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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

	1994	1995	1996	1/
Income, Production and Employment
Nominal GDP	64.1	74.1	83.1
Real GDP Growth (pct) 2/	4.4	4.8	5.4
Nominal GDP By Sector:
Agriculture	14.1	16.1	18.6
Manufacturing	14.9	17.0	18.7
Services	29.2	34.3	38.3
Government 3/	6.3	7.6	8.1
Per Capita GDP (US$)	956	1,081	1,184
Labor Force (000s)	27,654	28,380	29,130
Unemployment Rate (pct)	9.5	9.5	9.1
Money and Prices (annual percentage growth)
Money Supply Growth (M2) 4/	26.8	25.2	20.5
Consumer Price Inflation	9.0	8.1	8.7
Exchange Rate (pesos/US$ ­ annual average)
Interbank Rate	26.42	25.71	26.28
Balance of Payments and Trade
Merchandise Exports, FOB	13.5	17.4	20.3
Exports to U.S. 5/	5.7	7.0	8.1
Merchandise Imports, FOB	21.3	26.4	33.4
Imports from U.S. 5/	3.9	5.3	6.1
Trade Balance	­7.9	­9.0	­13.1
Balance with U.S. 5/	1.8	1.7	2.0
Current Account Deficit/GDP (pct)	4.6	2.5	4.8
External Public Sector Debt	29.2	28.5	27.0
Debt Service Payments/GDP (pct)	6.5	6.6	7.0
Fiscal Surplus/GDP (pct)	1.0	0.5	0.5
Gold and Foreign Exchange Reserves	7.1	7.8	11.3
Aid from U.S. (US$ millions) 6/	87	89	150
Aid from Other Sources 6/	1.6	1.5	1.6

Sources: National Economic and Development Authority, Bangko Sentral ng Pilipinas, Department of Finance.

1/ 1996 figures are all estimates based on available monthly data as of October 1996.
2/ Percentage changes based on local currency.
3/ Government construction and services gross value added.
4/ Growth rate of yearend M2 levels.
5/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.
6/ Inflows per balance of payments, net of inflows from the U.S. Veterans Administration (USVA).

1. General Policy Framework

The Philippine population is estimated at over 70 million, growing at 2.3 percent yearly. Gross Domestic Product (GDP) for the first time surpassed the equivalent of $1,000 per capita in 1995. The agricultural sector accounts for over 40 percent of employment, but provides less than one­fourth of GDP. Poverty and skewed income distribution are important concerns. The Philippines historically has had to grapple with chronic trade deficits and a "boom­and­bust" economic growth pattern. Continuing and accelerating the initiatives of its predecessor, the Ramos administration is implementing a far­reaching reform program aimed at sustaining economic growth, preserving macroeconomic stability, and transforming the Philippines into an industrialized market­driven economy.

Within the past three years, the Government has implemented important reforms liberalizing trade, foreign exchange and investment regimes; privatizing parastatals; reducing entry barriers for vital industries (such as banking, insurance, aviation, telecommunications, and oil); and encouraging key private­sector infrastructure investments under a Build­Operate­Transfer (BOT) program. These reforms have boosted exports, increased overseas workers' remittances, and attracted foreign investments, trade financing and capital flows. Real Gross National Product (GNP) growth has been accelerating since 1993. With every sign of continuing, reforms are feeding optimism that the Philippines has, at last, embarked on a path of sustained economic expansion. The country is a founding member of the World Trade Organization (WTO).

Maintaining fiscal balance remains a crucial goal to ensuring macroeconomic stability. Departing from two decades of fiscal deficits, the national government has posted fiscal surpluses since 1994 through a combination of revenue measures and expenditure cuts. The fiscal situation nevertheless remains fragile. Falling privatization receipts, declining tariffs, widespread tax evasion and weak tax administration contribute to uncertainty. (See Section 3)

The 1993 financial restructuring of the Central Bank (now known as Bangko Sentral ng Pilipinas, BSP) has restored the monetary authority's ability effectively to conduct monetary and exchange rate policy, allowing staggered reductions in reserve requirements since 1993 (from 25 percent to 15 percent of deposit liabilities). Surges in capital flows, spurred by an acceleration in the liberalization of foreign exchange and investment since 1993, have posed an additional challenge for monetary and foreign exchange policymakers.

2. Exchange Rate Policy

Reflecting major reforms implemented in 1992, current account transactions are now fully convertible. Except for some restrictions on foreign debt and investments, the Government has also lifted most restrictions on capital account transactions. There are no barriers to full and immediate capital repatriation and profit remittances. In September 1995, the Philippines joined the ranks of "Article VIII" International Monetary Fund (IMF) member countries, underscoring its commitment to an open foreign exchange and payments regime.

Foreign exchange rates generally evolve freely in the interbank market, although the BSP imposes limits on banks' overbought and oversold foreign exchange positions. A "volatility band" (containing day­to­day fluctuations to 1.5 percent below or above the previous day's average rate) has been applied since late 1994 as a defense against excessive short­term exchange­rate fluctuations. Targeted for elimination by March 1997, the Government has been phasing down a forward foreign­exchange cover scheme for oil imports since December 1994.

3. Structural Policies

Prices are generally determined by free market forces, with the exception of fuel (moving towards full deregulation by March 1997) and basic public utilities such as transport, water and electricity. The Government grants incentives to investors in "preferred" activities (see Section 6). The Foreign Investments Act (FIA) of 1991 permits full foreign ownership of companies not availing of investment incentives, except those covered by a foreign investment "negative list" (see Section 5). March 1996 legislation lowered foreign investment barriers further by abolishing FIA's negative list C, which protected "adequately served" sectors such as insurance, travel agencies, tourist lodging firms, and conference organizers and lowered the minimum capitalization (from $500,000 to $200,000) at which majority foreign ownership would be allowed.

The Philippines' Tariff Reform Program, now covering all Harmonized System Code chapters 1 through 97, provides for the progressive reduction in applied rates of duty. The major exception is in agriculture, where quota restrictions (QRs) on "sensitive" agricultural products (except rice) were lifted and replaced with protective tariffs. The Philippines is moving towards two rates: three percent for raw materials and intermediate goods, and 10 percent for finished products by the year 2003, settling to a final uniform five percent by 2004. Complementing trade liberalization, the Philippines has shifted its customs valuation system from "home consumption value" to "export value", an interim step towards adoption of a "transaction value" system before the year 2000.

Reforms since the start of the decade improved access to important service industries (such as aviation, banking, telecommunications, and insurance). Following March 1996 legislation, the Government partially deregulated the downstream oil industry after nearly two decades of government control. While an automatic pricing mechanism provides for petroleum product price adjustments monthly, the government set a ceiling for price increases and placed a cap on oil firms' profit margin until scheduled full deregulation takes effect in March 1997. Previously (in October 1995), the government lifted controls on imports of petroleum products and (with the exception of refineries) on the establishment of facilities such as gas stations, depots and LPG filling tanks.

Since 1993 the Government has adopted a number of measures to raise revenues (such as increasing stock transaction and documentary stamp taxes, imposing a minimum three percent tariff, and hiking government fees/charges). It implemented an "expanded" value­added tax law in January 1996 (extending coverage to goods and services, such as the lease and sale of real property, telecommunications, restaurants/caterers/hotels, publications, and professional and financial services). The Government is relying on congressional approval of a "Comprehensive Tax Reform Program" (CTRP) to sustain revenue flows. The CTRP estimates pesos 14 billion ($530 million) in additional revenues can be raised by simplifying the tax system and widening the tax base through a package of reforms on income and excise taxation, tax administration, and the rationalization of fiscal incentives.

4. Debt Management Policies

The foreign debt level (estimated at $38 billion) has been growing, but debt servicing is no longer a major problem. The ratio of debt service to merchandise and service exports has fallen to under 15 percent, from 40 percent in the early 1980s. The Philippines has had four debt rescheduling rounds with official bilateral (Paris Club) creditors. It implemented a debt­to­equity swap program from 1986­1993 and, between 1990 to 1992, repurchased and/or restructured nearly $6 billion in debt owed to foreign commercial banks. The Philippines reentered the voluntary international capital markets in 1993 after a decade's absence. The Government did not exercise a fifth Paris Club debt rescheduling agreement. The IMF approved a three­year extended arrangement in mid­1994, which the Philippines intends to use as an exit program. The country continues to benefit from sector­specific and structural adjustment programs provided by multilateral institutions such as the Asian Development Bank and the World Bank Group.

5. Significant Barriers to U.S. Exports

Tariffs: The Philippines adopted a minimum access volume (MAV) system for imports of some 85 tariff lines of "sensitive" agricultural products in July, 1995. Among those were products, such as pork and poultry, on which the government had undertaken minimum access commitments in the Uruguay Round (UR). Delays in implementing the MAV's on these products have raised concerns among WTO members relating to implementation of UR commitments in agriculture. The Philippine government also imposed MAV's for imports of fresh, chilled and frozen beef, which had previously been subject to a 30 percent duty. Imports below the MAV for beef of 21,131 metric tons (MT) in 1996 (six months), rising to 130,994 MT in 2003, will continue to be subject to a 30 percent tariff. Imports over the MAV will be subject to a 60 percent tariff, falling to 40 percent in 2000. Finally, in some cases, products which had previously been imported without restriction, are now subject to the MAV system. This has resulted in the application of prohibitive tariff levels in cases where no MAV's (subject to in­quota rates) were established. Administrative requirements for import certificates under the MAV system for all products are burdensome.

Import Licenses: The National Food Authority remains the sole importer of rice and continues to be involved in imports of corn. While trade reforms have greatly reduced import restrictions, some products are still subject to import regulation, generally for reasons of health, morals, national security, and rationalization/development programs.

Cigarette Excise Tax: The current ad valorem system imposes a higher rate on imports and locally produced cigarettes using foreign brand names. Under a proposed Comprehensive Tax Reform Program (see Section 3), the Government envisions a shift to a three­tiered specific tax system based on prices, rather than on origin or brand name.

Services Barriers: Banking ­ A law signed in May 1994 relaxed foreign investment restrictions in place since 1948. A foreign bank can enter either as a wholly­owned branch bank, or own up to 60 percent (up from 30 percent) of an existing domestic bank, or a new locally­incorporated banking subsidiary. However, the new law permitted only 10 new foreign banks entry on a full­service, branch basis. (All 10 slots have been filled. Four other foreign branch banks were established prior to 1948.) Each new foreign branch bank is limited to establishing six branches each. Four older banks were permitted to each add six new branches.

Securities ­ Membership in the Philippine stock exchange is open to foreign­controlled stock brokerage firms that are incorporated in the Philippines. Foreign ownership in securities underwriting companies (investment houses) is limited to less than 50 percent. Foreign firms are not allowed to underwrite securities for the Philippine market, but may underwrite Philippine issues for foreign markets. Financing companies must be at least 60 percent Filipino­owned.

Insurance ­ As a general rule, only the Philippines' Government Service Insurance System may provide coverage for government­funded projects. A 1994 administrative order extended this policy to BOT­funded projects.

Legal services ­ As a general rule, the Philippine Constitution reserves the practice of professions for Philippine citizens.

Telecommunications: The Philippine Constitution limits foreign ownership in telecommunication firms to 40 percent.

Standards, Testing, Labelling, and Certification: Of the total 1,625 Philippine National Standards, 15 percent are aligned with international norms. The government, for reasons of public health, safety and national security, implements regulations that affect U.S. exports of drugs, food, textiles and certain industrial goods. Notable examples follow:

(a) The Department of Health's renewed campaign for the full implementation of the "Generic Act" of 1988 vigorously promotes "cheap" generic drugs. A drug's generic name must appear above its brand name.

(b) Local inspection for standards compliance is required for imports of about 30 industrial products including lighting fixtures, electrical wires and cables, sanitary wares and household appliances, portland cement and pneumatic tires. For other goods, however, the Government accepts U.S. manufacturers' self­certification of conformance.

(c) Labeling is mandatory for textile fabrics, ready­made garments, household and institutional linens and garment accessories.

Investment Barriers: The Foreign Investment Act of 1991 contains two categories of foreign investment "negative lists". "List A" covers activities in which foreign equity is excluded or limited by the Constitution and other laws. These include investments in mass media, practice in licensed professions, retail trade, small­scale mining and private security agencies which are reserved for Filipinos. In addition to land ownership (where a 40 percent foreign­equity ceiling applies), varying foreign ownership limitations are imposed, among others, on companies engaged in advertising (30%), employee recruitment (25%), private construction (40%), financing (40%), public utilities (40%), and the exploration and development of natural resources (40%). "List B" limits foreign ownership (generally to 40 percent) for reasons of public health, safety and morals (e.g., gambling operations and sauna and massage parlors), and to protect local small and medium­sized firms. To protect smaller firms, a company must be capitalized at a minimum of $200,000 to be more than 40 percent foreign­owned.

The Government generally imposes a foreign ownership ceiling of 40 percent on firms seeking incentives with the Board of Investment (BOI) under the Government's annual Investment Priorities Plan. While there are exceptions to the ceiling, divestment to 40 percent is required within 30 years. The BOI imposes industry­wide local­content requirements under its motor­vehicle development program and requires participants to generate, via exports, a certain ratio of the foreign exchange needed for import requirements. The Government has issued guidelines to phase out these trade­related investment measures by the year 2000.

Current regulations limit domestic borrowings by foreign firms, set as maximum debt­to­equity ratios, which must be maintained for the term of the debt. The Bangko Sentral intends to lift these restrictions in 1997.

Government Procurement Practices: Contracts for government procurement of goods and services are awarded by competitive bidding. In general, government procurement policies do not discriminate against foreign bidders. However, preferential treatment of local suppliers is practiced in government purchases of medicines, rice, corn, and iron/steel materials for use in government projects. Government agencies must procure petroleum from government­owned sources. Contractors for infrastructure projects which require a public utility franchise (i.e., water and power distribution, public telephone and transportation systems) must be at least 60 percent Filipino­owned. For other major contracts (such as BOT projects), where operations do not involve a public utility franchise, a foreign constructor must be duly accredited by its government to undertake construction work. To the benefit of U.S. suppliers, areas of interest including power generation equipment, communications equipment and computer hardware do not generally confront significant restrictions.

The Philippines is not a signatory to the GATT Government Procurement Agreement.

Customs Procedure: All imports valued at over $500 are permitted entry only when accompanied by a preshipment inspection report ­­ "Clean Report of Findings" ­­ issued by Societe Generale de Surveillance (SGS), the authorized, contracted, outport inspector. The Philippines has adopted the 1996 version of the Harmonized System Nomenclature. To assess import duty, the Bureau of Customs has shifted from "home consumption value" to "export value" as an interim step towards a shift to "transaction value" before the year 2000.

6. Export Subsidies Policies

Firms (including exporters) engaged in activities under the Government's annual Investment Priorities Plan may register with the Board of Investment (BOI) for fiscal incentives under the 1987 Omnibus Investment Code. These incentives include income­tax holidays, preferential tax/duty treatment on imported capital equipment, tax credits for domestically purchased equipment, and income­tax deductions for incremental labor expenses. In addition to these general incentives, some benefits apply specifically to BOI­registered export firms (such as tax credits for raw­material imports, and tax/duty exemptions on imported spare parts). Export companies in government­designated export zones and industrial estates registered with the Philippine Economic Zone Authority enjoy basically the same incentives as BOI­registered firms.

Enterprises accredited under the Export Development Act may also avail of time­bound incentives which include: duty­free importation of capital equipment and accompanying spare parts until 1997; partial tax credit until 1997 for locally purchased raw materials, equipment and spare parts for exporters of nontraditional products; tax credit until 1999 for imported inputs and raw materials not readily available locally; and tax credit for increases in the current year's export revenues, contingent on performance and local content.

There are a number of specialized credit programs targeted for small and medium­scale enterprises in general or exporters in particular, several funded by foreign multilateral or bilateral agencies. Most interest rates are market­based, although a number of facilities offer fixed rates. The Bangko Sentral maintains an "Export Development Fund" (EDF), the foreign exchange counterpart of its peso rediscounting facility. EDF rates are LIBID­based and adjusted periodically. The BSP imposes a ceiling on the spread at which banks can relend the funds.

7. Protection of U.S. Intellectual Property

While IPR protection is improving, serious problems remain, and the issue remains a bilateral trade concern. Current penalties for infringement and counterfeiting are not effective deterrents. Insufficient funding hampers the operation of agencies tasked with IPR enforcement. Joint government­private sector efforts have improved administrative enforcement; but when IPR owners must use the courts, enforcement is slower and less certain.

In February 1993 President Ramos created the Inter­agency Committee on Intellectual Property Rights as the body charged with recommending and coordinating enforcement oversight and program implementation. The Philippines is a party to the Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty. It is also a member of the World Intellectual Property Organization and the WTO.

The Philippines was moved from the U.S. Trade Representative's Special 301 "Priority Watch List" to the "Watch List," following the April 1993 signing of a bilateral IPR agreement, which commits the Philippine Government to improving its legislative protection and to strengthening enforcement significantly. The Philippine government has generally complied with the agreement, and is working on legislative requirements. Although legislative commitments under the bilateral was to be submitted to the Congress before the end of the June 1994 congressional session, the Government did not meet the deadline. A new IPR "code" was introduced in both houses of Congress in the second half of 1996. Its passage remains a government priority.

Patents: Present law recognizes the possibility of compulsory licensing two years after registration of a patent with the Patent, Trademark and Technology Transfer Board, if the patented item is not being utilized in the Philippines on a commercial scale, or if domestic demand for the item is not being met to an "adequate extent and on reasonable terms." For pharmaceutical and food products, use, inadequate production for domestic demand, etc. need not be established. Royalty rates higher than five percent of net sales are allowed only in meritorious cases. Naturally occurring substances (plants or cells, for example) are not patentable.

Trademarks: Trademark counterfeiting is widespread. Many well­known international trademarks are copied, including denim jeans, designer shirts, playing cards, sporting equipment and personal beauty and health care products. Some U.S. firms ­­ for example Disney ­­ have had success in curbing piracy in cooperation with Philippine enforcement agencies. The National Bureau of Investigation (the Philippine equivalent of the FBI) has recently been cited by the private sector for its excellent cooperation in conducting raids against trademark violators.

Philippine law requires trademark owners to file an affidavit of use or justified nonuse with the Patents, Trademark and Technology Transfer Board every five years to avoid cancellation of trademark registration. Nonuse of a mark must be for reasons totally beyond the control of a registrant (import bans, for example). Current practice provides that internationally well­known marks should not be denied protection because of nonregistration or lack of use in the Philippines (which pending legislation seeks to incorporate into Philippine law).

Copyrights: Current Philippine law is overly broad in allowing the reproduction, adaptation or translation of published works without the authorization of the copyright owner. A presidential decree permits educational authorities to authorize the reprint of textbooks or other reference materials without the permission of the foreign copyright holder, if the material is certified by a school registrar as required by the curriculum and the foreign list price converts to 250 pesos (about $9.50) or higher. This decree is inconsistent with the appendix of the 1971 text of the Bern Convention.

Video piracy is a serious problem, but declining from about 80 percent of the market a few years ago to about 60 percent now. Copyright protection in the present law for sound recordings, currently 30 years, is shorter than the internationally accepted norm of 50 years. Industry sources estimate that piracy of recorded music has fallen to an average of about 40 percent. About 98 percent of all computer software sold is pirated. Computer shops routinely load software on machines as a free "bonus" to entice sales.

Special IPR Courts: The Philippine Supreme Court, under Administrative Order No. 113­95, has designated 48 courts to handle IPR violations and speed up IPR cases. The order instructs all judges to terminate "as far as practicable" the trial of IPR cases in 60 days and to render judgement in another 30 days.

New Technologies: Many shops rent video laser discs purchased at retail stores in the United States without remitting commercial rental fees. More recent issues involve copyright infringement complaints against cable television stations which retransmit copyrighted works without authorization from or payment to the copyright owners. The bilateral IPR agreement of April 1993 commits the government to fully enforce the protections afforded to audio­visual works under Philippine laws and regulations.

8. Worker Rights

a. The Right of Association: All workers (including public employees) have a right to form and join trade unions, a right which is exercised without national government interference, although opposed in practice by some employers and officials of local government units. Trade unions are independent of the government and generally free of political party control. Unions have the right to form or join federations or other labor groupings. Subject to certain procedural restrictions, strikes in the private sector are legal. However, unions are required to provide strike notice, respect mandatory cooling­off periods, and obtain majority member approval before calling a strike. The Secretary of Labor and Employment often assumes jurisdiction over strikes, in effect arbitrating a settlement.

b. The Right To Organize and Bargain Collectively: The Philippine Constitution guarantees the right to organize and bargain collectively. The Labor Code protects and promotes this right for employees in the private sector, as well as those employed in government­owned or controlled corporations. A similar but more limited right is afforded to employees in most areas of government service. Dismissal of a union official or worker trying to organize a union is considered an unfair labor practice. Nevertheless, employers sometimes attempt to intimidate workers by threats of firing or closure. Although labor law and practice are uniform throughout the country, there have been complaints about local official efforts to maintain "union free/strike free" policies in several of the export processing zones.

c. Prohibition of Forced or Compulsory Labor: The Philippines prohibits forced labor. As the world's foremost "exporter" of both unskilled and trained labor, it is sensitive to reports of abuse of Philippine workers overseas.

d. Minimum Age for Employment of Children: Philippine law prohibits the employment of children below age 15. The exceptions involve situations under the direct and sole responsibility of parents or guardians, or in the cinema, theater, radio and television in cases where a child's employment is essential. Such employment, however, must not impinge on the child's education, health, safety or morals, and the parent or employer must procure a work permit. The Labor Code allows employment for those between the ages of 15 and 18 for such hours and periods of the day as are determined by the Secretary of Labor, but forbids employment of persons under 18 years in hazardous work. However, a significant number of children are employed in the informal sector of the urban economy or as unpaid family workers in rural areas.

e. Acceptable Conditions of Work: The Minimum Wage Act of 1989 authorized tripartite regional wage boards to set minimum wages. Rates last underwent general revision in late 1993, with the highest in Manila and lowest in rural regions. As a seasonal rice shortage (combined with storm­related and other factors) caused sharp upward price shifts in the second half of 1995, it was expected that regional wage boards would respond accordingly. Wage boards outside the National Capital Region (NCR), in addition to establishing lower minimum levels, also exempted employers according to such factors as establishment size, industry sector, involvement with exports, and level of capitalization. This approach excluded substantial numbers of workers (especially in agriculture, domestics, laborers, janitors, messengers and drivers) from coverage under the law. The present minimum wage for workers in the NCR is 165 pesos (about $6.25) per day. Detected minimum wage violations continue to run high. The legal workweek before overtime is 48 hours for most categories of industrial workers and 40 hours for government workers. The law mandates a full day of rest weekly and overtime for any hours worked over an eight per day limit. A comprehensive set of occupational safety and health standards exists in law. Statistics on actual work­related accidents and illnesses are incomplete, as incidents (especially in regard to agriculture) are underreported.

f. Rights in Sectors with U.S. Investment: U.S. and other established multinational firms apply U.S., European or Japanese standards of worker safety and health to meet the requirements of their home­based insurance carriers. They also treat their work force according to professional employee management principles. Firms in the export processing zones have resisted efforts to unionize their workers and the local authorities supported their nonunion policies.

Category		Amount
Petroleum		(1)
Total Manufacturing		1,254
Food & Kindred Products	342
Chemicals and Allied Products	427
Metals, Primary & Fabricated	34
Machinery, except Electrical	­2
Electric & Electronic Equipment	306
Transportation Equipment	0
Other Manufacturing	147
Wholesale Trade		200
Banking		259
Finance/Insurance/Real Estate		(1)
Services		(1)
Other Industries		235
TOTAL ALL INDUSTRIES		2,648

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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