Risks and Vulnerabilities Philippines: Typhoons are a Risk but Don’t Rule out the Emerging Market Potential
In November 2013, one of the strongest typhoons to make landfall since records began struck the central Philippines. It is too early to assess the full damage to the overall economy but Euromonitor forecasts a slight downward revision in real GDP growth in 2013 and 2014 (to around 7.0% and 6.5% respectively) in line with government estimates that the typhoon may reduce economic growth by as much as 1 percentage point in 2014. However, we believe that investors should not rule out the country’s long term potential as one of the next major emerging markets to watch globally. Furthermore, reconstruction efforts will provide a boost to economic growth in the impacted regions in the short term.
The scale of the tragedy and human cost that Super Typhoon Haiyan (known locally as Yolanda) left in its path of destruction across the central Philippines cannot be overstated. With the death toll topping 5,000 at the time of writing, the International Labour Organization (ILO) estimates that five million workers (equivalent to the population of Norway) have been impacted by the devastation. Euromonitor’s Risks and Vulnerabilities Country Briefing highlights the fact that the country’s tropical climate makes it prone to storms that often turn into typhoons and cyclones. However, as has been evident in previous such disasters around the world, reconstruction efforts will be a priority for the government and will bring hope, opportunity and a revival of the economic and labour outlook for the worst-hit regions.
Reasons to Remain Optimistic
Our Risks and Vulnerabilities Country Briefing and Business Environment report for the Philippines highlight the reasons that the country should not be ruled out as an important investment destination.
- The Philippines is a member of the Association of Southeast Asian Nations (ASEAN) and accounted for 10.8% of their total GDP in 2012;
- Real GDP growth reached 6.8% in 2012, amongst the fastest growth of the ASEAN countries;
- The Philippines benefits from a buoyant business process outsourcing (BPO) sector with services accounting for 57.1% of GDP in 2012;
- Remittances inflows accounted for 9.8% of GDP in 2012 and grew by just over 50.0% in US$ terms in 2007-2012. The typhoon could well result in a spike in remittances during 2013 and 2014;
- With total exports accounting for 20.8% of total GDP in 2012, the Philippine economy is not overly export-dependent for economic growth. It is likely that the worst effected exports will be from agricultural products that were wiped out by the typhoon;
- The general government budget registered at just 0.9% of GDP in 2012. Its public debt stood at 41.9% of GDP in 2012, meaning that government finances are in a strong position to be able to invest and assist in aid and reconstruction;
- The Philippines’ credit rating reached investment grade status in 2013 highlighting the country’s macroeconomic fundamentals.
Challenges Remain Significant but Investors Should Not Rule the Philippines Out
The Philippines will continue to experience weather-related disasters in the future. Storms and flooding affected 24.9 million people and caused damages of US$3.2 billion in the 2007-2012 period, according to EM-DAT. Corruption remains a problem and the Philippines rank poorly in the World Bank’s Ease of Doing Business 2014 at 108th out of 189 countries. Other challenges include a significant brain drain resulting from the large number of emigrants leaving the country, poverty, a high youth unemployment rate and persistent income inequality.
The super typhoon’s impact will largely be felt in central areas, home to the agricultural sector with rice and sugar cane crops especially damaged. We may well see some short term spikes in inflation as rice and food shortage pressures build. However, the damage to the capital city of Manila was more limited as was the effect on the manufacturing sector, which is the largest contributor to the economy at 20.3% of total gross value added (GVA) in 2012. The economy will benefit from the aftermath of natural disasters in the form of reconstruction efforts, which will boost employment, construction and incomes. Although the country ranks poorly in the World Bank’s Doing Business rankings in 2014, it saw a major upwards improvement of 25 places compared to 2013. Overall, the Philippines offer long term promise with a young and largely English-speaking population and we maintain that it will continue to be one of the main emerging market economies to watch.