Slide 1

The 2015 BudgetRecent Economic Performance, Growth Assumptions and TargetsARSENIO M. BALISACANSecretary of Socioeconomic PlanningDBCC Briefing to CongressHouse of Representatives6 August 2014Chairman Isidro T. Ungab and honorable members of the House Committee on Appropriations, colleagues in the government, good morning.

On behalf of the DBCC, I am honored to provide an overview of our recent economic performance and present the macroeconomic assumptions and growth targets underpinning the proposed budget for 2015.1OutlineRecent Economic Performance

Development Challenge

PDP Midterm Update 2014-2016

Macroeconomic Assumptions and Risks

This is the outline of my presentation.2I. RECENT ECONOMIC PERFORMANCE

The Philippine economy has been growing robustlySource: Philippine Statistics Authority and National Economic and Development Authority.Philippine Real GDP at 2000 Prices (Millions Php)(1960 to 2013)Real GDP growth3.7% (2011)6.8% (2012)7.2% (2013)2013Aquino administrationRecently, the Philippine economy has become one of the bright spots in the Asian region. This is primarily due to our real GDP growth of 7.2 percent in 2013, which was an improvement from the 6.8 percent growth that was achieved in 2012 despite the uncertain global environment and a series of natural disasters that afflicted the country.

3Source: PSAAverage Contribution to Growth (ppt)Supply Side: Manufacturing is increasingly picking up as a major growth driver...2.2%3.6%4.6%5.0%5.9%7.2%5.7%I. RECENT ECONOMIC PERFORMANCEThe Philippines economic performance in recent years is even more evident if we look at the countrys average growth rate per decade. In 1991-2001 the economy grew an average of 2.9 percent which increased to 4.8 percent during the 2001-2010 period. Presently, under the Aquino administration, we witnessed an even higher average growth rate at 6.3 percent. This indicates that we are heading towards a higher and more sustainable growth path.

On the supply side, the services sector still takes the lions share of economic growth, but industry, particularly manufacturing, is increasingly picking up as a major growth driver.

[In terms of sectoral contributions to growth during the first quarter of 2014, increase in production mainly came from services and industry sectors as follows: manufacturing (1.6 ppts); real estate, renting &business activities (1.0 ppts); trade (0.8 ppts); and transport, storage & communication (0.7 ppts)].

4Source: PSAAverage Contribution to Growth (ppt)Demand side: Investment is increasingly becoming a major growth driver2.2%3.6%4.6%5.0%5.9%5.7%I. RECENT ECONOMIC PERFORMANCEOn the demand side, although household spending continued to have the largest contribution to GDP, investment is increasingly becoming a major driver of growth.

As already noted, the Philippine economy has been able to weather the global slowdown attesting to its ability to draw on internal sources of growth. With the eventual recovery of advanced economies, the prospects for future growth can only get better.

52013 Q12014 Q1GDP Growth7.7%5.7%By Industrial Origin Share to GDPGrowthRateShare to GDPGrowthRateAgriculture11.13.210.60.9Industry33.411.333.35.5Of which: Manufacturing23.59.523.76.8Services55.56.556.06.8By ExpenditureHousehold Final Consumption68.45.568.55.8Govt Final Consumption11.510.011.12.0Capital Formation21.649.822.07.7Of which: Fixed Capital23.117.324.311.2 of which: Public Construction1.6 36.61.8 22.3 Private Construction7.2 33.36.4 (6.0) Durable Equipment12.110.413.921.6 Changes in Inventory-1.472.5-2.2(63.6)Exports43.3(10.6)46.212.6Imports45.82.846.88.0Source: PSAGrowth moderated in Q1 2014 as the country is still reeling from the impact of Typhoon Yolanda..I. RECENT ECONOMIC PERFORMANCEIn the first quarter of 2014, while the countrys economic growth moderated to 5.7 percent from a high of 7.7 percent in the same period in 2013, the country continued to be one of the fastest growing economies in Asia. The moderate first quarter growth was expected as the country was still recovering from the heels of devastation brought about by Typhoon Yolanda (Haiyan) in the last quarter of 2013. Moreover, reconstruction and rehabilitation efforts are yet to gain traction.

6 Sound macroeconomic fundamentals supported this remarkable performance.Sustainable fiscal and external positionLow and Stable InflationFavorable Interest Rate and Sound Banking System* end-May 2014, **Jan- July 2014, *** end-Dec 2013

I. RECENT ECONOMIC PERFORMANCE

The countrys strong macroeconomic fundamentals continued to support growth and created positive expectations to businesses and households. This is characterized by low and stable inflation, favorable interest rates, sustainable fiscal and external positions, and a stable financial sector.

Headline Inflation: 4.3 (Jan-July 2014)NPL: 2.2 percent (end-May 2014)Real Interest Rate: 1.2 percent (Jan-July 2014)CAR (Consolidated ): 17.65 percent (end-Dec 2013)NG Deficit to GDP: 1.4 (2013)NG Debt to GDP: 49.2 percent (2013)Positive current account balance since 2003: CA to GDP ratio: 3.5 percent (2013);External debt to GDP ratio: from 24.1 percent (2012) to 21.5 percent (in 2013)7Source: Labor Force Survey, Philippine Statistics Authority

*- Estimates for April 2014 & April 2013 excludes Leyte; employment generation for April 2013 cannot be computed as PSA did not provide for April 2012 (less Leyte) data8II. DEVELOPMENT CHALLENGECreation of quality employment remains a big challenge.IndicatorAve 2010Ave 2011Ave 2012Ave 2013Apr 2013*Apr 2014*Labor Force Level (000) 38,893 40,00640,426 41,022 40,056 41,589 Employment Level (000) 36,035 37,192 37,600 38,118 37,011 38,665 Wage and salary workers (% share to total employment) 54.5 55.2 57.2 58.4 57.657.5Unemployment Level (000)2,859 2,813 2,826 2,905 3,046 2,924 Unemployment Rate (%) 7.3 7.0 7.0 7.1 7.6 7.0 Underemployment Level (000)6,762 7,163 7,514 7,371 7,096 7,030 Underemployment Rate (%)18.8 19.3 20.0 19.3 19.2 18.2 However, the generation of more decent, productive and high quality employment that provides adequate income for the Filipino workers continues to be a major challenge.

The recent results of the Labor Force Survey (LFS) show that both unemployment and underemployment rates have remained high. While the quality of employment has been improving, as can be seen from the rising share of more-remunerative wage and salaried workers in the total number of employed workers, the increases in the number of productive employment opportunities have not been enough to both absorb the new entrants to the fast-growing labor force and reduce the huge stock of the unemployed and underemployed workers.

In the April 2014 LFS round, the economy generated 1.7 million employment. Total employment in April 2014 reached 38.7 million, 4.5 percent higher than the 37.0 million level of employment in the same period in 2013. All major sectors (i.e., agriculture, industry and services) posted employment gains. This broad-based growth in employment provides a good indicator of the countrys economic performance in the second quarter of 2014.

89II. DEVELOPMENT CHALLENGESource: Philippine Statistics AuthorityFirst Semester Poverty Incidence (%) The latest poverty statistics reveal that poverty incidence improved to 24.9 percent in the first semester of 2013, down from 27.9 percent for the same period in 2012. This translates to about 2.5 million people lifted out of poverty.On a positive note, based on the latest poverty statistics released by the PSA, the estimated poverty incidence among Filipinos improved to 24.9 percent in the first semester of 2013, down from 27.9 percent for the same period in 2012.

This translates to about 2.5 million people lifted out of poverty.9Key StrategiesIII. UPDATED PDP 2014-2016Spatial and sectoral focus in development strategiesDisaster-risk reduction through preparedness, prevention and mitigation, income diversification, social protection and insuranceEfforts toward improving competitiveness and human capitalFiscal prudence and sound macroeconomic fundamentalsTransparency, accountability, regulatory efficiencyWe believe that we will be able to keep the momentum by addressing the lessons we have learned these past three years. These have been considered in the Philippine Development Plan Midterm Update.

Constraints faced by the poor shall be specifically addressed by integrating spatial and sectoral focus in development strategies;In terms of reducing and managing disaster risks, a comprehensive strategy will be pursued, covering aspects of preparedness, prevention and mitigation, income diversification, social protection and insurance to mitigate effects of disasters;Government will continue to enhance efforts to improve competitiveness by investing in infrastructure and human capital development, and improving regulatory environment to support investments and innovation;Fiscal prudence will continue to be observed as well as the commitment to maintain sound macroeconomic fundamentalsAnd finally, governance reforms will remain a priority and these will focus on transparency and accountability

10Key sectorsGrowth sectorsStrategic plans and roadmapsManufacturingIndustry roadmaps focus on increasing linkagesAgribusinessPrograms to increase linkage between agriculture, and industry and servicesTourismTourism Development Program and tourism cluster destinationsIT-BPMNext Wave CitiesLogisticsNational Logistics PlanConstructionCore Infrastructure Investment ProgramIII. UPDATED PDP 2014-2016The Updated PDP identifies six key sectors that have the potential to generate high quality employment for Filipinos. These are manufacturing, agribusiness, tourism, IT-BPM, logistics and construction.

Strategic plans and roadmaps are developed to support growth in each of these sectors, as shown in the slide.11III. UPDATED PDP 2014-2016The proposed 2015 budget will help us move towards inclusive growthThe proposed 2015 budget strives to support the key strategies in the Updated PDP, with the end view of massively generating high quality employment for Filipinos and significantly reducing poverty. The proposed budget also supports positive actions with sectoral and spatial focus, so that development will be truly inclusive.12IV. MACROECONOMIC ASSUMPTIONS2013 (Actual)2014(Year to date)2015(Target)2016(Target)Inflation (2006-based):3.04.3 (Jan-Jul)2.0-4.02.0-4.0Dubai crude oil (US$/bbl)105.52105.29 (Jan-Jun)90-11090-110Exchange rate (Php/US)42.4544.34 (02 Jan-01 Aug)42-4542-45364-Tbill rate (%) 0.721.31 (Jan-Jul)2.0-4.02.0-4.0LIBOR, 6 mos. (%)0.410.3285 (Jan-Jun)1.0-2.01.0-2.0Exports (Goods): Nom (US$ bn)

Growth (%)44.7-3.610.89 6.6 (Q1)51.38.056.410.0Exports (Services): Nom (US$ bn)

Growth (%)21,790 6.6 4,8339.4 (Q1) 28,943 15.3 33,220 14.8Imports (Goods): Nom (US$ bn)

Growth (%)63.3-3.114.964.1 (Q1)75.810.084.912.0Imports (Services): Nom (US$ bn)

Growth (%)14,968 5.0 3,81928.2 (Q1) 21,237 13.3 24,320 14.5The 2015 budget proposed by the NEDA Board-DBCC considers the macroeconomic assumptions shown in the slide. Some of these, particularly the monetary variables, will be discussed later by BSP Governor Amando Tetangco, Jr.13Natural disasters (e.g., typhoons, prolonged monsoon rains, El ino, now with 70% probability, earthquakes);Excessive volatility in capital flows;Possible spike in commodity prices (e.g., petroleum, electricity); Sustainability of recovery in the Euro area, US, and Japan;Geo-political tensions in the Middle East and also between Russia and Ukraine;Further economic slowdown in large emerging economies of Asia, particularly China and India; andDelays in infrastructure projectsIV. RISKSThe government is ready to put in place measures to guard against risks to growth:Although prospects in the next three quarters remain upbeat, the government remains on guard to provide the necessary measures to mitigate if not prevent the effects of realized risks like:

Natural disasters, such as typhoons, prolonged monsoon rains, El ino, and earthquakes;Excessive volatility in capital flows;Possible spike in commodity prices (e.g., petroleum, electricity); Sustainability of recovery in the Euro area, US, and Japan;Geo-political tensions in the Middle East as well as the on-going conflict between Russia and Ukraine;Further economic slowdown in large emerging economies of Asia, particularly China and India; andDelays in infrastructure projects14ANNUAL PLAN TARGETSIndicatorsBaseline (2013)201420152016Rapid and sustained economic growthGross domestic product (%)6.86.5-7.57.0-8.07.5-8.5Massive creation of quality employmentUnemployment rate (in %)7.06.86.76.6Underemployment rate (% of employed)20.019.018.017.0Poverty reduction Poverty Incidence (% of population)25.224.022.519.0In closing, I would like to reiterate the socioeconomic targets indicated in the PDP Midterm Update:

GDP to grow by 6.5 to 7.5 percent in 2014, 7 to 8 percent in 2015, and 7.5 to 8.5 percent in 2016. Unemployment rate to decline from 7.0 percent in 2013 to 6.5 to 6.7 percent in 2016. Income poverty to be reduced to 18 to 20 percent by 2016.

While we are yet midway through the year, we believe that our targets for this year will be attained. We will remain vigilant in monitoring the accomplishment of these targets.15The 2015 BudgetRecent Economic Performance, Growth Assumptions and TargetsARSENIO M. BALISACANSecretary of Socioeconomic PlanningDBCC Briefing to CongressHouse of Representatives6 August 2014With that, I would like to end my presentation.

Thank you very much, Mr. Chair.16Chart168.4819030158-2.585237818861.41619113-1.033158572153.8609769543-0.180523766554.6685128082-0.882111813954.7789746371-3.719507477352.4038588078-3.492616149250.8607947399-2.037436056851.01-2.298434543849.2-1.2

NG Debt to GDP (LHS)Fiscal Balance to GDP (RHS)

Sheet1NG Debt to GDP (LHS)Fiscal Balance to GDP (RHS)200568.48-2.59200661.42-1.03200753.86-0.18200854.67-0.88200954.78-3.72201052.40-3.49201150.86-2.04201251.01-2.30201349.20-1.20Regular Debt as of April5,640,224.0043.422014 GDP12,990,308.92Deficit as of March(84,123.89)(2.93)Q1 20142,868,054.00559017729769000000Source: Bureau of the Treasury10564886464061.86.9074949597*Debt to GDP and Fiscal Balance to GDP in 2013 is as of October and Q3 respectivelyDebt to GDP in 2013 was computed using the full year program GDP* Debt as of August

Sheet1

NG Debt to GDP (LHS)Fiscal Balance to GDP (RHS)

Sheet2

NG Debt to GDP (LHS)Fiscal Balance to GDP (RHS)

Sheet3