Industrial policy deemed key to elevating PHL to UMIC status

By Aubrey Rose A. Inosante, Reporter

THE Philippines needs to make public spending more transparent and assign more weight to industrialization to achieve upper middle-income country (UMIC) status, analysts said.

The road to UMIC status, a long-stated government objective, is now expected to face further delays, possibly to 2027, due to cooling economic growth, they added.

“Better transparency on public spending and strong industrial policy are the key to reaching UMIC status,” Oikonomia Advisory and Research, Inc. economist Reinielle Matt M. Erece told BusinessWorld via Viber.

A corruption scandal in infrastructure projects surfaced after heavy rains in July, which exposed flood control works that were substandard or even non-existent. It resulted in an overhaul of the Department of Public Works and Highways, whose disbursements were subjected to greater scrutiny, slowing down public spending and damaging investment confidence.

Mr. Erece also noted that the government may find it challenging to achieve UMIC status unless the gross domestic product (GDP) growth expands by at least 7%.

“Even if we reach that pace in 2026, we may only reach UMIC status by 2027,” he added, noting that this projection represented the optimistic scenario.

This will take longer than the government’s target of achieving UMIC status by 2026. The Philippines has been classified as lower middle-income since 1987.

“It’s going to be quite a challenge to do that. (Economy Secretary Arsenio M.) Balisacan already said he’d want 6 to 7% growth to have a strong chance of achieving that goal,” Ser Percival K. Peña-Reyes, director of the Ateneo Center for Economic Research and Development, said via Viber.

Finance Secretary Frederick D. Go last week said he remains optimistic the Philippines can achieve UMIC status by 2026, assuming a rebound in economic growth.

“Our strategy is to grow the economy and make sure that no one is left behind,” Mr. Go told reporters on Dec. 18.

The Philippines’ gross national income per capita stood at $4,470 in 2024, up from $4,230 a year earlier, according to the World Bank’s country income classification issued in July.

The Philippines was $26 short of the threshold of $4,496 to be reclassified as an UMIC. The upper end of the UMIC band is $13,935.

Securing up to 7% GDP growth is likely out of reach, with Mr. Balisacan conceding that the Philippines may not even hit 5.5 to 6.5% goal this year.

“If public spending continues to be tight, and more politicians continue to want to cut spending rather than improving transparency measures, GDP growth will continue to falter,” Mr. Erece said.

Analysts also lagged the peso’s recent weakness as a potential risk to UMIC status, but some said it could support exports, with remittance inflows also cushioning the currency’s depreciation.

Mr. Peña-Reyes said he sees the weak peso as a concern but noted that the central bank is intervening to stabilize the currency.

The central bank said it is intervening in the foreign exchange market to dampen volatility in the peso, thought it has no target rate against the dollar.

“We don’t always intervene. We’re kind of shy about intervening. But if we do decide to intervene, we’re more likely to do it when the market is going crazy,” Bangko Sentral ng Pilipinas governor Eli M. Remolona, Jr. said.

The peso breached the P59-to-the-dollar mark several times since November and hit a record low of P59.22 on Dec. 9.

Mr. Go has said that the peso could be one of the obstacles to the UMIC transition, as the World Bank income categories are set in dollars.

“Even if we grow in pesos, if the foreign exchange rate works against us, that’s the problem,” Mr. Go said.

Mr. Erece said the depreciation of the peso is an economic risk, but does not consider it a “major risk” in achieving UMIC.

“A depreciated peso may even be helpful in boosting export demand due to competitive prices, and OFW (Overseas Filipino Workers) remittances may also offset the falling peso,” he said.

The weak peso can make the exports more competitive, Mr. Erece said.

“Thus, a strong industrial policy is also needed to boost the economy and create more jobs. If the government is concerned about higher import costs due to the falling peso, a strong industrial policy is much more needed to create competitive domestic industries, which may even absorb some of the demand away from imports,” he said.

Foundation for Economic Freedom President Calixto V. Chikiamco said pursuing UMIC status is irrelevant, as it does not account for how income is distributed.

“The fact that a fluctuating figure like the exchange rate affects the milestone emphasizes its artificiality,” he told BusinessWorld via Viber.

Mr. Chikiamco said the UMIC transition is “nothing to celebrate and nothing to keep watching over,” as it affects the country’s eligibility for access to cheap loans or multilateral assistance.

Achieving UMIC status would mean the Philippines would have reduced access to official development assistance from development partners.