Coface Group
Philippines

Philippines

Population 106.6 million
GDP per capita 3,104 US$
B
Country risk assessment
B
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Synthesis

Major macro economic indicatorS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 6.7 6.2 5.8 -1.5
Inflation (yearly average, %) 2.9 5.2 2.5 3.0
Budget balance (% GDP) -2.2 -2.8 -3.2 -3.5
Current account balance (% GDP) -0.8 -1.5 -2.5 -2.3
Public debt (% GDP) 39.9 38.9 39.3 39.3

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Large population that is young (50% is under 25), qualified and with good command of English
  • Diverse geographic and sectoral origin 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

Despite headwinds, growth remains enviable

Growth should pick up in 2020. Household spending (70% of GDP) will remain the main driver of growth. Remittances from expatriate workers (10% of GDP), mainly from the United States and the Gulf countries, should continue to support household consumption, which will also benefit from lower borrowing costs. The Bangko Sentral ng Pilipinas (BSP) implemented a cumulative 75 bps interest rate cut in 2019 and lowered Reserve Requirement Ratios (RRR) by 400 bps. CPI will likely remain within the 2-4% target range in 2020, making it possible for BSP implement an additional 50 bps cuts and lower the RRR by 200 bps in 2020. The higher 7.0% growth target will nonetheless remain elusive. Exports, which account for 30% of GDP, slowed as a result of the US-China Trade War, which compounded with weaker investor sentiment, will continue to impact activity in 2020. The Philippines is exposed via supply chain links and in terms of final demand, as China is the largest export market. Philippines’ main exports include parts and components of electronics and electrical machinery (around 60%), followed by agri-food products such as coconut oil and fruit. Investments (25% of GDP) will face some headwinds. Private investment will be subdued on weaker sentiment; while FDI – which accounts for only 2% of GDP – will also remain weak, as corruption perceptions are still a concern for the country. Most of the investment growth will therefore be public, on the back of President Duterte’s “Build Build Build” public infrastructure investment project that is expected to regain speed after the 2019 downfall. This should increase growth potential in the medium- to long- term. The Business Process Outsourcing (BPO) and tourism sectors should continue to perform well.

 

Expansionary fiscal policy will barely touch deficits

The budget balance is expected to deteriorate in 2020, as the rise in revenue will not match the one in spending. Ongoing tax reforms aimed at increasing revenues by levying excise duties (fuel, automotive products, alcohol and tobacco), broadening the VAT base, and implementing 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. Moreover, additional transfers will continue to be made to low income households. Despite the growing imbalance, strong growth should help stabilize the public debt-to-GDP ratio, and almost all of the public debt has medium to long-term maturity, while over two thirds of this debt is held by domestic creditors and denominated in local currency.

 

The trade deficit will remain high, as the decline in imports, although bigger than the one in exports, is not large enough to offset the structural deficit, which is driven by domestic demand and imported parts for use by industry, especially electronics and information technology outsourcing. A potential increase in energy prices could even lead to a higher deficit, as crude oil remains the largest commodity import; however, this is not our baseline scenario for 2020. Remittances from expatriates, although stagnant, will still offset a big part of it. The resulting current account deficit will be financed by FDIs, although low, due to restrictions, higher production costs than in neighbouring countries, and political uncertainties. Depreciation pressures on the peso should ease somewhat throughout 2020, as the FED is expected to remain on hold, resulting in fewer capital outflows. Foreign exchange reserves will 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 update: May 2020

 

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.

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