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<html><body><div><p><em>Aris Dacanay is ASEAN economist at HSBC.</em></p><p>The Philippines has what it takes to become one of ASEAN's leading economic performers in the next five years. In much the same way a rocket needs a sturdy launchpad, the country has built a solid runway for takeoff by embarking on two decades of hard-earned reforms. Fueling this takeoff will be the strength of the labor force, which underpins the economy's demographic tailwinds.</p><p>This journey is not without its challenges. For example, there is a risk of artificial intelligence (AI) replacing jobs in the booming business process outsourcing (BPO) sector. But we think the Philippines can use India's diverse services exports as a blueprint for resilience in an increasingly digital, AI-driven world.</p><p>The Philippines has one of the best reform narratives in ASEAN. From broadening its tax base and raising excise taxes, to liberalizing key sectors, it has laid a solid macroeconomic foundation that can finance the long-term investments needed to lift the country's growth potential. For instance, tax revenue relative to gross domestic product has been increasing since 2012, in stark contrast to declines in other ASEAN nations. Equally, while some ASEAN states are shifting their spending from investments to consumer subsidies and welfare, the Philippines is boosting its long-term potential through infrastructure and physical capital. In fact, despite an ambitious goal of spending 5% of gross domestic product on infrastructure, we believe the Philippines will still see its public debt-to-GDP ratio decline on an annual basis.</p><p>While reforms have provided the stability needed for takeoff, the nation's favorable demographic profile -- the median age is 25 -- is the economy's fuel. There are many projections one could point to, but just as an illustration: From 2025 to 2035, the working-age population is expected to grow by as much as 15%, the fastest pace in ASEAN. And more workers mean more economic fuel.</p><p>What is less known is how the booming labor market is performing better than the demographic tailwinds it already enjoys. Since 2023, the economy has employed 3.9 million more workers, or 9% more than what the demographic trend would suggest.</p><p>This is because digitization and inclusivity have put more hands on deck. For instance, the internet has given its young and English-speaking workforce a space to generate 3.4 million digital jobs since the pandemic, compared to just 1.9 million in the nondigital space. The growing participation of women is also contributing to growth. Since the pandemic, more women have joined the labor market, leading to as many as 800,000 more jobs being created for and by women than for men.</p><p>Digitization has also led to the rise of the country's BPO industry, a sector that delivers roughly $30 billion in export revenues, making it the region's leader in developing ASEAN's "light-asset" services exports.</p><p>This presents a distinct opportunity. With world trade becoming increasingly inward looking, digitization has made services more tradable. Consequently, greenfield foreign investment in services have surpassed that of manufacturing since 2019, with the Philippines one of the beneficiaries.</p>        
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<p>But the development of AI has stoked concerns about the durability of the country's economic engines. In much the same way that robotics creates opportunities and poses challenges to low-end manufacturing, AI can either make jobs in services more productive, or replace them altogether.</p><p>With this in mind, the Philippines can look to India, an economy with similar characteristics and niche economic strengths, to find a blueprint for resilience.</p><p>India has grown beyond the BPO sector by pushing its professionals and highly skilled workers to cater to the rest of the world. For example, the services offered by global capability centers (GCCs) have seen a host of multinational corporations relocate their core and administrative functions to India. This contrasts with BPOs, where overseas companies hire a third-party provider for services on their behalf. GCCs prefer to employ local staff and train them to perform more complex tasks and services.</p><p>As a result, services exports in India are much more diverse than in the Philippines. The BPO sector in India accounts for only 7% of its light-asset services exports, versus 41% contributed by professional services. In contrast, the Philippines' BPO sector represents as much as 74% of its services, making it more exposed to AI risk.</p><p>Although integrating AI can "future proof" a workforce, pushing the economy's professionals to serve markets globally also helps. The Philippines is not short of talent, so it should only be a matter of opening up fresh opportunities for its professionals to meet the needs of overseas companies while working from home.</p><p>It took two decades for the Philippines to build the stability needed to reach for prosperity. Now it is only a matter of going that extra mile. The economy is heading in the right direction, thanks to its main driver of growth -- its people. While the Philippines has grown in size and influence, if it can build on that momentum, the country could become the second-fastest growing economy in ASEAN, behind Vietnam and the third-fastest growing in Asia.</p>
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