Poor infrastructure creates bottleneck for further investment
The Philippine economy will grow to hit the target range this year, fueled by urbanization that will spur consumption and strong remittances by overseas Filipino workers that will offset weak local wages, a study by The Economist Intelligence Unit (EIU) said.
If the global economy performs better than expected, domestic growth could gain further support but poor infrastructure will remain a bottleneck for any increased investment, the London-based think tank said in its assessment of the country’s economic conditions.
The EIU forecast real gross domestic product (GDP) will rise 6.8 percent in 2014 following a rapid 7.2 percent expansion in 2013, then moderate to an annual average of 5.9 percent in 2015 to 2018.
The EIU projection falls within the government’s 6.5 percent to 7.5 percent target range for this year, but it said growth in excess of 7 percent could be achieved if the global economy exceeds expectations.
“Urbanization, which has spurred demand for housing and transport services, will continue to underpin strong private consumption growth in the forecast period, along with an increase in the number of people entering the workforce and remittances sent home by overseas Filipinos. These factors will offset relatively weak wage growth,” the study said.
The EIU added that the outlook for investment growth in the country is favorable as post-typhoon reconstruction in 2014 is expected to provide a boost to investment, which is seen increasing by 9.4 percent during the year.
Demand for homes and office space from the business-process outsourcing (BPO) sector will also remain a driver of construction investment, it added.
A major bottleneck
However, the EIU sees inadequate public investment, revenue generation and trade deficit as challenges to investment growth.
It said public investment is notoriously inadequate, particularly given the Philippines’ woefully poor infrastructure, which itself is a major bottleneck for foreign investment and higher economic growth.
“The government has set itself the target of raising spending on infrastructure to be in line with the Southeast Asian average of around 5 percent of GDP by 2016, up from about 3 percent in 2012,” it said.
Achieving the infrastructure spending target will be a challenge; new mining taxes and an excise tax on alcohol and tobacco should help, but the government has been resistant to broader tax increases, it added.
Growth in imports will outpace exports, owing to strong domestic demand for consumer goods and capital equipment.
“As a result, the external balance will weigh on GDP. In 2015-18 import growth will broadly track exports, as a large proportion of imports by the Philippines comprises inputs used to manufacture goods that are then sold abroad,” it said.
Sovereign risk upgraded
The Philippines’ credit standing received another boost with the EIU recognizing the improvement in the country’s political climate and the resolve to further increase public investments amid a healthier debt profile.
The EIU raised the country’s sovereign risk rating by a notch to BBB from BB, pointing at the declining proportion of the state’s outstanding debt to GDP.
According to the rating definitions of the organization, BBB indicates a country’s capacity and commitment to honor debt obligations and only slight susceptibility to changes in economic climate.
The country’s debt/GDP ratio consistently dropped from 54.8 percent in 2009 to 49.2 percent last year, the EIU said.
It also cited the government’s prudent practice of relying more on medium- and long-term debt issuance—and less on short term—to finance its budget deficit.
“The Economist Intelligence Unit has upgraded its sovereign risk rating for the Philippines . . . to reflect ongoing improvements in the country’s public debt position,” it stated.
Reduced political risk
At the same time, the EIU upgraded the country’s political risk rating by a step from CCC to B mainly on account of the latest peace accord between the Philippine government and Muslim rebels, the first time for the EIU to elevate the country from the C to the B category in terms of political risk.
Political risk rating measures the potential drag of political events on a country’s ability to service liabilities. The upgrade from CCC to B indicates that stability of the political environment in the country is no longer questionable for the risk rater, at least for the short term.
The EIU said the peace deal between the government and Muslim rebels signed earlier this year is expected to help attract investment in the southern part of the country.
“The security situation in the Philippines should ease in the coming years following the signing in March of a comprehensive peace agreement between the government and the Moro Islamic Liberation Front, which in theory, puts an end to a decades-long conflict,” the EIU said.
“The recent peace deal with Muslim rebels in southern Philippines bodes well for stability,” it added.
Meanwhile, the organization kept the country’s currency risk rating at BBB, the banking-sector risk rating at BB, and the economic-structure risk rating at BB. It cited a stable outlook on the peso, strong asset quality and capital adequacy of banks, and sustained flow of remittances that boost household consumption as reasons behind these ratings.