Philippine economy to keep facing headwinds

Economic momentum will remain virtually unchanged in 2024, posting a tepid rate compared to those posted in pre-pandemic years (6.5% on average over 2015-2019). On the external front, modest improvement in exports (28% of GDP in 2022) is expected after having declined by 8.4% year-on-year in the first eleven months of 2023. Electronics, which account for around 60% of the Philippines’ goods exports, may stop declining as there were signs of a timid recovery in global demand for ICT in the second half of 2023. However, as the Philippines exports mostly low value-added chips for which the demand has remained sluggish, the improvement should be limited. In addition, a marked rebound in overall exports is unlikely as the global economy, notably in the two main export markets, namely the US and China, is set to post slower economic growth. Meanwhile, continued recovery in tourism (10% of GDP) will support services exports. The number of international tourists in 2023 represented 61% of incoming arrivals in 2019, while it was only 25% a year earlier. On the domestic front, demand is likely to undergo further erosion, at least in the first part of the year, on back of elevated interest rates. The aggressive monetary tightening operated by the country’s central bank, Bangko Sentral ng Pilipinas (BSP) that saw a 450-basis-point increase in the policy rate from May 2022 to the end of 2023 would continue to slow private consumption (76% of GDP) and investment growth. While the central bank is expected to pivot during the year, risks related to geopolitical tensions and weather conditions affecting food prices – food accounts for almost 35% of the consumption basket – may result in persistently above-target inflation in the first half of the year, preventing an active cut in policy rates. In particular, rice and sugar prices could increase further amid reduced global crops due to El Niño. Domestic weather conditions which saw several typhoons strike in 2023 should also hamper the country’s 2024 harvest, including that of rice and corn. This would add to farmers’ problems, on top of durably elevated fertiliser prices. Private consumption would, however, continue to be driven by an improving labour market with the unemployment rate already below the pre-pandemic level, i.e., 4.2% in October 2023 vs. 5.1% on average in 2019. Robust remittances would also support it. Regarding private investment, while also hit by high interest rates and discouraged by governance shortcomings, it would be supported by tax incentives aimed at attracting foreign investment. Meanwhile, the Build Better More infrastructure programme will drive public investment. The latter might nonetheless be affected by a cooling relationship with China, which was expected to finance some projects.

No major risks linked to twin imbalances

The public budget deficit should keep gradually reducing in 2024. Continued robust economic growth and efforts to raise greater revenue would boost public tax collection. These efforts would include an excise tax on single-use plastics, a value-added tax on digital services, and an increase in the motor vehicle users’ charge and road user tax. The reform of the military pensions also shows the government’s willingness to contain expenditure. All of this will offset a higher budget bill that continues to focus on education, health, and infrastructure, and that keeps including measures to limit the effect of high commodity prices on the population through vouchers and reduced import tariffs. Consequently, the public debt-to-GDP ratio would only slightly increase in 2024. The debt’s risk profile is limited by the relatively low share of foreign currency-dominated funding (around 32%).

Regarding external accounts, the current deficit should slightly narrow with the deficit of the balance of goods remaining substantial as exports would not markedly rebound. Meanwhile, the services surplus would enlarge thanks to the recovery of tourism and robust BPO activities in a context of de-sourcing from China. Robust remittances amid an increasing number of Filipinos working overseas (+7.6% in 2022) would also help limit the current account deficit. Foreign investment, mostly in the form of FDI from Japan and Singapore, might not entirely cover the current deficit and thereby put pressure on international reserves. Nevertheless, these remain at comfortable levels, representing 7.5 months of import in November 2023.

Veering away from China

Ferdinand Marcos Junior, the son of the namesake dictator who ruled the country for 20 years from 1965, has been President since May 2022. With Sara Duterte as his candidate for Vice Presidency, he won by a clear victory garnering 59% of the vote, the highest score since his father’s time, bringing together the federalist Partido Federal ng Pilipinas into power for the first time and his allies, now ruling both chambers of Congress. Nevertheless, some political developments in the second half of 2023 imply the existence of tensions in the coalition between the President’s and former President Duterte’s camps. Among them is Marcos’ 180-degree stance on his predecessor’s hardline take against the International Criminal Court (ICC), which is investigating Rodrigo Roa Duterte’s bloody drug war. The investigation also concerns Vice President Sara Duterte who was mayor of Davao at that time and could thus lead to her impeachment. Another reason for the friction could be Marcos’ foreign policy shift away from China towards countries such as Japan and the US. While Rodrigo Duterte had improved the country’s diplomatic ties with Beijing, tensions between the two countries have increased since Marcos’ election amid intensified US-China rivalry. After the Philippines granted US forces access to four more of the country’s military bases in early 2023, the year ended with Philippines and Chinese vessels colliding near a disputed shoal in the South China Sea.