Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 82638-PH INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUPPLEMENTAL FINANCING DOCUMENT Public Disclosure Authorized FOR PROPOSED SUPPLEMENTAL FINANCING IN THE AMOUNT OF US$500 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR Public Disclosure Authorized THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN TO FOSTER MORE INCLUSIVE GROWTH FOR POST TYPHOON RECOVERY December 04, 2013 Poverty Reduction and Economic Management Sector Department Philippines East Asia and Pacific Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GOVERNMENT'S FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS Currency unit: Philippine Pesos (PHP) as of November 12, 2013 US$ 1 = PHP43.59 Currency Unit US$1.00 ABBREVIATIONS AND ACRONYMS AIR Applied Insurance Research JBIC Japan Bank for International Cooperation BPO Business Processing and Outsourcing KALAHI- Kapitbisig Laban Sa Kahirapan- CIDSS Comprehensive and Integrated Delivery of Social Services BSP Bangko Sentral ng Pilipinas LBP Land Bank of the Philippines CAS Country Assistance Strategy LDP Letter of Development Policy CAT-DDO Catastrophe Draw Down Option LGU Local Government Unit CCT Conditional Cash Transfer NCDDP National Community Driven Development Project COA Commission on Audit NDRRMC National Disaster Risk Reduction and Management Council DBM Department of Budget and Management NEDA National Economic Development Authority DBP Development Bank of the Philippines NHTS-PR National Household Targeting Survey for Poverty Reduction DOF Department of Finance NGO Non-Government Organization DPO Development Policy Operation NIA National Irrigation Authority DPL Development Policy Loan NSCB National Statistical Coordination Board DPWH Department of Public Works and OFDA/ Office of Foreign Disaster Highways Assistance/Centre for Research on CRED Epidemiology of Disasters EM-DAT Emergency Events Database PDNA Post-Disaster Needs Assessment EMMA Emerging Market Mapping and Analysis PEFA Public Expenditure and Financial Accountability FAITH Foreign Aid Transparency Hub PFM Public Financial Management FY Fiscal Year GDP Gross Domestic Product GFMIS Government Financial Management PHP Philippine Peso Information System GNP Gross National Product SME Small and Medium Enterprises IBRD International Bank for Reconstruction and SONA State of the Nation Address Development IDA International Development Association UACS Unified Account Code Structure IFC International Finance Corporation UNDP United Nations Development Program IMF International Monetary Fund UNOCHA United Nations Office for Coordination of Humanitarian Affairs IPF Investment Project Financing WBG World Bank Group Vice President: Axel van Trotsenburg Country Director: Motoo Konishi Sector Director: Sudhir Shetty Lead Economist: Rogier van den Brink PHILIPPINES SUPPLEMENTAL FINANCING FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN FOR POST TYPHOON RECOVERY TABLE OF CONTENTS PROGRAM SUMMARY ...............................................................................................................................................i I. BACKGROUND .................................................................................................................................................. 1 II. TYPHOON HAIYAN/YOLANDA ...................................................................................................................... 1 III. GOVERNMENT’S RESPONSE TO THE CRISIS.............................................................................................. 4 IV. WORLD BANK GROUP’S RESPONSE AND STRATEGY ............................................................................. 4 V. THE SECOND DEVELOPMENT POLICY LOAN REFORM PROGRAM TO FOSTER MORE INCLUSIVE GROWTH ............................................................................................................................................................. 7 A. ECONOMIC PERFORMANCE SINCE THE APPROVAL OF DPL 2 ................................................................................ 7 B. ECONOMIC AND FISCAL COSTS OF THE TYPHOON ................................................................................................. 8 C. REFORM PROGRAM SUPPORTED UNDER DPL 2 ................................................................................................... 10 D. POVERTY AND SOCIAL IMPACT ASSESSMENT ..................................................................................................... 12 VI. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING ................................................................. 12 VII. IMPLEMENTATION ARRANGEMENTS ....................................................................................................... 13 A. TERMS OF THE SUPPLEMENTAL FINANCING ........................................................................................................ 13 B. FUNDS FLOW AND AUDITING REQUIREMENTS FOR THE SUPPLEMENTAL FINANCING .......................................... 13 C. FIDUCIARY ASPECTS ........................................................................................................................................... 13 D. ENVIRONMENTAL ISSUES .................................................................................................................................... 14 VIII. BENEFITS AND RISKS .................................................................................................................................... 14 A. BENEFITS ............................................................................................................................................................ 14 B. RISKS .................................................................................................................................................................. 14 MAP …………………………………………………………………………………………………………………20 TABLES Table 1 : Philippines: Selected Macroeconomic Indicators, 2010-2015 ...................................... 10 ANNEXES Annex 1: Casualties and economic damage of storms in the Philippines and elsewhere ............. 15 Annex 2: IMF Assessment Letter ................................................................................................. 16 Annex 3: Country at a Glance ....................................................................................................... 19 This document was prepared by Rogier van den Brink, Paul Mariano, Maria C. Sy, Wael Mansour, Danielle Malek, Miguel-Santiago Oliveira, Aleksandra Posarac, Ousmane Dione, Deepak Mishra, Hoon Sahib Soh, Rocio Castro, Marianne Juco, Abighail Baca, Joseph Louie Limkin, Anthony Sabarillo, Jolanta Kryspin-Watson, Kevin Cruz, Karl Chua, Kai Kaiser, Joselito Armovit, Miro Capili, Maribelle Zonaga, Jesse Ang, Chiyo Kanda, Edward Mountfield, Manuela Francisco, Amelia Johnston, Ayleen Ang, Mildred Gonsalvez, Lynnette Perez, Rashiel Velarde, Jorge Avalos, Agnes Albert-Loth, Caryn Bredenkamp, Roberto Rosadia, Tomas Sta. Maria, Cecilia Vales, Aisha de Guzman, Christopher Ancheta, Catherine Vidar, Eleanor Gonzales, Hanif Anilmohamed Rahemtulla and Victor Dato. PROGRAM SUMMARY THE REPUBLIC OF THE PHILIPPINES SUPPLEMENTAL FINANCING FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN Borrower: The Republic of the Philippines Implementing Agency: Department of Finance Financing Data: IBRD Loan Amount: US$500 million Terms: The Borrower selected a US denominated, Commitment-linked IBRD Flexible Loan with a variable spread, with level repayments on June 1 and December 1 of each year, with a Grace Period of 10 years and a Final Maturity of 25 years, with all conversion options selected. The Front End Fee and the Premia for Interest Rate Caps and Collars will be capitalized. The Lending Rate for the Loan would be US$ 6 month LIBOR + variable spread (resets every 6 months). The Lending Rate would be approximately: 0.344% (US$ 6 month LIBOR) + 0.47% (variable spread) = 0.814% based on today's rates. Disbursements: The proposed Supplemental Financing will be disbursed in one tranche upon effectiveness Project ID: P148862 i INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROPOSED SUPPLEMENTAL FINANCING TO THE REPUBLIC OF PHILIPPINES SECOND PHILIPPINES DEVELOPMENT POLICY LOAN (DPL 2) I. BACKGROUND 1. Before Typhoon Haiyan, locally named “Yolanda”, struck the Philippines, economic prospects looked excellent. Remarkably, the Philippine economy had grown by 7.6 percent in the first half of 2013, outperforming major economies in the region. Growth was the highest among the five largest South-East Asian economies.1 The country’s strong macroeconomic fundamentals, characterized by low and stable inflation, healthy external balances, and strong government finances, shielded the economy from the persistent weaknesses of the global economy. 2. In June and July, financial markets across the developing world, including the Philippines, experienced high volatility as investors responded to the planned tapering of the US monetary stimulus program. However, indicative of its strong macroeconomic policy framework, Philippine financial markets quickly stabilized and rebounded in September. On October 3, the country received an upgrade to investment grade from a third credit rating agency. 3. Then, on October 15, 2013, a 7.2 magnitude earthquake