Q: What’s your macroeconomic outlook for the months to come?
A: The Philippines remains one of the fastest growing economies in Asia and the world, having grown by 7% in quarters one to three in 2016. We expect to achieve, if not exceed, the full-year growth target of 6%-7% on the back of higher government spending, rising private-sector investments and robust consumption.
The country’s productive capacity has increased over the past decades, allowing the economy to maintain robust growth without stoking inflation. We expect inflation to average below 2% this year, before inching up to within the midpoint of the target band of 2%-4% in 2017 and 2018. Strong macroeconomic fundamentals – including surpluses in the current account and the balance of payments, as well as ample foreign exchange reserves – will help keep the economy resilient to external headwinds.
The stable banking system, which finances investments and consumption, and favourable demographics, which meet the labour demands of investors, will continue fuelling economic growth. The government has set growth targets of 6%-7% for this year, 6.5%-7.5% for next year, and 7%-8% for 2018 to 2022. We believe these are achievable.
The economy’s rising productive capacity, supported by investments, allows it to maintain robust growth without causing inflation to breach the target.
Q: What is the impact on the economy and inflation of a weakening peso, which has depreciated by 11.5% against the US dollar since the end of 2014?
A: The peso’s depreciation lately is in line with movements of regional currencies, and is due partly to external factors including uncertainties over the leadership transition in the US and certain jurisdictions in Europe, as well as the slowing Chinese economy. The path of Federal Reserve normalisation (after its hike at its December meeting) and its impact on global interest differentials would continue to affect volatility in the peso and regional currencies. We expect the impact of the peso’s weakening to be manageable, given the support provided by strong foreign-exchange inflows led by remittances and business process outsourcing [BPO] revenues, as well as increasing revenues from the tourism sector.
Due to structural developments in our economy, the impact of exchange rate movements on inflation has declined over the years. As such, inflation is expected to remain manageable even with the peso’s weakening. On the overall economy, the peso depreciation will help boost consumption of remittance-dependent households and make our exports more price-competitive.
Q: The Philippines lags behind its neighbours on FDI. Why? How can the country improve its appeal to foreign investors?
A: We recognise there is room for growth in the area of FDI. Nonetheless, we note that the Philippines is in catch-up mode, with its FDI growth significantly outpacing that of its neighbours in recent years. Net inflow of FDIs reached an all-time high of $5.8bn in 2015, an almost four-fold jump from $1.7bn in 2005. In the first nine months of 2016, it increased by 25.3% year-on-year to $5.9bn.
To sustain the catch-up trend, the Philippines has to boost infrastructure development and further enhance ease of doing business. This is exactly what the government is doing. It has set out a bold infrastructure agenda, under which public infrastructure spending will rise annually from 5.4% of GDP next year to 7.1% in 2022.
Rising budget allocation for infrastructure is complemented by the public-private partnership programme, under which the private sector is welcome to submit unsolicited proposals on and participate in biddings for public infrastructure projects.
The government likewise has given teeth to its anti-red tape initiative, a move seen to boost investments. Agencies have been instructed to significantly cut processing time for permits, tax refunds, payment of taxes and fees, and so on. The government is also implementing structural reforms to open up the economy for more foreign investors.
Examples are legislative measures enacted over the past few years, including the foreign bank liberalisation law, the Philippine Competition Act, amendments to the Cabotage law, and the Right-of-Way law. In the pipeline of additional legislative reforms are easing of constitutional restrictions on foreign investments; comprehensive tax reform, which includes cut in corporate income tax, and freedom of information, among others.
Q: How do you think the election of Donald Trump will affect monetary policy in the US, and how will it affect the peso and investment flows into the Philippines?
A: Based on his campaign, incoming US president Donald Trump seems inclined toward expanding fiscal policy, such as by boosting government spending on infrastructure and job creation. This should ease the burden on monetary policy as far as accelerating US economic growth is concerned. Should the expansionary fiscal policies result in inflationary pressures in the US, the Fed, which had been forced to keep rates low to stimulate growth, has room to raise rates.
Having said that, US interest rates had been rising even before the Fed actually raised its target Fed Funds rate by 25 basis points at its December meeting. The rise in US interest rates has caused some capital to flow out of emerging markets, bringing about depreciation pressures on emerging market currencies, including on the peso.
Nevertheless, we believe with its solid macroeconomic story and the structural reforms in the pipeline, the Philippines will continue to see its share of investments inflows, particularly once the “transition uncertainties” clear out. In turn, this should provide fundamental support for the peso.
Meantime, we’ll have to wait and see how Mr Trump’s rhetoric on deportation of migrants and against job outsourcing will translate into actual policies. On the issue of deportation, the majority of Filipino migrants in the US are either permanent residents or legally documented, whereas the planned deportation of migrants only covers illegal aliens.
As such, the potential impact on employment of overseas Filipinos and their remittances should be manageable. Remittances have been growing between 4% and 8% annually in recent years. In the first 10 months of 2016, remittances grew by 4% year-on-year to $22.1bn.
However, there has been a decline in the share of remittances from the US to total remittance flows to the Philippines. This is amid diversification of offshore labour markets for Filipino workers over the years. From 60.1 % in 2005, the share of remittances from the US to total remittance flows to the Philippines slipped to 39.3% in 2015.
Diversification of labour markets gives comfort that potentially adverse US policies will have manageable impact on overall employment of overseas Filipinos and on remittances. On the issue of restricting job outsourcing, the US is the Philippine BPO sector’s biggest source of service-export revenues. In 2013, the US accounted for 72.6% of the Philippine BPO sector’s export revenues, followed by Europe (13.3%), Australia-New Zealand (4.5%), and Japan (3.7%).
Nonetheless, we are hopeful that any impact would be manageable and that the pronouncement of Mr Trump against outsourcing of jobs abroad is not set in stone. US companies in the Philippines, including BPOs, continue to pour investments in our country. This shows that they are keen on doing business in the Philippines over the long haul, as the country offers favourable growth prospects and ample supply of young, highly skilled, English-speaking workforce.
Also, many foreign companies find it more viable to outsource jobs to the Philippines because of cost efficiency.
Q: President Rodrigo Duterte is working on ambitious reforms to free up private sector potential and create opportunities for poor Filipinos. In your view, what are the three priorities the government should address?
A: The Philippines is now one of the most resilient and among the fastest growing economies in the world. Having significantly improved its macroeconomic landscape over the years, the logical next step for the Philippines is to make more people enjoy the benefits of a robustly growing economy. As such, attaining a more inclusive growth should be a priority.
We have made some inroads on poverty reduction – the poverty rate fell from 25.2% in 2012 to 21.6% in 2015 – but we want this process to accelerate. It is comforting to know that the Duterte administration is putting due focus on poverty alleviation. It set a goal of slashing poverty rate to 17% or lower by 2022.
Another important agenda is infrastructure development. Given the Philippines’ fiscal space and need for better mobility, the country has to implement more infrastructure projects. Lastly, attracting more FDI is another challenge. FDI inflows have grown by leaps and bounds over the past few years, but we continue to lag behind our neighbours.
For its part, the central bank will continue to efficiently fulfil its role in achieving price and financial stability, as well as in financial inclusion and capital market development. Doing so complements government efforts to help boost investments, ensure availability of financing for more infrastructure projects, and achieve a sustained and more inclusive economic growth.