Philippines' Midterm Election to Shape Economic Future Amid 5.4% Growth

The Philippines is gearing up for its midterm election on May 12, a critical juncture that will shape the country's economic future amidst a challenging global trade landscape. The election will determine the composition of 12 senators, over 300 congressmen, and nearly 18,000 local officials, all of whom will influence the nation's economic policies. This vote is particularly significant as the country aims to boost investment and consumption while navigating external pressures.

President Ferdinand Marcos Jr. and Vice President Sara Duterte, who are backing different candidates, face a significant test with this election. Investors are keenly watching to see if the election will result in political stability, which is crucial for sustaining economic reforms. The Philippines' economy grew by 5.4% in the first quarter of the year, slightly below the 5.7% forecast by analysts but still an improvement from the previous quarter. The government is targeting at least 6% growth for the year, following a 5.7% expansion in 2024.

The Philippines is actively working to mitigate the impact of proposed tariffs by the Trump administration, which include a 17% levy on certain goods. While this rate is lower than those proposed for other Southeast Asian countries, the Philippines sees an opportunity to gain a competitive edge if it can maintain domestic reforms. However, European investors remain cautious about long-term operational inefficiencies, urging the government to focus on reducing operational costs and improving the ease of doing business.

The country's young, English-speaking workforce is a significant asset, but challenges such as red tape, infrastructure, energy costs, and regulatory unpredictability persist. Despite enacting legislation to attract investors, including measures to cut corporate taxes and remove foreign ownership limits in sectors like renewable energy, businesses are calling for more reforms. A shaky political situation post-election could divert the government's focus from these much-needed changes.

Finance Secretary Ralph Recto recently withdrew a proposal to increase capital gains, donor, and estate taxes, citing ample tax collection in the past three months. The bill, which would have generated roughly 300 billion pesos in additional revenue over the next five years, was met with resistance. The new Congress, set to convene in July, will face a backlog of pending bills, including measures to ban raw mineral exports and reduce the stock transaction tax.

The outcome of the election is particularly critical for Duterte, as the 12 senators being elected will be among the jurors for her impeachment trial, which begins in July. Businesses, however, seem unconcerned as long as political disputes do not affect their operations. The Philippines' consumption-driven economy, powered by remittances from Filipinos working abroad, accounts for about 70% of the country's economic output, providing a certain level of protection against global risks.

Economic Planning Secretary Arsenio Balisacan emphasized that while political noise is common, the key is to ensure that it does not reverse good policy directions. Teresita Sy-Coson, whose family leads SM Investments Corp., advised focusing on business rather than political noise. The Philippines' benchmark stock index has dropped 1% in the year through May 7, trailing the MSCI Asia Pacific index's 5% gain. Local bonds have handed dollar-based investors a gain of 6.3%, while the peso is up around 4%.