The Philippines Economic Outlook and Challenges The Philippines Economic Outlook and Challenges

Shanaka J. PeirisIMF Resident Representative to the PhilippinesNovember 2014

Shanaka J. PeirisIMF Resident Representative to the PhilippinesNovember 2014

52nd Philippines Economic Society Annual Meeting

The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

Buoyant global financial markets, economic disappointments…

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Year-to-datechange in

economic surpriseindex

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Investment growth is still soft…

Manufacturing PMI(three-month moving average; deviations from 50)

Real Gross Fixed Investment (annualized quarterlypercent change)

2012

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Sep.14

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United States

Euro area

Japan

2007 08 09 10 11 12 13 14:Q2

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Advanced economies

Emerging market economies

2012

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China

Emerging Asia excl. China

LAC

World U.S. Euro Area Japan Brazil Russia India China LIDCs

2014(October

2014)3.3 2.2 0.8 0.9 0.3 0.2 5.6 7.4 6.1

2014(April 2014) 3.6 2.8 0.8 1.4 1.8 1.3 5.4 7.5 6.3

2015(October) 3.8 3.1 1.3 0.8 1.4 0.5 6.4 7.1 6.5

2015(April 2014) 4.0 3.0 1.3 1.0 2.7 2.3 6.4 7.3 6.5

WEO Real GDP Growth Projections (percent change from a year earlier)

Source: IMF, World Economic Outlook.

The outlook is thus for a continued recovery, but the pace is weak and uneven…

The Philippines recent growth has been impressive…

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Indonesia Malaysia Phillipines Thailand (RHS)

Quarter over quarter (SAAR)Year over year

Real GDP Growth

(In percent)

Led by domestic demand, particularly private consumption and construction…

While the export ratio has fallen, albeit with signs of diversification lately.

2000 2011 2012Services 8 25 26Goods 92 76 74 Agriculture 4 6 5 Minerals 2 4 3 Manufacture 83 62 64

electronics 67 39 36 other manufactures 16 23 29

Sources: Balance of Payment Data

(share in total goods and services export)Export Structure

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60Exports

Imports

Exports and Imports as Share of GDP(In nominal terms)

Source: National Account Data

Philippines economic outlook is among the best in the region…

But the Philippines’ Growth and…

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Poverty and employment challenge is enormous and growth.

Philippines’ Growth Take-off: Can it be Sustained?

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Favorable endowments for growth take-off

Demographic dividend Large domestic market

and ASEAN economic community by 2015

Large English-speaking and literate workforce

Rapid service sector growth particularly BPOs

Agri-business, mining and tourism potential

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Macroeconomic Stability Established–A Precondition for Growth

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GDP Growth(In percent)

Inflation (In percent)

Current account (In percent of GDP)

Nonfinancial publicsector debt

(in percent of GDP, RHS) 1/

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1993-2002

2003-2012

Improvement in Economic Fundamentals

Sources: CEIC Data Company; Philippines authorities; and IMF staff calculations.1/ Nonfinancial public debt in 2001 (blue) and 2011.

Sustaining Medium-term Growth: a growth accounting approach

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Growth Capital (K)

Augmented labor (L)

Technology (A)

Social policies, labor

market regulation

Investment climate

Philippines

Potential and TFP growth has been rising in the Philippines despite weak capital accumulation…

And could be around 6-6.25 percent with the rise in TFP and solow residual as well as investment based on quarterly national accounts…

Potential Human

Growth TFP Capital Capital Labor

1998:Q2-2001:Q4 3.71 1.57 0.72 0.45 0.97

2002:Q1-2004:Q4 4.88 2.10 0.80 0.48 1.51

2005:Q1-2009:Q4 5.11 2.06 0.91 0.47 1.66

2010:Q1-2012:Q4 5.26 2.16 1.18 0.47 1.44

2013:Q1 6.20 2.56 1.37 0.47 1.79

2013:Q2 6.02 2.57 1.40 0.47 1.58

2013:Q3 6.08 2.57 1.43 0.47 1.61

2013:Q4 6.12 2.56 1.46 0.47 1.63

Source: IMF staff calculations.

Philippines: Potential Growth Decomposition

(In percent)

Consistent with level estimated by the multivariate filter to be around 6-6.5 percent.

Partly related to the rise in modern services that are increasingly tradable and sophisticated…

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China India Philippines Sri Lanka Singapore Thailand

ModernTraditional

Growth in Modern Services Exports, 2000 - 2012(in percent)

Sources: WTO, World International Trade Statistics; and IMF staff calculations.

8.6

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

China India Indonesia Malaysia Philippines Singapore Thailand

Service Exports Sophistication

Sources: Anand, Mishra, and Spatafora (2012).

while service exports will likely be critical to sustain rapid growth in the future…

Empirical Model of Productivity Growth

 Following IMF (2006), TFP growth is regressed on various factors representing initial conditions and other control variables (X) from the productivity growth literature as well as service export sophistication, industry or manufacturing export sophistication (EXPY) and trade diversification in a non-overlapping 5-year panel of 120 countries from 1991-2012.

 The “standard” panel regression used for analysis is as follows:

Service export sophistication and goods export diversification matter more than the level of trade openness per se in the post-ICT era…

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20002010 20002010 20002010 20002010 20002010 20002010 20002010 20002010 20002010

Indonesia China India Philippines Sri Lanka Singapore Thailand Malaysia Vietnam

Modern Traditional

Figure 5. Share of Modern Services Exports in Total Services Exports 1/

Sources: WTO, World International Trade Statistics; and IMF staff calculations.1/ Traditional covers travel and transportation; modern includes communications, financial, royalties and other services.

Investment rate is low—why?

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Source: WEO database. 1/ Advanced economies excluding Asia. 2/ EME/CIS stands for Emerging Europe and Commonwealth of Independent States. Both groupings follow the World Economic Outlook country classifications.

Gross Fixed Capital Formation(In percent of GDP, 2003−12 average)

A low revenue ratio has constrained public investment.

Weak Investment Climate

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InstitutionsInfrastructure

Macroeconomic environment

Health and primary education

Higher education and training

Goods market efficiencyLabor market efficiency

Financial sector development

Technolicial readiness

Market size

Business sophistication

Innovation

1

3

5

7

Philippines Average Advanced EconomiesASEAN3

Source: World Economic Forum, Global Competitiveness Report, 2013

And FDI is constrained by costs of doing business and restrictions on foreign ownership…

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Employment rate is low partly due to weak social indicators and..

Labor market rigidities and skills mismatches.

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Percentile Rank/1 Value/2

Percentile Rank Value Percentile Rank Value

Percentile Rank Value

Percentile Rank Value

Percentile Rank Value

Overall 100 4.08 25 4.79 103 4.0 62 4.35 1.0 5.8 56 4.40A. Flexibility/3 108 4.08 29 4.89 133 3.74 120 3.98 1.0 6.1 97 4.2

Cooperation in labor-employer relations/4 34.0 4.8 19.0 5.2 49.0 4.6 37.0 4.8 2.0 6.0 64.0 4.4Flexibility of wage determination/5 109.0 4.5 33.0 5.5 106.0 4.6 111.0 4.5 5.0 6.0 69.0 5.1Hiring and Firing Practices/6 117.0 3.3 26.0 4.5 39.0 4.3 31.0 4.4 3.0 5.6 81.0 3.9Redundancy Costs/7 124.0 27.4 110.0 23.9 141.0 57.8 135.0 36.0 3.0 6.0 111.0 24.6

B. Efficient use of Talent/8 82.0 4.1 32.0 4.7 56.0 4.34 31.0 4.7 4.0 5.4 41.0 4.6Pay and Productivity/9 44.0 4.2 2.0 5.2 29.0 4.4 31.0 4.4 4.0 5.2 15.0 4.7Reliance on Professional Management/10 32.0 5.0 21.0 5.4 34.0 4.9 57.0 4.4 8.0 5.1 119.0 3.6Capacity to retain talent/11 71.0 3.4 20.0 4.6 39.0 4.1 27.0 4.3 8.0 5.1 95.0 3.0Capacity to attract talent/11 86.0 3.2 22.0 4.6 28.0 4.1 32.0 4.1 2.0 6.0 69.0 3.5Women in Labor Force (ratio to men)/12 111.0 0.6 121.0 0.6 115.0 0.6 65.0 0.8 84.0 0.8 21.0 0.9

Source: Global Competitiveness Index 2013-2014 data platformNotes:1. Percentile Ranking reports the country’sposition among the 148 economies covered by the GCI 2013–2014.(1=best, 148=worst)2. Value reports the country’s score oneach of the variables that compose the GCI, with 7 being the most desirable outcome.

Labor Market EfficiencyPercentile Ranking in Selected Labor Market Efficiency Indicators

Philippines Malaysia Indonesia Thailand VietnamSingapore

The End

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