Philippines - Country Commercial Guide
Market Overview

Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.

Last published date: 2022-07-25

The Philippine economy grew by 5.7 percent in 2021, beating the government’s 5-5.5 percent target range and rebounding from the 9.5 percent pandemic-induced recession in 2020.  This strong economic performance, the second fastest in ASEAN, brought the Philippines closer to its pre-pandemic 6.6 percent average gross domestic product (GDP) growth rate from 2012-2019.  Economic activity picked up during the year, driven by increased private consumption due to eased mobility restrictions, business reopening, and improvement in labor market conditions.  Philippine officials expect the country to achieve an upper middle-income status – a 2020 goal derailed by the pandemic – by 2023.  The Philippines’ gross national income per capita was estimated at around $3,500 in 2021, below the World Bank’s upper middle-income range of $4,096 to $12,695.

The Philippine government expects the economy to expand by 7-8 percent in 2022.  GDP grew by 8.3 percent in the first quarter, higher than the 6.7 percent forecast and reversing last year’s 3.8 percent economic contraction.  This brought the GDP to $88 billion, exceeding its 2019 level.  While strong domestic demand could help sustain the recovery momentum, external risks such as the Russian invasion of Ukraine, economic slowdown in China, global supply chain disruptions, and U.S. Federal Reserve rate hikes, cloud the overall economic outlook.  Domestic risk factors, such as potential COVID-19 infection resurgence, rising inflation, and increasing budget deficits and debts, could also temper the 2022 economic growth.  To meet the government’s GDP targets, officials support shifting all regions to the least restrictive COVID-19 alert level, boosting the vaccination rate, and fully resuming in-person schooling.  

Consumer price inflation averaged a three-year high of 4.5 percent in 2021, faster than the 2.6 percent in 2020 and above the Central Bank’s 2-4 percent target band.  Higher prices of meat, transport, and fuel were the top drivers of inflation for the year.  Inflation pressures continue to build up through 2022, caused mainly by the Russian invasion of Ukraine that pushed up international oil and commodity prices.  The inflation rate averaged 4.1 percent in January-May 2022, in line with the Central Bank’s expected annual average inflation rate of 4.6 percent.  Rising domestic food, transport, and utility costs, as well as increased wages and transport fares, significantly increased the inflation expectations.  

To tame rising inflation, the Philippines extended the lower most favored nation (MFN) tariff rates for pork and rice; reduced MFN rates for corn to 5 percent in quota (from 35 percent non-ASEAN) and 15 percent out-quota (from 50 percent); and eliminated the 7 percent MFN rate on coal.  The Central Bank in May also raised its key policy interest rate by 25 basis points for the first time since 2018, bringing it to 2.25 percent from a historic low of 2 percent.  This marks the Central Bank’s gradual exit from pandemic-induced monetary accommodation, which included a cumulative 200 basis points interest rate cut in 2020 and cash advances to the National Government as budgetary support.  The Central Bank hinted at further increasing its policy interest rates by at least 50 basis points for the rest of the year to contain price pressures.  

The balance of payments (BOP) position yielded a lower $1.3 billion surplus in 2021, from $16 billion in 2020.  The current account ran a deficit of $6.9 billion, from $12 billion in surplus the previous year, mainly due to wider merchandise trade gap amidst the gradual reopening of the economy.  Exports of goods rebounded by 12.4 percent, while imports of goods grew faster by 31.7 percent.  Net receipts in the secondary income account ($29.5 billion) and trade in services ($14.2 billion) expanded during the year, supported by sustained flows of remittances from overseas Filipino workers and revenues from the business process outsourcing industry, respectively.  Meanwhile, the capital account registered a 26.3 percent growth in net receipts to reach $80 million in 2021 from $63 million in 2020.  The financial account recorded net inflows of $6.9 billion in 2021, the same level as in 2020.  Net inflows in direct ($8 billion) and other investment ($6.2 billion) accounts were offset by net outflows in portfolio investment ($8 billion).  The Philippines’ stock market ended lower by 0.2 percent in 2021, as continuing COVID-19 uncertainties and fears of global economic slowdown drove investor sentiments.  The local currency bond market, on the other hand, grew by 14 percent in 2021, reaching $190 billion in outstanding debt securities.  Government and corporate bonds comprised 85.5 percent and 14.5 percent of the market, respectively.  

Net foreign direct investment (FDI) inflows rebounded after declining for three consecutive years and rose by 54% year-on-year to $10.5 billion in 2021.  The Philippines continues to lag similarly sized and ranked ASEAN neighbors in attracting FDI.  The United States — with an estimated $150 million in fresh investments in 2021, a 0.7% decrease from 2020 — ranks among the Philippines’ top investors.  The Philippines slightly improved its competitiveness ranking in 2022 (Rank 48 from 52 the previous year in the Institute for Management Development World Competitiveness Report) but continues to lag among Asia-Pacific peers due to poor infrastructure and a decline in government and business efficiency.  Investors also repeatedly cite government red tape, regulatory uncertainties, a slow judicial system, inconsistent application of laws by Local Government Units (LGUs), and corruption as challenges to doing business in the country.  Meanwhile, the passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) in March 2021 as part of the Comprehensive Tax Reform Program (CTRP) is expected to lure $4 billion in new investments in the next three years but is also estimated to erode government revenues by up to $10 billion in the next five years.  CREATE, deemed a pillar in the government’s COVID-19 response, cuts the corporate income tax rate to 25% for large enterprises and 20% for micro, small, and medium enterprises, from the current 30%, in exchange for rationalization of fiscal incentives.

The Philippine Central Bank’s gross international reserves (GIR) stood at $108.8 billion as of the end-December 2021, down from $110.1 billion a year ago.  As of April 2022, GIR remained high at $106.8 billion.  The latest GIR level represents an ample external liquidity buffer, equivalent to 9.4 months’ worth of imports of goods and services and payments of primary income and about 7 times the country’s external debt based on original maturity and 5.5 times based on residual maturity. 

Credit rating agencies Moody’s, Standard & Poor’s (S&P), and Fitch Ratings maintained the Philippines’ investment grade credit rating, although Fitch kept its outlook at “negative,” which suggests a credit downgrade is possible over the near-term.  Fitch flagged the country’s deteriorating fiscal position due to the COVID-19 pandemic, but cited modest government debt relative to peers, ample international reserves, and still solid economic growth prospects despite the pandemic.  The Japan Credit Rating Agency (JCRA) in April 2022 similarly affirmed the Philippines’ “A-” credit rating.  S&P has assigned a “BBB+” rating since April 2019, two notches above the minimum investment grade and just below the “A” scale.  Ratings from Fitch (“BBB”) and Moody’s (“Baa2”), meanwhile, are two steps below this scale.

The average unemployment rate eased to 7.8 percent in 2021, from 10.4 percent average in 2020.  This translated to a 3.7 million unemployed labor force, lower than the 4.5 million in 2020.  During the height of the COVID-19 pandemic in April 2020, the Philippines’ unemployment rate hit an all-time high of 17.6 percent (7.3 million unemployed).  Job quality remains a challenge, as the underemployment rate remained high at 15.9 percent in 2021. This nonetheless is an improvement from last year’s 16.4 percent underemployment rate, equivalent to about seven million looking for additional work and longer working hours.  The labor market steadily improved as of April 2022, with the unemployment rate down to the lowest level since the pandemic at 5.7 percent (2.76 million).  Meanwhile, the poverty rate rose to 23.7 percent as of the first semester of 2021.  This was equivalent to more than 26 million living below the domestic poverty threshold of about $228 in monthly income.  Before the COVID-19 crisis, the poverty incidence was down to 16.6 percent based on the 2018 survey, from 23.3 percent in 2015.

The political situation in the Philippines is stable, and the June 2022 change in administration was peaceful.  Elected in 2016 for a single six-year term, former President Duterte has sustained historically high approval ratings.  The Philippines experienced continued economic growth during his administration until it was significantly impacted by the COVID-19 pandemic and subsequent lockdowns in 2020.  In 2020, the Duterte Administration relied on business closures and travel and social distancing restrictions to contain the spread of the virus, which has negatively impacted many sectors of the economy.  

In May 2022, the Philippines elected President Ferdinand Marcos Jr. by an overwhelming margin.  President Marcos Jr. shared a few concrete economic proposals during his candidacy, including that he intends to lower consumer prices (currently inflated relative to wages due to rising fuel prices and global inflation), support Philippine farmers, and develop the country’s future energy security through nuclear energy (to replace coal-fired power in the long-term) and renewable energy (to help meet medium-term needs).  President Marcos Jr. has named experienced technocrats for key economic positions, including nominating the Central Bank Governor as the new Secretary of Finance. 

The Philippine government is consistently challenged by a lack of due process, checks and balances, systemic corruption, weak oversight and regulatory institutions, and an overburdened criminal justice system known for slow court procedures.  The national government launched a crackdown on crime and illegal drugs at the beginning of the Duterte administration that has drawn criticism from both the international community and human rights groups for violating civil liberties and led to the opening of an investigation by the International Criminal Court in 2021 into whether the campaign constitutes a crime against humanity.  The Administration of President Marcos Jr. has yet to articulate its program for combatting crime and illegal drugs. 

Terrorist groups occasionally attack civilian targets, kidnap civilians – including foreigners – for ransom, and engage in armed attacks against government security forces.  These groups have typically carried out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea.  Although both Islamic State-East Asia affiliated terrorist groups and the Communist Party of the Philippines-New People’s Army (CPP-NPA) are capable of conducting operations outside of the rural, southern Philippines, these attacks are rare in the more populous, urbanized northern areas of Luzon, which is home to more than half the country’s population and over two-thirds of GDP in 2020.  The national government is attempting to end one of the longest-running militant insurgencies in Southeast Asia through a peace process with the Moro Islamic Liberation Front (MILF), which resulted in the creation of the Bangsamoro Autonomous Region in Muslim Mindanao in 2019.  

U.S.-Philippines bilateral trade grew by 23.4% year-on-year in 2021 to $23.3 billion, recovering from the 11.4% decline the previous year due to the lockdown that restricted mobility of people and hampered the shipment of goods in and out of the country.  However, headwinds in renewed supply chain bottlenecks are still observed.  In 2021, the Philippines ranked as the 33rd largest export destination for U.S. products and the 30th largest source of U.S. merchandise imports.  The U.S. trade deficit with the Philippines was $4.8 billion in 2021.

The United States was the Philippines’ fifth largest country supplier in 2021, with a 6.6% share of the country’s imports.  The top two import sources of the Philippines were China and Japan, with 22.7% and 9.4% import share, respectively.  The United States was the largest export market of the Philippines, with 15.9% of total exports value in 2021.  It was followed by China, a very close second, which accounted for 15.5%.