QRT Eco Chart Jan 16 2018

Isabela ballroom
Makati Shangri-La
January 25, 2018
WWW.WALLACEBUSINESSFORUM.COM
QRT ECO CHARTS JAN. 16, 2018 1
Economy springs a surprise…
It slowed as expected, to 6.7% in 1st3Q’17 from 7.1% in 1st3Q’16,
(likely to be close to the 1st3Q’17 growth for the whole of 2017)
Due to:
Absence of election-related
spending this year
Households able to buy less
with their money due to
doubling of inflation
“wait and see” mode in
investments – FDI flattened
…It did better than most had expected
Most (including WBF) had thought GDP world grow 6.5% or even
lower in 2017
Unexpected lift came from:
Exports amazingly strong performance, up 19.2% in volume,
double a year ago and 4x world average export growth
Among the fastest-growing exports in Asia in 2017
Infrastructure spending sustained even immediately after election
which never occurred in the past. Previous new presidents would
tighten belt right after assuming office.
And negatives hardly dented economic
performance
Marawi incident + Martial Law in Mindanao failed to dampen visitor
interest in PH
Tourist arrivals up 12% in 1st 10 months likely to have reached all time
high of close to 6M in 2017
Revenues from tourism up 36% 1st 9 months
Fitch upgraded PH credit rating despite EU legislators criticism in fight

vs. illegal drugs, PRRD’s trash talk against UN Human Rights Group
Other highlights in 2017
 Agriculture recovered, up strongly by 4.6% in 1 st 3Q’s after 2 years
of downturn
 Buoyed by construction and manufacturing, the industrial sector
reclaimed the role of growth leader from services for the 3 rd
straight year
 Peso has depreciated sharply, perhaps the biggest loser among
Asian currencies, but it seems that the BSP is allowing it to slide to
support exports, OFWs, BPOs, etc. and to correct the current
account deficit.
PH economy remains among
Asia’s fastest-growing
GDP GROWTH IN SELECTED
ASIAN ECONOMIES (%)
Country/Economy 1st3Q’17 2016
China 6.9 6.7
Philippines 6.7 6.9
India 6.3* 7.9
Vietnam 6.3 5.6
Malaysia 5.9 4.2
Indonesia 5.0 5.0
Korea 4.2 2.2
Thailand 3.8 3.2
Singapore 3.3 2.0
Taiwan 2.6 1.5
*1st half 2017 only
ECONOMIC GROWTH SUMMARY: 1st 3 Quarters (%)
% GROWTH 1st3Q’17 1st3Q’16
GDP 6.7 7.1
Household spending 5.4 7.3

Gov’t current expenses 5.3 9.6
Fixed investment 10.4 28.0
Public construction 10.0 30.9
Private construction 5.8 13.4
Durable equipment 11.6 37.9
Export, goods & services 19.2 9.9
Import, goods & services 17.0 19.5
Agriculture 4.6 -1.3

Industry 7.1 8.5
Services 6.7 7.5
Key risks: Can they spoil the party in 2018?
 Current account deficit  BOP deficit; for the 3rd straight year?
This would mean erosion in dollar reserves  continued peso

 vs. dollar.
Could threaten PH international finance position, affect access

to global funds for supporting growth
50:50 chance of happening, but adverse impact tempered by

FDI  in anticipation of more open investment policy, ODAs
from China & Japan – which means likely scenario is BOP could
be in surplus even if current acct. is in deficit in 2018/2019
Key risks… 2
 Delays in approval of ₱72B new ecozones could constrain export
capacity expansion, result in missed opportunity from favorable
world trade environment
Delay due to waiting for results of 2nd tax reform package which
could change the tax incentives system for FDI?
 Slowing property market = will affect role of private
construction as one of economy’s growth legs
 Vacancy rates in retail segment, office space and residential
units rising – new projects will adjust to avoid oversupply
 Investments in BPO slowing – will affect demand for office
space
 Real estate lending more prudent to keep property loan
share to bank’s loan portfolio under control (i.e., <20%)
Key risks… 3
 Security and terrorism threats
Marawi city “liberated” from terrorist groups but threat from other
groups could disrupt rehabilitation of the city
ISIS-inspired elements could also retaliate, albeit on a smaller
scale, in other areas
Increased activities from leftist groups after gov’t broke off peace
talks with NDF-CPP-NPA
Extension of Martial Law in Mindanao till end-2018 an indication
that security risks remain. SC likely to concur
Opportunities: What excites the market this
year
 Tax Reform – TRAIN has left the station: ₱90B yield from 1st
package for 2018
70% for “Build, Build, Build”, will surely drive economic growth
30% for social safety nets – inclusivity looks more promising
2nd package now in the works, likely approved in 2018,
implemented 2019
Originally revenue neutral, but now targeted to yield ₱40B to
recover foregone losses from the 1st package (which was initially
targeted to generate ₱130B)
Opportunities… 2
 Marawi City rebuilding
Rehabilitation could cost up to ₱90B
₱15B is earmarked from the 2018 budget
Allocation for 2019 will depend on remaining needs of the
rehabilitation; spending expected to go beyond 2019
Task Force created to oversee the work; priority is to
rebuild/develop settlement areas in the city
 A more open FDI regime
NEDA has submitted proposed changes in the 11th Foreign
Investment Negative List (FINL)
Some need amendment of existing laws others changes in the
Constitution
Opportunities… 3
Proposed FINL changes needing amendment of existing
laws…
Investment Area Change Law to be amended
Recruitment and
placement of 100% from 40% presently Art. 27 of Labor code
workers
Construction Elimination of P1-Bn investment RA 7718 IRR prepared by

companies requirement PCAB
Financing and RA 10881 of 2015 can be

100% ownership from 60% presently
investment houses cited as basis for change
Retail trade $200K minimum down from RA 8762 (Retail Trade

enterprises $2.5 Mn presently Liberalization Act)
Opportunities… 4
Investment Area Change Law to be amended
Practice of Allow practice of pharmacy, forestry & RA 594;

professions teaching in higher education institutions RA 6239
Supply of goods to
100% ownership from 40% presently RA 5183
gov’t corporations
Rice and corn

100% ownership from 40% presently Section 5 of PD 194
production
Wellness centers 100% ownership from 40% presently None
Opportunities… 5
Proposed FINL changes needing Constitutional
amendments
FDI ownership in public utilities to be raised to 70%.
Constitution limits foreign ownership in public utilities to 40%.
Article XII, Sect. 11 of the Constitution specifies that “no
franchise…for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least
60% of whose capital is owned by such citizens...”
But public utilities are defined and listed down in Section 13 of
the Public Service Act of 1936.
Hence, opening up of public utilities to majority foreign
ownership of will need constitutional amendment and a
redefinition of public utilities under the Public Service Act.
Opportunities… 6
 Increase in foreign ownership of marketing and

advertising from 40%
 100% foreign ownership of higher education institutions
from 40%
Duterte gov’t will push Congress to prioritize revision of
the Constitution through 2018
Plebiscite of proposed changes by 2019 mid-term
elections
Opportunities… 7
Proposed reforms in foreign investment policy + likely end to

“wait-and-see” stance of investors will lead to improved FDI
growth over the medium-term
FDI up by 20.5% to $7.86 Bn in first 10 months of 2017
-driven by increase in equity placements (54.7%) and reinvested
earnings (9.4%)
Fastest-growing equity placement in power and utilities (up 20x),
transport (up 7x), and professional services (up 4x)
Strong interest in power utilities and infrastructure + capacity
expansions in buoyant export manufacturing enterprises will
drive FDI in 2018/2019
What to expect in 2018/2019
 Momentum on “Build, Build, Build” infrastructure program will be
sustained –
— Thanks to added funds from the 2 packages of TRAIN
 Marawi rebuilding an added boost to infrastructure spending:
₱15B allotted for Marawi in 2018
 Exports slowing but still buoyant, ~10% p.a. volume growth, 2x
world average. Export growth – supported by capacity expansion
since 2 years ago
 Consumer spending picks up in 2018 due to tax breaks to
households, more moderate price increases, job creation in
construction, export-oriented industries, etc.
What to expect… 2
 BPO slowing with call centers approaching 4.5% p.a. natural
growth of talent pool; other growth segments still small to
compensate for slowdown. But 9-10% p.a. growth (vs. 15-20% in
2000-16) remains respectable
 Mining still desultory, with ban on open pit mining still standing
 Agriculture will return to its historical growth of 2-3% p.a.
 FDI performance, after a pause from 2H16 to 2017, could start to
improve with reforms underway
 Foreign tourist arrivals unfazed by security issues in Mindanao,
lifted further by peso depreciation: >> 6M tourists in 2018/2019
What to expect… 3
 Inflation in 2018 almost unchanged from 2017’s 3.3%:
World oil & commodity prices relatively stable, peso
depreciation less pronounced. But …..
Tax reforms will raise domestic prices of petroleum, electricity,
sweetened beverages = will add < 1%-pt. to inflation
Dips to ~3% in 2019 with more benign global market conditions,
tax reform running its course on inflation
 Peso depreciation sustained especially starting 2 ndQ’18 – but less
sharply than in 2017 as:
BSP will push interest rates up a bit to stabilize prices &
minimize peso volatility, align domestic rates with global rates
What to expect… 4
 BOP surplus maintained with strong export performance and
pick up in FDI, OFW remittances & tourist receipts
Peso stabilizes in 2019 on sustained fundamental strength of the
economy and return to current account surplus
 Interest rates – up slightly – as mentioned previously, BSP will
finally raise policy rates
But interest rates still at reasonably low levels that would enable
government or companies to push economic growth at a high rate
Business and Industries likely to benefit
 Construction – related
Cement & concrete products  plastic products  other non-metallic
products (e.q., ceramics, sand & aggregates)  iron and steel 
wood products
 Export – oriented industries
Electronics  chemicals  auto parts  aircraft parts  food &
beverages manuf’g  metal products (copper metal; shapes,
sections and sheets of iron and steel)
 Tourism & leisure
Hotels/hospitality  airlines & transport services  restaurant 
retail shops
PH Economic Growth Outlook
% GROWTH 2016A 2017E 2018F 2019F
GDP 6.9 6.7 7.0 7.0
Household spending 6.9 5.5 6.4 6.5

Gov’t current expenses 23.5 6.0 6.7 7.0
Fixed investment 29.0 9.3 10.8 10.5
Export, goods & services 9.1 18.3 10.0 10.0
Import, goods & services 17.5 13.6 12.0 10.0
Agriculture -1.3 5.0 3.0 2.5

Industry 8.0 7.0 7.8 7.6
Services 7.3 6.7 7.2 7.4
₱:$ Rate (ave.) 47.5 50.4 51.0 51.0

Bank lending rate (%,ave.) 5.6 5.7 6.0 5.8
Inflation 1.8 3.3 3.2 3.0
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QRT Eco Chart Jan 16 2018

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Isabela ballroom

Revenues from tourism up 36% 1st 9 months

Fitch upgraded PH credit rating despite EU legislators criticism in fight

% GROWTH 1st3Q’17 1st3Q’16

GDP 6.7 7.1

Household spending 5.4 7.3

Agriculture 4.6 -1.3

This would mean erosion in dollar reserves  continued peso

Could threaten PH international finance position, affect access

50:50 chance of happening, but adverse impact tempered by

Construction Elimination of P1-Bn investment RA 7718 IRR prepared by

Financing and RA 10881 of 2015 can be

Retail trade $200K minimum down from RA 8762 (Retail Trade

Investment Area Change Law to be amended

Practice of Allow practice of pharmacy, forestry & RA 594;

Rice and corn

Wellness centers 100% ownership from 40% presently None

 Increase in foreign ownership of marketing and

Proposed reforms in foreign investment policy + likely end to

% GROWTH 2016A 2017E 2018F 2019F

GDP 6.9 6.7 7.0 7.0

Household spending 6.9 5.5 6.4 6.5

Agriculture -1.3 5.0 3.0 2.5

₱:$ Rate (ave.) 47.5 50.4 51.0 51.0

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