philippine economy 2022 essay

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Philippines records strongest economic growth in more than 40 years

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Philippines economy shows strong expansion

Executive Director and Asia-Pacific Chief Economist, S&P Global Market Intelligence

The Philippines economy has rebounded strongly during 2022 from the negative impact of the COVID-19 Delta wave that hit the nation in the second half of 2021. In the third quarter of 2022, GDP growth was up 7.6% year-on-year (y/y), after rising by 7.5% y/y in the second quarter. The latest S&P Global Philippines Manufacturing PMI reached a six-month high in December 2022, signaling sustained growth across the Philippines manufacturing sector.

Over the decade ahead, rapid economic growth is forecast for the Philippines economy. By 2034 the Philippines is set to join the ranks of a small group of countries in the Asia-Pacific region that have a GDP exceeding one trillion dollars. This will result in a significant transformation of the structure of the Philippines economy, with substantial expansion in the size of the domestic consumer market. This will also help to drive foreign direct investment inflows into the Philippines, as multinationals build up their local presence in a wide range of manufacturing and service sector industries.

Strong growth in early 2022

The Philippines economy has shown strong growth momentum during 2022, with GDP growth rising to 7.6% y/y in the third quarter of 2022. The easing of domestic COVID-19 restrictions during 2022 has allowed the rebound of household consumption spending, which helped to drive strong economic growth. Household consumption expenditure grew by 8.0% y/y in the third quarter of 2022, while gross capital formation rose by 21.7% y/y.

Philippines GDP growth, 2019-2022

The S&P Global Philippines Manufacturing PMI continued to post above the 50.0 no-change mark that separates growth from contraction in December 2022. The headline index rose from 52.7 in November to a six-month high of 53.1 in December.

A solid expansion in production levels was reported during December as rate of growth quickened, indicating the fastest rise in output levels since June. The data pointed to domestic demand being the driving force behind the latest upturn in incoming new business, as foreign orders contracted for the tenth month running.

Philippines Manufacturing PMI

Deteriorating current account deficit

Merchandise exports have continued to record strong expansion, rising by 13.2% y/y in November 2022, showing resilience to the impact of the slowdown in mainland China, which is a key export market. An important driver for merchandise exports has been electronics exports, which rose by 22.9% y/y in November, accounting for 64% of total merchandise exports. For the first eleven months of 2022, merchandise exports rose by 7% y/y.

However, imports have shown even more rapid growth, rising by 20.3% y/y in the first eleven months of 2022. Consequently, the trade deficit for the first eleven months of 2022 rose to USD 53.7 billion, compared with USD 37.1 billion in the same period of 2021.

The transmission effects from weaker growth in the US and Western Europe are a vulnerability for the Philippines export sector in 2023, since the US accounted for 15.6% of total exports and the EU accounted for 10.4% of total Philippines exports in 2021.

In 2020, the current account surplus reached a record high of USD 11.6 billion or 3.2% of GDP, boosted by the sharp slump in imports due to the severe contraction in domestic demand. However, the current account shifted back to a deficit of USD 6.0 billion in 2021, or 1.5% of GDP, as growth recovery triggered higher domestic demand and rising imports.

Imports soared during 2022, with surging prices for world oil and gas being important factor contributing to a further sharp deterioration in the current account balance for calendar 2022. In December 2022, the Philippines central bank, Bangko Sentral ng Pilipinas (BSP), revised down its current account projection for 2022 to a deficit of USD 20.5 billion or 5.1% of GDP due to a widening trade deficit, as the economic recovery and rising oil prices pushed up imports. This was a significant downward revision from its March 2022 projection of a current account deficit of USD 16.3 billion, or 3.8% of GDP.

Philippines export markets

An important stabilizing factor for the Philippines economy has been overseas worker remittances by Filipinos working abroad, which remained quite stable during 2020 despite the COVID-19 pandemic, down only 0.8% y/y, and equivalent to around 10% of GDP. Remittances sent home by workers are an important factor supporting domestic consumer spending in the Philippines. Despite concerns about job losses for workers abroad due to the impact of the pandemic on many industries such as tourism and aviation, remittances data continues to show resilient remittance inflows for 2021. Remittances by workers abroad rose by 5.1% y/y in 2021, to a record high of USD 34.9 billion. In the first eleven months of 2022, remittances by workers abroad rose by 3.4% y/y, to USD 32.7 billion.

Rapid growth in exports from the IT-BPO sector have also become an important boost for the Philippines economy and for total exports. IT-BPO exports have risen from USD 9.5 billion in 2010 to USD 25.1 billion by 2021, according to BSP estimates.

Rising inflation pressures

During 2022, inflation pressures have been rising in the Philippines, with higher energy prices having been a key factor pushing up the CPI inflation rate. Both average cost burdens and output charges rose markedly during 2022. However, according to recent S&P Global Philippines Manufacturing PMI surveys, there has been some easing of price pressures during the fourth quarter of 2022, although rates of inflation remain high and an ongoing threat to demand. In December, the pace of increase in cost burdens was the slowest for three months, whilst firms raised their selling prices at the softest rate for a year in December amid efforts to drive sales.

Philippines PMI Input and Output Prices

Bangko Sentral ng Pilipinas (BSP) has faced rising headline CPI inflation pressures driven by rising energy and food prices, with the December CPI having risen to 8.1% y/y, compared with 3.0% y/y in January 2022. With CPI inflation having moved significantly above the BSP inflation target range of 2% to 4%, the BSP has tightened monetary policy by a total of 350bps during 2022. The rate hike of 0.25bps on 20th May was the first rate hike since November 2018. Faced with rising headline CPI inflation pressures, the BSP continued to tighten monetary policy during the second half of 2022, closing the year with hikes of 75bps on 17th November and a further 50bps on 16th December. This pushed the policy rate to 5.5% by the end of 2022. In its November 2022 Monetary Policy Report, the BSP expected that the CPI inflation rate would likely peak in the fourth quarter of 2022, moderating back to within the BSP inflation target range by the third quarter of 2023.

ASEAN CPI inflation compared to US & EU, November 2022

The Philippines peso had depreciated against the USD during much of 2022, from 51.0 per USD on 1st January to 59.2 per USD by 10 October, as the US Fed tightened monetary policy aggressively, which increased the relative attractiveness of the USD and US fixed income assets. However, since mid-October the PHP has rebounded, rising to 55.7 by end-December 2022 and 54.7 by mid-January 2023.

Philippines economic outlook

Despite the impact of the COVID-19 Delta wave in the second half of 2021, GDP growth for calendar 2021 rebounded to 5.6% y/y. Strong growth momentum has continued in 2022, at a pace of over 7% y/y in the second and third quarters of the year.

Easing of pandemic-related travel restrictions during 2022 has also allowed a gradual reopening of domestic and international tourism travel. If sustained during 2023, this would provide an important boost to the economy. Prior to the pandemic, in 2019, gross direct tourism value added as a share of GDP was estimated at 12.7% of GDP, including both international and domestic tourism spending. International tourism spending was estimated at Peso 549 billion, while domestic tourism spending was estimated at Peso 3.1 trillion. Due to the importance of domestic tourism in the overall contribution of tourism to GDP, the recovery of domestic tourism could be a significant growth driver in 2023.

Philippines long-term GDP outlook

Continued rapid GDP growth of around 5.6% y/y is expected in 2023, helped by continued strong private consumption spending, an upturn in government infrastructure spending and improving remittance inflows.

Over the next decade the Philippines economy is forecast to continue to grow rapidly, with total GDP increasing from USD 400 billion in 2021 to USD 830 billion in 2031. A key growth driver will be rapid growth in private consumption spending, buoyed by strong growth in urban household incomes.

By 2034, the Philippines is forecast to become on the Asia-Pacific region's one trillion-dollar economies, joining mainland China, Japan, India, South Korea, Australia, Taiwan and Indonesia in this grouping of the largest economies in APAC.

This strong growth in the size of the Philippines economy is also expected to drive rapidly rising per capita GDP, from USD 3,500 in 2021 to USD 6,400 by 2031. This will help to underpin the growth of the Philippines domestic consumer market, catalysing foreign and domestic investment into many sectors of the Philippines economy.

Philippines per capita GDP

The Philippines will also benefit from its membership of the recently implemented RCEP trade deal, particularly due to its very favourable rules of origin treatment, which provide cumulative benefits that will help to build manufacturing supply chains within the RCEP region across different countries. This will help to attract foreign direct investment flows for a wide range of manufacturing and infrastructure projects into the RCEP member nations, particularly into low-cost manufacturing hubs such as the Philippines.

Consequently, the outlook for the Philippines economy over the next decade is very favourable, with significant progress in economic development expected. Rapidly rising per capita GDP and standards of living will help to underpin a broad improvement in human development indicators and should deliver a significant reduction in share of the population living in extreme poverty over the decade ahead.

Read the accompanying press release here.

Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence

[email protected]

© 2023, S&P Global Inc. All rights reserved. Reproduction in whole or in part without permission is prohibited.

Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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Benjamin E Diokno: The Philippine economy post-COVID-19 - moving steadily towards recovery

Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Philippine Economic Briefing 2022, Manila, 30 January 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good day, everyone. I hope you are all safe and well. Thank you to Daiwa Securities Group for allowing me to share updates on the economy and how we plan to maintain our strong growth momentum.

I am pleased to present to you latest developments in the Philippine economy. 

After five consecutive quarters of negative growth, the Philippine economy maintained its positive momentum and grew 7.7 percent in the fourth quarter of 2021. This brings the full-year GDP growth figure to 5.6 percent. The full-year print exceeds the government's revised forecast range of 5 to 5.5 percent, giving us even more confidence of even brighter recovery prospects.

Labor conditions have improved. In November 2021, the country's unemployment rate, down from a peak of 17.6 percent in April last year, fell even further to 6.5 percent, the lowest since January 2021. 

Employment gains for the month have occurred mainly in the services sectors, particularly in public administration and defense, as well as wholesale/retail trade; and in fishing and aquaculture. 

Meanwhile, the country's year-on-year headline inflation further decelerated to 3.6 percent in December 2021 from 4.2 percent in November 2021, bringing the year-to-date average inflation to 4.5 percent. This is slightly above the Government's inflation target range of 2.0-4.0 percent for 2021. 

The slowdown in December 2021 inflation supports the BSP's assessment that inflation would decelerate to within the target range over the policy horizon. Meanwhile, the Development Budget Coordination Committee (DBCC) decided to retain the current inflation target range at 3.0 percent ± 1.0 percentage point for 2022–2024.

The prevailing policy stance is also supported by a manageable inflation outlook and anchored inflation expectations. Based on our latest baseline forecasts, inflation is seen to settle at 3.4 percent in 2022 and 3.2 percent in 2023, well within the government's target range of 2 to 4 percent. 

We expect liquidity in the financial system to remain adequate in supporting credit activity and a broad-based economic recovery. M3 expanded by 8.2 percent year-on-year to P14.8 trillion in November 2021, unchanged from the growth rate (revised) recorded in October 2021. 

Overall liquidity conditions thus continue to provide support for domestic economic activity. The various liquidity-easing measures of BSP have injected the equivalent of 12.0 percent of GDP into the financial system.

Meanwhile, outstanding loans of universal and commercial banks (U/KBs), net of reverse repurchase (RRP) placements with the BSP, increased at a faster rate of 4.0 percent year-on-year in November 2021 from 3.5 percent in October 2021. 

Moving on to banking sector developments-

Philippine banks have shown resilience to the COVID-19 crisis, benefiting from risk-management and other regulatory reforms of the past two decades. 

Banks have ample buffers against shocks. Capital adequacy ratio (CAR) is at 17.6 percent, well above the 8.0 percent prescribed by the Bank for International Settlements (BIS) and the BSP's 10.0 percent minimum requirement.   

Exposure to bad debts remains manageable. Average non-performing loans (NPL) ratio stood at 3.9 percent as of end-November this year, much lower than the double-digit figures in the aftermath of the Asian financial crisis. 

The implementation of the FIST Act, signed earlier this year, is projected to reduce average NPL ratio of the banking system by 0.6 to 5.8 percentage points for the years 2021 to 2025.

The exchange rate movements remain broadly in line with the country's long-run macroeconomic fundamentals.

In 2021, the foreign exchange market was supported mainly by positive market sentiment as the economy continued to show signs of recovery amid the pandemic. 

The BSP has held to its long-standing approach of keeping the exchange rate market-determined and taking measures only to ensure orderly market conditions and reduce excessive short-term volatility in the exchange rate that may impact on inflation and inflation expectations. 

Looking ahead in the year, the peso is expected to remain stable, supported by structural inflows from exports, overseas Filipino remittances, BPO receipts, and foreign direct investments. 

Meanwhile, the country's external sector continues to provide sufficient buffers to ward off the potential adverse effects of external headwinds. 

Our gross international reserves (GIR), which stood at US$108.9 billion as of end-2021, continue to provide ample cushion against unforeseen demand for FX liquidity. The GIR level is equivalent to 10.3 months' worth of imports of goods and payments of services and primary income. It is also about 6 to 9 times the country's short-term external debt based on residual and original maturity, respectively. 

Amid the strong rebound in external demand in key trade partners, the country's exports of goods increased by 16 percent in January to September 2021. 

Meanwhile, following the gradual resumption of domestic economic activities and restocking of inventories, imports of goods grew at a much faster rate of 30.2 percent in the same period. This resulted in a wider trade deficit at US$36.6 billion and has caused the overall BOP position to reverse to a deficit of US$665 million in the first nine months of 2021 from a US$6.9 billion surplus in the same period last year.

The country's external sector has remained supported by structural FX flows from overseas Filipino remittances, business process outsourcing receipts, and foreign direct investments.

Cash remittances from overseas Filipinos (OFs) are steadily flowing in with a 5.2 percent growth posted in January to November 2021, from a slight contraction in 2020.

Meanwhile, BPO services exhibited strong recovery in the same period at 8.3 percent as the sector was quick to adjust to the new normal work set up. 

Net foreign direct investments (FDI) in January to October 2021 increased by 48.1 percent due to positive foreign investor sentiment and improving confidence on the country's growth prospects. This bodes well for job creation.

Moreover, favorable external debt profile acts as a cushion against external shocks. External debt-to-GDP ratio settled at 27.3 percent as of end-September 2021 compared to about 60.0 percent in mid-2000s.

Given that bulk of the country's external debt have medium and long-term maturity, and are fixed interest rate bearing, debt repayment schedule is more manageable and financially sustainable over the medium to long term.

Considering recent economic developments and significant progress in mass vaccination, we are optimistic that there is sufficient support for the country's recovery this year and in the near term. The management of risks, the expected revitalization of key industries from government policy support and structural reforms, as well as the resumption of global economic activities should help the Philippine economy move towards a steady recovery path.

The latest projections as of the 16 December 2021 monetary policy meeting indicate that average inflation is likely to ease towards the midpoint of the target range in 2022, at 3.4 percent, and 2023, at 3.2 percent. 

OF cash remittances are seen to increase, while receipts from BPO services are expected to rise as host economies open further and access to digital financial services is enhanced.

Inflows of foreign direct investments (FDIs) are seen to climb as the domestic and global investment climate improves. 

Moving forward, the BSP's actions and policy thrusts will continue to be anchored on its core mandates of promoting price and financial stability. 

On monetary policy: the BSP will remain vigilant over the current inflation dynamics to ensure that the monetary policy stance continues to support economic recovery to the extent that the inflation outlook would allow. It will carefully scan the operating environment with a forward-looking perspective to move in a pre-emptive fashion to address any risks to our price stability mandate.

On the financial sector: the BSP will intensify its monitoring and surveillance over its supervised institutions to ensure that they remain responsive to emerging risks and to promote the continued soundness, stability, resilience and inclusivity of the banking system, particularly through the pursuit of enhanced digitization.

Finally, on the external sector: the BSP will remain supportive of policies that will help strengthen the economy's resilience to external shocks, including that of maintaining a market-determined exchange rate, keeping a comfortable level of reserves, and  keeping the country's external debt manageable.

In closing, I leave you with three key takeaways:

First, the Philippines' economic fundamentals remain solid, and these will carry us through full recovery. The national government will continue to implement measures that will balance the twin goals of saving livelihoods and saving lives.

Second, BSP will keep its policy settings and regulatory relief measures supportive of the economy as needed; withdrawal of policy measures will only be done once full recovery is underway. 

Lastly, the BSP remains one with the government and the Filipino people in dealing with this crisis head on and in pushing the economy toward full recovery. The accelerated vaccination program, implementation of economic recovery measures and pursuit of key structural reforms will help lessen the long-term scarring effects of the pandemic and ensure a robust growth trajectory for the economy.

Thank you for your attention.​

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The Philippines’ Post-Pandemic Economy Is Booming

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Pacific money  |  economy  |  southeast asia.

The country’s economy has rebounded from its COVID-19 recession, posting a growth rate of 7.6 percent in 2022.

Glassy buildings reflect a dramatic afternoon sky in Bonifacio Global City, Metro Manila, Philippines.

Last week the Philippine Statistics Authority released year-end data on the national economy, and all things considered the numbers are looking pretty good. For 2022 as a whole, the economy grew by 7.6 percent compared to 2021. Year over year, the service sector expanded by nearly 10 percent in the fourth quarter while household consumption was up 7 percent.

This makes sense, given that pandemic era restrictions are ending and people can go out and engage in every day commercial activities again. By comparison, industrial production saw a more modest 4.8 percent rise in the fourth quarter, so it appears post-pandemic growth is being primary driven by increased consumption and its impact on service industries.

This is good news for President Ferdinand Marcos Jr. Just a few months ago, many economic forecasters were predicting a global recession in 2023. While ASEAN as a whole was expected to grow even as the world economy stagnated, a global recession would still impact the Philippines by lowering demand from foreign trade markets and squeezing investment.

Global recession in 2023 no longer seems like a sure thing, with the United States closing out 2022 with decent GDP growth and inflation appearing to cool. But even back in October the Marcos Jr. administration evinced quite a bit of confidence in the economy. Going against the grain, the 2023 budget features spending increases in many areas. This expansionary fiscal stance was based on a projected 2023 growth rate of around 7 percent, which seemed optimistic at the time. But these 2022 year-end figures suggest those forecasts were not that unrealistic.

We shouldn’t be too surprised to see rapid growth year over year in 2022. The pandemic caused the Philippine economy to drastically shrink in 2020 and many sectors, such as service industries, were forced to sit idle. As things swing back into full gear and previously idled industries are revived, we would expect to see large initial year over year percentage increases as the economy makes up the ground it lost during the pandemic. It remains to be seen whether a growth rate of 7.6 percent can be maintained in 2023 and beyond, especially as consumers may not keep spending at the current pace indefinitely.

The other bit of good news for the Philippine economy is that the currency has strengthened considerably since October 2022, when it looked like it was going to push through 60 pesos to the dollar. Right now it has strengthened to around 54.5, which is in line with the upper range forecasters used to model the 2023 budget. With the Federal Reserve likely done or nearly done hiking interest rates, it seems Bangko Sentral ng Pilipinas may have weathered the worst of this global monetary tightening cycle.

A stronger peso in 2023 will come in handy, as inflation remains high and the Philippines continues to run big trade deficits. December 2022 saw a trade deficit of $4.6 billion and a headline inflation rate of 8.1 percent. A stronger peso and moderating commodity prices in 2023 mean that budget-busting imports like energy should contribute less to inflation in 2023.

As for the trade deficit, that is nothing new in the Philippines, particularly during the Duterte years as infrastructure development and investment boosted demand for imported capital goods. It’s generally offset to some degree by large inflows of secondary income from Filipinos living and working abroad, who remit a portion of their earnings back home. We will have to wait and see the extent to which these inflows offset the trade deficit in 2023, and its impact on the current account as a whole.

All things considered, these GDP figures are good news for the Philippine economy and for the new president, who on economic issues wants to continue the steady gains of his predecessor. The big difference is that economic growth under Duterte was led by investment and fixed capital formation, and this 2022 economic boom is more consumption-based.

It remains to be seen whether consumption-led growth can be sustained at this level, and whether the 2023 budget does enough to cushion the impact of higher prices on consumers. The impact of persistent trade deficits on the current account and the currency are also something to keep an eye on. But these figures show that 2022 closed on a relatively high note, and that some of the more optimistic assumptions baked into the 2023 budget may not be that far off the mark after all.

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The Philippine Economy in 2022

With a favorable projected global economic growth rate for 2022, the Philippines assesses its economic prospects for the year by identifying opportunities and challenges.

Last 14 January 2022, the Nordic Chamber of Commerce of the Philippines hosted the 2022 Philippine Economic Outlook in partnership with the German-Philippine Chamber of Commerce and Industry, Advantage Austria, British Chamber of Commerce of the Philippines, CCI France Philippines, Dutch Chamber of Commerce In the Philippines, La Camara Manila, Philippine Institute of Supply Management, Philippine Swiss Business Council, and the Semiconductor & Electronics Industries in the Philippines Inc. (SEIPI). Mr. Kelly Bird, the Country Director for the Philippines of Asian Development Bank (ADB), and Mr. Jonathan Ravelas, the First Vice President and Chief Marketing Strategist at Banco De Oro Unibank Inc. (BDO), were among the guest speakers of the event.  

 Mr. Bird first gave an update on the macroeconomic data of the Philippines. The economic recovery has gained traction since late 2021, prompting ADB to raise its GDP (Gross Domestic Product) growth forecast for 2022 to 6 percent. Specific government initiatives identified as drivers of this recovery, i.e., accommodative fiscal and monetary policies, sustained public spending on infrastructure, relaxation of mobility in Metro Manila, and the national vaccination program. He then discussed the most recent data on COVID-19 cases and the government's vaccine roll-out program, a critical foundation for the country's economic recovery. Mr. Bird also spoke about ADB's Lending Program in the Philippines for 2022, which focuses on infrastructure, climate change, and post-pandemic recovery initiatives.  

Mr. Ravelas discussed the factors to consider in the Philippines' recovery from the pandemic. He alluded to the effects of the new Omicron variant as the Philippines became the new COVID-19 hotspot in Southeast Asia. However, the rapid increase of vaccinations boosts economic confidence, laying a solid foundation for the country's economy in 2022. Mr. Ravelas noted that while economic confidence is currently low, businesses and consumers are optimistic about economic activity, particularly in the second half of the year. He identified the financial risks for the year, which include the emergence of new virus variants, inflationary conditions caused by high demand from a recovering economy, geopolitical impacts, and overextended markets. Meanwhile, peaceful elections in May, improved pandemic management, revenge spending as restrictions loosen, and continued infrastructure spending were identified opportunities for the country's economy in 2022.  

Following the presentations, Mr. Jesper Svenningsen, Executive Director of the Nordic Chamber, moderated the Q&A session in which Mr. Bird and Mr. Ravelas answered questions from the audience. 

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Rāpopoto - Summary

• The Philippines posted growth of 8.2% in its Gross Domestic Product (GDP) during the first quarter of 2022 and expanded less than expected in the second quarter at 7.4%, but still on track with the official 2022 growth target.
• Due to rising domestic investment and consumption as pandemic restrictions eased, the Philippine economy is poised to grow by 6.5% - 7.5% in 2022 and could further rise by 8% in 2023, forecasted to be the highest economic growth rate among ASEAN+3 countries.
• Key changes to the Foreign Investment Act and Public Service Amendment Act have now been signed into law. The amendments are expected to promote foreign investment by reducing foreign ownership restrictions while also removing restrictions on foreign equity in most public service companies.
• Further engagements and strengthening of bilateral trade between New Zealand and the Philippines are expected to stem from membership of the Indo-Pacific Economic Framework for Prosperity (IPEF). Firm statements are being made regarding RCEP, but it remains unratified. Negotiations to upgrade the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) are ongoing and are expected to further reduce trade barriers and boost two-way trade.
• To date, indications are that the new administration of President Marcos Jr will continue in the same vein as the previous administration with a more robust approach and a relatively orthodox and business-friendly ideology.

Pūrongo - Report

Philippine economic updates: performance, challenges, and policies.

On As the Philippines emerges from the worst of the pandemic and transitions to a new administration, the economy is well placed to regain lost ground and return to its pre-pandemic trajectory. Loosening restrictions saw the country post year on year Gross Domestic Product (GDP) growth of 8.2% for the first quarter and 7.4% for the second quarter of the year, building on the momentum generated in 2021 when the economy grew by 5.6% and returned above its pre-pandemic level. This was largely driven by the continuing resumption of activity in the country’s major economic sectors including agriculture, forestry, and fisheries. Retail and services have also experienced considerable growth as pandemic-related restrictions ease, allowing a gradual resumption of domestic and international tourism. Merchandise trade has also grown, with total exports up 7.1% in the year to June 2022. This growth has been broadly in line with the traditional composition of the Philippines’ exports, with 7 of the country’s top 10 commodity groups recording an annual increase, including their number 1 export – electronic products. Other strong performers have been coconut oil which surged by 180.5% (likely benefiting from disruptions to Ukrainian sunflower oil exports), mineral products (up 32.9%), and chemicals (up 23.6%), reflecting the rising price of commodities globally and the increasing demand for industrial inputs as economies return to scale. Although New Zealand exports to the Philippines are still down ~27% compared to pre-pandemic levels, they grew 2.6% in the year to March 2022. New Zealand’s largest export to the Philippines, Dairy (accounting for some 71% of total exports), was down 1% over this period, but was offset by strong growth in other key exports, particularly wood (5%), meat (55%), and food preparations (20%). Concerns that meat exports would be impacted by the expiration of New Zealand’s accreditation to export meat into the Philippines have been largely relieved. The Department of Agriculture, through the Bureau of Animal Industry, has assured that there will be no trade disruption of accredited commodities provided food safety guidelines are followed and no transboundary animal diseases are reported.

Looking ahead, economists see a range of factors affecting overall GDP growth, but remain optimistic about the outlook for 2022 and beyond. ADB and the World Bank forecast strong GDP growth due to rising vaccination rates, falling COVID-19 infections, and normalising economic activity (specifically in services) following the lifting of pandemic restrictions. The outlook is also buoyed by strong fundamentals relative to many of its ASEAN neighbours. Unemployment now sits at 6% (having reached 10% in 2020) and remittances from Filipinos working abroad, an important stabiliser in the Philippines’ economy, are steadily growing as key markets rebound from the pandemic (especially the US, China, UAE, and Japan. The return of international investment is also expected to play a key role in the Philippines’ recovery, particularly in the wake of legislative changes to the Public Service and Foreign Investment Acts in March 2022. The amendments seek to strengthen foreign investment by allowing foreigners to build and fully own domestic enterprises, while also lowering the minimum employment and paid-in capital (for select technology) that is required, while also removing restrictions on foreign equity in most public service companies, including key utilities and infrastructure holdings (e.g. ports, expressways, railways). As is the case for most economies, the key downside risk remains the prospect of further COVID-19 waves due to the emergence of new variants. President Ferdinand “BongBong” Marcos Jr. stated during his State of the Nation Address on 25 July 2022 that the country cannot afford another lockdown and is looking to revise COVID-19 restrictions in the country by mid-August. Inflation is likely to persist in the medium-term. While the Philippines has little direct trade exposure to Russia and Ukraine, the invasion’s impact on global food and energy prices has already been sorely felt, with prices up 6.4% in the year to July. The Philippines has also been affected by the prospect of rising interest rates in the US and elsewhere which have weakened the Peso exchange rate and further lifted the price of imports. This will not only present economic headwinds but also a political challenge for President Marcos Jr. Despite announcing a monthly cash payment (PHP 500/NZD 14.63) for Filipinos earning below the median wage and a fuel subsidy for taxi and public transport drivers, there are signs of growing frustration at the Government’s response (or perceived lack thereof). Following speculation that the Bangko Sentral ng Pilipinas (BSP) would take a more dovish approach to fighting inflation, noting concerns around an overcorrection, the bank unexpectedly tightened their benchmark rate by 75 basis points on July 14, bringing it to 3.25%. Most commentators now see the policy rate reaching 4.5% by the end of year (still below the 2019 highwater mark of 4.75%).

Economic policy under President Marcos Jr

The positive projections for economic growth are welcome news for the Marcos administration, whose economic policy started as a key unknown but was addressed during his first State of the Nation Address (SONA) and in more detail during the Post-(SONA) Economic Briefing. The economic team led by Finance Secretary Benjamin Diokno detailed the administration’s 8-point socioeconomic agenda in the near and medium term on how they plan to achieve this, as below.

Trade Secretary Alfredo Pascual has stated the administration will prioritize ratification of the Regional Comprehensive Economic Partnership Agreement (RCEP). It has also been an early and vocal proponent of the US-led Indo-Pacific Economic Framework (IPEF), which despite the absence of any meaningful market access still has the prospect of facilitating trade. The administration has also expressed its support for concluding negotiations to upgrade the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). On 26 July the New Zealand ambassador to the Philippines Peter Kell attended the Post-State of the Nation Economic Briefing hosted by Secretary of Finance Benjamin Diokno. Secretary Diokno had his entire economic team there including Secretary of Education and Vice President Sara Duterte for what turned out be a comprehensive, thoughtful and well-organised explanation of the direction, approach and detail of the new administration’s economic policy which was a key unknown when elected. The event was well attended: senior leaders in the business community, representatives of the Asia Development Bank, UN and other multilateral partners, and many from the diplomatic corp were out in force.

The Marcos Jr Administration has adopted the country’s first-ever Medium-Term Fiscal Framework

This Framework will serve as a blueprint to reduce the fiscal deficit, promote fiscal sustainability and enable robust economic growth. Key elements of it include enhancing fairness and efficiency of the tax system, bringing down the debt-to-GDP ratio to less than 60% by 2025, reducing deficit-to-GDP ratio to 3% by 2028, and maintaining high investment in infrastructure at 5-6% of GDP annually. The Marcos Jr Administration has inherited a solid platform for not only economic recovery but growth The Duterte Administration had:

• amended the Retail Trade Liberalization Act, Foreign Investment Act and Public Service Act
• established the Corporate Recovery and Tax Incentives Act, making it easier for foreign investment to flow into the country
• consolidated many infrastructure projects from the previous administration as well as some new ones of its own and got many of them over the line, or close to the line, for implementation.

Continuity will be a feature of the Marcos Jr Administration’s economic approach. Particularly the infrastructure projects, where Marcos Jr has said that he would like to “Build, Better, More,” leveraging former President Duterte’s “Build, Build, Build” programme.

The Philippines’s growth prospects are bright, and projected to be the highest in the ASEAN+3 region

The economy grew 8.2% in the first quarter of this year. It is expected to grow by 6-6.5% this year and next. The government aims to undertake structural reforms and provide further opportunities that will have the economy grow by 8% from 2023 to 2028.

Renewable Energy

The Philippine Department of Energy conducted the first round of bidding for 2,000 MW of renewable capacity under the Green Energy Auction Program (GEAP) on 17 June 2022. There has been a steady increase in the share of renewable energy in recent years in the country, with solar now 5% and wind 2% of the installed capacity. Marcos Jr. has emphasised the importance of expanding the use and access to renewable energy in the Philippines.

Access in the Philippines

Businesses have noted that despite IPEF looking unlikely to result in any multilateral tariff reductions, they are optimistic that it could promote the resolution of certain non-tariff barriers (NTBs) they face in the market, such as the product registration and paper-based certification process, which if addressed would be of significant benefit. The government’s ongoing push to further promote digitalisation and automation of government processes should also improve such processes in the market. Accreditation for the Philippine Customs’ “Green Lane” is resulting in positive experiences. Imports are automatically released and inspection is only done at the warehouse, significantly fast tracking customs clearance for imports.

Implications for New Zealand

There may be more opportunities for NZ Exporters as President Marcos Jr has vowed to ensure that food imports into the Philippines are not obstructed as part of his commitment to ensuring access to food for the people of the Philippines. The President’s focus on renewable energy, improving bureaucratic efficiency should also continue to provide for NZ exporters in these areas. This report is based on Philippine government official statistics, briefings and economic updates from ADB, World Bank Philippines, McKinsey & Company, and market insights from local banks (Banco de Oro and Bank of Philippine Islands).

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This information released in this report aligns with the provisions of the Official Information Act 1982. The opinions and analysis expressed in this report are the author’s own and do not necessarily reflect the views or official policy position of the New Zealand Government. The Ministry of Foreign Affairs and Trade and the New Zealand Government take no responsibility for the accuracy of this report.

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Philippine Economy Seen Recovering in 2021, with Stronger Growth in 2022 — ADB

News from Country Offices | 28 April 2021 Read time: 3 mins

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MANILA, PHILIPPINES (28 April 2021) — Public spending on infrastructure and social assistance, better progress in the country’s coronavirus (COVID-19) vaccination drive, and a steady recovery in the global economy will underpin growth of the Philippine economy this year and the next, according to a new report from the Asian Development Bank (ADB) released today.

The Asian Development Outlook (ADO) 2021 , ADB’s flagship economic publication, forecasts the Philippine economy to grow by 4.5% in 2021 and 5.5% in 2022. Substantial progress in the country’s vaccination rollout will help restore consumer and business confidence, though uncertainties over how the pandemic will unfold globally and domestically can pose risks to growth prospects.

“Our 4.5% growth forecast is at the lower end of economists’ estimates, so there are upsides to this projection,” said ADB Philippines Country Director Kelly Bird. “Priority should be given to addressing the scarring effects of the pandemic on private sector employment. Programs supporting workers and firms impacted by labor market adjustments and reforms to boost productivity growth and investment will help counter the negative effects of the pandemic on employment over the medium term.”

The government’s expansionary fiscal program and accommodative monetary policy will put the economy on a firm recovery path by the second half of 2021. The report says government plans to strengthen labor market programs and assist in the recovery of sectors badly affected by the pandemic, including agriculture and tourism, will further support a pickup in the economy.  

Challenges remain, however, including uncertainties over the course of the pandemic and the emergence of new coronavirus variants across the globe. The Philippines’ COVID-19 vaccine rollout may suffer from global supply shortages in the short term, and local community quarantines could be extended to curb the spread of COVID-19.

Inflation is forecast to rise to 4.1% in 2021, up from 2.6% in 2020, due to rising global commodity prices and other supply-side factors. For instance, the African swine fever has resulted in disruptions to the pork supply in the Philippines. Inflation is expected to ease to 3.5% in 2022 as government takes measures to address supply-side pressures.

The current account surplus is forecast to narrow to 2.5% of gross domestic product in 2021 and 1.8% in 2022. Merchandise exports are expected to increase with the rise in global trade, as imports, especially capital goods, rebound to support public infrastructure development.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.

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• Publication: Asian Development Outlook (ADO) 2021
• News: Developing Asia to Grow 7.3% in 2021 Even as COVID-19 Lingers
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What does 2023 hold for the Philippines’ economy?

The COVID-19 pandemic and other geopolitical events have caused a global crisis over the past couple of years. Major upheavals of this scale are not unknown—in the 20th century, various significant events shook the world, like both World Wars and the Cold War. Between these periods of disruption, global events played out across three “eras”: the Post-War Boom after the Second World War, the Era of Contention from 1972 to 1974, and the Era of Markets from 1989 to 1992, each of which had distinct characteristics and opportunities.

The effects of the current crisis, both humanitarian and economic, cannot be underestimated. However, as the world continues to emerge from the pandemic, business leaders can take advantage of these upheavals, and shape innovation and growth—as evidenced in previous eras—by anticipating future disruptions and shaping strategies accordingly. This kind of “era thinking” is particularly valuable in the Philippines, where disruptions caused by the conflict in Ukraine and international supply-chain crises have had a clear impact.

Looking ahead into 2023, the economic forecast for the Philippines remains a moving target. After a record 10 percent contraction in 2020, the country may bounce back in 2023 with projected growth of around 5.3 percent, though it will hardly rise above preCOVID-19 levels (exhibit).

Key challenges face the country: significantly high unemployment numbers; a high inflation rate (forecast to reach 5.1 percent in 2023); rising policy rates; import and export bottlenecks; and the declining strength of the Philippine peso against the American dollar. 1 “2023 inflation seen topping official target,” Manila Times , January 13, 2023.

The state of the Philippines’ economy in seven major sectors

This article analyzes seven key sectors that offer a detailed insight into the state of the Philippines’ economy in 2023 and beyond. As the data shows, the outlook is complex—there are serious issues to address, but also reasons for optimism.

Real estate and construction

Several global and macroeconomic shocks will likely impact the Philippines’ post-pandemic economic recovery in the real estate and construction sectors. Policy rates may reach 6.25 percent in the first half of 2023, which would negatively impact home lending rates and increase the strain on a sector that must also address the increased costs of construction and logistics caused by supply-chain issues.

Nonetheless, more optimistic projections include an expansion in real estate investment opportunities and the emergence of green real estate, a promising step toward the Philippines’ goal to reduce carbon emissions by 75 percent by 2030. 1 “Philippines raises carbon emissions target to 75 percent by 2030,” Reuters, April 16, 2021.

Much of the sector is expected to recover to pre-pandemic levels by the end of 2023, and construction by the end of 2024. Much of this growth will likely be driven by residential building construction, predicted to grow by 12 percent. Non-residential construction, by contrast, has yet to recover to pre-pandemic levels.

There will likely be an increased demand for office space, caused by companies introducing return-to-office policies, as well as a resurgence in the need for industrial, retail, and leisure spaces, both of which would boost sector-wide growth.

Another consideration is hybrid working—this is in fact higher in the Philippines than the global norm. 1 Vaughn Alviar, “Hybrid work is the future,” Philippines Daily Inquirer , March 11, 2022. Office spaces may need to be reinvented as companies look to adopt more hybrid ways of working. This could result in vacancy rates persisting, however the growth of coworking facilities and the desire for sustainable buildings will necessitate innovations in construction techniques and leasing agreements, thus encouraging sector-wide growth.

Travel and hospitality

The outlook for the travel and hospitality sector is strong, with a full recovery to pre-pandemic levels expected by 2024. Outbound and inbound travel may be sluggish due to remaining international travel restrictions and further health and safety concerns: 71 percent of Asian countries still impose travel restrictions to varying degrees; Europe is more lenient with 50 percent of countries imposing no restrictions at all.

Despite this, hotel occupancy is expected to rise as more foreign tourists visit the Philippines. China’s removal of quarantine on arrival from January 8, 2023, and Hong Kong’s withdrawal of mandatory quarantine on arrival in September 2022, are both reasons for optimism. If mainland China’s air travel were to recover at the same pace as Hong Kong’s, four million air passengers a month out of China can be expected by the second quarter of 2023, pushing air travel back up to 40 percent of pre-COVID-19 levels.

Several key trends are expected to influence economic recovery in the sector, the impacts of which may be both positive and negative. High inflation, for example, has increased airlines’ operating expenses. The weakening peso, by contrast, could have a positive effect by encouraging locals to travel and spend within the country rather than abroad. In fact, local air travel is already on the rise and is expected to reach preCOVID-19 levels in the second half of 2023. 1 Katlene O. Cacho, “Air travel approaches pre-pandemic levels,” SunStar, December 20, 2022

The growth of “revenge travel” (travelling widely and often to make up for time and opportunities lost during the COVID-19 pandemic and attendant travel restrictions) also contributes to the robust growth of leisure travel, while business travel is recovering more slowly. This is largely due to the inconsistent travel restrictions between countries, and remote working tools that do away with the necessity of meeting in person.

Sustainable tourism and increased awareness of eco-friendly travel options may not negatively affect the number of tourists visiting the Philippines, but they will likely change how visitors and locals arrive in, and travel through, the country. The fact that the hospitality industry has recovered more significantly than airlines shows this. Other contributing factors include the increase in domestic travel and the popularity of the “digital-nomad” lifestyle, which allows travelers to live and work for extended periods in their destinations of choice, rather than flying between destinations frequently.

Financial services

The strength of the Philippines’ financial services sector in 2023 will likely be subject to two key factors: interest rate hikes and rising inflation. Interest rate hikes could have a positive effect by widening the net-interest margin, but macrovolatility could cause a slowdown in new loans. Rising inflation will likely increase the pressure on wages and increase operational costs.

The financial sector is already responding to these challenges. It is prioritizing the interoperability and digitization in top banks, and the country’s central bank, Bangko Sentral ng Philipinas, is expected to increase interest rate hikes to keep up with inflation. 1 Lawrence Agcaoili, “More BSP rate hikes boom as inflation spikes,” Philstar Global, January 6, 2023.

Banks have taken additional steps. These include recovering nonperforming loans, reducing loan loss provisions with an outlook on improved credit status, and the emergence of digital neobanks, which offer higher savings interest rates and faster customer acquisition. Perhaps most crucially, there are growing efforts to make banking more accessible and inclusive. The growth of digital banking is significant: in 2021, 60 percent of Filipinos used digital banking (a sharp increase from 17 percent in 2019), and growth is expected to accelerate in 2023. 2 “2021 financial inclusion survey,” Bangko Sentral ng Pilipinas, 2021.

Growth in the Philippines’ energy sector contracted to 4.8 percent in 2022 and is expected to rebound to 5.5 percent in 2023. However, the sector needs to ensure that this growth target can be met given looming supply constraints and while accelerating the transition to green energy.

Due to a growing population, an economy coupled with the depletion of domestic gas from the Malampaya gas field, and a heavy reliance on imported fuel, a power supply shortage is expected closer to 2024 to 2025. 1 “Malampaya depletion expected by 1st quarter of 2027,” BusinessWorld, May 19, 2021. This will put sustained upward pressure on prices and an urgency to bring greenfield capacity online.

On the energy transition, major players are addressing the challenge by diversifying energy assets across the board, with investments in cleaner technologies such as solar, hydro, and battery energy storage systems. These efforts are underway in both the private and public sectors. For example, the Philippine government has introduced measures to improve the availability and sustainability of energy. Legislation has been passed to reduce fuel and power costs via subsidies for transport operators, boost investments in indigenous energy resources such as coal, and strengthen electric cooperatives for broader access to electrification. 2 Philippine energy plan 2020–2040, Department of Energy, Republic of the Philippines.

The Philippines may generate enough energy to cover its consumption needs, but the supply-demand balance will remain tight, with clear downside risks. Threats to the energy supply include rising oil and gas prices, supply-chain disruptions, and currency depreciation.

The healthcare sector experienced strong growth during the COVID-19 pandemic: in 2021, healthcare services increased by 14.1 percent and pharmaceutical manufacturing by 12.9 percent. Growth stalled in 2022 (3.9 percent and 8.25 percent for healthcare services and pharmaceuticals respectively), and this trend is expected to continue in 2023. While demand will continue to grow, the sector will have to address three major challenges.

First, rising inflation will impact costs for service providers and manufacturers, though prices will initially lag due to procurement contracts being set in advance. One of the biggest drivers of inflation is an increase in healthcare wages, especially of hospital staff such as nurses, who are in short supply locally and globally. Second, supply-chain disruptions will drive up medicine price variations and production inefficiencies, particularly as the Philippines is a net importer of pharmaceuticals. And third, turnover levels for health workers are expected to remain high, straining the capacity of service providers and potentially resulting in a poor quality of healthcare.

To address these challenges, the sector is renewing the emphasis on universal healthcare and building robust healthcare ecosystems. The Department of Health aims to close the supply-demand gap in healthcare by increasing facilities in areas outside Metro Manila and making medicines more affordable. 1 “Universal health care,” Department of Health, Republic of the Philippines.

In the private sector, key players are investing strategically to cover the healthcare value chain, and making concerted efforts to tap into growing online markets through electronic medical records, all-in-one telemedicine and consultation apps, and other ancillary services.

The Philippines’ healthcare sector is so vast that broad, sector-wide forecasts can sometimes obscure as much as they reveal. The outlook becomes clearer when subsectors are evaluated on their own terms, as they diverge widely in market size, are subject to different trends, and experience different rates of growth. The healthcare providers subsector, for example, boasts a larger market size than the products and payors subsectors combined.

Despite significant growth in 2022, the Philippines still has some catching up to do. There is no doubt that it faces global macroeconomic headwinds in 2023, however big pockets of opportunity exist within each of its biggest sectors. To grasp these as soon as possible, companies need to rethink how they deliver to customers and operate their businesses. With such strategies in place for possible future disruptions, the Philippines can stand strong and continue to grow its economy in the year ahead.

Jon Canto is a partner in the Manila office, where Kristine Romano is a partner and Danice Parel and Vicah Villanueva are consultants.

The authors wish to thank Aaron Ong, Ryan Delos Reyes, and Jeongmin Seong for their contributions to this article.

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Philippines economic outlook 2022

The Philippines Growth Dialogues

Philippine economy grows at fastest pace in 40 years

Analysts warn global slowdown and soaring inflation point to a difficult year ahead for the Southeast Asian economy.

The Philippine economy has ended 2022 with the fastest growth in more than 40 years underpinned by a robust final quarter, but analysts and policymakers warn that a global slowdown and soaring inflation will make for a difficult year ahead.

Manila’s fourth quarter forecast-beating annual growth of 7.2 percent reported by the statistics agency, compared with the 6.5 percent pace expected in a Reuters poll, brought full-year expansion to 7.6 percent, the fastest since 1976 and above the government’s target of 6.5 to 7.5 percent.

Economic Planning Secretary Arsenio Balisacan attributed the stellar fourth-quarter performance to strong domestic demand, a rise in jobs, and “revenge” spending following the lifting of pandemic curbs and full reopening in the last three months of the year.

“We are confident that we will remain in our high growth trajectory,” Baliscan told a media briefing on Thursday.

He said China’s reopening will be a boon for the Philippine economy while protecting the purchasing power of Filipinos and ensuring food security would remain priorities for the government as the public grapples with high inflation.

On a quarter-on-quarter basis, GDP growth came in at 2.4 percent in October-December, compared with expectations for a 1.5 percent rise and the previous quarter’s upwardly revised 3.3 percent expansion.

Balisacan said the government was sticking with its 6 to 7 percent growth target for 2023, but that is not without risks, with the global economy expected to slow further this year, roiled by the Ukraine conflict, while rising inflation could lead to further policy tightening.

Like the rest of the world, the Philippines is battling red-hot inflation, currently running at 14-year highs, which if not tamed could crimp domestic consumption, a major driver of growth.

Government data showed household spending slowed for a third straight quarter in the October-December period, growing at an annual rate of 7 percent from 8 percent in the third quarter.

“We expect a difficult year ahead for the Philippines,” Capital Economics said in a note, citing the impact of high inflation and tighter monetary policy on domestic spending. For 2023, Capital Economics is expecting growth of 5.5 percent.

Elevated inflation, plus the need to maintain interest rate differentials between the US and the Philippines, have forced the Bangko Sentral ng Pilipinas (BSP) to embark on an aggressive tightening cycle last year.

Its governor has signalled further tightening in the first quarter to bring inflation, which hit 8.1 percent in December, back to its 2-4 percent target this year.

Global Economic Prospects

• Current Issues

Growth Stabilizing But at a Weak Pace

Despite an improvement in near-term prospects, the global outlook remains subdued by historical standards. In 2024-25, growth is set to underperform its 2010s average in nearly 60 percent of economies, comprising over 80 percent of the global population. Downside risks predominate, including geopolitical tensions, trade fragmentation, higher-for-longer interest rates, and climate-related disasters. Global cooperation is needed to safeguard trade, support green and digital transitions, deliver debt relief, and improve food security. In EMDEs, public investment can boost productivity and catalyze private investment, promoting long-run growth. Comprehensive fiscal reforms are essential to address ongoing fiscal challenges in small states, including those arising from heightened exposure to external shocks. 

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Policymakers have cause to celebrate today, World Bank Group Chief Economist and Senior Vice President Indermit Gill, writes in his Foreword. The global economy appears to be in final approach for a “soft landing” in 2024, indicating that a global recession has been avoided despite the steepest rise in global interest rates since the 1980s. Yet policymakers “would be wise to keep their eye on the ball,” Gill writes. “Growth rates remain too slow for progress. Without stronger international cooperation and a concerted push for policies that advance shared prosperity, the world could become stuck in the slow lane."

Global and Regional Outlooks

Global growth is projected to hold steady at 2.6 percent this year. Given continued inflationary pressures, central banks are likely to remain cautious in easing policy; accordingly, benchmark policy interest rates are envisaged to be notably higher than before the pandemic. Global growth over the forecast horizon is expected to remain lackluster, at nearly half a percentage point below its 2010-19 average. High debt and elevated debt-servicing costs highlight the need for EMDE policy makers to balance sizable investment needs with fiscal sustainability. To bolster long-term growth, policy action to raise productivity growth, improve public investment efficiency, build human capital, and close labor market gender gaps is critical.

Growth in the East Asia and Pacific (EAP) region is projected to slow from 5.1 percent in 2023 to 4.8 percent in 2024, mainly reflecting a deceleration of activity in China. In the region excluding China, growth is projected to increase to 4.6 percent this year, supported by a recovery in global trade. Over the next two years, growth in EAP is projected to continue moderating—to 4.2 percent in 2025 and 4.1 percent in 2026, as a further slowdown in China again offsets a modest pickup elsewhere in the region. While risks to the outlook are somewhat more balanced than in January, they remain tilted to the downside. Risks stem particularly from worsening conflicts and heightened geopolitical tensions at the global level, further trade policy fragmentation, and a sharper-than-projected slowdown in China, with adverse spillovers to the broader region. Tighter global financial conditions and climate-related natural disasters pose additional downside risks. In contrast, faster-than-expected U.S. growth could have positive spillovers to regional activity.

Growth in Europe and Central Asia (ECA) is projected to soften to 3.0 percent this year and to 2.9 percent in 2025. The slowdown in 2024 largely reflects decelerations in the Russian Federation and Türkiye. Excluding these two economies and Ukraine, growth is projected to firm this year and next, as inflation eases, monetary policy rates are cut, and the growth of exports, particularly to the euro area, strengthens. Geopolitical developments remain the predominant downside risk to the growth outlook, especially those linked to Russia’s invasion of Ukraine and conflict in the Middle East. Uncertainty about economic policies is also likely to remain elevated. Although the risks of higher-than-expected inflation have decreased, there could still be upward pressure on commodity prices or wages, along with potential new episodes of financial strains.

Growth in Latin America and the Caribbean (LAC) is forecast to decelerate from 2.2 percent in 2023 to 1.8 in 2024 (after the peak in interest rates in 2023) before picking up to 2.7 percent in 2025. The forecast for 2024 has been revised downward since January, mainly because of a marked downgrade for Argentina, which is now expected to contract this year before resuming growth next year. Risks to the forecast are tilted to the downside. Tighter-than-assumed global financial conditions, as well as elevated local debt levels, could weigh on private demand and require accelerated fiscal consolidation in the region. A further growth slowdown in China could hurt LAC’s exports, particularly from South America. Extreme weather events related to climate change pose another downside risk. On the upside, stronger-than-expected activity in the United States could enhance regional growth, particularly in Central America and the Caribbean.

After slowing to 1.5 percent in 2023, growth in the Middle East and North Africa (MNA) region is expected to pick up to 2.8 percent in 2024 and 4.2 percent in 2025, mainly due to a gradual resumption of oil production. The outlook for 2024 has weakened since January, partly reflecting extensions of additional voluntary oil production cuts and the ongoing conflict in the Middle East centered in Gaza. Risks to the outlook are tilted to the downside. Key downside risks include an escalation of armed conflicts, heightened local violence and social tensions, a sudden tightening in global financial conditions, more frequent or severe natural disasters, and weaker-than-projected growth in China. Conversely, stronger-than-expected activity in the United States and associated spillovers entail an important upside risk.

Growth in the South Asia (SAR) region is projected to slow from 6.6 percent in 2023 to 6.2 percent in 2024, mainly due to a moderation of growth in India from a high base in recent years. With steady growth in India, regional growth is forecast to stay at 6.2 percent in 2025-26. Among the region’s other economies, growth is expected to remain robust in Bangladesh, though at a slower rate than in the past several years, and to strengthen in Pakistan and Sri Lanka. However, risks to the outlook remain tilted to the downside. These include disruptions in commodity markets caused by the escalation of armed conflicts, possible abrupt fiscal consolidations, financial instability stemming from the large exposure of banks to sovereign borrowers, more frequent or severe extreme weather events, and slower-than-expected growth in China and Europe. Conversely, stronger-than-projected activity in the United States and faster-than-expected global disinflation are upside risks to the forecast.

Growth in Sub-Saharan Africa is projected to pick up to 3.5 percent in 2024, and average about 4 percent in 2025-26, as inflation retreats and private consumption and investment improve. The projected recovery is somewhat weaker than January’s forecast, largely reflecting the damaging effects of recent increases in political instability and conflict that have delayed recovery in parts of the region. Importantly, the expected increase in per capita income is insufficient to make significant progress on poverty alleviation in the region. Recent growth in debt-service costs has sharply narrowed fiscal space and exacerbated financing needs in many economies. Risks to the outlook remain tilted to the downside. These risks include increasing global geopolitical tensions, especially an escalation of conflict in the Middle East; a further deterioration in regional political stability; a sharper-than-expected economic slowdown in China; greater frequency and intensity of adverse weather events; and a heightened risk of government debt distress.

Two Current Issues

A significant acceleration in investment is essential if emerging market and developing economies (EMDEs) are to achieve key development goals and tackle the challenges associated with climate change. Investment—public as well as private—tends to fuel a virtuous cycle of development, boosting growth, improving productivity, and reducing poverty. In EMDEs, however, investment growth has seen a sustained slowdown since the global financial crisis and is expected to remain weak in the coming years. Policy action is necessary to reverse this trend. Public investment averages about one-quarter of total investment in the median EMDE—a modest share. Yet it can be a powerful policy lever to help ignite growth, including by helping to catalyze private investment. This chapter offers a comprehensive assessment of public investment and its macroeconomic effects in EMDEs. It finds that public investment in these economies has experienced a historic slowdown in the past decade. In EMDEs with ample fiscal space and a record of efficient government spending, on average, scaling up of public investment by one percent of GDP can increase output by up to 1.6 percent over five years. Public investment also crowds in private investment and boosts productivity, promoting long-run economic growth in these economies. To maximize the impact of public investment, EMDEs should undertake wide-ranging policy reforms to improve public investment efficiency—by, among other things, strengthening governance and fiscal administration—and create fiscal space through revenue and expenditure measures. The global community can play an important role in facilitating these reforms—particularly in lower-income developing countries—through financial support and technical assistance.

The COVID-19 pandemic and the global shocks that followed have worsened fiscal and debt positions in small states, intensifying their already substantial fiscal challenges—especially the need to manage more frequent climate change-related natural disasters. Forty percent of the 35 emerging market and developing economies (EMDEs) that are small states are at high risk of debt distress or already in it, roughly twice the share for other EMDEs. Larger fiscal deficits since the pandemic reflect increased spending to support households and firms, and weaker revenues. To improve their fiscal sustainability and resilience to future shocks, small states need to strike a balance between maintaining adequate fiscal buffers and increasing investments in human capital and climate change-resilient infrastructure. Comprehensive fiscal reforms are essential. First, small states’ revenues, which are highly volatile and dependent on sometimes unreliable sources, should be drawn from a more stable and secure tax base. Second, spending efficiency needs to be improved, especially on transfers to public enterprises, subsidies, and the public wage bill. Third, these changes should be complemented by reforms to fiscal frameworks, including better utilization of fiscal rules and sovereign wealth funds. Finally, to help these countries stay on sustainable fiscal paths, well-coordinated and targeted global policies are also needed. Policies supported by the global community can help improve fiscal policy management, provide technical assistance, address debt challenges, and bolster funding for small states to invest in climate change resilience and adaptation, and other priority areas.

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