To be tagged Asia’s fastest growing economy makes for a good headline, but brings its own set of policy issues. The Philippines gained that designation in the first quarter, its 7.8% expansion of its GDP year-on-year pipping China’s 7.7%.
That, in part, is because of a particular cross-over moment when China’s economy is decelerating from its previous high growth rates and the Philippines’ is accelerating after several years of underperforming regional rivals. As one of the two big economic dogs in the region, China’s slowdown, if sustained, will affect the Philippines in due course.
For now, public-sector construction and private-sector investment to meet strong domestic consumer demand is keeping the Philippines’ economy humming. Both increased by more than 40% year-on-year in the first quarter. With demand for the country’s high-tech exports uncertain given the slowdown in the global economy, the government is not changing its GDP full-year growth target of 6%-7%.
The policy issues are two: the peso and jobs. Despite its rapid economic growth, the country is struggling to keep up with the rising numbers joining the workforce. Unemployment hit a year high of 7.1% in March. Underemployment is likely three times that. Hence the $9.9 billion government budget this year for public-private works projects to improve roads, ports, bridges and airports.
Longer-term, a stronger peso — the currency has appreciated 25% in real effective exchange rate terms over the past six years — will consolidate shifts away from manufacturing and towards services such as business process outsourcing (BPO). As an indication of the scale of the challenge, though the Philippines is now the world’s largest BPO hub, it provides only 500,000 jobs for a workforce of 41 million.
The currency was further bolstered by a first investment grade rating for the Philippines’ sovereign debt from two of the international credit ratings agencies earlier this month on the back of the robust growth and improving public finances. Since the end of last year, the central bank has resisted the temptation to cut its benchmark rates, as regional neighbors India, Vietnam, and Thailand have done, to keep their currency’s value down and to boost growth.
With inflation at the bottom end of the target band of 3%-5%, these latest GDP figures will likely mean that the bank will keep its overnight borrowing rate unchanged at 3.5% when it meets on June 13 for its regular policy review. It will likely, though, continue to cut the rate on its special deposit accounts to keep steering credit to the domestic economy and to curb potentially destabilizing capital inflows with their concomitant risk of asset bubbles.