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Philippines: strong economic growth amidst upcoming elections

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This study was written by Rohit Shah during his internship at Rabobank Economic Research.

The May 2016 presidential elections will help determine whether the recent favourable developments in terms of governance will continue. Growth has remained rather high, and is expected to continue to do so in the near term.

Strengths (+) and weaknesses (-)

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

In the past 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 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 international reserves.

(-) Low level of development

Despite the recent progress, Philippines’ institutions remain relatively weak. Poverty and inequality remain relatively high, while the high economic growth of recent years has not significantly reduced underemployment.

(-) Small tax base

Government revenues are low (15% of GDP in 2015) due to a large informal economy, which limits the ability of the government to provide basic public investment and services. 

Key developments

1. Presidential election takes a different direction

The May 2016 election in the Philippines is of major importance as the president has a lot of power in the political system of the country. Incumbent President Benigno Aquino implemented structural reforms that resulted in major improvements in social indicators like corruption and ease of doing business, which improved from a rank of 134 and 148 in 2010 to 85 and 103 in 2015 respectively.

The question is whether this progress will be consolidated and sustained under the new president. In the latest polls, it is still undecided which of the main candidates will win. One of them, Grace Poe, has been disqualified by the electoral commission due to questions about her citizenship. Poe is popular under the low-income citizens who make up a majority of the voters. Her policies are focused on improving infrastructure and employment, easing restrictions on foreign ownership and not backing down against China in a disputed maritime territory conflict. All are very similar to Aquino’s policies.

After Poe’s disqualification, there are now three main candidates. The first, Mar Roxas, is a former interior secretary and is an ally of current president Aquino. Roxas’ policies are likely to be similar to Aquino’s in terms of anti-corruption, more transparency and attempts to diversify economic ties away from China. Another important candidate is Rodrigo Duerte, who is the mayor of Davao city. Duerte gained popularity due to his tough rhetoric on crime and his proposals to decentralise power to local governments. A majority of Poe’s middle-class supporters will probably be split between Roxas and Duerte. However, a third candidate, former Manila mayor Jejomar Binay, is likely to benefit most from Poe’s disqualification, as Poe’s low-class voters will probably favour him. Binay is a populist and pro-welfare candidate. There are several corruption investigations against him. His presidency could lead to a reversal of certain reforms initiated by Aquino, as he is less likely to continue anti-corruption and pro-transparency programs. Additionally, Binay has promised to improve diplomatic conditions with China and move away from the US, India and Japan.

Roxas and Binay both have promised to continue the economic liberalization that has started under current president Aquino. Binay has openly announced to amend the constitution to ease foreign ownership rules. Roxas is likely to have a more cautious approach in liberalising foreign ownership rules.

Figure 1: Economic growth is still strong
Figure 1: Economic growth is still strongSource: Macrobond
Figure 2: Current account still positive
Figure 2: Current account still positiveSource: Macrobond

2. Economic growth outlook remains favourable, although still some risks

GDP growth has remained strong (5.8% in 2015), mainly driven by private consumption and fixed capital investments. Moreover, growth in private consumption and investments are expected to keep GDP growth strong (6%) in the coming few years. In the short term, lower oil prices (oil represents 18% of total imports) are a boon for consumption. In the longer term, consumption growth will be driven by rising employment and strong remittance flows. There are three main risks to this outlook. First, Philippines’ exports are somewhat concentrated. Export dependence on China and Japan is high, as these two countries together account for 35% of exports. And in terms of products, exports are mostly geared towards electronics (49% of exports). If either China or Japan or the electronics sector shows slower growth, this will hurt Philippines’ exports and thus economic growth. Second, inflation could unexpectedly rise due to the effect of El Nino and typhoons on food prices (11% of imports is food), or if oil prices rise sharply (oil account for 18% of imports ), for example due to severe instability in the Middle East. Third, investment growth could slow due to political uncertainty (see below).

3. Further increase in investments in infrastructure needed

Poor infrastructure continues to hamper economic development. In 2014 the Philippines only scored a 2.6 out of 5 on the World Bank Logistic Performance Index, which describes the quality of trade and transport related infrastructure. Although investments in infrastructure, often in the form of public-private partnership (PPP), have increased strongly during Aquino’s presidency, inadequate infrastructure remains a huge bottleneck. PPP’s have been hindered by government underspending. Moreover, the presidential election may lead to delays in infrastructure investments as private investors are likely to wait for post-election clarity. All presidential candidates have promised to continue to improve infrastructure, but it remains to be seen whether they will be able to deliver on these promises.

Factsheet Philippines
Factsheet 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. 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 productivity in the agricultural sector, which employs about one-third of the workforce, but accounts for only 11% of GDP, is low. 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 business process outsourcing 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 7,107-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 from 1965 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 more strained.

Economic indicators of Philippines
Economic indicators of PhilippinesSource: EIU
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