The Philippine Economy

Status quo et status ad quem

Ernesto M. Pernia, PhD SECRETARY OF SOCIOECONOMIC PLANNING

National Economic and Development Authority

Outline

• Where are we and where we should go?

• Need for economic rebalancing

• Recent economic performance

• The Plan

• The Outlook

• Opportunities

• Drivers of growth

• Risks and uncertainties

• Postlude

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GDP in 2000 prices, trillion Php, 1960-2018

PH economy has been on a sharp upward growth trajectory since

the beginning of current decade …

3

Real GDP growth

6.2% (2010-2015)

7.6 (2010)

3.7 (2011)

6.7 (2012)

7.1 (2013)

6.2 (2014)

5.9 (2015)

6.9 (2016 S1)

Source: PSA

Structural break for potential GDP ca. 2009

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1990-1999 2000-2009 2010-2015 1Q2016

con

trib

uti

on

to

gro

wth

in p

pt

(%)

Agriculture Industry Services

Investment & industry becoming significant drivers of growth but consumption still dominates as does the service sector, while agriculture remains lethargic and net exports are down …

2.8%

4.5%

6.2%

Ave. growth

6.9% Supply Side Demand Side

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1990-1999 2000-2009 2010-2015 1Q2016con

trib

uti

on

to

gro

wth

in p

pt

(%)

Consumption GovernmentInvestment Net exportsstatistical discrepancy

4.5%

6.2%

6.9%

2.8%

Stark inequality not only among income classes (HHs)

(Gini = 0.46) but also across regional economies,

highlighting NCR-centered development for decades …

Source: PSA

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Regional Share-to-GDP (%), 2013 - 2015

2013 2014 2015

… while economic growth across regions has been markedly

uneven.

Source: PSA

5.9

3.3

6.4

7.2

9.3

5.1

8.3

4.3

5.2

7.8

(2.4)

6.6 7.1

9.3

6.2

9.4

3.0

6.6

3.7

5.0

3.7

5.3 5.9

1.7

8.4 8.3

4.8

3.9

7.2

5.5

7.9

3.3

4.2

(0.8)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

Real GDP Growth Rate (%) by Region, 2013-14, 2014-15

13-14 14-15

Population Growth and Poverty in ASEAN

• Country Population growth(%) Poverty(%)

2010-2015 ca. 2014

• Cambodia 1.5 13.5

• Indonesia 1.4 11.2

• Lao PDR 1.5 23.2

• Malaysia 1.6 0.6

• Myanmar .... 25.6*

• Philippines 1.9 26.2**

• Thailand 0.4 10.9

• Viet Nam 1.1 8.4

* 2010

** 2014 S1

Source: ADB Basic 2016 Statistics

Need for Innovative Statistics

• Issue: why is recent high GDP growth not

trickling down?

• Metrics on how economic growth is distributed

across income classes.

• Metrics on how economic growth is distributed

across the regions.

• And, by the way, we also need to valuate and

monitor our “blue economy”.

Poverty- and Inequality-Reducing

Economic Growth

This program objective of President Duterte entails

major rebalancing of the economy from being:

a) consumption-driven to investment and exports;

b) services-oriented to agriculture and industry

(manufacturing);

c) NCR-centered to regional and rural

development; and

d) in due course, fossil-fueled to renewable energy.

(a) to (c) are to be achieved through the 0 to 10-point

economic agenda.

PARTICULARS

First

Quarter Second Quarter

First

Semester

2016 2015 2016 2016

GROSS NATIONAL INCOME 7.4 5.4 6.8 7.1

Net Primary Income 9.9 2.5 6.2 8.0

GROSS DOMESTIC PRODUCT 6.8 5.9 7.0 6.9

By Production Sector

Agri, Fishery and Forestry (4.4) (0.1) (2.1) (3.3)

Industry 9.0 6.1 6.9 7.9

o.w. Manufacturing 8.0 4.7 6.3 7.2

Services 7.6 6.7 8.4 8.0

By Expenditure

Household Final Consumption Expenditure 7.0 6.4 7.3 7.2

Gov’t Final Consumption Expenditure 11.8 2.4 13.5 12.7

Capital Formation 26.6 21.4 27.6 27.1

o.w. Fixed Capital Formation 28.2 12.7 27.2 27.7

Exports 7.3 5.1 6.6 7.0

Imports 19.0 12.6 20.9 19.9

Growth accelerated in first half of 2016

Source: Philippine Statistics Authority (PSA)

The Philippines is expected to remain one of the fastest

growing economies in Asia

GDP growth of selected Asian economies (%)

Source: IMF-WEO April 2016, July 2016 Update, Article IV consultations for forecast values, and various government websites for actual values

Note: FY2016 and FY2017 are IMF estimates. 2Q2016 figures for India and Philippines are as of 1Q2016

PDP 2011-2016 Targets vs Accomplishments

Indicators Baseline (2012)

2014 2015 2016

Gross Domestic Product (%)

6.8 6.5 -7.5 7.0-8.0 7.0-8.0

Unemployment rate (in %)

7.0 6.8 6.7 6.6

Underemployment rate (% of employed)

20.0 19.0 18.0 17.0

Poverty Incidence (FY; % of population)

25.2 24.0 22.5 19.0

Indicators Baseline (2012)

2014 2015 2016

S1

Gross Domestic Product (%)

6.7 6.1 5.9 6.9

Unemployment rate (in %)

7.0 6.6* 6.3* 6.0

Underemployment rate (% of employed)

20.0 18.4* 18.5* 19.0

Poverty Incidence (S1; % of population)

27.9 26.3

Targets Accomplishment

• Growth has not been broadly shared across

socioeconomic classes and regions -- e.g., inequality

metric persistently high (Gini coefficient at 0.46);

CAR, MMIMAROPA, Eastern Visayas and ARMM

had even slower growth in 2010-2015 than in 2004-

2009.

• Agriculture, Fishery and Forestry grew by only 1.4%

annually in 2010-2015; -2.1% in Q1 2016.

• Food price, in particular rice, rose; poverty line

increased by almost 30% during the period 2009-

2015.

• Resulting in 10M+ more Filipinos.

The nagging PUZZLE:

Fast GDP growth but slow reduction in poverty incidence. Why?

Challenge Agenda

Adverse investment climate Peace and order; massive infrastructure upgrade; cut red tape; ease constitutional restrictions on FDI …

Uneven growth Regional and rural development; pro-poor economic growth ...

Contraction in Agriculture and Fishery sector

Agricultural development; land administration and asset reform; technology and innovation; moving up the value chain and agri-business ...

The Plan: The 0-10 Point Socioeconomic Agenda

designed to address the puzzle & challenge

To illustrate….

Challenge Agenda

High food prices Raise farm productivity;macroeconomic, esp. price, stability; strategic trade policy

Faster population growth [bulge of reproductive-age (15-49) women] during the coming six years or so

Full, rapid and sustained implementation of RPRH Law esp. in LGUs.

PH’s huge lag in Science and Technology (S&T) relative to ASEAN neighbours

Promote S&T and creative arts for self-sustaining inclusive growth and PH’s participation in global knowledge economy

The Plan: The 0-10 Point Socioeconomic Agenda

designed to address the puzzle & challenge

Outlook

Macroeconomic Assumptions

Not

As of July 5 DBCC

2016 2017 2018 2019 2020 2021 2022

Inflation (2006-based) Target 2.0-4.0 2.0-4.0 2.0-4.0 n.a. 2.0-4.0 2.0-4.0 2.0-4.0

Forecast 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0 2.0-4.0

Dubai crude oil (US$/bbl) 35-50 40-55 45-60 50-65 50-65 50-65 50-65

Exchange Rate (Php/US) 45-48 45-48 45-48 45-48 45-48 45-48 45-48

364-Tbill rate (%) ** 2.0-4.0 2.5-4.0 2.5-4.0 2.5-4.0 2.5-4.0 2.5-4.0 2.5-4.0

LIBOR, 6 mos. (%) 0.8-1.8 1.0-2.0 1.5-2.5 1.5-2.5 1.5-2.5 1.5-2.5 1.5-2.5

Merchandise exports (PSA) (%) 4.0 7.0 9.0 11.0 11.0 12.0 12.0

Merchandise imports (PSA) (%) 8.0 11.0 12.0 13.0 13.0 14.0 14.0

Merchandise exports (BPM6) (%)

3.0 6.0 8.0 10.0 10.0 11.0 11.0

Merchandise imports (BPM6) (%) 7.0 10.0 11.0 12.0 12.0 13.0 13.0

Services exports (BPM6) (%) 11.5 13.5 14.0 14.5 14.5 15.0 15.0

Services imports (BPM6) (%) 15.0 15.5 16.0 16.5 16.5 17.0 17.0 **Based on primary market rate Note: Approved by the DBCC last July 5, 2016. Based on BSP data.

Medium – Term

Growth Prospects for 2016-2022

Expenditure

2015 2016 2017 2018 2019 2020 2021 2022

Actual Emerging Emerging Emerging Emerging Emerging Emerging Emerging

GNI 5.8 5.9-6.9 6.5-7.5 6.8-7.8 6.6-7.6 6.6-7.6 6.7-7.7 6.7-7.7

GDP 5.9 6.0-7.0 6.5-7.5 7.0-8.0 7.0-8.0 7.0-8.0 7.0-8.0 7.0-8.0

NPI 5.3 5.5-6.5 6.4-7.3 5.6-6.6 4.7-5.6 4.7-5.6 5.3-6.2 5.3-6.2

Deficit – 2016: 2.7 %, 2017-2022: 3.0 %

Opportunities

Closer economic integration in the ASEAN region which would

open up new sources of capital and markets

Philippine hosting of ASEAN meetings in 2017

Peaceful and smooth transfer of power

Commitment to continue current macroeconomic policies and

programs, sustain reform momentum

Potential resumption of peace talks with NDF, MILF, MNLF

Expected Drivers of Growth

Demand side

Household consumption: remittance inflows, better employment prospects, strong

consumer confidence, low inflation, low interest rates

Government spending: expansion of human development and social protection

programs (i.e. CCT, K-12, health, etc)

Investment: public construction, including infrastructure and reconstruction; private

construction

Exports of services: good prospects for Business Process Management (BPM) and

tourism

Supply side

Lower petroleum prices

Construction and infrastructure development

Manufacturing resurgence

Real estate, renting, and business activities in response to demand from the BPM

sector

Tourism-related services

Wholesale and retail trade

Fragile growth in Japan and European Union

Slowdown in large emerging economies, particularly China

Asynchronous monetary policies in major developed economies

Uncertainties over “Brexit”

Geopolitical tensions in the Middle East, extended period of low oil prices

Maritime dispute in the West Philippine Sea

Risks and Uncertainties

External

Domestic

Logistics bottlenecks

Delays in government infrastructure and reconstruction projects

Weather shocks, potential La Nina

Widening trade deficit

Closure of mines

We remain vigilant and well- positioned against the downside risks to growth

Need for Behavioral Change

• “Vicious patience” vs. “virtuous impatience”

• The former results in vicious circle that keeps us in low-level

equilibrium trap, while the latter leads to virtuous circle that

steadily lifts us out of such a trap.

• The three diverse branches of government can argue and

should act according to their respective roles, but should be

complementary.

• And always aim for a common goal – diversity towards unity –

an exemplar that could be followed by all citizenry – toward

achieving poverty- and inequality-reducing economic growth!