Insights and Analysis

In the Philippines: Economy Less Dependent on US

January 30, 2008

By Jaime Faustino

“Accelerating growth, low inflation, low interest rates, and improving government finances.” Is that a reference to Thailand, Malaysia or another dynamic Southeast Asian country? To the surprise of many, it is the Philippines. Most know the Philippine as the “sick man of Asia” characterized by “boom and bust” economic growth since the overthrow of Ferdinand Marcos in 1986.

What accounts for this dramatic change? The structure and drivers of the Philippine economy have changed.

First, remittances. Estimated at $15 billion annually, remittances have grown at a compound annual growth rate of 11% in the last 10 years (through 2006) and comprise over 10% of GNP. These income flows have been driving domestic consumption and investments in housing and deepening of financial markets as new savings and investments products are developed.

Second, competition. In his examination of prospects for 2008, Dr. Victor S. Limlingan, Chairman of Philippine stock brokerage Regina Capital, emphasizes the importance of competition to understanding the dynamism of the economy. “The Philippine economy was asleep not because of politics but because of the anti-competitive policies of the government as urged upon by the business elite. When these policies were reversed, the Philippines awoke.” Beginning in the early 1990s, the Ramos administration introduced competition in telecommunications, aviation, maritime, and financial markets. This new policy environment is providing dynamic opportunities for entrepreneurs and business in terms of “reducing the cost of doing business” due to the reduction of monopoly rents.

So how will a US slowdown or recession affect the improved situation in the economy of the Philippines?

Analysts at the Philippine stock exchange note that the financial sector is more vulnerable to significant fluctuations than the real economy. But developments in the financial sector can impact growth. The Philippine stock market responds to two main factors: international (most significantly the US) stock markets and domestic developments. Analyst Valentino Sly recently noted that “investors should expect this extreme volatility to continue throughout much of the first half of 2008 as the bulls and bears play tug-of-war.”

For the real economy, analysts argue that the Philippines has moved from an export-led to a domestic demand driven economy. Hong Kong Shanghai Bank’s economist Friedrich Neumann notes that “[g]rowth can slow a little bit this year but not as much if we’re entirely dependent on the United States.”

Jaime Faustino is an Economic Program Officer for The Asia Foundation in the Philippines.

Related locations: Philippines
Related programs: Inclusive Economic Growth


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