Philippines

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Philippines

Philippines

Asia Pacific Economic Outlook, March 2013

Domestic and government spending and business investments will drive moderate growth in the Philippine economy this year. However, exports are an area of concern, given a slowdown in global demand.

The Philippines economy will likely continue expanding at a moderate pace this year, achieving the government’s growth target of 6–7 percent. The country ended 2012 on a positive note, registering a growth rate of 6.6 percent—the fastest in Asia after China. Favorable domestic consumption, government spending, and business investments in the Philippines will remain the country’s primary drivers of growth as exports stay subdued with only a marginal improvement in the global economy.

Domestic consumption in 2013 will likely be driven by expectations of better employment prospects, salary increases, and stable prices. According to the central bank’s consumer sentiment survey, demand for big-ticket items such as consumer durables, automobiles, and real estate is expected to remain steady for the next 12 months. Remittances from overseas Filipino workers, which account for nearly 8.5 percent of the GDP and are vital to household spending, are also projected to rise by 6.3 percent in 2013. Meanwhile, spending related to the midterm elections in May will likely be another significant economic driver this year.

In addition, rising government expenditure on infrastructure, health care, education, and other social welfare initiatives is expected to enhance economic activity in 2013. The government is planning to increase its spending by 10 percent in 2013 to $47 billion, and it will direct nearly $7.7 billion toward infrastructure development, including highways, railways, and natural gas pipelines. However, similar to previous years, the government may underspend its infrastructure budget because the public-private partnership (PPP) scheme to execute these projects is progressing slowly; delays in infrastructure improvement could adversely affect growth prospects in the long run.

Philippines’ economy might also benefit from positive business sentiment across most sectors, including manufacturing, construction, trade, and services. Anticipated election-related spending, higher consumer demand, rising tourism, stable prices, and foreign exchange rates are driving business confidence. As such, 30 percent of the 1,247 respondents of the central bank’s sentiment survey are planning expansions, new projects and product lines, and hiring in the second quarter of 2013. Expansion plans are the strongest in the electricity, gas, water, mining, agriculture, and manufacturing sectors. To support local businesses’ growth aspirations, the central bank intends to keep interest rates low this year. Inflation is also expected to remain at the lower end of the targeted 3–5 percent range this year.

Furthermore, the country may achieve an investment grade rating in 2013, which could expand foreign investments and boost growth. In addition, increasing production costs in China and disputes in the South China Sea are prompting many Japanese and South Korean businesses to shift their operations to the Philippines. Meanwhile, the government plans to revisit policies that restrict foreign ownership in order to attract overseas investments. However, bureaucratic hurdles and challenges related to infrastructure and labor laws have traditionally limited investments in the country.

In addition, rising government expenditure on infrastructure, health care, education, and other social welfare initiatives is expected to enhance economic activity in 2013.

Amid the many positives for the Philippines economy, exports could be a dampener. In 2012, exports grew 7.6 percent, falling short of the government’s target of 8 percent. This year could prove more challenging; the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) expects weak export growth of 4.3 percent for Philippines due to lukewarm global demand. However, the Philippines government remains hopeful and has again set an annual target of 10 percent export growth. According to the Department of Trade and Industry (DTI), there will be rebound demand for goods such as electronics, garments, and wood products as well as services such as business process outsourcing. Last year, electronics exports, which account for 38 percent of total exports, shrank 5.5 percent.

The central bank plans to ease rules on foreign exchange transactions to prevent an appreciation of the local currency in order to improve export performance. In addition, the DTI is encouraging local businesses to boost their global competitiveness on non-price aspects such as innovation and superior after-sales service. Local businesses are also being asked to explore new markets in emerging economies worldwide while continuing to concentrate on the traditional markets of China, Japan, Korea, and the United States.

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