Philippine Economic Growth Looks Strong in 2015
The Philippines has become one of the fastest growing economies in Asia, with an annual GDP growth rate of 6.1 percent in 2014 – the second highest in the Asia-Pacific region after China. This healthy growth is due to strong economic fundamentals and a faster than expected GDP growth of 6.9 percent in the fourth quarter of 2014.
The strong fourth quarter growth led J.P. Morgan to revise its 2015 GDP growth forecasts for the Philippines to 6.4 percent instead of its earlier projection of 5.4 percent. According to J.P. Morgan, “The key highlight of the GDP print was the recovery of government spending in the fourth quarter which assuages concerns regarding the potential pull factor from the government infrastructure spending bottlenecks”.
GDP growth had been lower in the third quarter of 2014 due to a lack of government spending, which was mainly due to legal challenges that slowed down certain state funded projects. The chief legal challenge was a ruling by the Supreme Court in July that said a proposed government economic stimulus plan would violate the country’s constitution. However, earlier this month, the Supreme Court revised its earlier judgment, thus paving the way for fewer prohibitions on the funding of many types of projects which use government funds.
Anti-corruption programs show success
An additional reason for the decrease in spending by the Philippine government was the recent anti-corruption crackdown by Philippine President Benigno Aquino, which resulted in civil servants delaying a range of projects. This led to 15 percent of planned state spending, about US$1.85 billion, being unused in the third quarter of 2014. However, this was only a short term decrease and, in the long-run, the crackdown on corruption should lead to a more transparent business environment as well as more equitable economic growth.
Benefits are already being reaped from the country’s anti-corruption campaign in the form of credit rating upgrades by major credit rating agencies. Moody’s recently upgraded the government’s foreign currency shelf rating to (P)Baa2. Additional reasons for the upgrade included the Philippines’ ongoing debt reduction and improvements in fiscal management, as well as favorable prospects for strong economic growth and limited vulnerability to common risks such as excessive reliance on an economically slowing China.
Investor demand has helped make the Philippine peso the best-performing currency in the last three months of 2014, when it rose 1.5 percent against the already strengthening dollar. The peso was the only currency in ASEAN to strengthen against the dollar during this period. Standard Chartered has said that it expects the peso to settle to a rate of 45 pesos to the dollar by mid-2015 because “inflationary pressures [will] have eased, most notably from energy. Tighter monetary conditions should rein in inflationary pressures for now”.
An important result of the Philippines’ strengthening fiscal management should be easing inflation, this will be helped further by the current low oil prices and portfolio investments that will feed off the recent credit upgrade. According to BofA Merrill Lynch Global Research estimates, every 10 percent drop in oil prices leads to a 0.3 percent uptick in Philippine GDP, a -0.45 percent decline in inflation, and 0.2 percent increase in the country’s current account balance.
Another key reason for the Philippines strong fourth quarter growth was the increase in the country’s exports – shipments rose about 12 percent in 2014. Foreign investment increased as investors looked to diversify to cheaper destinations as wages in China continue to increase. Businesses have also started seeing the Philippines as an alternative to Thailand because of the latter’s political instability and its ailing King.
The Philippine economy’s continued expansion has also been driven by the business processing outsourcing (BPO) sector and the steady inflow of remittances. Filipino employees are particularly attractive to BPO employers because they tend to be very fluent in Western-accented English. The large Filipino diaspora contributes greatly to the country’s favorable balance of payments and helps empower the country’s rising middle class.
With a multitude of benefits and positive results from reforms spearheaded by Philippine President Aquino, the country should continue to be one of the fastest growing countries in ASEAN as well as the one of the most attractive for FDI in the coming years.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
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