Discusses key economic indicators and trade statistics, which countries are dominant in the market, the U.S. market share, the political situation if relevant, the top reasons why U.S. companies should consider exporting to this country, and other issues that affect trade, e.g., terrorism, currency devaluations, trade agreements.
Last Published: 7/12/2017
  • The Philippines is the twelfth largest country in the world by population (more than 102 million) and is the fourth-largest English-speaking country.  It also has one of the youngest populations in the world, with more than two-thirds of the population under the age of 35.  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.  

  • Philippines year-on-year GDP growth accelerated from 6.1% in 2015 to 6.9% in 2016, among the fastest in the region.  Helped in part by election-related spending, robust domestic demand spurred the economy’s expansion despite a weak external environment and a contraction in agricultural output.  Most economists project the economy will continue to grow in the 6.5-7.0 percent range in 2017, buoyed in part by the Duterte government’s more expansionary fiscal stance and increased infrastructure spending.

  • Consumer spending remained the major component of domestic demand, supported by remittances from overseas Filipinos, continued strong growth in the Business Process Outsourcing (BPO) industry, a growing middle class, and moderate inflation; and capital formation (up nearly 24 percent from last year) emerged as 2016’s major growth drivers.  Construction spending (up 13.6 percent) grew at a faster pace, reflecting healthy private construction activity (up 9.5 percent) and a marked improvement in public construction expenditures (up 29 percent) during the 2016 election year.  Spending on durable equipment increased 32.6 percent, suggesting more robust investments toward expanding the economy’s production capacity.

  • The country’s macroeconomic fundamentals remain sound, and the incoming central bank governor is expected to maintain the country’s strong performance. Year-on-year consumer price inflation saw a creeping, upward trend for most of 2016, which mounted toward the fourth quarter and saw year-on year inflation rising to 2.6 percent in December.  Nevertheless, average inflation for the full-year settled at 1.8 percent, only somewhat higher than in 2015 (1.4 percent) and below the central bank’s targeted two to four percent range.  Inflation pressures have continued into 2017, averaging 3.2 percent during January to April as a slightly weakening currency, higher global oil prices, and upward adjustments in electricity and transport rates wove themselves into general price levels.  Higher inflation also reflected the heavily weighted food price index’s vulnerability to climate/weather-related disturbances.  Average full-year inflation for 2017 is nevertheless expected to remain within the central bank’s two to four percent target band.

  • The Philippines posted a modest $420 million (0.1 percent of GDP) balance of payments deficit in 2016.  The current account barely mustered a fourteenth consecutive year of annual surpluses, shrinking nearly 92 percent to $600 million (equivalent to barely 0.2 percent of GDP), and failed to offset significant net outflows of portfolio capital stemming from anxieties over the U.S. Federal Reserve Board’s tightening decisions and geopolitical uncertainties (including Brexit and the U.S. elections); as well as larger net outflows in other financial assets/investments (primarily reflecting residents’ deposits in offshore banks, net lending by local banks to non-residents, and net repayments of foreign loans).  The narrow current account surplus reflected the widening of the merchandise trade gap by 43 percent year-on-year to $34 billion on tepid export growth (0.6%) and strong import demand (16.6 percent) – eroding gains from overseas Filipinos’ remittances (up 4.9 percent) and Business Process Outsourcing revenues (up 12 percent). On a positive note, demand for capital equipment and raw materials/intermediate goods mainly drove import growth in 2016 -- suggesting larger production capacity investments, consistent with the strong expansion in capital formation recorded in the national income accounts.  Lagging industrial development and integration of the manufacturing sector in global value chains pose longer-term challenges to the Philippines’ export competitiveness. 

  • Net foreign direct investment (FDI) inflows have been on an upward trend since the administration of former President Benigno Aquino III and rose by more than 40 percent year-on-year during 2016 to a record-high $7.9 billion (from $1.1 billion in net FDI flows in 2010 when the former President assumed office).  The Philippines nevertheless remains among Southeast Asia’s FDI laggards, with barely four percent of the total FDI stock in the region.  The United States -- with an estimated $4.7 billion of FDI in the Philippines as of end-2015 -- ranks among the Philippines’ top investors. The Philippines has improved in various competitiveness rankings. 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) ended 2016 barely higher from end-2015’s $80.7 billion cushion but remained comfortable, equivalent to nine months’ worth of goods and service imports and nearly four times the Philippines’ short-term foreign debt -- well above international benchmarks.

  • The Duterte administration, which assumed office in July, increased the national government’s programmed fiscal deficit ceiling for 2016 from two percent to 2.7 percent of GDP to allow more expansionary spending.  The fiscal deficit ended 2016 at 2.4 percent of GDP, higher than the barely one percent of GDP average from 2013-2015 which triggered criticisms of “underspending” against the previous government.  Expenditures increased from 16.8 percent of GDP during 2015 to 17.6 percent of GDP in 2016, the highest recorded since 2010.  The ratio of taxes to GDP -- which remains among the lowest regionally -- improved slightly from 13.6 percent to 13.7 percent year-on-year. The former Aquino government fell short of its goal to improve the government’s tax effort to 16.5 percent of GDP during its six-year term.  The new government has programmed a higher, annual budget deficit ceiling of three percent of GDP under President Duterte’s administration to boost spending on social services and infrastructure and to make more significant inroads to reduce poverty.  Boosting tax collections through legislative and administrative reforms, untangling spending bottlenecks, and improving government agencies’ capacity to implement programs/projects will be critical to delivering on these promises.  The Duterte government is shepherding congressional approval of a Comprehensive Tax Reform Program to achieve its twin goals of raising revenue and promoting a simpler and more equitable tax system.

  • The overall improvement in macroeconomic stability, resilience to domestic and external shocks, and debt management efforts has been recognized by the “big three” credit rating agencies — Fitch, S&P, and Moody’s – which all have given the Philippines investment grade ratings.  S&P and Moody’s currently rate the Philippines’ long-term foreign currency sovereign ratings a notch above minimum investment grade, the highest achieved thus far in the Philippines’ credit-rating history.  Credit rating agencies are closely watching progress on tax reform, infrastructure spending, and budget implementation.

  • The higher growth trajectory (averaging six percent under the former Aquino government) helped push down the unemployment rate from 7.3 percent to 5.5 percent between 2010 and 2016.  The official, national poverty rate also declined to 21.6 percent in 2015 from 25.4 percent in the previous 2012 survey.  Anecdotal evidence suggests that the middle class is expanding.  Although gradually improving, the still high level of inequality nevertheless remains a challenge.  The incidence of poverty varies significantly across regions and the country’s underemployment rate continues to hover at around 18 percent.

  • U.S.-Philippines bilateral trade has grown by over 45 percent since 2009, amounting to US$18.3 billion in 2016.  In 2016, the Philippines ranked as the 31st 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$1.8 billion in 2016.

  • In 2016, the United States was the Philippines’ largest export market after Japan, with more than 15 percent of total exports.  The United States was the Philippines’ third largest supplier, with a nine percent share of the country’s import bill.

  • Speculation over the timing and pace of U.S. Federal Reserve rate increases continued to fuel volatility in the foreign exchange market, along with volatile global oil prices, the United Kingdom’s vote to exit the European Union, anxiety over the local and U.S elections, other geopolitical uncertainties, and the narrowing current account surplus.  The local currency depreciated to ten-year lows toward the end of 2016.  The Philippine peso closed 2016 at 49.72 to the U.S. dollar, almost 5.7 percent weaker than the end of 2015 (PhP 47.06 per U.S. dollar). The peso traded at an average rate of 49.96 to the U.S. dollar during the first four months of 2017. 

  • The Philippine Stock Exchange Index (PSEi) closed in negative territory for a second consecutive year, declining 1.6 percent in 2016 on top of the 3.9 percent decline registered at the close of 2015.  The first four months of 2017 generally saw an uptick in the benchmark index, which closed April up nearly 12 percent year-to-date.  Encouraging domestic news and developments include strong fourth-quarter 2016 GDP growth, upward adjustments of short-term economic growth forecasts by several private economists and multilateral development banks, affirmation of the country’s investment-grade sovereign credit ratings, progress on tax reform initiatives, and encouraging corporate earnings reports which attracted bargain hunters to the local bourse.  

    Political Situation and Other Issues that Affect Trade

  • The political situation in the Philippines is stable.  Philippine voters elected President Rodrigo Duterte on May 9, 2016 to a single six-year term with approximately 39% of the vote.  Mr. Duterte enjoys high approval ratings and has cracked down on crime, illegal drugs, and corruption, though his campaign has drawn criticism from the international community and human rights groups. Economic stability and business activity has continued unabated, however.

  • The Duterte administration is attempting to end one of the longest running and most debilitating militant insurgencies in Southeast Asia. Duterte is pursuing constitutional changes to expand local government autonomy, a move the government expects will support the peace process with the Moro Islamic Liberation Front (MILF), the largest Muslim separatist group in the country.  A 2014 effort to implement a peace deal failed to pass in Congress, but the Duterte administration has restarted the dialogue as part of a larger discussion with additional stakeholders.  In response to increased terrorist activity in the southern island of Mindanao, Duterte declared on May 24 a 60-day period of martial law.  This enables law enforcement to implement as-needed emergency operations.

  • The Duterte Administration inherited a strong economy fueled by the unabated growth of call centers and remittances.  While the Philippines’ reputation has shifted from being the sick man of Asia to a bright star in the region, it continues to face constraints to growth and development and is working to improve regulatory quality, rule of law, anti-corruption enforcement, revenue collection and expenditure management, and human capacity development in health and education.  President Duterte has appointed a strong economic team, and while his anti-U.S. rhetoric initially created uncertainty among foreign investors, growth remains strong and his cabinet’s economic policies are largely in line with U.S. priorities.

  • The U.S. and the Philippines concluded a five-year Millennium Challenge Corporation (MCC) compact on May 25, 2016. The MCC effectively completed a 222-kilometer secondary national road; empowered over 4,000 communities which designed and implemented development projects focused on small-scale infrastructure and social services; and improved tax administration and collections.  While the MCC deferred its decision to reselect the Philippines for another compact in December 2016, the national government is closely working with MCC to develop programs which will address key constraints to growth identified in a preliminary study and a root cause analysis.  

Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.

Philippines Trade Development and Promotion