MACROECONOMIC FRAMEWORK AND
DEVELOPMENT FINANCING
II. Challenges
A. Ensuring macroeconomic stability
The integration of the Philippines into the world economy is generally expected to
yield economic benefits through a larger market for Philippine products and access to newer
technology and larger amounts of financial resources. However, as demonstrated by the Asian crisis, there
are inherent risks and costs as well. Reliance on volatile portfolio capital flows, especially in the
form of short-term debt and investments, can destabilize the foreign exchange market and the
financial system.
One indicator that foreign investors look at when making their portfolio allocation choices
is the ability of the economy to generate dollars (i.e., liquidity) and the ability of the economy
to service the debt (i.e., solvency). This requires a sustainable current account position, which
hinges on sustained growth of exports. A major challenge, therefore, is how the economy can continue
to generate sufficient export revenues without running into a huge current account imbalance.
Another is how to attract long-term and stable sources of capital such as foreign direct investments
to finance current account deficits.
On the fiscal front, the challenges are: (a) to raise sustainable and sufficient
revenues that will enable the government to finance a progrowth and propoor budget without losing track of
the need for fiscal prudence; (b) reform the expenditure framework to make it more efficient,
equitable and propoor; and (c) pursue an optimal financing mix of the deficit in order to lessen the
pressure on domestic interest rates and the total budget.
B. Reducing poverty and income inequity
While poverty incidence has declined, the absolute number of the poor has
increased. Moreover, about 17 percent of the population continue to live below subsistence levels.
Since majority of the poor are found in the rural areas, policies to accelerate the modernization of
the agricultural sector and generate nonfarm rural incomes are in order. This will also lead to a more
equitable distribution of
income. Another challenge that is best addressed by improving
agricultural productivity is how to keep inflation, especially on food items, at low rates so as to
preserve income gains.
The reduction of poverty significantly rests on the generation of adequate, more
remunerative, fulltime jobs in the formal market. In turn, job generation also hinges on improving job-matching.
This requires the government to increasingly improve its capacity to facilitate labor market
information on one hand, and upgrading its programs for tooling and retooling workers in agriculture,
services and industry.
C. Strengthening the financial and corporate sectors
The challenge to the financial and banking system while adhering to the policy of
deregulation, is to bring about efficiency in financial intermediation and resiliency against volatile
short-term capital flows. This entails strengthening the regulatory and supervisory framework amidst a
more liberalized financial market. The 1997-98 crisis showed that a healthy financial sector also
hinges on a strong corporate sector. Thus, it is imperative that the policy infrastructure for
corporate governance be clarified and established. This shall include the formulation of rules to
govern bankruptcy cases and the resolution of debt relief petitions of distressed corporations.
Finally, there is a need to further strengthen regional cooperation in the surveillance of the financial
and monetary developments in the region.
D. Increasing long-term domestic savings
As the Philippines improves its infrastructure and builds up its physical capital stock,
investment requirements must be matched by long-term sources of domestic financing. This will prevent
foreign debt from reaching unsustainable levels, particularly short term dollar-denominated debt, and
lessen the vulnerability of the economy against volatile foreign capital. While the NG has succeeded
in generating fiscal surpluses, these will have to be augmented by increasing the saving rate of
households and the nonincorporated sector and other government entities. Over the medium-term,
government must begin reviewing its policies on contractual savings and work towards a reform package
that will bring about sustained growth in the country's saving rate.
E. Increasing productivity and competitiveness
There is a need to improve the country's productivity to raise per capita incomes and
the country's competitiveness as an export base and an investment haven. While the private sector
is expected to partly finance the costs of improving the country's state of technology and
upgrading the skills of the labor force, there must be a corresponding shift in the government's
spending priorities and the continued implementation of financial and tariff policies.