The Philippines: Year in Review 2012

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Despite concerns over a slowdown in some of its main overseas markets, the Philippines rounded out 2012 with solid growth. Domestic demand has helped drive economic expansion, a trend that is forecast to continue into 2013.

The Philippines entered the last month of 2012 with a tragedy, as Typhoon Bopha struck the south of the country, cutting a wide swathe of devastation across Mindanao, Leyte, Cebu and Negros. While the storm left many hundreds dead and the government mobilising to deliver aid to the hardest-hit regions, it is not expected to impact the country’s upward economic trend, with much of the material loss being confined to rural and fishing communities. However, the typhoon will put pressure on the government to step up investments in the affected areas.

Overall growth accelerated in the third quarter, as GDP expanded by 7.1% year-on-year (y-o-y), well up on the 3.9% increase recorded in 2011. The strong result took overall GDP growth to 6.5% for the year, at the top end of the government’s forecasts and above those of most international agencies.

The third-quarter performance was almost 2% higher than some analysts predicted, with several citing falling activity in global markets. However, others surveyed by the Reuters news agency just before the latest GDP figures were released felt domestic demand would take up some of the slack.

On December 8, the Asian Development Bank (ADB) predicted that the Philippines would continue to have one of the highest rates of GDP growth in Asia in 2013, though it warned that ongoing debt problems and economic weakness in Europe and the fiscal problems in the US were real concerns.

While there are worries that the Philippines could be affected by any easing of its main trade markets, exports continued to perform strongly as the year drew to a close. In September, overseas sales totalled $4.8bn, a 22.8% increase on the same month in 2011. The result took overall merchandise exports to just over $40bn for the first nine months of 2012, up 7.2% y-o-y, with manufactured goods, forestry products and minerals shipments leading the way.

Construction was also a sound performer through the year, with spending on building projects up 24.3% in the third quarter. The state-backed capital investments in construction are of particular importance, signifying that the government is in the process of clearing blockages that have dogged its infrastructure programme.

With more big ticket developments due to be rolled out in 2013, such as extensive road and irrigation schemes, supported by growing demand for private real estate, commercial and industrial projects, construction should be a strong contributor to GDP in 2013.

Banks have also benefitted from growing domestic demand, with profits of commercial banks rising by more than 10% in the third quarter. This is expected to continue into 2013 as lending increases, with income from non-interest activities equally set to grow.

While domestic demand is on the rise, it has not been matched by any notable movement in price increases, with annualised headline inflation falling to 2.8% in November, down from 3.1% the previous month. This is well inside the rate targeted by the Bangko Sentral ng Pilipinas, the central bank, which has been indicating it will maintain its historically low interest rates for the time being or even reduce them further to help maintain high growth rates.

As of mid-December, the central bank’s overnight borrowing rate stood at 3.5%. While these low rates may discourage some overseas investors, the strength of the domestic economy means the Philippines is better placed than most to sustain its own growth without hot money inflows.

Another traditional source of capital continued to flow strongly throughout 2012: remittances from Filipinos working overseas increased by 5.5%, with more than $15.5bn being channelled into the domestic economy. If this level of remittances is maintained or increases, it would offset any weaker flows of investor capital and help to sustain domestic expansion.

Looking ahead, President Benigno Aquino’s government is aiming for GDP growth of between 6% and 7% in 2013. However, in late November Arsenio Balisacan, the secretary of socio-economic planning, said the administration wanted to remain conservative in its expectations due to what he described as “weakness in the global economy”. While these weaknesses could impact the Philippines’ economy to a degree, higher state spending and surging domestic demand should offset any overseas downturn, making for a promising outlook for the coming 12 months.

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