Published on 13.11.2020

ASEAN series: Philippines

The Philippine economy shows a clear disparity: a modern electronics industry and a booming service sector on the one hand, and poverty and subsistence agriculture on the other. In addition, there is a developmental inequality between Greater Manila ("National Capital Region" / NCR), which in many places reflects the level of development of an emerging country, and the economically more backward provinces and remote islands.

Agriculture still employs about one-third of the workforce, but its share of GDP is only about 10 %. Industry accounts for about one third of GDP. The electronics industry is an important pillar of the economy. Semiconductors, electronics and electrical engineering accounted for more than half of Philippine exports in recent years. Other important growth sectors are construction, mining, food and beverage and infrastructure.

In addition to the mining sector mentioned above, which benefits from large gold, silver, chromite and copper reserves and has been flourishing again since 2004 due to a new investor law, which again allows 100% foreign ownership of companies. Other international corporations have long been represented in the Philippines. For example, Texas Instruments has been building a large part of its digital signal processor chips (DSP) for cell phones in Baguio for 20 years. Bosch also produces a large part of its ABS brake systems in the Philippines.

The Philippines particularly benefits from natural deep-sea ports, which facilitate the construction and repair of cargo ships and the operation of container ports and form the backbone, the logistics of Manila and the other four major port cities.

Although growth in the Philippines in recent years has not been as strong as in Vietnam or Thailand - the countries with the highest growth rates in the ASEAN region - it is very steady compared to these countries. Compared to Vietnam, the country has a more continuous political leadership and compared to Thailand, it is less dependent on tourists. Since 1990, the Philippine economy has thus been able to grow at an average of 7.56%. Measured in terms of GDP per worker (productivity) in 2017, the Philippines was in the regional midfield with about US$17,000 per worker.

Effects of the Corona Pandemic and government fiscal incentives

Already at the beginning of 2020 the economy suffered from the eruption of the Taal volcano, but this situation has of course worsened with the outbreak of the Corona virus.
At the beginning of March, the main island of Luzon - which accounts for 70% of the national GDP - was placed under a general quarantine. Some of the travel, exit and economic restrictions are still in place today, and compared to the peak of the pandemic, only all stores are open.
Philippine burgers are only allowed to leave the country under certain conditions and foreigners are still not allowed to enter. All these measures, including the suspension of local and long-distance passenger transportation within the country, have hit the economy hard.

Although the measures have had an impact against corona, GDP shrank by 0.2% in Q2 2020 and by an estimated 16-19% in Q3 2020. The Central Bank of the Philippines, similar to international analysts, is currently forecasting GDP growth of -8% for the full year.

To counteract this deep cut, the government has adopted an economic stimulus package of PHP 1.3 trillion (around EUR 23 billion) for the period after the pandemic, in order to be able to continue the high growth rates of previous years. With 300 billion pesos, the "National Emergency and Investment Corporation" will try to minimize the damage caused by COVID-19 to the economy; 200 billion pesos will be provided for wage subsidies and the granting of interest-free loans to support small and medium-sized enterprises. To ensure that the broad middle class does not slip into unemployment.

The central bank is also trying to boost the economy further. After a 50 basis point cut in March to a new record level of 2.75 %, the interest rate was further reduced by 0.5 percentage points to 2.25 % in July.
The central bankers stress that there is still room for interest rate cuts. If one compares Philippine monetary policy with other countries where the level was already significantly lower. The Philippine peso is also supported by sufficient reserves of foreign currency.

The Japanese rating agency Japan Credit Rating Agency (JCR) even upgraded the Philippines from BBB+ to an A rating for the first time in mid-year, the highest level ever awarded to the Philippines. According to the JCR, however, long-term reforms to modernize the financial sector, such as investments in the use of electronic payment options and the improvement of the banking infrastructure, are absolutely necessary.

Economic outlook for the Philippines

The country's low debt, soundly managed national budget and adequate foreign exchange reserves enable the government to take additional support measures when necessary. Downside risks also exist for next year. A slow global recovery is likely, which could severely impact trade, investment and even remittances from Philippine migrant workers from overseas.

The continuously high growth of the Philippines economy is to a large extent also based on the very active construction and infrastructure sector. This sector and the related engineering services have proven to be one of the driving forces behind the high economic growth in recent years (2017: +6.7%, 2018: +6.2%). The infrastructure sector has been in the limelight of the government's program at least since President Duterte took office. Under the motto "Build! Build! Build!", government spending on infrastructure is to be raised to over 7% of gross domestic product in the coming years.

Concrete business opportunities for Germans are offered in particular in sectors where a lot of know-how is in demand. Suppliers of electronic components, automotive parts, machinery, technical equipment, construction materials, and civil engineering services have many opportunities to operate economically in the Philippines.
The rapidly growing population, which spends a large part of its income on food and beverages, also makes the food industry in the Philippines an attractive industry.