economic briefing for the philippine finance association econ briefing...12 source: data from nscb...

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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