The Republic of the Philippines:

A Fortified Credit Story

June 2012

Disclaimer

This document does not constitute or form part of and should not be construed as an offer to sell or issue or the solicitation of an offer to buy or acquire securities of the Republic of the Philippines (the "Republic") or as an inducement to enter into investment activity. No part of this document, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This document isnot financial, legal, tax or other product advice. This document has been prepared by the Republic based on information available to them for use at a non-deal road show presentation by the Republic for selected recipients for information purposes only and does not constitute a recommendation regarding any securities of the Republic. The information has not been independently verified. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. None of the Republic or any of its advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of thisdocument or itscontents or otherwise arising in connection with the document. This document is being given solely for your information and for your use and this document, or any portion shared, copied, reproduced or redistributed to any other person in any manner. thereof, may not be

The statements contained in this document speak only as at the date as of which they are made, and the Republic expressly disclaims any obligation or undertaking to supplement, amend or disseminate any revisions to any statements contained herein to reflect any change in events, conditions or circumstances on which any such statements are based. By preparing this document, none of the Republic, its representatives and their respective advisors undertakes any obligation to provide the recipient with access to any additional information or to update thisdocument or to correct any inaccuraciesin any such information which may become apparent. This document may contain forward-looking statements based on the currently held beliefs and assumptions of the Republic, which are expressed in good faith and, in their opinion, reasonable. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual economic results, financial condition, performance, or achievements of the Republic to differ materially from the economic results, financial condition, performance or achievements expressed or implied by such forward-looking statements. Given these risks, uncertaintiesand other factors, recipients of this document are cautioned not to place undue reliance on these forward-looking statements.

22

The Philippines: Pushing Forward on All Fronts

Strong momentum and governance reforms help sustain positive economic performance

Resilient and stable economic growth driven by strong domestic consumer base and growing investment Credible and effective monetary policy that has ensured price stability through its proactive stance and independent approach to policy implementation Strong external payments position with large foreign exchange reserves, robust overseas foreign worker remittances and a net external creditor balance Prudent fiscal management focused on fiscal consolidation and medium-term debt sustainability Stable banking system, which is resilient to external shocks due to low NPLs, strong prudential ratios and stable domestic funding sources Reform-minded Administration with a growing track record of good governance, prudent fiscal and budgetary management and popular support from the Filipino people Growing third-party recognition with several credit rating upgrades over the past two years and ongoing market appetite

33

The Philippines: Pushing Forward on All Fronts

Sustained improvements across credit metrics

2005 v s. 2011 2005 GDP Per Capita 1 (US$) Inv estment (% of GDP) National Gov ernment Interest (% of Rev enue) Fiscal Balance (% of GDP) General Gov ernment Debt (% of GDP) Gross External Debt (% of CAR) Import Cov er Current Account (% of GDP) 1,159 21.6 36.7 (2.6) 59.2 89.9 3.8 1.9 2011 2,347.0 21.7 20.5 (2.0) 39.1 2 69.9 11.3 3.1 Difference 102.5% .46% (44%) (23%) (34%) (22%) 197% 63%

Source: Bangko Sentral ng Pilipinas (BSP), National Economic and Development Authority (NEDA), Department of Finance (DOF) Note: (1) At current prices (2) Preliminary Q3 2011 data

44

The Philippines: Pushing Forward on All Fronts

Strong momentum sustained in 2012

Strong Q1 2012 GDP growth Philippines Q1 2012 GDP growth of 6.4% higher than 4.8% market consensus Q1 economic performance above the preliminary average growth (3.7%) of the ASEAN region and better than Indonesia (6.3%), Malaysia (4.7%), Vietnam (4.0%), Singapore (1.6%), Thailand (0.3%) and other neighboring countries [Korea (2.8%), Japan (2.8%)] except China (8.1%) Growth was broad based led by public construction (up 62.2%), government consumption (24.0%), services (8.5%), household consumption (6.6%) and exports (7.9) Services sector supported by 15% increase in tourist arrivals Growth in the first quarter created additional 1.1 million jobs with employment generation more pronounced in services, followed by industry Fiscal consolidation on track PHP31.0 billion budget surplus in April 2012 cuts the national governments budget deficit to PHP2.9 billion for the first four months of the year Revenue rose 11.4% on governments intensive campaign against tax evasion National government spending grew 12.1% as government stepped up implementation of infrastructure projects Strong investor sentiment The Philippine Stock Exchange index (PSEi), up 15.8% as of June 5, is one of ten best performing stock market indices globally Market conditions continue to be robust and constructive for issuances in the domestic markets. PHP corporate issuances increased to ~PHP135.9 billion in 2011 from ~PHP121.5 billion in 2010. The 1H2012 saw many Philippine issuers tapping the domestic market to take advantage of low interest rates The market perceives ROP as an investment grade credit. Philippine 5-year CDS spread stood at 201.6 bps on June 1, lower than investment grade-rated countries like Indonesia (247.8) and India (385.0) Positive credit ratings momentum Moodys raised the outlook on the Philippines Ba2 rating to positive from stable on May 29 S&P upgraded the Philippines sovereign ratings to BB+ from BB on July 4.

55

The Philippines: Pushing Forward on All Fronts

Reaping benefits from structural reforms

1993: 1994: 1995: 1997: 1998: 2000: 2001: 2002: 2003: 2004: 2005: 2006: 2007: 2009: 2010: 2011:

Creation of the Bangko Sentral ng Pilipinas (BSP) Liberalization of foreign bank entry Liberalization of the telecommunications industry Privatization of water services (MWSS) Deregulation of the oil industry; Adoption of consolidated bank supervision Passage of the Philippine E-Commerce Act Liberalization of the power sector (EPIRA) Adoption by BSP of Inflation Targeting Framework; Passage of the Special Purpose Vehicle Act Passage of the Government Procurement Reform Act Passage of the Securitization Act or Republic Act 9267; Adoption of Basel 2 Passage of expanded value-added tax (E-VAT) Establishment of the Wholesale Electricity Spot Market (WESM) Full implementation of risk-based bank supervision Privatization of the National Transmission Corporation (TransCo) and National Power Corporation (NPC) Implementation of procurement and budget reforms Issuance of the guidelines on the adoption of Philippine Financial Reporting Standards (PFRS) 9; Adoption of phased-in migration to Basel III; Passage of GOCC Reform Act; Implementation of pocket open skies

66

The Presidents Social Contract with the Filipino People

Philippine Development Plan 2011-2016: In pursuit of inclusive economic growth

From the beginning of my campaign, I have maintained that the job of the President is composed of three thingsfirst is the efficient allocation of resources that as a country with a sizable debt and limited resources, we must be able to utilize these resources to the maximum benefit of our people. Second is to make certain that, as we walk the path to progress, no one is left behind it is the governments job to promote inclusive growth, and the third is the bedrock on which the first two are built on the idea that by curbing corruption we can reduce poverty. President Benigno S. Aquino III, Feb. 21, 2012

The Presidents Social Contract

A program of government committed to transformational leadership, institutional reform, economic stability and inclusive growth A re-awakened sense of right and wrong, through the living examples of our highest leaders; An organized and widely-shared rapid expansion of our economy through a government dedicated to honing and mobilizing our peoples skills and energies as well as the responsible harnessing of our natural resources; A collective belief that doing the right thing does not only make sense morally, but also translates into economic value as well; and Public institutions rebuilt on the strong solidarity of our society and its communities

77

The Presidents Social Contract with the Filipino People

Philippine Development Plan 2011-2016: In pursuit of inclusive economic growth

Medium-Term Targets
7.0-8.0% average GDP growth rate per year* 22.0% investment/GDP by 2016* 1 million employment generation per year* 6.8% unemployment rate by 2016* 16.6% poverty incidence by 2015 * 2.0% deficit/GDP by 2013* Upper 30% in global governance and competitiveness rankings by 2016* Investment grade sovereign credit ratings before 2016

Strategies to Achieve Inclusive Economic Growth

Invest massively in infrastructure Proposed US$130.2 billion Public Investment Program (PIP) for 2011 to 2016 (at PHP43/US$1.0) 22 PPP projects worth US$4.76 billion in the pipeline Boost competitiveness in productive sectors to generate massive employment Improve access to financing Promote transparent, accountable and participatory governance Implement Government Integrated Financial Management Information System and procurement reforms Enhance role of Local Government Units in the anti-corruption drive Pursue Government-Owned-and-Controlled Corporation (GOCC) reforms Develop human resources through improved social services and protection Maintain a stable macroeconomic environment Ensure ecological integrity Advance the peace process and guarantee national security
*Source: Philippine Medium-Term Philippine Development Plan 2011-2016 Results Matrices

88

The Administrations Five Priority Sectors

Continued efforts to improve five major industries

Agribusiness
10,907 jobs generated through f arms-to-market roads program f rom Jan Oct 2011 2011 rice imports reduced to 860,000 MT or 1/3 of 2010 v olume of 2.4 million MT Targeted sufficiency in food staples by 2013 through Food Staples Suf ficiency Program (FSSP)

BPO / Call Centers / IT

Philippines is the call center capital of the world, with about US$ 11bn in rev enues in 2011 and 640,000 employ ees Targets by 2016: Job generation of 4.5 million and cumulativ e exports of US$ 92bn

Creative Industries
Philippines activ ely promotes its creative industries, which include adv ertising, music and digital content Industry growth of 1,459.5% from 2002 to 2008 Creativ e Industries Dev elopment Council established to f ormulate master plan for sustained dev elopment of industry

Tourism
Increase of tourist arrivals by 11.3% to 3.9 million in 2011 surpassing national target of 3.7 million Planned expansion of priority markets to achieve target of 4.1 million foreign v isitors in 2012 and 10 million a y ear in 2016

Infrastructure
Sav ings of P6.1bn in 2011 achieved by DPWH from addressing collusion in inf rastructure bidding DPWH has slated P63.5bn f or its Infrastructure Program, and 86% of total inf rastructure projects in 2012 are already bid out Sev eral airport projects are being implemented and are under construction

99

The Administration has the Ample Backing of the Country

The President's mandate is as strong as ever

Ample satisfaction w ith general performance of the Administration

General Performance*
C.AQUINO 70 50 30 10 -10 -30 -50 1987 2987 2988 2989 2990 2991 1992 2992 2993 2994 2995 2996 2997 1998 2998 2999 3000 2001 3001 3002 3003 2004 3004 3005 3006 3007 3008 3009 2010 3010 3011 2012 RAMOS ESTRADA ARROYO B.AQUINO

Satisfaction Rating %

+56

Public acceptance of the Administrations focus on eradicating graft and corruption

Eradicating Graft and Corruption*
C.AQUINO RAMOS ESTRADA ARROYO B.AQUINO

Evidence of a sound monetary policy and satisfaction w ith the Administration on fighting inflation
Fighting Inflation*
C.AQUINO RAMOS ESTRADA ARROYO B.AQUINO

Satisfaction Rating %

Source: 4th Quarter 2011 Social Weather Report, Dec 3-7, 2011 National Survey Note: Net figures (% satisfied less % dissatisfied) correctly rounded

Satisfaction Rating %

10 10

Economic Resilience Highlighted by Sustained GDP Growth

Long-term investment and structural reform provide foundation for higher and more stable growth

A decade of rapid and sustained economic grow th is set to continue

8% 7% 6% 5% 4% 3% 2% 1% 0%

7.6% 6.7% 5.0% 3.6% 2.9% 1.1% 4.8% 5.2% 4.2% 3.9%
Av erage: 4.7%

6.6%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

GDP Growth (YoY on quarterly basis)

Healthy domestic consumption shields the economy from a global slow dow n
100% 80% 60% 40% 20% 0% 2007 2008 2009 2010 2011
Ho usehold Co nsumption/ GD P Go vernm ent Co nsumption/ GD P

A decade of sustained grow th w ith marginal volatility

Real GDP growth ranked by mean 2000 - 2010 16.0% 12.0%

9.3%

8.8%

9.9%

9.7%

9.6%

8.0% 4.0%

73.5%

74.3%

74.7%

0.0%

71.6%

73.7%
(4.0%) (8.0%) China Indonesia Malaysia Philippines Thailand Turkey Brazil

Hi / Low Real GDP Growth

Source: S&P, BSP

Mean Real GDP Growth

Source: National Statistical Coordination Board (NSCB), Moodys, IMF, WB, ADB, The Economist

11 11

Sound and Stable Inflation Environment

Refinements in the inflation targeting mechanism has allowed BSP to meet its inflation target consecutively for three years

The Republic has achieved the right policy balance betw een containing inflation and supporting economic grow th

15
Global inflationary cycle

10 5 0 2002 2003 2004

Headline
Upper Bound 5% Apr 2012: 3.0% Lower Bound 3%

2005

2006

2007

2008

2009

2010

2011

2012

Low er Bound of Target

Upper Bound of Target

Liquidity and domestic interest rates remain supportive

5 000 4 500 4 000 3 500 12 10

Mar 2012: P4,535.9 bn

14

PH billion P

3 000 2 500 2 000 1 500 1 000 500 0 2002 2 003 20 04 M3 (LHS) 2005 2 006 200 7 2008 20 09 201 0 2 011 20 12 Ban k Len ding Rates (RHS) Reverse Rep urcha se Rate (R HS)

Mar 2012: 6 6.1% Mar 2012: 4 4.0%

2

Source: BSP

12 12

Strong External Payments Position Supports the Philippine Peso

Local currency stable relative to currencies of other emerging market economies

Peso has remained stable in recent years

8.8% appreciation in Peso from Jan 2009 to June 2012

Peso more stable than peers currencies

3 Months Realized Volatility

50

160 140

48

120
46
2012YTD Av g: PHP42.95/US$

100 80 60

44

42
2010 Av g: PHP45.1/US$

40 20 0 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Philippine Peso Indonesian Rupiah Thai Baht Turkish Lira South Af rican Rand

40

38 A pr -09 A pr -10 A pr -11 A ug-09 A ug-10 A ug-11 Dec-09 Dec-10 Dec-11 A pr -12 Oct-09 Oct-10 Oct-11 Feb-09 Feb-10 Feb-11 Feb-12 Jun-09 Jun-10 Jun-11 Jun-12

Source: BSP, Bloomberg June 1, 2012

13 13

Market Affirmation of the Philippines Limited Credit Risk

Low CDS spreads and record high PSE performance are acknowledgment of positive investor sentiment for the Philippines

Philippines CDS levels are tighter than some higher rated peers
500.0 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 Apr-10 Aug-10 Sep-10 Oct-10 Dec-10 Apr-11 Aug-11 Sep-11 Oct-11 Dec-11 Jan-10 Feb-10 Mar-10 Jun-10 Nov-10 Jan-11 Feb-11 Mar-11 Jun-11 Nov-11 Jan-12 Feb-12 May-10 May-11 Mar-12 Apr-12 Jul-10 Jul-11 May-12 Country Brazil Peru India Indonesia Philippines Turkey Ratings (Moodys/S&P/Fitch) Baa2/BBB/BBB Baa3/BBB/BBB Baa3/BBB-/BBBBaa3/BB+/BBBBa2/BB/BB+ Ba2/BB/BB+ CDS lev el as of 1 June 2012 174.7 175.7 385.0 247.3 201.5 302.4

Brazil

India

Indonesia

Peru

Philippines

T urkey

Philippine Stock Exchange index sustains its bullish trend

6000 5000 4000 3000 2000 1000 0 Jun-07
5,062.44 pts 1 June 2012

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Phi l i ppi ne Stock Exchange Index

Source: Bloomberg Note: Bank of India used as a proxy for the Indian sovereign

14 14

Strong Growth in Remittances

Resilient remittance growth has created sustained current account surpluses

Consistent increase in remittances over the past decade

22 20 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 Mar-11 Mar-12

Remittances continue to provide an enormous source of strength to the rapidly grow ing current account surplus
700% 600% 500% 400% 300% 200% 100% 0% 2004 2005 2006 2007 2008 2009 2010 2011

526%

540% 453% 284% 203% 185% 210%

US$ bn

239%

OF Remittances

Rem ittances / CA balance

Remittances regardless of source remain impervious to external shocks

1,900.0

Despite numerous shocks, remittances have continued to grow

Dot Com Bubble Oil price shocks US subprime mortgage meltdown EU debt crisis

1.5% 0.1%

16.0%

12.8%
USD mn

1,700.0 1,500.0 1,300.0 1,100.0 900.0 700.0

16.6% 53.0%

500.0 300.0 Dec-00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Source: BSP Asi a

Americas

Europe

Africa

Oceani a

Mi ddle East

OFW Remittances

15 15

Growing Foreign Exchange Reserves

The strong build-up of foreign exchange reserves continues to buffer the economy from external shocks

Foreign exchange reserves continue to grow and coverage ratios expand As of end-April 2012, the countrys foreign exchange reserves could cover 11.5 months w orth of imports of goods and payments of services and income At this level, reserves are equal to 10.9 times the countrys short-term external debt based on original maturity Foreign exchange reserves continue to provide a healthy buffer from external shocks

Reserves have increased approximately 5 times over the past 8 years

90 80 70 60 50 40 30 20 10 0 17.1 16.2 18.5 23.0 4.0 3.6 3.8 4.2 37.6 44.2 5.8 6.0 75.3 62.4 4.0 2.0 0.0 33.8 76.5 6.0 8.7 9.5 11.3 11.5 14.0 12.0 10.0
months

Reserves cover more than 10x the short-term external debt

1200 1000 800 600 400 200 0 2003 2004 2005 2 006 20 07 200 8 276.2 321.6 289.2 4 58.5 47 6.4 536 .4

1 ,105.5 990.8

1,073.8 1,0 91.4

8.0

2003

2004

200 5 20 06 2 007

2008

2009

201 0 201 1 Apr'12

2009

2010

2011 Apr'12

FX Reserves (LHS)

Import Cover (RHS)

Short-te rm external deb t c over based on original maturity

Source: BSP

16 16

Moderate Exposure to EU Headwinds

Limited reliance on EU markets shelters the economy from external boom-bust cycles

Financial sector risk from EU exposure is limited The banking sector continues to fund itself primarily through domestic deposits eliminating the need for external financing Domestic banks have limited exposure to EU assets, mitigating the potential impact from NPLs or financial instrument contagion Local banking systems consistently improving asset quality, good liquidity and favorable capital profile serve as a buffer to external and domestic shock

Limited trade and financial dependence on EU

2010 Exports to EU / Total Exports Imports f rom EU / Total Imports Net EU FDI / Total FDI OFW Remittances from Europe / Total Remittances 1 14.4% 7.2% (109.9%) 17.0% 2011 12.4% 7.4% (24.3%) 16.6% 2011 Actual Value US$5.95bn US$4.45bn (US$0.31bn) US$3.3bn

1/ 53.0% of all rem ittances com from the Am e ericas, 16.6% from Europe, 16.0% from the Middle East ,12.8% from Asia, and 1.6% from other regions

The economy is less susceptible to trade shock than other EMs

Trade Openness 2010: Higher number indicates more vulnerability to trade shock Malaysia Taiwan Thailand Philippines China Indonesia Turkey 0 20 40 60 80 100 ST DEV Turkey Malaysia Thailand Taiwan Philippines China Indonesia 0.0

Limited impact on real economy from global economic shock

2009 GDP Growth Shock 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 7.5 5.3 5.3 4.5 3.1 1.5 0.7

Trade Openness: Sum of US dollar value of current account transactions as % of GDP Source: BSP; IMF WEO Apr 2011 release; Fitch Sovereign Data Comparator Dec 2011

Grow th Shock: Standard deviation seen in 2009 GDP grow th compared w ith the preceding fiveyear average grow th rate

17 17

Fiscal Reform Under the Aquino Administration

Getting on a sustainable fiscal path with improving fiscal metrics

Actual

Strict implementation of administrative reform measures at the BIR and BOC to improve revenue generation Run After the Tax Evaders Program (RATE)

2008

2009

2010

2011

RATE is a program initiated by the DOF and Bureau of Internal Revenue (BIR) to investigate and prosecute individuals or entities engaged in tax evasion The objectives are generating the maximum deterrent effect on the taxpaying public, enhancing voluntary compliance and promoting the confidence of the public in the tax system 105 tax evasion cases filed as of April 26, 2012 with total tax liabilities of PHP38.9 billion

Rev enues (% of GDP)

15.6

14.0

13.4

14.0

Rev enue Grow th (%)

5.8

(6.6)

7.5

12.6

Run After the Smugglers Program (RATS)

RATS is a vigorous campaign against smugglers that was launched in 2005 Revitalized RATS program zeroes in not only on smugglers but even on Bureau of Customs (BOC) officers and personnel who may be involved in illegal operations Fiscal Balance (% of GDP) (0.9) (3.7) (3.5) (2.0) 75 smuggling cases filed as of May 3, 2012 with total dutiable value of PHP60.3 billion

Expenditures (% of GDP)

16.5

17.7

16.9

16.0

Revenue Integrity Protection Service (RIPS)

General Gov ernment Debt (% of GDP) 44.2 44.3 42.2 39.1
1

RIPS was created to address persistent reports of corruption in revenue generating agencies of the government that lead to collection shortfalls 108 cases filed against 149 personalities as of May 7, 2012

Source: NSCB, Bureau of the Treasury (BTr) Note: (1) Q3 2011 data

18 18

National Governments Fiscal Consolidation Efforts on Track

Fiscal performance further solidifies under the Aquino Administration

Good gov ernance efforts bearing fruit as fiscal position continues to improv e
Aquino Administration Takes Office

1,422

1,522

1,558

1,271

1,137

1,149

963

980

894

1,250
707

1,044

(3.7%)

1,123

1,500 1,000 750 500 250 0

1,208

1,203

1,360

1,750

5% 4% 3%
514 517

Firm administrative measures have resulted in higher tax revenues and lower deficits Jan-April 2012 deficit at PhP2.9 billion Revenues were up 11.4% y-o-y for JanApr 2012 with BIR and BOC posting 13.9% and 11.6%, respectively Expenditures were up 12.1% y-o-y in Jan-Apr 2012 as the government made quality investments in infrastructure and social development

(3.7%) (3.5%)

816

(2.6%) (2.0%) (1.0%) (0.2%) (0.9%)

2% 1% 0%

2004

2005

2006

2007

2008

2009

2010

2011

J an to April 2012

Revenues

Expenditures

D eficit/GD P

Aquino Administrations efforts yielding positiv e results

Aquino Administration Takes Office

20.0 %

% change, y-o-y

Firm administrative measures have resulted in higher tax revenues The BIR and the BOC continue to post double digit growth in revenue collections

10.0 % 0.0 % -10.0 % -20.0 %

S ep-09 Oct-09

Oct-10 Nov-10 Dec-10 Jan-11

Oct-11 Nov-11 Dec-11

Nov-09 Dec-09 Jan-10

F eb-10 Mar-10 Apr-10

F eb-11 Mar-11 Apr-11

Ma y-10 Jun-10

Ma y-11 Jun-11 Jul-11

BIR (rolling 12 month sum, y-o-y % c hange) (LHS) Other Offices (rolling 12 month sum, y-o-y % c hange) (LHS)
Source: BTr

BOC (rolling 12 month sum, y-o-y % c hange) (LHS)

Jan-12 F eb-12 Mar-12

Jul-09 A ug-09

Jul-10 A ug-10 S ep-10

A ug-11 S ep-11

Apr-12

19 19

Funding Good Governance

Efforts to enhance governance are reflected in the 2012 Budget

Administration continues to allocate funds to social services

2012 Budget allocation by sector
6.3 %

Significant commitment to capital outlays for infrastructure

2012 Budget allocation by expense class
1.3% 17.9%

18 .6 %

31 .3 %

32.7%

19 .6% 2 4.2 % Social Se rvice s Deb t Burde n Def en se Econ omic Se rvices Gen eral Pu blic Se rvice

31.5% 16.6%

Personal Services Other Current Operating Expenditures* Net Lending

Maintenance & Other Expenditures Capital Outlays

Reforms in governance are at the core of economic policy making and budget allocation The Social Services sector w ill continue to receive the bulk of the budget allocation at 31.3% of the total budget The administration is aw are that long-term grow th is dependent on continued improvement in infrastructure. Therefore allocation to capital outlays has been increased 24.3% over 2011, w ith specific allocation to infrastructure expenditure up 40.6% over 2011

Source: Department of Budget and Management (DBM) Note: Other current operating expenditures include allotment to LGUs, subsidies and interest payments

20 20

Prudent Debt Management

Domestic / foreign borrowing mix effectively managed

Prudent strategies to finance the annual funding requirement minimize foreign exchange risk and increase funding self-sufficiency
National Government Gross Financing
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 Domestic 2007 Foreign 2008 2009 2010 2011 Jan-April 12 Global-Peso Notes 85.8% 54.7% 65.8% 64.5% 73.4% 56.6% 56.2% 65.6% 65.2% 75.9% 14.2% 45.3% 34.2% 35.5% 26.6% 43.4% 43.8% 28.5% 25.0% 5.9% 9.8% 24.1%

The external debt component w ithin the overall funding mix has been gradually declining over the years
2003 2006
2011

Jan-Apr 2012

49.2% 50.8%

44.1% 55.9%

42.0% 58.0%

40.8% 59.2%

Foreign
Source: BTr, DOF

Domestic

21 21

Improving Debt Sustainability

Proactively managing the liability profile

The national government foreign debt mix has grow n longer dated over time Domestic Debt

Reduced rollover risk and increased debt carrying capacity over the past ten years Debt portfolio has become significantly longer in tenor New issue yields decreasing and foreign currency-denominated bonds are receiving a substantial bid from onshore investors

10 0% 8 0% 6 0% 4 0% 2 0% 0% 20 03 Sh ort-te rm - 1 year or less 2005 29% 27% 44% 29 % 54% 41 % 26% 30 % 19% 20 10 2 0% 1 0% 2011 16% 9% Mar-1 2 Lo ng-te rm - Beyon d 10 years 7 0% 75%

Me dium -term - Beyond 1 year but less tha n 10 ye ars

Foreign Debt
1 00% 80% 60% 40% 20% 0% 2 003 Long -term - Beyond 10 yea rs 2 005 20 10 20 11 Ma r-1 2 Short-term - 1year o r les s 90 % 96 % 100 % 100 % 100% 10 % 4%

Me dium -term - Beyond 1 year but less than 10 ye ars

Source: BTr, DOF

22 22

Demonstrated Ability to Service Debt

Debt levels continue to decline due to the administrations effective liability management

External debt ratios have declined significantly over the last 8 years
80
68.6% 60.2%

General government debt/GDP in Q32 011 is 12 percentage points low er than National Government debt

70
63.4%

68.3%

66.1%

6,000 67.1 5,000

52.7%

73.4 74.4 68.5 61.4 68.0 63.3 58.8 65.8 59.2 51.6 44.2 44.2 44.3 53.9 54.7 54.8 52.4 51.0 61.3

80 70 60 50 40 39.1 30 20 % 23 23

60

50
44.1%

4,000 P bn 3,000 2,000 1,000 0

40

37.1% 31.3% 32.6% 30.1% 27.5%

42.2

30

20

10 0

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
External Debt / GDP

Consolidated General Gov ernment Debt (LHS)* National Gov ernment Debt (LHS) GG Debt-to-GDP (RHS)* NG Debt-to-GDP (RHS)

Source: BSP, BTr, DOF

Demonstrated Ability to Service Debt

Combination of improving metrics and external balance sheet strength

External debt is supported by grow ing current account receipts

140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 102.8% 115.5% 109.6% 113.6% 98.3% 89.9% 76.1% 70.0% 68.1% 77.0% 67.7% 69.9%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

External Debt / Current Account Receipts

Ample reserves to cover debt service burden

12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2.1 2.2 2.4 2.8 4.4 5.1
Improving external debt ratios underpin the countrys strengthening external payments position

Revenues allocated to debt service have declined drastically

10.1

40% 35% 30% 25% 20% 15% 10% 5% 0%

35%

37% 37% 32% 24% 23% 25% 24% 21% 22%

8.5 6.4

2003

2004

GIR / Debt Serv ice Burden

Source: BSP, BTr

2005 2006 2007 2008 2009 NG Interest Payment/NG Revenue

2010

2011 Jan-Apr 2012

24 24

Improving Asset Quality Underpins Soundness of Banking System

The banking system is in good health evidenced by low NPLs and strong prudential ratios

Improving asset quality has minimized the risk of a potential banking-system led crisis The resilience demonstrated by the Philippine banking system is highlighted by the decrease in system-wide NonPerforming Loans (NPL) and Non-Performing Assets (NPA) levels even at the heart of the global financial crisis NPL coverage ratios have strengthened as insurance against potential future asset deterioration, and underpin the conservative nature of the banking system

Strong capitalization above international norms

Capital Adequacy Ratio (CAR) (%)
20% 18% 16% 14% 12% 10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 endSep 2011 CAR, solo CAR, cons olidated 17.4% 16.4%

System-w ide NPL level has show n sustained improvement even through the global financial crisis
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total loan portfolio, gros s NPL R atio 0 8
40

While NPLs have shrunk, NPL coverage ratios have strengthened

NPL coverage ratio (%)
20 16 12
120 100 80 60

3,727.2

103.9

2.8% 4

20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 NPL Coverage Ratio

Source: BSP Note: NPA ratio is equal to the percentage of assets that are no longer paying interest or principal as a percentage of total assets

25 25

Reform-Minded Administration with Focus on Good Governance

Good governance agenda with emphasis on fiscal discipline, transparency and accountability

Key Reforms Instituted by the Administration

Prudent fiscal controls coupled w ith intensified revenue collection efforts over the past year have laid the framew ork for efficient budgetary allocation in 2012 Tax reform measures including the proposed hike in the Sin tax (alcohol and tobacco product taxes) and the rationalization of fiscal incentives aim to further improve the fiscal position Tighter prioritization of expenditures through the Zero Based Budgeting approach, improved composition of expenditures and quality of government services Rigorous implementation of RATE, RATS, RIPS programs to go after evaders, smugglers, corrupt officials, respectively, have improved tax collection Contracts and public tenders are now posted on public w ebsites to instill transparency in the procurement process Set-up BIR key performance indicators and publish actual results; establish appropriate performance standards and evaluations Enacted the GOCC Governance Act of 2011 w hich lays the groundw ork for enhanced discipline in GOCCs Set up the Debt Management Office at the Department of Finance w hich is tasked to formulate and oversee the implementation of the Republics debt management strategy

Fiscal Discipline

Transparency and Accountability

Source: BSP

26 26

Focus on Good Governance Yielding Results

The Philippines is showing improvements on several governance and competitiveness indicators

2009/2010
Heritage Foundation Index of Economic Freedom Transparency International Corruption Perceptions Index World Bank Government Effectiveness Indicator World Economic Forum (WEF) - Enabling Trade Index WEF Financial Development Index WEF Competitiveness Rankings Overall Institutions M acro environment Higher Education and Training Goods and M arket Efficiency Technological Readiness Financial Market Development Business Sophistication Innovation 85 125 68 73 97 95 75 60 111 115** 139 51 92 50

2010/2011*
107*** 134 52 72 44

Change
8 places 5 places 1 percentile 20 places 6 places

75 117 54 71 88 83 71 57 108

10 places 8 places 14 places 2 places 9 places 12 places 4 places 3 places 3 places

Source: World Bank , Transparency International and WEF *World Bank Governance Indicators and Transparency International values are for the year 2010 / World Econom Forum Rankings values are from the 2011/2012 report data ic ** Heritage Foundation 2011 ranking *** Heritage Foundation 2012 ranking

27 27

A Promising Future Lies Ahead

The Philippines is the last major economy in Asia to enter its demographic sweet spot

The youngest population in Asia supports a strong medium-term economic grow th outlook The median age in the Philippines is only 22.2 years, w ell below other young countries in Asia, such as Malaysia (25), India (25.1), Indonesia (27.8) and Vietnam (28.2) According to United Nations population projections, in 2015 the Philippines w ill enter its Demographic Window , w hen the proportion of the population that is of w orking age is particularly prominent The Philippines is the last major Asian economy to benefit from this demographic dividend, w hich is typically associated w ith accelerated economic grow th Extended periods of high GDP grow th in Asias fastest-grow ing economies have coincided w ith countries entering their Demographic Window s* On average, grow th over the 10-year period follow ing the beginning of the Demographic Window has been 7.3%

Demographic Window s* in Asia

Japan Hong Kong Singapore Korea China Thailand Indonesia Vietnam Malay sia India Philippines 1960 1980 2000
1965 1980 1980 1985 1990 1995 2005 2005 2010 2010 2015 1995 2015 2015 2020 2025 2030 2040 2040 2045 2050 2050

Average GDP Grow th, First 10 Years of Demographic Window (%)

12 10.3 10 8 6 4 2 0
Singapore Vietnam China Korea India Hong Kong Thailand** Indonesia Malaysia Japan

9.0 8.2 8.1 7.8 7.4 7.0 6.2 5.4 3.3

2020

2040

2060

*Defined as the period when population under 15 years old drops below 30% and
population over 65 years old is less than 15%.

**Thailand is an exception, as its Dem ographic Window began in 1995, and thus its highgrowth period was interrupted by the Asia Financial Crisis of 1997-98

Sources: UN World Population to 2030, UN World Population Prospects (2010 Revision), IMF World Economic Outlook, Japan Cabinet Office

28 28

Economic Outlook: Moving From Strength to Strength

Robust economic outlook

2012 outlook and projections of selected economic indicators

Actual 2008 Real GDP Grow th (%) Headline Inflation (%) Exports Grow th (%) Imports Grow th (%)
1/

Proj ections a/ 2010 7.6 3.8 34.0 27.5 2011 3.7 4.4 (6.9) 9.5 2012 5.0-6.0 3.0-5.0 10.0 15.0

2009 1.1 3.2 (22.1) (24.0)

4.2 9.3 (2.5) 5.6

1/

OF Remittances 2/ Amount (US$ billion) Grow th Rate Current Account (US$ billion) Balance of Payments (US$ billion) GIR (US$ billion)

16.4 13.7

17.3 5.6

18.8 8.2

20.1 7.2

21.1 b/ 5.0 b/

3.6

9.4

8.9

7.1

4.3 b/

0.1 37.6

6.4 44.2

14.3 62.4

10.2 75.3

2.8 b/ 79.0 b

b/

Source: BSP, NSO a/ Based on projections approved by the DBCC on Jan 25,2012 Based on BSP projections as presented to the Monetary Board on 2 December 2011 1/ Based on NSO data 2/ Remittances coursed through banks

29 29

Economic Outlook: Moving From Strength to Strength

Robust economic outlook

2012 Grow th Outlook (grow th rate, in %, at constant prices) Actual 2010 GDP GNI Demand Side HH Cons. Govt. Cons. Investment Total Exports Total Imports Supply Side Agriculture Industry Services (0.2) 11.6 7.2 2.6 1.9 5.0 4.1 5.6 4.9 5.0 6.6 5.9 3.35 4.0 31.61 21.0 22.5 6.1 (0.7) 11.1 -3.8 1.9 4.6 4.0 8.9 8.4 9.7 5.6 4.6 10.2 9.3 10.4 7.6 8.2 2011 3.7 2.6 2012 Assumption* Low 5.0 4.0 High 6.0 5.0

Near-term Policy Directions Stimulating domestic demand Sustaining domestic consumption Securing investments Accelerating fiscal spending and infrastructure outlays Diversifying domestic and external trade Strengthening economic relations w ith fast-grow ing ASEAN economies; seizing the opportunity from China rebalancing

Global and Domestic Risks to Grow th External Risks Balance sheet issues and w eak consumption in the US Fiscal problems and sluggish output in the Eurozone Internal Risks Weak industry output Damages in agriculture and infrastructure due to natural calamities Timely and effective implementation of disbursements Acceleration Program

*DBCC approved only the GDP growth rate. Assumption details may still change.

30 30

Medium-Term Fiscal Program

The new budget is designed to keep the ROP on track to achieve a deficit of 2.0% of GDP by 2013

Program PARTICULARS 2012 Rev enues (PHP billion) % of GDP 1,560.6 14.4

Proposed 2013 1,780.1 14.8 2014 2,040.5 15.1

Estimated Lev els 2015 2,333.1 15.5 2016 2,669.9 15.9

BIR BOC BTr Others

1,066.1 347.1 61.8 85.6

1,238.6 397.3 53.2 91.0

1,428.4 460.2 53.3 98.6

1,637.4 533.6 55.1 107.0

1,888.1 612.0 54.2 115.6

Disbursements (PHP billion) % of GDP

1,839.7 17.0

2,021.1 16.8

2,310.5 17.1

2,634.1 17.5

3,006.9 17.9

Surplus/(Deficit) (PHP billion) % of GDP

(279.1) (2.6)

(241.0) (2.0)

(270.0) (2.0)

(301.0) (2.0)

(337.0) (2.0)

GDP

10,824.0

12,061.0

13,504.2

15,039.6

16,825.8

Source: Development Budget Coordination Committee (DBCC), as of January 25, 2012

31 31

Medium-Term Financing Program

Increasing reliance on domestic financing sources

National Government Financing Program 2012 - 2016

Program 2012 Ov erall Financing (PHP million) Foreign Borrowings Domestic Borrowings Change in Cash Financing Mix (%) Foreign Domestic 25 75 24 76 23 77 22 78 17 83 279,100 105,177 183,685 9,762 Proposed 2013 241,000 65,968 184,954 9,922 2014 270,000 55,327 223,675 9,002 Estimated Lev els 2015 301,000 86,866 224,188 10,054 2016 337,000 17,057 330,832 10,889

Source: DBCC as of January 25, 2012

32 32

The Republic of the Philippines:

A Fortified Credit Story

June 2012