Economic growth slowed in the first half of 2019, driven by a rapid deceleration in investment growth due to contraction in public spending and weaker global economy. Nevertheless, the Philippines expects to sustain progress in poverty reduction.
Amidst rising global uncertainties, the Philippine economy remains strong and is projected to grow 5.8% in 2019, before recovering to 6.1% and 6.2% in 2020 and 2021, respectively.
In the short term, fast tracking the implementation of recently approved game-changing reforms would help to achieve inclusive growth. In the long-term, promoting competition to generate quality jobs will enhance the impact of growth on poverty reduction in the Philippines.
Recent Economic Developments
In the first half of 2019, economic growth slowed to its lowest level in eight years amid challenging external environment and a significant slowdown in investment growth.
Private consumption was the main growth driver, as growth recovered to 5.8% year-on-year in the first half of 2019 from 5.3% during the same period last year, driven by moderating inflation, steady remittance inflows, an improving job market, and an increase in economic activity from election-related spending.
Declining inflation driven by stabilizing prices of food and energy prompted the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) to adopt a more accommodative policy stance in 2019. Inflation fell to 1.7% in August 2019, the lowest in almost 3 years.
The Philippine government’s expansionary fiscal policies for 2019 was put on hold as the delayed passage of the 2019 public budget impacted the pace of public spending significantly in the first half of the year, resulting in substantial underspending. Nevertheless, the implementation of previous tax-policy reforms led to robust revenue, resulting in a lower than programmed fiscal deficit for the first half of 2019.
Improving labor market conditions, and sustained growth in real household incomes, led to progress in poverty reduction.
Outlook and Risks
The Philippines’ growth outlook is weakened by a difficult external environment and domestic challenges, as growth is expected to slow from 6.2% in 2018 to 5.8% in 2019, before recovering to 6.1% in 2020 and 6.2% in 2021. Both fiscal and monetary policy remain supportive of growth, while a weak global economic environment and a slow recovery in public investments, constitute the main downside risks.
Poverty reduction is expected to continue based on the current economic outlook. The country’s poverty rate measured by the World Bank middle-income poverty line of US$3.20/day is estimated to have declined from 26% in 2015 to 20.8% in 2019, and further declining to 19.7% in 2020, and 18.7% in 2021.
In the short-term, resuming public investment and fast tracking the effective implementation of game-changing reforms such as the Ease of Doing Business Law, the Rice Tariffication Law, the creation of a foundational ID system, and other such transformational policy changes would be critical to set the country to a higher path toward accelerating inclusive growth. While in the long-term, promoting competition to foster quality job creation will enhance the impact of economic growth on poverty reduction and shared prosperity.
Fostering Competition and the Challenge of Restrictive Regulations
Philippine markets are highly concentrated limiting market competition.
The lack of competition in key sectors has negatively impacted Philippine firms and consumers, resulting in sub-optimal outcomes in key sectors such as electricity, telecommunications, transport and logistics.
Reducing restrictions to market competition would yield significant payoffs for households and firms in the country to boost the economy’s overall competitiveness.
Implementing these reforms will be critical:
Address unclear or restrictive regulations in infrastructure sectors and professional services to create more competitive conditions;
Eliminate restrictions on foreign and domestic investors to help level the playing field;
Minimize the scope of controlled prices to incentivize firms to compete;
Lessen the involvement of state-owned enterprises and other operations in typically competitive markets to promote a more effective use of public funds; and
Streamline burdensome administrative procedures for businesses to make it easy to enter the market.