MANILA, December 5, 2023 – Fully implementing key reforms to bolster private investments is crucial for sustaining growth and boosting job creation in the Philippines amid challenges including high inflation, elevated interest rates, sluggish international trade, and global uncertainties associated with Russia’s invasion of Ukraine and conflict in the Middle East, the World Bank said in its semi-annual Philippines Economic Update (PEU).
The Philippine economy is expected to grow by 5.6 percent in 2023 and edge up to 5.8 percent in 2024, driven by a healthy labor market and stable remittances growth that continue to fuel robust household consumption. The services sector is anticipated to be the main driver of growth, supported by the ongoing recovery of the tourism sector and the consistent performance of the information technology and business process outsourcing industry. This activity is likely to stimulate job creation, boost household incomes, and benefit consumption and tourism-related industries.
“Persistently high inflation amid volatility in global commodity prices, the high cost of borrowing for businesses and households, and geopolitical uncertainty have affected private investments,” said Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, the Philippines, and Thailand. “Full implementation of key recent reforms is important to mitigate these challenges, stimulate private investment, and promote job creation and poverty reduction."
In recent years, the Philippines has enacted several legislations that are expected to boost private investment and enhance the country’s attractiveness as an investment destination.
Reforms include amendments to the Public Services Act allowing full foreign ownership of businesses in industries such as airports, railways, expressways, and telecommunications; the Retail Trade Liberalization Act lowering the paid-up capital requirement for foreign retail enterprises; the Foreign Investment Act allowing international investors to set up and own domestic enterprises, including micro and small enterprises; and amendments to the implementing rules and regulations of the Renewable Energy Act allowing foreign ownership of renewable energy projects.
The enactment of the new Public-Private Partnership Code, which aims to establish a unified legal framework for all public-private partnership (PPP) projects, will enhance clarity and predictability. This, in turn, will further encourage private sector participation in PPP initiatives and reduce risks during implementation.
Additionally, the passage of reforms aimed at promoting competition in digital services, increasing connectivity, strengthening financial inclusion, and enhancing government service delivery through digitalization will attract more investments in the digital economy and improve market access for medium and small-scale enterprises.
Inflation is likely to ease, but there are risks that could cause it to rekindle, including volatility in global commodity prices amid escalating global geopolitical tensions and increasing trade restrictions; the persistent threat of climate shocks, including the current episode of El Niño, to the domestic food supply; and currency depreciation, the report says.
According to Ralph Van Doorn, World Bank Senior Economist, the government’s strategy of using both monetary and non-monetary policy measures will help contain inflationary pressures, while continuing the use of targeted social protection and transfer programs will mitigate the impact of high inflation on poor and vulnerable Filipinos. He added that enhancing forecasting and planning to help stabilize food prices, reduce market volatility, and ensure a consistent and reliable food supply remains fundamental to reducing inflation in the short term.
“In the long term, more effective public spending in agriculture could boost productivity and improve local food supply, thereby reducing the impact of food price shocks that disproportionately affect the poor,” said Van Doorn. “The flagship 4Ps cash transfer program, the digital food stamp program to ‘food poor’ families, cash subsidies to farmers, and fuel subsidies to public utility vehicle operators remain important tools to protect the incomes of poor and vulnerable Filipinos.”
Sustaining the country's efforts towards fiscal consolidation, which involves reducing fiscal deficits and improving revenue intake, will strengthen the business environment by enabling businesses to make long-term investment decisions with greater confidence, supporting job creation, increased productivity, and overall economic growth.
To enhance long-term growth potential, addressing structural challenges to growth in key sectors will be key, the report says. Effective implementation of pro-investment reforms in renewable energy and sectors like trade, transport, and telecommunications would generate economy-wide productivity gains. Also, undertaking reforms to increase access and enhance the resilience of water supply and sanitation, education, and health care systems, can enhance potential growth in the face of climate change impacts, public health crises, or natural disasters.