cielito f. habito, ph.d. professor of economics & director,

Cielito F. Habito, Ph.D.Professor of Economics & Director,Ateneo Center for Economic Research & DevelopmentAteneo de Manila University

Presentation on the Economic Performance and Outlook for

MEPI

Overview

– Where We Have Been: 50 Years A Laggard

– Where We Are Now: Key Economic Trends

– What It All Means for Filipinos– Outlook & Imperatives

•Economic Drivers & Downers•The Challenge of Inclusive Growth•Where We Need to Push•Outlook for Pharmaceuticals•Long Term Prospects

The Philippines & Thailand:Estranged Twins

Thai Phil Thai PhilPopulation (million) 36 36 66.9 92.2Population G.R. (%) 3.1 3.1 0.6 2.0GDP Per Capita (US$) 250 250 4062 1796GDP Share (%) Agriculture 32.0 26.0 11.6 14.8 Industry 23.0 27.5 43.3 30.2 Services 45.2 46.7 45.1 55.0

Gross Dom Inv (%GDP) 20.0 20.0 21.8 14.6Gross Dom Saving (%GDP) 18.5 20.3 31.7 15.6

FDI Stock (Billion US$) 7.8 2.3 93.8 22.91998 2009

Indicator1970 2009

1965 2009

• In 1960, average income in RP was twice that of Thailand; now it is the reverse

• Other East Asian economies’ GDP grew annually at 3.6-6.0%; RP only grew 1.4%

• Per capita GDP has grown 19 times in China, 8 times in Thailand, 6 times in Malaysia & Indonesia, but only 2 times in RP

• At current rates of per capita income growth, WB estimates it would take RP >200 years to reach the average per capita GDP of the OECD (developed) countries

Fifty Years A Laggard

Top Heavy GrowthBottom-Heavy Needs

Narrow: Growth is propelled primarily by a few leading sectors and geo-graphic areas

Shallow: Weak linkages to rest of economy – e.g., low domestic value-added exports

Hollow: Jobless growth; poverty-increasing growth

Poverty incidence rose from 30% in 2003 to 33% in 2006, and 37% in 2009 (NSCB)

Real per capita income fell 10% nationally, and fell in 50 provinces between 2003 and 2006 (NSCB)

Basic education enrollment rates dropped in 75% of provinces between 2002 & 2004 (PHDR 2009)

Wide disparities in life expectancy across provinces: Low - 53.4 (Tawi-tawi); High - 74.6 (La Union) (PHDR 2009)

Top-Heavy Growth, Bottom-Heavy Needs

Wanted:Inclusive Growth

a.k.a. Broad-Based Growth:

• Sectorally

• Geographically

• Temporally

Assessing Economic Performance: The “PITIK

Test”The Essential Yardsticks (P-T-K):

•Price Stability (Presyo)

•Jobs (Trabaho)

•Incomes (Kita)

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Prices: Rose faster than in 2009, but more slowly than projected; now ticking up again

Jobs: Jobs caught up with labor force growth – but job quality remains a challenge

Incomes/Output: Strong Overall―Manufacturing surged―Services saw robust growth―But agriculture declined

The Economy Last Year & Now: Good News && Bad News

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Investment and Exports: strong rebound, even with dropping foreign investment inflows

Balance of Payments: favorable last year; has now turned negative

Peso: appreciating with weak dollar and amid “currency war”

Net Income Inflows: slows to single digit growth; now facing new threats

Fiscal Deficit: too big for comfort

The Economy Last Year & Now: Good News && Bad News

Presyo:Inflation Trends

2007-Present

2.8%

9.3%

3.2% 3.8% 4.3%

2007 2008 2009 2010 2100

Trabaho:Latest Jobs SurveyMixed Picture

Kita:Incomes/Production

(GDP): 2010: Renewed Industrial Vigor• Surge in Private Construction

(19.1%) and Durable Equipment (25.7%)

• Exports up 33.7% in Dollar values (25.6% in real terms)

• Consumption growth surges in Q4 (7% from normal 4-5%)

• Manufacturing up by double digits

• Private services (esp. media) up 8.8% (media surged 31.4% in Q1)

• Spoiler: Agriculture declines 1% (but bounced back in Q4)

Q1 Q2 Q3 Q4 FY

GNP Growth (%) 8.6 7.6 6.0 6.7 7.2Net Factor Inc fr Abr 14.1 3.9 3.9 3.8 6.0GDP Growth (%) 7.8 8.2 6.3 7.1 7.3 Agri, Fish & Forestry -2.7 -3.2 -3.0 5.4 -0.5 Industry 15.9 16.1 8.6 8.3 12.1 Services 7.1 6.7 8.0 6.9 7.1

Indicator2010

Overall Output/Income Growth

Industry Takes the Lead

Industry Leads the Way Manufacturing Makes

A Comeback

Q1 Q2 Q3 Q4 FY

INDUSTRY SECTOR 15.9 16.1 8.6 8.3 12.1 Mining/Quarrying 7.4 37.4 6.9 15.5 18.4 Manufacturing 20.4 12.7 9.0 8.9 12.3 Construction 4.3 22.5 7.5 2.4 10.5 Utilities 8.2 8.6 8.8 8.5 8.5

2010Sector

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-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Gross Regional Domestic Product, 2008-2009

Bicol Region grew

fastest

4 Regions declined

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Q1 Q2 Q3 Q4 FY

Personal Consn Exp 5.4 4.6 4.1 7.0 5.3

Govt Consumption 20.0 5.8 -7.9 -7.6 2.7

Capital Formation 21.9 10.8 12.4 22.8 17.0 Of which: Construction 7.9 23.9 8.6 3.4 12.0 Public 8.5 27.8 -24.0 -14.3 3.7 Private 7.6 18.5 34.7 14.6 19.1 Durable Eqpt 26.0 31.8 18.8 26.8 25.7 Br Stck & Orch Dev 1.4 3.3 2.1 2.9 2.4

Exports 22.4 29.1 28.3 21.1 25.6Imports 22.4 20.4 18.5 21.8 20.7

2010Indicator

Private Investment Surges…Govt Spending Takes the Background

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… even as FDI dipsInflows Down, But Intentions Up

Top 2 Sources: Japan,

Netherlands

89% in Manufacturing

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YearRemittances

(US$)Growth Rate (%)

2003 75784582004 8,550,371 12.82005 10,689,005 25.02006 12,761,308 19.42007 14,449,928 13.22008 16,426,854 13.72009 17,348,052 5.62010 18,762,989 8.2

Remittances slowed in 2009, but picked up anew

How do recent economic trends translate to human welfare and poverty of Filipinos?

Ateneo Center for Economic Research and Development

The Economy in Human Terms

• Poverty rose from 24.9% (2003) to 26.5% (2009) [Under old definition: 30% (‘03) to 33% (‘06) to 37% (‘09)]

• No. of poor Filipinos up by 970,000, or 185,000 families between 2006 and 2009 (Poverty line: P7,017/month per family of 5)

• Net elementary school participation rate down from 97% in 2001 to 85% in 2008

• Net high schol participation rate down from 66% to 62%

• Malnutrition incidence went up in most provinces

Self Rated Poverty: 49% of Filipinos feel poor (Q4-

2010)

Lowest since Cory Aquino – but is it really?

Hunger: Roller Coaster

SWS Q1-’10 Puzzle: Self-Rated Poverty Down But

Hunger Up • Of the 4 million households

reporting hunger in March 2010, only 2.6 million rated themselves as Poor.

A significant 1.4 million who suffered from hunger did not consider themselves to be Poor.

• Living standards had dropped so low that standard of “poorness” has dropped (misery loves company)

Outlook & Imperatives

Why 2011 Should

Be Better Recovery from El Niño Resurgence in investment

(especially domestic) Proven “immunity” to global

slowdown Remittances continue growth “Rebalancing” of Asian growth

toward more internal, intra-regional demand

Recovery from El Niño Resurgence in investment

(especially domestic) Proven “immunity” to global

slowdown Remittances continue growth “Rebalancing” of Asian growth

toward more internal, intra-regional demand

Possible double-dip recession (W-shaped recovery) in the West?

European economies under threatMiddle East unrest and new

inflation pressures Peso appreciation (mixed effect)Japan earthquake/tsunami and

nuclear disasterMedium Term: Heavy debt burden

and continued fiscal pressures

Possible double-dip recession (W-shaped recovery) in the West?

European economies under threatMiddle East unrest and new

inflation pressures Peso appreciation (mixed effect)Japan earthquake/tsunami and

nuclear disasterMedium Term: Heavy debt burden

and continued fiscal pressures

Why 2011 ShouldWhy 2011 ShouldBe WorseBe Worse

Where is the Peso Going?Where is the Peso Going?

Euro

Baht

Sing$

Peso

Rupiah

Revenues: Restore tax effort to 17%; mostly from collection/compliance boost; sin taxes, trim excess tax perks

Infrastructure: Massive catch-up program needed; needs above revenue boost &/or better BOT rules

Investment: Now exceeded by savings; confidence boost needed

Democratize Growth: Massive SME boost, asset reform, competition policy (esp. with PLDT-Digitel merger)

Achieving Inclusive Growth:Where To Push

Sectors to Watch,Sectors to Push

Sectors to Watch,Sectors to Push

End of El Niño droughts

Rebound from 4-quarter decline

Ongoing budget reforms promise positive results

DA to “steer” while LGUs “row”

Remittance-fueled consumer food demand may taper in short term due to external developments

Agriculture & Agribusiness

Focused investments under Tourism Act of 2009 underway

Pocket open-skies policy to lower costs, hike tourist arrivals

Improved peace prospects in Mindanao; tourism a major thrust in Mindanao 2020 Plan

“Appreciation lag” of Peso vs. neighboring currencies can make PH relatively more attractive

Tourism& Allied IndustriesTourism& Allied Industries

Sustained demand growth projected for long term

Indian firms now moving into Philippines

Need to address dwindling skilled recruitable personnel

Important driver of real property development sector

Business Process Outsourcing

Private construction is on a rebound (19.1% growth in 2010)

Massive infrastructure push (GAA & PPPs) is imperative & inevitable

Revenue performance needs clear improvement; PPP policy environment needs constant improvement

Huge unmet demand in low to medium-cost housing

ConstructionConstruction

Electronics: Continued dominance

Food & Beverages: Rising average incomes; elastic demand for processed food steady medium to long-term growth

Design-based manufactures: Innate competitiveness (e.g. Cobonpue, Lhuillier)

Manufacturing

Projected annual PH market growth rate to 2015: 6.9% (BMI)

Drivers:− Cheaper Medicines Act (Elastic

demand leads to higher gross sales)

− Mergers/industry consolidation (Greater stability)

− Universal PhilHealth coverage by 2015 (Wider market)

PharmaceuticalsPharmaceuticals

Economic Outlook: 2011

•Presyo: ➔ Inflation projected to inch

upward to 5-6% •Trabaho:

➔ Marginal improvement at 7-8% unemployment

•Kita: ➔ Consensus GDP growth

projection: 5-6%

• Exceptionally rich natural & human resources

• Strategic geography (transshipment, shipbuilding/repair, tourism)

• Favorable global, regional trends (e.g. aging, medical tourism, outsourcing)

• Resilient, adaptable people, in high demand worldwide

Completing the picture: Good Governance is key!

Long Term Outlook:Building on Inherent Strengths

Quality Appointments to Cabinet, revenue and regulatory agencies

Zero Tolerance for Corruption: an unequivocal policy

Decentralized Governance where NG “steers,” LGUs “row”

Participatory Mechanisms: bring people to the gov’t & gov’t to the people

Streamline Government Processes to reduce cost of doing business

Checklist For Good Governance

Bgy. Lopero, Jose Dalman, Z Norte Carabaos, Not Fertilizers: A Farmer’s Plea

Magsaysay, Davao del SurDiversified Organic Farming System: A Mayor’s Lament

Upland Barangay, SaranganiHorses vs. FMR: A Pragmatic Farmer

Bottom-up devt; Solutions need not be sophisticated nor expensive!

Post Script:Stories from the Countryside

cfhabito@gmail.com