FY 2001 Country Commercial Guide: Philippines

1 U.S. Department of State FY 2001 Country Commercial Guide: Philippines The Country Commercial Guide for Philippines was prepared by U.S. Embassy Manila and released by the Bureau of Economic and Business in July 2000 for Fiscal Year 2001. International Copyright, U.S. & Foreign Commercial Service and the U.S. Department of State, 2000. All rights reserved outside the United States. TABLE OF CONTENTS I. EXECUTIVE SUMMARY II. ECONOMIC TRENDS AND OUTLOOK III. POLITICAL ENVIRONMENT IV. MARKETING U.S. PRODUCTS AND SERVICES V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT VI. TRADE REGULATIONS, CUSTOMS AND STANDARDS VII. INVESTMENT CLIMATE VIII. TRADE AND PROJECT FINANCING IX. BUSINESS TRAVEL X. ECONOMIC AND TRADE STATISTICS XI. U.S. AND PHILIPPINE CONTACTS XII. MARKET RESEARCH XIII. TRADE EVENTS 2 I. EXECUTIVE SUMMARY This Country Commercial Guide (CCG) presents a comprehensive look at the Philippines’ commercial environment, using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Coun- try Commercial Guides are prepared annually at U.S. embassies through the combined efforts of several U.S. government agencies. Real Gross Domestic Product (GDP) of the Philippines grew 3.2% in 1999, led by the agricultural sector’s 6.6% growth, in contrast to 1998’s weather-related 6.6% output losses. The Embassy projects a real GDP growth rate of 3.5 to 4% for 2000. The accelerating revival of manufacturing will compensate for the expected slower agricultural growth. The Philippines recorded in 1999 its first merchandise trade surplus ($4.3 billion) in over two decades on the back of the region’s best export growth. Full year merchandise export receipts were up 18.8% over 1998, but are expected to return to more “normal” levels in 2000. U.S. exports to the Philippines, which represented one-fifth of total Philippine imports, increased 7.3% in 1999. The value of the peso has slowly declined in 2000, due more to erosion of consumer confidence than to economic fundamentals. An eruption of the Mindanao insurgency in the first half of 2000 and a rash of bombings in Manila and other urban centers have contributed to the growing sense of pessi- mism. By mid-July, 2000, the peso reached a 23-month low of 44.3 to the US dollar. This weakness in the local currency will inevitably hurt U.S. exports to the Philippines. On the brighter side, inflation has remained under control in the 5-6% range. Improving longer-term fiscal stability remains among the Philippines’ most important challenges. Weak public finances impede investments in much needed infrastructure and the delivery of essen- tial services, which could affect the country’s competitiveness in the rapidly globalizing world economy. The challenge now for the Philippines is to lay a firm foundation for ensuring steady growth and attracting more direct foreign investment. Progress in investment liberalization has been substantial and is proceeding despite sometimes-contentious opposition by “nationalist” blocs and vested interests. In the first six months of 2000, the Philippine Congress passed legislation opening the retail trade sector and the corn and rice milling business to foreign investment and substantially easing restrictions on foreign ownership of banks. A provision in the new E-Commerce Act may also open the door to foreign investment in cable infrastructure. Congress is also finalizing legislation to restructure the power sector and privatize the government owned National Power Corporation. American firms are continuing to recognize the attractiveness of this market. The Philippines has a natural competitive advantage in its abundant supply of skilled and semi-skilled, English-speaking workers. This has attracted companies who seek to relocate back office operations, operate call centers, and perform accounting, software development, engineering, and electronic publishing from higher cost locations. There is an accelerating flow of direct foreign investment in these and other shared services operations. Texaco recently invested $1.4 billion in the Malampaya natural gas development project that has been spearheaded by Shell Philippines Exploration Corp. U.S. exports to the Philippines grew by 7.27% in 1999 to $7.23 billion, and increased another 15% in the first quarter 2000, making the Philippines our 19th largest export market overall. 3 Leading U.S. export sectors over the near-term are: (1) information technology with a focus on Internet/E-commerce; (2) telecommunications equipment; (3) electric power systems; (4) building; (5) construction equipment; (6) water resource equipment/services; (7) pollution control equipment/ services; (8) food processing and packaging equipment; (9) hotel and restaurant industry equipment; and (10) medical equipment. Sectors offering the greatest investment potential for U.S. firms are: Information Technology; retailing; and franchising. II. ECONOMIC TRENDS AND OUTLOOK A. Major Trends and Outlook The economic fundamentals in the Philippines are improving. Output is up, exports are growing, and the revival in manufacturing is accelerating. The economy — spurred in 1999 by a “pump- priming” government budget and agriculture’s rebound from 1998’s drought-induced losses — grew 3.4% year-on-year during the first quarter of 2000 and seems headed for a broader-based expansion. Achieving the government’s full-year 2000 4%-5% GDP growth target will depend largely on the strength of the private, non-agricultural sector as the government works to reduce its fiscal deficit and agriculture reverts to a more normal growth pattern. Year-on-year consumer price inflation, which averaged 3.3% from January-May 2000, will likely accelerate on stronger demand and adjust- ments in fuel and utility rates but should remain within the government’s 5%-6% full-year target range. Interest rates are at pre-crisis levels despite occasional pressures triggered by foreign ex- change-related disturbances and fiscal uncertainties. The banking sector is generally sound and well-capitalized despite higher levels of non-performing assets. During the first half of 2000, President Estrada signed into law an updated general banking act, a less restrictive retail trade law, and electronic-commerce legislation. Significant progress has been made on other legislation which will move the economy forward -- such as power sector, securities market, and investment incentive reforms. Continued trade and tariff reforms that further open Philippine markets to the global economy are needed, as are steps to further lower barriers to foreign investment. A positive economic performance for the year will, hopefully, give the Estrada administration breathing room to implement additional reforms needed to continue current positive trends. Despite this upbeat near-term assessment, the government faces significant challenges to make the recovery sustainable, including a sometimes deafening array of background noises such as stock market scandals and perceptions of political instability. The challenge for the government is to strengthen the foundations of the economy so it can sustain growth of over 5% — probably the minimum needed to make significant inroads in poverty reduction. Structurally weak public finances and a bloated bureaucracy constrict the economy’s ability to grow by severely limiting the resources needed to address urgent needs such as infrastructure, health and education. Inadequate revenues and a low domestic savings rate make it especially imperative for the Philippines to main- tain an environment conducive to continued investment, but several issues cloud the investment horizon. An aviation dispute with Taiwan has cut into tourist arrivals from that country, as well as impacted on the electronics industry by raising costs and lengthening delivery times for components and finished products shipped between Taiwan and the Philippines. Local electricity costs are the 4 second highest in the region (next to Japan) — an issue which pending legislation to restructure the power sector hopes to address. Foreign investors are also deterred by perceptions of instability, policy drift, and weak public and corporate governance. The agricultural sector, which supports more than half of the population directly and indirectly but contributes barely 20% of real GDP, is in urgent need of reform. The sector’s low productivity has hampered its ability to efficiently supply industry with needed inputs; at the same time, low rural incomes limit the otherwise higher growth potential that could be spurred by a stronger consumer base. B. Principal Growth Sectors The Medium-Term Philippine Development Plan (MTPDP) 1999-2004 focuses on rural development, particularly the modernization of agriculture, to reduce poverty. In 1999, agriculture employed 40.1 percent of the Philippine labor force and produced 19 percent of gross value added. The MTPDP targets agriculture to grow from 3.1 to 3.9 percent in 1999-2004, industry by 4.5 to 5.4 percent, and services by 5.1 to 6.0 percent. According to the MTPDP, policies in the agriculture sector will be supported by policies to develop infrastructure in the countryside. The government plans to pursue deregulation and privatization programs to enable the private sector to improve basic infrastructure services such as power, water, transportation services (including rail-based

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