Evaluation, Studies and Prospective Department of the Philippines
Evaluation, Studies and Prospective Department of the Philippines
The Philippines is characterised by the following 4 strengths:
You will find below a summary and a detailed analysis of the perspective of the Philippines realized by BPI FRANCE.
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SUMMARY:
Risk evolution: Stable
Political environment and governance:?
Environment and climate policy:
STRUCTURE OF EXCHANGES
The country has suffered the full brunt of the consequences of the health crisis, recording a historic contraction in its GDP of -9.5% in 2020, due in particular to the impact of measures containment on the activity.?
In 2021, GDP growth reached +5.3%. This moderate recovery was limited by a weak rebound in private consumption (+3.7% following a fall of -7.9% in 2020), GFCF (+12% against a fall of -27.5% in 2020), and net exports (+26.5% following a fall of -35.4% in 2020), mainly caused by the extension of sanitary restrictions. Public investment in infrastructure, on the other hand, rebounded strongly (+44.6% during the first eight months of 2021).?
In the wake of the rebound in activity, the unemployment rate has started to fall (to 7.8% after an explosion of 10.4% in 2020), while still remaining above the pre-pandemic level (5.1% ). Household income was able to benefit from the resilience of remittances from foreign workers (record level in 2021).?
From a sectoral point of view, the extent of the increase in activity in the construction sector (+9.8%) or wholesale and retail trade (+4.3%) remained limited. Indeed, these sectors have not returned to their pre-pandemic level of activity1, due to the reintroduction of health measures and successive waves of contamination in 2021. The ban on international flights and the closure of borders, still in force in 2022, deprived the country of tourism revenue (2 billion USD in 2020 against 9 billion in 2019). The tourism sector plays a crucial role in the Philippines, accounting for nearly 22% of GDP, a level significantly higher than other Asian countries.
Following a recovery hampered by the confinements in 2021 and in the face of forecasts for the easing of health restrictions for the year 2022, the various forecasting institutes are counting on growth of between +5.9 and +6.5%, thus allowing GDP to return to its pre-crisis level (but not its pre-crisis trend). Activity would be driven in particular by the “Build Build Build” program, with investments in public infrastructure.?
Private consumption (68% of GDP), should increase by +5% in 2022 according to Fitch. However, with the rebound in inflation, real wages would remain 4% below their pre-pandemic level, and private consumption growth would be limited to the mechanical rebound effect of a year much less subject to health restrictions than the previous one. The pandemic has largely halted the poverty reduction trend of recent years in the Philippines. The incidence of poverty increased to 23.7% in the first half of 2021, resulting in an additional 3.9 million Filipinos living below the poverty line2. The objective set by the government to reduce the poverty rate to 14% by 2022 seems difficult to achieve.
After a rise in inflation in 2021 (+4.3% y/y), driven by the rise in food prices), the Central Bank (BSP) announced at the end of 2021 an estimate of the level of inflation at +3.2 % in 2022, again falling within the criterion set by the BSP of inflation between 2 and 4%. However, the impact of Typhoon Rai - having destroyed many agricultural plantations - on the one hand and the increase in the price of raw materials on the other hand, should lead to higher than expected inflation, and encourage the BSP to increase its policy rates in 2022.
The health crisis has led to an increase in defaults on personal and commercial loans, and a stagnation in new credit applications. The non-performing loan (NPL) ratio increased to 4.5% in August 2021 from 2% in 2019. The level of NPLs is expected to stabilize as the economy recovers. Faced with this deterioration in the quality of assets, the banking system increased its capital in order to strengthen its solvency. The capital adequacy ratio (CAR) increased to 17.2% in June 2021 (from 16.3% at the end of 2019), well above the minimum threshold of 10% set by the BSP.
Average GDP growth by 2025 is estimated by Fitch at +6.3%, and would be driven by investments within the framework of “Build” as well as the resilience of private consumption (+4.9%). The Covid-19 crisis would nevertheless have lasting medium-term effects on the tourism sector – which would only return to its pre-pandemic revenue level in 2023 according to the BSP. The IMF predicts a return to the pre-pandemic unemployment level in 2025 (5.1%), in particular thanks to job creation generated by infrastructure spending as part of the "Build" project consisting of a few thousand construction projects. infrastructure throughout the country (roads, bridges, airports, railways, ports, hospitals, schools etc). These projects are intended to help reduce production costs, facilitate mobility, develop and improve incomes in rural areas, and would create 1.7 million jobs by 2022.
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2. PUBLIC FINANCES
Public spending, already on the rise pre-pandemic, continued to increase in 2021 (27.6% of GDP in 2021 compared to 21.6% in 2019). As public revenue increased relatively less than expenditure, the public deficit reached -7.6% of GDP in 2021. The 2022 Budget forecasts an increase in expenditure of +11.5% compared to the Budget of the previous year. This budget will be dedicated mainly to investments in infrastructure, reconstruction following the damage caused by Typhoon Rai, and measures to curb the epidemic.
In parallel, the economic recovery in 2022 should lead to an increase in revenues (+14%). Tax revenues, already on the rise in 2021, should increase in 2022 according to government estimates, in particular thanks to the increase in taxes on alcohol and cigarettes. This increase in revenue will however be curbed by the implementation of the CREATE law, reducing the corporate tax rate (see Part 4).
The Philippines is expected to record a still significant budget deficit in 2022, around -6.2% of GDP according to the IMF.
The Covid-19 crisis has caused a sharp rise in public debt. While public debt represented 36.9% of GDP in 2019, it should reach 62.2% of GDP in 2022 according to the IMF. Indeed, faced with the decline in activity and the rise in the unemployment rate, the government has prioritized support for the recovery to the detriment of the consolidation of public finances, which will constitute a challenge for the next government. To maintain investor confidence and reduce the budget deficit, a reduction in public spending will be necessary in the years to come.
The debt profile nevertheless remains favourable at this stage, with in particular a long maturity which limits the risk of refinancing and a large share of the debt issued on the local market. The share of foreign currency debt is about 20% of the total, a moderate level, mitigating foreign exchange risk on Philippine debt.
3. EXTERNAL POSITION
In 2021, the current account balance returned to deficit (-1.5% of GDP), in a context of a faster recovery in imports compared to exports and a rise in commodity prices, and more particularly in the price of oil (price of the barrel of Brent from 83.5 USD in October 2021 against 40.2 USD in October 2020).
This trend is expected to continue in 2022 with an expected increase in imports of 23% against an increase in exports of 17.2%, according to the IMF. This sharp increase in imports in 2022 would be linked to the increase in domestic demand, in particular via the need for raw materials as part of the “Build” plan. Persistently high transport costs, supply difficulties and slowing Chinese growth would be the main obstacles to rising exports in 2022.
In the medium term, trade could be stimulated by the entry into force of the Regional Comprehensive Economic Partnership (RCEP) to which the Philippines is a signatory. The creation of a large free trade area would promote trade between ASEAN members and other major markets in the Asia-Pacific region (these countries capturing 51% of the Philippines' exports). Faced with growing regional competition and strong domestic demand, the trade balance would remain in deficit in the medium term.
FDI flows to the Philippines jumped in 2021 and would increase in 2022 according to the IMF to reach 1.6% of GDP (compared to 1.2% of GDP in 2019). However, structural obstacles to attracting FDI remain (slow removal of investment restrictions), and the level of FDI relative to Philippine GDP remains well below that of most ASEAN countries.
Foreign exchange reserves remain high (10 months of exports) and provide the authorities with leverage to curb currency depreciation. The Philippine peso (PHP) depreciated by -4.5% during 2021 and this trend should be confirmed in 2022, according to the BSP. This depreciation is mainly due to the deterioration of the current account. Another explanation lies in the signals sent by the Federal Reserve (Fed) to the United States on its desire to put an end to its purchases of securities (Fed tapering) and to increase its interest rates from March 2022. This Monetary tightening could generate volatility on capital flows and weigh on the value of the peso, a situation which would lead the BSP to also raise its interest rates (see Part 1).
4. POLITICAL ASPECTS
The presidential elections were held in May 2022. The new President BongBong Marcos Jr, should ensure strong political continuity. The winner of the May 9, 2022 election is likely to continue the “Build” agenda, as well as fundraising for social services and fighting crime.
The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was signed by President Duterte in March 2021. It aims to provide tax relief to domestic and foreign corporations doing business in the Philippines (5% lower tax on companies for resident foreign companies and national companies, then decline by 1% per year to reach 20% in 2027). The business climate, already on the rise in 2020-2021 (up 29 places in the Doing Business 2020 ranking) should therefore continue to improve in 2022. However, efforts remain to be made at the regional level, with the country only ranking in 10th place in the East Asia and Pacific region in 2020.
If a political rapprochement with China has been observed in 2020, the repeated intrusions of Chinese ships into the disputed waters of the China Sea have finally led to a reversal of the foreign policy of the archipelago, in favour of its historical ally, United States. President Duterte's successor, an arguably less controversial figure, should strengthen these ties to continue to benefit from the significant military and financial assistance from the United States, to the detriment of relations with China.
5. CLIMATE AND ENVIRONMENT
The Philippines is prone to major seismic, volcanic and weather disasters and the country is highly vulnerable to climate change and especially sea level rise.
The country's CO2 emissions have accelerated in recent years, with an increase of +73.3% from 2011 to 2019. In April 2021, the country finally committed to raising its carbon emissions reduction target by 2030, not at -70% as set under the Paris Agreements, but at -75%, which remains ambitious given the recent dynamic.
In December 2021, the Asian Development Bank (ADB) launched the Energy Transition Mechanism (ETM) plan to accelerate the closure of coal-fired power plants in the Philippines, the biggest sources of carbon emissions. While the current energy mix is 47% coal, 22% natural gas, 24% renewables and 6.2% oil, the goal is to increase renewables to 35% by 2030 through the addition of wind and solar photovoltaic energy.