Important sectors of the Philippine economy include agriculture and industry, particularly food processing, textiles and garments, and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromite, nickel, and copper. Significant natural-gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Agriculture generally suffers from low productivity, low economies-of-scale, and inadequate infrastructure support. Agricultural output fell in 1997 and 1998 due to an El NiÒo-related drought but increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.9% year-on-year in 2002 and 3.2% in 2003. Agricultural output increased by 4.9% in real terms during 2004 but stagnated during the first semester of 2005 due to drought and intermittent weather disturbances.

The Philippines relies heavily on electronics shipments for about two-thirds of export revenues. Although there has been some improvement, over the years, local value added of electronics exports remains relatively low at about 30%. Overall export receipts expanded by 9.6% in 2004, led by an 11.2% increase in foreign exchange receipts from electronics shipments. Year-on-year export growth slowed to 3.6% during the first half of 2005, with receipts from electronics shipments up by a lethargic 1.2%.

Although less severely affected than its neighbors, the Philippines' banking sector was not spared from high interest rates and non-performing asset (NPA) levels during the Asian financial crisis and its aftermath. Increases in minimum capitalization requirements, increasing loan-loss provisions, and generally healthy capital-adequacy ratios have helped temper systemic risk. The Special Purpose Vehicle (SPV) Act of January 2003, which provides time-bound fiscal and regulatory incentives to encourage the sale to private asset management companies, has helped to reduce banksí portfolios of non-performing assets (NPAs). As of July 2005, the ratio of the commercial banking systemís NPAs to total assets had declined to under 9.5% (from 12.3% as of July 2004). Banks had until April 2005 to conclude notarized agreements to sell their NPAs to qualify for incentives under the law. A bill supported by the Philippine Central Bank and the banking sector seeks to extend the deadline towards further reducing the NPA ratio to pre-crisis levels of under 5%. Circumstances surrounding bank closures continue to highlight remaining impediments to more effective bank supervision and timely intervention--including stringent bank secrecy laws, obstacles preventing bank regulators from examining banks at will, and inadequate legal protection for Central Bank officials and examiners. The government faces another important challenge in addressing threats to the long-term viability of state-run pension funds. The monetary authorityís adoption since January 2002 of an inflation-targeting framework has enhanced transparency in the conduct of monetary policy. The government--which has targeted lower fiscal deficits since 2003 toward balancing the budget before the end of President Macapagal-Arroyoís term--contained the full-year 2004 budget deficit to 3.9% of GDP (down from 2002ís 5.3% record high) and is on track thus far to containing the 2005 deficit to 3.4% of GDP in 2005, reflecting spending restrain and more vigorous efforts by tax collection agencies to improve administration, enforcement, and governance. However, the current 13% tax-to-GDP ratio remains well below the 17% peak ratio achieved in 1997.

The Aquino and Ramos administrations opened up the relatively closed Philippine economy and provided a firmer base for sustainable economic growth. After a slow start, President Estrada and his cabinet continued with, and expanded, liberalization and market-based policies and reforms. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange, and the President's close ties to certain businessmen, shook confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

The Macapagal-Arroyo Administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). The Financial Action Task Force (FATF) removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The Macapagal-Arroyo government is pushing for congressional approval of an anti-terrorism law to strengthen its campaign against terrorism and terrorist financing.

Although encountering implementation hitches, the Macapagal-Arroyo administration also enacted legislation in 2001 to rationalize the electric power sector and privatize the governmentís debt-saddled National Power Corporation (NPC). The government has achieved some success in establishing an independent regulatory system for electricity pricing which will benefit NPC finances. In addition to the Special Purpose Vehicle law, President Macapagal-Arroyo also signed into law in 2003 a priority initiative to reform the government procurement system (the Government Procurement Reform Act). During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the Philippinesí convoluted documentary stamp tax system and encourage secondary trading of financial instruments, as well as legislation (the Securitization Act) towards establishing the necessary infrastructure and market environment for a wide range of asset-backed securities. She also signed legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of overburdened court dockets.

Notwithstanding a number of favorable policy developments, the Philippine economy continues to juggle extremely limited financial resources while attempting to meet the needs of a rapidly expanding population and address intensifying demands for the current administration to deliver on its anti-poverty promises. Over 80% of the government budget is gobbled up by non-discretionary expenses (i.e., debt service, government salaries and benefits, and legally-mandated revenue transfers to local government units). The current high level of government debt, the substantial share of foreign obligations, the emerging risks posed by contingent liabilities (particularly those of the governmentís debt-saddled NPC), and the worrisome deterioration in the tax collection performance from the 1997 peak (still low by regional standards) have increased the countryís vulnerability to severe external and domestic shocks. More recent reforms include laws increasing excise taxes on tobacco and liquor products and establishing a system of rewards and penalties in revenue collection agencies. An amended Value Added Tax law (which would reduce VAT exemptions and increase the VAT rate from 10% to 12% in 2006 represents the most significant measure thus far in the Macapagal-Arroyo Administrationís efforts to raise revenues from legislative measures to balance the budget two years ahead of schedule (2008 vs. 2010) while expanding investments in infrastructure and improving the delivery of essential social services. As of end-September 2005, the amended VAT law--originally scheduled for implementation in July 2005 but challenged by opposition lawmakers and other groups before the Supreme Court--was on hold pending a final ruling by the Court.

Reflecting weaknesses in intellectual property rights protection, the country remains on the U.S. Trade Representative's Special 301 Priority Watchlist. Potential foreign investors, as well as tourists, continue to be concerned about law and order, inadequate infrastructure, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. Competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, lower costs of doing business, and promote good public and private sector governance. The government has been working to reinvigorate its anti-corruption drive and the Office of the Ombudsman has reported improved conviction rates. Nevertheless, the Philippines will need to do more to improve international perception of its anti-corruption campaign--an effort that will require strong political will and significantly greater financial and human resources.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. The government has instituted conservation programs, but deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for the agriculture subsector, the marine fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and inadequate government support.

The industrial sector is concentrated in the urban areas, especially in the metropolitan Manila region and has only weak linkages to the rural economy. Inadequate infrastructure, transportation and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industryís overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil and gas.