Economic Update

Published 23 Jan 2020

In 2019 the Philippines saw moderate but steady economic growth, even if it fell short of government targets for the year.

According to the Philippine Statistics Authority, GDP grew by 5.6% year-on-year (y-o-y) in the first quarter of 2019, 5.5% in the second quarter and 6.2% in the third.

The third quarter result was more positive than some had anticipated, driven by higher government investment after limited spending earlier in the year. The 2019 budget was delayed by congressional debates, resulting in a 3.2% y-o-y drop in state spending in the first four months of the year.

Despite the more positive performance in the third quarter, a report published in November 2019 by Moody’s Analytics noted that, in order to meet the government’s annual target of 6-7%, fourth quarter growth would need to be at least 6.7%, a level not seen since 2017.

Nonetheless, preliminary results for the fourth quarter show the economy growing at 6.6%, bringing full-year GDP growth to over 6%.

Meanwhile, full-year inflation for 2019 was recorded at 2.5%, within the targeted range of 2-3%, as set out by the central bank, Bangko Sentral ng Pilipinas (BSP).

The local business community has been broadly positive about the BSP’s actions in 2019, which included a series of interest rate cuts.

The central bank cut the benchmark rate three times over the course of the year, from 4.75% to 4%.

Furthermore, on May 23 the BSP announced it would cut the reserve requirement ratio (RRR) for small and medium-sized banks from 8% to 6%. Similarly, the RRR for rural and cooperative banks was lowered to 4%, with the hope that higher levels of liquidity will increase lending to small and medium-sized enterprises.

See also: The Report – Philippines 2019

Improving ease of doing business

Reflective of its overall drive to improve the business climate, the country improved to 95th place out of 190 countries in the World Bank’s 2020 ease of doing business index, up from the previous year’s ranking of 124th.

With the Ease of Doing Business Act implemented in 2019 to reduce red tape and streamline the business approval process, the country will be looking for further improvements in forthcoming global rankings.

“The ease of doing business is the number-one concern for potential investors in the Philippine market. The new rules and regulations signal a desire to further encourage investment,” Chris Nelson, executive director and trustee of the British Chamber of Commerce Philippines, told OBG.

Despite some notable improvements in the operating climate, 2019 was not a particularly good year for foreign direct investment (FDI). At the end of October annual net FDI measured in at $5.8bn, 32.8% lower than the $8.6bn seen in October 2018, according to the BSP.

Analysts attributed this fall to weak investor sentiment internationally, as well as uncertainty occasioned by interest rate cuts and the ongoing overhaul of the tax system.

Tax reform update

As for the government’s extensive tax reforms, some progress was made in 2019.

The Corporate Income Tax and Incentives Rationalisation Act (CITIRA), previously known as TRABAHO, is the second package of the Tax Reform for Acceleration and Inclusion (TRAIN), the most important fiscal initiative of the current administration.

It aims to rationalise tax incentives for companies operating in special economic zones, and has outlined plans to reduce the corporate income tax to 20% from the current 30%, the highest among major Asian economies.

CITIRA was approved by the House of Representatives in September and is currently being discussed by the Senate, which is expected to come to a decision in February 2020.

The delay in its definitive ratification stems to some extent from opposition among the local business community.

Islamic banking

The progress on tax reform was accompanied by the ratification of a new law granting the BSP additional powers over the regulation and organisation of the Islamic banking sector.

Under the new law, approved by President Rodrigo Duterte in August, Islamic banks will be able to issue sharia-compliant financing.

It is hoped that the new regulations will draw more people into the formal banking system, particularly from the Philippines’ sizeable Muslim minority.

Aside from adding to the number of sharia-compliant lenders in the country, new Islamic banking regulations could help finance large-scale infrastructure projects.

The government has in the past flagged the possibility of using sukuk (Islamic bonds) to diversify its investor base. Given the financial requirements of the Build, Build, Build initiative, the government’s P8.4trn ($165.7bn) flagship infrastructure programme, the development of Islamic finance could attract significant capital from Muslim-majority countries around the world.

Build, Build, Build

Progress towards the ambitious targets of Build, Build, Build was somewhat slow throughout 2019, with local media reporting that only nine of its 75 flagship projects were under way.

Notwithstanding this, there were significant accomplishments on smaller-scale projects in the provinces throughout 2019. In November a government spokesperson said that 9845 km of roads, 2709 bridges and 71,803 classrooms had been completed under the programme.

Meanwhile, in September Zhao Jianhua, the Chinese ambassador at the time, announced that his country had provided $398m in grants and $273m in soft loans for the programme. Another $421m of grants are to be provided over the coming three years.