Philippines Economy

Philippines Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

From the second half of 2021, the country continues its gradual economic recovery after the recession that lasted for five consecutive quarters and ended only in the second quarter of 2021. The drivers of growth can be considered construction, wholesale and retail trade, and the manufacturing industry. Conversely, the decline continues in agriculture, forestry and fishing. Economic recovery is also helped by the growth of remittances from abroad, which represent one of the traditional engines of the Philippine economy. The fiscal situation worsened during the pandemic due to the introduction of support measures during the lockdowns, as well as a sharp decline in tax collections due to weaker economic performance. In terms of the economic growth outlook, the economic recovery in the Philippines is expected to gain momentum in 2022 due to the continued relaxation of quarantine measures, the abatement of the pandemic and macroeconomic support. According to Philippine data, GDP growth of 8.3% was recorded for the first quarter of 2022. GDP growth projections for 2022 according to the ADB, the IMF and the World Bank range from to 6.3%. Despite the positive outlook for GDP growth, major structural problems persist, particularly in terms of wide income disparities between socioeconomic classes and different regions of the country. The unemployment rate in 2022 reaches 6%. However, this number remains higher compared to pre-pandemic years. Increased vulnerability in the labor market reduced household earnings and incomes. The incidence of poverty has increased to 24% in 2021. Although the Philippine economy is expected to continue its expansion in 2022, the effects of Russian aggression in Ukraine may negatively affect this trajectory.

According to cheeroutdoor.com, the Philippines’ total foreign trade will grow to US$185 billion in 2021. Philippine imports rose to US$114 billion, while total exports rose to US$71 billion. China remains the Philippines’ largest trading partner mainly because of the Philippines’ huge imports. Other important trading partners include Japan, the United States of America, Singapore, South Korea, the Netherlands, Hong Kong, Germany, Taiwan and Thailand. Exports primarily include semiconductors and electronic products, vehicles, clothing, copper products, petroleum products, coconut oil and fruits. In 2021, the Philippines’ total balance of payments showed a surplus of $1.35 billion. This figure was lower than the $16 billion surplus recorded in 2020. However, overall flows were tempered by a deeper goods trade deficit of $43 billion.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 6 -9.4 5.4 6 5.5
GDP/population (USD/PPP) 9,290.80 8,383.50 8,998.80 9,810.00 10,480.0
Inflation (%) 2.5 2.6 4.4 4.1 3.2
Unemployment (%) 5.1 10.4 7.9 6 5.3
Export of goods (billion USD) 70.9 64.4 71 77.9 82.5
Import of goods (billion USD) 117.4 87.3 114 127.7 137.7
Trade Balance (Billion USD) -49.3 -33.8 -49.4 -56.6 -62.1
Industrial production (% change) -8.4 -10.3 50.3 12.7 7.6
Population (millions) 108.1 109.6 111.1 112.5 114
Competitiveness 46/63 45/63 52/64 ON ON
OECD export risk 03.VII 03.VII 03.VII ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -7.6
Public debt (% of GDP) 60.7
Current account balance (billion USD) -7.3
Taxes 2022
AFTER 20% / 25%
F.O 5% – 32%
VAT 12%

As the Philippine government has resorted to borrowing to finance its initiatives related to the pandemic and the economic recession, public debt has been rising rapidly since the outbreak of the pandemic, reaching PhP 12.68 trillion in March 2022. Public debt as of March 2022 reaches 63.5% of GDP. This is the highest leverage ratio since 2005 and is expected to rise further in the coming months. With the recorded debt-to-GDP ratio above the recommended 60.0%, the country faces the risk of higher interest rates due to a possible credit downgrade and tighter global financial conditions. The growing debt also puts pressure on the incoming administration, which will have to operate in a tighter fiscal space. However, the Philippine central bank remains upbeat, saying the country’s debt is still “quite manageable” as local growth has resumed. The ratio of foreign debt (30.1%) is still relatively low compared to the region. The Central Bank of the Philippines also considers the budget deficit to be reasonable, though it was 6.1% of the country’s GDP in 2021.

The country’s rising debt service is another fiscal concern for the incoming administration. The ratio of debt service to income has increased in recent years, reaching 40.1% in 2021. At the same time, the interest that the country has to pay also rises. However, the country’s gross international reserves of US$106.76 billion are sufficient to cover the required payments. The government plans to finance the deficit by issuing new bonds and borrowing from multilateral organizations. Stronger revenue growth will help keep public debt at a manageable level, but societal pressure on continued spending on the country’s education and health systems to provide services to a growing population, a growing proportion of which has fallen below the poverty line as a result of the pandemic, will make it impossible for the debt-to-GDP ratio to return to pre-2019 level.

Banking system

The Philippine banking sector is not developing as fast as other Asian countries. The banking system is headed by the Central Bank of the Philippines – Bangko Sentral ng Pilipino (BSP), which fulfills the traditional role of the central bank and determines monetary policy. The banking system is one of the few sectors of the economy open to foreign investors, or enabling a more than half ownership stake when investing in the country. In 2013, this also enabled the Czech company Home Credit to enter the Philippines.

Banking system
• Central bank – serves as a regulator of the financial system
• commercial banks – have a decisive position in the banking system and provide a full range of banking services. The banks with the largest number of branches are BDO (Banco de Oro) and Bank of the Philippine Islands (BPI).
• local banks (rural banks) – they have an important position in other regions, where they ensure the functioning of the banking system and also serve to finance the agricultural sector
• savings banks were established in the early 1970s and serve mainly as a place for providing loans
• foreign banks – they are mainly focused on carrying out foreign financial and business transactions. According to the current law, a foreign bank can have a maximum of 9 branches. Some foreign banks are trying to penetrate the Philippine market more easily by merging with a local bank.
• development banks – these are 2 specialized banks:
• The Development Bank of the Philippines used to finance the development of infrastructure, agricultural production, electricity production and to support exports
• The Land Bank used to implement government purchases of land for their further redistribution under the agrarian reform program

The banking sector of the Philippines is considered stable by the IMF due to a slight decrease in the proportion of bad loans and high capitalization of banks even beyond the obligation set by the Central Bank. The large number of financial institutions and the fragmentation of the banking system remain a problem. The capital market is relatively well developed.

Tax system

The Bureau of Internal Revenues (BIR) is responsible for collecting taxes and fees under the supervision and management of the Ministry of Finance. The law provides for taxes on income, property, gift tax, VAT, other percentage taxes, excise duty, stamp duty and taxes additionally applied and collected by the BIR. Taxes are levied on individuals and corporations through regional collection offices established by the BIR or for which the relevant government offices or even banks authorized to serve may serve. Customs collection is the responsibility of the Bureau of Customs (BOC). Local town halls (so-called local administrative units – Local Government Units – LGUs) are authorized to collect additional taxes from certain activities in their areas of jurisdiction.

Philippine companies are taxed on worldwide income; non-resident companies are taxed only on Philippine sources. A foreign company with a branch in the Philippines is taxed on Philippine source income. The taxable income of branches is calculated in the same way as subsidiaries. Corporate income tax is levied on the profits of a corporation, which usually consists of business/trading income. Ordinary business expenses can be deducted when calculating taxable income. Philippine companies are generally taxed at a rate of 25% effective July 1, 2020 (reduced from 30%), except for companies with net taxable income not exceeding PHP 5 million and with total assets not exceeding PHP 100 million, which are taxed at 20%. ROHQs are taxed at the normal corporate income tax rate.

Philippines Economy