It is both an honor and privilege to be presenting the views of one of the most respected economist of the country and a very dear colleague, Dr. Alvin Ang. I always run to Dr. Ang for help in anything that deals with economics and he has always been there to help. Aside from being a well respected economist, Dr. Ang’s heart to help uplift the nation is something I have always admired.

The 2014 Outlook of Dr. Alvin P. Ang, Ph

The Philippine Economy in 2014: Bring in the Good out of the Bad

2013 will be one for the history books for what transpired in the Philippines.  The economic performance that outpaced the rest of ASEAN probably grew 7% in 2013.  Backed by the investment upgrades of the major ratings agency, the economic performance helped push equities to all time highs until the middle of the year. Nonetheless, these good reports were soon crowded by external pressures led by the quantitative easing plan by the US Fed and various internal man-made and natural disasters.  All told, strong typhoons hit the north and central areas coupled with the strong earthquake. The Zamboanga incursion and the PDAF issue are big man-made disasters that also barreled through.

Did the bads cancel out the goods? It is very unlikely that the Philippines will reverse its current upward economic growth trend. The reason for this are as follows:

Firstly, the momentum for growth has pushed strong domestic capital formation.  Private sector is building and expanding capacities for production. This is validated by the above 5% growth in durable equipment for the last 8 quarters.  This is confirmed by robust growth in manufacturing which (contributes to about 20% of GDP) is also experiencing a similar above 5% growth in last 8 quarters. The rebound of the US (our largest trading partner) and the becoming expensive China open good opportunities to support export growth. similarly the growth in support services in the BPO, tourism and private construction sector will be modest but will continue to be robustly close to the higher single digit.

Second, the impact of the disasters will push public sector expenditures to even higher levels. Public construction, in particular, is now at 1/3 of private construction. In the past, it hardly reached 1/5.  This will probably be higher in next 3 to 4 years as the reconstruction requirements of the affected regions will require strong government support.  Furthermore, public services expansion in the form of education, health and basic social support to reconstruct human capital formation.  This is already seen in the approved supplemental budget for reconstruction in 2014.  Pressures to ensure proper usage of these funds will make the national budget much more efficient and put to direct use.  Likewise, all forms of aid from international and local sources will continue to come in phases providing additional fund base.

Thirdly, budgetary reforms including the direct use of the approved budget will facilitate expenditures. Moreover, the investment upgrades will allow the country to access the international funds market easily for additional budgetary support.  This is now starting with the launch of the 10 year Philippine Global Fund.

Finally, the OFW remittance will remain as the robust financial support for sustained personal consumption expenditures.  On the monthly basis, the remittances has breach the USD2Bn in October 2013.  For full year 2013, this has probably reached more than USD22Bn or a growth of above 5%. Remittances also is seen to increase to support private reconstruction efforts as anecdotally observed last November – December of 2013 and in previous disasters. This should help lead to a remittance growth of about 7% pushing it to USD 24 Bn this 2014.  All told, these conditions are seen to help push 2014 GDP growth to a low of 7% and possibly to a higher 7.5% as all these go full steam.

The main concern apart from the challenges out of reforms is the physical impact of the disasters.  These have brought damage to agriculture which is connected to food prices which in turn could lead to inflationary pressures. Coupled with the looming increase in electricity rates, households may experience upward price pressures.The quantitative easing also shows that there will be less dollars in the economy than before which depreciate the peso to about 45 to 1. This is good for OFWs and exporters but could also lead to higher prices particularly of imported inputs. Finally, a lot of funds out of the SDA are still in the system and not finding their ways to productive pursuits.  These could challenge the relatively low inflation rate regime we have been experiencing and consequently the low interest environment.  However, we do not see inflation beyond 5% unless significant supply constraints occur in food and electricity.

While GDP growth for 2014 will likely remain at around 7%, price pressures may cause equities to move tentative and upside potential for interest rates for this year. However, more than the price pressures is the opportunity to improve the disaster affected regions.  These have continuously been high poverty and low productivity areas. If the reconstruction is done right – it will be good for long term growth.  Overall, the growth story will be the same but the critical factor is its sustainability and inclusivity.  A growth that is able to expand its base will certainly be better than a one time event.  Investing in the Philippines is believing that its growth potential is becoming broader and larger segments are benefiting.  At this perspective, its present value is still quite affordable.

Blessings for a great 2014 and beyond!

Alvin P. Ang has more than 20 years of professional experience in both public and private sectors.  He started his Economist experience with the National Economic and Development Authority (NEDA) of the Philippines where he developed his skills in Development Planning, Policy Formulation and Analysis.  He also worked in Investment Research and Economic Forecasting with his stints at the Philippine National Bank and All Asia Capital as Chief Corporate Planner and as Economist, respectively.  Within those periods, he has been teaching part-time at the University of Santo Tomas in Manila.  In 1999, he joined the academe as full-time Faculty member after completing his Master in Public Policy at the National University of Singapore as a Scholar of the Singapore Government.  He went on to complete his Ph.D. in Applied Economics at Osaka University in 2006 as a Japanese Government Scholar.  He has published in renowned journals such as the Review of Development Economics, Asia Pacific Social Science Review, among others.  His research fields are in Labor and Development Economics and his research interests include Privatization and Development Finance.  His researches on Remittances and Economic Growth in the Philippines have been widely circulated.  He has also consulted for the World Bank, World Health Organization, the European Union, Asian Development Bank, International Labor Organization and the USAID on policy matters. He recently won the first prize (together with Jeremaiah Opiniano) in the Outstanding Research for Development in the 2011 Global Development Awards (besting 400 entries worldwide)  held in Bogota, Colombia.  He is a lifetime member of the Philippine Economics Society where he currently the President.  He is an advocate of responsible personal finance and has lectured on this topic in many fora.  Presently, he is a Full Professor of Economics at the University of Santo Tomas.

To be honest, I never really paid much attention to the State of the Nation address of the Presidents. The last administration’s SONA were full of ambiguity and questionable claims. Lately, the SONA of President Noynoy has been something I have been paying attention to and for the first time in decades, I actually listened to it live as it was happening. I’ve actually participated in the SONA this year by posting some of my thoughts through my twitter account (@randelltiongson).

It was nice to hear the accomplishments of the President for the year that has passed and I am eager to see many of the plans unfolding which will bring the country to a better situation and environment. There are many things that this present administration that needs to be addressed and with only 3 more years in his term. the President must accomplish much.

There are many gains in this administration and there are 2 giant accomplishments that  this administration has been able to accomplish – a drastic reduction of systemic corruption (still far from ideal) and our investment grade status. The nation’s economy has been on an over-drive and it’s about time. Inclusive growth however, seems to be still elusive but I am realistic enough to know that it will take a long time. What I like with this administration is that he seems to be genuinely sincere in leaving a better government for the the next President, like history repeating itself.

Many things needs to be addressed still such as generation of more jobs and better jobs at that. Only when we can have more and better employment can we really say that there is inclusive growth.

I am hopeful for the next 3 years of this administration but even the President understands his limitations. It is my belief that we need to support the President in his reforms and that we need to constantly pray for him and the nation. The Bible says “Blessed is the nation whose God is the Lord.” – Psalm 33:12, NIV

I’ve also asked the thoughts of my friend Dr. Alvin Ang, President of the Philippine Economic Society and this is what his views are:

“PNoy’s 4th SONA is a Call for Contribution. ‘Makiambag sa Solusyon.’ There are no direct allusion to the economy except that there are current efforts though not seen that are happening such as job creation in technical skills and the exportation of rice.”

“Infrastructure that are correctly priced and of quality are the order of the day. They may be causing delays but transparency will make sure that things are right. Overall, the warning about those who continue to defy the Matuwid na Daan is an admission that overall change takes time.”

“This President indeed means business and he is doing things navigating through the democratic process. This is great encouragement for me as a Filipino.”

Let us pray as a nation for the nation.

There is every reason why we should be celebrating Fitch’s recent credit upgrade of the Philippines. With the upgrade, we are now officially “investment-grade” which really means many things. An investment-grade status is a confirmation that the Philippines is a sound nation financially and that it has the capacity to pay off its debts.

President Aquino is obviously ecstatic with the upgrade; he said “this is an institutional affirmation of our sound good governance agenda” in a statement.

In a nutshell, the new status will effectively reduce the cost of our borrowings which when managed properly, can be used for key investments and infrastructure that will further spur economic growth. The upgrade will also usher the inflow of more institutional investments such as investment funds of other countries that usually require investment destinations to be ‘investment grade’. This move will even grow the local investment market which has been bullish in the last 3 years. The Philippine Stock Market already reflected a positive sentiment upon the news of the upgrade. It is more likely that the stock market will continue to ride on this upgrade, as well as other investment instruments like bonds.

It is important to note that while Fitch is a very reputable rating organization, the other two rating organizations namely Standard & Poor’s and Moody’s must also upgrade the status of Philippines to confirm our being truly ‘investment-grade’.

I believe that the upgrades merely affirmed what the market has already known as showed by how the Philippine investments have been faring, particularly our sovereign debt. For some time now, the Philippine sovereign issues (ROPs) have been trading with yields much lower than other nations with the same credit rating; in fact, the Yield-to-Maturity (YTM) of our ROPs are even lower than the debts of other nations who are rated as ‘investment-grade.’ Returns are always an indication of the risks involved so when the market makes our debts trade with lower yields, it also means that the market views us as low risk as well.

I asked some of my friends about what the benefits of the upgrade means to them and to the nation as a whole. I’m also proud to say that these friends of mine are experts in their own fields as well – I am blessed with awesome friends right? This is what they say:

“We deserve the upgrade, but remember that a credit rating is just a confirmation of what is already present in a debt issue, the debt security issuer and the economy as a whole. In other words, we and not the rating agency made ourselves investment grade. So upgrade or not, the country is indeed on its way to becoming an economic force in the world arena. We just need to learn how to spread wealth better.”

— Efren Ll. Cruz, RFP- President of Personal Finance Advisers Corp., best-selling finance author, columnist, investments expert

“This is definitely the seal and proof that Philippines is a good country to invest in and supports my bullishness in the Philippines. This will open up our markets to more investors who were not allowed to participate before. Increased Investments will surely open up better opportunities for the ordinary Filipino. I definitely recommend that Filipinos participate in this growth opportunity by investing as well.”

— Marvin Fausto – Chief Investment Officer of Banco de Oro Universal Bank

“The investment upgrade will propel our stock market even further as it will allow more foreign funds to invest in the Philippines. It will also help our economy as it will allow our government to borrow cheap, build more infrastructures, and allow businessmen to expand their businesses further. To the common Filipino, it would give them an opportunity to take housing and car loans cheaper. This upgrade has triggered a signal to the world that – ‘Hey! The Philippines exists and is now a safe haven for your money!’ This is such a great time to be a Filipino.

— Marvin Germo, RFP – Stock Market expert and investments speaker

“Investment Grade is not an end objective. It is a recognition that a country has graduated from a condition of doubt to a reasonable level of investment risk. The Philippines graduating to that is an expectation this year – the only thing uncertain was when. Fitch’s ratings upgrade to the Philippines is a validation of the core improvement in the country’s international credit and investment status. This upgrade means that the Philippines has to do its homework. It has leveled up in the eyes of the investment community globally. The upgrade actually does not necessarily translate to immediate economic betterment as being investment grade simply means that one can borrow at cheaper rates in the international market. Borrowing is something we do not need to do now as the country is very liquid – both the government and the private sector. Local interest rates are in their historic lows already. What the investment grade is telling us is that ‘we believe in your country to be able to institute the needed structural reforms to translate our trust into productive pursuits.’ Finally, it is important that the two other larger ratings agencies – S&P and Moody’s should affirm the same soon to consolidate and cement this trust.”

— Dr. Alvin P. Ang – Economist and President of the Philippine Economic Society

“Companies that would not otherwise invest in the Philippines as they require investment grade status would now do so. Our borrowing costs would also go down. This means more jobs and a stronger economy as money goes towards industries, infrastructure, etc. In the near term the peso is likely to appreciate though, which could pose problems for OFW families.”

— Rizalina Mantaring – President & CEO, Sun Life Philippines

The above views are from the experts; I will post another blog about the views of ordinary Filipinos (who are experts in their own rights) which I solicited through social media.

We are very excited with the nation as a whole and while there is much work to be done, I believe we are in the right path. We must also never forget where all these blessings are coming from and knowing our responsibilities for such blessings, lest all these gains will be for nothing.

Blessed is the nation whose God is the LORD, the people he chose for his inheritance. – Psalm 33:12, NIV