Doing Business in the Philippines: 2014 Country Commercial Guide for U.S. Companies INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2010. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES. • Chapter 1: Doing Business in the Philippines • Chapter 2: Political and Economic Environment • Chapter 3: Selling U.S. Products and Services • Chapter 4: Leading Sectors for U.S. Export and Investment • Chapter 5: Trade Regulations, Customs and Standards • Chapter 6: Investment Climate • Chapter 7: Trade and Project Financing • Chapter 8: Business Travel • Chapter 9: Contacts, Market Research and Trade Events • Chapter 10: Guide to Our Services 8/26/2014 Return to Table of Contents Chapter 1: Doing Business in the Philippines • Market Overview • Market Challenges • Market Opportunities • Market Entry Strategy Market Overview Return to top Key Economic Indicators and Trade Statistics • The Philippines has the twelfth largest population in the world (about 100 million) and is the fourth-largest English-speaking country. It also has one of the youngest populations in the world, with more than one-third under the age of 35. The country’s population growth is likely to drive economic growth for the next several years, while also increasing the strain on the country’s infrastructure. • In 2013, the economy showed resilience despite a number of natural disasters, most notably Typhoon Haiyan and a major earthquake in Bohol, as well as volatile financial markets following U.S. signals and subsequent announcements to reduce Quantitative Easing (QE). The Philippine GDP rose by 7.2 percent in last year, second only to China in the Asia region. Most economists project the economy will grow approximately five to six percent in 2014. • Consumer spending and capital formation, led by construction and robust investments in durable equipment and infrastructure, fueled growth on the expenditure side. Remittances by Philippine overseas foreign workers (OFW’s) continue to play a major role in the economy. • On the production side, the services sector continued to drive the economy’s growth, although the industrial sector, spurred in part by a more robust expansion in manufacturing output, recently contributed more to GDP growth. • Average year-on-year consumer price inflation slowed from 3.2 percent in 2012 to three percent in 2013, which was at the low end of the 3-5 percent range targeted by the Philippine Central Bank. • However, inflation accelerated towards the latter part of 2013 due to Typhoon Haiyan-related supply shocks to the heavily-weighted food index. The Monetary Board announced that the future inflation path is likely to stay within the target ranges of 4-5 percent in 2014 and 3-4 percent in 2015. • The Philippines posted a US$5.1 billion balance of payments (BOP) surplus in 2013 despite sluggish merchandise exports from weak electronics shipments, a slump in foreign portfolio capital flows as investors repositioned funds following QE-tapering news, and larger net repayments of foreign loans by the national government. • Overseas workers’ remittances rose 7.5 percent year-on-year to US$23 billion, while robust business process outsourcing (BPO) revenues were up 15.7 percent to US$15.5 billion. Growing foreign direct investment (FDI), which increased 20.1 percent year-on-year to US$3.9 billion, also contributed to the surplus, although the Philippines has only three percent of the total FDI in the region. • The Philippine Central Bank’s gross international reserves (GIR) ended 2013 at US$83.2 billion, or about 0.8 percent (US$600 million) lower versus 2012. This was due mainly to government foreign debt servicing, foreign exchange operations to temper excessive volatility in the foreign exchange market, and the revaluation of gold and foreign exchange holdings. The GIR cushion equaled more than eleven months’ worth of goods and services imports and more than five times the Philippines’s short-term foreign debt, still well above international benchmarks (i.e., three months’ worth of imports and 100 of short-term foreign liabilities). • The national government’s fiscal deficit ended 2013 at 1.4 percent of GDP, below the government’s two percent-of-GDP program for that year. The ratio of taxes to GDP, which remains among the lowest regionally, improved from 12.9 percent to 13.3 percent, due largely to reforms in excise taxes on tobacco and liquor products that went into effect in 2013. Tax collections nevertheless fell short of the government’s goal; however, larger shortfalls in targeted expenditures, including infrastructure spending, were more than offsetting. • The overall improvement in macroeconomic stability and the economy’s resilience to domestic and external shocks has been recognized by the “big three” credit rating agencies—Fitch, S&P, and Moody’s—with “investment grade” ratings. The Philippines has also made progress in terms of improving competitiveness rankings. • The country’s progress has been reflected in its rise in various international surveys, including the World Economic Forum’s Enabling Trade Index (April 2014), which showed that the country has risen 28 spaces since 2010. Still, these and other studies show that the Philippines ranks below its ASEAN partners and is generally rated low in infrastructure and Government red tape (specifically business permits). • The generally good economic news has been diminished by persistently high unemployment, hovering at seven percent of the labor force, while about 20 percent of the workforce is considered to be underemployed. Poverty engulfs about a quarter of the population. • Total U.S. exports have grown by 46 percent since 2009, amounting to just over US$8.4 billion in 2013. The Philippines ranks as the 34th largest export destination for U.S. products. In 2013, the U.S. posted annual trade deficits with the Philippines, estimated at US$862 million. • For 2013, China, the United States, and Japan were the top exporters to the Philippines, accounting for 13, 10.8 and 8.5 percent of total Philippine merchandise imports, respectively. Other major import sources include Taiwan, the Republic of Korea, and Singapore. • The foreign exchange rate broke from a three-year appreciating trend following foreign portfolio capital withdrawals to average 42.45 Philippine pesos (PhP) to the U.S. dollar during 2013, down 0.5 percent from the 2012 average rate. The peso closed 2013 at 44.39 to the U.S. dollar, more than eight percent weaker from the end of 2012 (PhP41.05 per U.S. dollar). The peso averaged 44.81 to the U.S. dollar during the first four months of 2014. • Helped by low domestic interest rates and optimism over Philippine economic prospects, the Philippine Stock Exchange index (PSEi) rose to historic highs through mid-May 2013. The PSEi then lost most of its year-to-date gains, closing 2013 only 1.3 percent higher than 2012, as investors repositioned funds in U.S. assets on signs of improving macroeconomic prospects and expectations that U.S. monetary authorities would begin to pare monetary stimuli. There has since been some recovery with foreign investors re-entering the market in February 2014, buoyed in part by positive corporate earnings reports and the economy’s better-than-expected expansion following Typhoon Haiyan. As of April 2014, the PSEi was up nearly 14 percent from the beginning of the year and ranked among the better performers among Asian indices. Political Situation and Other Issues that Affect Trade • The political situation in the Philippines is considered to be stable. Philippine voters elected President Benigno S. Aquino III on May 10, 2010, by a wide margin, to a single six-year term, in the country's first nationwide automated elections. Mid-term elections were held in 2013 under generally peaceful conditions, with Aquino’s slate of candidates winning nine of the twelve available seats in the Senate. President Aquino is limited to one term, which is due to expire in 2016. • On March 27, 2014, the Philippine Government and the Moro Islamic Liberation Front signed a comprehensive peace agreement that paves the way for the creation by 2016 of a new, autonomous political entity called “Bangsamoro” for the predominately Muslim areas in the conflict-prone southern Philippines. • The Philippines is considering but has not yet signed on for the negotiations of the Trans-Pacific Partnership (TPP) agreement. • The U.S. and Philippines signed a five-year Millennium Challenge Corporation (MCC) Compact, effective 2011, to reduce poverty through economic growth. The grant funds three categories of projects focused on road infrastructure, community-level infrastructure and social services, and tax administration reform. The Compact is due to expire in 2016. Market Challenges Return to top • Graft and Corruption: The Aquino Government has made major strides in fighting graft and corruption. Over the last year, however, a major corruption scandal involving the diversion of billions of pesos in development aid from government coffers has resulted in the arrest of three senators and allegedly several other high-profile legislators and their staff. Corruption remains a major constraint to business and outside investment. Despite the country’s recent progress, Transparency International still ranks the Philippines in the lower half of its latest survey (105/179). • Ineffective Judicial System: A severe shortage of judges and prosecutors, corruption, and a weak record of prosecution plague the judicial process. Most cases take many years to reach a final verdict. • Limited Ownership: The Philippines has restricted foreign ownership in selected industries. See Chapters 5 and 6 for more information on these restrictions. • Regulatory System: Product registration, product standards, and environmental and labeling requirements place restrictions on certain products. See Chapter 5 for additional information. • Value-Added Tax (VAT): The VAT is a 12 percent tax levied on the sale of all goods and services, including the imports of goods into the Philippines.