Finance Secretary Carlos Dominguez says despite the restrained growth performance during the second quarter (when economic growth dived to just 6 percent), the Philippine economy remains one of the fastest-growing in Asia.
“This growth is increasingly fueled by investments,” points out the leader of President Duterte’s economic team. The team has been under fire lately for apparent failure to contain inflation and the runaway rise in prices of rice, corn, sugar, meat, vegetables, and gasoline.
The 10-year high August 2018 inflation of 6.4 percent is seen as a failure of economic governance despite Duterte’s vaunted political will. Not coincidentally, amid the decade-high inflation, the President’s job approval ratings have fallen by double digits.
As a share of Gross Domestic Product (GDP), capital formation, a comprehensive measure of investment, rose to 27.4 percent during the first half of 2018 compared to the 25.4 percent during the same period in 2017. This is much higher than the 21.3 percent average share of investments to GDP for the past 16 semesters.
Of the major components of investments, fixed capital, which mainly consists of construction and durable equipment, grew by 14.8 percent compared to 10.4 percent in the same period in 2017. This is a substantial increase from the 12.4-percent average growth for the last 16 semesters.
Foreign direct investments soared by 142.9 percent in May this year, rising to $1.6 billion from $677 million in the same month in 2017. From January to May this year, foreign direct investment net inflows grew by 49 percent to $4.8 billion compared to the $3.3 billion posted for the same period last year.
Per NEDA data, total net Foreign Direct Investments in 2016 was $8.3 billion, rising to $10 billion in 2017, and $5.8 billion in the first half of 2018.
Economic Planning Secretary Ernesto Pernia says the Philippines still has much-untapped potential in terms of economic growth.
“Our economy has been on a strong footing, growing by an average of 6.4 percent in the last eight years, the strongest since the mid-1970s.
In 2017, real GDP grew by 6.7 percent, from the previous year’s 6.9 percent. “Such performance was within our growth targets of 6 percent-7 percent for 2016 and 6.5 percent-7.5 percent for 2017,” Pernia says.
For the first half of 2018, the economy grew at a respectable 6.3 percent, slower than the 6.6 percent in the first half of the previous year. “This is due to prudent and judicious policy decisions for the environment, made by the government for long term, sustainable, and resilient development,” explains Pernia.
Compared with its neighbors in Asia, the Philippines followed India (8 percent), Vietnam (7.1 percent) and China (6.8 percent), and was ahead of Indonesia (5.2 percent), Thailand (4.8 percent), Malaysia (4.9 percent), and Singapore (4.2 percent).
Pernia says “the economy is also undergoing structural transformation. Growth is increasingly being driven by investments vis-à-vis consumption on the demand side, and by the industry sector—manufacturing, in particular —relative to the service sector on the supply side. In other words, the sources of economic growth have broadened and diversified.”
Moreover, the economy’s total factor productivity (TFP) has risen sharply, close to 3 percent, now the highest in Asean.
Pernia explains these three points, namely—consistently high growth, structural transformation, and high TFP—suggest that economic development is sustainable and capable of creating quality or more gainful jobs.
“Investment spending or capital formation accelerated by 16.4 percent in the first semester of 2018—a silver lining amid above-target inflation over the last few months,” Pernia says.
Manufacturing resurgence is likely to continue as foreign investors are recognizing the potential of the Philippines as a manufacturing hub.
More than a third (35.5 percent) of actual foreign net equity investments in 2017, and almost half in the first five months of 2018 went to manufacturing, from only 13 percent in 2016.
The International Monetary Fund projects the Philippines to remain one of the best-performing economies in the region in 2018 and 2019. The IMF projects the economy to grow by 6.7 percent in 2018, next to India projected to grow by 7.3 percent. ADB has lowered 2018 Philippine GDP growth to 6.4 percent, down from 6.8 percent previously forecast.
Global sentiment also remains upbeat relative to 2017. In its July 2018 outlook update, the IMF forecasts global growth to pick up to 3.9 percent in 2018 and 2019, from 3.7 percent in 2017.
The Philippines has one of the youngest populations in Asia with a median age of 24.1 in 2015, well below the world’s (29.6), Asian (30.3), and Southeast Asian (28.5) (median age based on the UN report on World Population Prospects 2017).
Compared with its Asian peers, the Philippines has yet to enter its demographic dividend window. In terms of dependency, the Philippines had the highest ratio in Southeast Asia in 2015 at 58.2 percent. However, the ratio is expected to decline in the next few years as the working age population steadily grows, and will be lower than Singapore and Thailand by 2035.
The Philippines is expected to be the last major Asian economy to benefit from the demographic dividend window between the years 2025 to 2070.
If not properly addressed, Pernia says we would need to wait until at least 2050 to benefit from the demographic dividend, or possibly even miss it altogether. For this reason, we need to fully implement the RPRH Law that includes the family planning program and investment in the youth’s human capital.