Although rocked by the worst typhoon in its history late last year, the Philippines was one of Asia’s 2013 success stories, maintaining strong macroeconomic fundamentals and steady GDP growth.
While damage from Typhoon Haiyan pushed up inflation and darkened the medium-term economic forecast, the Philippines benefited from a significant increase in foreign direct investment (FDI) and three credit rating upgrades during the year.
The Philippines was the fastest-growing economy across Asia in the first quarter of 2013, with GDP rising by 7.8% year-on-year (y-o-y), thanks to gains in manufacturing and construction. The three-month expansion marked the highest quarterly growth rate since President Benigno Aquino took office in 2010 and contrasted sharply with a slowdown elsewhere in the region.
The rapid pace of expansion continued, as the nine-month period from January to September saw a y-o-y increase of 7.4%, exceeding the government’s target of 6-7%. However, growth prospects dimmed in the aftermath of Typhoon Haiyan, which killed more than 6000 people and left millions homeless when it hit the Visayas region on November 8. Government estimates in late November put damage, mainly to agriculture and infrastructure, at $559m.
Inflation reached a two-year high of 4.1% in December 2013, as food prices increased as a result of the typhoon. The disaster prompted economists from Barclays and JP Morgan Chase to cut their GDP growth expectations for the year from 7.2% to 6.8% and 7.1% to 6.9%, respectively.
One of the most important developments of the year was an increase in FDI, an area where the Philippines has lagged its Asian neighbours. Net FDI inflow jumped 33% y-o-y in the first nine months of 2013 to reach $3.11bn, ending the period with a 141% annual change for September. Equity placements for the month reflected broader annual trends, with financing sourced from the US, UK, Japan, the Netherlands and Hong Kong. The majority of funds went into the manufacturing, real estate, financial, insurance and mining sectors.
Growth in FDI is expected to continue following Fitch’s decision in March to upgrade the Philippine’s economy to “BBB-” from its previous “BB” status, which took the country into investment grade territory. Standard & Poor’s followed suit with a credit upgrade in May, while Moody’s also moved to upgrade the sovereign rating one level in October.
Public-private partnership (PPP) projects for the development of infrastructure are set to drive foreign investment. The Aquino administration is looking to roll out PPP deals with a value of at least $4bn over the next several years, including the $615m Metro Manila Skyway, the $812m Cavite-Laguna Expressway (Calax), and the $1.39bn LRT-1 light rail expansion project.
Investment in public works, as well as a housing shortage, is boosting demand in the construction sector, which grew rapidly in 2013 and is expected to continue to do so this year.
In November, Augusto Manalo, the president of the Philippine Contractors Association (PCA), said construction projects in 2014 were set to total PHP400bn ($9.17bn), topping projections for 2013 of PHP380bn ($8.71bn). Manalo added the value of work in the construction sector reached PHP287bn ($6.58bn) for the first six months of 2013, up 23.7% on the same period in the prior year.
Large infrastructure projects will help boost GDP in 2014 and beyond, according to Barclay’s, which in early December said the Philippines and Malaysia would lead expansion in the ASEAN region up to 2015.
In early January, Florencio Abad, the secretary of the Department of Budget and Management, said growth would hit the upper half of the government’s 6.5-7.5% target range for 2014, thanks in part to reconstruction efforts in the wake of the typhoon.
The rebuilding, along with an increase in foreign remittances and export growth, will support expansion of 7% this year, according to local invest bank First Metro Investment Corporation (FMIC), while Citibank expects GDP to rise by 7.3%. FMIC forecasts inflation to hover between 3.8 and 4% this year, well inside the BSP’s target of 3-5%, with foreign remittances projected to increase 6-7%.
The Philippine peso should average somewhere between 43 and 46 against the US dollar, the FMIC added, while exports are expected to rise by 6-10% and imports 8-12%.
Reconstruction in the aftermath of Typhoon Haiyan will be costly for the Philippines and take time. However, the country’s growing reputation as a prime investment destination, combined with higher public spending on infrastructure and increased domestic demand, should help the Philippines’ economy to flourish in 2014.
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