The Philippine economy ended last year on a high note, and growth will likely remain positive this year, global management consulting company McKinsey said.
"Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures," McKinsey and Co. said in a report last Thursday.
Gross domestic product (GDP) growth was 5.6 percent last year, below the government's 6.0- to 7.0-percent target. It was, however, the fastest in Southeast Asia and was driven by factors such as commercial activities, public infrastructure spending and digital financial services.
"Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent) performing the best," McKinsey noted.
"While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties," it added.
Below-target growth
This year's GDP expansion will likely fall between 5.0 and 6.0 percent, McKinsey said, although one of three scenarios presented projected a slowdown to 4.8 percent under "challenging conditions."
Inflation, meanwhile, which averaged above the 2.0- to 4.0-percent target at 6.0 percent in 2023, is expected to fall between 3.2 percent to 3.6 percent in 2024.
All growth scenarios — two involving slowdowns and one an acceleration from 2023 — set out forecasts below the government's 6.5- to 7.5-percent GDP goal for this year.
Under McKinsey's "slower growth" scenario, challenges such as declining trade and higher inflation would lead to GDP expanding by just 4.8 percent.
This supposes a rise in inflation to 5.2 percent in the first half that prompts the Bangko Sentral ng Pilipinas (BSP) to hike its key rate — currently at 6.5 percent, the highest since 2007 — to 6.75 percent and then cutting to 6.5 percent by yearend.
The "soft landing" scenario, meanwhile, has growth moderating to 5.2 percent and inflation ranging from 3.0-4.2 percent throughout 2024.
Amid favorable global conditions that include regional trade demand and a stable investment environment, the BSP keeps its benchmark rate above 6.4 percent to achieve the 2.0-4.0 inflation percent goal.
The "accelerated growth" picture, lastly, has growth accelerating to 6.1 percent with inflation slowing to 3.0-3.5 percent in the first half.
This could prompt the BSP to change its inflation target to below 4.0 percent, McKinsey said, and also pause from hiking its key rate, which could still be adjusted to 6.6 percent.
Higher employment and improved private spending due to relaxed public policies will boost productivity, it added.
Sectoral outlooks
In the report, McKinsey also focused on seven sectors — financial services, energy and power, health care, consumer and retail, manufacturing, information technology and business process outsourcing (IT-BPO), and sustainability — and cited challenges and opportunities for growth.
It said that a recovery in financial services appeared on track, although growth in value-added output could slow to about 5.0 percent this year from 7.0 percent in the last two years.
Factors that are expected to affect the sector are the BSP's push for financial inclusion, growth in digital adoption, a slowdown in unsecured lending, and lower interest rates.
Increasing demand from the underserved could unlock growth, McKinsey said, with particular opportunities in digital/data transformation and financing small and medium enterprises.
The energy sector, meanwhile, could grow by 7.0 percent this year, from 4.0 percent in 2023, given the current focus on renewable energy.
The identified challenges were the need to import liquefied natural gas to address declining output from the Malampaya field and above-target global inflation affecting supply chains, while the removal of foreign ownership limits could accelerate the shift to green energy.
A shift to gas could drive investments in energy infrastructure and capacity, McKinsey said, with opportunities also seen in the government's large-scale renewable auctions.
Upgrades to the transmission grid will also provide flexibility, it added.
As for health care, growth was forecast to slow to 2.8 percent this year from 6.6 percent in 2023, while pharmaceuticals could grow by a faster 5.2 percent from 1.9 percent last year.
Increased prevalence of chronic diseases, health consciousness, and a rise in the numbers of the elderly could strain the sector given a lack of health workers, while higher use of health care benefits could lead to lower profitability.
McKinsey proposed the consolidation of health care systems and programs to attract workers and pharmaceutical investments and pointed to opportunities in digital/data transformation and unified and seamless patient care.
Prices a concern
Retail and wholesale growth, meanwhile, was forecast to slow to 4.0 percent from 6.0 percent, while that for consumer goods was a higher 5.0 percent from 4.0 percent last year.
The report noted that prices remained high and were a primary concern for Filipinos, most of whom have changed their shopping habits and switched brands.
Omnichannel strategies, agile supply chains and products that meet changed consumer preferences were tagged as growth opportunities, and McKinsey also noted the need for infrastructure investments and government initiatives to lower inflation and support retailers.
Manufacturing growth is expected to stay steady at 6.0 percent, meanwhile, and a rising focus on resilient supply chains and self-sufficiency was said to be one of the emerging themes for the sector.
Digital, innovation and upskilling initiatives could drive growth, and McKinsey also urged a shift to the production of more complex electronics components, generic over-the-counter drugs and nature-based medicines, and green products such as solar panels and batteries for electronic vehicles.
For IT-BPO, revenues could rise to $38 billion this year from $35 billion in 2023, given increasing demand, although automation and generative artificial intelligence (Gen AI) present both risks and opportunities.
The Philippines would do well to develop a talent hub, BPO centers outside metropolitan areas, capabilities in areas such as Gen AI, and new service areas, McKinsey said.
Lastly, given the country's vulnerability to climate change, the consulting firm proposed a focus on the development of renewable energy, the manufacture of solar cells, electric mobility, battery development, and nature-based solutions to greenhouse gas emissions.
These could help limit economic losses from climate change, which are expected to average $3.2 billion annually — up to 7-8 percent of nominal GDP — over the next 50 years.
"Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth," McKinsey said.
Source: Manila Times