2017: The rainbow after the storm?
2016 was a turbulent year. We saw dramatic changes across the globe as unexpected events took hold - Brexit, the election of Trump in the US, the impeachment of two presidents and the resignation of popular heads of state. Even the election of President Duterte, while predicted by the polls, was nowhere on the horizon just a year earlier. Europe and the US were subjected to a spate of terrorist attacks, the crisis in the Middle East worsened, hundreds died from hurricanes and earthquakes, and iconic personalities passed away.
On the economic front, while we saw strong gross domestic product (GDP) growth at 7.1 percent in Q3 we also saw the stock market wipe out all its gains for the year, ending down 1.6 percent for the year. After the initial euphoria following the peaceful transfer of power in the elections, what happened?
One, the anticipated US Fed rate hike and the Philippines’ narrowing current account surplus had been pushing the peso downward. This was further exacerbated by the election of Trump and the seemingly worsening US-Philippines relations. With the protectionist stance of the US president-elect and his America-first rhetoric, fears started to grow on the outlook for the BPO industry, one of the key legs of the economy. The result of all these has been a 5.65percent depreciation of the peso by yearend, at one point almost reaching an eight-year low.
Two, as foreign funds continued to move from emerging markets and into the US due to the strong dollar, the Philippines was the most affected as foreign participation in the Philippine equity market is highest in the region at 50 percent vs just 10-20 percent for most other countries.
Now that 2016 is over, what can we expect for 2017?
I think there are two key factors that will heavily influence the direction of the economy— policy certainty, and the ability of the government to execute on the president’s agenda.
It has been said that money was the most cowardly of things, and money hates uncertainty. Companies need to be assured that their investments here will be protected, that the contracts they sign today will be honored 10, 20 years from now, and that the business environment and governing policies will be conducive to growth.
President-elect Trump’s controversial campaign promises to pursue a protectionist policy, bring back jobs to the US and increase the tax burden for companies with overseas operations continue to threaten the growth of the BPO industry. Keeping good relationships with the US will help.
Consider: The BPO industry has directly generated 1 million jobs and 3-4 million jobs indirectly. About 70 percent of the BPO revenue of $22 billion is sourced from US firms. Further, BPOs account for 70 percent of the Philippines’ projected office space demand. Any slowdown or contraction of the industry will have large ripple effects on the economy.
On the positive side though, the Philippines has advantages that would be hard to ignore. Total costs, including salary, rent, and other operating costs, are less than a quarter of what it would cost to the do the same job in the US. We are the thirdlargest English speaking country and one of the youngest with a median age of 23. Our labor pool is young, educated with half a million college graduates produced every year, has a strong affinity to western culture and excellent soft skills.
The second factor is the ability to execute on President Duterte’s agenda. The concern on the drug war could draw attention away from meaningful reform plans, which is unfortu- nate as we believe the structural reforms the government is implementing can lead to sustained economic growth.
Tax reform and infrastructure spending will be key. Can the Department of Finance get legislative support to pass the first package of the tax reform program? Can the government address structural bottlenecks that have delayed infrastructure spending in the past?
I can remember attending a briefing where the planned road network upgrades to Metro Manila and surrounding provinces were presented. These projects had approved budgets, yet none of them had been started. When asked why, the presentor mentioned numerous issues—local government permits required from all areas through which the roads passed, COA rules, etc., etc. Perhaps one thing our legislators can do immediately is to address all these bottlenecks, to facilitate construction of sorely needed infrastructure. To increase the sources of funding, regulators can remove the barriers which currently prevent companies from investing in infrastructure, such as steep capital charges for such investments.
As for taxes, much has already been said about this— we are one of the most heavily taxed in the region. The promised reduction will be a welcome relief and hopefully stimulate spending and investment and make our products more competitive.
Poverty alleviation will also be important. While GDP growth has been one of the highest in Asia, the Philippines continues to have one of the highest poverty rates in the region, according to the World Bank. Thus, despite the progress experienced over the last few years, Filipinos elected change.
So do we see a rainbow in 2017 after the storms of 2016?
In the short term,
the US Fed rate hike and indications of further hikes are creating uncertainties. However, looking longer term, our macroeconomic fundamentals are good and should result in continued growth. Our balance of payments position has been improving, unemployment has been declining, and inflation has remained low, as have interest rates.
The World Bank, IMF and ADB have all revised their 2016 and 2017 growth projections upward and we expect the economy to grow at least 6.8 percent-7 percent this year. Despite the noise from the US elections, OFW remittances and BPO revenues will continue to grow and fuel domestic consumption. The country’s economic managers have been very prudent; we do not see this changing.
In order to deliver sustained, above-average GDP growth however, the government’s ability to deliver on programs that aim to address poverty, increase infrastructure spending, and improve the efficiency of the country’s tax system will be critical.
Can the government deliver? We believe they can and they will. Structural reforms take time, but once they are on-stream, expect the Philippines to continue to grow strongly in the years to come.