Economic Update

Published 26 Dec 2014

Despite declining from the highs of 2013, the Philippines’ economy showed marked resilience in 2014, as it battled back from the impact of a devastating typhoon late last year to give a strong overall performance.

Economic growth was driven by strong foreign direct investment (FDI), which surpassed government targets well before the end of 2014, alongside remittances and expansion in the real estate, business process outsourcing (BPO) and mining sectors.

Although the Philippines continued to outperform regional neighbours its economic expansion eased in 2014. GDP growth reached 5.3% in Q3 2014 − its slowest rate in three years − down from 7% year-on-year (y-o-y) due to weak government consumption and a decline in infrastructure spending. The World Bank estimates growth of 6.4% in 2014 and 6.7% in 2015, up from 7.25% in 2013. The IMF and analysts see growth around or below the 6% mark.

Remittances, which rose 6.2% to $12.7bn during the first half of 2014, continued to drive macroeconomic growth, together with accommodative monetary and financial conditions, according to an IMF report.

Industry leads the way

Manufacturing made the biggest contribution to GDP growth in the third quarter, despite slowing to 7.2% from 8.9% growth a year ago. Socioeconomic Planning Secretary Arsenio Balisacan told local media that manufacturing was expected to continue leading growth in 2015, boosted by a large inflow of additional capital for projects.

Mining also performed well, with exports of minerals rising to P2.09bn ($46.8m) during the first half, almost matching the entire export total for 2012 of P2.33bn ($51.86m). Growth in nickel mining surged, following a decision by Indonesia at the beginning of the year to enact a ban on unprocessed ore exports. The move enabled the Philippines to become a top supplier of nickel laterite ore to Chinese producers, with exports to the Asian giant jumping by 26% between January and August.

Construction boom

The construction industry grew strongly in the year, expanding by 11.9% in the third quarter, compared to 3.4% a year ago. The number of construction permits issued in the second quarter rose by 11% y-o-y to 32,729 due to a surge in residential projects, according to the Philippines Statistics Authority.

The government has shifted efforts from relief to reconstruction in areas affected by Typhoon Yolanda, releasing P32bn ($720m) up to May. Physical works ramped up in the second half, alongside the National Economic and Development Authority’s plans to construct one million homes for areas hit by the typhoon.

Real estate consultancy CBRE reported that low interest rates, aggressive infrastructure improvement efforts, political stability and stable inflation had helped encourage investment in the real estate sector.

The industry boom also comes on the back of sustained growth in tourism and business process outsourcing (BPO) activities, which is fuelling demand in the office segment. Employment in the BPO industry hit an all-time high in August, reaching more than one million employees, following a decade of strong growth that has seen revenues and employment expand ten-fold.

Question marks over AEC

The coming year will see the Philippines and its Asean neighbours – Brunei Darussalam, Laos, Vietnam, Cambodia, Singapore, Indonesia, Thailand, and Myanmar – edge closer to a regional milestone as they prepare for integration under the ASEAN Economic Community (AEC).

The AEC will operate as a single market and production base to develop into a competitive economic region, similar to the European Union (EU), East African Community (EAC), and Gulf Cooperation Council (GCC), offering the benefits of free movement of goods, services, investment, skilled labour and freer flow of capital.

The deadline has been set for end-December 2015, but opinions vary as to whether the process of integration will be finalised next year. A report published by the US Chamber of Commerce in September found respondents surveyed were sceptical about whether the targeted 2015 launch date would be met, with few expecting the AEC to be up and running before 2020. Stakeholders have expressed doubts about ASEAN integration, arguing cheap imports may harm local industries, especially the agricultural sector.

For now, the Philippines homegrown industries are expected to keep the domestic economy on a sound footing into 2015 and beyond.