2013 and beyond: Renaissance for growth. Can it continue?

(Published in the ECCP Business Review, 2012)

THE YEAR 2013 will be a happy new year. And this doesn’t refer to the traditional holiday greeting.

Most major metrics point to an improving economy in 2013 buoyed by multi-billion peso election spending and anchored on strong economic fundamentals that made the Philippines Southeast Asia's leading growth economy in 2012.

The long-term outlook until 2016 -- which, coincidentally marks the end of President Benigno Simeon Aquino's six-year term -- is again optimistic. Among the reasons: the long-sought dissipation of the Eurozone debt crisis, which is at last easing, and a Philippine upgrade to investment status by some or all three of the international ratings agencies.

The European Union is the Philippines largest single export destination. It currently accounts for 13% of total Philippine exports and 17% of overseas Filipino remittances. Exports constitute about two-fifths of the Philippines’ consumption-driven economy.

The investment upgrade, while more of a boost to government morale, is nonetheless seen as validating the success of President Aquino's economic platform founded on boosting transparency, leveling the business playing field and restoring trust in government.

It should somewhat help remedy the Philippines' nagging inability to secure more foreign direct investments (FDIs) because of poor infrastructure and inconsistent investment policies.

“We have to address policy inconsistencies. There are so many inconsistencies, especially in mining, utilities and infrastructure," said Victor Abola, senior economist at the University of Asia and the Pacific.

The Philippine share of FDIs going into ASEAN in the first-half of 2012 was among the smallest in the region, said the UN Conference on Trade and Development.

GDP growth uptrend

Both the government's economic managers and foreign experts, however, agree that Philippine gross domestic product (GDP) growth in 2013 will exceed 5%. This growth could expand to 8.5% by 2016. Socioeconomic Planning Secretary Arsenio Balisacan said the country will most likely grow from 6% to 7% in 2012.

"We are already at 6.5% (in the third quarter), and the fourth quarter is always good for us because of the holiday spending. We kept growth and fiscal targets for 2012 to 2014.

"For 2013 onwards, we want to stay conservative. We recognize that there are still uncertainties external to the country."

The government targets 6% to 7% growth in 2013; 6.5% to 7.5% in 2014; 7% to 8% in 2015 and 7.5% to 8.5% in 2016.

It also hopes to keep the fiscal deficit capped at 2.6% of GDP in 2012 and 2% in 2013 and 2014.

The Philippine economy grew 7.1% in the third quarter, the fastest pace since 2010. It was a result that surprised even the government since this quarter is historically always the slowest in output.

This “unprecedented growth,” said the government, was better than Vietnam’s 4.7%; Thailand’s 3%; Indonesia’s 6.2% and Malaysia’s 5.2%.

The domestic market driven growth was led by construction (up 24.3% year-on-year, mainly on the condominium boom) and manufacturing (up 5.7% year-on-year). The government claims the spike in these sectors led to more jobs.

The services sector, which includes the robust IT-BPO industry, will again be a leading growth driver from 2013 onwards. Economists, however, warn that the Philippines must develop its own industries for economic growth to reach 7% to 8%.

The Philippines must also create more than one million jobs to sustain growth at this high level, but this task might well prove a serious challenge considering current realities and the paucity of FDIs.

High unemployment continues to plague the Philippines despite rising growth. The official Philippine unemployment rate of 7% in the third quarter of 2012 was the highest in ASEAN. Only Myanmar and Indonesia had unemployment rates above 4%.

Underemployment in the Philippines remains stubbornly high, estimated at almost 25%. These numbers emphasize the need for job creation and highlight the reason why 10% of Filipinos are working abroad.

More muscle will be added to the economy by government plans to increase infrastructure spending to a record level. Government also plans to invest P640 billion in roads and airports to prod growth to a high 7% in 2013 and beyond.

Lower inflation but higher prices

Inflation did not put a brake on growth in 2012 and is expected to reprise this role in 2013. It slowed to 2.8% in November 2012 year-on-year on cheaper food and gasoline prices. Headline inflation in 2011 was 4.8%.

Full year 2012 headline inflation is placed at 3.2%. But this was before the P11.7 billion damage to agriculture in Mindanao inflicted by Typhoon Pablo in early December.

The November headline inflation, however, is below government expectations of 3% to 5% from 2012 to 2014. Core inflation in November fell to 3.4% from 3.6% in October and 4.5% year-on-year.

The government cut its inflation forecast for 2013 to 3.1% from an earlier 3.9% during the last meeting of for the year of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP). This lower inflation rate for 2013 took into account a rise in wages and salaries; an upcoming fare increase for the MRT and LRT intercity rail systems; higher jeepney fares and more expensive rice prices.

Record stock market in the making

The Philippine stock market is already reflecting investor exuberance at the Philippines’ strong fundamentals and the movement of “hot” short-term money moving to emerging markets. It closed at a new all-time high of 5,763.64 on December 6, mostly due to lower inflation, said analysts.

The main index of the Philippine Stock Exchange, Inc. and its sub-indices reported gains, especially those that were consumer driven like banks and property. PSEi or the Philippine Stock Exchange Composite Index ended a seven-day rally on December 5 after peaking at 5,706.28 on December 4 thereby breaching the 5,700 mark for the first time.

No new taxes in 2013

President Aquino’s pledge not to raise taxes in 2013 is another cause for business optimism. Instead of new taxes, the government will raise revenues through more efficient tax collections and two reform bills: the “sin tax” and the fiscal incentives bill.

The sin tax bill, which passed Congress on December 11, increases the excise or specific taxes on "sin" products such as tobacco and alcohol. It could add some P34 billion to government revenues in 2013 and P184 billion in total revenues until 2016.

The fiscal incentives bill seeks to rationalize and simplify the grant and administration of fiscal and non-fiscal incentives to promote foreign and domestic investments. The House of Representatives and the Senate each have their own version of the bill that has to be reconciled for the bill to pass into law. It is the aim of the Administration to create more transparency and accountability in granting incentives in future.

The Joint Foreign Chambers of the Philippines, of which the European Chamber of Commerce of the Philippines (ECCP) is a member, commented that removing the income tax holidays might negatively impact Philippine competitiveness as an investment destination within the Asia-Pacific.

Peso to stay muscular

The peso’s strength (about P41.00 to US$1.00 in mid-December) has again been both pleasant and alarming. The peso gained some 7% in 2012, the best performer after the Korean won among Asia’s 11 most-widely traded currencies. The peso’s exchange rate in December 2011 averaged P43.64 to a dollar.

Exporters are worried. To calm their fears, the government has promised to remain vigilant against the continuing rise of the peso. Further strengthening will threaten to erode Philippine export earnings and the purchasing power of OFW remittances, and lead to a surge in imports and hot money. The government shunned a further interest rate cut in December as a means of weakening the peso.

The consensus is for a strong peso in 2013 and 2014. The ING Group sees the peso staying strong against the dollar in the next two years, and to trade near the P40.00 to US$1.00 level. The main concern among policymakers is the peso falling below the critical P40.00 to US$1.00 barrier, an event that could conceivably occur in the next two years.

Interest rates to rise in 2013

A decision by the BSP on December 13 to keep its benchmark interest rate unchanged at 3.5% was a clear signal the Philippine economy is now racing along on a high gear that makes monetary intervention unnecessary at this point.

Deputy Governor Diwa Guinigundo said the Philippine economy demonstrated resiliency in the first three quarters.

“There’s very little need for assistance from monetary policy.”

The BSP decision meant the economy had withstood the global slowdown better than most and that inflation, which could have hammered growth, is being kept in check. BSP cut borrowing costs by a total 100 basis points this year.

Interest rates, however, are widely expected to rise in 2013 to head-off inflationary pressure. Analysts see the BSP raising interest rates by 25 basis points in the first quarter of 2013 and by another 25 basis points in the second quarter.

The BSP cut interest rates by a quarter percentage point in October  2012 to record lows. The rate paid by BSP to lenders for overnight deposits now stands at 3.5% while the rate borrowers pay for overnight credit from BSP fell to 5.5%.

It was the central bank's fourth rate cut in 2012 and was meant to encourage investment and consumption to guard against risks associated with weaker overseas demand.

Record remittances—again

Where will the economy be without the pick-me-up from overseas Filipino worker (OFW) remittances?  The answer becomes apparent when one considers remittances still account for 10% of GDP, driving the domestic market and GDP growth.

Remittances are expected to hit a record US$21.2 billion in 2012 and rise again to a new record of US$22.2 billion in 2013. The strong peso, however, is the greatest threat to these growth assumptions.

Close to 80% of remittances through banks come from the United States, Canada, Saudi Arabia, Japan, the United Kingdom, the United Arab Emirates and Singapore. The Philippines is the world’s third-largest recipient of remittances behind India and China.

The government, however, has noticed a decrease in the economy's dependence on remittances since 2011. The National Economic and Development Authority (NEDA) observed that the country’s Net Primary Income from Abroad (NFIA) has been falling and that this can be seen in the Gross National Income (GNI). NFIA includes remittances and is a component of GNI.

NEDA said NFIA grew by only 1% in 2011 while GDP growth came to 3.9%. Government data showed GDP growing at 7.6% in 2010 while NFIA grew 10%.

Mobile remittances, the next big thing in remittances, has not gained traction as a cost-cutting tool since governments remain uncertain as to how to regulate remittances using mobile phones.

Exports: key growth engine to recover

Exports traditionally contribute two-fifths of GDP and undoubtedly remain key to attaining the envisaged high GDP growth.

Electronic products are the Philippines leading export while the inputs used to make these products are the largest import items. These commodity groups will dominate trade in 2013, and will be among the first to surge with a recovery in its main markets, the USA and Europe.

Conversely, weak exports have a profoundly negative effect on growth.  Weak exports were the major reason for the GDP growth plunge in 2011. The government estimates that the export plunge cut the Philippines’ potential GDP growth by 2.2 percentage points.

Sturdy investor confidence

Florencio Abad, Secretary of the Department of Budget and Management, said high growth will also create investor confidence in the economy.

“We are, in other words, creating an environment that’s ripe for both local and foreign investments and stable enough to keep our fiscal performance at a reasonable high,” he said.

“We are optimistic that our fourth-quarter growth will remain as energetic. Public consumption will most definitely stay robust, fueled by high consumption levels during the holidays, continuing investments in public and private infrastructure, and the kick-start of election-related spending this Christmas season.”

Moody’s Investors Service raised the Philippines’ credit rating to one step below investment grade in October leading to investment pledges from European and other multinational firms.

Strong business optimism

ECCP President Michael Raeuber noted the prevailing business optimism among European companies doing business in the Philippines.

"We have to credit President Aquino and his team for the reforms, especially the emphasis on ethical government and integrity that have helped restore business confidence and started the process towards  the level playing field," Raeuber said.

Raeuber noted that President Aquino is a staunch supporter of the “Integrity Initiative,” a two-year old campaign co-founded by ECCP that has become the business sector’s champion in the fight against corruption in government and the private sector.

President Aquino noted that the Integrity Initiative has played a role in the Philippines’ economic recovery by its untiring advocacy to create a level business playing field. He revealed the government is directing the gains from Integrity into projects and programs that will make the Philippines more competitive.

“We have been channeling the budget into investments in our people, education, health, poverty alleviation and infrastructure because we recognize that sustaining our momentum requires a citizenry that can compete in the world arena,” he said.

“At the bottom line of our strategy is ensuring a level playing field, one that is stable, rules-based and whose outcomes are predictable,” the President said.

Election spending boost

In a mid-year estimate, the government’s Development Budget Coordination Committee (DBCC) said the growth drivers for 2013 will be strong domestic demand; more government infrastructure spending that will likely add P180 billion to the deficit; a moderate peso depreciation that will continue to spur spending by OFWs; a 2.5% growth in agriculture and a 25 basis point policy rate cut by the BSP that will bring overnight lending and borrowing rates to record lows.

Hindsight apparently confirms the soundness of most of these premises. The growth estimate for agriculture has now become suspect in light of P11.7 billion damage inflicted on Mindanao’s agriculture by powerful Typhoon Pablo (Bopha) during the first week of December.

The Eurozone and the USA are the Philippines’ key export markets and major sources of FDIs. This is the reason the Eurozone crisis and the halting economic recovery of the USA could restrict the Philippines’ growth to the higher levels dreamt of by government.

In the short-term, however, the key critical factor for Philippine growth in 2013 will be the general elections scheduled for May 13.

Over 18,000 officials, mostly at the local level, will be elected in this mid-term election. The scale of these elections is massive. Up for election are 12 senators, 229 district members of the House of Representatives, 80 provincial governors, 138 city mayors and 1,496 municipal mayors.

It is these elected officials at the provincial, town and city levels that will, for good or ill, exert an excessive influence on who succeeds President Aquino in 2016.

The aphorism that all Philippine elections are local elections--including that for the presidency--will again be invariably proven during the presidential election in 2016. Hence, the importance to President Aquino that the local candidates of his Liberal Party and its allies do well or dominate the May 2013 local elections.

Stacking the deck is the name of this political game. The opposition realizes this full well, too.

And at this juncture, only President Aquino's chosen successor can be counted on to continue his far-reaching reforms that have been largely responsible for this renaissance in Philippine economic growth and integrity. Given this situation and the uncertainties regarding the succession in 2016, it is essential that the reforms of the Aquino administration be institutionalized before the team leaves office.

Massive election spending in the 2007 and 2010 elections (the latter a presidential one) contributed to the high economic growth rates in those years and a spike in consumer spending. Election spending in 2013 will almost certainly boost growth and will most probably drive it over 7%. The economy last peaked in 2010, an election year.

The Philippines’ three highest GDP growth rates in the past decade took place in 2004, 2007 and 2010, all of which were election years. And except for 2009, the next highest growth rates were the years before election years, or in 2003 and 2006.

Secretary Abad said there might be some election spending as early as the end of this year. This, plus consumer spending during the Christmas holiday, usually boosts GDP growth, he said. Total consumption traditionally accounts for some 70% of GDP.

"Christmas is the time where Christmas and campaigning mix . . . The rush for spending for Christmas and preparations for the elections will further boost the economy," he said.

Abad noted that the 7.3% GDP growth in 2010—an election year—was the highest in 34 years.

"I don't know to what extent (election spending will boost 2013 economy), but you saw 2010.”

International financial institutions were also positive about Philippine growth in 2012. The World Bank upgraded its growth forecast to 5% from 4.8% after the Asian Development Bank increased its growth estimate to 5.5% from 4.8%.

“The Philippine economy continues to show strength despite global and regional economic slowdown,” the ADB said.

ADB cited the rise in investments by local firms, robust household consumption, and increase in government spending as factors behind the latest growth forecast.

ADB said the sources of growth are investments by local firms, robust household consumption, and an increase in government spending. It expects the economy to grow by 5% in 2013.

Metropolitan Bank and Trust Company, the second largest Philippine bank, raised its GDP growth forecast to 6.6% from 5.5% due to the robust GDP expansion in the first nine months. It said household consumption, which accounts for two-thirds of GDP, will drive growth. More remittances, a rise in government spending and benign inflation will also contribute to this growth.

Jollibee Foods Corporation, the country's largest fastfood firm, expects record sales and profit in 2012 due, in part, to early election spending later in the year.

CEO Tony Tan Caktiong believes spending for the 2013 mid-term elections will boost local sales that constitute 80% of the company's system-wide sales.

"Because of the campaign there are a lot of funds going into the society so I think that's basically the reason that boosts consumption.”

High unemployment to persist

That Philippines’ rosy economic outlook, however, has apparently had no effect on reducing what is Southeast Asia’s highest unemployment rate. The 7.1% GDP growth, when set against the unemployment rate of 7% in the same third quarter, reveals that growth’s benefits are not “trickling down” to consumers, but are instead being reinvested in non-productive financial instruments that boost personal income.

By comparison, Vietnam’s unemployment rate stood at 2%; Thailand’s at 0.9%; Indonesia’s at 6.5% and Malaysia’s at 3%. These countries have also had much higher levels of foreign direct investments that create jobs.

To its credit, the government admitted that trickle down growth is more easily felt by those in the business sector. It said high growth has instead allowed the government to spend more for the people, enabling more citizens to “feel” the benefits of growth through its “social protection strategy.”

“We want to make sure that this improvement in the economy won’t benefit only those who invest in the stock exchange. That’s why we call it inclusive growth,” said Presidential spokesperson Edwin Lacierda.

The Asian Development Bank has praised the government’s social protection strategy, saying the latter’s “Conditional Cash Transfer Program” to uproot extreme poverty costs less than 0.5% of GDP but helps 15 million people in a population of 90 million.

Far too many will remain poor

Growth has also not made a notable dent in reducing the ranks of the poor, said the ADB. 

“Despite growth, poverty incidence in the Philippines rose from 2003 to 2009,” said Neeraj Jain, ADB country director for the Philippines. “That is a cause for concern.”

The Philippines defines poor as anyone earning less than P16,841 a year. This comes to about P46.00 or US$1.00 per day, which is the generally accepted definition of poverty worldwide. About 27% of Filipinos fit this bill.

Jain said the Philippines must implement policies that bring investments to sectors that can provide jobs for the poor, especially those without a college education.

There has to be more focus on ‘inclusive growth’; the private sector needs to get involved in education; the first steps will be made in the K+12 programs. ECCP would like to see more emphasis on dual education/apprenticeship programs.

In 2015, the government intends to reduce poverty incidence to 16.6% or half the 33.1% poverty rate in 1991. The high growth in 2012; the expected growth until 2016 and relatively benign inflation make the government confident of achieving this goal.