Philippines: A good year ahead

Philippines: A good year ahead

Philippines: A good year ahead

Asia Pacific Economic Outlook, September 2013

In the past few months, Philippines’ economy has been on an upturn with strong first-quarter GDP growth and sovereign rating upgrades. In the long term, however, the economy faces many challenges.

APAC September 2013The past few months have been good for the Philippines, with positive economic news flowing in from several quarters. The first was strong first-quarter GDP growth, which was the highest in nearly three years. Another bit of positive news was on the sovereign rating front, with Standard & Poor’s (S&P) upgrading the Philippines to investment grade in May, following a similar move by Fitch in March. Meanwhile, monetary policy remains pro-growth, with the Bangko Sentral ng Pilipinas (BSP) holding its benchmark interest rate at a record low in July. With fiscal policy also likely to remain accommodative and strong remittances aiding consumer spending, GDP growth in 2013 is expected to hit the government’s 6–7 percent target range.

Investments to keep economic momentum strong

GDP growth came in strong at 7.8 percent year over year in Q1 2013, up from 7.1 percent in the previous quarter. Investments (16.8 percent) and government expenditure (13.2 percent) were key contributors to growth in Q1 2013. Both received a boost from policy focus on infrastructure development. The government plans to initiate about 80 public-private partnership (PPP) projects by 2016, mostly in the transportation space, with investments close to $18 billion. Foreign direct investment (FDI) is also set to receive a boost as companies relocate from China due to rising costs and focus on the Philippines’ strong domestic economy, local value chain linkages, and English-speaking workforce. As a result, investment is expected to remain a strong force in the economy in the medium term, growing by 8–10 percent in 2013 before slowing to a sustainable 6 percent over 2014–17.

Interestingly, GDP growth in Q1 2013 was the fastest since Q2 2010, and continued from the strong momentum of 2012 when the economy expanded by 6.8 percent. This perhaps indicates that the economy is probably moving to a higher growth trajectory, up from the previous decade’s average growth of less than 5.0 percent. Going forward, growth is likely to stay close to the 6 percent mark in the medium term as the government focuses on aiding manufacturing, infrastructure development, macroeconomic stability, and public finance management.

Already, Moody’s has praised the country for its strong economic growth, improved public finances, and greater political stability due to recent electoral gains.

Healthy economy and rising remittances to aid private consumption

Although consumer spending growth eased in the first quarter, it nevertheless remained healthy at 5.1 percent. Consumption growth is likely to gain momentum in the coming quarters, given high remittances this year, government handouts, and positive economic expectations. Consumer confidence posted its highest reading in Q2 2013 since the BSP’s survey began in 2007. Meanwhile, remittances climbed to a little less than $8.8 billion in the January–May period, up 5.6 percent year over year and above the central bank’s 5 percent growth projection for the whole year. Overall, consumption growth is likely to be in the range of 5.5–6.0 percent in 2013, and will remain close to that figure in the next few years as well.

Rating upgrade enables BSP to keep monetary policy loose

In March, Fitch upgraded the Philippines to investment grade, and this was followed by a similar move by S&P in May. An upgrade by Moody’s to investment grade is also on the cards. Already, Moody’s has praised the country for its strong economic growth, improved public finances, and greater political stability due to recent electoral gains. An expected healthy current account surplus is another positive for the Philippines even as reforms in revenue collection are likely to push the fiscal deficit to below 2 percent of GDP this year.

A move to investment grade and healthy economic fundamentals were likely the main reasons behind the central bank’s decision to keep interest rates unchanged in July. This is despite a 5 percent decline in the Philippine peso relative to the US dollar after the US Federal Reserve Chairman Ben Bernanke’s comments on a likely tapering off of its asset purchases program. Also aiding a continuation of loose monetary policy is low inflation (2.8 percent in June), which is below the BSP’s target range of 3–5 percent. However, the central bank expects inflation to move up partially this year, given peso depreciation and the rise in prices of utilities. It has raised its inflation forecast for 2013 to 3.3 percent from an earlier figure of 3.1 percent.

Exports to face pressure due to a slowing China

Peso depreciation is not likely to aid export competitiveness much. In fact, exports are likely to face pressure from a shaky external environment, especially slowing growth in China. In the first five months of 2013, exports totaled $21.1 billion, down 6.0 percent year over year. Exports of electronics goods, a critical segment, continue to remain weak (a 9.3 percent decline in May). A pickup in the segment is expected in the second half of 2013, aided by higher shipments of smartphones and tablets. However, growth for 2013 is likely to be lower than the electronics industry group’s projection of 5–6 percent. Meanwhile, the impact of lower exports on the current account is likely to be offset by strong remittances and services exports. Earnings from both are likely to push the current account surplus above 3.0 percent of GDP this year from 2.8 percent in 2012.

Key challenges remain

In the medium to long term, the economy faces a number of challenges. First, infrastructure is the biggest detriment to industrial progress and therefore to tackling poverty and unemployment (7.5 percent). Although the government has made a start with an objective of initiating 80 PPPs by 2016, currently it seems to be behind its target. Second, developing high-end manufacturing is another challenge. Currently, most manufacturing activity is in the low-value-added car and electronics assembly segments. On a positive note, however, foreign companies are starting to move into high-value manufacturing, especially sectors with strong domestic linkages down the value chain. FDI in manufacturing grew to $1 billion in 2012 from a mere $0.1 billion in 2011. The third problem is with regard to fiscal management. The tendency to underspend on the allocated budget and frequent shortfalls in revenue collection ensure suboptimal impact of fiscal policies on the economy. Fourth, there is a risk to political stability if peace negotiations between the government and rebels in Mindanao fail. Fortunately, both parties seem committed, and any risk of a breakdown in talks appears low.


Akrur Barua

Akrur Barua is a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, September 2013: Philippines
Illustrations by Jessica McCourt (Cover), Stephanie Dalton Cowan (Philippines)