The Philippines' business environment needs improvements

The Philippines' business improvement has scope for improvements based on the results of the World Bank's inaugural Business Ready (B-Ready) report.

The country's scores across the three pillars and 10 topics covered by the report ranged as high as the first, or top, quintile and as low as the fifth.

Overall, the B-Ready report assesses a country's "business environment by focusing on the regulatory framework and the provision of related public services directed at firms and markets, as well as the efficiency with which firms can comply with regulations and access public services," the World Bank said.

The 10 topics, meanwhile, "correspond to various stages of the life cycle of a firm and its participation in the market while opening, operating (or expanding) and closing (or reorganizing) a business."

Economies in the top quintile "demonstrate the highest performance," the World Bank said, while those in the second "have above-average scores ... but also show potential for improvements."

Third quintile members, meanwhile, "exhibit a mix of strengths and weaknesses," those in the fourth "grapple with a challenging business environment," and the bottom quintile comprise economies that "face significant challenges."

The Anti-Red Tape Authority (ARTA) said it welcomed the Philippines' "inclusion in the top 40 percent." The report, however, did not present an overall ranking of the 50 economies studied.

The World Bank instead divided countries into five equal groupings, or quintiles, based on their scores in terms of the three pillars and topics.

The Philippines posted its highest score of 70.68, in a scale of zero to 100, in the regulatory framework pillar, enough to put it in the second quintile or 16th out of the 50 economies.

It was in the middle of the pack, or the third quintile, in the public services pillar with a score of 50.80 for 24th.

The country was 36th in terms of operational efficiency, scoring 57.95, which placed it in the fourth quintile.

"Economies of varying income levels can adopt strong regulatory frameworks," the World Bank said, noting that while high-income countries dominated this pillar (Hungary was 1st), it also included a lower-middle-income economy such as the Philippines.

As for public services, "high-income economies tend to provide higher quality public services to support businesses, but all income levels are represented across top quintiles," it added.

Estonia topped this category.

With regard to the third pillar, where Singapore came first, "economies across all income levels can facilitate operational efficiency for firms."

By topic, meanwhile, the Philippines was in the first quintile (6th) in terms of labor, in the second with regard to international trade (17th); and in the bottom fifth in terms of business entry (42nd).

It was in the third quintile for the remaining seven topics: business location (30th), utility services (23rd), financial services (29th), taxation (22nd), dispute resolution (21st), market competition (28th) and business insolvency (29th).

The ARTA said that the Philippines' 16th place in the regulatory framework pillar underscored progress in improving the country's business environment.

This, it added, showed the government's success in "establishing clear and effective rules and regulations that support business operations from startup to closure."

As for the public services and operational showings, the ARTA said that it acknowledged the "need for further improvement."

With regard to the topic results, it said that the Philippines posted a "strong performance" in the areas of labor, international trade and utility services.

"It highlights significant advancements made in improving labor conditions, digitalizing trade processes and providing transparent utility services, it added.

The key areas for improvement, meanwhile, were said to be business entry, business location, market competition and business insolvency.

"ARTA is confident that the country's ranking will continue to improve with the full implementation of the government's efforts that are designed to enhance the delivery of government services," the Office of the President-attached agency said.

"We recognize the need for a whole-of-nation approach that underscores the significance of coordinated and harmonized alignment of relevant service delivery from the government to the stakeholders."

The B-Ready report, it also said, "may not yet fully capture the impact of the government's recent initiatives, [but] we are optimistic about the continued improvements in the country's business environment moving forward."

The World Bank said that the B-Ready report was still being refined in terms of process and methodology. Next year will see coverage expand to 112 economies, while the 2026 list will grow to 184.

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Source: Manila Times

World Bank optimistic on PHL growth

The World Bank is confident the Philippine economy will continue to perform well this year and in 2025, as easing interest rates will likely boost domestic consumption.

“We are confident, we’re relatively confident that the economy will continue performing well,” Gonzalo J. Varela, World Bank lead economist and program leader of the equitable growth, finance and institutions practice group for Brunei, Malaysia, the Philippines, and Thailand, told reporters.

The World Bank expects the country to grow by an average of 5.9% from this year until 2026. It projects Philippine GDP growth at 5.8% in 2024.

Economic managers are targeting 6-7% growth this year, and 6.5-7.5% in 2025.

Despite the impact of recent typhoons, Mr. Varela said he sees “some persistence in high economic activity” and expects a strong economic performance in the third quarter.

“On the one hand, you have expectations of the BSP (Bangko Sentral ng Pilipinas) loosening monetary policy, and that will stimulate consumption and investment, at the same time, you have a global economy that is going to be more difficult to navigate,” he said.

The BSP began its easing cycle on Aug. 15 with a 25-basis-point (bp) cut, bringing the policy rate to 6.25%.

Mr. Varela said the BSP’s next rate cut will depend not just on easing inflation but also on the US Federal Reserve.

“It will depend on what happens with the Fed in the next couple of weeks. So if the Fed decreases interest rates, as we are expecting for the next 12 months, or large reductions in interest rates, I think that will give space for BSP to loosen monetary policy,” he said.

The Federal Reserve is now widely expected to undertake a smaller 25-bp interest rate cut at its meeting next week.

BSP Governor Eli M. Remolona, Jr. has previously said they could cut rates by another 25 bps within the year. The Monetary Board’s last two policy-setting meetings this year are scheduled for Oct. 17 and Dec. 19.

GLOBAL SLOWDOWN

However, a slowdown in the global economy could impact the Philippines’ growth trajectory.

“We also need to keep in mind that we’re in a world in which growth is slower. So global growth being slower, you know, the Philippines cannot escape gravity,” Mr. Varela said.

The World Bank forecasts a 2.6% GDP growth for the global economy this year, and 2.7% expansion in 2025 and 2026.

“The Philippine economy, like many others, is vulnerable to global economic downturns. A slowdown in the global market can lead to decreased exports, lower remittances from Filipinos working abroad, and higher borrowing costs,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.

To temper the impact of a global slowdown, Mr. Roces said rate cuts by the BSP would “stimulate domestic demand and stabilize the peso.”

“However, effectiveness will always depend on the severity of the global slowdown amidst the strength of the Philippine domestic economy, and the coordination of monetary and fiscal policies,” he added.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort also said in a Viber message that lower interest rates would spur loan demand, leading to a pickup in GDP growth, investments, employment, trade, and other business activities.

In a separate Viber message, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the global slowdown is not expected to have a significant drag on the Philippines’ economy due to the midterm elections in May 2025.

Historically, the economy gets a boost from increased spending during election years.

FINANCING PROJECTS

Meanwhile, Mr. Varela said the World Bank will continue to provide financing for projects in the Philippines even as it becomes an upper middle-income economy.

“We expect the program to keep growing… We expect to keep supporting the Philippines in that respect. The transition to upper middle-income branch status, in terms of cost of financing, what we need to keep in mind is that interest rates are expected to decline globally and that will also impact on the cost of financing that the World Bank can offer,” he said.

According to the World Bank’s latest income classification data, the Philippines remained a lower middle-income country with a gross national income (GNI) per capita of $4,230 in 2023, higher than $3,950 in 2022.

The Marcos administration is aiming to achieve upper middle-income status for the country by 2025.

To become an upper middle-income country, the Philippines now needs to have an estimated gross national income (GNI) per capita of $4,516 to $14,005. This is higher than the previous range of $4,466 to $13,845.

Mr. Varela also said the World Bank is working with its partners to reduce the cost of financing by blending grants with loans, especially for climate change mitigation or adaptation projects.

“The Philippines is in the ‘ring of fire’ of typhoons. It’s the number one country most affected by natural disasters globally. So, investing in resilient infrastructure is crucial,” he added.

Meanwhile, Mr. Varela said that the World Bank’s Country Partnership Framework for 2025 to 2028 is expected to be approved early next year.

Under the new framework, World Bank loans would be focused on increasing firms’ and farms’ productivity, bolster a competitive business environment, ensure inclusive finance, improve health and nutrition.

The World Bank also aims to help enhance education quality and skills, improve resilience to shocks and climate change, and provide better services to conflict-affected and underserved areas, and help in the country’s transition to a greener economy.

The World Bank is also expected to approve the Philippine Second Digital Transformation development policy loan (DPL) and Digital Infrastructure Project around October to November, Mr. Varela said.

The government is seeking a $750-million loan for the Second Digital Transformation DPL, which aims to fast-track the countryside adaptation of digital technologies. It also seeks a $287.24-million loan for the Digital Infrastructure Project, which seeks to improve broadband connectivity in the country.

Source: Business World

Philippines’ growth outlook clouded by inflation risks

The Philippines is likely to continue its stable growth trajectory in the medium term, although inflation and elevated interest rates remain major risks to this outlook, analysts said.

“First, inflation remains one of the main downside risks to growth for the year,” Gonzalo Varela, World Bank lead economist and program leader of the Equitable Growth, Finance and Institutions Practice Group for Philippines, Malaysia, and Brunei Darussalam, said.

“While inflation is back to within the Bangko Sentral ng Pilipinas’ (BSP) target, inflation for key commodities, such as rice, remains high.”

Since 2022, the Philippines has faced rising inflation due to a spike in global commodity prices and supply chain disruptions. Inflation averaged 5.8% in 2022 and 6% in 2023, well-above the BSP’s 2-4% target range.

The BSP expects inflation to average 3.4% this year.

To tame persistent inflation, the government has employed various monetary and non-monetary measures such as raising interest rates and lowering tariffs on certain commodities.

“Our (economic) performance would have been even better if not for the high inflation, particularly in food. But we expect those inflation pressures to diminish, allowing us to go back to the 2-4% inflation target,” National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said.

The Philippine economy grew by 7.6% in 2022 but slowed to 5.5% in 2023.

The Development Budget Coordination Committee (DBCC) has set the country’s gross domestic product (GDP) growth at 6-7% this year, 6.5-7.5% next year, and 6.5-8% from 2026 to 2028.

Over the past months, the DBCC has trimmed its growth targets due to external headwinds.

“We stick to that (targets), and we have our fiscal consolidation program to ensure that even as we aim for high growth, we remain fiscally sound, externally sound, so that you can sustain the growth momentum even beyond the administration,” Mr. Balisacan said.

Many multilateral institutions’ Philippine GDP forecasts either fall short or settle at the low end of the government’s growth target.

ASEAN+3 Macroeconomic Research Office (AMRO) Senior Economist Andrew Tsang said that the Philippine government’s medium-term targets are “ambitious as they are higher than the trend growth rate.”

“My general sense is that the GDP growth targets in recent and in coming years are overly optimistic considering a few key factors,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

“The damage caused by COVID-19 (coronavirus disease 2019) and the cost-of-living crisis to household balance sheets in the Philippines is quite substantial and will take many years to repair,” he added.

PANDEMIC IMPACT

Mr. Balisacan admitted the economy is still reeling from the pandemic due to the “extraordinarily” long lockdowns.

“The pandemic and (the government’s) response to it, caused the sharp contraction of the economy. That easily wiped out three years of economic growth,” he said, referring to the 9.6% GDP contraction in 2020.

“Nonetheless, for the past two years, the objective was to restore the economy to pre-pandemic levels and to recover many of the losses. Many of these losses, like learning losses, take many years to recover.”

Despite expectations of below-target growth, most multilateral institutions’ forecasts still place the country among the fastest-growing economies in Southeast Asia or even the Asia-Pacific region.

The World Bank expects the country to grow by an average of 5.9% from this year until 2026. It sees GDP growth averaging 5.8% in 2024.

“This level of growth puts the Philippines as one of the top growth performers in the East Asia Pacific region (close to Cambodia’s 6.1% average and Vietnam’s 6% average,” Mr. Varela said.

AMRO sees Philippine growth averaging 6-6.2% from 2026 to 2028. This year, it projects GDP growth averaging 6.1%, which places it as the second-fastest expected growth in the ASEAN+3 region, after Vietnam.

“The Philippines will register one of the fastest growth in the ASEAN+3 region during 2024-2025 and will continue to grow steadily in the medium term,” Mr. Tsang said.

“The Philippines’ economy will outperform many of its regional peers in terms of growth. That is largely a catch-up following its long and deep downturn during the pandemic,” Sarah Tan, an economist from Moody’s Analytics, said.

However, Ms. Tan noted that economic output is still below around 10% of its pre-pandemic levels, which is much lower than the average 6-7% seen in other Association of Southeast Asian Nations (ASEAN) countries.

“We expect the economy to narrowly miss the government’s growth target of 6-7% as high borrowing costs keep a lid on private consumption — its main engine of growth.”

“Likewise, high interest rates will also slow private investment growth,” Ms. Tan added, as Moody’s expects GDP growth to average 5.9% this year.

Meanwhile, the International Monetary Fund (IMF) expects GDP to settle at 6% this year.

IMF Representative to the Philippines Ragnar Gudmundsson said this will be driven by a “recovery in exports and accelerate further to 6.2% in 2025 amid declining inflation and lower interest rates.”

“GDP growth is expected to remain at around 6-6.5% over the medium term, in line with the economy’s potential growth. This would make the Philippines one of the fastest-growing economies in the region, reflecting recent strong performance,” he added.

Aris D. Dacanay, economist for ASEAN at HSBC Global Research, said the country’s growth trajectory is “promising” but there is still much to be done.

“The odds are in the Philippines’ favor, and we expect that despite a backdrop of weak global growth, the Philippines’ medium-term outlook for growth is a promising one,” he said.

“The country has re-achieved stability. And in truth, the country will still grow respectably even when the status quo is maintained. But stability is different from prosperity, and to achieve prosperity requires going the extra mile,” Mr. Dacanay added.

INFLATION RISKS

Mr. Balisacan said that inflation is one of the primary concerns that the government must address.

“Inflation is linked with or breeds other problems. High inflation prompted the BSP to raise the policy rate, which is not good for business and not good for consumers,” the NEDA chief said.

“So, if you are able to reduce that, reduce the inflation, then there’s a lower likelihood that you’ll have your interest rates rising in the future,” he said.

The BSP at its Aug. 15 meeting reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%. This was the first time the central bank cut rates since November 2020.

BSP Governor Eli M. Remolona, Jr. has also signaled the possibility of another 25-bp cut in the fourth quarter.

Managing inflation will continue to be crucial, Mr. Varela said. “Keeping inflation in check is important to ensure that the process of monetary policy normalization, or the reduction in the key interest rate by the BSP, is not delayed,” he said.

In the short term, Mr. Tsang said that the country’s growth prospects may be dampened by high inflation, particularly due to possible supply shocks which could stoke food prices.

“Inflation is still one of the main concerns given how private consumption is the largest contributor to GDP by expenditure. While we expect inflation to recede through the year and stabilize in the next, elevated food inflation threatens to slow the deceleration,” Ms. Tan said.

“That’s partly a function of poor food supply as the country is vulnerable to natural disasters like droughts and floods,” she added.

The Philippines is one of the countries most affected by storms, with an average of 20 typhoons per year.

The agriculture sector is still recovering from the impact of the El Niño, which caused P15.3 billion in total farm damage from June 2023 to August 2024.

“A key downside risk stems from the threat of climate and extreme weather-related events. For example, a stronger-than-expected La Niña and more destructive storms could cause disruptions to business activity and damage to farm output which could put pressure on food prices,” Mr. Varela said.

IMF’s Mr. Gudmundsson said that the balance of risks to the near-term growth outlook has improved but remains tilted to the downside.

“On the downside, higher-for-longer interest rates or spillovers from fiscal risks in the United States could result in tighter financial conditions than expected in the Philippines and larger-than-expected capital outflows,” he said.

Barring these risks, inflation is widely expected to begin easing for the rest of the year and in 2025.

“Inflation is expected to stay within the target range in the second half of 2024 and 2025, benefiting from the continued easing of international commodity prices and reduction in tariffs on imports, although the upside risks, such as peso depreciation, and wage increases, remain,” Mr. Tsang said.

The tariff cut is also widely expected to boost household consumption, Mr. Dacanay said.

“Households in the Philippines usually spend 9% of their budgets on rice so potentially lowering rice prices by a fifth can help lower the pressure on household budgets and unleash as much as 1.1% of GDP. That’s a lot of potential growth waiting on the sidelines.”

In June, President Ferdinand R. Marcos, Jr. approved a reduction on tariffs on rice imports to 15% from 35% previously, until 2028.

OTHER RISKS

Apart from inflation, analysts also cited other factors that could derail the country’s growth path.

Mr. Varela noted delays in the implementation of key investment and productivity-enhancing reforms, which could hinder the entry of foreign investments.

“Greater investment in physical infrastructure and human capital is still needed, while the Philippines has a lot of catching up to do in terms of signing and joining major free trade agreements with the world’s largest markets,” Mr. Chanco said.

In the long term, Mr. Tsang said that lagged effects from the pandemic could continue to constrain growth amid the “slow upgrading of the labor force and weak recovery in private investment.”

“Meanwhile, the potential growth is also affected by the pace of infrastructure development, prolonged geopolitical risks, and natural disasters caused by climate change. These factors underscore an urgent need for action to foster resilient, sustainable, and inclusive long-term growth,” he added.

To achieve higher growth, Mr. Tsang said the economy should address the scarring effects of the pandemic “by implementing human capital policy and investment policy in a timely manner and continue to embark on infrastructure development.”

Mr. Gudmundsson also noted that an escalation in geopolitical tensions could “disrupt trade and put pressure on the peso.”

GROWTH DRIVERS

Meanwhile, the NEDA secretary said that the government is ensuring that growth will be felt across all sectors.

“In the meantime, we are pushing every policy lever that we can use that ensures growth is not just high, but also inclusive. Despite the inflation pressure, growth has been broadly inclusive,” Mr. Balisacan said.

Mr. Varela said the economic growth potential for the Philippines remains high over the medium and long term.

“If the government commits to a combination of fiscal prudence and ambitious investment and productivity-enhancing reforms, the economy could be growing at higher rates than the already high rates at which it is growing today,” he said.

The government must also ensure the timely implementation of reforms to strengthen competition and boost productivity, Mr. Varela said.

“In an increasingly competitive environment, further efforts to attract FDIs (foreign direct investments) and measures to ensure knowledge transfer will be needed,” Mr. Tsang said.

Infrastructure development will also be key to supporting robust growth.

“The pace of infrastructure development is one of the key challenges facing the Philippine economy. Infrastructure investment should be stepped up through strategic prioritization among different sectors and effective utilization of various funding sources,” Mr. Tsang said.

The Marcos administration plans to spend 5-6% of GDP on infrastructure annually.

Mr. Dacanay noted that infrastructure must be well-planned and well-designed to “prioritize the overall mobility and welfare of all Filipinos, regardless of income.”

He said infrastructure development must also incorporate climate mitigation to make sure Filipinos become more resilient in the face of stronger typhoons.

“Looking forward, accelerating reforms to raise productivity, reduce infrastructure and education gaps, and harness benefits from the digital economy and demographic dividends could boost the country’s potential growth,” Mr. Gudmundsson said.

Policies must also strengthen social protection schemes and address climate issues, Mr. Gudmundsson added.

“In addition, policies that aim to close the physical and human capital investment gaps for the country will be important to boost our long-term growth prospects. This will allow the Philippines to continue to expand its potential growth,” Mr. Varela said.

UPSKILLING

The government must also focus on upskilling the labor force, analysts said.

“Overcoming the scarring effects of the pandemic mandates a sustained focus on upgrading and upskilling the workforce to embrace a more technology-driven economy,” Mr. Tsang said.

“In particular, the government should closely collaborate with the industries and training providers to formulate action plans and implement the plans to ensure that the supply of skilled labor is matched with industries’ demand,” he added.

Robust investments to generate quality employment is one of the priorities of the administration, Mr. Balisacan said.

“Our push is for investments, massive investments that we need to do because then the returns of labor will be higher in those places where there are investments.”

Mr. Balisacan said the government should address Filipino students’ learning losses from the pandemic as its effect will be felt when they join the workforce in a few years.

The NEDA in 2021 said that the lack of face-to-face schooling for one year during the pandemic may result in over P11 trillion in productivity losses over the next four decades.

Mr. Dacanay noted that skills training must also incorporate emerging technologies such as artificial intelligence (AI).

“Skills training needs to be prioritized, particularly in AI, to maintain the momentum seen in the country’s digital space,” he said.

By sector, the services industry is seen to continue being a key driver of growth. It is typically the biggest contributor to the economy among major industries.

“Within services, growth will be led by wholesale and retail trade as monetary policy easing reduces pressure on households’ budgets, giving consumer spending a lift,” Ms. Tan said.

Mr. Tsang said that the business process outsourcing (BPO) industry will “expand robustly going forward.”

“The BPO sector will continue to grow given the ongoing trend of digitalization and steady rise in external demand for IT-BPM services for cost optimization.”

Tourism is also seen as a bright spot for the Philippines, Mr. Tsang said.

“In the coming years, there is potential in the tourism industry with strong domestic tourism, and the level of international tourists is expected to surpass the pre-pandemic level,” he said.

In 2023, tourism accounted for 8.6% of GDP, up from 6.4% a year ago. The industry’s direct gross value added, which measures the value generated from various tourism-related activities, was P2.09 trillion.

The country should also continue to enhance the manufacturing of semiconductors, its top export.

“Over the near to medium term, the Philippine semiconductor industry is expected to benefit from the upturn of the global semiconductor cycle (it is expected to last until mid-2025) and the US semiconductor diversification strategy,” Mr. Tsang said.

Ms. Tan said that enhancing semiconductor production to move up the value chain will “attract investment and talent, improving the sector’s competitiveness.”

“Rising factory output is crucial to maintaining economic expansion; since the end of the pandemic, manufacturing output growth has lagged service-providing industries by half,” she added.

Source: Business World