Work In Progress

Growth in the Philippines surpassed expectations. After a strong 2012 GDP performance, the economy accelerated again in Q1 2013, driven by household consumption, and is expected to remain strong in the quarters ahead. Reforms to reduce economic weaknesses (better business climate, infrastructure projects, fiscal consolidation) have proven to be effective and are beginning to pay off. Yet the country is still plagued by major sources of vulnerability and must keep up its economic transformation efforts.

Growth accelerates
The Philippines economy expanded by 6.6% in 2012, reporting the strongest growth of the ASEAN-4 countries (which also comprises Indonesia, Thailand and Malaysia). Despite several downside risks to growth (sluggish global demand, potential decline in remittances from overseas workers, renewed risk aversion), resilient domestic demand has maintained strong growth, which surpassed expectations. Real GDP growth accelerated again in Q1 2013, up 7.8% y/y after 7.1% in Q4 2012. According to available survey data, growth is expected to remain strong in the quarters ahead. Growth is projected at 7% in 2013 and 2014, driven by domestic demand.

Thanks to export diversification efforts (by markets and by products) undertaken over several years, net exports should continue to make a positive contribution to growth in 2013 and 2014. More importantly, domestic demand will continue to support growth. Private consumption, which accounts for more than 70% of GDP, was the main growth engine in 2012 and in Q1 2013, up by 5.1% y/y. Remittances from Filipino overseas workers (roughly 8% of GDP) provide major support for private consumption. More recently, Business Process Outsourcing, which accounts for about 5% of GDP and 25% of exports, has grown rapidly, fuelling the emergence of a middle class and providing new support for private household consumption and residential investment. For several quarters, GFCF has also boomed, up 16.9% y/y in Q1 after growing at an average annual rate of 10% in 2012, which has mainly benefited the construction and real estate sectors.

■ Mild inflationary pressures
After hitting an average annual rate of 3.1% in 2012, inflation averaged 3% in the first 5 months of 2013, at the lower end of the central bank’s inflation target of 3% to 5%. Inflationary pressures are expected to remain mild in 2013. The authorities are thus expected to hold the key policy rate at 3.5% in the upcoming months. Monetary policy aims both to facilitate investment spending and to temper capital inflows, which were massive in the first half, raising the risk of forming asset bubbles. Sustainably low interest rates are fostering a boom in private sector lending. Yet the rapid expansion of credit, notably in the real estate sector, does not seem to be creating much risk of overheating.

BY Helene DROUOT

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