The grim side of Philippines' growth story

Written by Ansuya Harjani, with reporting by Connie Tan
People riding on a makeshift trolley that is pushed on the rails of the Philippine railroad in Manila.
Jay Directo | AFP | Getty Images

From "Asia's rising star" to "one of the greatest economic comeback stories" the Philippines has grabbed headlines with its robust growth performance amid a sluggish global economy.

The Philippines' gross domestic product (GDP) expanded 7.2 percent in 2013 - fueled by robust private consumption and investment - making it as the second-fastest-growing economy in the Asia-Pacific region, next to China.

Earlier this month, Standard & Poor's raised the Philippines' credit rating by one notch to BBB, its highest in history, in recognition of the reforms undertaken by President Benigno Aquino's administration that have allowed the economy to progress.

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Despite the economy's successes, there is a grim side lurking in the Philippines growth story.

It has the highest unemployment rate among members of the Association of Southeast Asian Nations (ASEAN), according to the International Labor Organization (ILO). The economy registered an unemployment rate of 7.3 percent last year - compared with 3.2 percent in Malaysia and 1.9 percent in Vietnam. Meanwhile, its underemployment rate remains elevated at 19.5 percent.

"Philippines has suffered from persistent poverty in the last couple of decades because of its inability to translate economic growth into better and more jobs, and until the country can address that fundamental challenge we are going to see these poverty rates being maintained," Stephen Groff, VP for East Asia, SEA, and the Pacific, Asian Development Bank told CNBC.

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Reflecting a lack of good jobs, the poverty rate was 25.2 percent in 2012, only a small improvement on 26.3 percent in 2009, according to the latest available figures.

Every year, more than a million Filipinos leave the country to work abroad, underscoring the lack of employment opportunities at home.

One factor behind the dismal unemployment rate is a mismatch between supply of labor and industry demand, according to the Organization for Economic Cooperation and Development (OECD). Skill shortages are especially acute in industries such as engineering and business process outsourcing roles that require technical skills.

Another key reason is the absence of a large and vibrant labor-intensive manufacturing sector. Although manufacturing grew at a brisk pace last year, it accounts for a small share of GDP and employment compared with regional peers.

Manufacturing contributes around 23 percent of the country's GDP, compared with 34 percent in neighboring Southeast Asian economies, according to Trade Undersecretary Adrian S. Cristobal, Jr. Services have been the main growth driver in the recent years, currently accounting for almost 60 percent of GDP.

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"The economy needs a more dynamic manufacturing sector to drive the jobs growth that it requires, but for that the investment climate needs to improve," said Rajiv Biswas, chief Asia economist at IHS, pointing to a reduction in government red tape and removal of infrastructure bottlenecks.

"The government needs to take much more aggressive approach to encourage investment," he added.

While the economy has outperformed its peers in terms of growth, its infrastructure lags far behind. According to an HSBC survey of 11 Asian countries, the Philippines ranks last in the quality of its infrastructure behind Vietnam and India.

The lack of infrastructure, such as rail and road networks as well as the expensive and unreliable power supply, for instance, are a nagging concern for potential investors.

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Arsenio Balisacan, Secretary of Socioeconomic Planning and Director-General of the Philippine National Economic and Development Authority (NEDA) fears the economy may hit a wall if the county's infrastructure deficit is not addressed fast enough.

"The sheer lack of quality infrastructure is the single most important deterrent to investment, because it leads to high cost of doing business," Balisacan said.

Trinh Nguyen, economist at HSBC says with infrastructure development so behind, even a little improvement can go a long way.

This year, the Philippine government is set to spend 404.3 billion pesos ($9.2 billion) or 3.1 percent of the country's GDP for various infrastructure projects such as constructing national roads and bridges, rail systems, and ports.

It aims to increase infrastructure spending to 5.1 percent of the country's GDP by 2016.