Economic Analysis
Philippines

Philippines

Population 106.6 million
GDP per capita 3,104 US$
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Synthesis

Major macro economic indicatorS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 6.7 6.2 5.8 -7.0
Inflation (yearly average, %) 2.9 5.2 2.5 2.5
Budget balance (% GDP) -2.2 -2.8 -3.2 -6.5
Current account balance (% GDP) -0.8 -1.5 -2.5 -3.0
Public debt (% GDP) 39.9 38.9 39.3 50.0

 

(e): Estimate (f): Forecast

STRENGTHS

  • Large population that is young (50% is under 25), qualified and with good fluency in English
  • Diverse geographic and sectoral origins of remittances from expatriate workers (10% of GDP)
  • Thriving Business Process Outsourcing (BPO) sector
  • Poverty reduction (Pantawid Pamilyang Pilipino Program)

WEAKNESSES

  • Inadequate infrastructure levels, low fiscal revenues
  • Governance shortcomings and high corruption perceptions
  • High levels of income inequality
  • Terrorism in the South of the country
  • Strict bank secrecy and casinos that facilitate money laundering

RISK ASSESSMENT

The worst  growth contraction since the Asian financial crisis

In 2020, growth is expected to witness its sharpest contraction since the Asian financial crisis. COVID-19 prompted authorities to impose strict social distancing measures in order to contain it. These include lockdown measures in major cities of the largest island Luzon (60% of GDP), which lasted for over 2 months, from 17 March to 1 June and from 8 Aug to at least the 18, the longest and strictest in Asia. Such measures have been dragging on the main drivers of growth. On the external front, exports, which account for 30% of GDP, have been on a downward trend because of the U.S.-China trade war and will be further hit by weaker global demand induced by the pandemic. Overseas remittances (10% of GDP) and tourism (12.7% of GDP) are evaporating. Lockdown measures have also affected both consumer and business confidence, aggravated by the restricted mobility of the population. This has resulted in weak domestic consumption (70% of GDP) and investment (25% of GDP). This trend will be exacerbated by rising unemployment levels (17.7% in April). Weaker sentiment has also fuelled a contraction in FDI (3% of GDP), which were already weak due to corruption concerns. Most of the investment growth will therefore be public, on the back of President Duterte’s “Build Build Build” public infrastructure investment project, which is expected to regain speed after the 2019 downfall. A recovery in the second half of the year will depend on the evolution of COVID-19 cases in the country and if new lockdowns are imposed.

 

Deterioration in fiscal and current accounts

The budget deficit should further deteriorate in 2020, as the COVID-19 outbreak is causing a near-term shock on the economy. This will result in lower revenues, as lockdown measures forced businesses to shut and dampened consumption. Moreover, ongoing tax reforms through levying of excise duties (fuel, automotive products, alcohol and tobacco), broadening of the VAT base, and implementation of higher tax rates for higher income brackets, will not be enough to compensate the increase in spending induced by President Rodrigo Duterte’s infrastructure programs. The sluggish growth will deteriorate the public debt-to-GDP ratio, although over two-thirds of this debt is held by domestic creditors and denominated in local currency. Fiscal buffers accumulated during 2019, thanks to low government debt, will likely be eroded by the pandemic’s shockwave.

The structural trade deficit will worsen, as imports will decrease at a slower pace than exports. The former are dragged by lower demand for imported parts from the local industry, especially transport equipment (-89.8% in April), as well as weak domestic demand. Strict lockdown measures abroad caused a plunge in overseas remittances, which will not even partly offset the trade deficit, as usual. On the other hand, the Philippine peso has been strengthening through 2020 due to the collapse in imports, which led to lower demand for overseas currencies. Foreign exchange reserves remain adequate, representing around seven months of imports.

 

Presidential promises facing a reality check

Rodrigo Duterte was elected in May 2016 for a term of six years, succeeding Benigno Aquino. His ethos is twofold: combatting inequalities, and law and order. Like his predecessor, he intends to introduce universal healthcare (currently 93%) and free education from pre-school up to a basic university degree level. Combating drug trafficking, maritime piracy and Islamist terrorist groups (Abu Sayyaf and Maute groups) is the other priority. In this regard, the country is building closer ties with its neighbours, Indonesia and Malaysia. Relations with China have improved significantly under his mandate, even though some tensions linger with relation to territorial disputes in the South China Sea. Despite some successes in fighting radical Islamist groups, the President’s high popularity ratings have suffered (75% in approval ratings mid 2019) following a probe on alleged irregularities in the prison system. Duterte’s War on Drugs has raised some concerns amongst the international community. Philippines improved in last year’s Ease of Doing Business index, but it continues to lag significantly relative to other peers in the region such as Malaysia, Vietnam, Thailand and even Mongolia.

 

Last updated: September 2020

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