Presentation for Eagle Watch IAteneo Rockwell Campus, Makati City

31 January 2019

Sustaining Steam:

The DutertenomicsChallenge

Cielito F. Habito

Professor of EconomicsAteneo de Manila University

Overview1. The year that was: worsening trends

• PiTiK update• A closer look

2. The year ahead: more of the same?

• Inflation, Jobs and Growth Outlook

3. Moving forward: Tailwinds & headwinds

• Strengths and opportunities• Weaknesses and threats

1. The Year That WasSpeeding prices, slowing growth

‘PiTiK’ Update, 2018Now More Blue than Green

Presyo: Inflation now on a decline – 5.1% in Dec after hitting 6.7%

Trabaho: 826,000 new jobs in 2018; unemployment down – 5.3% FY average vs. 5.7% in 2017

Kita: GDP growth slowed down, but still among world’s fastest – 6.2% full year 2018 vs. 6.7% in 2017

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

J08

MS J09

MS J10

MS J11

MS J12

MS J13

M S J14

MS J15

M S J16

M S J17

MS J18

MS

Inflation: Finally Slowing DownAfter almost year-long acceleration

9.3%

3.2%

3.8%4.4%

3.2% 2.9%4.2%

1.4%

1.8%

3.2%

5.2%

3.43.8 4.3

4.5 4.6

5.2

5.7

6.46.7 6.7

6.0

5.1

2.53.1 3.1 3.2 2.9

2.5 2.4 2.63.0

3.13.0 2.9

0.9 0.70.5 0.5

0.00.6 0.5

0.9 0.9

0.3-0.2

-0.6

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

J F M A M J J A S O N

2018 (M-O-M)

2017 (Y-O-Y)

2018 (Y-O-Y)

…but had mostly been slowing in real time, until rice prices messed things up

Jobs Creation: 2017 Decline ReversesBut slowed down thru 2018

EmploymentDataJan2018

Unemployment(%) 5.3

NetNewJobs('000) 2,408Agriculture 841Industry 719Services 847

Underemployment(%) 18.0

Apr2018

July2018

5.5 5.4

625 488-723 -737605 172742 1,053

17.0 17.2

Oct2018

Oct2017

2018 2017

5.1 5.0 5.3 5.7

-218 -134 826 -663-419 -1,428 -260 -803405 374 475 212-204 920 610 -72

13 15.9 16.4 16.1

Income/Output Slows DownAgriculture lags behind

Inflation is hurting the poor more…

• While overall inflation rate is 5.1%,

Food & Non-alcoholic Beverages – 6.7%(Alcoholic Beverages & Tobacco – 21.7%)

• Food takes a much higher share of poor families’ budgets

…and the countryside more.

• Inflation rate in Metro Manila (NCR) – 4.8%

• Inflation rate outside NCR – 5.3%

• 70% of Filipino poor reside in the rural areas

Nov Dec Nov DecNov Dec

Better Quality JobsWage employment is expanding

Rising Entrepreneurship(Based on July Data)

A New Growth Track

0 2 4 6 8

1981-1990

1991-2000

2001-2010

2011-2017

1.8

2.9

4.8

6.2

AverageGDPGrowthRate

Industry: Now Fastest Growing Sector

Manufacturing and Construction Drive Industry

Manufacturing, 2018:

Winners• Petroleum/Fuel (22.1%)

• Non-met Minerals (14.4%)

• Paper/Paper Prods (13%)

• Rubber, Plastic Prods (11.7%)

• Radio/TV/Comm Eqpt (11.3%)

• Electrical Machinery

• Wood Etc Prods

• Fab. Metal Prods.

• Non-elec Machinery

• Office Equipment

• Publishing/Printing

Losers• Tobacco Mfg (-18.2%)• Textiles• Chemical Products• Basic Metal Prods• Wearing Apparel

• Furniture & Fixtures• Food Manufactures• Footwear/Leather• Misc Manufactures• Beverages (2.9%)• Transport Equipt (0.9%)

.

Foreign Direct Investment:Sluggish Growth

Jan-Oct Inflows Up 1.8%

Significant Slowdown from 2017 Growth

But Domestic Investment is Brisk

1.8

-1.8

6.2

12.0

15.8

10.5

-5.0 0.0 5.0 10.0 15.0 20.0

2010-2017

2004-2009

Source: PSA

Investment Spending: An 8-Year Roll

Private

Construction

Durable

Equipment

Fixed

Investment

Growth Rate (%)

Agriculture in 2018Staples, Exportables Take a Beating

Exports Had Been Dropping

Source: PSA

-2

0

2

4

6

8

10

12

14

NC

R

CA

R

I

II

III

IV-A

IV-B

V

VI

VII

VIII

IX

X

XI

XII

XIII

AR

MM

All regions are contributing to growth

Mindanao regions are strong growth contributors

Poverty had seen biggest drop in recent memory…

Source: PSA

26.626.3

25.2

21.6

20.0

21.0

22.0

23.0

24.0

25.0

26.0

27.0

2006 2009 2012 2015

…but appears to have risen in the past year due to rice crisis

Source: PSA

2. The Year AheadMore of the same?

Short Term Outlook (2019)

Inflation Rate: 3-4% likely

Jobs: Employment Rate of 94.0-95.0% (Unemployment Rate 5.0-5.5%)

GDP Growth: 6.0-6.5% (election year); downside risks

IMF World Economic Outlook Global economy is expected to slow down

in 2019 (3.5% GDP growth)

Graphic: IMF

PH will do even better at 6-7+%!

OECD now expects only 3.2%

Managing Inflation

• Moderate our (self-fulfilling) expectations

• Adjust budgets toward less inflationary substitutes

• BSP: Monetary policy can only do so much against cost-push inflation

• Longer term: liberalize food trade, but give rice farmers more focused support (even cash)

• Exports need focused attention (bring P/$ down)

Moving ForwardDraw on strengths and opportunities, overcome weaknesses and threats

Highly adaptable and resilient

Relatively better educated (vs. other Asian peers)

Hardworking and diligent

Excellent personal hygiene

Extremely hospitable

Etc.

Our Greatest Strength:Human Resources

PH Population Age Profile, 2050

Philippines

Demographic Sweet Spot

Opportunities:ASEAN Economic Community

ASEAN is now our largest trading partner.

Sources: PSA, BSP

…However,

PH trade with ASEAN appears to have

leveled off

PH Trade growth in last 6 years has more

been with non-ASEAN Asian partners:

• Japan – PH exports grew 15.4% from 2010 to 2014; due to PJEPA (2008)

• China – PH exports to China grew 23% from 2010 to 2013; due to ASEAN-China FTA (2010)

China Presence: Widely Felt in PH

PH-China bilateral trade grew 2.7% in 2015 ($45.6B) when China-ASEAN trade fell 1.7%

China’s growing presence in the PH consumer market is palpable (Novo, New Star, etc.)

FDI statistics show Chinese FDI insignificant, yet 27 Chinese mining firms are in PH

New relations unleashing new trade, tourism, investment, ODA

China is coming – and coming big. We must plan for an economy closely linked to China (and beyond).

China’s New Directions

• Growth has tempered at 6-7% range

• Saddled with overcapacity (steel, cement, solar panels, etc.)

• China’s Strategy:

– Redirect capital abroad

– Diffuse excess domestic industrial capacity

– Reap improved financial returns

– Build goodwill with neighbors, Europe, Africa

– Take the lead in higher level knowledge-based industries and renewable energy

China’s Economic Trends Are Widely Felt

IMF: World economic growth to lose 1.5 percentage points if China stops growing

China economy slowdown is ‘exported’ to “resource economies” (Australia, Canada, Brazil, PH, Indonesia)

China needs to do something different, and do something fast…

Belt & Road Initiative

Silk Road Economic Belt

Maritime Silk Road

Belt & Road Initiative

BRI: Scope & Coverage

Price tag: $2-3 Trillion (12x bigger than Europe’s Marshall Plan

Will encompass 4.4 billion people (2/3 of humanity)

Accounts for well over half of global GDP

Covers 75% of known energy reserves

Integrates Asia, Africa and Europe through closer diplomatic, commercial and financial cooperation

Upgrading of Piraeus port (Greece)

Bullet train from Belgrade to Budapest

Network of rails, roads and pipelines from Central China stretching all the way to Belgium

8,000-mile cargo rail route between Yiwu and Madrid

$46 billion economic corridor (pipeline, rail, roads, bridges++) through Pakistan connecting NW China to Gwadar port on the Arabian Sea

BRI: Some Elements (1)

• High-speed rail system connecting China with Southeast Asia

• Series of transport grids consisting of railroads (2,233 km), bridges and paved highways (3,350 km) linking 54 African countries (>1,000 projects)

• Freight train from eastern China to Tehran, Iran via Kazakhstan and Turkmenistan takes 14 days, less than 1/3 the time if by sea

BRI: Some Elements (2)

• Asian Infrastructure Investment Bank ($100 Billion initial capital, with 57 members including PH)

• China’s $40 billion Silk Road Fund (to support private investments)

• BRICS’s New Development Bank ($100 B)

• Export-Import Bank of China ($80B loans in 2015)

• Singapore with China Construction Bank ($22B for BRI projects)

• International pension funds, insurance companies, sovereign wealth funds, private equity funds

BRI: Financing

Opportunity:Move Even Beyond ASEAN

Shed defensive posture in favor of a proactive and aggressive one

Leverage AEC regional integration to address food security, advance strategic economic interests

Tap BRI opportunities via ASEAN business partnerships

Mango, coconut with Myanmar

JV in rice production, processing

Manufacturing (GVCs)

Source of Data: BSP

Weakness:We trail even farther behind in exports…

Export Earnings, 2017 ($ Billion)

We’re now last, with a wider gap

Weakness:We trail even farther behind in exports…

Source of Data: BSP

We’re now last, with a wider gap

Export Earnings, 2017 ($ Billion)

0

50

100

150

200

250

SIN MAL THA INO PHI VIE

230

141110

86

41 32

Exports ($M), 2005

…and lag behind in FDI

Source of Data: BSP

0.0

5.0

10.0

15.0

20.0

SIN THA INO MAL VIE PHL

15.7

4.6 4.0 3.5 3.1 2.2

FDI Inflows, Q1-2018 ($ Billion)

Our trade is in deep deficit amidst our neighbors’ surpluses.

-40

-20

0

20

40

60

SIN MAL THA INO VIE PHI

45.5

22.713.9 11.8

2.7

-27.4

Trade Balance, 2017 ($ Billion)

0

1

2

3

4

5

SIN THA MAL INO VIE PHI

0.2

1.31.8

3.33.8

4.8Inflation Rate, Q2-2018 (%)

We have the highest inflation among our peers (and pulling farther away)…

…and the highest unemployment too.

0

1

2

3

4

5

6

THA SIN VIE MAL INO PHI

1.2

2.2 2.2

3.4

5.6 5.7Unemployment

Rate, 2017 (%)

The Peso has been “worst performing”…

Trade Balance (Exports-Imports)Slipping Deeper In Deficit

Threat:

OFW Remittances Slowing Down

7.26.3

7.47.2

4.0

5.04.3

2.4

0.0

2.0

4.0

6.0

8.0

2011 2012201320142015201620172018

Growth Rate, %)

Threat:Industry 4.0: The Age of Disruption

• Artificial intelligence threatens our best asset; BPOs days are numbered

• Average age of farmers now around 60 – need successor generation of food producers

Momentum Breakers

Persistent Infra Shortcomings – Transport, Telecoms, Internet woes

Build, Build, Bust? – Shift away from PPP; implementation weaknesses at DPWH, DOTr

Momentum Breakers

Persistent Infra Shortcomings – Transport, Telecoms, Internet woes

Build, Build, Bust? – Shift away from PPP; implementation weaknesses of DPWH, DOTr

2017 COA Reports:

• DPWH budget grew from P110.6 billion in 2011 to P650.9 billion in 2018

• Managed to spend only 34.1%of its budget allocation in 2017

• DOTr only disbursed P18 billion, or 25.6% of the total P71.2 billion

Momentum Breakers

Persistent Infra Shortcomings – Transport, Telecoms, Internet woes

Build, Build, Bust? – Shift away from PPP; implementation weaknesses at DPWH, DOTr

Politics: Our Biggest Block –Rent-seeking politicians; populist but business unfriendly policies; shift to federalism

Fact: One in every three (33.5%) Filipino children < 5 years old is stunted (hence will

never reach full brain and physical development potential)

Our Biggest Threat

Formation of white matter in the

brain is severely restricted in

stunted young children

Stunting means lifelong damage.

Restricted rice trade (NFA monopoly) in the name of rice self-sufficiency pushed domestic rice prices up to 2x world price

Rice takes 20-25% of daily budget of the poorest Filipinos; expensive rice leaves no money left for “ulam”

Opening rice trade (tariffication/removal of NFA monopoly & control) will lower prices closer to the world price, subject to tariff applied (35% for ASEAN)

Need to provide focused help for 2 million rice farmers without causing collateral damage on 101M (and 22M poor) consumers

Stunting is linked to our flawed age-old rice policy.

Lowest average intelligence in ASEAN?

https://new-iq-test.com/iq-by-country/

Philippines

Population Age Profiles, 2050

Stunted Generation

or Demographic Time Bomb?

The compelling need:

Make food affordable, feed the young children

Mabuhay!cielito.habito@gmail.com