���������������������������

FOREWORD �

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he primary objective of monetary policy is to promote a low and stable rate of inflation conducive to a balanced and sustainable economic growth. The

adoption in January 2002 of the inflation targeting framework for monetary policy was aimed at helping fulfill this objective.

One of the key features of inflation targeting is greater transparency, which means greater disclosure and communication by the BSP of its policy actions and decisions. This Inflation Report is published by the BSP as part of its transparency mechanisms under inflation targeting. The objectives of this Inflation Report are: (i) to identify the risks to price stability and discuss their implications for monetary policy; and (ii) to document the rigorous economic analysis behind the conduct of monetary policy and convey to the public the overall thinking behind the BSP’s decisions on monetary policy. The broad aim is to make monetary policy easier for the public to follow and understand and enable them to better monitor the BSP’s commitment to the inflation target, thereby helping both in anchoring inflation expectations and encouraging informed debate on monetary policy issues.

The government’s targets for annual headline inflation under the inflation

targeting framework have been set at 3.5 percent and 4.5 percent for 2009 and 2010, both with a tolerance interval of ± 1.0 percentage point. The inflation target range for 2009 therefore is 2.5-4.5 percent and for 2010, 3.5-5.5 percent.

The report is published on a quarterly basis, presenting a survey of the various

factors affecting inflation. These include recent price and cost developments, prospects for aggregate demand and output, labor market conditions, monetary and financial market conditions, fiscal developments, and the international environment. A section is devoted to a discussion of monetary policy developments in the last quarter, as well as a comprehensive analysis of the BSP’s view of the inflation outlook for the policy horizon. This is followed by a discussion of the implications of the assessment of inflation and economic conditions on the monetary policy settings of the BSP.

The Monetary Board approved this Inflation Report at its meeting on

29 October 2009. �

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����������AMANDO M. TETANGCO, JR. Governor �������������������������������������������������������������������������������������

30 October 2009

T

ii

List of Acronyms, Abbreviations, and Symbols AFF Agriculture, Fishery, and Forestry AMCs Asset Management Companies ARMM Autonomous Region of Muslim Mindanao AP Asia Pacific AL Auto Loans BAS Bureau of Agricultural Statistics BES Business Expectations Survey BIS Bank for International Settlements BOC Bureau of Customs BPO Business Processing Outsourcing BTr Bureau of the Treasury CAMPI Chamber of Automotive Manufacturers of the Philippines, Inc. CAR Capital Adequacy Ratio CBD Central Business District CCRs Credit Card Receivables CES Consumer Expectations Survey CDS Credit Default Swaps CI Confidence Index CPI Consumer Price Index ECB European Central Bank EMBI Emerging Market Bond Index ENSO El Niño Southern Oscillation ERC Energy Regulatory Commission EU European Union FAO Food and Agriculture Organization GDP Gross Domestic Product GNP Gross National Product GRAM Generation Rate Adjustment Mechanism IBL Interbank Loans EIA Energy Information Administration ICERA Incremental Currency Exchange Rate Adjustment FCDA Foreign Currency Differential Adjustment IEA International Energy Agency IMF International Monetary Fund IPP Independent Power Producer KBs Commercial banks LFS Labor Force Survey LPG Liquefied Petroleum Gas LTFRB Land Transportation Franchising and Regulatory Board MEM Multi-Equation Model Meralco Manila Electric Company MISSI Monthly Integrated Survey of Selected Industries MTP Major Trading Partner MW Megawatt NCCP National Council for Commuters Protection NDA National Domestic Assets NFA Net Foreign Assets, National Food Authority NFIA Net Factor Income From Abroad NG National Government NIA National Income Accounts

iii

NPC National Power Corporation NPLs Non-performing loans NSO National Statistics Office OECD Organization for Economic Cooperation and Development OMOs Open market operations OPEC Organization of Petroleum Exporting Countries PBR PCE PMI

Performance-based Rate Personal Consumption Expenditure Purchasing Managers’ Index

PSALM Power Sector Assets and Liabilities Management PSEi Philippine Stock Exchange Composite Index PSS Postal Savings System PSIC Philippine Standard Industrial Classification RB Rural Banks REER Real Effective Exchange Rate RM Reserve Money ROP Republic of the Philippines RP Repurchase RREL Residential and Real Estate Loans RRP Reverse Repurchase SEM Single-Equation Model SDA Special Deposit Account TB Thrift Bank TCS Transportation, Communications, and Storage U/KBs Universal/commercial banks WEO World Economic Outlook

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iv

THE MONETARY POLICY OF THE BANGKO SENTRAL NG PILIPINAS

The BSP Mandate The BSP’s main responsibility is to formulate and implement policy in the areas of money, banking and credit, with the primary objective of maintaining stable prices conducive to a balanced and sustainable economic growth in the Philippines. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency. Monetary Policy Instruments The BSP uses various instruments to effect the desired monetary policy stance to achieve the inflation target. These include (a) raising/reducing the BSP's policy interest rates; (b) increasing/decreasing the reserve requirement; (c) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks and trust entities of BSP-supervised financial institutions; (d) increasing/decreasing its rediscount rate on loans extended to banking institutions on a short-term basis against eligible collaterals of banks’ borrowers; and (e) outright sales/purchases of the BSP’s holdings of government securities. The BSP’s primary monetary policy instruments are its overnight reverse repurchase (RRP) or its borrowing rate and overnight repurchase (RP) or its lending rate. Policy Target The BSP uses the Consumer Price Index (CPI) or headline inflation rate which is compiled and released to the public by the National Statistics Office (NSO) as its target for monetary policy. The policy target is set by the Development Budget Coordinating Committee (DBCC)1 in consultation with the BSP. For 2009, the headline inflation target has been set at 3.5 percent ± 1.0 percentage point, while for 2010, the inflation target has been set at 4.5 ± 1.0 percentage point. BSP’s Explanation Clauses These refer to the predefined set of acceptable circumstances under which an inflation-targeting central bank may fail to achieve its inflation target. These clauses recognize the fact that there are limits to the effectiveness of monetary policy and that deviations from the inflation target may sometimes occur because of factors beyond the control of the central bank. Under the inflation targeting framework of the BSP, these exemptions include inflation pressures arising from: (a) volatility in the prices of agricultural products; (b) natural calamities or events that affect a major part of the economy; (c) volatility in the prices of oil products; and (d) significant government policy changes that directly affect prices such as changes in the tax structure, incentives, and subsidies.

1 The DBCC, created under Executive Order (E.O.) No. 232 dated 14 May 1970, is an inter-agency committee tasked

primarily to formulate the National Government's fiscal program. It is composed of the Department of Budget and Management (DBM), National Economic and Development Authority (NEDA), and the Department of Finance (DOF). The BSP sits as a resource agency.

v

The Monetary Board The powers and functions of the BSP, such as the conduct of monetary policy and the supervision over the banking system, are exercised by its Monetary Board, which has seven members appointed by the President of the Philippines. Beginning in July 2006, the Monetary Board meets every six weeks to review and decide on the stance of monetary policy. Prior to July 2006, monetary policy meetings by the Monetary Board were held every four weeks.

Chairman Amando M. Tetangco, Jr. Members Peter B. Favila

Raul A. Boncan

Juanita D. Amatong

Nelly F. Villafuerte

Alfredo C. Antonio

Ignacio R. Bunye

The Advisory Committee The Advisory Committee was established as an integral part of the institutional setting for inflation targeting. It is tasked to deliberate, discuss and make recommendations on monetary policy to the Monetary Board. The Committee meets every six weeks (beginning July 2006) but may also meet in between the regular meetings, whenever it is deemed necessary. Prior to July 2006, the Committee met every four weeks.

Chairman Amando M. Tetangco, Jr.

Governor Members2 Diwa C. Guinigundo

Deputy Governor Monetary Stability Sector

Nestor A. Espenilla, Jr. Deputy Governor Supervision and Examination Sector

Ma. Cyd N. Tuaño-Amador

Assistant Governor Monetary Policy Sub-Sector

Ma. Ramona GDT Santiago Managing Director Treasury Department

2 The Advisory Committee is supported by a Technical Secretariat composed of officers and staff from the Department of

Economic Research, Center for Monetary and Financial Policy, and the Treasury Department.

vi

Schedule of Meetings of the Advisory Committee and the Monetary Board on Monetary Policy for 2009

Meeting No.

Advisory Committee 1 Monetary Board 2 Publication of MB

Highlights 3

1 26 January 29 January 26 February

2 2 March 4 5 March 4 2 April

3 13 April 16 April 14 May

4 25 May 28 May 25 June

5 6 July 9 July 6 August

6 17 August 20 August 17 September

7 28 September 1 October 29 October

8 3 November 5 5 November 5 3 December

9 14 December 17 December 14 January 2010

Notes: 1 Under MB Resolution No. 630, the frequency of meetings of the Advisory Committee and the Monetary Board was set at every six weeks starting July 2006. Prior to this, the Advisory Committee and the Monetary Board meetings were held every four weeks. 2 Monetary Board meetings on monetary policy are held on the Thursday after the latest Advisory Committee meeting. 3 Under MB Resolution No. 630, the lag in the publication of the highlights of the Monetary Board meetings on monetary policy was reduced to four weeks. Prior to this, the highlights were published six weeks after the reference meeting date. 4 Advisory Committee meeting scheduled on 9 March 2009 and Monetary Board meeting scheduled on 12 March 2009 will be moved one week earlier. Bank for International Settlements (BIS) bi-monthly Governors’ meeting is on 8-9 March 2009. 5 Advisory Committee meeting scheduled on 9 November 2009 and Monetary Board meeting scheduled on 12 November 2009 will be moved one week earlier. Bank for International Settlements (BIS) bi-monthly Governors’ meeting is on 8-9 November 2009; 2 November 2009 (All Soul’s Day), which falls on a Monday, is a holiday.

vii

CONTENTS��

Overview 1

I. Inflation and Real Sector Developments 3

Prices 3

Aggregate Demand and Supply 11

Aggregate Demand 12

Aggregate Supply 21

Labor Market Conditions 23

II. Monetary and Financial Market Conditions

24

Interest Rates 24

Financial Market Conditions 26

Banking System 29

Exchange Rate

33

34 Domestic Liquidity and Credit Conditions 36

III. Fiscal Developments IV. External Developments

38

39

V. Monetary Policy Developments

42

VI. Inflation Outlook 44

Private Sector Economists’ Inflation Forecasts BSP Inflation Forecasts

Risks to the Inflation Outlook VII. Implications for the Monetary Policy Stance

44 46

50

55

1

OVERVIEW3

Inflation decelerates further. Quarterly inflation decelerated further in Q3 2009, largely reflecting base effects from significant increases in global commodity prices recorded during the same period last year. In particular, the drop in inflation was driven mainly by the slowdown in food prices, and the negative contribution of fuel inflation, following the very high kerosene and LPG prices a year ago. Core inflation also eased during the quarter, reflecting sluggish domestic demand. The domestic economy shows signs of recovery. Economic activity in the second quarter came out better than expected with GDP recording a 1.5 percent growth, driven by consumer and government spending. Various economic indicators also showed improvements, particularly increased vehicle and energy sales, the steady rise in capacity utilization of manufacturing, and improved consumer confidence and business expectations. Meanwhile, there are still some soft spots in the macroeconomy including weaker property market activity due to the ongoing correction, continuous negative growth in exports, and the slightly higher unemployment level posted in July.

Financial markets reflect some signs of stability. Stock market activity was generally upbeat in Q3 2009, driven by the improvements in global and domestic indicators particularly in July and August. Likewise, debt spreads narrowed at the end of Q3 relative to the end of Q2 2009 as emerging signs of global economic recovery attracted investors to higher-yielding emerging market assets. In the foreign exchange market, the peso appreciated against the dollar in September 2009 on a year-to-date basis, in tandem with other Asian currencies, as risk appetite for emerging market assets increased.

Domestic liquidity growth remains strong, while credit continues to grow, albeit at a slower pace. The growth in domestic liquidity was mainly driven by the increase in net foreign assets of depository corporations as the BSP continued to build up its international reserves, while banks reduced their foreign liabilities as they paid off maturing obligations��Meanwhile, bank lending continued to grow, albeit at a decelerating pace. The expansion of lending to some productive sectors was offset partly by the contraction in other sectors, including manufacturing, which comprised about 15 percent of total loans.

Domestic interest rates continue to decline. Interest rates fell further in Q3 2009 compared to the previous quarter’s levels, following the decline in the BSP’s policy interest rates and as monetary conditions improved. The secondary market yield curve for government securities shifted downward in Q3 2009 as lower inflation expectations drove down interest rates across all tenors. Similarly, interest rates declined, as banks had passed on partially to their borrowers the BSP’s cuts in policy rates.

2

The Monetary Board reduces the BSP’s key policy interest rates further by another 25 basis points in July 2009 and holds policy rates steady in August 2009. The decision to reduce policy rates further took into consideration the Monetary Board’s resolve to provide support to economic activity to the extent that the inflation outlook would allow. This brought the cumulative rate reduction to 200 basis points since December 2008. Meanwhile, policy rates were kept unchanged in August with the assessment that the prevailing monetary settings were appropriate given the manageable inflation outlook and the encouraging signs of an economic rebound. In addition, the Monetary Board noted that the substantial monetary easing that has been implemented since the latter part of 2008 will continue to provide support to domestic economic activity. Maintaining an accommodative policy stance was appropriate and would allow prior substantial monetary stimulus measures to fully work their way through the system. The latest baseline forecasts continue to indicate that inflation would settle within the target ranges for 2009 and 2010. The BSP’s latest baseline forecasts show inflation settling at the lower half of the target range for 2009 and 2010, gradually increasing over the next two quarters, and remaining stable until the end of the policy horizon. From 2009 levels, inflation for 2010 would likely pick up with the expected recovery in domestic and world economic activity, and as the impact of the BSP’s monetary policy easing becomes more evident. Prospects of an uptrend in food prices due to the recent typhoons and some base effects from a lower projected inflation path for 2009 could also contribute to higher but broadly stable inflation in 2010. Other upside risks to the inflation outlook include a stronger-than-expected rebound in economic activity and its potential tightening effect on commodity supply-demand balances; adverse weather conditions; increases in utility rates due to cost recoveries; and an untimely unwinding of large global stimulus programs. On the downside, inflationary pressures are expected to be dampened by the likelihood of a slow recovery in global economic activity and the impact on consumer prices of the recent peso appreciation. The manageable inflation environment over the policy horizon provides room for policy flexibility. Given a favorable inflation outlook, the BSP has the flexibility to continue to provide adequate stimulus to the real sector amid the presence of soft spots in the domestic economy and the vulnerabilities brought by the recent calamities. Nonetheless, the BSP remains mindful of the emerging challenges to monetary policy particularly as economic growth gains momentum. Moving forward, the BSP will continue to carefully scan the operating environment with a view to moving preemptively to address any risks to price stability. [On 1 October 2009, the Monetary Board maintained the RRP and RP rates at 4.0 and 6.0 percent, respectively.]

3

I. INFLATION AND REAL SECTOR DEVELOPMENTS Prices

-1

1

3

5

7

9

11

13

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Headline Inflation Quarterly average in percent (2000=100)

Q3 20090.3

Quarterly inflation decelerated further in Q3 2009, largely reflecting base effects from the significant movements in global commodity prices in the same period last year. In particular, the drop in inflation was driven mainly by the slowdown in food prices, and the negative contribution of fuel inflation, following the very high kerosene and LPG prices a year ago. At the same time, core inflation eased during the quarter, reflecting sluggish domestic demand.

0

2

4

6

8

10

12

14

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3

2002 2003 2004 2005 2006 2007 2008 2009

Headline Inflation Core Inflation

Headline and Core InflationQuarterly average in percent (2000=100)

Q3 2009

Headline0.3

Core3.1

Headline and Core Inflation Headline inflation dropped to 0.3 percent in Q3 2009 from 3.2 percent in the previous quarter and the 2008 peak of 12.2 percent in Q3 2008. Both food and non-food inflation declined markedly in Q3 2009, owing mainly to the base effects of last year’s surge in commodity prices. Food contributed just 0.9 percentage point to headline inflation, as rice deducted 0.4 percentage point to overall inflation. Housing and repairs and clothing contributed 0.4 percentage point and 0.1 percentage point, respectively, while services contributed negatively by 0.6 percentage point. Meanwhile, waning fuel prices resulted in the negative contribution from fuel, light and water, shaving off 0.32 percentage point from headline inflation.

Inflation follows a downward path.

4

Food and non-food inflation both decelerate steeply.

-2

0

2

4

6

8

10

12

14

16

18

2002 2003 2004 2005 2006 2007 2008 2009

Headline Inflation Food Inflation Non-food Inflation

Headline, Food and Non-food Inflation Quarterly average in percent (2000=100)

Core inflation falls on sluggish demand.

Food inflation dropped further to 1.9 percent in Q3 2009 from 5.6 percent in Q2 2009 and from a high of 17.0 percent in the same quarter a year ago. Non-food inflation was negative 1.1 percent in Q3 2009 from 0.7 percent in Q2 2009 and 7.8 percent in the same quarter in 2008. Core inflation, an indicator of the long-term trend of inflation, extended its downtrend during the quarter. The official NSO core inflation measure eased further to 3.1 percent in Q3 2009 compared to 4.4 percent in the previous quarter and 6.9 percent in the same quarter a year ago. Similarly, alternative measures of core inflation estimated by the BSP reflected an overall downtrend in Q3 2009. Core inflation contributed 1.4 percentage points to headline inflation in Q3 2009, lower than the 2.8 percentage-point and 5.9 percentage-point contribution to inflation recorded in Q2 2009 and Q3 2008, respectively. With the contraction in year-on-year food and petroleum prices, the non-core CPI items posted a negative contribution to headline inflation at -1.1 percentage points from 0.4 percentage point in the previous quarter and 6.4 percentage points in the same quarter a year ago.

�������������� ���������������� Quarterly averages of year -on-year change

QuarterOfficial Core

InflationTrimmedMean 1/

WeightedMedian 2/

Net of Volatile Items 3/ *

2007 2.8 2.6 2.3 2.7Q1 3.2 2.9 2.5 3.0Q2 2.6 2.2 2.2 2.5Q3 2.9 2.3 2.1 2.5Q4 2.4 2.9 2.5 3.0

2008 6.2 7.6 7.3 7.8Q1 4.1 5.1 4.5 5.2Q2 6.2 7.7 7.4 8.0Q3 6.9 9.6 9.1 9.7Q4 7.7 7.9 8.1 8.1

2009 Q1Q2Q3

6.34.43.1

5.83.91.8

5.63.92.4

5.22.61.1

1/ The trimmed mean represents the average inflation rate of the (weighted) middle 70 percent in a lowest -to-highest ranking of year -on -year inflation rates for all CPI components.

2/ The weighted median represents the middle inflation rate (corresponding to a cumulative CPI weight of 50 percent) in a lowest -to-highest ranking of year -on-year inflation rates. 3/ The net of volatile items method excludes the following items: educational services, fruits and vegetables, personal services, rentals, recreational services, rice, and corn. * The series has been recomputed using a new methodology that is aligned with NSO’s method of computing the

official core inflation, which re -weights remaining items to comprise 100 percent of the core basket after excluding non -core items. The previous methodology retained the weights of volatile items in the CPI basket while keeping their indices constant at 100.0 from month to month.

Source: NSO, BSP estimates

����������������������� ��������in percent

ItemWeight in Headline

CPI

Percentage Contribution to Year -on -Year Headline

InflationQ3 2009

Q22009

Q3 2008

Core Inflation 81.6 1.39 2.83 5.87Non- core Items 18.4 -1.05 0.35 6.35

Rice 9.4 -0.36 0.67 4.12Corn 0.9 -0.04 0.06 0.29Fruits and Vegetables 5.3 0.09 0.31 0.81

Gas, LPG 1.3 -0.19 -0.22 0.37Kerosene 0.3 -0.07 -0.05 0.13Oil, Gasoline and

Diesel 1.3 -0.48 -0.41 0.64

Headline Inflation 100.00 0.3 3.18 12.2

Source of Basic Data: NSO, BSP

5

The number of items with above-target inflation rates decreases further.

The proportion of Consumer Price Index (CPI) components [at the 4-digit Philippine Standard Industry Classification (PSIC) level] showing inflation rates above a given threshold provides an indication as to whether pressures on consumer prices are becoming generalized over time. As anticipated, the number of items with inflation rates greater than the threshold of 4.5 percent (the upper end of the inflation target for 2009) fell sharply to 45 in Q3 2009 from 75 in the previous quarter. These items accounted for a much lower proportion of the CPI basket at 16.0 percent compared to 51.4 percent in the previous quarter. Dividing the CPI basket into food and non-food components generated the same trend. There were 25 food items with inflation rates above the threshold compared to 46 in the previous quarter, while 18 non-food commodities posted inflation rates higher than the threshold in Q3 2009 compared to 37 in the previous quarter.

0 20

40

60

80

100 120

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2004 2005 2006 2007 2008 2009 Cumulative Weight (in percent) Number of Items Exceeding Threshold Inflation

Number and Weight of CPI Items with Inflation Rates Above Threshold

6

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Quarterly averages in percent (2000=100)

Commodity 2009 2008

Q3 Q2 Q3 Q2

Food, Beverage and Tobacco 1.9 5.6 17.0 13.8Food 1.8 5.7 17.9 14.6Cereal & Cereal Products -2.1 7.4 36.7 28.0o/w Rice -3.8 7.2 44.0 33.0

Corn -5.0 6.7 33.0 27.0Dairy Products 5.0 7.1 13.7 13.5Eggs 6.4 7.4 6.1 7.9Fish 6.5 5.4 9.3 9.7Fruits & Vegetables 1.7 5.8 15.3 10.2Meat 2.6 4.2 10.9 10.5Misc. Food 2.7 4.0 9.0 7.4Beverages 3.2 4.3 6.1 5.1Tobacco 3.5 3.8 3.9 3.5

Source of Basic Data: NSO, BSP

Prices of agricultural commodities decline generally.

Food Inflation Year-on-year food inflation declined steeply in Q3 2009 relative to quarter- and year-ago rates as the prices of all cereal products declined from very high levels in 2008. Agricultural Commodity Prices Palay prices fell to P14.15 per kilo in September 2009 from P15.63 per kilo in June as palay output increased due to the expansion in area harvested and increase in yield. However, the average palay price in September 2009 was higher than the year-ago level of P13.57 per kilo. Special and ordinary rice prices fell to P33.83 per kilo and P30.33 per kilo, respectively, in September 2009 from P34.55 per kilo and P31.40 per kilo in June 2009. The early start of the harvest season accounted mainly for the decline in the prices of commercial rice (special and ordinary) in areas outside the National Capital Region (NCR). The intensified rice distribution of the National Food Authority likewise helped stabilize prices, particularly in NCR. Meanwhile, the price of yellow corn decreased to P18.63 per kilo in September 2009 from P20.44 per kilo in June 2009 as output increased with the expansion of area harvested. However, the average price of yellow corn in September 2009 was higher than the year-ago price of P18.06 per kilo.

Food inflation falls markedly.

7

Likewise, prices of non-food items decline.

����������������������������

���� ��� �Quarterly averages in percent (2000=100)

Commodity2009 2008

Q3 Q2 Q3 Q2

Non-Food Items -1.1 0.7 7.8 6.1Clothing 2.2 2.6 4.6 4.1Housing & Repairs 2.2 3.0 4.9 4.1Fuel, Light & Water -4.5 -4.2 7.1 8.0

Fuel -12.8 -12.2 27.4 19.0Light -1.5 -1.4 -5.7 1.7Water 12.4 10.3 2.6 2.2

Services -3.7 0.3 12.7 8.2Transpo & Comm. -10.3 -4.3 18.5 9.4Miscellaneous 2.3 2.9 3.3 2.8

Source of Basic Data: NSO, BSP

Non-Food Inflation Non-food prices posted negative inflation rates in Q3 2009, heavily influenced by the base effects from the surge in oil prices over a year ago. All sub-components of the non-food index, except water, registered either lower or negative inflation rates relative to the quarter- and year-ago rates. Energy Prices The international price of Dubai crude oil was lower by 40.1 percent year-on-year at US$67.93 per barrel in Q3 2009 from an average of US$113.34 per barrel in the same period last year. Prices were largely influenced by weak demand for oil due to the slowdown in the world economy and concerns over an extended recession which could keep oil demand weak for some time. On a quarter-on-quarter basis, however, the international price of Dubai crude oil was higher by 14.9 percent in Q3 2009 compared to US$59.12 per barrel in Q2 2009. The increase in price was driven by the recent drop in inventories (reflecting higher oil consumption) and better economic prospects in the US as well as tentative signs of improvement in the world economy.

5

15

25

35

45

55

65

75

85

95

105

115

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Dubai Crude OilQuarterly average spot price in US dollars per barrel

Q32009 US$67.93

International oil prices fall sharply.

8

Local pump prices of petroleum products decrease.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain its current oil production level during its meeting on 10 September 2009. OPEC forecasts that world oil demand will decline by 1.6 million barrels per day (mb/d) in 2009.4 Meanwhile, the Energy Information Administration (EIA) expects that the world economy will begin to recover at the end of 2009 and oil demand will grow in the fourth quarter, led by non-member countries of the Organization for Economic Cooperation and Development (OECD) in Asia.5 The International Energy Agency (IEA) made an upward revision of its 2009 demand forecast (by 0.2 mbd).6 OPEC, EIA, and IEA project that demand will recover in 2010 with developing Asia as the main growth engine. In the domestic scene, pump prices of petroleum products were lower compared to the same period last year. The prices of gasoline, kerosene, diesel, and LPG at the end of Q3 2009 declined by P6.35 per liter, P12.99 per liter, P14.52 per liter, and P1.88 per liter, respectively. Relative to end-Q2 2009, however, the domestic prices of gasoline, kerosene, and LPG were higher by P0.90 per liter, P0.25 per liter, and P4.57 per liter, respectively, which resulted from the price increases implemented during the review quarter. The prices of gasoline were raised six times; and the price of kerosene and LPG, five times. Meanwhile, the price of diesel was lower by P0.19 per liter with five reductions during the quarter. The import tariff on specific crude and refined petroleum products remained at three percent from July to September 2009, as the average prices of Dubai crude and diesel remained below the trigger price levels during the period.7

9

Future world oil prices are expected to track a lower path.

��

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���� ���� ���� ���� ���� ���� ��� ���� ���� ��� ����

Spot and Estimated Future Prices of Dubai Crude Oil* Price in US dollars per barrel

*Futures price derived using Brent crude futures data.

30 Jun 09

30 Sep 09

Retail electricity rates sustain downward trend. Upside pressures on electricity rates stemming from pending petitions with ERC remain.

The estimated future prices of Dubai crude oil, based on movements in Brent crude oil futures, suggest a lower path for 2009 and 2010 relative to a quarter ago on expectations of a continued weakness in global oil demand. Transportation In the transport sector,8 petitions for a minimum jeepney fare increase remain pending with the Land Transportation and Franchising Regulatory Board (LTFRB). The Alliance of Concerned Transport Operators and Pasang Masda filed separate petitions with the LTFRB for a fare increase of P1.00 and P0.50 (to be added to the existing P7.00), respectively, in August. As of end-September, however, no hearing has been set to discuss these new petitions. Utility Charges Power Retail electricity rates were lower in the third quarter by an average of 3.9 percent year-on-year.9 Meralco reported that, in addition to lower generation rates of the National Power Corporation (NPC), the reduction in power rates during the period was also due to cheaper natural gas and the relatively lower prices at the Wholesale Electricity Spot Market (WESM).10 Meanwhile, the Energy Regulatory Commission (ERC) approved the rules for Prepaid Retail Electricity Service (PRES). With the issuance of these rules, distribution utilities (DUs) may now file their applications with the ERC to offer PRES to their residential customers using a prepaid metering system.11 Electricity rates will be the same as those charged under the existing postpaid scheme unless the DU applies for, and ERC approves, a different tariff for prepaid meters. There remain potential sources of upside pressures on electricity rates stemming from pending petitions with the ERC. These include: (1) the Power Sector Assets and Liabilities Management’s (PSALM) petition to recover NPC’s stranded contract cost and debts which could raise NPC’s effective rates by P0.39;12 (2) NPC’s petition to recover actual and incremental fuel, IPP and foreign exchange rate fluctuation costs under the 14th generation rate

10

Water rates are lower.

adjustment mechanism (GRAM) and the 13th incremental currency exchange rate adjustment (ICERA). Barring a reversal or lower-than-expected increase in power rates to be granted by the ERC, power rates will increase by P1.51/kilowatt-hour (kwh) in Luzon and P1.34/kwh in Visayas. In Mindanao, NPC proposed to reduce its rate by P0.10/kwh; (3) NPC’s petition to recover actual and incremental fuel, IPP and foreign exchange rate fluctuation costs under the 13th GRAM and the 12th ICERA. On a month-on-month basis, this will increase rates by an average of 4.3 percent for Luzon, and 52.7 percent for Visayas. Mindanao rates, however, will go down by 4.4 percent; and (4) Meralco’s petition to retrieve its lifeline and inter-class cross-subsidy under-recoveries, which will raise electricity rates by P0.40/kwh and P0.05/kwh, respectively, over a one-year period. Meanwhile, potential rate reductions could come from the proposed lower system loss caps for DUs. Water The Metropolitan Waterworks and Sewerage System-Regulatory Office (MWSS-RO) approved the reduction in water rates through the foreign currency differential adjustments (FCDA) for Q3 2009 by P0.01/m3 and P0.09/m3 for Manila Water Company, Inc. (MWCI) and Maynilad, respectively. On a quarter-on-quarter basis, MWCI and Maynilad rates were lower by 0.05 percent and 0.29 percent, respectively. On a year-on-year basis, water rates were lower by 2.6 percent for Maynilad. However, MWCI rates were higher by 13.4 percent due to rate

11

NTC issues policies to promote consumer welfare. Aggregate Demand and Supply The economy continues to post positive growth.

0

1

2

3

4

5

6

7

8

9

10

2002 2003 2004 2005 2006 2007 2008 2009

GDP GNP

GDP and GNP Growth RatesAnnual Growth in Real Terms (%)

1.5 pct

4.4 pct

Q2 2009

rebasing which resulted in an upward adjustment in the basic rate for the year.13 Telecommunications In July, the National Telecommunications Commission (NTC) issued new policies to support consumer welfare. These new orders include: the rules on prepaid cards which increased the validity period per amount purchased; additional rules and regulations on broadcast messaging service which addressed the issue on spam; and reduction of voice call unit of billing to six seconds per pulse instead of one minute per pulse. Real GDP grew by an annual rate of 1.5 percent in the second quarter of 2009, a slowdown compared to the 4.2 percent growth in Q2 2008. Nonetheless, the second quarter growth turnout was an improvement from the 0.6 percent growth posted in Q1 2009. On the expenditure side, second quarter growth was driven by consumer and government spending, contributing 1.7 percentage points and 0.7 percentage point to GDP growth, respectively. On the production side, the agriculture and services sectors contributed 0.1 percentage point and 1.5 percentage points to GDP growth, respectively. Overall growth was, however, pulled down by the contraction in capital formation and exports (on the expenditure side) and the decline in industrial output (on the production side). Gross National Product (GNP) grew by 4.4 percent in Q2 2009 from 3.1 percent in the first quarter and 5.3 percent in the same period last year. GNP growth was supported by the 29.7 percent surge in net factor income from abroad (NFIA) due mainly to the sustained inflow of overseas Filipinos’ (OF) remittances. Meanwhile, the seasonally-adjusted GDP growth estimate rebounded in the second quarter after posting a contraction in the first quarter. Seasonally-adjusted GDP grew by 2.4 percent quarter-on-quarter from negative 2.1 percent in Q1 2009, as all major production sectors expanded. The seasonally-adjusted

12

Household and government spending are holding up aggregate demand …

-25

-20

-15

-10

-5

0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009

Private Consumption Govt. Spending Fixed Investment

Domestic DemandAnnual Growth in Real Terms

…while gross capital formation and exports decline. ������ ��������� ����

Growth rate (in percent)

Sector 2009 2008

Q2 Q1 Q2By expenditure itemPersonal consumption 2.2 1.3 4.1Government Consumption 9.1 4.5 0.0Capital Formation -9.8 -15.1 13.6

Fixed Capital Formation -1.9 -7.2 1.7Exports -16.0 -14.7 6.1Imports -2.7 -20.6 0.0

Source: NSCB

GNP likewise grew by 3.0 percent from the previous quarter, a turnaround from the 2.4 percent contraction in the first quarter. Aggregate Demand Expenditures by major economic sectors Personal consumption expenditure (PCE) posted a 2.2 percent growth in Q2 2009, lower compared to the 4.1 percent growth in Q2 2008. However, the growth in PCE is an improvement over the 1.3 percent growth registered in Q1 2009, as softer consumer prices and favorable consumer demographics buoyed up household spending amid pressures posed by the global financial crisis. Food expenditure (which accounts for 53.5 percent of total PCE) grew 3.8 percent in Q2 2009, maintaining the rate recorded in Q2 2008. Likewise, household spending in the other major expenditure sub-sectors, including household operations, transportation and communications, and miscellaneous items, registered modest expansions during the quarter. Meanwhile, expenditures on less essential items such as clothing and footwear, and beverages continued to post negative growth rates. Government consumption increased considerably by 9.1 percent in the second quarter, higher than the 4.5 percent growth in the previous quarter and the zero growth in the comparable period last year. The expansion was due to increased disbursements of funds particularly for infrastructure projects, as part of the government’s stimulus package. Capital formation posted a negative growth for the third consecutive quarter. Capital formation continued to decline, albeit less steeply, in Q2 2009 by 9.8 percent from a contraction of 15.1 percent in the previous quarter, as investment on durable equipment fell 18.9 percent. Meanwhile, the 29.9 percent increase in public construction, which offset the 6.5 percent drop in private construction, led to an 11.7 percent growth in the construction subsector. The global economic downturn continued to hit the country’s exports in the second quarter. Total exports declined by 16.0 percent as exports of merchandise goods dropped by 22.4 percent. The decline in total imports at 2.7

13

percent, however, was much less compared to the steep drop in exports. The overall performance of merchandise imports was supported by the double-digit increase in the importation of mineral fuels, lubricants, and related materials, cereal products, and chemicals

Land values are lower.

0

20,000

40,000

60,000

80,000

100,000

120,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Average Land Values, Makati CBD and Ortigas Real prices, based on rebased CPI (1991=100)(in pesos per square meter)

Makati Ortigas

*Base year chosen was the earliest year for which data was available.

Other Demand Indicators Various economic indicators also showed improvements, particularly increased vehicle and energy sales, the steady rise in capacity utilization of manufacturing, and strong consumer and business expectations. Meanwhile, there are still some soft spots in the macroeconomy including weaker property market activity due to the ongoing correction, the still negative growth in exports, and the slightly higher unemployment level posted in July. Property Prices

The latest report from Colliers International indicated that, implied land values14 were lower in Q2 2009 on a quarter-on-quarter basis while on a year-on-year basis, land values posted a decline for both the Makati Central Business District (CBD) and Ortigas Center in Q2 200915. Land values were also lower in emerging business districts such as the Bonifacio Global City (BGC).16

14

Makati CBD office and residential vacancy rates increase.

Vacancy Rates The monthly office vacancy rate in the Makati CBD at 5.7 percent was higher in Q2 2009 compared to the quarter- and year-ago levels. Meanwhile, the residential vacancy rate at 8.8 percent during the quarter was lower compared to Q1 2009 but higher than a year ago. In the office sector, premium and grade A buildings led the increase in vacancies, with tenants moving to lower-cost buildings or to other locations outside of the Makati CBD.17 In the residential sector, while the current vacancy rate indicated that demand in Q2 2009 was better than in Q1 2009, this level was the second highest vacancy rate recorded for the Makati CBD in the last 27 months. The slight quarter-on-quarter improvement in the demand for residential units was observed for the 2-bedroom and 1-bedroom units starting in June 2009. According to Colliers, with no condominiums expected to be completed anytime soon, vacancy levels within the next few months will remain broadly unchanged. Rental Values

Monthly office rents in the Makati CBD reached P660/sq.m. in Q2 2009, lower by 5.0 percent than the levels in the previous quarter.18 According to Colliers, the decline in office rents was led by premium grade office buildings and persisted during the quarter as landlords failed to fill in spaces left by various locators despite offering concessions and rent-free periods. The threat of higher vacancies in the future remains, and this has pushed forecasts downward even further.

Office rental values in Q2 2009 fell below the 1997 levels for premium grade offices. In real terms, office rental values are about 44.5 percent of the comparable levels in 1997.

Monthly rents for 3-bedroom condominium units in the Makati CBD declined by 2.0 percent to P564/sq.m. from the previous quarter. Colliers noted that: (1) foreign clients

Vacancy Rates, Makati CBD (%)

2009 2008

Forecast Year -On -Year Growth (%)

2009 2010 Q2 Q1 Q2 Q3* Q4* Q1* Q2

Office 5.7 4.4 1.6 5.2 6.0 6.1 7.0 Residential (all grades) 8.8 9.0 5.3 8.8 6.7 7.1 7.5

Source: Colliers International Research * Forecast from previous quarterly reports.

15

were starting to inquire again, although for slightly smaller spaces; (2) some leasing transactions were on 6-12 month contracts, implying a high degree of uncertainty in the secondary market; and (3) some companies have shortened the length of stay of their expatriate employees as a cost-cutting measure.

Residential rental values are above their 1997 levels in nominal terms but are only about 62.0 percent of their 1997 levels in real terms.

16

Vehicle sales improve.

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009

Quarterly Sales of Commercial VehiclesYear-on-year change in percent

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009

Quarterly Sales of Trucks and BusesYear-on-year change in percent

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009

Quarterly Sales of Passenger CarsYear-on-year change in percent

Vehicle Sales

Year-on-year sales of commercial vehicles improved in Q3 2009, growing by 9.8 percent after recording three consecutive declines from Q4 2008 to Q2 2009. Commercial vehicle sales grew by 2.3 percent in the same quarter a year ago. According to the Chamber of Automotive Manufacturers of the Philippines, Inc., the increase in sales can be attributed to the popularity of multi-purpose vehicles as well as the industry’s aggressive marketing. On a quarter-on-quarter sales growth of commercial vehicles also expanded by 6.5 percent, albeit slower than the previous quarter’s growth of 11.3 percent. Likewise, year-on-year sales of trucks and buses increased by 3.8 percent in Q3 2009 after posting a contraction of 17.0 percent in the previous quarter. Sales grew by 11.8 percent in the comparable period in 2008. Quarter-on-quarter sales also grew by 21.2 percent in Q3 2009, higher than the 1.0 percent growth in the previous quarter. Meanwhile, year-on-year passenger car sales further declined by 7.1 percent in the third quarter of 2009 from a contraction of 1.0 percent in the previous quarter. This was also a reversal of the year-ago growth of 20.7 percent. On a quarter-on-quarter basis, however, passenger car sales grew by 6.6 percent, albeit lower than the 7.6 percent growth in Q2 2009.

17

Energy sales recover on higher consumption, particularly from the industrial sector.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009

Quarterly Meralco Power SalesYear-on-year change in percent

Capacity utilization increases steadily.

75.0

76.0

77.0

78.0

79.0

80.0

81.0

82.0

83.0

84.0

2007 2008 2009

Monthly Average Capacity Utilization for ManufacturingIn percent

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009

Volume of Production Value of Production

Volume and Value Indices of Manufacturing Productionyear-on-year change in percent

Power Sales

Year-on-year energy sales expanded by 4.2 percent in the third quarter, higher than the year- and quarter-ago growth rates of 1.4 percent and 0.3 percent, respectively. The increase in energy sales can be attributed to higher consumption across all sectors, with the industrial sector picking up in Q3 2009 after declining for the past three quarters. According to Meralco, the increase in energy consumption was due to easing inflation and higher remittances. Quarter-on-quarter energy sales grew by 4.0 percent in Q3, lower than the 14.2 percent growth in the previous quarter.

Capacity Utilization Average capacity utilization remained below last year’s average level, but has been increasing at a steady pace since February. Average capacity utilization in manufacturing reached 81.6 percent in July 2009, sustaining a period of above 80 percent capacity utilization for five consecutive months.

Volume and Value of Production Meanwhile, the latest available data on NSO’s Monthly Integrated Survey of Selected Industries (MISSI) indices for volume and value of production showed two-digit year-on-year declines in the second quarter, which continued until July.

18

Business sentiment turns bullish.

��������� !��������������

Index 2009 2008

Q3 Q2 Q1 Q3 Q2 Q1

Business Outlook Index

Current Quarter 18.0 -2.6 -23.9 -12.9 12.6 29.9

Next Quarter 33.0 13.7 -6.5 16.6 16.6 41.0

Source: BSP

Consumer confidence improves.

������ ��� !��������������

Index 2009 2008

Q3 Q2 Q1 Q3 Q2 Q1

Current Quarter

-31.9 -34.2 -25.7 -52.8 -43.8 -32.1

Next 3 months

-3.7 -13.2 -6.2 -25.1 -26.9 -3.4

Next 12 months

-0.9 -7.6 -2.3 -23.9 -20.3 6.6

Source: BSP

Business Expectations Survey Results of the Q3 2009 Business Expectations Survey (BES) showed business sentiment turning bullish for the quarter and even more so for the next quarter. The improvement was seen relative to the last quarter as well as the quarter a year ago. Business sentiment improved further in Q3 2009 as the overall confidence index (CI) rose by 20.6 index points, to 18.0 percent from -2.6 percent last quarter. The next quarter outlook was more bullish with a CI of 33.0 percent, compared to 13.7 percent in the past quarter. This means that optimists further outnumbered the pessimists on the next quarter outlook. Both the current quarter and next quarter indices showed double-digit increases relative to the quarter- and year-ago numbers.

Consumer Expectations Survey The Q3 2009 Consumer Expectations Survey results showed improved overall consumer confidence quarter-on-quarter and year-on-year. The nationwide consumer confidence index (CI) for the third quarter of 2009 at -31.9 percent improved quarter-on-quarter by 2.3 index points and year-on-year by 20.9 index points. Optimists attributed their outlook to expected improvement in household finances and lower personal debts given better employment conditions. Meanwhile, pessimists were concerned about low income, higher cost of commodities, and increase in household expenses. Similarly, nationwide consumer expectations for the next quarter and the next 12 months were better compared to quarter- and year-ago survey results.

19

� !������"����#�$�����%Growth rate (in percent)

Commodity Group2009 2008

Q2 Q1 Q2

Coconut products -57.8 -60.0 69.1

Sugar and Products -14.5 73.3 -9.2

Fruits and Vegetables -6.0 8.2 -3.4

Other Agro-based products

-25.9 -12.7 26.0

Forest products -12.4 -25.0 46.6

Mineral products -49.4 -38.1 -0.8

Petroleum products -59.4 -91.9 1.4

Manufactures -25.5 -35.1 3.9

Special transactions -43.6 -47.2 26.5

Total Exports, as per NSO Foreign Trade Statistics

-28.9 -36.8 5.5

Conceptual and coverage adjustments

-2.8 24.4 -19.7

Total Exports, BPM5 -29.4 -37.0 5.3

Source: BSP

� !������"����#�$�����%Growth rate (in percent)

Commodity Group2009 2008

Q2 Q1 Q2

Capital Goods -27.4 -26.6 6.3

Raw Materials & Intermediate Goods

-28.7 -33.4 2.8

Mineral Fuels & Lubricant

-44.7 -54.9 44.8

Consumer Goods -13.1 -7.2 62.2

Special Transactions -21.2 -47.1 25.3

Total Imports1/ -30.0 -34.6 15.6

Conceptual and coverage adjustments

-71.6 -11.9 27.6

Total Imports, BPM5 -30.4 -34.4 15.7

1/ Include valuation adjustments to NSO dataSource: BSP

Industrial output continues to fall while services and agriculture post modest expansions.

External Demand

Exports Exports of goods declined in Q2 2009 by 29.4 percent, a reversal of the 5.3 percent growth in the same period in 2008, but was less negative than the 37.0 percent contraction in the previous quarter. The contraction was led by manufactures which dropped by 25.5 percent, contributing 21.5 percentage points to the decline in exports. Meanwhile, electronic products declined by 28.6 percent in the review quarter, followed by exports of mineral products that fell by 49.4 percent and contributed 2.8 percentage points to the contraction of exports as global commodity prices went down. Exports of coconut products also contracted by 57.8 percent due to waning demand for coconut oil from countries affected by the global economic downturn. Likewise, exports of petroleum products declined by 59.4 percent.

Imports Imports of goods declined by 30.4 percent year-on-year in Q2 2009, lower than the 34.4 percent contraction in the previous quarter.19 Import of goods grew by 15.7 percent in the same quarter a year ago. All major commodity groups posted negative year-on-year growths during the review quarter. Imports of raw materials and intermediate goods decreased by 28.7 percent and contributed 14.6 percentage points to the contraction of imports. This was mainly driven by the 31.8 percent decline in imports of semi-processed raw materials (mainly raw materials and intermediate goods) which contributed 15.3 percentage points to import contraction. This was followed by imports of mineral fuels, lubricants, and related materials, which dropped by 44.7 percent and contributed 9.3 percentage points to the decline in import growth, as petroleum crude imports contracted by 58.6 percent due to the decline in both import volume and import price. Aggregate Supply With the broad slowdown in external demand, the industry sector continued to post negative growth in Q2 2009. Industrial output, which

20

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2002 2003 2004 2005 2006 2007 2008 2009

Agriculture Industry Services

Agriculture, Industry and Services SectorsAnnual Growth in Real Terms

represented 33.4 percent of total GDP, declined by 0.3 percent in the second quarter. Nonetheless, the contraction in industry was much less compared to the 2.5 percent decline recorded in the previous quarter as the growth in mining and quarrying, construction, and electricity, gas and water partly tempered the 7.2 percent contraction in manufacturing. Driving the 21.4 percent growth in mining and quarrying were the improvements in crude oil, natural gas, and condensate (from the Malampaya oil field) and non-metallic minerals. The surge in the demand for non-metallic minerals could, in part, be attributed to additional domestic infrastructure requirements and the stimulus packages in major economies.

Services provided the biggest contribution to GDP growth. Supporting the 3.1 percent growth in services was the accelerated growth in trade, finance, and government services. The expansion in government services by 7.7 percent was mainly due to the recruitment of additional personnel. Meanwhile, the financial sector grew by 1.8 percent in Q2 2009, an acceleration from the quarter- and year-ago growth of 1.2 percent and 1.0 percent, respectively. This developed as the banking sub-sector expanded by 5.3 percent in Q2 2009 from a growth of 4.2 percent in Q2 2008. The non-bank and insurance sub-sectors, however, continued to contract during the period by 12.1 percent and 2.6 percent, respectively. Growth in the agriculture, fishery and forestry (AFF) sector slowed down in Q2 2009. AFF, which accounted for 16.5 percent of GDP, grew at a much slower pace of 0.3 percent in the second quarter from the quarter- and year-ago growth levels of 2.1 percent and 4.9 percent, respectively. Although the current growth level was slightly lower compared to the year- and quarter-ago growth rates, the positive growth rate of the AFF sector supported the overall output growth during the quarter. Growth in the AFF was driven by fishery, banana, poultry, livestock, palay, and coconut. The increase in palay output was due to the expansion of harvest area brought about by sufficient water supply in Central Luzon, Western Visayas, Bicol and Ilocos regions. In addition, yield gains were noted in

������ ��������� ����

Growth rate (in percent)

Sector 2009 2008

Q2 Q1 Q2By industrial originAgriculture, Fishery & Forestry 0.3 2.1 4.9

Agriculture and Fishery 0.4 2.2 5.0Forestry -8.7 -11.8 -3.8

Industry -0.3 -2.5 4.0

Mining and quarrying 21.4 19.5 -13.7Manufacturing -7.2 -7.6 6.1Construction 16.9 14.0 2.3Electricity, gas and water 2.9 0.6 6.6

Services 3.1 2.0 4.0

Transport., Comm., & Storage 1.7 5.6 3.9Trade 3.0 0.4 2.8Finance 1.8 1.2 1.0O. Dwellings & real estate 3.4 0.7 7.5Private services 2.8 2.5 6.0Government services 7.7 1.1 5.3

Source: NSCB

21

most regions of Luzon, Central Visayas and ARMM on account of increased use of hybrid and certified seeds, coupled with sufficient water supply and increased fertilizer usage. Meanwhile, corn production declined by 0.5 percent in Q2 2009, a turnaround from the 24.0 percent growth registered in the same period last year. A number of factors contributed to the drop in corn output, including contraction in area harvested in Cagayan Valley, reduced plantings in Western Visayas and movement of harvests from Q2 to Q3 2009 in Northern Mindanao and ARMM. Livestock production registered a 4.5 percent growth in Q2 2009, a turnaround from the 3.1 percent contraction in the previous year. Hog and cattle production increased, which in turn, raised the number of animals sold for slaughtering. Meanwhile, poultry grew by 4.5 percent, faster than the 4.2 percent growth posted in the previous quarter but slower than its year-ago growth rate of 7.6 percent. The increased poultry production was driven by better egg laying efficiency ratios and higher broiler production from commercial farms. The Food and Agriculture Organization’s (FAO) July 2009 Crop Prospects and Food Situation continued to indicate smaller global cereal output in 2009 compared to the previous year’s record output as farmers in several major producing countries have been discouraged by poor expected returns on their crops due to the sharp decline in grain prices and high input costs. World cereal production in 2009 is forecast at 2.2 billion tons (including rice on a milled basis), 3.4 percent down from last year's global high, though still expected to be the second largest crop production on record. Output for wheat and coarse grains is expected to decline while global rice crop may increase marginally. This year's reduction in grain production is partly a result of the return-to-trend yields after strong productivity gains last year, as well as the reduction in overall plantings (mostly wheat) after last year's exceptional level.

22

Labor Market Conditions

Unemployment remains high.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2006 2007 2008 2009Unemployment rate, SA Underemployment

Unemployment and Underemployment Rate

Labor market conditions softened during the quarter. According to the July 2009 Labor Force Survey (LFS), the unemployment rate increased to 7.6 percent in July 2009 from 7.5 percent in April 2009 and 7.4 percent in July 2008.20 This could potentially lower domestic demand as affected households cut their personal spending. Compared to Q2 2009 and Q3 2008, the latest LFS showed that the total number of employed persons rose by 1.5 percent and 2.6 percent, respectively. The July LFS showed that the services sector employed 51.5 percent of the total employed population, while the agriculture and industry sectors accounted for 33.6 percent and 14.8 percent, respectively.

Underemployment in July 2009 was 19.8 percent from 18.9 percent in April 2009 and 21.0 in July 2008. Based on the latest survey, underemployed persons in agriculture accounted for 44.1 percent, services for 40.3 percent, and industry for 15.6 percent of the total number of underemployed persons.21

23

II. MONETARY AND FINANCIAL MARKET CONDITIONS Interest Rates

The 91-day, 182-day, and 364-day Treasury bill (T-bill) rates declined in Q3 2009 relative to the previous quarter to settle at 4.107 percent, 4.230 percent, and 4.417 percent, respectively. T-bills remained attractive to investors as auctions by the Bureau of the Treasury (BTr) continued to attract a large volume of bids in Q3 2009.

Yield Curve Secondary market yields for government securities (GS) declined across all tenors (except for the 25-year tenor) as of end-September 2009 relative to end-June 2009. The decrease in yields ranged from 2.6 basis points (for 5-year GS) to 52.9 basis points (for 2-year GS). The yield curve shifted downward with increased buying activity due to positive market sentiment and improved economic outlook, as reflected in the successful RTB issuance on 15 September 2009.

Domestic interest rates decline.

2

3

4

5

6

7

8

2007 2008 2009

91-day T-bill rate Overnight RRP Rate

91-day T-bill rate and BSP RRP rate In percent

Yields in the secondary market decrease across all tenors during the quarter.

2

3

4

5

6

7

8

9

10

11

12

3Mo 6Mo 1Yr 2Yr 3 Yr 4Yr 5Yr 7Yr 10Yr 20Yr 25Yr

Yield in percent

Maturity

end-March 2009 end-June 2009 end-Sep 2009

Yield of Government Securities in the Secondary MarketIn percent

24

-400.0

-300.0

-200.0

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Jul 09 Aug 09 Sep 09

RP 91-day T-bill vs US 90-day LIBOR (before tax) RP 91-day T-bill vs US 90-day T-bill (before tax)

RP 91-day T-bill vs US 90-day LIBOR (after tax) RP 91-day T-bill vs US 90-day T-bill (after tax)

Interest Rate Differentialsin basis points

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009

BSP RRP rate US Fed funds rate

BSP RRP Rate and US Fed Funds Rate In percent

Real lending rate increases on lower inflation.

Interest Rate Differentials The positive differentials between domestic and US T-bill rates, net of tax, narrowed as of end-Q3 2009 relative to end-Q2 2009, due to the larger decline in domestic interest rate compared to the fall in US T-bill rate. The after-tax differentials between RP T-bill and US LIBOR rates eased, given the bigger decline in the RP 91-day T-bill rate compared to that for the corresponding US LIBOR rate. Similarly, the differential between the BSP's policy interest rate (overnight borrowing or RRP rate) and the US federal funds target rate decreased to 375 basis points in end-Q3 2009 from 400 basis points in the previous quarter. This reflected the net impact of the BSP's policy rate cut of 25 basis points in July. Adjusted for the risk premium—which is measured as the differential between the 10-year Republic of the Philippines (ROP) note and the 10-year US Treasury note—the spread between the BSP’s policy rate and the US federal funds target rate, however, widened to 130 basis points as of end-September 2009 compared to 99 basis points as of end-June 2009. This development may be traced to the decline in the risk premium given the larger decline in the yield of the 10-year RP note relative to that for the 10-year US note. The real lending rate, measured as the difference between the average bank lending rate and inflation, climbed to 7.4 percent as of end-September 2009 from 6.9 percent as of end-June 2009. This was due to lower inflation posted during the quarter in review compared to the previous quarter. The Philippines' real lending rate ranked third highest (from being the fourth highest in June 2009) in a sample of 10 Asian countries, while India at 11.9 percent registered the highest real lending rate during the quarter.

Both the interest rate differentials between Philippine and US T-bills and policy interest rates narrow.

25

Financial Market Conditions

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PSE Composite Index

Stock Market Stock market activity was upbeat in Q3 2009, driven by improvements in global and domestic economic indicators particularly in July and August. The Philippine Stock Exchange Composite Index (PSEi) averaged 2,827.8 index points during the quarter, higher by 22.4 percent than the previous quarter’s 2,310.3 index points and by 8.3 percent over the 2,611.6 average registered during the same period a year ago. While bullish trading generally characterized stock market activity in August, trading in September was generally lackluster. The index closed the month of September at 2,800.8 index points, 49.5 percent higher than the end-December 2008 index of 1,872.9 index points but 2.9 percent lower than the end-August 2009 index of 2,884.2 index points. In the first week of September, the stock index was dragged down by the retreat in the US stock market due to the following: a US Labor Department report showing more job cuts in the private sector in August; the fall in the Shanghai Composite Index on concerns that China's economy may not be able to meet high economic growth expectations; and the lack of fresh positive news that triggered profit-taking in the local equities. In the second week, trading was upbeat with the continued easing of inflation in August and expectations of an upward revision in the government’s GDP growth targets. In the third week, profit-taking pushed the index down to 2,789.3 index points on 18 September, 2.8 percent lower than the previous week’s close. During the trading week 22-30 September, market sentiments were generally sluggish with the PSEi moving within a tight consolidation range. Typhoon “Ondoy” was an added market dampener, which prompted some investors to pull out of the market while others opted to stay on the sidelines.

The local stock market recovers.

26

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Oversubscription of T-bill AuctionsIn billion pesos

Debt spreads narrow with the improvement in global economic indicators.

Government Securities

The government securities market continued to attract strong demand from banks as the financial system continued to show indications of ample liquidity. Relative to the second quarter, the volume of excess bids rose considerably from P41.1 billion to P95.4 billion in Q3 2009. Demand for T-bills was notably strong in July, as risk-averse market players channeled their funds to safer investments amid fiscal budget deficit concerns. T-bill auctions continued to be oversubscribed in August and September, but the volume of bids was relatively thinner as compared to the previous auctions. Appetite for T-bills somewhat dampened at the end of Q3 2009 as the market showed preference for the Retail Treasury Bonds issued on 15 September 2009. Sovereign bonds and CDS spreads Debt spreads narrowed at the end of Q3 relative to the end of Q2 2009 as additional indicators of a resumption in macroeconomic recovery attracted investors to higher-yielding emerging market assets. The G-20’s agreements on maintaining economic stimulus policies and implementing other measures to curb bank leverage and raise the amount and quality of bank assets fueled market optimism that the worst of the financial crisis and global recession is over. The IMF’s estimate that developing-nation economies shall lead the global economy’s recovery from its worst recession likewise supported demand for emerging market assets. Meanwhile, Fitch Ratings has not issued any revision on its stable outlook for Philippine debt issuances in May.22 The EMBI+ Philippine spread or the extra yield for holding Philippine bonds over US bonds narrowed to 264 basis points in end-September 2009 compared to 323 basis points and 321 basis points, recorded at the end of the previous quarter and end- September 2008, respectively.

27

Meanwhile, emerging market borrowing costs fell to levels before the collapse of Lehman Brothers in September 2008.23 The extra yield investors demand to own emerging market debt instead of US Treasuries, or the EMBI+ Global spread, narrowed to 327 basis points from 424 basis points and 414 basis points at the end of the previous quarter and end-September 2008, respectively. The perception of credit risk in the country likewise improved as the Philippine five-year CDS spread declined, below the levels observed before the Lehman crash.24 The spread of Philippine five- year credit default swaps (CDS) narrowed to 180 basis points at the end of Q3 2009 from 216 basis points as of end-June 2009 and 286 basis points as of end-September 2008 Against neighboring economies, the Philippine CDS spread has remained below Indonesia’s level which stood at 183 basis points during the same period, but higher than Malaysia’s and Thailand’s CDS levels at 84 basis points and 87 basis points, respectively.

28

Banking System

Philippine banking system remains stable. Banks’ deposit base increases.

Growth in bank lending slows down.

The Philippine banking system remained sound and stable during the third quarter of the year. The system’s asset base has been expanding steadily, supported by sustained growth in deposits. Furthermore, the profitability of the banking system remained respectable, although with some moderation recently. Banks remained adequately capitalized at levels above both the BSP-regulatory requirement and the international (BIS) standard. Savings Mobilization Banks’ total deposits25 as of end-August 2009 amounted to P3.2 trillion, 12.0 percent higher than its year-ago level of P2.8 trillion. Savings deposits, which accounted for almost half of the funding base, grew higher at 14.4 percent compared to the 9.7 percent growth registered during the end of the previous quarter. Demand and time deposits posted year-on-year growth of 21.6 percent and 2.6 percent, respectively.

Lending Operations

Growth in outstanding loans of commercial banks, net of banks’ reverse repurchase (RRP) placements with the BSP, remained strong at 5.9 percent as of end-August 2009, albeit slower than the 14.3 percent growth at end-June 2009. Bank lending including RRPs likewise grew by 3.1 percent, also lower compared to the 11.1 percent growth posted at the end of the previous quarter.

29

Credit card receivables decline, reflecting some moderation in consumer spending. Auto loans recover due to the aggressive marketing schemes of banks and car financing firms.

Residential real estate loans rise, with TBs accounting for more than half.

The combined credit card receivables (CCRs) of U/KBs and TBs, inclusive of credit card subsidiaries as of end-June 2009 reflected some moderation in consumer spending during the period. The ratio of CCRs to the total loan portfolio (TLP) in June 2009 climbed to 5.0 percent from the previous quarter’s 4.9 percent. The non-performing CCRs of U/KBs and TBs, inclusive of credit card subsidiaries, grew by 7.1 percent to P16.5 billion from last quarter’s P15.4 billion. Meanwhile, the ratio of non-performing CCRs to total CCRs settled at 12.7 percent from last quarter’s 12.2 percent as the increase in non-performing CCRs outweighed the expansion in total CCRs. The combined auto loans (ALs) of U/KBs and TBs, inclusive of non-bank subsidiaries, amounted to P86.2 billion as of end-June 2009, an increase of 5.5 percent from last quarter’s P81.8 billion. The aggressive marketing strategy of banks and other car financing firms in promoting car loans may have encouraged individuals to avail of these loans for the purchase of cars. The proportion of total ALs to TLP, exclusive of interbank loans (IBL), went up to 3.3 percent from last quarter’s 3.2 percent with the slower growth in TLP (net of IBL) at 0.9 percent. In terms of loan quality, the non-performing ALs to total ALs improved slightly to 5.1 percent from last quarter’s 5.2 percent. As of end-June 2009, the combined residential real estate loans (RRELs) of U/KBs and TBs grew by 2.8 percent to P164.8 billion from last quarter’s P160.4 billion. Meanwhile, the ratio of RRELs to TLP went up to 6.4 percent from the previous quarter’s 6.3 percent. TBs accounted for the bigger slice of the total residential real estate exposure at 54.2 percent (P89.3 billion) while U/KBs held the remaining 45.8 percent (P75.5 billion). In terms of loan quality, the ratio of non-performing RRELs to total RRELs of U/KBs and TBs declined to 7.0 percent from last quarter’s 7.5 percent. This was due primarily to the 4.9 percent drop in non-performing RRELs, which amounted to P11.4 billion from last quarter’s P12.0 billion.

30

. Resources of the banking system expand due to the rise in holdings of debt securities. Mergers and consolidations reduce the number of banks, but operating network continues to expand. Asset quality of banks continues to improve.

Institutional Developments Total resources of the banking system rose by 8.5 percent to P6.0 trillion as of end-August 2009 from the year-ago level of P5.5 trillion. The increase was due mainly to the rise in holdings of debt securities. U/KBs continued to account for almost 90 percent of the total resources of the banking system. The number of banking institutions (head offices) fell further to 804 as of end-June 2009 from the year-ago level of 841, indicating the continued consolidation of banks as well as the exit of weaker players in the banking system. By banking classification, banks (head offices) consisted of 38 U/KBs, 74 TBs, and 692 rural banks (RBs). Meanwhile, the operating network (including branches) of the banking system increased to 7,898 from 7,769 during the same period last year, reflecting mainly the increase in commercial and rural banks’ branches/agencies. The banking system’s asset quality continued to improve as the non-performing loan (NPL) ratio eased further to 4.2 percent as of end-August 2009 compared to 4.4 percent a year ago. Prudent lending standards and controlled growth in loans helped banks in maintaining minimal exposure to bad debts. The lower NPL ratio was likewise due to the 3.7 percent decline in NPLs complemented by the 1.6 percent expansion in the industry’s TLP. NPLs declined to P117.1 billion from the previous year’s level of P121.6 billion, while TLP expanded to P2,793.9 billion from P2,749.6 billion for the same period last year. Meanwhile, the NPL ratio of U/KBs fell further to 3.5 percent as of end-August 2009, an improvement from the 3.9 percent ratio registered a year ago.

31

Banks remain adequately capitalized, exceeding prescribed levels set by the BSP and the BIS.

The Philippine banking system’s NPL ratio of 4.2 percent was comparatively lower than Indonesia’s 4.6 percent but higher than Thailand’s 4.1 percent, Malaysia’s 2.1 percent and South Korea’s 1.5 percent. The lower NPL ratios in Malaysia and South Korea may be traced to the creation of publicly-owned asset management companies (AMCs), which purchased the bulk of their NPLs, a practice which was not resorted to in the Philippines. The loan exposure of banks remained adequately covered as the banking system’s NPL coverage ratio was steady at 88.3 percent as of end-August 2009. The ratio was indicative of banks’ continued compliance with the loan-loss provisioning requirements of the BSP to ensure adequate buffers against unexpected losses. The banking system remained adequately capitalized as of end-March 2009 with the average capital adequacy ratios (CAR) remaining strong at 14.6 percent on a solo basis and 15.3 percent on a consolidated basis. These ratios, however, were lower than that registered as of end-December 2008 on solo and consolidated bases, respectively. However, the industry’s CAR continued to exceed the statutory level set by the BSP at 10.0 percent and the Bank for International Settlements’ (BIS) standard at 8.0 percent. The decline in the banking system's CARs was expected following the implementation of the last phase of the staggered increase in risk weight applied to foreign-currency (FCY) denominated exposures to the NG. (i.e., from 0 percent to 33.33 percent starting 1 July 2007, to 66.67 percent starting 1 January 2008 and to 100 percent starting 1 January 2009). The Philippine banking system’s CAR remains comparatively higher than those of Malaysia (14.6 percent), and Korea (12.9 percent) but lower than Thailand (17.6 percent). Meanwhile, Indonesia posted the highest CAR in the region at 17.8 percent.

32

Exchange Rate

35

40

45

50

55

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

P/US$

Daily Peso-US Dollar Rate

��

�

�

�

�&��'������������(����������

Appr./Depr. (-)Year-to-date

30 Sep 09* 30 Jun 09**

Philippine peso 0.3 -1.3

Thai baht (onshore) 3.7 2.2

Chinese yuan 0.0 0.0

Malaysian ringgit -0.1 -1.4

South Korean won 7.0 -1.4

Singaporean dollar 1.1 -1.1

New Taiwan dollar 2.1 0.0

Indonesian rupiah 15.0 9.2

Japanese yen 1.0 -5.2

Indian Rupee 2.3 1.8

Source: Bloomberg, Reuters and PDEX*As of 4:00 p.m.,30 September 2009 **As of 4:00 p.m., 30 June 2009

�

On a year-to-date basis, the peso appreciated against the US dollar by 0.3 percent on 30 September 2009 as it closed at P47.39/US$1, moving in tandem with other Asian currencies, with the increase in risk appetite for emerging market assets.26

On a quarter-on-quarter basis, the peso depreciated by 0.6 percent to average P48.15/US$1 in Q3 2009 from P47.88/US$1 in the Q2 2009.27 Compared with the P45.51/US$1 average in Q3 of 2008, the peso depreciated by 5.5 percent. The peso weakened amid the global slowdown as market concerns on the deep contractions in major economies, the health of the global financial system, the expected slowdown in capital inflows and OF remittances and the contraction in exports earnings weighed down on the currency. In July 2009, the peso depreciated by 0.5 percent to average P48.15/US$1 from the previous month’s P47.91/US$1 average. The peso continued to weaken on concerns over the sluggish pace of the global recovery. Lower corporate dollar demand in July and reports on the government’s lower-than-programmed budget deficit for the first semester of 2009, however, helped temper the depreciation of the peso.28 Moreover, investors’ appetite for regional stocks and high-yielding currencies improved in the third week of July following reports of favorable earnings of U.S. companies.

The peso appreciates.

33

In August 2009, the peso depreciated slightly by 0.03 percent to average P48.16/US$1. The peso remained firm in the first two weeks of August due to increased risk appetite for emerging market assets following reports of a better-than-expected U.S. GDP growth rate in the second quarter of 2009,29 easing U.S. unemployment,30 as well as improving consumer confidence and economic outlook in Europe. In the domestic front, sustained overseas Filipinos’ (OFs’) remittances provided support to the peso.

� However, market correction and concern on the National Government’s fiscal position weakened the peso towards the middle of August.31 Moreover, regional currencies were weighed down in the last two weeks of August by renewed risk aversion due to market uncertainty on the pace of global recovery as positive economic and financial developments remained scarce during the period. In September 2009, the peso remained firm as it averaged at P48.14/US$1. The peso firmed up against the U.S. dollar on improved risk appetite for high-yielding assets as reflected in the regional stock markets’ rally. Furthermore, continued strong dollar inflows from OFs’ remittances helped buoy the peso.

� Meanwhile, volatility, as measured by the coefficient of variation of the daily average exchange rates, is lower at 0.7 percent in the third quarter of 2009 relative to 1.0 percent in the previous quarter as the peso remained range bound during the review period.

34

� On a real, trade-weighted basis, the peso

gained some external price competitiveness in the third quarter of 2009, relative to the previous quarter, against the basket of currencies of major trading partners (MTPs) and competitor countries.32 The real effective exchange rate (REER) index of the peso against the basket of currencies of MTPs and competitor countries in the broad and narrow series decreased quarter-on-quarter by 0.4 percent, 1.6 percent and 2.7 percent, respectively.33 The nominal depreciation of the peso against these currencies negated the widening inflation differential against the MTPs and competitor countries. Meanwhile, on a year-on-year basis, the peso also gained some external price competitiveness against the basket of currencies of MTPs during the review period as the REER index of the peso against this basket decreased by 4.4 percent. However, the peso lost some external price competitiveness against the competitor countries in the broad and narrow series in the third quarter of 2009 as the REER index of the peso increased by 4.2 percent and 1.3 percent, respectively.

35

Domestic Liquidity and Credit Conditions

Domestic liquidity or M3 growth remained strong at 13.4 percent year-on-year as of end-August 2009, from 12.6 percent as of end-June 2009. The sustained growth in net foreign assets (NFA) of depository corporations, which accelerated to 29.9 percent in end-August from 17.6 percent in end-June, continued to drive M3 expansion. The NFA position of the BSP and of other depository corporations grew at 20.7 percent and 104.9 percent, respectively, as the BSP continued to build up its international reserves and as banks reduced their foreign liabilities. Meanwhile, net domestic assets (NDA) contracted by 2.8 percent in end-August from a growth of 3.2 percent in end-June as the growth in net domestic credits slowed down to 11.1 percent from 15.2 percent in end-June. The growth in credits extended to the private sector continued to slow down to 6.2 percent from 15.1 percent in end-June. Meanwhile, credit extended to the public sector remained strong at 21.8 percent. Year-on-year growth in reserve money, a narrower measure of monetary aggregates, increased to 7.6 percent as of end-August 2009 from 1.8 percent as of end-June 2009.34

Domestic liquidity growth remains robust.

36

Banks’ SDA placements increase while RRP placements decline.

Credit standards and demand for credit remain basically unchanged.

Banks’ special deposit account (SDA) placements with the BSP went up year-on-year by P59.4 billion to P616.8 billion as of end-September 2009 from P557.4 billion in the same period last year. Meanwhile, the total volume of reverse repurchase (RRP) placements by banks with the BSP amounted to P215.8 billion during the same period, higher by P8.9 billion compared to a year earlier. Preliminary results of the BSP Senior Bank Loan Officers Survey indicated that bank credit standards and demand for credit remained basically unchanged for enterprises and households for Q3 2009 from Q2 2009. Results of the previous survey (Q2 2009) yielded the same results.

37

��������"����� ���������������� ����

)���������!��� ���*++,

In billion pesos

January-September Percent Change

Q1-Q3 2009Program

% to Q1 –Q3 2009 Program 2008 2009

Surplus/(Deficit) -53.4 -237.5 345.0 -217.6 109.2

Revenues 879.9 839.8 -4.6 914.2 91.9

Expenditures 933.3 1,077.3 15.4 1,131.8 95.2

Source: BTR

The January-September 2009 fiscal deficit reached P237.5 billion, more than four times higher than the P53.4 billion deficit in the comparable period last year. This exceeded the P217.6 billion programmed deficit for the first three quarters by P19.9 billion. Revenue collections declined by 4.6 percent to P839.8 billion in Q1-Q3 2009 compared to P879.9 billion for the same period last year. Of this amount, the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) contributed P557.0 billion and P165.4 billion, as their collections dropped by 5.2 percent and 14.4 percent, respectively, compared to the levels in the same period last year. On the other hand, collections by the BTr increased by 9.3 percent to P52.2 billion from P47.8 billion in the comparable period last year. Revenues from other offices also went up by 27.6 percent to P65.1 billion. Meanwhile, the cumulative expenditures for the first nine months of 2009 amounted to P1,077.3 billion, 15.4 percent higher than the disbursements in the comparable period in 2008. Excluding interest payments, total disbursements increased by 20.5 percent to P842.1 billion. Interest payments also rose by 0.2 percent to reach P235.5 billion.

III. FISCAL DEVELOPMENTS�

NG fiscal deficit for the first three quartersof 2009 widens.

38

IV. EXTERNAL DEVELOPMENTS Positive data, particularly on manufacturing gains, suggest that global recovery has begun and could accelerate earlier than previously expected. Overall global economic growth, however, remains largely policy driven. The pace of decline in economic activity, particularly in manufacturing, moderates in the US.

The rebound of the global manufacturing sector continued to accelerate in the third quarter, as evidenced by higher gains in manufacturing in US, Japan, China, and other emerging market economies. Despite the still high degree of uncertainty, the current recession appears to be bottoming out, supported by the strong stimulus measures and improving financial conditions globally; while negative base effects from last year’s price surge and the prevailing weakness in global economies continued to dampen prices. Current high fiscal deficits, record-low interest rates, large-scale monetary easing, and other state interventions may not sustainable: an expansion of private demand is necessary to drive the global recovery beyond the impact of the various stimuli. US Q2 2009 GDP registered a significantly lower decline of 1.0 percent compared to a contraction of 6.4 percent in Q1. The negative contributions from private investments, personal consumption expenditures, and exports were offset by positive developments from federal government spending and state and local government spending, indicating that the improvement in Q2 was still largely policy driven. Meanwhile, the US manufacturing sector grew for the second consecutive month at 52.6 in September from 52.9 in August, based on its key gauge—the Institute for Supply Management’s manufacturing index— suggesting that US economic activity may turn positive soon. The Conference Board’s measure of consumer confidence, however, reported a decline in September at 53.1 from 54.1 in August. In addition, the US unemployment rate increased further to 9.8 percent in September from 9.7 percent in August. Non-farm payroll employment continued to decline (-263,000), with the largest job losses in manufacturing, retail trade, and government services.

39

Economic activity declines only slightly in the Euro area, supporting the view that the area is already on its way to stabilization.

The rate of decline in the EU GDP for the second quarter of 2009 slowed down at -0.1 percent (quarter-on-quarter) after a 2.5 percent contraction in the previous quarter, confirming the view that the Q1 2009 GDP was the inflection point in the decline in Euro area economic activity.35 The slowdown in the decline of Euro area economic activity could be attributed to the stabilization of exports following the collapse in world trade in Q4 2008 up to Q1 2009. However, employment growth has typically lagged business cycle fluctuations, which could explain the continued decline in employment even as manufacturing survey indicators’ point to a stabilization in the Euro area economy. Meanwhile, Eurozone manufacturing PMI rose to 49.3 in September from 48.2 in August—a 16-month high—but remained below the 50.0 mark of manufacturing growth. Unemployment also continued to increase to 9.6 percent in September from 9.5 percent in the previous month. In addition, the Euro area continued to experience disinflation for the third consecutive month in August 2009, driven mainly by the sharp decline in the energy and food components of Euro area HICP, which reflecting strong downward base effects in recent months due to the volatile swings in oil prices over the last two years. Average Euro area inflation for the first two months of Q3 2009 stood at -0.5 percent, lower than the 0.3 percent average inflation in the comparable period in Q2 2009. In the near term, the Euro area could benefit from the recovery in exports and the macroeconomic stimulus being undertaken by Euro area countries. However, recovery would depend significantly on the ongoing balance sheet correction in the financial and non-financial sectors of the economy, both inside and outside the Euro area.

40

Japanese economic activity improves, owing mainly to exports and fiscal stimulus. Asian central banks are faced with the policy question of when to exit and how.

In Japan, economic activity started to recover in Q2 2009, following four successive quarters of negative growth. Government estimates of real GDP increased to 0.9 percent quarter-on-quarter in Q2 2009, reflecting mainly the improvement in the performance of exports. Private consumption and government investment also registered increases, stemming primarily from the fiscal stimulus. Meanwhile, inflation has been decelerating in recent months, with annual overall CPI inflation declining in July to -2.2 percent, compared with -1.8 percent in June, owing to the base effects of the significant movements in energy prices in the past year. Looking ahead, economic prospects in Japan are expected to improve gradually. This, in part, reflects the impact of the fiscal stimulus support and improved prospects for external trade. At its most recent meeting on 11 August 2009, the Bank of Japan decided to keep its target for the uncollateralized overnight rate unchanged at around 0.1 percent. Given the improved outlook on the inflation path and evidence of a broad recovery in most emerging Asian economies, Asian central banks are now looking closely at the inflationary implications of the stimulus packages earlier implemented. Nevertheless, the scale of the global shock over the past year has led most policymakers to take a more cautious stance on deciding whether they should begin to remove accommodative measures. Policy rates are expected to remain at current levels, as the main concern is still aimed at helping the economies grow. Meanwhile, the surge in fiscal deficits and increase in government debt in the developed world, are shared by emerging Asian economies, and constitute another major policy concern over the short to medium term which could complicate their exit strategies.

41

3

4

5

6

7

8

9

10

11

2004 2005 2006 2007 2008 2009

Overnight RRP Rate Overnight RP Rate

BSP Policy Interest RatesIn percent

Risks to inflation are tilted to the downside.

The Monetary Board implemented its sixth policy rate cut in July, bringing the cumulative rate reduction to 200 basis points since December 2008. The decision to reduce policy rates took into consideration the BSP’s resolve to provide support to economic activity to the extent that the inflation outlook would allow. An accommodative stance would help maintain confidence as the world economy is expected to remain under a prolonged period of deleveraging. Confidence could be slow to return, and the rebalancing of global demand could take some time. Thus, monetary policy must continue to be on the accommodative side to reinforce confidence among banks, firms, and households. The Board noted that there remained some scope to reduce policy rates further given the latest baseline forecasts which continued to show inflation settling within the target range for 2009 and 2010 while inflation expectations remained well anchored. The downside pressures on prices continued to predominate and were due mainly to expectations of a marked weakening of global economic activity and still ample inventory levels. In addition, with economic recovery expected to be gradual as financial market conditions remained weak, a rapid rebound in commodity prices was seen as remote in the near term. With inflation pressures subdued and domestic demand conditions weak, there was some scope for monetary policy to balance any short-run trade-off between inflation variability and output variability. However, the Board was mindful of upside pressures on prices over the long term and the possibility that global commodity prices could be reaching a trough.

The Monetary Board reduces the BSP’s key policy interest rates by another 25basis points in July.

V. MONETARY POLICY DEVELOPMENTS

42

The Monetary Board keeps policy rates unchanged in August.

During its August meeting, the BSP kept policy rates unchanged. In its assessment the Board noted that there were some encouraging signs of an economic rebound as domestic leading indicators had started to improve. At the same time, baseline forecasts continued to be manageable, with headline inflation projected to remain broadly on target. Thus, the present monetary settings were seen to continue to be appropriate given the prevailing financial and economic conditions.

Moreover, since the transmission of monetary policy actions to the real economy works over a two-year period, maintaining current policy settings was deemed appropriate to allow substantial monetary stimulus measures to fully work their way through the system. A pause was also seen to provide policymakers more time to assess the impact of recent monetary measures as well as to consider incoming data on the trend of economic activity and the balance of risks to inflation and output.

43

Private Sector Economists’ Inflation Forecasts

4.1 4.2

6.1

6.5

4.5

4.0

3.53.2

4.84.9

4.84.8

4.64.9

4.84.9

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009

2009

2010

2011

MEAN INFLATION FORECASTS BY PRIVATE ECONOMISTS/ANALYSTSIn percent

49.2

32.9 34.0

0.0

10.0

20.0

30.0

40.0

50.0

<1 1.0-2.0 2.1-3.0 3.1-4.0 4.1-5.0 5.1-6.0 6.1-7.0 7.1-8.0 8.1-9.0 9.1-10.0 10.1-11 11.1-12 >12

2009 2010 2011

Probability Distribution For Analysts' Inflation Forecasts* 2009 -2011

*Probability distributions were averages of those provided by 9 respondents. (Source: BSP Survey)

Private Sector Forecasts for Inflation Annual Percent Change

2010 2011Q4 Full year Q1 Full year Full year

ATR Kim Eng. 2.0 3.1 3.6 4.2 -Banco de Oro 3.5 3.31 4.15 4.25 4.47Deutsche Bank AG - 3.4 - 6.0 -Forecastweb 2.6 3.2 4.2 4.8 6.1HSBC 1.9 3.2 3.6 4.8 5.9IDEA 2.8 3.3 5.6 7.3 5.5ING Bank 2.0 3.1 3.5 4.3 4.6Metrobank 2.1 3.0 - 4.4 -PEP/Bank of America-Meryll Lynch 2.9 3.3 4.3 4.7 -RCBC 2.4-3.1 3.2-3.4 3.3-4.8 4.5-6.0 4.0-5.5Standard Chartered 2.0 3.0 1.5 3.3 3.3

Median Forecast 2.4 3.2 4.1 4.7 4.8Mean Forecast 2.5 3.2 3.8 4.8 4.9High 3.5 3.4 5.6 7.3 6.1Low 1.9 3.0 1.5 3.3 3.3Number of observations 10 11 9 11 7

Memo Item:Government Target 3.5±1.0 4.5±1.0

2009

.

Based on the results of the BSP’s survey for September 2009, inflation is expected to be within the target ranges for both 2009 and 2010. The mean inflation forecast for 2009 stood at 3.2 percent, lower than the 3.5 percent forecast in the survey three months ago. Forecasts for Q4 2009 and Q1 2010 are 2.5 percent (from 2.7 percent last quarter) and 3.8 percent, respectively. For 2010, the average inflation forecast is unchanged at 4.8 from the previous quarter. Moderate economic growth is expected to limit demand pressures and may temper any upside risks to inflation in 2009. The strong peso is also seen to mitigate any price increases for the year. Meanwhile, some economists noted supply side pressures coming from the impact of the recent calamities and the potential rebound in oil prices in the latter part of the year which could lead to higher inflation in 2009. Diminishing base effects would also have an inflationary impact. For 2011, the mean inflation forecast is higher at 4.9 percent (from 4.8 percent in Q2 2009). Meanwhile, based on the probability distribution provided by 9 respondents, there is a 49.2 percent chance that average inflation for 2009 could be within 3.1-4.0 percent, well within the 3.5 ± 1.0 percentage target for the year. The AP Consensus Forecasts for Philippine inflation in 2009 also showed easing expectations in July, August, and September 2009.

The BSP’s survey of private economists expects inflation to remain within the target ranges for 2009 and 2010.

VI. INFLATION OUTLOOK

44

Results of the latest Business Expectations Survey for Q3 2009 indicate that the proportion of respondents that anticipate inflation to move up in Q3 2009 sharply decreased. Consumer Expectations Survey for Q3 2009 shows a marginally lower inflation expectation for the next 12 months: from 8.7 percent in the previous survey to 8.6 percent.

Relative to the previous survey, a significantly lower majority of respondents in Q3 (from a diffusion index of 14.1 percent to 4.4 percent) expects inflation to move up in Q3 2009. However, a slightly bigger majority of respondents (from a diffusion index of 15.0 percent to 15.7 percent) expects inflation to increase in the next quarter. Significantly lower inflation is expected for fish (from 12.1 percent to 11.5 percent), educational services (from 9.1 percent to 8.1 percent), rice (from 11.0 percent to 10.6 percent), light (from 10.7 percent to 10.3 percent), and medical services (from 9.9 percent to 9.2 percent). However, consumers expect transportation inflation to increase (from 11.5 percent to 12.7 percent) as well as that of meat (from 7.8 percent to 8.0 percent). In terms of the diffusion index, however, a slightly bigger majority of households nationwide expects increases in the prices of goods and services over the next 12 months: from 49.3 percent in Q2 2009 to 49.5 percent in Q3 2009.

45

BSP Inflation Forecasts The BSP's latest baseline forecasts indicate inflation would settle at the lower half of the inflation target range for both 2009 and 2010.

Similar to the previous report, the current outlook shows inflation would gradually increase over the next two quarters and remain stable until the end of the policy horizon. From 2009 levels, inflation for 2010 would likely pick up with domestic and world economic activity expected to recover gradually and as the impact of the BSP’s monetary policy easing during the first half of 2009 becomes more evident. Prospects of an uptrend in food prices due to the recent typhoons and some base effects from a lower projected inflation path for 2009 would also contribute to higher but broadly stable inflation in 2010. Relative to the previous report, the inflation path for 2009 has shifted slightly downwards due to the low but within-projected inflation turnouts in Q3 2009. Meanwhile, the path for 2010 inflation has increased slightly due to the upward revision in real GDP growth projections and higher world oil price assumptions. Based on data as of the first week of October, inflation would settle at the lower half of the 3.5 percent +/- 1.0 percentage point target range for 2009 and the 4.5 percent +/- 1.0 percentage point target range for 2010. Demand Conditions Relative to the previous report, latest information shows more signs of stronger economic activity. The second quarter 2009 GDP growth, while still below the pre-crisis trend, came out better than expected while other demand indicators have shown improvement: growth of energy sales turned positive, vehicle sales generally grew, business and consumer confidence improved, while capacity utilization in manufacturing sustained its modest uptrend. On the other hand, property vacancy rates increased, land and rental values declined, and unemployment grew.

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Favorable prospects remain for global cereal production. However, domestic agricultural output may be negatively affected by the impact of typhoons Ondoy and Pepeng. Oil production is expected to recover in 2009 and 2010. Output gap estimate turns positive.

Supply Conditions The Food and Agricultural Organization (FAO) forecasts a 3.4 percent reduction in global cereal output in 2009, reflecting mainly a return to trend yields after last year's record productivity gains. In the domestic market, emerging estimates of agricultural losses from recent typhoons are expected to result in lower-than-target production. Based on reports from the Department of Agriculture, damages in agriculture caused by typhoons Ondoy and Pepeng were estimated at about P18.4 billion.36 For rice and corn alone, total losses from Pepeng were placed at P9 billion and P568 million, respectively. From Ondoy, the losses were about P5.4 billion for rice and P57 million for corn. Lost rice harvest due to typhoons Ondoy and Pepeng was estimated at 4.8 percent and 13.0 percent, respectively, of the national target production for the year. The lost corn harvest was about 0.2 percent and 3.3 percent, respectively, of the national target production. In the oil market, the EIA sees a possible increase in OPEC crude oil production for the rest of 2009 in response to an anticipated rebound in demand. Likewise, non-OPEC supply is also expected to increase in the second half of 2009 and in 2010 due to higher output from Brazil, the United States, Azerbaijan, Kazakhstan, and Canada. OPEC member countries are scheduled to meet on 22 December 2009 to reassess the market situation. The balance of demand and supply conditions, as captured by the output gap (or the difference between actual and potential output) provides an indication of potential inflationary pressures in the near term. Inflation tends to rise (fall) when demand for goods and services exert pressure on the economy’s ability to produce goods and services, i.e., when the output gap is positive (negative). Based on revised GDP data, preliminary estimates yielded an output gap of 2.4 percent in Q2 2009, up from -0.1 percent in the previous quarter. The higher positive output gap suggests that demand-side pressures have increased.

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Risks from high inflation expectations abate, as reflected in the decline in various indices of expected inflation.

Inflation Expectations Relative to the previous survey, results of the latest BSP survey among private sector analysts and the Asia Pacific Consensus Forecasts as of September 2009 generally indicate lower inflation expectations for 2009 and 2010. Meanwhile, results of the Q3 2009 Consumer Expectations Survey (CES) showed marginally lower expected inflation for the next 12 months, while the Q3 2009 Business Expectations Survey (BES) indicated a sharp decrease in the number of respondents expecting inflation to increase in the current quarter.37 Consistent with these survey results, secondary market yields on government securities as of end-September 2009 generally declined relative to end-June. The decline in most measures of inflation expectations can be attributed to subdued domestic and external demand conditions, stable commodity supply, and the favorable inflation outlook.

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Key assumptions used to generate the BSP’s inflation forecasts The BSP's baseline forecasts indicate inflation would settle at the lower half of the inflation target range for both 2009 and 2010. The forecasts are generated from the BSP’s single equation model (SEM) and the multi-equation model (MEM), and are based on the following assumptions: (a) endogenously-determined real GDP growth in the BSP multi-equation model; (b) a budget deficit of 3.2 percent of GDP for 2009 and 2.8 percent for 2010; (c) headline overnight RRP rate at 4.0 percent from July 2009 to December 2010; (d) 91-day T-bill rate which is consistent with the DBCC-approved macroeconomic assumptions and the Dubai crude oil price assumption which is consistent with the futures price of oil in the international market; (e) annual increase in nominal wage of 6.1-6.5 percent in 2009 and 2010; and (f) endogenously-determined exchange rate in the BSP’s multi-equation model through the purchasing power parity and interest rate parity relationships.

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Risks to the Inflation Outlook

The latest fan chart shows inflation would rise gradually over the next two quarters and remain stable until the end of the policy horizon. Additional upside risks to the central projection become evident since the last Inflation Report. Upside risks to the inflation outlook include a stronger-than-expected rebound in economic activity and its potential tightening effect on commodity supply-demand balances; adverse weather conditions; increases in utility rates due to cost recoveries; and a delayed unwinding of large stimulus measures.

The risks to the inflation outlook over the policy horizon may be presented graphically through a fan chart. The fan chart depicts the probability of different inflation outcomes based on the central projection (corresponding to the baseline forecast of the BSP) and the risks surrounding the inflation outlook. The central projection of the current fan chart indicates an uptrend in inflation until Q1 2010 and a broadly stable path thereafter. Based on data as of the first week of October 2009, annual average inflation would settle at the lower half of the 3.5 percent +/- 1.0 percentage point target range for 2009 and the 4.5 percent +/- 1.0 percentage point target range for 2010. This outlook is subject to some uncertainty as depicted by the widening bands of the fan chart over time. Since the previous Inflation Report, there have been additional upside risks to the inflation outlook while downside risks have diminished. Upside risks include a stronger-than-expected rebound in economic activity and its potential tightening effect on commodity supply-demand balances; adverse weather conditions; increases in utility rates due to cost recoveries; and an untimely unwinding of large stimulus programs. Downside risks to the projected inflation path consist of a stalled economic recovery and its pull on commodity prices, and the impact on consumer prices of the recent appreciation of the peso. Upside risks to the inflation outlook have heightened since the previous Inflation Report. The IMF noted that increased financial market confidence given signs of economic recovery could lead to a stronger-than-expected rebound in consumption and investment. This in turn could boost world GDP growth and inflation higher than initially anticipated.

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Latest Inflation Profile

The fan chart shows the probability of various outcomes for inflation over the forecast horizon. The darkest band depicts the central projection, which corresponds to the BSP’s baseline inflation forecast. It covers 25 percent of the probability. Each successive pair of bands is drawn to cover a further 25 percent of probability, until 75 percent of the probability distribution is covered. The bands widen (i.e. “fan out”) as the time frame is extended, indicating increasing uncertainty about outcomes. The band in wire mesh depicts the inflation profile as of Q2 2009.

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Future commodity prices would depend on the pace of recovery in emerging economies whose shares in global consumption have steadily risen and whose commodity demand is relatively more income-elastic than in advanced economies. In the food market, for example, stock-to-use ratios for major crops are anticipated to remain relatively tight despite prospects of robust crop output, reflecting the expected pickup in demand from emerging economies. The upside risk is that the recent run-up in non-oil, as well as oil, prices would be sustained should emerging and developing economies rebound faster than currently projected.38 For the oil market, another upside risk to prices is the pace at which current excess capacity is absorbed as the global economy recovers, amid lower or deferred investments in new capacity as a result of the financial crisis. Adverse weather conditions could add to inflationary pressures. Weak El Niño conditions are prevailing across the equatorial Pacific Ocean. Based on the latest observations and international forecast models, El Niño is likely to intensify and last through the first quarter of 2010.39 Damages to agriculture caused by typhoons Ondoy and Pepeng could also boost domestic food prices. Moreover, with the Philippines being a key player in the world market for rice, the output losses in the domestic rice sector could push up global rice prices which could later feed back to domestic inflation.

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Downside risks to the projected inflation path include a stalled economic recovery.

There could also be some upside pressures on inflation from electricity rate hikes due to the following: (1) the pending petitions of the NPC to recover actual and incremental fuel, independent power producers (IPP) and foreign exchange rate fluctuation costs under the 13th GRAM and the 12th ICERA and the 14th GRAM and 13th ICERA; and (2) Meralco’s petition to retrieve under-recoveries from lifeline and inter-class cross subsidies.

In its October 2009 World Economic Outlook report, the IMF noted that the global economy is recovering but the upturn will be sluggish and unlikely to be accompanied by a significant easing of credit conditions and a quick rebound in employment. Global GDP growth forecasts were revised slightly upwards from -1.4 percent to -1.1 percent for 2009 and from 2.5 percent to 3.1 percent for 2010. According to the IMF, the sluggish recovery suggests a prolonged period of subdued inflation and vulnerability of some advanced economies to mild deflation. On balance, the IMF views risks to world economic growth as still titled to the downside though such risks have receded since its last assessment. Tighter financial conditions could materialize should increased delinquencies and higher unemployment hamper progress in repairing banks’ balance sheets. A premature exit from accommodative fiscal and monetary policies could hinder the recovery process.40

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Surges in global commodity prices akin to last year’s increases appear unlikely given the outlook of a slow recovery in world output. The OPEC also observed that oil market fundamentals remain weak, refinery utilization rates are low, and stocks could build up further.41 Even as it raised global oil consumption estimates, the EIA maintained its projections for world oil prices because of ample supplies in the market, elevated inventory levels and expectations of higher OPEC production.42 For non-oil commodities, the FAO forecasts a 3.4 percent reduction in global cereal production in 2009.43 Nonetheless, world cereal output this year would be the second highest on record and would keep crop supply-utilization balances at satisfactory levels according to the FAO. The recent appreciation of the peso could also bring inflation below the baseline path by reducing the landed cost of imported commodities.

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VII. IMPLICATIONS FOR THE MONETARY POLICY STANCE

The manageable inflation environment over the policy horizon amidst increasing signs of economic recovery provides room for policy flexibility. Since the previous Inflation Report, there are additional upside risks to the inflation outlook. At the same time, the presence of soft spots in the macroeconomy suggests the need to maintain an appropriately accommodative policy environment.

The BSP's latest baseline forecasts continue to indicate that inflation would settle at the lower half of the inflation target range for both 2009 and 2010 while inflation expectations remain anchored toward the target over the policy horizon. At the same time, there are increasing signs of recovery with real sector activity gradually normalizing, supported by household and government spending. Leading economic indicators also continue to show some steady improvements in recent months while domestic financial market conditions have improved. These developments provide monetary authorities sufficient latitude to balance the risks to the inflation outlook against the need to preserve the stimulus to economic activity. There is a need to be more circumspect given the additional upside risks to the inflation outlook. Upside risks include a stronger-than-expected rebound in economic activity and its potential tightening effect on commodity supply-demand balances; adverse weather conditions; increases in utility rates due to cost recoveries; and an untimely unwinding of large stimulus measures. On the downside, inflationary pressures are expected to be dampened by the likelihood of a slow recovery in global economic activity and the impact on consumer prices of the recent appreciation of the peso. Economic recovery is expected to gain traction given gradually improving global conditions, the resiliency of domestic demand, the infusion of monetary and fiscal stimulus, and the sustained inflows of remittances from overseas Filipinos (OF). However, the continued contraction in gross capital formation, the increase in unemployment, the modest expansion in credit activity, and the devastation brought about by the recent typhoons suggest that the current monetary policy stance could continue to provide adequate stimulus to the real sector. Moreover, the volatility of economic indicators in advance economies indicates that uncertainty remains high. This warrants the need to exercise caution in assessing the evolving global economic and financial developments.

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The BSP will continue to carefully scan the operating environment with a view to preemptively address any risks to price stability.

The BSP maintains its resolve to keep monetary conditions conducive to credit demand and investment activity. Given a favorable inflation outlook, the BSP has the flexibility to preserve a generally accommodative policy environment amid the presence of soft spots in the domestic economy and the vulnerabilities brought by the recent calamities. Nonetheless, the BSP stands ready to calibrate monetary settings depending on how the balance of risks surrounding growth and inflation prospects will evolve. [On 1 October 2009, the Monetary Board maintained the RRP and RP rates at 4.0 and 6.0 percent, respectively.]

The BSP Inflation Report is published every quarter by the Bangko Sentral ng Pilipinas. The report is available as a complete document in pdf format, together with other general information about inflation targeting and the monetary policy of the BSP, on the BSP’s website:

www.bsp.gov.ph/monetary/inflation.asp If you wish to receive an electronic copy of the latest BSP Inflation Report, please send an e-mail to bspmail@bsp.gov.ph. The BSP also welcomes feedback from readers on the contents of the Inflation Report as well as suggestions on how to improve the presentation. Please send comments and suggestions to the following addresses:

By post: BSP Inflation Report

c/o Department of Economic Research Bangko Sentral ng Pilipinas

A. Mabini Street, Malate, Manila Philippines 1004

By e-mail: bspmail@bsp.gov.ph