Summary

Overall score 22, Stable

Political risk: Stable, 8/10

Economic risk: Stable, 7/10

Commercial risk: Stable, 7/10


Political Risk – Stable at 8

The new president Ferdinand “Bongbong” Marcos Junior, elected in a landslide at the May presidential election, has pledged to continue many of the policies pursued by the outgoing president Rodrigo Duterte. These include the controversial and sometimes brutal war on drugs, and the pro-China policy.

Marcos released few details of economic policies during the election campaign.  He is the son of the former dictator of the same name. Marcos is likely to follow Duterte in placing technocrats in key economic posts.

Meanwhile, Duterte’s daughter, Sara Duterte-Carpio, won the vice-presidency, having run on a joint ticket with Marcos. Her election should protect Duterte against potential legal action by the International Criminal Court, which is investigating thousands of killings since 2016 during his war on drugs. Duterte’s government has denied wrongdoing and has said it will not cooperate with the ICC.

The election result is unlikely to have any significant impact on economic or investment policy, or on the country’s overall political stability. The Philippines is a democracy in which powerful families, rather than ideology, tend to dominate the political environment. Despite reports of vote-buying and some election-related violence, recent polls have been reported as fair and credible. Meanwhile, long-term violent insurgencies continue in parts of the country, although their threat to the state has diminished significantly in recent years.

Economic Risk – Stable at 7

One of the most dynamic economies in the region, the Philippines was hit hard by the COVID-19 pandemic, but growth is now recovering strongly. Over the 10 years to 2019, economic growth averaged 6.3 per cent per annum, one of the highest rates in Asia. According to the IMF, “sustained reforms and prudent macroeconomic policies supported strong economic growth and helped contain external and macro-financial vulnerabilities”.

A failure to control the spread of COVID-19 and slow progress on the vaccine rollout means the Philippines’ economy has suffered more than other large Southeast Asian economies. Indeed, in 2020, the country experienced the largest recession since records began, with real GDP shrinking by 9.6 per cent. Frequent lockdowns hit business investment and consumer spending.

However, an expansionary fiscal program and accommodative monetary policy helped power an economic recovery in the second half of 2021. Government assistance to support employment and assist in sectors hard-hit by the pandemic, including agriculture and tourism, together with improving consumer confidence and progress in the national COVID-19 vaccination programme, aided the pickup in the economy.

Robust consumer spending ahead of the Christmas holidays helped bring full-year GDP growth to 5.6% in 2021, exceeding the government’s 5.0%-5.5% target. The government anticipates growth of 7.0%-9.0% for 2022 and 6.0%-7.0% for both 2023 and 2024. The budget deficit is projected to fall from 8.2% of GDP in 2021 to 5.1% of GDP in 2024.

The IMF issued an upbeat assessment of the economy in its latest review, published in July 2021, arguing that “strong fundamentals and prudent macroeconomic policies” had helped to maintain macro-financial stability. It also welcomed the authorities’ emphasis on structural reforms to improve the business environment and foster more sustainable, inclusive, and greener growth.

Commercial Risk – Stable at 7

The business environment is improving significantly, according to the World Bank’s Ease of Doing Business (EODB) index. Its 2020 report ranked the Philippines in 95th place out of 190 economies, with a score of 62.8. But the country jumped 29 notches from 124th and a score of 57.68 in 2019. The World Bank uses 10 indicators to measure a country’s EODB performance: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency.

The Philippines made significant progress in the areas of Protecting Minority Investors, Getting Credit, and Dealing with Construction Permits during the year. In other indicators, the Philippines ranked 32nd in Getting Electricity, 120th in Registering Property, 95th in Paying Taxes, 113th in Trading Across Borders, 152nd in Enforcing Contracts, and 65th in Resolving Insolvency.

The Philippines ranks joint 115th out of 180 countries in Transparency International’s 2021 Corruption Perceptions Index – significantly lower than the likes of Thailand, Vietnam and Indonesia. According to the Philippines Corruption Report by GAN, high levels of corruption severely restrict the efficiency of businesses operating in the Philippines. GAN cites extensive bribery within the public administration and vague and complex laws that make foreign companies vulnerable to extortion and manipulation by public officials. Favouritism and undue influence are widespread in the courts, leading to time-consuming and unfair dispute resolution, and to an uncertain business environment. Corruption plagues the customs administration, and fraud routinely occurs for companies when filing import and export documentation. Moreover, GAN says that the legislative framework for fighting corruption is scattered and is not effectively enforced by the weak and non-cooperative law-enforcement agencies.

The country ranks in 80th place in terms of economic freedom, as ranked by the Heritage Foundation’s 2022 Index, down from 73rd in 2021. Its overall score decreased by 3.0 points over the year, primarily because of a decline in fiscal health and monetary freedom. The Philippines is ranked 15th among 39 countries in the Asia–Pacific region, and its overall score is above the regional and world averages.

Jul 2022 bulletin

Political Risk – Stable at 8 out of 10

The government faces no significant threats to its rule. President Marcos, who according to the constitution can serve just one term of six years, is particularly popular with younger Filipinos.  The election of Marcos Junior and Duterte-Carpio has avoided a situation, which has happened in the past, when candidates from rival parties have been elected to the posts of president and vice president and have been unable to work together. No major changes to policy are expected.

The main challenges facing the administration include tackling the government’s budget position, as well as inflation. How to deal with China’s increasingly assertive stance in the South China Sea, while balancing close ties with the US, will be the most pressing foreign policy issue.

Under Duterte, the Philippines moved closer to China, and threatened to break Manila’s long-standing treaty alliance with Washington, which criticised the war on drugs. Meanwhile, China opened up markets to Philippine agricultural products and pledged billions of dollars in credit and investments, mostly for infrastructure.

Economic Risk – Stable at 7 out of 10

The economy is accelerating, registering growth of 8.3%, on an annual basis, in the first quarter of 2022, faster than the 7.7% expansion seen in the previous quarter. Full year growth for 2021 came in at 5.7%, exceeding the government’s 5.0%-5.5% target and after a record 9.6% contraction in 2020 driven by prolonged COVID-19 lockdowns.

The Asian Development Bank is forecasting growth of 6.0% in 2022, rising further by 6.3% in 2023. The ADB said that:

“Nearly all indicators point to higher growth for the Philippines this year and in 2023, barring the impact of external factors from geopolitical tensions that may dampen growth globally, including in the country’s key export markets Europe and the United States.”

The ADB added that increased public investment in large, priority infrastructure projects will continue to boost growth, with the government aiming to sustain infrastructure spending at over 5.0% of GDP in 2022 from 5.8% in 2021.

However, in June – and following the rapid first quarter expansion -Moody’s Analytics hiked its GDP growth to above 7% from 6.1% for this year.  That means the Philippines could emerge as the second-fastest growing economy in Asia-Pacific, after India, in 2022.

Meanwhile, inflation is forecast to rise to 4.2% in 2022 on pressures from higher global oil and commodity prices due to geopolitical tensions. In March, the government issued fuel subsidies and discount vouchers to public transport drivers, farmers, and fishermen to help them cope with rising fuel and production costs. Inflation is expected to decelerate to 3.5% in 2023 as global commodity prices moderate.

The central bank has kept its key rate at a record low of 2.0% since November 2020, vowing to prioritise the economic recovery. It has indicated it will not raise interest rates any time soon despite the threat of tightening in the United States and elsewhere.

A nearly two-year ban on foreign travellers was lifted in early February as the Omicron surge eased. The move should provide a welcome boost to tourism and the economy. Tourism contributed 12.7% of GDP and generated 5.7 million jobs in the pre-pandemic year of 2019.

More than 67 million out of 110 million Filipinos had been fully vaccinated by May, and over 13 million had received booster shots. Vaccine shortages and public reluctance to be vaccinated has hampered the vaccine campaign.

Commercial Risk – Stable at 7 out of 10

The outlook for the banking sector is improving, according to a Fitch Ratings report issued in January 2022. Fitch cited data from the central bank showing the gross non-performing loan ratio of Philippines’ banks declined to an eight-month low of 4.35% in November from 4.42% in October as the industry’s asset quality continued to improve. The November ratio was the lowest since the 4.21% recorded in March 2021, as the level of loans disbursed by Philippine banks continues to improve. Preliminary data showed that the loans disbursed by banks rose by 4.3 percent to P11.08 trillion from January to November last year compared to P10.62 trillion in the same period in 2020. Fitch expects a deterioration in loan asset quality for banks and non-bank financial institutions as fiscal and policy support are withdrawn in 2022. However, it anticipates that banks will offset these reductions with improved pre-impairment profitability and the reduction of loan loss allowances and excess capital buffers accumulated through the pandemic.

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