After decades of being written off as the basket case of Asia, since the financial crisis the Philippines has been a rising star, enjoying rapid growth and strengthening macroeconomic fundamentals.
Before the disaster, growth was on track to reach between 7.3% and 7.5% this year, up from 6.6% in 2012.
However, analysts warn that the devastating impact and aftermath of the super typhoon that struck the central regions of the island archipelago in early November is a reality check.
The administration of president Benigno Aquino is in the midst of an ambitious six-year development plan to deliver sustainable growth. Reforms include improving government transparency and accountability, spurring infrastructure development, inclusive growth to benefit all, boosting industrial competitiveness, and strengthening the financial sector and capital mobilization.
Images of destroyed ports, roads, water and power supplies, and even emergency shelters, have shone a light on the lack of progress in improving infrastructure, while regional and central authorities feeble response has shown the goal of effective government remains some way off.
The Philippines has not only failed to achieve a meaningful increase in infrastructure spending but the overall rate of investment in the economy, which at just under 20% trails GDP growth and lags that of its neighbours. Indonesias investment rate is 33%, Thailands is 27%, Malaysias is 24%, while South Koreas stands at 29%.
Lombard Street Researchs emerging markets economist Shweta Singh blames underinvestment on the easy growth gains the Philippines has enjoyed.
One of the key sources of growth has been private consumption and one of the key drivers of private consumption growth has been remittances from the US, she says. At least in the short term, it makes one feel that: OK the economy is growing at a robust pace so why worry?
But that really is a very myopic view because you cant really sustain private consumption growth if you dont have capex spending to have ways to satisfy it. It will just lead to higher inflation, such as that were seeing in Brazil.
Singh adds: Firstly, well see a sharp pull-back in growth because of these supply-side shocks from the typhoon and then we will likely see a massive surge in growth simply because infrastructure projects start taking place and the economy tries to catch up to make up for the lost growth.
If this wasnt the case, I was really getting worried about the 7% growth rate because thats not sustainable. If that had continued for even a couple of more quarters, I would definitely believe that the economy is overheating, and if the central bank or fiscal policy did not tighten it would be in the situation Indonesia was, as in markets will force tightening, force rebalancing.
She continues: As it is, well see the output gap come down sharply and then the growth rate pick up but the output gap will still remain negative because there has been substantial damage to the supply side.
Singh says she wouldnt be surprised if year-on-year GDP growth for this quarter was negative, pulling down full-year growth below trend growth of 5.5%. Trickle-down effects mean this will likely persist into the first quarter.
Rebuilding cost is a positive because it gets growth going, but that only happens once things have stabilized, she says. By that point, youll also have to start bearing in mind possible Fed tapering, which might distort the growth trajectory a bit.
The development plan calls for an investment rate of 22% by 2016 and growth of 7% to 8%, with the aim of bringing down the countrys high unemployment and underemployment rate by creating one million jobs a year.
However, with only two-and-half years left of Aquinos administration, the viability of his ambitious strategy to double infrastructure spending to 5% to 7% of GDP by partnering with the private sector on key projects is being thrown into doubt.
Its not for lack of money. The Asian Development Bank and World Bank are set to lend the Philippines $7.3 billion over a six-year period. And the investment-grade rating the Philippines won from the three main credit rating agencies this year means access to cheap funds for big projects.
However, despite a record government budget, only 60% of the $6.7 billion earmarked for infrastructure spending this year had been disbursed as of August.
Problems and delays to public-private partnership (PPP) contracts worth $11.9 billion, ranging from upgrading rail and road networks and airports expansion, to hydro-electric, irrigation and flood management schemes, means only two out 47 PPP projects are under way.
Progress has been hampered by wrangling between the government and consortia bidding for contracts over taxes, rates of return and tariff levels.
Aquinos much-lauded anti-corruption mandate has also taken a toll. More than $2 billion-worth of projects signed by the previous administration have been cancelled or put back up for re-negotiation because costs had been inflated or for technical reasons.
Weak governance remains the main challenge holding back the economy, according to Anastasia Nesvetailova, director of the city political economy research centre at City University London.
Although its usually considered to be part of the so-called Asian developmental state the Asian miracle where the state takes a very pro-active role in planning and charting the developmental trajectory, its actually one of the poorer and least organized places.
The Philippines is a segregated economy, in the sense that the dynamics of governmental structures are separate, or delayed, from the dynamics in the financially driven economy.
She adds: So growth might be there and export industries might have benefited, but theres a tiny elite who are super-wealthy and a large number of poor people, so the social gap between the rich and the poor is vast.
The very thin concentration of wealth in a very thin layer of elite and the masses of people who are left behind creates massive fragilities of structural weaknesses. The lack of coordination and politics you see in the Philippines is a direct result of this economic system.
Nesvetailova concludes: This is an economy that relies heavily on remittances from workers abroad. The long-term financial viability of such a governance model is doubtful because its a finite source of inflows, given that most workers eventually return home.
Others take a less bearish point of view: after all, the country has achieved solid growth rates in recent years, boosted government transparency, achieved an investment-grade rating, while fiscal and monetary policies have strengthened.
The hope is the government can up its investment-to-GDP ratio to turbo-charge inclusive growth.