The Philippine Economy in 2014 and Prospects for 2015 and Beyond

www.pids.gov.ph

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Philippine Institute for Development StudiesSurian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Adoracion M. Navarro, OIC-Vice President PIDS Romulo Hall, 19 May 2015

Key questions

• What global and regional developments have the most significant implications for the Philippines?

• What are the key messages in the 2014 Philippine economic performance?

• What are the prospects for 2015 and beyond?

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Global and regional developments

www.pids.gov.ph

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Global economic growth, 2010-2014 (in percent)

2010 2011 2012 2013 2014

World 5.1 3.9 3.1 3.3 3.3

United States 2.4 1.8 2.8 2.2 2.4

Japan 4.5 -0.6 1.4 1.6 0.1

Euro area 2 1.4 -0.7 –0.5 0.8

China 10.4 9.3 7.7 7.8 7.4

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Source: IMF World Economic Outlook, various years

Slow global growth quantitative easing in Japan and the EU region led to an expansion of hot money, which found its way into emerging markets like the Philippines and pushed equity prices upward

Drastic oil price decline

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World Oil Prices (Brent, Dubai, West Texas Intermediate), 2008-2014(in US$ per barrel)

Source: International Monetary Fund Commodity Prices

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Mar

-08

Jun

-08

Sep

-08

De

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ar-0

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Mar

-12

Jun

-12

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-12

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2M

ar-1

3Ju

n-1

3Se

p-1

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ec-

13

Mar

-14

Jun

-14

Sep

-14

De

c-1

4

in U

S$ p

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rel

Brent Dubai West Texas Intermediate

Declining domestic prices of petroleum products

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Philippine Wholesale (Pump) Prices of Oil Products, 2008-2014

Source: Department of Energy

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Gasoline Kerosene Diesel Oil LPG

High growth in the ASEAN region

2010 2011 2012 2013 2014

Brunei Darussalam 2.6 3.4 0.9 –1.8 -1.2

Cambodia 6.0 7.1 7.3 7.5 7.0

Indonesia 6.2 6.5 6.2 5.8 5.0

Lao PDR 8.1 8.0 7.9 8.0 7.4

Malaysia 7.4 5.1 5.6 4.7 6.0

Myanmar 9.6 5.6 7.6 7.5 7.7

Philippines 7.6 3.7 6.8 7.2 6.1

Singapore 15.2 6.1 2.5 3.9 2.9

Thailand 7.4 0.6 7.1 2.9 0.7

Viet Nam 6.4 6.2 5.2 5.4 6.0

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Source: Asian Development Bank

GDP growth, 2010-2014 (in percent)

The Philippine Economy in 2014

www.pids.gov.ph

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Economic development indicators

• GDP grew in real terms by 6.1%

a continuation of the high growth in the past few years, which is deemed necessary to make a huge dent in the fight against poverty

• real GDP per capita = Php71,867

nominal GDP per capita = Php126,496

• Poverty incidence = 25.8% as of first semester 2014 (latest Annual Poverty Indicators Survey) about 25.8 million poor Filipinos

(Based on the 2012 Family Income and Expenditure Survey, poverty incidence = 25.2% roughly 25 million poor Filipinos)

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Demand-side contributions to growth

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• Primary growth drivers household consumption and net exports

• “Miscellaneous” services, which constitute 79% of total export services, contributed the most to export service growth

• Government consumption pulled down growth on the third quarter

• Additions to the capital formation have not been substantial; declines in investments in durable equipment and intellectual property products pulled down capital formation growth

Supply-side contributions to growth

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• The services sector contributed the most to GDP growth and all the subsectors under it performed well

• In the industry sector, manufacturing contributed the most to overall growth; this validates the ongoing revival of the manufacturing sector

• Growth has been slow in most agriculture subsectors, with contractions in the production of coconut and coffee

Fiscal management

Programmed Actual Difference

Revenues2,018.10 1,908.50

(109.60) -5%

Expenditures2,284.30 1,981.60

(302.70) -13%

of which:

Interest

Payments 352.65 321.20 (31.45) -9%

Other

expenditures 1,931.65 1,660.40 (271.25) -14%

Fiscal Surplus /

(Deficit) (266.20) (73.10)193.10 -73%

Fiscal Surplus /

(Deficit) as % of

GDP

0.6%

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Source: Department of Budget and Management and Bureau of Treasury

(in Php billion unless otherwise indicated)

• Fiscal deficit shrunk to 0.6% of GDP, much lower than the 2% target; could mean missed opportunities in spending for economic development

• Total revenues up from 14.9% of GDP in 2013 to 15.1% of GDP in 2014, even without new tax laws; expansion of economic activities broader tax revenue base

• Still, the Philippines has a long way to cover in catching up with its ASEAN neighbors (average revenue = 19% of GDP)

Debt management

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Source: Department of Finance

National Government Debt Stock

• Government debt declined to 45.4% of GDP in 2014, much lower than 2013 debt

• Trend shows a deepening commitment to debt reduction as a fiscal management strategy

• Combined strategy of pre-paying debts, reducing reliance on ODA, and optimizing the foreign-domestic borrowing mix given the low interest rates prevailing in financial markets

0%

10%

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50%

60%

2008 2009 2010 2011 2012 2013 2014

% o

f G

DP

Domestic External

Balance of Payments

• BOP deficit for the first time in ten years: -1% of GDP or -US$2.86 billion

• However, not alarming as it was reversed in the first few months of 2015

• Moreover, remittances, which are reckoned under the secondary income sub-account of the current account, continued to be large; averaging at around 9% of GDP, it led the formation of current account surpluses for the past years

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Inflation

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Source: Philippine Statistics Authority

• Inflation was generally within the target range of 3%-5%, except in December when inflation settled at 2.7%

• High electricity charges in the first quarter

• Weather-related production disruptions, decline in buffer stocks of rice during the second quarter and temporary rice shortages due to failed import bidding in the third quarter

• Manila port congestion induced bottlenecks in the supply chain

Price of capital

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Source: Philippine Dealing System Treasury Reference Rates

• Higher short-term interest rates; BSP raised key rates in order to counter the effects of rising inflation during Q2 to early Q3

• What is interesting: longer maturities did not follow this increasing trend excess supply of long-term capital; demand for long-term investments yet to catch up; mobilizing long-term capital leaves much to be desired, yet the economy needs more productivity-enhancing investments on infrastructure, research and development, and innovations

Decline in unemployment

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• Downward trend, Jan – Oct 2014; increased employment in the services and industry sectors

• Hit a record low of 6% in October 2014 (initial Jan 2015 data –worsened to 6.6%)

• But number of unemployed persons is still substantial = 2.6 million Filipinos

• Where jobs creation is needed the most: NCR (9.3% unemployment); Calabarzon (8.6%); Ilocos Region (8.5%); Central Luzon (8.5%)

7.5 7.3 6.5 7.5 7 6.7 6

19.2 19.2 17.9 17.5 18.2 18.3 18.7

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Apr2013

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in p

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Unemployment Rate

Underemployment Rate

Prospects for 2015 and beyond

www.pids.gov.ph

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Global and regional outlook, 2015-2016

2015 growth

(%)

World 3.5

United

States3.1

Japan 1.0

Euro area 1.5

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Source: International Monetary Fund, World Economic Outlook. April 2015

2015 growth

(%)

ASEAN

Brunei Darussalam –0.5

Cambodia 7.2

Indonesia 5.2

Lao PDR 7.3

Malaysia 4.8

Myanmar 8.3

Philippines 6.7

Singapore 3.0

Philippine economic outlook

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• 2015 GDP growth of 6.8%- PIDS’ Economic Policy Monitor 2014 and Prospects for 2015

• Risks to outlook:

decline in government revenues (BOC revenues from oil, tax exemption of workers' de minimis benefits and productivity bonuses, higher tax exemption celing on 13th month pay)

equity price shifts and capital outflows

overstretched infrastructure (tight power supply; port, airport and land transport congestion)

lower exports (slowdown in major trading partners’ economic growth, ASEAN neighbors' growing competitiveness & responsiveness to GVCs)

weather-related risks to farm output

Beyond 2015Potential to grow at sustained 7%

Policy responses:

Ensuring the reliability of power supply and transport infrastructure

Facilitating the transmission of resources from the financial to the real sector

Taking advantage of the oil price decline

price normalizing but the expected "normal" level is still relatively low

Monitoring regional and global developments

opportunities to join global value chains; EU deflation; Middle East geopolitical tensions

Taking steps to narrow down the saving-investment gap

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Taking steps to narrow down the saving-investment gap

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• Mobilize long-term capital and other resources

• Massive and continuous market research and project development activities not only for national-level but also LGU-level infrastructure and agribusinesses (note that domestic investors are more unlikely to pull out in case of equity price shifts) dynamic pipeline for the public sector, dynamic potential investment portfolio for banks and industries steadily growing readiness for investments

• Support scaling up of SMEs and innovations

0%

5%

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30%

35%

2009 2010 2011 2012 2013

% o

f G

NI

Savings Rate Investment Rate

Long-term consequences are enormous

Sustaining growth

• Raising productivity – investments in infrastructure, connectivity, and human capital

• Pursuing innovations and market expansion

Address these:

slow development of national quality infrastructure for our products and services (standards, testing, certification, metrology, branding)

lack of technology intermediaries and “angel investors”,

blind spots in policymaking due to outdated information and inadequate STI indicators

• Building climate change resilience

• Good governance and political will

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Philippine Institute for Development StudiesSuriansa mga Pag-aaralPangkaunlaranng Pilipinas

Service through policy

research

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