The Philippines: Economy slowing but steady

The Philippines’ economy appears to be slowing, with most analysts revising the country’s growth predictions as weakening demand in global markets undermines its export trade. However, given the Philippines’ sound fiscal reserves, there are few concerns that economic expansion will actually stall.

On November 22, the World Bank issued its latest update for the East Asia region, with the international lender lowering its growth forecasts for the Philippines’ economy. Six months ago, the World Bank projected GDP to expand by 5% this year and 5.4% in 2012, but citing rising global uncertainties and an easing of the flow of investments, the bank revised its estimates to 4.2% and 4.8%, respectively.

Though the bank has predicted a slowing of economic activity, there remain a number of factors that should help insulate the Philippines from any excessive decline, including political stability, the strong flow of remittances from overseas Filipino workers and a solid fiscal situation.

“The Philippines is well-positioned to absorb any new financial shock that might evolve from the current turmoil. The country is well insulated from the global financial crisis owing to a significant improvement of macroeconomic fundamentals and to some extent regulatory reforms already in place following the Asian financial crisis of 1997-98,” the bank wrote in its assessment.

However, offsetting these advantages, the World Bank noted that the Philippines was struggling to match its regional neighbours in attracting foreign direct investment, with just $838m flowing into the economy in the first six months of the year, a figure the report said equalled only 1% of GDP.

The Philippine government remains somewhat more optimistic over the outlook for growth, though the National Economic and Development Authority (NEDA) has also recently lowered its expectations. The agency is now predicting that GDP will expand by between 4.5% and 5.5% this year, down from earlier projections of 8%, and by 5% to 6% in 2012.

Though the economy’s rate of growth is expected to ease, the Philippines continues to fare well compared with its neighbours, eclipsed only by Indonesia, which is expected to see GDP jump by 6.4% in 2011 and 6.3% next year. Malaysia’s economy will grow at much the same rate as the Philippines, while Thailand’s 2.4% increase in GDP is a far cry from the 4.2% Manila will enjoy, according to World Bank projections.

A recent report by Fitch ratings agency lends further support to the World Bank’s position that the Philippines has developed a resilience to external economic shocks. In the report, entitled “Emerging Asian Sovereign Pressure Points”, the organisation wrote that the country’s solid foreign exchange reserves would serve as a buffer against any sharp deterioration in global market liquidity.

In mid-November, the Bangko Sentral ng Pilipinas (BSP), the country’s central bank, issued a statement placing total international reserves at $75.8bn as of the end of October, while the balance of payments was a healthy $9.9bn for the year to date.

However, while the balance of payments figure for the first 10 months of the year is strong, warning flags were raised over October’s performance. The surplus for that month dropped by 92.2% from the $2.73bn of October 2010 to just $208m, according to BSP data.

The main culprit for this decline is the slowdown in exports, with the National Statistics Office (NSO) reporting on November 10 that overseas sales fell by 27.4% year-on-year for September, mainly due to a sharp downturn in the export of electronics goods, which plunged by 47.9% for the month.

On November 21, trade secretary Gregory Domingo acknowledged that weakening overseas demand for electronics and semiconductor products, a result of the economic turbulence in key export markets, was hurting the Philippines’s trade figures.

“This would all depend on how the electronics sector would fare in the last quarter,” he said of the chances year-end export figures would be in positive territory. “Given what’s happening to electronics now, we may most likely get zero growth.”

While exports may be easing, remittances from overseas workers remain high, with up to $20bn expected to flow into domestic coffers this year, a 7% increase from 2010 figures. Though a downturn in the global economy may drain off a bit of this flow, it is still expected that payments from expatriate workers will continue to rise, offsetting at least some of the weakening demand for the country’s exports.

With the government vowing to increase state expenditure on investment and infrastructure projects in 2012 after falling well short of spending targets this year, more funds should be flowing into the economy over the coming 12 months. Even if some of the world’s leading economies slip back into recession, this increased public spending should help sustain domestic economic growth.