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

PHL on track to reach upper middle-income status

The Philippines is still on track to become an upper middle-income economy next year as long as the growth momentum continues, National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said.

“If growth this year is not dampened, [we] should be on track,” he told reporters on the sidelines of the BusinessWorld Economic Forum on Wednesday.

The administration of President Ferdinand R. Marcos, Jr. has set a target for the Philippines to reach upper middle-income status by 2025. An upper middle-income country means having a gross national income (GNI) per capita income range of $4,466 to $13,845.

The World Bank currently classifies the Philippines as a lower middle-income country with a GNI per capita of $3,950.

Mr. Balisacan said gross domestic product (GDP) growth must average 6.1% in the next three quarters to hit the government’s 6-7% growth target.

The Philippine economy expanded by 5.7% in the first quarter, slightly faster than 5.5% in the previous quarter.

“There are still three quarters out there. The good thing is inflation is manageable now. Even though we expected worse for the April [print,] it turned out better than expected. So, we hope that will continue,” Mr. Balisacan said. 

Inflation accelerated for a third straight month to 3.8% in April from 3.7% in March. Inflation averaged 3.4% in the January-April period, below the central bank’s 3.8% full-year forecast.

In the coming months, NEDA expects economic growth to be favorable as the Bangko Sentral ng Pilipinas (BSP) was “less hawkish” in its last policy meeting and has signaled a possible rate cut in August.

“If the BSP is not going to raise any further the interest rate, and in fact, the governor has indicated that they might start loosening, so that will improve expectations, and expectation drives consumption,” Mr. Balisacan told reporters.   

Last week, the Monetary Board kept its target reverse repurchase rate unchanged at a 17-year high of 6.5%.

The waning El Niño dry pattern and expected easing of rice prices may also improve the country’s GDP growth prospects, according to the NEDA chief.

“Since El Niño is tapering, we expect that world prices for commodities, including rice, are expected to moderate and start falling, especially for rice,” Mr. Balisacan said.

Rice inflation, which contributes nearly half to the overall inflation print, accelerated by 23.9% in April. However, this was slower than 24.4% in the previous month.

Security Bank Corp. Chief Economist Robert Dan J. Roces said that achieving upper middle-income status “is not just about hitting a specific threshold, but about building an equitable economy.”

“While the Philippines has made significant progress in recent years, driven by factors such as a young population, a thriving services sector, and increasing foreign investments, it is also crucial that the benefits of economic growth are more evenly distributed,” Mr. Roces said.

To increase its GNI per capita, the country must also ensure competitiveness across all sectors, address infrastructure gaps and challenges, and improve governance in all institutions, Mr. Roces said.

Since 1987, the Philippines has been classified as a lower middle-income economy, according to the World Bank’s earliest records.

“While the Philippines has strong growth prospects that suggest it could reach upper middle-income status in a few years, several challenges — like a potential global economic slowdown, infrastructure and education deficits, and the impact of natural disasters — could impede this goal,” Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co., said.

The World Bank forecasts that the Philippines would be the fastest-growing economy in Southeast Asia this year with a 5.8% growth estimate.

For 2025, the multilateral lender hiked its growth forecast for the Philippines to 5.9% from 5.8%.

However, the World Bank’s growth forecasts for the Philippines still fall behind the government’s 6-7% target band.

Mr. Balisacan cited the need to “diversify” the country’s growth sources to ensure inclusive and sustainable economic expansion.

“So, what are the growth drivers? We are pushing on all fronts. Opportunities across the entire economy abound in enabling public infrastructure such as energy, water, and physical and digital connectivity, as well as social infrastructure such as schools, healthcare facilities, and housing,” he said.

The government is also looking to expand growth outside the National Capital Region (NCR), he added.

Source: Business World

Philippines to achieve upper middle-income status by 2031

The Philippines is projected to be an upper middle-income economy by 2031, past the government’s target of reaching the status by 2025, amid a broader growth slowdown in the Association of Southeast Asian Nations (ASEAN) economy, ANZ Research said.

In a report written by ANZ economists Sanjay Mathur, Krystal Tan and Debalika Sarkar, the research firm said the Philippines would cross the World Bank’s threshold for upper-middle-income economies by 2031.

“This is not an unfavorable outcome, but the broader question is whether faster growth and higher per capita incomes can be attained,” ANZ Research said.

Last year, the World Bank said the Philippines may reach upper middle-income status by 2025 or 2026, which is in line with the Marcos administration’s target.

An upper middle-income country means having a gross national income (GNI) per capita income range of $4,466 to $13,845.

The World Bank currently classifies the Philippines as a lower middle-income country with a GNI per capita of $3,950.

The Philippines has been classified as a lower middle-income country since 1987, based on the earliest available data from the World Bank.

Meanwhile, ANZ said Malaysia, Thailand and Indonesia have per capita incomes of $11,700, $7,200 and $4,900, respectively. These economies all lie in the upper-middle-income category.

However, growth among ASEAN-4 economies may slow down over the next decade due to weakening demographics, it said.

The gross domestic product (GDP) growth in ASEAN-4 will likely average 4.1 percent between 2024 and 2035, slower than the five-percent average in 2015 to 2023, not including the pandemic years of 2020 and 2021.

“Going forward, the region will experience slower growth in its working age population and potentially capital accumulation,” ANZ said, even though the Philippines is “at a more advantageous demographic phase, with a significant portion of their populations within the working age bracket.”

ANZ said there is room to increase the labor force participation rate (LFPR) in the Philippines to mitigate the slowing population growth. 

It said the Philippines, Indonesia and Malaysia have an LFPR that is lower than that of high-income countries.

Based on data from the Philippine Statistics Authority, the country’s labor force stood at 52.13 million in December 2023, 658,000 more than in November and 907,000 higher than in December 2022.

The LFPR reached 66.6 percent in December 2023, an improvement from 65.9 percent in November and 66.4 percent in December 2022, bringing the average workforce size to 50.38 million last year, which translated to a record-high LFPR of 64.9 percent.

“Nonetheless, we should also be cognizant that a higher LFPR is not a natural progression but rather requires significant policy intervention to help absorb labor into productive activities,” ANZ Research said.

Governments should also mitigate the likely growth slowdown by enhancing digital skills, improving digital infrastructure, and creating an enabling environment that fosters digitalization in sectors such as public services, education and businesses.

The payoff from successful intervention could be significant, as overall GDP may be lifted by 0.5 percent to 0.7 percent from the baseline forecast.

“We believe that even partially successful policy intervention can be rewarding in that it can create a virtuous cycle of a profitable reallocation of labor from low productivity employment, and hence faster income and overall GDP growth,” ANZ said.

However, improving the digital skills of the country’s workforce would be challenging, as education in ASEAN-4 economies is not on par with global standards.

Source: Philstar