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The State of the
Philippine Economy
Sec. Arsenio M. Balisacan
National Economic and Development Authority
Ayala-UPSE Economic Forum
InterContinental Manila, Makati City
29 January 2015
1
Takeaway
• No longer the “sick man” of Asia
– 1970s to 2000s: Low economic growth in comparison with
Southeast & East Asian neighbors
– If boom occurred, it was soon followed by bust
• Resurgence beginning 2010
– “Structural break” to higher growth trajectory
– 2010-2014 average growth: 6.3%, highest 5-year average in
the past 40 years
– 2014: 6.1%, high by the standard of major developing
countries
– Supported by sound economic fundamentals
• Bright prospects in the near term: 2015 & 2016 growth to
remain among the fastest in Asia’s developing countries
• But big challenges remain: deepening reforms to sustain
growth and make it more inclusive
• Good governance plus good economics is key to good growth
(rapid, sustained, inclusive)
2
The Philippine economy is on a higher growth trajectory
since the beginning of the current decade.
GDP in 2000 billion Php, 1946-2014
8.00
7.00
6.00
5.00
4.00
Real GDP growth
6.3% (2010-2014)
Structural break of
potential real GDP
at around 2009
6.1% (2014)
7.2% (2013)
6.8% (2012)
3.00
2.00
1.00
-
Source: PSA
3
Average growth in 2010-2014 is the highest 5-year average
growth since the mid-1970s.
Real GDP growth (5-year moving average)
10.00%
1973-1977
2010-2014
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
5-year moving average
6.3% (2010-2014 ave.)
Source: Authors’ calculations
4
Philippine growth in 2010 to 2013 is among the highest in
Asia — no longer the “sick man” of Asia.
Average GDP growth (in %, 2005 prices)
12.0
10.0
8.0
China
Indonesia
Malaysia
6.0
Philippines
Thailand
4.0
Vietnam
2.0
0.0
1960-1969
1970-1979
1980-1989
1990-1999
2000-2009
2010-2013
Source: WB
5
What have driven recent growth?
• Private consumption, on the demand side, and
services, on the supply side, have been the
main drivers of growth
– Private consumption, fuelled partly by OFW
remittances: over two-thirds of GDP
– Services: over one-half of GDP
• Need for “rebalancing” to reduce vulnerability
to regional/global shocks and generate more
and higher-quality jobs
– Demand side: Driving investment and net exports
– Supply side: Driving resurgence of industry,
particularly manufacturing; revival of agribusiness
6
Structural changes in the economy are taking place.
Investment and industry are increasingly becoming major drivers
of GDP growth.
Demand side
7.0%
6.0%
6.3%
Ave. growth
5.0%
4.0%
3.0%
Supply side
6.1%
7.00%
6.3%
6.00%
4.5%
5.00%
6.1%
4.5%
4.00%
2.8%
3.00%
2.0%
2.8%
2.00%
1.0%
0.0%
1.00%
-1.0%
0.00%
Consumption
Government
Investment
Net exports
Agriculture
Industry
Services
Source: NEDA
7
Growth of GDP by component, 2013 & 2014
2013
Supply side
Agriculture
Industry
Manufacturing
Services
Demand side
Private consumption
Government
consumption
Fixed capital
formation
Exports
Imports
GDP
2014
Growth rate Share to
(%)
GDP (%)
Growth rate
(%)
Share to
GDP (%)
1.1
9.3
10.3
7.2
8.8
27.5
19.1
47.6
1.9
7.5
8.1
6.0
8.4
27.8
19.4
47.5
5.7
58.2
5.4
57.7
7.7
9
1.8
8.6
11.9
17.8
8.6
18.2
-1.1
5.4
7.2
37.4
39.3
100
12.1
5.8
6.1
39.5
39.1
100
Source: PSA
8
Supporting this remarkable performance are sound
macroeconomic fundamentals.
Monetary side • Robust external position
• Low and stable inflation
• Favorable interest rate & sound banking system
Inflation rate (%)
6
Interest rate & CAR (rhs), %
Current account balance (% GDP)
5
4
3
2
1
Sources: PSA, BSP
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Q3
Q3
2013 2014
9
Supporting this remarkable performance are sound
macroeconomic fundamentals.
Fiscal side • Declining external debt & interest payments
• Modest fiscal deficit
• Increasing reliance on domestic financing
• Result: wider fiscal space
40
External debt (% GDP)
35
30
25
20
15
10
5
0
2007
2008
2009
2010
2011
2012
2013
Mar-13 Mar-14
10
Result: The country enjoys an unprecedented level of confidence among
the international business community — and has improved its global
competitiveness rankings.
Long-term sovereign credit ratings
Baa2
BBB
Outlook: Stable
Outlook: Stable
BBB-
As of December 11, 2014
As of May 8, 2014
As of March 27, 2013
Outlook: Stable
Global Competitiveness ranking, 2009-2015
Philippines
2009-10
2010-11
2011-12
2012-13
2013-14
2014-2015
87
85
75
65
59
52
Source: The Global Competitiveness Report, World Economic Forum
Ease of Doing Business rankings, 2009-2014
Philippines (old
method.)
2009
(181
economies)
2010
(183
economies)
2011
(183
economies)
2012
(183
economies)
2013
(185
economies)
2014
(189
economies)
141
144
134
136
133
108
Philippines
(new method.)
Source: Doing Business Report, World Bank and International Finance Corporation
86
2015
(189
economies)
95
11
But why has poverty been persistently high?
• Lesson of recent economic history: structural
transformation drives poverty reduction.
– From low-productivity areas/sectors to high-productivity
areas/sectors
• East Asia’s experience: Rapid & sustained growth (3
to 4 decades); shift of employment from agriculture
to industry and services, facilitated by robust
agricultural productivity growth.
• Philippines: Low growth for most of post-1970s.
– Poorly performing agriculture
– Industry, particularly manufacturing, saddled by high
production costs (low productivity)
12
Weak performance in poverty reduction relative to the country’s
neighbors.
“Lost decade” in 2000s owing primarily to low income growth and to the
high inequality of access to employment & social development
opportunities.
90
Poverty headcount ratio at $1.25/day, PPP (% pop.)
80
70
60
50
40
30
20
10
0
EAP (developing only)
Indonesia
Philippines
Thailand
Viet Nam
China
Source: WB
13
Poverty reduction has been slow over time, though recent
gains have been made.
Poverty incidence among pop. (%)
40
35
34.4
28.8
30
25
Response of poverty
to growth (elasticity)
has improved
(source: WB)
20
–2.02 (2012-2013)
26.6
28.6
27.9
24.9
26.3
25.2
–0.24 (2006-2012)
17.2
15
Annual estimates
First semester estimates
Note: The 2014 1st Semester estimates will be released in March 2014.
MDG target
Source: PSA 14
Similarly, self-rated hunger has somehow abated in recent
years.
Total hunger incidence, July 1998 to Dec 2014
(% of households)
25
20
15
10
5
0
Source: SWS
15
The other big challenge: EMPLOYMENT.
• Not a “jobless growth” – about 1 million new employment
generated between Oct 2013 & Oct 2014.
• Unemployment rate is decreasing, although underemployment
remains stubbornly high.
• Quality of jobs is improving – rising share of wage and salaried
workers in total employment.
Ave
2010
Ave
2011
Ave
2012
Ave
2013
Ave
2014*
Oct
2013**
Oct
2014**
Labor force (‘000)
38,893
40,006
40,426
41,022
40,051
40,397
41,322
Employed (‘000)
36,035
37,192
37,600
38,118
37,309
37,793
38,839
54.5
55.2
57.2
58.4
57.9
57.7
58.1
Unemployment rate (%)
7.3
7.0
7.0
7.1
6.8
6.4
6.0
Underemployment rate
(%)
18.8
19.3
20.0
19.3
18.4
18.0
18.7
Indicator
Wage and salary workers
(% share to total employment)
Source: Labor Force Survey, Philippine Statistics Authority
*The average estimates for 2014 exclude Region 8. Moreover, average estimates for wage and salary workers are computed
using the January 2014 data (which exclude Region 8) and April-October 2014 (which exclude Leyte).
**Due to Typhoon Yolanda’s devastation, estimates for Oct. 2014 exclude Leyte; for comparability purposes, Oct 2013
16
estimates less Leyte is also provided.
The other big challenge: EMPLOYMENT.
• Internationally, the share of wage & salaried workers in total
employment is a broad indicator of employment quality
• Rising in the Philippines, albeit slowly
Wage and salaried workers (% of total employed)
100
90
80
70
60
Indonesia
50
Malaysia
40
30
20
Philippines
Singapore
Thailand
10
0
Source: WB
17
Deepening reforms to sustain growth
& make it more inclusive
•
•
Rapid growth in recent years is
the outcome of past and
ongoing governance and policy
reforms
– Broadly, reforms have been
evidence-based, focused on
most binding constraints to
growth
Primacy of deepening reforms
to sustain growth and make it
more inclusive
– Learning from the lessons
of recent development
experience
– Deploying political capital
for reform & development
Lessons learned in first 3 years
of PDP implementation
– Good governance is an effective
platform for the strategies’
implementation
– Macroeconomic and political
stability fuel positive expectations
leading to growth
– Economic growth is necessary but
not sufficient for poverty
reduction
– Growth strategies need to have
spatial and sectoral dimensions to
ensure inclusivity
– Disasters can negate gains and
even push back development 18
Deepening reform efforts to address the key constraints to
growth and shared prosperity
Huge backlog in
infrastructure & human
capital development
Weak &
fragmented
regulatory
systems
Key
constraints
to growth
Conflicts & human
insecurity, especially
in Mindanao
High vulnerability to
natural disasters &
extreme events
19
Infrastructure:
There have been improvements in the overall quality of
infrastructure, but we’re still lagging far behind ASEAN
counterparts.
Overall quality of infrastructure (2010-2014 ranking)
2010
2011
2012
2013
2014
(139 economies)
(142 economies)
(144 economies)
(148 economies)
(144 economies)
Philippines
113
113
98
98
91
Malaysia
27
23
29
25
25
Thailand
46
47
49
61
48
Indonesia
90
82
92
82
56
Source: WEF Global Competitiveness Report 2010-2014
Inadequate infrastructure has contributed to the growing congestion problem in
Metro Manila.
Economic cost of congestion (Php billion/day)
2012
2030 (w/o
intervention)
2030/2012
ratio
2.40
6.00
2.50
Source: JICA Study Team 2014
20
Infrastructure:
Public infrastructure spending is targeted to rise from 2.2% of GDP
in 2012 to at least 5.0% in 2016.
Public infrastructure spending as % of GDP
6
5.1
5
Actual (2011-2013)/Projected (2014-2016)
Target
4
3
2.2
2
1
4.0
1.6
2.2
3.5
2.5
5.1
4.1
3.4
2.7
1.6
0
2011
2012
2013
2014
2015
Source: DBM; note: 2011 to 2013 – Based on actual GDP and spending; 2014 – Based on General
Appropriations Act; 2015 – Based on National Expenditure Program; 2016 – Projected
2016
21
Human capital:
Due to a wider fiscal space, spending in human capital
development and social protection have enjoyed increasing shares
in the national government budget.
Sector
Education
Health
Social protection
Share to total NG budget (%)
Growth rate (%)
2011
2012
2013
2014
2012
2013
2014
46.7
47.2
47.2
46.2
9.8
18.2
18.0
7.4
8.9
8.3
10.5
29.4
10.2
53.0
21.3
24.5
24.2
25.5
25.3
16.7
26.8
Source: BESF, DBM
The country’s CCT program (4Ps) has been scaled up rapidly.
60
4Ps budget and beneficiary families
50
6
5
4
40
3
30
2
20
10
1
0
0
2007 2008 2009 2010 2011 2012 2013 2014
Number of families (in
million)
Budget (in billion Php)
70
Budget allocation in the GAA
(billion Php)
Number of families in millions
(right axis)
Source: DSWD
22
Disaster preparedness:
Investment in disaster preparedness is crucial given the country’s
high vulnerability to natural disasters.
Climate Risk Index
2013
Ranking
Country
2012
Ranking
Deaths per
100,000
inhabitants
Absolute losses (in
million USD PPP)
1
2
Philippines
6.65
24,538.56
2
65
Cambodia
1.22
1,495.52
3
46
India
0.60
15,147.02
6
3
Pakistan
0.16
5,419.77
8
32
Viet Nam
0.17
2,397.04
Source: Germanwatch
Average annual loss for the Philippines is estimated to be Php 206B/year
(1.8% of GDP) in direct losses to private and public assets. [WB 2015]
High rates of return to investment in disaster preparedness:
•
Studies on the Philippines show $3 to $30 worth of benefits per $1 of
investment, depending on type of disaster or hazard. [Kelman & Shreve 2013]
23
Conflict:
ARMM’s underdevelopment is linked to its long history of armed
conflict. (Annual cost of around P5-7.5 billion [HDN 2005].)
ARMM
National
Average
Rest of
Mindanao
14,565
68,897
46,050
55.8
25.2
39.1
72.5
26.1
95.2
64.6
-
4. Access to safe water source
36.6
79.9
73.3
5. Seal of Good Housekeeping
6.6
76.6
59.7
Number of armed groups
43
86
3
Number per million pop.
12.3
0.91
0.13
Indicators
1. GDP per capita,
PHP in 2000 prices
(PSA 2013)
2. Poverty incidence
(%, PSA 2012)
3
Net enrollment
(%, SY 2012-13)
Primary
Secondary
(source: ARMM-RPDO/DepEd)
(% of HH, FIES 2012)
(%, municipalities, DILG 2012)
6. Private armed groups
(PNP 2012)
Sources: PSA, Bangsamoro Development Plan [2014]
24
Regulation and corruption:
Remaining bottlenecks in sound regulation and corruption are
reflected in the country’s competitiveness rankings.
2013 rank
WB - Ease of Doing Business
WB - Ease of Doing Business (new
method.)*
Change
(past 3-4 years)
2014 rank
ASEAN rank as of
2014*
108/189
na
40
na
86/189
95/189
na
5 (10)
WEF - Global Competitiveness Report
IMD - World Competitiveness Report
TI - Corruption Perception Index
59/148
38/60
52/144
42/60
33
-1
5 (9)
5 (5)
94/177
85/175
49
3 (9)
HF - Economic Freedom Index
97/177
76/178 (2015)
33
5 (9)
Source: National Competitiveness Council [2014]
*Rank of PH within ASEAN. Figures in parentheses are number of ASEAN countries covered.
Cost of starting a business (% GNI p.c.)
Indonesia
Malaysia
Thailand
Viet Nam
Philippines
Source: ADB [2014].
2005
101.7
26.6
8.1
27.6
23.9
2013
20.5
7.6
6.7
7.7
18.7
Change
-81.2
-19.0
-1.4
-19.9
-5.2
Time to start a business (days)
2005
2013
151
37
33
45
47
48
6
28
34
35
Change
-103
-31
-5
-11
-12
25
Priority legislative measures to sustain growth and make it
more inclusive.
•
•
•
•
•
•
•
•
•
•
•
•
•
Bangsamoro Basic Law
Competition Law
Fiscal Incentives Rationalization
Rationalization of Mining Revenues
Removing investment restrictions in specific laws cited in the
Foreign Investment Negative List (FINL)
Amendment to BOT Law
Amendment to BSP Charter
Customs and Tariff Modernization Act (CMTA)
Water Sector Reform Act
Amendment to Cabotage Law
National Land Use Act
Land Administration Reform Act
Acquisition of Right-of-Way of Government Infrastructure
Projects
26
Growth targets & outlooks for 2015 & 2016
NEDA
BoardDBCC
(as of Jan. 7,
2015)
2015
(projected)
2016
(projected)
GDP growth (%)
7.0-8.0
7.0-8.0
Inflation, CPI (%,
2006=100),
average
2.0-4.0
2.0-4.0
Exchange rate
(PhP/USD)
42-45
42-45
-2.0
-2.0
Budget deficit (%
GDP)
PDP
Update
(as of Jan.
2014)
–
–
–
6.7
6.6
Underemployment rate (%)
18.0
17.0
Sources: NEDA, DBM. *First semester estimate.
–
–
–
Unemployment
rate (%)
Poverty
incidence (%)
Drivers of growth in the near to
medium term
• Supply side
22.5
19.0
•
Manufacturing
Construction and logistics
including rehab. in disasteraffected areas
International and domestic
tourism
Wholesale and retail trade
Business Process Management
(BPM) fueling growth in the real
estate, renting, and business
activities sector
Agribusiness
Demand side
–
–
–
–
Investment: public construction,
including infrastructure and
reconstruction; private
construction
Household consumption:
remittance inflows, strong
consumer confidence
Exports of services: good
prospects on BPM
External trade conditions: low
world price of oil
27
International organizations’ outlooks for Philippine growth
remain optimistic (as of Jan. 2015).
2013
2014
2015
(forecast)
2016
(forecast)
IMF
7.2
..
6.6
6.4
WB
7.2
6.0
6.5
6.5
ASEAN-5
IMF
5.2
4.5
5.2
5.3
Emerging and
developing Asia
IMF
6.6
6.5
6.4
6.2
East Asia & Pacific
WB
7.2
6.9
6.7
6.7
IMF
7.8
7.4
6.8
6.3
WB
7.7
7.4
7.1
7.0
IMF
3.3
3.3
3.5
3.7
WB
2.5
2.6
3.0
3.3
Philippines
China
World
Sources: IMF’s WEO Update (Jan 2015); WB’s Global Economic Prospects (Jan 2015)
28
The 3Gs of Inclusive Development
Good
governance
Good growth
• Rapid
• Sustained
• Inclusive
Good
economics
29
Thank you!
Presentation can be downloaded from:
http://www.econ.upd.edu.ph/ayala-upse
30