Philippines - Country Commercial Guide
Market Overview

Discusses key economic indicators and trade statistics, which countries are dominant in the market, the U.S. market share, the political situation if relevant, the top reasons why U.S. companies should consider exporting to this country, and other issues that affect trade, e.g., terrorism, currency devaluations, trade agreements.

Last published date: 2020-07-20

The Philippines is the thirteenth largest country in the world by population (more than 109 million) and is the sixth largest English-speaking country. It also has one of the youngest populations in the world, with about 43 percent of the population under the age of 20. Approximately 90% of Filipinos are functionally literate. Relatively high population growth (nearly two percent annually) will continue to help drive economic growth for the next several years, while also increasing the strain on social spending and the country’s infrastructure.

•    Before the COVID-19 crisis, the Philippine gross domestic product (GDP) consecutively documented 6%+ growth since 2012 – making the country one of the fastest growing economies in the world. The Philippines was also on track to graduate to an upper-middle income status by 2020 with $3,830 per capita income as of latest 2018 World Bank data, close to the $3,956 threshold. Consumer spending -- supported by remittances from more than ten million Filipino migrants and overseas workers --  anchors economic growth (up 5.9 percent in 2019) as it comprises more than two-thirds of the economy at over $33.5 billion in 2019.   

•    In the first quarter of 2020, GDP contracted by 0.2 percent in an early sign of fallout from more than two months of COVID-related lockdown. While the Enhanced Community Quarantine (ECQ) ended for the Metro Manila Region in early June, a General Community Quarantine (GCQ) with restrictions still continues as of July 15. Public Transportation and business operations have not fully resumed, and with infection rates increasing, the government expects continued negative economic impact for the rest of the year. The two decade growth streak will slow down, and is expected to result in negative 3.4% GDP growth for 2020. Some say that this figure may also be too optimistic, and that the Philippines will have a harder time recovering in comparsion to ASEAN neighbors. However, others remain positive, citing continued confidence from multilateral lenders and credit rating agencies, and strong macroeconomic fundamentals (characterized by healthy fiscal position and high international reserves), that could enable the economy to bounce back in 2021. 

•    Consumer price inflation averaged 2.5 percent in 2019, well-within the government’s two to four percent target for 2019 to 2020 and down from a 5.2 percent spike in 2018. Softer food prices (2.1 percent in 2019 from 6.8 percent in 2018), supported by the downward trend in rice prices because of a 2019 law liberalizing the rice market (Rice Tariffication Law), limited upward pressures on inflation. The central bank sees the inflation rate settling at the low-end of their target range in 2020, as the pandemic is expected to weigh down both domestic and global demand. Lower international oil prices also support the subdued inflation environment. 

•    For January to May 2020, the inflation rate averaged lower at 2.5 percent from 3.5 percent in the same period in 2019. The favorable inflation dynamics gave the central bank enough leeway to ease policy interest rates to support the economy amid the ravages of the COVID-19 pandemic. Since May 2019, the central bank has cut rates by a total of 200 basis points, unwinding the 175 basis points rates hike in 2018 and bringing overnight repurchase rate to a record low 2.75 percent. The central bank also gradually slashed commercial banks’ reserve requirements ratio to 12 percent from 18 percent in June

2018, while promising to trim it further to 10 percent before the end of 2020.
The balance of payments reversed to a $7.8 billion surplus (2.2 percent of GDP) in 2019 from a $2.3 billion in deficit the previous year. The turnaround resulted from a remarkably lower current account deficit, from 2.7 ($8.8 billion) percent in 2018 to 0.1 percent of GDP ($464 million) in 2019, due to a narrower trade gap and higher net receipts in the trade in services and primary and secondary income accounts. The current account deficit in the past four years, which came after 13 years of surpluses prior to 2016, had been largely driven by high imports of construction materials and equipment for the government’s BBB (Build Build Build) infrastructure program. The Merchandise trade gap decreased by 8.8 percent in 2019, as imports fell 3.0 percent while exports rose 2.7 percent. Exports of services, consisting mainly of business process outsourcing (BPO) revenues, grew by 12.4 percent ($13 billion); while the primary and secondary income accounts benefitted from continuing remittance inflows and lower payments to foreign direct investors. Meanwhile, the capital account surplus increased by 7.5 percent to $70 million in 2019 from $65 million in 2018. The financial account recorded lower net inflows of $6.3 billion from $9.3 billion the previous year as decreases in foreign direct investments (down 23.1 percent to $7.6 billion) and other investment account inflows (attributed mainly to higher net lending by local banks to non-residents and higher national government loans from non-residents) offset the 69.3 percent increase in net foreign portfolio investments ($5.6 billion). The Philippine stock market ended 2019 higher by 4.7 percent, reflecting a rebound in investor sentiments amid falling inflation and interest rates and resilient economic growth. However, the Philippine stock exchange (PSEi) index suffered a deep 31.9 percent drop in the first quarter of 2020 compared to end-2019 level as pandemic worries led to a massive sell-off in stocks.

•    Net foreign direct investment (FDI) inflow, which started strong in the first few years of the Duterte Administration  reversed its uptrend in 2018 and decreased by 23 percent year-on-year to $7.6 billion in 2019. The Philippines lags  behind is similarly sized and ranked ASEAN neighbors in attracting   FDI.  The United States -- with an estimated $7.6 billion (FDI stock) in 2018, a 7.4 percent increase from 2017-- ranks among the Philippines’ top investors. The Philippines slipped in terms of global competitiveness after successively registering overall improvements in various competitiveness rankings over the past seven to eight years, with inadequate physical and digital infrastructure the main drivers for the decline. Investors also repeatedly cite  government red tape, regulatory uncertainties, a slow judicial system, and corruption as challenges to doing business in the country.

•    The Philippine Central Bank’s gross international reserves (GIR) stood at $87.8 billion as of end-December 2019, up significantly from a seven-year low $79.2 in reserves a year ago. GIR continued to increase to an all-time high $90.9 billion as of April 2020. The GIR level represents an ample external liquidity buffer, equivalent to 8.0 months’ worth of imports of goods and services and payments of primary income and about 5.5. times the country’s external debt based on original maturity and four times based on residual maturity.

The national government recorded a 3.55 percent fiscal deficit-to-GDP ratio in 2019, overshooting the 3.25 percent ceiling and increasing from 3.2 percent in 2018. Public expenditures rose by 11.4 percent and exceeded the target by about one percent in 2019, as agencies caught up on budget disbursements towards the end of the year. Infrastructure disbursements expanded by 9.7 percent and surpassed programmed expenditures by 2.6 percent in 2019, bolstered by December outlays for big-ticket road and bridge projects, railways construction and rehabilitation, and military modernization. Meanwhile, government revenues grew by 10.1 percent in 2019, but still short from target collections. Nevertheless, higher tax receipts (up 10.2 percent in 2019) boosted tax collection efforts to a 22-year high of 16.9 percent in 2019. Higher collections from Tax Reform for Acceleration and Inclusion Act (TRAIN) (up 8 percent from target in 2018; up 18.2 percent in Jan-Sep 2019), the first package under the Duterte administration’s Comprehensive Tax Reform Program (CTRP), helped the government source the needed funding for higher 2020 program expenditures, which have been redirected to COVID-19 pandemic response and recovery measures. The increases in sin taxes on tobacco products, alcohol, vapes, and e-cigarettes effective January 2020 are expected to beef up government coffers to help fund a universal healthcare law signed in 2019. For fiscal year 2020, the fiscal deficit is expected to jump to 8.1 percent of GDP as the COVID-19 pandemic depresses tax collections, while disbursements for COVID measures rise. This could bring the Philippines’ debt-to-GDP ratio to about 50 percent in 2020 from a low of 39.6 percent recorded the previous year. As part of pandemic stimulus measures, the Duterte administration is ushering the passage of the second CTRP package Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which seeks to accelerate corporate tax cut to 25 percent from one of Asia’s highest 30 percent rates in exchange for rationalization of fiscal incentives. The proposal is the first-ever tax-eroding CTRP measure, expected to result in $840 million in forgone revenues in 2020 and $12.5 billion in the next five years.

•    Credit rating agencies Moody’s, Standard & Poor’s (S&P), and Fitch Ratings affirmed the Philippines’ investment grade ratings in May 2020, while Japan Credit Rating Agency (JCR) upgraded its rating to target “A-” reflecting the country’s resilient medium-term growth prospects and strong macroeconomic fundamentals despite the pandemic’s economic damages. S&P has assigned a “BBB+” credit rating since April 2019, which is two notches above the minimum investment grade or just below the government’s target “A” scale. Fitch and Moody’s, meanwhile, pegged the country’s credit ratings two steps away from the target threshold. Debt watchers have warned a downgrade is possible if the Philippines suffers a worse and prolonged economic downturn as well as a deterioration in its fiscal position.

•    The unemployment rate fell to 5.1 percent in 2019 from 5.3 percent in 2018, translating to 2.3 million jobless Filipinos in 2019. This result was near the upper end of the 4.3 to 5.3 percent target in the Philippine Development Plan 2017-2022. The labor force participation rate was up 0.4 points to 61.3 percent while the underemployment rate was down 2.4 points to 14.0 percent, indicating increased jobs generation during the year amid sustained economic expansion. The government estimates net jobs created in 2019 at 1.3 million. Unemployment is expected to increase in 2020 as the government estimates 4 million job losses due to the impact of the global pandemic.  Poverty incidence declined to 16.6 percent in 2018 from 23.3 percent in the previous 2015 survey and studies suggest the middle class is expanding. Although gradually improving, the high level of inequality nevertheless remains a challenge; the incidence of poverty varies significantly across regions.  Additionally, the expected economic contraction in 2020 could delay the government’s goal to bring down poverty further to 14 percent by the end of President Duterte’s term in 2022.

•    The political situation in the Philippines is stable. Elected in 2016 for a six-year term, President Duterte sustains high approval ratings.  He has cracked down on crime and illegal drugs, though his anti-drug campaign has drawn criticism from the international community and human rights groups.  Economic stability and business activity have continued largely unabated. 

•    The Duterte administration is attempting to end one of the longest running and most debilitating militant insurgencies in Southeast Asia.  Despite the liberation of Marawi City – a regional hub of 200,000 people in the southern island of Mindanao – from a five-month terrorist siege in October 2017, terrorism remains a threat.  The entire island region of Mindanao was placed under martial law from 2017 until the end 2019, when it was allowed to expire.  Although there has been progress in implementing the 2014 peace agreement between the government and the Moro Islamic Liberation Front, with the government providing greater political and economic autonomy for Muslim Mindanao, there remain significant challenges to peace and security. 

•    U.S.-Philippines bilateral trade has grown by almost 40 percent since 2010, amounting to US$21.6 billion in 2019.  In 2019, the Philippines ranked as the 33nd largest export destination for U.S. products and the 29th largest source of U.S. merchandise imports. The U.S. trade deficit with the Philippines was at US$4.2 billion in 2019.

•    The United States was the Philippines’ fourth largest country supplier in 2019, with a 7.2% share of the country’s imports. The top three import sources of the Philippines are China, with a 22.8% import share; Japan, 9.5%; and South Korea, 7.6%. The United States was the Philippines’ largest export market, with 8.9% percent of total value in 2019.