Philippines - Market OverviewPhilippines - Market Overview
- The Philippines is the thirteenth largest country in the world by population (more than 104 million) and is the fourth-largest English-speaking country. It also has one of the youngest populations in the world, with about 41 percent of the population under the age of 20. About 90% of Filipinos between the age of 10 and 64 are functionally literate. Relatively high population growth (nearly two percent annually) will continue to help drive economic growth for the next several years, while also increasing the strain on social spending and the country’s infrastructure.
- The government’s infrastructure program (“Build Build Build”) failed to significantly spur economic activity in 2018 as Philippine annual GDP growth slowed for the second consecutive year to 6.2 percent in 2018, from 6.7 percent the previous year. Growth, which was below the government’s 6.5 to 6.9 percent target range, was dragged down by the weak performances of exports (up 13.4 percent in real terms from 19.7 percent in 2017), manufacturing activity (up 4.9 percent from 8.4 percent in 2017), and agricultural harvests (up 0.9 percent from 4.0 percent in 2017). Meanwhile, public sector construction outlays accelerated by 21.2 percent in 2018 from 12.7 percent the previous year.
- Consumer spending -- supported by remittances from more than ten million Filipino migrants and overseas workers -- remained the major component of domestic demand but slowed in 2018 (up 5.6 percent in real terms from 5.9 percent in 2017) as high inflation eroded consumer sentiments. Combined public and private sector construction expenditures rebounded to 13.6 percent after slowing to 5.8 percent in 2017. Investments in durable equipment increased slightly (12.4 percent) in 2018, albeit still slower than the 37.7 percent recorded in 2016. Major multilateral lenders reduced growth projections to 6-7 percent for 2019, from the government’s ambitious 7-8 percent target, amid the escalating global trade tensions, the delay in the approval of the 2019 budget (signed 4 months late in April 2019) and prolonged dry spell in the country. However, ratings agencies have maintained the Philippines’ investment-grade rating, with Standard and Poors (S&P) backing the country’s upgrade from “BBB” to “BBB+” with a “stable” outlook, citing the country’s continued above-average economic growth and sustainable public finance.
- Consumer price inflation soared further in 2018 and averaged 5.2 percent for the full year (higher than 2.9 percent in 2017), exceeding the central bank’s targeted two to four percent band. Inflation accelerated for nine consecutive months from January 2018 and reached a high of 6.7 percent in September. The surge was attributed to supply disruptions that pushed food prices higher, rising global oil prices, and the effects of the first tax reform package enacted into law in December 2017 (which, among others, imposed or increased excise taxes on petroleum products, sugar-sweetened beverages, automobiles, tobacco and liquor, and coal). Inflation tapered off starting November at 6.0 percent and eased further in 2019, hitting 3.0 percent in April and averaging 3.6 percent in the first quarter of 2019. The central bank expects inflation to remain within the target range of two to four percent in 2019 until 2020 but remains cautious amidst the stronger and prolonged episodes of the dry spell and the continued rise in global crude oil. The combination of falling inflation and slowing growth led the central bank to cut benchmark interest rates by 25 basis points in May 2019, unwinding part of the 175 basis points of interest rate hikes it undertook in 2018. The central bank immediately flowed the rate cut with a two percent downward adjustment to the reserve requirement ratio for banks, from 18 percent to 16 percent.
- The Philippines balance of payments deficit significantly widened, from $863 million in 2017 to $2.31 billion (equivalent to 0.7 percent of GDP) in 2018. The current account logged a deficit for a third consecutive year, following 13 consecutive years of surpluses prior to 2016, and increased from 0.7 percent to 2.4 percent of GDP ($7.9 billion). This exceeded the central bank’s 1.9 percent target, driven by rising machinery and equipment purchases from abroad to support infrastructure projects under the Administration’s Build, Build, Build development program. The higher current account deficit reflected the widening of the merchandise trade gap by almost 22 percent year-on-year to over $49 billion as the merchandise import bill (up 9.4 percent) outpaced export revenues (down 0.3 percent). The rise in export goods was offset by gains from services (up 20.7 percent), which is largely comprised of business process outsourcing revenues, and remittance inflows and earnings from investments abroad by Filipino citizens (up 19.2 percent). Meanwhile, the capital account surplus ($65 million) fell by 6.3 percent in 2018, but posted a $3.8 billion surplus for the first quarter of 2019, compared to the $1.2 billion deficit for same period in 2018. The financial account deficit widened to $7.8 billion from $2.8 billion the previous year as larger net inflows of foreign direct investments combined with significantly lower net outflows in other financial investments (attributed mainly to lower net lending by local banks to non-residents and net repayments of foreign loans) more than offset the net outflows of portfolio capital ($858 million, down by 65 percent). The Philippine Stock Market was one of the world’s poorest performers in 2018, reflecting weak sentiments towards corporate earnings following the steep rise in the prices of commodities, depreciating peso, and slowing economic growth. Philippine Stock Exchange index (PSEi) gained 6.1percent in the first quarter of 2019, higher than the 2.6 percent posted in the last quarter of 2018 and up from the 6.8 percent decline the first quarter of 2018.
- Following the central bank’s lowering of interest rates by 25 basis points and bank reserve requirement rations by two percent, the Manila index rose 1.6 percent to a near 4-month high.
- Net foreign direct investment (FDI) inflow, which had been trending upward since the administration of former President Benigno Aquino III, reversed its uptrend and fell by 4.4 percent year-on-year to $9.8 billion in 2018 from a record-high of $10 billion, falling short of the $10.4 billion government projections for the year. The Philippines remains behind on FDI investments compared to Southeast Asian peers. The United States -- with an estimated $7.1 billion (FDI stock) in 2017, a 12.5% increase from 2016-- ranks among the Philippines’ top investors. The Philippines has improved overall in various competitiveness rankings over the past seven to eight years, though several declines were reported in the past year. However, the inadequate state of infrastructure remains a weak spot and investors also continue to cite government red tape, regulatory uncertainties, a slow judicial system, and corruption as challenges to doing business in the country.
- The Philippine Central Bank’s gross international reserves (GIR) fell to a seven-year low and contracted to $79.2 billion as of end-December 2018 from $81.6 billion a year ago, but continued to increase reaching $83.96 billion in April 2019. This is an equivalent of 7.4 months of imports of goods and payments of service and primary income.
- From two percent of GDP under its predecessor, the current administration has programmed a higher annual budget deficit ceiling of three percent of GDP under President Duterte’s term to boost spending on social services, undertake an ambitious infrastructure plan, and make more significant inroads to reduce poverty. The 2018 fiscal deficit (3.2 percent of GDP) ended above programmed deficit; revenue collections increased by 15.2 percent year-on-year and exceeded the target set for the year while expenditures exceeded the target by over one percent. Higher revenues were fueled by the implementation of a tax reform law implemented in January 2018 (known as the Tax Reform for Acceleration and Inclusion, or TRAIN I), while higher spending and the wider deficit was attributed to the hefty infrastructure development and social services funding. The government raised the 2019 deficit target to 3.2 percent of GDP to accommodate bigger provisions for infrastructure projects. Infrastructure/other capital outlays, which surged 41.3 percent, exceeded the full-year 2018 goal by 3.6 percent, bolstered by spending on road and bridge networks, flood control projects and military modernization, among other. The TRAIN I tax reform package featured a more progressive scheme to personal income tax, simplified estate and donor’s tax as well as value added tax, and increased taxes for certain products. However, the additional increase in revenue collection generated under the measure was not enough to drive tax collection to hit its target for 2018. Tax collection missed its 2018 goal by 4.01 percent, although it grew by 10.2 percent annually. A second package of the government’s proposed Comprehensive Tax Reform Program (CTRP), known as TRAIN II, aims to reduce the current 30 percent corporate income tax, considered the highest in Southeast Asia. It also includes provisions to modify and limit the tax incentives granted to certain businesses and proposes tax amnesty in certain areas of tax collection. The Duterte administration has proposed a total of 4-5 tax reform packages to comprise the CTRP, which together would generate an additional average of 0.7 percent of GDP in revenues from 2018 to 2022 (when President Duterte is scheduled to end his six-year term). The government hopes to shepherd further tax policies and administration reforms to achieve its twin goals of raising revenues more from 15.7 percent of GDP in 2017 to 17.5 percent of GDP by 2022 and promoting a simpler and more equitable tax system.
- Sustained economic growth, resilience to domestic and external shocks and strong fiscal position have earned the Philippines a credit rating of BBB+ that is two notches above the minimum investment grade, the highest achieved thus far in the Philippines’ credit-rating history, awarded by S&P. Fitch and Moody’s pegged the country’s rate a notch above minimum investment grade. Credit rating agencies are closely watching further progress on tax reform, infrastructure spending (particularly for the “flagship” projects), budget implementation, and monetary policy responses to accelerating inflation, foreign exchange rate volatility, and rapid credit growth.
- The unemployment rate fell to 5.3 percent in 2018 from 5.7 percent in 2017, translating to 2.3 million jobless Filipinos in 2018. This result came amid a lower labor force participation rate (down 0.3 points to 60.9 percent) and higher underemployment rate (up 0.3 points to 16.4 percent), indicating challenges with the availability of quality of jobs. Around 826,000 net jobs were created in 2018, according to the government, but this was below the annual target of 900,000 to 1.1 million jobs. The official, national poverty rate declined to 21.6 percent in 2015 from 25.4 percent in the previous 2012 survey and anecdotal evidence suggests the middle class is expanding. Although gradually improving, the high level of inequality nevertheless remains a challenge; the incidence of poverty varies significantly across regions.
- The political situation in the Philippines is stable. Elected in 2016 for a six-year term, President Duterte enjoys high approval ratings. He has cracked down on crime and illegal drugs, though his anti-drug campaign has drawn criticism from the international community and human rights groups. Economic stability and business activity have continued largely unabated.
- The Duterte administration is attempting to end one of the longest running and most debilitating militant insurgencies in Southeast Asia. Despite the liberation of Marawi City – a regional hub of 200,000 people in the southern island of Mindanao – from a five-month terrorist siege in October 2017, terrorism remains a threat. The entire island of Mindanao remains under martial law at least through the end of 2019. Although there has been progress in implementing the 2014 peace agreement between the government and the Moro Islamic Liberation Front, with the government providing greater political and economic autonomy for Muslim Mindanao, there remain significant challenges to peace and security.
- U.S.-Philippines bilateral trade has grown by almost 70 percent since 2009, amounting to US$21.3 billion in 2018. In 2018, the Philippines ranked as the 32nd largest export destination for U.S. products and the 29th largest source of U.S. merchandise imports. The U.S. trade deficit with the Philippines was at US$3.9 billion in 2018.
- In 2018, the United States was the Philippines’ second largest merchandise export market after China, with more than 15 percent of total exports. The United States was the Philippines’ fourth largest supplier, with a seven percent share of the country’s merchandise import bill.
- The United States was the Philippines’ fourth largest country supplier in 2018, with a 7% share of the country’s imports. The top three import sources of the Philippines are China, with a 20% import share; Korea, 10%; and Japan, 10%. The United States was the Philippines’ largest export market, with 15 percent of total value in 2018.
Philippines Trade Development and Promotion