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2013: A Bakers Dozen as a New Start for the Philippine Economy Ronilo M.

Balbieran1 Senior Research Associate Research, Education, and Institutional Development Foundation, Inc. You would have realized at this time, as you read this article, that the world did not end last December 21, 2012 as predictions had it. We now have the inevitable predicament to face the new year with more practical and applicable predictions and forecasts relevant to our personal, professional, spiritual, and economic life. This article would try to contribute on our ability to assess the new year of 2013 as regards business and economic activities and opportunities the Philippines await. The Good News: Faster Growth, Supported with More Savings, More Resources, With Stable Prices, Led by a Determined Political Will FASTER GROWTH: We began to end the year of 2012 (and of the world) with nothing but reports of economic growth apparently exceeding the forecasts of the government as well as international institutions such as the World Bank, International Monetary Fund, and the Asian Development Bank. The economy grew by 7.1% in the third quarter of 2012, against the third quarter performance last year. This is measured through the Gross Domestic Product, a measure of total domestic production. The report was a turn-around for the deceleration of the growth from first quarter of 6.4% to 6.0%. Combined with a series of bright prospects from data and information about factors that support economic growth, there is a consensus to upgrade the forecast of the Philippine economy in 2012 and 2013. Consequently, the credit rating of the country has been raised already to an almost investment grade level.

The author would like to acknowledge the guidance, insights, and inputs of Dr. Emilio Antonio, Jr. and Dr. Victor Abola, Dr. Enrico Basilio, and Prof. Ma. Cherry Lyn Rodolfo.
1

GDP Quarterly Growth Rate (year-on-year)


10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: NSCB

SUPPORTED with More Savings and More Resources (Public and Private): Started more than a decade ago, the savings rate of the Philippines climbed up due to fast and massive inflows of dollars from the remittances of Overseas Filipino Workers (OFWs) and Filipino companies abroad, and recently, further reinforced by the dollar revenues from Business Process Outsourcing (BPOs) and Tourism. Whereas 20 years ago, the countrys savings rate barely passed the 20% of GDP, lagging behind those of the Asian neighbors which are at least 30% of GDP. But now, national savings account for almost 40% of GDP surpassing many neighbor countries already.

2012

OFW Remi ances (in $ million)


25,000

20,000

15,000

10,000

5,000

0
89 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 19 19

Source: BSP

The savings of the country is so huge the banks are forced to offer to clients and avail of the money-parking facility of the BSP called the Special Deposit Account (SDA). The SDA was meant to stabilize the potential increase in money supply by mopping-up the excess money from the economy that might push prices up.

Source: BSP

The dollar reserves of the country, on the other hand, is at its all-time high both as a value at almost $ 82 billion, and in terms of number of months of import it can cover which is about 12 months or one year, enabling the Bangko Sentral ng Pilipinas (BSP) to commit a loan of $ 1 billion to IMF as a contribution to the recovery of Europe. The amount of dollar reserves is a measure of how the country throughout the years is able to receive more dollar income than what it gives out as dollar expenses, thereby accumulating the annual surpluses from dollar transactions. Consequently, it will also be the muscle of the BSP to have control over speculation of the exchange rate, and the management of the currency towards a more competitive environment for investments and trade.

Dollar Reserves of the Philippines (in Months of Import Cover)


13 12
Number of Months of Import Cover

11 10 9 8 7 6 5 4 3 2 1 0 90 -1 91 92 93 94 95 96

As of Oct 2012 = $ 81.7 billion Months of Import Cover = 11.8 months Short-term Liabili es = negligible

Gross Int'l reserves Net Int'l Reserves

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Source: Recent data from BSP; 2000 and earlier from Presentations of Dr. Emilio Antonio, Jr.

Lastly, the National Government has been experiencing easy and cheap access to both domestic and international resources for its social and economic spending plans. Funds from domestic banks oversubscribing treasury bills and treasury bonds even at rates significantly sliding over the years. WITH DIVING INTEREST RATES: Interest rate is the price of money. With the massive growth of financial resources of both the private and public sector, supply of money exceeds demand making interest rate substantially go down. This is indeed the time to plan our personal and business investments. STABLE PRICES: The reports of further slide of interest rate brought about by expansion of peso savings and dollar reserves, together with very tempered increase in consumer prices pushed spending both in consumer items as well as private investments. DIRECTED BY POLITICAL WILL: The Aquino administration promised a good governance-led management. It took the government some time since 2010 in trying to fix deficient, if not corrupt, practices in different agencies that delayed many important and crucial projects such as airports, school buildings, trains, housing and toll roads that would have further boosted the economy. But having

adjusted in its battle against corruption and the Tuwid na Daan slogan, the government has already gained momentum in terms of spending for construction projects. It has adopted the policy of directly helping the poor by providing them significant direct allocation through the conditional cash transfers (CCT) that will ease their hunger as they try to be more productive through employment or entrepreneurship. Issues and Challenges: Much More Room for Growth HUGE SAVINGS NOT FULLY TRANSLATED TO INVESTMENTS. The Philippine economy should be growing by at least 7% since 2011 with all the resources that it has. But it has not grown relatively slower in the past two years. Since, much of the private money are in BSP (more than Php 2 trillion), around 15% of the national income are actually sleeping, and incidentally, there is also a 15% gap between 40% Savings rate and a 20% Investment rate. This is a significant opportunity cost for the economy that needs to grow faster, longer in order to have real impact on poverty alleviation. This is translated to the lack of investment loans, lack of circulation of money and income, and lack of expansion in the purchasing power of the people. This was precisely the reason why in the first State of the Nation Address (SONA) of the President, he emphasized the importance of Public-Private Partnership (PPP) Program to capitalize on the domestic resources of the private sector in pumping up the infrastructure spending that would not have been as fast and as big under the regular timeframe and budget of the National Government. The size of excess savings of the private sector is almost as big as the annual national budget of the whole government. Though government is to be praised in its effort to increase public spending, especially in infrastructure in the recent quarters, it faced substantial delays in the big ticket items such as ports, airports, highways, buildings which are all lined-up as priorities of the PPP Program. These PPP projects, when rolled out, should have been the trigger for banks to get their money out of BSP and lend to private constructions companies, which will in turn, pump prime the money to the economy.

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%


1990 1992 1994 1996

Savings and Investments as % of GDP

1998

2000

2002

2004

2006

2008

2010

2012

Source: BSP, NSCB. Notes: Computation of Savings uses GNI as the measure of Income.

TOO MUCH APPRECIATION OF THE PESO: In the last decade, the peso-dollar rate has been on a downward trend. While this topic can be a subject of never-ending debate, there are a few ideas that can already be introduced here without much discussion. One, the an appreciation is a manifestation of an healthy economy. That the economy has more access to dollar revenues that it pays for dollar expenses. However, it is not automatic on the reverse analysis that the economy will continue to grow if there is continued peso appreciation. This is because of the following: 1. Impact on the purchasing power of OFW remittances Policy bias on appreciated currency may be helpful if most of the national revenues have imported intermediate cost items, or if the imports are mostly intermediate goods. This situation is true decades before. But now, the dollar revenues of the country are boosted by OFW remittances that have no imported cost items. In short, the country receives more than $ 20 billion that is fully translated to purchasing power in the domestic economy. Thus, a Php 1appreciation translates automatically to an evaporation of the Php 20-billion purchasing power of these.

100.0%

OFW Remi ances Dollar Growth vs Peso Growth

80.0%

60.0% $ growth 40.0% Php growth

20.0%

0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-20.0%

Source of Basic Data: BSP -40.0% 2. Impact on Exporters and Manufacturers Though this topic will be discussed in another article, suffice it is to say that exporters and manufacturers are faced with global competition with perfectly competitive prices. If they do not have any control over the dollar price, their only hope of survival if for the exchange rate to be predictable and stable , otherwise their profit will be squeezed.

Exchange Rate
60

50

40

30

20

10

Source: BSP

19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12

The Better News: Facing the New Year with a Bakers Dozen There are many challenges and issues the country is facing right now. But this is not to conclude in any way that country is not doing well, nor the government is doing its job, or that the country has not been progressing. Rather, the opposite seems to be true as the third quarter economic data are released. Almost everything turned around and everybody is confident that the last quarter data will even added more hope and inspiration as we face the new year. The following are some of the reasons why we will face the new year with bonuses or bakers dozen: 1. PPP - From Projects Properly Prepared to Projects in Pipelines being Procured: The good news is that many PPP projects are already gaining momentum. Two PPP Projects were already successfully awarded: a) US$ 46M Daang Hari-SLEX Link Project, and b) US$ 381-M PPP for School Infrastructure Project Phase 1 (around 10,000 classrooms). More over, the following projects are up for bidding by end of 2012: US$ 378-M NAIA Expressway Phase 2 US$ 136-M Modernization of Philippine Orthopedic Center US$ 262-M PPP for School Infrastructure Project Phase 2 Recently published US$ 1.4-B LRT Line 1 South Extension (submission of bids by first quarter of 2013)

Meanwhile, 4 PPP projects are in the process of securing government approvals before the concerned implementing agencies will publish the invitation to bid. These are: 1) NLEX-SLEX Connector Road (Unsolicited Proposal), 2) Cavite-Laguna Expressway, 3) Vaccine Self-Sufficiency Project Phase II, and 4) C-6 Expressway and Global Link (South Section). 2. Massive Public Infrastructure Spending: The government has further increased its spending on national roads, ports and airports as well as construction and improvement of local roads to prepare for domestic and international tourism. 3. Major and crucial developments in the field of trade, transport and tourism: Senate Bill 3343 and House Bill 6022: Bills that will exempt international carriers from common carriers tax (CCT) or percentage tax and from gross Philippine billings tax (GPBT) on the principle of reciprocity. This will hopefully attract back the foreign airlines that halted their operations in the Philippines due to high costs of paying 2.5% GPBT

and 3% CCT, under the National Internal Revenue Code, which is not being charged by other nations to Philippine carriers. RORO between Philippines and Indonesia through Davao City and Manado: A Memorandum of Cooperation was signed on November 16, 2012 by the Philippine and Indonesia business leaders expressing strong desire and support for the establishment of Davao-GenSan-Bitung RO-RO route. The business leaders agreed to wage a marketing campaign in Manado, Indonesia on January 2013 to jumpstart the inaugural RO-RO service in February 2013.

4. Further Easing of Monetary Policy: The Monetary Board (MB) of the BSP cut the policy rate by 25 basis points (bps) to 3.5%. This is a second recordlow achieved in 2012 further communicating a long low-interest rate regime 5. Election Spending Lastly, money is expected to circulate and further push consumption spending together with acceleration of infrastructure spending in the first quarter of 2013. Summary With all the positive trends and development happening in the Philippines, with issues and challenges being addressed, the economy can easily achieve a 7% growth for 2013. From the production side of GDP, the growth will come from construction, utilities, transportation, communication, trade, tourism and financial services. On the expenditure side, growth will be a joint effort of the private consumption and government spending. Thus, if and when the world did not end by December 21, 2012, we can still see that the old world of shortages and slow growth will end, and we will all face a new world of surpluses and bonuses for the Philippine economy for 2013. Truly, an economic Bakers Dozen for all us working hard for a more prosperous life.

2009 I. Agriculture, Fishery and Forestry II. Industrial Sector A. Mining and Quarrying B. Manufacturing C. Construction D. Electricity, Gas, Water III. Service Sector A. Transportation, Storage and Communication B. Trade C. Financial Intermediation D. Real Estate, Renting and Business Activities E. Public Services F. Private Services Gross Domestic Product Net Primary Income Gross National Income -0.7 -1.9 16.1 -4.8 6.8 -0.9 3.4 -0.1 1.4 5.5 4.1 6.1 6.5 1.2 25.0 6.1

2010 -0.2 11.6 11.5 11.2 14.3 9.9 7.2 1.0 8.4 10.1 7.5 5.8 8.4 7.6 10.0 8.2

2011 2.7 2.3 7.0 4.7 -7.3 0.6 5.1 4.3 3.4 5.3 9.3 0.3 6.6 3.9 1.0 3.2

First Semester 3Q 2011 2012 2011 2012 6.3 2.7 17.4 6.9 -13.4 -1.1 4.7 4.2 2.7 9.1 7.4 -2.1 5.5 4.2 -0.6 3.0 0.8 4.9 -8.4 5.0 7.1 7.3 7.8 9.6 7.6 7.9 8.2 1.8 9.1 6.1 3.1 5.4 2.2 0.1 4.1 2.0 -8.8 1.7 5.2 4.6 4.5 1.4 8.7 0.7 7.8 3.2 -0.8 2.2 4.1 8.1 -2.2 5.7 24.3 2.7 7.0 9.0 7.0 8.1 7.8 4.3 5.3 7.1 4.9 6.6

Forecast 2012 2013 2.6 5.9 -4.6 5.8 15.7 5.1 7.3 9.4 7.2 8.1 8.2 3.3 6.9 6.3 4.0 6.3 2.8 7.9 1.0 7.0 10.0 6.0 7.5 8.3 7.0 9.0 7.5 4.0 7.5 7.1 6.0 6.9

Source: actual data by BSP, NSCB, Authors projections

First Semester Expenditure Item

3Q

Forecast 2012 2013

2009 2010 2011 2011 2012 2011 2012

I. Personal Consumption Expenditures II. General Government Consumption Expenditures III. Gross Domestic Capital Formation A. Fixed Capital Formation IV. Exports of Goods and Services V. Less: Imports of Goods and NonFactor Services

2.3 10.9 -8.7 -1.8 -7.8 -8.1

3.4 4.0 31.6 19.1 21.0 22.5

6.3 1.0 8.1 0.2 -4.2 0.2

5.7 -4.6 11.0 1.1 1.9 4.6

5.4 12.3 -13.2 6.0 9.5 0.7

7.4 8.9 21.8 1.0 -11.9 -1.8

6.2 12.0 4.3 8.7 6.9 8.3

6.0 12.9 -1.4 8.9 8.5 6.2

6.8 14.5 13.2 10.0 12.0 15.0

Expenditures on Gross Domestic Product

1.2

7.6

3.9

4.2

6.1

3.2

7.1

6.3

7.1

Net Primary Income Expenditures on Gross National Income

25.0

10.0

1.0

-0.6

3.1

-0.8

4.9

4.0

6.0

6.1

8.2

3.2

3.0

5.4

2.2

6.6

5.8

6.9