Heading toward an economic miracle

CONTINUING with what I wrote about last time, economists at the University of Asia and the Pacific (UA&P) in their mid-year business-economic briefing find the present macro fundamentals of the country very promising.

The country is becoming one of the region’s fastest-growing economies which can, very well, make the Philippines join the ranks of strong nations.

To recap, the country has robust domestic demand that is driven by higher consumer spending arising from the positive effect on the peso’s depreciation against the dollar—largely resulting from overseas Filipino worker (OFW) remittances and exporters’ revenues—higher capital spending on durable goods, and government spending focused on infrastructure and reconstruction.

The country has also a low interest rate regime owing to, among others, the significant improvement in the number of households able to set aside money as savings. East Asian countries’ savings rates in 1990 ranged between 32.3 to 44.0 percent of GDP while the Philippines was only at 18.7 percent. This rose to 28.6 percent in 2000 and climbed to within the average savings rate of East Asian countries in 2005, following the rise in the number of OFWs.

Since 2012, the number of households able to set aside money and deposit them as savings has hovered at 33 percent of GDP.

The Philippines is slowly gaining strategic significance as a manufacturing hub. Due to this, it is experiencing increased activity in the local automotive manufacturing industry led by Japanese and Korean assemblers, bringing about a noticeable resurgence, too, in suppliers’ network activity observed to stimulate productive activities in industries like textiles, iron and steel, plastics, electrical wiring, petrochemicals and aluminum, among others.

The Philippines also now has a stronger external position. The national government’s debt ratio has gone down substantially. In 2003, it fell to 49 percent. This is expected to go down further to 44 percent in 2016 despite infrastructure spending rising to 3 percent of GDP in 2014 and 5 percent of GDP in 2016.

It is also observed that the government’s share of external debt to GDP in 2013 has gone down to 22 percent as compared to 99 percent in 1985.

International reserves have, likewise, dramatically climbed since 2007, abetted by the Business Pro- cess Outsourcing (BPO) sector, which is growing—and expected to continue to grow—at the compound annual growth rate (CAGR) of 28 percent.

The Philippines, however, has only an investment rate equivalent to 20 percent of GDP. To sustain rapid growth, this has to increase to 25 percent.

More observations

Notwithstanding external headwinds, the Philippines now has a healthy external position. The country’s current account balance is in surplus and its financial and capital account in the black.

Making an important contribution is the state of Philippine export. It has diversified and expanded in the value chain. Electronic merchandise which traditionally accounted for 70 percent of total exports is now only 40 percent.

With this strong external position, too, the country has been able to export a portion of its foreign-currency savings to help less developed economies. In the last few years, it has transformed into a net creditor country from a net borrower in many decades past.

Another plus for the Philippines is its expected entry to the “demographic window” in 2015. This is “the time when the proportion of population aged 15 years old and younger falls below 30 percent and when the proportion of population aged 65 years old and above drops to less than 15 percent. This will last until 2050.

According to Bangko Sentral ng Pilipinas (BSP), the Philippines will have reached its demographic “sweet spot” by then. Filipinos will have increased purchasing power and capacity “to further drive consumption, investments and a faster economy.”

As explained in another review, this period will attract businesses as labor supply and income-earning consumers are abundant and the economy is productive.

This is why Hong Kong, Singapore, South Korea, China and Thailand are now in their advanced economic status. They experienced an average growth rate of 7.3 percent for 10 years following their entry into this window. This is now seen to happen in Indonesia, Malaysia and India since they entered the window recently.

An important aspect in this entry through the demographic window is the improvement in quality and quantity of human capital. In this connection, the government has placed a spending program directed on education and skills training, in addition to its program of granting Conditional Cash Transfers (CCT) to the poor.

Another key contributor to the positive growth prospects of the Philippine economy is its fiscal space. There is room in the government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy.

Bottom line spin

There are internal threats to further growth. One is the truck ban in Manila. It has caused the accumulation of cargo ships in Manila Bay, hurting exporters and local producers. It has also resulted in higher freight costs, now greatly felt in food prices.

The cost of power and supply shortages is another big threat. It will figure in critically in 2016 to 2017 following current developments.

Third is the state of the property sector. There is an observed high end oversupply. Banks are reportedly starting to feel past due loans or defaults. The sector has been growing at a CAGR of 18 percent from 2007 to 2013. This declines to 11 percent if the covered period is extended to 2000.

The good news is that the annual requirement for housing is estimated at 325,000 units, with the sector still holding a back log of three million. And, even if mortgage rates rise by 3 percentage points, a large number of clients could still qualify for loans.

As for the equity market, the Philippines is found to be overvalued in price-to-earnings multiples and dividend yields metrics existing in Indonesia, Malaysia, Taiwan, Thailand, Hongkong and China.

Again, we are running out of space and we still have more observations to review.