Philippines - Economy
The Philippines remained a strong performer in the region, despite slow global growth. Coming from a slow start in the first half (H1) of 2015 due to weak government spending, the economy bounced back in H2, bringing full year growth to 5.8 percent in 2015. Among the major economies in the region, the Philippines is behind China and Vietnam only. On the supply side, the services sector remained the main engine of growth, while agriculture continued to underperform as El Niño intensified. On the demand side, robust growth of private consumption and the rebound in government spending in H2 compensated for weak external demand.
The Philippine economy has performed remarkably well in the face of a weaker external environment and global financial turbulence in 2015. Despite a large drag from net exports, real GDP growth remained robust in 2015 at 5.8 percent, reflecting a strong pickup in private investment and public construction through the year. Real GDP growth is projected at 6.0 percent in 2016 and 6.2 in 2017, driven by continued strong domestic demand offsetting weak net exports. The unemployment rate has fallen to a decade’s low of 6.3 percent, but significant under-employment remains. Inflation fell to 1.4 percent in 2015, below the inflation target range (2–4 percent), due to lower food and fuel prices. Inflation is expected to rise to 2 percent in 2016 as commodity prices stabilize.
The external and fiscal positions remain comfortable. Despite a sizable decline in the fuel import bill and continued strong business process outsourcing inflows, the current account surplus is estimated to fall to 3.0 percent of GDP in 2015 (from 3.8 percent in 2014) due to sluggish exports and remittances, and is likely to narrow further in 2016. The peso depreciated against the U.S. dollar in 2015, but by less than other regional currencies. The budget deficit will come below the 2.0 percent of GDP target in 2015 due to slow budget execution early in the year and the public debt ratio declined further.
The economic outlook is favorable but subject to increased downside risks, including lower growth in China and the region, higher global financial volatility and capital outflows, and weather related disruptions. However, the Philippines’ capacity to respond if these risks materialize is substantial given its ample reserves and policy space, both monetary and fiscal. Credit growth slowed to 13.1 percent in 2015 and is supportive of financial stability and sustainable growth as private credit to construction and real estate has moderated.
While the Philippines has recently become an economic powerhouse in Asia, with strong growth driven mostly by domestic consumer spending on goods and services, the government said it would focus on foreign investment, which was lagging. In 2014, the Philippine GDP was up 6.1 percent, placing the country behind China, which had the fastest economic growth for the year at 7.4 percent.
The Philippines’ growing middle class, strong domestic demand, and stable political environment, paired with gross domestic product (GDP) growth of 7.2% in 2013 made the country an increasingly attractive destination for Foreign Direct Investment (FDI). FDI rose in 2013 and is expected to continue with the Government of the Philippines (GPH) emphasizing job creation and inclusive economic growth. Thanks to a relatively large, educated, English-speaking workforce, the Business Process Outsourcing (BPO) and tourism industries have experienced growth in recent years and these trends are likely to continue. Under the administration of President Benigno Aquino, the Philippines implemented reforms to improve the investment climate, making strides in good governance, transparency, and accountability.
The economy of the Philippines is an anomaly in the Asia-Pacific region in that it has lagged behind other economies, such as those of Singapore, South Korea, and Taiwan. From a position as one of the wealthiest countries in Asia after World War II, the Philippines is now one of the poorest. Since the 1970s, which were a relatively prosperous decade, the Philippines has failed to achieve a sustained period of rapid economic growth and has suffered from recurring economic crises. This persistent underperformance has occurred in spite of the Philippines' rich natural and human resources.
The reasons are rooted partly in history, partly in policy. As a legacy of the U.S. colonial period, oligopolies have dominated the economy, particularly in agriculture, where farmland continues to be concentrated in large estates. In the post-World War II period, the Philippines pursued a strategy of import substitution industrialization, whereby domestic goods are substituted for imports. This strategy required protectionist measures, which led to inefficiencies and the misallocation of resources.
Although some trade protectionist measures were relaxed in the early twenty-first century, the Supreme Court continues to support restrictions on foreign ownership of land and other assets in effect since the constitution of 1935. These restrictions, plus widespread graft and corruption, have suppressed inbound foreign direct investment. A historically low rate of taxation - only about 15 percent of gross domestic product (GDP), partly as a result of widespread tax evasion - has led to under-investment in infrastructure and uneven economic development.
After reconstruction following World War II, the Philippines was one of the richest countries in Asia. Growth slowed however, as years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation. Political instability during the Corazon Aquino administration further dampened economic activity. During the 1990s, the Philippine Government introduced a broad range of reforms designed to spur growth and attract foreign investment. As a result, the Philippines saw a period of economic expansion, although the Asian financial crisis in 1997 slowed growth once again.
Like many developing countries after World War II, the Philippines protected local industry from foreign competition through measures such as import tariffs and quotas, and hoped to replace imported finished goods with domestically produced goods over time. Successive administrations also intervened in domestic economic affairs by imposing quantitative trade barriers, price controls and subsidies. Initially, the economy grew rapidly, with GNI growing at an average rate of 5.7% per annum from 1970 to 1980, largely due to increased exports and Government investments.
Infrastructure spending increased, and state ownership and nationalization of commercial enterprises became more prevalent. By the early 1980s, however, the Republic began to face increasing budget deficits, growing levels of foreign and domestic borrowing, rising inflation, climbing interest rates, a depreciating peso, declining investment capital and slowing economic growth or, at times, a contraction in GNI. The Republic’s unstable political situation during that period, highlighted by the assassination of opposition leader Benigno Aquino in 1983, exacerbated its economic problems.
The general optimism brought about by the peaceful removal of the unpopular Marcos administration in 1986 helped economic recovery. GNI grew by 3.4% in 1986, increasing to a growth of 6.8% in 1988 before reversing to a decline of 0.6% in 1991. The economic contraction in the early 1990s was caused principally by underlying macroeconomic imbalances, compounded by supply bottlenecks, natural disasters, political instability, a global recession and the Persian Gulf crisis of 1990 to 1991.
The government of President Corazon Aquino, who came to power in 1986, embarked on a stabilization program aimed at preventing an upsurge in inflation, controlling the fiscal deficit and improving the external current account position. The economy responded favorably to these measures, posting increases in GNI, investments, private consumption and imports in 1992. The Corazon Aquino administration also recognized that the Republic’s economic difficulties in large part resulted from its protectionist policies. The Corazon Aquino administration therefore initiated reforms to open the economy to market forces and reduce the size and role of the government in the Philippine economy. The government of President Fidel Ramos, who assumed office in 1992, accelerated the reform efforts initiated by the Corazon Aquino administration.
Following a review of a number of the policies and programs initiated by previous administrations, the Estrada administration continued many of the financial policies and market-oriented reforms of the Corazon Aquino and Ramos administrations. After the onset of the Asian economic crisis in mid-1997, the Philippines experienced economic turmoil characterized by currency depreciation, a decline in the performance of the banking sector, interest rate volatility, a significant decline in share prices on the local stock market and a reduction of foreign currency reserves. These factors led to a slowdown in the Philippine economy in 1997 and 1998. In response, the Government adopted a number of policies to address the effects of the Asian economic crisis by strengthening the country’s economic fundamentals.
The Philippines was not as severely affected by the Asian financial crisis as many of its neighbors, aided in part by remittances from OFWs. With the exception of 1998, when agricultural harvests were negatively impacted by poor weather and drought, the Republic has recorded positive real GDP growth every year since the Asian financial crisis. After a 0.6% decline in 1998, GDP growth increased to 3.1% in 1999 and 4.4% in 2000 before slowing down to 2.9% in 2001. The slowdown was largely due to global security concerns, domestic political uncertainty, and a global economic downturn that reduced demand for Philippine products by the United States and Japan.
In the early 2000s, the Government pursued economic strategies to improve infrastructure, implement changes to the tax system, support deregulation and privatization of the economy, and further develop trade ties within Asia. GDP growth increased to 3.6% in 2002 and 5.0% in 2003 notwithstanding the impact of the Iraq War, the SARS epidemic and credit ratings downgrades. GDP growth accelerated to 6.7% in 2004 before leveling off to 4.8% in 2005 and 5.2% in 2006.
Beginning in the second half of 2007, the short-term funding markets in the United States experienced credit issues, leading to liquidity disruption in various markets. In particular, subprime mortgage loans in the United States experienced increased rates of delinquency, foreclosure and loss. These and other related events had a significant adverse impact on the global credit and financial markets as a whole, which included the bankruptcy filings by, and the acquisition, restructuring and nationalization of, certain financial institutions. Regulators in the United States, Europe and Asia took steps in response to the unprecedented conditions facing financial institutions in their jurisdictions. Against the backdrop of the global financial crisis, the Republic has experienced limited exposure to subprime assets and bankrupt financial institutions.
The Philippine economy proved comparatively well-equipped to weather the global financial crisis, partly as a result of the efforts to control the fiscal deficit, bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector -- which makes up 80% of total financial system resources -- had limited direct exposure to distressed financial institutions overseas, while conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector.
In 2008 the Republic experienced slower growth rates, a weakening of equity prices, a lower exchange rate for the peso against major currencies and increasing inflation. In 2009, the Republic’s economy began to exhibit indications of a recovery, although certain of the Republic’s economic recovery policies had yet to result in positive effects. OFW remittance levels in 2009 exceeded the Republic’s forecasts and supported growth in the economy despite continuing slowdowns in other production sectors, while increased Government spending in an effort to stimulate the economy resulted in an increasing fiscal deficit.
After slowing to 3.8% growth during 2008, and sputtering to 1.1% during 2009, real year-on-year GDP growth rebounded to 7.6% during 2010, a 34-year high, fueled in part by election-related spending, optimism over the peaceful transition to a new government, and an accommodating monetary policy. Growth slowedin 2011 and is likely to be in the 3.5 to 4% range. Overseas workers’ remittances are on track for an 8% annual growth rate, and, continue to comprise roughly 10% of GDP. Annual GDP growth averaged 4.6% over the past decade, but it will take a higher, sustained economic growth path--at least 7%-8% per year by most estimates--to make progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 24.9% to 26.5% between 2003 and 2009, equivalent to an additional 3.3 million poor Filipinos.
In 2010, the Republic continued its recovery despite an erratic economic recovery globally. In the second quarter of 2010, certain European nations experienced widening yields on their debt securities, triggering widespread restructuring and necessitating a financial bailout from other nations in the region. The bailout failed to resolve the crisis, and in January 2012 Standard & Poor’s downgraded the sovereign credit ratings of some European countries. Fitch and Moody’s issued similar downgrades in February 2012. Along with most Asian and emerging markets, the Republic was largely spared from the substantive effects of these events due to minimal trade and financial linkages with the affected nations, but the situation in Europe further highlighted the need for fiscal consolidation and more effective risk management by the Republic.
Despite challenges to her presidency and resistance to reforms by vested interests, the Arroyo administration made considerable progress in restoring macroeconomic stability. The Benigno S. Aquino administration assembled a strong economic team and has focused on combating corruption and focused spending on education, health and other social services. It addressed the country’s infrastructure shortcomings through a Public-Private Partnership infrastructure initiative. Nonetheless, long-term economic growth remains threatened by these shortcomings, as well as by barriers to trade and investment.
The threat of sovereign defaults in the European Union and the possible consequential effects on the international financial system, including the effects on global credit and liquidity, remain a systemic concern in the international markets. In light of this, the Republic has sought through its financial regulatory framework and monetary policy to mitigate the impact on the Republic of the European sovereign debt crisis and the resulting economic slowdown in Europe.
Europe is one of the primary destinations of Philippine exports. According to data from Bangko Sentral, in 2011, the European Union accounted for approximately 13.2% of the Republic’s total exports. Between January and June 2012, total exports to the European Union amounted to U.S.$3.2 billion, or 12.1%, of the Republic’s total exports of goods. In addition, while Europe accounted for only 3% of total foreign direct investments to the Republic in 2011, gross foreign placements in portfolio investments from the European Union accounted for 41% of the total in 2011.
The Philippine stock market index ended 2011 up 4% after gaining 63% in 2009 and 38% in 2010. The Philippine peso closed 2010 up 5.1% year-on-year. From $44.2 billion as of end-2009, gross international reserves rose to a new record high of nearly $62.4 billion as of end-2010, adequate for nearly 10 months of goods and services imports and equivalent to 5.5 times foreign debts maturing over the next 12 months.
Although still relatively high, the debt of the national government declined to under 56% of GDP (from a 2004 peak of 78% of GDP); and the consolidated public sector debt has declined to about 75% of GDP (from a 2003 peak of 118% of GDP). The national government worked to reduce its fiscal deficits for 5 consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008 but opted instead for measured deficit spending to help stimulate the economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 and 2009 with deficits equivalent to 0.9% and 3.9% of GDP, respectively.
The deficit-to-GDP ratio declined to 3.7% of GDP in 2010, with a 1.7% deficit likely for 2011, Further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; it declined and stagnated at 14% in 2007 and 2008, however, and declined further to 12.8% in 2009 and 2010, low relative to historical performance (i.e., 1997’s 17% peak ratio) and regional standards. The passage of revenue-eroding measures, partly to temper the impact on incomes of the global financial crisis, exacerbated weaknesses in revenue administration. The government has used privatization receipts to reduce shortfalls in targeted tax collections, but this has not been a sustainable revenue source.
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