2015 Philippine

Economic Outlook
M IRAVITE C ONSULTING G ROUP
February 2015

Robust GDP Expansion to

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T he Philippine economy is expected to grow by

approximately 6% in terms of real Gross Domes-
tic Product (GDP) in 2015 and approximately 6% also
in terms of real Gross National Product (PH GNP is
higher than PH GDP in absolute terms because of
net factor income from abroad/OFW remittances).
The growth in GNP is undoubtedly helped by Figure 1: Real GDP Growth Rate of the Philippines
OFW remittances which are expected to grow by
approximately 7% this year and hit a figure of US$
25.6 billion for the full year. OFW remittances have sum of real GDP growth and the inflation rate). Thus,
helped push consumption expenditures, which ac- incremental GDP (note that production translates
counts for approximately 75% of the country’s GDP, into income) will be approximately PhP 1.3 trillion.
higher in absolute terms. Overall GDP growth will Considering the fact that consumption is approx-
occur on the back of expansion in sectors such imately 75% of GDP, the additional consumption
as power, infrastructure, BPOs, property/housing, will be about PhP 975 billion, which is a significant
gaming and entertainment, consumer goods indus- amount for the various firms in the country. This
tries, and retail trade, among others. Figure 1 showsis the (potential) amount which many companies
the Philippine real GDP growth rate in the past few will go after and which can be the source of their
years. revenue growth, on top of the OFW remittances.
Figure 2 shows consumption data of the Philippines
in the past few years.
A Growing Consumption Pie The demographic characteristics of the Philip-
pines are favorable to growth, unlike other countries
In absolute terms, Philippine GDP is expected to hit whose populations are aging and thus the act of
approximately PhP 14.3 trillion in 2015, compared to saving becomes a priority in preparation for retire-
PhP 13 trillion in 2014 (nominal GDP growth is the ment (e.g., Japan). Aside from a relatively young

2015 Philippine Economic Outlook • February 2015 page 1 of 5

population (as compared to Japan and Europe), the policy. This is crucial because credibility plays an
Philippine population is relatively large in absolute important role in achieving macroeconomic stability.
terms at 101.57 million (2014 estimate by Philippine Note that the country’s inflation rate decelerated
Statistics Authority, based on 2010 Census data). to 2.7% in December (from 3.7% in November, 4.3%
October, 4.4% September and 4.9% July and Au-
gust). The core inflation rate (which takes out the
supply-side shocks) likewise decelerated to 2.3% in
December (from 2.7% in November, 3.2% October,
3.4% August and September). It is important to also
note that the price of oil has gone down due to
hydraulic fracturing, slower world economic growth
compared to before, and the inability of the OPEC
cartel to cut oil output at this point in time. In
light of all these developments, interest rates in the
Figure 2: Consumption Expenditures in Current Pesos Philippines are likely to remain stable. The other
(trillions) macroeconomic variable – the unemployment rate –
is expected to be in the 7-7.5% range.
The continuous growth of the Philippine economy,
especially in the past few years has led to “consumer
affluence.” This is expected to raise the propor-
tion of the consumers’ expenditures on items other
than those deemed truly essential (necessities/basic
goods). Such a phenomenon is an empirical regu-
larity in economics (and is called the Engel’s law).
Thus, sectors such as retail trade, gaming, and en-
tertainment will benefit from such growth. Such
“consumer affluence” can be seen in the expansion
of malls, which showcase international brands in Figure 3: Inflation Rate (Philippines)
the clothing industry, and the proliferation of up-
scale restaurants, Starbucks, gadgets and the like.
Advertising, technology, and media in general have
no doubt also played an important role in growing Recent Weakening of the
consumption expenditures. Lower oil prices will
also help boost consumption spending this year. Peso Not Reflective of
Philippine Macroeconomic
Low Inflation Rate to Remain; Fundamentals
Interest Rates are Expected The weakening of the Philippine Peso from the PhP
to Remain Relatively Stable 40 level to the PhP45 level should not be a cause
for major alarm. Such weakening of the Peso is
The country’s inflation rate will be under control a result of the volatility of capital flows due to
and is expected to be within the 2-4% target range concerns about the U.S. Federal Reserve’s tapering
of the Bangko Sentral ng Pilipinas (BSP). “Inflation of its bonds-buying program and probable interest
targeting” is the monetary policy approach of the rate increases in the coming years. Thus, it is more
BSP and it has been quite successful in managing of the financial markets’ reaction and less reflective
inflation in the past many years. Figure 3 shows the of Philippine macroeconomic fundamentals.
relevant data. The Governor of the BSP, Amando Indeed, the weakening of the Peso was a positive
Tetangco Jr., has received numerous awards and development because when the peso was hovering
citations in the field of central banking/monetary at the PhP 40 level and showed signs of further

2015 Philippine Economic Outlook • February 2015 page 2 of 5

possible appreciation, it was threatening the viability see Figure 4).
of the BPOs, hurting the export sector in general,
and harming the welfare of OFWs. Therefore, the
weakening of the Peso actually helped these 3 major
sectors. Furthermore, when the Peso was appreciat-
ing before, it was hurting the financial position of
the BSP, which had to buy the dollars in the forex
market and incur foreign exchange losses. It was
deemed necessary to do this to help the export sec-
tor. Otherwise, the competitiveness of the export
sector would have been seriously threatened. Now,
with the continuous appreciation pressure largely
Figure 4: Current Account Balance as % of GDP (PH)
dissipated, the BSP can have a sigh of relief.
We expect the Peso to exhibit volatility and
hover/fluctuate at the PhP 44:USD 1 level due to The past years, however, have shown positive
volatility in financial markets and capital flows (it current account surpluses and we project a current
is difficult, however, to pin down exactly the peso- account surplus of approximately 3% for this year.
dollar rate due to the unpredictable nature of capital Figure 5 shows the relevant data.
flows). The volatility of the exchange rate should
not be construed as a sign of a fundamental weak-
ness of the economy and should not set off alarm
bells as mentioned above. This should only be the
case if the economy shows continuous current ac-
count deficits over the years (more on this in the
paragraph below dealing with balance-of-payments).
Regarding the BSP’s financial position, should the
BSP need an infusion of capital from the national
government, the latter should do so in a timely
and efficient manner as the BSP needs solid sup-
Figure 5: Current Account Balance as % of GDP (PH)
port for it to continue implementing its responsible
monetary policies.
Another very important economic indicator to
look at when assessing the external/BOP position of
Philippine Current Account the Philippines is the external debt to GDP ratio. The
Philippines has shown tremendous improvement in
Balance to Remain in a this area over the years as shown in Figure 6 (a ratio
Surplus Position above 40% is a red flag).

It is important to look at the current account po-

sition of the country’s balance-of-payments (BOP).
This is because Philippine macroeconomic history
has been a boom-and-bust story time and again,
primarily because we oftentimes run into BOP diffi-
culties due to foreign exchange constraints. Indeed,
this is the major reason why the country’s external
debt ballooned under Ferdinand Marcos. Even dur-
ing the Ramos era when our economy was expand-
ing prior to the occurrence of the Asian economic
Figure 6: External Debt to GDP Ratio
crisis in mid-1997, our economy was suffering from
sizable trade and current account deficits (please

2015 Philippine Economic Outlook • February 2015 page 3 of 5

A Sound Banking System
The Philippine banking system remains on solid
footing. The Gross Non-Performing Loan (NPL) ratio
of the PH banking system is only 2.56% as computed
by the BSP (as of September 2014). The net NPLs
are even lower as Philippine banks have significant
provisions for probable loan losses (allowance for
credit losses) which they source from their profitable
operations. Philippine banks also are more than
adequately capitalized with the capital adequacy
ratio (CAR) at 15.94% as of November 2014, much
higher than the minimum 10% set by the BSP and
the international standard of 8%. Table 1 shows
pertinent data of the Philippine banking system (as
of September 2014).
Having a solid banking system is crucial because
a collapse of the banking system can lead to the
collapse of the macroeconomy. Note that the Non-
Performing Asset (NPA) ratio (NPA ratio equals NPL
ratio plus ROPOA; ROPOA stands for Real and Other
Property Owned and Acquired; the latter represents risk analysis – BOP analysis, banking system health,
foreclosed collateral) of the Philippine banking sys- and the financial viability of the government’s fiscal
tem during the Asian economic crisis exceeded 20%. position – the Philippines passes with flying colors.
Impaired bank balance sheets and financial positions
lead to credit crunches and to significant drops in
economic activity.
Gross NPL Ratio 2.56%
(incl. interbank loans)
Gross NPL ratio 2.64%
(excl. interbank loans)
Net NPL ratio 0.63%
(incl. interbank loans)
NPL coverage 117.20%
Table 1: Asset Quality Indicators of the Philippine Bank-
ing System
A Healthy Fiscal Position
The government debt as a % of the country’s GDP
is expected to be at 49% for this year, below the
critical threshold of 60% (when the ratio is above
60%, then a red flag is raised). Figure 7 shows
2015 Philippine Economic Outlook • February 2015
the relevant data. This is a very good achievement
considering the fact that the ratio reached 73.9%
in 2004 (before the imposition of the E-VAT) which
pushed the country at risk of having a sovereign
debt crisis if the deterioration continued. This
major improvement is one of the reasons why the
Philippines received last year credit-rating upgrades
from the major rating agencies.
Figure 7: Government Debt as % of GDP
Thus, with respect to the 3 major parts of country
Areas that Need Improvement
It is without doubt that the country’s economy will
continue to grow this year and next year. The
challenge is how to make our economic growth
sustainable in the long-run. A number of areas
definitely need to see improvement if our economic
growth is to be sustainable in the long run and for
us to move up into the next stage of development.
They are as follows:
• Better balance in the economy is needed; there
is a need to balance consumption and invest-
ments; more economic investments are needed
especially in the area of power; we do not want
a repeat of the power crisis in the early 1990s
when we had 8-10 hour brownouts daily
• Higher tax effort in collecting tax revenues;
our tax revenues as a % of GDP remains low
at 14.1% (preliminary estimate for 2014); this
needs to be improved if we are to finance
the country’s development programs such as
education, health care, public infrastructure,
etc.
page 4 of 5
 • Growth has to be more inclusive – growth has
to reach the majority of the country’s popula-
tion especially the lower classes

• Underemployment remains high at approxi-

mately 20

• Low foreign direct investments (below $5 billion

for the Philippines) especially when compared
to our Asian neighbors (Indonesia: approxi-
mately $20 billion)

• Weak regulatory policy – this can be seen in

sectors such as the power industry and water
industry

• Slow PPP

• Poor physical infrastructure

• High power costs

• Need for industrial upgrading of our manufac-

turing sector to achieve better competitiveness;
this should be reflected in better total fac-
tor productivity (TFP) and incremental capital-
output ratio (ICOR) in the future

• PH agricultural sector needs support; many of

the sectors in agriculture are not competitive
especially in lieu of the lowering of tariffs

• Bureaucracy/ease of doing business – too many

permits needed to pursue a project

• Significant improvement in human resources

needs to be achieved – education, technical
skills and the like

• Better social infrastructure (note: social infras-

tructure pertains to the rule of law, peace and
order, the effectiveness of the judiciary, the
quality of governance of the government, level
of corruption, and the like); development eco-
nomics has shown that a high level of social
infrastructure in terms of quality brings higher
amounts of human capital investments and
physical/economic investments which are both
critical in the growth process of a country. 

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