Political noise is seen slowing the Philippines’ growth even as macro fundamentals remain solid and supportive of sustained economic expansion compared to regional peers, London-based economic research firm Capital Economics said.
In a report, Capital Economics identified the Philippines alongside Hong Kong and Pakistan as among the economies in the region where “other forecasters are being much too optimistic for next year.”
For one, the International Monetary Fund (IMF) expects the Philippines’ gross domestic product (GDP) to grow by a slightly faster 6.7 percent in 2018 compared with its 2017 forecast of 6.6 percent.
“We expect the Philippines to remain one of the region’s fastest-growing economies over the coming years. But with signs that the worsening political climate is starting to discourage investment, growth is likely to be weaker than most expect,” Capital Economics said. “Many of the tailwinds that are currently supporting growth, including increased infrastructure spending, buoyant global demand and loose monetary policy, look set to continue over the coming year. Meanwhile, low wages and strong English language skills bode well for continued development of the manufacturing and business process outsourcing sectors.”
However, Capital Economics said the prevailing political situation posed uncertainly. “Although the election of President Duterte has not been the disaster for the economy that many feared, there are signs that his controversial war on drugs and erratic policymaking style are starting to weigh on the economy’s prospects,” it said.
“Having climbed up the business rankings under the previous president, Benigno Aquino, improvements to the business environment appear to have ground to a halt,” Capital Economics said, citing the latest Global Competitiveness Report of the World Economic Forum where the Philippines’ ranking slid to eighth in Asean behind Vietnam and Brunei.
“There are already signs investors are starting to think twice before committing to long-term investments in the country. Inflows of foreign direct investment (FDI) have leveled off since Mr. Duterte came to power, having grown rapidly between 2010 and 2016,” Capital Economics added.
The net inflow of job-generating FDIs from January to July continued to fall behind a year ago levels, dropping 16.5 percent to $3.9 billion as of end-July this year, the latest Bangko Sentral ng Pilipinas data released last week showed.
In July alone, FDIs declined by a faster 37.9 percent year-on-year to $307 million, reversing the 182.7-percent jump in June. The July FDI figure was the lowest monthly inflow in 13 months, or since June last year’s $238 million, BSP data showed.
“So while growth should remain relatively strong in 2018, there is a good chance that it will start to slow. Certainly, the IMF’s forecasts of 6.7 percent is too optimistic. We think 6 percent is more likely,” according to Capital Economics.