STRONG fundamentals such as current account, fiscal position, demographics, reform-minded government and manufacturing sector will support the Philippines’ long-term economic growth, according to macroeconomic research company Capital Economics.
In a report, Capital Economics lauded the country’s “healthy” gross domestic product (GDP) growth in the last quarter of 2013, saying that ”the economy came through the destruction of Super Haiyan [Super Typhoon Yolanda] reasonably well.”
The Philippine economy remains as one of the best performing economies in the Asian region, growing by 6.5 percent in the fourth quarter of 2013, placing the full year GDP growth to 7.2 percent.
”The outlook is also bright, with long-term growth prospects among the best in Asia. In this Weekly, we outline five reasons to be positive about the Philippines,” it said.
The first reason that Capital Economics cited is the country’s large current account surplus and the robust foreign exchange reserves resulting to lack of dependence on foreign financing and limits the country’s vulnerability to sudden capital outflows.
”That has allowed the central bank to keep interest rates low to support growth, which stands in stark contrast to India and Indonesia, where central banks have been forced into raising rates,” it stated. The Bangko Sentral ng Pilipinas has kept interest rates for the overnight borrowing or reverse repurchase facility at 3.5 percent, while overnight lending or repurchase facility was still at 5.5 percent.
Second, Capital Economics said that the Philippines’ improving fiscal position, wherein government debt to GDP ratio has fallen sharply over the past decade from 70 percent in 2003 to 40 percent.
It said that the improvement has two implications: First, the chances of sovereign debt crisis have been greatly reduced; and second, with less money spent on debt repayment, the government has more resources to spend on infrastructure, education and healthcare, which can raise productivity and drive long-run growth.
Sweet spot Capital Economics said that the third reason is the country’s healthy demographics, noting that the Philippines is entering a “demographic sweet spot.” It cited United Nations projections, which showed that the population of the country’s working age is expected to rise by over 40 percent from 2010 to 2030.
”Provided jobs can be found for these people, a rapid increase in the working age population can boost growth by increasing the productive potential of the economy,” Capital Economics stated.
Fourth, the firm said that the reforms made by the current administration have made significant progress in improving the business environment in Philippines.
”Among the most important reforms have been a crackdown on corruption; new legislation to control population growth; public-private finance initiatives aimed at improving the country’s infrastructure; and a peace agreement with Islamic insurgent groups,” it said.
Fifth, Capital Economics said that the country is also making good progress in nurturing a competitive manufacturing sector, which has been the key route through which economies in Emerging Asia have traditionally developed.
”Looking ahead, a high level of spoken English, plenty of young workers, low labor costs in China mean the Philippines is better placed now than it has been for a very long time to develop a competitive manufacturing sector,” it stated.
Furthermore, Capital Economics said that it remain fairly upbeat on the Philippines, and believe growth will average about 6.5 percent to 7 percent over the next decade. It also said that the election of another reform-minded president that will replace President Benigno Aquino 3rd, would provide a major boost to the country’s prospects but there are clearly no guarantees this will be the case.
”Indeed, there is a danger that Mr. Aquino will be followed by a weak, incompetent or corrupt leader who fails to build on, or even reverses, the progress that Aquino has made in his first few years as president,” it said.