Philippines needs faster growth to reach UMIC status by ’26 — analysts

By Aubrey Rose A. Inosante, Reporter

INCREASED public expenditure and investments are needed to boost the economic growth and bring the Philippines closer to becoming an upper middle-income country (UMIC) by 2026, analysts said.

“To achieve upper middle-income status, the gross domestic product (GDP) must continuously grow by at least 6%-7%. This will both increase the country’s income and outpace population growth,” Oikonomia Advisory and Research, Inc. economist Reinielle Matt M. Erece told BusinessWorld on Feb. 8 via Viber message. 

In the 2024 Philippine Development Report, the Marcos administration expects the Philippines to reach upper middle-income status over the next two years (2025-2026) “driven by strong economic performance and sound fiscal policies.”

According to the World Bank’s latest income classification data, the Philippines remained a lower middle-income country with a gross national income (GNI) per capita of $4,320 in 2023, higher than $3,950 in 2022.

To become an upper middle-income country, the Philippines now needs to have an estimated GNI per capita of between $4,516 and $14,005.

Ateneo School of Government Dean and Economics Professor Philip Arnold P. Tuaño said the only way for the Philippines to reach the upper middle-income status is to boost economic growth.

“This will be dependent on the level of investments and consumption that we will achieve in the short term,” he told BusinessWorld.

“There is some likelihood that we will be able to achieve UMIC status even in the prospective difficult international environment that most likely will occur, but this requires steadfast macroeconomic management and prudent assessment of our fiscal resources,” he added.

The Philippine economy grew by a weaker-than-expected 5.6% in 2024, falling short of the government’s 6-6.5% target but slightly faster than 5.5% in 2023.

Economic managers are targeting 6-8% GDP growth for this year until 2028.

On the other hand, Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said the Philippines is unlikely to achieve the government’s target of achieving UMIC status in the near term “mainly because we are growing at slightly 6% for the last two years.”

Mr. Erece said global economic uncertainty such as softer demand for exports and inflation risks may weigh on Philippine growth prospects which “can make it difficult to achieve upper middle-income status quickly.”

However, Mr. Erece said that achieving upper middle-income status is still possible within the next two years “as more monetary policy easing and increased fiscal spending are seen to materialize in 2025 to boost economic activity.”

“Further, building a resilient economy through political stability, improving the ease of doing business, and accommodative economic reforms in the country can attract more investments, boost employment, and overall provide higher income for Filipinos,” he said.

Jose Enrique “Sonny” A. Africa, executive director at think tank IBON Foundation, said the Philippines will most likely become a UMIC this year or in 2026 “but the government should do so much more for the benefits from that growth to be more equitably shared.”

“The biggest barrier to this kind of more inclusive growth boost is the bias of current economic policy for supporting the profits of large foreign and domestic corporations in a few regions of the country like National Capital Region, Central Luzon and Southern Tagalog rather than the economic activity of rural producers, small enterprises and low-income households nationwide,” he said. 

In Philippine Development Report, the National Economic and Development Authority (NEDA) said it anticipates improved income levels for Filipinos in the next two years.

“(This) positions the country to attract more investments and a stronger fiscal capacity to fund development priorities such as critical infrastructure, education and social services,” NEDA said.

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

“One of the benefits we will lose once we upgrade to an upper middle-income country is access to cheap loans, a benefit for developing countries,” Mr. Erece said.

Mr. Erece said fiscal consolidation is “key to improving our self-liquidity.”

“This involves improving the country’s tax collection system, robust export sector for both goods and services and attracting investments can also provide additional capital inflow for the Philippines,” he added.

According to the 2023 ODA Portfolio Review Report, the country’s active ODA portfolio of loans and grants reached $37.29 billion in 2023.

Mr. Lanzona said the Philippines will see an increase in investments once it achieves upper middle-income status, which could be more than enough to offset any decline in ODA and concessional loans.

“But this involves more than just capital growth and infrastructure because it will require expanding opportunities and improving capacities of workers… Reaching this higher status next year will be meaningless to the majority of the population. How can we think of reaching and sustaining upper middle-income status when learning poverty is at 90%? The crucial step is institutional reform,” he said.

Mr. Africa said since ODA is used to support domestic spending “the government should also already consider revenue generation with a more progressive tax system.”

“This means more direct taxes on income of rich families and large corporations, and on billionaire wealth,” he added.

Among Association of Southeast Asian Nations (ASEAN), the Philippines, Vietnam ($4,110), Cambodia ($2,390), Lao ($2,110), and Myanmar ($1,230) are all classified as lower middle-income countries.

Meanwhile, Indonesia ($4,810), Thailand ($7,200) and Malaysia ($11,710) are classified as upper middle-income countries. Brunei ($34,480) and Singapore ($70,590) are classified as high-income countries.

“But even if (the Philippines) did reach UMIC, this will be just in name since its position can be so shaky that it may fall back into lower middle-income class especially since the population is still growing and debilitating effects of climate change have not been resolved,” Mr. Lanzona said.