An Economic & Social Background to the Philippines 2017

Op/Ed by: Bob Shead

The Philippines is an island nation with a unique geography, a very diverse culture and history.  The country is composed of over 7000 islands, of which approximately 2000 are inhabited, and lies in the western Pacific Ocean.  The Philippines archipelago is divided into 18 regions, the three main island groupings are Luzon (including Manila) in the north, the Visayas in the center, and Mindanao in the south.   The Philippines strategic positioning as a gateway between the Pacific and the rest of Asia, in particular its proximity to the region’s two largest economies, China and Japan, provides it with several vital sea routes for trade and commerce.  However, to the west is the South China Sea, and the subject of China’s expanding footprint in the region.  This dispute, along with China’s ongoing maritime disputes with neighboring ASEAN countries, i.e. the 9 Dash Line (Vietnam, Malaysia, Indonesia, Brunei) is putting bilateral trade between the Philippines and these other ASEAN nations at risk.  Nonetheless, a more recent conciliatory tone from Manila towards Beijing has shown promise that intra-ASEAN and Philippines-China tensions may now be subsiding. As a result, the country is enjoying renewed interest from foreign investors, both in light manufacturing, and service industries such as business process outsourcing.     

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Climate

The climate is predominately hot and humid, marked by a rainy season from June to November which brings plenty of rain and a few typhoons every year.  November to February tends to be cool and dry, while March to May tends to be hot and dry.  Since 2015, the Philippines has been hit by the El Nino weather phenomenon, that has had a serious effect of water and agriculture issues.  The country’s location on the Ring of Fire, along the Pacific Rim, also increases the risk of earthquakes and volcanoes. Generally speaking, the climate is monsoonal with calmer weather during the winter months, being hot and humid in summer.

Population

The population of the Philippines is currently at 101.6 million (World Bank & Philippine Statistics Authority), and the 12^th largest globally.  Since 2015, the Philippines has entered the ‘demographic window’ with 70 percent of the population being of working age, with a current median age of 23.4 years.  Population growth currently stands at 1.9 percent, although this is accepted as a rather contentious figure.  Additionally, about 12 million Filipinos live and work overseas, and form one of the world’s largest diasporas, that generates an inward remittance flow of approximately US$26 billion annually, according to the Bangko Sentral ng Pilipinas. 

Religion

The Philippines boasts the third largest Catholic population globally, and sharply contrasts with the rest of Southeast Asia.  The Spanish Catholic 300 year colonial rule makes the Philippines only one of two countries in the region with a majority Christian population (the other being East Timor).  The Muslim population is approximately 5 percent and primarily in and around the southern Mindanao region.

Language

Although the official language of the Philippines is Tagalog, English is the predominately spoken business language here, due to the US influence over the past 100 years, and this has been an important asset, keenly sought after by multinational companies and other inward investment opportunities, especially in the rapidly increasing BPO industry, that is building up in cities also outside of Manila.

Education

The Philippines signed into law during 2013 a K+12 Education Programme.  This gives students the ability for a total of 12 years education, from kindergarten to senior school.  By constitutional decree, education receives the largest portion of budgetary spending.  Tertiary education at the country’s 2000 plus higher education institutions, normally consists of a four year program, modeled on the US education system.

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 Natural Resources

The Asian Development Bank (ADB) headquartered in Manila, has named the Philippines as the fifth most mineralized country globally, with 30 percent of the land believed to contain metallic mineral deposits, including nickel, cobalt, silver, gold and copper, these deposits are mainly the result of the volcanic geology.  This geology also contributes to the significant geothermal resources, making the Philippines the second largest geothermal producer worldwide, after the US.  Mining in the Philippines however, remains an undeveloped and frequently a corrupt sector, with the current Philippine Secretary of Environment recently closing or restricting many existing mining operations due to environmental issues.  However, mining remains an undeveloped sector with only 1.5 percent of the country’s land area covered by mining permits, and mining only contributes about 3 percent of GDP.  There are also believed to be major offshore oil and gas deposits, as yet undetermined, within the Philippines maritime area.  Coal remains the dominant energy type, with several coal fired power stations under construction.  However, the potential for geothermal energy is enormous.

Politics

The Philippines gained independence from Spain in 1898, with the help of the US.  However, the US then became the new colonial power, until the end of WWII.  In 1946, the first Philippine Presidential elections were held and Manuel Roxas became the first President of an independent Philippines.  The US retains many military bases in the Philippines, the largest being located within the SUBIC Development Zone, under the joint US Military Agreement (JUSMAG).  There is also a joint military agreement between the US, Japan, and the Philippines, plus Taiwan.

The current President of Philippines is President Rodrigo Duterte (Digong) was inaugurated on 30 June 2016, replacing President Benigno Aquino III (Noy Noy) who was in office for the previous 6 years.  Duterte’s rise to the Presidency from his former role for 20 plus years, as mayor of Davao City (capital of southern Mindanao Region) has been a much debated and difficult time for the Philippines, especially in the area of international relations.  Duterte has established a reputation as a tough-talking and direct acting President, who does not have much time for diplomatic niceties etc.  However, Duterte’s popularity ratings in the Philippines remain high, in spite, and some say due to, the increased issues of Extra Judicial Killings (EJK) of alleged drug dealers.  However, the President has made some useful economic changes that has recently boosted international business confidence in the Philippines, and has raised the countries business profile within the Southeast Asian region.  President Duterte has also raised concerns with its major trading partner, the US with his initial strategy to develop closer ties with China, however, it has become obvious that the President has drawn back from this strategy, and is now improving ties with both Japan and the US.

Economics

Data published recently by the Philippine Statistics Authority showed the economy grew by 6.8 percent for the year 2016, with a 6.6 percent growth in gross domestic product (GDP) for the October-December quarter.  The fourth-quarter saw the slowest pace of growth for the full year, which analysts attributed to weak agricultural production resulting from a series of typhoons and also from the lack of a one-time boost from election spending in the first half of the year.  Recently CNBC reported the quarterly growth was higher than the 6.5 percent print from a year earlier, and that key drivers of growth for the quarter were manufacturing, trade, real estate, renting and business activities, while the industrial sector saw the fastest growth at 7.6 percent on-year.   The current government has sustained the economic policies that have been responsible for a trend growth of 6.2 percent in the last six years.  The new economic team has also developed a good reputation as a solid team with a strong influence on Duterte’s economic decisions.

Also guiding Duterte’s economic decisions is a 10-point economic plan, announced last June, which includes tax reforms, liberalizing foreign direct investments and increasing infrastructure spending to prop up domestic growth and fuel private consumption, which accounts for 70 percent of the economy.

Basically, there has been a recent record of a maintained stable high growth, a wider and increased expansion driving major increases in the Business Process Operations (BPO) in the cities of Manila, Cebu and more recently Dumaguete.  The IMF has upgraded its forecast for the Philippines for the period 2017 – 2020 from an average of 6 percent to 6.5 percent, mainly due to an acceleration of infrastructure projects.  The IMF has recommended further infrastructure investment projects, as improvement is still needed.  These recent years, obviously contrast with the Philippines previous reputation as the ‘sick man of Asia’ for its consistently underperforming compared to its peer countries during the 80s and 90s.  The BPO industry continues to grow rapidly, pulling along other sectors such as construction, retail, real estate and restaurants.  The estimated employment figures for the BPO industry are approaching 1.5 million Filipino staff, and increasingly companies based in Bangalore, India are moving their offices to the Philippines.   The biggest export from the Philippines is the electronics and electrical goods market.  This sector currently accounts for approximately 60 percent of Philippine exports.  The country produces a large quantity of integrated circuits and other related components that are primarily exported to other parts of Asia.  There is also a stronger demand for these products from US and Europe.

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In conclusion, the Philippines has, over the past few years, been playing a positive ‘catch up’ strategy, and is now one of the leading economies within ASEAN.  Despite the many problems that still exist within the Philippines, the poverty, the social issues, the natural disasters, the corruption issues, etc.  It is accepted, that the economy of the Philippines is on the increase, along with an improved commercial sector, thus adding a general improvement to all sectors of the Philippines.

Credit:

Bob Shead is the Philippines Correspondent for ASEAN Briefing. He has a career background in the UK Diplomatic Service and has lived and worked in China and the Philippines for 23 years. He is based in Manila. Please contact: bob.shead@asiabriefing.com 

Dezan Shira & Associates have a Dezan Shira Asian Alliance Office in the Philippines, and can assist with foreign investment legal, tax and operational advisory services into the country. Please contact philippines@dezshira.com or visit www.dezshira.com  

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