Assessment: Macroeconomic Case for the Philippines

A Country s Current Economic State

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T H E E C O N O M I C C A S E F O R P H I L I P P I N E S

Philippines is now classified as a newly industrialized economy. This means a country is moving

away from being a resource-driven economy, forgoing using natural resources for means of

economic production, to an export-driven economy. Abandoning the natural resources as a major

potential tool for building a robust economic foundation has its cost. The decision for moving to a

new type of growing strategies has left the agricultural sector further in the bottom by not being

provided the highest priority to invest in machineries and initiatives to improve the assets to be

used in agrarian operations. The Philippines pride itself of tourist destinations, land and maritime

wildlife species and picturesque landscapes because of its abundance in forestry, mountains, hills,

volcanoes, seas, rivers, beaches and bay. A profound capital and untouched resources is either left

idle, in ruin by the drought and flood, or undergoing inefficient cultivating process and high

production costs. The stagnated state of productivity in the agricultural, forestry, and fisheries

section (see figure 1) hurts the population working for that sector, particularly the low-income

families residing in the rural states. The farmers and fishermen comprising the majority of the

population are trapped in earning low-to-minimum wages. This further fuels the income inequality

in the country.

Figure 1. Labor Productivity by Sector (Source: Philippine Statistics Authority)

Due to this process, migration of the rural population continued on to the urban cities in Luzon,

particularly in the capital of Manila wherein international and local business headquarters and top

performing Universities reside. Sudden pour of population in the developed states without the job

creation needed to swallow its increasing available supply of workers has led to discouraged

civilians and the rise of poverty slums around the main city. The speed of increasing working age

population (see figure 2) if then not be able to meet business standards of an above minimum wage

earner with reasons of an incomplete education or not obtaining any third level degree will

decrease the labor participation rate.

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Agriculture, Forestry and

Fishing

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Services

Figure 2. Summary of Projected Population by Five-Year Interval (Source: Philippine Statistics

Authority)

Zooming in on the country s GDP in an industry origin approach, the country is being driven by the services sector (see figure 3)1. Its champions are the Trade and Repair, Motor Vehicles and

Household goods sector, followed by the Real Estate business, and the other services (The other services sector can be attributed to the arrival of Business Processing Outsourcing firms wherein the Philippines surpassed India as the leading call center industry in Asia).

Figure 3. Gross National Income and Gross Domestic Product By Industrial Origin (Source:

Philippine Statistics Authority)

Although the biggest sector with economic production can be allotted to the service sector, the industry s manufacturing sector exceeds both the motor vehicles & household sector and real estate business (see figure 3a)2 altogether because of its rise in productivity. Granted that the advent of

1 Unit in million pesos and at constant 2000 prices 2 Unit in million pesos

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technology managed its way to be utilized effectively, the colossal share of the manufacturing industry is also credited to the country s export portfolio wherein the trade of machineries and equipment comprises the majority of the products being sold to other countries (More of this topic

on trade on later pages).

Figure 3a. Gross National Income And Gross Domestic Product By Industrial Origin (Source:

Philippine Statistics Authority)

Then again, middle and upper class population are enjoying the growth of the industrial and service

sector of the country. From 3.3%, 'other services' grew to 8.0% in a year. The increase in demand of

Motor Vehicles and Household Goods boosted the sector from 5.7% to 6.9% (see figure 3b)3.

Adapting an open-economy style, joining global markets, and opening itself to trade, the industry

3 Unit in Percent Rate

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2013 2014 2015

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a. Agriculture and forestry

b. Fishing

a. Mining & Quarrying

b. Manufacturing

c. Construction

d. Electricity, Gas and WaterSupply

a. Transport, Storage &Communication

b. Trade and Repair of MotorVehicles, Motorcycles, Personal andHousehold Goods

c. Financial Intermediation

d. R. Estate, Renting & BusinessActivities

e. Public Administration &Defense; Compulsory Social Security

f. Other Services

and service sectors are driving the Philippines economy at this state. The population of urban cities

is meeting the demand, and the prosperity of these sectors is augmented and continuing.

Figure 3b. Gross National Income and Gross Domestic Product By Industrial Origin (Source:

Philippine Statistics Authority)

With the labor market getting opportunity from the upsurge of the industrial & service sectors, the

employment rate has increased from 88% in 2005 to 94% in 2016 (see figure 4). By economic

standards, the economy is operating at a current full employment rate. This, however, can later

spur on inflation, with aggregate demand increasing faster than supply.

Figure 4. Philippines Employment Rate 1995-2016

Concluding to the data that the population has increased its spending capabilities and along with

the rise of wages (see figure 5) and influx of remittances (see figure 6) from overseas Filipino

workers4, the population has more income equipped to be spent and more goods and services will

later on be consumed and thus filling the cycle of the nation at its expansionary phase.

Figure 5. Philippines Average Nominal Wages 2001-2016

Figure 6. Philippines Remittances 2006-2016

Meanwhile, the inflation as expected is a steady volatile uptrend and the Consumer Price Index

remains on an uptrend (see figure 7) due to a lot of dynamics. The wage to production ratio being

greater than one is an aspect; increase in the cost of production or the quality of the goods is also a

factor. The upturn in the standard of living must have been the consequence in improving the

education system, the hospitals, and infrastructures. Now that more people can afford a better

lifestyle, it has continued to race the prices up but it leaves a larger gap for the low-income families

to cross over. Increase in overall aggregate demand will further push inflation and shrinkage in

supply of labor due to an almost all time low of unemployment rate will then further increase

wages and prices.

4 The number of Overseas Filipino Workers who worked abroad at any time during the period April to September 2014 was estimated at 2.3 million (Philippine Statistics Authority)

Figure 7. Philippines Consumer Price Index vs Philippines Inflation Rate (2006-2016)

Continuing on assessing the country s macroeconomic condition, the Philippines comparing to its

neighboring states and other countries who undergone the same economic transition as a newly

industrialized economy is currently performing at the lowest rank (see figure 8)5. If we re assessing the Philippines growth alone, we can attest to the fact that the economy is indeed performing well

(see figure 9) but relatively speaking, the Philippines is underperforming. There are more

opportunities to grow, financial returns currently untapped, and social returns and labor market

waiting to be further cultivated. More of this topic, reasons cited for underperforming is the

infamous corruption and political instability6 and lack of proper governance. All of which is a

dominant determinant for economic growth and poverty reduction.

Figure 8. Philippines’ GDP vs India’s, Mexico’s Turkey’s Indonesia’s South Africa’s Thailand’s and Malaysia’s (Source: World Bank)

5 Side note: Although China is also part of the newly industrialized country shift, comparing it to other emerging markets surpasses the other countries standard 6 read the 10 Billion Peso Priority Development Assistance Fund scam in 2013

Going back to the Philippines GDP growth jump as it enters the 2000 era (see figure 9); there will

be a fine line between a GDP driven by increase of production and consumption and a GDP growth

powered by hyperinflation as it proceeds through the 2020s. Continual increase in wages as

discussed before and indulgent spending will trigger an economic bubble as a main driver of GDP.

To be able to combat massive inflation strike, aggregate supply must increase by progressing

forward with enhanced productivity and efficiency. Cumulative productivity will offset the inflation

and promote economic growth.

Figure 9. Philippines’ GDP growth -2012 (Source: World Bank)

In an investor s point of view, riding with the boom of the economy can do well for an investment

portfolio. Investing in the Philippine Stock Exchange index fund7 will generate positive returns

during an expansion phase and realize the benefit of growing with the inflation rate. The positive

pace of the annual GDP growth rate (see figure 10)8 guarantees the decrease of unemployment,

giving rise to consumerism and increase in profits of businesses in the industrial and service sector

in the long run.

7 Disclaimer: this is not a persuasion or a recommendation of investments, however, assuming the increase in spending will eventually increase the profits of business sectors then all else equal, the increase of profit will later on reflect the stock price. 8 At Constant 2000 Prices

Figure 10. Philippines GDP Annual Growth Rate 2006-2016

Furthermore, breaking down the composition of the Philippines Gross Domestic Product9 (see

figure 11) displays the lead of household consumption followed by the export and import of goods.

In the year 2008-2010 a decent trade surplus occurs but then shadowed by year 2011-2015 by a

trade deficit (see figure 12). The trade deficit associates with the expansion phase leading to an

increase demand for imported goods by household consumers.

Figure 11. Philippines’ GDP in Expenditures Approach 2008-2015 (Source: Philippine Statistics

Authority)

9 2015 GDP only includes 1st-3rd quarter

Figure 12. Philippines’ Trade Balance -2015 (Source: Philippine Statistics Authority)

Looking closely to the export side, Philippines major exported products10:

1. Machineries

2. mineral products

3. instruments

4. metals

5. vegetable products

6. foodstuffs

7. chemical products

8. precious metals

9. textiles

10. transportation

11. plastic products

12. animal & vegetable bi-products

13. wood products

14. miscellaneous items

15. concentrated milk

16. animal hides

17. glass bulbs

18. cigarette paper

19. weapons

20. footwear & headwear

Accdg to the Economic Complexity Index (Hidalgo, 2009) Philippine ranks as the 49th complex

country in 2013, meaning that the exported products by the country are not at most fully

diversified but less unstable. Able to garner sources of income frome different type of tradeable

products (see figure 13) will help the country to withstand unexpected hindrance in export

10 Arranged as largest % of export to smallest from 2013 data (Source: MIT Atlas)

2.300.000

2.500.000

2.700.000

2.900.000

3.100.000

3.300.000

3.500.000

2008 2009 2010 2011 2012 2013 2014 2015

EXPORT

IMPORT

Top Export Destinations accdg to MIT Atlas:

1. Asia (38-42 countries)

China, Japan, Hong Kong, Singapore,

South Korea, Thailand, Malaysia,

Vietnam, Indonesia, India being the

top countries

2. North America (14-25 countries)

US, Mexico, Canada are the top

countries

3. Europe (32 countries)

Germany, Netherlands, UK, France,

Russia, Switzerland

4. Oceania (18 countries)

Australia

5. South America (12 countries)

6. Africa (14 countries)

production whether a slump in prices11 or an increase in sudden cost of manufacture or a decline in

demand caused by a recession.

Figure 13. Philippines’ Portfolio of Exported Products (Source: MIT Atlas)

Philippines top trading partners is something to watch out for. As the country joined itself to a

wider and interconnected web of network, problems arising from speculative crashes and other

financial crisis in the economy of a major exporter will cause ripple effects to the country s own

economy. Disruptions will affect businesses and job employment.

Now the imported products12 as follows:

1. Machines

2. Mineral Products

3. Transportation

4. Chemical Products

5. Metals

6. Foodstuffs

7. Textiles

8. Vegetable Products

9. Instruments

10. Paper Goods

11. Stone & Glass

11 This refers to the oil supply glut in 2014-15 coinciding with the falling demand of China, the largest oil importer, wherein oil prices went from $125 per barrel down to $30 below causing major oil exporter countries to suffer due to its large dependence on oil as a revenue stream. 12 Ranked from largest %of import to smallest from 2013 data (Source: MIT Atlas)

Top Import Origins accdg. to MIT Atlas:

1. Asia

2. Europe

3. North America

4. Oceania

5. South America

6. Africa

Top import countries are China, Japan, USA, South

Korea, Other Asian countries, Singapore, Thailand,

Indonesia, Malaysia, Saudi Arabia, Germany,

France, Hong Kong, Russia, Australia, Vietnam,

India, UAE, Qatar, and Brazil

12. Miscellaneous

13. Wood Products

14. Animal & Vegetable Bi-Products

15. Footwear & Headwear

16. Precious Metals

17. Animal Hides

18. Weapons

Proceeding to more monetary subjects, Philippine s Central Bank has been increasing its foreign reserves since the start of 2000. Initiative to accumulate foreign reserves is significant in

controlling fluctuations in the exchange rate. This inflow of remittances by the OFWs managed to

strengthen the peso against the dollar. The exchange rate of the Philippine peso stays within the

range of Php 40 to 48 in the last 5 years (2012-2016) comparing to the exchange rate back in 2006

where it was trading at Php 55 to a dollar (see figure 14), making the exports costlier and the

imports cheaper. The weakening of the dollar against the Philippine peso makes Foreign Direct

Investment elusive and fluctuated over time (see figure 15).

Figure 14. Philippine Peso to US Dollar Exchange Rate 2000-2016

Figure 15. Foreign Direct Investment in the Philippines 2001-2016

Tourists on the other hand are still benefiting from the dollar-peso relationship. The lenient

affordability of living in a developing country caused visits to climb (see figure 16) as other

countries are experiencing affluence more and more so because of GDP outputs growing faster than

the rate of the Philippines .

Figure 16. Tourist Arrivals in the Philippines 2006-2016

In 2002, the Central Bank lowered its interest rates to 8% rate from its sudden spike to 15% rate in

2001. From then on it has continued its slide until it reached its present 4% in 2016. Note the

relationship between the Interest rate and GDP growth rate of the country (see figure 17). From the

high employment rate, escalation in remittances, increase in tourist arrivals, and the leadership of

service sectors and household consumers, the economic activity is hitting its sweet spot from the

splurge of the Filipino consumers. Monetary policies are being maneuvered to accommodate this

fever as interest rates keeps on going down to spur more borrowing13 (see figure 17a) which in turn

amplifies the spending capabilities of the consumers to purchase more goods and services.

Figure 17. Relationship of GDP annual growth rate with Interest Rate 2001-2016

13 Bank lending rates moves with the Philippine interest rates set by its Central Bank

Figure 17a. Philippines Bank Lending Rate 2001-2016

Note in Figure 18 how consumer spending climbs with consumer credit leaving clues that most of

the spending are fueled by debt. In the data in 2011 to 2012 (see figure 19), we ve seen nominal wages beating debt but its increase is not enough to surpass the inflation-driven prices of the asset

classes.

Figure 18. Relationship of Consumer Credit with Consumer Spending 2008-2016

Figure 19. Relationship of Consumer Credit with Average Nominal Wages

Businesses can also gain from the fall of interest rates as lending gets easier to acquire and an

access to finance to acquire machineries and equipment is a helping hand for the sectors to produce

more goods for the increasing demand of the population. The dip to 3.4% interest rate (see figure

20)14 managed to spark the lending activities to the private sector to an increase from 36015 to 460

in two years.

Figure 20. Relationship with Interest Rate and its effect on Volume of Loans to Private Sector

Increase in the money supply from 2006 to 2016 (as the expected effect of lowering interest rates)

adds to the expansion phase of the country (see figure 21a16 and Figure21b17)

Figure 21a. Money Supply M0 with M1 2006-2016

14 Data of loans to private sector in year 2014 and below are not publicly available 15 Units in Million 16 Data shows the M0 and M1 or the money classified as coins, notes, and cash 17 Data shows the M2 & M3 or the money clustered in savings, timed deposits and money market funds

Figure 21b. Money Supply M2 & M3 2006-2016

Performance of the PSEi Fund reflects the consumer activity of the country and has been riding

along the indulgence of buying (see Figure 22); P/E ratio already performing at 20 times the earning

back in 2015 (Rappler, 2015) is a determinant signal for an expensive stock. Interestingly, the P/E

of PSEi reflects the whole market; top industries are now selling at an all-time high and may result

to a bubble. Although consumer confidence is still low at a negative 5.7 (see figure 23), it has been a

positive performance from the negative 25 in 2015. Persistent advances in consumer confidence

will be the effect of the optimistic labor and consumer market.

Figure 22. PSEi Fund Market Price per Share 1992-2016

Figure 23. Consumer Confidence 2012-2016

Note in Figure 24-26: Due to a constant increase in GDP, the government debt is decreasing relative

to the size of its GDP. The government therefore receives more leverage to borrow and overspend

its revenue and distribute its income stream back to the lower income families. Poverty and low

education completion rates are two main problems still unsolved by decades of shifting powers

amongst politicians. Further research can determine whether the government is investing on

productive projects rather than one-time income stream for the people at the bottom of the trickle-

down pyramid.

Figure 24. Debt to GDP 2006-2016

Figure 25. External Debt 1981-2016

Figure . Government’s Spending Balance -2016

Key Points:

Productivity rate is growing in the three main sectors: agricultural, service, and industrial.

GDP is growing steadily. The country is at an expansion phase.

The Service (BPO, Household Goods, Motor Vehicles, and Real Estate) and Industrial Sector

(Manufacturing) are driving the economic engine; Main expenditures come from the

Household Sector and Export of Services (OFWs)

Economy is operating at a full employment rate. In a Philip s curve principle, low unemployment rate will result to high inflation rate.

Aggregate Income and Demand will rise in the coming years sparking spending activities.

Nominal wages has been increasing. Increase in wages may push prices further upwards.

Economic Complexity Index or the export portfolio is positive or going into a more

diversified collection.

Trade deficit resulted in the past years. Consumers demand and can afford more imported

goods.

Philippine peso is strengthening against the dollar due to influx of remittances. Meanwhile,

the Central Bank is increasing its foreign exchange reserves to prevent it from dipping.

Foreign Direct Investment still fluctuates. Tourist arrivals are growing.

Inflation rate is at a steady pace; Consumer Price Index has been increasing since.

Interest rates and bank lending rates are down to 4%; Money supply (M0, M1, M2, M3)

escalates.

Consumer credit and spending climbs with the lowered interest rate.

Philippine Stock Exchange Index Fund is trading at 20 times the earnings.

Business cycle is currently at an inflationary/expansionary gap.

Government s external debt alone is still at large while Debt to GDP is decreasing.

Deficit spending aims to revitalize lower income families.

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bargains-bpi

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