Economic outlook Strong recovery from the global financial crisis October 2010

Following global financial crisis, a V-shaped recovery in 2010 Sources: NSCB, ATRKE

Where did growth come from? — Industry and services +3.5 +3.2 +5.2 +4.8 +1.7 +1.5 +1.2 +0.2 -0.6 -0.5 -0.5 -1.7 Sources: NSCB, ATRKE

In industry — high growth in manufacturing & construction +5.2 +4.8 Slower manufacturing growth in 10Q2 offset by stronger contribution from construction +1.2 -1.7 Sources: NSCB, ATRKE

Recovering economies boosted exports  manufacturing Global financial crisis affected economy through plummeting exports Sources: NSCB, ATRKE

Elections buoyed public construction and . . . private did well too Earlier recovery probably due to Ondoy reconstruction Avoiding election ban on infra projects Sources: NSCB, ATRKE

Can strong growth be sustained beyond 1H10? Yes . . . because economy not burdened by high debt levels Households typically are savers, aided by OFW remittances. Corporate sector has been paying down debt since the Asian crisis of 1997-98. Government ran bigger budget deficits in 2008-09 to stimulate economy during global financial crisis. V-shaped recovery allows withdrawal of fiscal stimulus. because banking sector not compromised by “toxic assets” can perform its function of extending loans to support growth But growth likely to be slower in 2H10 compared with 1H10 due to absence of one-off factors like elections.

OFW remittances continue to grow robustly . . . Sources: BSP, ATRKE

. . . bolstering private consumption (in contrast to US) Private consumption is about 2/3 and 3/4 respectively of US and Philippine economies Sources: CEIC, ATRKE

Weak US growth because of deleveraging Mar 2001 US$20.2t Dec 2008 US$38.0t June 2010 US$35.3t Source: CEIC

In general, according to IMF research “Recoveries from recessions associated with financial crises were found to be slower relative to a typical recovery.” In advanced economies, recoveries from financial crises feature a near-absence of growth in credit. Behavior of credit and output during recoveries                                                                                                                 Prakash Kannan, IMF, The lingering effects of financial crises, 19 Nov 2009

Smaller deficit ratio expected (higher in advanced economies) Source: IMF

Specific advanced economies with government deficit issues Source: IMF

Lower debt ratio (unlike developed countries in general) Source: IMF

Specific advanced economies with government debt issues Source: IMF

To reduce deficit, aim to grow tax collection with no new taxes Sources: BTr, NSCB, ATRKE

and strengthening peso Higher GDP growth than advanced economies attracting capital and strengthening peso Sources: CEIC

Strong peso dampens inflation—more than 2009 but below trend Sources: NSO, ATRKE

Low inflation will tend to keep interest rates low Source: CEIC

External demand likely to weaken Because of slow growth in OECD, export growth may stall Strong peso will make exports more expensive Strong peso will lessen value of OFW remittances Contribution of exports and OFW remittances likely to decline GDP Greece Italy Philippines Portugal Spain UK US OECD 2006 4.5 2.0 5.3 1.4 4.0 2.8 2.7 3.0 2007 1.5 7.1 2.4 3.6 1.9 2008 -1.3 3.7 0.0 0.9 -0.1 0.2 2009E -2.0 -5.0 1.1 -2.6 -3.7 -4.9 -3.2 2010F -4.0 1.0 7.0 -0.3 1.7 2.6 2011F 0.7 2.3 2.2 2012F 0.6 1.8 2013F 2.1 2.9 2014F 1.3 1.2 2.5 2015F Source: IMF

Domestic demand expected to take up slack Low inflation and interest rates, strong peso will benefit private consumption and investment Government will increase investments through public-private partnerships Foreign direct investment may rise because of attractive growth prospects All the above could improve domestic employment

Optimism likely to translate to improving domestic growth Source: CEIC

Public-private partnership projects (may be presented in Nov) Extension of the Light Rail Transit (LRT) Line 1 to Bacoor, Cavite (P70b) Extension of the LRT Line 2 to Masinag Junction in Antipolo (P11.3 billion) A new airport in Bohol (P7.5 billion) A "city terminal" for the Diosdado Macapagal International Airport in Pampanga (cost to be determined) Privatization of the operation and maintenance contract of the Laguindingan airport in Misamis Oriental (cost to be determined) A new airport in Puerto Princesa (P4.4b) An expressway connecting the North and South Luzon tollways (P21b) The Cavite-Laguna Expressway (P10.5b) Supply of treated bulk water for Metro Manila (cost to be determined) A new airport in Daraga, Albay As reported in Businessworld

Economic forecasts 2007 2008 2009 2010F Ytd 2011F GDP growth, % change 7.1 3.8 1.1 7.0 7.9 1H 6.2 NG budget balance, Pb -12.4 -68.1 -299 -311 -229 7M -318 as % of GDP -0.2 -0.9 -3.9 -3.7 -2.3 1H -3.3 Current account, US$b 7.1 3.6 8.6 9.3 4.4 1H 9.7 as % of GDP 4.5 2.2 5.3 4.9 5.0 1H 4.4 International reserves, US$b 33.8 37.6 44.2 54.2 53.5 Sep 59.6 Consumer inflation, % Y/Y 2.8 9.3 3.3 4.0 4.1 9M 4.5 91-d T-bill rate, avg, % pa 3.4 5.4 4.2 3.9 3.9 Ytd 4.3 Exchange rate, avg, P/US$ 46.2 44.4 47.6 45.5 45.5 Ytd 43.7

Risks to economic forecasts Political risks (1) Execution risks with new government – implementation of lower deficit ratio crucial to spending plans Inflation risks (3) Surge in international commodity prices especially food and fuel (4) Downward stickiness of power rates because of supply issues Growth risks (5) Double-dip recessions in developed countries because of fiscal crisis (6) Early implementation of exit strategies for fiscal and monetary stimulus packages