Outlook for Global Economic Recovery:

Opportunities and Challenges

Rogier van den Brink Lead Economist and Program Leader

Philippines

Bangko Sentral Ng Pilipinas

Conference on:

Gearing Up for External

Competitiveness

Limketkai Luxe Hotel,

Cagayan De Oro City

19 November 2014

2

Contents

1. Global trends—pessimistic

2. Philippine trends—optimistic

3. Inclusive growth—challenge

4. Opportunity—stars aligned, wind in your sails

5. Poverty projections—look good

6. Jobs challenge—remains

7. The way forward…

3

Global recovery is weak and slow…

Outlook is pessimistic

Disappointing year

Global growth forecasts: revised further down

Trade: slower long-term growth

Outlook is pessimistic:

Summers’ “Secular Stagnation”

Lagarde’s “New Mediocre”

Rodrik’s pessimism about the relevancy of the “old” growth

strategies for the future

Developing countries: transition to a new environment

Post-crisis growth slowdown widespread

Structural challenges abound

4

Global growth downgraded during 2014

Global growth:

3.2% >> 2.6%

Growth in developing countries:

5.3% >> 4.5%

Growth in high income countries:

2.2% >> 1.8%

Source: World Bank Global Economic Prospects

Medium-term global growth: mediocre

5

Sources: World Development Indicators; DECPG Projections

-4

-2

0

2

4

6

8

10

200

7

20

08

200

9

201

0

201

1

201

2

201

3

201

4

20

15

201

6

201

7

World High income countries Developing countries

GDP growth (percent)

Slower trade growth….structural shift?

6

80

100

120

140

20

05

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

World trade

Trend 05-08

Trend 11-14

Index, 2008Q1 = 100

Rodrik on service sector and growth

strategies in developing countries…

7

But… Philippines’

growth is only now

picking up, strategy

is not based on

export-led, labor

intensive

manufacturing, and

the BPO sector is

booming!

3% by 2030 is far from assured:

Business as usual will not get us there

8

Scenario Headcount

(percent)

Number of poor

(million)

Average income growth of 4% p.a. in each country 3 252

Each country sustains avg per capita growth during past 20 years 6.8 573

Each country sustains avg per capita growth during past 10 years 4.8 405.4

Each country sustains avg per capita growth during past 10 years

(survey-based growth) 6.7 564.8

Global Poverty in 2030 at $1.25 per day (2005 PPP),

assuming unchanged inequality

Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared

Prosperity

…and growth is slowing.

Projecting the changing face of poverty to

2030

9

Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared

Prosperity

Note: Data for the Philippines refer to 2012 poverty data taken from the Family Income and

Expenditure Survey, the latest year with available full year poverty estimates.

…But the Philippines has experienced higher

growth in recent years…

10

-10

-5

0

5

10 Real GDP per capita (2000 prices) growth

Pe

rce

nt

Sources: National Statistics Office (NSO), WDI, World Bank staff estimatesNote: Red line at 2.5 percent (long run average)

Post war

reconstruction

Debt-driven

growth

Governance-led growth

…along with stronger macro fundamentals…

11

-9

-6

-3

0

3

6

Current account balance

Perc

ent

of

GD

P

Sources: WDI, Department of Budget and Management (DBM)Notes: The red line is at -3 percent. Current account balance has a series break in 1977 and in 2005.

…lower inflation…

12

Low and stable inflation in the last decade has led to

increased real income for businesses and households

0

5

10

15

20

Pe

rce

nt

CPI inflation

Sources: Philippine Statistics Authority, Bangko Sentral ng PilipinasNotes: The red line is at 5 percent.

…improving fiscal position…

13

-6

-5

-4

-3

-2

-1

0

1

2

0

10

20

30

40

50

60

70

80

90

Per

cen

t o

f G

DP

National government deficit and debt

Debt

Deficit (rhs)

Per

cen

t o

f G

DP

Source: WB staff estimates using NSCB, BTr, and DOF data

Lower debt levels and deficit mean more fiscal space for pro-poor

spending. In fact, social spending doubled in the last 4 years.

-15

-10

-5

0

5

10

15

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2011 2012 2013 2014

Perc

enta

ge p

oint

Demand side: contribution to GDP Growth

Private consumption Govt consumption Capital formation

Statistical Discrepancy Net Exports GDP growth

Source: PSA

Recent economic and policy developments

14

GDP growth decelerated somewhat to 6.0 percent in H1 2014

due to weak government consumption and public construction.

Private consumption continued to drive growth.

But growth was third highest in the region behind only China and

Malaysia.

Inclusive growth challenge: Creating more and better jobs, reducing poverty and protecting the

vulnerable

15

Growth may be necessary but is not sufficient to ensure poverty reduction…

How broadly based growth is—i.e., how pro-poor the distribution of

growth is—also matters…

Raising the returns to labor—the main asset of the poor

by…

…increasing value-added per worker in

agriculture

…moving workers out of agriculture to higher value-

added activities in manufacturing and service

…as does how resilient growth is and the extent to which poor and vulnerable households are protected

from shocks

Putting in place appropriate

social protection schemes

…and raising human capital endowments

China’s incidence of growth:

inclusive growth in several periods

16

Philippines?

17

• Long history of policy distortions

slowed the growth of agriculture

and manufacturing in the last six

decades.

• Incomplete structural

transformation

• Agricultural productivity has

remained depressed,

manufacturing has failed to grow

sustainably, and a low-

productivity, low-skill services

sector has emerged as the

dominant sector of the economy.

0

20

40

60

80

Sector share to GDP

Agriculture Industry Service

Source: PSA

Perc

ent

0

10

20

30

40

50

60

70

Perc

ent

Employment share by sector (detailed)

Agriculture Manufacturing Other industries

Formal services Informal services

Source: LFS, PSA

Philippine incidence of growth: less

inclusive

18

-10

-5

0

5

10

15

20

1 11 21 31 41 51 61 71 81 91

Ave

rage

an

nu

al g

row

th in

pe

r ca

pit

a co

nsu

mp

tio

n (

%)

Percentiles of the distribution of per-capita household consumption

PHILIPPINES: per-capita household consumption GROWTH INCIDENCE CURVES

1994-1997

2006-2009

2003-2006

2000-2003

1997-2000

2009-2012

A window of opportunity

19

A regional environment favorable to the Philippines

Sound macroeconomic fundamentals

A government committed to reform

Widespread confidence

Highly skilled, talented, English-speaking, youthful

population

Abundant natural resources

Opportunity to build on momentum of reforms already

successfully implemented, for instance:

Better public financial management, which created fiscal space

Doubling of budgets for social services since 2010

Conditional cash transfer and CDD programs

Major improvements in transparency (Open Government)

Good neighborhood to be in!

20

Source: World Bank

0

1

2

3

4

5

6

7

8

East Asia &Pacific

Europe &Central Asia

Latin America &Caribbean

Middle-East &North Africa

South Asia Sub-SaharanAfrica

2012 2013 2014 2015 2016

Percent annual GDP growth

East Asia and ASEAN growth projections

21

Forecast

Changes from April 2014

(in percentage points)

2012 2013 2014 2015 2016 2014 2015 2016

East Asia 6.0 6.1 6.0 6.1 6.1 -0.2 -0.2 -0.3

Developing East Asia 7.4 7.2 6.9 6.9 6.8 -0.2 -0.2 -0.3

China 7.7 7.7 7.4 7.2 7.1 -0.2 -0.3 -0.4

Indonesia 6.3 5.8 5.2 5.6 5.6 -0.1 0.0 0.0

Malaysia 5.6 4.7 5.7 4.9 5.0 0.8 -0.1 0.0

Philippines 6.8 7.2 6.4 6.7 6.5 -0.2 -0.2 0.0

Thailand 6.5 2.9 1.5 3.5 4.0 -1.5 -1.0 -0.5

Vietnam 5.2 5.4 5.4 5.5 5.8 -0.1 -0.1 0.0

Cambodia 7.3 7.4 7.2 7.5 7.2 0.0 0.5 0.2

Lao PDR 8.0 8.5 7.5 6.4 7.0 0.3 -1.5 -2.1

Myanmar 7.3 8.3 8.5 8.5 8.2 0.7 0.7 0.4

ASEAN 5.7 5.0 4.5 5.0 5.3 -0.3 -0.2 -0.1

Memo: Developing East Asia ex-China 6.2 5.2 4.8 5.3 5.1 -0.2 -0.3 -0.1

World 2.5 2.4 2.6 3.2 3.3 -0.4 -0.1 -0.1

High-income countries 1.5 1.3 1.8 2.3 2.4 -0.3 -0.1 0

Developing countries 4.8 4.8 4.5 5.0 5.3 -0.5 -0.4 -0.3 Source: World Bank, "East Asia and Pacific Economic Update: Enhancing Competitiveness in an Uncertain World", October 2014

Current growth more pro-poor…

22

20

22

24

26

28

30

32

0

4

8

12

16

20

24

28

Po

vert

y in

cid

en

ce (

pe

rce

nt

of

po

pu

lati

on

)

Mag

nit

ud

e o

f p

oo

r (i

n m

illio

ns)

Poverty incidence and magnitude(first semester estimates)

Magnitude (in millions) Incidence (lhs)

Source: PSA, United Nations World Population Prospects

Jan Apr Jan Apr Jan Apr

Unemployment 7.2 6.9 7.1 7.6 7.5 7.0

Underemployment 18.8 19.3 20.7 19.2 19.5 18.2

Job creation (thousands) 1,005 1,001 519 -37 283 1,654

By industry:

Agriculture 132 323 -540 -621 121 323

Industry 210 219 318 228 117 345

Services 664 458 741 393 45 910

By sector:

Public sector 115 21 24 45 -35 -11

Private sector 891 980 495 -82 318 1,665

By class of worker:

Wage and Salary 435 838 1,820 593 -994 914

Self-employed 349 -15 -613 -225 705 445

Unpaid workers 220 178 -688 -404 536 296

Source: LFS

2012 2013 2014

Note: January estimates exclude Region 8, whi le Apri l estimates

exclude the provnce of Leyte, due to the effects of typhoon Yolanda.

In 2013, poverty incidence declined

significantly

23

First half poverty incidence among the population fell by 3 ppt. to 24.9

percent, down from 27.9 percent in the same period in 2012.

This translates to around 2.5 million Filipinos uplifted from poverty.

Job creation:

In 2013, weak

In 2014, better

Philippine Development Plan’s poverty targets

for 2016…can be achieved

24

Scenario 1:

GDP p/cap growth 4.2%

(Med-Term WB estimate)

Alternative elasticities of

pov reduction not pro-

poor to pro-poor growth.

Scenario 2:

GDP p/cap growth 5.7%

(Gov. 7-8% GDP growth

target by 2016)

Same alternative

elasticities of poverty

reduction.

Under both growth scenarios, achievement of 18-20% poverty target

possible, if the 2012-2013 elasticity is maintained (pro-poor growth).

In the higher growth scenario, an elasticity half the size would also

achieve the target.

These rough estimates suggest the government could achieve its

poverty reduction target…

Elasticity = -2.03 (2012-2013)

Elasticity = -1.00

Elasticity = -0.24 (2006-2012)

The jobs challenge is more daunting…

25

Medium-term reform agenda:

26

Thematic areas:

Enhancing competition

Simplifying business regulations

Securing property rights

Increasing investment in physical and human

capital

No silver bullet…these are the “economy-wide

capabilities” that Rodrik was talking about

Example: Enhancing competition in the shipping

industry needs a package of reforms

27

Philippines EAP

Weak competition Share of primary routes served by a single operator (%) 40 NA

High shipping costs Share of logistics costs to wholesale price (%) 24-53 20

High shipping costs Share of shipping and port handling costs to wholesale price (%) 8.4 NA

High shipping costs Share of shipping and port handling costs to retail price (%) 4.9 NA

Small domestic trading volumes Domestic market throughput (millions of metric tons) 74 782

Low quality of services Rank in liner shipping connectivity (out of 157) 66 17

Poor port infrastructure Rank in quality of port index (out of 148) 116 47

Low profitablity Average return on equity (%) 1 NA

Old vessel age Average age of ships (years) 30 22

Poor safety standards Average number of yearly accidents 228 32

Poor safety standards Average number of yearly casualties 303 60

Sources: World Bank (2013), World Economic Forum (2013), JBIC (2002), Securities and Exchange Commission, MARINA, National Statistical Coordination Board, World Development Indicators, and Board of Maritime Inquiry, UNCTAD (2011), Various country statistical officesNote: Average age of ships used was global average in the absence of dataSelect East Asia and the Pacific countries are Singapore, Hong Kong, China, Malaysia, Thailand, Viet Nam, and IndonesiaA group of 5 international comparator shipping firms from the region were used for average return on equity

Sector Features Measurement Indicator

Example: Simplifying regulations requires a

package of reforms…

28

Indicator 2015 Rank(Change), DTF

2014 2013

Ease of doing business 95 (+13), 62.08 108 138

Starting a business 161 (+9), 67.23 170 161

Dealing with construction permits 124 (-25), 66.08 99 100

Getting electricity 16 (+17), 90.59 33 57

Registering property 108 (+13), 62.81 121 122

Getting credit 104 (-18), 40.00 86 129

Protecting investors 154 (-26), 41.67 128 128

Paying taxes 127 (+4), 66.46 131 143

Trading across borders 65 (-23), 77.23 42 53

Enforcing contracts 124 (-10), 52.02 114 111

Resolving insolvency 50 (+50), 56.74 100 165

RANKINGS: Philippines in ASEAN - Up 1

29

Countries 2015

N=189

2014

N=189

2013

N=185

2012

N=183

2011

N=183

Singapore 1 1 1 1 1

Malaysia 18 6 12 14 23

Thailand 26 18 18 17 16

Vietnam 78 99 99 99 90

Philippines 95 108 138 136 134

Brunei D. 101 59 79 83 86

Indonesia 114 120 128 130 126

Cambodia 135 137 133 141 138

Laos 148 159 163 166 163

Starting a Business

30

Country

(Starting a Business Rank) Number of

Procedures

Singapore (6) 3

Malaysia (13) 3

Thailand (75) 4

Laos (154) 6

Vietnam (125) 10

Indonesia (155) 10

Cambodia (184) 11

Myanmar (189) 11

Brunei D. (179) 15

Philippines (170) 16

0

1

2

3

4

5

6

Pe

rce

nt o

f GD

P

Education

0

1

2

3

Pe

rce

nt o

f GD

P

Health

0

1

2

3

4

5

Pe

rce

nt o

f GD

P

Infrastructure

Public Expenditure

Source: WDI and ADB estimatesNotes: Education and health figures are from 1995 to 2012 (Some countries have missing values for certain years.). Infrastructure data is from 2008 to 2012.

Example: investing in infrastructure, health

and education…

31

However, the Philippines has an investment deficit

Spending on infrastructure, health and education has been lower than in

some neighboring countries.

Low spending has contributed to weak health outcomes and lower

quality of education, and tremendous traffic.

But recent trends are in the right direction…need to be sustained

Financing this trend needs more revenues…

so reduce the tax gap

32

0.31.8

3.01.8

6.9

0.8

0.3

1.4

1.4

4.0

0

2

4

6

8

10

12

SEP CE CIT VAT Total

Actual Gap

(0.5)

-

0.5

1.0

1.5

2.0

2.5

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Using NSO imports Using BOC imports

BIR tax gap (in percent of GDP)

(Actual collection plus collection gap) BOC tax gap (in percent of GDP)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

UsingNSOimports UsingBOCimports

33

…and more reforms in areas such as

real property tax.

• As of June 2014, around 80% of cities and 75%

of provinces use outdated schedule of market

values (SMVs) for collecting real property tax.

• Richer LGUs continue to use decade-old property

valuation.

Quezon City

Makati City

Pasig City

Los Baños

Tagaytay City

Dasmariñas City

Cainta

Malolos City

San Miguel

Antipolo City

San Pablo City Calamba City

(9, 29]

(6, 9]

(3, 6]

[2, 3]

Number of years since

last update

(9, 29]

(6, 9]

(3, 6]

[2, 3]

Number of years

since last update

…needs a tax reform package…

34

Raising tax revenues efficiently and equitably

First phase: raising tax revenues

Rationalize tax incentives to reduce

redundancy;

Enact a tax expenditure ceiling

Reduce the number of VAT exemptions;

use the NHTS-PR to protect vulnerable

Filipinos

Centralize the valuation of real properties

and, if needed, levy a national surtax to

enhance equity

Index petroleum excise taxes once prices

have fallen or automatic increase in excise

tax once fuel price falls to enhance equity

Second phase: lowering tax rates and

further broadening the base

Reduce the corporate income tax rate

while increasing the gross income

earned to enhance equity

Reduce the highest marginal tax rate for

personal income tax and reduce the

number of brackets

Consolidate all laws and regulations on

tax incentives into one code

Simplify the tax regime for micro and

small firms into a single tax on turnover

to reduce compliance cost

The way forward

35

“We Can Work It Out” is not just a nice

slogan…

36

Broad reform coalitions are necessary. Without a broad coalitions,

reforms made under a strong president can be reversed, as the

country’s history has shown.

Stakeholders need to focus on a package of reforms to support inclusive

growth. Given the political economy, individual reforms will face strong

opposition.

Example: sin tax reform

These coalitions can form at many levels and around many themes

Country needs to come together and seize this unique window of

opportunity

…not to be missed!

Inspiration: a history of successful reforms

that made a big difference, but were strongly opposed by

key stakeholders

37

0

100

200

300

400

500

600

700

800

900

Hundre

d t

housands

BPO sector - total employment

Source: BPAP

0

10

20

30

40

50

60

70

80

90

100

Mill

ions

Number of mobile phone subscribers

Source: WDI

0

5

10

15

20

25

30

Mill

ions

Number of internet users

Source: WDI

0

5

10

15

20

25

Mill

ions

Air transport, passengers carried

Source: WDINote: Data include passengers of both domestic and

international flights.

Final example: What to do about rice prices?

38

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Wh

ole

sa

le p

ric

es

, U

SD

/kg

Philippines

Vietnam

Thailand

In September 2014,

1kg of rice cost PHP

41 in Philippine

supermarkets.

Consumers in Vietnam

were paying the

equivalent of PHP 16.

Example of a balanced package of reforms:

39

Government

• Enhance programs to reduce food prices without farm profits falling

• Provide universal social protection, health insurance, basic education

• Simplify business regulations, for firms of all sizes

Businesses

• Support reforms that promote competition to level the playing field

• Support freedom of association and collective bargaining

• Partner with government and organize training for workers to create and upgrade skills

Labor

• Actively participate in dialogue and include informal workers

• Recognize valid forms of flexible contracts

• Reduce calls to hike minimum wages, as food prices fall.

Civil society

• Ensure broad-based participation and support for this type of agreement.

• Monitor commitments made

• Support evidence-based policy making, performance-informed budgeting (media, Open Government)

The way forward

40

Thank you

Rogier van den Brink Program Leader and Lead Economist