Philippines may escape ‘middle-income trap’ by 2050

It may take more than two decades before the Philippines can escape the “middle-income trap,” Nomura Global Markets Research said, citing the need to implement key reforms to boost investment-led growth.

“The countries that continue to reap the benefits of the demographic dividend include Vietnam, Indonesia and the Philippines, and all have brighter prospects than Thailand on breaking free of the trap,” it said in a report.

“However, this is still a long-term challenge. Assuming strong potential growth is sustained (i.e., 5% for Indonesia and 6% for the Philippines and Vietnam), these countries may escape the trap by 2050.”

The Philippines remained a lower middle-income country despite an increase in its gross national income (GNI) per capita to $4,230 in 2023 from $3,950 in 2022, according to the World Bank’s latest income classification data.

To become an upper middle-income country, the Philippines would need a GNI per capita of $4,516 to $14,005.

The Philippines has been stuck in the lower middle-income bracket since 1987, according to the latest available data.

In its report, Nomura created a Middle-Income Trap Escape Index (MITEI), which assesses the ability of countries to break free from the middle-income trap.

Countries are ranked on a scale where a score of 100 is the sample average, with anything higher or lower than 100 indicating an above or below average score, respectively.

The Philippines garnered a score of 85 under the MITEI Index, the lowest among Southeast Asia. It scored lower than Malaysia (103), Thailand (98), Vietnam (94) and Indonesia (87).

Nomura said the Philippines is considered in a “tight spot,” which is defined as “traditionally poorer countries that continue to trail middle-income league tables.”

“Vietnam, Indonesia and the Philippines are catching up fast, propelled by strong investment growth, but breaking free of the trap is a long-term challenge.”

There is a need to implement structural reforms to drive investment growth through infusion and innovation, it added.

The Marcos administration is targeting to reach upper middle-income status by this year. The World Bank usually releases the income classification data in July.

Nomura said “business-as-usual” growth is not enough to escape the middle-income trap.

“In the Philippines, the government’s continued push for infrastructure investment will be supportive of medium-term growth,” it said.

The government is targeting 6-8% economic growth from this year until 2028. It has also committed 5-6% of gross domestic product on infrastructure annually.

However, Nomura noted that increased geopolitical tensions, particularly between the Philippines and China, could hinder foreign direct investment from entering the country.

“The underperformance during the latest supply-chain reconfiguration could therefore limit the boost to investment relative to peers,” it added.

Nomura said the process of graduating to a higher income class will be a long and challenging process.

“To escape the middle-income trap, a country cannot continue to rely on cheap labor and rapid urbanization. The move from investment-led growth to innovation-led growth, however, is complicated,” it said.

“It needs the combination of policies to attract and adopt foreign technologies, an adequately skilled workforce, increases in human capital and more deep-rooted reforms of the economic and business climate.”

Adapting technological innovations such as generative artificial intelligence will also be critical, it added

Source: Business World

Prices of goods in NCR grew slower in 2024

Retail prices of goods in Metro Manila grew at 1.8 percent in 2024, lower than the 4.5 percent in 2023, according to data from the Philippine Statistics Authority (PSA).

In its latest report, the PSA attributed the decline of the general retail price index (GRPI) in NCR to the slower annual average increase in food prices at 2.4 percent in 2024 from 8.2 percent in 2023.

On the other hand, a higher annual increase was recorded in the prices of crude materials, inedible except fuels at 1.1 percent during the month, a slight movement compared to the 1.0 percent in October 2024.

Slower annual increases were also observed in the indices of some commodities.

Prices of beverages and tobacco grew slower at 3.5 percent in 2024 from 5.9 percent in 2023; crude materials at 1.0 percent from 4.8 percent; chemicals, including animal vegetable and oils and fats by 2.4 percent from 3.2 percent; manufactured goods classified chiefly by materials at 1.3 percent from 2.7 percent; machinery and transport equipment at 0.5 percent from 1.4 percent; and miscellaneous articles at 1.4 percent from 1.7 percent.

However, the prices of mineral fuels, lubricants and related materials recorded an annual average increase of 0.4 percent in 2024 from an annual decline of 4.5 percent in 2023.

In December 2024, the GRPI in Metro Manila was at 1.4 percent, slightly higher than the 1.3 percent growth in the previous month.

The PSA cited the slower annual decrease in the index of mineral fuels, lubricants and related materials, whose prices fell by 0.3 percent from 3.0 percent in the previous month.

Meanwhile, higher annual increases were noted in the indices of beverages and tobacco at 3.9 percent from 3.6 percent in November 2024 and manufactured goods at 1.5 percent from 1.3 percent.

Four commodity groups

But slower annual increases were noted in the indices of four commodity groups. Food prices in December 2024 slightly declined to 1.9 percent from 2.0 percent in November; crude materials, inedible except fuels, 0.7 percent from 1.1 percent; machinery and transport equipment, 0.2 percent from 0.3 percent; and miscellaneous manufactured articles, 1.4 percent from 1.5 percent.

Chemicals, including animal and vegetable oils and fats, retained its previous month's annual rate of 2.5 percent.

The GRPI measures changes in commodity prices at which retailers sell their goods to consumers or end-users. It is also used to monitor the economic situation of the retail trade sector.

The wholesale and retail trade sector is the economy's backbone, contributing P4.4 trillion to the country's gross domestic product (GDP) and employing over 10.3 million Filipinos, the Department of Trade and Industry (DTI) said.

In partnership with the Philippine Retailers Association and Supply Chain Management Association of the Philippines, DTI started discussions in the last quarter of 2024 to create a comprehensive roadmap dubbed the Job Blueprint to further energize the wholesale and retail trade sector.

It aims also to address also aims workforce development, digital transformation, supply chain optimization and the regulatory landscape.

Source: Manila Times

Stronger 2025 growth expected

Robust household spending, low unemployment and election-related economic activity are expected to bolster the country's economic growth, potentially hitting the official target.

Bank of the Philippine Islands (BPI) expects a 6.3-percent economic expansion for 2025, with household consumption remaining its biggest driver.

The government is aiming for 6.0- to 8.0-percent annual growth this year, wider than the 6.0 to 6.5 percent for 2024 that most analysts expect to have been missed.

"The factors sustaining consumption over the past decade, such as remittance inflows, have remained in place despite the economic slowdown in major economies," BPI lead economist Emilio Neri said.

"With aging populations abroad driving the demand for labor, the impact of headwinds on remittances like trade barriers and anti-immigration sentiment will likely be limited," he added.

Low unemployment, particularly in the services sector, is also expected to sustain household income growth and expand the middle class.

While concerns about job displacement due to artificial intelligence (AI) persist, Neri said there would be minimal disruption as adoption of the technology remained in its infancy.

AI, he added, could potentially enhance labor productivity for companies that leverage the technology effectively.

Meanwhile, "the economy also stands to benefit from the recent reduction in interest rates and provision of additional liquidity through the reserve requirement ratio."

"Private sector spending in construction activities has not yet returned to pre-pandemic levels, but lower interest rates may fast track its recovery," Neri said.

The Bangko Sentral ng Pilipinas (BSP), which lowered its policy rate by 75 basis points (bps) to 5.75 percent last year, was forecast to cut by 50 bps this year.

The central bank was earlier expected to cut by as much as 100 bps amid a favorable inflation outlook, but concerns over protectionist threats made by US President-elect Donald Trump have prompted analysts to revise their outlooks.

Neri said that global uncertainties, particularly the policy direction of the US Federal Reserve (Fed) under a second Trump administration, could influence the peso's performance and limit the extent of monetary easing.

"Rate cuts in the first half of the year appear feasible, but the latter half may bring challenges as the Federal Reserve could shift its policy stance in response to President Trump's policies," he said.

Neri added that "depreciation pressure on the peso may persist as markets continue to assess the potential impact of Republican policies on inflation and monetary policy."

The Fed's anticipated 50-bp rate cut this year, contingent on US economic data, could also play a role in shaping currency trends.

Source: Manila Times