Regional Focus

The Philippines – a land of potential

Published: Jul 2014

Key facts

Land Area:
300,000 km2
105,720,644 (July 2013 est)1
Philippine peso (PHP)
GDP (official exchange rate – 2013 est.):
$272.2 billion2
Exports (2013 est.):
$47.45 billion2

Known as the Pearl of the Orient Seas, the Republic of the Philippines is an archipelago, consisting of 7,000 islands, sitting to the west of Vietnam in the Pacific Ocean. Approximately 100 of these islands are inhabited, hosting a population of just over 100,000.

From 1521 the Philippines was a Spanish colony, until 1898 when the country was sold to the United States. Then, following World War II, the country was granted independence and, for a time, was regarded as the second wealthiest nation in East Asia. Subsequent political instability and economic mismanagement, however, caused the economy to stagnate and other Asian nations began to overtake.

The economy began to pick up again in the early 1990s, until the 1997 Asian financial crisis hit. Due to the conservative nature of Filipino economic policy at the time, the crisis had a lesser impact than it did on the nation’s South East Asian neighbours. In fact, following the Asian crisis the Fillipino economy has boomed, expanding at an annual rate of around 5% since 2006.

Standing out

In 2013, the GDP of the Philippines increased 7.2% – its highest increase since 2010 – at a time when regional growth was largely cooling down. As a result, many analysts referred to the country as South East Asia’s ‘rising star’. A number of factors have contributed to the economy’s growth, including an increase in exports, primarily in the electronics sector, and the country’s expanding service industry which has seen it become the world’s number one location for outsourced call centres.

Another key factor in the country’s economic growth is domestic consumption, which in 2012 accounted for 70% of the economy. This has been fuelled by remittances from the legions of overseas Filipino workers (OFW’s). In 2012 it was estimated that 11% of the population worked abroad and their remittances contributed around $225 billion, which according to Standard Chartered, constituted 8.6% of the nation’s GDP. These remittances have also brought currency stability and allowed the government to build up healthy foreign reserves, permitting the nation to navigate relatively unharmed through global financial shocks.

With increased investment and industrialisation supporting domestic demand and the flourishing services industry, the Filipino government is aiming to achieve GDP growth between 6.5% to 7.5% in 2014. Both the World Bank and the IMF forecast that the Philippines will achieve the lower end of this target, projecting slightly slower growth of 6.6% and 6.5% respectively, primarily due to the damage caused by Typhoon Haiyan in late 2013.


While the Philippines may be top of the class in South East Asia due to its economic growth, there are challenges that the country is yet to address. Unemployment is a key issue and skills shortages and a small, labour-driven manufacturing sector haven’t helped the government translate the booming economy into jobs. For example, in 2013, 7.3% of the population was unemployed while the underemployment rate stood at just under 20%. These figures have caused large parts of the population to live in poverty; 24.9% in the first half of 2013, according to the Philippine Statistics Authority.

The nation’s underdeveloped infrastructure also poses a challenge to the continued growth of the Filipino economy. In late 2013, the Philippine Institute for Development Studies claimed that the country’s infrastructure was the second poorest in the Association of Southeast Asian Nations (ASEAN). This was further emphasised in the fallout of Typhoon Haiyan, as the lack of surfaced roads, ports and power lines, made it difficult for people to receive aid. Warnings have been given by economists who suggest that the Philippines must improve its infrastructure to sustain the economic growth it has seen in the last few years.

Investment grade status

On a more positive note, a further boost was given to the Filipino economy in 2013 as Fitch, Standard and Poor’s and Moody’s all awarded the country investment-grade status. Moody’s, the last to upgrade the Philippines, reported that recent economic performance, improved fiscal management, political stability and improved governance all contributed to the upgrade.

The benefits which the upgrade may bring to the country include increased foreign investments, greater levels of tourism and lower borrowing costs. As the Philippines continues on its upward trajectory, the global research department at HSBC has predicted that if the country follows its current path, by 2050 it will rise 27 places to become the 16th largest economy in the world.

Financial sector

The financial sector of the Philippines is widely perceived to be in a stable and healthy position. This was confirmed in 2013, as the central bank of the Philippines, Bangko Sentral Ng Pilipinas (BSP), declared that it had seen a positive performance based on its KPIs. These include stronger profitability, firm liquidity positions, improved asset quality and higher capitalisation. Outside parties also recognised the strong performance of the sector, such as Moody’s, who gave the sector a positive outlook and which has thus far been maintained throughout 2014.

The performance of the financial sector is beginning to offer benefits to corporates operating in the country. “We have seen the banks develop a strong appetite for offering corporate loans in recent months,” says Robert Martinez, Assistant General Manager and CFO at Getz Brothers. “Corporates are now being wooed by financial institutions that are competing against each other to provide the best rates.” Over the past year, interest rates on corporate loans have been steadily declining for corporates in the Philippines, from around 6% to 8% twelve months ago to currently around 3%. It is primarily the local banks which are most bullish in offering the best rates. “While this is still relatively high compared to Europe and the United States, this is a marked improvement for the Philippines,” says Martinez.

The local advantage

Both local and international banks in the Philippines offer a range of services to corporates operating in the country, such as trade services and cash management products. However, as in many South East Asian countries, local banks tend to have an advantage when it comes to corporates’ domestic operations because of their branch network.

For example, Getz operates a Post Dated Cheque Warehouse with BDO, one of the largest banks in the country. “We use this bank to pay our suppliers but also for collections customers across the country,” says Roberto Velilla Jr, Assistant Financial Controller at Getz Brothers. “Thanks to the wide BDO branch network, which penetrates even the smallest municipalities, our sales team are able to collect the cheques and then deposit them into the local BDO branch.” Foreign banks sometimes struggle to offer corporates the same network and therefore their use may be somewhat limited in this regard.

Rather, corporates rely on the international banks for the provision of outward facing products and services. These include remittance collection from any offshore operations and payments to overseas suppliers. Furthermore, international banks can offer support to foreign multinationals who are establishing operations in the Philippines. However, in May 2014, the Philippines House of Representatives approved a Bill which would begin to allow foreign banks full entry into the country, owning up to 100% of the voting stock and the ability to invest this into new bank subsidiaries and opening branches. Falling in line with ASEAN regulation, the aim of the bill is to consolidate the banking sector through encouraging foreign banks to purchase weak banks and strengthen the sector. The international banks are also expected to bring new technology and resources to assist with corporate operations and growth in the country.

Exchange controls

“PHP’s convertibility has a direct impact on corporates operating in the country and certain restrictions can be an issue,” says Johnson Sia, Head of Financial Markets, ING Bank Manila. Traditionally the Philippines have stood on a very conservative base regarding the management of foreign exchange. However, in recent years the BSP has taken steps to liberalise the foreign exchange controls which tie in with their commitments to the ASEAN 2015 Economic Blueprint.

Residents are able to purchase up to $60,000 or equivalent in foreign currency daily without supporting documents. However this does not include currency for servicing trade obligations, loan repayments or investments. “Because of this, whenever we purchase a foreign currency through the banking system, even a small amount such as $2,000 to pay off an import, we have to produce several supporting documents,” says Velilla Jr. “These then have to be registered with the BSP who then either approve or reject the transaction.”

Royalty remittances are also subject to regulation from the BSP – these are required to be completed on a quarterly basis. When completing these, the BSP requires the submission of all financial statements and several other tax documents before the remittance can be completed. The BSP requires this because the transaction essentially involves the purchase of foreign exchange.


Hedging is common practice in the Philippines and there are a number of products available for corporates both onshore and offshore. “Currency hedging is available via both deliverable and non-deliverable forwards; options and other more exotic structures are also available, although these are much less liquid,” says ING’s Sia. “Deliverable, onshore forwards would normally entail underlying documentation as required by the Central Bank; while the offshore non-deliverable market offers an alternative hedging tool. However the pricing and liquidity conditions of both instruments vary according to market conditions.”

“At Holcim we hedge against our imports,” says Michelle Ann Palad, Treasury Officer at Holcim Philippines. “However, we are only able to use forwards on a percentage of our underlying trade documents, such as invoices and bills of lading. Therefore, we are only able to mitigate the risk upon this percentage, causing a loss from the inception of the trade until the time the handover is complete.” This also means that corporates in this situation cannot hedge against their projected cash flow, meaning that only part of the exposure can be hedged, creating risk.

ING’s Sia added that interest rate hedging is also available, although a commonly accepted short-term interest rate benchmark is still evolving. Most public issuances are at fixed rates, while banks could offer both fixed and floating rate for bilateral loans.

Treasury landscape

“The cash management techniques which are available to corporates operating in the Philippines are generally basic compared to neighbouring nations,” says Holcim’s Palad. For example, notional pooling is prohibited both domestically and cross-border, while cross-border cash sweeping is allowed – but not widely practised – due to the restrictions on transfer limits cross-border. This poses a challenge for multinational corporates who normally pool excess funds in other jurisdictions by swapping local currency into USD and visa versa, as they will not be able to do this.

Overdrafts are also prohibited in the Philippines and therefore corporates are unable to offset negative and positive balances. “The view of the Bureau of Internal Revenue is that if a corporate has an overdraft and also holds another account which is net positive, then you are effectively taking a loan,” says Martinez. In the Philippines, every loan transaction is covered by a promissory note which is subject to the payment of documentary stamps, so in the eyes of the Bureau of Internal Revenue by doing this the corporate is trying to avoid tax. Corporates therefore use zero-balance sweeping as an alternative to notional pooling and this is a principal liquidity management technique.

As companies in the Philippines expand, there may soon be a drive towards implementing more sophisticated tools into the treasury. “I think we will begin to see the demand for more effective treasury services grow,” says Martinez. “As we do, treasurers will have to look at more sophisticated cash management tools and technologies to provide value add and further enhance the businesses expansion and growth.”

Bank account management

In the Philippines many of the large local banks are owned by groups of companies. For example, BDO is owned by the SM Group of Companies, a large Filipino conglomerate, with interest in retail, real estate and tourism. “If a corporate has dealings with these companies it will be required to open an account with their bank,” says Martinez. Many corporates in the country therefore find themselves with a large volume of bank accounts, many of which are obsolete.

While many of these banks offer electronic banking services to corporates, there is no standardised platform and all banks have their own proprietary system. Corporates therefore have an issue with oversight and management of these accounts. “I am running out of passwords,” says Holcim’s Palad, “but more importantly the lack of a standardised platform makes it difficult to have full visibility over our cash. If we must continue this way then then it would be very beneficial if platforms could be standardised to allow for improved oversight and management of the accounts.”

Payment Systems

Currently, cash is the primary payment method in the country, especially for low value retail payments. On the corporate side, however, cheques dominate the payments landscape and they are the most popular form of cashless payment countrywide. “Currently this is acceptable for corporate needs in the country,” says Rafael J. Consing Vice President and Treasurer at ICTSI. Cheques drawn within the Greater Manila region are cleared within three days while cheques issued elsewhere take seven days to clear. “However most corporates have in place a credit facility, such as bills purchase, which allows them to obtain instant funding and not have to wait for the cheque to clear,” says Palad.

“Cheques are a safe form of payment and there is little risk exposure when dealing with large companies,” says Velilla Jr. “However there is some exposure when dealing with SMEs and we have encountered some instances of bounced cheques.” Interestingly, being responsible for a bounced cheque is a criminal offence in the Philippines, which can lead to lengthy legal procedures.

Electronic payments is an area which many corporates would like the Philippines to develop, similar to the country’s regional neighbours. While the ability to conduct electronic payments already exists in the country, the cost is too high for it to be a viable option for corporates. This pertains to the average daily balance which has to be maintained in the account – which can range from PHP 500,000 and above. While these payments are often waived for multinationals due to collateral business, it remains a burden for SMEs operating in the country.

“E-payments also pose a problem when looking to obtain official receipts from the supplier for the payment. Corporates are required to have these official receipts for VAT purposes and also as support documents when registering the payments with the Bureau of Internal Revenue,” says Palad. “It would be beneficial if the cost was reduced,” he continues. “Electronic payments would be more efficient, safer and also bring us in line with other countries in the region. However, the conservative nature of the Philippines and the fact the banks would lose a degree of profit means that it remains to be seen how long this transition will take.”

The future

On the treasury side, more work is still to be done to bring the country in line with other developing Asian nations. “While we have some improvements in the country,” says Palad, “we need to begin to streamline our operations and reduce our banking partners in order to make treasury a more effective tool for the business. More liberal regulations will also help with the development of treasury in the Philippines.” This includes further liberalisation of the PHP which would allow corporates to work with external partners more efficiently and expand their operations. If these improvements occur, Martinez sees a positive future for treasury operations in the Philippines. “As regulations liberalise and companies grow more rapidly, the focus will move ever increasingly onto treasury to support this growth.”

  1. Index Mundi
  2. CIA World Factbook

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