Slower economic growth is expected
After growing at its fastest rate in over four decades, the Philippines’ economy is expected to slow in 2023 amid a complex domestic and global environment. The global economy will experience a slowdown, affecting the country’s exports (26% of GDP in 2021). In particular, weak demand for electronics will continue to weigh, as the sector accounts for around 60% of exports. Domestically, private consumption is also expected to soften amid tighter financial conditions and high inflation. In 2022, the latter averaged 5.8%. At January 2023, inflation had not yet peaked as it was spreading to a wider range of products and services. Climatic events in the last quarter of 2022 also contributed to the trend, exacerbating already elevated food inflation. Consequently, headline inflation and core inflation respectively hit a 14-year and a more-than-two-decade high in the first month of 2023. To address these developments, the Philippines’ central bank Bangko Sentral ng Pilipinas (BSP) responded aggressively, hiking its policy rate by a cumulative 400 basis points to 6% in February 2023. Rate hikes are expected to continue in the first half of 2023. In addition to these factors, a higher savings rate in the last quarter of 2022 (30.5%) may suggest the end of a “revenge spending” phenomenon that occurred following the gradual lifting of mobility restrictions that started in the second quarter of 2022. Nevertheless, the rebound in tourism and improvements in the labour market which saw the unemployment rate fall below pre-pandemic levels (4.3% in December 2022) should support household consumption (75% of GDP). Private investment growth is also set to moderate due to the tighter financial conditions which have been partly responsible for weaker business confidence. Although it benefits from government aid, the agricultural sector (10%) will remain vulnerable to high fertilizer prices and climatic events. Storms prevented growth in agricultural output in 2022, which registered a slight decline of 0.1%. Meanwhile, government spending should support further economic growth.
Small reduction in twin deficits
The public budget deficit should reduce moderately with Marcos’ first budget foreseeing larger expenditures. In the wake of Duterte and his ‘Build! Build! Build!’ programme, infrastructure will remain a priority, amounting to nearly 40% of the national budget. Meanwhile, higher spending should be devoted to agriculture, education, and health. Public debt is therefore expected to continue to increase in 2023. Having said this, its risk profile is limited by the relatively low share of foreign currency-dominated funding (around 30%). Regarding external accounts, the current deficit is likely to post a small reduction. After hitting a record-high in 2022, the deficit of the balance of goods will remain substantial but should nevertheless lessen. Despite the slowdown in export growth, the import bill will shrink along with reduced commodity prices and less buoyant domestic consumption. Although large remittance flows could take a hit from slower economic growth in their two major country sources, namely the US and Singapore, higher tourism receipts (22.5% GDP in 2019 but only 10.4% in 2021) and the development of the Business Process Outsourcing (BPO) industry will fuel the service balance surplus. Foreign investment, mostly in the form of FDI, cannot entirely cover the current deficit and will put pressure on international reserves. That said, reserves remain at comfortable levels, representing 7.3 months of imports as at December 2022. These external imbalances contributed to the Phillippine Peso being among the worst regional performers in 2022.
Maintaining close ties with two rivals
Rodrigo Duterte finished his permitted six-year term of office in 2022. The country elected Ferdinand Marcos Junior, the son of the namesake dictator who ruled the country for 20 years starting in 1965. Sara Duterte, Rodrigo’s daughter, was elected as vice-presidential. The President’s top priorities for his six-year term are infrastructure upgrades, fiscal management, and the improvement of the agricultural sector. Illustrating this, Ferdinand Marcos Jr appointed himself agriculture minister after he took office. The context of high commodity prices in 2022 has resulted in high food inflation and shortages in the country, drawing attention to the weaknesses of the sector. Externally, the country is trying to maintain close ties with the United States and China, a delicate exercise in the context of tensions between the superpowers. While the relationship with Beijing is vulnerable to a dispute regarding territories in the South China Sea, China is a major trade partner (2nd export destination with 15.5% of total exports in 2021). In early 2023, the two countries vowed to handle the issue through “friendly consultations”. In the meantime, the country enjoys historical ties and increasing support in terms of military matters from the world's leading economy. In February 2023, the Philippines granted the United States expanded access to its military bases amid tensions between China and the US’ ally Taiwan.