President Rodrigo Duterte has inherited an economy that has shifted to a higher growth trajectory, and sustaining or even surpassing it depends on the new government’s determination to build on previous socioeconomic reforms.
This is the consensus view among financial services firms Nomura and PT. RHB Securities Indonesia, London-based research consultancy Capital Economics, Fitch-owned BMI Research, and banking giants HSBC and DBS, ahead of Duterte’s first State of the Nation Address on Monday.
The previous Aquino administration claims it had turned over to the Duterte government a robustly growing and resilient Philippine economy, fuelled by a strong services sector and a reliable stream of overseas workers’ remittances.
The seeds of growth, however, were planted during the administration of former President Gloria Macapagal-Arroyo.
Arroyo’s tumultuous decade of governance from 2001 to 2010 undertook major fiscal recovery and consolidation efforts, including the passage of painful tax reforms such as the hike and expansion of the value-added tax.
As a result, the national government has generated new revenues and is now able to invest more on social protection mechanisms such as conditional cash transfers and public infrastructure.
“Once called the ‘Sick Man of Asia,’ the Southeast Asian economy of more than 100 million people is now commonly referred to as a ‘bright spot’ given its encouraging economic performance despite challenges hurled by the external environment,” according to the June 2016 issue of EconomyPH, the bi-monthly economic newsletter of the government’s Investor Relations Office (IRO).
In a summary of the Philippines’ economic achievements over the past six years, the IRO said that from 2010 to 2015, the country’s gross domestic product (GDP) grew by an average 6.2 percent—the fastest six-year average in the region and the world, and also the fastest average that the Philippines had registered in the last 40 years.
The share of investments to economic output expanded in 2015 to 23.8 percent from 20.8 percent in 2010, it added, indicating renewed investor confidence in the country.
The share of the industry sector, led by manufacturing, rose to 33.4 percent in 2015 from 32.6 percent in 2010, in what could be the beginning of a structural shift in the domestic economy, to become less dependent on services.
The IRO added that the country’s rankings in various global competitiveness surveys took a leap, jumping substantially since 2010.
These include Transparency International’s Corruption Perceptions Index, the World Bank’s Ease of Doing Business Report, Heritage Foundation’s Index of Economic Freedom and the World Economic Forum’s Human Capital Index.
All major credit rating agencies—Fitch Ratings, Moody’s Investors Service and Standard & Poor’s—finally assigned the Philippines the minimum investment grade in 2013, after fiscal reforms that began under Arroyo.
It was followed by succeeding credit-rating upgrades in the following years as the Aquino administration raised revenue collections and implemented budget reforms.
“Investment-grade sovereign credit ratings and the leap in global competitiveness, which are anchored on sound economic policies and improved macroeconomic fundamentals, helped place the Philippines in the radar screen of more investors,” the report stated.
The IRO said this was proven by the huge jump in foreign direct investments (FDIs) over the past six years. From a mere $1.07 billion in 2010, net inflow of FDIs reached $5.7 billion in 2015, marking an increase of over 400 percent.
The surge in investments created more jobs, it added, thereby cutting unemployment rate to 6.1 percent in April 2016 from 8 percent in April 2010.
Rising revenue collection, aided partly by administrative reforms that helped the Bureau of Internal Revenue plug tax leakages, and prudent debt management policies helped the government bring down the debt burden, or the percentage of government debt to GDP, to a more manageable level.
From 42.2 percent in 2010, general government debt as a percentage of GDP dropped and settled at 36.3 percent as of end-December 2015.
Duterte’s economic policies
Given this backdrop, the Duterte administration said existing sound economic policies will be maintained but reforms will be implemented through its 10-point socioeconomic agenda.
The Duterte agenda aims to translate high growth figures into better living standards for the majority of Filipinos.
In a summary, the agenda include the continuation of current macroeconomic policies; progressive tax reform; increasing competitiveness and the ease of doing business; accelerating annual infrastructure spending; promoting rural and value chain development; ensuring security of land tenure; investing in human capital development; promoting science, technology and the creative arts; improving social protection programs; and strengthening the implementation of the Responsible Parenthood and Reproductive Health Law.
On July 5, official GDP growth targets were set at 6.5 percent to 7.5 percent next year and 7 percent to 8 percent annually from 2018 until the end of Duterte’s term in 2022.
This year, GDP is expected to grow between 6 percent to 7 percent, albeit a lower range compared with the 6.8 percent to 7.8 percent set by the previous government.
Nomura said the quality of growth in the Philippines should continue to improve with larger contributions from investment spending.
“Whether this can continue beyond this year will depend in large part on the new administration’s economic agenda,” it said, noting that its baseline view remains that President Duterte’s policy approach would be pragmatic and it would be unlikely the reform progress made in the last few years would be reversed.
“As a result, we are optimistic that the medium-term growth outlooks will stay solid,” it added.
Under the assumption of no sudden change in main policies, PT. RHB Securities Indonesia said it foresees the economy to continue to grow, led by private investments.
Capital Economics noted that Duterte seems content to leave the economy in the hands of more qualified people, like Finance Secretary Carlos Dominguez 3rd, which provides some reassurance that the quality of policymaking will not deteriorate overnight.
BMI Research said that should Duterte succeed in cutting crime rates without overstepping his executive privilege, while simultaneously bolstering fiscal efficiency, liberalizing foreign investment laws, and cutting through the country’s bloated bureaucracy, economic growth would continue.
HSBC said it was particularly encouraged by the strong pedigree of Duterte’s economic team, which includes leaders from the business community and academics with past policy experience.
DBS said Duterte’s game plan to continue economic reforms with the priority of accelerating infrastructure development and fiscal spending is positive for the longer-term growth outlook for the economy.