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Philippines Economic Update: October 2019 Edition Summary

Core Content

The Philippines Economic Update: October 2019 Edition provides an overview of the country's economic performance, policy changes, and external conditions over the past six months. It emphasizes the need for reform to foster competition, enhance growth, and improve social outcomes.

Main Points and Key Information

Recent Developments

• Economic Growth: Philippine GDP growth slowed to 5.5% yoy in the first half of 2019, the lowest in eight years, due to a significant moderation in investment growth.
• Public Investment: Public infrastructure spending declined by 15.7% yoy, from 5.4% of GDP in 2018 to 4.3% in 2019, caused by the delayed 2019 national budget and pre-election spending ban.
• Private Consumption: Became the main growth driver, increasing from 5.3% yoy in the second half of 2018 to 5.8% yoy in the first half of 2019, contributing 75% to overall growth.
• Inflation: Declined steadily, easing to within the BSP's 2-4% target, supported by lower food and energy prices.
• Labor Market: Improved significantly, with the unemployment rate reaching its lowest level in over a decade and underemployment also declining.
• Export Performance: Slowed to its weakest growth since 2013, affected by trade tensions and global demand weakness.
• Import Trends: Sharp deceleration in import growth, particularly in capital goods and raw materials, due to weak investment and manufacturing output.
• Fiscal Deficit: Narrowed to 0.5% of GDP in H1 2019, down from 2.3% in H1 2018, due to strong revenue collection and delayed public spending.
• Monetary Policy: The BSP adopted a more accommodative stance, cutting the policy rate by 50 basis points in 2019, and reducing the reserve requirement ratio (RRR) by 200 basis points to boost liquidity.

Outlook and Risks

• Growth Forecast: The World Bank revised the growth outlook for 2019 to 5.8%, with a recovery to 6.1% in 2020 and 6.2% in 2021.
• External Risks: Increased due to global slowdown, trade tensions, and rising protectionism. The U.S.-China trade war disrupted regional value chains.
• Domestic Risks: Weak public spending momentum and limited absorptive capacity could affect the baseline growth forecast.
• Fiscal and Current Account Deficits: Expected to widen as the government accelerates infrastructure spending, but careful management is essential to maintain business confidence.

Fostering Competition

• Regulatory Challenges: Philippine markets, even those with low natural entry barriers, are highly concentrated, indicating a lack of competition in many sectors.
• Key Sectors: Manufacturing, wholesale/retail, agriculture, and transport/storage show high market concentration, suggesting restrictive regulations and dominant market players hinder competition.
• PMR Score: The Philippines has a higher PMR score than comparator countries, with heavier restrictions on state control, entrepreneurship, and trade/investment.
• Policy Implications: Regulatory restrictions lead to poorer service delivery and higher prices for goods and services. Reforming these areas is crucial to support firm competitiveness and household welfare.

Key Reforms and Policy Options

The report outlines several critical reforms to reduce regulatory restrictiveness in key markets:

1. Infrastructure and Professional Services: Tackle unclear or restrictive regulations to create more competitive conditions.
2. Foreign and Domestic Investment: Eliminate restrictions to ensure a level playing field.
3. Controlled Prices: Minimize the scope of state-controlled pricing to incentivize competition.
4. SOEs and Public Involvement: Reduce the involvement of state-owned enterprises (SOEs) in competitive markets and ensure competitive neutrality between public and private operators.
5. Administrative Procedures: Streamline burdensome procedures to facilitate easy market entry.

Conclusion

Despite a slowdown in economic growth, the Philippines showed improvements in consumption, labor market conditions, and inflation control. However, external risks and domestic policy challenges remain significant. Fostering competition through regulatory reform is essential to sustain and accelerate growth, reduce poverty, and enhance shared prosperity. The timely passage of the 2020 budget and resolution of uncertainties around tax reforms will be critical in maintaining the positive momentum of public investment and economic recovery.