Philippines Year in Review 2015

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Strong domestic demand and increased government spending helped sustain high levels of economic expansion in the Philippines throughout 2015, though a slight slowdown was observed late in the year as demand from the country’s main trading partners eased.

While year-end data has yet to be released, estimates from the Asian Development Bank (ADB) in December project GDP growth of 5.9% ­– short of the 6.4% forecast earlier in the year – as a result of declining merchandise exports, which fell by 6.9% year-on-year (y-o-y) in the first three quarters to $43.7bn.

Despite the modest slowdown, the Philippine government remains confident that end-of-year spending will help boost GDP growth to 6-6.5% by the close of 2015.

The months ahead are expected to usher in strong economic expansion, with the ADB projecting growth of more than 6% in 2016 as the government continues to increase public spending. Higher demand from India and other South-east Asian economies is expected to offset the effects of this year’s weaker exports.

Inflation subdued, employment up

While still modest, inflation gained pace late in the year, rising to 1.1% in November, up from 0.4% in October. However, rates remain within the Central Bank of the Philippines’s target band of 0.4% to 1.2%, and well below the 3.7% registered in November 2014.

According to the Philippine National Economic and Development Authority, inflation is being driven by rising food and non-food prices stemming from higher local demand and the lingering effects of Typhoon Lando, which struck the country’s shores in October.

Core inflation – which excludes energy and unprocessed food costs – edged up in the last quarter of 2015, reaching 1.8% in November, its highest level since July, but still below the 2% target set by monetary authorities.

In a research note issued in early December, Barclays predicted inflation would rise to 2.4% in 2016, due in part to a modest anticipated increase in fuel costs and the potential impact of the El Niño weather pattern on agricultural prices.

Nonetheless, the ongoing strength of the economy helped stem unemployment in 2015, with figures released by the Philippine Statistics Authority in early December reflecting a 5.6% unemployment rate as of October, down from 6.5% in July 2015.

Positive ratings outlook

The steady growth and stability of the Philippine economy prompted ratings agency Fitch to revise its outlook for the country from stable to positive in late September. The agency also affirmed the Philippines' long-term foreign- and local-currency issuer default ratings at “BBB-” and “BBB”, respectively, maintaining the country’s investment-grade standing.

Moody’s was also optimistic about the Philippines’ economic prospects for 2016, reaffirming the country’s “Baa2” bond rating with a stable outlook in mid-October. According to the agency, the rating reflects the “resilience of [the Philippine] economy to the current headwinds buffeting neighbouring countries” and expectations that the positive economic and fiscal trends will continue for the next one to two years.

Budget deficit widens

The year’s economic expansion was fuelled in part by higher levels of government spending, which led to a deeper budget deficit in the latter half of the year. On the back of more than P1.82trn ($38.5bn) of disbursements in the first 10 months of the year, the year-to-date budget shortfall rose to P52.6bn ($1.1bn) in October, up 56% y-o-y.

While outlays were higher than anticipated, government revenues were also up, with receipts rising by 12% y-o-y to P1.77trn ($37.4bn) between January and October.

In past years the government had come under fire for the relatively slow pace of spending, which often fell short of expenditure targets and delayed investment and capital projects. The late-term acceleration in public spending could help clear some of the project backlog and further stimulate the economy.

Economic activity in the coming year is also set to be fuelled by presidential elections in May 2016. A recent report by Standard Chartered Bank predicted the election campaign would spur an influx of investment in the manufacturing, government services, private services, transport, communications and storage sectors, in particular.

According to the bank, the ramp up in public spending, alongside higher household consumption levels, could add between 0.1 and 0.3 percentage points to GDP in 2016.

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