Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Major Reasons for Continuing Optimism

           As we move towards the last quarter of the year, there are major reasons to be increasingly optimistic about prospects for the Philippine economy in an otherwise bleak global environment resulting from a hard landing of the Chinese economy, the travails faced by most emerging markets like Russia and Brazil, 00.   Most assessments of the near and intermediate future of the Philippine economy by international analysts still place us at the top of Asian economies.  In fact, there is increasing consensus that China may be growing only at 4 to 5 percent, and not at the official propaganda of 7 per cent. The 5.6 percent growth of GDP in the second quarter, an acceleration from the first quarter 5.0 percent, augurs well for the rest of the year and next year.  An average of 6.5 percent  annual growth rate for the next 18 months can be achieved as domestic consumption is stimulated by both the depreciation of the peso and the election-related spending that is expected to kick off by October 2015 and may last till June of 2016.  It is also providential that the last quarter will surely see both OFW remittances growing faster and consumers being encouraged by the Christmas spirit to spend more.

          Especially encouraging is the way effective leadership in the Department of Public Works and Highways was able to address the underspending syndrome of the National Government.  For the second quarter of 2015, the DPWH was way above budget.  Considering that the Aquino Administration will move heaven and earth to impress the electorate with massive public works in the last quarter of 2015 and the first few months of 2016, just before the election ban on construction, we can expect public spending to strongly complement the two engines of growth of the national economy:  the remittances of Overseas Filipino Workers (estimated to reach $30 billion if we include the informal channels in 2015) and the revenues of the IT-BPO sector which will exceed $20 billion in 2015. Multiplying these sizeable earnings by an average of P46.50 to $1, one can count on a veritable explosion of expenditures on Fast Moving Consumption Goods, like food and beverage, fashion goods, consumer durable goods, automobiles, and leisure and entertainment.  In fact, the 40 million domestic tourists will bring higher growth to regions outside of Metro Manila, like Bohol, Iloilo, Cebu, Palawan, Ilocos Norte, and other tourist destinations.  While we may not be very bullish about foreign tourism, especially considering the slowdown in the expenditures of Chinese consumers, domestic tourism is another thing.  The 40 million or so domestic tourists are giving a big boost to the Bed and Breakfast sector, especially in places like Puerto Princesa and CALARBAZON.

          The earnings of OFWs and BPO-IT workers continue to support the economic, low-cost and mid-level housing industry that continues to undersupplied.  Thanks to low rates of interest that can be maintained at least for the next 18 months, housing units costing anywhere from P400,000 to P6 million continue to sell, not only in the National Capital  Region but in other “rurban”  areas like Cebu, Iloilo, Cagayan de Oro, Naga, Angeles-San Fernando City, Dagupan and the booming CALABARZON area where Japanese firms are mushrooming, thanks to much higher labor costs in China and the escalating energy prices in Japan.  Some real estate developers are now constructing dormitories for thousands of workers who are being attracted to economic zones in Cavite, Laguna, Batangas, Rizal and even Quezon.  Horizontal housing is again getting more attention as middle-income households are being attracted to housing subdivisions in the suburbs, such as those being put up by Vista Land and Pro-Friends, among others.

          In the next three years, expect to see a revival of manufacturing from the growth of food and beverage enterprises catering to the domestic market.  There is also an increasing role for domestic pharma enterprises like United Laboratories and Pascal Laboratories in supplying the increasing demand for health-oriented products as these capture a greater fraction of household expenditures, especially among the low middle-income segments that are the targets for generics and over-the-counter products.  Also benefiting from the consumption-led growth are fashion goods, restaurants and leisure-oriented goods and services.  I am especially watching the increased interest in football and the resulting growth of consumer products related to this industry.

          The major reasons for optimism in the middle-term is the sustainability of a consumer-led growth.  Over the longer term, however, say ten years or more, we should worry if investment as a percentage of GDP continues to be at the level of 19 to 20 percent, the lowest in the Asian region.  Such low investments will mean deteriorating infrastructures, higher levels of unemployment and the continued stagnation of the agricultural and rural sectors.  We must choose leaders in the next Administration that will address this nagging problem by directing more infrastructure investments in regions outside the Metro Manila area, removing constitutional and other obstacles to Foreign Direct Investments, investing more in quality education at all levels and increasing investments in research and development.   As I have discussed in previous articles, these are also the measures needed for the Philippines to avoid the “Middle Income Trap.”    For comments, my email address is bernardo.villegas@uap.asia.