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Philippines Growth Racing Ahead of Neighbors

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The Wall Street Journal: The Philippines’ economy is shedding its reputation as a laggard and outpacing others in the region—with the fastest growth rate among major economies in East Asia after China. The country notched growth last year of just over 6%, and the central bank targets growth of 7% to 8% in 2015. That compares with 0.9% in Thailand and 5% in Indonesia in 2014. For years, the Philippines was viewed as a sluggish economy marred by graft and bureaucratic inefficiencies.

President Benigno Aquino III, who came to power five years ago, has launched an anticorruption corruption drive and has focused on public spending to help lift growth.

The government is planning to spend $13 billion on infrastructure this year, up from $2.8 billion in 2010, and has earmarked $18 billion for 2016. Already this year, the government has approved six major projects with a price tag of just under $8 billion, including a 400-mile rail line connecting the capital of Manila to the southern province of Albay.

The Philippines has other advantages. It has a growing working-age population that speaks English, with more than 60% of the population between the age of 15 and 64. There’s a large overseas workforce that sends huge amounts of money home each month. And unlike many credit-addicted economies in the region, household debt levels are among the lowest in Asia.

“It’s going to be one of those countries that’s likely going to grow just because they’re getting a few things right, and those few things right are actually quite important,” says HSBC  economist Trinh Nguyen, referring to the Philippines’ low debt levels, improving governance and demographics. “Relative to everyone, I think they have a good story.”

All of this has helped to stoke demand, especially as inflation remains benign because of cheap oil prices. Last year, private consumption generated more than 60% of growth in gross domestic product, driven by a 5.4% bump in consumer spending and a 2.8% rise in employment.

Remittances, which make up about 10% of GDP, are crucial. Low wages at home have pushed many Filipinos to look abroad for work. Remittances have been growing at about 7% annually since 2009, writes ING. Data released last week showed remittances in March rose 11% on year to $2.1 billion, the fastest pace in six years.

There are risks to the Philippines’ outlook.  Exports contracted in the first quarter because of weak demand and a relatively strong Philippine peso. The currency has gained more than 7% against the euro this year, which led to slimmer remittances in January and February.

Slowing remittances are the central bank’s “biggest concern,” Ms. Nguyen wrote in a research note. About 15% of the Philippines’ remittances originated from the eurozone in 2014, according to Barclays BCS.

Another risk is the country’s dependence on foreign investment in stocks and bonds, which can quickly be yanked out of the country if the U.S. raises interest rates later this year. That could force the Philippines to follow suit, stunting growth.

Portfolio flows for 2014 were $2.5 billion compared with just $800 million of direct investment, which is harder to pull out, according to data from Barclays.

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