Philippines: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large population that is young, qualified, and has a command of English
- External accounts in balance
- Diverse geographic and sectoral origin of remittances from expatriate workers (10% of GDP)
- Thriving Business Process Outsourcing (BPO) sector
- Low rates of investment and outdated infrastructures
- Governance shortcomings: bureaucracy and corruption
- High levels of income inequality
- Problematic security situation in the Muslim regions of the South
- Strict bank secrecy and casinos facilitate money laundering
Growth Expected to Remain Strong
In 2018, the economy is expected to maintain its momentum, buoyed above all by domestic demand. Household spending (70% of GDP) will again be the main growth driver, as it will benefit from significant remittances from expatriate workers, mainly in the United States and the Gulf States. The depreciation of the peso and the creation of the Overseas Filipino Bank – which will not deduct a commission – are set to boost the value of these remittances. Moreover, the income tax payment threshold will be raised. Finally, credit will likely continue to grow strongly, as the central bank will maintain its accommodative monetary policy with inflation still in the center of its target. Investment (25% of GDP) is expected to grow moderately. Businesses will be under pressure to invest because of the high production capacity utilization rate but will favor continued caution because of political risk and uncertainties over reforms. While infrastructure levels remain inadequate, the government has reaffirmed its intention to increase public spending on infrastructure to 6% of GDP. This should help to boost the country’s growth potential.
Exports, 70% of which are towards Asia, are expected to perform well, especially exports of electronic components (19% of the total), business services (16% including notably call centres and content control for the American internet giants), IT equipment (5%) and timber (5%). Exports will likely be driven by favourable economic conditions in core markets. However, as internal demand and depreciation simultaneously drive up the import bill, trade’s contribution is expected to remain slightly negative. Business process outsourcing (BPO), tourism, and trade will continue to be the main beneficiaries. Industry is another beneficiary as regards construction materials (cement, glass, metals, and wood), agro-food, furniture, telecommunication devices, transport, and office equipment.
The Country's Financial Position Remains Sound
The central government deficit is expected to stay close to 3% of GDP (2% for the whole public sector) in 2018. However, spending is expected to rise by 12%, with a focus on infrastructure (roads, bridges, railways, health, and education) and social programmes (child vaccinations, assistance to poor families, extension of health insurance cover, primary education). The deficit is unlikely to increase, as revenues will grow thanks to a series of tax reforms announced by the government in 2017. These include levying excise duties (fuel, automotive products, alcohol and tobacco), broadening the VAT base, and implementing higher tax rates for higher income brackets. Despite growing government spending, strong growth should help stabilize the public debt to GDP ratio. Most of this debt, around 67% of the debt held by domestic creditors.
Externally, the current account balance should be close to equilibrium in 2018. The trade deficit (above 10% of GDP) is driven by strong domestic demand and imports for use by industry, especially electronics and IT outsourcing. This deficit is covered by the services surplus (business process outsourcing, tourism), remittances from expatriate workers and yields on Filipino investments abroad. Foreign direct investments are limited and almost equal to those by Filipinos abroad. This reluctance to invest is the consequence of both restrictions and political uncertainties. In total, the balance of payments shows a slight surplus, which explains the low level of external debt (24% of GDP), exceeded by Filipino assets abroad, the weak depreciation of the peso and foreign exchange reserves equivalent to nine months of imports.
Presidential Promises Facing Reality Check
Rodrigo Duterte was elected to the presidency in May 2016 for a term of six years, succeeding Benigno Aquino. His ethos is twofold: law and order, and combatting inequalities. Like his predecessor, he intends to introduce universal healthcare (currently 93%) and free education from pre-school up to basic university degree level. Combating drug trafficking, maritime piracy and Islamist terrorist groups (Abu Sayyaf and Maute groups) is the other priority. In this regard, the country is building closer ties with its neighbors, Indonesia and Malaysia. Relations with China have improved significantly under Mr. Duterte, but some tensions remain surrounding disputes in the South China Sea. In November 2017, the army ended a 6-month siege in Marawi on the southern Island of Mindanao by groups close to Islamic State, killing their leaders. Moreover, the peace process with the Moro National Liberation Front (MNLF) and the Moro Islamist National Liberation Front (MILF) who have long battled with government forces on Mindanao and in the chain of islands towards Borneo.
Despite these successes, the president’s high popularity ratings have tumbled (50% in approval ratings from late 2017) following the drug-related extrajudicial executions carried out by the armed forces, allegations of corruption against allies of the president and the slow pace of reforms.
Socio-economic circumstances make it necessary to boost State revenues (14% of GDP) failing which there will be a worsening of the public accounts.