‘Unstable politics’ drags Philippines’ potential to succeed Vietnam as export hub—think tank

“Unstable politics” in the Philippines is getting in the way of it becoming an alternative regional export hub to Vietnam amid the threat of tariffs from US President Donald Trump, according to the think tank Capital Economics.

“Vietnam has seen a surge in exports to the US in recent years and arguably emerged as the biggest winner of Trump’s first trade war with China. However, Vietnam’s huge bilateral trade surplus with the US makes it a likely target for penal tariffs in Trump’s second term,” Capital Economics senior Asia economist Gareth Leather noted in a March 6 report.

For Capital Economics, Vietnam being on the radar of Trump’s tariffs “could create opportunities for other countries in the region to gain market share.”

“The obvious place for investors to look is Southeast Asia,” the think tank said.

In the case of the Philippines, Capital Economics said that “the fundamentals are in place for strong growth.”

However, “the country’s unstable politics and failure to make needed improvements to infrastructure and the broader business environment means it would struggle to capitalize on any opportunities,” the think tank lamented.

As for other Southeast Asian countries, Capital Economics flagged the “worrying start” of Indonesian President Prabowo Subianto last October, Thailand’s “rapidly worsening demographics and a shift towards economic populism,” and Malaysia’s relatively higher wages coupled with corruption worries there.

“The upshot is that nowhere in Southeast Asia offers the same appeal as Vietnam as a production base, and we don’t expect one clear winner to emerge,” Capital Economics said.

As such, the think tank said India and Bangladesh may emerge to become alternative production bases to Vietnam.

This was despite Capital Economics’ report last year where it highlighted the Philippines entering a demographic sweet spot, which “could provide a big boost to economic growth.”

“But this will only happen if enough new jobs can be created for the wave of young people that will enter the workforce over the coming decade,” Leather said in July last year.

Citing the latest forecasts from the United Nations’ (UN) Population Division, Leather had noted that the Philippines’ working-age population is expected to grow by 1.5 percent annually during the next decade, a rate higher than that of any other Asian country, save for Pakistan.

To fully capitalize on its demographic dividend, Leather had said the Philippines must ensure there are sufficient quality job opportunities for the growing workforce in the coming years.

For Leather, crucial to this goal will be the expansion of the manufacturing sector, which he had pointed out has historically been the primary driver of productive employment needed to absorb a rising workforce.

Unfortunately, there are “few signs of this happening” in the Philippines, as Leather had lamented that manufacturing output as a share of gross domestic product (GDP) is not only lower than the regional average, but it has also been on the decline.

“The fracturing of the global economy between the West and China presents opportunities for countries able to link their economies to shifting global supply chains. So far, the main beneficiaries of this shift have been Vietnam and Mexico. But as a low-wage economy, close to existing supply chains, and a key ally of the US, the Philippines is also well-placed to benefit,” Leather had said.

“Whether it can capitalize on this opportunity will go a long way to determining whether the Philippines can make the most of its demographic dividend,” according to Leather. — Ben Arnold de Vera