Assessment of the current prospects of the Philippine economy

By Bjorn Biel MBeltran, Special features and content assistant editor

Although the Philippine economy remained robust last year despite global headwinds, expectations for the outlook were muted for many. For the full year, gross domestic product (GDP) growth was recorded at 5.6%, missing the lower end of the government’s annual target of 6%. If we ignore the historic 9.5% decline in the pandemic year of 2020, 2023 was the slowest growth the economy has seen since 2011.

Sentiment rose into the first quarter of 2024, with the Bangko Sentral ng Pilipinas (BSP) noting that business sentiment in the country became less optimistic as the overall confidence index (CI) fell from 35.9% in the fourth quarter of 2023 to 33.1%.

“This reflects the combined decrease in the percentage of optimists and the increase in the percentage of pessimists. Operating results in the first quarter of 2024 became less strong, mainly due to companies’ concerns about: (a) post-holiday decline in demand for goods and services and the slowdown in business activities, (b) the persistent inflationary pressures due to higher food and oil prices and their impact on the economy, (c) intense competition, and (d) the negative impact of a strong El Niño event in 2024 on the agricultural sector,” the central bank said in a statement in April.

Cautious optimism appears to be on the cards for many as the BSP noted that businesses generally expect better prospects in the second quarter of 2024 as the confidence index rose to 48.1% from 38.2% in the last 2023 survey . products and services, more completed projects thanks to a better business environment, seasonal incentives in tourism and fishing, expansions and lower inflation are all reasons behind this confidence.

If we look further ahead to next year, the prospects are also much brighter: the confidence index rises from 54% to 60.8%. This optimistic sentiment is driven by expectations of continued high demand, favorable economic conditions, continued low inflation, business expansion and lower interest rates.

For the financial sector, and banks in particular, there are opportunities simmering just beneath the surface. Global credit rating agency Fitch Ratings recently upgraded the outlook for the Philippine banking sector from neutral to improving, expecting banks to be able to maintain their record-high net interest margins for longer due to a slowdown in policy rate cuts.

“This, combined with a continued rise in higher yielding consumer loans and the rollout of key infrastructure projects, is likely to positively impact banks’ revenue prospects for the remainder of 2024. Meanwhile, we believe that the extension of higher interest rates will have a manageable impact on the sector’s asset quality given the resilient economy, with Fitch forecasting GDP growth of 5.8% in 2024,” the agency said .

Michael O. de Jesus, president and CEO of the Development Bank of the Philippines (DBP), expressed the same sentiment, saying in an interview that the Marcos administration’s ambitious infrastructure spending plans for this year, including a significant P1 allocation, 5 trillion for 2024 highlight the role of the banking sector in financing vital projects such as transportation networks and utilities.

“These investments not only stimulate economic growth, but also stimulate demand for financial services ranging from project financing to construction loans. Moreover, supporting the growing manufacturing sector, which recorded robust growth through electronics and food products, allows banks to facilitate growth through tailor-made financial solutions such as working capital and expansion loans,” he shared. Business.

Other sectors are also emerging as promising investment opportunities for Philippine banks, such as renewable energy, manufacturing and the proven IT-BPM industry.

“Renewable energy initiatives, which aim to achieve a substantial share of the energy generation mix by 2030 and 2040, provide banks with stable investment prospects in solar, wind and hydropower projects, in line with global trends towards sustainable financing,” he said.

“The dynamic IT-BPM sector, which is expected to grow at 7%-8% annually, offers banks opportunities to finance technology advancements and expansion initiatives. By offering specialized financial products and services tailored to the needs of the sector, banks can leverage this growth momentum to drive innovation and meet changing market demands.”

Digitally driven momentum

Another factor playing in the financial sector’s favor is the significant momentum the Philippines has gained in its digitalization efforts. Driven by the significant penetration of mobile phones and the Internet among the Philippine population, in addition to the rise of digital payment and e-wallet platforms, financial services are more accessible than ever, allowing both the unbanked and unbanked to transact without traditional bank accounts.

“Banks like DBP are actively using digital innovation to expand their reach and target underserved segments through mobile apps, partnerships with fintechs for solutions such as e-wallets, digital lending and money transfers. However, the urban-rural digital divide persists, with many rural areas lacking reliable connectivity and infrastructure,” said Mr De Jesus.

“Continued efforts in digital literacy, financial education and collaboration between banks, fintechs and government are needed to bridge gaps and ensure inclusive financial services reach remote communities. While progress has been made, further innovation is needed for truly inclusive financial digitalization across the country,” he added, especially with regard to improvements to mobile internet and telecommunications infrastructure for the country’s most remote and far-flung communities country.

Banking at a turning point

While the Philippine financial sector still faces significant challenges, such as persistently high interest rates of 6.5% to curb inflation, increased geopolitical tensions and weak growth in economies such as China, which impact global commodity prices and export-oriented industries, Mr De Jesus pointed out that the sector itself is at a turning point.

“Over the next five years, the Philippine financial sector will undergo significant evolution due to technological advancements and changing consumer behavior. Digital banking will emerge as a crucial capability for financial institutions, improving customer experience and operational efficiency. As customers increasingly demand seamless and accessible banking services, the industry will intensify its digital transformation efforts, leveraging technology to stay competitive and meet changing expectations,” he said.

Technologies will continue to disrupt and have lasting impacts. For example, generative AI can transform financial services by improving customer interactions and backend operations, personalizing customer experiences, and streamlining processes such as fraud detection and risk management in digital payments. In addition, there is a growing focus on sustainable finance, driven by regulatory requirements and increased consumer awareness. Banks are now integrating environmental, social and governance (ESG) criteria into their activities and products, aligning with global trends and creating opportunities for innovation through responsible investing and green financial products.

“The trajectory of the Philippine financial sector over the next five years will thus be determined by the embrace of digitalization, the transformative potential of AI technologies, and a commitment to sustainable finance. Banks that are adept at dealing with these shifts will not only strengthen their market position, but also make a positive contribution to economic growth and social development in the Philippines.”