Business Dynamics: Philippines

Country Briefing | 01 Jun 2016

Improvement in the Filipino business environment requires efficiency enhancing reforms, more anticorruption measures and a more flexible labour market. However, a rising growth rate, coupled with a
growing information and communications technology space has made it more attractive for firms to operate
in the nation. Despite this, skills shortages and brain drain are posing to be significant issues for the labour
market. However, low wages have made the countrys labour market competitive.
Chart 1 SWOT Analysis: Philippines

Source: Euromonitor International

REGULATORY ENVIRONMENT
Ease of Doing Business ranking declined from 2014 to 2016
Businesses will require further regulatory reform in order to function, with a particular emphasis on
increasing the efficiency of the tax environment:

Since 2014 the performance of the Philippines in the World Banks Ease of Doing Business Index has
seen a broad-based decline; indicating a government which has not implemented efficient regulations;

Philippines tax environment is relatively difficult, with its total tax rate being the sixth highest in
Asia Pacific for 2016. However, the country has in place business tax exemptions, reducing the effective tax

rate, such as full tax rebate if firms undertake infrastructural projects in less-developed areas. In 2006,
Philippines informal economy accounted for 61.0% of the GDP (latest data available) (trade sources),
indicating a significant loss of taxable revenue;

Philippines ranking in the Index of Economic Freedom has improved from 2010 to 2016 owing to a
rise in monetary freedom. However, the country needs to focus on better implementing anti-corruption
measures to further improve economic freedom;

The country seeks to increase competitiveness in order to increase FDI inflows. Foreign and
domestic firms are treated equally, except for certain sectors which are reserved exclusively for Filipinos
such as mass media, small-scale mining, private security and marine resources.
Chart 2 Overview of the Business Environment in Philippines

Source: Euromonitor International from the World Bank/ Heritage FoundationNote: The Index of Economic Freedom
Rankings are out of 178 nations.

OPERATING RISKS
Third highest Global Terrorism Index Score in Asia Pacific for 2015
Corruption is still a problem, despite government reforms. Inefficacies in regulation and terrorism, if not
tackled, could decrease the competitiveness of the country:

Philippines ranking for the 2015 Corruption Perceptions Index was higher than that of 2010, owing
to President Aquinos anti-corruption measures. One example of these measures is the Republic Act 10365,
passed in 2012, which tacked the issue of money laundering in the nation. However, corruption is still an
issue, with each corruption scandal estimated to be worth US$94.0 million on average (trade sources). With
the election of the new Filipino president, Rodrigo Duterte, on May 11th 2016, this ranking is expected to
rise given his tough anti-corruption stance;

Regulatory Quality Ranking for Philippines has improved from 2010 to 2014, owing to reforms
undertaken by the government. However, excessive bureaucracy and regulatory inefficiency still plague the
country;

Terrorism is a significant problem for the entire nation. There are several terrorist groups active in
Philippines, such as New Peoples Army, Abu Sayyaf Group and Jemaah Islamiyah, who attack places
frequented by foreigners. Incidents are not localised, concentrated mostly in the southern region and
hamper business growth.
Chart 3 Operational Risks in Philippines

Source: Euromonitor International from Transparency International/Institute for Economics and Peace/UNDOC/World
BankNote: Global Terrorism Index 2015 scores were calculated for 162 countries. A higher score (out of 10.0) in the Global
Terrorism Index implies a worsening country environment related to terrorism. A higher ranking in the Rule of Law Index
implies better governance

ACCESS TO FINANCE
Philippines central bank kept the interest rate constant in 2015
Getting credit in Philippines is expected to become tougher from 2014 to 2016:

Philippines Getting Credit ranking has deteriorated since 2014 and was the seventh lowest in Asia
Pacific for 2016. It is difficult to obtain credit, due to a lack of availability of borrowing history of entities in
the credit market;

The Bangko Sentral ng Pilipinas (BSP), kept the interest rate steady in 2015, as a higher growth
rate implied that less monetary stimulus was needed in the economy. Strong growth, coupled with an

inflation rate expected to be less than 2.0% in 2016, means that the BSP will potentially not change the
interest rate for 2016;

Annual lending rates in Philippines in 2015 were lower than in 2010, owing to consistent interest
rate cuts by the BSP, making access to credit easier for firms. However, in 2015 and the first five months of
2016, the BSP has kept interest rates constant. The nonperforming loans to total gross loans (NPLs) rate in
2015 was lower than 2010 levels, partly owing to stringent lending standards adopted by banks;

The Philippine stock market index value has seen the second-highest growth in Asia Pacific since
2010, behind Pakistan.
Chart 4 Finance in Philippines

Source: Euromonitor International from IMF/IFS/World Bank/World Federation of Exchanges/national

sources/Eurostat/OECD/UN

TRANSPORT AND INFRASTRUCTURE

Emphasis on public-private partnership to develop infrastructure
In order to boost business growth, improvement in the logistical environment and infrastructure is required:

The infrastructural environment of Philippines is relatively undeveloped, with the quality of port,
railroad and road infrastructure requiring significant investment;

Philippines ranking in the Logistics Performance Index has declined from 2010 to 2015, partly
owing to a decline in the Timeliness of International Shipments category;

Philippines recognises the importance of public-private partnership in developing infrastructure and

promoting business growth. In 2015, the Asian Development Bank, along with the government, set up a
strategy which involved the investment of US$600 million to improve infrastructure in the country (trade
sources).
Chart 5 Infrastructural Environment in Philippines

Source: Euromonitor International from ICAO/World Bank/national statistics/IRF/ International Union of Railways
(UIC)/EurostatNote: A higher score in the Logistics Performance Index (and its sub-categories) implies a better logistical
environment

COMMUNICATIONS AND INNOVATION

Second lowest rate of R&D spending, as a percentage of GDP, in Asia Pacific for 2015
Investment in telecom, low tariffs and ICT related infrastructural development, especially in rural areas
define the ICT space in Philippines:

Philippines ICT environment is developing, partly led by private investment in the latest
technologies such as 3G and 4G LTE. Government initiatives to enhance the ICT space have also been
initiated, such as the Philippine Digital Strategy (2011-2016), increasing access to information for Filipinos;

From 2010 to 2015, IT use in businesses has been rising in Philippines, partly owing to the rise in
the number of smartphones and rising use of mobile broadband. This gives businesses further access to the
rising consumer base online;

Networked Readiness Ranking for Philippines has risen over the 2010-2015 period, reflecting an
increase of investment in the infrastructural environment as well as the rise in the adoption of ICT related
services by the government;

Philippines had the second lowest expenditure on R&D as a percentage of GDP in Asia Pacific across
the 2010 to 2015 period. Lack of R&D related infrastructure, inefficient R&D related financial management
and high tax rates applicable on R&D related imports are the major reasons for this low rate.
Chart 6 ICT Environment and Innovation in Philippines

Source: Euromonitor International from UNCTAD/Eurostat/ITU/ WEFNote: Networked Readiness Ranking (NRR) 2010 is out
of 133 nations and NRR 2015 is out of 143 nations

EDUCATION AND SKILLS

Fifth lowest higher education rate in Asia Pacific for 2015

Severe skills shortages, lack of education and migration of skilled professionals are decreasing the quality of
the labour force:

Philippines higher education rate was marginally above the average of Asia Pacific, but was still
relatively low. Higher educational institutions are mainly owned by the private sector, making education
expensive. Additionally, the quality of higher education is poor, which dissuades people from obtaining higher
education. In 2015, the government allocated a further US$5.8 million (trade sources) to improve the
quality of state universities and colleges;

Skills shortages are a severe problem for the nation, as adequately skilled graduates are few,
especially in the architecture, engineering and technology sectors. Brain drain is also an issue, with a
significant number of skilled Filipinos settling in the Middle East. Philippines is one of the worlds largest
exporters of labour.
Chart 7 Education and Skills in Philippines

Source: Euromonitor International from national statistics/UN/Eurostat/OECD/UNESCO

EMPLOYMENT AND LABOUR COSTS

Rigid labour market in 2015, owing to cumbersome labour market regulation
Philippines labour market in 2015 was relatively inflexible owing to high redundancy costs, lack of flexibility
in wage determination and relatively high costs associated in hiring and firing workers:

Philippines youth unemployment rate and unemployment rates in 2015 were lower than 2010
levels, owing to strong economic growth. However, unemployed youth account for half of the total
unemployed Filipinos in 2015, partly owing to the job skills mismatch that graduates face. The countrys
unemployment rate in 2015 was higher than the Asia Pacific average;

The country has employment increasing plans in place such as the Philippine Labor and Employment
Plan (2011-2016), which planned to increase employment by 1.0 million a year by 2016 (government
sources);

The minimum wage per month in the Philippines was the seventh highest regionally. The state
increases the minimum wage in response to increasing prices in the economy. In 2015, the government
introduced a hike of US$0.3 per worker per day for 587,000 workers in Manila (trade sources). However, the
minimum wage per month in real terms declined from 2010 to 2015. The minimum wage varies regionally in
the Philippines, with the cities earning more than other areas. Hence the wages in the cities pull up the
national average, with the minimum wage in rural areas being low.
Chart 8 An Overview of the Labour Market in Philippines

Source: Euromonitor International from ILO/Eurostat/ national statistics/World Bank.Note: (1) Wholesale and Retail Trade
includes Repair of Motor Vehicles, Personal and Household Goods; (2) Financial Intermediation includes Real Estate,
Renting and Business Activities; (3) Undefined sectors refers to activities not adequately defined elsewhere in the other
categories