Philippines Year in Review 2016

Accelerated growth, backed by rising spending on infrastructure and domestic demand, were the hallmark of the Philippines’ economy in 2016, though offshore political and economic uncertainties could darken prospects for 2017.

The Philippine economy was a top performer in South-east Asia in 2016, according to a November report from ratings agency Standard & Poor’s (S&P), due to its growing middle class, a business process outsourcing (BPO) boom and expansionary fiscal policy that emphasises public infrastructure.

GDP growth was on track to reach 6.5%, up from the 5.9% posted in 2015, according to the report.

Looking forward, 2017 could be marked by greater volatility across the region, with interest rates likely to rise and foreign exchange rates set to be more fluid. As a result, S&P expects GDP growth to ease marginally to 6.3% next year and 6.2% in 2018.

The IMF had a more positive outlook, however. According to the most recent “World Economic Outlook” report, released in October, GDP was projected to rise by 6.4% this year, accelerating to 6.7% in 2017 and 6.8% the following year.

Modest warming of inflation

Inflation remained subdued through the year, assisted by weaker fuel costs. As of the end of October, consumer inflation was running at 2.3% – well within the 2-4% target set by the central bank, Bangko Sentral ng Pilipinas. The bank was expecting a dip in the final months of the year, as slight declines in rice, power and fuel prices were factored in.

However, inflation is set to accelerate next year on increased economic volatility, with the IMF forecasting inflation will rise to 3.4% in 2017 before climbing to 3.5% by 2019.

Depreciation of the peso, which fell by nearly 3% against the US dollar in the fourth quarter, could feed into inflation, pushing up the cost of imported goods and services. As in other emerging markets, depreciation is being driven in part by speculation that the US Federal Reserve will increase benchmark interest rates in 2017.

Another factor that could affect inflation is commercial rental costs, with high demand for office space and narrowing vacancies in the latter part of the year driving prices well above the headline inflation rate, accor­ding to a report released at the end of November by property management firm JLL.

Much of this demand stems from the BPO industry, which continued to post strong growth throughout 2016. Further demand growth is expected, with the Asian Development Bank predicting the industry will be one of the strongest performers in the Philippine economy in 2017.

The sector does, however, face some uncertainty in the short to medium term, with questions over the possible impact of the incoming administration of President-Elect Donald Trump on the US outsourcing market.

With up to 70% of the sector’s $21bn-22bn in annual revenue stemming from US clients, a downturn in the US economy or a policy shift by the new administration to bring jobs state-side, as promised during the election campaign, could dampen growth forecasts.

In mid-November ratings agency Moody’s echoed these concerns, citing campaign commitments to reduce imports, lower outward foreign direct investment (FDI) and restrict immigration, which could have a carry-through effect on remittances.

Moody’s nonetheless maintained the country’s credit rating at “Baa2,” one level above investment grade, with a stable outlook.

The Duterte effect

The election of President Rodrigo Duterte in May is also set to have far-reaching effects on the national economy, with the new president promising to ramp up spending on infrastructure, streamline bureaucracy and encourage investment in industry through tax reductions.

Easing regulations on foreign investment – a process that began earlier in the year – was one of the policies proposed by Duterte ahead of coming to office.

In June 2015 the administration of then-President Benigno Aquino III removed a number of industries, including lending firms, investment houses and financing companies, from the foreign investment negative list.

The new government has vowed to go further, opening up more sectors to foreign ownership as part of its programme to make the Philippines one of the top FDI destinations in South-east Asia by 2022.

In another policy signal from the new administration, infrastructure comprises a significant proportion of the 2017 budget, signed into law by President Duterte at the end of December, with a total allocation of P860.7bn ($17.3bn), or 5.4% of all spending. This represents a 13.8% increase in funding from the previous budget.

Although increased spending on infrastructure traditionally goes hand-in-hand with fiscal deficits, the strong state of the economy and improved revenue-generating measures suggest government debt levels will actually ease marginally over the coming years.

According to IMF estimates, government debt will reach 33.4% of GDP in 2016 before declining to 32.4% next year and 29.1% by 2021, though these levels could be affected by further shocks from the global economy.

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