Philippines: Building blocks

The construction sector in the Philippines appears to be cooling after a fast-paced 2010, with a slowing of state spending and concerns over the health of the global economy taking some of the heat out of what remains a growth industry.

In early July the World Bank confirmed its forecast for the country’s economy to expand by 5% this year, with GDP projected to grow by a further 5.4% in 2012. Among the forces expected to push the Filipino economy forward is the construction sector, along with other industries such as mining, manufacturing and agriculture.

However, while the construction sector is estimated to contribute around 8% to GDP annually, a series of official reports has indicated that there has been a fall in the number of new building permits being issued and an easing in the overall rate of growth in the industry.

A July 12 report released by the National Statistics Office (NSO) showed that there was a 5.5% decline in the number of approved building permits in the first quarter of the year from the same period in 2010, with the total falling to 28,347 from 29,992.

While there had been a 17.4% increase in non-residential construction permits, with 3495 approvals issued in the opening quarter of the year, this was outweighed by the 11.9% drop in residential building permits granted, with the total falling from 23,586 to 20,784. More positive news can be found in the fact that while the number of building projects fell, the value of private developments under construction actually rose, increasing by 11.6% year-on-year to $1.2bn. However, there is no conclusive evidence if this growth can be sustained or is just the final outcome from last year’s burst of activity.

In part, the private construction segment faces the prospect of being undermined by events much further afield. With the risk of the global economy slowing, combined with political unrest in parts of North Africa and the Middle East, there is the potential that there could be a drop in remittances from overseas Filipino workers. This could dry up some of the flow of cash into the construction sector, according to Benjamin Diokno, an economist at the University of the Philippines.

“With uncertainty in the air, overseas Filipino workers will be more careful with their money,” he said in an interview with Business World on July 20. “Long-term investment may be on hold since overseas Filipino workers don’t know whether or not their contracts will be renewed. Investment in housing would be affected.”

A further study, compiled by the National Statistical Coordination Board and released in mid-July, said that there had been a deceleration in the construction sector as a whole in the first quarter. While there had been a 4% rise in the industry’s gross value added to the economy, totalling $1.6bn, this was less than half the 9.7% expansion posted a year earlier. Most significantly, there was a sharp decline in state spending on construction projects, with public expenditure dropping from $570m in the first three months of 2010 to $358m for the same period this year.

Analysts attribute this decline to the government’s efforts to reduce the budget deficit while also encouraging the private sector to buy into more large-scale infrastructure projects though public-private partnerships (PPPs).

One factor favouring the construction sector is the near flat rate of price increases for materials, with the cost of some essential products actually falling. Data issued by the NSO on July 18 showed that the retail price index for selected construction materials in the Manila region fell by 0.1% between May and June. This deceleration of prices took the year-on-year fall in materials costs to 4.2%, though the NSO report did note that some key products, such as cement and steel reinforcing rods, had posted a slight cost rise in June.

The construction industry can look forward to better times, at least as far as state-backed projects are concerned, with the government planning to auction off five PPP projects this year. It has announced its intention to tender $16.8bn worth of such developments by the end of 2012. However, the state has fallen behind on its schedule to roll out these projects, so the industry may have to bide its time before the major PPP investments begin.

Until then, the construction trade will likely continue to expand, albeit at a slower rate than in recent years, as it waits for a clearer picture of the flow of remittances from overseas foreign workers and of the health of the local and global economy.

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