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Country Report Philippines

Country Report


Philippines flag

The institutional quality of the Philippines has improved in recent years, while growth has been relatively high. On the political front, the peace agreement with the MILF bodes well for stability, but relations with China remain poor. 

Strengths (+) and weaknesses (-)

(+) Relatively high growth underpinned by improvements in business environment

In the past two years, the Philippines has been one of the fastest growing countries of South East Asia. The good growth performance has been underpinned by an improvement of the quality of governance (see key development 1) and higher investment in infrastructure.  

(+) Solid and improving external (liquidity) position

Large and stable inflows of remittances have allowed the Philippines to maintain a surplus on the current account since 2003 and have helped to build up a large stock of foreign exchange reserves (of USD 79.6bn in April 2014).

(-) Low level of development

Despite the progress booked in recent years, the institutions of the Philippines remain relatively weak. Poverty and inequality remain relatively high, as the population has continued to grow quickly, while the high growth of recent years has not significantly reduced underemployment.

(-) Small tax base

Partially due to the fact that a large part of economic activity takes place in the informal sector, government revenues are low (15% of GDP in 2013), which continues to limit the ability of the government to provide basic public investment and services. 

Key developments

1. Institutional quality improves under President Benigno Aquino

Under President Benigno Aquino, a member of an important political family who won the 2010 elections convincingly on an anti-corruption platform, the Philippine government has improved budgetary discipline and has become more active in fighting corruption. Even the most high-ranking members of the elite have not escaped investigation. For example, Aquino’s predecessor Arroyo is under detention in hospital and will face trial for rigging elections and corruption and the Supreme Court chief justice was impeached after he failed to disclose huge sums of assets. However, Aquino’s image as an anti-corruption fighter took somewhat of a hit when it became clear that his allies were involved in the stealing of money from discretionary government funds (the so-called pork barrel scandal) and Aquino was accused of not doing enough to combat these practices. Nonetheless, the recent approval by the Senate of a law that will speed up decision-making of the country’s anti-corruption court and cut its huge backlog of cases could help to further improve governance. The government only has slightly more than a year to implement further institutional reforms, as political players are thereafter likely to enter into campaign mode in anticipation of the 2016 elections. These elections will determine the extent to which the recent progress will be continued, as the constitution does not allow President Aquino to run for re-election. While some of the recent reforms have been institutional, other measures, such as the installation of a competition watchdog by presidential degree, could be revoked by a new president. Nonetheless, the improvement made so far has been visible in various surveys. On the Global Competitiveness index of the World Economic Forum, Philippines moved from the 85th place out of 139 countries in 2010/2011 to the 59th place out of 148 countries in 2013/2014, whereby it even moved from the 125th place to the 79th place on the institutional pillar of this index. Likewise, the country moved from the place 134 out of 178 in 2010 to 94 out of 177 on the Corruption Perceptions Index of Transparency International. Better governance was also one of the factors that drove the three major ratings agencies to upgrade the Philippines to investment grade in 2013.

2. Good recent growth performance

In recent years, the Philippines has been one of East Asia’s fastest growing economies. In 2013 the economy grew by 7.2%, up from 6.8% in 2012. Growth was not only driven by private consumption, which traditionally accounts for a large part of demand (73% of GDP in 2013), but also by private investment, which has traditionally been relatively low in the Philippines. Sectors that have done relatively well recently are the business process outsourcing (BPO) sector, in particular call centre operations, and the manufacturing sector, which is still relatively small in the Philippines. Looking forward, the growth prospects remain rather good, though typhoon Haiyan, the deadliest typhoon in the country’s history, which struck the Philippines in November 2013 killing at least 6,200 people, had a negative impact on agricultural and manufacturing growth in the first quarter of 2014. Remittances are likely to remain strong and the outlook for the BPO sector also remains good, while the impact of tapering by the US Fed has been limited. Growth should be boosted by raising public investment. Though the government’s response to typhoon Haiyan has so far been relatively slow, reconstruction should boost investment. Even before the typhoon struck the government was already planning to increase investment in infrastructure from 2.2% of GDP in 2012to 5% of GDP in 2016. Even so, infrastructural bottlenecks will disappear only gradually at best. While investment in infrastructure and education has risen in recent years and government revenue growth has exceeded nominal GDP growth in the past 3 years, the tax base of the country remains small, which limits the ability of the government to provide basic public services. Moreover, despite the good recent growth performance, poverty, underemployment and inequality remain relatively high, while the creation of official employment has been rather low. More employment-intensive growth is therefore needed to make the present high growth episode more sustainable.

Figure 1: Economic growth
Figure 1: Economic growthSource: EIU
Figure 2: Current account balance
Figure 2: Current account balanceSource: EIU

3. Peace accord improves domestic political stability,

In March 2014, the government and the Moro Islamic Liberation Front (MILF), the main rebel group on the southern island of Mindanao, signed a comprehensive peace agreement. This is a success for President Aquino, but implementing the peace agreement is unlikely to be easy. Meanwhile, there have been some tensions with China in the South Chinese Sea. Recently the Philippines seized a Chinese vessel as it accused the crew of carrying endangered species. While this escalated less than naval incidents between China and Vietnam, relations with China remain rather poor. 

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

Background information

After the Second World War, the Philippines was one of the richest countries in Asia. However, though the country managed to develop a sizeable electronics sector, it largely failed to make a structural transformation towards manufacturing. As a result, income per capita is still relatively low. The country has a low productivity agricultural sector, which employs about one-third of the workforce, but accounts for only 11% of GDP. The fact that 10.5m to 13.5m Philippines work overseas is also an expression of underemployment within the country. At the same time, the remittances sent home by these workers (almost 10% of GDP) provide a stable source of foreign income. Meanwhile, the fact that English is widely spoken has boosted the development of the BPO sector. Thanks to a gradual fall of the high fertility rates the country could benefit from the demographic dividend, while the growing economic integration within the ASEAN Economic Community (AEC) could also boost the development of the country.  However, the country remains vulnerable to natural disasters and lacks a well-developed and comprehensive infrastructure, something the 7107-island archipelago desperately needs. Large parts of the economy thereby have an oligopolistic structure and are controlled by a few influential families. A few powerful families also still dominate the political landscape. The Philippines has a turbulent political history and was ruled by the dictator Ferdinand Marcos until 1986, but the political environment has become markedly more stable in recent years. While the standards of governance have improved somewhat in recent years, politics in the Philippines remains more driven by personality than by ideology. On the external front, the country has strong political relations with the US, while its relations with China are much less cordial.

Economic indicators of Philippines
Economic indicators of PhilippinesSource: EIU

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