Economic Outlook for 2016
The Philippine Economy: Outlook for 2016
January 4, 2016
Primary Article Contributor – Nick Avis
Team Leader following the Philippines – Cameron Torrens
Keywords: Philippine peso, American dollar, GDP, interest rates, remittance, economy growth, economic uncertainty.
In late 2015, the largest money manager in the Philippines predicted that 2016 would be a poor year for Philippine investments, which he supported with evidence of the peso’s six-year low (compared to the US dollar), the $1.2B that investors have removed from equities this past year, and the high valuation given to Philippine stocks (compared to Asian counterparts). Throw in the economic slowdown of neighbouring Asian countries and an unpredictable national election, and the evidence suggests that the Philippines may be entering a new year of economic turmoil.
Perhaps most worrisome for the Philippines are economic activities taking place outside of the country. One specific event is the strengthening US economy, which resulted in the US Federal Reserve raising its lending rate (further interest rate hikes are expected over the next several months). These events in American have caused the US dollar to appreciate 5.5% compared to the Philippine peso, meaning multi-national corporations (MNCs) bringing money into the Philippines get 5.5% more pesos than they did a year ago (conversely, companies removing money from the Philippines lose 5.5% more compared to a year ago). As the US dollar strengthens, investors will continue to seek higher returns in American and the Philippine economy will see further outflows of foreign capital, causing the peso to continue falling. As the dollar appreciates, all goods priced in US dollars will become more expensive—a serious problem for the Philippines since it gets its second-largest number of imported goods from the US. Costlier goods will only cause stress in the Philippine economy, and if serious enough inflation may result (making it more expensive for businesses to operate in the country).
In addition to events happening in the US, the Philippine economy is impacted by regional changes. There are indications that the current economic slowdown in Asia is spreading to the Philippines. In October, exports from the Philippines fell 10.8% year-on-year, a significant decrease from the predicted 3.3% fall and part of a trend that follows on September’s 15.5% decline. This decrease is significant because the current trade-to-GDP ratio in the Philippines is 60% (for comparison, the US is 30% and China is 42%). This high trade-to-GDP ratio means that the Philippines will be more economically sensitive to changes in international trade than countries with a lower ratio. This high ratio is particularly concerning because two of the top three Philippine trading partners are Japan and China, both of which are experiencing slower growth and therefore less likely to generate high demand for Philippine exports.
A general pattern of slow international growth is a serious issue for the Philippines because more than 10MM Filipinos work abroad and, in 2014, they sent home over US$24B—roughly ten percent of the Philippine GDP. Remittance growth is slowing, but it is unknown whether this is a result of a worsening global economy or poor exchange rates. Regardless, provided that remittances do not slow down too quickly they can provide insulation to the Philippine economy over the short-term because the diaspora act like a diversified portfolio—even if some national economies where the diaspora work slow down, there is a high probability that workers in another country will benefit from favourable economic conditions and send home enough money to compensate for the decrease in remittances from other countries.
Not all the economic news in the Philippines is bad. According to a recent IMF report, investors can take comfort in the fact that the Philippines is “well-placed” to absorb international economic shocks like the recent slow-down in China’s economy. This is supported by the trade surpluses that the Philippines posted in recent quarters and the reserves that the country has to cover nearly a year’s worth of imports. Moreover, unemployment fell to a record-low of 5.6% in October 2015 and the government reduced its debt to less than less than 50% of GDP. It should also be noted that in the second half of 2015 the Philippine GDP grew 5.6%, which was lower than expected but third highest in the region (only China and Vietnam grew quicker). Overall real GDP growth is estimated by the World Bank to be 6.5% for 2015, an increase from 6.1% in 2014. The forecasts for 2016 and 2017 are 6.5% and 6.1%, respectively. These favourable economic indicators suggest that the Philippines is well-positioned to continue its path towards economic development and stability, although some of the negative factors mentioned earlier may make a slight dent in overall growth in 2016.
Business should also consider qualitative reasons to invest in the Philippines in addition to economic data. For example, the Philippines has the fifth largest educated English-speaking workforce, meaning English-language companies will encounter less of a language barrier in the Philippines compared to other Asian countries. Language familiarity will make it cheaper and easier to deal with local businesses, hire employees, and interact with the government. Additionally, American colonization in the 20th century resulted in the Philippines adopting many aspects of American culture. As a result of American influences, industries serving Americans (like call centres) are booming and because companies find it cheap and easy to train workers who are already versed in American language and culture.
The Philippines has had one of the developing world’s strongest GDP growth rates over the past decade. As 2016 begins, there are many indicators suggesting that growth in the Philippines may slow, largely due to events occurring outside the nation. There is, however, the potential that strong national trends like low unemployment and debt combined with qualitative factors will insulate the country from uncertainty in global markets. Although there are risks involved with investments in the Philippines, the country remains likely to generate a positive return for medium to long-term investments.
