Research and analysis

Philippines economy: update June 2014

Published 24 June 2014

0.1 Summary

The Philippines continues to grow quickly. However, rapid population increase and deeply-entrenched unemployment, combined with long-standing deficits in infrastructure and public sector capacity threaten longer-term sustainability. With the public sector at just 11% of GDP, growth opportunities for UK business are increasingly based on an energized and effective private sector and an expanding middle class.

0.2 Detail

The Philippines is still riding high following 2013, when the economy grew 7.2% on the back of booming household consumption and an expanding services sector. But Q1 growth in 2014 fell below expectations, to 5.7%. With higher food prices steadily pushing up inflation, the Central Bank faces a tough choice between tightening policy to dampen price pressures and doing just enough to give growth – still forecast at above 6% - a boost.

The last few years have seen genuine improvements in the investment climate. The Philippines jumped six places to place 59th of 189 countries on the 2013 WEF Global Competitiveness Rankings, went up 30 spots to 108 out of 189 on the 2013 World Bank Doing Business report, and raised its Transparency International corruption ranking by 11 places, to 94 out of 177. Public deficits are capped at a sustainable 2% of GDP in 2014 and the finance ministry has steadily taken in more revenue. The country’s growing fiscal strength led all three major credit ratings agencies to raise the national debt to investment grade status.

The government has also taken some steps towards redressing longstanding structural weaknesses. In 2013, infrastructure spending, FDI, total investment and manufacturing all exceeded the overall growth rate. The low base from which these start – FDI and infrastructure, in particular, being much less than their regional neighbours – means they would need to grow at this rate for over a decade to achieve the same significance in the economy as in Vietnam or Indonesia.

0.3 Unemployment

Focusing solely on the top-line macro achievements does not, however, tell the whole story. In particular, the population is growing very quickly. A growth rate of 1.89%, total fertility rate still high at 3.1 children per woman, and 1.15 million Filipinos entering the labour market every year places a huge demand on the economy. Economic growth under the present Government has resulted in job creation only just keeping pace with the rising population. The cyclical nature of informal, contractual work has pushed the effective unemployment rate to about 27.5% in January 2014, leaving about 14 million Filipinos looking for work at any one time, particularly in rural areas.

0.4 Threats to Future Growth

The Aquino Administration’s improved governance and fiscal consolidation has contributed to the recent growth. But threats to future growth remain, including legal and constitutional barriers to future investment, a need for reform of public procurement and the need for an ambitious energy strategy to address power shortages.

0.5 Opportunities for the UK

The public sector accounts for just 11% of GDP. And whilst poverty and unemployment are grave domestic concerns, they do not change the fact that sections of the economy are growing strongly. The result is that UK companies find increasing opportunities here, with exports growing at over 10% a year for the last three years. Increased infrastructure spending and the continued success of well-run, family-owned conglomerates drives demand for high-end UK expertise including financial services, engineering and design. Meanwhile, the disposable income of the increasingly affluent 10 million+ strong middle class, fuels purchases of items from high-end clothing to foreign travel which has benefitted Airbus and Rolls Royce.

Domestic conglomerates are also beginning look overseas. Several leading businesses have expressed interest in looking at investment opportunities in the UK.

0.6 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.