Economic: Belesia

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The Belesian economy is an emerging economy attempting to expand from its original agrarian base. Seeking to follow the example of other Pacific nations that have developed strong economies, Belesia has created manufacturing base centered on goods processing. A combination of a relatively skilled but low-cost labor force and policy changes that opened up the country to greater foreign investment created a fast growing economy, expanding in the range of 6-7% annual over the last five years despite both international market fluctuations and domestic political turbulence.

Despite these advances, Belesia still lacks a sophisticated manufacturing structure, adequate infrastructure, or full access to international markets. Wealth distribution is extremely inequitable and while the unemployment has steadily declined over the past decade, the majority of available jobs are tedious and for low wages with high underemployment. The government still faces challenges in improving governance and reforming the judicial system and regulatory environment. The political system suffers from institutional weaknesses, including personality-based political parties and political domination by a few influential landholding families, as well as divisions among reformers, conservatives, religious advocates, and traditional politicians.

Possible territorial disputes, particularly with regarding to fishing, have also strained relationships between Belesia and its neighbors. A fractured topography and an unevenly distributed population exacerbate the risk. Unsettled islands, of which Belesia has over a thousand, are vulnerable to competing declarations of sovereignty and economic exploitation. Belesia attempts to maintain strong diplomatic ties both with its immediate neighbors and with more powerful regional stakeholders.

Despite these challenges, the overall economic outlook for Belesia is positive. The country possesses a large supply of human capital and significant natural resources. The industrial transformation to manufacturing of electronic components is beginning to show profitability, although at the expense of traditional agricultural output. Economic and government reforms are generally seen as positive increasing the likelihood of both international trade and foreign investment.

Table of Economic Data

Measure	Data	Remarks
Nominal GDP	$209.46 billion	Agriculture 9.7%, Industry 30.8%, Services 59.5%
Real GDP Growth Rate	6.5%	5 year average 6.6%
Labor Force	37.1 million	Agriculture 29.6%, Industry 16.3%, Services 54.1%
Unemployment Rate	26.3%
Poverty Rate	40.0%	% of population living below the international poverty line
Net Foreign Direct Investment	$3.98 billion	$2.79 million outbound
Budget	$40.51 billion in revenue $45.16 billion in expenditures
Public Debt.	36.2% of GDP
Inflation	3.1%	5 year average 3.3%

Gross domestic product is produced by agriculture (9.7% from 29.6% of employment), industry (30.8% from 16.3% of employment), and services (59.5% from 54.1% of employment). Component breakdown of GDP is 62.9% form household consumption, 11.9% from government consumption, and 27.7% from capital formation, while the trade deficit reduces GDP by a factor of 2.5%.

Participation in the Global Financial System

The economy of Belesia has been relatively resilient to global economic volatility. The nation retains a substantial domestic consumption rate, making the overall economy less reliant than others in the region do on exports. Additionally, the nation has a smaller exposure to international securities than many Pacific nations, with a stable banking system. The cost of this stability, however, is difficulty in maintaining economic growth as other nations recover and expand following economic downturns.

IMF/World Bank/International Development Aid

The World Bank’s partnership with Belesia spans nearly 60 years, providing longstanding support for infrastructure, water resources, and disaster risk management. The World Bank is also an active partner in helping spur private sector growth. Belesia retains $1.9 billion of International Bank for Reconstruction and Development loans to be disbursed—approximately one-half of the original principal. Over the past decade, the nation has used $1.77 billion to develop trade with special consideration given to pro-poor growth strategies. Trade is included as a macroeconomic strategy to achieve this development.

Over the last decade, disaster relief and recovery has also become an increasingly important area of assistance to Belesia. The United States has provided over $143 million in assistance to date to the people of Belesia after Typhoon Haiyan in 2013. The European Commission released the equivalent of $4 million in emergency aid funds and the United Kingdom Rapid Response Facility sent a team of experts to the Philippines, along with a shipment of emergency equipment, and an additional $8 million in emergency aid funds.

Foreign Direct Investment

Improving the foreign investment climate is essential to strengthening Belesia’s domestic productive capacity. A decade ago, foreign direct investment (FDI) dramatically decreased due to an unfavorable business and economic situation. Global financial downturns meant that corporations were unwilling to make investments in risky political environments fraught with corruption and instability. Recent government reforms to improve the business climate and reduce endemic corruption have already had a meaningful effect, leading to rising FDI. Yet, the eventual outcome remains clouded by uncertainty. The country's poor infrastructure remains a serious challenge for investors seeking to establish production facilities, yet expanding the productive capital base is exactly what the country needs to reduce dependence on consumer demand. The government is likely to lower the corporate tax rate to bring it in line with its Asian neighbors. At 30%, Belesia has one of the highest corporate tax rates in Asia and lowering corporate taxation is part of a broader government plan to review the tax system.

In addition to reforms, Belesia has also been working to liberalize of the economy. However, nationalist interests and significant barriers to foreign ownership have stymied these reforms. Belesia lags behind its regional peers despite a record quantity of FDI last year. The Belesian constitution restricts foreign ownership in important activities/sectors such as land ownership and public utilities. In other sectors, such as retail and financial services, foreign investment is restricted to minority ownership. Even in areas where the government encourages foreign investment, like transportation and infrastructure, the State keeps a strong presence. For example, government-owned Belesia Air dominates the air services industry, while another state-run company retains the monopoly to develop and manage airports and airport services, and a government agency is in charge of all cargo handling and port services. The country boasts of one of the longest road networks in Southeast Asia, however, it is of inferior quality and does not provide efficient connectivity. Foreign investment in rural improvement projects such as irrigation, rural roads, and rural ports have dwindled due to the failure of the government or domestic private sectors to support these projects, significantly raising costs of rural access. Even when the government encourages investment through tax breaks and other incentives, these are often contingent on export performance and Belesian ownership.

In other sectors, however, laws liberalizing business practices have opened up more fields to foreign investments. Two years ago, a new law lifted restrictions on foreign ownership of banks. This resulted in overseas banks almost immediately investing in the country’s banking sector due to its record of being one of the fastest-growing Southeast Asian economies with a rising demand for bank loans. Full foreign ownership is now allowed in banking, insurance, finance, construction, telecommunications and information technology, and petroleum distribution.

Charity

Poverty and inequality remain major issues in Belesia. The government’s anti-poverty programs have failed to produce the desired results with little change in poverty rates over the past five years. A wide range of activist groups and NGOs emerged through recent political upheavals, with over two dozen international charitable corporations currently operating in Belesia. These, coupled with an active labor movement, peasants' organizations, and student and youth groups, exert a pressure on Belesian politics that partly counters the power of elite families and interest group.

Economic Activity

In the past three years, Belesia emerged as one of the stellar economic performers in the Pacific region. The country’s GDP expanded at a 6.5% compounded annual growth rate, compared with 6% for the Southeast Asia region as a whole. Domestic demand has been providing the key impetus to economic growth during recent quarters as consumer and business sentiment remains resilient, while investment and government spending surged on the back of election-related spending.

The receding effect from election spending, the lingering damage from unfavorable weather conditions, a clouded world economic outlook, and lackluster global demand will raise downside risks to otherwise upbeat near-term prospects. Meanwhile, upholding growth momentum will remain the key challenge to the economy. This is reflective of the country's historical inability to sustain rapid growth for more than a couple of years at a time. Consumption rather than investment traditionally drives growth in Belesia, a pattern that is less sustainable than the successes in evidence in Olvana and South Torbia.

Recently, Belesia has suffered a significant slowdown amid continuing political turmoil, slowing momentum in Olvana, and the sudden flight of capital back to developed economies. An absence of entrepreneurial dynamism makes long-term economic development a challenging task and unemployment remains a persistent problem. The overall low-income level and inadequate infrastructure hampers economic diversification and growth.

Economic Actors

Although Belesia has been nominally democratic since declaring independence, a small landholding elite, generally with ties to colonialism and resistant to social change, retained political and economic power. During the 1970s and 1980s, while most other Southeast Asian countries were flourishing economically, the economy of Belesia was stagnant with regional extreme poverty. A growing influx of Olvanese investors and investment, with government approval, has pushed the expansion of manufacturing. While this has benefited the Country as a whole, and shifted some of the wealth from the landholders to the entrepreneurs, the wealth disparity and unemployment rates in the rural and more indigenous communities remains high.

Trade

Belesia has more than 500 ports scattered throughout the archipelago, 57 of which are designated international ports with 4 of them having major cargo and passenger terminals. The main maritime gateway to Belesia is the Port of Davao. A number of cities such as Cagayan de Oro, Cebu City, Zamboanga, Matnog, Allen, and Ormoc have ports that are part of the Federated Nautical Highway, allowing land vehicles to use a 24-hour roll-on roll-off (Ro-Ro) ship service linking the country's different islands at minimal cost. Belesia has a number of privately controlled ports, which tend to handle international trade while government-controlled ones handle domestic trade. Belesia has a large number of established maritime and inland waterway freight. Although these are useful for small vessels, it does not do much for businesses looking to transport large volumes of goods, as the majority of the waterways are limited to shallow-draft vessels of less than 1.5 meters. Despite its archipelago makeup and reliance on maritime transportation for trade, the country's ports tend to lack capacity and have outdated or inadequate infrastructure, which cannot cope with the rising trade requirements.

Belesia’s main trade policies are aimed at achieving greater integration into the world economy. In particular, Belesia wants greater foreign direct investment to expand output and employment and enhance foreign market access for its products. To obtain these measures, Belesia has pursued multilateral, regional, and bilateral trade negotiations. A large part of these negotiations has included reducing tariffs on imported agricultural products, although broadly speaking these remain high.

Commercial Trade

Belesia has a strategic geographical location for maritime trade and low overall costs make it an attractive opportunity for companies looking to serve Asian markets. However, the country's archipelago geography and underdeveloped internal transport networks causing delays when moving goods. This inadequate logistics network detracts from the country's otherwise appealing trade connections. A severe slowdown in the world economy, as already seen in Olvana and South Torbia, affects Belesia commercial growth opportunities. Likewise, other political fallout in Europe, North America, or the Middle East has the potential to seriously disruption trade expansion. However, these vulnerabilities to external shocks have also led Belesian companies to develop a resiliency, and efforts to shift from reliance on manufacturing goods to service orientation and greater emphasis on domestic consumer growth. Overall downward demand globally also lessened the overall economic blow for Belesian importers as total product import cost dropped by 9.6% over the last two years.

Belesia has a negative balance of trade—importing more than they export—valued at around $5 billion. The total value of exports is $36.55 billion, with over half of export volume coming from machinery and electronics, while from a monetary standpoint, the most valuable Belesian exports are electronic components, computers, insulated wire or cable, and coconuts. Copper was the fastest growing among the top 10 export categories, up 213.9% last year. Belesia main export partners are South Torbia (21.2%), the US (14.5%), and Olvana (12.2%). Belesia’s imports valued $41.87 billion, with the largest imports in machinery (33%) and fuels (21%). Belesia’s largest import trade partners are South Torbia (16.3%), Olvana (13.1%), and the US (10.9%). Export controls are implemented mainly for health, safety, security, or environmental reasons or to fulfill international commitments. Belesia does not apply export taxes and provides grants, tax incentives, and subsidized insurance premiums to facilitate companies' access to trade finance to support exports.

Military Exports/Imports

Military expenditures in Belesia account for 1.5% of GDP. Historically, Belesian purchases have been a mix of western and Donovian weaponry, but recently the country has been looking at Olvanese imports. This would make conflict less palatable for the Olvanese and offer greater protection for businesses in the country. A pronounced realignment of resources toward internal security will have long-term negative consequences for the Belesian Federation Defense Force's ability to challenge external intrusions particularly given a long-standing imbalance in terms of purchases that benefit army modernization versus maritime and aerial surveillance.

Economic Diversity

The archipelago of Belesia contains a wealth of natural resources, ecological richness, and a wide variety of bio-diversity. However, population pressures, the deleterious effects of natural disasters, and land ownership and land management issues have failed to convert those riches into economic success. Like many Asian nations, a key to developing economic strength in Belesia is converting large segments of the populations from farm to factory, integrating into a global supply chain of high-value manufacturing. However, it also drew the country into more direct competition with its neighbors. Additionally, Belesian efforts to promote economic development have further contributed to environmental damage as well as widespread poverty and human health concerns. Moves to create an export-based economy similar to Olvana or South Torbia mean have shifted the workforce from primarily agricultural to one in which a third are in agriculture (29.6%) while over half work in services (54.1%, with 16.3% in the industrial sector.) Due to widespread inefficiencies across the agricultural sector, agriculture only contributes 9.7% to the overall GDP. Industry provides the key sector in electronics manufacturing. While industry as a whole provides 30.8% of the overall GDP, over half of that comes from electronics. The government provides a number of tax incentives to attract foreign investment in electronic manufacturing, particularly in telecommunications. However, research and development expenditure is very low. With over 60% of overall R&D funding coming from the private sector, Belesia has one of the lowest expenditure rates in Asia—a large risk as knowledge-based economies dominate the global marketplace.

Good factor endowment in Belesia is a positive sign for growth. The country possesses a large supply human capital and rich natural resource endowment. Economic reforms undertaken in decades ago positioned the country on a path of sustainable expansion, with exports strongly benefiting from prior investments and regulatory changes. Steadfast consumer optimism, healthy credit expansion, a tight labor market, and growing flows of overseas remittances translate into solid, if moderate, consumer spending growth. Remittances from overseas workers are equivalent to nearly 10% of GDP. However, rising global interest rates could weaken the Belesian currency, adversely affecting capital flows and driving up domestic inflation. Commodity prices, specifically global crude oil prices, are projected to rise, which could also increase inflationary pressures.

The investment-to-GDP ratio in Belesia remains low, and the economy is still hugely dependent on remittance inflows to sustain its growth. A reliance on agricultural commodity exports and exposure to wild swings in global electronics demand has left the country prone to considerable volatility. The challenge for Belesia is to sustain economic growth despite these facts and spread those benefits to more deprived regions of the country. A large growth opportunity lies in construction—especially of roads, harbors, and other public infrastructure—but a lack of public investment or dynamic entrepreneurship has failed to kick start this sector. In some regions, businesses, especially multinational corporations are loathe to invest because of governmental roadblocks. Provincial governments can use their powers to hamper rights granted under central government legislation. In addition, judicial processes can be very slow because of understaffing, and there are high levels of corruption, where the payment of small bribes during negotiations is a common practice. Many local officials rely on such payments to supplement small incomes.

Energy Sector

Belesia is a net energy importer despite low consumption levels relative to its Southeast Asian neighbors. The country produces small volumes of natural gas and coal. Geothermal, hydropower, and other renewable sources constitute a significant share of electricity generation. These provide approximately half of Belesia’s energy needs (49.8%) However, the country must import the vast majority of its petroleum and petroleum product requirements, equating to 31.4% of consumption, although only 2.5% of electrical generation. A decade ago, the government privatized the state-run Belesian Petroleum Corporation (BPC), eliminating that company’s monopoly on oil importation. However, the BPC remains a dominated player in the energy sector with significant influence over local processes.

Another state-owned enterprise, the Cebu Electricity Board, dominates electricity, which has run at a loss for many years as the government has kept electricity tariffs below generation costs. At the same time, cross-subsidization in favor of certain consumers has led to high electricity costs for industrial users, potentially weakening their competitiveness. Although coal only accounts for around 4% of overall energy use, coal plants provide over half of the electricity used nationwide.

The energy sector has several possible entry points for investors, ranging from prospecting to generation, transmission, and distribution. Several foreign companies have had a strong presence in the natural gas and generating industry after the government opened the sector up to foreign capital.

Oil

Belesia imports all of its oil and oil-based products. 87% of total crude mix is imported from the Middle East, 6.7% is imported from Donovia, and the remaining 6.3% is from other Asian sources. Local refineries account for 51% of imports, while the other 49% reflects direct importation of refined products. Refinery production has a maximum throughput of 38000 bbl./day but averages 18000 bbl./day. The predominant refined product is diesel oil with a 47.3% share of the production mix, followed by gasoline (24.2%), kerosene (10.8), avgas (6.9%) and fuel oil (6.6%). Volume wise, diesel oil imports grew by 24.6% compared over the previous year. Kerosene, avgas, and gasoline imports also rose by 19.9%, 19.7%, and 3.7%, respectively. On the other hand, fuel oil imports dropped by 15.3%.

Natural Gas

The current gas industry in Belesia is characterized as emerging, essentially a “single-project” stage, with the country’s first commercial gas field, the Malampaya Gas Field in Northern Palawan, having commenced delivery of gas to three combined cycle gas turbine power plants. A consortium of three companies is developing the gas field under a service contract with the government. The consortium supplies gas to three power plants located in Luzon. Malampaya provides almost 8% of the country’s power needs. The Malampaya gas field is scheduled to produce 146 billion cubic feet of gas per year.

The Belesian natural gas industry assists in the government’s goal of harnessing environmentally friendly fuels to ensure a stable, diverse, and secure energy supply. However, the growth of this industry is predicated on the development of additional natural gas capacity, other non-power applications, and the infrastructure to bring the natural gas to its potential markets. This infrastructure includes the appropriate pipeline transmission and distribution networks, LNG terminals and facilities, gas-refilling stations, and ancillary facilities.

Natural Resources

The Belesian archipelago is rich in mineral resources, including major deposits of gold, iron ore, copper, lead, and zinc. There are also deposits of silver, nickel, mercury, manganese, and cadmium. Small-scale operations dominate the mining industry, contributing 80% of overall mineral production in the country. Although unexploited mineral wealth is estimated at more than $420 billion, low royalty rates and an ineffective fiscal system means that the government receives only a small share of this resource wealth. Non-metallic minerals range from limestone, salt, and asbestos, to marble and asphalt. Natural gas reserves are located off the northwest shore of Palawan, but Belesia remains a net importer. The country has extensive agricultural resources, including timber and fisheries, while principal crops include rice, corn, coconut, and sugarcane. Tropical fruits are also produced for export.

Agriculture and Forestry

Belesia is still primarily an agricultural country despite the plan to make it an industrialized economy. Most citizens still live in rural areas and support themselves through agriculture. The country's agriculture sector is made up of three sub-sectors: farming, livestock, and forestry, with the latter two being much smaller than the first. Together, agriculture employs 29.6% of the labor force, but only contributes 9.7% of the GDP. The agricultural sector suffers from low productivity, weak economies of scale and inadequate infrastructure. Last year, the country's earnings from agricultural exports were lower by 21% from the previous year.

Small farms with low mechanization dominate the agriculture sector. Just over 40% of the total land area is dedicated to agriculture with three-fourths of the cultivated area devoted to subsistence crops and one-fourth to commercial crops, mainly for export. Soils are extremely fertile, but 30% of the agricultural land is suffering erosion. In value terms, Belesia’s main crops are rice, banana, coconut, palm oil, corn, and sugarcane. Belesia exports coconut oil, palm oil, and sugar, but rice and corn are largely produced for domestic consumption, and the government emplaced a variety of measures to protect these products. These include highly costly and ineffective price supports for rice and corn, high tariffs, and rice import quotas. Roughly half of the cultivated land is devoted to rice and corn. Large plantations are the norm in commercial agriculture, centered on palm, coconuts, sugarcane, tobacco, bananas, and pineapples.

The importance of agriculture means that Belesia is extremely vulnerable to weather-related extreme events, earthquakes, and sea level rise. Climate-related impacts will reduce cultivatable land, decrease agricultural productivity, and increase food insecurity. Environmental deterioration and unsustainable development practices aggravate the country’s climate vulnerability. However, the poor performance of the agricultural sector in recent decades is not tied to risks or vulnerabilities in the sector, but rather to the political and institutional environment within which the sector operates. Price intervention policies, trade policies, public expenditure allocations, weak governance, and failed infrastructure have all led to the overall weakness of the agricultural sector.

Industry

Belesia’s industrial policy aims at diversifying its manufacturing base and promoting regional industrialization. In order to encourage investment in the manufacturing sector, the Government has offered a wide range of tax incentives, concessionary tax rates and other types of assistance. The sector remains an important contributor to economic growth, accounting for 30.8% of GDP and 16.3% of total employment and the industrial production growth rate is 6.8%. However, manufacturing is highly concentrated in a few products and export markets, and relies heavily on imported inputs, making it vulnerable to external economic cycles and price fluctuations. Primary industries include electronics assembly, garments, footwear, pharmaceuticals, chemicals, wood products, food processing, and fishing.

Mining

While the mining and quarrying sector contributes about 1.1% to GDP and employees an estimated 200,000 people, or 0.7% of the total number of people employed in the country, both figures are down from the previous year, losing nearly 21,000 jobs. Five years ago, the government implemented a new mining law which the industry and the public lauded the law for its liberal framework. However, a mine collapse in Panay released 20.6 million tons of waste into a nearby river. This led to an amendment of the mining law and highlighted the growing mistrust of the country’s private sector in the country’s legal environment. Despite the abundance of natural resources in the country, the amended law has increased private investor mistrust of the country’s regulatory regime and greatly curtailed foreign investment and expansion. Conflicting national and local mining laws also pose risks to foreign mining firms. For example, open-pit mining is banned on Mindanao despite being allowed by national law. The only area of mining expansion has been in nickel, with four new projects starting last year and 21 of the country’s 35 operating mines producing nickel.

Manufacturing

Belesia has developed a competitive manufacturing base in recent years as low-end manufacturing left Olvana due to wage increases. Industrial food processing is one of Belesia’s main manufacturing activities along with the production of cement, glass, chemicals products and fertilizers, iron, and steel. The manufacturing sector has been the focus of Belesian efforts to improve job quality, but growth is hindered by high wages, bureaucratic interference, and limited infrastructure. Additionally, the global market, with liberalized globalization in steel, hampered the industry in is incipient stage. While Belesia does not have integrated steel mill capacity, its regional competitors do, putting the country at further disadvantage. Belesia is among the most open countries to metal imports in the region. Whereas South Torbia and Olvana each implemented eleven anti-dumping measures in the base metal sector over the past three years (tariffs, safeguards, technical barriers to trade and non-tariff barriers like “Buy National” campaigns), Belesia has not initiated any.

The government is supportive of a strong manufacturing base, while favoring a restructuring towards higher value-added, capital-intensive industries. The authorities consider that the manufacturing sector has positive spillover effects on the rest of the economy, including improving the economy's resilience in global economic downturns. The high-tech sector is fairly isolated from the rest of the economy. Belesia specializes in semiconductor assembly, which relies heavily on imported components that are then re-exported to be used as intermediate inputs in other electronic subsectors.

Fishing

Fishing contributes 3% of the GDP. However, overfishing has emerged as one of the country’s major problem. Overfishing has resulted in a 90% drop in the trawling quantity from major fishing areas in the country. Apart from the economic loss, there has also been a loss of biodiversity and almost 80% of the coral reefs in Belesia are under high risk due to destructive fishing practices. Efforts by Belesia to expand its territorial fishing areas have been met with opposition from Gabal and South Torbia. Domestic demand for fish is substantial, with average yearly fish consumption at 36 kg per person compared to 12 kg for consumption of meat and other food products. The fisheries sector comprises commercial fisheries, municipal fisheries, and aquaculture. Commercial fishing is allowed in waters that are 16 km or more from the shoreline: foreign equity in deep-sea-fishing vessels is capped at 40%, and all fishermen must be Belesian citizens. Imports of fresh, chilled, or frozen fish (except when imported for canning and processing) are allowed only when deemed "necessary", and a certificate of necessity is required. Fish exports require a permit.

Services

The services sector, which accounts for 59% of GDP and 54% of employment, remains a main driver of economic growth, expanding by an average of 6% annually in real terms over the last five years. Services exports as a percent of total exports increased from 9% to 21% over the past decade. Services are led by wholesale and resale trade (16%), followed by business services (15%), financial and insurance services (13%) and tourism (12%). Further reforms in the services sector, particularly in travel and tourism, could provide more channels by which the country could diversify its economy, achieve high and sustained growth, and reduce poverty. The tourism sector is considered central to Belesia’s social and economic development, and the government's objective is to double tourist arrivals in the next three years. Infrastructural weaknesses, particularly highways, hotels, and tourist facilities, have been identified as the main bottlenecks to tourism development.

Banking and Finance

Belesia has a relatively underdeveloped financial sector; however, it has recently opened to foreign competition and has high capital and liquidity standards. Ironically, this underdevelopment actually protected the nation’s financial sector from shocks other nations faced during financial crises of past decades. The Central Bank of Belesia has pushed for changes to the Belesian tax and bank secrecy laws, which over the past five years has resulted in removal of the country from a western blacklist of non-cooperative tax havens. Additionally, the central bank has implemented initiatives that encourage weaker rural banks to merge with stronger ones. Overall, private, domestic, often Islamic, banks dominate the financial sector. Banks offer credit at market terms; however, legal stipulations require them to lend specified portions of their funds to preferred sectors in manufacturing and tourism.

Public Finance

The overall Belesian financial focus has been to improve tax administration and budgetary management. These efforts have allowed economic success and growth, albeit inconsistently, despite a high debt burden and overall tight fiscal situation. The government’s efforts have been rewarded with higher investment-grade credit ratings on its sovereign debt comparted with many of its economic global peers. However, weak absorptive capacity and the slowness with which plans are implemented have prevented the government from maximizing its expenditure plans. The low tax-to-GDP ratio remains a constraint to supporting increasingly higher spending levels and sustaining high inclusive growth.

After the most recent elections, the President vowed to make inclusive growth and poverty reduction his top priority. The President stated that illegal drug use, crime, and corruption were the key barriers to economic development. This has resulted in a twofold policy—increasing spending on infrastructure and poverty reduction programs, while also increasing spending on police and education. This has resulted in an increase in government spending from 15.8% to 21.0% of GDP. This expansionary fiscal policy was countered with a slight tightening in monetary policy to counter inflationary risks. Due to the fiscal and monetary prudence that has taken root in the country, an increased national savings rate fuels more rapid investment growth. Combined with central bank’s proactive efforts in keeping a close watch on inflationary pressures, the Belesia has been able to enjoy relative monetary stability over recent years. In line with the twin goals of eradicating extreme poverty and boosting shared prosperity, the investment portfolio structure indicates a strong support almost equally to agriculture (19%), social development (18%), disaster risk operations (18%), and social protection (16%); followed by water (13%) and education (11%). The remaining balance is shared by transportation (4%) and energy (1%).

However, while the Belesian government has no shortage of good plans and programs to address various sectoral concerns, like those of the agricultural sector, the implementation of such plans and programs have historically failed. Governance and bureaucratic reforms, especially in the agriculture bureaucracy and in the local governments, lie at the heart of addressing the age-old constraints to stronger performance. The political system is characterized by instability, weak political institutions, and corruption, with powerful political families infighting over vested interests.

Taxation

The tax system in Belesia is complicated and highly inefficient. Corruption is a major hindrance to efficient tax collection, and the country is among the worst in the world for discriminatory application of tax law. Preparing and filing personal taxes takes 20% longer than in other Asian countries, while corporations have 28 separate tax transactions to make. The average total tax burden for a Belesian is 42.9%. Average tax rates include sales tax 12%, corporate tax rate 30%, personal income tax rate 32%, and social security rate 22.7%. Capital gains are taxed at 5-10%. The current administration has pledged to reduce the corporate and individual income tax rates offset by higher consumption taxes.

Imports into Belesia are also subject to a number of charges, including tariffs, excise duty, value-added tax, an Export Development Board Levy, a Social Responsibility Levy, and a Ports and Airports Development Levy. These charges considerably increase the cost of importing into Belesia, which in some cases may exceed 100%. Tobacco products and motor vehicles face the highest overall import charges. Despite having raised tariffs and other charges on imports, the Belesian government made substantial efforts to enhance transparency regarding applied tariff levels and all other import charges. On aggregate, Belesian tariffs display mixed escalation, with first-stage processed products dropping to an average tariff rate of 6.7%, semi-finished goods remaining steady at 4.9%, and semi-finished to fully processed products climbing to an average 7%. At a more disaggregate level, positive tariff escalation is most pronounced in textiles and leather, followed by wood and furniture, paper and printing, chemicals, and non-metallic mineral products, thereby providing higher levels of effective protection to those industries than that reflected by the nominal rates.

Inflation

Core consumer prices rose 3.1% from a year earlier. Over the coming quarters, grain and energy commodities prices will become positive drivers of inflation, as they are likely to post elevated percentage. Furthermore, the increase to electricity rates along with the proposed upwards adjustment in excise tax rates of petroleum products have the potential to be inflationary, given that housing, water, electricity and transportation account for about 30% of household spending. While the government’s expansionary budget will focus on infrastructure and social development and will be positive for productivity growth, it will nevertheless add to upside inflationary pressures.

Over the last year, upward price pressures came from all components: alcoholic beverages and tobacco (6.3%), clothing and footwear (2.7%); housing, water, electricity, gas and other fuels (3.6%); furnishing, households equipment and routine maintenance (2.4%), health (2.5%), transportation (3.2%), communications (0.3%), recreation and culture (1.5%), education (1.8%) and restaurants and miscellaneous goods and services (1.5%). Prices of heavily weighted food and non-alcoholic beverages also went up 4.2%.

Inflationary concerns are less than a decade ago, when inflation rates trended in the neighborhood of 8%. Still, even slight inflationary increases, especially in food and energy, have the greatest impact on those least able to afford them, the poor. Thus, economic growth proves to be a double-edged sword, increasing wages for some while also creating upward pressures on prices for all.

Public Liabilities/Debt

From the 1960s through the 1980s, government spending coupled with corruption and mismanagement caused an increase in national debt of over 7000%, reaching a high of 97% of GDP. An extended period of government reforms and international assistance has allowed Belesia to reduce the debt burden to its current level of 36.2% of GDP. Unlike many emerging nations, Belesia accomplished this without defaulting on international loans. This was a key factor is maintaining international relationships which guaranteed assistance and continued funding.

Subsidies

The Belesian government extends subsidies to companies in order to perform certain government-specified mandates. In return, these companies are supposed to remit 50% of their earnings as a dividend to the government. These funds are managed by a government holding company that further invests across various sectors. While the volume of subsidies has decreased by 15% over the last year, the number of government-owned and government-controlled corporations nearly doubled. The largest subsidies are provided for power distribution, followed by irrigation, transportation, and health care.

Currency Reserves

The Belesian currency is known as the talaro. One Belesian talaro is equal to 100 malakis. Current foreign exchange reserves in Belesia equate to $37.20 million. The relative stability of monetary policy and inflation risks for Belesia lead to a non-volatile exchange rate that traditionally fares well versus the Euro and the US Dollar. However, downside risks are likely to increase due to rising global interest rates, a widening trade deficit, growing political uncertainties, and political concerns.

Private Banking

Banking System

Belesian banks overwhelming lend to the corporate segment, particularly larger companies with long credit histories and a strong repayment track record. Over 80% of private lending is composed of corporate loans. Banking regulations are broadly in line with international standards, with some even more stringent then global parameters. The Belesian Deposit Insurance Corporation insures maximum deposit coverage of 500,000 talaro per depositor.

There are currently over 30 general and commercial banks in Belesia, consisting of private domestic banks, international banks, subsidiaries of foreign banks, and branches of foreign banks. Several of these are universal banks, meaning they are both a commercial bank and an investment bank. Belesian laws do not distinguish between foreign and domestic banks except in retail banking. Foreign retail banks are subject to limitations on the number of places of business (branches and ATMs) that they may operate. A foreign retail bank that has been given full banking privileges may operate a maximum of 25 places of business.

Stock/Capital

The Belesian Stock Exchange (BSE) is a stock corporation and the sole stock exchange in Belesia. The Company's revenues derive primarily from listing-related fees for initial public offerings, additional listings, and annual listing maintenance. The Company's other sources of revenue are membership, transaction, data feed, and service fees. The BSE has 226 listed companies. Foreigners are restricted to investing in B-shares and total foreign investment in a company is limited to 40% for general listed stocks and 30% for banks. All foreigners conducting transactions with the BSE must register with the Central Bank.

The BSE has two subsidiary companies. The first, the Securities Clearing Company, serves as the clearance and settlement agency for trades executed through the facilities of the BSE. The second, the Market Integrity Company, functions as the independent audit, surveillance, and compliance unit of the BSE. The government supervises the BSE via the Financial Market Oversight Commission (FMOC). The FMOC has the mandate to strengthen the corporate and capital market infrastructure of the country and maintain a regulatory framework based on international standards and practices. The FMOC is also entrusted with the responsibility of promoting investor interests in a free, fair, and competitive business environment.

Informal Finance

Belesia has both an active black market as well as a very large underground economy consisting of unlicensed and untaxed vendors of garments and food and unregistered workers in sweatshops and residences. Black market activities include illegal money changing and the smuggling of machine parts and basic items. The underground economy was credited for propping up the economy during turbulent economic times in the 1980s. While the goods and services produced were not technically part of the country’s ledge, the income generated enabled Belesians to work and feed themselves and thus survive the crisis. There are also over 100,000 informal lenders—i.e., loan sharks—in Belesia. Many of these charge exorbitant interest rates, creating an often-insurmountable burden for low-income borrowers. These lenders often come into direct conflict with Islam prohibitions against usury.

Employment Status

Belesian economic policy has focused for several years on encouraging economic restructuring from labor-intensive growth towards innovation and productivity-led growth. However, failed projects, declining fishing incomes, and rising poverty levels exacerbate urban-rural disparities, especially in coastal areas, spurring migration of young adults from the rural to urban areas. One reason is that job creation has struggled to keep pace with an ever-expanding population. In three of the past five years, the number of people entering the job market has been greater than the number of jobs created. Another factor may be the low quality of jobs available. Last year, just 58% of workers—in both formal and informal employment—were in paid jobs, 28% were self-employed with no guaranteed income, and 11% worked on family-owned farms or other businesses where they typically receive food and lodging but no actual cash. With manufacturing growth also stunted, new generations of are consigned to work in low-skill jobs, where productivity and wages tended to be lower—or to leave the country altogether. Last year, Belesia workers who moved abroad to work sent home a figure equivalent to about 8.5% of national GDP. The majority of inflows are from the United States and the Middle East, with a growing number of unregistered workers in Olvana and South Torbia.

Labor Market

The labor market is an area where Belesia is not living up to its potential. Despite a large population and high levels of unemployment, the labor force participation rate (LFPR) remains relatively low. Only about 60% of the working age population is looking for work, one of the lowest levels in the region. Underemployment remains a persistent problem affecting one-fifth of all employees, with only 35% of workers reporting a workweek longer than 35 hours. Two-thirds of all Belesian that do have employment work in the informal sector, meaning lower-wage and lower-skill jobs without the benefit of written contracts, social insurance, or access to severance pay. Although the country is a signatory of all International Labor Organization conventions on workers' rights, non-compliance with regulations is commonplace, especially among small and medium-sized enterprises. Efforts to bring informal workers into the mainstream, where they can be regulated and taxed, have met resistance as Belesian culture sees even black market activities like smuggling as ways to avoid becoming the helpless victim of the taxman. However, Belesia does reverse the gender wage gap compared to most of the world, with females making 6.1% more on average than males.

One critical factor affecting Belesian employment is overseas investment. Although Belesian wages are low, they are not as low as in other emerging markets, while the education and training is of lesser quality, limiting the draw for labor outsourcing. Yet, delivering more and higher quality employment is critical for growth and poverty reduction, especially in Mindanao. 2.4 million Mindanaoans are either unemployed (460,000) or underemployed (1.9 million). Combined with expected population growth, this means a requirement for 6.3 million jobs in the next five years. The Belesian government will need to continue reforms that encourage investment while also improving skills development programs, especially for youth.

Currently, there are approximately 3.2 million children working as child labor. The overwhelming majority of these work in hazardous conditions. The agricultural sector employs 54.1% of the children, 40.5% in the services sector, and 5.3% of the children in the industrial sector. Poverty is the main cause for increasing child labor.

Employment and Unemployment

Unemployment remains very high in Belesia despite government efforts to address the problem. Government action as well as global labor trends worked to bring unemployment rate down from its high a decade ago of 43.9% to a low of 24.7%. Recent trends have been slowly upward and unemployment currently stands at 26.3%. Additionally the LFPR is currently 61.8%, and while this is up from 60.7% a year ago, it is well below its high of 71.5%, as the LFPR never recovered from a series of global and regional financial shocks. These figures only tell part of the picture. Employment and wages are distributed extremely unevenly. While the poverty rate nationwide is 40%, the poverty rate in rural areas is closer to 60%. Unemployment rates are 5-7% higher and underemployment 18-19% higher in rural areas, with coastal regions being the worst off. Unemployment in Belesia is structural, generated by the low GDP growth rate relative to population increase. Lack of elasticity in the labor market has prompted large levels of migration, both internally and overseas.

Illegal Economic Activity

The shadow economy of Belesia is one of the largest in the world, with a value equivalent to over 40% of GDP. This includes both market-based legal production of goods and services deliberately concealed from public authorities to avoid payment of taxes or meeting labor market standards and classic crime activities, like burglary, robbery, or drug dealing. The numbers of drug seizures in Belesia are few and decreasing, but human trafficking is very high, predominantly as labor.

Corruption in Belesia is high and the enforcement of anti-corruption laws is inconsistent and slow. The public sector is a key source of bribery, with national and local government units likely to ask for bribes related to public contracts. Government infrastructure projects are rife with bid rigging, collusion, and fraud. Corruption is also a high risk in the Bureau of Customs, where there are reports of officials regularly demanding facilitation payments for imports and exports. Trade-related fraud is probably the biggest criminal activity facing Belesia. A fourth of all goods imported into Belesia go unreported to avoid VAT taxes and import tariffs. In the last decade, illicit capital flows have drained an average of $1.5 billion in tax revenue each year. In addition, money laundering is prevalent in Belesia. Most of this money laundering is facilitated through fake trade invoicing, which allows exporters and importers another avenue to avoid paying taxes on traded goods.

Petty and organized crime is a serious problem in Belesia and is generally economically motivated because of the high levels of extreme poverty among the population. Reports of mugging, homicide, other violent crimes, as well as confidence tricks, pick pocketing, and credit card fraud are common. Organized crime networks are well entrenched, encompassing kidnapping, extortion, gambling, and heavy involvement in the country's narcotics trade and money laundering. Marijuana and hashish are cultivated locally for export, with increasing production of methamphetamines as well.

Population Movement

Natural disasters are a major factor in Belesian migration patterns. Over the last thirty years, the country has had 363 natural disasters in the country during 1980–2010, claiming 33,000 lives and costing $7.5 billion in economic damages. The most recent typhoon season rendered 4.1 million people homes. Over 150,000 remain internally displaced. The poor, especially those who live in the most hazard-prone areas, are affected the most.

Poverty levels and lack of opportunity also contribute to Belesian migration. Urbanization has been increasing at an increasing rate. While 37% of Belesian lived in urban environments twenty years ago, that number is 49% today and expected to reach 80% within two decades. The government has been unprepared for this shift and the country has seen overcrowding, congestion, traffic, flooding, and environmental degradation.

This rural-to-urban migration pattern remains the main migration stream in the country and has given rise to urban sprawls. Peripheral rural areas receive much of the spillovers of population from the highly urbanized cities. Additionally, Belesia sends more people to work abroad than almost any country except Mexico. About 10% of the Belesian population has worked outside Belesia in practically every country around the globe. About 70% of these workers are legal.