Philippines Macroeconomic Updates December 2016 Table of Contents ° Policy Agenda 3 ° Favorable Macroeconomic Trends 7 ° Firm Institutional Foundations through Structural Reforms 21 ° Infrastructure Development 25 ° Sound and Strengthening Government Finances 31 ° Strong External Position 42 ° Sound Financial System 48 ° Economic Outlook 52 ° The President and the Economic Team 62 ° About the Investor Relations Office 65 2 Policy Agenda of the Duterte Administration Vision for the Philippines ° By 2022 Poverty rate reduced from 26.3% in 2015 to 17% by 2022 Law abiding country Peace within the country and with neighbors Achieve high middle income status (USD3,000 to USD4,100 GNI per capita) Vision for the Philippines ° By 2040* Extreme poverty eradicated Inclusive economic and political institutions offering everyone equal opportunities Achieve high income status (USD3,000 to USD 12,000 GNI per capita) President Duterte signed on 11 Oct 2016 Executive Order No. 5 adopting “Ambisyon 2040,” a 25-year long-term vision to eliminate poverty, as a guide for development planning in the country. ° Sustain economic growth of at least 7% every year for one generation ° Shift the source of growth from consumption to investment ° Massively invest in Health Infrastructure Education Life-long training Social protection Research and development Broad strategies to ° Tax policy reforms achieve the vision Lower personal income tax and corporate tax Index oil excise tax to inflation Levy tax on sugary and fatty products Expand the VAT base Reform property taxes ° Economic reforms: secure property rights, enhance competition, improve food security, simplify regulations, and relax foreign ownership restrictions ° The National Economic and Development Authority (NEDA) is coordinating the formulation of the Philippine Development Plan (PDP) for the period 2017-2022. The proposed PDP Framework will be anchored on the country’s long-term vision or the AmbisyonNatin2040 and will translate the President’s 0-10 Socioeconomic Agenda into concrete plans, strategies and programs. 4 *Refer to Vision 2040: http://2040.neda.gov.ph/ 10-Point Socioeconomic Agenda of the Duterte Administration Strong mandate from people ensures political capital to advance transformational reforms that will move the economy to even higher growth plane and improve welfare of Filipinos. Action-oriented, results-driven leadership style of the President boosts prospects for a more robust investment climate characterized by common compliance to law and order in a more conducive regulatory environment Economic Agenda Legislative Agenda 1 ° Continue and maintain current macroeconomic policies, including ° Proposed FY 2017 Budget of PHP3.35tr fiscal, monetary, and trade policies. ° Shift to a federal system of government ° Comprehensive Tax Reform program ° Institute progressive tax reform and more effective tax collection, indexing taxes to inflation. Reduce in personal and corporate income tax rates ° Increase competitiveness and the ease of doing business. This Increase excise on all petroleum products & index to inflation Levy a tax on sugary products and index to inflation effort will draw upon successful models used to attract business to local cities (e.g., Davao), and pursue the relaxation of the Adjust sin taxes ° Constitutional restrictions on foreign ownership, except as Amendments to loosen the Bank Secrecy Law ° regards land ownership, in order to attract foreign direct Emergency powers to solve transport and traffic problems ° investment. The Bangsamoro Basic Law without unconstitutional provisions ° ° Accelerate annual infrastructure spending to account for 5% of Creation of the People’s Broadcasting Corp. to replace PTV-4, with separate GDP, with PPP playing a key role. television channels for Muslims and the Lumad ° ° Promote rural and value chain development toward increasing Whistleblower Protection Act ° agricultural and rural enterprise productivity and rural tourism. Creation of a Single Department to Handle Overseas Filipino concerns ° ° Ensure security of land tenure to encourage investments, and Universal health insurance through the Philippine Health Insurance Corp ° Amendments to the Anti-Money Laundering law, particularly to make tax evasion address bottlenecks in land management and titling agencies. 2 ° Invest in human capital development, including health and as a predicate crime to money laundering ° Amendments to the 1996 Passport Law to extend validity of passport education systems, matching of skills and training to meet the 2 ° demand of businesses and the private sector. PPP Act ° Exemptions from the salary standardization law for BIR and BOC personnel 2 ° Promote science, technology, and the creative arts to enhance 3 ° innovation and creative capacity towards self-sustaining, Freedom of Information covering the Executive Branch of Government ° Budget Reform Act 4 inclusive development. ° Streamlining the Government Act 4 ° Improve social protection programs, including the government’s ° Military and Uniformed Personnel (MUP) Compensation and Pension Reform 4 CCT program, to protect the poor against instability and ° Amendments to Anti-Terrorism Law 5 economic shocks. ° Amendments to Anti-Cyber Crime Act 5 ° Strengthen implementation of the Responsible Parenthood and ° Passage of an Act Creating the Department of Housing and Urban Development 5 Reproductive Health Law to enable especially poor couples to ° Amendments to the National Defense Act to Revise Reserve Officers’ Training make informed choices on financial and family planning. Corps 5 1Based on the State of the Nation Address of President Rodrigo Duterte on July 25, ° Reinstatement of the death penalty 5 2016 ° Freedom of Information Act 5 2Based on pronouncements of Economic Managers 3On July 24, 2016, President Duterte signed an Executive Order implementing 4Based on the President’s 2017 Budget Message 5 freedom of information in the Executive Branch 5http://www.rappler.com/nation/146324-list-priority-bills-duterte-administration Ample Political Capital to Pursue Difficult Structural Reforms Continued Favourable Prospects under the Duterte Administration 86% Performance and Trust Ratings Performance & Trust Ratings of President Rodrigo R. Duterte ° President Rodrigo R. Duterte obtained overwhelming margin of more than 6mn vs. his September 25 – October 1, 2016 / Philippines (in %) closest rival at the May 2016 national elections ° Most Filipinos are satisfied with his performance in the first 3 months: Performance and Trust Ratings at 86% based on Sep 2016 Pulse Asia survey “Very good” net satisfaction and “Excellent” trust ratings based on 3Q Social Weather Survey (SWS) at 64% and 76%, respectively ° Based on BSP’s Business Expectations Survey, the confidence index for Q4 2016 while lower compared to the previous quarter remained positive at 39.8% Optimism of domestic-oriented companies increased at 48.8% in Q4 2016 from 44.9% a quarter ago on the back of robust domestic demand The percentage of businesses with expansion plans in the industry sector for Q1 2017 increased to 31.7% from 28.1% last quarter ° Consumer sentiment posts highest reading with a positive index for Q3 2016 based on BSP’s Consumer Expectations Survey. According to respondents, their optimism during the current quarter was due to improvements in the peace and order situation, and availability of more jobs, among others Net trust rating of “Excellent” at +76% Net satisfaction rating of “Very good” at +64% 6 Source: Social Weather Station, Pulse Asia, BSP Favorable Macroeconomic Trends Economic Outperformance to Continue under the Duterte Administration Sound economic management and transformational reforms to accelerate growth and improve welfare of Filipinos Favorable macroeconomic trends Commitment to ensuring medium-term supported by strong domestic demand, fiscal sustainability increasing contribution of investments Imperatives of V Efforts to embark on a sustainable public revenue and and services to GDP, an emerging higher the Duterte spending path include reforming the tax system through a value-adding manufacturing sector and comprehensive tax reform package, institutionalizing favorable demographic profile Administration transparency and accountability in granting fiscal incentives, reducing tax evasion and instituting stronger V IMF raised its forecasts for ROP’s GDP growth to 6.4% public finance accounting and management standards from 6.0% in 2016 and to 6.7% from 6.2% in 2017 Achieve Foster a Law Progress in strengthening the fiscal position on declining V Positive sentiment reflected in consumer and business V expectations surveys. Emerging as one of the top Lasting Abiding debt and manageable fiscal deficit provides greater fiscal promising destinations of FDIs based on United Nations space to accelerate spending on poverty reducing Peace Society measures as well as implement countercyclical policies in Conference of Trade and Development (UNCTD)’s World the event of a shock Investment Report 2016 ROP’s debt profile shows minimal refinancing risks; debt V Favorable demographics, policy focus and budgetary V affordability continues to improve with lower debt service allocation towards regional development and education Reduce and social protection to tackle poverty and inequality Poverty burden reducing growth Acceleration of infrastructure and Firmer institutional foundations bode well for industries development to bring about greater governance, competitiveness reforms