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1

THE ECONOMY IN THE NEAR TERM

8 August 2011

Prof. Ernesto M. Pernia, Ph.D.

University of the Philippines, School of Economics

Highlights of the PH economy, ‘11-’13

• GDP will grow 5.0% in 2011; growth marginally

decelerates to 4.8% and 4.7%, respectively, in the next

2 years

• Higher inflation, weak global economy are challenges

to policy makers of sustaining “fighting” growth

targets

• BPO, remittances keep GDP growth up

• Investment, PPP offers growth opportunities

• KEY CHALLENGES: strengthen fiscal position, improve

investment climate, unequivocal and resolute

population policy

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PH economy saw modest

GDP growth in Q1:2011

GDP

GNI

0%

2%

4%

6%

8%

10%

12%

14%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2009 2010 2011

Source: National Statistic Coordination Board

2011 first quarter economic highlights

Inflation creeping up

as GDP growth slowed

2007

2008

2009

2010

2011

0%

2%

4%

6%

8%

10%

12%

14%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: National Stati stics Office

Headline inflation, 2007 – June 2011

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IDEA forecasts assumptions

2010 2011 2012 2013

Inflation rate, % 3.8 4.9 3.8 3.6

91-day Treasury bill rate, % 3.5 2.1 2.5 3.0

Peso-dollar exchange rate 45.1 43.1 42.4 41.8

Remittances growth rate, % 8.4 8.0 10.0 10.0

NG deficit, in billion pesos (314.5) (326.9) (286.0) (286.0)

US GDP growth rate, % 2.9 1.6 (0.2) (2.0)

Japan GDP growth rate, % 1.5 (2.0) 0.0 1.8

IDEA forecasts

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011/f 2012/f 2013/f 

Source: National Stati stical Coordination Board; IDEA

Gross domestic product and gross national income, 1999 - 2013

GDP

GNI

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Clouds in the horizon

Global food prices

remain high and volatile

Source: Food and Ag riculture Organization

Food and Agriculture Organization food price index

(2002-2004 = 100), 2007 – June 2011

2008

2009

2007

2010

2011

120

140

160

180

200

220

240

260

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Oil price remains high

due to increased demand

2010

2007

2009

2008

2011

20

40

60

80

100

120

140

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: World Bank

Dubai oil price per barrel in US$, 2007 – June 2011

FBT, services, and

home and repair drive inflation…

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

     J    a    n   -     1     0

     F    e     b

     M    a    r

     A    p    r

     M    a    y

     J    u    n

     J    u     l

     A    u    g

     S    e    p

     O    c     t

     N    o    v

     D    e    c

     J    a    n   -     1     1

     F    e     b

     M    a    r

     A    p    r

     M    a    y

Inflation (headline)FBT

Clothing

H&R

FLW

Services

Misc

Source: National Stati stics Office

Contributions to headline inflation, 2010 – May 2011

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…but consumers seem less

pessimistic in the year ahead

Current quarter

Next 12 months

Next quarter

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011

Source: Bangko Sentral ng Pil ipinas

Consumer economic outlook index, 2008 – Q2:2011

US shows anemic growth, Japan signals

sharp downturn

Source: US Bureau of Economic Analysis, Japan Statistics Bureau and Statistics Center

Real GDP growth rates of Japan and the US, 2009-2011:Q1

US

Japan

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2009 2010 2011

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Redeeming grace is Asia

(excl. Japan)

East Asia andPacific

India

Developing

World

High income

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011/f 2012/f  

Source: World Bank Global Economic Prospects, June 2011

Comparative GDP growth rates by region, 2008 - 2012

Silver linings in the clouds

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Remittances surging despite

modest global economic growth…

2008

2009

20102011

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: National Stati stics Office

Remittances in current billion dollars, 2008 - May 2011

…but inflow only maintains

peso value two years ago

2010

2008

2011

2009

50

55

60

65

70

75

80

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: National Stati stics Office

Remittances in current billion pesos, 2008 - May 2011*

*Using monthly average nominal exchange rate

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BPO poised for

strong growth once again

Growth rate(right scale)

Level(left scale)

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011/f  

Source: Business Processing Association of the Philippines

BPO revenues in current billion dollars, 2004 – 2011/f 

Sovereign ratings upgrades

provide tailwind for investment…

Rating agency Long-term currency ratingForeign Local

Standard and Poors' BB BB+

Moody's Ba2 Ba2

Fitch Ratings BB+ BBB-

Source: Bangko Sentral ng Pil ipinas

Latest Philippine long-term sovereign credit ratings

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…investment grade requires

stronger NG’s fiscal position

Source: Bureau of Treasury

NG revenue, expenditure, and cash position in current billion

pesos, 2010 – May 2011

Cash position(right scale)

Expenditure(left scale)

Revenue(left scale)

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

0

20

40

60

80

100

120

140

160

180

PPP also addresses corruption

and bureaucracy policy gaps

NAIA Expressway (Phase 2)

Daang Hari - SLEX link road

NLEX - SLEX connector

MRT/LRT Expansion Program: LRT 1 South Extension Project

CALA Expressway – Manila Side Section (27.5 km)

New Bohol Airport Development

Puerto Princesa Airport Development

New Legaspi (Daraga) Airport Development

Privatization of Laguindingan Airport Operation and Maitenance

LRT Line 2 East Extension Project

Source: Public-Private Partnership Center

Projects for 2011

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Sectoral outlook

Favorable outlook on crops

buoys prospect for AFF

Source: National Stati stics Office

Agriculture, Fishery, and Forestry growth rate, 1999 - 2013

-2%

0%

2%

4%

6%

8%

10%

12%

1999 2000 2001 2002 2003 200 2005 2006 2007 2008 2009 2010 2011/f 2012/f 2013/f 

GDP

 AFF

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Solid mining/quarrying, construction point

to sustained industry growth

Source: National Stati stics Office

Industry growth, 1999 - 2013

GDP

Industry

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1999 2000 2001 2002 2003 200 2005 2006 2007 2008 2009 2010 2011/f 2012/f 2013/f 

Real estate/business activities, trade lend

optimism to services growth

Source: National Stati stics Office

Services growth rate, 1999 - 2013

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011/f 2012/f 2013/f 

GDP

Services

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Continuing challenges

Employment growing,

unemployment hardly improved

Unemployed(left scale)

Employed(right scale)

Underemployed(left scale)

32,000

33,000

34,000

35,000

36,000

37,000

38,000

0

2,000

4,000

6,000

8,000

10,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2

2007 2008 2009 2010 2011

Source: National Stati stics Office

Employment picture, 2007-2011:Q2

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Only modest cut in poverty incidence from

2003 to 2009…

24.9%26.4% 26.5%

0%

5%

10%

15%

20%

25%

30%

2003 2006 2009

Source: National Statistics Coordination Board

Actual poverty incidence among population vs target, 2003-2009

… highly uneven poverty rates across

regions

4.0%

13.9%

18.8%

22.9%

15.3%

23.3%

31.2%

35.7%

31.3%

35.0% 35.5%

39.6%

45.1%

41.4%43.1%

47.8%45.9%

0%

10%

20%

30%

40%

50%

60%

Actual poverty incidence among population vs target

by region, 2003-2009

Source: National Statistics Coordination Board

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KEY CHALLENGES

• Strengthen fiscal position

 –  Raise tax effort (better collection and/or new taxes)

 –  Raise strategic spending (infrastructure, human capital

• Improve investment climate

 –  Simple and transparent regulatory system, fair and speedy

 judicial processes, law and order

 –  Simple and efficient tax system, labor market flexibility

 –  Better infrastructure (transport, power water)

• Unequivocal and resolute population policy –  (RH/RP/FP) better human resources, employment,

poverty reduction, environment, etc.

THE ECONOMY IN THE NEAR TERM

Thank you.

Prof. Ernesto M. Pernia, Ph.D.

University of the Philippines, School of Economics