Philippines Economic Update

October 2019
Key Findings

 Economic growth slowed in the first half of 2019, driven by a rapid

deceleration in investment growth due to contraction in public spending and
weaker global economy. Nevertheless, the Philippines expects to sustain
progress in poverty reduction. 

 Amidst rising global uncertainties, the Philippine economy remains

strong and is projected to grow 5.8% in 2019, before recovering to 6.1%
and 6.2% in 2020 and 2021, respectively. 

 In the short term, fast tracking the implementation of recently approved

game-changing reforms would help to achieve inclusive growth. In the long-
term, promoting competition to generate quality jobs will enhance the
impact of growth on poverty reduction in the Philippines.

Recent Economic Developments

 In the first half of 2019, economic growth slowed to its lowest level in
eight years amid challenging external environment and a significant
slowdown in investment growth.

 Private consumption was the main growth driver, as growth recovered

to 5.8% year-on-year in the first half of 2019 from 5.3% during the same
period last year, driven by moderating inflation, steady remittance inflows,
an improving job market, and an increase in economic activity from
election-related spending.

 Declining inflation driven by stabilizing prices of food and energy

prompted the Bangko Sentral ng Pilipinas (Central Bank of the Philippines)
to adopt a more accommodative policy stance in 2019. Inflation fell to 1.7%
in August 2019, the lowest in almost 3 years. 

 The Philippine government’s expansionary fiscal policies for 2019 was

put on hold as the delayed passage of the 2019 public budget impacted the
pace of public spending significantly in the first half of the year, resulting in
 substantial underspending. Nevertheless, the implementation of previous
tax-policy reforms led to robust revenue, resulting in a lower than
programmed fiscal deficit for the first half of 2019. 

 Improving labor market conditions, and sustained growth in real

household incomes, led to progress in poverty reduction.

Outlook and Risks

 The Philippines’ growth outlook is weakened by a difficult external

environment and domestic challenges, as growth is expected to slow from
6.2% in 2018 to 5.8% in 2019, before recovering to 6.1% in 2020 and 6.2%
in 2021. Both fiscal and monetary policy remain supportive of growth, while
a weak global economic environment and a slow recovery in public
investments, constitute the main downside risks. 

 Poverty reduction is expected to continue based on the current

economic outlook. The country’s poverty rate measured by the World Bank
middle-income poverty line of US$3.20/day is estimated to have declined
from 26% in 2015 to 20.8% in 2019, and further declining to 19.7% in 2020,
and 18.7% in 2021.

 In the short-term, resuming public investment and fast tracking the

effective implementation of game-changing reforms such as the Ease of
Doing Business Law, the Rice Tariffication Law, the creation of a
foundational ID system, and other such transformational policy changes
would be critical to set the country to a higher path toward accelerating
inclusive growth. While in the long-term, promoting competition to foster
quality job creation will enhance the impact of economic growth on poverty
reduction and shared prosperity.

Fostering Competition and the Challenge of Restrictive Regulations

 Philippine markets are highly concentrated limiting market competition.

 The lack of competition in key sectors has negatively impacted

Philippine firms and consumers, resulting in sub-optimal outcomes in key
sectors such as electricity, telecommunications, transport and logistics. 

 Reducing restrictions to market competition would yield significant

payoffs for households and firms in the country to boost the economy’s
overall competitiveness.
 Implementing these reforms will be critical:

 Address unclear or restrictive regulations in infrastructure sectors

and professional services to create more competitive conditions;

 Eliminate restrictions on foreign and domestic investors to help

level the playing field; 

 Minimize the scope of controlled prices to incentivize firms to

compete; 

 Lessen the involvement of state-owned enterprises and other

operations in typically competitive markets to promote a more effective
use of public funds; and

 Streamline burdensome administrative procedures for businesses

to make it easy to enter the market.
The Philippine economy has grown by about 5 percent a year on average over the last ten years,
significantly higher than in the previous two decades. Yet the number of people living below the poverty
line has actually increased. What does the administration of President Benigno “Nonoy” Aquino III —
now in office for nearly two years—need to do to be able to maintain rapid economic growth while
making it more inclusive?

On the eve of the bilateral strategic dialogue between the Philippines and United States on April 30, Bert
Hofman, Chief Economist for the East Asia and Pacific Region at the World Bank, John Nye, Frederic
Bastiat Chair in Political Economy at the Mercatus Center at George Mason University, and Steven Rood,
Country Representative for the Philippines and Pacific Island Nations at the Asia Foundation, joined
Carnegie’s Vikram Nehru to discuss the economic and political prospects and challenges facing the
Philippines.

A SYSTEM DESIGNED AGAINST DEVELOPMENT

Lagging growth has its roots in regulations and distortions that drive a wedge between the productive
and unproductive sectors of the economy, largely to the benefit of elites, Nye argued.

Structural Problems: The roots of underdevelopment lie in the underlying structure of the Philippines’
economy, which is mostly rural, agricultural, and suffers from low productivity, Nye said. He added that
China, the greatest developmental success story in recent decades, owes much of its growth to the
migration of rural workers from the rural inland to highly productive coastal regions.

Regulations: Commercial, regulatory, and labor market distortions have prevented a similar transition
from taking place in the Philippines, Nye argued. High minimum wages and “regularization” policies that
prevent companies from firing employees apply only to the formal commercial sector, hobbling its
growth. The result has been two classes of workers—the privileged few who can enjoy the benefits of
these regulations in the modern sector and the vast majority with low productivity jobs in the informal
and agricultural sectors.

Land Reforms: While the government has transferred land to poor Filipinos, the recipients are
prohibited from selling their land or buying additional land, explained Nye. As a result, most
beneficiaries resell their land to agricultural elites through shadowy arrangements, further entrenching
inequality.
“Legalism” Not the Answer: Additional laws and regulations would do little to solve the paradox of the
Philippine government, which does both too much and too little to promote growth, concluded Nye.
Instead, policymakers should identify which rules are productive and crucial to development and jettison
those that are not.

REASON FOR OPTIMISM

The fact that the proportion of the Filipino population living in poverty has remained steady over 30
years is cause for concern, Hofman said. Given the surge in population during that period, the absolute
number of Filipinos living on roughly $1.25 per day has increased dramatically. Hofman identified
several reasons for persistent underdevelopment, as well as reasons for optimism.

Uneven Growth and Job Creation: Too little growth has occurred in the modern sectors, and the growth
that has occurred in manufacturing has been capital-intensive, producing relatively few jobs. At the
same time, the low-quality education received by many workers excludes them from accessing higher-
paying jobs.

Political Risk Deters Investment: Foreign investors are worried by the volatile and unpredictable shifts in
national politics. A history of mass protests, coupled with the Supreme Court’s frequent revisions and
reversals of laws, have created a climate of uncertainty.

Momentous Reforms a Positive Sign: However, the current Aquino administration has undertaken major
reforms in state enterprise governance, public finance management, and social programs. These
reforms have created a stronger basis for inclusive growth.

Targeting Poverty: One successful program is the conditional cash transfer (CCT) program, which has
harnessed powerful incentives to reduce poverty and is slated for expansion. The Department of Social
Welfare, which administers the CCT, is one of the cleanest government agencies in the Philippines,
Hofman added.

China and the Region: Rising real wages in China are encouraging a shift away from labor-intensive
manufacturing, creating an opportunity for its poorer Southeast Asian neighbors to fill the gap. If the
Philippines can make itself into an attractive destination for foreign investment, its growth could
accelerate significantly.

POLITICAL LEADERSHIP A CATALYST FOR REFORM

In contrast to some of his predecessors, President Aquino has been a driving force behind controversial
but necessary structural and anti-corruption reforms, Rood said. Sustained high-level commitment
suggests that these reforms may actually have a chance to reach fruition, he added.
Public Support: President Aquino has enormous political capital from his popular support, Rood
observed. Approval ratings have held steady at 46 percent, compared to roughly 32 to 35 percent in the
Ramos and Estrada eras.

Empowering Voters: The CCT programs have had the added benefit of freeing poorer voters from the
influence of local officials and elites, Rood added. Similarly, the Aquino administration has accelerated
grants of property titles to urban residents, giving citizens greater land security.

Mixed Results on Peace Process: The Aquino administration has succeeded in gaining the trust of some
of the country’s insurgent groups, like the Islamic Liberation Front in Mindanao, but at the same time, it
has seen the peace process with others, like the communist New People’s Army, stall.

Anti-corruption Efforts: Most controversially, the Aquino government has launched high-profile
prosecutions of members of the Arroyo administration—including former President Arroyo herself,
Rood said. After encountering repeated efforts to obstruct anti-corruption efforts by members of the
Supreme Court, the Aquino government proceeded with prosecution of the Chief Justice as well.

Beyond the Election Cycle: With midterm elections coming up in 2013, foreign observers will have to
look beyond the fanfare of the election media coverage to monitor the progress of “below-the-radar”
structural reforms, Rood stressed.

"Political stability and economic development are deeply intertwined."

High-caliber experts from the government, the academe and the private sector weighed in on what lies
ahead for the Philippine economy at the Pilipinas Conference 2018 organized by independent think tank
Stratbase Albert del Rosario Institute held recently in Makati.

For starters, it’s a dire picture in terms of the government’s attempt to make economic growth inclusive,
said Calixto Chikiamco, president of Foundation for Economic Freedom. The country failed to achieve its
target of reducing poverty incidence to 17.2 percent by 2015 and instead hit 21.5 percent. More
recently, a Social Weather Stations survey revealed that 13.3 percent, or some 3.1 million families,
“experienced involuntary hunger at least once in the past three months.” This is 3.9 points higher than
the 9.4 percent recorded the previous quarter and the highest since December 2017, when it hit 15.9
percent.

Some aspects of the macro-economic picture aren’t as rosy either, according to Chikiamco. The
country’s Gross Domestic Product growth rate has slowed down due to subpar agriculture and
manufacturing numbers. Agricultural productivity is down and while manufacturing expanded by 4
percent in the third quarter of this year, it was a significant increase from the 10.1 percent jump
recorded a year ago.

In addition, the usual sources of strength for the economy are being undermined by a wide range of
factors. OFW remittances have slowed down due to, among others, the severe government deficit that
the Saudi Arabian economy is experiencing, which has affected scores of workers. Once a sunshine
industry, the Business Process Outsourcing sector is facing threats from key strides in automation and
artificial intelligence, although the development also brings with it some opportunities.

“BPO companies need to upgrade the skills of their call center agents to high-value industries—
healthcare information management, software development, and data analytics,” Chikiamco said.

Some of the fundamental weaknesses of the economy remains, if they have not worsened. Imports still
outpaced exports in the third quarter of the year, with exports declining by 2.6 percent and imports
swelling by 26.1 percent. “Although the country’s dollar reserves are still comfortable, the trend must be
reversed, and structural problems must be addressed as well,” he added.

Also, the country’s export base remains to be largely undiversified: a large chunk of it lies in the low
value-added electronics sector and its agriculture exports are further affected by slower growth,
swelling population, and high food inflation. Meanwhile, the potential of some industries—like the
mining sector that can harness the country’s rich mineral reserves—is undermined by unstable
government policies.

The reforms necessary to reverse these trends are fundamental in nature, Chikiamco said. These include
the removal of constitutional restrictions on foreign investments, the passage of the amendment to the
Public Service Act, liberating the rural land market, stabilizing the country’s mining policy, and amending
the Labor Code, among others.

The Philippine economy must therefore navigate a “new normal,” said U.P. School of Economics
professor Raul Fabella. In particular, the government must closely monitor the manufacturing sector,
which is “relatively linked to poverty reduction,” as seen in the recent growth of China and Vietnam.

Unfortunately, while manufacturing grew faster than the service sector during the Aquino
administration and up until Duterte’s first year in office, it started to slow down in Duterte’s second
year. The clamor to end to contractualization does not bode well for the industry, too, he said.

In line with this, Fabella’s recommendations include staying on track with the Tax Reform for
Acceleration and Inclusion Law 1 and not suspending the fuel excise tax increase; passing the second
TRAIN package but “with better regard for tradables;” minimizing the uncertainties in political projects,
such as sensitive topics like charter change and contractualization; and restoring property rights stability
in agriculture.
The position on TRAIN is supported by George Barcelon, Chairman of the Philippine Chamber of
Commerce and Industry, in light of the country’s economic story for 2018. On one hand, he highlighted
the “strong macroeconomic fundamentals” of the Philippine economy, especially in relation to
consumer spending, infrastructure, and capital outlays. June data for Foreign Direct Investments, a
perennial problem for the Philippines, actually surpassed targets. On the other hand, while half a million
jobs were created in 2018, stubbornly high underemployment is still an issue.

It’s the quality investments that TRAIN would attract, he said, that could address another problem for
businesses—high logistic cost, in fact the highest in ASEAN. Barcelon thus lauds the continuing
government effort to further ease the act of doing business despite some hiccups in implementation.
Lastly, he echoed the need for government to invest in the development of human skills, including the
laudable transfer of TESDA to the Department of Trade and Industry toward aligning training with
industry needs.

In all these, political stability and economic development are deeply intertwined. And because the
reforms necessary to make growth inclusive and sustainable are many, this administration’s still-
significant political capital is crucial, said ADRI president Dindo Manhit.

He added: “Our political institutions and mechanisms may have its flaws and shortcomings, but they
remain to be vital in driving change and promoting accountability and good governance. While our
economic fundamentals are strong, they need to be anchored on solid and effective leadership backed
by sound, predictable, and sustainable policies to ensure continuity of growth.”