The Philippines Economic Outlook and Challenges Shanaka J. Peiris IMF Resident Representative to the Philippines November 2014 Shanaka J. Peiris IMF Resident Representative to the Philippines November nd Philippines Economic Society Annual Meeting The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

Buoyant global financial markets, economic disappointments…

Investment growth is still soft… Manufacturing PMI (three-month moving average; deviations from 50) Real Gross Fixed Investment (annualized quarterly percent change)

The Philippines recent growth has been impressive… 5 Real GDP Growth (In percent)

Led by domestic demand, particularly private consumption and construction…

While the export ratio has fallen, albeit with signs of diversification lately.

Philippines economic outlook is among the best in the region…

But the Philippines’ Growth and… 9

Poverty and employment challenge is enormous and growth.

Philippines’ Growth Take-off: Can it be Sustained? 11

Favorable endowments for growth take-off  Demographic dividend  Large domestic market and ASEAN economic community by 2015  Large English-speaking and literate workforce  Rapid service sector growth particularly BPOs  Agri-business, mining and tourism potential 12

Macroeconomic Stability Established– A Precondition for Growth 13

Sustaining Medium-term Growth: a growth accounting approach 14 Growth Capital (K) Augmented labor (L) Technology (A) Social policies, labor market regulation Investment climate Philippines

Potential and TFP growth has been rising in the Philippines despite weak capital accumulation…

And could be around percent with the rise in TFP and solow residual as well as investment based on quarterly national accounts…

Consistent with level estimated by the multivariate filter to be around percent.

Partly related to the rise in modern services that are increasingly tradable and sophisticated…

while service exports will likely be critical to sustain rapid growth in the future…

Empirical Model of Productivity Growth Following IMF (2006), TFP growth is regressed on various factors representing initial conditions and other control variables (X) from the productivity growth literature as well as service export sophistication, industry or manufacturing export sophistication (EXPY) and trade diversification in a non-overlapping 5-year panel of 120 countries from The “standard” panel regression used for analysis is as follows:

Service export sophistication and goods export diversification matter more than the level of trade openness per se in the post-ICT era…

Investment rate is low—why? 22

A low revenue ratio has constrained public investment.

Weak Investment Climate 24 Source: World Economic Forum, Global Competitiveness Report, 2013

And FDI is constrained by costs of doing business and restrictions on foreign ownership… 25

Employment rate is low partly due to weak social indicators and..

Labor market rigidities and skills mismatches. 27

The End 28