The Philippine manufacturing industry is poised to grow strongly in the near-term but challenges are growing, London-based Capital Economics said.
In a report released over the weekend, the research firm noted that manufacturing was a key factor behind the country’s strong economic growth.
“Low interest rates, strong global demand and buoyant confidence levels should all help to support manufacturing growth for the next few quarters,” it said.
A number of reasons also allow for optimism about the medium-term outlook, Capital Economics added.
The first is labor costs that, despite not being the cheapest in Asia, are roughly half the level found in China and at par with those in Vietnam.
The Philippines should benefit with low-end labor-intensive manufacturing leaving China in search of cheaper places elsewhere, Capital Economics said.
“What’s more, whereas large parts of Asia are having to worry about shrinking workforces, the Philippines is expected to see a sharp rise in the number of people of working age. This should allow manufacturing employment to rise without putting too much upward pressure on wages,” it said.
A cheaper exchange rate should also help, with the research firm noting that while most Asian currencies had appreciated against the US dollar since the start of last year, the peso is one of the few emerging market currencies to have lost ground against the greenback.
In trade-weighted terms, it said the peso had lost 11 percent of its value since the start of 2017 while the real effective exchange rate had fallen by 10 percent over the same period.
Another reason for optimism is the infrastructure progress being made in the Philippines.
“Poor road, rail and port facilities have for a long time been a drag on the country’s growth prospects but the past few years have seen infrastructure spending increase sharply,” it said.
The passage of a landmark tax reform bill last year has also given the government resources to fund further improvements.
It isn’t all smooth sailing, however, given policy and other challenges.
“[I]f companies are to invest in new manufacturing capacity, they need a stable and predictable business environment,” Capital Economics said.
“While Rodrigo Duterte has not been the disaster for the economy that some feared, there are signs the new president’s war on drugs and erratic policymaking style are starting to weigh on prospects,” it added.
Another challenge is that increasing automation is removing the advantage that low labor costs give to countries such as the Philippines.
This may not result in industries “reshoring” back to developed economies but it may spell an end to the “flying geese” model where industries moved successively from Japan to Korea and Taiwan and to other places in search of cheap workers.
Manufacturers struggling to respond to rising wages may in future employ robots instead rather than seek out a new, cheaper pool of workers, it noted.
“China’s increased use of robots is a particular threat to the Philippines, raising the possibility that even as costs in China continue to rise, it will remain competitive in many lower-end sectors,” the firm continued.
The Philippines could fail to meet its full potential without a vibrant manufacturing sector, Capital Economics concluded.