Economic studies
Philippines

Philippines

Population 102,2 million
GDP 2,927 US$
A4
Country risk assessment
B
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Synthesis

Major macro economic indicatorS

Main economic indicators 2015 2016 2017 2018(f)
GDP growth (%) 6.1 6.9 6.8 6.5
Inflation (yearly average, %) 1.4 1.8 3.2 4.5
Budget balance (% GDP) 0.6 -1.5 -2.0 -2.5
Current account balance (% GDP) 2.5 0.2 -0.8 -1.5
Public debt (% GDP)* 44.8 42.8 41.2 41.0

 

* central government

(f): forecast

STRENGTHS

  • Large population of young, qualified, English-speakers
  • Balanced external accounts
  • Expatriate worker remittances (10% of GDP) come from diverse origins (geographic and sectorial)
  • Thriving Business Process Outsourcing (BPO) sector

WEAKNESSES

  • Low rates of investment: inadequate and outdated infrastructure
  • Governance shortcomings: bureaucracy and corruption
  • High levels of income inequality
  • Problematic security situation in the Muslim regions of the South
  • Strict bank secrecy and casinos facilitate money laundering

RISK ASSESSMENT

Growth expected to remain strong

The economy is expected to maintain its momentum throughout 2018, buoyed above all by domestic demand. Household spending (70% of GDP) will again be the main growth driver, as remittances from expatriate workers (10% of GDP in 2017) – who are located mainly in the United States and the Gulf – grew by 4.4% year-on-year in the first five months of 2018, with this pace, with this rate of growth expecting to be maintained. This growth is connected to the depreciation of the Philippine peso, as well as the creation of the Overseas Filipino Bank, which will not deduct a commission.

However, the economy is also facing various pressures. As a result of strong inflationary pressures, predominantly due to the weakness of the peso and fiscal reforms, the central bank raised overnight rates twice in the first half of 2018, and is expected to continue to raise rates into 2019. Investment (25% of GDP) is expected to suffer as a result of tighter borrowing costs, but should continue to grow moderately, mostly thanks to public infrastructure investment projects. Infrastructure levels remain inadequate, although the government has reaffirmed its intention to increase public spending on infrastructure to 6% of GDP.

Exports, 70% of which are towards Asia, will not contribute to growth. Although electronic components (19% of total exports) performed well, this did not compensate for the decrease of demand for machinery and transport equipment, coconut oil, and gold in the first half of 2018. A deterioration in US-China trade relations will further weaken external demand, as the country is significantly exposed to China via its trade links. This trend is reinforced by rising imports, as internal demand and depreciation simultaneously drive up the import bill. Business Process Outsourcing (BPO), tourism, and trade will continue to be the main beneficiaries to trade.

 

The country's financial position deteriorates

The budget balance is expected to deteriorate in 2018, as the rise in revenue will not be enough to offset the rise in spending. Since January 2018, an extensive tax reform should raise revenues by levying excise duties (fuel, automotive products, alcohol and tobacco), broadening the VAT base, and implementing higher tax rates for higher income brackets. Further reforms are under revision by Parliament in 2018. However, this reform will not be enough to compensate the increase in spending (expected to rise by 12%), induced by President Rodrigo Duterte’s infrastructure investments and social programmes (child vaccinations, assistance for poor families, extended health insurance cover, universal primary education). Moreover, additional transfers will have to be made to low income households, who are affected by the tax reform and accelerating inflation. Despite the growing imbalance, strong growth should help to control the increase in public debt to GDP ratio. Most of this debt, around 67%, is held by domestic creditors.

The balance of payments position (BOP) recorded a USD 1.2 billion deficit in the first quarter of 2018. This is set to deteriorate further across the rest of the year, due to a widening trade deficit and net portfolio outflows. The trade deficit (more than 10% of GDP) is driven by strong domestic demand and imports for use by industry, especially electronics and Information Technology (IT) outsourcing. Foreign direct investments (FDI) are increasing, but remain limited when compared with massive remittances by overseas Filipinos. This reluctance to invest in the country is the consequence of both restrictions on FDI and political uncertainties. The effects of these pressure should be be cushioned by adequate foreign exchange reserve levels, which are equivalent to nine months of imports.

 

Presidential promises facing reality check

Rodrigo Duterte was elected to the presidency in May 2016 for a term of six years, succeeding Benigno Aquino. His ethos is twofold: law and order, and combatting inequalities. Like his predecessor, he intends to introduce universal healthcare (currently 93%) and free education from pre-school up to university undergraduate degree level. Combating drug trafficking, maritime piracy, and Islamist terrorist groups (including the Abu Sayyaf and Maute groups) form 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 Mr Duterte, but some tensions remain surrounding disputes in the South China Sea. In November 2017, the army ended a six-month siege in Marawi on the southern island of Mindanao by groups close to the Islamic State, killing their leaders. Moreover, the peace process with the Moro National Liberation Front (MNLF) and the Moro Islamist National Liberation Front (MILF) who have long battled with government forces on Mindanao and in the chain of islands towards Borneo is progressing: the Bangsamoro Organic Law (BOL) was signed, paving the way for greater autonomy in the Muslim majority regions of the South. Despite these successes, the president's high popularity ratings have tumbled (45% in approval ratings mid 2018) following the drug-related extrajudicial executions carried out by the armed forces, allegations of corruption against allies of the president, rising inflation and alleged blasphemous stances.

 

Last update : September 2018

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