The Philippines races ahead
The Philippines is expected to outpace other ASEAN economies this year as it rebounds strongly from the slump caused by COVID-19 lockdowns. That would be a continuation of the outperformance seen in recent years and would cement the Philippines reputation as one of East Asia’s most dynamic economies, argues Adrian Ashurst of Worldbox Business Intelligence.
The Philippine economy is forecast to grow by up to 8 per cent this year, according to Oxford Economics, as it bounces back from the record 9.5 per cent contraction seen in 2020 – a result of one of the world’s longest and strictest lockdowns to contain the coronavirus. Growth in 2021 is expected to be higher than that for the other ASEAN economies, including Malaysia (5.5 per cent growth forecast in 2021), Indonesia (4.7 per cent) and Thailand (4.0 per cent).
Sustained reforms and prudent macroeconomic policies appear to have raised the country’s long-term growth potential. According to the World Bank, the Philippines achieved an average annual growth rate of 6.4 per cent between 2010 and 2019: one of the fastest expansions in the world, and up from an average of 4.5 per cent between 2000 and 2009. The country is on its way from a lower-middle-income country, with a gross national income per capita of US$3,850 in 2019, to an upper-middle-income nation (with a per capita income range of US$4,046–12,535) in the near term.
Annual GDP growth in the Philippines and all ASEAN economies (%), 2010-2019
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
ASEAN economies 7.5 5 6.2 5.2 4.7 4.8 4.8 5.3 5.2 4.6
The Philippines 7.3 3.9 6.9 6.8 6.3 6.4 7.2 6.9 6.3 6
Source: World Bank, Statista
In the World Bank’s view, the key drivers of growth are increasing urbanisation, a growing middle class, a large and young population, a vibrant and competitive labour market, and robust remittances, which are propelling strong consumer demand. An ambitious programme of investment in the country’s infrastructure – new rail lines, a subway, highways, and bridges – in the coming years should also eliminate bottlenecks and further raise the country’s potential growth rate.
Liberalisationattracts foreign investors
Foreign direct investment (FDI) is lower than in regional peers, a reflection of strict rules that hinder global companies looking to enter a market dominated by local conglomerates. However, FDI is growing as the country adopts investor-friendly reforms. In 2020, for example, the Philippines jumped 29 ranking points compared with the previous year in the World Bank’s Doing Business2020 report. The Philippines is ranked 95th out of 190economies, and the climb up the league table reflects substantial improvements in the business climate. It is now easier to start a business and deal with construction permits, while minority investor protection has also been strengthened.
Further liberalisation seems likely this year. The government is expected to enact legislation that will cut corporate taxes in a bid to speed the economic recovery and attract foreign investment. Corporate income tax will fall from 30 per cent to 20 per cent for domestic corporations with total assets of no more than P100 million (just overUS$2million), excluding land, and with a net taxable income of no more than P5 million. The corporate income tax for all other corporations will be lowered from 30 per cent to 25 per cent.
The legislation will also grant up to 17years of incentives for exporters and for domestic-market enterprises declared as “critical” by the National Economic and Development Authority. The fiscal perks include four to seven years of income-tax holiday and ten years of special corporate income tax or enhanced deductions. Other domestic-market enterprises may enjoy up to 12 years of incentives.
FDI stock reached around US$88 billion in 2019, an increase of more than US$60 billion on the 2010 level. Moreover, while FDI in Southeast Asia contracted by 31 per cent in 2020, FDI in the Philippines rose by 29 per cent over the same period, mainly due to M&A deals in agriculture and energy, to reach US$6.4 billion. 
The pickup in FDI and economic reforms have contributed to a turnaround in the Philippines’ productivity growth. Fromlagging the ASEAN average in the first decade of the century, the country has become one of the regional leaders in productivity growth, a key determinant of economic prosperity.
Per-worker labour productivity growth in ASEAN member states (% growth), 2001-2010 and2011-2018
ASEAN 3.05 3.45
the Philippines 1.94 3.86
Indonesia 3.24 3.38
Malaysia 2.53 2.12
Thailand 3.14 3.49
Vietnam 4.48 4.79
Source: Regional Study on LaborProductivity in ASEAN, IMF, December 2020
Rebalancing global supply chains
While the pandemic hit the country hard, the Philippines should also benefit as a result of the move to shift supply chains out of China. The country offers many advantages to foreign investors, including “an English-speaking and well-skilled workforce, a strong cultural proximity to the U.S., exposure to an emerging market, and a geographical location in a dynamic region”, according to Santander. A relatively large domestic market of 110 million, the second-largest in Southeast Asia, provides further appeal.
The main sectors for investment are information and communication, electricity, gas, steam and air-conditioning supply, manufacturing, and administrative and support service activities. Singapore, South Korea, China and Japan are among the largest investors in the Philippines, but interest among US and European countries also appears strong, according to Standard Chartered. In March 2021, the banking giant cited its second “Borderless Business” study as showing that European and US companies ranked the Philippines among the top five countries in the region for opportunities to establish or expand their sourcing, selling or operations over the next six to 12 months. The Philippines central bank expects FDIto pick up to around US$7.5 billion this year.
This article is one of a series outlining key business trends in Southeast Asia identified by Worldbox Business Intelligence.
Worldbox Business Intelligence is a global solution provider of business intelligence and data analytics, headquartered in Zurich, Switzerland with research operations around the world.
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