Economy



Oxford Business Group


The Philippines Year in Review 2013




Posted on January 24, 2014


ALTHOUGH rocked by the worst typhoon in its history late last year, the Philippines was one of Asia’s 2013 success stories, maintaining strong macroeconomic fundamentals and steady GDP growth.

While damage from typhoon Haiyan pushed up inflation and darkened the medium-term economic forecast, the Philippines benefited from a significant increase in foreign direct investment (FDI) and three credit rating upgrades during the year.

RAPID GROWTH IN 2013
The Philippines was the fastest-growing economy across Asia in the first quarter of 2013, with GDP rising by 7.8% year-on-year (y-o-y), thanks to gains in manufacturing and construction. The three-month expansion marked the highest quarterly growth rate since President Benigno Aquino took office in 2010 and contrasted sharply with a slowdown elsewhere in the region.

The rapid pace of expansion continued as the nine-month period from January to September saw a y-o-y increase of 7.4%, exceeding the government’s target of 6-7%. However, growth prospects dimmed in the aftermath of typhoon Haiyan, which killed more than 6,000 people and left millions homeless when it hit the Visayas region on Nov. 8. Government estimates in last week put damage, mainly to agriculture and infrastructure, at $811 million.

Inflation reached a two-year high of 4.1% in December 2013 as food prices increased as a result of the typhoon. The disaster prompted economists from Barclays and JP Morgan Chase to cut their GDP growth expectations for the year from 7.2% to 6.8% and 7.1% to 6.9%, respectively.

AN IMPROVEMENT
IN FDI FIGURES

One of the most important developments of the year was an increase in FDI, an area where the Philippines has lagged its Asian neighbors. Net FDI inflow jumped 33% y-o-y in the first nine months of 2013 to reach $3.11 billion, ending the period with a 141% annual change for September. Equity placements for the month reflected broader annual trends, with financing sourced from the US, UK, Japan, the Netherlands and Hong Kong. The majority of funds went into the manufacturing, real estate, financial, insurance and mining sectors.

Growth in FDI is expected to continue following Fitch’s decision in March to upgrade the Philippine’s economy to “BBB-” from its previous “BB” status, which took the country into investment grade territory.

Standard & Poor’s followed suit with a credit upgrade in May, while Moody’s also moved to upgrade the sovereign rating one level in October.

INFRASTRUCTURE DEVELOPMENT
Public-private partnership (PPP) projects for the development of infrastructure are set to drive foreign investment. The Aquino administration is looking to roll out PPP deals with a value of at least $4 billion over the next several years, including the $615-million Metro Manila Skyway, the $812-million Cavite-Laguna Expressway (Cala-Ex), and the $1.39-billion LRT-1 light rail expansion project.

Investment in public works, as well as a housing shortage, is boosting demand in the construction sector, which grew rapidly in 2013 and is expected to continue to do so this year.

In November, Augusto Manalo, the president of the Philippine Contractors Association (PCA), said construction projects in 2014 were set to total P400 billion ($9.17 billion), topping projections for 2013 of P380 billion ($8.71 billion). Mr. Manalo added that the value of work in the construction sector reached P287 billion ($6.58 billion) for the first six months of 2013, up 23.7% on the same period in the prior year.

FORECAST FOR 2014

Large infrastructure projects will help boost GDP in 2014 and beyond, according to Barclays, which in early December said the Philippines and Malaysia would lead expansion in the ASEAN region up to 2015.

In early January, Florencio Abad, the secretary of the Department of Budget and Management, said growth would hit the upper half of the government’s 6.5-7.5% target range for 2014, thanks in part to reconstruction efforts in the wake of the typhoon.

The rebuilding, along with an increase in foreign remittances and export growth, will support expansion of 7% this year, according to local invest bank First Metro Investment Corp. (FMIC), while Citibank expects GDP to rise by 7.3%. FMIC forecasts inflation to hover between 3.8 and 4% this year, well inside the BSP’s target of 3-5%, with foreign remittances projected to increase 6-7%.

The Philippine peso should average somewhere between P43 and P46 against the US dollar, the FMIC added, while exports are expected to rise by 6-10% and imports 8-12%.

Reconstruction in the aftermath of Typhoon Haiyan will be costly for the Philippines and take time. However, the country’s growing reputation as a prime investment destination, combined with higher public spending on infrastructure and increased domestic demand, should help the Philippines’ economy to flourish in 2014.