A tiger cub economy in the medium term?

MANILA, Philippines—NEDA Chief Cayetano Paderanga has been quoted as saying, “for 2011 to 2016, we are targeting a higher annual growth path that will bring us above seven percent.”

The goal may raise eyebrows, leading some to dismiss it as too ambitious. But the evidence points to high growth over the medium term. The new dynamism comes from a fortunate mix: global labor demand, correct policies from the past, the rise of new industries, and support for the new leadership. It seems that by late 2011, the Philippines may begin to growl like a tiger cub economy.

One new feature of the economy is that it manages to post growth even during harsh world conditions. This reverses the old boom-and-bust cycle, where the economy would grow for a few years then contract. Lately, the Philippines has enjoyed 37 quarters of continuous growth. This pattern will continue in the medium term.

The economy proved to be resilient during the global crisis. In 2009, the International Monetary Fund said that the economy would contract. But because of well-planned spending, the Philippines still posted growth, albeit weak, of about 1 percent. In contrast, the country’s neighbors contracted: South Korea, Singapore, Malaysia, Hong Kong, Thailand and Taiwan.

The World Bank raised its Philippines GDP growth forecast for 2010: from 4.4 percent to 6.2 percent. The IMF upgraded its estimate as well: from 6 percent to 7 percent.

Remittances from overseas Filipinos are a major plank of this resilience. The IMF and the World Bank had forecast a 4 percent contraction in OFW [overseas Filipino workers] remittances in 2009. But in fact, remittances grew by 5.6 percent. Mass layoffs were feared then. But less than 7,000 were actually laid off that year, while more than 3,000 OFWs were deployed each day.

Simply put, there is much demand for OFWs. Many overseas workers are highly skilled and are employed in sectors less vulnerable to recession, like healthcare and education. This is related to the factor of global demographics. Aging is a trend sweeping Europe, the Americas and Asia. The elderly populations need healthcare, hence the demand for doctors, nurses and caregivers. Because the graying of populations are a long-term trend, the demand for healthcare professionals will be a long-term trend.

The economy has grown high-technology industries. Recall that the government liberalized the telecommunications industry in the mid-1990s. Executive Orders 59 and 109 and RA 7925 forced the interconnection of all telecommunications carriers. This effectively increased industry competition.

By far, the most dominant segment in the telecom sector is the cell-phone system. Its dramatic growth was fueled by an unprecedented explosion since 1998 in the use of short messaging service or SMS. Today, there are 35 million cell-phone subscribers, compared with 0.9 million in 1996.

Hence, Filipinos benefit from fierce competition among telecom firms. The Philippines is a world leader not only in the volume of text messages sent, but in SMS innovation. From here rose the concept of text messages as a form of currency.

Another relatively new industry is business process outsourcing (BPO). Thanks to government policy, the Philippines is second only to India in BPO and is No. 1 in call centers. In 2009, the industry grew by 19 percent even during the global crisis and generated $7.2 billion in revenue. It employed around 450,000.

In November 2009, the National Outsourcing Association of the UK cited the Philippines as the best offshoring destination of the year. That same year, A.T. Kearney global services location index ranked the Philippines as higher than India, Thailand, Malaysia and China.

BPO outside Metro Manila

Outsourcing is a phenomenon beyond Metro Manila and Cebu. The Commission on Information and Communications Technology (CICT) has identified other cities that would be most attractive to BPO investors. They have the human resources and infrastructure to deliver outsourcing services. The current list of Next Wave Cities includes Metro Laguna, Metro Cavite, Iloilo City, Davao City, Bacolod City, Metro Pampanga, Bulacan East and West, Cagayan de Oro City and Lipa City.

The transportation industries will also drive growth because of reforms in air, sea and land transport.

Air transport used to be a monopoly. Today, partial liberalization made possible the entry of players, such as Cebu Pacific, Air Philippines, Asian Spirit, Mindanao Express, Laoag International Airways and SeaAir. This has resulted in unprecedented competition. The benefits to the consumer are seen in the deep cuts in air fares during special promotions.

As for sea travel, the big change is the creation of the roll-on, roll-off (Ro-Ro) shipping system. One can think of them as floating highways: buses, truck, and cars may now travel straight from Luzon to Mindanao. This has reduced travel time by 12 hours, and has cut transport cost by 37 percent to 43 percent for passengers and by 24 percent to 34 percent for cargo.

Land travel is now boosted by new infrastructure, thanks to the Comprehensive Integrated Infrastructure Program (CIIP).

There is the northern Luzon expressway (NLEx), linked with the Subic-Clark-Tarlac expressway (SCTEx). There is the C5-NLEx-South Luzon expressway (SLEx) link. SLEx itself is being extended. The new Marikina-Infanta road has opened Quezon province to more development. LRT Line 1 will soon meet up with the MRT line.

Tourism industry

The tourism industry, where the Philippines has a natural comparative advantage, will rise in the medium term.

During the first nine months of 2009, the volume of domestic tourists increased by 21 percent, while foreign tourists grew by 2.7 percent.

Improved tourism infrastructure is providing access to major tourism destinations. Subic Bay Port has been completed. The same with the Batangas Port Development Project and the Southern Tagalog Arterial Road (Star) Expressway. In Boracay, the New Iloilo Airport was completed in June 2007, while the New Bacolod (Silay) Airport, for Negros Island destinations, was inaugurated on Jan. 18, 2008.

The industry’s growth will be further boosted by the new tourism law of 2009. Private sector participation will be mobilized via pre-zoning and titling land with high tourism values. The flow of foreign and local investments will be facilitated through the proclamation of Tourism Enterprise Zones.

Retirement estates

Related to tourism is the retirement estates industry, which is still struggling, but will bear fruit in a few years. It has been estimated that a fully developed Philippine Retirement Industry can create four million jobs. Half of those who retire in the Philippines are from South Korea, followed by mainland China, Taiwan, Japan, Europe and the United States. Note that 1.7 million Filipino-Americans will retire by 2015.

Mining is another emerging sector. It got a big boost from the Mining Act, which liberalized the entry of foreign investment. The big companies are coming in because the country has gargantuan mineral reserves worth $840 billion. The Philippines is No. 3 in the world in gold reserves, No. 4 in copper, No. 5 in nickel, and No. 6 in chromite. World demand, especially from China, will drive up mineral prices over the medium term.

Renewable energy will become more prominent over time because of the urgency of global warming. The Philippines is well positioned to ride this wave. The government plans to double power capacity sourced from renewable energy by 2030. The country is already No. 2 in the world in tapped geothermal energy, after the United States. The world’s largest solar panel manufacturer is in Laguna province. Solar producers want to turn the Philippines into Asean’s solar hub, and will install capacity for 300 megawatts. The nation is already the Asean leader in wind power.

The Philippines benefits from the new Renewable Energy Law. The Department of Energy has awarded more than 80 renewable energy contracts to 18 companies for the development of biomass, geothermal, solar, hydropower, ocean and wind energy resources. The Energy Development Corp. (EDC) will be investing $1 billion over the next five years to upgrade its capacity for geothermal energy. These recent developments will boost environment-friendly and cheaper sources of electricity.

OFWs are creating the new middle class, and that is multiplying the malls. This year, in the SM chain alone, new malls are opening or have opened in Calamba, Tarlac, Novaliches, Masinag on Marcos Highway, and San Pablo, Laguna.

The Chamber of Real Estate and Builders’ Associations Inc. (Creba) notes that OFWs spend some 30 percent of their income on housing—whether to buy a new home, renovate existing homes or pay rent. And Filipinos who have been naturalized abroad are benefiting from the dual citizenship law, which allows them to own land.

BPOs are expanding and in need of more office space. The outsourcing sector occupies 670,000 square meters of prime and grade-A buildings in the business districts of Makati, Ortigas, Alabang, Eastwood City, Fort Bonifacio, Robinsons Cyberpark and Araneta Center. More demand will be fueled by the Next Wave Cities being wired across the nation.

A recent development is positive public sentiment following the election of President Aquino. His net trust rating is phenomenal, a record +83 percentage points, according to the Social Weather Stations 2nd quarter poll. To put that into context, others who scored extremely high in trust were Corazon Aquino (+72 in October 1986) and Pope John Paul II (+72 in March 1995). A caveat though: SWS president Mahar Mangahas cautions that comparing scores is different from comparing persons.

Optimism posted an all-time high as well in the second-quarter SWS survey. Fully 41 percent said they expected their quality of life to improve over the next 12 months. This is in contrast with 5 percent who saw deterioration. The net score of +36 percentage points is even higher than the +35 in March 1987, during the term of President Corazon Aquino.

The stock market has been hitting record highs. As of November 3, it was the best-performing stock market in Asia. Bangko Sentral also notes that for the first seven months of the year, portfolio investments have risen by 164 percent. The central bank cites “positive developments on the domestic front, including lower inflation rates, a stable peso and a more positive outlook with the assumption of the new administration.”

So put it together: the Philippines seems ready to become a tiger cub economy in the medium term. Unlike in the past, and unlike other economies, the Philippines just grows, it no longer contracts. Remittances are keeping growth steady, and demand for OFWs will be healthy over the long term due to global demographics. The economy is drawing strength from hi-tech industries. Other industries are on the rise: tourism, transport, mining and renewable energy. Investment should benefit from enormous public support for the new administration.

Possible threats

Finally, a word on possible threats. If the Philippines is poised to become a tiger cub, what can derail high economic growth?

First is fiscal failure. This entails losing battles in the fight against tax evasion. Poor public revenues have long been the economy’s major weakness. A form of fiscal failure is spending malfunction. Government must spend correctly, prioritizing infrastructure and social protection. The public-private partnerships for infrastructure must take off.

A second risk is a relapse of the world economy, or the Great Recession part II. This may be triggered by the continued sputtering of the United States. However, as of Nov. 9, 2010, American economic confidence, as measured by Gallup, tied its best monthly score for the whole 2010. Behind the improved outlook are the Federal Reserve’s actions to pump money into the economy, an uptick on Wall Street, the conduct of midterm elections, and employment data that were better than expected.

A more likely risk is wild weather arising from climate change. Last year, typhoons Ondoy and Pepeng dumped unprecedented levels of rain on the Philippines. Climate change is no longer Al Gore speaking on DVD. Climate change is now “in your face.”

It is best for government to assume that more freak storms will come, and prepare for them early on. –Dennis M. Arroyo, Philippine Daily Inquirer