms V Executive Summary 7 Part I. Recent Economic and Policy Developments 10 1.1 Economic Growth: Sustaining the Growth Momentum 11 1.2 External Sector: Peso Depreciation amid Rising Imports 14 1.3 Inflation and Monetary Policy: Renewed Inflationary Pressures 16 1.4 Fiscal Policy: Narrowed fiscal deficit 19 1.5 Employment and Poverty: Continued Recovery amid Economic Uncertainties 22 Part II. Outlook and Risks 24 2.1 Growth Outlook 25 2.2 Poverty and Shared Prosperity 31 2.3 Risks and Policy Challenges 32 Part III. Improving Digital Enablers in the Philippines: Bridging the Digital Divide and Accelerating the Recovery through Reforms 38 3.1 Introduction 39 3.2 Despite recent achievements, Philippine firms are not reaping the full benefits of digitalization 41 3.3 Enablers of Digitalization 43 3.4 Digital infrastructure 45 3.5 Digital Financial Services and Digital ID 47 3.6 Digital skills 51 3.7 Conducive Regulations for Digital Markets 53 3.8 Way forward (Reform Agenda) 56 3.9 Conclusion 59 References 61 List of figures Figure 1. Output has surpassed its pre-pandemic level. 12 Figure 2. Growth was buoyed by robust private domestic demand in Q1 2022. 12 Figure 3. The industry and services sectors drove growth on the production side. 12 Figure 4. Commodity prices have jumped since the outbreak of the war in Ukraine. 13 Figure 5. The global financial market has been volatile. 13 Figure 6. The goods trade deficit widened in Q1 2022 amid higher imports. 14 Figure 7. The Philippine peso depreciated but continued to outperform most currencies in the region in early 2022 14 Figure 8. The Philippines is a net importer of staple foods, fertilizers, and energy items. 17 Figure 9. The war in Ukraine led to an uptick in inflation in March 2022. 17 Figure 10. NPLs and restructured loans have risen. 17 Figure 11. The deficit narrowed in Q1 2022 as the government reduced pandemic-related expenditures 19 Figure 12. …although public debt inched upward 19 Figure 13. The drop in health claims coincides with the onset of COVID-19 and lockdown measures. 21 Figure 14. Reduction in malnutrition pregnancy care is especially worrisome for human capital, as the impact is compounded over Filipinos’ lifecycle 21 Figure 15. Labor Force Participation Rates, January 2019–March 2022 (normalized, Jan 2020=1) highlights greater volatility of PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION III female labor force participation 23 Figure 16. The underemployment rate fluctuated widely while the unemployment rate fell. 23 Figure 17. The Philippines is expected to be among the top growth performers in the region. 26 Figure 18. The medium-term growth prospect is positive. 26 Figure 19. Cumulative output losses (2020-2024) versus the pre-pandemic trend are expected to mount. 29 Figure 20. Inflation is above target in the vast majority of inflation-targeting countries. 29 Figure 21. Consumer confidence has been steadily improving since mid-2020. 30 Figure 22. Actual and projected US$3.20-a-day poverty rates 31 Figure 23. Simulated Changes in Poverty from Increases in Cereals and Energy Prices. 31 Figure 24. Adoption of Digital Technologies by Type, 2021. 41 Figure 25. Global Innovator Services: Employment Share and GDP per Capita 41 Figure 26. Number of Digital Business relative to GDP, 2020 42 Figure 27. Median Investment Received Per Firm, 2020 (US$ million) 42 Figure 28. Adoption of Digital Technologies since COVID-19 Onset by Type of Technology and Firm Size 42 Figure 29. Adoption of Digital Technologies since COVID-19 Onset by Sector 42 Figure 30. Main Reported Barriers to Adopt Digital Technologies, 2022. 43 Figure 31. Foundational Enablers for Business Digitalization 44 Figure 32. Mobile and Fixed Broadband Internet Penetration by Country, 2022 45 Figure 33. Mobile Broadband Speeds by Country 46 Figure 34. Fixed Broadband Speeds by Country 46 Figure 35. Regional Comparisons of the Proportion of Youths and Adults with ICT Skills 51 Figure 36. Basic, Standard, and Advanced ICT Skills by Country, 2017–2019 52 List of tables Table 1. Balance of Payments, 2017–2021 15 Table 2. Economic Indicators for the Baseline Projections 27 Table 3. Real Growth Projections 29 List of boxes Box 1. Recent Global Developments 13 Box 2. Fiscal Measures to address the Impact of Rising Inflation 18 Box 3. Lessons from COVID-19 to Strengthen the Health Sector’s Pandemic Preparedness 20 Box 4. Global Economic Outlook 28 Box 5. Rebuilding Fiscal Buffers through Fiscal Consolidation 34 Box 6. Spotlights on PhilSys for social protection delivery 36 Box 7. Digital Government: Public Services Access made easy 49 Box 8. A prevalent threat in East Asia: how to avoid winner-take-all dynamics in the digital economy? 54 Box 9. A private coalition in Sri Lanka to advance digital cross-border transactions. 55 PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION IV Abbreviations and acronyms 4Ps Pantawid Pamilyang Pilipino Program FIES Family Income and Expenditure Survey AICS Assistance to Individuals in Crisis G2P Government-to-person Situations GSMA Global system for mobile communica- ASBP Abuse of Superior Bargaining Position tions association ASEAN Association of Southeast Asian GVCs Global value chains Nations HEI Higher educational institution BARMM Bangsamoro Autonomous Region in ICT Information, Communication, and Muslim Mindanao Technology BIR Bureau of Internal Revenue IT-BPM Information technology - business BOP Balance of payments process management BPM Business Process Management KYC Know Your Customer BPO Business process outsourcing LFPR Labor force participation rate BPS Basis points LFS Labor Force Survey BSP Bangko Sentral ng Pilipinas LGUs Local government units BTr Bureau of the Treasury LICs Low income countries CAs Certification authorities MSMEs Micro, small and medium enterprises CHED Commission on Higher Education NCR National Capital Region COA Commission on Audit NICTHS National ICT Household Survey CPI Consumer Price Index NPL Non-performing loans CREATE Corporate Recovery and Tax Incentives NTC National Telecommunications for Enterprises Commission CRM Customer Relationship Management ODR Online Dispute Resolution DA Department of Agriculture PhilSys Philippine Identification System DFS Digital financial services PMI Purchasing Managers’ Index DICT Department of Information and PQF Philippine Qualifications Framework Communications PSA Philippine Statistics Authority DOH Department of Health SAP Social amelioration program DOLE Department of Labor and Employment SEC Securities and Exchange Commission DPA Data Privacy Act SME Small and Medium Enterprises DSWD Department of Social Welfare and TESDA Technical Education and Skills Development Development Authority DTI Department of Trade and Industry TOP TESDA Online Program EAP East Asia and Pacific TRAIN Tax Reform for Acceleration and EMDEs Emerging market and developing Inclusion economies TVET Technical and Vocational Education ERP Enterprise Resource Planning and Training EU European Union VAT Value-added tax FCP Financial Consumer Protection and Services Act PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION V Executive Summary Recent Developments Headline inflation jumped in March and April 2022 as the war in Ukraine pushed global energy and commodity The external environment has turned less favorable at prices to record highs. After steadily declining since August a time when the Philippines has weathered the worst 2021, headline inflation rose to an average of 4.4 percent so far of the COVID-19 pandemic. Three international in March and April, up from 3.0 percent in January and developments are placing significant pressure on the February. The shock of the war in Ukraine pushed global economy. First, the war in Ukraine is disrupting food and energy and commodity prices to record highs, spilling over fuel supplies, raising market volatility, and undermining to domestic inflation. Inflation related to housing, water, and global confidence. While the Philippines has limited direct electricity prices increased from an average of 4.7 percent exposure through trade or financial flows, the conflict and in January-February to 6.6 percent in March-April, while sanctions affect it in terms of higher energy and food prices. transportation inflation rose from 7.9 percent to 11.7 percent Second, rising global inflation is inducing policy rate hikes in in the same period. In response, the government approved a advanced economies and emerging market and developing total of 0.4 percent of GDP in fuel grants and cash transfers economies (EMDEs). Tightening financing conditions are to cushion the impact of rising oil prices. Excluding volatile dampening global and domestic investment prospects. food and energy items, the core inflation rate is estimated Finally, China’s structural slowdown and regulatory response to have risen from 2.1 percent in January to 2.8 percent in to COVID-19 are disrupting global trade and exacerbating April 2022, indicating rising underlying price pressure. The the global growth deceleration. China’s slowdown adversely Bangko Sentral ng Pilipinas (BSP) raised the policy rate by 25 impacts the Philippines, as its trade is increasingly oriented basis points (bps) to 2.25 percent in May to prevent further toward Chinese markets. second-round effects and buildup of inflation expectations. The Philippines demonstrated strong growth in the The fiscal deficit narrowed in the first quarter of 2022. first quarter of 2022, but the recovery is uneven across The unwinding of COVID-19-related fiscal support and the sectors. The economy rebounded from a contraction of base effect from a one-time equity infusion to government 3.8 percent in Q1 2021 to an expansion of 8.3 percent in Q1 financial institutions in the first quarter of 2021 resulted in 2022. On a seasonally adjusted basis, first quarter output slower growth of public expenditures in the first quarter of breached its pre-pandemic level, exceeding Q4 2019 output 2022. Public revenues were maintained at 15.9 percent of by 0.3 percent. Growth was driven by the expansion in GDP, the same ratio as in the first quarter of last year. This services and industry and a recovery in private domestic reduced the fiscal deficit to 6.4 percent of GDP in the first demand, and partly lifted by base effects. The contact- quarter of 2022, down from 7.4 percent in the same period intensive services sector benefitted from the relaxation of a year ago. Nevertheless, the deficit contributed to higher movement and capacity restrictions, while manufacturing financing needs, which in turn increased central government activity was supported by still robust global demand. debt from 60.4 percent at end-2021 to 63.5 percent in the However, the agriculture sector performed tepidly as output first quarter of 2022. was impacted by several typhoons. While most sectors have caught up to their pre-pandemic levels, some sectors such The labor market continued to recover with increased as accommodation and food services, real estate services, labor force participation and accelerated job creation. and transport and storage have yet to return to their pre- The labor force participation rate rose to 65.4 percent in pandemic output levels in 2019. This is indicative that the March 2022, surpassing the pre-pandemic level of 61.7 recovery has been uneven across sectors. Meanwhile, percent in January 2020. The increasing trend has occurred domestic demand picked up along with people’s mobility. amid intermittent declines associated with the reimposition Private consumption was buoyed by steady improvement in of community quarantines in July 2021 and emergency the labor market and the relaxation of movement restrictions measures in response to the onslaught of Typhoon Odette beginning in February. Public consumption growth slowed and the emergence of the COVID-19 Omicron variant in as the government gradually withdrew its fiscal support. January 2022. Notwithstanding the increasing number Meanwhile, higher investments in durable equipment and of workers in the labor force, the unemployment rate construction activities drove growth in capital formation. continues a decreasing trend, indicating that the labor However, net exports weakened as import growth outpaced market is creating jobs and absorbing more workers. The export growth. unemployment rate registered at 5.8 percent in March 2022, PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 7 down from 7.1 percent in the same month in 2021. Meanwhile, disruptions; (iv) currency depreciation; and (v) recovering the underemployment rate, which has fluctuated widely local demand. High inflation will dampen household during the pandemic, rose again to 15.8 percent in March consumption, which is expected to rebound with the lifting 2022, reversing the downward trend since November 2021. of mobility restrictions. It can also induce rate tightening, which will increase the cost of borrowing. The authorities Outlook and Risks must use their available policy tools to tame inflation, some immediately and others later as needed. These tools The country’s strong domestic conditions will help include supply-side measures such as freer importation compensate for the weak external environment. and lower tariffs and non-tariff barriers to help augment Growth is expected to benefit from an improving domestic domestic supplies as needed; support to agricultural environment, characterized by declining COVID-19 cases, production through extension services, seeds, and fertilizers; more vigorous public mobility, and wider economic and monetary tools to prevent a de-anchoring of inflation reopening. New daily COVID-19 cases dropped from a peak expectations. of nearly 40,000 in mid-January to less than 200 in mid-May, prompting the authorities to further ease mobility restrictions Pursuing fiscal consolidation will help protect long- across the country. The easing of restrictions ensued amid term fiscal sustainability. The authorities must, however, increased vaccine coverage and a short-lived Omicron carefully manage the risks and trade-offs associated with wave, which kept the country’s hospital and critical care consolidation. Increased taxation or a reduction of public capacities below precarious levels. People’s mobility has spending will hold back economic activity in the short to returned to pre-pandemic levels across different activities medium term due to the reduction in aggregate demand. including for work and recreation. The return of robust However, improved macro management will help safeguard domestic activity is expected to buoy growth at a time of long-term growth. To exercise fiscal discipline means that weak external environment, reeling from a global growth public revenue growth is higher than public expenditure deceleration, rising inflation, and geopolitical turmoil. growth in the coming years. This can be achieved through improved revenue collection, better spending efficiency The growth outlook is positive but subject to downside and increased value for money in public procurements. Fast risks. The Philippines is projected to grow at 5.7 percent economic growth and fiscal consolidation will be needed in 2022 and 5.6 percent, on average, in 2023-24, in line to lower the debt ratio to near pre-pandemic levels. The with its lower, long-term potential rate. Growth will anchor country’s debt profile remains favorable. Public debt is on recovering domestic demand and sustained public mostly domestic (69.9 percent as of March 2022), long- investments amid an anticipated recovery among EMDEs term (65.7 percent), and peso-denominated (69.8 percent). next year. The reopening will benefit the services sector, Financing risks are curtailed by the Philippines’ comfortable especially transportation, restaurant and food services, and access to capital markets, both domestic and international, wholesale and retail trade. Tourism prospects have improved and strong engagement with multilateral institutions. with the reopening of borders and attractions and relaxed travel requirements. Sustained public investments and The authorities could improve public investment reinvigorated domestic activities will likely raise the demand management and leverage private sector participation for construction and industry. Growth in the agriculture to narrow the country’s infrastructure gap. Limited fiscal sector will remain tepid due to chronic underinvestment space makes it necessary for the authorities to improve and vulnerability to weather-related shocks. The outlook public investment management to increase spending faces downside risks from geopolitical uncertainty, abrupt efficiency and minimize cost overruns. There is significant tightening of global financing conditions, and growth room for improvement, as the country’s spending efficiency deceleration of main trading partners like the United States is about 23.0 percent lower than what is considered best and China. While the number of COVID-19 cases has been practices in efficiently translating public investment into low for a long period, the threat of a new variant-driven infrastructure. The authorities can also leverage public- surge hangs over the outlook. private partnerships to improve the country’s infrastructure as long as financial risks to the government are managed The authorities must continue to use its available policy and the quality of services for citizens is secured. The private tools to tame inflation, some immediately and others later sector is a source of not only finance but also expertise as needed. The source of inflationary pressure includes: and innovation to improve the economy’s infrastructure (i) elevated global commodity and energy prices; (ii) global readiness. The passage of investment-friendly laws and supply constraints driven by weak global agricultural amendments to restrictive laws signal the government’s output, exports ban by key commodity exporters, and the intent to intensify private sector involvement in key war in Ukraine; (iii) international supply chain and logistics industries, including telecommunications, shipping, railways, PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 8 and subways. can empower firms of all sizes to access markets beyond traditional boundaries, with local micro, small, and medium Improved targeting of social assistance could ensure enterprises (MSMEs) finding themselves competing in the the protection of poor and vulnerable households. The global market on the back of digital technology. A 10 percent implementation of social protection measures will help increase in Internet use in an exporting country is found to mitigate the adverse impact of shocks, including high increase the number of products traded between two inflation, on the vulnerable population. However, the narrow countries by 0.4 percent. Digitalization has also helped firms fiscal space means that assistance needs to be timely and build resilience. Firms that have adopted digital platforms targeted, only reaching those most in need. The challenge experience about 7.0 percent higher employment growth is to identify beneficiaries and swiftly deliver assistance in and are about 10 percent less likely to face bankruptcy than the most efficient way. There is no single targeting method digitally constrained firms.1 that is universally preferred or equally effective across countries, as methods must be adjusted to the purpose of While the use of digital technology has accelerated the program, availability of data, and institutional capacity. during the pandemic, the Philippines has not fully The digital transformation of the delivery system and the use leveraged its expected benefits. During the first year of the of the Philippine National ID system for identifying recipients pandemic, the share of new users among online consumers are steps towards building a more dynamic registry to better was 20 percent in the Philippines, the highest among inform the needs of citizens. Southeast Asian countries. The average number of new digital services consumed by Filipinos climbed from 3.9 With the threat of climate change, the authorities need before the pandemic to 8.2 in 2021. By March 2022, to strengthen the use of public resources in disaster approximately 71 percent of Philippine firms had either mitigation, response, rehabilitation, and recovery. Climate started or increased their use of digital platforms since the change and the COVID-19 pandemic have compounded pandemic began. However, the density of digital solution the impacts of natural disasters, which has made it more providers in the country was only 0.5 digital businesses per difficult for the government to prepare for, respond to, and US$1 billion of economic output in 2020, much lower than recover from disaster events. Over the past 10 years, strong Vietnam (9.2) and Malaysia (14.9). Moreover, digital adoption typhoons have devastated 9 out of 17 regions and affected diverges significantly between small and large firms and an average of 5 million people. Recently, the country was hit across different sectors, especially on the use of advanced by Super Typhoon Odette that affected 11 million people and digital solutions, which has a high impact on firm productivity. incurred total direct damages and indirect losses of around There has also been an uneven adoption of digital 1.45 percent of GDP. The increasing intensity and frequency technology in areas outside the National Capital Region of natural disasters will likely add pressure to the country’s (NCR) and key metropolitan cities. growth prospects and fiscal position. Hence, the government needs to strengthen the efficiency, transparency, and There has been progress in expanding digital inclusive use of public resources in disaster mitigation, connectivity, but challenges remain. Digitalization faces response, rehabilitation, and recovery. Given the country’s a ceiling due to the low coverage of broadband service, vulnerability to disasters, deepening disaster risk financing despite the entrant of a third full-service operator in 2021. will strengthen financial resilience. The country’s fixed broadband, which is important for high- volume data transmission and typically required by large Special Focus - Improving digital enablers in the businesses and institutions, continues to lag that of regional Philippines: Bridging the digital divide and accelerating comparators such as Vietnam, Malaysia, and Thailand. A recovery through reforms key challenge is underinvestment owed to decades of insufficient competition and outdated legal, policy, and Digitalization represents a key driver for long-term regulatory frameworks. Franchising requirements, complex economic growth. While the Philippines has grown permitting for network equipment, and lack of policy on remarkably in the past decades, only a transformative infrastructure sharing are also slowing the network rollout. solution will catapult the economy into reaching its AmBisyon These challenges can be addressed by introducing Natin aspiration of a prosperous middle-class society by pro-competition legislation for shared deployment of 2040. Part of the solution lies in harnessing the digital network infrastructure and by streamlining of permitting, economy. The benefits brought by the digital economy are efficiently allocating spectrum, and advancing public private extensive and can be shared by all sectors of society. partnership models for investment and management of Digitalization can enhance productivity by reducing firms’ infrastructure. operational costs and delivering economies of scale. It Digital financial services (DFS) remain in their infancy 1 World Bank Group, COVID-19 firm surveys. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 9 and take up has been bound by limited financial inclusion use; (ii) adopting more upskilling and reskilling policies for of consumers and businesses alike. Enabled by fintech highly specialized Fourth Industrial Revolution skills (4IR); innovations, DFS have the potential to lower costs, increase (iii) strengthening linkages with industry; (iv) improving the speed of transactions, and allow for more tailored digital skills training under TTechnical Education and Skills financial services to serve the needs of underserved Development Authority (TESDA) programs; and (v) ensuring segments of the population at scale. However, the country skills qualification and accreditation mechanisms reflect has experienced a limited uptake of DFS (barely 10 percent changes in skills demand and enhance the portability of of households), while fintech development remains nascent. skills. While challenges to growing DFS are wide-ranging, two critical ones are: (i) limited coverage of payment The explosive digitalization during the pandemic requires infrastructure in the last mile; and (ii) low levels of consumer policies to keep up with the pace of development of trust that impede wide-scale adoption. Addressing these the digital economy. Market access can be expanded by challenges require promoting the adoption of Philippine adopting an efficient regulatory framework that builds trust Identification System (PhilSys) to underpin growth in DFS; in the digital economy and facilitates electronic transactions easing regulations to promote the entry and innovation and data flows. Digital consumers and operators need to feel of fintech and non-banks in the provision of DFS; and confident in using digital services and safe from the undue establishing stronger coordination and better enforcement risk of personal data breaches, unscrupulous vendors, and of the consumer protection framework. potential infringement on their privacy. While the government has passed laws and regulations to promote trustworthiness Demand for digital skills is growing steadily, but the in the digital economy, some of these measures seem market does not seem ready to meet the rising demand. inadequate to protect consumers online. The legal basis Digital occupations have featured disproportionally on of electronic transactions was cemented in 2000, and the the list of most in-demand jobs in the country. However, authorities have recently issued guidelines on electronic workers’ digital skills and literacy have not caught up. In the documents, signatures, and digital signatures in government World Digital Competitiveness Ranking 2021, the Philippines transactions. However, the absence of rules on electronic ranked 54th on digital/technological skills, reflecting weak notarization, the persistent official requirements on paper talent and training, and education. Results from the 2019 documentation and manually signed forms, the limitations National ICT Household Survey reveal that over a quarter on the issuance of individual digital certificates, and the of Filipinos do not use the Internet because they do not absence of accredited private certification authorities know how to use it. While the government has started to limit the widescale adoption of electronic contracts, address the skills gap, more can be done, including: (i) receipts, invoices, and the use of supporting documents for fostering digital competency through basic education to government transactions. build the foundational skills for digital hardware and software Photo: Dragon Images PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 10 The following table summarizes key reforms that could improve the digital enablers in the Philippines over the next three years: Enabler Key Policy Recommendations Digital infrastructure Expand pro-competition legislation for shared deployment of network infrastructure and streamlining of permitting. This will include the passage of the implementing rules and regulations of the Public Services Act amendment, and National Broadband Plan and Common tower and pole attachment policy. Promote investment in connectivity through efficient allocation of spectrum and advancing public private partnerships models for infrastructure. This includes reviewing and revising regulations on spectrum allocation for mobile broadband and leveraging public private partnerships to draw private investments and manage government assets, including physical assets, and domestic backbone network especially in far-flung locations. Digital financial services Accelerate adoption of PhilSys to underpin growth in DFS. This involves and national digital id promulgating use-cases for the greater use of the National ID and enabling the Know Your Customer (KYC) framework by issuing supplemental guidelines to allow underserved segments to access financial services. Ease regulations to promote entry and innovation of fintech and non-banks in the provision of DFS. This includes establishing the Open Finance Oversight Committee, adopting industry-accepted standards, and promoting digitalization among rural financial institutions. Digital skills Enhance the digital competency of the work force and meet the increasing demands of the changing work environment. This involves strengthening foundational skills through basic education under the Department of Education. This involves strengthening foundational skills through basic education under the Department of Education. Higher education institutions, supported by the Commission on Higher Education, should update the higher education curricula and training opportunities to fit the needs of 4IR. Strengthen digital skills training under Technical Education and Skills Development Authority. Conducive regulations Improve regulatory practice in the platform economy by improving guidelines on for digital market access accreditation of private certification authorities and electronic notarization, which can stimulate the adoption of digital certificates. This includes advancing the transition to digital invoices, which is likely to simplify accounting systems for MSMEs. Strengthen international cooperation on rules and certification for transmitting and processing personal data, which can accelerate data transfers. Photo: wee dezign PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 11 Part I Recent Economic and Policy Developments Following a steady decline in COVID-19 cases in the Philippines, the authorities have loosened mobility restrictions, leading to more economic activity. The economy expanded by 8.3 percent, year-on-year, in the first quarter of 2022, fueled by the recovery of domestic demand and a still supportive external environment. The fiscal deficit narrowed as the government continued to wind down its COVID-19 fiscal support. Meanwhile, inflationary pressure has intensified, exacerbated by high global commodity and energy prices and the war in Ukraine. The authorities raised the key policy rate by 25 basis points in May to prevent further second-round effects and a buildup of inflation expectations. The growth recovery coincided with improvements in the labor market, with accelerated job creation and higher labor force participation. MDV Edwards Photo: Photo: ultramansk PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 10 1.1 Economic Growth: Sustaining the growth momentum The economy expanded by 8.3 percent in the first quarter of 2022 despite the surge in COVID-19 cases in early-2022. Robust growth was driven in part by base effects and fueled by the recovery of the industry sector, a supportive external environment, and recovering private domestic demand. Despite the Omicron wave, the pace of economic Domestic demand picked up in Q1 2022 despite the recovery accelerated in the first quarter of 2022. The high implementation of strict containment measures in growth rate was driven by an increase in domestic activity January (Figure 3). Private consumption was buoyed by despite the Omicron-induced wave of infections and the shift steady improvement in the labor market, moderate inflation, to stricter mobility restrictions early in the year.2 Domestic and the relaxation of movement restrictions beginning in activity remained robust as households and firms have February due to the swift containment of the Omicron learned to cope with new infections and mobility restrictions. induced wave of COVID-19 infections. As a result, private Moreover, the quick containment of the Omicron wave consumption grew by 10.1 percent in Q1 2022, from a 4.8 resulted in the shift to the looser Alert Level 1 status in March. percent contraction over the same period in 2021. Private Domestic activity was also buoyed by an improving labor investment spending remained below pre-pandemic levels market, robust remittances, and a reopening of the country’s as robust growth was driven by base effects from the borders to international tourism. On a seasonally adjusted previous year amid lingering uncertainty and low business basis, first quarter output breached its pre-pandemic level, confidence in Q1 2022. Meanwhile, public consumption exceeding Q4 2019 output by 0.3 percent, although the growth slowed as the government gradually withdrew its country’s economic revival lags several countries in the fiscal support, while public investment contracted amid a region (Figure 1). slowdown in public infrastructure delivery. The economy rebounded from a contraction of 3.8 Buoyant global demand drove merchandise trade. percent in Q1 2021 to an expansion of 8.3 percent in Q1 Exports grew by 10.3 percent in Q1 2022, led by the 5.9 2022, driven by strong growth in industry and services percent expansion in merchandise exports, as demand from (Figure 2). Strong industry growth was driven by the 10.1 the rest of the world remained strong (Box 5). Robust percent expansion of manufacturing, as electronics demand for electronics products lifted demand for manufactures, the country’s main export commodities, electronics exports, the Philippines’ main export benefitted from robust global demand. In addition, the commodities. However, services exports languished, as construction sector sharply expanded by 13.5 percent in Q1 services exports remained well below pre-pandemic levels. 2022, from a 22.6 percent contraction in Q1 2021, fueled by Despite the strong rebound in business services and strong public construction activity due to the government’s telecommunications, computer, and information services recovery program. The services sector expanded by 8.6 exports, the growth in services exports continued to be percent, with transportation, accommodation, miscellaneous dampened by the international tourism, travel, and transport services, and wholesale and retail trade benefitting from the industries. Meanwhile, imports expanded by 15.6 percent in relaxation of capacity restrictions. Meanwhile, the agriculture Q1 2022, driven by a broad-based recovery in the sector’s tepid performance continued into Q1 2022, as importation of consumption goods, raw materials, and capital output marginally increased by 0.2 percent due to the goods. The recovery of imports reflected increased adverse impact of several typhoons. While most sectors domestic activity and the robust performance of the have caught up to their pre-pandemic levels, some sectors manufacturing industry, leading to robust imports of raw such as accommodation and food services, real estate materials and inputs. services, and transport and storage have yet to return to their pre-pandemic output levels. 2 Several regions in the Philippines were placed under Alert Level 3 Status from January 3 until January 31, 2022 as COVID-19 cases reached nearly 40,000 in mid-January. As cases declined, several regions were placed in Alert Level 2 status beginning in February, before shifting to Alert Level 1 Status in March as cases reached nearly 200 per day. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 11 Figure 1. Output has surpassed its pre-pandemic level. INDEX: 100 = 2019Q4 120 Indonesia Malaysia Philippines Thailand Vietnam 110 100 90 80 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2019 2020 2021 2022 Source: Haver Analytics. Figure 2. Growth was buoyed by robust private domestic Figure 3. The industry and services sectors drove growth demand in Q1 2022. on the production side. 20 14 15 12 10 10 8 5 6 4 0 2 0 -5 Percentage point Percentage point -2 -10 -4 -15 -6 -8 -20 -10 -25 -12 -14 -30 -16 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 -18 -20 2019 2020 2021 2022 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Net exports 2019 2020 2021 2022 Investments Government Consumption Household Final C onsumption Expenditure Agricul ture Manufacturing Other industries GDP Growth Services GDP growth Source: Philippine Statistics Authority (PSA). Source: PSA. y (PSA). Photo: Antonio V. Oquias PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 12 Box 1. Recent Global Developments Global economic growth accelerated in 2021, but the 40 percent to reach record highs. In addition, the prices recovery was uneven. Global growth surged to 5.5 percent of metals like aluminum, nickel, and palladium have also in 2021, its strongest post-recession pace in 80 years. reached all-time highs. Elevated commodity prices have However, supply chain disruptions and high energy prices been fueling inflation, with the median global consumer lowered growth from its earlier forecasts, and growth varied price index consumer price index (CPI) inflation reaching across regions. In advanced economies, economic growth 4.6 percent in February, its highest level since 2008. averaged 5.0 percent, fueled by high vaccination rates and sizable fiscal support. The recovery in EMDEs was, however, Global trade contracted in March due to supply chain slower than previous forecasts due to waning policy support disruptions. Global goods trade fell in March, as evidenced and tightening financing conditions. While growth averaged by the decline in Global PMI manufacturing new exports 6.3 percent in EMDEs in 2021, it was 5.2 percent when orders index from 50.8 to 48.2. The war in Ukraine, which excluding China. Moreover, low-income countries (LICs) grew has led to logistic disruptions and airspace bans, has by a mere 3.3 percent, as low vaccine coverage, high exacerbated supply bottlenecks as commodity prices have inflation, and limited policy space constrained the recovery. increased and trade has been re-routed to longer and more expensive routes. Trade through the Black Sea has already The war in Ukraine and the COVID-19 surge in China been disrupted, with dry bulk vessels down more than 90 are weighing on the global economic recovery. The percent in Ukrainian ports, and calls to Russian ports are global composite output purchasing managers’ index (PMI) down by more than 20 percent over the same period. declined from 53.5 in February to 52.7 in March. Global Meanwhile, the recent lockdowns in China due to the activity slowed, as the war in Ukraine and the uptick in Omicron variant surge have disrupted global value chains, COVID-19 cases in China led to a surge in commodity prices with more than 85 percent of Chinese manufacturers and supply chain disruptions. Due to recent geopolitical reporting disruptions in trucking and shipping in March. risks, global financial conditions worsened as financial market volatility jumped. Aside from the war in Ukraine, Global financing conditions have tightened. The Russia- COVID-19 continued to threaten growth. In China, the Ukraine war soured risk appetite, causing global financial Omicron surge and the authorities’ zero-COVID policy conditions to worsen in March (Figure 5). In addition, the US led to lockdowns in manufacturing hubs, Shanghai and Federal Reserve raised its policy rate by 25 bps in March, Shenzhen, adversely affecting global value chains (GVCs). which adversely affected EMDEs and LICs where financial conditions are at their tightest since 2020. Due to elevated Commodity prices rose due to the war in Ukraine, risk, global equities fell 5 percent between mid-February and fueling global inflation. The price of Russian and Ukrainian mid-March. In a sign of heightened volatility, US long-term commodity exports jumped in March (Figure 4). The price yields rose by 12 bps, and European equity volatility reached of oil, Russia’s biggest export, reached a 10 year high of levels last seen during the initial spread of COVID-19. US$130/bbl (Brent Crude oil), while the price of wheat, Meanwhile, sanctions targeting Russia led to the collapse of where both countries are top exporters, increased by Russian financial asset prices. Figure 4. Commodity prices have jumped since the Figure 5. The global financial market has been volatile. outbreak of the war in Ukraine. Index, 100 = January 2022 100 103 Russian invasion of 90 Ukraine 350 102 80 300 70 101 60 250 100 Index 50 200 99 40 150 30 98 20 100 97 10 50 0 96 17 -17 20 0 Ap 1 2 6 9 -15 8 -14 4 l- 2 r- 1 r- 1 l- 1 r- 2 -1 -2 n- ct n n- 0 l ct Ju Ju Ju Ap Ap ct Ja Ja O O Ja O Jan-22 Mar-22 May-22 Coal Oil Natural gas Wheat VIX Global financial conditions (RHS) Source: Bloomberg, UN Comtrade, World Bank. Source: Chicago Board Options Exchange, Goldman Sachs. Source: Global Economic Prospects, January 2022; Global Monthly, March 2022; East Asia and Pacific (EAP) Economic Update, April 2022 PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 13 1.2 External Sector – Peso Depreciation amid Rising Imports The Philippines’ balance-of-payments (BOP) surplus narrowed to 0.3 percent of GDP in 2021 as recovering imports widened the trade gap. The continued rise in import demand and soaring global commodity and oil prices weakened the peso against the US dollar in early 2022. A wider trade gap reversed the current-account balance equivalent to 2.0 percent of GDP as foreign investors to a deficit in 2021. From a surplus of 3.2 percent of GDP in divested from domestic debt securities. The BOP surplus 2020, the current-account balance reversed to a deficit of fell from 4.4 percent of GDP in 2020 to 0.3 percent of GDP 1.8 percent of GDP in 2021 as the trade deficit broadened. in 2021. The BOP remained in surplus in Q1 2022 amid Recovering domestic activities, alongside rising global prices stronger remittances, government foreign borrowings, and of commodities and oil, drove goods imports, which surged foreign direct and portfolio investments. As of March 2022, by 31.7 percent in 2021. It outpaced the 12.4 percent growth the cumulative BOP surplus reached US$495 million (0.5 in goods exports, which gained momentum from improving percent of Q1 2022 GDP), a reversal from the US$2.8 billion external demand. Recent data point to a larger trade deficit deficit (3.1 percent of Q1 2021 GDP) posted during the same in the first three months of 2022 relative to the same period period in 2021. in 2021, driven by 28 percent growth in goods imports and 9.8 percent growth in exports (Figure 6). Meanwhile, growth The Philippine peso depreciated against the US dollar in the business process outsourcing (BPO) sector partly in Q1 2022. After strengthening by 4.4 percent in nominal buoyed net services exports, which grew at a slower pace in terms in 2020, the peso gained a mere 0.8 percent in 2021 2021 due to a weak tourism sector. After contracting in 2020, as the trade deficit broadened. Higher imports driven by remittances bounced back by 5.1 percent in 2021, supported recovering domestic demand and rising global prices of oil by a sustained global economic recovery. Remittances and commodities, and the expected interest rate differential continued to grow by 1.9 percent during the first two months given the US Fed Rate hikes led to a 6.2 percent, year- of 2022. on-year, nominal depreciation of the peso during Q1 2022 (Figure 7). Nevertheless, the Philippine peso continued to Net capital inflows financed the current-account deficit outperform most currencies in the region. In real effective and contributed to the BOP surplus in 2021 (Table 1). terms, the peso appreciated marginally by 0.6 percent in Capital and financial account net inflows rose to US$7.0 2021, before depreciating by 3.4 percent in Q1 2022. The billion (1.8 percent of GDP) in 2021, as higher inflows from real depreciation could help boost the country’s trade foreign direct investment and other investment accounts competitiveness, as exports become relatively cheaper. outweighed portfolio investments net outflows. From a 21.3 Gross international reserves dropped slightly by 1.2 percent percent slump in 2020, net foreign direct investment rose by to US$108.8 billion by end-2021, before inching further down 54.2 percent to US$10.5 billion (2.7 percent of GDP) in 2021. to US$106.8 billion (9.4 months of import coverage) by April Meanwhile, portfolio investments reversed to net outflows 2022. Figure 6. The goods trade deficit widened in Q1 2022 amid Figure 7. The Philippine peso depreciated but continued higher imports. to outperform most currencies in the region in early 2022. Foreign Goods Trade (Percent of GDP) 110 Index of USD/LCU (March 2019=100) 40 105 30 100 20 Percent 10 95 0 90 -10 -20 85 Mar-20 Nov-20 Jan-20 Mar-19 May-19 Sep-19 Nov-19 Jul-19 Mar-22 Jan-22 Mar-21 May-21 Sep-21 Nov-21 Jan-21 Jul-21 May-20 Sep-20 Jul-20 2 Q 20 19 3- 0 4- 0 Q 20 9 Q 19 9 Q 21 3- 1 4- 1 Q 1 02 2 2 1 01 2 2 2 20 20 20 0 0 20 20 20 20 20 20 1-2 1-2 1-2 1-2 2- 3- 4- 2- 2- Q Q Q Q Q Q Q Q Philippines Indonesia Malaysia Trade balance Exports Imports Thailand Vietnam Source: PSA. Source: Haver Analytics. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 14 Table 1. Balance of Payments, 2017–2021 2017 2018 2019 2020 2021 In percent of GDP, unless otherwise indicated. Current account -0.7 -2.6 -0.8 3.2 -1.8 Goods -12.2 -14.7 -13.1 -9.3 -13.7 Exports 15.8 15.0 14.2 13.3 13.8 Imports 28.0 29.7 27.3 22.7 27.4 Services 2.6 3.3 3.5 3.8 3.6 Primary Income 1.0 1.1 1.4 1.1 0.8 Secondary Income 8.0 7.7 7.4 7.6 7.5 Capital and Financial accounts 0.9 2.7 2.2 1.9 1.8 Capital account 0.0 0.0 0.0 0.0 0.0 Financial account -0.9 -2.7 -2.1 -1.9 -1.8 Direct investment -2.1 -1.7 -1.4 -0.9 -2.1 Net acquisition of financial assets 1.0 1.2 0.9 1.0 0.6 Net incurrence of liabilities1/ 3.1 2.9 2.3 1.9 2.7 Portfolio investment 0.7 0.4 -0.7 -0.5 2.0 Financial derivatives 0.0 0.0 0.0 -0.1 -0.2 Other investments 0.5 -1.4 0.0 -0.5 -1.6 2/ Net unclassified items -0.5 -0.8 0.7 -0.7 0.3 Overall BOP position -0.3 -0.7 2.1 4.4 0.3 Memo: Basic Balance 1.5 -0.9 0.6 4.1 0.3 Gross International Reserves (in billions US$) 81.6 79.2 87.8 110.1 108.8 Import Coverage (in months) 7.8 6.9 7.6 12.3 9.6 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. Source: BSP Photo: aldarinho PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 15 1.3 Inflation and Monetary Policy: Renewed Inflationary Pressures After steadily declining since August 2021, inflation jumped in March and April 2022 as the war in Ukraine pushed global energy and commodity prices to record highs. In response, the Bangko Sentral ng Pilipinas (BSP) raised the policy rate by 25 bps to prevent further second- round effects and a buildup of inflation expectations. Inflation jumped in March and April because of the war from the higher policy rate, the BSP has reconfigured its in Ukraine. Inflation fell between August 2021 and February government securities purchasing window from a crisis 2022, settling within the BSP’s 2–4 percent target range. intervention measure into a regular liquidity facility. However, the shock of the war in Ukraine pushed global energy and commodity prices to record highs, spilling The Philippines’ banking system appears resilient to a over to domestic inflation as the country is a net importer significant credit shock. The gross non-performing loan of most staple foods, fertilizers, and fuels (Figure 8).3 As (NPL) ratio stood at 4.2 percent as of February 2022 (Figure these commodities comprise around 36.3 percent of the 10), higher than its pre-pandemic level of 2.0 percent and CPI, headline inflation rose to an average of 4.4 percent higher than peer countries such as Indonesia, Malaysia, and in March and April, up from an average of 3.0 percent Thailand. Other forward-looking indicators of asset quality between January and February (Figure 9). Inflation related have also deteriorated during the pandemic, pointing to to housing, water, and electricity prices increased from an some risks previously masked by regulatory forbearance: average of 4.7 percent in January-February to 6.6 percent for instance, restructured loans to total loans increased in March-April, while transportation inflation rose from an from 0.41 percent in February 2020 to 3.09 percent in average of 7.9 percent in January-February to 11.7 percent February 2022. Nonetheless, the banking sector appears in March-April. In response, the government approved to have sufficient financial buffers, as the NPL coverage fuel grants and cash transfers to cushion the impact of ratio of 88.4 percent as of March 2022 is recovering and rising oil prices (Box 2). Excluding volatile food and energy coming near to the 93.0 percent recorded in December items, the core inflation rate is estimated to have risen 2020. Furthermore, banking sector profitability indicators from 2.1 percent in January to 2.8 percent in April 2022, shows that Return on Asset at 1.2 percent increased by 50 indicating slowly rising underlying price pressure.4 percent year-on-year and Return on Equity at 9.6 percent increased by 49 percent year-on-year in March 2022. The BSP kept the key policy rate at historic lows to support the economic recovery despite recent global The support of the banking sector to the economic uncertainties. The Monetary Board raised the key recovery increased but remains weak. Private credit policy rate by 25 bps to 2.25 percent in May 2022, after grew by 5.6 percent in March 2022, still much lower than maintaining the rate at 2.0 percent since December 2020. the pace recorded before and at the early stage of the Inflationary pressures brought by high commodity prices pandemic (between 8 and 10 percent between January coupled with terms of trade deterioration5 and peso and May 2020). The possible causes of continued slow depreciation, the emergence of second-round effects credit growth include economic conditions and policy in wage hikes, and the buildup of inflation expectations support (demand side) as well as concerns over borrower drove its decision to tighten monetary policy stance. risks and asset quality and profitability (supply side). Survey Moreover, the rebound in economic activity and data6 point to stable household demand for credit. In the improving labor market conditions in the first quarter of Philippines, change in credit growth stood at 1.4 percent 2022 gave the BSP policy space to start rolling back compared to a year ago, suggesting an almost constant pandemic-induced monetary accommodation. Aside rate of credit expansion, similar to other regional peers. 3 The Brent crude oil prices reached a 10-year-high of US$130/bbl in early March, and the price of other commodities like wheat and several metals also reached an all-time high. 4 Official core inflation data based on 2018-based CPI series is not yet available. To estimate core inflation, the calculation followed the definition used for the 2012-based CPI series, which excludes the following commodities: rice, corn, meat (fresh, chilled, or frozen), fish (fresh, chilled, or frozen), vegetables (fresh, chilled, frozen, or dried cultivated for their fruit or roots), and fuels and lubricants used for personal transport equipment. These amount to 22.1 percent of the CPI using the 2018-based series. Rising import prices have deteriorated the terms of trade (2018 base year) from 93.95 in Q4 2021 to 90.06 in Q1 2022. 5 Rising import prices have deteriorated the terms of trade (2018 base year) from 93.95 in Q4 2021 to 90.06 in Q1 2022. 6 Department of Supervisory Analytics, Financial Supervision Sector, Bangko Sentral ng Pilipinas, January 2022. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 16 Figure 8. The Philippines is a net importer of staple foods, Figure 9. The war in Ukraine led to an uptick in inflation in fertilizers, and energy items. March 2022. Net Exports as Percent of GDP Contributions to inflation (2010-2020 Average) 6 5 0.2 - 4 (0.2) 3 Percent (0.4) 2 (0.6) 1 Percent (0.8) 0 (1.0) (1.2) -1 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr (1.4) (1.6) 2021 2022 (1.8) Other non-food commodities Transport: Fuels and lubricants for personal transport s t ) s) e) s sh ) e as ea de le er c el Utilities: Electricity, gas, and other fuels ric Fi Ri (g ab M liz ru fu cl. um (c rti t Alcoholic beverages and tobacco id ge Fe (in um l le so Ve Food and non-alcoholic beverages al t ro le s( re t ro al Pe Ce Headline inflation Co Pe Core inflation Source: PSA. Source: PSA Figure 10. NPLs and restructured loans have risen. 5.0 4.5 4.0 3.5 3.0 Percent 2.5 2.0 1.5 1.0 0.5 0.0 Jul-21 Sep-21 Feb-20 Mar-20 Apr-20 May-20 Oct-20 Jan-20 Jun-20 Jul-20 Aug-20 Sep-20 Nov-20 Dec-20 Dec-19 Feb-22 Jan-22 Feb-21 Apr-21 Oct-21 Jan-21 Mar-21 May-21 Jun-21 Aug-21 Nov-21 Dec-21 NPL Restructured Loans to total loans Source: BSP. Photo: MDV Edwards PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 17 Box 2. Fiscal Measures to address the Impact of Rising Inflation The government has approved a total of 0.4 percent could further constrain the fiscal space. Financing new of GDP in fuel grants and transfers to help cushion the fiscal measures to provide support could prove more difficult impact of the war in Ukraine on inflation. The package in the future, given the country’s narrower fiscal space. of interventions includes targeted transfers to the poorest For example, while the government has committed to a households, fuel grants to the agriculture and transportation monthly cash transfer of Php500 to the bottom 50 percent sector, and fertilizer grants for non-rice farmers. In particular, of households for 12 months, the Department of Finance a Php500 (US$10) monthly cash transfer will be provided has only allocated funding for the first six months of the to the bottom 50 percent of households for an initial program. Meanwhile, additional fiscal support amounting six-month period, with a total fiscal cost of Php41.4 billion to 0.4 percent of GDP will be financed in part through a (0.2 percent of GDP). The proposal was approved by the realignment of the 2022 national government budget and president in lieu of a fuel excise tax suspension, which would partly rely on excess dividends from government- would have cost the Philippine government Php105.9 billion owned and controlled corporations and windfalls from (0.5 percent of GDP) in foregone tax revenues. In addition, higher value-added tax (VAT) collections on higher oil the government will provide a total of Php3.0 billion (0.02 imports. Moving forward, the incoming administration percent of GDP) in additional fuel grants to the transportation must continue to review and rationalize existing grants (Php2.5 billion) and agriculture (Php0.5 billion) sectors, and transfer programs beyond the core social protection and Php20 billion in fertilizer grants, sourced from the programs in the context of an improving economy and its Department of Agriculture’s (DA) realigned 2022 budget. fiscal consolidation goals. Given the country’s narrower fiscal space, measures need to be rationalized and targeted While the fiscal cost of additional transfers and grants with efficient disbursement and distribution mechanisms. is relatively small, future increases in fiscal support Photo: VideoFlow PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 18 1.4 Fiscal Policy: Narrowed fiscal deficit The fiscal deficit narrowed in the first quarter of 2022 relative to the same period last year as the government continued to unwind its COVID-19-related fiscal support. The fiscal deficit narrowed in the first quarter of 2022 same period, likely due to the impact of strict mobility (Figure 11). The unwinding of fiscal support and the base restrictions that remained early in the year. Meanwhile, effect from a one-time equity infusion to government non-tax revenues increased due to higher incomes by the financial institutions in the first quarter of 2021 resulted in the Bureau of the Treasury and remittances from government- slower growth of public expenditures in the first quarter of owned and controlled corporations. 2022. This reduced the fiscal deficit to 6.4 percent of GDP in the first quarter of 2022, from 7.4 percent in the same period Public spending growth slowed as the government a year ago. The deficit contributed to an increase in reduced pandemic-related fiscal support. National financing needs, leading to the rise in central government government spending expanded by 8.2 percent in the first debt from 60.4 percent in end-2021 to 63.5 percent in the quarter of 2022 (19.9 percent growth over the same period in first quarter of 2022 (Figure 12). Despite the increase in debt, 2021) to reach 22.3 percent of GDP, lower than the 23.3 the country’s debt metrics remain favorable toward long- percent of GDP in the first quarter of 2021. The decline was term fiscal sustainability, as 5.3 percent of total debt is short driven by a one-time Php45 billion equity infusion to term, while 69.8 percent is peso denominated. government financial institutions in 2021, as mandated by the Bayanihan 2 law for pandemic response. Excluding the Public revenues-to-GDP remained steady in the first one-time equity infusion, government expenditure grew by quarter of 2022. National government revenues expanded 13.2 percent due: to (i) higher local government units (LGUs) by 12.6 percent in the first quarter of 2022 (8.7 percent allotments (29.2 percent growth) in compliance with the contraction over the same period in 2021) to reach 15.9 Mandanas Ruling;7 and (ii) increased interest payments (8.7 percent of GDP. This is the same as the revenue-to-GDP percent growth) because of higher public debt. Education ratio in the first quarter of 2021. Tax collections by the and election-related spending, as well as the continued Bureau of Customs rose from 3.4 percent of GDP in the first procurement of COVID-19 vaccines, also contributed to the quarter of 2021 to 3.8 percent in the same period in 2022, growth in disbursements. The pandemic has highlighted the supported by the growth of merchandise imports. By importance of investments in core public health functions, as contrast, tax collections by the Bureau of Internal Revenue the health sector received one of the largest budget declined from 10.7 percent to 10.2 percent of GDP in the increases across sectors in 2021 (Box 3). Figure 11. The deficit narrowed in Q1 2022 as the Figure 12. …although public debt inched upward. government reduced pandemic-related expenditures… 30 0.0 Domestic debt External debt -1.0 70 3.5 National Government Guaranteed Debt (RHS) 25 -2.0 Fiscal balance (Percent of GDP) 60 3.0 -3.0 20 50 2.5 Percent of GDP -4.0 Percent of GDP Percent of GDP 15 -5.0 40 2.0 -6.0 30 1.5 10 -7.0 20 1.0 -8.0 5 -9.0 10 0.5 0 -10.0 2019 2020 2021 Q1 2021 Q1 2022 0 0.0 2017 2018 2019 2020 2021 Q1 2022 Revenues Expenditure Fiscal Bala nce (RHS) Source: BTr, DBM. Source: Bureau of the Treasury (BTr), DBM. 7 The Mandanas Ruling increased the internal revenue allotment given to LGUs by requiring non-Bureau of Internal Revenue taxes to be included in the computation of the block grant. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 19 Box 3. Lessons from COVID-19 to Strengthen the Health Sector’s Pandemic Preparedness The Philippines has been hit hard by the COVID-19 stockpile from the national government. While the country’s pandemic. To date, there has been over 3.7 million cases national vaccination coverage is high, only a quarter of and close to 60 thousand deaths related to COVID-19. people living in Bangsamoro Autonomous Region in Muslim Reduced mobility, facility closures, and the fear of Mindanao have been fully vaccinated. contracting COVID-19 have threatened to wipe out progress made in health outcomes. Overall, average monthly The pandemic has highlighted the importance of utilization of essential health services decreased by 25 investments in core public health functions—a lesson that percent in 2020 relative to 2019, with poorer households the DOH has taken to heart. Health saw one of the largest more likely to forgo care (Figure 13). There was also a budget increases (20 percent) across sectors in 2021, the reduction in the use of services related to nutrition, bulk of which was allocated to system strengthening tuberculosis, and ischemic heart conditions at the primary activities to ensure resilience to emerging infectious care level. Moreover, estimates suggest that over 2 million diseases. Along this vein, the Philippines should consider: Filipino children are expected to miss out on life-saving immunizations due to the pandemic (Figure 14). 1. Strengthening health management and information systems. Digitizing medical records and automating the The government’s COVID-19 emergency response reporting of notifiable diseases at the facility level would prioritized scaling up surveillance, testing and isolation generate real-time data to promptly identify and respond to capacity, and vaccine delivery. The Department of Health disease outbreaks. Accelerating the digital health (DOH) included COVID-19 on the list of nationally notifiable transformation would also facilitate analytics to better target diseases and set aside funds for the establishment of a health interventions, monitor the quality of care, improve the virology institute. The number of testing centers increased efficiency of health spending, and support decision-making from a single national reference laboratory to over 300 able and policy formulation overall. to conduct more than 50,000 RT-PCR8 tests a day. The DOH and provincial hospitals were upgraded with additional 2. Increasing capacity of specialized laboratory services. isolation, intensive care unit, and ventilator-supported beds. Developing a comprehensive national laboratory networking Initial supply chain bottlenecks were addressed through strategy would provide a benchmark for budget and tri-partite contracts with the private sector, LGUs, and planning decisions on meeting testing, staffing, quality, and multilateral partners. And, as of March 30, 2022, the reporting requirements for each level. Philippines had fully immunized approximately 66 million Filipinos, or 73 percent of the population. 3. Safeguarding health promotion and hygiene. Ensuring an adequate stockpile of personal protective equipment, However, the response has not been without its cleaning and disinfection supplies, and water, sanitation, and challenges. The lack of integrated information systems hygiene facilities at healthcare facilities would temper global across (and within) levels of government and paper-based supply chain shortages and mitigate the spread of infection. reporting at health facilities hampered the government’s ability to do contact tracing and contain the pandemic early 4. Enhancing the resilience of health facilities, including on. Tests per million population remains one of the lowest in vaccine and cold chain storage. As one of the most the Association of Southeast Asian Nations (ASEAN), and hazard-prone countries in the world, there is a need to adapt bed occupancy in newly created isolation facilities is low. healthcare facilities to withstand the impacts of extreme The vaccines procured through tri-partite agreements were climate-related events, including flooding and heat events. delayed and arrived after some LGUs had already received a Photo: MIA Studio 8 Reverse Transcriptase Polymerase Chain Reaction Test which is considered gold standard for SARS-CoV2. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 20 Figure 13. The drop in health claims coincides with the onset of COVID-19 and lockdown measures. Total NUMBER of claims by month and year (2018-2020) 1200000 First confirmed COVID 1000000 case January 30, 2020 800000 600000 400000 200000 0 2020m6 2020m9 2019m12 2020m2 2020m5 2018m8 2020m8 2018m3 2019m3 2020m3 2018m4 2019m4 2020m4 2018m1 2019m1 2019m11 2020m1 2018m7 2019m7 2020m7 2019m10 2020m10 2018m6 2018m9 2019m6 2019m9 2020m12 2018m2 2018m5 2018m12 2019m2 2019m5 2019m8 2018m11 2020m11 2018m10 Source: PhilHealth Claims, 2021. Figure 14. Reduction in malnutrition pregnancy care is especially worrisome for human capital, as the impact is compounded over Filipinos’ lifecycle. Percentage change between pre-COVID (2018-2019 average) Percentage change between pre-COVID (2018-2019 average) and post-COVID (2020) visits at the primary care level. and post-COVID (2020) hospital admissions. -2% 67% 56% -18% -20% -25% 13% -4% -39% -43% -30% -43% -58% -48% * re n* TB * n* V es ic es ic n re ca n tio TB io HI V m et tio io m ns HI ca et he tr i y ab ns he tr i nc r te ab nu Isc y r te nu Di Isc nc na al Di pe al pe M na eg Hy M Hy eg Pr Pr * Does not include visits paid under the primary care benefit package. Source: PhilHealth claims, 2021. Source: PhilHealth claims, 2021. Photo: CaveDweller99 PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 21 1.5 Employment and Poverty: Continued Recovery amid Economic Uncertainties Increased labor force participation and accelerated job creation reflect signs of a continuous labor market recovery. However, uncertainties brought about by the pandemic, natural disasters, and rising fuel and commodity prices threaten household earnings and job security. More individuals seek opportunities in the labor and aquaculture was likely associated with the heavy market as the economy gradually reopens. The labor destruction from Typhoon Odette in December 2021. force participation rate rose to 65.4 percent in March 2022, surpassing the pre-pandemic level of 61.7 percent Job quality remains a concern. The dominance of in January 2020 (Figure 15). The increasing trend has elementary occupations associated with lower pay occurred amid intermittent declines associated with the remained high, registering at nearly one-third in March reimposition of community quarantines (July 2021) and 2022. This is in line with the large number of jobs added in the onslaught of Typhoon Odette and the Omicron variant wholesale and retail trade as well as agriculture. The share related alert measures (January 2022). The typhoon of part-time workers—those working less than 40 hours directly impacted about 2.2 million workers, of whom nearly a week—was 33.8 percent in March 2022, slightly higher 839,000 (38 percent) were women.9 Notwithstanding than the pre-pandemic level of 31.6 percent in January the increasing number of workers in the labor force, the 2020. Further, the share of wage and salary workers and unemployment rate follows a decreasing trend, indicating employers in the total labor force was nearly 4 percentage that the labor market is creating jobs and absorbing points lower than before the pandemic at 63.8 percent in more workers. The unemployment rate registered at March 2022 (compared to 67.6 percent in January 2020). 5.8 percent in March 2022, down from 7.1 percent in the same month in 2021. Meanwhile, the underemployment The growth contraction in 2020 and the associated rate, which have fluctuated widely during the pandemic, income loss among poor and vulnerable households rose again to 15.8 percent in March 2022, reversing the led to an increase in poverty in 2021. Preliminary official downward trend since November 2021 (Figure 16). poverty estimates using national poverty lines show that the poverty incidence increased by 2.6 percentage points Net job creation continued to accelerate. From October between the first semester of 2018 and the first semester 2021 to March 2022, there was a net increase of nearly of 2021. The crisis hit Luzon and Visayas the heaviest, with 3.15 million jobs, despite the surge in COVID-19 cases, poverty increasing by almost 5 percentage points—from enhanced alert levels, and devastation from the typhoon 12.7 to 17.1 percent in Luzon and from 26 to 30.8 percent especially in January. About a third of the net increase in Visayas. Inequality has also likely increased, with the in jobs were from the agriculture sector, whereas Gini coefficient estimated to have inched up from 42.3 manufacturing and construction have added only a small percent in 2018 to 45.0 percent in 2021. These poverty number of jobs. Meanwhile, some sectors such as fishing and inequality indicators would have been higher in 2021 and aquaculture, water supply and sewerage, and waste without the social assistance (e.g., cash transfers and food management and remediation activities experienced aid) given to families during the height of the pandemic.10 a fall in employment. The decline in jobs in fishing Photo: Twinsterphoto 9 UNOCHA Reliefweb. 10 Results are based on a macro-microsimulation model that combines population and macroeconomic projections between 2020 and 2022 with pre‐crisis data from the 2018 Family Income and Expenditure Survey (FIES) to predict income at the individual and household level. The model uses labor markets as the main transmission mechanism and allows for two types of shocks: (i) shocks to labor income, including employment shocks and earnings shocks from the pandemic, and (ii) shocks to non‐labor income, including changes in private transfers and changes in social protection mechanisms (transfers from Bayanihan to Heal as One Act). PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 22 Figure 15. Labor Force Participation Rates, January 2019– Figure 16. The underemployment rate fluctuated widely March 2022 (normalized, Jan 2020=1) highlights greater while the unemployment rate fell. volatility of female labor force participation 1.2 25.0 20.0 1.1 15.0 Percent 1 10.0 0.9 5.0 0.8 0.0 Aug Aug Jul Jan Apr Jan Apr Jan Mar Apr Jun Jan Mar Jan Apr Jan Mar Apr Jan Mar Oct Oct Oct Dec July July May Nov Oct Oct Dec July May Nov Feb Sep Feb Feb Sep Feb Jul Jun 2020 2021 2022 2019 2020 2021 2022 MALE FEMALE Unemployment Rate Underemployment Rate Source: PSA Labor Force Survey (LFS) (various rounds). Note: Starting February 2021, the LFS is conducted monthly to produce more timely data. Photo: vichie81 PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 23 Part II Outlook and Risks The economy is projected to grow at 5.7 percent in 2022 and 5.6 percent, on average, in 2023-24. Growth will draw strength from the domestic environment, with declining COVID-19 cases, looser restrictions, and wider reopening. The strong domestic condition will help compensate for the weak external environment, which is reeling from a global growth deceleration, rising global inflation, and geopolitical turmoil. The growth outlook, however, is subject to significant downside risks from external and domestic sources. The authorities are expected to tighten monetary policy and pursue fiscal consolidation in the medium term. The incoming administration needs to swiftly confirm its economic priorities to dispel policy uncertainty and preserve market confidence. Photo: Photo: chanachai ultramansk urchaitakul PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 24 2.1 Growth Outlook The economy is projected to grow over the medium term, anchored in the recovery of domestic activities. Policy space is narrowing, with the authorities expected to raise the key policy rates and face the prospect of fiscal consolidation. The external environment has turned less favorable at a next year. Growth is projected at 5.7 percent in 2022 and 5.6 time when the Philippines has weathered the worst so far percent, on average, in 2023-24, same as the projections of the COVID-19 pandemic. Three international made in the April East Asia and Pacific Economic Update developments are clouding the outlook. First, the war in (Figure 18). The projection incorporates the adverse impact of Ukraine is disrupting food and fuel supplies, raising market higher inflation on household consumption. The outlook volatility, and undermining global confidence. While the faces downside risks from abrupt tightening of global Philippines has limited direct exposure through trade or financing conditions, geopolitical uncertainty, and growth financial flows, the conflict and sanctions are affecting it in deceleration in main trading partners like the United States terms of higher energy and food prices. Second, rising global and China. While the number of COVID-19 cases have been inflation is inducing policy rate hikes in advanced economies low for a long period now, the threat of a new variant-driven and EMDEs. Tightening global financing conditions are surge hangs over the outlook. dampening global investment prospects. Finally, China’s structural slowdown and regulatory response to COVID-19 Without mitigation measures, the country faces weaker are disrupting global trade and exacerbating the global long-term growth potential due to economic scarring growth deceleration. China’s slowdown will adversely impact from the pandemic. Firm closures, due to the pandemic, the Philippines, as its trade is increasingly oriented toward have directly contributed to permanent jobs and income Chinese markets. About 4.1 percent of its value-added losses and the erosion of valuable intangible assets, exports were destined for China in 2018, up from 3.0 percent such as management and technical know-how, employee in 2007.11 competencies, and value network and relationships.12 Some surviving firms face impaired balance sheets and The country’s strong domestic conditions will help are deferring productive investments. Higher incidence of compensate for the weak external environment. Growth malnutrition among the poor and disruption in education are will draw strength from an improving domestic eroding human capital and hurting peoples’ future earning environment. Growth will draw strength from an improving potential. The pandemic will have an adverse impact on domestic environment, characterized by declining COVID-19 the economy, lowering the long-term growth potential to cases, more vigorous public mobility, and wider economic a projected 5.7 percent, on average, in 2020–29, below reopening. New daily COVID-19 cases dropped from a peak the pre-pandemic estimate of more than 6.0 percent. of nearly 40,000 in mid-January to less than 200 in mid-May, The challenge is to limit the scarring by capitalizing prompting the authorities to further ease mobility restrictions on growth opportunities such as the acceleration of across the country. The easing of restrictions ensued amid digitalization, and implementing a catch-up plan to mitigate increased vaccine coverage and a short-lived Omicron wave, the adverse socio-economic impacts of the pandemic. which kept the country’s hospital and critical care capacities below precarious levels. People’s mobility has returned to Monetary policy is expected to tighten in the face of pre-pandemic levels across different activities including for inflationary pressure and policy rate hikes in advanced work and recreation. The return of robust domestic activity is economies. Headline inflation is expected to breach the central bank’s target range of 2.0-4.0 percent in 2022, expected to buoy growth at a time when the external before declining in succeeding years. Rising oil and environment is weak. commodity prices, exacerbated by the war in Ukraine, firming local demand, and a weaker peso are stoking The growth outlook is positive but subject to downside domestic inflationary pressure. Global energy prices are risks. The Philippines is expected to be one of the key forecast to rise by more than 50 percent this year, with the growth performers in the region over the short- to medium- Brent Crude Oil price averaging US$100/bbl—an upward term (Figure 17). Its growth trajectory anchors on recovering revision of US$24/bbl.13 Meanwhile, agricultural prices are domestic demand and sustained public infrastructure forecast to rise by about 18.0 percent this year, reflecting investments amid an anticipated recovery among EMDEs weaker grain production and high input costs for fuel, 11 See World Bank, “East Asia and Pacific Economic Update: Braving the Storms,” Washington, D.C.: World Bank, April 2022. 12 The Philippines COVID-19 Firm Survey (March 2022) showed that 7 percent of firm respondents have closed and expected not to re-open, while another PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 25 Figure 17. The Philippines is expected to be among the Figure 18. The medium-term growth prospect is positive. top growth performers in the region. 9.0 9 8.1 Forecast 8.0 7 5 7.0 6.5 3 6.0 5.7 5.7 5.8 5.5 5.6 5.3 5.2 1 5.1 Percent 5.0 4.5 -1 Percent 4.3 4.3 4.0 3.7 -3 3.1 -5 2.9 3.0 2.6 -7 2.0 1.6 -9 1.0 -11 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 0.0 2021 2022F 2023F April 2022 projection June 2022 projection Philippines Malaysia Vietnam Indonesia China Thailand Actual g rowth Source: World Bank staff estimates; various national statistics offices. Source: PSA; World Bank staff estimates.. chemicals, and fertilizers. In May, the Department of Trade services sector, especially transportation, restaurant and and Industry (DTI) approved raising the suggested retail food services, and wholesale and retail trade. Moreover, prices of 82 basic necessities and prime commodities prospects have improved for international and domestic between 2 and 10 percent,14 while regional wage boards, tourism following the reopening of borders to vaccinated including in Metro Manila, approved an increase in minimum individuals, the reopening of tourist attractions, and relaxed wages for workers. The U.S. Federal Reserve started to hike travel requirements for travelers. Sustained public key policy rates in March, and it has signaled its intent to investments, along with reinvigorated domestic activities, will raise rates further within the year. Monetary policy in the likely raise the demand in construction and industry. Weak Philippines is thus expected to tighten in a bid to manage external demand, however, may partly temper manufacturing inflationary pressure and align with higher global interest growth. Growth in the agriculture sector remains tepid due to rates. chronic underinvestment and vulnerability to weather-related shocks. Yet, supporting the sector is important to achieving The fiscal deficit is expected to remain elevated in the inclusive growth, as it employs a disproportionate share of medium term but gradually decline with the economic the labor force, while food comprises a large share of the recovery. The fiscal deficit is projected to reach 7.1 percent household consumption basket. of GDP in 2022, before narrowing to 6.0 percent and 5.1 percent in 2023 and 2024, respectively (Table 2). The Net exports are expected to be weaker amid a subdued declining trajectory hinges on the economic recovery, which external environment. After rebounding to 5.7 percent in would be faster if the new administration pursues fiscal 2021, global growth is expected to soften to 2.9 percent in consolidation measures. The recovery will lead to higher tax 2022 and 3.0 percent in 2023 (Box 4). Growth in advanced collection from consumption taxes, while higher imports are economies is projected to decelerate by 1.2 percentage contributing to increased customs collection. Corporate points in 2022 from earlier projection, and impact the income tax revenue, however, is expected to be lower by an country’s goods exports, as nearly 70 percent are destined average of 0.5 percent of GDP per year in 2022-23 as the for high-income economies. Still, the prospect for services government implements the Corporate Recovery and Tax exports has improved from last year’s as the BPO sector is Incentives for Enterprises law. Meanwhile, public spending is expected to continue to capitalize on sustained global expected to decelerate over the medium term as the demand, and international tourism is set to recover with the government unwinds its pandemic response. Still, capital reopening of borders and lifting of restrictions. Meanwhile, outlays will likely remain elevated as the government import growth will likely accelerate as the government pursues infrastructure investments. implements infrastructure projects, leading to renewed demand for capital goods and construction materials. The The economic reopening will benefit the services and current account deficit is projected to widen to 4.0 percent industry sectors, while agriculture will grow modestly due this year, and remain in deficits in 2023-24. to structural weaknesses and the impact of natural disasters. The reopening will benefit the contact-intensive 13 World Bank, Commodity Market Outlook: The Impact of the War in Ukraine on Commodity Markets,” Washington, D.C.: World Bank, April 2022. 14 Department of Trade and Industry, “DTI releases new SRP bulleting for basic necessities and prime commodities,” available online: https://www.dti.gov.ph/ news/dti-releases-new-srp-bulletin-for-basic-necessities-and-prime-commodities/. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 26 Photo: anek.soowannaphoom Table 2. Economic Indicators for the Baseline Projections 2019 2020 2021 2022F 2023F 2024F Real GDP growth, at constant market prices 6.1 -9.5 5.7 5.7 5.6 5.6 Private Consumption 4.3 -5.8 3.1 4.0 4.1 4.1 Government Consumption 1.1 1.3 1.1 1.4 1.3 1.1 Capital Formation 0.9 -9.1 3.9 3.2 3.1 3.1 Exports, Goods and Services 0.8 -4.7 2.2 2.1 1.9 1.7 Imports, Goods and Services 1.0 -8.7 4.5 5.2 4.8 4.5 Real GDP growth, at constat factor prices 6.1 -9.5 5.7 5.7 5.6 5.6 Agriculture 0.1 0.0 0.0 0.1 0.1 0.1 Industry 1.7 -4.0 2.5 1.9 1.9 1.8 Services 4.3 -5.5 3.3 3.6 3.7 3.7 Inflation (period average) 2.4 2.4 3.9 4.6 3.9 3.5 National government balance (% of GDP) -3.4 -7.6 -8.6 -7.1 -6.0 -5.1 National government debt (% of GDP) 39.6 54.6 60.5 61.9 62.7 62.7 Current account balance -0.8 3.2 -1.8 -4.0 -3.5 -3.3 Source: PSA, BTr, and World Bank staff estimates. Note: Growth subcomponents show contributions to growth. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 27 Box 4. Global Economic Outlook The global economic recovery is expected to slow due to not be able to provide additional support when needed. the War in Ukraine, and as the effects of the pandemic reverberate across countries with limited fiscal space. While global trade is expected to rebound in tandem with After rebounding to 5.7 percent in 2021, global growth is the economic recovery, it may be adversely affected by projected to decelerate to 2.9 percent in 2022 with growth supply chain disruptions. The volume of goods traded in EMDEs projected to reach 3.4 percent (2.7 percent globally is expected to increase by 4.0 percent in 2022 and excluding China) (Table 3). The War in Ukraine resulted 4.3 percent in 2023. Higher transport costs and persistent in drastically worse projections compared to the rosier supply chain issues are making it challenging for GVCs forecasts earlier this year. Both Russia and Ukraine are contribute to the relatively meager growth. Nevertheless, major exporters of key commodities, such as wheat, natural these supply chain bottlenecks are expected to ease in gas, palladium, and seed oil. The conflict has contributed the medium-term as pandemic-related shutdown of ports to heightened global inflation due to higher energy and are lifted and the shortage of semiconductors and shipping food prices, which were already surging due to pandemic- containers ease. Still, key downside risks remain including related supply chain disruptions. Policymakers now face potential new COVID-19 variants that could engender a increasingly difficult tradeoffs as they attempt to support fresh round of port-related restrictions, elevated oil prices recovery while taming high prices. Conditions in EMDEs could lead to persistently high shipping costs, and increased deteriorate as increasing risk aversion induce capital flight. protectionism around the globe that could dampen trade in The environment of EMDEs remains challenging because the long term horizon. of limited policy response options to combat increasing debt and price levels, and lingering adverse effects of the Global inflation remains persistently higher than pandemic on human and physical capital accumulation. expected, and high global debt levels contribute to increased financial stress. Inflation is above target in Global growth is projected to further moderate in 2023, a vast majority of countries that employs an inflation keeping both EMDEs and LICs below pre-pandemic targeting scheme (Figure 20). The War in Ukraine caused growth trends. Global growth is expected to moderate a surge in energy prices, worsening food inflation which to 3.0 percent in 2023 as revenge spending is exhausted was already reeling under the impact of supply chain and fiscal support expires. The cumulative losses in output bottlenecks. In the near term, this may accentuate food over its pre-pandemic trend is expected to mount until at insecurity, particularly in EMDEs and LICs. Persistently high least 2024, especially on EMDE commodity importers due levels of inflation have led some monetary authorities to to high prices and limited policy options (Figure 19). Globally, tighten monetary policy and raise long-term interest rates. EMDEs and LICs whose food needs (e.g. wheat, corn, and This, in turn, has exacerbated the already-limited fiscal seed oil) are dependent on Russia and Ukraine may become space of EMDEs as the prospect of further debt financing vulnerable to episodes of food insecurity. Energy prices diminishes. If not reined in, worsening financial stress could are forecasted to rise by 52 percent in 2022, and Europe, reverberate across EMDEs as demand for traded goods which is critically dependent on Russian oil and gas, may and commodities decrease. Muted business and consumer also bear the brunt of this price spike in energy prices as confidence could dampen corporate profits, leading a prolonged conflict looms. Limited policy space to rein to bankruptcies that would dent bank balance sheets. in inflationary pressures and weak investment prospects Moreover, the war has triggered further risk aversion among are expected to particularly worry policymakers in EMDEs investors, which could lead to capital outflows from EMDEs, and LICs. Climate-related disasters may exacerbate the resulting in currency depreciation, a fall in equity market already fragile situation as EMDEs and LICs, which may valuations, and risk premium increases in bond markets. Photo: MDV Edwards PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 28 Figure 19. Cumulative output losses (2020-2024) versus Figure 20. Inflation is above target in the vast majority of the pre-pandemic trend are expected to mount. inflation-targeting countries. 0 100 75 -15 Percent of 2019 GDP Percent 50 -30 25 -45 0 World EMDE EMDE EMDE 2019 2020 2021 Apr-22 commodity commodity exporter importer Advanced Economies EMDE Source: Consensus Economics, World Bank, International Monetary Fund Source: PSA; Consensus Economics, World Bank, International Monetary Fund Table 3. Real Growth Projections. 2019 2020 2021e 2022f 2023f World 2.6 -3.4 5.7 2.9 3.0 Advanced economies 1.7 -4.6 5.1 2.6 4.2 Emerging market and developing economies 3.8 -1.7 6.6 3.4 4.2 East Asia and Pacific 5.8 1.2 7.2 4.4 5.2 Philippines 6.1 -9.5 5.7 5.7 5.6 Notes: 1. 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. 2. Global growth projections may be updated in the upcoming Global Economic Prospects January 2022. Source: Global Economic Prospects June 2022; East Asia and Pacific Economic Update April 2022. Photo: Al.geba PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 29 Photo: Bankoo Private consumption is expected to expand with more its public infrastructure agenda. Public infrastructure robust economic activity, recovering employment, investment is expected to drive capital formation growth, and sustained remittances. The economic reopening is with capital outlay disbursements programmed to rise from expected to revitalize business activities, leading to job 5.1 percent of GDP in 2021 to 5.8 percent of GDP in 2022. creation and improved household incomes. Together with The rollout of public infrastructure investments is expected to sustained remittance inflows, recovering incomes will continue with the incoming administration, which has already release pent-up demand and drive private consumption. signaled its intent to continue the flagship infrastructure Moreover, like in past election cycles, election-related program of the current administration. Private investment activities are expected to have provided an added boost may be challenged by rising interest rates, a weak external to the economy in the first half of the year. However, environment, and domestic policy uncertainty. Nonetheless, rising inflation is dampening consumer confidence, in the medium term, broader private sector participation which has steadily improved since the trough during the may drive capital formation growth.15 With the adoption of pandemic (Figure 21). Moreover, it has partly compelled the amendment to the Public Service Act and the Foreign the authorities to raise the key policy rate. Absent the Investment Act, along with the passage of the Retail Trade inflationary effect and the monetary tightening, private Liberalization law and the Corporate Recovery and Tax consumption recovery would have been higher in 2022. Incentives for Enterprises (CREATE) law, the government has set the stage to attract foreign investments.16 This is Capital formation will drive growth in the medium term as timely, as the authorities face narrower fiscal space amid the government attracts foreign investment and pursues the continued delivery of infrastructure investments. Figure 21. Consumer confidence has been steadily improving since mid-2020. Overall Consumer C onfidence Index (Current quarter) Overall Business Confidence Index (Current quarter) 60 40 20 0 -20 -40 -60 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2016 2017 2018 2019 2020 2021 2022 Source: BSP. 15 These laws allow more industries to full foreign ownership, lower the minimum paid-up capital requirement for foreign retail enterprises, and liberalize the practice of professions not governed by existing special laws. 16 These laws allow more industries to full foreign ownership, lower the minimum paid-up capital requirement for foreign retail enterprises, and liberalize the practice of professions not governed by existing special laws. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 30 2.2 Poverty and Shared Prosperity The gradual opening of the economy in March 2022 will likely have a positive effect on household incomes as conditions for workers and businesses improve. However, looming uncertainties on the ongoing was in Ukraine will likely slow down progress in poverty alleviation. The gradual reopening of the economy, with most parts of conflict will slow down the decline in poverty mainly due the country placed under the lowest COVID Alert Level 1, to direct effect of higher food prices and the knock-on will accelerate a recovery of labor markets, businesses, effect of fuel price increases. Data from the 2018 Family and household incomes in 2022. Following current growth Income and Expenditure Survey (FIES) reveal that food projections, the poverty incidence is projected to decrease expenditures comprise over half of household consumption to 21.0 percent in 2022 and continue to decline through for 60 percent of households in the Philippines. For 2024 (Figure 22).17 Poverty will likely decline faster in major households in the poorest decile, food consumption economic centers in Luzon (i.e., NCR, CALABARZON and accounts for 64 percent of total household consumption, Central Luzon) than in the rest of the country in 2022 with cereals alone comprising 44 percent of total because of faster employment growth in these areas. Recent consumption. With cereals comprising a considerable share official employment statistics also suggest that sectors of household expenditure, an increase in cereal prices will associated with rural employment (e.g., agriculture and likely hurt the poorest households the most. Estimates of the traditional services) is recovering slower than other sectors, direct effects of prices variations on poverty show that a 10 indicating that poverty reduction will likely be slower in rural percent increase in the global price of cereals is expected to areas. The potential emergence of new COVID-19 variants raise the poverty headcount by 1 percentage point, pushing and mobility restrictions during new rounds of lockdowns an additional 1.1 million Filipinos into poverty (Figure 23). An would impede the downward trend in poverty. increase of 10 percent in energy prices, on the other hand, is estimated to raise the poverty headcount by 0.3 percentage The looming uncertainties on the ongoing Russia-Ukraine points, equivalent to an additional 329,000 poor Filipinos. Figure 22. Actual and projected US$3.20-a-day poverty Figure 23. Simulated Changes in Poverty from Increases rates in Cereals and Energy Prices. 45 4 Change in poverty (percentage points) 3.5 40 3 35 2.5 30 2 Percent 25 1.5 20 1 15 0.5 10 0 5 10% 20% 30% 10% 20% 30% 10% 20% 30% 0 Cereals Energy Energy & 200 6 200 8 2010 2012 2014 2016 2018 2020 2022 2024 cereals Simulated change in prices (%) Source: World Bank staff estimates; various national statistics offices. Source: FIES and World Bank staff estimates. 17 The macro-microsimulation model combines population and macroeconomic projections over 2020-2022 with pre‐crisis data from the 2018 Family Income and Expenditure Survey (FIES) to predict income at the individual and household levels. The model uses labor markets as the main transmission mechanism and allows for two types of shocks: (1) shocks to labor income, including employment shocks and earnings shocks from the pandemic, and (2) shocks to non‐labor income, including changes in private transfers and changes in social protection mechanisms (transfers from Bayanihan to Heal). PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 31 2.3 Risks and Policy Challenges The growth outlook faces significant downside risks emanating from the external and domestic environments. The new administration will face the difficult challenges of taming inflation and supporting the economic recovery with narrowing fiscal space. It will need to swiftly confirm its economic priorities to dispel policy uncertainty. Prolonged geopolitical tensions, coupled with intensified for the government to prepare for, respond to, and recover sanctions on Russia, could further disrupt global from disaster events. Over the past 10 years, strong economic activity. These geopolitical-related shocks typhoons have devastated nine out of 17 regions and would be wide-reaching, affecting global growth (e.g., affected an average of five million people. Recently, the growth deceleration in major economies), trade (e.g., country was hit by Super Typhoon Odette that affected 11 adverse price and terms-of-trade shocks), and financial million people and incurred total direct damage and indirect markets (e.g., muted capital flows). The Philippines would losses of around 1.45 percent of GDP.19 The increasing come under immense price pressure given its demand intensity and frequency of natural disasters will likely add for imported crude oil, fertilizer, and food such as wheat pressure to the country’s fiscal position and growth prospect. and rice. Investment flows may be tempered as global Hence, the government needs to strengthen the efficiency, investor sentiments retreat amid high uncertainty. As transparency, and inclusive use of public resources in growth in advanced economies decelerate, with a fear of disaster mitigation, response, rehabilitation, and recovery. recession in Europe, demand for Philippine goods export Given the country’s vulnerability to disasters, deepening would weaken, which in turn, would impair manufacturing disaster risk financing will strengthen financial resilience.20 activities. The adverse impact on growth would be severe and may have lingering effects in the medium term amid While the number of COVID-19 cases has been low for a tempered investment and disrupted trade flows. long period, the threat of a new variant-driven surge hangs over the outlook. The COVID-19 pandemic remains Faster-than-expected monetary tightening in advanced an ongoing threat more than two years after its initial economies could induce financial market volatility and emergence. Subvariants of the Omicron strain have already costlier financing. Central banks in advanced economies emerged and known to be spreading in a few countries. In may accelerate the pace of monetary policy tightening if the April, the Philippines detected its first case of the Omicron current period of elevated inflation persists and de-anchors subvariant. Nevertheless, the country is now better inflation expectations. The U.S. Federal Reserve already equipped to respond to the re-emerging threat. Vaccination started raising the Federal Funds Rate in March, and it coverage has reached 70 percent of the targeted signaled additional rate hikes within the year. A faster-than- population, and health protocol such as mask wearing expected tightening could induce capital outflows from continues. Moreover, the country has adopted systems that EMDEs (including the Philippines), lead to currency allow more public mobility and localized responses to depreciation, and raise financial market volatility. Private outbreaks while households and businesses have learned to sector borrowing costs would rise, dampening investments, cope with the restricted mobility, effectively reducing the while the ensuing currency depreciation would be a burden adverse economic impacts of the pandemic. on firms with large foreign currency-denominated loans. In April, EMDEs’ financial conditions were already at their Taming the rise in domestic inflation is a key challenge tightest levels since 2020,18 while in the Philippines, bond this year. The source of inflationary pressure includes: (i) spreads increased from 83 bps at the start of the year to 143 elevated global commodity and energy prices; (ii) global bps on May 4. supply constraints driven by weak global agricultural output, exports ban by key commodity exporters, and the war in The threat of natural disasters and climate change calls Ukraine; (iii) international supply chain and logistics for strengthening the use of public resources in disaster disruptions; (iv) currency depreciation; and (v) recovering mitigation, response, rehabilitation, and recovery. Climate local demand. High inflation will dampen household change and the COVID-19 pandemic have compounded the consumption which is expected to rebound with the lifting of impacts of natural disasters, which has made it more difficult mobility restrictions. It can also induce rate tightening, which 18 World Bank, Global Monthly April 2022. 19 This is higher than the damage and losses incurred during Typhoon Haiyan in 2013 at 1.10 percent of GDP. 20 World Bank, Philippines Economic Update: Building a Resilient Recovery,” Manila: World Bank, December 2020. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 32 will increase the cost of borrowings. The authorities must will help safeguard growth in the long term. Exercising fiscal use its available policy tools to tame inflation, some discipline means that the growth of public expenditure is immediately and others later as needed. These tools include slower than the growth of public revenues. This can be supply-side measures such as freer importation and lower achieved through tax administration and policy measures, tariffs and non-tariff barriers to help augment domestic improved spending efficiency and increased value for supplies as needed, support to agriculture production money in public procurements. Besides fast economic through extension services, seeds, and fertilizers, and growth, fiscal consolidation is needed to lower the debt ratio monetary tools to prevent a de-anchoring of inflation to near pre-pandemic levels. The country’s debt profile expectations. remains favorable. Public debt is mostly domestic (69.9 percent as of March 2022), long-term (65.7 percent), and In the short to medium term, pursuing fiscal consolidation peso-denominated (69.8 percent). Moreover, contingent will help protect long-term fiscal sustainability (Box 5). liabilities in the form of national government outstanding The authorities has to carefully manage the risks and guaranteed debt have remained manageable and continued trade-offs associated with consolidation. Increased taxation to decline to 2.1 percent of GDP as of March 2022. Financing or a reduction of public spending would hold back economic risks are curtailed by the Philippines’ comfortable access to activity in the short to medium term due to the reduction in capital markets, both domestic and international, and strong aggregate demand. Still, the improved macro management engagement with multilateral institutions.21 Photo: Pra Chid 21 In comparison with regional peers, the general government gross debt in the Philippines (59.1 percent of GDP in 2021) is lower than China’s (68.9 percent) and Malaysia’s (67.0 percent), but higher than Thailand’s (58.0 percent), Vietnam’s (47.9 percent) and Indonesia’s (41.4 percent). PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 33 Box 5. Rebuilding Fiscal Buffers through Fiscal Consolidation The COVID-19 pandemic has placed an undue burden on Philippines’ ability to weather external shocks is aided by its the Philippines’ fiscal position. The combined effect of the prudent management of external debt and short-term risk, global health crisis and the implementation of stringent the country’s fiscal buffers have narrowed over the medium containment measures led to a historic recession in 2020 term. As a result, the Philippines will have less policy space and continued weakness in 2021. In 2020, revenue to remain flexible in an event of another exogenous shock, collection weakened while public expenditures were which could potentially derail the country’s long-term reallocated to prioritize social spending and immediate inclusive growth agenda. Moreover, additional fiscal buffers COVID-19 support. Despite the sharp erosion in tax are needed to help mitigate the damaging effects of the revenues, the government continued to pursue expansionary COVID-19 pandemic in terms of firm closures, jobs and fiscal policy in 2021 to provide relief, jumpstart the economic income losses, and health insecurities and education recovery, and support growth. This resulted in a sharp disruptions. increase in national government debt from 39.6 percent of GDP in 2019 to 60.5 percent of GDP in 2021, the highest A combination of revenue raising reforms, strategic level since 2005. As a result, the Philippines now faces the expenditure cuts, and growth-enhancing structural challenge of protecting its fiscal health while attempting to reforms will be instrumental for the Philippines to pursue navigate a challenging economic recovery in the medium- fiscal consolidation that does not disrupt its growth term. potential. The country has shown a willingness to pass difficult yet potentially game-changing reforms that could Although debt sustainability risk remains manageable, improve the country’s long-term growth trajectory. For pursuing fiscal consolidation in the medium-term is example, it has passed key reforms that have further necessary to rebuild fiscal buffers, anchor the economic liberalized the economy with amendments to the Public recovery, and undo the economic scarring effects of the Services Act, Foreign Investment Act, and Retail Trade COVID-19 pandemic. The current administration’s medium- Liberalization Act. Ensuring that similar policies continue into term fiscal program aims to gradually reduce the fiscal the next administration will be crucial to help with economic deficit, by initially unwinding fiscal support. Under current recovery and reduce the strain on fiscal policy in order to macro-fiscal assumptions, the debt-to-GDP ratio is projected safeguard the country’s fiscal health and inclusive growth to peak at 62.9 percent of GDP in 2024, before declining agenda. gradually to 60.6 percent of GDP by 2028. Although the Photo: KieferPix PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 34 Photo: LiteChoices The authorities could improve public investment Ensuring access to commodities from both domestic or management and leverage private sector participation to foreign markets will help address inflationary pressure and narrow the country’s infrastructure gap. Limited fiscal mitigate food insecurity. The Rice Tariffication Law, in space makes it necessary for the authorities to improve particular, has replaced quantitative restrictions on rice public investment management to increase spending imports with tariffs, resulting in lower and more stable prices efficiency and minimize cost overruns. There is significant for unmilled and retail rice.23 Recently, the temporary room for improvement as the country’s spending efficiency is increase in the minimum access volume for pork and lower about 23.0 percent lower than what is considered best tariffs raised pork import and added to supplies amid the practices in efficiently translating public investment into outbreak of African Swine Fever which decimated local hog infrastructure.22 The authorities can also leverage public- population. Food security is tied to the ability to draw from private partnerships to improve the country’s infrastructure diversified sources both local and international. as long as financial risks to the government are managed, and quality of services for the citizens are secured. The Improved targeting of social assistance could ensure the private sector is a source of not only finance but also protection of poor and vulnerable households. The expertise and innovation to improve the economy’s implementation of social protection measures will help infrastructure readiness. The passage of investment-friendly mitigate the adverse impact of shocks, including high laws and amendments to restrictive laws signal the inflation, on the vulnerable population. However, the narrow government’s intent to intensify private sector involvement in fiscal space means that assistance needs to be timely and key industries including telecommunications, shipping, targeted, only reaching those most in need. The challenge is railways, and subways. to identify beneficiaries and swiftly deliver assistance in the most efficient way. There is no single targeting method that Diversifying the sources of key food commodities through is universally preferred or equally effective across countries, free trade would help ensure local produce, where as methods must be adjusted to the purpose of the program, inadequate, is augmented by foreign supplies. In the availability of data, and institutional capacity.24 The digital context of recovering consumer demand following the transformation of delivery systems and the use of the PhilSys loosening of mobility restrictions, high commodity prices, for the identification of recipients are steps towards building along with global food and fuel supply constraints, are partly a more dynamic registry to better inform the needs of driving inflationary pressure in the domestic economy. citizens (Box 6). 22 International Monetary Fund, “Public Investment Management Assessment,” IMF Country Report No. 19/137, Washington, D.C.: IMF, May 2019. 23 R. Briones, “Does rice tariffication in the Philippines worsen income poverty and inequality?” PIDS Policy Notes no. 2021-02, February 2021. 24 M. Rutkoswki and M. Grosh, “Is there a best way to target social assistance?” World Bank Blogs, March 2022, available online: https://blogs.worldbank.org/ voices/there-best-way-target-social-assistance. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 35 Box 6. Spotlights on PhilSys for Social Protection Delivery The Philippines has made steady progress towards a information, such as to identify gaps or duplications comprehensive social protection framework. The flagship in assistance. And documentation-related barriers for conditional cash transfer, Pantawid Pamilyang Pilipino beneficiaries to access financial services means that Program (4Ps), has contributed to reducing poverty, government-to-person payments cannot be digital. improving human capital, and women’s empowerment, among other positive outcomes for the poorest families. In The authorities have shown commitment to use PhilSys to addition to the regular program for poverty reduction and tackle these challenges as part of a broader agenda for human capital investment, adaptive social protection digital transformation to increase impact and resilience. programs to mitigate the negative consequences of shocks The Department of Social Welfare and Development (DSWD) have been implemented. The unconditional cash transfer in was the first to sign a memorandum of agreement with PSA response to the Tax Reform for Acceleration and Inclusion on PhilSys adoption, and has begun preparation for piloting (TRAIN) in 2018 and social amelioration program (SAP) in PhilSys seeding, online identity authentication and e-KYC response to the COVID-19 pandemic for instance into 4Ps and the Assistance to Individuals in Crisis Situations demonstrate at a large scale how the country has been (AICS) program. These pilots will pave the way for the DSWD using social assistance to mitigate the socio-economic to launch several important and interconnected initiatives: impacts of shocks for the poor and vulnerable population. • Cleaning databases: Using PSN token seeding to identify These policies and best of intentions, though, have ghost, deceased, and duplicated beneficiaries. been undermined by relatively weak delivery systems. • Establishing a Unified Beneficiary Database: Integrating Processes for enrollment, eligibility determination, and beneficiary and household information across programs to payments – with some exceptions related to 4Ps – are make monitoring and decision-making easier. paper-based and manual, and thus inefficient, costly, and • Dynamic targeting: Shifting from intermittent surveys time-consuming. This was on display during the SAP when towards a real-time system of targeting by cross-checking the use of paper forms, manual data entry, and physical administrative data in real-time in sources such as PhilHealth, cash delivery increased processing times, and led to Social Security System, DA, and the community-based crowds that increased public health risks.25 Listahanan, monitoring system. the current targeting system that depends on surveys • On-demand enrollment: Using e-KYC to shift to online and every few years, does not cover all households, does paperless applications for assistance, which will be especially not link information between surveys, and is out of date important during responses to disasters and other shocks. for Filipinos whose socio-economic situation may have • Digital government-to-person payments: Incorporating changed since the enumeration or was not captured bank and e-money account information into DSWD’s delivery accurately. Furthermore, agencies face difficulties matching systems will enable programs to transfer payments digitally. Photo: Venus78 25 Y. Cho and D. Johnson, “COVID-19 and Social Assistance in the Philippines: Lessons for future resilience,” Manila: World Bank, March 2022. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 36 Promoting digital transformation brings an opportunity use of online platforms, and expansion of e-commerce, to boost economic recovery and position the country the use of digital technologies has been uneven, creating for long term growth. This will require leveraging digital a digital divide between demographics (young and old), technologies to (i) create new markets and business models, socioeconomic groups (rich and poor), regions (urban (ii) enable economies of scale and better organization, and and rural), and firms (large and small firms). Chapter 3 of (iii) improve operational efficiency and service delivery. this report investigates the state of digitalization of the While the pace of digitalization has accelerated, evidenced private sector in the Philippines, identifies the challenges by the higher volume of digital transactions, increased to digital adoption, and provide policy recommendations. Photo: Chaay_Tee PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 37 Part III Improving digital enablers in the Philippines: bridging the digital divide and accelerating recovery through reforms Digitalization encompasses innovative technologies that have the potential to radically change the way firms operate, create new markets and business models, and make goods and services accessible to more consumers. This special chapter focuses on reforms aimed at accelerating the growth of digital markets and services as well as digital technology adoption by firms. It shows that digitalization in the Philippines has expanded over the past years and accelerated during the pandemic. The use of digital technology is reshaping service delivery and improving the competitiveness of the economy. However, the depth of digitalization falls behind regional peers, and its benefits have not been shared equally across firms. This chapter examines specific barriers that explain these gaps in the Philippines. It performs a deep dive into the building blocks of the digital economy and provides reform recommendations to bridge the digital divide. Policy reforms need to build on the reform impetus of the past two years to ensure the digital dividend is broad- based. Photo: Photo: chanachai ultramansk urchaitakul PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 38 3.1 Introduction While the Philippines has grown remarkably in the long-term growth trajectory. Stringent lockdowns imposed past decades, only a transformative growth solution during the pandemic drove a new wave of digitalization in will catapult the economy into reaching its long-term the Philippines. The average number of new digital services aspirations laid out in the Ambisyon Natin 2040. Prior used by Filipinos climbed from 3.9 before the pandemic to to the COVID-19 pandemic, the Philippines enjoyed about 8.2 in 2021. The country is shifting to a new phase of two decades of uninterrupted economic growth. Growth managing the post-pandemic recovery, where policymakers accelerated from an annual average of 2.8 percent in will refocus from pandemic relief to economic growth. 1990–99 to 4.5 percent in 2000–09, before averaging an Harnessing the power of the digital economy will be central impressive 6.4 percent in 2010–19. However, the pandemic to accelerate growth. One important benefit of digitalization slowed this momentum, with an economic contraction of is that it drives productivity by enhancing coordination, 9.5 percent recorded in 2020. It had an adverse effect reducing operational costs, delivering economies of scale, on the economy, hurting both physical and human capital and increasing firm efficiency. Its benefits have been well accumulation, and lowered the country’s growth potential documented. The most digital-intensive industries have below the pre-pandemic projection of more than 6.0 driven labor productivity growth in European countries and percent. Furthermore, recent global technology trends have contributed to as much as 86 percent of labor are disrupting the way countries participate in the market productivity growth in the United States. Moreover, digital economy. The growth of digital services as a complement to adoption is associated with productivity gains, having a deep manufacturing, and the emergence of artificial intelligence, impact on productivity in industries such as manufacturing the Internet of Things, and Big Data, as complements to and those with routine-intensive activities.26 services, are being embraced by regional competitors of the Philippines, such as Vietnam, Malaysia and Indonesia. Digitalization has the power to expand market access for Therefore, a business-as-usual approach will not deliver businesses and consumers. Digital solutions can reduce the sustained growth necessary to reach the Ambisyon the need for face-to-face interaction, allowing for remote Natin 2040 aspirations of attaining a prosperous, middle- delivery of services. It can easily connect firms, workers, class society by 2040; rather, a transformative solution suppliers, and customers and create opportunities to expand is needed to increase the economy’s productivity and tele-health, financial technology (fintech), and travel competitiveness. That transformative growth solution technology business models. Digitalization has led to greater lies in harnessing the potential of the digital economy. trade in more markets, often by newer and younger firms. For instance, a 10 percent increase in internet use in an The digital economy offers an opportunity to boost the exporting country is found to increase the number of economic recovery and position the Philippines on a products traded between two countries by 0.4 percent; while Photo: Chinnapong 26 Van Ark et al. (2019) and Gal et al. (2019). PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 39 a similar increase in internet use of a country pair increases proposes reforms to improve the enabling environment the average bilateral trade value of products by 0.6 percent.27 and advance the digital transformation of businesses. It builds on previous reports,31 expands the discussion by Furthermore, digitalization can build resilience against examining the barriers to digital adoption in the private economic shocks. The presence of technology sector and provides recommendations to accelerate the sophistication before the COVID-19 pandemic resulted in pace of reforms. The study presents four main findings. First, higher sales during the initial stages of the crisis.28 In the underinvestment in digital infrastructure, owed to decades of Philippines, the pandemic has encouraged firms to digitalize insufficient competition and outdated legal, policy, and and consumers to increase the use of digital services in regulatory frameworks, has hampered the rollout of more response to the economic shock. By March 2022, affordable, faster, and reliable internet services, especially approximately 71 percent of Philippine firms had either broadband. Second, DFS face two critical challenges: (i) started or increased their use of digital platforms since the limited coverage of payment infrastructure in the last mile; pandemic began. Moreover, firms that adopted digital and (ii) low levels of consumer trust. Third, the labor market platforms have experienced about 7.0 percent higher does not seem ready to meet the rising demand for digital employment growth and are about 10 percent less probable skills. While the government has begun to address the skills to go bankrupt than digitally constrained firms.29 During the gap, more can be done to foster digital competency through pandemic, 39.0 percent of digital merchants believed that basic education, deliver upskilling and reskilling for highly their business would not have survived the pandemic if not specialized skills, and strengthen skills qualification and for digital platforms.30 accreditation. Finally, regulations must keep up with the development of the digital economy in areas of trust, This focus note investigates the digitalization of firms and electronic transactions, and data flows. Photo: Richard Whitcombe 27 World Bank (2016). 28 The paper is based on the firm technology adoption surveys done in Vietnam, Senegal and Brazil. It proposes that a one standard deviation on technology sophistication before the onset of the pandemic leads to 3.8 pp of higher sales during the early stages of the pandemic (Cirera et al, forthcoming). 29 World Bank Group, COVID-19 firm surveys. 30 Google, Temasek, and Bain (2021). 31 The World Bank Philippines Digital Economy Report 2020 systematically analyzed the operating environment for households, businesses, and government in the digital economy. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 40 3.2 Despite recent achievements, Philippine firms are not reaping the full benefits of digitalization The Philippines is among the leaders in the use of digital clients and MSMEs. This reform attracted strong interest media, and digital service exports. Filipinos consume from the financial sector, and to date five digital banking social media at high rates. They spend more than 9 hours licenses have been approved. Furthermore, the country on the internet every day, one of the highest rates in the has in several ways been a pioneer of building legal world. The Philippines’ information technology - business enablers and safeguards for digital government, such as by process (IT-BPM) management sector dominates the global adopting the Electronic Commerce Act (2000), Data Privacy voice and call center services market, and its receipts Act (2012), and the Ease of Doing Business Act (2018). feature disproportionately in export revenues. In 2020, the information technology - BPO sector generated more than Despite the strength of the IT-BPM sector in exports, US$26 billion and employed about 1.3 million Filipinos. At the contribution of high value services to the economy 20 percent, the Philippines had the highest proportion of is below par. Digital technologies enable the service new online users among Southeast Asian countries during economy, particularly, global innovator services.33 This group the pandemic. With more users online, its internet economy of services are highly connected to the rest of the economy doubled to US$17 billion in 2021, driven by government and therefore tend to be more productive. However, the initiatives and mass digital adoption due to the pandemic.32 employment share of information and communication technologies (ICT) and professional services in the Philippines Philippine regulators have introduced reforms at a is low considering the country’s income level. The growing remarkable pace in recent years, which have underpinned gap between the Philippines and regional peers will likely growth in digitalization. Foundational reforms under the lead to a loss of competitiveness and missed opportunities National Retail Payment System (NRPS) framework built to promote productivity growth (Figure 24 and Figure 25). solid retail payment system infrastructures that led to a significant increase in the share of digital payments in The dynamism of the digital services ecosystem is lower the retail sector. In addition, the BSP has also established in the Philippines than in comparator economies. Digital a new banking license classification of digital banks to businesses are a core driver of digitalization by supplying promote financial services to unserved and underserved digital solutions to firms and consumers. With a low density areas. In 2020, the BSP introduced a regulatory framework of digital solution providers in 2020 (only 0.5 digital business on digital banks to create an enabling environment for per US$1 billion of economic output), the Philippines lagged providing a cost-effective banking experience for retail peers such as Vietnam (9.2), Malaysia (14.9), and Cambodia Figure 24. Adoption of Digital Technologies by Type, Figure 25. Global Innovator Services: Employment Share 2021. and GDP per Capita CHE 80 25 CYP ISR Share of services employment (%) IRL 70 GBR SWE CZE 60 20 SVN ITA NSA EST DOT HRV ETA BAU POL BEL 50 BGR HUN GRC NOR SRB ESP 15 ROU LVA DNK Percent BIH CRI PRT 40 MUS SVK GEO MKD LTU WSM LKA PER BRN 30 IND MNG MNE PAN URY BRA 10 KGZ BOL FJI NAM DOM TUR 20 MLI NPL COM PSE MEX EGY ETH VNM HND SLV THA MDV 10 RWA KHM CIV IDN ECU 5 BDI PAK SDN GUY MDG GMB BODZWB GHA GTM SWZ 0 NER ZMB PHL Online sales or Social media CRM or SRM ERP software SLE TZA MMR MOZ UGA payment data analytics for software 0 solutions marketing 4 6 8 10 12 Cambodia (May 21) Malaysia (Jul 21) Philippines (May 21) In (GDP per capita) Source: Nayyar, et. al (2021) Source: World Bank COVID-19 firm surveys. Note: Calculations based on data from the International Labour Organization and World Development Indicators. 32 Google, Temasek, and Bain (2021). This group represents services that are highly connected to the rest of the economy, such as design, engineering, architecture, and financial services and 33 that create greater linkages to other sectors of the economy, including manufacturing, and hence tend to be more productive. See Nayyar et al. (2021). PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 41 (14.3). Similarly, median investments per digital firm (e.g., While there is convergence across firms in the use of through venture capital and private equity) are below that of front-end technologies, including online sales36 and social peers, with a median ticket size of US$0.5 million (Figure 26 media,37 a large gap exists between small and large firms in and Figure 27). the use of sophisticated, back-end technologies, such as enterprise resource planning (ERP) and customer In addition, the level of digital adoption is uneven across relationship management (CRM) applications, internal firms. In several East Asian countries,34 firms have process technologies, and data storage and management increasingly used front-end (consumer facing) digital technologies. Furthermore, the adoption of digital technologies to reach customers and fulfill sales online. But technologies is slower in areas outside the NCR and key larger firms in these countries, as in the Philippines, have metropolitan cities, and digital adoption is higher in services also increased the use of advanced digital solutions that sectors than in manufacturing and extractives (Figure 28 and have a greater impact on firm productivity performance.35 Figure 29). Figure 26. Number of Digital Business relative to GDP, Figure 27. Median Investment Received Per Firm, 2020 2020 (US$ million) Digital business per US$1 billion of economic output Singapore China 5.0 [n=5,136] Malaysia Thailand 2.2 [n=152] Cambodia Singapore 1.7 [n=892] China Indonesia 1.6 [n=264] Vietnam Cambodia 1.2 [n=13] Thailand Vietnam 0.6 [n=102] Philippines Malaysia 0.6 [n=244] Indonesia Philippines 0.5 [n=141] - 1.0 2.0 3.0 4.0 5.0 6.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Percent Source: World Bank FCI Digital Business Database based on CB Insights, Pitchbook and Briterbridges Note: These charts use CB Insights to enhance cross-country comparability. 2020 represents the latest round of investment. Figure 28. Adoption of digital technologies since Figure 29. Adoption of digital technologies since COVID COVID-19 onset by type of Technology and Firm Size Onset by sector 90 90 80 Predicted probability of using digital 70 80 60 70 50 60 Percent 40 technologies 30 50 20 40 10 30 0 20 Micro (0-4) Med/large (20+) Micro (0-4) Med/large (20+) Micro (0-4) Med/large (20+) Micro (0-4) Med/large (20+) Small (5-19) Small (5-19) Small (5-19) Small (5-19) 10 0 s e e lity g g s ie nc al ice in r in ita ilit es in ina tu rv sp m Ut Online sales or Social media data CRM or SRM ERP software ol ac se F wh d n/ Ho T/ uf an payment solutions analytics for software er io IC an nd ct th ro M t ru O marketing il a Ag ns ta Co Re May 2021 March 2022 Source: World Bank COVID-19 firm survey, March 2022. Source: World Bank COVID-19 firm survey, March 2022. 34 Adoption between baseline and wave 1 or wave 2 for EAP countries comprising Indonesia, Mongolia, the Philippines, and Vietnam, Business Pulse Surveys, and COVID-19 firm surveys of the World Bank. 35 Marked differences in the adoption of more complex technologies by large firms. Large firms that use digital platforms were 35 percent more likely to use them for supply chain management, and 38 percent more likely to use for internal business processes than smaller firms (World Bank, EAP Economic Update). 36 Reported use for small firms at 27 percent versus large firms at 35 percent. 37 By 31 percent for small versus 38 percent for large firms. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 42 3.3 Enablers of Digitalization The business environment and firm capabilities in credit information disproportionally affect SMEs since represent complementary conditions for the adoption they typically lack financial records. Furthermore, the of digital technologies. Several factors affect the speed pandemic has heightened risk aversion to SME lending. of digitalization among firms. Key drivers such as digital Sources of financing for early-stage firms are also infrastructure, a conducive regulatory environment, DFS, limited, hampering business opportunities to access and digital skills, to name a few, need to be in place. mentoring, smart capital, and financial resources to These are external to the firm and remain under the scope innovate in digital services. Digital businesses tend to be of policy reforms. But complementary factors that are disproportionally affected by lack of innovation finance, internal to the firm, such as the business capacity to use particularly as their intangible assets are not recognized digital infrastructure effectively or the ability to manage as collateral for traditional loan-type financing. Young firms externally financed investments in digitalization, can drive cite access to innovation finance as a major constraint the speed of digitalization. The importance of these factors in establishing a new business and innovating.39 depends on the context, the type of digital technology, and the type of firm susceptible to digitalization.38 Demand constraints that prevent investment in digitalization such as lack of perceived benefits from Limited access to finance ranks high among perceived technologies, and uncertainty, rank high as well, and constraints to technology adoption in the private need to be addressed with priority. Issues that affect the sector (Figure 30). The difficulty in obtaining financing demand from digitalized and digital firms for investments affect digitalized and digital firms alike. Digitalized firms in digital technology, such as the perception of value from are traditional (analog) firms that seek to apply digital digitalization, and awareness of the potential benefits technologies to their business functions. Examples include behind adoption represent necessary pre-conditions for travel tech, fintech, digital media and entertainment, deciding whether to acquire digital solutions. Smoothing health tech and educational tech. Digital firms include the digital transition through access to finance should data-driven firms and online platforms that provide digital become a priority once the demand for investment has solution services to traditional firms. These services been established. Despite the importance of finance for include software solutions, cloud services, and big data the expansion of digitalized and digital firms, this note will and analytics. In the Philippines, SMEs are more likely to not address it in detail. The scope of SME and innovation be financially constrained to invest in acquiring digital finance is part of broad agenda whose scope extends technology, which is contributing to the divergent trend in beyond the topic of digitalization in this focus note. digitalization between small and large firms. Weaknesses Figure 30. Main reported barriers to adopt digital technology, 2022. 30 29 25 21 20 16 Percent 15 10 9 8 6 5 5 5 1 0 Di culty in Too costly or Uncertainty or Lack of Lack of Dont know Other It is di cult or Reorganization obtaining not convinced lack of demand technical skills information on costly to comply cost, resistance financi ng of the economic or skilled what with to change from benefit employees technologies governmen t employees required to are available regulations and/or support thi s managers equipment. Source: World Bank COVID-19 firm survey, March 2022. 38 Cirera et al., forthcoming. 39 In 2020, Philippines’ start-up ecosystem was ranked 53rd in the world (up from 70th in 2017), being home to 400+ startups, 50+ angel investors, 40+ venture capitalists, and 35+ incubators and accelerators and having seen an estimated 47 known deals in 2019. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 43 Promoting digital adoption requires creating strong Besides digital skills, managerial and organizational foundational enablers of digitalization These enablers skills support investments in digital ‘upgrading.’ The skills include affordable and reliable digital connectivity, which is a needed to operate in the digital economy go beyond skills basic prerequisite to participate in the digital economy, as related to ICT. Not only do employers and workers need to well as DFS and digital identification, which can sustain know how to use digital technology, but they also need to electronic transactions and allow for increased financial gain soft leadership, managerial, and organizational skills inclusion. The depth of digital skills in the labor pool can also to help navigate the complexities of the work environment. expand the use of technology and increase the economic Before the pandemic hit, the prevalence of skills and participation of workers in digital technology. Finally, a strong favorable attitudes toward entrepreneurship among small regulatory framework that builds consumer trust and and medium-sized enterprises (SMEs) represented key manages risks for participants of e-commerce will help to determinants of innovation among these same firms.42 allay potential concerns about privacy and support safe However, 62.5 percent of firms report that managerial engagement in digital markets. The continued talent is difficult to find. Supporting underlying managerial implementation of reforms aimed at creating these digital competencies and providing the right information about enablers of digitalization is needed because: (i) these the availability and potential value of digital technology foundational enablers are necessary to foster digital investments will be important to support digitalization. technology adoption at scale; (ii) prioritizing legal, regulatory, and institutional reforms will put less stress on fiscal There are gaps in business digitalization that deserve resources, especially if they can unlock private investment; government attention. The ensuing sections identify these and (iii) improving the operating environment for firms can digitalization gaps and provide the general policy direction boost the economic recovery by easing business entry and to bridge the digital divide. promoting the efficient reallocation of investment and human resources. Figure 31 borrowed from the Digital Economy for Figure 31. Foundational Enablers for Business All framework to introduce the foundational enablers. Digitalization Biases in management may prevent firms from making Usage the necessary growth-enhancing investments. Cognitive bias plays a role in inhibiting the adoption of e-commerce, especially for smaller firms in the Philippines, and favoring Digital Market access Digital Financial and Entry (Platforms) technological path-dependence is one of the most critical Services impediments to adopting e-commerce.40 Firms tend to not be aware of their own limitations and the potential value Digital skills from adopting new technologies. Preference to preserve the Digital Government status quo ranks at the top of the reasons for not investing in and Identifications new technology, with 18.6 percent of respondents reporting this to be a bottleneck. For example, firms continue to be Digital largely unaware of the potential economic benefits from Infrastructure acquiring digital solutions for business management.41 As a Cross-cutting areas result, firms do not spontaneously replace their existing Strong regulatory framework to foster competition analog methods with digital ones, and many would rather Manage risk: data privacy and cyber security Supportive macroeconomics and business climate continue to employ technologies in areas where they have a comparative advantage. Source: Adapted from the World Bank Digital Economy for All (DE4A) framework. Photo: Urbanscape 40 Quimbo and Cateo (2019) 41 World Bank COVID-19 firm survey. 42 Asian Institute of Management, 2018 PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 44 3.4 Digital infrastructure Digital connectivity is critical to bridge the digital divide While there has been progress in enhancing digital and enable deep digitalization. Affordable, reliable, and connectivity, challenges remain. Private investment in widely available high-speed internet is a prerequisite for the broadband infrastructure and services increased in 2020-21 in Philippines to accelerate the nation’s digital transformation. response to growing pandemic-related demand for internet- Acceleration requires a combination of increased based services. While mobile penetration in the Philippines is investment, particularly in unserved and underserved parts among the highest in the region, its broadband penetration of the country, and regulatory reforms that crowd in private is still lower than that of neighboring economies, despite investment. In many parts of the country with limited or no the entrant of a third full-service operator in 2021 (Figure 32, internet access, MSMEs have yet to benefit from online Figure 33, and Figure 34). The Philippines’ fixed broadband transactions and e-commerce opportunities. Telemedicine is (e.g., fiber to premises), which is important for high-volume out of reach for many urban and most rural communities, data transmission for large businesses and institutions, limiting its growth prospect. Access to fast internet stands as continues to lag regional comparators. The quality of internet a prerequisite for deepening of digitalisation, as the service (indicated by average download speeds) improved operability of cloud computing, internet of things, and large in 2020 and 2021 due to network upgrades and increased data management depends on reliable service, capable of infrastructure deployment. However, there is scope for further sustaining high volume of information. improvement, particularly in smaller urban centers, rural areas, and islands planned for accelerated tourism development. Figure 32. Mobile and Fixed Broadband Internet Penetration, 2022 Mobile: Population penetration Fixed broadband: Household penetration 160% 140% 120% 100% 80% 60% 40% 20% 0% Lao PDR Cambodia Vietnam Thailand Malaysia Indonesia Philippines China Mobile: Population Penetration Fixed broadband: Household Penetration Source: Global System for Mobile Communications Association. Photo: kittirat roekburi PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 45 Figure 33. Mobile broadband speeds: Philippines & Figure 34. Fixed broadband speeds: Philippines & selected economies selected economies Mobile Broadband Throughput (Mbps) Fixed Broadband Throughput (Mbps) 120 200 180 100 160 80 140 120 Mbps Mbps 60 100 80 40 60 20 40 20 0 0 na sia es m sia R nd a a na sia es m sia R nd PD di di PD na n i na ne ila n ay i Ch bo ne ila bo ay Ch pi pi et et a o al do a lip o al do m lip m Th La Vi Th La Vi M M Ca i Ca In i Ph In Ph Source: http://www.speedtest.net/global-index on 5 February 2022 (Dec Source: http://www.speedtest.net/global-index on 5 February 2022 (Dec 2021 data) 2021 data) Key challenges to faster rollout Restrictions on investment and competition are of digital infrastructure deterring further expansion of digital infrastructure. The requirement for congressional franchise limits the ability Underinvestment in broadband infrastructure stems of new telcos and independent internet service providers from decades of insufficient competition and outdated to deploy infrastructure, access spectrum, and use distinct legal, policy, and regulatory frameworks. The rugged types of Internet technologies. Similarly, the franchise topography and archipelagic nature of the Philippines requirement and licensing framework on cable TV operators increases the costs of extending connectivity to make it costly and cumbersome to compete in providing underserved populations. However, the slow rate of rollout broadband services. Furthermore, the absence of access of telecommunications infrastructure has been in part to parts of the broadband infrastructure increases the due to barriers to competition and restrictions on foreign provision costs of mobile broadband services and restricts direct investments. The development of the Philippines’ competition to non-incumbents. This is exacerbated by digital infrastructure has always been private-sector- the lack of regulation to unbundle the local loop, which led. From the monopoly and fixed line era, the country has enabled incumbent telcos that control the control shifted to mobile services following the liberalization of loop to impose discretional access prices for wholesale the telecommunications sector in 1993, which resulted and retail broadband service provision at levels that limit in new market entrants and increased competition. the ability of rival providers from competing efficiently, However, unchecked mergers and acquisitions over the increasing the cost of broadband services and reducing years have resulted in a highly concentrated market, with the penetration of digital services in harder to reach areas. two dominant players, each controlling and operating their own single, vertically integrated network. A third Complex permitting for network equipment and lack of player entered the market in 2020 but has not yet proven policy on infrastructure sharing are slowing the network disruptive. Several reforms in the sector have recently rollout. While local clearances for the construction of towers been passed, but there are a few remaining challenges. and poles have improved, the remaining clearances for the installation of network equipment and its electrification Lack of efficient digital spectrum management results are administratively awarded, and the process can take in an uneven playing field for new prospective entrants. time and, without guidance for an expeditious awarding Current laws that regulate spectrum use and allocation process, cause delay or even halt the network rollout. In are designed for legacy (analog) technology and merely addition, the regulator, the National Telecommunications provide a general framework for the regulator to interpret Commission, still imposes significant requirements for the into regulation. The current allocation is fragmented based importation, distribution, and installation of equipment. on the original distribution of the spectrum to legacy Furthermore, the government has no guidelines on how telcos and would benefit from a restacking program. An the private sector can use government assets, such as administrative approach, instead of auctions, to allocate landing stations (e.g., Pacific Light Cable Network) and spectrum favors incumbents and large telcos and diminishes the National Grid Corporation of the Philippines’ fiber the chance for spectrum to be awarded to a new entrant. optic network. The hurdles on permitting and lack of The scarcity of the remaining unassigned spectrum bands infrastructure sharing represents a missed opportunity to limits the competitiveness of any new incoming player. attract investment in network and connectivity infrastructure. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 46 3.5 Digital financial services and digital ID While the growth of DFS can benefit the economy, of monthly payments as of total payments went from 1 risks need to be managed. DFS encompass a range of percent to 20.1 percent. DFS played a key role during the transaction accounts, digital payments, and digital insurance pandemic by facilitating the use of digital payments by and credit. Enabled by fintech innovations, they have the consumers. Digital transactions, measured by account-to- potential to lower costs, increase the speed of transactions, account transfers through a fast payment infrastructure, and allow for more tailored financial services to serve the increased by 600 percent from February 2020 to April needs of underserved segments of the population at scale. 2022 by both value and volume. These include payment Where available, DFS have been found to allow faster transactions initiated by mobile phones using the QR disbursement of relief payments to both households and Ph which is a standardized Quick Response code. firms, and they can reduce information asymmetries, support sound risk management, and allow lenders to support the Innovation finance and embedded e-commerce financing recovery through the uninterrupted provision of credit to represent key DFS that can help extend firms’ access households and businesses. However, the adoption of digital to finance. The expansion of fintech and other innovative technologies, including the provision of finance, also poses nonbank financing is an alternative to the limited access various risks and challenges such as data protection and to bank finance to unleash private-sector-led growth and privacy, cyber security, and operational risks. These risks can help close some of the $221.8 billion of the country’s and challenges need to be well understood and mitigated. MSME financing gap. Similarly, DFS presents important opportunities for the development of e-commerce. Account ownership has significantly increased but DFS can augment the impact of e-commerce through financial inclusion remains uneven. The financial inclusion embedded services, including payments, consumer credit, landscape of the Philippines, measured by the account authentication, and verification. The expansion of interbank ownership, has drastically changed due to heightened needs transfers and digital payment acceptance have enabled for use of accounts for payments. BSP estimates 53 percent the Philippine private sector and individuals to use fast of adults now have accounts, jumping from 37 percent in payments (InstaPay) and batch payments (PESONet). 2017.43 For a long period of time, only a third of adults had accounts in the Philippines. The country has had a limited Several initiatives have been launched by the GOP, uptake (10 percent of households) of DFS, while fintech BSP and financial sector regulators to address the development is rapidly developing and increasingly diverse, above constraints including digital banks, open but remains nascent. Encouragingly, fintech players in finance, credit risk database and approval of Financial services beyond payments have notably grown since 2018. Consumer Protection and Services Act (FCP). In 2020, BSP introduced the regulatory framework on digital banks The adoption of a series of reforms during the COVID-19 to create an enabling environment for providing a cost- pandemic has laid a solid foundation for the rapid growth effective banking experience for retail clients and MSMEs. of digital finance. Building on the NRPS, the BSP has This reform attracted strong interest from the financial formulated the Digital Payment Transformation Roadmap, sector and to date five digital banking licenses have been which aims to increase the share of digital transactions in approved. The open finance regulatory framework has retail to 50 percent and provide 70 percent of Filipinos with been introduced in 2021 laying down the technical, security, payment accounts by 2023. Moreover, the Government and governance standards for data sharing. This aims to of the Philippines (GOP) has renewed its commitment empower customers by giving them better control over under the new National Strategy for Financial Inclusion their personal and financial data and developing products 2022–2028 and identified reform areas to reach its goals. and services responsive to their needs. The credit risk Finally, financial sector regulators have been promoting database launched by the BSP has been operationalized responsible DFS through the Financial Sector Forum, and is expected to expand access to finance for MSMEs and DFS has played a key role during the pandemic by by strengthening credit information that will allow better facilitating the use of digital payments by consumers. assessment of risks by financial institutions. The recently enacted FCP Act aims to strengthen the mandate and During the pandemic, digital payment transactions powers of financial sector regulators to implement increased rapidly. Between 2013 and 2020, the share market conduct supervision and regulation effectively 43 World Bank Global Findex 2017. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 47 and thus build consumer trust in the financial sector. companies to more easily onboard gig workers, such as for ride hailing and deliveries. For the air industry and other PhilSys can play a role in facilitating electronic transportation sectors, digital onboarding of customers will transactions through secure authentication. It has the allow them to improve the customer experience, including power to expand the value of a digital ID by enabling by automating their processes at air and seaports. digital onboarding through websites and smartphone applications. This will open new channels for products and Fast-tracking e-governance can increase efficiency and services and increase access for Filipinos living in rural transparency in the provision of government to business and remote areas. Identity verification services can allow (G2B) and government to citizen (G2C) services. The businesses to reduce costs through automation. This will government’s essential backbone processes such as also improve the overall customer experience, through budget and treasury management are still largely paper paperless documents. Authentication and e-KYC services based and fragmented, which is a source of inefficiency, can help with accuracy of demographic information held constraining the development of e-gov services. The by the private sector and facilitate data sharing, when integrated budget and treasury management system legally authorized.44 Solving the identity problem can (BTMS) is aimed to address these constraints. It offers become the basis for open APIs and protocols to link digital an end-to-end solution to execute financial transactions, financial services and payments, data sharing platforms, generate electronic purchase orders and process payment e-signature providers, e-commerce, and other platforms orders to vendors and citizen alike. As public expenditures to create a set of rails for digital economy transactions. make about 25 percent of GDP, the BTMS represents a This would create a more open digital ecosystem that potential driver for digital transformation. The BTMS has would unlock innovation and entrepreneurship. been acquired and customized. However, its roll out has been suspended. Resuming the roll out of this essential PhilSys is also a strong enabler of financial inclusion. backbone system to foster digital transformation is thus a Agents equipped with a smart device will allow for services priority. It will further help anchor agency specific digitization such as account opening, deposits, and withdrawals in and streamlining efforts, such as customs processes areas where there is no access to branches and ATMs. to increase transparency and mitigate corruption. The PhilSys authentication will reduce fraud in the financial Document Tracking System, for example, enables the sector, including with respect to loans and insurance, public to view and monitor online the status of documents as biometric verification will provide more integrity to received by the Bureau of Customs (BOC 2019). Moreover, application processes. It will also improve the quality of providing citizens and firms with the option to pay taxes credit information and unlock data portability, which is crucial and process salaries through digital means can reduce for the country’s open banking framework initiative. It is for processing times and costs. Mobile-intermediated these reasons that the BSP has been one of the strongest government-to-citizen payments also offer the opportunity drivers in creating an enabling regulatory environment for to encourage uptake of mobile services and widen the its supervised entities to leverage PhilSys. Other sectors public’s participation in the digital economy But this would that will benefit from PhilSys include e-commerce and require the government to digitize its own core financial transportation. For example, securely verifying the identity management systems on which most of these e-government of buyers and sellers on platforms will increase trust in services to citizens and firms are built upon (Box 7). transactions, and remote onboarding will allow for online Photo: Ezra Acayan 44 An example is the India Stack, which offers an interface that integrates authentication, payment, and data sharing on top of the digital ‘rails’ of Aadhaar (India’s digital ID system), the Unified Payments Interface (UPI), e-Sign (for electronic signatures), and the Data Empowerment and Protection Architecture (for consented data sharing). Today, India is developing a Health Stack that would follow a similar approach, enabling healthcare providers to build systems on top of the same ‘rails’ PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 48 Box 7. Digital Government: Public Services Access made easy Digitalization of government is more than digitalizing The root causes and challenges are structural and government systems and transactions. It is also about multi-faceted. Fundamentally, past efforts have focused capitalizing on opportunities to make systems more efficient more on technology rather than on the people and and effective and transactions simpler, enabling government processes required to digitally transform the government, services to be smarter and more proactive. For example, the and the digital skills of government officials, including in objective could be to enable the authorities to: (i) provide LGUs, remain limited and have not been systematically pre-filled taxation declarations (to improve compliance and developed nor fostered. Low civil service salaries and limited increase revenue); (ii) make more evidence-based fiscal career growth opportunities also make it difficult to attract policy decisions; (iii) check the eligibility of welfare and retain ICT professionals and graduates (compared to the beneficiaries (to ensure the right assistance is going to the private sector). Initiatives are often ad hoc and focused on right people); and (iv) allow businesses to use and re-use front-end applications and services, rather than addressing public sector databases (to unlock data-driven innovation to essential back-office systems and processes upon which boost the digital economy). these services rely. Moreover, rigid and paper-based budget and public procurement practices are not conducive nor The Philippines has made steady progress in establishing adaptable to digital technology adoption, especially larger laws and policies for digital government. The Department projects that span across multiple years and agencies. of Information and Communication Technologies (DICT) was Finally, coordination between agencies remains a key established in 2016 as the Philippines’ first cabinet-level challenge to realize horizontal integration and whole-of- agency dedicated to promoting digitalization. For instance, government systems, data, and shared infrastructure. While the DICT updated the Cloud First Policy in 2020, which was the DICT has stepped up, especially as part of the COVID-19 very forward-looking and a good example of creating a response, it is acutely under-staffed and under-resourced to policy framework for digital government. However, this also carry out its mandate effectively. requires the re-engineering and simplification of core government policies and business processes, such as the There are four clear measures that can be taken to begin budget and treasury management system, which impacts all fast-tracking the digitalization of government: public services aimed at firms and citizen alike. 1. Equipping the DICT with the human and financial resources necessary to coordinate efforts, develop whole- The experience of effectively leveraging policies, laws, of-government frameworks that will end the fragmentation of and institutions in implementation efforts has, however, government systems and data, and develop digital skills been mixed, and the Philippines risks falling behind across the public sector. comparable countries. In the 2020 UN E-Government 2. Prioritizing and expediting the digital transformation (and Development Index, the country ranked a respectable 77th integration) of core cross-cutting government budget, globally and 5th among ASEAN countries, although this financial management, and human resources processes and represented an increase of only one place since 2010. In the systems upon which all public services depend (e.g., Budget same period, Indonesia and Thailand jumped from 109th to Treasury and Management System (BTMS) to improve 88th and 76th to 57th, respectively. While most, if not all, payments to citizens and firms). national government agencies are adopting digital 3. Re-engineering and simplifying (not just digitizing) technologies, the process has been very fragmented in the essential government business processes to enable Philippines, characterized by digitizing what exists rather meaningful digital transformation and services (both than digitalization for optimization and integration. For backbone and e-gov services). instance, forms have been made available to download only 4. Modernizing procurement policies and processes to be to be required to be printed and submitted at an office, conducive for digital technology projects, including to rather than enabling citizens and businesses to submit forms maximize the use of digital public goods such as open- and complete transactions online. There is a lack of source software. Prioritizing LGU digitalization by, for integrated backbone information systems to manage example, adapting national frameworks and systems (e.g., financial and human resources and administrative processes. BTMS, e-procurement, etc.), re-usable software, cloud Many LGUs also face significant challenges digitalizing their computing, and infrastructure tools that reduce the need for processes. Nevertheless, there have been some successful LGUs to ‘re-invent the wheel’ for common use cases, such as initiatives, such as the Philippine Identification System public financial management and e-procurement, license (PhilSys), the VaxCertPH digital COVID-19 vaccination and permit applications, and social protection and healthcare certificate, and the digital transformation of the Bureau of delivery. Accelerating the adoption of cloud services will be Internal Revenue. particularly important to enable the sharing of technology resources and services. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 49 Photo: Ezra Acayan Key constraints that limit the uptake of digital finance in the Philippines Underlying collateral requirements, along with difficulties direct debit. In addition, the high cost of fees charged by in evaluating borrowers’ creditworthiness, reduce the banks for interbank transactions, caused by low competition, demand for DFS. The Philippine credit reporting system has created incentives for consumers to choose non-digital remains underdeveloped, which results in limited information payments. However, a series of reforms before and during available to banks to assess credit risks when lending to the pandemic have created a strong momentum to digitize MSMEs. The COVID-19 pandemic has further exacerbated financial services by enabling new services and allowing SMEs’ access to much-needed liquidity, due to heightened new players to enter the market. Most recently, the BSP risk aversion by financial institutions and risks of rising firm insolvencies. While some fintech companies are entering the announced the introduction of new payment streams such as space of SME finance, low digital adoption by SMEs and bill pay, direct debit, and ‘request to pay.’ These will address limited data in digital format pose challenges. As mentioned obstacles to using digital payments to make recurring earlier in this note, the limitations to access finance remains payments (e.g., for utilities), collect payments, and pay bills. a top impediment for SMEs to further invest in digital upgrading. Low levels of consumer trust and awareness of electronic payments impede wide scale adoption of DFS. Fraud Digital finance and fintech services are still at nascent (actual or the perception of risk) and breaches in consumer stage, although the landscape is rapidly changing. Non- data have led to low levels of online consumer trust. digital payment instruments such as cash and checks have Moreover, according to World Bank Findex, 40 percent of long been widely used in the Philippines. Both firms and banked Filipinos were not aware of electronic payments in individuals are accustomed to payment transactions that are 2017, showing the limitations of the country’s current level of convenient for face-to-face transactions. Checks, including digital financial literacy. Without awareness of the benefits of postdated checks, have often been used due to a lack of electronic payments and trust in electronic payment systems, appropriate payment instruments such as interoperable additional uptake of electronic transactions may stall. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 50 3.6 Digital skills Demand for digital skills is growing steadily.45 Digital However, the market does not seem ready to meet this occupations figure heavily on the list of the country’s most rapidly rising demand. In the World Digital Competitiveness in-demand jobs, with applications and game developers, Ranking 2021, the Philippines ranked 54th on the digital/ cyber security experts, data development engineers, and technological skills indicator and 58th on the overall index database managers highly sought after in the information for digital competitiveness, dropping from the 46th in 2017. technology and services, computer software, financial The decline in the country’s performance is reflected in the services, and business outsourcing industries (DOLE weakening of the talent, training, and education, suggesting 2020). In terms of freelance work, COVID-19 labor market a need to improve training in digital literacy and competency. information survey conducted by the Department of Labor and Employment (DOLE) revealed IT-related jobs on top Key Challenges to Deepening Skills for the of the list for 2020-2022 such as IT specialist, online Future seller, graphics designer, IT developer, IT programmer, data analyst, digital marketer, and encoder.46 Most of There are considerable gaps in digital skills and other these professions did not exist even a decade ago, and it skills among students, although they vary by field of is likely that the advent of the technologies of the Fourth study. An analysis using an algorithm that matches the Industrial Revolution (4IR)47 will spawn new industries. forecasted demand for skills, along with predictive analytics This will require the training and education sectors to using demand data from job sites, reveals a worrying reality continue adjusting their programs to respond to future (World Bank & HeadAi, 2022). The analysis identified a skills needs. Data from LinkedIn (2020) identify the top large number of unique missing skills (skills gaps). Missing 10 emerging professions and job titles that require high- digital skills include knowledge of Windows, search engine level 4IR digital skills. In the order of industry demand are optimization, social media marketing, blogging, and data robotics engineers, cybersecurity specialists, customer analysis. Other missing skills include soft skills such as success specialists, data scientists, sales development team leadership, problem solving, coaching, and public representatives, full stack engineers, DevOps engineers, speaking, in addition to hard and technical skills such as data engineers, JavaScript developers, and cloud engineers. data analysis, strategic planning, and business strategy. Figure 35. Regional Comparisons of Proportions of Youths and Adults with ICT Skills 59.5 59.4 57.4 54.9 53.9 50.6 43.8 47 43.4 40.7 39.7 37.6 34.7 30.2 26.8 26.2 25.9 25.8 25.2 25.5 24.5 24.2 22.2 20.6 19.8 14.7 15.1 10.5 11.3 8.5 9.1 7.2 9 4.6 2.5 0.6 Using basic arithmetic Using copy and paste Sending e-mails with Creating electronic Finding, downloading, Transferring files formula in a spreadsheet tools to duplicate or attached files presentations with installing and configuring between a computer and move information within a presentation software software other devices document Cambodia (2017) Indonesia (2018) Malaysia (2018) Singapore (2018) Thailand ( 2018) Philippines (2019) Source: Data for the Philippines are from 2019 National ICT Household Survey (NICTHS), DICT, and PSRTI, https://dict.gov.ph/ictstatistics/nicths2019/. Data for all other countries are taken from UN Global SDG Database, https://unstats.un.org/sdgs/indicators/database/. 45 Digital skills include proficiency in using basic, standard, and advanced ICT skills. Basic skills, for example, comprise using copy and paste tools to duplicate or move information within a document, managing email, and navigating the internet. Standard ICT skills include using basic arithmetic formulae in a spreadsheet. Advanced ICT skills include programming, use of artificial intelligence (AI), Augmented reality/Virtual reality/Mixed reality technologies (AR/VR/MR), big data analytics, Internet of Things (IoT), among others. IT, engineering and other STEM related disciplines are also critically needed in the digital economy. In addition, digital occupations require not only digital skills, but also cognitive and socioemotional skills (Cunningham et al. 2021). Digital skills can be more effective when coupled with good cognitive and socioemotional skills 46 JobsFit Labor Market Information Report: Road to Recovery, DOLE, 2022. 47 The 4th Industrial Revolution (4IR) is a fusion of advances in artificial intelligence (AI), robotics, the Internet of Things (IoT), genetic engineering, quantum computing, and more. . PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 51 DOLE (2022) corroborates this finding and shows that the Philippines lags other neighboring countries. Similarly, skills shortages are prevalent with unmet demand for in a study on digital trends in the Asia and Pacific region, high-level and middle-level skills, especially in digital a significantly lower share of individuals in the Philippines skills. The report also shows that highly demanded jobs possess basic, standard, and advanced ICT skills (e.g., require advanced and specialized digital skills such as writing a computer program using specialized programming computer network operations, information technology language) than in regional peers (ITU 2021) (Figure 36). and support, and software development, in addition to hard skills like financial analysis and business services.). Despite the Government’s recent efforts to bridge the gap, qualification and accreditation of new skills remain Limited digital skills and low level of digital literacy in imperatives to expand their availability. The Philippines the Philippines are obstacles to digital transformation. government has introduced several reforms and increased The country performs below its peers on Sustainable allocation of resources to modernize education and build Development Goal Indicator 4.4.1 on Skills for a Digital the skills of the future.48 Given the evolving complexities World, which identifies a set of needed ICT skills in youth accompanying increased digitalization, these initiatives and adults. An analysis from the 2019 NICTHS reveal that seek to close gaps in digital literacy and skills across over a quarter of individuals in the Philippines do not use Filipino workers, provide trainings on how to navigate the Internet because they do not know how to use it. It online spaces effectively, improve employment prospects, further finds that only 25.8 percent of both youth and adults and to equip micro, small, and medium-sized enterprises have the basic ICT skills to send e-mails with attached files, with the needed capacity to bring their businesses online. while less than one in 10 can use basic arithmetic formulae However, strengthening schemes for skills qualification and in a spreadsheet or create electronic presentations with accreditation is necessary to reflect the rapidly changing presentation software (Figure 35). Across these ICT skills, skills demand and to enhance portability of skills. Figure 36. Basic, Standard, and Advanced ICT Skills by Country, 2017–2019 Philippines 1% 2% 6% Thailand 1% 10% 16% Cambodia 1% 5% 34% Indonesia 4% 25% 46% Singapore 7% 42% 53% 8% Malaysia 35% 50% 0% 10% 20% 30% 40% 50% 60% Advanced skills Standard skills Basic skills Source: ITU (2021). 48 The Public Schools of the Future in Technology (PSOFT) Act was unanimously passed in December 2021 to ensure adequate investment in digital technology and innovation in the country’s public schools. The CHED has allocated additional funding to support the digital transformation and modernization of higher education and launched an open educational resources platform to provide free access to learning, teaching, and research materials for students, teachers and researchers. CHED is also currently developing the Digital Transformation Strategy of Philippines Higher Education 2022-2025 to enhance digital skills—from basic to high-level—of Filipino workers and citizens. The Department of Education has launched the Digital Rise Program to enhance digital literacy, basic programming skills, and ICT-assisted learning for K-12 basic education. In light of the COVID-19 pandemic and the unprecedented disruption to employment stability, the TESDA has renewed its focus on strengthening the digital skills of the Filipino workforce, including through the Go Digital ASEAN program. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 52 3.7 Conducive regulations for digital markets Digital technology has opened market access of online sellers and gig economy workers/service providers. opportunities for more Filipinos. E-commerce platforms, for Exempting certain digital businesses from permits required example, allow firms to access domestic and foreign markets for ‘offline’ businesses (e.g., sanitary permits or fire safety and expand their market reach.49 It can also boost trade by inspection permits) could incentivize them to register. This reducing the costs of operations and sales. Together with formalization would enable digital businesses to issue other digital technologies, the use of digital platforms, has receipts and pay taxes, which in turn would promote been shown to lower SME export costs by as much as 82 consumer trust in digital businesses. percent and foreign market operating costs by up to 59 percent.50 Digital markets can also expand market access by A regulatory framework that fosters competition is critical enabling services from home, adding flexibility in working to a dynamic digital market. Digital services can be hours and location. Finally, technology-driven integration into dominated by networks of connected firms that create global data value chains (e.g., by enabling cross-border data barriers to entry for new and independent firms. Promoting flows) expands market access for firms and stimulates market contestability provides a level playing field for new innovation by exposing firms to international competition and entrants to introduce innovations that would create value for promoting technology transfer. the digital economy. While applicable to digital markets, the Philippines Competition Law does not respond to the Market access can be expanded by adopting an efficient challenges of data-driven business models, multi-sided regulatory framework that builds trust in the digital digital platforms, and digital mergers. For example, in merger economy and facilitates electronic transactions and data control and notification mechanisms, the law has not been flows. Well-designed regulations are needed to achieve adapted to the nature of small but competition-distorting inclusive market participation and promote deeper digital mergers and acquisitions in which big digital digitalization. Trust is a prerequisite for engaging in digital technology firms acquire smaller firms before they can commerce. Digital consumers and operators need to feel become a competitive threat (‘killer acquisitions’). Meanwhile, confident that participating in digital markets will not expose efforts to update merger control and acquisitions provisions them to undue risk of personal data breaches, unscrupulous to address digital markets must also balance pro-competitive vendors, and infringement on their privacy. The willingness integration of complementary assets (through mergers and to surrender personal and financial information depends on acquisitions) into larger organizations and incentivize funding it. Without trust, scaled adoption of digital technology and to and innovation by smaller firms. engagement in digital services will not be possible. A good regulatory framework for electronic transactions can enable Incorporating a digital angle into existing competition remote contractual arrangements between buyers and policy can promote market contestability and dynamism. sellers and clarify the rights, responsibilities, and obligations Digital competition policy comprises contestability, firm entry, of market operators engaged in digital commerce, which can and rivalry that are often embedded in ex ante market increase trust in the digital economy. Contractability is policies and enforcement of antitrust laws ‘ex post’ if essential for deepening digitalization. Last year, a spate of violations are detected. Contestability in digital markets is fraudulent orders and unjust cancellations victimized food affected by a range of issues that Philippine regulators need and grocery delivery riders in the Philippines, prompting the to account for. These issues include: (i) the relationship authorities to start exploring legal means to protect the between online platforms and firms that are dependent on community of users and operators in the industry. them to conduct business (i.e., online supplier protection); (ii) market concentration due to economies of scale and scope Rapid digitalization during the COVID-19 pandemic has in data-driven business models (e.g., dominance of made it clear that policies need to keep up with changes ‘gatekeeping’ platforms); and (iii) opportunities to enhance in the digital economy. The stringent requirements for contestability by making data more widely available. registration, operation, and closure of brick-and-mortar Traditional antitrust laws are challenged because digital companies equally apply to online sellers and gig economy business models blur the lines between markets and workers, discouraging entry and formalization in the sector. complicate the use of established antitrust tools and Adapting these procedures to online business models and thresholds (e.g., competition analyses focused on prices may simplifying them will be critical to facilitate the formalization not work in the case of nominally free online services). 49 World Bank, 2016; World Bank and World Trade Organization, 2019 50 Ganne and Lundquist, 2019; AMTC, 2018. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 53 Key Challenges to Building Trust Box 8. A prevalent threat in East The Government of the Philippines passed laws and Asia: how to avoid winner-take-all regulations to promote trustworthiness in the digital economy, but these need updating and enforcing dynamics in the digital economy? to protect consumers online.51 The 2000 Electronic Large conglomerates have a diversified offering Commerce Act established the DTI’s authority over of products and services that reach several differ- e-commerce. The DTI has taken steps to join international ent sectors. Paired with high market shares and enforcement efforts to address complaints about vertical integration, this creates a market structure online cross-border transactions. However, mandatory that could be prone to market dominance, barriers mediation mechanisms for consumer complaints remain to entry, and abusive anticompetitive practices in limited for cross-border transactions. The launch of a Southeast Asia. Commercial strategies from these pilot phase of the Philippine Online Dispute Resolution firms are frequently focused on ensuring customers System by the DTI’s Consumer Policy and Advocacy use the adjacent products/services provided by Bureau in 2021 was a crucial step toward supporting the conglomerate. To do this, they commonly offer the enforcement of consumer rights in e-commerce. benefits for the use of the platform’s digital wallet to make purchases in its digital commerce marketplac- Enforcement of consumer protection falls short on es or even offline retail store. The kind of benefits sanctioning transgressors. As a guardian of consumer offered range from point collection and redemption, rights, DTI has instituted a ‘No-Wrong Door’ policy to address rebates and cashback when using digital payments consumer complaints received, typically related to delays, within the conglomerate’s environment. The user of online fraud, copyright infringement, prevalence of defective each digital commerce platform then tends to use products and reneged warranty agreements, among others. the respective digital wallet since it offers better However, information on responses, such as seizure of promotion and services. goods and collection of fines, is not available to consumers. In addition, DTI has infrequently exercised its authority to impose sanctions, which is a critical tool to increase trust in the system. Instead, it has issued voluntary guidelines for While the Data Privacy Act (DPA) addresses many e-commerce.52 While the current legal framework for online relevant issues, its enforcement lags in effectiveness and consumer protection fosters mediation, there is also room transparency. The National Privacy Commission (NPC) has to increase the imposing of sanctions when appropriate, shown its commitment to address cases and privacy and to increase consumer awareness of existing remedies, complaints, but it seems less effective in imposing fines to and encourage them to file complaints when appropriate, deter violations. Information on complaint resolution is not overcoming a mindset less familiar with complaint processes. easy to find.53 Close to 10 years after the enactment of the DPA, the NPC is still working toward making administrative Enforcement of privacy and consumer protection rules fines effective. The current policy draft incorporates a should be strengthened and widely announced for penalty ceiling of PHP 5 million, with potential penalties participants in digital markets. Remedies and enforcement based on annual gross income,54 ranging from 0.25 to 3 need to be shared among consumers and suppliers percent for grave violations and 0.25 to 2 percent for major alike. This can build credibility that remedies are effective violations. Furthermore, the DPA lacks standards for data when online transaction go awry. In a non-litigious culture, anonymization, limiting the potential use and transfer of education campaigns that familiarize consumers and anonymized data. Proper anonymization would allow the suppliers of their rights, and the actions they can take if government and private firms to leverage anonymized data violations arise, can build trust in the digital economy, and for research, product development, performance increase confidence in the system. Close alignment and optimization, productivity improvements, and better services. integration with partner countries’ ODR (Online Dispute Therefore, the issuance of guidelines on appropriate Resolution) systems is critical to ensure the resolution of safeguards for anonymization by data controllers could help cross-border disputes – as agreed upon, for example, in unleash the value potential of data. The NPC could the ASEAN Strategic Action Plan on Consumer Protection). communicate to stakeholders the specific modalities of data 51 The law on digital transactions – the Electronic Commerce Act– was passed over 20 years ago. Its implementation has been further supported by legislation that applies to both online and offline transactions. This includes the Data Privacy Act, the Philippine Competition Act, the Consumer Act of the Philippines, and the National Payment Systems Act, amongst others. 52 DTI Bureau of Product Standards, referencing a recent Singapore’s standard (TR 76), issued Philippine National Standard (PNS) 2155:2020: Guidelines for e-commerce transactions 53 The annual report provides no details about how the cases are resolved or what the resolution consists of. 54 of personal information controllers or processors. . PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 54 e.g., by preventing firms to offer products and services Box 9. A private coalition in Sri Lanka elsewhere under better conditions (i.e., ‘most-favored nation’ to advance digital cross-border provisions), self-preferencing their own products on the transactions platform, or delisting suppliers’ products or accounts without prior notice and justification. Despite Sri Lankan authorities enacting the Electronic Transactions Act. No. 19 (ETA) in 2006, Key Challenges to E-transactions, Cross bureaucratic red tape, and administrative resistance Border Trade and Data Transfers to modernization stalled the implementation of this act. The ETA authorized the use of digital The Philippines imposes few restrictions on and signatures and digital documents in export engages with partners to support international data import processes, which would have streamlined transfers. The country does not impose data localization exports. Sri Lankan exporters continued to face requirements concerning personal data, but certain data costly requirements to submit hard copies of remain restricted from international transfers on grounds trade paperwork for customs clearances. of national security. This provides a favorable environment for integrating the country into global data value chains. The Import Section of the Ceylon Chamber of In addition, the government has joined efforts to support Commerce (CCC), along with the legislature and international data transfers through the APEC Cross- the civil service, tried to understand why the Border Privacy Rules System—a government-backed data implementation of the ETA had not taken hold. privacy certification scheme, which the Philippines has They realized that only a very small proportion not yet fully implemented. Without the ability to manage of business leaders were aware of the ETA’s international data transfers, service exporters, such as provisions, and the system relied on outdated those operating in the IT-BPO sector will gradually lose clearance protocols and administrative procedures. competitiveness and find themselves unable to become the next generation of international businesses. The coalition of stakeholders, led by the CCC, put together a reform proposal to automate and There is an umbrella framework that supports the validity reengineer clearance processes, paving the way of electronic documents, but equivalency between paper for electronic document (e-document) processing and electronic documents falls below par. The legal basis platforms and shorter customs procedures. They of electronic transactions was cemented in 2000, and raised awareness among exporters and government the authorities recently issued guidelines on the use of officials that provisions authorizing e-documents electronic documents, signatures, and digital signatures in and e-signatures were critical. These improvements government transactions, as well as on the use of electronic led to faster clearance times for import and export collection and payment for government transactions. transactions, and a reduction in the number of steps These new guidelines can increase uptake of electronic necessary for clearance. (Based on CIPE, 2019) transactions by easing concerns that electronic documents are not recognized by government auditors. However, the absence of rules on electronic notarization, persistent sharing that it would consider permissible under the Act, official requirements on paper documents and manually rather than just communicating what it might prohibit. signed forms, limitations on the issuance of individual digital certificates, and lack of accreditation of certification Weak online supplier protection vis-à-vis digital platforms authorities limit the adoption of electronic contracts, receipts, limits market dynamism. The Philippines lacks a dedicated invoices, and supporting documents for government law that to protect either online suppliers or merchants. transactions. Furthermore, the risk of differing interpretation MSMEs and online contractors face challenges when selling of contractual rules on cross-border contracts deters through online platforms, when dependence on one or few commerce. If the problems to build equivalence between platforms leads them to accept exclusionary and unfair paper and electronic documents are not addressed, then the contract terms. In addition, there are documented cases in pace of digitalization of the economy will slow significantly. which platforms directly engage in anti-competitive behavior, PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 55 3.8 Way forward (Reform Agenda) The following section presents the key areas for reform, based on the barriers identified in the previous section. ENABLER KEY POLICY RECOMMENDATIONS Digital infrastructure Expand pro-competition legislation for shared deployment of network infrastructure and streamlining of permitting. Competition will help accelerate access to mobile and broadband infrastructure, the quality of which remains poor and unequal across regions in the Philippines. The government has taken steps to promote market entry and simplify complex permitting processes for cell site construction and cable laying through the passage of the implementing rules and regulations of the Public Services Act amendment, the National Broadband Plan, and the Common tower and pole attachment policy. However, more can be done in terms of enacting regulations for passive infrastructure sharing (ducts for optical fiber) and regulations for active infrastructure sharing (mobile). The operationalization of the Public Service Act IRR will lower barriers to entry for foreign investments. In addition, the DICT and National Telecommunications Commission (NTC) can revise and streamline parallel permitting provisions for certificates of public convenience and necessity for new firms. Promote investment in connectivity by ensuring an efficient allocation of spectrum and advancing public private partnership models for infrastructure. The government, through the DICT, can stimulate increased mobile network expansion in rural areas through an efficient spectrum allocation by the operator (for 4G/LTE and 5G). This would entail reviewing and revising regulations on spectrum allocation for mobile broadband. In addition, the Philippine government should leverage public private partnerships to attract private investment and manage government assets, including physical assets, right-of-way, aggregated demand to create alternative sources of international bandwidth, the submarine cable landing station, and the domestic backbone network, especially in far-flung areas. Consideration may be given to the creation of incentives for attracting additional investment in broadband internet in underserved and unserved regions. Digital financial services Accelerate adoption of PhilSys to underpin growth in digital financial services. PSA and and national digital id DICT should promulgate use-cases for the greater use of the National ID. Enhance Philsys— enabled KYC framework by issuing supplemental guidelines to allow underserved segments to access financial services. The implementation of the national ID system is going to play a key role in expanding digital finance (access and use of accounts) and economy by facilitating mechanisms for knowing your customer. The law was enacted in 2018, but smooth implementation remains challenging, particularly with its linking with other existing identification databases. The BSP and Bureau of Internal Revenue (BIR) should generate regulations for private electronic payment systems, while the Department of Finance (DOF), Commission on Audit (COA) and BTr can work on government e-payment regulations. Revisions to the rules pertaining to electronic ledgering, receipting, eKYC, contracting with payments services, and auditing by the BTr, COA, and BIR to facilitate greater adoption by the government for existing payment systems. Ease regulations to promote entry and innovation of fintech and non-banks in the provision of DFS. Expanding the availability of DFS could be achieved through open finance and data sharing. This would entail effective implementation of an open finance framework by the establishment of Open Finance Oversight Committee and the adoption of industry accepted standards that allow for data sharing. In addition, the BSP and the Securities and Exchange Commission (SEC) could introduce measures to promote digital transformation of rural financial institutions and microfinance institutions and increase penetration of financial PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 56 services in underserved geographic areas. The financial sector forum could issue guidelines for the implementation of industry sandbox for digital finance innovations. The recently approved guidelines from the Insurance Commission (IC) to advance the regulatory framework for insurtech is a good example. Finally, the Securities and Exchange Commission (SEC) could introduce guidelines to enhance the framework for crowd-funding platforms to increase uptake and diversify sources of finance to SMEs. Promote stronger coordination for better enforcement of the consumer protection framework. Policymakers should strengthen regulatory and supervisory framework for financial consumer protection, including cybersecurity by the passage of the Financial Products and Services Consumer Protection Act. This is especially important as different agencies in the Philippines share consumer protection responsibilities in their respective fields: e.g., Central Bank, BSP, for electronic payments; the DA for agricultural and fishery products; the DOH through the Food and Drug Authority in relation to the health and safety hazards with respect to food, drugs, cosmetics, medical devices. Horizontal coordination mechanisms to learn, identify synergies and avoid duplication, can improve enforcement across agencies. This mechanism could include, for example, establishing international cooperation frameworks to support overseas enforcement of consumer protection; adopting interoperable digital platforms to address complaints and reducing duplication of efforts for certain markets – ridesharing, e-commerce, and e-banking. Digital skills Educational and training institutions need to enhance the digital competency of the work force to meet the increasing demands for customer services, technical support, data scientists, software, and engineering. Digital competency is not just about technology but also about digital knowledge, technical skills, and attitude formation, as well as complementary (soft) skills (e.g., team building, cross-functional collaboration, and problem solving). Fostering digital competency must start at the basic education level (under DepEd) to include foundational skills on how to find information in the internet, send emails, and use software such as word processors. The competency progresses into higher education levels with more advanced topics on programming, AI, etc. Knowledge of basic cybersecurity and data protection merits policy attention for skills development and strengthening, as business and government transactions are increasingly digitalized. DepEd’s latest Basic Education Development Plan aims to strengthen students’ competency in using digital technologies, data, and information to stay relevant in the evolving economy, and this requires continued policy attention. HEIs, supported by the CHED, should expand upskilling and reskilling for highly specialized 4IR skills and deepen linkages with industry. With the changing nature of work, individuals will need to learn new skills for existing jobs (upskill) or learn new skills for different jobs (reskill). Upskilling strategies include updating HEI curricula and training opportunities to fit the needs of 4IR. HEIs can also participate in reskilling by strengthening opportunities for lifelong learning and providing alternative credentials such as digital badges and micro-credentials, which current employees may undertake through industry partnerships. Strengthening academe-industry linkages can help close skills gaps by ensuring the current supply of worker skills meets industry needs. Strengthen digital skills training under TESDA. The TESDA Online Program—a free online platform seeking to expand access to high quality technical and vocational education and training has seen a high concentration of demand for courses in ICT. The uptake of courses on digital skills is particularly pronounced. In 2021, TESDA announced an expansion of its offerings on digital skills training in partnership with the Asia Foundation under the Go Digital ASEAN program. This program seeks to equip SMEs with the needed capacity to bring their businesses online. Efforts to enhance e-commerce potential include instructions on how to utilize social media to expand markets and customer base as well as skills-building on digitizing business PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 57 operations (Cruz 2021, TESDA 2021). The offerings on TESDA’s online portal cater to in-demand skills, especially under the new normal, with a particular emphasis on digital and ICT skills—animation, web, and game development, among other high-level digital skills (World Bank 2021). While strengthening the online courses and offerings for mass training for ICT skills, TESDA would need to continue to incorporate digital competency into its overall class based and enterprise-based training. Boost skills qualification and accreditation to reflect changing skills demand and enhance skills portability. The national qualifications system known as the Philippine Qualifications Framework (PQF) was introduced in 2012 and its Implementing Rules and Regulations was developed in 2019. To implement the PQF, a National Coordinating Council was constituted to guide the implementation of multiple agencies including DepEd, TESDA, CHED, and DOLE. While PQF is anticipated to promote lifelong learning and skills mobility by a qualification and accreditation mechanism recognized in the regional market (especially that of ASEAN countries), its implementation is at the nascent stage, with limited description on proficiency of digital skills. Meanwhile, the demand for skills is rapidly changing; many of the jobs in high demand today can no longer be demanded soon. For instance, call center services that consist of 50-60 percent of jobs in the business process management (BPM) sector in the Philippines are highly vulnerable to developments in AI and emergence of chatbots. To promote lifelong learning, reflect rapidly changing skills demand, and promote recognition of skills and experiences, there is a need for PQF to be strengthened. Conducive regulations Learn from international experiences which can help Philippines policymakers to improve for digital market access regulatory practice in the platform economy. The Philippine’s Internet Transactions Act contains provisions for new Online Dispute Resolution mechanisms that offer protection for both consumers and merchants. However, this ex-post dispute resolution alone is unlikely to achieve sufficient protection for online suppliers. Policymakers in other countries have used complementary approaches to protect online suppliers. The European Union (EU) uses its Platform-to-Business Regulation to ensure basic protections that ex-ante establishes a requirements and codes of conduct under which platforms must adhere to (e.g., scope and processes around terms and conditions, transparency, dispute resolution). Another approach relies on using traditional anti-trust tools to redress abuses of market dominance by platforms. Finally, another approach is to designate platform operators with superior bargaining position (ASBP) platforms to target potential abuse and reduce the relative dominance by ruling out certain actions toward small suppliers. In Brazil, the National Consumer Secretariat introduced the ODR portal consumidor.gov.br in 2014. Customers and companies voluntarily register on the website and settle their disputes. As of 2017, 80 percent of complaints were resolved and took on average seven days. The ODR has more than 2.2 million registered users and 860 registered companies, processed more than three million cases up until August 2020. Improve current guidelines on accreditation of private CAs and electronic notarization to stimulate the adoption of digital certificates. No private Cas have been accredited to date, and only the DICT has been able to issue digital certificates as the Government CA. In addition, the issuance by the Supreme Court of guidelines supporting electronic notarization will increase uptake of digital transactions. A positive step – induced by the pandemic – was the Supreme Court ‘s rule allowing the notarization of paper documents and instruments with handwritten signatures or marks, using videoconferencing facilities, in areas covered by community quarantine restrictions. Lessons from the adoption of these interim rules may inform the finalization of rules on electronic notarization, to further build trust in electronic documents. Another opportunity is the transition to digital invoices, which are likely to simplify accounting systems for MSMEs. PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 58 Strengthen enforcement and communication on enforcement actions on consumer and supplier protection and privacy. While the current regulatory framework confers enforcement powers to both the DTI and the NPC, those have been underutilized, particularly regarding the imposition of sanctions for relevant cases. This weakens any perception of trust on the regulatory framework and its relevance. The DTI and the NPC should strengthen their enforcement capabilities, with more training and resources dedicated. This should include better communication and increased transparency on enforcement actions, and enhanced consumer and supplier education on the remedies available to them. Strengthen international cooperation on rules and certification for transmittal and processing of personal data to accelerate data transfers. While the DPA was based on international best practice, it lacks recognition by the EU in providing adequate protection of data privacy. This limits the potential for transferring personal data to and from the EU, Norway, Liechtenstein, and Iceland. As more countries implement the EU framework for transfer restrictions, which allows data transfers only to third countries that have laws with adequate protection, the government needs to strengthen the DPA and encourage organizational measures by data processors and controllers. The Philippines should continue working on harmonizing cross-border data rules with its main trading partners, providing businesses and consumers more legal certainty, and supporting the APEC Cross Border Privacy Rules framework. Through the Ease of Doing Business Act, the Anti-Red Tape Authority can support the establishment of a one-stop shop for virtual businesses and gig economy workers and advance e-government initiatives (e.g., a whole-of-government approach) to support formalization and make it easier for gig workers (and others) to make social security contributions. Photo: Ezra Acayan PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 59 3.9 Conclusion Digitalization will be a key driver of long-term economic streamlining of permitting, efficiently allocating spectrum, growth. The benefits of digitalization are extensive and can and advancing public private partnership models for be shared by all sectors of society. It can enhance infrastructure. productivity by aiding the private sector in increasing production efficiency, reducing operational costs, and DFS have remained in their infancy and take up has been delivering economies of scale. Digitalization empowers firms bound by limited financial inclusion of consumers and of all sizes to access markets beyond traditional boundaries. businesses alike. Enabled by fintech innovations, DFS have Even local MSMEs find themselves competing in the global the potential to lower costs, increase the speed of market. Digital solutions have also reduced the need for transactions, and allow for more tailored financial services to face-to-face interaction, allowing for remote delivery of serve the needs of underserved segments of the population services and opening opportunities to expand telehealth, at scale. However, there has been a limited uptake of DFS in fintech, and travel tech business models. These capabilities the country (they are used by barely 10 percent of have become especially important during the pandemic, as households), while fintech development remains nascent. firms have depended on digital platforms to survive. While challenges to growing DFS are wide-ranging, two critical ones are: (i) the limited coverage of payment The authorities have introduced important reforms at an infrastructure in the last mile; and (ii) low levels of consumer accelerated pace over the past three years, while the rate trust that impede wide-scale adoption. Addressing these of digital uptake has accelerated during the pandemic; challenges require promoting the adoption of PhilSys to however, the Philippines has yet to fully leverage the underpin the growth of DFS; easing regulations to promote digital technologies. COVID-19 has accelerated the entry and innovation of fintech and non-banks in the adoption and use of digital technologies. However, provision of DFS; and establishing stronger coordination and digitalization is constrained by the country’s low high-speed better enforcement of consumer protection. broadband penetration, which lags neighboring middle- income countries. Moreover, digital adoption diverges Demand for digital skills is growing steadily, but the significantly between small and large firms, and firms market does not seem ready to meet the rising demand. operating in different sectors. While there is convergence in While digital occupations have figured heavily on the list of digitalization on front-end technology, including online sales, the country’s most in-demand jobs, workers’ digital skills and social media, and consumer-facing technology, a wide literacy have not caught up. In the World Digital divergence remains in the use of sophisticated back-end Competitiveness Ranking 2021, the Philippines ranked 54th technologies, which are linked to higher productivity. The on digital/technological skills, reflecting weak talent and adoption of digital technology has also been slower in areas training, and education. Results from the 2019 National ICT outside the National Capital Region and key metropolitan Household Survey reveal that over a quarter of Filipinos do cities. This note focuses on digital enablers, which include not use the Internet because they do not know how to use it. Digital infrastructure, Digital financial services, and national The government has embarked on efforts to address this digital ID, Digital skills, and Conducive regulations for digital gap, but more can be done, such as: (i) fostering digital market access. The table below summarizes the main competency through basic education to build the challenges and the key policy reforms for each of the foundational skills for digital hardware and software usage; enablers. (ii) increasing upskilling and reskilling for highly specialized 4IR skills; (iii) strengthening linkages with industry; (iv) While there has been progress in expanding digital improving digital skills training under TESDA programs; and connectivity, challenges remain. Overall broadband (v) ensuring skills qualification and accreditation reflect penetration is lower in the Philippines than in neighboring changing skills demand and enhance the portability of skills. economies, despite the entrant of a third full-service operator in 2021. The country’s fixed broadband, which is The explosive digitalization during the pandemic has important for high-volume data transmission and typically emphasized the need for regulations that keep in pace required by large businesses and institutions, continues to with the development of the digital economy. Well- lag that of regional comparators. A key challenge is designed regulations are needed to achieve inclusive underinvestment owed to decades of insufficient market participation and promote deeper digitalization. competition and outdated legal, policy, and regulatory Digital consumers and operators need to feel confident and frameworks. Franchising requirements, complex permitting safe from undue risk of personal data breaches, for network equipment, and lack of policy on infrastructure unscrupulous vendors, and infringement on their privacy. sharing are slowing the network rollout. These challenges While the government has passed laws and regulations to can be addressed by introducing pro-competition legislation promote trustworthiness, some seem inadequate to protect for shared deployment of network infrastructure and consumers online. Meanwhile, the legal basis of electronic PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 60 transactions was cemented in 2000, and the authorities Policymakers need to act in earnest to advance critical recently issues guidelines on electronic documents, reforms and support deeper digitalization in the signatures, and digital signatures in government Philippines. There is a need to increase digital adoption by transactions. However, the absence of rules on electronic the private sector to accelerate the recovery from the notarization, persistent official requirements on paper COVID-19 economic shock. The digital economy can drive documents and manually signed forms, limitations on the growth and leapfrog the economy toward the aspirations laid issuance of individual digital certificates, and the absence out in Ambisyon Natin 2040. The government must therefore accredited CAs limit the adoption of electronic contracts, urgently take an active role in creating and delivering an receipts, invoices, and supporting documents for enabling environment through priority policy and regulatory government transactions. Finally, contestability in digital reforms that reduce the digital divide, expand the use of markets is affected by a range of issues that Philippine digital payments and national IDs, improve the availability of regulators need to account for, including online supplier human capital and digital skills, and create a more conducive protection, dominance of ‘gatekeeping’ platforms, and business environment. The payoff of reforms will be government open data or industry data policies. enormous, while the lack of action will be consequential. Photo: Philippine Statistics Authority PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 61 Summary of challenges and recommendations. Enabler Challenges Key Policy Recommendations Digital infrastructure • Insufficient competition and • Expand pro-competition legislation outdated legal, policy, and for shared deployment of network regulatory frameworks. infrastructure and streamlining of permitting. • Inefficient digital spectrum management • Promote investment in connectivity results in an uneven playing field by ensuring an efficient allocation of for new prospective entrants. spectrum and advancing public private • Restrictions on investment and partnership models for infrastructure. competition are deterring further expansion of digital infrastructure. • Complex permitting for network equipment and lack of policy on infrastructure sharing are slowing the network rollout. Digital financial services • Underlying collateral requirements, • Accelerate the adoption of PhilSys and national digital ID along with difficulties in evaluating to underpin growth in DFS. borrowers’ creditworthiness, • Ease regulations to promote the entry reduce the demand for DFS. and innovation of fintech and non- • Low levels of consumer trust and banks in the provision of DFS. awareness of electronic payments impede wide scale adoption of DFS. Digital skills • There are considerable gaps in digital • Enhance the digital competency of the work skills and other skills among students, force and meet the increasing demands although they vary by field of study of the changing work environment. • Limited digital skills and low level of • Expand upskilling and reskilling for digital literacy in the Philippines are highly specialized 4IR skills and obstacles to digital transformation. strengthen linkages with industry. • Despite the Government’s • Strengthen digital skills training recent efforts to bridge the gap, under the Technical Education and qualification and accreditation of Skills Development Authority. new skills remain imperatives Conducive regulations • Enforcement of consumer protection • Improve regulatory practice in the for digital market access falls short on sanctioning transgressors. platform economy by improving • The Philippines imposes few guidelines on accreditation of private restrictions on and engages certification authorities and electronic with partners to support notarization, which can stimulate the international data transfers. adoption of digital certificates. • There is an umbrella framework that • Strengthen international cooperation on supports the validity of electronic rules and certification for transmitting documents, but equivalency and processing personal data, which between paper and electronic can accelerate data transfers. documents falls below par PHILIPPINES ECONOMIC UPDATE JUNE 2022 EDITION 62 References Barroga, K., V. 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