Global risks and vulnerabilities: Philippines

Euromonitor International 10 September 2009

The ongoing global economic downturn has caused a slump in the Philippines' exports, FDI and remittance inflows. The real estate market is weakening but is not likely to suffer a major slowdown owing to demands from overseas workers. Implementation of stimulus packages could cause a delay in achieving the government's goal of balanced budgets. Rampant poverty and a high unemployment rate remain severe problems in Philippine society.

Table 1

Summary

Type of risk Type of risk External shocks Real estate Government finance Energy Socio-political shocks Environmental shocks
Note:

Level High Medium Medium High High Medium

The level of risk for each section has been assessed internally and rated based on the exposure each type of risk has to the overall economy.

1.

EXTERNAL SHOCKS

Vulnerable to external shocks

External trade has been an important sector in the Philippines' economy. The share of exports of goods to GDP, however, has declined in recent years due to a slowdown of export growth. In 2008, Philippines' exports-to-GDP ratio stood at 29.1%, compared to 45.5% in 2003. Machinery and transport equipment, including semiconductors and electronic products, account for the largest share of the country's total exports, which reached 72.1% in 2008. Other major exports include garments, wooden products and petroleum products. Most of the Philippines' exports go to the USA, Japan and EU-27. Those markets made up 16.3%, 15.5% and 14.0% of total exports of goods in 2008 respectively. The Philippines's main imports are machinery and equipment, mineral fuels, chemicals and food, especially rice. In 2008, total imports of cereal including rice accounted for 31.8% of Philippines's total food and live animals imports. The country was badly affected as prices of food, including rice, soared during 2007-2008. The over-reliance on exports of semiconductors and electronics to Western markets has made the Philippines vulnerable to external shocks. Amid the global financial crisis, exports have slumped. In June 2009, total exports recorded an annual drop of 24.7%, compared to a growth of 9.2% a year earlier. Exports of electronic products declined by 26.0% year-on-year in the same month.

Chart 1

Chart 1: Exports by commodity 2008

Source: Note:

Euromonitor International from UN Trade Statistics Other goods include exports of beverages; tobacco; animal and vegetable oils; fats and waxes; postal packages not classified according to kind; special transactions and commodities not classified according to kind; coin (other than gold coin), not being legal tender; gold, non-monetary (excluding gold ores and concentrates).

Foreign direct investment (FDI) has not been a significant driver of economic growth in the Philippines. In 2008, total approved FDI was Ps183 billion (US$4.1 billion), equivalent to 2.4% of total GDP in that year. The country's FDI performance is lower than other countries in the region due to its indequate infrastructure and legal restrictions on foreign ownership. The Philippines is more reliant on remittances from Filipino workers overseas as an important source of foreign capital inflows. In 2008, the Philippines recorded a remitance inflows of US$18.3 billion, equivalent to 10.8% of total GDP in the same year. The country, however, is experiencing a decline of both FDI and remittance inflows during 2009 as a result of the global economic downturn. According to national statistics, FDI inflows to the Philippines in the first quarter of 2009 fell by 80.9% year-on-year over the same period in 2008. The Philippines maintains a free floating foreign exchange rate regime, in which the peso, Philippines' national currency, is detemined by supply and demand on the foreign exchange market. Since 2004, the peso has appreciated significantly as a result of the Philippines' stable economic growth over the last few years. The peso strengthened to Ps44.5 per US$ in 2008, from Ps56.0 per US$ in 2004. The Philippines' foreign exchange reserves have increased steadily in recent years mainly owing to rising remittances from Filipino workers overseas. In 2008, foreign exchange reserves stood at US$33.0 billion, representing a growth of 9.9% in current terms over 2007 and accounting for 19.6% of total GDP in the year. Growing foreign reserves should provide a cushion for the Philippines' economy during the economic downturn.

Chart 2

Chart 2: Foreign exchange reserves & exchange rates 2003-2008

Source:

Euromonitor International from IMF

2.

REAL ESTATE

Weakening market
The share of GDP from construction to total GDP has been stable in the Philippines in recent years. It stood at 4.2% in 2008, slightly down from 5.3% in 2003. The growth of property demand in the Philippines is largely driven by the demand of overseas Filipino workers, which caused a sharp increase in house price during 2006-2008. According to the Global Property Guide, the Philippines' house price-to-income ratio is among the highest in the region, resulting in a low level of home affordability. House price-to-income ratio stood at 103.9 in 2008, compared to 57.3 in Indonesia and 16.8 in Malaysia. A slowing economy and weakening remittance inflows have negatively affected house prices in the Philippines. Due to shrinking demand, several real estate projects, especially luxury condominium projects, have been delayed or cancelled. In the first quarter of 2009, house prices in Makati Central Business District (CBD) dropped by 0.7% quarter-on-quarter. While house demand is affected by lower remittances, it is also hampered by the Philippines' underdeveloped mortgage system. There are only a few major banks which offer housing loans, and the land titling and registration process remains problematic in the Philippines. Average retail rents in Ayala Center went down slightly from Ps1,278 (US$28.7) per square metre in the fourth quarter of 2008 to Ps1,230 (US$27.6) in the second quarter of 2009. Rents are likely to fluctuate at current levels and sharp drops are not expected because of a high demand for retail spaces. With more than half of the country's GDP contributed by private consumption, the retail sector in the Philippines remains resilient during economic recession.

Chart 3

Chart 3: House prices change in Makati CBD Q1 2005 Q1 2009

Quarterly change (%)

Source:

Colliers International

3.

GOVERNMENT FINANCE

Delay in balanced budget goals

Government budget deficit has declined in the Philippines in recent years as a result of fiscal reform and consolidation efforts. In 2007, national government budget deficit declined to Ps12.4 billion (US$0.7 billion), the lowest level in eight years. In 2008, however, the government recorded an increase of fiscal deficit to Ps68.1 billion (US$1.5 billion), equivalent to 0.9% of total GDP in the year. The increase was due to higher government spending as a result of rising food and fuel prices in 2008. In order to cope with the current global economic downturn, the Philippine government, in January 2009, approved a stimulus package of Ps330 billion (US$7.4 billion) to be spent during the year. It is also planning another package for 2010. While implementation of the stimulus packages would cause a delay in achieving the government's goal of a balanced budget in 2010, analysts believe they are appropriate to support the economy and maintain investor confidence. The government, however, needs to increase its revenue through tax reform measures in order to ensure a modest budget deficit. By the end of 2008, Philippines' national debt reached Ps4,221 billion (US$94.9 billion), equivalent to 56.3% of total GDP in the year. While debt levels have been stable in recent years, the high level of debt-to-GDP ratio puts a fiscal risk on the country and makes the economy vulnerable to external shocks. Also, it limits the government's ability to support the economy during recession. While the exposure of the Philippine banking sector to the US sub-prime mortgage crisis is limited, banks have faced a liquidity squeeze on international capital markets. This, however, should not have a large impact on the Philippine banking sector or on government finances.

Chart 4

Chart 4: Government Finance 2003-2008

Ps billion

Source:

The Philippines Department of Finance

4.

ENERGY

Reliant on oil imports

With limited oil and natural gas resources, the Philippines have to import about half of its energy needs including oil, coal and natural gas. In 2008, the country imported a total value of US$10.5 billion of petroleum and petroleum products. More than 90.0% of its oil imports come from the Middle East, making the country vulnerable to the political instability in the region. The world oil prices spike in 2008 hit the Philippines hard, as inflation soared on account of rising prices. In order to reduce its reliance on oil imports, the Philippine government has given itself the goal of attaining a primary energy self-sufficiency of 60.0% by 2010. While consumption of crude oil has been declining in recent years, owing to the government's effort to diversify the country's energy sources, it still accounts for the largest share of primary energy consumption. In 2008, consumption of crude oil made up 53.6% of total energy consumption, down from 63.5% in 2003. In the Philippine Energy Plan issued in 2005, the government introduced measures to promote the use of other domestic energy sources including geothermal and biofuels to cut down oil imports and consumption.

Chart 5

Chart 5: Primary energy consumption 2003-2008

% of energy consumption

Source:

Euromonitor International from BP Amoco, BP Statistical Review of World Energy

5.

SOCIO-POLITICAL SHOCKS

Poverty and unemployment on the rise

Poverty and income inequality remain severe problems in the Philippines. According to the government's latest poverty survey, the poverty rate rose from 30.0% in 2003 to 32.9% in 2006. In 2008, the country's Gini index (an index measuring the level of income inequality) stood at 48.1, among the highest in the region, reflecting a high level of unequal income distribution. Rampant poverty and a large income gap are results of high unemployment, pervasive corruption, rising food prices and a lack of adequate social programmes in the Philippines. Poverty and social disparity are sources of social unrest, which dampens the Philippines' business environment. Deep poverty has accelerated the Mindanao conflict. This conflict is accompanied by Maoist insurgency and violence linked to militant Islamist groups, as well as clan wars and banditry, since the 1970s.

Unemployment has been higher in the Philippines than in other countries in the South East Asia due to the fact that employment growth has failed to keep up with rapid population growth. In 2008, for example, the Philippines' unemployment rate was 7.7%, compared to 1.4% in Thailand and 3.3% in Malaysia. Underemployment has also been high, which reached 18.2% in January 2009, suggesting a mismatch of skills. The government has so far failed to implement its pledge to create about 1.5 million jobs a year between 2004 and 2010. The current global economic downturn has worsened the unemployment situation in the Philippines. The manufacturing sector has cut down jobs and many workers have returned home from recession-hit countries. The Philippines are not experiencing a rapid population ageing owing to its high birth rate. The share of population aged over 65, however, will increase from 3.5% in 2000 to 5.5% in 2020. Being the second largest labour-exporting country, it suffers from a major brain-drain. While a large number of Filipino overseas workers are un-skilled, there are a growing number of skilled workers leaving the country, especially in the healthcare, shipping, mining and aviation sector. The brain-drain has affected economic growth in the Philippines, as the country faces skills shortages in its key sectors.

Chart 6

Chart 6: Population by age 2000-2020

% of total population

Source:

Euromonitor International from national statistics

6.

ENVIRONMENTAL SHOCKS

Prone to natural disasters

In 2008, the Philippines was one of worst affected countries by natural disasters after China and the USA. The country is by virtue of its geographical circumstances highly prone to earthquakes, volcanic eruptions, typhoons and floods. The Philippines reported 8.5 million disaster victims (4.0% of world's total in 2008) and 959 disaster deaths in 2008. The total damage costs of natural disasters reached US$481 million in 2008, equivalent to 0.3% of total GDP in the year. The social and economic cost of natural disasters has increased in the Philippines in recent years as a result of population growth, unplanned urbanisation and environmental degradation. It has become a restricting factor for economic and social development of the country which hinders the government efforts towards poverty reduction.

Chart 7

Chart 7: Natural disasters 2003-2008

% of total damage cost

Source:

EM-DAT, The OFDA/CRED International Disaster Database