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Economic Briefing for the Philippine Association of National Advertisers
24 February 2010
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Presentation flow – 11 themes for 2011
1. Economic growth is real.
2. Service oriented economy.
3. Consumption driven growth.
4. OFW remittances still coming in strong.
5. Manila centric economy but strong growth in the regions.
6. The inflation threat?
7. Alarming fiscal position.
8. Combating corruption is a must.
9. Private sector needed for infrastructure.
10. Upside in the financial markets.
11. Finally Asian decoupling?
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1. Economic growth is real
Historical Philippine economic growth 2001-2010
Source: NSCB
1.8%
4.4%
4.9%
6.4%
5.0%
5.3%
7.1%
3.7%
1.1%
7.3%
2.3%
4.2%
5.9%
6.9%
5.4% 5.4%
7.5%
6.4%
4.0%
7.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GDP Growth
GNP Growth
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1. Economic growth is real – Keeping up with our neighbors
Average annual GDP Growth 2003-2010
Source: CLSA Asia Pacific Markets
3.8%
4.4%
4.5%
4.8%
4.9%
5.1%
5.5%
6.6%
8.3%
10.5%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
Korea
Taiwan
Thailand
Hong Kong
Malaysia
Philippines
Indonesia
Singapore
India
China
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Supply side (as a % of GDP)
2. Service oriented economy
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Philippine Service Sector (by sub-sector) 2002-2010
2. Service oriented economy
Source: NSCB, CLSA Asia Pacific Markets
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2. Service oriented economy
Source: Business Process Association of the Philippines & CLSA Source: CLSA
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Key features of Asian economic growth:
Source: World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy (World Bank Policy Research Reports). Oxford University Press Diokno, B. (2008). The Philippines: Fiscal Behavior in Recent History. AC-UPSE Economic Briefing
Rapid output and productivity growth in Agriculture
Even higher growth of Manufactured Exports
Earlier and steeper declines in fertility
Growth in infrastructure supported by high savings rates
Human capital development and productivity
None of these are true for the Philippines
• Philippine economy is currently built around its Services sector driven by stable Consumption growth.
• Agriculture and Export sectors have taken a back seat.
• Population growth is relatively high at about 2% per year.
• Very low savings rate of 19% versus an average of 33% in developing Asia.
• Declining real per capita spending on education and healthcare.
2. Service oriented economy
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Demand side (as a % of GDP)
Source: NSCB
3. Consumption driven growth
1986 1996 2010Private consumption 73.5% 76.8% 79.0%Gov't consumption 7.4% 8.1% 6.8%Investments 15.3% 24.8% 18.5%Net exports 3.8% -12.1% -1.9%Statistical discrepancy 0.0% 2.5% -2.4%
TOTAL 100.0% 100.0% 100.0%
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Food , 54.3%
Tobacco, 1.7%
Clothing & Footwear,
3.0%
Fuel, Light, Water, 3.6%
Household
Furnishings, 3.0%
Household
Operations, 7.8%
Transportation/
Communication, 9.1%
M iscellaneous, 15.5%
Beverage, 1.9%
Breakdown of Personal Consumption Expenditure 2010
Source: NSCB
3. Consumption driven growth
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4. OFW remittances coming in strong
Source: Tabuga, A. (Dec 2007). How do Filipino families use the OFW remittances?. PIDS Policy Notes. Makati, Philippines.
Source: BSP
How do Filipino Families use OFW Remittances?
OFW remittances (USD Bn)
7.68.6
10.712.8
14.416.4 17.3
18.8
0
5
10
15
20
2003 2004 2005 2006 2007 2008 2009 2010
12 Source: Data from NSCB
5. Manila centric wealth but strong growth in the regions
Regional nominal per capita income 2009
USD per capita
PPP parity
Singapore 57,238
United States 47,123
Hong Kong 45,277
Australia 39,692
Japan 33,828
So. Korea 29,791
New Zealand 27,460
Saudi Arabia 23,742
Malaysia 14,603
Brazil 11,289
Metro Manila 11,222
Thailand 8,643
China 7,518
Indonesia 4,380
Philippines (Avg) 3,725
India 3,290
Vietnam 3,123
World average 10,725
Region Per capita
income (PHP)
NCR Metro Manila 246,753
X Northern Mindanao 91,453
CAR Cordillera 90,041
XI Davao Region 85,720
VII Central Visayas 75,220
VI Western Visayas 73,077
IVA CALABARZON 68,895
XII SOCCSKSARGEN 64,861
III Central Luzon 57,862
IVB MIMAROPA 55,071
IX Zamboanga Peninsula 54,532
I Ilocos 42,395
II Cagayan Valley 41,992
XIII CARAGA 41,506
VIII Eastern Visayas 39,764
V Bicol 38,022
ARMM ARMM 18,924
Philippine Average 83,261
Comparison of Per Capita Incomes (USD PPP) Based on 2010 IMF data
Authors estimates
13 Source: IMF, NSCB
5. Manila centric wealth but strong growth in the regions
Regional Personal Consumption growth 2007/08 & 2008/09
14 Source: Index Mundi
6. The inflation threat
International Food Commodity Price Index 2006-2010
World Rice prices (USD/MT) 2006-2010
World Sugar prices (US cents/Pound) 2006-2010
• International food price inflation is due to:
1. Higher demand
2. Lower yields
3. Weather
4. Crops diverted to biofuels
World Corn prices (US cents/Pound) 2006-2010
15 Source: CLSA, Index Mundi
6. The inflation threat
Weight of food on CPI basket (%)
Historical Philippine CPI inflation, World Commodity Food Index Growth and Dubai Crude Price Growth (%)
(30.0)
(20.0)
(10.0)
-
10.0
20.0
30.0
40.0
50.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Phil CPI
World Food Commodity Index
Dubai Crude
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7. Alarming fiscal position
• 2009 Budget deficit was 3.9% of GDP.
• Primarily due to low tax effort, which is now at under 13% of GDP.
• Rough estimates show that by raising tax effort to about 17% would wipe out the deficit.
• This is easier said than done.
Source: DOF
How to improve tax effort? Medalla and Jandoc (2009)
1. Updating excise taxes (i.e. sin taxes) for inflation
2. Rationalizing fiscal and tax incentives
3. Substituting “good” indirect taxes (i.e. VAT) for direct taxes
4. Restructuring BIR and BOC
Source: Medalla, F. & Jandoc, K. (2009) Reforming the National Tax and Expenditure System. AC-UPSE Economic Briefing
0.3%0.1%
-1.9%
-3.8%-4.0%-4.0%
-5.4%
-4.6%
-3.8%
-2.7%
-1.0%
-0.2%
-0.9%
-3.9%
-3.2%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(Jan-
Nov)
Philippine budget deficit as a % of GDP 1996-2010 (Jan –Nov)
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Source: Global Competitiveness Report 2010-2011: World Economic Forum & NEDA
Global Competitiveness Report 2010-2011
The most problematic factors for doing business
7. Alarming fiscal position
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8. Combating corruption is a must
Control of corruption index 1996-2008
Source: World Governance Indicators, UNCTAD, Various statistical agencies
Political stability index 1996-2008
Relative income levels 1960-2004
Foreign investment flows 1980-1996
(Taken from De Dios, E. (2010).How do Institutions constrain Philippine growth?. AC – UPSE Economic Forum.)
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Source: DPWH
9. Private sector needed for infrastructure
Four priority projects for roll-out in H1 2011:
NAIA Expressway Phase 2 Privatization of MRT 3
Privatization of LRT 1
Privatization of Laguindingan airport
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Source: DPWH
9. Private sector needed for infrastructure
Other notable projects
NLEX-SLEX link Cavite-Laguna (CALA) Expressway
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10. Upside from financial markets
PSEi and Value traded Jan 2010 to present
• Recent weakness has been felt around the region due to concern about higher inflation and consequently higher interest rates.
• Despite this weakness, the Philippines is still supported by healthy macro indicators.
• Companies have strong earnings growth projected for the year which should justify higher share prices.
• There has been a lack of visible catalysts to move the market upward.
• At current prices, the Philippines trades at approximately 12X PE, lower than its long term historical average of 15.5X.
Source: PSE
1,000
6,000
11,000
16,000
21,000
4-Jan-10 29-Mar-10 29-Jun-10 24-Sep-10 23-Dec-10
2,500
3,000
3,500
4,000
4,500Value traded (PHP Mn)
PSEI
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11. Finally Asian decoupling? (Taken from Fishwick, E. (2011).Asia de-coupled or Asia inflated. CLSA Research Note
US Non-financial businesses Liabilities /GDP (%) 1960-2010
US Households Liabilities /GDP (%) 1960-2010
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11. Finally Asian decoupling? (Taken from Fishwick, E. (2011).Asia de-coupled or Asia inflated. CLSA Research Note
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11. Finally Asian decoupling? (Taken from Fishwick, E. (2011).Asia de-coupled or Asia inflated. CLSA Research Note
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11. Finally Asian decoupling?
For the Philippines in particular
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What can we expect?
GDP growth Inflation USD-PHP
Philippine Government 7% to 8%* 3% to 5%* 42.00-45.00**
World Bank 5.0% 4.6% 45.00
ADB 4.6% 4.4%
IMF 4.5% 4.0%
Analyst consensus 4.9%
Summary of Philippine 2011 forecasts
Source: Analyst consensus from Bloomberg
* Target ** Assumption
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Thank you
