The Philippines stands out as one of the most vulnerable emerging economies to the impact of President Donald Trump’s “America First” policy because of its direct trade links to the US, a report by London-based research consultancy firm Capital Economics said.
The study said although the Philippine economy does not rely much on its exports to the US, other business sectors that bring in significant revenues to the country such as business process outsourcing (BPO) and Filipino workers’ remittances could get hit.
“China and Mexico were the main focus of Donald Trump’s protectionist threats on the campaign trail. But the Philippines also stands out as vulnerable to any moves by the US toward isolationism,” it said in the report released Friday.
An obvious channel through which the Philippines could be affected is through its direct US trade links, but there are other business sectors that make the Southeast Asian country vulnerable.
Philippine exports of goods to the US are worth about 3 percent of its gross domestic product (GDP), which makes it less vulnerable than other countries in Emerging Asia to moves by the US to restrict imports, such as through a border adjustment tax, the study said.
“But just looking at merchandise exports understates how important the US is for the Philippines,” it said.
The think tank explains that the booming business process outsourcing business has been a key driver of the economy in recent years, bringing in revenues equivalent to 8 percent of GDP in 2016 and employing over one million people.
“It has been estimated that around three-quarters of total revenue from the sector comes from servicing US companies,” it added.
Although it has so far been big manufacturing companies like Ford which have been put under the most pressure by Trump to bring production back to the US, the study said outsourcing companies have also come in for criticism.
Given this, Capital Economics said a number of outsourcing companies located in the Philippines have put expansion plans on hold, while some are reportedly already drawing up precautionary plans to relocate some operations back to the US.
Besides concerns over exports, there are also fears over the outlook for remittances, the research firm said.
It noted that the 4 million or so Filipinos currently living in the US send back remittances equivalent to about 3 percent of the Philippines’ GDP, which is the highest of any major emerging market.
“Unlike the 6.5 million or so undocumented Mexicans living in the US, the Filipinos living in the US are mostly there legally and have not been threatened with expulsion. But if the US were to press ahead with a tax on remittances, which it has already threatened to do against Mexico, it could cause remittances growth to slow sharply,” it explained.
Growth forecast stays
Despite all this, Capital Economics kept its GDP growth forecast of 6.5 percent for the Philippines for this year, but noted that the risks are firmly to the downside.
“In particular, any aggressive move by Trump to target the outsourcing sector would prompt us to cut our forecasts,” it said.
Capital Economics’ forecast compares with the 6.8 percent economic expansion achieved by the Philippines in 2016 and the government’s official growth target range of 6.5 percent to 7.5 percent for this year.