Philippines: Good economic fundamentals will help the country overcome its worst recession


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The covid-19 domestic and external shock has led to the country’s worst recession.
  • The covid-19 domestic and external shock has led to the country’s worst recession.
  • The ST risk outlook remains very uncertain as it largely depends on the evolution of the pandemic.
  • Good fundamentals and stable macroeconomic management will ensure resilience and allow the country to overcome the crisis. 
  • Political violence and terrorism risks related to Islamist groups are among the main country risks in the MLT. 
  • Credendo is likely to maintain its political risk ratings in the coming months.

The covid-19 pandemic severely hit the economy and clouded the short-term outlook

Credendo has classified the Philippines’ MLT political risk in category 3/7 ever since May 2013. This good and stable rating reflects good economic and financial fundamentals. They have, however, deteriorated with the covid-19 shock, as the collapsed external and domestic demand will lead to the country’s worst recession ever and the first since the 1998 Asian crisis with an expected annual real GDP contraction of 3.6%. The economy is forecasted to recover strongly next year, increasing again to 6.8% (see graph below). Nonetheless, those figures still require high caution as they could be revised downward depending on the severity and duration of the pandemic. 

The current crisis is severe for the Philippine economy, which might see a substantial widening of its current account deficit this year (from 0.1% of GDP in 2019 to an expected 2.3% in 2020). This is explained by sharply dropped exports due to poor external demand (from the key markets in China, Japan and the US), disrupted supply chains and one of the world’s strictest lockdowns in Manila and on the largest and economically most important island of Luzon, which hit the manufacturing sector and business activity hard. The collapse in exports combined with the marked decline in tourism revenues and in traditionally resilient and large workers’ remittances, both accounting for more than 27% of total current account receipts in 2019, is expected in total to exceed the softer domestic consumption this year, thereby deepening the current account deficit. During the first half year, the opposite has so far occurred, as the tumble in imports resulting from the domestic demand plunge was even more severe than the negative impact on exports. This shows how uncertain the forecasts for the coming months still are. Besides, the rising global demand for electronic items in the wake of the covid-19 pandemic might support an important component of the Philippine export sector in the future. After some external financing pressure in the first months of the year, the Philippine peso has shown resilience, highlighting confidence in an economic situation expected to improve in a post-covid-19 future given robust fundamentals and optimism in effective macroeconomic policies. This being said, when it comes to the crucial domestic demand, recent large income and job losses will mitigate growth for some time. As for the external sector, the global protectionist trend might be detrimental to the open Philippine economy while at the same time it will benefit from growing regional economic integration. 

Given the high level of uncertainty, the short-term risk outlook is tilted to the downside as it will fundamentally depend on the pandemic being under control (i.e. not before a vaccine is widely available). As seen last month, the resurgence of covid-19 infections led to the reimposition of stricter containment measures for several weeks, which will keep consumer and business confidence at low levels and delay a strong economic recovery.  

Good fundamentals will allow a shaken economy to overcome this unprecedented shock

Although covid-19 is a huge economic shock for the Philippines, the country has the tools and capacity to overcome it. The government addressed the shock with aggressive monetary easing (including interest rate cuts) and a strong fiscal package (about 3.3% of GDP) focused on infrastructure investments and supporting consumption. More fundamentally, the Philippines has robust fundamentals, as reflected in its MLT political risk rating. The country has a strong average growth (6.3% since the 2008/2009 crisis), and a diversified economy with large manufacturing and service sectors (including the important business outsourcing sector). Public debt is moderate (below 40% of GDP in 2019), the country has comfortable foreign exchange reserves (covering more than 7 months of imports, which explains why the ST political risk rating of 2/7 remained unchanged so far), and low external debt and debt services. Although those factors will deteriorate in the short term, this favourable macroeconomic picture is strengthened by the stable and disciplined government policies witnessed over the past decade. 

Even under the unconventional President Duterte’s rule – mostly known for his controversial anti-drug war – the Philippines has continued its economic successes as he maintained pro-business and investment policies. The MLT outlook is expected to be boosted by the infrastructure development (under the ‘Build, Build, Build’ programme) and a pragmatic Chinese policy that prioritises economic benefits over sovereignty claims on maritime rights in the South China Sea. This being said, Duterte’s presidency has been characterised by a more authoritarian stance and it is unclear whether his successor will continue on this eroding democratic trajectory (and maintain the more peaceful relation with China) when his 6-year mandate ends in 2022. What’s more, the country remains affected by political violence, communal tensions and terrorism, mainly in the southern island of Mindanao. Last year, the federal government granted broad autonomy to most of the region through the ‘Bangsamoro Organic Law’, hoping to improve stability and security risk prospects in the region. Still, instability remains a big issue and, as seen recently, the IS threat and non-participating rebel groups are there to continue terrorist attacks. The biggest threat comes from IS-affiliated Abu Sayyaf. Indeed, the Philippines – where the military had to fight several months in 2017 to free the second-largest city Marawi from hundreds of jihadists – is considered an IS target to establish a future Asian caliphate.

Taking into consideration all the above macroeconomic fundamentals and risk factors and the unprecedented economic shock due to covid-19, Credendo still maintains a positive outlook for the Philippines’ MLT political risk rating. The rating is expected to stay at 3/7, supposing that the covid-19 pandemic will be largely under control at some point in 2021.

Analyst: Raphaël Cecchi –

Facts & figures


Disciplined and stable macroeconomic policies
Good macroeconomic fundamentals
Large workers’ remittances
Young and skilled workforce


Vulnerable to trade war and rising protectionism
Infrastructure gaps
Persisting high poverty
High terrorism risk in Muslim South

Head of State and of government

Rodrigo Duterte


108.1 million

GDP per capita

USD 3,850

Income group

Lower middle income

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