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Why upcoming elections will jolt the Philippines economy

Although 2019 is not a presidential election year, First Metro Investment Corporation’s Rabboni Francis Arjonillo predicts May’s general election will stimulate consumer confidence and the nation’s economy in the first half of this year.

There’s plenty of reasons to feel optimistic about the Philippines economy in 2019.

Falling inflation, rising tourist numbers, an election just around the corner, stable oil prices at $50-55, and an uptick in consumer spending are all drivers for growth, pushing the nation towards a predicted GDP of 6.8-7.2% this year.

Despite headwinds from liquidity, a widening trade deficit and pressure on the peso tempering growth, it’s anticipated that manufacturing will recover, and construction and public spending will grow as the economy expands in the year ahead.

Historically, elections bolster the nation’s GDP. Of the five elections in the past 15 years, election year GDP’s averaged 7%.

Rabboni Francis Arjonillo

This year is no exception. The nation’s general election on May 13 encompasses 12 senate seats plus the House of Representatives, together with regional, provincial, city and municipal polls. According to First Metro Investment Corporation’s (First Metro) president Rabboni Francis Arjonillo, the nation’s purse strings are once again opening. “In an election year, there is much more spending. Consumer spending is about 70% of our GDP and inflation is projected to abate this year as supply issues are being addressed.”

After hitting a nine-year high of 6.7% in October 2018, inflation tumbled to 5.1% in December. First Metro’s analysts predict this downward trajectory will continue, falling to late 2017 levels, at 3-3.5%. 


Foreign direct investment (FDI) is another source of recovery. According to Arjonillo, FDI  hovered around $1-2 billion a year for the past decade.

As of October, FDI inflows had reached $8.5 billion. This represents significant growth, although it still falls below FDIs into other regional economies such as Vietnam, where foreign investment inflows average $10 billion a year.

An inflow of foreign funds in January gave the nation’s stock market reason for optimism after it experienced a net outflow of about 100 billion peso ($19.1 million) in 2018.

First Metro believes the market bounce will continue. “We think the US will become less attractive as an investment destination for portfolio funds, as its economy slows down. When you compare this to the relatively high growth economies of the emerging markets like the Philippines, we think fund managers will be looking for undervalued stock markets that dropped dramatically last year like the Philippines,” Arjonillo said.


A weakening US dollar in anticipation of slow down in the US economy, coupled with ongoing US-China trade tensions has helped to strengthen both the peso and other emerging market currencies, relative to the US dollar with the peso now hovering above P52/US dollar.

Arjonillo predicts the peso will remain in this position for the first half of the year, which will attract liquidity, but the currency will remain under pressure due to the nation’s widening trade deficit. “The peso will have to remain competitive to address our trade gaps, so we’re looking at the peso to go back to the high 53 levels by the end of the year.”

Other key areas likely to benefit from an election year are consumer and property sectors. Property prices are rising due to the Philippine’s growing middle class and urbanisation. An influx of Chinese and other foreign investors is helping to drive up prices, making this sector attractive to portfolio managers.

Corporate earnings are also likely to recover, moving from 2018’s 6-8% to around 10% this year, and remittances – one of the Philippines' biggest economic drivers  – are forecast to grow at a moderate 2-4%. 

Election year upside

Source: PSA


While the mood is generally buoyant, Arjonillo admits some risks remain. Liquidity is an ongoing issue.

The US Federal Reserve’s reversal of quantitative easing combined with the shrinking of balance sheets by global central banks means tighter liquidity may negatively affect investment. “Given our loans to deposits ratio of banks has risen to around 90%, as well as the growth of loans in the last couple of years hitting around 18% a year – liquidity has dried up,” Arjonillo said.

Last year, Bangko Sentral ng Philipinas (BSP) came up with two regulations to strengthen the liquidity of banks and banks issued bonds to shore up their funding.

Arjonillo believes this strategy, together with an aggressive government borrowing programme, will further crowd out liquidity in the system. He fears these headwinds will reverse the downward trend of interest rates. “If all these borrowings from banks, government and corporations kick in, then you might see tightness again and this will elevate interest rates,” he said. However, he expects that the BSP will cut reserve requirements by a minimum of 2% this year, which will infuse liquidity of at least P180 billion, thereby helping to alleviate the tight liquidity situation.

US-China trade negotiations are being closely watched, so too is Brexit. One of the Philippines’ strongest trading partners is China and if China’s growth weakens due to trade issues with the US, exports to China will also decrease.

"Currently, we are running a huge current account deficit. Trade is one component of a current account balance and, as of November, we were running a trade gap of $38 billion which is $8 billion more than 2017 level,” Arjonillo said, adding that the nation’s current trade balance at 2% of GDP, is way healthier than its ASEAN neighbours (Indonesia’s current account deficit is -2.9% and India’s is -2.4%), or economies on the watch list such as Turkey at - 5.4% and Argentina at -7.1%.

"So we’re doing OK, I don’t think we should push the panic button yet. We can always bank on an election year to be a very good year."

For more insights from First Metro Investment Corporation please click here

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