Oxford Business Group – Philippine Economy Motors Ahead

Growth in the Philippines is expected to continue at a steady clip over the next two years, spurred by proactive government and central bank measures to improve governance and boost macroeconomic performance. There is concern, however, that slowdowns in Europe, the US and China could dampen full-year growth figures.

Economic expansion in the first half of the year came in at 6.1%, with GDP expanding 6.3% in the first quarter and 5.9% in the second, according to the National Statistical Coordination Board. The expectation among analysts, officials and international institutions is that robust growth will continue through the rest of the year and into 2013, though forecasts of the exact rate differ. Some expect the current pace to be maintained, while others see a slight cooling to just below 5% for the full year.

The economy has been supported by a number of factors, including government spending on construction, which was up 46% on the first half of 2011, according to international press reports, and strong domestic demand, stimulated in part by growing remittances from Filipinos living abroad. As the IMF noted in a statement at the end of its July staff mission to the country, a spike in net exports and fixed investment earlier in the year have also helped drive growth.

A recent report note by HSBC economist Trinh Nguyen suggested that the continued success of the country's business process outsourcing (BPO) industry, which has benefitted from companies in the developed world looking to lower costs during the crisis, had contributed to GDP expansion from the private sector.

Proactive policy-making by the government and central bank has also been important. The Bangko Sentral ng Pilipinas (BSP) has cut interest rates three times in 2012 to record-low levels to support growth and curb rises in the Philippine peso, one of Asia's best-performing currencies thus far this year. In its September meeting, the BSP kept rates unchanged, at 3.75% for overnight borrowing and 5.75% for overnight lending.

The government has won considerable praise for its management, including reforms of governance and efforts to tackle corruption, as well as maintaining a steady macroeconomic course. As the IMF said, "macroeconomic conditions remain generally sound and the authorities' policy management is supporting confidence".

Solid economic management puts the government in the enviable position of being able to loosen fiscal policy if the global economic situation worsens considerably. It has also helped the Philippines achieve ratings upgrades, enhancing the country's appeal to investors, as well as bringing in the resources to finance much-needed infrastructure investments that should help ease economic bottlenecks and underpin longer-term growth.

Arsenio Balisacan, the economic planning secretary, has told the international press that he expects the economy to prove resilient, despite global uncertainties, with full-year growth at the upper end of the government's 5-6% target range.

Similarly, the Capital Market Research Centre, a Philippine think-tank established by a local investment firm and a university, expects growth to reach 5.5%-6% in 2012, despite economic difficulties in Europe and the US, both of which are major export markets for the Philippines.

The centre's upbeat forecast is based on the expectation of a continuation of strong domestic demand and government spending, as well as smoother bank lending, offsetting a possible slowdown in exports. While the organisation expects a slowdown in the third quarter, in the final three months of the year, it sees growth picking up again, helped by the stimulus effect of pre-election spending both in the US and at home. Relatively low inflation expectations should benefit consumer spending, it added.

The economic outlook is thus positive, but authorities and investors alike are aware that this good news should not mask downside risks and structural weaknesses. Despite the impressive first-half growth figures, the stock market's reaction seemed to focus on the fact that year-on-year growth slowed from the first quarter to the second, and quarter-on-quarter growth was only 0.2%, despite government spending, low interest rates and high credit growth.

Perhaps the biggest short-term risk is a worsening of the global economic climate: in addition to concerns over Europe and the US, China's medium-term growth and stability prospects are also worrying. The international outlook is the main reason the IMF takes a more cautious view than some on the Philippines; in its July statement, it said, "growth is expected to stabilise around 4.8% and 4.9% in 2012 and 2013, respectively, in line with soft global economic conditions".

Longer-term issues hampering the country's economic performance also persist: efforts to overhaul the administration, address corruption and upgrade infrastructure all reflect long-standing weaknesses and will take some time to run their course. Reforms to increase tax take and tackle anti-competitive practices are also priorities.

Oxford Business Group

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