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<text> <title> Philippines: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: The Philippines </hdr> <body> 1. General Policy Framework Following a severe recession in 1983-85, the economy experienced a strong recovery between 1986 and 1989. But beginning in late 1989 growth started to sag as inflation, high interest rates, fiscal and trade imbalances, an attempted coup, the Iraqi occupation of Kuwait, and a series of natural disasters disrupted consumer and investment spending. Potential investors are now taking a wait-and-see approach pending the outcome of the May 1992 general elections. Gross National Product (GNP) growth in 1990 dipped to 3.7 percent and growth in 1991 is anticipated to be less than one percent. Serious poverty continues to burden the Philippine economy. Per capita income in 1990 stood at $713, but unbalanced income distribution means that half the country's 62 million people live below the poverty line. The Philippine government fiscal deficit continued to be a major source of economic concern during 1991. The deficit exceeded three percent of GNP in 1990, although sharp spending cuts are aimed at reducing it to less than one percent of GNP in 1991. The consolidated public sector deficit (including government corporations and the Central Bank) was 5-6 percent of GNP. Most of the shortfall has been financed by domestic borrowing, primarily through Treasury bills. Thus, public sector demand for funds has kept interest rates high, although in 1991 they dropped to roughly 20 percent from the 30 percent levels of 1990. In 1991 service on the government's domestic debt consumed 30 percent of the budget. The Philippines' $28.9 billion foreign debt also remains a major preoccupation of policymakers. The Central Bank has used periodic "mopping up" operations, a combination of Treasury bill floats, adjustments of reserve requirements, and reverse repurchase operations, to attempt to keep liquidity in compliance with International Monetary Fund (IMF) targets. Pinched by a burgeoning trade deficit, the Central Bank, which generally intervenes in the foreign exchange market, was forced to allow the peso to depreciate by 25 percent in nominal terms in 1990. However, due to weak import demand and greater foreign exchange reserves, the peso recovered by four percent from January to October 1991, raising concern about Philippine export competitiveness. Foreign trade, especially imports, slowed in the first half of 1991 because of the general economic slowdown and a temporary nine percent additional import levy imposed to increase government revenues. The levy was reduced in August 1991 to five percent, and is scheduled to be eliminated entirely during the first half of 1992. The Philippines continues to run a trade surplus with the United States, amounting to $729 million in 1990. Overall trade is in deficit, however; the gap was $4 billion in 1990 on exports of $8.2 billion and imports of $12.2 billion. 2. Exchange Rate Policies Commercial banks are required to make dollar purchases in the official interbank market. The exchange rate is free floating but strongly influenced by Central Bank intervention in support of the peso-dollar rate. Traders also buy and sell dollars at a premium on a vibrant parallel market for those who cannot, or will not, justify their purchases under foreign exchange and tax regulations. The Philippine government has traditionally attempted to maintain a somewhat overvalued peso, given the high import component of the country's export products, high debt service costs on the country's nearly $29 billion in foreign borrowings, and strong demand for imported consumer goods by those able to afford an international lifestyle. The peso appreciated by 0.9 percent in June 1991 to approximately 27.75 pesos to the dollar, and by November was below 27:1. Slowed economic activity, savings from reduced oil prices, and inflows of dollars from multilateral institutions have resulted in a buildup of foreign exchange reserves, resulting in a strengthening of the peso in the parallel market. Continued weak import demand will allow the Central Bank to maintain the present exchange rate in the short run, but when economic activity increases, demand for foreign currency will increase and push the value of the peso lower. The question of the proper value of the peso may be an election year issue in 1992; exporters are attempting to organize better to push for more export-oriented tariff and exchange rate policies. 3. Structural Policies The government's economic leadership continues to pursue much-needed structural economic reforms, including measures to liberalize and promote foreign investment, accelerate financial sector reform, privatize state-owned assets, and improve government revenue gathering. Economic planners face resistance, however, from both the Congress (especially the Senate) and from political leaders in the Administration. An executive order restructuring the country's tariff system was pushed through the bureaucracy in 1991 after an earlier, more ambitious attempt at tariff reform was quashed by bureaucratic and private sector resistance. This reform, which will lower tariffs in stages over the next four years, should be a boon for U.S. exporters of many finished and semi-finished products. The government continues to liberalize imports by eliminating quantitative restrictions, an initiative begun in 1987. The government also succeeded in pushing the milestone Foreign Investment Act of 1991 through the Congress. The new law is an attempt to encourage foreign investment by opening up new areas to investment and lowering the required domestic equity share for joint ventures in several other sectors. A bill liberalizing the Philippines' oligopolistic banking sector is also in the works, although it is not clear whether it will get through Congress during the Aquino Administration, which ends in June 1992. Financial liberalization of this kind would be an important complement to foreign investment liberalization. Privatization of state-owned assets (many of which are collapsed Marcos-era firms) has stalled, due in part to poor market conditions. The government has also proposed a number of revenue enhancement measures; under pressure from the IMF and international creditors, the Administration has squeezed government expenditures but is still faced with a yawning central government deficit next year. As the country approaches an election season, administrative measures for improved tax collection would seem to be more possible than Congressional approval of new taxes. 4. Debt Management Policies As of June 1991 the Philippines' foreign debt totalled $28.9 billion, or roughly 63 percent of GNP. The debt is overwhelmingly public sector (81 percent) and about half of it is owed to commercial banks or suppliers. Debt servicing consumes approximately 25 percent of export earnings. Servicing was suspended in 1983 in the midst of a political and economic crisis. Relations with the international financial community began to move back to normal with the completion of a debt rescheduling agreement in 1985. The Aquino Administration, which came to power in 1986, has reiterated the country's determination to service its debt while pursuing structural reforms to alleviate the debt burden through growth. The Philippines was unable to meet the conditions of a medium-term IMF program and has also experienced some difficulty in meeting the monetary targets set in a more modest 18-month standby agreement approved in February 1991. Heavy Central Bank purchases of foreign exchange and higher-than-expected levels of domestic bank reserve deficiencies have complicated efforts to meet these benchmarks. An IMF review of the country's key performance criteria took place in November 1991. The country is on generally good terms with its commercial bank creditors. Since 1983, the Philippines has periodically rescheduled both its commercial and its Paris Club (official creditor) debt. In August 1991 the Philippine government and its commercial bank creditors agreed in principle on the structure of a $5.3 billion debt relief package, a Brady-type program with a menu of options such as par bonds and interest rate reduction bonds. Negotiations between the government and the banks continue; one important issue still to be resolved is the inclusion of debt paper related to the Bataan nuclear power plant. The government is under pressure to repudiate the nuclear debt because of questions surrounding the original contract and the construction of the plant, while creditors insist that it be included in the rescheduling package. In June 1991 Paris Club creditors rescheduled $1.5 billion of official Philippine debt; a bilateral U.S.-Philippine agreement to implement the Paris Club pact is now under review. 5. Significant Barriers to U.S. Exports Tariffs and Other Import Charges: The government undertook tariff reform as part of a broader trade liberalization program under a 1981 World Bank structural adjustment program. As a result, most tariff rates were set between 10 and 50 percent and average nominal tariff rates fell from 42 percent in 1979 to 28 percent in 1991. Continuing the reform process, President Aquino signed Executive Order 470 (E.O. 470) on July 20, 1991, putting into place a tariff reduction, restructuring, and simplification program. In effect since August 22, 1991 E.O. 470 will be phased in over a four year period, resulting in average nominal tariff rates of 20 percent. Upon its full implementation, E.O. 470 will have compressed the current seven-tier tariff structure to a four tier structure of 3, 10, 20, and 30 percent. Selected products will be exempt from this basic framework. Tariffs will remain at 50 percent and 40 percent for such products as meat, fish, and produce, garments, textiles, glass, home appliances, audio and television equipment, and other consumer goods. While the tariffs on most of these products will be phased down into the basic framework over the life of the program, some 208 products identified as "strategic" will continue to attract 50 percent tariff rates. Included in this group are rice, vegetable oils, sugar, fruits, and luxury consumer goods such as alcohol, tobacco, and leather goods. Import Licenses: Under the government's import liberalization program, prior clearances from Philippine government agencies, such as the Central Bank, the Board of Investments, and agencies of the Department of Trade and Industry, are no longer needed to open letters of credit for most imports. However, clearance requirements for certain restricted or controlled items still apply. Commodity imports financed through foreign credits still require prior approval from the Central Bank. The Philippines is a signatory to the GATT Import Licensing Code. Between 1981 and 1991, licensing requirements were lifted on 2,489 items representing 90 percent of the 2,762 commodities identified for liberalization over a twelve year period. In September 1991 a cabinet-level committee approved a working-level recommendation to remove import licensing requirements from an additional 61 products, primarily consumer electronics. Those products which remain to be deregulated include more sensitive products such as animal and meat products, consumer durables and transport equipment. In addition, over 100 of these products are unlikely to be liberalized for reasons of health, safety, or national security. (Note: The specific count of items is based on the original Philippine Standard Commodity Classification Code (PSCC). Under the revised PSCC, the number of items liberalized will appear larger as a result of the disaggregation of many product lines.) Banking: Foreign bank branches have been denied entry since 1948. Foreign participation is currently limited to no more than 30 percent (40 percent with Presidential approval) of voting stock in existing domestic banks. Four foreign banks whose operations have been grandfathered control approximately 12 percent of total assets in the commercial banking system. In June 1990 the Central Bank lifted a prohibition against the installation of off-premise automated teller machines in high-demand areas, provided the bank has a regular branch operating within the service area. Since foreign banks cannot establish additional branches, this ruling places them at a disadvantage. The Central Bank is currently studying the possibility of allowing the limited entry of additional foreign banks, as well as increasing the maximum level of foreign participation in domestic banks. Foreign bank branches have also been denied entry into trust activities, although one foreign bank does have a grandfathered trust license. A foreign bank may not obtain a "universal banking" license which would allow it to participate in investment banking activities. Insurance: The licensing of new domestic and foreign life insurance companies has been suspended since 1947 and that of new nonlife insurance firms since 1966. Under the Philippine Insurance Code, foreign firms are defined as those organized under laws outside the Philippines. Companies organized under Philippine law, even if majority foreign-owned, are defined as domestic firms. There are about seven such companies in the country which were operating before the 40 percent nationality cap on foreign investment was imposed. Majority foreign-owned companies, whether foreign or domestic, control an important segment of the overall insurance market. Securities: Although only domestically incorporated companies may engage in the securities brokerage business, the government allows majority foreign ownership in this activity. A foreign investor who wishes to purchase shares of stock of a domestic corporation is limited by national ownership requirements. Stock exchange membership is open to any company incorporated in the Philippines. Legal Services: Philippine citizenship, graduation from a Philippine law school, and membership in the Integrated Bar of the Philippines are the requirements which a U.S. attorney must meet in order to practice in the Philippines. Motion Pictures: Industry problems include excessive taxation and pressure from the local motion picture industry to increase the time reserved in theaters (30 percent) for locally produced films. There has been some improvement in the incidence of piracy, although it remains widespread (see below). Standards, Testing, Labelling and Certification: The generics drug law of 1988 is now fully in force. Department of Health (DOH) implementing regulations call for the generic name of most drugs to appear above the brand name, in a slightly larger typeface, and enclosed in a box, with contrasting backing. The guidelines also require DOH approval for all new labels. Labelling changes caused by the generics legislation imposed substantial one-time costs, amounting to millions of pesos, on all pharmaceutical firms. This poses a greater burden for foreign firms than those that produce in the Philippines, as the foreign firms are forced to change their labelling just to fit the regulations of a relatively small pharmaceuticals market. The Philippines is a signatory to the GATT Standards Code. Investment Barriers: The new Foreign Investment Act of 1991 is an important milestone. It increases the number of industries in which foreigners can take up to 100 percent ownership without prior governmental approval. However foreign equity is still limited to 40 percent in enterprises related to national defense (weapons) and in businesses involved in the exploration, development, and utilization of natural resources. Also, only Filipino citizens or corporations, at least 60 percent Filipino-owned, may own land. The government gives tax and other incentives to export-oriented businesses. The Department of Labor allows the employment of foreigners provided there are no qualified Philippine nationals for the position. However, the employer must train Filipino replacements and report on such training periodically. The Philippine Constitution explicitly states that all executive and managing officers of firms engaged in mass media and in the operation of public utilities should be Filipino citizens. The free remittance of profits and repatriation of investment is allowed, subject to emergency foreign exchange provisions as necessary. The permissible time period for the repatriation of investment currently ranges from one to nine years, depending on net foreign exchange earnings, the size of investment, and the type of industry, with more liberal treatment accorded investments in government-registered, export-oriented, or import-substituting industries. The Philippines currently does not provide guarantees against losses due to nationalization, damage caused by war, or inconvertibility of currency. However, a full Overseas Private Investment Corporation (OPIC) agreement is in effect, and U.S. investors may contract for coverage under this arrangement. Government Procurement Practices: Philippine government procurement policies do not generally discriminate against foreign bidders. Preferential treatment is given to Filipino firms in the purchase of medicines. Government offices which grant rice allowances to their employees must purchase the rice from a specified Filipino source. Philippine government agencies must procure their petroleum products from government-owned sources. Pre-qualification for potential bidders in infrastructure projects requires the domestic corporation to be at least 75 percent Filipino owned. Subject to the availability of products of comparable quality, price, and delivery terms, preferential treatment is to be given to locally manufactured iron and steel products in government projects. Areas of interest to U.S. suppliers, including power generation equipment, communications equipment, and computer hardware, are not affected by significant restrictions. The Philippines is not a signatory to the GATT Government Procurement Code. Customs Procedures: One element of the import liberalization program is pre-shipment inspection of imports, imposed since 1987 to prevent misdeclaration of goods into the Philippines and tariff evasion. Under the current scheme, imports valued over $2500 from ten countries (Japan, Hong Kong, Taiwan, South Korea, Macau, and all ASEAN countries) are subject to pre-shipment inspection. The government plans to expand this program to cover all imports valued over $500 from all countries. Implementation is scheduled to begin on December 1, 1991. The Philippine government has been working to make custom procedures more transparent and to minimize widely reported irregularities and corruption in the system. The Philippines is not a signatory to the GATT Customs Valuation Code. 6. Export Subsidies Policies Enterprises registered with the Board of Investments (BOI) are entitled to tax and duty exemptions. The Philippine Omnibus Investment Code of 1987 provides for several programs which benefit Philippine industry. These include income tax holidays, tax and duty exemptions for imported capital equipment, as well as tax credits for purchases of domestic capital equipment and raw materials. Export traders are entitled to tax credits for imported raw materials required for packaging purposes. The Central Bank operates a rediscounting window which allows exporters to borrow at less than market rates. However, to comply with the terms of a World Bank program, the Central Bank plans to eliminate this facility in early 1992. 7. Protection of U.S. Intellectual Property The Philippine government is a party to the Paris Convention for the Protection of Industrial Property, the Patent Cooperation Treaty, the Berne Convention for the Protection of Literary and Artistic Works, and is a member of the World Intellectual Property Organization. The Philippines remains on the U.S. Trade Representative's Special 301 "Watch List" under the provisions of the 1988 Omnibus Trade and Competitiveness Act. Where administrative enforcement is possible, as for example by working with the Videogram Regulatory Board (VRB), enforcement raids can be readily arranged and cases can be resolved expeditiously. However, where intellectual property owners must have recourse to the courts, enforcement is slower and less certain. Many prosecutors are not familiar with intellectual property laws. As a result, intellectual property owners frequently complain of arbitrary and capricious decisions. The Philippines argues that U.S. standards of intellectual property protection are too high for developing countries. The Philippine Department of Trade and Industry has recently taken several steps to improve enforcement of intellectual property laws. These steps include strengthening the Philippine government's interagency task force on anti-piracy and counterfeiting, and creating regional task forces in areas where counterfeiting is prevalent; issuing a Department order identifying copyright law as one which can be enforced administratively by Trade and Industry personnel; and permitting private-sector intellectual property organizations to assign a full-time representative to work with enforcement officials in the Department's Bureau of Trade Regulation and Consumer Protection. Patents: The main problems with the present law relate to working of the patent, provisions which allow issuance of a compulsory license under lenient conditions beginning three years after the patent is granted, and a requirement that places a very low ceiling on royalty payments. These provisions undermine the nominal protection available under Philippine law and discourage foreign and domestic investment. Several pharmaceutical products have been subjected to compulsory licensing, but, considering the years that provision has existed, the actual number of licenses is small. Trademarks: Trademark counterfeiting is widespread. While enforcement is possible, results can be disappointing because of slow legal procedures and because penalties for infringement are not sufficiently high to deter pirates. Philippine law requires use or justified nonuse of a trademark to avoid cancellation of registration after five years. Nonuse of a mark must be totally beyond the control of a registrant, but it is unclear whether Philippine government restrictions, such as import bans, constitute justified nonuse. All license arrangements between foreign companies and Philippine companies must be submitted to the Technology Transfer Registry for approval and registration, and there is a requirement that royalty for the license to use trademarks may not exceed one percent of net sales of the licensed product. Copyrights: Philippine law is overly broad in allowing the reproduction, adaptation or translation of published works without the authorization of the copyright owner. Also, a Presidential Decree allows compulsory reprint licenses for textbooks used in school courses. The compulsory licensing provisions, especially for textbooks, are inconsistent with the appendix of the 1971 text of the Berne Convention. The Motion Picture Export Association of America reports effective cooperation with the VRB. A key factor in recent enforcement improvements on the videotape front is the presence in the Philippines of U.S. firms offering legal versions of videos not previously available. Printed material piracy and audio piracy are not problems. Computer software is pirated, but software owners are beginning to organize to protect their rights in the Philippines. New Technologies: Many shops rent video laser discs purchased retail in the United States without payment of commercial rental fees to the producers. The Motion Picture Export Association of America reports the cooperation of the VRB in arranging an interim solution which would allow these shops to license discs for a fee to be paid to Philippine representatives of U.S. producers. 8. Worker Rights a. Right of Association The right of workers, including public employees, to form and join trade unions is assured by the Constitution and legislation, and is freely practiced without government interference. About ten percent of the nation's employed work force of approximately 23 million workers are organized into over 3,700 trade unions. Subject to restrictions in the Labor Code and emergency executive powers, strikes in the private sector are legal, and take place frequently. The right to strike and the status of employees in government-owned industries, however, have not yet been clarified. Numerous strikes by public sector workers occurred, although there were comparatively few in 1991. b. Right to Organize and Bargain Collectively Labor's right to organize and bargain collectively is provided for in law. Since 1986, the number of collective bargaining agreements in force has increased from 3,112 to 4,982. In the same period, the number of registered unions increased by more than 10 percent. It is an unfair labor practice to dismiss a union official or a worker who is trying to organize a union. Nevertheless, employers sometimes attempt to intimidate workers by threats of firing or closure. Allegations of intimidation and discrimination for union activity are actionable, as unfair labor practices before the National Labor Relations Commission (NLRC). There is a history of industrial relations violence in the Philippines which has been exacerbated by the insurgency and the counterinsurgency. However, labor-related violence declined significantly in 1991. The rate of unionization and the number of collective bargaining agreements concluded in the several export processing zones (EPZ's) is similar to that in the rest of the country. c. Prohibition of Forced or Compulsory labor Compulsory labor is illegal and there were no reports of forced labor being practiced. d. Minimum Age for Employment of Children The Constitution contains prohibitions against employment of children below age 15, except under the sole responsibility of parents or guardians and then only if the work does not interfere with schooling. e. Acceptable Conditions of Work Despite the minimum wage laws, substantial numbers of workers mostly laborers, janitors, messengers, drivers, and clerk-typists, earn less than the law stipulates. The standard work week is 48 hours. The law mandates a full day of rest per week. Employees with more than one year on the job are entitled to five days of paid leave. A comprehensive set of enforceable occupational safety and health standards is in effect, and the standards for protecting workers against hazards of the workplace and harmful substances are relatively advanced. f. Rights in Sectors with U.S. Investment Worker rights conditions in goods-producing sectors with U.S. investment tend to be better than those in Philippine industry taken as a whole. Firms with U.S. investment are extensively organized by all of the unions within the broad spectrum--left to right--of local labor organizations. Nearly all of these firms have concluded collective bargaining agreements. The labor relations scene in companies with U.S. capital is as active as that in industry generally. This is a result of workers' greater expectations regarding pay, benefits, and fair play in dealing with U.S.-Philippine joint venture management. Firms with U.S. investment have acquired a reputation for being responsible and responsive in dealing with the workforce. The prevailing lowest wages in companies with U.S. capital are generally much higher than the legal minimum wage. Employees in most of these firms work a 40-hour week with premium pay for overtime. All of the largest firms with U.S. participation apply U.S. standards of worker safety and health, mainly because of the requirement of their U.S. insurance carriers. Source: National Trade Data Bank, Agency: U.S. Department of State </body> </article> </text>