1.

MACRO ENVIRONMENTAL ANALYSIS

Economic Forces

Corporate income taxes to be reduced to 25%

According to the State of the Nation Address (SONA) conducted last July 2016, the
government plans to revise and reduce the corporate income tax from 30% to 25% 1. This is forecasted
to be implemented on June 20172. Once implemented, the company will experience a 5% savings in
tax expenditure which can be used as an additional capital to grow the company.

Oil and fuel price will continue to increase

The World Bank has forecasted that crude oil prices will increase to $55 per barrel from $53
in 2017 as a result of the Organization of the Petroleum Exporting Countries (OPEC) agreement to
reduce production3. Furthermore, the BSP’s monetary board forecasted that oil prices will range from
$40 to $60 per barrel by 2018 and $50 to $65 per barrel by 2019 4. Lastly, the Philippine government
is planning to increase the excise tax on petroleum products starting 2017, approximately PHP 4 per
liter for diesel, as part of the proposed tax policy reform program 5.

Companies that belong to the heavy construction and civil engineering industry rely heavily
in the usage of heavy equipment in its operations. The projected surge in oil and fuel prices will have
a huge impact the company’s operational expenditure.

Inflation rate targeted to remain at 3% ± 1%

The Banko Sentral ng Pilipinas (BSP) has reported that the Philippine government, through
the Development Budget Coordination Committee (DBCC), plans to keep the inflation rate target of
3% ± 1% from 2017 to 20196. A low inflation rate would ensure stability in the prices of raw
materials and services that the company spends on for its operations.

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1
Official Gazette / The 2016 State of the Nation Address, July 26, 2016
2
Philippines Daily Inquirer / Lower income tax rate seen passed by January 2017, August 25, 2016
3
The World Bank / World Bank Raises 2017 Oil Price Forecast, October 20, 2016
4
Manila Bulletin / BSP sees uptick in inflation rate next year, December 23, 2016
5
Business World Online / Fuel excise tax of P4 to P6 studied, August 5, 2016
6
Manila Bulletin / BSP sees uptick in inflation rate next year, December 23, 2016

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Steel price will continue to increase

Table 3.1 shows the price index for construction materials in the Philippines. It can be seen
that the price of reinforcing steel has a significant increase of 5.73% from 2015 to 2016. Furthermore,
The World Bank has forecasted that worldwide steel prices will increase by 11% in 2017 due to the
tightening of supply and strong demand of China 7. According to BMI Research, China’s narrowing of
supply will continue until 20208. This paper will assume that the growth rate of 11% will continue in
2018 and 2019.

Construction companies use reinforcing steel as one of the key components in the
construction of roads and highways. The projected increase in steel prices will highly affect the
companies’ operational expenses.

Table 3.1: Construction Materials Wholesale Price Index

2013 2014 2015 2016

COMMODITY GROUP
Ave Price Ave Price % Chg Ave Price % Chg Ave Price % Chg
               
2.46
SAND AND GRAVEL 202.30 211.00 4.30% 216.20 % 223.50 3.38%
-
0.20
CEMENT 190.20 197.00 3.58% 196.60 % 200.30 1.88%
0.59
REINFORCING STEEL 251.40 253.30 0.76% 254.80 % 269.40 5.73%
0.60
ASPHALT 464.00 464.00 0.00% 466.80 % 466.80 0.00%

Source: The Philippine Statistics Authority

Political Forces

Philippines government to prioritize road and infrastructure development

Last July 2016, the Philippine government reported its plans to expand, improve and
accelerate road and infrastructure development 9. On December 2016, President Rodigo Duterte signed
the 2017 General Appropriations Act (GAA) or Republic Act no. 10924 10. This marks into law the
458.6Bn DPWH budget for 2017, with a 15.5% increase from the 397.1Bn budget last 2016 11.

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7
The World Bank / Industrial Commodities Prices to Surge in 2017, January 24, 2017
8
BMI Research / Steel: China To Be Key Driver Behind Oversupply, March 2, 2016
9
Official Gazette / The 2016 State of the Nation Address, July 26, 2016

2
10
Philippines Daily Inquirer / Duterte signs P3.35-T nat’l budget for 2017, December 22, 2016
11
Department of Budget and Management / 2017 People’s Proposed Budget

On December 28, 2016, Budget Secretary Benjammin R. Diokno released a memorandum

regarding the 2018 budget proposal. In this proposal, priorities such as the accelerated infrastructure
should still be complied12. This paper will assume that the growth rate of 15.5% will continue in 2018
and 2019. These plans would mean growth for the industry and further increase both the volume and
size of the projects that Badoc Builders and Supply will be able to participate.

Expansion in scholarship programs for skilled workers in the infrastructure and housing sector

The Technical Education and Skills Development Authority (TESDA) continuous to expand
its work scholarship program for infrastructure / housing. The agency was able to provide scholarship
for 27,067 workers, 33,834 workers, and 37,217 workers for 2014, 2015, and 2016, respectively 13.
Last December 2016, the PHP 2.2Bn budget for the Training for Work Scholarship (TWSP) under
TESDA was approved14. This is the same budget allocated for 2016 and this paper will assume that
this budget will be the same for 2018 and 2019 given the government priorities in spending.

The lack of skilled workers, particularly heavy equipment operators and mechanic, has
significantly lowered the capabilities of the industry to accept and finish projects. The government,
through TESDA, continues to expand its scholarship program to train skilled workers and has
partnered with several private companies to provide training. This gives more access for the company
to hire skilled workers.

Environmental Forces

Changes in Climate Patterns

The Philippine Atmospheric, Geophysical and Astronomical Services Administration

(PAGASA) have conducted studies that indicate changes in climate patterns 15. Road construction
cannot operate during rains and typhoons. Any changes in climate patterns disrupt the project forecast
that slows, if not completely stops, operations.

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12
Manila Bulletin / Deterte Admin Begins 2018 Budget Preparations, January 4, 2017

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13
Technical Education and Skills Development Authority / TESDA Roadmap
14
Department of Budget and Management / 2017 People’s Proposed Budget
15
Philippine Atmospheric, Geophysical and Astronomical Services Administration / Climate Change
in the Philippines