Economic Update

Published 27 Dec 2017

Rising domestic and external demand helped place the Philippines as one of Asia’s best-performing economies in 2017, with many key sectors posting high levels of growth.

Driven in part by a rise in exports, as well as strong domestic consumption and public sector investment, the economy continued to sustain the high rates of growth seen last year, expanding by 6.4% and 6.7% in the first and second quarter, respectively, before accelerating to 6.9% in the third quarter, according to official data.    

At a media briefing in mid-November, Ernesto Pernia, the secretary of socio-economic planning, said the government was confident GDP growth would reach the forecast year-end target of between 6.5% and 7.5%, with year-to-date expansion running at 6.7%.

While this falls slightly short of last year’s growth, which stood at 6.8% for the year and 7.1% in the third quarter, Pernia said the Philippines’ remains one of the top-performing Asian economies, second to Vietnam (7.5%) and ahead of China (6.8%).

Industry, services and construction among strong performers

Overall growth was driven by strong performances in some of the Philippines’ key sectors.

Services, which accounts for more than 50% of GDP, saw its rate of growth mirror that of the broader economy, expanding by an average of 6.7% over the first nine months of the year, compared to 7.5% last year. Growth in the industrial sector, meanwhile, expanded by 7.1% between January and October, 1.4 percentage points down on last year. 

Growth in construction totalled 6.5% year-on-year (y-o-y) over the first three quarters of 2017. Although this was down on the 14.9% expansion recorded over the same period in 2016, the sector looks set to benefit from accelerated public spending on infrastructure, under the government’s new Build, Build, Build programme. Overall state spending rose 10% y-o-y over the January-to-October period, with a large proportion directed towards infrastructure development.

Another key component of the economy, the business process outsourcing (BPO) sector, maintained a steady flow of investment, though the capital stream was tempered by caution regarding external factors. These include a slowing of the economies of some key markets and concerns about US pressure on BPO clients to bring their businesses back onshore.

Though competition in the sector is increasing, the country’s central bank, Bangko Sentral ng Pilipinas (BSP), estimated in mid-November that the BPO industry would generate revenues of $24.5bn in 2017, up on the $22.9bn earned in 2016.  

External factors also had a negative impact on agriculture this year. While growth reached 4.9% in the first quarter and 6.3% in the second, adverse weather conditions saw this rate fall to just 2.5% in quarter three, and expectations are that growth in the last three months of the year will also be affected. 

Rates, inflation hold steady

The economy’s strong showing throughout 2017 has been supported by the relatively low cost of funds.

On November 9 the BSP decided to hold its key benchmark rate steady at 3% for the seventh meeting in a row. The bank’s overnight lending rate remained at 3.5% and the overnight deposit rate at 2.5%.    

While maintaining its accommodative lending rates, the BSP may look to marginally tighten monetary policy in the new year, having flagged a modest increase of inflation in its forecast for 2018.

The country’s year-end inflation expectations are steady at 3.2%, while the bank expects prices to rise by 3.4% next year, with higher energy prices tipped to put upward pressure on the consumer price index.  

ASEAN chair leads to new business agreements, tax reforms stimulate spending

The Philippines was given a further boost in 2017 by holding the chair of ASEAN.

At the most recent ASEAN summit in November, the Philippines committed to a series of bilateral agreements with countries including the US, Russia, Japan, Canada and Australia. It also signed 14 cooperation agreements with China, with deals ranging from infrastructure cooperation to the development of industrial parks.  

Another key economic development was the proposed overhaul of the tax system. The Tax Reform for Acceleration and Inclusion (TRAIN) looks likely to come into force in 2018, after being drafted and tabled before the Parliament in 2017.

Among the changes is a broadening of the value-added tax (VAT) base to include more goods and services, annualised increases in fuel costs, higher excises on vehicles and taxes on sugared products.

Offsetting these revenue measures are steps streamlining tax collection, including the self-employed being required to make payments annually, rather than quarterly; raising the yearly VAT exemption threshold for small businesses from P1.9m ($465,000) to P3m ($734,000); and lowering personal income tax for many Filipinos by raising bracket ceilings.  

While the widening of the scope of VAT may impact inflation in the shorter term, the tax breaks on offer for many low- and middle-income earners could further stimulate domestic spending, supporting economic growth after the initial effects of higher goods and services levies have been assimilated.

These tax changes, along with strong private sector activity, and government plans to increase infrastructure and development spending, are expected to contribute to further growth, with the BSP forecasting GDP will expand by 7% to 8% per annum through to 2022.