Growth with persistent downside risks 

Economic growth should come closer to its pre-pandemic levels in 2022. Still, it should remain fragile and uncertain due to frequent tight restrictions, especially in Metro Manila, which accounts for a third of the economy. Before reopening the borders, the government targets an 80-90% vaccination rate. However, a slow vaccination pace (less than half of the population was fully vaccinated as of 1 January) indicates the restrictions will likely linger into at least early 2022. Household consumption (74% of GDP) would thus recover gradually through 2022, supported by an increase in overseas remittances (9.7% of GDP, the U.S., Malaysia, and South Korea being their primary sources). However, household consumption should remain also constrained by weak labor market prospects (the unemployment rate increased to 8.9% in September 2021) and a low participation rate (59.8% in Q2 21). Ongoing reforms should address the labor market’s structural weaknesses: the National Employment Recovery Strategy would harmonize employment and improve social protection and training. Exports should remain robust, especially for electronic products, and benefit from recoveries in major trading partners such as China, the U.S., and Japan. Inflationary pressures, driven by high food and energy prices, should be transitionary and are likely to ease through 2022 – the Central bank (BSP) forecasts inflation to return within the 2-4% target at 3.2-3.3%. The return of policy normalization in the U.S. could prompt the BSP to tighten its monetary policy by the end of the first half of 2022. Business confidence should gradually improve, and FDI inflows should experience a recovery. With Duterte’s flagship “Build, Build, Build” program, public infrastructure should probably continue to drive investments. Still, the pre-election spending ban covering infrastructure projects will take effect in early 2022 and could delay some projects in the pipeline.

Budget deficit to improve, while the current account deficit will reappear 

The budget deficit is set to narrow as revenues should improve, supported by a more substantial economic recovery. The government expects the budget deficit to narrow from 9.6% to 7.5%. Most of the budget is allocated to social services (nearly 38%), focusing on education, infrastructure, and social welfare. Most deficit financing (77%) is sourced from the domestic market.

The balance of payments strengthened over the pandemic, showing a current account surplus that supported an appreciation of the peso and the accumulation of reserves. However, it is set to normalize. The existing account is set to experience a slight deficit due to a higher trade-in goods deficit, only partially offset by the further recovery in overseas remittances. Despite a solid external demand for electronic products, the trade-in goods deficit should widen due to an expected increase in imports. The domestic market should gradually recover, and commodities remain expensive. Tourism (12.7% of GDP in 2019) would slowly recover with the vaccination rollout. The free-floating peso is expected to weaken. However, the Philippines’ reserves are ample and stood at 9.4 months of imports as of August 2021, and should give some buffer to the authorities against currency depreciation.

Incoming elections could threaten or delay reforms and policymaking 

Rodrigo Duterte finishes his only six-year term in May 2022 and won’t be eligible to run again under the Philippines constitution. His agenda was mostly centered on the fight against drug trafficking, health, education, and infrastructure. The pandemic has, however, slowed his agenda, particularly in infrastructure – only 11 out of 119 projects under the “Build, Build, Build” program had been completed by November 2021. Ferdinand Marcos Jr, who ran for the presidency, adopted Sara Duterte, Rodrigo’s daughter, as his vice-presidential choice. Duterte will bring her father’s legacy, mitigating the Philippines’ former dictator son’s unpopularity among voters and activists who recall the 1972 martial law.

On the external front, the new government might tighten its stance towards China and cancel several projects backed by the Chinese government. While the Chinese government intended to contribute an overall equivalent of USD 24 billion in soft loans and direct investments, only a few materialized (three are under construction). Furthermore, Chinese vessels intensified activity in disputed territory claimed by the Philippines in the South China Sea. This leaves numerous potential candidates to challenge Duterte’s relaxed policy stance towards China.