Improving business climate and tackling poverty, more than other economic challenges, should be key priorities of the incoming administration of presumptive President Rodrigo Duterte, according to US-based think tank IHS.
“Despite the nation’s considerable economic progress under [President Benigno Aquino 3rd], the next President and the incoming government will face tremendous economic challenges,” Rajiv Biswas, IHS Asia-Pacific chief economist, said in a report issued for clients.
A weakness of the Philippine economy in recent years had been the relatively low level of FDI (foreign direct investment) inflows, he added.
The country’s FDI inflows, Biswas noted, are considerably lower than those of other Southeast Asian nations such as Indonesia and Vietnam.
Therefore, the IHS economist said, creating a better business climate and encouraging foreign investment will be key priorities for the Duterte administration.
The Philippines, Biswas pointed out, is ranked 103 out of 189 countries on The World Bank’s Ease of Doing Business Ranking for 2016.
He said while the country has lifted its position significantly in the World Bank ranking under President Aquino–from 136 in 2012 to 103 in 2016–it was still far below than those of other Southeast Asian economies, notably Singapore, which is ranked first globally; Malaysia, 18th; and Thailand, 49th.
“The rapid growth of manufacturing investment in Vietnam also poses a significant competitive threat, as Vietnam’s manufacturing export competitiveness will also be boosted by the new EU-Vietnam free trade area [FTA], as well as its membership [in]the Trans-Pacific Partnership Agreement, once the latter is ratified and implemented,” Biswas added, referring to the European Union.
He said while FDI inflows into the Philippines had improved in recent years, total FDI in 2015 was $5.7 billion, much lower than Indonesia’s $29 billion in the same year.
Biswas added that the rapid growth of foreign investments in the Vietnamese electronics industry is a particular competitive threat to the Philippines, as electronics is a key export sector of the country’s economy.
The IHS economist also noted that the Philippine electronics industry employs about 2 million people, with about 270 large electronics manufacturing firms having operations in Philippines.
Electronics exports accounted for around 43 percent of total merchandise exports from the Philippines in 2015.
At present, according to Biswas, electronics dominates the manufacturing export sector.
“Improving the business environment for foreign investments in manufacturing and infrastructure will therefore be a critical challenge for the incoming Philippine administration, in order to boost manufacturing exports and employment,” he said.
If economic reforms and investment liberalization initiatives are sustained, Biswas added, the potential gross domestic product growth rate of the Philippines over 2016 to 2020 is projected to be about 6 percent per year.
That rate, he said, would continue to keep the Philippines in the ranks of Asia’s fast-growing tiger economies.
According to Biswas, among the Duterte administration’s more important economic priorities would be tackling the high level of poverty that still persists in the Philippines.
He said an estimated 25.8 percent of the Philippines population still live below the poverty line, and this ratio has only declined very gradually from a rate of 28.8 percent in 2006.
Rural poverty in some regions is a key public policy challenge, Biswas added.
Poverty, the IHS economist said, has been aggravated by current dry weather conditions brought about by El Niño, causing severe drought in parts of southern Philippines and resulting in food shortages and severe hardship for the rural population in some areas.
Biswas added that agricultural production fell by 1 percent year-on-year in fourth-quarter 2015, with crop output down 2.7 percent and paddy rice crop down 3.8 percent year-on-year, mainly because of the El Niño effect and the impact of crop damage caused by typhoons.
“Therefore, ensuring that the benefits of rapid economic growth do reach a wider share of the population will be a crucial policy priority for the next administration, and key strategies to reduce poverty will be to accelerate foreign investment inflows into manufacturing and infrastructure development,” he said.
Biswas recommended that increased investment in agricultural infrastructure and irrigation technology be made, as well as insurance schemes for farmers, to help boost rural incomes and mitigate risks associated with extreme weather events such as droughts or typhoons.
The next administration, he said, will also need to ensure that trade and investment liberalizations are high priorities on its policy agenda, through bilateral and regional trade and investment initiatives with key partners such as the Association of Southeast Asian Nations, the European Union, the United States and India.