Exploring the 2019 economic outlook for the Philippines Exploring the 2019 economic outlook for the Philippines

Exploring the 2019 economic outlook for the Philippines
09 Jan 2019

Despite a recent downside risk of inflation in the Philippines, the International Monetary Fund (IMF) projects the country will see economic growth of 6.6% during 2019. Even though key inflation drivers include a weaker peso, higher excise taxes and rising global oil prices, inflation is currently forecast to fall to 4% compared with 6.7% in 2018.

The World Bank’s Economic Update also points to positive developments in terms of sustainability and inclusiveness. The government is attempting to tackle domestic challenges through careful fiscal management, the timely implementation of tax reforms and public investment programmes, such as President Rodrigo Duterte’s “Build, Build, Build” initiative.

In fact, infrastructure spending is rising year-on-year, with 44 out of a proposed 75 projects already introduced. Known for his strong political will and decisive leadership, Duterte is keen to see these initiatives being implemented swiftly, especially in areas with high business investment potential.   

Investment climate

By the end of 2017, the Philippines had registered the highest rate of foreign direct investment (FDI) among the Association of South East Asian Nations (ASEAN). FDI continued to grow by 42% in the first half of 2018 due to increasing investor confidence, which was driven by the country’s sound macroeconomic fundamentals and growth prospects.

In fact, the Philippine Statistics Authority (PSA) noted that approved foreign investments in the second quarter amounted to PHP 30.9 billion (US$575.9 million), far higher than the PHP 18.2 billion (US$339.2 million) recorded in 2017.

Despite a global fall in FDI, FDI inflows continue to surge in the country, reflecting a favourable investment climate. Foreign business leaders have also welcomed the government’s initiative encouraging them to set up new companies there.

On 29 October 2018, Duterte signed Executive Order No. 65 promulgating the 11th Regular Foreign Investment Negative List (FINL).  The Order included five areas eligible for 100% foreign investment participation, which were listed by the National Economic and Development Authority:

  1. Internet businesses, excluding mass media;
  2. Higher education teaching, provided the subject being taught is not a professional one, that is included in a government board or bar examination;
  3. Training centres that undertake short-term, high-level skills development but do not form part of the formal education system;
  4. Adjustment, lending and financing companies as well as investment houses;
  5. Wellness centres excluded in item four of List B of the FINL.

Opening up to foreign investors and limiting constraints on doing business has become a priority of the Duterte government. The President has frequently stressed the importance of amending the 1987 Constitution to lift foreign investment restrictions in order to cut red tape and further liberalise business practices. A shift to federalism also promises to boost the country’s competitiveness, thereby enabling it to create more employment opportunities.

Economy

  1. Internet provision

The Philippines has recently addressed a major industrial policy concern by bringing in a third telecommunications player to end the industry’s duopolistic status and enable new players to enter.

The National Telecommunications Commission confirmed Mislatel as the country’s third major telecom player. This consortium is made up of Chinese state-owned telco China Telecom as well as Udenna Corp and Chelsea Logistics, which are owned by Davao City-based tycoon Dennis Uy. 

A third internet provider has long been sought because of the country’s worsening online reputation here within Asia. Duterte’s stance in this context has been that foreign investment is needed to improve the country’s telecom and power sectors and, in turn, boost the wider economy. As a result, with constitutional change on its way in the shape of Executive Order No. 65, more foreign investors will be allowed to compete in this market.

While ‘industry’ may have been the fastest-growing area in terms of economic growth last year, in 2018 it was overtaken by the services sector, which grew at 6.9% compared with industry’s 6.2%. Growth in gross domestic product also stood at 6.1% as of November 2018.

  1. Banking and credit

Based on Moody’s investor service report about the Philippines banking system, the country maintains a Baa2 rating credit outlook, with very positive features. Moody predicts that credit growth will remain stable for the next 12 to 18 months and notes that cost-effectiveness is improving.

Back-to-back interest rates hikes are also seen in a positive light, amid inflationary pressures and the impact of the TRAIN Law tax reforms to improve income equality. The Banko Sentral ng Pilipinas (BSP), the country’s central bank, extended its borrowing rate by 150 basis points to cope with current inflation levels.

But the country’s external debt levels have fallen substantially in recent years. As of June 2018, foreign debt went down by 1.4% over the previous year, amounting to US$997 million. The BSP attributed this situation to a de-leveraging of private sector foreign borrowings, which minimised foreign exchange risk.

Outlook for 2019

Falling poverty rates and an estimated employment rate of 94.6% are contributing to a growth trajectory that currently appears sustainable. The rising population, which is estimated to reach 106.6 million in the near future, makes the country attractive for foreign investors looking for a young, well-educated and dynamic workforce. The completion of infrastructure development based on public expenditure is also considered likely to boost both business and consumer spending.

While external factors continue to generate uncertainty and pose risks in global financial markets, the World Bank’s 2018 report projects that average inflation rates in the Philippines will fall to 3% during 2019 – well within the BSP’s 2% to 4% target range. It also expects the service sector to become the country’s main driver behind economic growth.

 

By Zhorea Shara Garcia

 

This article was first published on ASEAN Briefing. 

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

 

OTHER ARTICLES THAT MAY INTEREST YOU

How to handle work permits for foreign workers in the Philippines

Everything you need to know about Filippino employment contracts

Exploring tax rates across the ASEAN region

Despite a recent downside risk of inflation in the Philippines, the International Monetary Fund (IMF) projects the country will see economic growth of 6.6% during 2019. Even though key inflation drivers include a weaker peso, higher excise taxes and rising global oil prices, inflation is currently forecast to fall to 4% compared with 6.7% in 2018.

The World Bank’s Economic Update also points to positive developments in terms of sustainability and inclusiveness. The government is attempting to tackle domestic challenges through careful fiscal management, the timely implementation of tax reforms and public investment programmes, such as President Rodrigo Duterte’s “Build, Build, Build” initiative.

In fact, infrastructure spending is rising year-on-year, with 44 out of a proposed 75 projects already introduced. Known for his strong political will and decisive leadership, Duterte is keen to see these initiatives being implemented swiftly, especially in areas with high business investment potential.   

Investment climate

By the end of 2017, the Philippines had registered the highest rate of foreign direct investment (FDI) among the Association of South East Asian Nations (ASEAN). FDI continued to grow by 42% in the first half of 2018 due to increasing investor confidence, which was driven by the country’s sound macroeconomic fundamentals and growth prospects.

In fact, the Philippine Statistics Authority (PSA) noted that approved foreign investments in the second quarter amounted to PHP 30.9 billion (US$575.9 million), far higher than the PHP 18.2 billion (US$339.2 million) recorded in 2017.

Despite a global fall in FDI, FDI inflows continue to surge in the country, reflecting a favourable investment climate. Foreign business leaders have also welcomed the government’s initiative encouraging them to set up new companies there.

On 29 October 2018, Duterte signed Executive Order No. 65 promulgating the 11th Regular Foreign Investment Negative List (FINL).  The Order included five areas eligible for 100% foreign investment participation, which were listed by the National Economic and Development Authority:

  1. Internet businesses, excluding mass media;
  2. Higher education teaching, provided the subject being taught is not a professional one, that is included in a government board or bar examination;
  3. Training centres that undertake short-term, high-level skills development but do not form part of the formal education system;
  4. Adjustment, lending and financing companies as well as investment houses;
  5. Wellness centres excluded in item four of List B of the FINL.

Opening up to foreign investors and limiting constraints on doing business has become a priority of the Duterte government. The President has frequently stressed the importance of amending the 1987 Constitution to lift foreign investment restrictions in order to cut red tape and further liberalise business practices. A shift to federalism also promises to boost the country’s competitiveness, thereby enabling it to create more employment opportunities.

Economy

  1. Internet provision

The Philippines has recently addressed a major industrial policy concern by bringing in a third telecommunications player to end the industry’s duopolistic status and enable new players to enter.

The National Telecommunications Commission confirmed Mislatel as the country’s third major telecom player. This consortium is made up of Chinese state-owned telco China Telecom as well as Udenna Corp and Chelsea Logistics, which are owned by Davao City-based tycoon Dennis Uy. 

A third internet provider has long been sought because of the country’s worsening online reputation here within Asia. Duterte’s stance in this context has been that foreign investment is needed to improve the country’s telecom and power sectors and, in turn, boost the wider economy. As a result, with constitutional change on its way in the shape of Executive Order No. 65, more foreign investors will be allowed to compete in this market.

While ‘industry’ may have been the fastest-growing area in terms of economic growth last year, in 2018 it was overtaken by the services sector, which grew at 6.9% compared with industry’s 6.2%. Growth in gross domestic product also stood at 6.1% as of November 2018.

  1. Banking and credit

Based on Moody’s investor service report about the Philippines banking system, the country maintains a Baa2 rating credit outlook, with very positive features. Moody predicts that credit growth will remain stable for the next 12 to 18 months and notes that cost-effectiveness is improving.

Back-to-back interest rates hikes are also seen in a positive light, amid inflationary pressures and the impact of the TRAIN Law tax reforms to improve income equality. The Banko Sentral ng Pilipinas (BSP), the country’s central bank, extended its borrowing rate by 150 basis points to cope with current inflation levels.

But the country’s external debt levels have fallen substantially in recent years. As of June 2018, foreign debt went down by 1.4% over the previous year, amounting to US$997 million. The BSP attributed this situation to a de-leveraging of private sector foreign borrowings, which minimised foreign exchange risk.

Outlook for 2019

Falling poverty rates and an estimated employment rate of 94.6% are contributing to a growth trajectory that currently appears sustainable. The rising population, which is estimated to reach 106.6 million in the near future, makes the country attractive for foreign investors looking for a young, well-educated and dynamic workforce. The completion of infrastructure development based on public expenditure is also considered likely to boost both business and consumer spending.

While external factors continue to generate uncertainty and pose risks in global financial markets, the World Bank’s 2018 report projects that average inflation rates in the Philippines will fall to 3% during 2019 – well within the BSP’s 2% to 4% target range. It also expects the service sector to become the country’s main driver behind economic growth.

 

By Zhorea Shara Garcia

 

This article was first published on ASEAN Briefing. 

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

 

OTHER ARTICLES THAT MAY INTEREST YOU

How to handle work permits for foreign workers in the Philippines

Everything you need to know about Filippino employment contracts

Exploring tax rates across the ASEAN region

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