Matthews Asia Weekly
The Philippines' Sweet Spot
Week of December 16, 2016
The Philippines is currently in a sweet spot, with investment growth accelerating while private consumption is well-supported by remittances from overseas Filipino workers and business process outsourcing (BPO) industry employment. Consumer confidence is quite high and household leverage is low, which suggests that as agricultural income picks up—following an extended drought—and employment creation continues (unemployment has fallen from 7% in 2011 to 4.7% in October 2016, despite the entry of around 1.5 million new personnel into the labor force over the past year), private consumption should accelerate.
From a policy perspective, significant attention is being paid to support growth of the manufacturing sector, which remains stunted relative to regional peers in Southeast Asia. With the demographic dividend (high growth rate in labor and rapidly falling dependency ratio) of young entrants into the work force, the Philippines’ attractiveness as a manufacturing base is expanding. This is an important factor for creating employment and generating wider spill-over effects into the economy.
However, poor infrastructure remains a major constraint. While infrastructure investment is rising as a percentage of GDP, funding and the public sector’s absorption capacity are bottlenecks. Near-term policy implementation is thus focusing on increasing the Philippines’ tax revenue base via comprehensive tax reform as well as developing alternative infrastructure financing channels to domestic bank debt. Increased foreign participation is crucial, but requires amendments over constitutional limits on foreign ownership, which may be a lengthy process.
Foreign policy and politics are also in focus. President Rodrigo Duterte’s tilt away from the U.S. may be aimed at reducing tensions in the South China Sea and leveraging China for support on investment and infrastructure spending. But it also risks destabilizing the country’s lucrative BPO industry, which is dominated by U.S corporations. Similarly, concerns have been raised regarding domestic politics as the powerful Philippine military forces may be discomfited by the Duterte administration’s overtures to long-time adversaries, such as the Communist Party of the Philippines and Muslim rebels in Mindanao. A recent move to support the re-burial of former President Ferdinand Marcos in a cemetery for military heroes has also galvanized liberal opposition to the Duterte administration. However, Duterte’s cabinet has continued to reassure investors that business-friendly policies will remain, and the president’s high popularity ratings suggest that any local pressures will continue to be held at bay.
Various other initiatives, from addressing congestion in Metro Manila, moderating the ban on labor contractualization, allowing agricultural land conversion (to other uses), liberalization of rice imports, and the lifting of restrictions on foreign ownership, are milestones to watch for progress toward the easing of economic constraints.
Despite these issues and risks, I believe the Philippines still has the ability to sustain growth above 6% for the next several years as total factor productivity growth, the demographic dividend and potential for higher household leverage drive consumption and provide room to maneuver.
Investment Strategist, ASEAN
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