RaboResearch - Economic Research

Country Report Philippines

Country Report


Philippines flag

The Philippines has managed to maintain macroeconomic stability despite a weak external environment. The country’s main challenges will be to enhance its level of development and improve its fiscal framework. Meanwhile, helped by large and steady remittances inflows, the country’s external (liquidity) position remains strong. 

Strengths and weaknesses


GDP growth largely resilient to external developments

Despite weak global demand, the Philippines has managed to maintain relatively strong growth rates in most of the past years, as remittances inflows have supported stable domestic consumption growth.

Solid and improving external (liquidity) position

Large and stable inflows of remittances in particular have allowed the Philippines to maintain a surplus on the current account since 2003 and have helped in the build-up of foreign exchange reserves (USD 73bn end-2012). Meanwhile, external debt ratios are improving.


Low level of development

Institutions are weak and governance remains poor, while the country’s infrastructure is inadequate and markets are underdeveloped, which hurts the business climate. Furthermore, poverty rates are high at 18%, as is income inequality, given a Gini-index of 43.

Weak government finances

Government revenues are relatively low (15% of GDP in 2012) and public debt is relatively high (51% of GDP in 2012, of which 36% is external). The government’s ability to implement much needed public investment is hindered.

Key developments

1. Growth has been resilient despite external weakness, but structural improvements needed

Despite a relatively weak external environment, in which all of the Philippines main trade partners experienced slower than usual growth rates, real GDP growth in the Philippines accelerated from 3.9% in 2011 to 6.6% in 2012. Private consumption growth, supported by remittances inflows from Filipinos working abroad, remained strong last year. Remittances inflows, in fact, have been pivotal to the Philippines’ relatively steady growth performance in the past years, as these inflows remained strong and relatively steady, even during times that the global economy was weak. In addition, last year, inflation decreased to below the lower end of the Central Bank’s target range of 3-5%, to 3.1%. This allowed the Central Bank to lower its main policy interest rate, the overnight reverse repo rate, from 4.5% at the start of 2012 to a historic low of 3.5% by October 2012. Lower interest rates, in turn, helped to boost investment growth, which grew from a mere 0.2% in 2011 to 8.7% in 2012. In the years ahead, real GDP growth is expected to remain rather resilient, slowing slightly to around 6% this year and around 6.5% in 2014.

The Philippines have been able to establish a track-record, albeit a short one, of resilient economic growth. However, as the country is still at a low level of development, it is vital that strong and stable growth is maintained for a prolonged period. This is badly needed to reduce poverty, which is high as 18% of the population lives below the World Bank’s poverty line. Moreover, unemployment is relatively high at 7% of the labor force. There are, however, a number of factors that have a negative impact on the business climate, resulting in suboptimal economic performance. The country’s poor infrastructure, its weak institutions, high level of corruption and lack of innovation need to be addressed. Moreover, labor market rigidities, and overregulation will hamper the revival of the country’s industrial sector. Although the government has plans to tackle these issues, it will likely take years before these are adequately addressed, even if sufficient funds would be available.

Figure 1: Growth remains relatively strong
Figure 1: Growth remains relatively strongSource: EIU
Figure 1: Growth remains relatively strong
Figure 1: Growth remains relatively strongSource: EIU

2. Government finances are improving, but remain substandard structurally

Under President Aquino, strengthening the government’s financial situation has been a key priority. As a result of more prudent budget plans, the budget deficit has narrowed from 3.5% of GDP in 2010 to 2.3% of GDP in 2012. However, public spending is set to increase by some 10% in nominal terms this year according to latest government budget. Meanwhile, to prevent a strong increase of the budget deficit, the government aims to increase revenue collection. But, the Philippines’ tax base is weak. Total revenues amount to a mere 15% of GDP, a reflection of the country’s weak institutions, and it remains to be seen to what extent bureaucratic reforms and the use of better technology, through which the administration aims to increase revenues, will be sufficiently successful. Hence, the budget deficit could turn out larger than currently estimated. Public debt-to-GDP is forecast to decline to a still high 48% of GDP by 2014 due to GDP growth, as public debt will continue to increase in nominal terms. As the weak tax base limits the government’s ability to raise revenue, it is unable to implement all of the much needed investments in infrastructure, rural development and human capital. By enhancing the quality of public spending and by focusing on public-private partnerships, which so has not been very successful, the government hopes to accelerate progress in these areas.

3. External (liquidity) position continues to improve

Supported by strong and steady remittances inflows, the Philippines has been able to post current account surpluses since 2003, in spite of large recurrent deficits on the trade balance. This has allowed the Philippines to build up its foreign exchange reserves to USD 73bn by end-2012, which equaled nearly 12 months of imports and 102% of the country’s total external debt, rendering the Philippines an external creditor. Total external debt, meanwhile, has decreased from roughly USD 76bn in 2011 to USD 72bn in 2012, of which less than 10% is short-term debt, and is expected to decline further to USD 65bn in 2014. As a result, external debt-to-GDP is expected to decrease from 43% in 2012 to a forecast 21% in 2014. As the country has become an increasingly popular base for business process outsourcing, also because the Filipino labor force largely speaks English, the surplus on the services balance is expected to widen further in the coming years. This will lead to further improvements of external liquidity ratios. The external debt service will decrease from 20% of total current account receipts today to a forecast 15% in 2014 and the Philippines’ liquidity ratio is anticipated to reach 200%, up from 179% last year. 

Factsheet of the Philippines
National facts of the PhilippinesSource: EIU, CIA World Factbook, UN, Global Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The Philippines has largely failed to undergo a structural transformation towards industrial manufacturing, although some success was achieved through the establishment of a competitive electronics sector in the 1990s. Instead, Philippine growth relied largely on services over the last seven years. As such, the services sector dominates the economy, contributing 57% of GDP, while the industrial sector comprises 31% of GDP. Additionally, although agriculture employs over one-third of the workforce, it produces just 13% of GDP, partially due to operational inefficiencies. The country’s exposure to natural disasters has been a main hindrance on agricultural production. In addition to environmental disadvantages, there are a number of structural weaknesses that negatively impact the Philippine business environment. A history of political instability and a high level of corruption discourage investment in the Philippine economy by foreign investors. The investment climate is further hampered by a largely inflexible labor market, legal uncertainty and frequent power supply problems. Finally, the country lacks a well-developed and comprehensive infrastructure, something this 7107-island archipelago desperately needs. Aside from incidents in the more remote areas and on sea border issues, the Philippines political environment has become markedly more stable in recent years. Even so, powerful families still dominate the political landscape and politics in the Philippines is more driven by personality than by ideology, which hurts policy consistency. 

Economic indicators of the Philippines
Economic indicators of the PhilippinesSource: EIU

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