In a recent Philippine investment conference, the Asian Development Bank (ADB) vice president for the private sector, Mr. Diwakar Gupta, reported on the future of the Philippine economy after the realization of the Asean Economic Community.
In his presentation, Mr. Gupta said the Philippines has emerged as one of the fastest growing economies in the world in recent years. Aided by a rising middle class, GDP grew 6.2 percent in 2010-2015. In 2016, GDP growth accelerated to 6.9 percent in the first half.
The two drivers of this growth were, 1) investments by both the private sector and government expenditures and 2) household consumption supported by OFW remittances. While remittance growth has been moderate, they remain substantial at an equivalent of 9 percent of GDP. Unemployment was down at 6.1 percent in April 2016.
The government is on track in meeting its full-year 2016 growth target of 6 percent to 7 percent, underpinned by domestic demand.
The growth challenges are high rates of poverty, underemployment and regional growth disparities. The national poverty incidence stood at more than 26 percent in the first half of 2015, though it was much higher in the Visayas at 34 percent and Mindanao at 41 percent. There is wide income inequality across the regions. Of the 18 regions in the country, just three – Metro Manila and two adjacent regions account for nearly two-thirds of GDP. Another constraint is the infrastructure deficit. It is important to remember that infrastructure enables access to education, healthcare, housing and other social services that allow communities to lift up their standards of living and to stay resilient to external shocks.
In conclusion, it said the prospect of the Philippines is promising and at the same time challenging. It is an exciting time when the global economy is rapidly evolving and the country is embracing a broad-based economic and social reform agenda to tackle a wide spectrum of economic and social issues.
At the end of this presentation, the host and CEO of Asia Euromoney, Tony Shale, polled the attendees with a show of hands on whether they believed that the Philippines could possibly hit 8 percent growth in the near future. I raised my hand with the majority of the attendees. I believed that since we are hitting 7 percent already, how could we not possibly grow by 8 percent?
The next question that he asked was, what could go wrong or the “speed bumps” that we should worry about.
The first thing mentioned was a risk that we’ve never heard before – “headline” risk. This was the day when our President DU30 made the headlines with his comments on the Americans in Mindanao, plus a few more, and the postponement of his meeting with President Obama. That drew some nervous laughter as we all realized that the headlines regarding the drug trade, human rights, government spending and tax policies have far reaching consequences on both capital inflows and the investment decisions that we have to make.
The other speed bumps include the global economic uncertainties, which include a long list of global concerns: commodity prices (particularly oil), to the Brexit vote, to the future of the Chinese economy. Some people also believe that the capital markets are overvalued while the business community remains steadfast that their companies can deal with a number of challenging situations.
Our business challenges include the matter of capital allocation. Most of the listed companies in the Philippines have healthy balance sheets. They invariably need to deploy cash while at the same time ensure an established and well-communicated priority system that rationalizes disbursements for growth or other uses, such as buybacks, dividends or debt reduction. This capital allocation prioritization should allow these companies to efficiently value and seize critical opportunities.
Another concern is executing the growth plans, which as they say, is the true test of the pudding (or the organization). Despite concerns that the economy may not be as perfect as we would like it to be, many companies are pushing forward with their growth plans (in order to meet 2020 targets). That focus entails its own set of concerns. Companies have to possess the abilities to identify target acquisitions, as well as divest themselves of certain investments.
The talent pipeline also seems to get continually challenging despite the number of graduates that join the workforce every year. Having the right people on the bus is essential to the achievement of the mission.
New technologies have the potential to disrupt the business process or the business model itself. Unlocking the potential of analytics, for instance, allows the business to capture and manage data to drive relevant content and better decisions. The significant growth of Platform as a Service (PaaS) for global banks underlies the significance of keeping one’s ears close to the ground.
Cyber risks are still hitting the headlines, with the Russian attack on the Olympic medical records, as well as the continuing saga of the infamous Bangladesh bank heist. We have to remain vigilant at all times as all of our databases are vulnerable to attacks.
The sky is clear at the moment and we can see the horizon ahead. We just have to prepare ourselves for possible speed bumps as we embark on our investment journey in the next six years.
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Ronald Goseco is currently executive vice president (EVP) of the Financial Executives Institute and chief operating officer (COO) of IDI—Volkswagen.