Poverty Hinders Philippines' Potential as the Next Asian Tiger Economy

Euromonitor International’s Philippines Economy, Finance and Trade Country Briefing focuses on the country that was once called ‘the sick man of Asia’ but has emerged as one of the fastest growing economies in the region. In recent years, the country has been attracting large foreign investments, via its status as the global hub for business process outsourcing (BPO), thanks to its large pool of educated and fluent English-speaking populace. Additionally, a young demographic, a huge foreign exchange reserve, prudent economic reforms and a relatively stable political environment adds to its charm, making it an appealing destination for companies that are eyeing to set up businesses. However, despite the ongoing economic advancements, high poverty level prevails, which is indeed a major obstacle the country needs to overcome to become the next Asian Tiger economy. Although previous governments failed in addressing this issue, President Rodrigo Duterte’s stringent poverty reduction reforms, if implemented properly, should help alleviate lingering poverty.

Poverty levels remain obstinately high, amidst thriving economic growth

• The Philippine economy has been performing well. In 2015, its strong economic growth was backed by robust domestic demand, which outweighed the negative effects of a fall in exports. Low commodity prices and an increase in job opportunities will continue to strengthen household demand. This along with a modest rebound in exports will support economic growth;

• The Philippines is a fairly well-diversified economy with large manufacturing and services sectors. The country is a global hub for business process outsourcing (BPO), such as call centres, information technology support and accounting;

• However, there has not been much change in the country’s high poverty level, which has contributed to emigration. A large proportion of its population continues to work in the informal sector, due to scarce job opportunities and the country still suffers from an inadequate infrastructure, due to underinvestment;

• In order to enhance the effectiveness of its monetary policy, from June 2016 onwards, the BSP made a shift to an interest rate corridor (IRC) system. Under this new system, the BSP’s key policy rates have been set at between 2.5% and 3.5%. This will help bring stability and enhance liquidity in the banking system;

• Foreign direct investment (FDI) inflows into the Philippines grew by 246% in real terms over 2010-2015, thanks to the numerous pro-business reforms implemented by the government, which included the easing of FDI norms. In 2014, the government allowed the full entry of foreign banks into the country with the right to own up to a 100% stake in local banks;

• The public-debt-to-GDP ratio in the Philippines continuously declined since 2010 and was sustainable in 2015. This was due to high growth in real GDP, manageable inflation, prudent fiscal policies, and low interest payments.

The newly elected government’s economic agenda mainly focuses on reducing poverty

Despite various pro-business reforms and increased infrastructural advancements that have helped buoy FDI and economic growth, there has been not much of a change in the Philippines’ poverty levels. The proportion of population living below the national poverty line stood at 25.8% in 2005, and has reduced only marginally to 24.6% in 2015. This figure is still one of the highest in the region. This can be attributed to high income inequality along with underemployment and growth being limited to few sectors such as the real estate, retail and BPO, leaving a sizable share of young Filipinos jobless. In addition, frequent natural catastrophes added to the country’s woes by further pushing people below the poverty line. On the whole, benefits from higher economic progression did not trickle down to the deprived. Nonetheless, since taking office in June 2016, President Rodrigo Duterte has vowed to reduce poverty to 17.0% of total population and transform the Philippines into an upper middle-income nation by 2022. To attain this, apart from concentrating on pro-business reforms, the new government’s economic agenda focuses on providing aid to small farmers (as the majority of the Philippines’ labour force is employed in the agriculture sector) so that they are able to boost productivity and market access. Additional poverty reduction actions comprise of tweaking the income tax system to make it more progressive and the expansion of the conditional cash transfer (CCT) scheme. With many more poverty reduction programmes in the pipeline, the government at present seems to be on the right trail. However, the success of this will clearly depend on the implementation of the aforementioned reforms and those in the pipeline.