Strong domestic demand buoys Philippine economy

Euromonitor International 23 February 2009

The Philippines has fared better than some of its neighbours during the global financial crisis, with real GDP growth in Q4 2008 surpassing predictions at an annual 4.5%. Strong domestic spending and a thriving services sector are helping to offset the adverse effects of international economic turmoil. However, slowing exports and remittances as a result of the global slowdown are a concern. The domestic-focused banking system had low exposure to the fallout of the US subprime crisis of 2007-2008: Consumer expenditure in the Philippines increased by an annual average 5.3% between 2003 and 2008 in real terms. Consumer spending accounted for over two thirds of GDP in 2008; Remittances are a major contributor to the Philippine economy and accounted for 11.3% of GDP in 2007; Annual inflation eased to 8.0% in December 2008 after a 14-year high of 11.4% in June 2008. Falling oil and food prices, combined with a strong Peso, have helped take financial pressure off consumers.

Chart 1

Philippine remittances and exports: January-November 2008

US$ 000 and US$ million

Source:

National statistics

Implications
Despite the global economic slowdown, remittances are reported to have risen by 15.1% to US$15 billion between January and November 2008; The consumer confidence index rose by 12.5% between Q3 and Q4 2008, as a result of lower prices for basic goods and sustained remittance inflows; However, exports dropped in the second half of 2008 owing to lower demand from recession-hit trading partners. The value of exports fell by 14.9% in November 2008 compared to the previous month, and the electronics sector was the worst affected. Electronic goods accounted for 57.7% of exports in November 2008; The typically strong services sector is starting to suffer from lower international demand, with growth dropping to 4.9% in Q4 2008 compared with 8.1% a year earlier; FDI is declining rapidly falling by 46.6% year-on-year in 2008. However, only 2% of GDP derives from FDI, which means that smaller inflows will not have a dramatic impact on the economy; The Philippine economy's relatively low dependence on exports (30% of GDP in 2008) means that it is less vulnerable to the global slowdown than other economies in the region, such as Malaysia and Singapore. The Philippines also has a strong outsourcing sector, which is still unaffected by the global financial crisis, since the Philippines is able to undercut competitor nations such as India and Eastern European countries on cost.

Chart 2

Quarterly value of the services sector and real GDP growth in the Philippines: 2007-2008

million pesos / % annual change

Source:

National statistics

Prospects
Despite strong fundamentals and buoyant consumer sentiment, real GDP growth is projected to slow to 3.5% in 2009 from 4.4% in 2008 as falling demand for exports and job losses in overseas employment markets catch up with the Philippines. Remittances are at risk of declining in 2009 as a result of job losses in recession-hit countries in Asia, Europe and North America, especially in the manufacturing sector. This will damage growth of the remittancedependent economy and lead to lower consumer spending. A US$633 million government stimulus package announced in January 2009 with a focus on infrastructure development, job creation and extended social security may encourage consumers to spend more. The government plans to create 3 million new jobs by the end of 2009, which could help offset falling overseas employment opportunities.