Economic booms have a significant impact on the cost of construction supplies in the Philippines, driven by increased demand, inflationary pressures, and shifts in supply chain dynamics. As the Philippine economy experiences robust expansion, these factors intertwine to shape the construction materials market.
Economic Growth and Construction Demand
In the recent past, the Philippines had done relatively well in its economic growth. In the second quarter of 2024, the GDP went up to 6.3% due to a construction boom. This is likely to continue as forecasts reveal that the construction sector will be one of the fastest-growing industries in the next few years, propelled by infrastructure projects and residential developments. As more and more construction is initiated, there is a higher demand for building materials like cement and steel, which, of course, inflates their prices.
Impact of Infrastructure Initiatives
The government’s “Build, Build, Build” program has been a significant catalyst for construction activity, revitalizing the industry and increasing the demand for building materials. As infrastructure projects resume and new developments are planned, the competition for construction supplies intensifies, resulting in higher prices. For instance, previous spikes in the construction materials wholesale price index (CMWPI) have been attributed to increased demand from large-scale infrastructure projects.
The “Build, Build, Build” program purports to bring the country’s “golden age of infrastructure”, consisting of roads, bridges, airports, and other essential infrastructures. Indeed, this ambitious project has already begun to transform the landscape with many major endeavors under construction or in the plans.
For the program, the Duterte administration has allocated a hefty budget of over 8 trillion pesos-or about $160 billion-for the period 2017-2022. The continuously increasing demand due to the said program is highly expected to keep the construction material prices high.
Residential and Commercial Development
Alongside the government’s infrastructure push, the private sector has also been a significant driver of construction activity in the country. The country’s growing middle class and rising incomes have fueled demand for residential housing, particularly in urban areas like Metro Manila. Developers have responded by launching numerous condominium projects and housing developments, further increasing the demand for construction supplies.
The commercial real estate sector is also one of the main contributors to the boom in construction. As the country continues to attract foreign investment and tourism, office spaces, shopping malls, and hotels have become very much in demand. Developers are rushing to supply this demand, thus the flurry of construction activities and a corresponding increase in the need for building materials.
Inflationary Pressures
During economic booms, inflation often rises due to increased consumer spending and heightened demand for goods and services, including construction materials. In the Philippines, inflation rates have fluctuated, with notable peaks that have affected the cost of construction supplies. For example, inflation reached a 14-year high of 8.7% in January 2024, impacting various sectors, including construction. As inflation persists, the costs of raw materials and labor also increase, further driving up the prices of construction supplies.
Interest Rates and Borrowing Costs
High inflation usually means higher interest rates, tempering construction activities. The Bangko Sentral ng Pilipinas has jacked up borrowing costs by as much as it has in recent times to keep inflation at bay, making it a bit more costly to finance a construction project. High interest rates reduce the appetite for new construction projects because developers would be extra-cautious and not as willing to leverage additional debt in a high-cost environment.
This situation could eventually slow down demand and have a depressive effect on the demand for construction materials, further complicating the dynamics of supply and demand. This factor makes the Philippines particularly vulnerable to the interest rate impact on construction activity, as a large chunk of its construction projects are heavily debt financed.
The increase in borrowing costs, therefore, will be partly passed on to consumers through higher housing and commercial building prices, thereby depressing demand for new projects and subsequently the demand for construction materials.
Supply Chain Disruptions
Economic booms further drive up construction supply costs in global supply chain disruptions. The geopolitical tension and disruption, as in this pandemic of COVID-19 virus, result in the shortage of such essential materials. Consequently, these drive up transportation costs, further delaying the most basic construction materials from arriving and their prices rocketing accordingly. With the Philippines still developing its construction sector, it remains highly vulnerable to such external shocks.
The country, thus, is very vulnerable to disrupted supply chains due to its heavy reliance on imported construction materials, particularly for specialized products. For example, whenever there are disruptions in the global supply chains, the cost of importation of such materials greatly increases and thus leads to astronomically high prices in the market. This condition is further worsened by a limited domestic production capacity of construction materials, such as steel and specialty chemicals.
The nation’s government has given support to ensure that there is domestic production of construction materials, thereby minimizing the impact that supply chain disruption brings. Initiatives like the “Made in the Philippines” campaign are advocating for the use of locally sourced materials in most of the construction projects. However, this will take some time for domestic production to increase and decrease the level of reliance on importation.
Key Takeaway
The situation regarding the relationship of economic booms and price of construction supplies in the Philippines is rather complex. While growth spurs demand, thereby pushing prices up, the effects of inflation and high interest rates temper this action by holding back construction, besides adding disruptions to the supply chain caused by global events affecting the availability and prices of construction materials.
Understanding these dynamics is important for construction industry stakeholders because they have to navigate both the challenges and opportunities provided by an economic world that is changing rapidly.
