With GDP growth coming in at 5.8% for 2015, after averaging 6.2% from 2010-14, the Philippine economy is establishing a record of stable high growth rates. Markets have recently been focusing on short-term downside risks emanating from slowing growth in China and South-east Asia, and the Philippines’ farm and food-processing sectors were hit by a dry spell related to the El Niño phase of the Pacific weather cycle. Yet the long-term growth outlook for the country has improved. As an importer of energy and construction materials, the Philippines benefits from lower commodity prices, while its large business process outsourcing (BPO) sector is enjoying strengthening demand from the US and other advanced economies.
Raising Expectations
In October 2015 the IMF upgraded its forecast for the Philippines for 2017-20 from an average annual growth rate of 6% to 6.5%. This was partly motivated by a long-awaited acceleration of infrastructure investment in the second half of 2015, and expectations thatspending will continue ramping up in 2016-17.
The infrastructure spending is crucial to reducing costly transportation bottlenecks, such as severe congestion in the Metro Manila area, and spreading growth to the rest of the country. Widening the tax base and improving revenue collection to support education, poverty reduction and infrastructure is another major challenge.
The Philippines’ recent record of high growth contrasts with its past, when it was labelled “the sick man of Asia” for consistently underperforming its peers. The 1980s were especially disappointing, with annual inflation averaging 14% while real GDP growth averaged just 2%, according to IMF data. Meanwhile, Malaysia, Indonesia and Thailand all grew at average of more than 5.5%.
Political reforms led to improved growth rates in the 1990s and 2000s, though not by enough to begin catching up with regional leaders. Most importantly, the central bank, Bangko Sentral ng Pilipinas (BSP), gained independence, and the government’s fiscal responsibility improved. Inflation came down to an annual average of 9.5% in the 1990s and 4.9% in the 2000s.
A number of factors coalesced in the 2010s to turn the Philippines into one of the fastest-growing economies in South-east Asia. President Benigno Aquino III’s election in 2010 on an anti-corruption platform and his conservative fiscal policies helped to improve national credit ratings and bring down the private sector’s cost of capital. Development and consumption picked up in traditionally impoverished outlying regions, driven by remittances from overseas workers and seafarers. The rapid, snowballing growth of the BPO industry transformed it into a major sector with enough weight to pull along other parts of the economy. A demographic bulge has also brought growing numbers of young adults into the workforce.
The Philippines’ 6.2% average growth rate in 2010-14 was surpassed within South-east Asia only by the less developed countries of Laos, Cambodia and Myanmar, according to IMF data. It compared to a 5.9% average growth in Vietnam during the same period, 5.8% in Malaysia and Indonesia, and 3.8% in Thailand. The catch-up is expected to continue: in its October 2015 “World Economic Outlook”, the IMF forecast average growth of 6.4% for the Philippines in 2015-20, compared to 5.5% in Indonesia, 4.9% in Malaysia and 3.2% in Thailand.
Labour Exports
The Philippines has a unique economic structure among East Asian countries, with growth led by exports of labour – including the BPO sector, overseas workers and seafarers – and consumption. Manufacturing for export is growing but does not take a leading role, and natural resources are limited and underdeveloped.
GDP came to P13.29trn ($295bn) in 2015, up from P12.64trn ($280.6bn) in 2014, according to Philippine Statistical Authority (PSA) data. PSA estimates show the population surpassing 100m during 2014, which means GDP per capita is close to crossing the $3000 mark. It is also important to bear in mind that Philippine GDP data does not include large amounts of money earned abroad by overseas workers and seafarers or family support sent home by Filipinos permanently living abroad. Cash remittances and wage payments from abroad came to a combined total of $25.8bn in 2015, up from $24.6bn in 2014, according to BSP data.
Consumpiton
Those inflows give households more disposable income than GDP alone would imply, and explain how the household consumption share of GDP stood at 73% at the end of 2015. That is an unusually high ratio for an emerging economy and tops even the famously consumerist US. Within household consumption, the top category for expenditure was food and non-alcoholic beverages, at 42.3% in 2015, followed by housing, water, electricity, gas and other fuels (11.7%), transport (11.3%) and education (4%).
Government consumption came to 11% of GDP and capital formation to 20.8%, a relatively low rate of investment for an emerging economy. Within capital formation, spending on construction accounted for 11.9% of GDP and investment in durable equipment came to 8.1%.
Value Added
In terms of breaking down GDP by the gross value added, service sectors dominate, accounting for 58.9% of GDP in 2015. Within services, trade is the largest sector, with gross value added equal to 18.1% of GDP. The large weight of the trade sector is reflected by the fact that three of the world’s top 15 malls by floor space are in Manila. Their operator, SM Prime, boasts a nationwide chain of 53 malls with more than 6.5m sq metres of floor space.
SM Prime malls draw 3m visitors per day, according to the company’s estimates. SM Prime and its parent SM Investments are the third-largest and largest companies in the Philippines by market capitalisation, respectively. They are owned by the Philippines’ richest man, Henry Sy.
The second-largest service sector is real estate and rental services, with gross value added equal to 12.9% of GDP, followed by financial intermediation (8%); transport, storage and communication (6.4%); and public administration and defence and compulsory social security (3.9%). The BPO industry’s results are not reported in national accounts, but according to the IT and Business Process Association of the Philippines (IBPAP), its gross revenues came to $18.9bn in 2014, or 6.7% of GDP.
Tourism-related industries, also spread across multiple sectors in terms of GDP contribution, make up a large portion of the economy when added together. PSA data shows tourism direct gross value added (TDGVA) at 7.8% of GDP in 2014 and gross value added of tourism industries (GVATI) at 11.2% of GDP. TDGVA counts all tourist-related goods and services sold to tourists, who are defined as domestic or international travellers who stay overnight. GVATI also counts the business that tourism-related firms do with local patrons. Neither of those totals includes non-tourist-related goods and services sold to tourists.
Industrial sectors accounted for 30.8% of GDP. Within industry, the manufacturing sector contributed 20.1% of GDP in 2015, the construction sector 6.9%, electricity, gas and water supply 3.1%, and mining and quarrying at 0.7%.
BPO Leads Growth
The BPO sector continues to grow rapidly, pulling along other sectors such as construction, retail and restaurants. The sector has done much to create jobs for the demographic bulge of young people reaching working age. By providing them with a relatively high income for their age group, the industry has also helped to fuel rapid consumption growth and demand for apartments near BPO workplaces. BPO revenues grew at an average annual pace of 15.2% in dollar terms in 2010-14, according to IBPAP data, resulting in a more than doubling of revenues since 2009. The local real value of that growth was still close to 11% a year after accounting for inflation and peso appreciation, which averaged 3.8% and 0.5% a year, respectively, over the same period.
A proxy for BPO revenues – comprising exports of two service categories in BSP balance of payments data, “technical, trade-related and other business services” and “computer services” – came to $17.5bn in 2014, equal to 93% of BPO revenues. The proxy was up by 12.6% year-on-year (y-o-y) in the first half 2015, slowing somewhat from the 22% revenue growth IBPAP reported in 2014.
The other sector that benefits most directly from BPO growth is construction, through the BPO industry’s need for desk space and its workers’ demand for residential, shopping and restaurant spaces. Construction GDP grew by 8.4% in 2015, after recording 10.9% growth in 2014.
Growth By Sector
Meanwhile, the pace of growth of remittances has gradually slowed. Cash remittances grew by 3.4% in dollar terms in 2015, down from a 6.8% average annual pace in 2009-14. The reduced growth is mainly due to a slowdown in the number of Filipinos who leave home for long periods to work overseas. The government’s Commission on Filipinos Overseas estimated that there were 10.24m Filipinos living or working abroad as of the end of 2013 according to the most recent figures available, including 5m migrant workers, 0.37m international seafarers, and 4.87m émigrés and foreigners of Filipino ancestry.
Most of those totals were little changed since 2011, but the estimated number of migrant workers was down from 5.2m, due to a crackdown on informal employment in Saudi Arabia. Amounts of money sent home from there still grew, which was not the first time remittances have proved to be remarkably resilient (see analysis).
Among domestic-oriented service sectors, trade continues to grow fairly strongly, with sector GDP increasing by 6.9% in 2015, up from 5.7% growth in 2014, PSA data shows. The transport, storage and communication sector is also growing strongly, up 7.9% in 2015, from 6.2% in 2014. The financial intermediation sector slowed somewhat, growing by 5.7% in 2015 after 7.2% growth in 2014. Growth in real estate, renting and business activities also eased, to 7.3% in 2015, down from 8.7% in 2014. The public administration, defence and compulsory social security sector grew by 0.6% in 2015, following 3.6% growth in 2014.
Farms & Food Production
Processing of food and drinks, the largest domestic-oriented manufacturing subsector, took a hit to its usual fast growth due to dry weather. Food manufacturing grew by just 1.5% in 2015, down from 7% growth in 2014. The beverage industry suffered an even more abrupt slowdown, going from 24.6% growth in 2014 to 0% in 2015.
The highly competitive and advanced food-processing and beverages sector had until recently been expanding rapidly despite the slow-growing agriculture sector, which fell from 1.6% growth of real value added in 2014 to 0.2% in 2015. The damage being done by El Niño, especially to exports, shows that food-processing is vulnerable to being held back by the farm sector’s weaknesses. Exports of almost all kinds of farm products, processed foods and beverages have fallen sharply: combined they were down 31.6% in volume in 2015 after a 9.9% contraction in 2014, according to PSA data. Sugar exports have collapsed, dropping by 80.8% in 2015 after falling by 66.6% in 2014.
Bernardo Villegas, chair of the Centre for Research and Communication at the University of Asia and the Pacific, told OBG that there were some signs of hope for the agriculture sector in the recent trend towards large-scale corporate farming, especially on the southern island of Mindanao. “You are seeing more and more large-scale plantations that are able to attract long-term financing. However, we need to give more attention to agribusiness,” he said.
Lower oil prices have helped boost growth in the mainly domestically oriented processing of oil, chemicals, plastics and rubber. Chemicals and chemical products manufacturing was up by 16.1% in 2015, following growth of 3.7% in 2014. Growth in rubber and plastic products was less spectacular at 3.3% in 2015, following on from 5.8% in 2014.
Powering Through
The electric power sector has long been a weak point of the economy, and prices are among the highest in Asia. Generation is deregulated and competitive, and investment is pouring into relatively cheap coal power.
However, investment has not been sufficient to keep pace with surging demand. In 2015 the Luzon and Mindanao power grids were forced into rolling power outages during the hot, dry season from March to May, when hydropower output drops and air conditioner usage peaks. That scenario is likely to recur until 2017 or 2018, after which substantial coal-fired plants that are currently being built are set to enter operation (see Energy chapter).
Export Manufacturing Holds Up
Electronics and electrical goods are by far the country’s biggest export. The sector accounted for some 59.4% of Philippine exports in 2015, up from 51.3% in 2014. The country produces mainly integrated circuits (ICs) and other components that are primarily exported to other parts of Asia for further assembly. Overall the industry did well in 2015 thanks to stronger demand from the US and Europe, which is where most of the Philippines-produced components end up.
In peso terms exports of electric and electronic goods were up 14.3% in 2015, accelerating from 13.3% growth in 2014. In volume terms such exports also accelerated, from 10.9% in 2014 to 18.6% in 2015, according to PSA data.
Resurgence
The electronics sector has been resurgent since 2014 as costs have risen in China and elsewhere in Asia and as Japanese investment has helped diversify it away from ICs to storage, printers, car parts and other high-value products. Falling prices for imported coal could be a boon to the sector, though costs overall are likely to remain high relative to competitors such as Vietnam.
Among other industrial sectors, mining has long been a disappointment relative to its considerable potential. With coal and most other locally found minerals getting cheaper in global markets, investment is unlikely to pick up soon.
Elections To Lift Spending
As in most countries, large private investment projects tend to slow to some extent ahead of major elections. But in the Philippines pre-election seasons are overall a time of increased expenditure, as candidates spend on campaigns and the government typically loosens fiscal purse strings.
Candidates at all levels spend aggressively, and most campaigning – even for national races – is done at the local level. Presidential, congressional and local elections will be held simultaneously on May 9, 2016. Villegas told OBG that major national elections tend to boost GDP growth by approximately one percentage point.
Fiscal policy is also expected to loosen in 2015 and 2016, though mainly because it has been so tight in recent years that the IMF is urging the government to loosen policy in order to better fund infrastructure, education and social support. The IMF and others are also urging the Philippines to increase government revenues for the same reasons (see analysis). The Philippines had the smallest government sector of any East Asian emerging economy in 2014, with total government spending at just 18.4% of GDP, according to IMF data.
The national government ran a deficit of 0.6% of GDP in 2014, according to government data, while the general government sector ran a surplus of 0.9% of GDP, according to the IMF. The 2015 and 2016 budgets both call for national government deficits of 2% of GDP and for large increases in revenues. As of October 2015 the IMF was forecasting general government expenditure increases of 14.2% in 2015 and 13.6% in 2016, backed by revenue increases of 8.4% in 2015 and 10.7% in 2016. Those would translate into general government deficits of 0.4% of GDP in 2015 and 0.9% of GDP in 2016, still very fiscally conservative numbers that would bring down total public debt from 36.4% of GDP at the end of 2014 to 33.9% of GDP by the end of 2016, according to the IMF. The debt-to-GDP ratio has come down from more than 44% of GDP when President Aquino took office in 2010 and a peak of 68% of GDP in 2003.
Monetary policy and banking sector regulation is also fairly conservative, which is reflected in the relatively low inflation rates despite the rapidly growing population. Consumer price inflation was 2.7% in 2014 and a mere 0.4% between September 2014 and September 2015 due to the drop in oil and other commodity prices.
Current Account Cushion
Strong service exports and substantial remittance inflows are key to the country’s ability to maintain high growth rates despite the recent slowdown in regional trade. Import volumes by Asian emerging economies increased only 0.4% y-o-y in the first seven months of 2015 after growing 5.7% in 2014 and 5.8% in 2013, according to the Dutch government’s World Trade Monitor.
Service exports and remittances help the Philippines run a substantial current account surplus, which came to $10.9bn, or 3.8% of GDP, in 2014, according to the BSP. Even using a more conservative estimate that attributes all statistical discrepancies between the BSP’s financial account and current account to uncounted imports, the current account surplus would still have come to $7.2bn, or 2.5% of GDP. The current account surplus came to 3.4% of GDP in the first half of 2015, according to the BSP, or 2.1% by the more conservative method. Also, because the Philippines is a net importer of raw materials, it benefits when their prices fall, as they typically do when global growth weakens. Emerging markets that run current account deficits or depend on raw materials exports are more vulnerable to global volatility.
Moreover, the Philippines’ focus on BPO and electronics makes it dependent on demand from the US and other advanced economies, whereas the recent trade slowdown is mainly affecting China and commodity producers.
Ready To Cha Cha?
An upturn in foreign direct investment (FDI) has also helped to cushion the impact of turbulent global markets on other kinds of investment inflows. FDI reached $6.2bn in 2014, up from $3.7bn in 2013 and $2bn in 2012. Inflows of foreign portfolio investment and foreign bank credit have been uneven and close to flat overall since 2013, when US Federal Reserve officials first began signalling a move towards tightening.
FDI continues to lag behind what regional peers receive. Vietnam drew $9.2bn in 2014, Malaysia $10.8bn, Thailand $12.6bn and Indonesia $22.6bn, according to the UN Conference on Trade and Development. The Philippines’ cumulative stock of FDI is much further behind, at about $26bn at the end of 2014, compared to $65bn in Vietnam, $102bn in Malaysia, $107bn in Thailand and $253bn in Indonesia. One of the main reasons for this lag are restrictions on foreign investment in the 1987 constitution, which banned foreigners and companies that are more than 40% foreign-owned from owning land or developing natural resources. Besides holding back FDI, the restrictions are also an obstacle to joining the recently agreed Trans-Pacific Partnership (TPP).
Many Philippines politicians want to lift the ban, which would require constitutional reform, known locally as a charter change, or “Cha Cha”. A first attempt at Cha Cha in the House of Representatives in 2015 failed to reach a floor vote, reportedly because President Aquino opposed it. However, another attempt is expected after the May 2016 elections, and some leading presidential candidates have expressed support.
Outlook
Though there are key differences among the leading presidential candidates, the Philippines’ overall economic direction is unlikely to change. Some reform momentum will likely be lost during election season and the political transition, and there is a risk that economic weakness will spread from China to advanced economies and from there to the Philippines.
However, the BPO sector appears set to continue snowballing and increasingly leading growth across the economy, and the drop in oil prices is an important positive change, the effects of which are likely to continue to play out for years. There is strong potential for growth to accelerate if the uptick in infrastructure spending that was seen in the second half of 2015 continues, and if the US economy remains strong. Constitutional reforms and a drive to join the TPP – which are serious possibilities in the medium term – could be the game-changers that finally turn the Philippines into a top-tier foreign investment destination.
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