Philippines: Year in Review 2017

Rising domestic and external demand helped place the Philippines as one of Asia’s best-performing economies in 2017, with many key sectors posting high levels of growth.

Driven in part by a rise in exports, as well as strong domestic consumption and public sector investment, the economy continued to sustain the high rates of growth seen in 2016, expanding by 6.4 per cent and 6.7 per cent in the first and second quarter, respectively, before accelerating to 6.9 per cent in the third quarter, according to official data.

At a media briefing in mid-November, Ernesto Pernia, the secretary of socio-economic planning, said the government was confident GDP growth would reach the forecast year-end target of between 6.5 per cent and 7.5 per cent, with year-to-date expansion running at 6.7 per cent.

While this falls slightly short of growth in 2016, which stood at 6.8 per cent for the year and 7.1 per cent in the third quarter, Pernia said the Philippines’ remains one of the top-performing Asian economies, second to Vietnam (7.5 per cent) and ahead of China (6.8 per cent).

 

Industry, services and construction among strong performers

Overall growth was driven by strong performances in some of the Philippines’ key sectors.

Services, which accounts for more than 50 per cent of GDP, saw its rate of growth mirror that of the broader economy, expanding by an average of 6.7 per cent over the first nine months of the year, compared to 7.5 per cent in 2016. Growth in the industrial sector, meanwhile, expanded by 7.1 per cent between January and October, 1.4 percentage points down on the previous year.

Growth in construction totalled 6.5 per cent year-on-year (y-o-y) over the first three quarters of 2017. Although this was down on the 14.9 per cent expansion recorded over the same period in 2016, the sector looks set to benefit from accelerated public spending on infrastructure, under the government’s new Build, Build, Build programme. Overall state spending rose 10 per cent y-o-y over the January-to-October period, with a large proportion directed towards infrastructure development.

Another key component of the economy, the business process outsourcing (BPO) sector, maintained a steady flow of investment, though the capital stream was tempered by caution regarding external factors. These include a slowing of the economies of some key markets and concerns about US pressure on BPO clients to bring their businesses back onshore.

Though competition in the sector is increasing, the country’s central bank, Bangko Sentral ng Pilipinas (BSP), estimated in mid-November that the BPO industry would generate revenues of US$24.5 billion in 2017, up on the US$22.9 billion earned in 2016.

 

External factors also had a negative impact on agriculture in 2017. While growth reached 4.9 per cent in the first quarter and 6.3 per cent in the second, adverse weather conditions saw this rate fall to just 2.5 per cent in quarter three, and expectations are that growth in the last three months of the year will also be affected.

 

Rates, inflation hold steady

The economy’s strong showing throughout 2017 has been supported by the relatively low cost of funds.

On November 9 the BSP decided to hold its key benchmark rate steady at 3 per cent for the seventh meeting in a row. The bank’s overnight lending rate remained at 3.5 per cent and the overnight deposit rate at 2.5 per cent.

While maintaining its accommodative lending rates, the BSP may look to marginally tighten monetary policy in the new year, having flagged a modest increase of inflation in its forecast for 2018.

The country’s year-end inflation expectations are steady at 3.2 per cent, while the bank expects prices to rise by 3.4 per cent in 2018, with higher energy prices tipped to put upward pressure on the consumer price index.

 

Asean chair leads to new business agreements, tax reforms stimulate spending

The Philippines was given a further boost in 2017 by holding the chair of Asean.

At the most recent Asean summit in November, the Philippines committed to a series of bilateral agreements with countries including the US, Russia, Japan, Canada and Australia. It also signed 14 cooperation agreements with China, with deals ranging from infrastructure cooperation to the development of industrial parks.

Another key economic development was the proposed overhaul of the tax system. The Tax Reform for Acceleration and Inclusion (TRAIN) looks likely to come into force in 2018, after being drafted and tabled before the Parliament in 2017.

Among the changes is a broadening of the value-added tax (VAT) base to include more goods and services, annualised increases in fuel costs, higher excises on vehicles and taxes on sugared products.

Offsetting these revenue measures are steps streamlining tax collection, including the self-employed being required to make payments annually, rather than quarterly; raising the yearly VAT exemption threshold for small businesses from 1.9 million pesos (US$465,000) to three million pesos (US$734,000); and lowering personal income tax for many Filipinos by raising bracket ceilings.

While the widening of the scope of VAT may impact inflation in the shorter term, the tax breaks on offer for many low- and middle-income earners could further stimulate domestic spending, supporting economic growth after the initial effects of higher goods and services levies have been assimilated.

These tax changes, along with strong private sector activity, and government plans to increase infrastructure and development spending, are expected to contribute to further growth, with the BSP forecasting GDP will expand by 7 per cent to 8 per cent per annum through to 2022.

 

This Philippines economic update was produced by Oxford Business Group.

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