Philippine Economic Update 2012: Accelerating Reforms to Sustain Growth

January 15, 2013

Economic growth accelerated to 7.1% in the 3rd quarter of 2012, but accelerating the implementation of reforms necessary to translate higher growth into jobs.

Report Highlights:

* The Philippine economy is one of the fastest growing economies in East Asia, posting a 7.1% growth in the third quarter of 2012 - driven by strong performance in the construction sector, robust private consumption and recovery of government spending. Overall, the economy is expected to expand by over 6 % this year, up from 3.9% last year.
* Sound macro-economic fundamentals - seen in low inflation and large current account surpluses and foreign exchange reserves, continue to shield the economy from external headwinds.
* A more diversified export basket allowed total exports to grow despite the decline in electronics export.
* However, weak global activity and uncertain economic outlook pose downside risks. Growth and employment in high income countries remain subdued. And while China's growth shows signs of bottoming out, the limits of its investment-led growth model could be tested going forward. Growth in remittances could decelerate further if Europe's recession and the fiscal worries of the United States continue.
* Strong domestic demand should hold up at around 6% in the near term, provided the government maintains a strong reform momentum. The recently-passed tobacco and alcohol excise tax reform law is estimated to yield about 0.4% of GDP in revenues earmarked for the universal health program. Higher public and private investment could push the country’s investment-to-GDP ratio to around 24 percent in the coming years, boosting potential growth.
* More structural reforms are needed to create more and better jobs as the overall labor market outcome has been less responsive to higher economic growth. To achieve a more inclusive growth pattern and to take full advantage of opportunities arising from global and regional economic rebalancing, the economy needs to shift from consumption to investment, and from low-wage and low-skill services to labor-intensive manufacturing and high value services, supported by rising productivity in agriculture.
*The shift will require carrying out policy reforms in agriculture, manufacturing, business and labor regulations. In the past, reform efforts were often thwarted by with strong vested interests in the status quo. However, when reforms did succeed (e.g. the earlier opening up of the telecoms sector to new players and competition), the impact on jobs was substantial (the establishment of a world-class business process outsourcing industry).
*Finally, aggressively scaling-up various existing open government/open data initiatives in the country can greatly strengthen the inclusiveness of the country’s institutions and deal a blow to corruption.