ASEAN
STAR AIMS FOR ECONOMIC POWERHOUSE STATUS
Philippines, the star of the ASEAN, is set to scale new heights. And if economic plans for the next few years come to fruition, it will have turned the country into an economic powerhouse by 2020.
The island nation’s economy is expanding at a faster rate than any other country in Asia except India. Gross Domestic Product (GDP) increased 7 percent in the second quarter of 2016 from a year earlier, close to India’s 7.1 percent growth. The unemployment rate dropped to a 10-year low in the third quarter of 2016. Adding to the positive news were exports numbers, as exports returned to growth in September after seventeen consecutive months of decline.
Goldman Sachs, a leading global investment banking, securities and investment management firm, included the ASEAN giant in its list of the “next eleven” economies and has projected that by the year 2050, the Philippines will be among the top 20 largest economies in the world. The $292 billion economy is forecast to grow 6.4 percent this year, the fastest pace in Southeast Asia, according to a Bloomberg survey of economists. The island nation is rated a newly industrialized nation, with an economy that is slowly transitioning from agriculture to one that is more services and manufacturing oriented.
Though the peso has seen some losses in recent months, experts say the strong fundamentals of the nation are bound to serve it well and help fuel a recovery over the coming years. The money repatriated by Filipinos working abroad remains a significant factor in ensuring the country’s progress and resilience. Remittances, which account for a third of GDP, totalled $2.13 billion in July after reaching a record $2.47 billion in December 2015.
Among the features that make the Philippines a perpetually attractive destination for Foreign Direct Investment (FDI) is its English-speaking workforce.
“In other countries, we still have to go through translations and sometimes there is a misinterpretation of what the message is,” said Roy Theodore Villafuerte, vice president, Southeast Asia of Bostik, a leader in waterproofing products and product assembly adhesives in the Philippines, and among the largest adhesive and sealant companies in the world, with headquarters in France. “In the Philippines, for our business, there was never a need to hire an expat in order to run business. The Philippines enjoys having local talent that can easily be trusted and can run the show.”
Among the nation’s competitive advantages are companies that emphasize quality and still deliver premium products in a cost-efficient manner. Welding Industries of the Philippines (WIP) is a prime example of such a feat. The company manufactures welding consumables and exports them worldwide, using original formulas from Switzerland, Germany, Belgium and France that are then improved resulting in lower prices, but without affecting quality, says Antonio C. Oppen, president of WIP.
Still others have made investing in the workforce a key priority – a strategy that further adds to the already well-rounded human capital in the Philippines.
“Upgrading the skills of our workforce is one of our biggest investments. Last year, we invested an equivalent of three months’ salary on all our employees for people development programs,” said Ronald Daniel Mascariñas, president of Bounty Agro Ventures, a poultry integrator company and a member of the Bounty Fresh Group of Companies. Bounty Agro Ventures along with its sister company Bounty Fresh Food Inc. is one of the biggest and most reliable suppliers of premium chicken products nationwide.
“We take pride that the skillset of our workforce is significantly ahead of the competition,” added Mr. Mascariñas.
Despite the upbeat forecasts and strong fundamentals, however, challenges ranging from congestion in Manila, to bureaucratic hurdles and inefficiencies, remain.
“Some local government units (LGU) process business permits quickly but most LGUS have a penchant for abusing authority creating months of red tape before we can start business,” said Mr. Mascariñas.
Others point to logistics and infrastructural deficiencies as major hurdles on the path for development in the Philippines.
“The Philippines is not an easy country for distribution. We are a very fragmented country. Logistically, it’s difficult to make a national distribution,” said Alex Janssen, Chief Operating Officer of Cosmetique Asia Corporation, a leading manufacturer and retailer of high-quality cosmetics in the country and the Asian region.
Despite strong economic growth during the last few years, one of Asia’s worst rich-poor divides has not improved and one in four Filipinos still lives on less than US$1.30 a day. Beyond the more tangible developmental challenges, many feel the nation needs to invest more in education.
“The economy and the social growth of a country are triggered by the improvement in the posi-
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tion of knowledge through sufficient education of citizenry and the documentation and dissimilation of knowledge through publishing and printing – digital or traditional,” said Dominador D. Buhain, president of Rex Group of Companies, a leading publisher in the Philippines. “In the ASEAN territory, Philippines is lagging behind other countries. Knowledge is very important as it is the key to the country’s intellectual, moral and social growth.”
A key component of the socioeconomic agenda of the current administration is to increase spending in the education sector--and rightly so. Inclusive growth fuelled, in part, by education, remains a salient aspiration for many citizens. Speaking of STEM (Science, Technology, Engineering and Mathematics) education, Mylene R. Abiva, president & CEO of Felta Multimedia Inc. noted: “They are still very male-dominated fields and I’m one of the few who has been able to make my mark and take a stand for women. We need more engineers and scientists in this field. Not because it’s genderbased but because we want girls to be out of the typical industries.”
Among key impediments to growth, especially when it comes to drawing foreign investors, is the current set of laws governing foreign investment. Foreign entities cannot own more than 40 percent equity in certain businesses, including those requiring franchises granted by congress, such as aviation and telecommunications.
“Foreign investors usually decry the 60-40 ownership of business in the country. The 1987 Constitution limits the foreign ownership of companies in the Philippines to 40 percent,” said Corazon Ballard, chairman and president of Rider Levett Bucknall (RLB), a construction cost consultancy with a global network that offers cost management, quantity surveying, project management and advisory services. RLB built Texas Instruments – a microchip group in Clark.
“The challenge is always, “why should I bring my money here if I cannot control 60% of my money?” The truth is that we’re losing a lot in the foreign investment because of this.”
And it seems the new government has taken heed.
In an effort to fire up Foreign Direct Investment (FDI), President Rodrigo Duterte’s government is aiming for constitutional change to lift restrictive foreign investment laws as part of his economic plan to propel the economy. Plans are also in place to spend more to address crumbling infrastructure and make it easier to do business overall, along with decentralization and the strategic goal of dispersing economic opportunities.
“Everybody is optimistic because of the very strong political will for reform,” said Mr. Mascariñas. “There is a high degree of optimism in the business community that the much-awaited reforms will be implemented.”
Businesses across sectors hope such a move towards attracting foreign investment would bring about much-needed benefits such as new technology and know-how, and steer them towards further growth.
“One positive would be the transfer of technology. We have had a positive experience with that because of our experience with our consultant, who designed agricultural equipment,” said Andrea Marie Dizon, vice president of Davao Beta Spring Inc., a metal works and engineering company.
Logistical and infrastructural deficiencies continue to impede performance. As a direct result of congestion in Manila, nearby areas are developing into urban centers, which in turns poses its own set of problems, especially when it comes to providing essential services. “The challenge arises because of traffic and congestion in the main metropolis. There is a trend towards urbanization and therefore, people in those newly urbanized areas will not want to go to the main metropolis anymore. The challenge for healthcare is to be able to bring health care closer to the communities,” said Dr Edgardo Cortez, president & CEO of St. Luke’s Hospital, the most modern hospital in the nation, well-known for its state-of-the-art facility.
But the hurdles also present vast possibilities for investment and growth in the nation beyond the usual corridors. “This will mean expansion and investment in the newly developed as well as developing areas,” added Mr. Cortez.
Albert Y. Pingoy, president of AYP Holdings Inc. confirms Davao is experiencing such expansion, and is potentially the logistical and agricultural hub of the country: “With open spaces, agriculture is essential. It is also closer to Indonesia, Malaysia and even Singapore than Manila.”
DEVELOPMENTS IN KEY SECTORS INFRASTRUCTURE
Billed as the ‘golden age of infrastructure’, the government has earmarked upwards of 7 trillion pesos (US $141billion) for infrastructure projects from 2017-2020. Big-ticket projects are expected to usher in an era of rapid infrastructure development under the new administration. Public spending for infrastructure will be ramped up from 2 to 3% of GDP last year, to 5.5% in Duterte’s first year in office.
Major infrastructure projects aimed at decongesting Metro Manila traffic, while also delivering regional development, are some of the headliners. Nearly $200 billion will be spent for at least nine major infrastructure projects, including the 45-kilometer long Manila-clark railway, and the 2,000-kilometer Mindanao express among others.
Many big infrastructure projects like the improvement of Clark Airport are long overdue and are expected to be tackled over the coming years. The delay in such projects contributes to the worsening traffic in major thoroughfares like EDSA. For years, Manila has suffered a congestion issue. The lack of adequate transportation infrastructure in nearby towns and cities meant that more people prefer to live in Manila. As a result, significant pressure has been placed on both Manila’s metro system as well as traffic around the city. Infrastructure development projects addressing these deficiencies are key areas of potential investment and are bound to drive economic growth, while solving critical issues at the local and regional level.
“I’m hoping that the plan to build a mass transit system will push through. We have a transit system, but it does not cover all the population. That’s why everybody is in Manila. The government needs to decongest Manila, and if we have all those railway systems, we can live anywhere,” says Mr. Ballard.
CONSTRUCTION
Construction along with the real estate sector makes up around 20% of the Filipino economy. The sector has experienced steady growth over the past few years. The industry boasts several success stories of companies like IMIC, the exclusive distributor of Bisazza in the Philippines. Bisazza is among the most revered luxury design brands and
a world leader in the production of glass mosaics for the decoration of interiors and exteriors.
IMIC was chosen the Small Medium Enterprise (SME) Company of the Year 2016 at the Asia CEO Awards. The company aims high when it looks to the future.
“In 10 years, I would like Bisazza to see IMIC as a real partner, not only as an affiliate; to be the ASEAN partner for installation and hand cut pattern production and distribution. You have to dream big, but always with integrity. If people can trust you, you can attract a lot of foreign companies to do business with you,” comments Ric Vincent Atienza, managing director of IMIC.
And the interest in global alliances isn’t a oneway road in the Philippines. International players have taken note of the opportunities on this island nation.
“Right now a couple of companies are approaching us for investment and some are logistics companies who want to get us to do the delivery for them, for instance, Maersk,” said Rodolfo Manuel, president of MEGACEM, among the leading distributors of cement that supplies quality products to high-rise residential buildings, supermalls, residential subdivisions and commercial buildings. “We’re currently in negotiations with them. Because of the booming economy, they were able to find us and talk about what they had to offer.”
MEGACEM established Megatransport, Inc. to support the growing trading business of MEGACEM. The company now has a capacity of 80 bulk carriers and also provides logistics services to other conglomerates in the cement, flour and food industry.
AGRICULTURE
Agriculture remains a key sector in the Philippines and plays a major role in its growth. It is also the country’s largest single employer, directly employing more than one-quarter of all workers in non-services industries. The sector accounts for 11%of the nation’s GDP according to the World Bank. The Philippines is the world’s largest producer of coconuts and the 8th largest rice producer globally. However, growth in the sector has not kept pace with the economy at large. “In the past several years, the maximum growth for agriculture has been 3%. Economic growth has always been ahead of agricultural growth,” said Takashi Sumi, president and CEO of Atlas Fertilizer Corporation, a fertilizer manufacturing company.
The new government plans to attract and increase FDI to boost the sector via partnerships and to make it one of the biggest exporters within the ASEAN. Agriculture is one of the priority sectors for the current administration with the stated aim of raising productivity. Some hope the push for Public-private Partnerships (PPPS) can help pro- pel the sector forward by promoting transparency.
“During the past three years, there have been a lot of unfair barters around. It is so difficult to follow through in the correct way. Transparency is important,” said Mr. Sumi.
TOURISM
The Filipino travel and tourism industry contributed a sizeable chunk to the local economy in 2015, equivalent to about 10.6%of the country’s GDP, according to the latest report by the World Travel and Tourism Council (WTTC). The industry’s total contribution is expected to rise by 6.6% this year and further increase by 5.4% by 2026, according to data from the WTTC’S Travel and Tourism Economic Impact 2016 report. By 2026, international tourist arrivals are forecast to reach 9.19 million. The tourism industry supported 1.3 million jobs in 2015, a figure that includes employment by hotels, travel agents, airlines and other passenger transportation services as well as activities of the restaurant and leisure industries directly supported by tourists.
Employment in the travel and tourism industry is expected to rise by 3.1% in 2016 and by 2.4% a year to 1.65 million jobs by 2026.
The government’s new infrastructure improvement plan, which involves hotels and airports, is bound to promote not only tourism but a related field: medical tourism.
“You can’t expect medical tourism to flourish if basic tourism is not developed because when it comes to basic tourism, these are people who want to go for leisure. They’re actually physically fit, but we can’t attract the sick patients if we don’t have the infrastructure. That’s a big challenge. Therefore we rely on the government to do all of this.” says Mr. Cortez.
BUSINESS PROCESS OUTSOURCING (BPO)
In 2008, the Philippines surpassed India as the world leader in business process outsourcing (BPO). A number of leading American BPO companies operate on the island nation. BPO is considered among the world’s fastest growing industries. The Philippines offers a competitive advantage as it boasts lower operational costs, an educated, English-speaking workforce and less expensive labor. The BPO industry is noted in the Philippines Development Plan as among the 10 high potential and priority development areas. In order to incentivize investors further, the government offers tax exemptions and simplified export and import procedures. The BPO industry is looking at adding more jobs to the Filipino economy, driven by emerging sectors, as it seeks to reach $25 billion (P1.026 trillion) in revenue this year. The industry’s call centers alone were expected to add about 225,000 new jobs this year, while the healthcare outsourcing subsector was aiming to hire 100,000 more workers in 2016. Healthcare outsourcing in the Philippines employs about 87,000 workers and has the fastest growth rate at 30%.
THE ROAD AHEAD
Economic growth will be delivered on the back of sustained private consumption, fixed investment and a likely fiscal expansion, predicts Focuseconomics. Exports are also expected to pick up, as the country gains in competitiveness and regional growth stabilizes. Focuseconomics panelists project the economy growing at 6.5% in 2016.
With the promise of inclusive development, that aims to address systemic bottlenecks, just on the horizon, many look forward to alliances with global partners like the United States. They hope the long-term appeal of the nation’s prospects and the depth of opportunities on the market will drive investors to set up shop in the Philippines.
¨US investors should look at the country as a growth strategy, not just coming to do one deal. Set up a real presence and expand over the next 20-30 years,” said Tony Segadelli, managing director of OWL Energy, one of the largest high-end power engineering consultancies in East Asia with engineering offices in Southeast and Northeast Asia. “The GDP growth is expected to continue growing at 6 to 7% for the next 10 to 15 years. Power will grow at least at that rate - maybe higher. There are going to be a lot of opportunities in the country so now is a good time to get into the market.”
Still others look to the future and ponder how the nation might brand and reposition itself on the ever-evolving global stage.
“If you want to rebrand, you have to create a different mindset,” said Alexander Wongchuking, owner of Mighty Corporation, a fully integrated tobacco company based in the Philippines. “Making a mindset means you have to outline your objectives and that’s the time you can change it.”