PHILIPPINES ECONOMIC UPDATE BRACING FOR HEADWINDS, ADVANCING FOOD SECURITY DECEMBER 2022 Photo by: ©Aver Justin Parado/World Bank ToC Contents Table of PREFACE Executive Summary Economic & The Philippines Economic Update (PEU) summarizes key economic and social developments, important policy Policy Dev Recent 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 Economic Growth macroeconomic management and financial-market dynamics to the complex challenges of poverty reduction 1.1 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. External Sector 1.2 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 Inflation & Monetary Equity; Social Protection and Jobs (SPJ); Agriculture Global Practice (Ag); and Governance Global Practices. 1.3 Lars Christian Moller (Practice Manager for the MTI GP), Souleymane Coulibaly (Lead Economist and Program Leader), and Ralph van Doorn (Senior Economist) guided the preparation of this edition. The team consisted of Kevin Chua (Senior Economist), Kevin Cruz (Economist), Ruijie Cheng (Young Professional), Eduard Santos, Fiscal Policy Ludigil Garces and Patrizia Benedicto (Consultants) from the MTI GP; Radu Tatucu (Senior Financial Sector 1.4 Specialist) and Uzma Khalil (Senior Financial Sector Specialist) from the FCI GP; Nadia Belghith (Senior Economist), Sharon Piza (Economist) and Karl Jandoc (Consultant) from the Poverty & Equity GP; Yoonyoung Employment and Poverty Cho (Senior Economist), Ruth Rodriguez (Social Protection Specialist) and Ma. Laarni Revilla (Consultant) from 1.5 the SPJ GP; and Nkosinathi Mbuya (Senior Nutrition Specialist) from the Health GP. A World Bank team from the Agriculture and MTI GPs, consisting of Anuja Kar (Senior Agriculture Economist), Mio Takada (Senior Agriculture Economist), Ma. Theresa Quiñones (Senior Rural Development Specialist), Animesh Shrivastava (Lead Agriculture Outlook & Risks Economist), John Nash (Consultant), Roehl Briones (Consultant) and Kevin Chua, prepared the Special Focus Note on Ensuring Food Security for All: Repurposing Public Investments, under the guidance of Dina Umali- Deininger (Practice Manager) and Lars Moller. The report was edited by Oscar Parlback (Consultant), and the graphic designer was Pol Villanueva (Consultant). Peer reviewers were Dhruv Sharma (Senior Economist), Outlook Growth 2.1 Ergys Islamaj (Senior Economist), Irina Schuman (Senior Agriculture Economist), and Ruslan Piontkivksy (Senior Economist). Logistics and publication support were provided by Geraldine Asi (Team Assistant), Mildren Peñales (Team Assistant), and Hunter Tiro (Consultant). The External Communications Team, consisting of Clarissa Prosperity & Shared Poverty David, David Llorito and Stephanie Margallo, and Justine Letargo (Consultant) prepared the media release, Philippines Economic Update December 2022 2.2 dissemination plan, and web-based multimedia presentation. Risks & Policy Food Security Challenges The team would like to thank Ndiame Diop (Country Director for Brunei, Malaysia, Philippines, and Thailand) for 2.3 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, Ensuring interpretations, and conclusions expressed in the PEU are those of the authors and do not necessarily reflect the for all views of the World Bank’s executive board or any national government. Introduction If you wish to be included in the email distribution list for the PEU and related publications, please contact 3.1 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). Effectiveness Implications Spending of Public 3.2 For more information about the World Bank and its activities in the Philippines, please visit www.worldbank.org/ph. for financial & Func Dev 3.3 Agenda for Agriculture An Action II 3.4 ToC Contents Table of TABLE OF CONTENTS Executive Summary Economic & Policy Dev Preface ii Recent Table of Contents iii List of figures iv Economic Growth List of tables v 1.1 List of boxes v Abbreviations and acronyms vi External Sector 1.2 Executive Summary vii Part I. Recent Economic and Policy Developments 6 Inflation & Monetary 1.3 1.1 Economic Growth: Outperforming Expectations 7 1.2 External Sector: Widening Deficits and Weakening Currency 9 Fiscal Policy 1.3 Inflation and Monetary Policy: Tighter Stance amid High Inflation 13 1.4 1.4 Fiscal Policy: Towards Consolidation 15 1.5 Employment and Poverty: Labor Market Vulnerabilities amid the Economic 17 Employment and Poverty 1.5 Recovery Part II. Outlook and Risks 20 Outlook & 2.1 Growth Outlook 21 Risks 2.2 Poverty and Shared Prosperity 27 2.3 Risk and Policy Challenges 28 Outlook Growth 2.1 Part III.Ensuring Food Security for All: Repurposing Public Investments 35 3.1 Introduction 36 Prosperity 3.2 The Effectiveness of Public Spending 38 & Shared Poverty Philippines Economic Update December 2022 2.2 3.3 Implications for Financial and Functional Devolution resulting from the 42 Mandanas Ruling Risks & Policy Food Security Challenges 3.4 An Action Agenda for Agriculture 44 2.3 Annex1 48 Bibliography 49 Ensuring for all Introduction 3.1 NOTE: CLICK THE SIDE BUTTONS TO GO TO THE SECTION YOU WANT TO READ OR GO TO THE Effectiveness Implications Spending TABLE OF CONTENTS (TOC). CLICK HOME BUTTON TO GO BACK TO TOC PAGE of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action III 3.4 ToC Contents Table of List of figures Figure 1. The economic recovery is underway in 2022. 7 Executive Summary Figure 2. The services sector significantly contributed to growth in Q1-Q3 2022, … 8 Figure 3. … buoyed by strong domestic demand. 8 Economic & Policy Dev Recent Figure 4. Strong merchandise imports have widened the trade deficit. 10 Figure 5. The current account deficit drove the BOP shortfall. 10 Economic Figure 6. Regional currencies have depreciated against the US dollar. 10 Growth 1.1 Figure 7. Global economic activity has slowed amid deteriorating investor sentiment. 12 Figure 8. Global tourism has started to recover as countries relax pandemic restric- 12 External Sector tions. 1.2 Figure 9. Inflation rose due to elevated food and energy prices. 14 Inflation & Figure 10. The BSP tightened its monetary policy in response to elevated inflation. 14 Monetary 1.3 Figure 11. The banking sector is showing signs of improvement, as the share of 14 NPLs and restructured loans declined. Fiscal Policy Figure 12. The fiscal deficit narrowed in H1 2022. 16 1.4 Figure 13. About two-third of the national debt is domestic debt. 16 Employment Figure 14. Female labor force participation has increased in recent months … 18 and Poverty 1.5 Figure 15. … while the unemployment rate continues to fall. 18 Figure 16. Poverty incidence by Region, 2018–2021. 19 Outlook & Figure 17. Food and energy account for a high share of total expenditure among 19 Risks poor households. Figure 18. Growth is expected to be lower in 2023, dragged by the unfavorable 21 Outlook Growth external environment. 2.1 Figure 19. Global commodity price pressure is weakening 22 Figure 20. Consumer confidence dropped in the previous quarter with household 25 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 concerns over rising prices. Figure 21. Actual and projected US$3.65-a-day poverty rates. 27 Risks & Policy Food Security Challenges Figure 22. National Government Expenditures (Obligation Basis), 2021–2023. 30 2.3 Figure 23. Stunting Rates in Selected Countries, 1990-2020. 33 Figure 24. Sectoral share (%) of employment, 2002-2019. 36 Ensuring for all Figure 25. Incidence and magnitude of poverty among population groups, 2006 – 18 37 (%). Introduction Figure 26. Prevalence of moderate or severe food insecurity in percent (3-year aver- 37 3.1 age). Figure 27. DA share to total budget ratio (%). 38 Effectiveness Implications Spending of Public 3.2 Figure 28. DA Appropriation Levels in Php Billions, and as a Ratio to Agricultural GVA (%). 38 for financial & Func Dev 3.3 Agenda for Agriculture An Action IV 3.4 ToC Contents Table of Figure 29. Allocation of National Government Expenditures for Agriculture and 39 Agrarian Reform, 2020–2022 (in Php billions). Executive Summary Figure 30. Allocation to the Commodity Banner Programs, 2015–2019, in Php 40 Millions. Economic & Policy Dev Figure 31. TFP Growth in Agriculture (%) 41 Recent Figure 32. Rice yields around the world,2000-2020 (ton/ha). 41 Figure 33. Comparison of Regional Ranking Based on Different Agricultural 41 Economic Growth Indicators, 2018. 1.1 Figure 34. Government Allocations for Agriculture to LGUs, by LGU Level. 42 External Sector 1.2 List of tables Table 1. Economic Growth, 2019-2030f 23 Inflation & Monetary 1.3 Table 2. Economic Indicators for the Baseline Projections 25 Table 3. Comparison of Regional Ranking Based on Different Agriutural Indicators, 48 Fiscal Policy 2018 1.4 List of boxes Employment and Poverty Box 1. Recent Global Developments 11 1.5 Box 2. Global Outlook and Risks 23 Box 3. Trends on Global Commodity Prices and Implications for the Philippines 26 Outlook & Risks Box 4. Proposed 2023 National Government Budget 30 Box 5. Investing in Nutrition in the Philippines: An Essential Foundation for Sus- 32 Outlook Growth tained Economic Growth 2.1 Box 6. Advantages of Decoupled Payment 47 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action V 3.4 ToC Contents Table of ABBREVIATIONS AND ACRONYMS Executive Summary AFMA Agriculture and Fisheries GVA Gross Value Added Economic & Policy Dev Recent Modernization Act HFS High Frequency Household Survey AgGDP Agricultural GDP IRA Internal Revenue Allotment APIS Annual Poverty Indicator Survey IT-BPO Information technology - business Economic BARMM Bangsamoro Autonomous Region in process outsourcing Growth 1.1 Muslim Mindanao LFPR Labor Force Participation Rate BBL One stock tank barrel LFS Labor Force Survey BCDA Bases Conversion Development LGC Local Government Code External Sector Authority LGU Local government unit 1.2 BIR Bureau of Internal Revenue MMBtu Million British thermal unit BOC Bureau of Customs NCR National Capital Region Inflation & Monetary BOP Balance of payments NFA National Food Authority 1.3 BPS Basis points NIA National Irrigation Authority BSP Bangko Sentral ng Pilipinas NNC National Nutrition Council BTr Bureau of Treasury NPL Non-performing loan Fiscal Policy CAR Cordillera Administrative Region NTA National Tax Allotment 1.4 CPI Consumer Price Index NTBs Non-Tariff Barriers to Trade CSA Climate Smart Agriculture O&M Operations and Maintenance Employment and Poverty DA Department of Agriculture OFs Overseas Filipinos 1.5 DAR Department of Agrarian Reform OPEC Organization of Petroleum DBM Department of Budget and Exporting Countries Management OSEC Office of the Secretary Outlook & DILG Department of the Interior and PFMAT Public Financial Management Risks Local Government Assessment Tool DOF-BLGF Department of Finance-Bureau of PhilRice Philippine Rice Research Institute Local Government Finance PHP Philippine Peso Outlook Growth 2.1 DTP Devolution Transition Plan PMI Purchasing Managers’ Index EAP East Asia Pacific PMNP Philippines Multisectoral EF Equalization Fund Nutrition Project Prosperity & Shared Poverty EMDEs Emerging Markets and Developing PPP Purchasing power parity Philippines Economic Update December 2022 2.2 Economies ppts Percentage points EO Executive Order PRDP Philippines Rural Development Risks & Policy Food Security Challenges F2C2 Farm and Fisheries Clustering and Project 2.3 Consolidation Program PSA Philippine Statistics Authority FDI Foreign Direct Investment PSY Philippine Statistical Yearbook FMRs Farm-to-Market roads TFP Total factor productivity Ensuring GDP Gross Domestic Product UNICEF United Nations Children’s Fund for all GHGs Greenhouse gases WHO World Health Organization GOCCs Government-Owned and WTO World Trade Organization Introduction Controlled Corporations 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action VI 3.4 ToC Contents Table of EXECUTIVE SUMMARY Executive Summary Economic & Recent Developments Policy Dev Recent The Philippine economy has remained resilient The Balance of Payments (BOP) deficit, along despite a challenging external environment. The with the rising interest rate differential and Economic Growth economy expanded by 7.7 percent, year-on-year, in general strengthening of the US dollar, led to a 1.1 the first three quarters of 2022, fueled by strong significant depreciation of the peso. In the first domestic demand. Domestic activity was buoyed by half of 2022, robust domestic demand and high the economic reopening, release of pent-up demand, commodity prices underpinned the surge in External Sector 1.2 and improved labor market conditions. The reopening merchandise imports, which outpaced the growth in benefitted the contact-intensive services sector, while net services exports and foreign remittances. This led the public infrastructure investment program fueled to the widening of the current account deficit, which Inflation & Monetary construction and industry growth. However, growth in was financed by increased borrowings and net 1.3 manufacturing moderated due to lower export financial inflows. Nevertheless, the balance of demand and base effects from the previous year, while payments deficit widened to 1.6 percent of GDP in Fiscal Policy agriculture performed modestly amid the impact of the first half of 2022 from 1.0 percent of GDP in the 1.4 typhoons, rising input costs, and low sectoral first half of 2021. Against the backdrop of continued productivity. On the demand side, private monetary tightening abroad, the BSP-registered consumption accelerated on the back of recovering investments reported net outflows in the third quarter Employment and Poverty household incomes, and sustained remittance growth. of 2022. The BOP shortfall, along with the rising 1.5 Capital investment growth anchored on renewed interest rate differential and the general private sector optimism and sustained public strengthening of the US dollar, led to a significant Outlook & investment. However, government consumption depreciation of the peso in the first ten months of Risks slowed as the government continued to unwind fiscal 2022. support for the pandemic, while net exports weakened amid low external demand. Higher revenue collections and lower-than- Outlook Growth programmed expenditures led to a narrower 2.1 Inflation accelerated due to price pressure from fiscal deficit in the first three quarters of 2022. elevated global commodity prices and a tight Public revenues increased to 17.1 percent of GDP in domestic food supply. Headline inflation averaged the first three quarters of 2022 from 16.3 percent of Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 5.4 percent in the first ten months of 2022, higher GDP in the same period last year. Customs collection than 4.0 percent in the same period in 2021. High exceeded its target amid strong imports demand and global commodity prices and currency depreciations higher excise tax collections. Internal revenue Risks & Policy Food Security Challenges fueled domestic inflation, as the country is a net collection rose on more robust domestic activity and 2.3 importer of most staple foods, fertilizer, and fuel. In efforts to strengthen digitalization and tax addition, weather disturbances and lower domestic administration. Meanwhile, public spending production of certain commodities such as sugar and declined from 24.6 percent of GDP to 23.6 percent Ensuring salt have also pushed food prices higher. Higher of GDP during the same period. Current spending for all energy prices spilled over utilities and transportation retreated in line with efforts to unwind pandemic costs. Excluding volatile food and energy items, core support while capital spending fell short of the Introduction inflation rose to 3.4 percent in January–October 2022, government program. The increase in public 3.1 up from 3.1 percent in the same period last year. The revenues and the decline in public spending led to a increase indicated underlying price pressures and narrower fiscal deficit from 8.3 percent of GDP to 6.5 Effectiveness Implications heightened inflation expectations in recent months. In percent of GDP in Q1-Q3 2022. However, the fiscal Spending of Public 3.2 response to rising inflation and peso depreciation, the deficit resulted in an increase in the national debt BSP has tightened its monetary policy. Between May ratio to 63.7 percent of GDP as of end-September and November 2022, it raised the key policy rate by 2022. Still, the debt composition remains favorable for financial & Func Dev 300 basis points (bps) to 5.0 percent, and it has with high share of peso-denominated (68.5 percent 3.3 signaled further increases in step with the hawkish of total debt), and medium- and long-term debt (96.2 monetary stance of the US Federal Reserve. percent of the total debt). Agenda for Agriculture An Action VII 3.4 ToC Contents Table of The labor market continued to recover but the recovery, and benefitting the contact-intensive recovery is underscored by a higher share of low services sector. However, the unfavorable external Executive Summary quality jobs than before the pandemic. The environment and its spillover to the domestic economic reopening allowed more individuals to economy will likely slow the growth momentum in participate and find jobs in the labor market. The the fourth quarter and into 2023. The growth Economic & labor force participation rate (LFPR) rose to 65.2 slowdown in 2023 is premised on the fading of Policy Dev Recent percent in September 2022, above the pre-pandemic pent-up demand, alongside elevated inflation and level of 61.7 percent in January 2020. Even with higher interest rate environment that will temper increasing labor force participation, the domestic demand. The higher rates will lead to lower Economic Growth unemployment rate declined from 8.9 percent in private credit and subdued investments at a critical 1.1 September 2021 to 5.0 percent in September 2022. time when public investment growth is expected to This indicated that the labor market accommodated slow in line with fiscal consolidation and a jobseekers, including new labor market entrants and programmed decline of public infrastructure External Sector young adults. Underemployment, which was high spending. As global growth is expected to 1.2 and volatile during the pandemic, appeared to be decelerate next year, external demand from stabilizing on a downward trend in 2022, although it advanced economies, which are key buyers of Inflation & Monetary rose between June and September. Nevertheless, the Philippines merchandise exports, will be subdued. 1.3 employment recovery was accompanied by a higher Medium-term growth will gradually approach its share of elementary occupations associated with low potential rate at 5.7 percent as the output gap closes pay, and part-time workers than pre-pandemic levels in line with the cyclical recovery. Fiscal Policy in January 2020. There has also been an increase in 1.4 the share of self-employed and non-paid workers, The growth outlook is subject to downside risks indicating growing informality in the labor market. at a time when the authorities face the Employment and Poverty challenging task of supporting recovery while 1.5 Outlook and Risks taming inflation amid a narrowing policy space. With central banks across the world raising interest rates to combat inflation and governments Outlook & The external environment has further Risks deteriorated with the realization of key withdrawing pandemic-related fiscal support, the downside risks, identified in the Philippines synchronous policy actions could produce larger Economic Update, June 2022 edition. Global impacts than intended, both in tightening financial conditions and deepening the growth slowdown. Outlook Growth growth is expected to decelerate in 2022 and 2023, 2.1 reflecting synchronous monetary tightening, The fear is that moderate shocks can tilt the global worsening financial conditions, and continued economy into recession, which will have dire disruptions due to the war in Ukraine. The ensuing consequences to the growth recovery in many Prosperity & Shared Poverty EMDEs including the Philippines. The fear is Philippines Economic Update December 2022 2.2 weaker global demand is weighing on global industrial production and trade, which has aggravated by the risk of an escalation of geopolitical decelerated since the start of the second half of tensions and supply chain bottlenecks could further Risks & Policy Food Security Challenges 2022. Rapid monetary tightening specially in disrupt commodity markets and international trade. 2.3 advanced economies has led to capital outflows and Escalating tension has already led to the curtailment currency depreciations in emerging markets and of energy supplies to Europe. While most global developing economies (EMDEs). These external commodity prices have eased since June, they remain Ensuring challenges have channeled through the Philippines in higher than the averages in the past five years. If the for all the form of high inflation, peso depreciation, and current period of elevated inflation persists and capital market volatility. de-anchors inflation expectations, central banks may Introduction accelerate the pace of monetary policy tightening 3.1 Robust domestic activity is driving growth in with consequences on credit and capital flows. 2022, but the deteriorating global environment Finally, as the pandemic has yet to be declared over, the risk of another COVID-19 wave hangs over the Effectiveness Implications is spilling into the economy and tempering its Spending of Public outlook. 3.2 growth prospect. The economy is projected to grow at an upward-revised 7.2 percent in 2022 before declining to 5.7 percent on average in 2023- The immediate domestic challenge that faces the for financial & Func Dev 25. The economic reopening this year is unleashing authorities is rising and high domestic inflation. 3.3 pent-up demand, contributing to jobs and incomes High inflation will dampen household consumption, Agenda for Agriculture An Action VIII 3.4 ToC Contents Table of while the ensuing policy rate tightening will temper Despite the public spending slowdown, it borrowings and investments. Inflationary pressure remains important to sustain investments in Executive Summary comes from multiple fronts including: (i) elevated health and education to reduce vulnerabilities global commodity and energy prices; (ii) from the scarring impact of the pandemic. The international supply chain and logistics disruptions; threat of a new variant-driven surge hangs over the Economic & (iii) currency depreciation; (iv) recovering demand; outlook. Nevertheless, the country is better Policy Dev Recent and (v) domestic supply constraints caused by weak equipped to respond to re-emerging threats with agricultural outputs and impact of natural disasters. high population vaccination coverage, and effective Addressing the inflationary pressure means public health protocols. Shocks from the COVID-19 Economic Growth employing both monetary and non-monetary pandemic, however, have manifested themselves in 1.1 measures including freer importation, lower tariffs child malnutrition and stunting, and reduced student and non-tariff barriers to help augment domestic learning especially among the poor. If unmitigated, supplies as needed, support to agriculture these shocks may have persistent impacts on External Sector production through extension services, seeds, and people’s wellbeing and damage future productivity, 1.2 fertilizers, and key policy rate hikes. earnings, and innovation. For this reason, sustained investments in nutrition and education are imperative Inflation & Monetary Continued near-term monetary tightening is despite pressure for fiscal consolidation. 1.3 appropriate to prevent a de-anchoring of inflation expectations. High inflation tends to inflict The new administration will need to take swift the greatest harm on low-income households where and decisive action to confirm its commitment Fiscal Policy inflation often outpaces wage growth, which these to its stated priorities. The new administration has 1.4 households rely on. Poorer households suffer laid out its eight-point socio-economic agenda, disproportionately given the higher share of food which aims to guide the economy back to its high- Employment and Poverty and energy on their expenditures. Monetary growth trajectory. It has taken steps to reassure 1.5 tightening is appropriate to prevent self-fulfilling businesses and investors the continuity of public expectation of rising inflation. Moreover, infrastructure program, business-friendly reforms, communicating monetary policy decisions clearly, and growth-supporting macroeconomic policies. Outlook & Risks and leveraging credible monetary frameworks will Structural reform initiatives are planned on the areas help limit the economic impact of the tightening of public-private partnership, foreign participation in cycle. strategic industries, and tax policy and administration, among others. The release of the Philippines Outlook Growth 2.1 Staying the course on fiscal consolidation Development Plan 2023-2028 will be a welcome signals commitment to fiscal sustainability. development as the plan provides a clear roadmap Fiscal consolidation has become more challenging to achieving the country’s medium-term priorities. Prosperity & Shared Poverty in the current high inflation environment, which may Philippines Economic Update December 2022 2.2 compel the government to expand social support Over the medium term, effective public programs or extend subsidies at a time of narrower spending in the agriculture sector will help Risks & Policy Food Security Challenges fiscal space. Targeted, instead of blanket, social address low agricultural productivity and 2.3 assistance measures will help manage expenditure alleviate the challenge of food security in the growth while maximizing returns of programs. country.Comprising less than 10 percent of GDP, Eliminating spending inefficiency and increasing agriculture has marginally contributed to economic Ensuring value for money in public procurements will be growth in the past decades. Low productivity has for all instrumental to a consolidation strategy. The hampered domestic food production, which, in turn, authorities also need to employ new tax policy and influences the volatility of consumer price inflation. Introduction administration measures to mobilize revenues. Over Nonetheless, the sector employs a disproportionate 3.1 the medium term, building fiscal buffers, diminished share of the labor force, significantly contributes to during the height of the pandemic, will help mitigate the household consumption basket among the poor, against downside risks. The proposed 2023 national and therefore, crucial to the delivery of inclusive Effectiveness Implications Spending of Public government budget lays out the medium-term fiscal growth. The growth prospect remains poor due to a 3.2 combination of chronic underinvestment and intense consolidation agenda, with target to reduce the vulnerability to weather-related shocks. To this end, for financial & fiscal deficits by 3.5 percentage points (ppts) of GDP the efficient use of public funds for public investments Func Dev 3.3 between 2022 and 2025. will help address the structural constraints of the sector, and deliver better extension services, stronger Agenda for Agriculture An Action IX 3.4 ToC Contents Table of value chain system, and improved business climate has come at the expense of other agricultural for agri-food system. products. As a result, Filipino consumers pay a very Executive Summary high price for food approximately 40% higher than Special Focus – Ensuring Food Security the regional comparators. Sustaining agriculture for All: Repurposing Public Investments growth is further complicated by the ongoing Economic & devolution resulting from the Mandanas Ruling Policy Dev Recent The growth momentum has been driven by key of the Supreme Court, which transfers greater structural reforms, leading to a significant responsibilities for and financing of agriculture reduction in poverty in recent years. Agricultural programs to local government units (LGUs). Economic Growth policy has spurred some growth in the sector but 1.1 falls short of sparking a structural transformation and To take full advantage of the opportunities arising dynamic development. Recently, the COVID-19 from the new strategic directions of the Department pandemic, the war in Ukraine, and adverse climatic of Agriculture (DA) and the devolution of more External Sector 1.2 and other events (typhoons, floods, and African responsibilities to LGUs, agricultural public Swine Fever outbreak), have contributed to rising expenditure policies must address three critical domestic food prices and heightened concerns challenges: (i) changing strategic focus from an Inflation & Monetary about food security in the country, especially for the objective of self-sufficiency in specific commodities 1.3 poor and vulnerable. The country remains vulnerable to align better with the administration’s ambition of to climate shocks and mounting challenges on improving sectoral competitiveness and resilience to Fiscal Policy account of the rising prevalence of food insecurity. ensure food security for all, (ii) improving the 1.4 effectiveness of the current spending, and (iii) Ensuring food security and sustained dealing effectively with the public expenditure agricultural growth has been hampered by issues related to devolution. To address the Employment and Poverty underinvestment in public goods in agriculture. challenges, this note proposes some policy 1.5 The continued focus on supporting rice production recommendations and interventions. Outlook & Risks Policy Recommendations Interventions Focusing on diversification Food security is a function of income and the general availability of nutritious to ensure greater balance foods. In aspirational terms, it means moving toward an agri-food system that Outlook Growth in sectoral priority-setting is: (i) resilient in the face of risks, (ii) inclusive in the opportunities it provides 2.1 and resource allocation, and the consumers it services, (iii) competitive in domestic and international and repurposing public markets, and (iv) environmentally sustainable from farm to fork. Prosperity & Shared agricultural expenditures in Poverty Philippines Economic Update December 2022 2.2 line with the strategic vision Pursuing this agenda requires shifting from protecting a specific product of the new administration (e.g., rice) and type of farmer to improving the overall resilience, competitive- Risks & Policy Food Security ness, and sustainability of the sector. One element is the transition in budget- Challenges 2.3 ing from a commodity-based planning mechanism to more area-based, focus- ing on holistic objectives rather than production targets. A second element is to focus on programs that fund public goods that are currently underfunded Ensuring (e.g., agricultural research). for all Investments in extension New modes of communication between agents and farmers allow more effi- Introduction services ensuring greater cient dissemination of information than the old face-to-face contact model. As 3.1 thrust on capacity extension services are increasingly decentralized, investments in technologies development for LGUs that help local extension staff reach a larger number of farmers should have high payoffs. Continued thrust on capacity-building initiatives for the LGUs Effectiveness Implications Spending of Public remains the key through guidelines, manuals, and guidebooks to improve 3.2 delivery of extension services. for financial & Func Dev 3.3 Agenda for Agriculture An Action X 3.4 ToC Contents Table of Scale up Climate Smart Key interventions are the following: Agriculture (CSA) policies • Reform agricultural support policies to encourage more diversified produc- Executive Summary and programs to foster tion systems. increased resilience of the • Improve water management and pricing policies to increase incentives for agri-food system to weather efficient use. Economic & Policy Dev shocks and reduce Green- • Use legal and regulatory reform to provide greater tenure security for farm- Recent house gases (GHG) emis- ers to encourage investments in more resilient, integrated, and diversified sions from the sector licy agriculture systems. Recommendations • Support technology generation and dissemination to promote CSA Economic Growth technology adoption. 1.1 Take advantage of the Mandanas process to build local capacity for mainstreaming CSA into policies and planning. Interventions External Sector 1.2 Improve budget priority There is a need for increased focus on improving value chain coordination to support programs that and integration under the Farm and Fisheries Clustering and Consolidation overcome barriers to farm Program (F2C2) initiative, with government support for buyers and producer Inflation & Monetary 1.3 consolidation and achieve- organizations in preparing and implementing profitable business plans. ment of economies of scale Measures to support collective action will also promote CSA investment options with high investment costs, e.g., solar-powered pumps, biodigest- Fiscal Policy ers, and small farm reservoirs, and therefore require joint action by groups of 1.4 farmers. Employment and Poverty Procedural improvements Getting the greatest value from public funds requires an efficient and effective 1.5 on government budgeting process to plan and execute the budget and see how and where the govern- institutions ment spends money. In particular, attention is needed in two areas: (i) to iden- tify the causes of low disbursement rates and resolve them; and (ii) to improve Outlook & processes for evidence- and results-based monitoring and evaluation. Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: hijodeponggol Agenda for Agriculture An Action XI 3.4 ToC Contents Table of Executive Summary Economic & Policy Dev Recent Economic Growth 1.1 External Sector 1.2 Inflation & Monetary 1.3 Fiscal Policy 1.4 Photo by: Jed Regala Employment and Poverty PART 1 1.5 RECENT ECONOMIC AND Outlook & Risks POLICY DEVELOPMENTS Outlook Growth 2.1 The economic recovery continued through the third quarter of 2022 Prosperity & Shared Poverty Philippines Economic Update December 2022 despite a challenging external environment that weighed on global trade, 2.2 inflation, and global financing conditions. The economy expanded in Risks & Policy Food Security Challenges the first three quarters of 2022, fueled by strong domestic demand. This 2.3 was buoyed by the economic reopening, and improved labor market conditions. The unemployment rate has declined to its pre-pandemic Ensuring for all level amid higher labor force participation. The fiscal deficit narrowed with growth in public revenues and winding down of pandemic support. Introduction However, inflationary pressure has strengthened, driven by high global 3.1 commodity prices, supply disruption, currency depreciation, and Effectiveness Implications recovering demand. In response, the Bangko Sentral ng Pilipinas (BSP) Spending of Public 3.2 raised the key policy rate by a total of 300 bps, so far this year. for financial & Func Dev 3.3 Agenda for Agriculture An Action 6 3.4 ToC Contents Table of 1.1 Economic Growth: Outperforming Expectations Executive Summary The post-pandemic recovery is underway driven by domestic demand. Although firming global headwinds have weighed on merchandise trade, the recovery has continued amid increasing household incomes, sustained remittances, and improved employment conditions. Economic & Policy Dev Recent The economy grew by 7.7 percent, year-on-year, The economic reopening buoyed the recovery of in the first three quarters of 2022 (4.9 percent the services sector, which accounted for 70 Economic in the same period in 2021), as improving percent of Q1-Q3 2022 GDP growth (Figure 2). Growth 1.1 domestic conditions offset a challenging external The economic reopening benefitted the contact- environment.1 The reduction in COVID-19 cases intensive services sector, which grew by 8.9 percent paved the way for an economic reopening that, along from Q1-Q3 2022 (4.4 percent a year ago). The External Sector with election-related activities, spurred domestic removal of mobility restrictions and release of pent- 1.2 demand. Campaign activities boosted travel, up demand led to a growth acceleration in wholesale accommodation, information and publishing, and and retail trade, transportation, and accommodation communication industries. The removal of stringent and food services. In addition, construction Inflation & Monetary 1.3 containment measures led to improved employment rebounded due to the public infrastructure outcomes to pre-pandemic levels and allowed for investment program, fueling growth in the industry the release of pent-up demand. Moreover, the strong sector. However, growth in manufacturing fell to 5.3 Fiscal Policy domestic recovery tempered the impact of global percent in Q1-Q3 2022 (down from 9.5 percent in 1.4 headwinds from the war in Ukraine, high global the same period in 2021), as decelerating global commodity prices, and tightening global financing demand for goods weighed on exports and Employment and Poverty conditions. On a seasonally-adjusted basis, output manufacturing. In particular, the slowdown in 1.5 in the Philippines has surpassed its pre-pandemic manufacturing was driven by the sharp deceleration level, although the pace of recovery has been slower in the growth of electronics manufactures, the than in some regional peers (Figure 1). The authorities country’s main export products. Moreover, the Outlook & have accelerated the pace of economic reopening, agriculture sector’s tepid performance continued Risks including the full return to face-to-face classes in throughout the year, as output was impacted by November 2022, given low COVID-19 cases and typhoons, rising input costs, and low productivity. vaccination progress. Outlook Growth 2.1 Figure 1. The economic recovery is underway in 2022. Prosperity & Shared Poverty Seasonally Adjusted Real GDP Philippines Economic Update December 2022 2.2 (2019-Q4 = 100) 120 Risks & Policy Food Security Challenges 115 2.3 110 105 100 Ensuring for all 95 90 Introduction 85 3.1 80 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 Effectiveness Implications Spending of Public Thailand Philippines Malaysia Indonesia Vietnam 3.2 Source: Haver Analytics. for financial & Func Dev 3.3 1 All figures are on a year-on-year basis unless otherwise stated. Agenda for Agriculture An Action 7 3.4 ToC Contents Table of On the demand side, growth was fueled by to a strong import demand. Although export private consumption, supported by the growth accelerated to 9.3 percent in Q1-Q3 2022 Executive Summary relaxation of containment measures and a (8.1 percent in Q1-Q3 2021), global headwinds has recovery of household incomes (Figure 3). started to weigh on trade. In particular, merchandise Private consumption grew by 8.9 percent in Q1-Q3 exports growth fell to 2.8 percent in Q1-Q3 2022 Economic & 2022 (up from 2.9 percent in Q1-Q3 2021). Rising (13.9 percent in Q1-Q3 2021), fueled by the Policy Dev Recent household incomes,2 growth in remittances, and the slowdown in global demand, particularly from China. reopening of the border to international tourism Services exports, meanwhile, expanded by 19.6 buoyed domestic demand. Domestic demand percent in Q1-Q3 2022 (a reversal from a contraction Economic remained resilient as private consumption gained of 0.1 percent a year ago), fueled by the growth Growth 1.1 steam despite a sustained rise in inflation in the third rebound in travel (221.3 percent) and transport (68.9 quarter. Meanwhile, gross fixed investment growth percent).4 In addition, growth was supported by the accelerated to 12.0 percent in Q1-Q3 2022 (up from continued strong performance of the information External Sector 9.6 percent in 2021), fueled by renewed private technology-business process outsourcing (IT-BPO) 1.2 sector optimism, private construction activities,3 and sector,5 which accounted for around three-fourths of growth in public investment. However, government the country’s services exports. Imports increased by Inflation & consumption slowed to 5.5 percent in Q1-Q3 2022 15.5 percent in the same period (up from 12.5 Monetary 1.3 (from 6.9 percent in 2021), as the government percent in Q1-Q3 2021), supported by strong continued to unwind fiscal support for the pandemic. domestic demand, and reflected in a broad-based recovery of consumption goods, raw materials, and Fiscal Policy Global headwinds weighed on merchandise capital goods imports. 1.4 exports while improved domestic conditions led Employment and Poverty Figure 2. The services sector significantly Figure 3. … buoyed by strong domestic demand. 1.5 contributed to growth in Q1-Q3 2022, … Outlook & 14 20 Risks 12 10 15 8 6 10 4 5 2 Outlook Growth 0 0 2.1 -2 -4 -5 Percentage point Percentage point -6 -10 -8 -10 -15 Prosperity & Shared -12 Poverty -20 Philippines Economic Update December 2022 -14 2.2 -16 -25 -18 -20 -30 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Risks & Policy Food Security Challenges 2019 2020 2021 2022 2019 2020 2021 2021 2.3 Agriculture Net exports Manufacturing Investments Other industries Government Consumption Services Household Final Consumption Expenditure Ensuring GDP Growth GDP growth Source: PSA. for all Note: Other industries are mining and quarrying, construction, electricity, gas, and water. Introduction Source: Philippine Statistics Authority (PSA). 3.1 Effectiveness Implications Spending of Public 3.2 2 Results from the most recent round of the World Bank High Frequency Household Survey (HFS) in May 2022 show that 51 percent of respondents report that they had the same level of income in May 2022 as they did prior to the pandemic, while 20 percent report that they had greater income than before the pandemic. Please refer to the Employment and Poverty section for a more detailed discussion. for financial & Func Dev 3 In particular, construction by financial and non-financial corporations grew by 20.3 percent in Q1- Q3 2022 — a sharp reversal from the contraction of 3.3 28.7 percent in Q1- Q3 2021. 4 Over 1.6 million international travelers have arrived in the Philippines since the reopening in February 2022. 5 The export of telecommunications, computer, and information services (12.5 percent) and business services (10.7 percent) continued to post strong growth in Q1-Q3 2022. Agenda for Agriculture An Action 8 3.4 ToC Contents Table of 1.2 External Section: Widening Deficits and Executive Summary Weakening Currency The large current account deficit overshadowed net capital inflows, which widened the Economic & Policy Dev balance-of-payments deficit in H1 2022. In Q3 2022, the increase in investments outflow Recent contributed to the peso depreciation, which registered a historic low against the US Dollar. Robust domestic demand and high commodity investments consisted of inflows related to loan Economic Growth prices underpinned the surge in merchandise repayments of non-residents to Philippine-based 1.1 imports, widening the current account (CA) banks. The portfolio investments registered marginal deficit in H1 2022. The CA deficit widened from 0.7 net outflows, due to the BSP withdrawal of percent of GDP in H1 2021 to 6.1 percent of GDP in investments in foreign debt securities, and lower External Sector 1.2 H1 2022. Merchandise imports surged 27.5 percent residents’ placements in foreign debt securities. because of the domestic recovery and high Against the backdrop of aggressive monetary commodity prices, while merchandise exports grew tightening abroad, the BSP-registered investments Inflation & Monetary at a lower 7.9 percent amid saturating demand for reported net outflows of US$ 556.7 million (0.6 1.3 consumer electronics in the US and anemic demand percent of Q3 GDP) in Q3 2022, a 57.8 percent for export goods in China due to pandemic-related increase from the same period last year. The BOP Fiscal Policy restrictions.6 The surge in imports was broad-based, deficit widened to 1.6 percent of GDP in H1 2022 1.4 although more than 70 percent of the increase can from 1.0 percent of GDP in the same period in 2021 be attributed to mineral fuels, raw materials and (Figure 5). intermediate goods. The goods trade deficit Employment and Poverty widened from 12.3 percent of GDP in H1 2021 to The Philippine peso, along with other currencies 1.5 17.6 percent of GDP in H1 2022 (Figure 4). Growth in in the region, depreciated substantially in the net service exports was anchored on the robust first ten months of 2022. The shortfall in the BOP, IT-BPO sector and the recovery of tourism in the first along with the rising interest rate differential and the Outlook & Risks half of the year. Remittances, meanwhile, grew at a general strengthening of the US dollar, led to a 11.9 relatively soft 2.8 percent in H1 2022, although the percent depreciation of the Philippine peso against amount that overseas Filipinos (OFs) sent home the US dollar in the first ten months of 2022. Outlook remained substantial at 8.2 percent of H1 GDP. Compared to regional peers, the Philippine peso was Growth 2.1 among the currencies that depreciated the most Net financial inflows financed the CA deficit in H1 against the US dollar since the start of the year, 2022. The financial account reversed from a net although it has rebounded lately (Figure 6). In real Prosperity & Shared Poverty Philippines Economic Update December 2022 outflow of 0.7 percent of GDP in H1 2021 to a net 2.2 effective terms, the peso depreciated by 1.5 percent inflow of 3.6 percent of GDP in H1 2022. Net inflows in the first nine months of 2022 compared to the from foreign direct investment (FDI) (1.4 percent of same period in 2021. The BSP has indicated that it Risks & Policy Food Security Challenges GDP) and other investment accounts (2.2 percent of does not intend to step in to defend the peso, and 2.3 GDP) exceeded the outflows in portfolio investments will only step in to tame excessive volatility. Gross (0.2 percent of GDP). FDI inflows mainly consisted of international reserves dropped by 12.8 percent to foreign investments to sectors such as manufacturing, US$94.0 billion in October 2022, enough to cover Ensuring real estate, finance, and information and 7.5 months of imports, down from 10.1 months in the for all communications technologies, while other same period last year. Introduction 3.1 Effectiveness Implications Spending of Public 3.2 Photo by: aldarinho for financial & Func Dev 3.3 6 World Bank, East Asia and Pacific Economic Update, 7 Fourteen currencies are included in the Philippine real effective exchange rate basket: US dollar, euro, Japanese yen, Australian dollar, renminbi, Hong Kong dollar, Indonesian rupiah, Malaysian ringgit, Saudi Arabian riyal, South Korean won, Taiwanese dollar, Thailand baht, and UAE dirham. Agenda for Agriculture An Action 9 3.4 ToC Contents Table of Figure 4. Strong merchandise imports have widened the trade deficit. Executive Summary Foreign Goods Trade (Percent of GDP) 40 Economic & Policy Dev 30 Recent 20 Percent 10 Economic Growth 0 1.1 -10 -20 External Sector 1.2 Q 21 Q 21 Q 21 Q 20 Q 20 Q 20 22 Q 019 Q 021 Q 19 Q 19 Q 19 Q 020 Q 022 20 20 20 20 20 20 20 20 20 20 2 2 2 2 1- 1- 2- 3- 4- 2- 3- 4- 1- 1- 2- 3- 4- 2- Q Inflation & Monetary Trade balance Exports Imports 1.3 Fiscal Policy Source: PSA. 1.4 Figure 5. The current account deficit drove the Figure 6. Regional currencies have depreciated Employment and Poverty BOP shortfall. against the US dollar. 1.5 103 Balance of Payments Components Outlook & 6.0 101 Risks 4.0 99 Percent of GDP (Posittive: Inflow) 2.0 97 Outlook Growth 95 2.1 0.0 93 -2.0 91 Prosperity & Shared Poverty -4.0 Philippines Economic Update December 2022 2.2 89 -6.0 87 Risks & Policy Food Security Challenges -8.0 H1 2018 H1 2019 H1 2020 H1 2021 H1 2022 85 2.3 2 2 2 22 2 2 2 22 2 2 r-2 -2 -2 -2 l-2 -2 Capital account Financial account -2 -2 p- g- ct ar ay n n b Ap Ju Se Ju Au Ja Fe O M M Net unclassified items2/ Current account Overall BOP position Indonesia Malaysia Philippines Thailand Vietnam Ensuring for all Source: BSP. Source: Haver Analytics. Note: The base is January 2022=100. Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 10 3.4 ToC Contents Table of Box 1. Recent Global Developments Executive Summary Global demand has slowed amid the collapse in inventory levels and a plummeting backlog of global investor confidence and tighter financing orders. Nevertheless, many governments relaxed conditions (Figure 7). Global growth declined their COVID-19 restrictions, benefitting global Economic & Policy Dev Recent from 2.4 percent (seasonally-adjusted annual rate) tourism. International tourist arrivals increased in Q1 2022 to 0.1 percent in Q2 2022. Global threefold during the first seven months of 2022, but investor sentiment soured, as investors anticipated the rebound in tourism remained highly uneven and weaker demand, continued high inflation, and Economic arrivals remained well below 2019 levels due to a Growth 1.1 further monetary tightening by central banks. In slowing global recovery (Figure 8). the United States, interest rate hikes by the Federal Reserve dampened industrial production growth, Global financing conditions tightened as central External while manufacturing activity in Europe contracted Sector banks battled high inflation. Global financing 1.2 due to higher gas prices. Demand in China remained conditions continued to deteriorate, reflecting tighter subdued due to the government’s zero COVID-19 monetary policies across the world and rising risk policy, record droughts, and continued decline aversion. Monetary authorities hiked their interest Inflation & Monetary 1.3 in real estate prices. Other EMDEs, including the rates to combat elevated inflation, led by the US Philippines, suffered from softer exports demand Federal Reserve, which increased the key policy rate brought by weakening global demand. The from near-zero in Q1 2022 to 3.75-4.0 percent as of Fiscal Policy slowdown in global demand likely continued into October 2022. Globally, the hawkish stance of the 1.4 Q3, as evidenced by the dip in the global Purchasing US Federal Reserve has fueled the strengthening US Managers’ Index (PMI) composite index below 50 dollar, resulting in the depreciation of many countries’ Employment and Poverty since August. currencies and pressuring policymakers around the 1.5 world. In advanced economies, the tighter stance Despite a rebound in tourism, global trade of central banks resulted in higher government contracted due to weaker global economic bond yields and lower equity prices. In EMDEs, Outlook & activity. Global goods exports declined in Q3, as policymakers followed suit and raised their interest Risks global PMI indices for new export orders for goods rates to address currency depreciation, heightened and services have remained negative since June. inflation, and portfolio outflows. In a sign of higher While supply chain disruptions due to the war in risk aversion, cumulative January–October debt and Outlook Growth Ukraine and lockdowns in China have eased, as 2.1 equity portfolio flows in EMDEs turned negative for evidenced by shorter delivery times and lower only the second time since 2008. Moreover, financial shipping costs, the slowdown in global economic stress worsened in the majority of EMDEs, with the Prosperity & Shared activity led to weaker demand for exports. The Poverty cost of insurance against sovereign credit default Philippines Economic Update December 2022 2.2 contraction in merchandise exports led to a surge in rising by 30 bps in Q3. Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: hxdbzxy Agenda for Agriculture An Action 11 3.4 ToC Contents Table of Executive Summary Figure 7. Global economic activity has slowed Figure 8. Global tourism has started to recover as amid deteriorating investor sentiment. countries relax pandemic restrictions. 100 50 International Tourist Arrivals Relative to Economic & Policy Dev 2019 Levels Recent 90 40 80 30 0 70 20 -10 -20 60 10 Economic -30 Growth 1.1 50 0 -40 Percent -50 40 -10 -60 30 -20 -70 External 20 -30 -80 Sector 1.2 10 -40 -90 -100 0 -50 s ld a t pe c Oct 2020 Oct 2022 Jul 2021 Apr 2021 Oct 2021 as ica Jul 2020 Jan 2022 Jul 2022 Jan 2020 Apr 2020 Apr 2022 Jan 2021 cifi ric or ro eE Inflation & Monetary Af er W Pa Eu Am dl e id 1.3 th M d an ia Global PMI composite output As Sentix economic expectations index, rhs 2021 Jan-July 2022 Fiscal Policy 1.4 Source: Haver Analytics. Source: United Nations World Tourism Organization. Sources: World Bank Global Monthlies, and Global Economic Prospects June 2022. Employment and Poverty 1.5 Outlook & Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: Denys Kurbatov Agenda for Agriculture An Action 12 3.4 ToC Contents Table of 1.3 Inflation and Monetary Policy: Tighter Stance amid Executive Summary High Inflation Inflation continued to rise due to a tighter domestic food supply and price pressure from Economic & Policy Dev elevated global commodity prices. The BSP has raised the policy rate by 300 bps since May to Recent re-anchor inflation expectations, manage the peso depreciation, and prevent further second- round effects. Economic Growth 1.1 Headline inflation accelerated in the first ten November 2022, it raised the key policy rate by 300 months of 2022 due to a tighter domestic food bps to 5.0 percent, and it has signaled further supply and elevated commodity prices. Headline increases in response to the tighter monetary stance External Sector inflation averaged 5.4 percent in the first ten months of the US Federal Reserve. The BSP has reversed its 1.2 of 2022, higher than 4.0 percent in the same period earlier accommodative stance to combat the buildup in 2021 (Figure 9). Food prices climbed since the of inflation expectations, peso depreciation, and the Inflation & emergence of second-round effects in wage hikes, Monetary start of the year due to a tighter domestic meat 1.3 supply, weather disturbances, and shortages in select transport fare hikes, and higher suggested retail commodities.8 In addition, the war in Ukraine pushed prices of several commodities. The continued global commodity prices to record highs earlier this rebound in economic activity brought by the Fiscal Policy year, exacerbating price pressures on domestic food reopening of the economy and improving labor 1.4 and fuel items.9 Food inflation remained elevated in market conditions in the first three quarters has also the first ten months of 2022 (5.0 percent), while fueled demand-side price pressures. Consistent with Employment and Poverty inflation related to housing, water, and electricity (6.3 the end of its accommodative stance, the BSP also 1.5 percent) and transportation (13.1 percent) rose due to reconfigured its government securities purchasing higher energy prices. In response, the government window from a crisis intervention measure into a adopted targeted fuel grants, cash transfers and free regular liquidity facility earlier this year.11 Regionally, Outlook & bus fare in select routes to cushion the impact of the BSP’s interest rate hikes are more aggressive than Risks elevated fuel prices.10 Excluding volatile food and Indonesia (175 bps), Malaysia (100 bps), and Vietnam energy items, core inflation rose at 3.4 percent in (200 bps). January–October 2022, up from 3.1 percent in the Outlook Growth The asset quality and profitability of banks 2.1 same period last year. Core inflation has accelerated since March 2022, indicating an increase in improved as the economic reopening boosted underlying price pressures and heightened inflation business conditions. The economic reopening and Prosperity the recovery of domestic demand likely boosted the & Shared Poverty expectations in recent months. Compared to Philippines Economic Update December 2022 2.2 regional peers, domestic headline inflation rose faster cash flow of borrowers, improving their ability to than petroleum exporters like Indonesia (4.0 percent) service debt. As a result, the restructured loans to total loans ratio declined from 3.1 percent in Risks & Policy Food Security Challenges and Malaysia (3.2 percent), and Vietnam (2.9 September 2021 to 2.8 percent in September 2022. 2.3 percent) which instituted fuel tax cuts and price Moreover, the gross non-performing loan (NPL) ratio freeze for some services. declined to 3.4 percent in September 2022, its lowest level since September 2020 but still higher Ensuring The BSP has tightened its monetary policy amid for all than its pre-pandemic level of 2 percent (Figure 11). high inflation (Figure 10). Between May and These developments increased the financial buffers Introduction 3.1 8 The African Swine Fever continued to affect domestic pork production, while higher grain prices led to higher prices for feeds. Meanwhile, the Department of Agriculture cited lower domestic production as the reason for the shortage of salt and sugar. 9 The country is a net importer of most staple foods, fertilizer, and fuel. The exchange rate pass-through to domestic prices has been significantly lower Effectiveness Implications Spending since the central bank’s adoption of inflation targeting. Latest estimates show that the average impact of a Php1 depreciation leads to a 0.08 ppt increase of Public 3.2 in quarter-on-quarter inflation during the inflation targeting period, compared with 0.35 ppt increase during the pre-inflation targeting period. See Bangko Sentral ng Pilipinas (2022), Monetary Policy Report, November, Available online: https://www.bsp.gov.ph/SitePages/PriceStability/FullReportMPR/MonetaryPolicyReport_Full_November2022.aspx. 10 The government approved fuel subsidies worth Php2.5 billion for transport sector and Php0.5 billion for the agriculture sector. Meanwhile, to cope for financial & Func Dev with higher cost of living, a Php500 monthly cash transfer program worth Php6.2 billion has also been approved for the poorest 50 percent of the 3.3 population. In addition, the free bus fare in EDSA busway was extended until December 31, costing the government an additional Php1.4 billion. 11 To support the government during the pandemic and ensure participation in the bonds market, the BSP implemented daily purchasing window for government securities in the secondary markets. In June 2022, the BSP has started to scale down these operations. The government securities purchasing window will be relaunched as a regular facility under the interest rate corridor framework. Agenda for Agriculture An Action 13 3.4 ToC Contents Table of of the banking sector, as the NPL coverage ratio 2020. The credit growth was driven by improving reached 100 percent in August 2022. Banking sector domestic activity amid the economic reopening, and Executive Summary profitability indicators have also largely rebounded. it represented a turnaround from the anemic private In September 2022, the return on asset and return on credit growth brought by pandemic restrictions and equity ratios reached 1.4 and 11.5 percent, depressed business confidence recorded last year. Economic & respectively, their highest levels since March 2020. The expansion of private credit also coincided with Policy Dev Recent the BSP’s tightening monetary stance, indicating Bank lending to the private sector expanded robust credit demand despite higher interest rates. amid stronger domestic demand. Private credit The money supply (M2) grew by 6.1 percent in Economic grew by 10.1 percent in September 2022, up from September 2022, lower than the double-digit Growth 1.1 3.2 percent in the same period last year but still lower growth recorded during the BSP’s policy support in than the increase in borrowing reported in March the early days of the pandemic. External Figure 9. Inflation rose due to elevated food and Figure 10. The BSP tightened its monetary policy in Sector 1.2 energy prices. response to elevated inflation. Contributions to inflation Inflation & Monetary 11 1.3 Transport: Fuels and lubricants for personal transport Food and non-alcoholic beverages 9 Utilities: Electricity, gas, and other fuels Alcoholic beverages and tobacco Fiscal Policy 9 Non-food and non-energy items 7 1.4 Headline inflation 7.7 8 Percent Core Inflation 6.9 7 6.46.3 5 6.1 6 5.4 Employment and Poverty 4.9 5 3 4.0 1.5 Percent 4 3.03.0 3 1 2 Outlook & 1 -1 Risks N 21 M 1 N 20 N 22 M 20 M 2 Se 1 Se 0 Ja 1 Se 2 1 Ja 0 2 0 2 M 1 M 2 -2 l-2 -2 -2 2 -2 l-2 l-2 -2 -2 -2 -2 - 2 p- n- p- - p- n- ar ov ay ar ar ov ov ay ay Ju Ju Ju M (1) Core Inflation Headline Inflation Sep Sep Aug Nov Aug Dec Jul Jul Mar Mar Jan Jun Jan Jun Oct Oct Feb Feb May May Apr Apr Food & Non-alcoholic beverage Non-Food Outlook Growth 2021 2022 BSP Key policy rate 2.1 Source: BSP. Source: BSP. Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Figure 11. The banking sector is showing signs of improvement, as the share of NPLs and restructured loans declined. Risks & Policy Food Security Challenges 2.3 5 18 17 4 Ensuring for all 17 3 Percent 16 Introduction 2 16 3.1 1 15 Effectiveness Implications Spending of Public 0 15 3.2 Sep-21 Jun-21 Dec-19 Apr-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Apr-22 Feb-20 Mar-20 May-20 Aug-22 Sep-22 Jan-20 Jun-20 Jul-20 Jan-22 Feb-22 Mar-22 May-22 Jun-22 Jul-22 Apr-21 Aug-21 Oct-21 Nov-21 Dec-21 Jan-21 Feb-21 Mar-21 May-21 Jul-21 for financial & Non-Performing Loans Restructured Loans to Total Loan Portfolio Capital Adequacy Ratio Func Dev 3.3 Source: BSP. Agenda for Agriculture An Action 14 3.4 ToC Contents Table of 1.4 Fiscal Policy: Towards Consolidation Executive Summary The fiscal deficit narrowed in Q1-Q3 2022, although it remains higher than pre-pandemic levels. Revenue generation improved due to robust domestic demand and a windfall from customs collections. The public spending-to-GDP ratio fell due to lower-than-target public spending and Economic & Policy Dev Recent unwinding of pandemic support. National government debt continued to increase by 17.8 percent through the first three quarters of as the fiscal deficit remained elevated in Q1-Q3 2022. In addition, customs revenues benefitted from Economic Growth 2022. The increase in public revenues and the higher excise tax collections (due to the peso 1.1 decline in public spending led to a narrower fiscal depreciation and rising global commodity prices) and deficit from 8.3 percent of GDP in Q1-Q3 2021 to 6.5 more stringent anti-smuggling measures. Meanwhile, percent of GDP in Q1-Q3 2022 (Figure 12). However, tax revenues from the Bureau of Internal Revenue (BIR) External Sector 1.2 the fiscal deficit remained well above the pre- grew by 12.3 percent in 2022, fueled by increased pandemic average of 2.7 percent of GDP, resulting in domestic activity and efforts to strengthen digitalization an increase in the national government debt ratio to and tax administration. Inflation & Monetary 63.7 percent of GDP as of end-September 2022 1.3 (Figure 13). While a portion of the debt mix relies on Public spending growth has moderated, as the external funding, 68.5 percent of outstanding debt is government has been unable to reach its Fiscal Policy peso-denominated, and medium- and long-term programmed spending target while pandemic 1.4 debt accounts for 96.2 percent of the total debt support has been reduced. National government portfolio, as of September 2022. Debt levels remain spending declined from 24.6 percent of GDP in the sustainable, but increasing financing costs, peso first three quarters of 2021 to 23.6 percent of GDP Employment and Poverty depreciation, and elevated fiscal deficits over the over the same period in 2022, as the government fell 1.5 short-term, present challenges to the fiscal short of its expenditure program by nearly 2 percent. consolidation agenda. Spending on capital outlays declined by 0.3 ppts of GDP to 5.2 percent of GDP, falling short of the Outlook & Risks The national government exceeded its revenue government program. Meanwhile, current targets in the first three quarters of 2022 buoyed expenditures declined by 0.7 percentage points of by the ongoing economic recovery. Public GDP to 15.3 percent of GDP, as the government Outlook revenues increased by 0.8 ppt of GDP to 17.1 percent reduced maintenance spending and subsidies by 0.4 Growth 2.1 of GDP in Q1-Q3 2022 fueled by the increase in tax percent of GDP each. The reduction in current revenues,12 reflecting the acceleration of the economic spending is in line with the government’s efforts to recovery during the year. A strong demand for imports unwind pandemic support amid the expected Prosperity & Shared Poverty Philippines Economic Update December 2022 contributed to record high revenues for the Bureau of 2.2 recovery and in taking steps towards fiscal Customs (BOC), which exceeded its collection target consolidation. Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Photo by: Lexter Yap Func Dev 3.3 Tax revenues increased by 0.5 ppt of GDP to reach 15.3 percent of GDP as of the third quarter of 2022, exceeding the target by 2.4 12 percent. Agenda for Agriculture An Action 15 3.4 ToC Contents Table of Figure 12. The fiscal deficit narrowed in H1 2022. Figure 13. About two-third of the national debt is domestic debt. Executive Summary 30 0 Domestic debt 70 External debt 7.0 -1 Economic & Policy Dev 25 NG Guaranteed debt (RHS) Recent -2 60 6.0 -3 20 Percent of GDP 50 5.0 -4 Economic Percent of GDP Percent of GDP Growth 15 -5 40 4.0 1.1 -6 30 3.0 10 -7 20 2.0 External -8 Sector 1.2 5 -9 10 1.0 0 -10 2019 2020 2021 Q1-Q3 Q1-Q3 0 0.0 Inflation & Monetary 2021 2022 1.3 20 1 20 22 11 10 12 13 14 15 16 17 18 19 Q 02 20 20 20 20 20 20 20 20 20 20 20 Revenues Expenditure Fiscal Balance (RHS) 2 3 Source: Department of Budget and Management (DBM); PSA. Source: DBM, PSA. Fiscal Policy 1.4 Employment and Poverty 1.5 Outlook & Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: MDV Edwards Agenda for Agriculture An Action 16 3.4 ToC Contents Table of 1.5 Employment and Poverty: Labor Market Executive Summary Vulnerabilities amid the Economic Recovery Lower unemployment and increased labor force participation signal the return of workers in the Economic & Policy Dev labor market. However, the high share of informal and elementary occupations underscores Recent the vulnerabilities of the labor market recovery. The poverty rate in 2021 increased due to the impact of the pandemic. Even though a strong growth rebound may partially decrease poverty Economic Growth in 2022, continuing labor market weakness and rising food and fuel prices will make a sharper 1.1 poverty reduction more challenging. The economic reopening has allowed more same subsectors whose outputs significantly External Sector 1.2 individuals to participate and find jobs.The LFPR expanded in the first three quarters of 2022, buoyed rose to 65.2 percent in September 2022, above by higher household consumption. Similarly, the the pre-pandemic level of 61.7 percent in January manufacturing sector added 0.8 million jobs given its Inflation & Monetary 2020. The increase was evident despite uncertainties sustained growth in the past six months. These 1.3 associated with the spread of COVID-19 variants and increases came amid a slowdown in job generation in rising fuel and commodity prices. Entry into the labor fishing and aquaculture. This may be attributed to the market was driven by women, whose LFPR continued impact of rising fuel prices which compel fisherfolks Fiscal Policy to rise despite wide fluctuations throughout the to reduce fishing activities or find alternative 1.4 pandemic (Figure 14). Even with increasing labor livelihoods as nearly 80 percent of their earnings go force participation, the national unemployment to fuel alone.13 Employment and Poverty rate has been on a steady decline, falling from 1.5 8.9 percent in September 2021 to 5.0 percent in The employment recovery is underlined by a September 2022 (Figure 15). Youth unemployment labor market with a higher share of low-quality of 11.5 percent in September was the second lowest jobs than before the pandemic. The share of Outlook & reported this year. The data indicate that the labor elementary occupations associated with low pay Risks market’s reopening has accommodated jobseekers, remained high at around 28.9 percent of total including new labor market entrants and young employment in September 2022, almost 2 adults, in various sectors. Underemployment, which percentage points higher than the pre-pandemic Outlook Growth 2.1 was high and volatile during the pandemic, appears level in January 2020. This is in line with the large to be stabilizing on a largely downward trend in number of jobs added in wholesale and retail trade, 2022. many of which are elementary occupations. The share Prosperity & Shared Poverty of part-time workers—those working less than 40 Philippines Economic Update December 2022 2.2 Net job creation accelerated in the last six hours a week—was 34.2 percent in September months, led by the services and manufacturing 2022, higher than 31.6 percent in January 2020. Risks & Policy Food Security Challenges sectors. Nearly 2.0 million jobs were added Furthermore, the share of wage and salary workers 2.3 between April and September 2022, a significant and employers among the employed slipped to 62.2 increase from a net creation of 0.2 million jobs percent in September 2022, nearly 5 percentage between November 2021 and April 2022. Most of points lower than before the pandemic (68 percent in Ensuring the jobs created came from the services sector, with January 2020). As a result, there has been an increase for all wholesale and retail trade, and transportation and in the share of self-employed and non-paid workers, storage adding about 1.2 million jobs. These are the indicating growing informality in the labor market. Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 J. Lagare, 2022, Decline in Fish Output seen in 4th Quarter, Philippine Daily Inquirer, October 19, Available online: https://newsinfo.inquirer. 13 net/1681750/decline-in-fish-output-seen-in-4th-quarter. Agenda for Agriculture An Action 17 3.4 ToC Contents Table of Figure 14. Female labor force participation has Figure 15. … while the unemployment rate increased in recent months … continues to fall. Executive Summary 1.2 25 Economic & Policy Dev 20 Recent 1.1 15 Percent Economic 1 10 Growth 1.1 5 0.9 0 External Sector Jan Jan Jan Jan Feb Feb Sep Sep July July Aug Nov May Aug May Dec Jul Jul Apr Apr Mar Apr Mar Apr Jun Jun Oct Oct Oct 1.2 2019 2020 2021 2022 0.8 Sep Sep Aug Aug Mar Mar Jan Jan Jan Jun Jan Jun Feb Feb Nov July July May May Dec Jul Jul Apr Apr Apr Apr Oct Oct Oct Unemployment Rate Inflation & Monetary 2019 2020 2021 2022 Underemployment Rate Expon. (Unemployment Rate) 1.3 MALE FEMALE Expon. (Underemployment Rate) Source: PSA-Labor Force Survey (LFS) (various rounds). Fiscal Policy Note: Starting February 2021, the LFS is conducted monthly to produce more timely data. Data show a normalized LFPR (January 1.4 2020=1). The growth contraction in 2020 and the cally reduce poverty. Results from the World Bank Employment and Poverty associated income loss among poor and vulner- High Frequency Household Survey (HFS) in May 1.5 able households led to an increase in poverty 2022 show that 51 percent of respondents have the in 2021. The latest national poverty estimates show same level of income as they did prior to the pandem- that the poverty incidence rose from 16.7 percent ic, while 20 percent reported greater incomes—a sig- Outlook & in 2018 to 18.1 percent in 2021 (Figure 16). This nificant improvement from the previous round in May Risks translates to 19.9 million individuals living in poverty, 2021. However, this recovery in household income an increase by 2.3 million people. Over the same faces multiple challenges. First, some segments of period, the poverty incidence in the economically the labor market have not fully recovered, with wages Outlook Growth 2.1 important regions of the National Capital Region and earnings still lagging behind the expansion of (NCR), Calabarzon, Central Visayas, and Central employment. Second, rising inflation can imperil the Luzon increased by 1.2, 3.1, 9.9, and 4.4 percentage recovery of living standards among the poor, as food Prosperity & Shared Poverty points, respectively.14 Nevertheless, the poverty rate and energy/utilities account for about 70 percent Philippines Economic Update December 2022 2.2 in the Bangsamoro Autonomous Region in Muslim of their household expenditures (Figure 17).16 The Mindanao (BARMM)—the poorest region in the coun- government has rolled out a few programs to cushion Risks & Policy Food Security Challenges try—decreased from 61.2 percent to 37.2 percent.15 the impact of rising prices on household incomes,17 2.3 Because of the increase in the household income the largest of which involved targeted cash transfers of poor households in BARMM, the country-wide (announced in March 2022) to support around 12.4 income-based Gini index dropped from 42.3 to 40.7 million vulnerable households belonging to the Ensuring in 2018–21. bottom 50 percent of Filipino households. Other for all programs include fuel subsidies for public transport Labor market vulnerabilities and rising food and drivers, farmers, and fisherfolk. Introduction fuel prices make it more challenging to drasti- 3.1 Effectiveness Implications Spending of Public 3.2 14 A poverty decomposition exercise shows that a deterioration of enterprise income and remittances contributed to an increase in the poverty incidence of these regions. 15 The main drivers of the significant drop in the poverty incidence in BARMM were increases in wages (both from regular and seasonal work) and income from both farm and non-farm enterprises. for financial & Func Dev 16 On average, the upper quintiles devote 27 percent of their spending towards housing, utilities, and fuels. These spending items are also exacerbated 3.3 by imported inflation. 17 The government has approved a total of 0.4 percent of GDP in fuel grants and transfers to help soften the impact of the war in Ukraine on inflation (World Bank 2022). Agenda for Agriculture An Action 18 3.4 ToC Recent 2.1 2.2 2.3 Ensuring 3.1 3.2 3.3 3.4 Table of Executive 1.1 1.2 1.3 1.4 1.5 Economic & Economic Outlook & Growth Poverty Risks & Policy Food Security Introduction Effectiveness Implications An Action Contents Summary External Inflation & Fiscal Policy Employment Risks Outlook & Shared Challenges of Public for financial & Agenda for Policy Dev Growth Sector Monetary and Poverty for all Prosperity Spending Func Dev Agriculture 19 Figure 17. Food and energy account for a high share of total expenditure among poor households. BARMM 10 CARAGA SOCCSKSARGEN 9 Davao Region Northern Mindanao Housing, water, electricity, gas, and other fuels 8 Zamboanga Peninsula Easter n Visayas 7 Central Visayas 6 Western Visayas 2021 Bicol Figure 16. Poverty incidence by Region, 2018–2021 2018 5 MIMAROPA CALABARZON 4 Central Luzon Cagayan Valley Food 3 Ilocos CAR 2 NCR Philippines 1 10 0 70 60 50 40 30 20 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percent Photo by: Ezra Acayan Source: FIES. Source: PSA. Philippines Economic Update December 2022 ToC Contents Table of Executive Summary Economic & Policy Dev Recent Economic Growth 1.1 External Sector 1.2 Inflation & Monetary 1.3 Fiscal Policy 1.4 Photo by: View Apart Employment and Poverty PART 2 1.5 OUTLOOK AND RISKS Outlook & Risks Robust domestic activity is driving growth in 2022, but the deteriorating Outlook Growth 2.1 global environment is spilling into the economy and tempering its growth prospect. Slowing global growth is expected to soften goods exports with Prosperity & Shared Poverty repercussion on manufacturing, while elevated domestic inflation and Philippines Economic Update December 2022 2.2 higher interest rates are expected to slow private consumption and Risks & Policy Food Security Challenges investment growth in 2023. The economy is projected to grow at an 2.3 upward-revised 7.2 percent in 2022 before declining to 5.7 percent on average in 2023-25. The growth outlook is subject to external and Ensuring for all domestic risks, where the authorities face the challenging task of supporting recovery while taming inflation amid a narrowing policy space. Introduction Sustained investments in health and education, and targeted social 3.1 assistance will help protect the poor and vulnerable from the pandemic Effectiveness Implications scarring and the adverse effects of high inflation. Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 20 3.4 ToC Contents Table of 2.1 Growth Outlook Executive Summary Unfavorable developments in the global environment are spilling into the domestic economy and tempering the growth prospect in 2023. The external challenges come at a time of Economic & Policy Dev narrowing policy space with rising domestic interest rates and ongoing fiscal consolidation Recent needs. The growth projection for 2022 is revised The external environment has further Economic Growth upward in light of stronger-than-expected Q3 deteriorated with the realization of key 1.1 performance. The economy is estimated to grow at downside risks, identified in the Philippines 7.2 percent year-on-year in 2022, higher than the 6.5 Economic Update, June 2022 edition. Global percent growth projection published in the East Asia growth is expected to decelerate in 2022 and 2023, External Sector 1.2 and Pacific Economic Update, October 2022. Third reflecting synchronous monetary tightening, quarter growth of 7.6 percent exceeded consensus worsening financial conditions, and continued projection of 6.3 percent.18 Strong domestic demand disruptions due to the war in Ukraine (Box 2). The Inflation & Monetary is driving growth, which is more than compensating ensuing weaker global demand is weighing on 1.3 for the unfavorable global environment. The global industrial production and trade, which has economic reopening this year is unleashing pent-up decelerated since the start of the second half of Fiscal Policy demand, contributing to jobs and incomes recovery, 2022. Rapid monetary tightening specially in 1.4 and benefitting the contact-intensive services sector. advanced economies has led to capital outflows and However, the weak external demand is tempering currency deprecations in EMDEs. These external manufacturing growth, while low productivity and challenges have channeled through the Philippines in Employment and Poverty natural disaster are hampering agriculture. While the form of high inflation, peso depreciation, and 1.5 growth in the first three quarters of 2022 reached an capital market volatility. average of 7.7 percent, the unfavorable external Outlook & environment and its spillover to the domestic The economy is projected to grow slower at an Risks economy will likely slow the growth momentum in average of 5.7 percent in 2023-25 (Figure 18). the fourth quarter and into 2023. The growth slowdown to 5.4 percent in 2023 is Outlook Growth 2.1 Figure 18. Growth is expected to be lower in 2023, dragged by the unfavorable external environment. Prosperity & Shared Poverty 9.0 Philippines Economic Update December 2022 2.2 Forecast 7.0 Risks & Policy Food Security 5.0 Challenges 2.3 3.0 1.0 Percent Ensuring -1.0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 for all -3.0 -5.0 Introduction 3.1 -7.0 -9.0 Effectiveness Implications Spending -11.0 of Public 3.2 October 2022 projection December 2022 projection Actual growth for financial & Source: PSA, World Bank staff estimates. Func Dev 3.3 18 Based on poll by Reuters. See https://www.reuters.com/news/picture/philippine-q3-gdp-growth-much-better-tha-idUSKBN2S001K. Agenda for Agriculture An Action 21 3.4 ToC Contents Table of premised on the fading of pent-up demand, 2022 and 4.3 percent in 2023, above the target alongside elevated inflation and higher interest rate range of 2.0-4.0 percent. Monetary policy in the Executive Summary environment that will temper domestic demand. The Philippines will follow its mandate of price stability, higher rates will lead to lower private credit and and is expected to tighten to anchor inflation subdued investments at a critical time when public expectation and manage inflation within the target Economic & investment growth is expected to slow in line with range. Policy Dev Recent fiscal consolidation and a programmed decline of public infrastructure spending from 5.5 percent of The fiscal deficit is expected to decline in the GDP in 2022 to 5.0 percent in 2023-25. As global medium term in line with the government’s Economic Growth growth is expected to decelerate next year, external medium term fiscal program. The deficit is 1.1 demand from advanced economies, which are key expected to decline from 7.1 percent in 2022 to 4.5 buyers of Philippines merchandise exports, will be percent in 2025. The declining trajectory hinges on subdued. Medium-term growth will gradually the economic recovery and fiscal consolidation External Sector approach its potential rate at 5.7 percent as the measures as reflected in the national government 1.2 output gap closes in line with the cyclical recovery. medium term fiscal program. The recovery is expected to lead to higher public revenue collection Inflation & Monetary Global commodity prices have eased, but from taxes on consumption and trade, on top of 1.3 inflation is expected to remain above target government efforts to expand revenue collection range in 2022-2023 due to currency through tax policy and administration measures. The depreciations (Box 3). The global growth authorities are considering new taxes on single-use Fiscal Policy slowdown is weighing on commodity prices, with plastics and digital services, a new mining fiscal 1.4 agriculture, energy, and metal prices easing from their regime, reform on real property valuation, among earlier peaks this year (Figure 19).19 Nonetheless, others. Moreover, a byproduct from the peso Employment and Poverty prices in domestic-currency terms in many economies depreciation is that customs collection will increase 1.5 remain elevated because of currency depreciations commensurate to the higher import valuation. including the Philippines which is a net food and Meanwhile, the pace of public spending is expected energy importer. Together with price adjustments in to decelerate over the medium term, driven by an Outlook & Risks public transport fares, regional minimum wages, and anticipated decline in recurrent operating retail prices of grocery items, the economic rebound expenditure from 17.0 percent of GDP in 2022 to will add to demand-side price pressure, and likely 15.0 percent in 2025, and capital outlays from 5.8 sustain the rise in core inflation this year. Headline percent to 5.1 percent, respectively. Outlook Growth 2.1 inflation is thus projected to reach 5.5 percent in Figure 19. Global commodity price pressure is weakening. Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 US$ index, 2010 = 100 200 Risks & Policy Food Security Challenges 180 2.3 160 140 120 Ensuring 100 for all 80 60 Introduction 40 3.1 20 0 Effectiveness Implications Spending of Public M - 18 M - 19 Se l-18 S e - 19 ov 1 ay 1 22 Ja -18 Ja -19 ov 0 ay 0 ay 2 Ju 18 Ju 19 Se l-21 Se l-20 Se l-22 Ja -21 Ju 21 Ja 20 Ju 20 Ju 22 f f N p-18 N p-19 M -18 M -19 M -21 M -20 M -22 23 24 N p-2 M r-2 N p-2 M -2 M -2 3.2 - - - p- - - - ar ar ov ov ay ay l n n n ar ar n n 20 20 a Ja Energy Agriculture Metal for financial & Source: World Bank. Func Dev 3.3 19 Energy prices are projected to rise by 59.1 percent year-on-year in 2022 before contracting by 11.2 percent in 2023, while food prices are projected to rise by 17.9 percent in 2022 before contracting by 6.2 percent in 2023. See World Bank Commodity Markets Outlook, October 2022. Agenda for Agriculture An Action 22 3.4 ToC Contents Table of Box 2. Global Outlook and Risks Executive Summary Global growth forecasts have been downgraded EMDEs face the prospect of further increasing markedly from the beginning of the year. Global sovereign spreads, especially against the US dollar. Economic & Policy Dev With already limited fiscal space and stretched Recent GDP is expected to grow by 2.9 percent in 2022, down by 1.2 ppts from the WB Global Economic national budgets, less accommodative borrowing Prospects January forecast. Higher borrowing costs conditions could leave them unable to pay larger amid a synchronized and rapid global response to import bills. Future energy and food shocks brought Economic Growth rein in inflationary pressure has raised the specter of a about by protracted geopolitical conflicts and 1.1 global recession. The War in Ukraine and curtailment extreme weather events remain key downside risks in of energy supplies have created a challenging the foreseeable future. situation for Europe, with soaring energy prices. External Sector 1.2 Moreover, COVID-19-related mobility restrictions in Global trade is expected to slow down due to China will continue to put considerable strain on anemic consumer demand, and is on course to global supply chains in the near term. Oil importing recover at a substantially weaker pace compared Inflation & Monetary countries are yet again facing rising prices following to previous post-recession recoveries. Leading 1.3 the decision of the Organization of Petroleum indicators, such as the S&P Global PMI Index,20 show Exporting Countries (OPEC) to reduce oil production contracting new exports orders since February 2022, Fiscal Policy in October. Growth is projected to remain subdued if primarily due to the slowdown of the global economy. 1.4 commodity prices remain persistently high for the rest Softening goods demand has eased supply chain of 2022, causing central banks to trigger another bottlenecks, as measured in the Federal Reserve Bank round of monetary tightening. of New York’s Supply Chain Index, although it Employment and Poverty remains above the pre-pandemic level. However, the 1.5 Significant downside risks threaten growth in prospect of further restrictions on mobility amid 2023 (Table 1). Global growth is expected to be China’s zero COVID-19 policies risks further strains in subdued in 2023 as consumers exhaust pent-up global supply chains should they materialize. A new Outlook & Risks demand, inflation persists, and monetary tightening wave of COVID-19 infections, however, could interrupt continues. Global inflation, however, is projected to the recovery of tourism, prolonging the damage to gradually ease in 2023 as global growth slows down small island economies that are tourism-reliant. In the Outlook and supply chain bottlenecks gradually abate. It is, near term, as the US Federal Reserve raise policy rates Growth 2.1 however, more persistent than previously expected, to stem domestic inflation, the US dollar is projected to and will remain above Central Bank targets for much gain further strength against other currencies, resulting of 2023. Tighter-than-expected monetary stances, in more expensive imports that will widen current Prosperity & Shared Poverty account deficits around the globe. Furthermore, Philippines Economic Update December 2022 should inflation prove to remain stubbornly high in 2.2 2023, will have a significant toll on consumer higher import bills are likely to contribute substantially spending and business investment. Vulnerable to domestic inflationary pressures across the globe Risks & Policy Food Security Challenges and further soften demand for imported goods. 2.3 Table 1. Economic Growth, 2019–2023f. 2019 2020 2021 2022f 2023f Ensuring World 2.6 -3.4 5.7 2.9 3.0 for all Advanced economies 1.7 -4.6 5.2 2.6 2.2 Introduction EMDEs 3.8 -1.7 6.6 3.4 4.2 3.1 East Asia and Pacific (EAP) 5.8 1.2 7.2 3.2 4.6 Philippines 6.1 -9.5 5.7 7.2 5.4 Effectiveness Implications Spending of Public 3.2 Source: World Bank Global Economic Prospects June 2022, World Bank Global Monthly September 2022, World Bank East Asia and the Pacific Economic Update October 2022. Note: World, AE, and EMDE forecasts for 2022 and 2023 were published in the June 2022 edition of the Global Economic Prospects. for financial & Forecasts for EAP and the Philippines were published in the October 2022 edition of the East Asia and the Pacific Economic Update. New Func Dev projections by the Global Economic Prospects are expected to come out by January 2023 at www.worldbank.org/gep. 3.3 20 The S&P Global Purchasing Manager’s Index (PMI) integrates survey responses by manufacturing executives. The survey includes questions on a compa- ny’s business output, new orders, and supplier performance, among others. Agenda for Agriculture An Action 23 3.4 ToC Contents Table of Weak external demand and tighter financial borrowings. Pent-up demand is likely to fade as Executive Summary conditions may drag activities in the services and discretionary spending dwindles into 2023, industry sectors. The high-inflation, high-interest rate following the big household consumption rebound environment may moderate domestic demand, this year. These will result in lower consumption Economic & Policy Dev manifesting as weaker household consumption and growth in 2023, exacerbated by higher inflation and Recent capital investment growth. In turn, the lower demand interest rates which may discourage private may hamper activities on services sector including borrowings and lead to postponed household wholesale and retail trade, food and accommodation, investments. Still, consumption will be supported by Economic Growth transportation and storage. Nonetheless, sub-sectors sustained remittance inflows and improving labor 1.1 such as the IT-BPO and tourism may continue to see market conditions, which will contribute to jobs and strong growth with sustained demand for BPO income generation. While the consumer confidence services exports and travel industry recovery in the level remains negative, its trajectory has been External Sector 1.2 Asia-Pacific in 2023. 21. High interest rates may improving since the pandemic, signifying fewer temper private borrowings and demand for new households holding pessimistic views on the construction projects, although the authorities economy. The prompt decrease in consumer Inflation & Monetary remain committed to its public infrastructure confidence in response to rising prices in Q3 2022 1.3 investment agenda. Meanwhile, weak external suggests, however, that prolonged elevated inflation demand will temper manufacturing growth especially will further dampen consumer confidence (Figure Fiscal Policy as electronics carves a lion’s share of the country’s 20). 1.4 merchandise exports. Growth in the agriculture sector remains tepid due to chronic underinvestment Capital formation will be a key growth driver in and vulnerability to weather-related shocks (Table 2). the medium term as the government attracts Employment and Poverty private investments and pursues its public 1.5 The subdued external environment is expected infrastructure agenda. The government has to weaken the net exports. After rebounding to conveyed its commitment to the infrastructure 5.7 percent in 2021, global growth is expected to investment agenda amid its pursuit of fiscal Outlook & Risks soften to 2.9 percent in 2022 and 3.0 percent in consolidation. Public infrastructure disbursements 2023. Growth in advanced economies is projected are programmed to decline from 5.5 percent of GDP to decelerate by 1.2 percentage points this year, and in 2022 to 5.0 percent of GDP in 2023-2025. To Outlook impact the country’s goods exports since nearly 70 cover for this decline, the administration targets to Growth 2.1 percent are destined for high-income economies. better attract foreign and private investments to the Still, the prospect for services exports remains strong Philippines. It has amended the Public Service Act with IT-BPO sector and international tourism. and the Foreign Investment Act, and passed the Prosperity & Shared Poverty Meanwhile, import growth will likely remain elevated Retail Trade Liberalization law, allowing full foreign Philippines Economic Update December 2022 2.2 as the government implements infrastructure ownership for more industries, lowering minimum projects, leading to sustained demand for capital paid-up capital requirement for foreign retail Risks & Policy Food Security Challenges goods. The current account deficit is projected to enterprises, and liberalizing for more industries the 2.3 widen to 4.9 percent of GDP this year, and remain in practice of professions not governed by existing deficits of about 3.9 percent in 2023-24. special laws. Likewise, the amendment of the implementing rules and regulations for the Build- Ensuring Private consumption growth is expected to Operate-Transfer law signals government intent to for all decelerate as pent-up demand fades and high make Public Private Partnerships more attractive to inflation and interest rates discourage the private sector. Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 World Travel and Tourism Council, 2022. Travel and Tourism Economic Impact 2022, August, available online: https://wttc.org/Portals/0/Docu- 21 ments/Reports/2022/EIR2022-Global%20Trends.pdf. Agenda for Agriculture An Action 24 3.4 ToC Contents Table of Figure 20. Consumer confidence dropped in the previous quarter with household concerns over Executive Summary rising prices. Overall Consumer Confidence Index (Current quarter) Overall Business Confidence Index (Current quarter) 60 Economic & Policy Dev Recent 40 20 Economic Growth 1.1 0 -20 External Sector 1.2 -40 Inflation & Monetary -60 1.3 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2016 2017 2018 2019 2020 2021 2022 Fiscal Policy Source: BSP. 1.4 Photo by: Jed Regala Employment and Poverty 1.5 Table 2. Economic Indicators for the Baseline Projections. Outlook & 2020 2021 2022e 2023f 2024f 2025f Risks Real GDP growth, at constant market prices -9.5 5.7 7.2 5.4 5.9 5.9 Private Consumption -5.8 3.1 6.0 4.1 4.4 4.4 Outlook Growth 2.1 Government Consumption 1.3 1.1 1.3 1.3 1.2 1.1 Capital Formation -9.1 3.9 3.6 1.6 2.8 3.4 Prosperity & Shared Exports, Goods and Services -4.7 2.2 1.9 1.2 2.3 3.0 Poverty Philippines Economic Update December 2022 2.2 Imports, Goods and Services -8.7 4.5 5.7 2.9 4.8 6.0 Real GDP growth, at constat factor prices -9.5 5.7 7.2 5.4 5.9 5.9 Risks & Policy Food Security Challenges 2.3 Agriculture 0.0 0.0 0.1 0.1 0.1 0.1 Industry -4.0 2.4 1.7 1.3 1.6 1.8 Ensuring Services -5.5 3.3 5.5 4.0 4.2 3.9 for all Inflation (period average) 2.4 3.9 5.5 4.2 3.9 3.5 National government balance (% of GDP) -7.6 -8.6 -7.1 -5.8 -5.0 -4.5 Introduction 3.1 Current account balance 3.2 -1.8 -4.9 -4.3 -3.5 -3.0 Source: PSA; Bureau of Treasury (BTr), World Bank staff estimates. Effectiveness Implications Note: Growth subcomponents show contributions to growth. Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 25 3.4 ToC Contents Table of Box 3. Trends on Global Commodity Prices and Executive Summary Implications for the Philippines A sharp global growth slowdown and concerns sharply, largely due to the significant slowdown in Economic & Policy Dev about an impending global recession are China’s property market. Agricultural prices have also Recent weighing on commodity prices. Indeed, the price eased, with food commodity prices declining as indexes for most energy products, non-energy Ukraine’s exports restarted over the summer (Figure commodities and precious metals are expected to 7). Nevertheless, at 21.2 percent, food price inflation Economic Growth decline by up to 15.2 percent over the next year or remains high globally, but it is significantly lower in 1.1 so. However, in many economies, prices – including East Asia and Pacific at 6.1 percent.22 commodity prices – in domestic-currency terms remain elevated because of currency depreciations. While Philippines has been hard hit in recent External Sector 1.2 This could deepen the food and energy crises already months by the elevated global commodity prices underway in a number of countries. As the global and the peso depreciation, the country stands to growth slowdown intensifies, commodity prices are benefit from the expected decline in commodity Inflation & Monetary expected to ease in the next two years, but they will prices. Indeed, elevated global commodity prices 1.3 remain considerably above their average over the and the peso depreciation contributed to the rising past five years. food and energy price pressure, as well as imported Fiscal Policy inflation due to higher cost of imports in the 1.4 Energy prices are expected to fall by over 10 Philippines. As average global crude oil prices percent in 2023 and 2024. Brent prices are peaked at US$ 112 per barrel, the elevated costs forecast to average US$92/bbl in 2023, down from directly passed through to consumer fuel prices, Employment and Poverty a projected US$100/bbl in 2022, before easing to which immediately affected transport and utilities 1.5 US$80/bbl in 2024. Oil prices have declined as components in the CPI basket. The peso depreciated growth has slowed down and Russia’s oil production significantly from an average of Php/US$51.2 in was more resilient than expected. However, there are January 2022 to an average of Php/US$57.4 in Outlook & Risks significant risks from the supply side, particularly September 2022, effectively raising the cost of related to the availability of energy supplies in Europe imported goods. On the other hand, given that during the upcoming winter. Natural gas prices in much of the recent increase in inflation in the Outlook Growth Europe rose sharply amid restocking, from US$29.2/ Philippines is caused partly by imported inflation – 2.1 mmbtu in May 2022 to US$70/mmbtu in August driven by the recent spike in global commodity prices 2022, although they have declined to US$39 in – the next two years should see an easing in the October 2022. Coal prices have soared from inflationary pressures due to the expected Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 US$157/mt in November 2021 to US$431/mt in considerable decline in global commodity prices. September 2022, followed by a modest decline to Moreover, BSP’s stance on inflation targeting has US$390 in October 2022, putting climate objectives been reaffirmed in recent months and the central Risks & Policy Food Security Challenges at risk. bank rose its benchmark interest rate multiple times in 2.3 2022 as a way to bring demand-driven inflation Agriculture and metal prices are projected to under control. Last, but not least, the depreciation of decline 5 and 15 percent, respectively, in 2023 the peso is likely to be mitigated by the expected Ensuring before stabilizing in 2024. Metal prices have fallen increase in remittances towards the end of the year. for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 22 Based on World Bank Food Price Index. Agenda for Agriculture An Action 26 3.4 ToC Contents Table of 2.2 Poverty and Shared Prosperity Executive Summary The economic reopening will likely have a positive effect on household incomes as conditions for workers and businesses improve, but new challenges mainly on high inflation and effects of Economic & Policy Dev natural disasters threatens poverty reduction. Recent The further easing of mobility restrictions and High inflation brought by heightened external Economic full reopening of the economy will help sustain risks and effects of extreme weather Growth 1.1 the recovery of businesses and labor market disturbances threaten the gains in poverty to boost household incomes. The resumption of reduction. The spike in commodity prices continue economic activities particularly in sectors severely to affect households and more adversely low-income External Sector affected by the pandemic will see more Filipinos households whose bulk of budget is on food. The 1.2 employed and household incomes continuing to worsening underemployment signals that households recover. As the economy is projected to maintain its are seeking to earn additional income likely to cope Inflation & growth momentum and some labor market indicators with the pressures of inflation. The programs that the Monetary 1.3 recover, poverty reduction is likely to follow suit. government continues to provide such as targeted Using the World Bank’s poverty line for lower-middle cash transfers, fuel and crop subsidies are crucial in income countries of US$3.65-a-day (2017 Purchasing protecting the purchasing power of lower income Fiscal Policy Power Parity (PPP)), poverty incidence is projected to households. As for those affected by calamities, 1.4 decrease from 19.5 percent in 2021 to 16.8 percent efficient and swift delivery of assistance is imperative. in 2022 and will continue to decline through 2024 But more importantly, disaster resilience and climate Employment and Poverty (Figure 21). adaptation measures should be implemented. 1.5 Figure 21. Actual and projected US$3.65-a-day Outlook & poverty rates.23 Risks 45% Outlook Growth 2.1 40% 35% Prosperity & Shared 30% Poverty Philippines Economic Update December 2022 2.2 25% 20% Risks & Policy Food Security Challenges 15% 2.3 10% 5% Ensuring for all 0% 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Introduction Source: World Bank staff estimates. 3.1 Photo by: MDV Edwards Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 23 Calculations based on EAPPOV harmonization, using 2018-FIES. Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. Projection using neutral distribution (2018) with pass-through = 1 based on GDP per capita in constant LCU. Agenda for Agriculture An Action 27 3.4 ToC Contents Table of 2.3 Risks and Policy Challenges Executive Summary A steeper global growth slowdown, more abrupt policy tightening, and prolonged geopolitical tensions risk further deterioration in the external environment. The authorities face the difficult Economic & Policy Dev balance of taming domestic inflation and supporting economic recovery amid narrowing policy Recent space. As the pandemic has yet to be declared over, the risk of another wave hangs over the outlook. The release of the Philippines Development Plan 2023-2028 is a welcome development to provide a clear roadmap to achieving the country’s medium-term priorities. Economic Growth 1.1 The synchronous policy tightening risks a capital outflows from EMDEs, intensified currency steeper global slowdown, which can further depreciation, and raise financial market volatility. dampen external demand. With central banks It would raise borrowing costs and may dampen External Sector 1.2 across the world raising interest rates to combat investments from the private and public sectors. inflation and governments withdrawing pandemic- related fiscal support, the synchronous policy actions An escalation of geopolitical tensions and Inflation & Monetary could produce larger impacts than intended, both supply chain bottlenecks could further disrupt 1.3 in tightening financial conditions and deepening commodity markets and international trade. the growth slowdown.24 The global economy is Geopolitical tensions arising from a prolonged Fiscal Policy experiencing its steepest growth slowdown since the war in Ukraine, and the economic sanctions on 1.4 1970s, led by the deceleration in the world’s three Russia can further disrupt trade and commodity largest economies – the United States, China, and markets, and reignite supply-driven inflationary the Euro Area. The fear is that moderate shocks can pressure. Escalating tension has already led to the Employment and Poverty tilt the global economy into recession, which will curtailment of energy supplies to Europe risking 1.5 have dire consequences to the growth recovery in a regional energy crisis. Meanwhile, citywide many EMDEs. The impact would be wide-reaching, lockdowns in China due to its zero-COVID policy Outlook & coursing to the Philippines through the growth and continued inland rail congestion in the United Risks channel (growth deceleration and softer activity), States contribute to supply chain bottlenecks that trade channel (lower trade and exports demand), are impacting trade activities in some regions and and financial channel (muted capital flows). industry sectors. These disruptions will put immense Outlook Growth supply and price pressure on the Philippines 2.1 Persistent elevated inflation may induce abrupt given the country’s demand for imported crude and higher-than-expected tightening of global oil, fertilizer, and food such as wheat and rice. Prosperity financial conditions. The global economy is seeing & Shared Poverty Philippines Economic Update December 2022 2.2 the sharpest policy tightening in four decades. The immediate domestic challenge that faces This is in response to rising headline inflation, the authorities is rising and high domestic which has breached the upper-bound of target inflation. High inflation will dampen household Risks & Policy Food Security Challenges ranges in advanced economies and more than consumption, while the ensuing policy rate 2.3 90 percent of EMDEs as of August 2022.25 While tightening will temper borrowings and investments. most global commodity prices have eased since Inflationary pressure comes from multiple fronts June, they remain higher than the averages in the including: (i) elevated global commodity and energy Ensuring for all past five years. Central banks may accelerate the prices; (ii) international supply chain and logistics pace of monetary policy tightening if the current disruptions; (iii) currency depreciation; (iv) recovering period of elevated inflation persists and de-anchors demand; and (v) domestic supply constraints Introduction inflation expectations. Recently, the U.S. Federal caused by weak agricultural outputs and impact 3.1 Reserve has announced its continuing efforts to of natural disasters. Addressing the inflationary tamp down inflation, and signaled policy rate hikes pressure means employing both monetary and Effectiveness Implications higher-than-initially projected in September. A non-monetary measures including freer importation Spending of Public 3.2 faster-than-expected tightening could lead to further and lower tariffs and non-tariff barriers to help for financial & Func Dev 3.3 24 J. Guenette, M. Kose, and N. Sugawara, 2022. “Is a Global Recession Imminent?,” Equitable Growth, Finance, and institutions Policy Note no. 4, World Bank: Washington DC, September. 25 F. Ohnsorge, 2022. “Is a Global Economic Recession Imminent?,” Presentation to the World Bank Manila Office, October. Agenda for Agriculture An Action 28 3.4 ToC Contents Table of augment domestic supplies as needed, support to is historically marked with the influx of foreign agriculture production through extension services, remittances. The Philippines is an investment-grade Executive Summary seeds, and fertilizers, and key policy rate hikes. sovereign credit, and maintaining the ratings will help ensure comfortable access to the international Continued near-term monetary tightening capital markets, which the country has tapped this Economic & is appropriate to prevent a de-anchoring of year though at higher borrowing costs. Nonetheless, Policy Dev Recent inflation expectations. High inflation tends to the Philippines’ EMBIG spreads stand at 144bps (as inflict the greatest harm on low-income households of October 31), below the average for investment- where inflation often outpaces wage growth, which grade (185bps) and BBB-rated sovereigns (233bps). Economic Growth these households rely on. Poorer households 1.1 suffer disproportionately given the higher share Staying the course on fiscal consolidation of food and energy on their expenditures. signals commitment to fiscal sustainability. Monetary tightening is appropriate to maintain Fiscal consolidation has become more challenging External Sector price stability and prevent self-fulfilling expectation in the current high inflation environment, which 1.2 of rising inflation. Moreover, communicating may compel the government to expand social monetary policy decisions clearly, and leveraging support programs or extend subsidies at a time of Inflation & Monetary credible monetary frameworks will help limit narrower fiscal space. Targeted, instead of blanket, 1.3 the economic impact of the tightening cycle. social assistance measures will help manage expenditure growth while maximizing returns of Maintaining a flexible exchange rate regime and programs. Eliminating spending inefficiency and Fiscal Policy preserving the investment-grade credit rating increasing value for money in public procurements 1.4 status will help contain external risks. Maintaining will be instrumental to a consolidation strategy. a market-determined exchange rate regime remains The authorities also need to employ new tax policy Employment and Poverty the first line of defense against external shocks. and administration measures to mobilize revenues. 1.5 Market interventions, as conveyed by the central Over the medium term, building fiscal buffers, bank, are conducted to smoothen excessive short- diminished during the height of the pandemic, term volatility of the peso against the U.S. dollar. The will help mitigate against downside risks. The Outlook & Risks country has accumulated sizable foreign exchange proposed 2023 national government budget lays reserves which is its second line of defense. But as out the medium-term fiscal consolidation agenda, reserves have declined in the past months, rebuilding with target to reduce the fiscal deficits by 3.5 this buffer will be beneficial during opportune ppts of GDP between 2022 and 2025 (Box 4). Outlook Growth 2.1 times such as the Christmas holiday season, which Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: RaksyBH Agenda for Agriculture An Action 29 3.4 ToC Contents Table of Box 4. Proposed 2023 National Government Budget Executive Summary To support the government’s medium-term fiscal embarks on its fiscal consolidation agenda. Within consolidation agenda, the proposed 2023 social services, the government will prioritize service national government budget is projected to delivery in education, social security, welfare and Economic & Policy Dev Recent decline by 1 ppt of GDP to 22.2 percent of GDP. employment, and health. Within economic services, The Marcos administration’s proposed budget communications, roads, and other transport will highlights the government’s spending priorities and receive the bulk of budget allocations, followed by fiscal consolidation strategy. To reduce the fiscal agriculture and agrarian reform. Meanwhile, the Economic Growth 1.1 deficit by 3.5 ppts of GDP between 2022 and 2025, proposed budget for general public services is set to public spending is expected to decline considerably, decline by 0.5 ppts of GDP in 2023 due to a while tax policy and administration reforms are likely contraction in general administration spending. External to gradually progress. While infrastructure Sector 1.2 development remains a key priority, infrastructure Line ministries’ budget priorities reflect the spending is expected to decline by 0.5 ppts of GDP government’s 8-point socioeconomic agenda. to 5.0 percent of GDP between 2023 and 2025. The While the 2023 public infrastructure budget is Inflation & Monetary national government’s infrastructure budget is expected to decline considerably, infrastructure 1.3 expected to contract by nearly 2 percent in 2023, a remains a key government priority under the Build, sharp reversal from the nearly 25 percent expansion Better, More program. The Department of Public Fiscal Policy recorded in the 2022 budget. Works and Highways is set to receive the largest 1.4 share of the budget (13.6 percent), despite a 9 Social and economic services remain the sectors percent decrease in its proposed budget. To support Employment with the highest budget allocations in 2023, the implementation of major railway, airport, and and Poverty while spending on general public services is road programs, the Department of Transportation’s 1.5 projected to contract to support the fiscal proposed budget is expected to more than double in consolidation effort. The government’s objective of 2023, accounting for 3.2 percent of the proposed Outlook & inclusivity is backed by a strong emphasis on budget. The focus on an inclusive budget is reflected Risks spending on social services, constituting nearly 40 in the large budget share of the Department of percent of the budget, or Php 2.1 trillion (8.7 percent Education (13.5 percent), Department of Social of GDP) (Figure 22). In addition, the objective of Welfare and Development (3.7 percent), and Outlook Growth economic transformation and sustainability is Department of Health (3.7 percent). Despite 2.1 supported by the nearly 30 percent budget share of accounting for around 2 percent of the proposed economic services. However, the proposed budget budget, the president’s focus on the modernization Prosperity & Shared for social and economic services is expected to of the country’s agriculture sector is reflected in the Poverty Philippines Economic Update December 2022 2.2 decline compared to 2022 as the government 43.9 percent expansion of the DA’s budget. Figure 22. National Government Expenditures (Obligation Basis), 2021–2023. Risks & Policy Food Security Challenges 2.3 NG Expenditures (Obligation Basis) 25 23.7 23.2 2.2 22.2 2.4 Ensuring 0.1 2.5 for all 20 0.1 4.4 3.9 0.1 3.4 1.1 1.0 Percent of GDP 15 1.1 Introduction 9.4 8.9 8.7 3.1 10 5 Effectiveness Implications 6.6 6.9 6.4 Spending of Public 3.2 0 2021 2022 2023 Economic Services Social Services for financial & Defense General Public Services Func Dev Net Lending Debt Service and Interest Payments 3.3 Source: DBM. Note: Data were derived from national government estimates on nominal GDP. Agenda for Agriculture An Action 30 3.4 ToC Contents Table of Despite the public spending slowdown, it pandemic, however, have manifested themselves in remains important to sustain investments in child malnutrition and stunting, and reduced student Executive Summary health and education to reduce vulnerabilities learning especially among the poor. If unmitigated, from the scarring impact of the pandemic. The these shocks may have persistent impacts on threat of a new variant-driven surge hangs over the people’s wellbeing and damage future productivity, Economic & outlook. Nevertheless, the country is better earnings, and innovation. For this reason, sustained Policy Dev Recent equipped to respond to re-emerging threats with investments in nutrition (Box 5) and education are high population vaccination coverage, and effective imperative despite pressure for fiscal consolidation. public health protocols. Shocks from the COVID-19 Economic Growth 1.1 External Sector 1.2 Inflation & Monetary 1.3 Fiscal Policy 1.4 Employment and Poverty 1.5 Outlook & Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: Andrew Repp Agenda for Agriculture An Action 31 3.4 ToC Contents Table of Box 5. Investing in Nutrition in the Philippines: An Executive Summary Essential Foundation for Sustained Economic Growth Nutrition is a key component of human capital security crises around the world. These unfortunate Economic & Policy Dev accumulation, which in turn is central to events indicate that unless immediate and targeted Recent economic development. Workers in rich countries action is taken, millions of Filipino children are at accumulate, on average, more human capital than increased risk of undernutrition, which in turn would their counterparts in poorer countries, due to a increase the likelihood of them performing worse at Economic Growth combination of better health and nutrition, higher school and achieve lower productivity as adults. 1.1 quantity and quality of schooling, and greater opportunities to accumulate skills. In the Philippines, Nevertheless, the Philippines can rapidly reduce undernutrition robs children of their chance for a childhood undernutrition. The country can adopt External Sector 1.2 bright future and presents a significant challenge to policies and implement programs that are in line with continued economic growth. The persistence of high the experience of countries that have successfully levels of undernutrition, despite decades of tackled childhood undernutrition. Specifically, the Inflation & Monetary economic growth and poverty reduction, represents authorities could pursue three sequential policy 1.3 a staggering, yet avoidable, loss of human and actions: economic potential. The economic burden Fiscal Policy associated with undernutrition in the Philippines was 1. Ensure adequate financing for nutrition. This 1.4 an estimated US$4.4 billion in 2015, which translates involves mobilizing sufficient domestic and to 1.5 percent of the country’s GDP.26 development partner financing for nutrition and nutrition-related activities, with priority given to those Employment and Poverty There has been modest improvement in the local government units (LGUs) with the highest 1.5 prevalence of undernutrition in the Philippines. In burden of childhood stunting, including BARMM, 2019, 29 percent of children younger than five years Southwestern Tagalog Region, Bicol Region, Western Outlook & old were reported to be suffering from stunting,27 Visayas, Soccksargen, Zamboanga Peninsula, and Risks down from 32 percent reported in 2008. The Central Visayas. Philippines is ranked fifth among countries in the East Asia and Pacific region28 with the highest prevalence 2. Implement large-scale, evidence-based Outlook Growth of stunting, and it is among the 10 countries globally nutrition-specific interventions. These should 2.1 with the highest number of stunted children (Figure include an evidence-based package of nutrition- 23). The country’s inordinately high levels of stunting specific interventions29 made available to each have been further exacerbated by the COVID-19 household in all high-priority LGUs. The package Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 pandemic, which disrupted the supply of nutritious could include high-impact essential health and foods, access to essential health and nutrition nutrition services delivered at the primary level of services, and the livelihoods of wage earning and care; a comprehensive social and behavior change Risks & Policy Food Security Challenges subsistence farming households alike. Moreover, the communications strategy delivered at the national 2.3 ongoing war in Ukraine is likely to exacerbate the and local level; and more innovative and food and nutrition security of vulnerable Filipino competency-based training of relevant primary health households. Globally, food prices, already on the rise facility staff, Barangay health workers, Barangay Ensuring since the second half of 2020, reached an all-time nutrition scholars, and their supervisors. Although it is for all high in February 2022 and are leading to food important to implement direct nutrition interventions Introduction 3.1 26 UNICEF (United Nations Children’s Fund). 2017b. “The Economic Consequences of Undernutrition in the Philippines: A Damage Assessment Report (DAR).” UNICEF, New York. Effectiveness Implications 27 Stunting results from chronic undernutrition and indicates a failure to attain the height expected for a healthy child. Height growth and brain Spending of Public development not achieved during the first 1,000 days of life (from conception to two years of age) is largely irrecoverable and has been associated with 3.2 measurable negative consequences for health, impaired cognitive development, reduced earnings in adulthood, and increased risk of developing chronic diseases. 28 UNICEF, WHO, and World Bank Group 2020. for financial & 29 Recommended direct nutrition interventions with global evidence of effectiveness: Before conception: folic acid supplementation and fortification Func Dev of key food commodities; During Pregnancy: multiple micronutrient supplementation, balanced energy, and protein and calcium supplementation; 3.3 Early infancy and young childhood: promotion of breastfeeding, social behavior change communication for improved complementary feeding and hygiene practices, vitamin A supplementation, management and treatment of moderate and severe acute malnutrition, and multiple micronutrient supplementation. Agenda for Agriculture An Action 32 3.4 ToC Contents Table of at scale, multisectoral approaches that simultaneously and concerned stakeholders. This will require greater Executive Summary address the underlying determinants of nutrition are cohesion and interaction between the NNC, DOH, also needed to ensure a long-term policy impact. To and LGUs at the national level, while at the local level address the multisectoral determinants of it will require efforts to support provincial leadership undernutrition in the Philippines, it is essential to in conducting performance and progress reviews of Economic & Policy Dev Recent achieve geographic convergence—down to the multisectoral nutrition policies and associated results. household level—of critical sectors and programs in The authorities will need to create incentives that LGUs with high rates of stunting. This could be done range from recognizing strong performers to financial Economic through the recently approved Philippines and non-financial rewards linked to improved Growth 1.1 Multisectoral Nutrition Project (PMNP), which has coverage of nutrition interventions. adopted a bold, multisectoral nutrition approach to deliver a coordinated package of nutrition-specific The economic returns from investing in nutrition External Sector and sensitive interventions across LGUs, along with a are substantial. The Philippines could have one of 1.2 harmonized social behavior change and the highest rates of returns from delivering a ‘full’ communications strategy. package of nutrition interventions.30 For every U.S. Inflation & Monetary dollar that the Philippines invests in a package of 1.3 3. Create strong and closely coordinated high-impact, nutrition-specific interventions, the partnerships for nutrition. A comprehensive increase in adult income is estimated at US$66,5 multisectoral response requires high-level much higher than US$2 for Malawi, US$13 for Fiscal Policy government ownership and leadership by entities Ethiopia, and US$48 for Vietnam. 1.4 able to monitor and enforce policies across ministries Employment and Poverty Figure 23. Stunting Rates in Selected Countries, 1990-2020. 1.5 Outlook & Risks Prevalence of stunting in selected countries 60 Outlook Growth 50 2.1 40 Prosperity & Shared Poverty 30 Philippines Economic Update December 2022 2.2 20 Risks & Policy Food Security Challenges 10 2.3 1990 1995 2000 2005 2010 2015 2020 Year Philippines Myamar Vietnam Ensuring for all Mexico Nigeria Peru Thailand Introduction Source: United Nations Children’s Fund (UNICEF) and World Health Organization (WHO). 3.1 Effectiveness Implications Spending of Public 3.2 for financial & 30 The package of nutrition-specific interventions found to promote a healthier society and a more robust economy if delivered in full and at 90 percent Func Dev coverage comprises: pre-conceptual flic acid supplementation or fortification; maternal calcium supplementation; maternal protein energy supplemen- 3.3 tation; breastfeeding promotion; vitamin A supplementation for children 6–59 months; complementary feeding education and food provision for food insecure households; preventive zinc supplementation; management of moderate acute malnutrition and treatment of severe acute malnutrition; and therapeutic zinc supplementation during treatment of diarrhea. Agenda for Agriculture An Action 33 3.4 ToC Contents Table of Investing in climate adaptation and mitigation supporting macroeconomic policies. Structural measures will reduce the economic losses in reform initiatives are planned on the areas of public- Executive Summary agriculture and industry brought by climate- private partnership, foreign participation in strategic related disasters. As one of the countries most industries, and tax policy and administration, among affected by extreme climate events, the Philippines others. The release of the Philippines Development Economic & has experienced highly destructive typhoons almost Plan 2023-2028 will be a welcome development as Policy Dev Recent annually for the past 10 years. Annual typhoon losses the plan provides a clear roadmap to achieving the have been estimated to reach 1.2 percent of GDP, country’s medium-term priorities. and as much as 4.6 percent of GDP in extreme cases Economic Growth like Super Typhoon Haiyan in 2013. The agriculture Over the medium term, effective public 1.1 sector is often especially hit hard with losses to crop spending on the agriculture sector will help production, farm livelihoods and agricultural address the sector’s low productivity and infrastructure which aggravate domestic food supply. alleviate the challenge of food security in the External Sector The increasing intensity and frequency of natural country. Growth prospects for the agriculture sector 1.2 disasters will add pressure to the country’s growth remain poor due to a combination of chronic prospect and fiscal position. In response, the underinvestment and intense vulnerability to weather- Inflation & Monetary government needs to (i) invest in adaptation measures related shocks. Agriculture comprised less than 10 1.3 in agriculture and climate-proofing infrastructure to percent of GDP, and the sector’s contribution to reduce the economic losses; (ii) invest in mitigation growth is minimal during the past five years. However, measures such as carbon pricing to reduce emission, it employs a disproportionate share of the labor force, Fiscal Policy increase growth, and generate jobs; and (iii) finance and domestic food production has a significant 1.4 climate actions.31 influence on consumer price inflation. Nevertheless, foreign investment and credit to the sector have been Employment and Poverty The new administration will need to take swift low, contributing to the sector’s low productivity. 1.5 and decisive action to confirm its commitment to Increasing agricultural productivity will be crucial to its stated priorities. The new administration has laid uphold food security and boost more inclusive out its eight-point socio-economic agenda, which growth. To this end, the efficient use of public funds Outlook & Risks aims to guide the economy back to its high-growth for public investments will help address the structural trajectory. It has taken steps to reassure businesses constraints including value chain weaknesses and and investors the continuity of public infrastructure poor business climate for agri-food system (see program, business-friendly reforms, and growth- Chapter 3). Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 Photo by: ymphotos for financial & Func Dev 3.3 31 World Bank, Philippines Country Climate and Development Report, Washington DC: World Bank, November 2022. Agenda for Agriculture An Action 34 3.4 ToC Contents Table of Executive Summary Economic & Policy Dev Recent Economic Growth 1.1 Photo by: Aver Justin Parado PART 3 External Sector 1.2 ENSURING FOOD SECURITY Inflation & Monetary 1.3 FOR ALL: REPURPOSING Fiscal Policy 1.4 PUBLIC INVESTMENTS32 Employment and Poverty 1.5 The Philippines has been among the most dynamic economies in the East Asia Pacific region over the past decade. The growth momentum has been driven by key structural reforms, leading to a significant Outlook & reduction in poverty in recent years. Agricultural policy has spurred some growth in the sector but falls Risks short of sparking a structural transformation and dynamic development. Recently, the COVID-19 pandemic, the war in Ukraine, and adverse climatic and other events (typhoons, floods, and African Swine Fever outbreak), have contributed to rising domestic food prices and heightened concerns Outlook Growth about food security in the country, especially for the poor and vulnerable. 2.1 Ensuring food security and sustained agriculture growth have been hampered by underinvestment in Prosperity & Shared Poverty public goods in agriculture. The continued focus on supporting rice production has come at the Philippines Economic Update December 2022 2.2 expense of other agricultural products. As a result, Filipino consumers pay a very high price for food at approximately 40% higher than the regional comparators. Sustaining agriculture growth is further Risks & Policy Food Security Introduction Challenges complicated by the ongoing devolution resulting from the Mandanas Ruling of the Supreme Court, 2.3 which transfers greater responsibilities for and financing of agriculture programs to local government units (LGUs). Ensuring To take full advantage of the opportunities arising from the new strategic directions of the Department for all of Agriculture (DA) and the devolution of more responsibilities to LGUs, agricultural public expenditure policies must address three critical challenges: (i) changing strategic focus from an objective of self- sufficiency in specific commodities to align better with the administration’s ambition of improving 3.1 sectoral competitiveness and resilience to ensure food security for all, (ii) improving effectiveness of the current spending, and (iii) dealing effectively with the public expenditure issues related to devolution. Effectiveness Implications Spending This chapter reviews the status and effectiveness of public spending in agriculture and the impacts of of Public 3.2 financial and functional devolution resulting from the Mandanas Ruling, and outlines key priority actions to achieve the medium to long-term agenda of enhancing agriculture productivity and for financial & strengthening domestic food security. Func Dev 3.3 32 This chapter is prepared by Anuja Kar with the core team comprising Animesh Shrivastava, John Nash, and Roehl Briones (Philippine Institute for Development Studies). It draws significantly from the report “Philippines Agriculture Public Expenditures Review (AgPER): With a special focus on the implications of the Mandanas Ruling” (World Bank 2022). Agenda for Agriculture An Action 35 3.4 ToC Contents Table of 3.1 INTRODUCTION Executive Summary Agriculture remains critically important in the Food and nutritional security-related concerns Philippines because of its connection to poverty remain widespread. The 2020 Annual Poverty In- Economic & Policy Dev reduction and its profound influence on national dicator Survey found that 66 percent and 75 percent Recent food security. The agriculture sector employs about of the total and poorest households, respectively, 24 percent of the total workforce in 2021 (Figure reported running out of food, going hungry, eating 24). During the pandemic, it absorbed retrenched less than they should, or going without eating for a Economic Growth workers from other sectors (World Bank 2022). The whole day. In 2019, the rate of stunting in children 1.1 poverty rate among farmers and fisherfolk has fallen under five was 28.8 percent in the Philippines, equal over time, but it remains higher than the national aver- to about 4 million children. According to the Food age, and nearly three times greater than the poverty Prices for Nutrition analysis, while 92.5 percent of the External Sector 1.2 rate among urban households (Figure 25). Recently, population was able to afford a calorically adequate the adverse impact of the COVID-19 pandemic and diet in 2017, over half (54 percent) could not afford the war in Ukraine have caused supply chain disrup- one that met the basic nutrient requirements, and 71 Inflation & Monetary tions and rising global prices of commodities, fuel, percent (about 75 million people) could not afford a 1.3 and fertilizer, which have spilled over to the Philip- healthy diet. The situation has improved by 2020, but pines. These impacts have been compounded by over two-thirds (68 percent) still could not afford a Fiscal Policy adverse climatic and other events (typhoons, floods, healthy diet.33 The prevalence of moderate to severe 1.4 African Swine Fever outbreak, etc). Headline inflation food insecurity continued to increase reaching 43.8 has risen to an average of 5.4 percent in the first ten percent of the total population (Figure 26). months of 2022, from 4.0 percent in the same period Employment and Poverty last year, driven by food and energy price pressure. 1.5 Soaring prices, increased food demand, and insuffi- cient local production to meet the demand, caused food to be far less accessible to lower-income groups Outlook & Risks in the country. Figure 24: Sectoral share of employment, 2002- Outlook 2019 (%). Growth 2.1 100% 90% Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 80% 70% Risks & Policy Food Security Introduction Challenges 60% 2.3 50% 40% Ensuring 30% for all 20% 10% 0% 3.1 2002 2003 2004 2005 2006 2007 2008 2009 2011 2010 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture, forestry & fishing Industry (including construction) Services Photo by: Tuah Roslan Effectiveness Implications Spending Source: The Jobs Group Jobs Structure Tool, PSA, Briones (2021). of Public 3.2 for financial & Func Dev 3.3 33 In 2015, most Filipino households could afford a calorically adequate diet, but one-third could not afford a nutritionally adequate diet (WFP 2015). Good nutrition is more expensive in urban areas—on average, urban consumers pay a premium of 10% for a nutritionally adequate diet compared to their rural counterparts. At the extreme, Metro Manila residents pay a 69% premium. Compared to other countries in the region, a nutritious diet also costs more in the Philippines. Agenda for Agriculture An Action 36 3.4 ToC Contents Table of Figure 25. Incidence and magnitude of poverty among population groups, 2006 – 18 (%). Executive Summary Incidence and magnitude of poverty among population groups, 2006 -18 45 41.2 41.3 39.2 38.5 38 38.3 40.84 40 Economic & 36.85 Policy Dev Recent 35 31.6 30 26.6 26.3 25.2 26.2 23.3 25 20 16.6 15 Economic Growth 10 1.1 5 0 2006 2009 2012 2015 2018 Incidence and magnitude of poverty among population groups, 2006 - 18 External Sector 1.2 Farmers Fisherfolk Population Source: PSA. Inflation & Monetary 1.3 Figure 26. Prevalence of moderate or severe food insecurity in percent (3-year average). Fiscal Policy 1.4 60 50 40 Employment and Poverty 30 1.5 20 10 Outlook & 0 Risks 2017-2019 2018-2020 2019-2021 The total population Male adult population Female adult population Outlook Growth 2.1 Source: FAO. Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 The current government is putting in place agriculture. policies based on the “One DA Reform Agenda”. The strategy for transformation is comprised of four Amid this backdrop, the effectiveness of the Risks & Policy Food Security Introduction Challenges pillars for sectoral development and modernization: Mandanas Ruling could be transformational for 2.3 agricultural consolidation, modernization, local service delivery if managed properly. The industrialization, and professionalization. This policy Supreme Court ruling on the Mandanas appeal re- reorientation holds promise for transformational quires the central government to increase the Internal Ensuring change that will produce a more resilient, inclusive, Revenue Allotment (IRA)—the share of government for all competitive, and environmentally sensitive sector. tax revenue going to the LGUs—starting in 2022. The Rice Liberalization Act (RA 11203), which The IRA, now called National Tax Allotment (NTA), abolished the import quota system (a long-standing increases by nearly 37.9 percent from Php695.5 3.1 instrument of protecting rice production), is billion in 2021 to Php959 billion in 2022. With more indicative of this strategic shift. The act opened up revenue share among the LGUs, the central govern- Effectiveness Implications the importation of rice to private traders and limited ment intends to devolve more responsibilities for Spending of Public 3.2 the mandate of the National Food Authority (NFA) to administering and funding projects and programs. domestic procurement of palay (unhusked rice) from Though such devolution presents an opportunity to farmers and maintenance of national rice stocks as an make agriculture service delivery more client-driven for financial & Func Dev emergency safeguard. This reform was an important and accountable, there remain significant risks if it is 3.3 step toward leveling the playing field for non-rice not managed well. Agenda for Agriculture An Action 37 3.4 ToC Contents Table of 3.2 The Effectiveness of Public Spending Executive Summary Level and Trends of Public Spending Among the agencies involved in agriculture, the DA accounts for the largest share of govern- vis-à-vis Agriculture Growth in the Economic & Policy Dev ment expenditures in the sector (Figure 29). Recent Philippines The Department of Budget and Management (DBM) classifies the item Agriculture and Agrarian Government expenditure on agriculture has Reform under agricultural spending. The agencies Economic declined over time. The DA budget declined from Growth responsible for this spending line are the DA, the 1.1 2.6 percent of total government budget in 2015 to Department of Agrarian Reform (DAR), and various 1.3 percent in 2019 (Figure 27). Current spending government-owned and controlled corporations levels are close to the 2012–2013 level in nominal (GOCCs). The DA’s share is over 50 percent, followed External Sector terms34, but well below the ratio of spending to- 1.2 by spending allocations to other government corpo- GDP benchmark. In 2021, spending as a share in rations, led by the National Irrigation Authority (NIA) agricultural GVA was only 3.4 percent, lower than and NFA (Figure 3.1). The DAR receives only a small Inflation & Monetary 3.8 percent in 2009, and 4.3 percent after 2012 allocation, reaching at most 9 percent of agricultural 1.3 (Figure 28). Agriculture’s share of the overall public spending, although the relative share has increased budget, relative to its share of the national GDP, has over time, up from just 4 percent in 2020. Among the been declining since 2016. Of the total expenditures, Fiscal Policy GOCCs, the biggest allocations are for the NIA and agricultural spending is approximately seven percent 1.4 NFA. The latter receives Php 7 billion annually to fund of agricultural GVA in 2021. The specific policy the government’s rice buffer stocking program. Sev- instruments employed and procedural issues in the eral GOCCs receiving large budgetary support are Employment and Poverty budget process have reduced the effectiveness attached to the DA, such as the NIA35, the NFA, and 1.5 of agricultural public expenditure in achieving its Philippine Rice Research Institute (PhilRice). Lastly, objectives. the large allocation for GOCCs in 2020 represents a temporary budget infusion mainly going to the NFA, Outlook & Risks the Bases Conversion Development Authority, and PhilRice. Figure 27. DA share to total budget ratio (%). Figure 28. DA Appropriation Levels in Php Billions, Outlook Growth 2.1 and as a Ratio to Agricultural GVA (%). 80,000 5 3 Prosperity & Shared Poverty 4.5 Philippines Economic Update December 2022 2.2 70,000 2.5 4 60,000 Risks & Policy Food Security Challenges 3.5 2 2.3 50,000 3 1.5 40,000 2.5 Ensuring 2 1 30,000 for all 1.5 20,000 0.5 1 Introduction 3.1 10,000 0.5 0 2015 2016 2017 2018 2019 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 0 Effectiveness Implications Spending of Public DA % to total budget ratio As ratio to GVA (%) Appropriations (Php Billions) 3.2 Sources: DBM (2022); PSA (2022). for financial & Func Dev 3.3 34 Data for DA budget (allocation, appropriation, disbursement) are represented in nominal terms. 35 NIA is sow reattached to the Department of Agriculture as of 2022. Agenda for Agriculture An Action 38 3.4 ToC Contents Table of Figure 29. Allocation of National Government Expenditures for Agriculture and Agrarian Reform, 2020– 2022 (in Php billions). Executive Summary 200 179.73 180 Economic & Policy Dev Recent 160 143.18 134.63 140 93.46 120 57.02 53.37 Economic Growth 100 1.1 80 7.52 12.74 1.41 1.27 8.77 1.45 60 40 77.48 71.04 72.01 External Sector 1.2 20 0 2020 2021 2022 Inflation & Monetary DA DAR DOST-PCAARD GOCCs Total 1.3 Source: DBM (2022a). Fiscal Policy 1.4 The DA budget reflects interventions under projects are a mix of short and long-term the Agriculture and Fisheries Modernization projects crafted or repackaged primarily to Employment and Poverty Act (AFMA) modernization and commodity- serve selected LGUs. Some of these projects 1.5 based programs. The banner commodity-based have an implementation period of under a year, programs are the major components of the budget, while others have become permanent features under which AFMA interventions are managed in the DA budget. Foreign-funded projects are Outlook & and delivered to the farmers and fisherfolk through Risks subsidies. The commodity programs account for investments requiring large capital and longer 31–51 percent of the total DA budget for 2015–2019. implementation periods. Unlike locally funded The National Rice Program dominates the banner projects, foreign-funded projects like the Outlook Growth Philippines Rural Development Project (PRDP) 2.1 commodity programs, receiving a 47 percent share, of which 3–12 percent constitutes input subsidies undergo rigorous evaluation and scrutiny from while investments in high-level crops remain oversight agencies, primarily concerning their Prosperity & Shared Poverty comparatively lower (Figure 30). The composition of financial implications on the expenditure and Philippines Economic Update December 2022 2.2 the budget for agriculture, including the DA’s banner debt program of the Philippine government. programs, suggests a focus on primary food crops Overall, a greater focus on programs that fund Risks & Policy Food Security to meet basic food security. The continued emphasis Challenges public goods that are currently underfunded, 2.3 on self-sufficiency has limited the choices available to such as research, agriculture extension and producers. innovation systems, market information systems, rural infrastructure, biosecurity systems, and Ensuring Capital investments represent only 16 for all percent of the Office of the Secretary programs supporting CSA is needed. Improving (OSEC) budget. These investments consist of implementation strategies, and utilizing available resources more efficiently can support the DA’s Introduction projects funded from domestic sources and position to increase its share of the budget. 3.1 foreign borrowings or grants. Locally-funded Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 39 3.4 ToC Contents Table of Figure 30. Allocation to the Commodity Banner Programs, 2015–2019, in Php Millions. Executive Summary 16,000 14,000 12,000 Economic & Policy Dev 10,000 Recent 8,000 6,000 Economic 4,000 Growth 1.1 2,000 0 Rice Corn Livestock High-value crops Organic agriculture 2015 2016 2017 2018 2019 External Sector 1.2 Source: DBM. Impact of DA spending on agriculture Rice has long commanded more attention from Inflation & Monetary 1.3 policy than any other crop, benefitting from Agricultural policy has spurred some growth enormous budgetary support and protection in the sector, but it falls short of sparking through import restrictions—with limited Fiscal Policy much-needed structural transformation and in results. Massive infusions of support have delivered 1.4 providing solutions for sustainable agriculture limited growth in rice productivity over the past four and food systems resilience. While the overall decades.38 Around 1980, rice yields in the Philippines Employment and Poverty economy has grown robustly, services and industry were close to the average in other Southeast Asian 1.5 mainly drove economic growth (World Bank 2021). countries. Since then, slower growth in rice yields Agricultural growth was just 1.3 percent over that has caused the Philippines to fall behind, which is a period. Total factor productivity (TFP) in agriculture major reason why domestic rice production cannot Outlook & has increased, as it rose by about 23 percent over compete with imports without significant support and Risks two decades, however, it has been below that of protection (Figure 32). regional neighbors such as Indonesia (72 percent), China (52 percent), and Vietnam (63 percent) There is a strong basis for using distributional Outlook Growth equity in assessing agricultural expenditure 2.1 (Figure 8). The growth in TFP was accompanied by some structural transformation within agriculture: programs of the government across space (i.e., from 2000 to 2021, agricultural gross value-added regional distribution), or across subsectors (i.e., Prosperity & Shared commodity distribution). A regional expenditure Poverty shares increased dramatically for bananas, animal Philippines Economic Update December 2022 2.2 production36, and agricultural support services, analysis shows that the regional allocation of the DA while that of rice and other crops37 and products budget is highest in Luzon region, but this seems Risks & Policy Food Security somewhat justified looking at regional allocations as Challenges saw decreasing shares. Overall, the sector has a ratio to agricultural GVA (Figure 33).39 The analysis 2.3 experienced a much slower pace of structural transformation compared to many regional peers, as finds that the DA allocation is disproportionate to measured by changes in average farm size, the pace the size of the regional agricultural economy in most Ensuring of agricultural mechanization, absorption of surplus regions. Notably, allocations for Regions III and IVA for all agricultural labor in the rest of the economy, changes are less than the ratio of the total regional allocation in agricultural land use, developing institutions for to total agricultural GVA. This implies that, relative to regional agricultural output, Regions III and IVA are Introduction collective action, and others. receiving even smaller allocations than the average 3.1 Effectiveness Implications Animals mainly represent livestock and poultry Spending 36 of Public Other crops represent high-value crops (fruits, vegetables and nuts) 3.2 37 38 A spending to support rice production—including subsidies, infrastructure, and agricultural services specifically aimed at palay production—is extremely high by any standard. While rice accounts for only around 20 percent of the agricultural sector’s production value, rice production spending amounted to 57 percent of the budget for banner programs or around 22 percent of the DA’s total budget in 2022. Support for rice extends beyond the for financial & DA budget and the National Rice Program. It includes irrigation development in rice-growing areas, a paddy procurement program under the NFA, the Func Dev 3.3 Rice Competitiveness Enhancement Fund (RCEF), and rice research through PhillRice. 39 Regional estimates are based directly on PSA official data on the poverty of basic sectors, namely, farmers and fisherfolk. The data set obtained by merging the Labor Force Survey and the FIES Estimates is used to create estimates by commodity. The association of households by agricultural commodity is based on the primary occupation of the household head, for those household heads whose primary occupation is in agriculture. Agenda for Agriculture An Action 40 3.4 ToC Contents Table of Figure 31. TFP Growth in Agriculture (%). Figure 32. Rice yields around the world, 2000– 2020 (ton/ha). Executive Summary TFP growth, 1990 - 2020 9 90 83 8 7 Economic & 80 Policy Dev Recent 72 70 6 63 5 60 52 4 Economic Growth 50 3 1.1 40 2 30 26 1 23 21 0 External Sector 1.2 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10 Brazil Cambodia Inflation & 0 Monetary China Malaysia 1.3 s nd a ia a Myanmar Peru ia m ne in di ys s na la ne Ch bo pi ala ai et Philippines Thailand do ilip Th m Vi M Ca In Ph Vietnam World Source: USDA, FAOStats. Fiscal Policy 1.4 Figure 33. Comparison of Regional Ranking Based on Different Agricultural Indicators, 2018. 14 Employment and Poverty 12 1.5 10 8 6 Outlook & 4 Risks 2 0 X II I n R VI XI A IX II ga V B I I III Outlook XI VI on VI CA Growth tio IV IV on on on on on on on ra on on gi on 2.1 via on on gi gi Ca gi gi gi gi gi Re gi gi gi Re Re gi gi Re de Re Re Re Re Re Re Re Re Re e t lu so ab Prosperity & Shared n Poverty ea Philippines Economic Update December 2022 2.2 GVA rank Poverty rank M Source: PSA, Author’s own calculation. region. On the other hand, the most lopsided budget, which was around 80 percent. For some Risks & Policy Food Security Challenges allocations over regional share in agricultural GVA important programs, the disbursement rate appears 2.3 are found for Cordillera Administrative Region (CAR) considerably lower, as revealed in the expenditure and Caraga. Comparing regional rankings, the DA review of the Farm-to-Market Roads (FMRs) Program allocations for Visayas and Mindanao underprioritize (World Bank 2021). The current review and a 2014 Ensuring for all regions with higher poverty and agricultural GVA. report by the DBM suggest that funds were unused due to multiple problems. These included poor One of the key underlying causes of low project selection, lack of prioritization, poor choice Introduction effectiveness is the notable gaps between of project location, and failure of the LGUs to provide 3.1 planned expenditure and actual disbursements. counterpart funding. Shortcomings of the agencies’ The disbursement rate for the DA’s budget is low and internal processes such as unrealistic cash programs, Effectiveness Implications Spending does not seem to be increasing. Obligation rates poor coordination between planning and budget of Public 3.2 across 2019–2021 have ranged between 85–92 and operations groups, procurement problems, percent, while disbursement rates have been only processing of claims for payment, and other 75–77 percent, even disregarding the much lower administrative issues also contributed to unused for financial & Func Dev rate in 2020, which may have been mainly due funds. The DA’s inability to spend the allocated funds 3.3 to the COVID-19 pandemic. This amount is lower hampers requests for an increase in the budget than the disbursement rate for the whole national during the budgeting process. Agenda for Agriculture An Action 41 3.4 ToC Contents Table of 3.3 Implications for Financial and Functional Executive Summary Devolution resulting from the Mandanas Ruling Budget allocation for LGUs Still, there remain some inconsistencies in the Economic & Policy Dev budgetary allocation to the LGUs. Financial incen- Recent LGUs are assigned the task of delivering tives for qualified LGUs that meet the criteria for good agricultural services to their constituents, but governance are made available in the national budget their spending allocation for agriculture is small and managed by the Department of the Interior and Economic Growth Local Government (DILG). The incentives allow LGUs 1.1 relative to the DA and their overall allocation from the government. Figure 34 presents to finance big-ticket projects they cannot accommo- Department of Finance-Bureau of Local Government date under their respective budgets. Some LGUs were awarded incentives several times, while others, External Finance (DOF-BLGF) data on agricultural expenditure Sector 1.2 by subnational governments (provincial/city/ particularly the lower-income LGUs, could not meet municipal). By 2018 LGU spending on agriculture the criteria. Some limitations on the budget distribu- was only Php 8.5 billion, which is relatively small tion are claimed to be restrictive and inconsistent with Inflation & Monetary local autonomy but are adopted as a matter of policy. 1.3 compared to the annual allocation to the DA for agricultural development.40 Despite this absolute Limitations of 80 percent for personal services and increase, the relative allocation for agriculture maintenance and other operating expenses and 20 Fiscal Policy declined from 2.1 percent of the total LGU transfers in percent for local development funds are imposed on 1.4 2012 to just 1.5 percent in 2018. the local budget. By law, 20 percent of IRA transfers should go to local development projects. Employment and Poverty 1.5 Figure 34. Government Allocations for Agriculture to LGUs, by LGU Level. Outlook & Risks 9 2.5 8 7 2 6 Outlook Growth 1.5 5 2.1 4 1 3 2 Prosperity 0.5 & Shared Poverty Philippines Economic Update December 2022 2.2 1 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Risks & Policy Food Security Challenges Total Agriculture City 2.3 Municipality Province Agriculture as a share in total LGU allocation (%) Ensuring for all Sources: DOF-BLGF for agriculture allocation; Philippine Statistical Yearbook (PSY) (2019) for LGU allocations. Introduction 3.1 Effectiveness Implications Spending of Public 3.2 40 Across LGUs, most spending is done by municipalities, followed by provinces. Cities tend to be urbanized jurisdictions with a small agricultural base for financial & Func Dev relative to municipalities, whereas provinces have fewer devolved key functions; however, the Agriculture and Fisheries Modernization Act (RA 8435) 3.3 assigns provinces to serve as coordinators of the various municipal programs within an area. Agenda for Agriculture An Action 42 3.4 ToC Contents Table of Imminent challenges • The focus of LGUs is often on high-visibility expenditures with an immediate political payoff. Executive Summary Consequently, there has been less priority given The agricultural allocation for LGUs increased to less visible rural and agricultural projects and over time in nominal terms but not as a share services. For example, spending on agriculture of LGU allocation. The Devolution Transition Plan Economic & extension services which was devolved after 1991 Policy Dev (DTP) developed by the DA to comply with Executive Recent has declined considerably. This limitation poses Order (EO) 138 did not specify the services for great risks for other services still to be devolved. devolution but reiterated those devolved under the Part of the problem is that some investments, such 1991 Local Government Code (LGC). Given that Economic Growth as FMRs and reducing agricultural greenhouse past patterns of allocation of LGUs for agriculture fall 1.1 gases (GHGs), have significant positive far short of what the national government spends externalities. (that is, benefits accrue to the nation on agriculture through DA, the lack of detail in the or the world, e.g., by integrating local markets DTP raises concerns about the prospects for public External Sector into the national road network or mitigating 1.2 agricultural spending post-Mandanas. For example, global warming). Local decision-making on how financing the devolved extension services will be a to allocate funds may not consider these benefits. persistent challenge to LGUs, which mostly depend Inflation & Monetary on the development fund for financial support for 1.3 • Possibility of insufficient funding for LGUs the broadening array of extension activities, set at 20 even with the extra financing from the percent at that time. The burden of securing funds Mandanas Ruling. There is no well-functioning Fiscal Policy for the agricultural sector lies in the local leadership, institutionalized mechanism to establish a direct 1.4 which is expected to constantly seek funds from correlation between the extra IRA allocation external sources to augment the meager resources of and the cost of providing the services that will the LGUs. Employment and Poverty be devolved. At least one study has concluded 1.5 that the funding—around 16 percent—is likely As the DA moves forward with fine-tuning and insufficient for many LGUs to continue to operationalizing its DTP, it will need to cope provide devolved services at the same level as Outlook & with many issues. Major issues that appear to Risks currently provided by the national government. be potentially problematic for the process in the LGUs’ heavy dependence on the IRA and their Philippines include: limited authority to raise revenue independently exacerbate funding problems. Outlook Growth Weak coordination between the DA and LGUs in 2.1 planning and delivering basic services. • A lack of a results-based monitoring, evaluation, and reporting system at the LGU level. No good Prosperity • A lack of financial and skilled workforce & Shared Poverty system exists for monitoring and enforcing Philippines Economic Update December 2022 2.2 capacity for effective expenditure planning and compliance with the LGUs’ commitment, which management in many LGUs, especially in the they must make before construction begins, to lower-income LGU categories. The ability to Risks & Policy Food Security Challenges maintain long-lived capital investments such as follow budget rules, manage finances, or even 2.3 FMRs after construction. The absence of such assess their capability for financial management a system is especially unfortunate since such using the Public Financial Management maintenance neglect leads to much higher costs Assessment Tool (PFMAT) is often missing. Ensuring further down the road. for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 43 3.4 ToC Contents Table of 3.4 An Action Agenda for Agriculture Executive Summary There is a need to shift from a rice-centered zones focused on maximizing farm incomes for agri-food policy to one that anticipates greater all producers, reducing poverty, and focusing on Economic & Policy Dev balance in sectoral priority-setting and resource sustainability rather than maximizing production. Recent allocation. An important objective underpinning past agricultural spending policy was a desire A second element to meet this challenge of to achieve high levels of self-sufficiency in food better alignment is to focus more on programs Economic Growth products, especially rice. This strategic objective that fund public goods that are currently 1.1 has driven spending decisions, and its impacts underfunded. Increased public spending on reverberate throughout the agricultural economy initiatives driving public rather than private goods like due to the magnitude of money spent and the input subsidies has successfully improved the quality External Sector 1.2 inefficiencies generated by spending programs. and impact of agricultural expenditure worldwide At the same time, a modern conception of food (Lopez and Gallinato 2007; Goyal and Nash 2013). security recognizes that security does not depend Reducing input subsidies would create budget space Inflation & Monetary on self-sufficiency, but rather is much more a function to ramp up spending on currently underfunded 1.3 of income and the general availability of nutritious public goods such as research and development, foods. In aspirational terms, it means moving toward agriculture extension and innovation systems, market Fiscal Policy an agri-food system that is: (i) resilient in the face of information, and biosecurity. Programs supporting 1.4 risks, (ii) inclusive in the opportunities it provides and CSA and climate-smart infrastructure, including the the consumers it services, (iii) competitive in domestic maintenance of FMRs, should also receive funding. and international markets, and (iv) environmentally Employment and Poverty sustainable from farm to fork. Pursuing this agenda For example, agricultural research is a classic 1.5 requires shifting from protecting a specific product public good, which yields high benefits by (e.g. rice) and type of farmer to improving the overall increasing productivity and raising incomes at resilience, competitiveness, and sustainability of the very modest costs. Spending on research in the Outlook & Risks sector as a whole. Philippines is very low—about Php 1,213 million in 2019, relative to an agricultural GDP of about Php The pathway to achieving a sustainable agri- 1,722 billion that year—and needs to be significantly Outlook Growth food system will need to be supported by the enhanced in quantity and quality. (Note that this 2.1 alignment of public agricultural expenditures figure does not include research spending falling with this new agenda. Results will depend on how outside the banner programs) Developed countries well this reorientation is operationalized in policy with strong agricultural sectors, such as Australia, Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 and spending decisions. Unfortunately, recent New Zealand, France, and the Netherlands, report budgets do not reflect this new strategy. This review investments in public agricultural R&D of 3–4 percent found that in contrast to the intentions, concrete of agricultural GDP (AgGDP), often supplemented by Risks & Policy Food Security Challenges spending decisions that would reflect new policy strong private agricultural R&D investment. In a survey 2.3 directions, such as reorienting production away of research programs in Southeast Asia, a recent from commodity-based programs, have not yet study by the Agricultural Science and Technology begun in earnest, especially for rice and other single Institute concluded that the Philippines had a Ensuring commodity programs. research intensity of 0.41 percent as of 2017. This for all figure placed the country in the middle among the One element in the shift in expenditure strategy Southeast Asian countries but far below best practice Introduction should be a transition in budgeting from a examples globally. The country had the greatest 3.1 commodity-based planning mechanism to one gap between actual and attainable investment in more area-based, focusing on more holistic agricultural research among all these countries.41 Effectiveness Implications objectives rather than production targets. This Spending of Public 3.2 adjusment would involve adopting bottom-up, Investments in improving agriculture extension area-based planning based on strategic agricultural services also offer big rewards, particularly for financial & Func Dev 3.3 As measured by the difference between actual research intensity (public research expenditure/AgGDP) and potential attainable research intensity as 41 estimated by ASTI. Agriculture Agenda for An Action 44 3.4 ToC Contents Table of those with strong public goods characteristics Use legal and regulatory reform to provide such as disease prevention and control, greater tenure security for farmers to encourage Executive Summary climate adaptation and mitigation, or those investments in more resilient, integrated, and with significant demonstration effects beyond diversified agriculture systems. the immediate beneficiaries. There have been Economic & major developments in digital agriculture and new • Support technology generation and Policy Dev Recent information and communication technologies dissemination to promote CSA technology and tools. Such developments have led to major adoption. Many innovative and longstanding agricultural extension and advisory service delivery production technologies are available. Measures Economic Growth improvements. New modes of communication include increased investments in research on 1.1 between agents and farmers allow more efficient climate impacts and technologies for both dissemination of information than the old face-to-face adaptation and emission reductions and contact model. As extension services are increasingly strengthening extension systems. External Sector decentralized, investments in technologies that help 1.2 local extension staff reach a larger number of farmers • Take advantage of the Mandanas process to should have high payoffs. build local capacity for mainstreaming CSA Inflation & Monetary into policies and planning. This process should 1.3 Policies and programs to scale up CSA will foster ensure inclusion in community planning since increased resilience of the agri-food system to CSA solutions are only sustainable if there is weather shocks and reduce GHG emissions from strong community ownership (World Bank and Fiscal Policy the sector. Climate-related disasters are a significant BioCarbon Fund 2021). 1.4 threat to Philippine agriculture, and this threat is likely to be magnified over time by global warming Improving budget prioritization is needed Employment and Poverty related to GHG emissions. Philippine agriculture, to support programs to overcome barriers to 1.5 particularly in the rice sector, contributes significant farmer collective action and economies of scale. emissions, and the sector can increase its resilience There is a need for increased focus on improving to weather shocks. The following are some key CSA value chain coordination and integration under the Outlook & Risks recommendations: Farm and Fisheries Clustering and Consolidation Program (F2C2) initiative, with government support • Reform agricultural support policies to encourage for efforts to overcome market failure by supporting more diversified production systems, which tend buyers and producer organizations in preparing and Outlook Growth 2.1 to be more resilient to climate shocks, while implementing profitable business plans. Measures to repurposing support for rice (one of the biggest support collective action will also help promote the producers of GHGs). Subsidize adopting CSA adoption of CSA investments with high investment Prosperity & Shared Poverty production technologies where appropriate and costs, e.g., solar-powered pumps, biodigesters, Philippines Economic Update December 2022 2.2 use social safety nets for disaster relief where and small farm reservoirs, and therefore require joint feasible, rather than setting up special programs. action by groups of farmers. The PRDP has already Risks & Policy Food Security Challenges Shift from physical input/fertilizer distribution implemented such a model through its Enterprise 2.3 to E-vouchers42 in the short term as these Development Component. encourage the over-use of nitrogen fertilizers, which contributes to GHG emissions (nitrous Government budgeting institutions also require Ensuring oxide). Over the longer term, decoupled direct procedural improvements. Getting the greatest for all payments are well suited to promoting climate- value from public funds requires an efficient and smart technology adoption and are designed for effective process to plan and execute the budget Introduction this in other countries (Box 6). and see how and where the government spends 3.1 money. In particular, attention is needed in two • Improve water management and pricing policies areas: (i) to identify the causes of low disbursement to increase incentives for efficient use. This means rates and resolve them; and (ii) to improve processes Effectiveness Implications Spending of Public curtailing both the provision of free irrigation and for evidence- and results-based monitoring and 3.2 the use of non-volumetric water charges based on evaluation. the area of land irrigated rather than water volume. for financial & Func Dev 3.3 42 Due to the current geopolitical scenario on account of the Russia-Ukraine war, fertilizer prices have skyrocketed. This has led the DA to provide a tem- porary cushion to counter rising fertilizer prices through additional subsidies. Agriculture Agenda for An Action 45 3.4 ToC Contents Table of Building Strong Agri-Food Systems targeted support to LGUs incapable of adequately carrying out the devolved functions. The fund under Devolution Executive Summary may be in the form of a conditional grant that can provide a mechanism to influence and direct capital Devolution can bring good results with investment priorities. Here, the menu system can be improved clarity over the implementation Economic & more effective by listing and prioritizing investments Policy Dev plan. The strategy of delegating powers and Recent with spillover effects outside the LGU jurisdictions, responsibilities to LGUs provides opportunities like FMR and road repair and maintenance, among for providing responsive and high-quality services others. and the possibility of strengthening accountability Economic Growth and extensive public participation in the delivery 1.1 Creating a mechanism to ensure that FMRs and of services. To strengthen the impact of devolution other long-duration infrastructure investments to build a strong agri-food system, the central receive needed investments in operations government needs to consider mechanisms to External Sector and maintenance is appropriate. This would 1.2 influence the spending priorities of the LGUs. The ensure that they do not continue to suffer from proposal for an enhanced menu system listing poor maintenance, resulting in high costs. The investment programs that LGUs may invest in Inflation & Monetary government should create a mechanism: (a) to using the 20 percent budget on capital outlays is 1.3 monitor each LGU’s spending on operations and imperative. This is the current policy for using the 20 maintenance (O&M) systematically, (b) to evaluate percent capital budget, but reported underspending whether that is adequate to maintain infrastructure in Fiscal Policy may reflect that the menu system has not been good condition, and (c) to sanction LGUs that fall out 1.4 effective in providing appropriate options. Also, an of compliance. Equalization Fund (EF) could be a grant to provide Employment and Poverty 1.5 Outlook & Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: Michael James Abrahams Agriculture Agenda for An Action 46 3.4 ToC Contents Table of Box 6. Advantages of Decoupled Payment Executive Summary A decoupled payment would not depend on current for large farms. This improvement is also possible for input use, product choice, or production quantity. vouchers. This mechanism can help support farmers’ incomes Economic & Policy Dev Recent without creating biases that favor the production In the short term, moving to an e-voucher system for of any specific crop or favoring the negative effects input subsidies would give farmers more choices and of input subsidies. Decoupled payment schemes incentives to develop better farm management skills have played a key role in reform in the EU, USA, and encourage private sector development in input Economic Growth 1.1 Turkey, Mexico, and other countries, where the form supply. of payment has been per hectare. A decoupled payment system has numerous advantages: The government would have multiple options for External handling the fiscal cost of this kind of reform. First, Sector 1.2 a) It is more controllable and WTO-friendly than the net fiscal cost would be zero if decoupled support linked to inputs or outputs. payments were substituted peso per peso for b) It is more effective than vouchers at helping existing subsidies. If decoupled payments can Inflation & Monetary 1.3 farmers develop farm management skills since it gives compensate for eliminating nontariff trade barriers, farmers more flexibility in choosing how to optimize the government has net fiscal costs. In this case, if their choices of production technology. tariffs are substituted for the NTBs as was done for Fiscal Policy c) It can incentivize farmers to make decisions on the rice, this additional revenue can be used to finance 1.4 environment, land management, public and animal decoupled payments. Another option would be health, or animal welfare, which prevent or minimize to use some of the fiscal savings from phasing out Employment and Poverty negative externalities. This incentivization is done subsidies to finance decoupled payments and 1.5 successfully in several countries, including the US channel some of the savings to other forms of and EU. spending on public goods. d) A decoupled payment system could be made Outlook & progressive, with more limited payments per hectare Risks Outlook Growth 2.1 Prosperity & Shared Poverty Philippines Economic Update December 2022 2.2 Risks & Policy Food Security Challenges 2.3 Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Photo by: Jed Regala Agenda for Agriculture An Action 47 3.4 ToC Contents Table of Annex 1 Executive Summary Comparing regional rankings, the DA ranking of that region in terms of GVA and Economic & Policy Dev Recent allocations for Visayas and Mindanao about six places higher or lower based on its underprioritize regions with higher poverty ranking by the number of agricultural poor. and agricultural GVA. The comparisons above Therefore, the mean absolute deviation is smaller contrast the size of regional budgets with the size for the GVA ranking than for the poverty ranking. An Economic Growth 1.1 of other indicators such as agricultural GVA or the expenditure allocation need not exactly align the number of poor persons. Alternatively, we can rankings based on one indicator, as doing so will simply base comparisons on the ranking of spending inevitably entail misalignment with other indicators. External priorities vs. ranking based on output and poverty Table 3, the third column presents the GVA ranking Sector 1.2 indicators. Table 3 displays the regions sorted relative to the poverty ranking. The mean absolute in ascending order of expen diture allocation; deviation is 3.9; aligning expenditure priorities to also shown are rankings of each region based on rank regions consistently with agricultural poverty Inflation & Monetary 1.3 the size of agricultural GVA and poor agricultural will deviate from perfectly aligned GVA ranking by population, both in descending order. For instance, an average of about four places. The reality of trade- the first-ranked region by expenditure is Region III, offs across various indicators should be recognized. Fiscal Policy which is also the first-ranked region by GVA, with a Further comparison of DA allocation compared 1.4 deviation of zero. However, the first-ranked region with the crop choice of farmers suggests that DA by expenditure is only ranked eleventh by poverty, prioritization across regions is being driven by its Employment and Poverty with a deviation of 10. commodity priorities, led by rice. Hence it is unlikely 1.5 to make better choices in terms of distributional The spending priority for a region is, on allocation unless it reorders its overall spending average, about four places different from the priorities. Outlook & Risks Table 3. Comparison of Regional Ranking Based on Different Agricultural Indicators, 2018. Outlook Relative to expenditure rank Relative to poverty Growth 2.1 Region GVA rank Poverty rank GVA rank Region III 0 10 1 Prosperity & Shared Poverty Region II 6 7 8 Philippines Economic Update December 2022 2.2 Region I 4 12 7 Region V 9 8 9 Risks & Policy Food Security Challenges Region IVB 4 1 13 2.3 Region VI 1 1 5 Region IVA 3 6 4 Ensuring 7 6 6 for all Region XII Region VIII 3 8 12 Region VII 8 4 10 Introduction Region X 1 8 2 3.1 CAR 2 7 15 Region IX 10 5 11 Effectiveness Implications Spending of Public Region XI 3 12 3 3.2 Caraga 1 5 14 Mean absolute deviation 4.1 6.7 3.9 for financial & Func Dev 3.3 Source: Author’s calculation. 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Ensuring for all Introduction 3.1 Effectiveness Implications Spending of Public 3.2 for financial & Func Dev 3.3 Agenda for Agriculture An Action 51 3.4 ToC The World Bank PHILIPPINES 26th Floor, One Global Place 5th Ave. corner 25th St. Bonifacio Global City, Taguig City Philippines 1634 T: +63 2-465-2500 F: +63 2-465-2505 W: www.worldbank.org/en/country/philippines