Economy
GDP (2006): $117.6 billion.
Annual GDP growth rate (2006): 5.4% at constant prices.
GDP per capita (2006): $1,352.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, food processing, electronics assembly, petroleum refining, fishing.
Trade (2006): Exports--$47.4 billion. Imports--$51.8 billion.

PHILIPPINES ECONOMY
Since the end of World War II, the Philippine economy has had a mixed history of growth and development. Over the years, the Philippines has gone from being one of the richest countries in Asia (following Japan) to being one of the poorest. Growth immediately after the war was rapid, but slowed over time. Years of economic mismanagement and political instability under the Marcos regime eventually harmed economic growth and grossly adversely affected macroeconomic instability. A severe recession in 1984-85 saw the economy shrink by more than 10%, and perceptions of political instability during the Aquino administration further dampened economic activity. During his administration, President Ramos introduced a broad range of economic reforms and initiatives designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, but the Asian financial crisis triggered in 1997 slowed economic development in the Philippines once again. President Estrada managed to continue some of the reforms begun by the Ramos administration. Important laws to strengthen regulation and supervision of the banking system (General Banking Act) and securities markets (Securities Regulation Code), to liberalize foreign participation in the retail trade sector, and to promote and regulate electronic commerce were enacted during his abbreviated term. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange, and the President's close ties to certain businessmen, shook the confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo has made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by widespread poverty, crumbling infrastructure and education systems, and trade and investment barriers.

Important sectors of the Philippine economy include agriculture and industry, particularly food processing; textiles and garments; and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant natural gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
GDP grew by 5.4% in 2006, marking the first time since the 1970s with three consecutive years of growth over 5%. Historically, the Philippines has had difficulty sustaining growth at over 5%. GDP increased by 6% in 2004, a 15-year high, and by 5% in 2005. Growth in 2006 was fueled by increased electronics exports, growth in the outsourcing industry, and a 20% increase in remittances from overseas workers to $12.8 billion and about 11% of GDP. GDP growth is expected to finish 2007 closer to the upper end of the government's targeted 6.1%-6.7% growth range. Still, it will take a higher, sustained economic growth path to make more appreciable progress in poverty alleviation given the Philippines' annual population growth rate of nearly 2%--one of the highest in Asia.

At $3.8 billion, the overall balance of payments ended 2006 with its largest surplus in nearly a decade. Exports totaled $47.4 billion in 2006, relying heavily on electronics shipments for about two-thirds of export revenues. Although there has been some improvement over the years, local value added of electronics exports remains relatively low at about 30%. Net foreign direct investment (FDI) inflow rose to $2.35 billion in 2006, nearly double the 2005 level. The U.S. remains the Philippines' largest trading partner with over $17 billion in two-way trade, and the largest investor with more than $6.5 billion in total FDI. Increased export revenue, investment inflows, and foreign remittances helped produce a current account surplus of $5 billion in 2006 (equivalent to 4.3% of GDP).

Increased foreign capital inflows made the Philippine stock market among the top performers in East Asia during 2006. Similarly, the Philippine peso appreciated about 7.5% to the U.S. dollar, making it among East Asia's best performing currencies in 2005-2006. The Philippines maintained reserves of foreign exchange and gold of $22.97 billion, adequate for 4.3 months of goods and services imports and equivalent to 2.5 times foreign debts maturing over the next 12 months.

Determined efforts to avert a fiscal and debt crisis through a combination of expenditure control and, more recently, new revenue measures have contributed significantly to positive financial sector indicators and the current air of cautious optimism. December 2004 legislation provided for biennial adjustments to the excise tax rates for tobacco and liquor products until 2011, while a law signed in January 2005 seeks to institute a performance-based rewards and penalty system in the government's revenue collection agencies. Despite public resistance and initial legal challenges, the government began implementing an expanded Value Added Tax law in November 2005, which added an estimated 75 billion pesos ($1.5 billion) to national government revenues during 2006 (equivalent to 1.2% of GDP).

Although still below the 17% peak of 1997 and the performance of most other countries in the region, the tax-to-GDP ratio--which had slipped to 12.5% by 2004 before improving to 13.0% in 2005--inched up for a second consecutive year to 14.3%. From a record $4.1 billion (5.3% of GDP) in 2002, the national government has recorded declining fiscal deficits for four consecutive years (to 0.6% of GDP in 2006) and targets balancing the budget by 2008. Consolidated public sector debt (which also includes the Central Bank, government-owned and controlled corporations, state-run social security agencies, and local government units) has declined from 2003's peak 118%-of-GDP ratio to under 90% of GDP. Major credit rating agencies raised their rating outlook for Philippine sovereign debt from "negative" to "stable" in recognition of fiscal progress. Interest rates on local government borrowings have come down, and spreads on foreign bonds have tightened significantly. Looking forward, further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms. Although steps have been taken to improve their financial health, challenges still remain to ensuring the long-term viability of state-run pension funds.

The Central Bank's adoption since January 2002 of an inflation-targeting framework has enhanced transparency in the conduct of monetary policy. The inflation rate averaged 6.2% in 2006, down from 7.6% in 2005, and is expected to fall further to under 3% in 2007, comfortably below the Central Bank's target of 4-5%.

The Arroyo administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). The FATF removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005.

Although encountering implementation hitches, the Arroyo administration also enacted legislation in 2001 to rationalize the electric power sector and privatize the government's debt-saddled National Power Corporation (NPC). The government has achieved some success in establishing an independent regulatory system for electricity pricing that will benefit NPC finances. In addition to the Special Purpose Vehicle law, President Arroyo also signed into law in 2003 a priority initiative to reform the government procurement system (the Government Procurement Reform Act). During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the Philippines' convoluted documentary stamp tax system and encourage secondary trading of financial instruments, as well as legislation (the Securitization Act) towards establishing the necessary infrastructure and market environment for a wide range of asset-backed securities. She also signed legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of overburdened court dockets.

The U.S. Trade Representative removed the Philippines from its Special 301 Priority Watchlist in 2006, reflecting improvement in its enforcement of intellectual property rights (IPR) protection. However, sustained effort and continuing progress on key IPR issues will be essential to maintain this status.

Despite a number of policy reforms and recent good news, the Philippines continues to face important challenges and must sustain the reform momentum to catch up with its regional neighbors and to translate the current cautious optimism into the long-term confidence required to spur investments, achieve higher growth, generate employment, and alleviate poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal stability will require more aggressive tax collection efficiency to address the severe under-spending in infrastructure and social services in recent years of tight budgets. Addressing delays in power sector privatization remains critical to the long-term stability of public sector finances, ensuring reliable electricity supply, and to bringing down the high cost of power.

Agriculture and Forestry
Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs more than one-third of the work force but provides less than one-fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. The government has instituted conservation programs, but deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for the agriculture subsector, the marine fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. Agricultural output fell in 1997 and 1998 due to an El Niño-related drought but increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.9% year-on-year in 2002 and 3.2% in 2003. Agricultural output increased by 5.1% in real terms during 2004 but stagnated to 2.24% in 2005 due to drought and intermittent weather disturbances. Despite the adverse effects of successive and very strong typhoons in the last four months of 2006, the overall annual farm output expanded by 3.8%.

Industry
Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper products, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron and steel, and refined petroleum products.

The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Mining
The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas.