What drives Philippine economic growth?

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RAOUL A. VILLEGAS

Consider this: the Philippine economy grew by 6.8 percent in 2016, outpacing the annual average growth rate of 6.7 percent during the administration of Ramon Magsaysay (1954-1957). People who will get their senior citizen cards this year have not lived in an economy growing this fast, since they were born.

Main growth drivers: agriculture, industry and services

Agriculture, which accounts for 10 percent of the economy, shrank last year by 1.3 percent from a year earlier. Agri-industry issues mainly stem from a lack of infrastructure. Farm-to-market roads remain a crucial need. Cold chain logistics, which is in high demand, is still highly fragmented and underdeveloped. Growth in gross value-added in palay, fishing, livestock and poultry (agriculture’s largest sub-segments) in 2016 actually decelerated, compared with the 2011-2016 compound annual growth rates (CAGRs).

Industry, comprising 33 percent of the economy, grew by 8 percent in 2016. Main growth drivers came from manufacturing, and correlate to population growth. Accelerating growth in these disparate sectors are actually tied together: food, beverage and tobacco; basic metals and rubber and plastic products; computing machinery, transport equipment and real estate rentals.


Services, which grew by 7.5 percent in 2016, account for 57 percent of our economy. Together with growth in industry, the opportunity to reverse the underinvestment in agriculture, and our nation’s natural advantages, the services sector has the potential to drive unprecedented economic growth.

Major economic growth themes

Before we dive into the microeconomy, it is useful to remind ourselves of one essential fact: despite all noise to the contrary, the Philippines technically does not have any external debt. As of September 2016, our external debt stood at $76.6 billion. In the same month, our gross international reserves (GIR) stood at $86.1 billion. Our net external debt is zero. This relatively low level of national leverage gives us tremendous flexibility to direct capital investment to areas where it is needed most – infrastructure being a glaring example.

On the private sector side, trends in industry segments and sub-segments have become clearer as of 2016, comparing near-term growth to compounded growth over the last five years. These trends are clustered around the four major Philippine economic growth themes: Population/consumer/retail play; Logistics and infrastructure; Tourism; and Business process outsourcing (BPO).

We have heard the story of how our country is in a demographic sweet spot, and that the BPO industry continues to generate significant revenues, employment and income. Among the four growth themes, though, let’s focus instead on logistics and infrastructure, as well as tourism, where there are many opportunities out of the incremental improvements in these industries.

Logistics and infrastructure

Logistics and infrastructure support consumer demand. Public construction grew by 30 percent in 2016, nearly double the five-year compounded growth rate of 16 percent. Marine logistics rose 6.5 percent, outpacing its five-year growth trend. Even demand for transport and transport equipment rose 25 percent, outstripping the five-year CAGR of 5 percent.

Should the government infrastructure build-up succeed, it will unleash major productivity gains in the economy that will drive further growth. A nation of 103.9 million spread across 7,107 islands will continue to demand products as incomes rise, and logistics and infrastructure are the only way to ship those products to their destinations.

For a country with obvious challenges in moving raw materials and products to where they are needed the most, our logistics industry remains relatively underdeveloped and extremely fragmented. Literally, anyone with a truck can call himself a logistics player in this market. Market information is spotty and opaque. Only a few players have scale. Large logistics customers frequently deal with tens, if not hundreds, of logistics providers to diversify risk, and increase their chances of optimal price discovery. All of this makes for an inefficient operating model.

All these characteristics point to the hypothesis that the industry is ripe for consolidation, with the added dimension that a large, savvy player with operating expertise and technological edge can really claim a significant beachhead in the logistics industry. One major limitation to this angle is that foreign players, who have the capital and the know-how, are subject to constitutional limitations on foreign ownership. If and when these limitations are relaxed, it will be a major catalyst in jumpstarting consolidation in the logistics industry.

Tourism

Tourism is a major growth driver and is really starting to flex its muscle. Hotels and restaurants’ gross value added (GVA) rose 10 percent in 2016, compared with its previous five-year compounded growth rate. Even more revealing is that air transportation was up by 14 percent in 2016, or 3 percentage points higher than its compounded growth from 2011 to 2016.

We have three of the top six island tourist destinations in the world: Palawan, Boracay and Cebu. It comes as no surprise that tourism is experiencing strong growth as the country gains more visibility on the international stage.

Our tourism industry will benefit exponentially if we address three key dimensions: infrastructure and access, product and security. The destination itself and its attractions are the product, but people have to first gain easy access and egress.

In an example of difficult access and egress, flights to and from key provincial destinations are often delayed because planes are stacked in the air traffic controller queue in NAIA. The main cause is the limited NAIA runway capacity—but this has ripple effects all over the Philippines, and overseas. Aside from air traffic challenges, transportation to and from destination is often disjointed.

Aside from the problem of access, the product is uneven. In up-and-coming destinations, there is insufficient hotel room capacity, trained staff to handle tourism traffic is wanting, and even local tourism offices are closed on weekends—presumably when the number of tourists is at its highest. The usual glamor destinations like Boracay are able to handle the visitors, but for the Philippines to capitalize on a truly national tourism strategy, our product quality has to improve, and we have to achieve and maintain a level of consistency expected by international travelers.

Security continues to be a concern for tourists, especially in the areas down south. There are beautiful destinations in Mindanao that tourists hardly get to see because those places are too dangerous to visit. This is unfortunate. If we can ensure a level of nationwide security that allows tourists to see the entire Philippines safely, the boom from tourism will echo for generations.

Raoul Villegas is a director from Deals and Corporate Finance of Isla Lipana & Co./PwC Philippines. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

 

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