Rajiv Biswas, Asia Pacific Chief Economist for IHS Markit
- After President Duterte’s first year in office, the Philippines economy is continuing to grow strongly. IHS Markit forecasts that the Philippines economy will grow at a pace of 6.4% in 2017, followed by 6.3% growth in 2018.
- The Duterte administration’s latest economic dashboard is flashing a healthy green, with GDP growth of 6.4% year-on-year (y/y) and exports up 18.5% y/y in Q1 2017, while the headline CPI inflation rate eased to 3.1% in May at around the mid-point of the central bank’s target range. The latest Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) for May produced by IHS Markit rose to 54.3, continuing to signal robust expansion in the manufacturing sector.
- One of the main economic reform thrusts of the Duterte administration’s economic policies is a major push to boost infrastructure spending. The Duterte administration has announced that it plans to boost infrastructure spending from 5.4% of GDP in 2017 to 7.4% of GDP by 2022, with total spending of Peso 8.4 trillion on infrastructure planned over the 2017-2022 period.
Economic Progress in President Duterte’s First Year in Office:
An important achievement of the incoming Duterte administration in the first year in office has been to provide a smooth transition for the macroeconomic management of the Philippines economy. The stable and credible economic management has provided policy continuity and has helped to reassure domestic and foreign investors that sound fiscal and monetary policies will continue to be implemented. During the election campaign, international investors had been concerned that Duterte’s election manifesto lacked detail about economic policy reforms, but since taking office he has appointed a strong economic frontbench and reassured financial markets about his administration’s sound economic policies. The performance of the economic team has been sound in the first year, giving confidence about the macroeconomic management and economic policy reform agenda. President Duterte’s decision to appoint Nestor Espenilla Jr. as the incoming central bank governor to replace outgoing highly respected BSP Governor Tetangco who has completed two terms in office has also met with approval from financial markets. Espenilla has had a long career as a senior official in the BSP, having served as Deputy Governor of the BSP for many years. He is expected to bring continuity and stability to the BSP in its management of the Philippines monetary system and banking sector.
One of the main economic reform thrusts of the Duterte administration’s economic policies is a major push to boost infrastructure spending. The Duterte administration has announced that it plans to boost infrastructure spending from 5.4% of GDP in 2017 to 7.4% of GDP by 2022, with total spending of Peso 8.4 trillion on infrastructure planned over the 2017-2022 period. The ability of the Duterte administration to deliver such large increases in infrastructure spending has been helped by the tremendous progress made by successive Philippines governments since 2004 in the task of implementing fiscal consolidation. The Philippines government debt-to-GDP ratio declined to a new record low of 34.6% in 2016, helped by the rapid pace of GDP growth and prudent fiscal management. Since 2004, the Philippines government debt-to-GDP ratio has more than halved, making the Philippines one of the most successful countries in the world in achieving prudent fiscal management under successive administrations during the past two decades. This has reflected a combination of sustained sound fiscal policy as well as rapid economic growth, and gives the Duterte administration fiscal space to boost infrastructure spending. With the Philippines economy having achieved sustained strong economic growth of over 6% per year since 2012, this has also allowed room for increasing infrastructure spending while still reducing the government debt-to-GDP ratio.
Over the next 12 months, significant increases in infrastructure spending are expected, with total infrastructure spending of Peso 1.13 trillion targeted for 2018, with transport and social infrastructure being key priorities. Improving infrastructure is very important for boosting the nation’s industrial and export competitiveness, as the Philippines is competing for foreign direct investment with other ASEAN countries like Malaysia, Thailand and Singapore which have invested heavily in high quality infrastructure.
The Duterte administration is also targeting tax reforms, with the new comprehensive tax reform package aiming to improve the efficiency of the tax system, providing some personal income tax reductions while aiming to increase revenue raised through indirect taxation. Reform of the VAT tax is planned, with significant scope for improving the efficiency of the VAT tax system in the Philippines by simplification and elimination of some exemptions. This would give scope for lowering the VAT tax rate, which would help to make the overall VAT system easier to administer and reduce complexity.
After one year under the Duterte administration, the Philippines economy is continuing to perform strongly, with GDP growth forecast by IHS Markit to be 6.4% in 2017 and 6.3% in 2018, maintaining the high growth trajectory that has been recorded since 2012. The Duterte administration has provided stable macroeconomic management and credible policy reforms, allowing the strong growth momentum of the Philippines economy that they inherited to continue. Key positive economic reforms have been the implementation of budget measures to boost infrastructure spending and plans to improve the efficiency of the tax system. The IT-BPO industry and overseas worker remittances continue to be important drivers of the sustained strong performance of the economy, with private consumption and the construction sector also showing strong growth. The near-term economic outlook remains positive, with the latest Nikkei Philippines Manufacturing Purchasing Managers’ Index for May produced by IHS Markit continuing to signal robust expansion in the manufacturing sector. Strong growth in manufacturing output and new orders have been underpinned by buoyant domestic demand growth. The Philippines GDP growth rate for Q1 2017 rose by 6.4% year-on-year (y/y) and was up 1.1% quarter-on-quarter, led by services sector growth of 6.8% y/y and industrial sector growth of 6.1% y/y.
A key challenge facing the Duterte administration continues to be the law and order situation, due to the high crime rates in major cities as well as the insurgency in Mindanao, where President Duterte has declared martial law. Another major medium term challenge is the high share of the population that are still living in poverty, with President Duterte having given a high priority to social expenditure to try to lower poverty rates during his remaining term in office.
Among the key challenges for the Duterte administration over the next five years will be to make the Philippines a more attractive hub for manufacturing investment, in order to make the manufacturing sector an important source of export growth as well as generating more manufacturing sector jobs. Although foreign direct investment inflows into the Philippines have been gradually improving over the past three years, the level of foreign investment inflows still remains low compared to other ASEAN emerging markets such as Indonesia and Vietnam. Further economic liberalization to encourage greater foreign investment into the services sector and infrastructure development should be important priorities. Another important industrial development strategy should be to diversify the hubs of regional economic growth away from Manila and encourage more dynamic industrial development in other major cities.