With strong economic growth, an expanding population and an increasingly sophisticated internal market, the Philippines is one of Asia Pacific’s brightest investment opportunities. Concerted efforts to reform taxes, improve the ease of doing business and shore up capital markets are under way, while inflation is back under control and a major programme of infrastructure development is accelerating. Meanwhile, structural reforms are continuing and significant shifts are being undertaken in key areas such as fuel subsidies and rice imports.
Additionally, more sectors of the economy are being opened up to foreign participation as the country moves towards greater integration with its international partners. All these moves are helping the Philippines move up the value chain, diversify its economy and attract greater foreign direct investment (FDI). As a nation of over 7000 islands with a wide range of income levels, promoting a more equitable distribution of wealth and development remains a key goal of the administration. Hard infrastructure is therefore a major priority, providing opportunity for private sector growth.
The Philippines benefits from a young, fast-growing workforce. Demographic data from 2017 showed that the country had a median age of 23.5 years, while, according to estimates from the Philippine Statistics Authority (PSA), the population stood at 107.4m as of the first quarter of 2019. This represents an increase from 27m in 1960, 76.5m in 2000 and 101m in 2015. Due to the country’s island geography, most people remain concentrated in a handful of key centres.
The National Capital Region (NCR), also known as Metro Manila, contains the three largest cities and around a quarter of the entire population. In 2018 the NCR accounted for 36% of GDP and contributed 1.8% points to the country’s 6.2% of GDP growth. Quezon is the largest city with 2.9m inhabitants, followed by Manila (1.8m) and Caloocan (1.5m). Beyond the NCR other major cities include Davao, which is located on the southern island of Mindanao, with a population of around 1.6m in 2015, as well as Cebu in the Central Visayas region with approximately 1m people. Many of the country’s islands are sparsely inhabited, and the geography of the Philippines contains many mountainous and difficult-to-access areas. The country is also vulnerable to climatic events such as the El Niño weather pattern and typhoons, especially in the summer months, as well as other natural disasters stemming from its location on the Pacific Ring of Fire. All these factors have an impact on economic performance – particularly in agriculture – posing challenges for both the government and the private sector in the development of key sectors.
Structure & Oversight
The Philippines is predominantly a service-based economy. Figures from the Board of Investments showed that the services sector accounted for 58% of GDP in 2018, up from 47.9% in 2017. This is followed by industry, which comprised 34% of GDP, and agriculture at 8%.
The industrial sector is now in the process of shifting away from resource and labour-intensive manufacturing to more differentiated and science-based work, spearheaded by the growth of the domestic electronics sector. Industrial growth, however, is challenged by high energy prices and poor infrastructure, both of which can hinder development. Meanwhile, as urbanisation has increased, rural depopulation and ageing have impacted the agriculture sector’s value-added services, as have deforestation and climate change. In services, the growth of IT-business process outsourcing (IT-BPO) has been a major development. Services has outpaced industry in share of GDP since the 1980s and in share of total employment since 2000. At the same time, the country’s overseas Filipino workers (OFWs) have grown to become a valuable source of income, with remittances from expatriates employed in the Gulf, Japan, Europe, North America and elsewhere helping families and local economies back home. In 2018 the top remittance recipients were India with $79bn, which was followed by China with $67bn, Mexico with $36bn and the Philippines with $34bn.
The Cabinet is headed by President Rodrigo Duterte and brings together key actors charged with shaping economic development, such as the heads of the Department of Finance (DoF), the Department of Trade and Industry (DTI), the Department of Agriculture, the Department of Public Works and Highways (DPWH), the Department of Energy (DoE) and the Department of Transportation (DoTr). In addition to the president, a total of 22 officials sit on the Cabinet.
The economy is also directed by the National Economic and Development Authority (NEDA). This is the Philippines’ top socio-economic and policy-coordinating body. The NEDA board is chaired by the president and co-chaired by NEDA’s director-general, Ernesto M Pernia. The board consists of 10 members, in addition to the president and director-general, including the secretaries of the DoF, DTI, DoE, DPWH and DoTr, the deputy governor of the country’s central bank, Bangko Sentral ng Pilipinas (BSP), and the chair of the Mindanao Development Authority, which focuses on developing some of the poorest regions.
NEDA is responsible for formulating and implementing the country’s economic development plans. The three-pillar Philippine Development Plan (PDP) 2017-22, which was launched in June 2017, is aimed at restoring public trust in government institutions; cracking down on corruption; reducing income inequality; accelerating economic growth; and ensuring macroeconomic and fiscal stability through fiscal prudence, tax reforms and strategic trade policy-making.
The PDP 2017-22 is expected to be the first of four medium-term plans that work towards the realisation of the long-term AmBisyon Natin 2040 vision. The 25-year scheme is a three-pillar development agenda emphasising socio-economic stability, security and good governance. The plan aspires to eradicate poverty and transform the Philippines into a prosperous middle-class society. It highlights inclusive, sustainable economic growth and aims to achieve a three-fold increase in per capita income, foster a competitive business environment and increase government investment in market linkages. These efforts will be supported by the development of human capital, science, technology and innovation. The long-term vision identifies priority sectors to reach its targets, including housing and urban development, manufacturing, transport, education, tourism, agriculture, health and financial services.
Since the start of the 21st century economic growth has been steadily increasing, while inflation, public debt and unemployment have been in decline. Although growth has fluctuated somewhat since then, between 2012 and 2018 expansion remained over 6% every year, with the economy growing by 6.2% in 2018 to reach $330.8bn. This upward trajectory moderated somewhat into the first quarter of 2019, with 5.6% reported by the PSA, but the IMF projected real GDP growth at 6.5% in 2019, 6.6% in 2020 and 6.7% in 2021. The country is also expected to join the “7% growth club”, which refers to seven economies that are set to sustain growth rates of around 7% through the 2020s.
The Philippines moved up 11 places to rank 124th out of 190 economies on the ease of doing business index in the World Bank’s “Doing Business 2019” report. The DTI has been leading the implementation of programmes designed to improve the country’s ranking, and the government enacted the Ease of Doing Business Act of 2018 to better streamline business processes, including the issuance of licences and permits, a move that is widely welcomed by the business community.
“The government is working to consolidate all the protocols into one uniform requirement specified in the rules and regulations of the Ease of Doing Business Act,” Helen Y Dee, chair of Rizal Commercial Banking Corporation, told OBG. “This will significantly speed up the process of opening a business.”
A series of both contingent and structural factors negatively impacted growth in agriculture in 2018, which slowed to 0.8% compared to 4% in 2017. Crop and fisheries production contracted by 1% and 1.1%, respectively, as the country was hit by extreme adverse weather conditions. A fishing ban was also imposed in the Visayas, and commercial fishing was suspended in Davao Gulf from June to August. Both moves were the result of a recent major decline in fish stocks. At the same time, underinvestment in irrigation systems also contributed to declining productivity. Crop production fell by 0.98% in 2018, after rising by 6.69% in 2017, leading to higher prices for agricultural products. The gross value of production rose by 2.2% given restricted supply, higher fuel costs and inefficiencies in market distribution. Shortages in rice, a major staple, prompted the National Food Authority, which regulates the basic food supply, to lift restrictions on imports in order to bring down prices in November 2018. Following this, a presidential ratification in February 2019 lifted quantitative restrictions on rice imports to help stem shortages.
Recent years have seen the services sector become the biggest contributor to the country’s GDP. In 2017 and 2018 the sector continued to drive growth, expanding by 6.8% and 6.6%, respectively.
Nevertheless, rising prices were a factor in services, with higher-than-normal inflation slowing wholesale and retail growth in 2018 to 5.9%, down from 7.7% in 2017. Another negative for services was the closure of the island of Boracay for six months in 2018, which impacted tourism arrivals in August and October. The island was closed for rehabilitation due to environmental concerns caused by over-tourism. Additionally, in 2018 the IT-BPO industry contributed 7% to GDP and continues to be a major contributor to the services sector.
The country’s industrial sector slowed somewhat but remained robust, growing by 6.8% in 2018, down from 7.2% in 2017. This downward trend was mainly due to global uncertainties and a contraction of chemical product exports, which fell by 25.3%. Contributing to subdued performance, manufacturing growth declined to its slowest rate in seven years, at 4.9% in 2018, down from 8.4% the previous year. Food processing, which accounts for almost 50% of manufacturing output, moderated from 4.9% to 4.1%, due to both inflation and issues with agriculture production.
Trade & Investment
The trade deficit has increased in recent years due to both internal and external factors. The government is ramping up imports of construction materials and equipment for the Build, Build, Build (BBB) infrastructure development programme, while trade tensions between the US and China, weak consumer sentiment and geopolitical uncertainties are slowing global demand.
According to figures from the PSA, in 2018 imports rose by 12.5% to $108.9bn, while exports shrank by 1.8% to $67.5bn, for a record deficit of $41.4bn. As of April 2019 imports totalled $35.1bn, while exports were at $21.9bn for the year to date, indicating the trade deficit is not yet reversing course. Strong infrastructure investment from the government helped boost fixed capital formation, which was up by 14% in 2018, after growing by 9.5% in 2017. This was attributable to increasing investments in durable equipment, with overall investment in construction jumping 15.1% – more than double the figure seen in the previous year.
Private consumption moderated somewhat as inflationary pressures began to have an impact. In 2018 private consumption grew by 5.6%, a slight reduction of 5.9% against the previous year. Other factors at play here included a slowdown in remittances from OFWs – which grew by 3% in 2018, down from 5.3% in 2017 – as the economies of the Gulf countries in particular went into a sluggish period as a result of several years of relatively low oil prices. The rollout of the first phase of the Tax Reform for Acceleration and Inclusion (TRAIN) was also a factor behind price hikes (see analysis).
Inflation was a major bugbear for the economy in 2018. The consumer price index (CPI) stood at 3.8% in the first quarter of 2018, still within the government’s target range of 3% plus-orminus 1 percentage point; however, by the end of the third quarter it stood at 6.2%, having reached a nine-year high of 6.7% in September and October. Overall, 2018 ended with a 5.2% increase in the CPI. The CPI went down to 5.9% before the end of the year and continued to ease in 2019, moving back into target range through May and June, dropping to 3.2% and 2.7%, respectively.
Increasing food prices contributed to more than half of the hike in headline inflation, according to the World Bank, although the latter months of the year saw food imports ease supply problems. Meanwhile, the rising cost of power generation and water contributed to higher utility bills, while new taxes and excise duties on oil and fuel brought in by the TRAIN package, coupled with a steady rise in global fuel prices exerted pressure on transport costs. Tobacco, alcohol and sugar-sweetened beverages also saw additional taxation. At the same time, a government scheme to offer free in-state tuition for students in tertiary education acted as a deflationary measure.
While the central bank initially faced criticism for not acting swiftly to counter rising prices, the BSP raised the policy rate from 3% to 4.75% in five stages starting in May 2018. As a result of the tightening monetary policy, domestic liquidity growth fell from 13% to 10% by the end of 2018. Household loans were particularly affected, falling from 20% annual growth to just 8.5% over the period. The banking system – noted for its high capitalisation and relatively low non-performing loan rates – remained resilient despite the squeeze, however, and profitability levels remained robust (see Banking chapter). Since 2016 the BSP has been operating a 100-basispoint-wide interest rate corridor system, with the overnight deposit and lending rates set as the upper and lower limits, and the reverse repurchase rate in the centre. The end of 2017 was characterised by the BSP’s open market operations increasing in frequency, pushing the rate towards the higher limit of the corridor. This led the BSP to look at how to unwind the rate; however, as inflationary pressures eased, calls for a rate cut returned.
In May 2019 the BSP cut its rate by 25 basis points to 4.5% while keeping the reserve requirement ratio for financial institutions at 18%, and in August 2019 it reduced this rate by a further quarter of a percentage point to 4.25% suggesting the central bank will likely take a cautious approach to monetary easing. Additionally, the BSP has the power to issue its own securities, according to an amendment to its charter made in February 2018, although as of August 2019 it had not yet deployed this facility.
Rates of Exchange
The Philippine peso operates under a fully free-floating exchange rate system. The currency has been steadily depreciating, and in 2017 and 2018 it fell by 5.8% and 4.3% against the US dollar, respectively. This was caused primarily by global economic uncertainty, declining exports, a fall in remittances coming from OFWs and the US Federal Reserve’s interest rate hikes, as well as fears of contagion within emerging markets from economic issues in Turkey and Argentina. This depreciation has had an impact on the balance of trade, causing the current account deficit to expand from 0.7% of GDP at the end of 2017 to 2.4% one year later – the highest since the 1997-98 Asian financial crisis. Capital inflows continued to increase, however, with the financial account producing a surplus of 2.4% of GDP in 2018, while other investments recorded a net surplus of 0.8% of GDP after a net outflow in 2017.
FDI recorded a significant slowdown from the record levels of 2017, contracting by 4.4% to reach 3% of GDP (see Trade & Investment chapter). The balance of payments deficit thus widened to 0.7% of GDP in 2018, up from 0.3% the previous year.
With the PDP 2017-22 calling for major upgrades to the nation’s infrastructure, the government reiterated that expansionary fiscal policy would continue to drive economic activity, with 2018 seeing the government’s largest public expenditure since 1983. At the same time, government revenues have also benefitted from the first phase of the TRAIN law, which saw its first full year of implementation in 2018. Nominal growth in public expenditure increased from 10.8% in 2017 to 20.7%, or 19.6% of GDP, in 2018. A large part of this was targeted at infrastructure, with public spending up 41.3% in 2018, after rising 12.8% the previous year. Government spending on personnel increased by 22.1%, representing 5.7% of GDP, with most of this accounted for by overdue pay rises and more efficient filling of vacant posts.
On the income side, nominal tax revenue growth hit 14% in 2018, boosting the tax ratio to its highest level since 1997. Non-tax revenues also grew by 27.8% to account for 1.7% of GDP, up from 1.4% in 2017. All of this led to an overall growth in government revenues of 15.2% for the year. Nonetheless, given the scale of public spending programmes, the country recorded a fiscal deficit of 3.2% of GDP. This was slightly over the 2018 target of 3% and significantly higher than the figure of 2.2% recorded in 2017. The deficit was well financed, however. This was done primarily through domestic borrowing, which comprised 75% of the total.
Foreign funding is taking an increasing share; in 2018 rising domestic interest rates made overseas borrowing more attractive, with average external borrowing at around 4.3% interest, compared to an average 5.3% at home. The effective management of public debt meant a decline in the debt-to-GDP ratio in 2018, despite the rising deficit. The debt is mainly composed of long-term borrowing – some 80.7% of the overall portfolio – with two-thirds denominated in pesos. The debt-to-GDP ratio fell from 42.1% in 2017 to 41.9% in 2018.
Into 2019 fiscal loosening was widely expected to continue, yet delays in the passing of a budget led to a slowdown in government expenditure. This was also a major reason behind the relatively sluggish GDP growth in the first quarter of the year. In April 2019, however, a new appropriations bill was signed, activating the $70.4bn budget for 2019, up some 10% on the previous year’s budget. Education, infrastructure and interior affairs make up the three largest spending areas, with the first receiving $9.6bn, the second $8.7bn via the DPWH and the last $4.4bn. Public works and interior affairs, which covers the national police and other criminal investigation services, both saw budget increases of 2.8% and 32.7%, respectively.
Per capita income has seen positive growth every year since 2010, expanding by more than 5% per year, with the exception of 2014 (4.43%). In current US dollars, the IMF placed per capita GDP at an estimated $3013 in 2018 and $3280 in 2019. Strong economic growth has likewise been reflected in the job market as demand for labour increases. In 2018 the unemployment rate fell to 5.3% – the lowest level it has seen in over a decade. Large additions to the workforce were made in the construction and manufacturing sectors, which generated a respective 328,000 and 144,000 extra jobs. The state also continued to be a major employer, adding 152,000 new positions to its public administration and defence payroll.
Joblessness is primarily increasing in agriculture, where some 259,000 losses were recorded. In addition, certain regions have been identified as unemployment blackspots, such as the Bangsamoro Autonomous Region in Muslim Mindanao, which has been beset with security issues and political uncertainty in recent years. The area is expected to receive an investment boost following an agreement made in 2019 to create a new autonomous region in the restive area (see Regions chapter).
With the 2019 budget now passed, 2019 and 2020 will see the accelerated rollout of public investment to stimulate economic growth. While much of the 2019 budget has been earmarked for infrastructure projects, the longer-term benefits to the economy will also begin to make themselves felt in the years ahead, boosting competitiveness, productivity and efficiency. This is creating a number of opportunities for the private sector, with the government open to public-private partnerships on multiple large-scale projects. Meanwhile, further opportunities for foreign players are expected, via the liberalisation of the Foreign Negative Investment List and the Ease of Doing Business law.
Going forward, potential areas of concern include a deepening of trade tensions between the US and China, coupled with higher oil prices stemming from supply uncertainties and production cuts from the 14 member states of the Organisation of the Petroleum Exporting Countries. Exports may thus continue to have a challenging year – yet this would also provide further impetus for Philippine industries to diversify markets and increase their value added. Meanwhile, the BBB initiative is expected to continue to set the pace at home. With the government strengthened by the 2019 mid-term election results, the state appears set to continue pushing forward with one of the country’s – and the region’s – most ambitious infrastructure development programmes.
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