With GDP growth averaging 6.4% between 2010 and 2017, the Philippines is one of the top-performing economies in South-east Asia. Underpinned by its robust services sector, it is seeing rising investment in manufacturing, strong remittance inflows from overseas workers and an infrastructure spending surge under the Build, Build, Build (BBB) development programme.
Foreign direct investment (FDI) reached an all-time high in 2017 as investors flocked to capitalise on rising domestic demand and optimistic growth projections. FDI is expected to increase once again in 2018, supported by both a young and skilled workforce, and rising government spending, with the long-awaited Tax Reform for Acceleration and Inclusion (TRAIN) initiative expected to augment public coffers.
Sound fiscal and monetary policy-making should help prevent the economy from overheating, even as socio-economic challenges, income inequality and inflation pose obstacles to inclusive growth. Public debt is low and fiscal buffers remain strong, although a shift away from public-private partnerships (PPPs) as the preferred model for new infrastructure projects will see government borrowing spike in 2018. Nonetheless, solid macroeconomic fundamentals, a diversified export base and growing domestic consumption should keep a steady upward trajectory into 2019 and beyond.
Market Breakdown
Located on the Ring of Fire in the western Pacific Ocean, the archipelago of the Philippines comprises over 7000 islands, 2000 of which are inhabited. Home to Metropolitan Manila, where most economic activities are concentrated, Luzon is the most important island, followed by the central islands of the Visayas, a key tourism and biodiversity centre. To the south, Mindanao remains largely rural.
As shown by figures from the Philippines Statistics Authority (PSA), the Philippines is a services-dominated economy, with this sector accounting for 47.9% of GDP, industry’s share standing at 28.4%, followed by agriculture at 7.1% in 2017. According to a February 2018 report by the World Trade Organisation (WTO), services also accounted for 56% of employment in 2016, with motor vehicle trade and repair accounting for 22% of GDP and 20% of employment in the same year.
Although real estate employed 0.5% of the labour force, it accounted for 16% of GDP in 2016, while manufacturing comprised 24% . The Philippines is a significant regional manufacturer of electronics, with merchandise exports amounting to 84% of GDP, according to the WTO. As the country has abundant mineral resources, mining and quarrying hold considerable growth potential, though they accounted for just 1% of GDP in 2016.
Demographics
The Philippines benefits from a young workforce: demographic data from 2017 shows that the population – estimated by the UN to be 106.5m in early 2018 – has a median age of 23.5 years. This means the country has entered its so-called demographic window: 70% of its population is working age, and the labour participation rate is 64%, according to the WTO. Labour exports form an important part of the economy, with overseas workers accounting for 3.2% of households. Although poverty indicators have improved in recent years, around one-fifth of the population lives under the poverty line (see analysis).
Unemployment has also risen in recent years, with the National Economic and Development Authority (NEDA), the primary socio-economic planning body, reporting that unemployment edged up to 5.7% of the labour force in 2017. This was an increase from 5.5% in 2016 and fell below the target of 5.1-5.4%. Youth unemployment rose to 14.4% in 2017, against a targeted 11%, and NEDA reported that job creation remains a challenge, with 663,243 net employment losses recorded in 2017.
Meanwhile, wages have risen: the Regional Tripartite Wages and Productivity Board – National Capital Region raised the daily minimum wage in Metro Manila by P21 ($0.41) per day in October 2017 to P475 ($9.38). The National Wages and Productivity Commission reported that the monthly minimum wage was between $171 and $299 in January 2018, against $158-346 in China, $288-296 in Thailand and $236-257 in Malaysia. This is still higher than wages in Vietnam ($147-165 per month), Cambodia ($140) and Myanmar ($82).
However, labour productivity in the Philippines has grown at the fastest rate in ASEAN, with the average total factor productivity – a measure of both output not explained by production inputs and efficiency in the production process – standing at 2.96 between 2010 and 2015, against Thailand’s 2.46, Cambodia’s 1.69, Malaysia’s 1.46, Indonesia’s 1.02 and Vietnam’s 0.97. According to the Hong Kong Trade and Development Council, this has attracted high-value-added manufacturing (see Trade & Investment chapter).
Golden Age
Macroeconomic growth has accelerated in recent decades, increasing from an average of 4.5% between 2000 and 2009 to 6.4% between 2010 and 2017, according to IMF data. After hitting 6.9% in 2016, growth moderated slightly to 6.7% in 2017 as consumption indicators relaxed, with NEDA reporting that growth in household consumption eased to 5.8% in 2017, against 7% the previous year, while capital formation growth fell from 23.7% to 9%. This differs from PSA data, which shows that household final consumption expenditure rose by 8.3% in both 2016 and 2017, reaching P11.6trn ($229bn) at the end of 2017. Growth slowed across the industrial and services sectors in 2017, hitting 7.2% and 6.7%, respectively, down from 8.4% and 7.4% in 2016. While some sectors experienced slightly less robust expansion, agriculture, fishery and forestry gained momentum, rebounding from a 1.3% contraction in 2016 to post 3.9% growth in 2017.
In its “Asian Development Outlook 2017”, the Asian Development Bank (ADB) stated that the Philippines is in a golden age of high, sustained economic growth, backed by a sound macroeconomic environment with moderate inflation and a strong fiscal position. The medium-term outlook is very optimistic, and in an April 2018 speech, Ernesto Pernia, secretary of socio-economic planning and director-general of NEDA, projected that the economy will be 50% larger in 2022 than it was in 2016, with per capita income expected to rise from $3550 in 2015 to at least $5000 in 2022.
Macro Fundamentals
Robust growth is supported by solid macroeconomic fundamentals, with prudent fiscal and monetary policy-making helping sustain high GDP growth. “On the macro side, the economy is doing quite well. The Philippines has one of the highest growth rates in Asia, and there is the expectation that it will remain strong in the coming years,” Yongzheng Yang, resident representative of the IMF, told OBG. “While the country is not quite there yet, necessary structural reforms and increasing infrastructure and social spending in line with successful tax reforms could make it possible for growth to hit between 7% and 8%.”
Government debt as a share of GDP declined to 42% in 2017, its lowest level in 20 years, according to the ADB, and down significantly from 75% in 2004. Meanwhile, the robust labour market growth, and particularly strong services, manufacturing and construction sectors, have further brightened the growth outlook.
Higher international fuel prices and sharp currency depreciation – the peso fell to an 11-year low against the US dollar in 2017, depreciating by 5.8% from its 2016 value by the end of the year – pushed headline inflation to 3.2% in 2017, against 1.8% in 2016. This led to substantially higher prices for fuel and imports. While this was still well within the target of 2-4% set by the central bank, Bangko Sentral ng Pilipinas (BSP), rising inflation and double-digit lending growth is expected to result in at least one interest rate hike before the end of 2018 (see Banking chapter). Furthermore, tax reforms have helped pushed inflation up to 4.3% in March 2018, exceeding the 4% ceiling (see analysis).
Trade & Investment
Trade and investment surged in 2017, though the trade deficit also swelled. According to PSA figures, imports rose by 10.2% to $92.7bn, while exports grew by 9.5% to $62.9bn, for a record deficit of $29.8bn. However, manufacturing benefitted from currency depreciation: Capital Economic, a London-based consultancy firm, reported that low interest rates, coupled with increasing global demand and external price competitiveness boosted Philippine manufacturing output by 8.6% in 2017.
Increased manufacturing investment drove FDI inflows to an all-time high in 2017: this figure increased by 21.4% to hit $10.1bn, supported by rising investment in manufacturing, real estate, construction, retail, and gas, steam and air conditioning supply (see Trade & Investment chapter).Services exports were bolstered by strong remittances from overseas workers: in February 2018 the BSP reported that full-year personal remittances rose by 5.3% in 2017 to hit $31.3bn, exceeding its 4% target, with remittances accounting for 10% of GDP and 8.3% of GNI that year.
While tourism revenue rose by 36.28% year-onyear (y-o-y) between January and October 2017 to hit P243bn ($4.8bn), the value of business process outsourcing and IT services exports declined slightly between January and October, falling to $8.02bn from $8.1bn during the same period in 2016. As a result, the current account deficit stood at $2.5bn – equivalent to 0.8% of GDP – in 2017, up from 0.4% in 2016. The balance of payments deficit also rose to hit 0.3% of GDP in 2017, up from 0.1% in 2016, owing to higher portfolio capital outflows. Gross international reserves stood at $81.6bn at the end of 2017, enough to provide an eight-month reserve cover, according to the ADB.
Development Strategy
Three main policies are guiding economic development. The first, the 10-point socio-economic agenda, was released by President Rodrigo Duterte’s administration in June 2016. Also called DuterteNomics, the plan outlines 10 policy goals, such as cracking down on crime and corruption; continuing fiscal, monetary and trade policies; enacting progressive tax reforms and optimising collection; and bolstering competitiveness and the ease of doing business.
The plan also aims to accelerate infrastructure spending to comprise at least 5% of GDP through increased deployment of PPPs, promote rural value chain development, secure land tenure, develop human capital, and promote science, technology and the creative arts to boost innovation. Other priorities emphasise improved social protection programmes, including reforms to reproductive health laws and the popular conditional cash transfer programme (see analysis).
2040 Goals
Long-term economic policy priorities are enshrined in AmBisyon Natin 2040, 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 wellness, and financial services.
Mid-Term Policy
In February 2017 NEDA officially approved the Philippine Development Plan (PDP) 2017-22 – the first medium-term plan to be anchored to both AmBisyon Natin 2040 and the 10-point socio-economic agenda. The PDP’s three pillars seek to restore public trust in government institutions and crack down on corruption, reduce income inequality and accelerate economic growth. The final pillar will include ensuring macroeconomic and fiscal stability through fiscal prudence, tax reforms and strategic trade policy-making.
There are seven priorities under the PDP, including social stability, reduced income inequality, increased growth potential, and creation of an enabling and supportive economic environment. It targets GDP growth of 7-8% per year until 2022 and aims to reduce the poverty rate from 21.6% in 2017 to 14% by 2022. In rural regions, where poverty is more common, poverty rates are expected to drop from 30% to 20% over the same period. Other targets include reducing unemployment from 5.5% to 3-5% by 2022 and attaining upper-middle-income status, defined by the World Bank as a GNI per capita of between $4036 and $12,745. Domestic GNI per capita rose from $1650 in 2006 to $3580 in 2016, putting the country within reach of this target.
BBB
One of the most important initiatives to launch under President Duterte is BBB, a sweeping infrastructure development agenda first unveiled in October 2017. The government has identified dozens of infrastructure projects to be undertaken, including 15 priority projects for 2018. BBB has sparked a recent surge in infrastructure spending that is expected to continue into 2019, with the programme increasing the 10-point socio-economic agenda’s infrastructure spending target to 7.2% of GDP by 2022, against 4.5% in 2016, with $158bn of capital outlays planned until 2022.
In February 2018 the Department of Budget and Management (DBM) announced that state spending rose by 11% in 2017 to hit P2.82trn ($55.7bn). Under the auspices of BBB, infrastructure spending rose by 15% over 2016 to P569bn ($11.2bn), with the ADB reporting that public spending on infrastructure hit 5.4% of GDP in 2017, while personnel services spending grew by 12% over the previous year to P808bn ($16bn), largely due to new hiring at state universities and colleges, the Department of Education (DepEd), the Department of Health and the Philippine National Police (PNP).
Other major expenses included subsidies – mainly for housing – as well as irrigation projects and health insurance, which had expenditures increase by 27% to P131bn ($2.6bn). Allocations to local government units were also on the rise, with growth of 15% over 2016 levels to hit P530bn ($10.5bn), as they recorded progressive improvements to internal revenue collections.
While various causes are calling for greater amounts of public expenditure, it appears that the authorities are becoming more accurate at estimating their needs. Underspending – a deviation between actual and planned disbursements – fell to 2% in 2017, or 3% including interest payments, against 13.3% and 12.8% in 2014 and 2015, respectively, according to the DBM.
2018 Budget
Both the 2018 budget and the first phase of the TRAIN programme were signed into law in December 2017, and they will see infrastructure spending rise once again. The P3.77trn ($74.5bn) budget represents a 12% increase in public spending over 2017 levels, with the majority allocated to infrastructure development, free education in state universities, universal health care and free irrigation. Major outlays will go to the Department of Public Works and Highways (DPWH), which will receive P638bn ($12.6bn), an P11bn ($217m) increase on 2017. “We’ve always had the ingenuity to deliver new infrastructure projects; now we have the resources as well,” Maria Catalina E Cabral, undersecretary for planning and PPPs at the DPWH, told OBG. “Our leadership is decisive, and we have the BBB blueprint now, so we’re ready to roll it out.”
The DepEd will receive P554bn ($10.9bn) for facility maintenance and repair, staff recruitment, and the development and provision of new learning materials, while the Department of the Interior and Local Government will receive P171bn ($3.4bn). Funds will be used to improve police operations, including P334m ($6.6m) to supply the PNP with body cameras and P850m ($16.8m) to operate and maintain police stations.
Building Up
In January 2018 the Department of Finance announced it anticipated a major pickup in infrastructure activity from BBB, reporting that 15 big-ticket projects were at the pre-construction stage, adding to 44 projects already under way. The combined value of the 60 ventures is P1.8trn ($35.6bn). Major projects in pre-construction include the P356bn ($7bn) Mega-Manila Subway project, the P285bn ($5.6bn) North-South Commuter Railway, the P211bn ($4.2bn) Malolos-Clark Railway and the P134bn ($2.6bn) Philippine National Railway south commuter line.
Spending is set to rise again in 2019, with the government announcing plans for a P4.2trn ($83bn) budget, another record high level of public spending and an 11.5% increase over the 2018 budget. In January 2018 the DBM announced that the next budget will continue to reflect priorities of the 10-point socio-economic agenda, the PDP and its related public investment programme, and the 2019-21 three-year rolling infrastructure programme (see Construction chapter).
Total expenditure increased by 37% y-o-y to P240bn ($4.7bn) in the first two months of 2018, according to the Bureau of the Treasury, while tax and non-tax revenue increased by 18% to P1.79trn ($35.4bn), and the budget deficit grew by 160% from P23.7bn ($468m) one year earlier. The government has planned for annual deficits of up to 3% of GDP in the lead-up to the year 2022, with this figure projected to increase to P524bn ($10.4bn) by the end of 2018.
“Our deficit target for 2018 remains at 3% of GDP, and interest payments will account for about 10.5% of expenditure,” Sharon P Almanza, deputy treasurer of the Bureau of the Treasury, told OBG.
Shifting Strategy
Managing the rollout of BBB is likely to be a major challenge for the government, though a shift towards development assistance and new financing models should see implementation accelerate in 2018. The government is increasingly seeking access to infrastructure financing through new domestic and international channels. Although PPPs will remain an important tool for project development, they have been criticised for experiencing significant delays. A new strategy is set to emphasise so-called hybrid PPPs – which aim to fast-track infrastructure projects – and unsolicited proposals for smaller PPP projects, while boosting overseas development assistance (ODA) and international debt markets for big-ticket projects.
In a July 2017 report examining infrastructure financing, the UN Economic and Social Commission for Asia and the Pacific (UNESCAP) reported that PPP development has not reached its full potential: out of six approved projects at various stages of tender in mid-2016, four have since been restructured into ODA projects, and tender processes for the remaining two have been suspended indefinitely.
ODA
Out of 75 planned flagship BBB projects, only two are slated for PPP implementation, indicating a shift towards ODA financing for infrastructure as the government seeks to rationalise expenditure and benefit from favourable, low-interest, long-term ODA arrangements. Out of the 15 key projects set for launch in 2018, eight will be funded by ODA, three by multilateral lenders, three by the government and one under a PPP.
“For the remaining four years of BBB, there are between 10 and 12 projects that are super-priority, including the Mega-Manila Subway system, estimated to cost $8bn-10bn over 10 years,” Hans B Sicat, managing director of ING in the Philippines, told OBG. “This project will be financed using ODA from the Japanese government under a 40-year concessional loan with a 0.5% spread, so with inflation expected to easily outpace this rate, this becomes a very good deal for the Philippines,”
PPPs will nonetheless continue to play a role in project financing, with UNESCAP reporting that the government’s move to roll out hybrid PPPs, under which facility construction costs are met through ODA, while private contractors cover operation and maintenance.
PPP Evolution
Another proposed model would see the government use ODA funding to finance its liabilities – including subsidies and availability payments – while private players would undertake design, construction, operation and maintenance. The government’s moves to welcome unsolicited proposals for PPPs could help spur development and implementation: according to UNESCAP, the submission of unsolicited proposals rose in the months following the mid-2016 announcement.
This prompted the PPP Centre – a public agency created to facilitate PPP implementation – to supplement the PPP framework with new guidelines to institutionalise the process for conducting the competitive Swiss challenge tendering process. Under this system, a government agency that receives an unsolicited proposal for a project publishes the bid details and invites competing companies to match or beat it.
With PPPs playing a smaller role in infrastructure development, the government is ramping up borrowing to support BBB and associated spending. Plans to tap global debt markets are set to accelerate in 2018 following the successful issuance of a Panda ( renminbi-denominated) bond in March 2018 (see analysis).
Outlook
Although geopolitical volatility – including a potential Sino-American trade war, US Federal Reserve rate hikes and rising inflation – could pose a challenge to GDP growth in 2018, the economy is projected to continue to see robust expansion (see Trade & Investment and Banking chapters).
In April 2018 Moody’s reported that although the Philippines is one of the fastest-growing economies in the Asia Pacific and the second-fastest among “Baa”- rated sovereigns globally, the economy is not at significant risk of overheating. Although headline inflation climbed to 3.9% y-o-y in February 2018 – its highest level since October 2014 – and the peso reached a 12-year low against the US dollar, the agency does not see a significant and prolonged rise in inflation beyond the BSP’s estimates of 4.3% for 2018 and 3.5% for 2019. Furthermore, inflation trends do not indicate overheating; rather, they are a result of near-term, transitory impacts from the TRAIN programme, which increased value-added tax on various consumer products while boosting take-home pay for workers (see analysis).
These sentiments are reflected in economic expansion projections for 2018 from various bodies: the government forecast growth to range between 7% and 8% for the year, while the IMF and World Bank have projected 6.7% and 7% expansion, respectively. Meanwhile, the ADB has projected that GDP growth will accelerate to 6.8% in 2018 and further, to 6.9% in 2019, supported by accommodative fiscal policies, large public infrastructure projects, low unemployment and steady remittance growth. Government targets are the most optimistic and appear to be the most accurate for the early year: in April 2018 the University of Asia and the Pacific reported that GDP growth was estimated to have been greater than 7% in the first quarter of 2018.
Read More from OBG
