The Philippine peso, in addition to sustained economic growth, is crucial to the Philippines’ bid to become an upper-middle-income country (UMIC) by 2025.
This is because the World Bank uses the US dollar to calculate nominal gross national income (GNI) per capita, which determines the income classification of countries. GNI per capita measures the economic output per citizen, including both domestic and international earnings.
The local currency’s depreciation to nearly 59 against the US dollar in June 2024 from 55.37 at the end of 2023 dashed hopes of achieving UMIC status by 2025. A World Bank official even said this could only be possible by 2026.
However, the government’s announcement that the gross domestic product (GDP) expanded by 6.3 percent in the second quarter of 2024 renewed investor appetite in the local equities market, pushing the benchmark Philippine Stock Exchange index near the 7,000 level as of Aug. 22, 2024.
These net inflows in foreign portfolio investments also boosted the peso in recent weeks, closing at 56.33 against the dollar as of Aug. 22, 2024, putting the country’s UMIC bid back on track.
Expectations that the US Federal Reserve will reduce its key interest rates in September also pushed global investors to bet on Asian currencies such as the peso. This is despite the Bangko Sentral ng Pilipinas’ decision to slash its overnight borrowing rate by 25 basis points to 6.25 percent ahead of the Fed’s action.
While the local currency faced some fluctuations, it managed to maintain its overall strength against the dollar in recent weeks, reflecting the country’s robust economic fundamentals.
The Development Budget Coordination Committee (DBCC), composed of economic managers, expects the peso to trade within a range of 56 to 58 against the dollar in 2024 and stabilize at 55 to 58 in the medium term, on the back of increasing international tourism receipts, growing BPO revenues and robust overseas Filipinos remittances that will support and keep the currency stable and resilient against persisting global headwinds.
As the Philippines continues to enjoy economic growth, the peso is also expected to remain a relatively strong and reliable currency in the years to come. This foreign exchange stability will also be crucial in achieving the minimum the UMIC threshold, which is estimated at about $4,500 this year.
The World Bank reported on July 2, 2024 that the Philippines’ GNI per capita reached a record $4,230 in 2023, representing a 7.1-percent increase from the preceding year. This surpassed the 2023 target range of $4,130 to $4,203 GNI per capita set in the Philippine Development Plan 2023-2028.
“Achieving the GNI per capita target for 2023 solidifies our trajectory toward attaining UMIC status within the next two years,” said National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan.
The World Bank estimates that the Philippines would likely reach the UMIC status by 2026. “Between 2011 and 2019, economic growth increased to an average of 6.3 percent year-on-year. Growth was pro-poor, job-rich, carbon efficient and spatially balanced. Although the Philippines experienced a sharp growth contraction during the pandemic, the country has since recovered and remains among the top growth performers in the region. Although the Philippines is expected to become UMIC by 2026, its human capital indicators fall short of a typical UMIC,” the World Bank said in its Philippines human capital review.
NEDA, however, believes that attaining the UMIC status is possible by 2025. The World Bank defines UMIC economies as those with GNI per capita ranging between $4,516 and $14,005 for the fiscal year 2025. “With current data, estimates suggest that the Philippines is poised to achieve UMIC status by 2025, provided the economy sustains a robust growth rate in 2024 and 2025,” Balisacan said.
Given the latest GDP outturn of 6.3 percent in the second quarter, the economy needs to grow by at least 6.0 percent in the second half of 2024 to meet the low-end growth target of 6.0 percent for 2024.
“Meeting the low end of the target will keep the country on track to becoming an upper-middle-income country by 2025, provided that the other macroeconomic targets are also achieved. For example, the average foreign exchange rate during the period does not exceed 58 to the U.S. dollar. Otherwise, reaching the upper-middle-income status could be delayed to 2026,” Balisacan said.
Amid the evolving risks and challenges, the Philippines’ economic outlook remains promising in the near and medium term, he said.
Balisacan said the expected transition to UMIC status is an indication that the country is headed in the right direction.
The DBCC maintained the economic growth targets of 6.0 to 7.0 percent for 2024, 6.5 percent to 7.5 percent for 2025 and 6.5 percent to 8.0 percent for 2026 to 2028. It also aims to reduce the poverty rate to a single-digit level by 2028 and achieve prosperity by 2040.
“More than hitting a number, the ultimate goal is to improve our people’s lives,” said Balisacan.
