Philippines jabs for growth after Yolanda knockout

Posted at 03/26/14 3:25 PM

MANILA – Like its boxing icon Manny Pacquiao, who was shockingly knocked out by an opponent but found redemption in his next fight, the Philippines should bounce back in 2014 after a deadly blow by typhoon “Yolanda” last year.

Three foreign institutions in separate reports said they expect the Philippines to maintain a strong growth rate this year, boosted by the government’s infrastructure projects and reconstruction program in the aftermath of the typhoon.

But for the Philippines to finally advance to another boxing division like Pacquiao, the Philippines must quicken its pace of project implementation.

“Our Philippines research highlights that the greatest single threat is disappointment with the administration due to slow pace of implementation,” said Australia’s Macquarie, which two years ago had set up with Philippines’ Government Service Insurance System (GSIS) a AUS$625-million fund to invest in infrastructure projects in the country.

Macquarie sees the Philippines maintaining a 6%-6.5% growth rate this year, while World Bank forecasts growth domestic product (GDP) growth rate at 6.6 percent.

DBS, Southeast Asia’s largest bank by assets, even raised its GDP growth forecast to 6.6% for 2014 from the previous estimate of 6.5%.

“The economy is largely unhurt from the devastating typhoon at the end of last year. If anything, the reconstruction efforts taking place in the first-half of 2014 will likely provide another boost to GDP growth momentum,” DBS economist Gundy Cahyadi said.

The country’s full-year GDP in 2013 grew 7.2%, higher than the government’s expectations of 6-7%, despite being struck by the one of the strongest typhoons to ever make landfall.

Construction of the 15-kilometer Metro Manila Skyway 3 project has started, but there are other transportation infrastructure that need to be implemented: the NLEX-SLEX connector road of the Metro Pacific group, and the Integrated Transport System (ITS) terminals.

World Bank country director Motoo Konishi said the $8 billion reconstruction program launched recently by the government will reduce the negative impact of typhoon Yolanda.

“The disruption to economic activity in the affected areas will pull down growth through lower consumption, but a speedy implementation of the Reconstruction Assistance on Yolanda (RAY) program would partially offset the decline in consumption and keep GDP growth strong at 6.6% in 2014 and 6.9% in 2015,” World Bank said.

Punches and headbutts

World Bank, however, warned that a slower global recovery and the end of quantitative easing in the US could release a torrent of punches to the economy.

Slower growth in high-income countries and in China would translate into lower demand for Philippine export products. China accounted for 12% of Philippine exports in 2012.

As to how America’s quantitative easing could impact the Philippines, here’s a quick recap: The US Federal Reserve began its asset buying program in November 2008, purchasing US Treasury notes and mortgage-backed securities, and issues credit to the banks' reserves to buy the bonds.

The purpose of this expansionary monetary policy is to lower interest rates and spur economic growth.

The program is now on its sixth year and since January, instead of buying $85 billion a month in bonds, as it has been doing since September 2012, the Fed has lowered its purchases to $75 billion in bonds each month.

The Fed is expected to gradually cut back on the bond purchases throughout this year so it can completely wind down its stimulus program. The rise in rates will likely pick up pace when the Fed finally raises its key overnight lending rate, which has been near zero since late 2008.

Last week, Fed Chair Janet Yellen, in a press conference following the first policy meeting that she chaired, said the Fed will probably end its bond-buying program next fall.

Kendrick Chua, World Bank senior economist for the Philippines, said the scaling back of quantitative easing in the US could result in higher borrowing costs in the Philippines.

This can impact on those who borrowed money to purchase houses or real estate assets. In case the interest rates rise sharply, some people may not be able to pay the amortizations and their properties may end up getting foreclosed.

The Bangko Sentral ng Pilipinas (BSP) is scheduled to hold a policy meeting March 27. Last week, BSP Governor Amando Tetangco told reporters an "early" and "gradual" adjustment in monetary policy stance rather than "discreet movements" would be less disruptive to businesses.

The BSP’s overnight rate has been at a record low of 3.5% since October 2012 when it was cut by 25 basis points.

Chua said that while businesses and households may be affected, the overall impact on the Philippines is expected to be manageable.

"The country continues to benefit from strong macroeconomic fundamentals, characterized by low and stable inflation, healthy external balances, and improving government finances. These strong fundamentals will continue to shield the economy," Chua said.

Going the distance: Tourism, Sciences

Will be the Philippines mirror Pacquiao, who started as a brawler, but later emerged as a skilled ring warrior?

To remain competitive, Macquarie said the Philippines must avoid or at least minimize the tendency of losing competitiveness in one segment before building competitiveness in other areas.

“The Philippines should improve competitiveness in a number of key agribusiness and metals/mining sub-sectors while maintaining and improving competitiveness in electronics,” Macquarie said.

“In addition to merchandising trade, the Philippines has in our view a significant untapped potential in services exports beyond BPO.”

In the context of IT-BPO (business process outsourcing), the industry continues to expand rapidly. IT-BPO revenues increased by 17% in 2013 and have reached $15.5 billion.

Although the growth rates are likely to taper-off, there is no doubt that the industry has multiple avenues of expansion.

The challenge is to continue diversifying away from voice and into faster areas of growth such as: back-office IT services; engineering & healthcare services; and higher value-added applications, such as animation, Macquarie said.

While the Philippines control almost 30% of the global voice BPO market, the country’s overall share of IT exports remains at around 1%, with clearly significant room for growth.

Fortunately, the current administration, which will be in power until June 2016, remains popular, according to Macquarie.

“Although net ratings are down somewhat, they remain considerably ahead of two other long-lasting administrations and there is an overall feeling of popular consensus for reform," Macquarie said.