The Philippines ranked among Asia’s 10 fastest growing economies in 2017. Consumer power, remittances from overseas workers and an influx of call centers had given it that status, raising hopes for easing rampant poverty. Then GDP expansion wobbled in 2018 because of rising prices and lack of new direct investment.

Now state spending on new infrastructure and local tourism are expected to decide whether the Philippines can get back on track this year.

The Philippine economy grew 6.2 percent last year, down from 6.7 percent in 2017 and 6.9 percent a year earlier. Inflation dented consumption in late 2018, while factory investors stayed away for lack of infrastructure compared to what’s available elsewhere in Asia. Storm damage to crops, another economic backbone, and the six-month shutdown of the tourist hotspot Boracay Island ate away further at growth.

“I think it’s a combination of factors,” said Eduardo Araral, associate professor at the National University of Singapore’s public policy school. “One would be inflation, because that would slow down consumption. Infrastructure is always a constraint. The economy is growing, but the bottlenecks are not yet fixed.”

Slumps in farming, consumption

A spike in consumer prices in the Philippines in late 2018 angered many, testing the popularity of President Rodrigo Duterte in his third year in office. August inflation set a nine-year record at 6.4 percent, then the highest in Southeast Asia.

World oil price hikes were felt at the pump, while reports of rice scarcity raised prices in some parts of the country. More than 70 percent of the $313 billion Philippine economy comes from consumption, and people – especially the poor – mind their spending when prices are up.

The GDP struggled to grow also after deadly typhoon Mangkhut caused $509 million in agricultural damage in September and three months later tropical storm Usman caused another $19 million in farm losses.

The Western Pacific archipelago gets typhoons every year but still lacks infrastructure to withstand them, said Song Seng Wun, regional economist with the private banking unit of CIMB in Singapore.

Tourism was robust overall last year, but the closure of Boracay Island hurt the country’s prime tourism spot. Duterte declared a state of calamity from April through October to clean up the island, which had brought in more than $1 billion in tourism receipts in 2017.

Quest for investors

But the lack of capital investment weighs particularly hard on economic policymakers this year. The country, known for cheap, skilled labor, is still missing the ports, railways and power generation capacity that business people expect before opening shop. Investment would create jobs, in turn easing poverty.

“In terms of the whole ease of doing business, the Philippines ranks very low, but one of those reasons is poor infrastructure,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit.

To attract more capital, the government is building $171 billion worth of infrastructure by 2022, one of Duterte’s priorities in office. By the same year, the government aims to cut poverty from 22 percent to 14 percent of the population.

Officials are sighting for this year new roads and a railway system on the impoverished island of Mindanao, flood control work around Manila and the first phase of a Metro Manila subway project, Budget and Management Secretary Benjamin Diokno said on his department’s website.

Progress on infrastructure would also show that the Philippines can overcome political fights that include open spats between Duterte and his detractors in Congress or the mass media, economists believe.

“Investors like clarity,” Song said. “So when you have leaders or opinion makers who can be very abrasive as well, would you want to be putting in millions of millions of investments given that environment?”

The budget department flagged manufacturing growth as an “area of concern.” In a statement on the 2018 economy, the department urged more transport infrastructure and asked Congress to amend the Foreign Investments Act, which deters foreign investors by limiting how much they can invest in certain local industries.

Bright spots

Some analysts already point to bright spots in the 2019 economy. Tourism on the heavily populated island Cebu stands to help real estate there, Biswas said, while tourism and investment are booming near the former U.S. airbase at Clark Field.

The Asian Development Bank expects 6.7 percent growth this year.

“If you look at it from a perspective that the Philippines is actually working on its infrastructure to attract investors, you have a government commitment to keep on spending, and you have a country whose growth is actually moving away from the key cities but into other areas, that will support above 6 percent growth,” said Jonathan Ravelas, chief market strategist with Banco de Oro UniBank in Metro Manila.
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