YEAR IN REVIEW

The Philippines is projected to experience slightly above average GDP growth in 2021. Experts say the economy will grow almost a percentage point higher than the 6% average of ASEAN nations. As the country looks to sustain this economic growth, it has several challenges to overcome as it evolves into a major regional player in the Pacific.

Last March, President Rodrigo Duterte imposed severe lockdowns in the capital of Manila and the surrounding region. With nearly a quarter of the Philippines living in poverty, the economic disruption caused by lockdowns was a disaster that threatened many peoples’ very survival. The pandemic also exacerbated the nation’s pre-existing food shortage. Many families living in poverty were forced to go without food during the early days of the pandemic.

With daily case counts still over 5,000, the threat of another wave of the virus is still a real threat, but the Philippines government is desperate to avoid additional lockdowns, so “the government is now pinning its hopes on vaccines.” Although initially delayed due to logistical and supply issues, a Chinese-developed vaccine is slowly being rolled out across the Philippines; however, even armed with the vaccine, the Philippines government faces an up-hill battle. Vaccine hesitancy is still very high. In a recent survey, over 68% of respondents said they would refuse a vaccine if offered. “Less than 1% of the country's 108 million people have been fully inoculated, according to data compiled by CNN.”

Because tourism is a major part of the local economy, the Philippines was especially hit hard by the pandemic. In 2019, the tourism industry contributed almost 13% to the Philippines’ GDP. The sector “lost some $8 billion in 2020 because of the pandemic.” Despite an incredibly low vaccination rate among the general population, the Philippines government recently loosened lockdowns in a desperate attempt to restart the economy. The government particularly wants to restart domestic tourism, which represents an important part of the Philippines tourism sector.

ECONOMIC GROWTH

The Philippines boasts one of “the most dynamic economies in the East Asia Pacific region.” Analysts attribute “increasing urbanization, a growing middle class, and a large/young population” as important factors contributing to economic growth potential. The Philippines economic power is “rooted in strong consumer demand supported by a vibrant labor market.” In short, the country has “sound economic fundamentals” and an internationally competitive workforce. The country has a strong business process outsourcing (BPO) sector and also enjoys robust “real estate, tourism, finance, and insurance” markets. Between 2010 and 2019, the country saw annual GDP growth of 6.4%. Although the Philippines GDP shrunk by 9.51% in 2020 during the pandemic, economists predict that the country will rebound and make a recovery over the next two years.

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GOVERNMENT

TENSIONS WITH CHINA

Despite President Dueterte’s friendly relationship with China, the Philippines have increasingly clashed with China over disputed waters near the Philippines. The Philippines government claims the disputed area, which is a rich source of fishing, oil, and gas reserves, lies solidly in Philippines’ internationally recognized territorial waters. The Chinese foreign ministry has asked the Philippines to “stop actions complicating the situation and escalating disputes.” The Philippines Defense Secretary Delfin Lorenzana responded in a statement, “While we acknowledge that China’s military capability is more advanced than ours, this does not prevent us from defending our national interests and our dignity as a people with all that we have.” The United States has signaled its intentions to support the Philippines’ claim over the disrupted waters. Despite Dueterte’s pro-China rhetoric, the Philippines has been forced to rebuild ties with the United States in the face of Beijing aggression.

POVERTY RATE

The Philippines have made real “progress in delivering inclusive growth,” but the “stubbornly high poverty rate” still currently hovers around 21%. It is a major factor constraining the Philippines’ potential. Critics say the Philippines government needs to redouble its efforts against local “corruption, elite capture, inadequate education, health services and infrastructure, limited access to financing” if the country is to succeed and achieve widespread prosperity.

INFRASTRUCTURE DEVELOPMENT

As the country continues to rapidly urbanize due to economic growth, the Philippines has struggled to facilitate modern infrastructure development, which is an important factor to spur outside investment in the country. This is a major concern for the Philippines since experts forecast that “the number of city dwellers in the Philippines [will] rise from about 33 million in 2013 to 47 million by 2030.” The Philippines government will need to “address major bottlenecks, focusing on transportation, water resources, and energy.” Broadly, “improvements in the quality of infrastructure services will help cut the cost of doing business...and enhance productivity around the country.” Currently, the Philippines’ infrastructure lags behind many of the country’s neighbors, but the Philippines is making progress. According to the International Monetary Fund, The Philippines recently implemented a plan to increase the national infrastructure budget to 6% of GDP by 2022 - up from just 3% in 2015.

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WEIGHING OPPORTUNITIES AND RISKS

OPPORTUNITY: UTILIZING BPO EXPERTISE

More companies should think about ways to creatively leverage the country’s flourishing business process outsourcing (BPO) sector. In fact, The Philippines is “second only to India in the number of large BPO centers. The sector boasts an “educated, English speaking and service-oriented labor pool.” For this reason, “the Philippines has become a business processes outsourcing destination for many companies across the world.  Many “English speaking countries have been utilizing Philippine-based outsourcing providers for over two decades because they have proven themselves to be powerful, efficient, and provide a quality product.” This technical workforce is a serious advantage for the Philippines, and many experts believe if this industry is further developed, this workforce could easily pivot into other “related service sectors” and boost economic growth.

RISK: CORRUPTION

Like many other developing economies, Corruption is an issue in the Philippines. The country ranked as the 65th most corrupt country on the planet by Transparency International’s Corruption Perceptions Index. According to a recent survey, 86% of citizens describe corruption as a major issue in the Philippines. Under the Duterte administration, the country has climbed 20 spots on the Corruption Perceptions Index since 2015. Despite his strong anti-corruption rhetoric, the country still struggles with a widespread culture of bribery and favoritism. Corruption can “severely restrict the efficiency of businesses operating in the Philippines...extensive bribery within the public administration and vague and complex laws make foreign companies vulnerable to extortion and manipulation by public officials.” To make matters worse, this type of corruption also exists in the court system, which can lead to “time-consuming and unfair dispute resolution, and to an uncertain business environment.”

OPPORTUNITY: MANUFACTURING

As the Philippines continues to modernize and revamp its infrastructure to support long-term economic growth, outside investors will have an incredible opportunity to harness the Philippines’ manufacturing capabilities. Over the past decade, the Philippines industrial sector has accounted for roughly 30% of the nation’s GDP. Given on-going trade tensions with China and the lingering effects of COVID-19, some companies are seriously considering “relocat[ing] production from China, their traditional base, to the Philippines and neighboring countries in Southeast Asia.”  The Philippines manufacturing sector has specific focuses in “mining and mineral processing, pharmaceuticals, shipbuilding, electronics, and semiconductors.” These factors place the Philippines in a unique position to benefit and “will help sustain the growth of the industrial sector in the years to come.”

Despite the difficulties caused by COVID-19, the Philippines is poised for economic growth in the 21st century. As an emerging market, the country is expected to “become the 16th largest economy in the world by 2050.” At CASTUS, we recognize the importance of global thinking. We have experience growing brands all over the world, so we know what critical data points and influencing variables need to be identified when planning for New Market Expansion. Unlocking new markets can drive revenue, reach new customer segments, and establish your brand as a global player. Our team of experts would love to talk to you about International Expansion.

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