Philippines

Major macro economic indicatorS

(e): Estimate (f): Forecast

RISK ASSESSMENT

Growth with persistent downside risks 

Economic growth should come closer   to its pre-pandemic levels in 2022, but should remain fragile and uncertain due to frequent tight restrictions, especially in Metro Manila, which accounts for a third of the economy. The government is targeting an 80-90% vaccination rate before reopening the borders. However, a slow vaccination pace (less than half of the population was fully vaccinated as of 1 January) indicates the restrictions are likely to linger into at least early 2022. Household consumption (74% of GDP) would thus recover gradually through 2022, supported by an increase in overseas remittances (9.7% of GDP, the U.S., Malaysia and South Korea being their main sources). However, household consumption should remain constrained also by weak labour market prospects (the unemployment rate increased to 8.9% in September 2021) and a low participation rate (59.8% in Q2 21). Ongoing reforms should address the labour market’s structural weaknesses:  the National Employment Recovery Strategy would harmonize employment, improve social protection and training. Exports should remain robust, especially for electronic products, and benefit from recoveries in major trading partners such as China, the U.S. and Japan. Inflationary pressures, driven by elevated food and energy prices, should be transitionary and are likely to ease through 2022 – the Central bank (BSP) forecasts inflation to return within the 2-4% target at 3.2-3.3%. The return of policy normalization in the U.S. could prompt the BSP to start tightening its monetary policy by the end of the first half of 2022. Business confidence should gradually improve and FDI inflows should experience a recovery. Public infrastructure with Duterte’s flagship “Build, Build, Build” program should probably continue to drive investments but the pre-election spending ban covering infrastructure projects   will take effect in early 2022 and could delay some projects in the pipeline.

Budget deficit to improve, while the current account deficit will reappear 

The budget deficit is set to narrow as revenues should improve, supported by a stronger economic recovery. The government expects the budget deficit to narrow from 9.6% to 7.5%. Most of the budget is allocated to social services (nearly 38%), with a focus on education, infrastructure and social welfare. Most of the deficit financing (77%) is sourced from the domestic market.

 
The balance of payments strengthened over the pandemic, showing a current account surplus that supported an appreciation of the peso and the accumulation of reserves. However, it is set to normalize. The current account is set to experience a slight deficit due to a higher trade in goods deficit, only partially offset by the further recovery in overseas remittances. Despite a strong external demand for electronic products, the trade in goods deficit should widen due to an expected increase in imports, as domestic demand should gradually recover and commodities remain expensive. Tourism (12.7% of GDP in 2019) would slowly recover with the vaccination rollout. The free-floating peso is expected to weaken, however, Philippines’ reserves are ample and stood at 9.4 months of imports as of August 2021, and should give some buffer to the authorities against a depreciation of the currency.

Incoming elections could threaten or delay reforms and policymaking 

Rodrigo Duterte finishes his only six-year term in May 2022 and won’t be eligible to run again under the Philippines constitution. His agenda was mostly centred on the fight against drug trafficking, health, education and infrastructure. The pandemic has, however, slowed his agenda, particularly in infrastructure – only 11 out of 119 projects under the “Build, Build, Build” programme had been completed by November 2021. Ferdinand Marcos Jr who runs for presidency, adopted Sara Duterte, Rodrigo’s daughter, as his vice-presidential choice. Duterte will bring her father’s legacy, mitigating the Philippines’ former dictator son’s unpopularity among voters and activists who recall the 1972 martial law.

On the external front, the new government might possibly tighten its stance towards China and cancel several projects backed by the Chinese government. While the Chinese government intended to contribute to an overall equivalent of USD 24 billion in form of soft loans and direct investments, only a few were materialized (three are under construction). Furthermore, Chinese vessels intensified activity in disputed territory claimed by the Philippines in the South China Sea. This leaves numerous potential candidates to challenge Duterte’s relaxed policy stance towards China.

Last updated: February 2022