First Quarter 2015 Update on the Economy: On Solid Ground


By: Rodolfo T. Azanza, Jr.

I attended the Economic Forum organized by the Nordic Business Council of the Philippines (NBCP) last April 23, 2015 at the BDO Corporate Center in Makati City. One of the speakers was Mr. Jonathan Ravelas, Chief Market Strategist of BDO, who gave a very interesting take on the prospects of the Philippine economy.
Mr. Ravelas showed forecast data that while the Euro Zone, the USA and the world economy will continue to show meagre growth in 2015 and 2016 (the world growing at 3% at most in 2016, with Europe only by 1.6%), Asia will continue to lead the charge as it had since 2011. Asia’s growth is forecasted to be 6.7% in 2015 and 6.2% in 2016. China and the Philippines will still be the 2 fast-growing economies, but with the prognosis that in 2016, the Philippines (7%) will overtake China (6.7%), growth-wise.

The main drivers behind the growth of the Philippines according to BDO’s Chief Market Strategist are: (1) growing population, (2) growing middle class, and (3) BPOs & OFWs. However, he also explained that the continuing government infrastructure spending will be a key factor as well. After the drive to clean up the bureaucracy of corruption, government has shifted its efforts last year to infrastructure development, both in terms of government-funded projects and PPPs.

We all know that a growing population acts like an engine in terms of fuelling demand for goods and services such as utilities (power, water, transport) and consumer products. The economy grows as goods and services are produced and money exchange hands several times, generating a multiplier effect. With a growing middle class, it means that more people will have the ability to pay for those products and services, therefore also allowing for producers to focus on producing more durable and quality outputs in order to court the paying public into patronizing their brands.

While it is absolutely fascinating to see how the middle class is able to drive an economy towards expansion, it is particularly enthralling that the rise of the middle class in the last decade is really a combo effect of the rise of the BPOs and the continuation of the OFWs’ significant contribution to the economy (which in recent years were more than 10% of GDP). The BPOs are providing decent jobs and decent pays. They are not just in the metro areas these days. They have moved out to the provinces in more than 20 new locations to avail of both cheaper regional wages and good, less congested communication infrastructure. On the other hand the OFWs are sending money back to send their siblings to school. As these people graduate from college, they join the army of the employed, and it would not be a surprise that they actually join the BPO industry, where young, energetic and ambitious people are welcome to take part in a hectic, fast-paced job, and the money is good. Barring any complications that may be brought in by natural calamities or early marriages (which could happen to young people who get overwhelmed by the sudden ability to earn thick wads of cash), these people will in turn help their younger sibling to go through school. And the cycle turns anew.

Indeed if you look at it, education is still the main tool in breaking the poverty cycle, and is the main reason behind the rise of the middle class in the country. As an aside, I know of a woman from 10 years ago who sent two daughters through college by operating a small pigpen and doing laundry for the neighbours. Now she lives in a 3-storey concrete house and goes to Singapore twice a year to visit one of daughters who now works there as a physical therapist. Her family is certified middle class these days.

The faith of BPOs in the Filipinos’ gift of gab (or gift of tongues?) has led to our unemployment rate staying below double digits since 2005. In 2014, the unemployment rate is only 6% and expected to drop some more.

Mr. Ravelas also emphasized that this a very good time indeed for the Philippines, noting that 2016 is another election year. By experience, the massive spending that occurs during an election year tends to drive the economy to expand. This expansion is not only felt in the current year but straddles a few years thereafter. We should just be on the lookout for inflationary effects. Having said that, BDO’s prognosis is that inflation rate will rest at 2.5% in 2015 and 3% in 2016.

We all know that a high-growth, low-inflation economy is the best there is. And this is what we had been having since 2013, when Dr. Nouriel Roubini (a.k.a. the Prophet of Doom in the economists’ circles) turned into the Prophet of Boom and deemed that the Philippines is Asia’s new rising tiger.

Mr. Ravelas opined that the Peso will stay within the 44-46 levels against the dollar. And the key sectors where investments could really thrive are: Food & Beverage, Retail and Real Estate. These are the three (3) main sectors driven by consumer spending. At this point it comes to mind that the proliferation of milk tea shops and retail perfume stalls in malls and every nook and cranny in metro areas is evidence of the spending power of the young, free and single. Testimonial evidence also shows that young people in early to mid-30s compose the main market for studio-type condo units in Metro Manila.

What remains as risk areas for the Philippines are apparently, (1) the growth challenges (I presume referring to growth with equity, trickle-down or what has been a buzzword these days: inclusive growth), (2) the geopolitical noise (both the outbreak of wars in the Middle East and elsewhere affecting our OFWs, and the territorial disputes in the West Philippine Sea), and (3) the rising US interest rates, which up to this time is not yet felt locally.

The Philippine economy indeed stands currently on solid ground; roaring in the first quarter of 2015. Moving forward, the government has to complete the infrastructure investments. Those airports, roads, communications, power and water supply need to be in place and operational. Moreover, more school buildings, hospitals, transport terminals, public markets and sports arenas should be built, spreading out these facilities to the regions and provinces where they are most needed. It is no rocket science, and no need for an economist’s gobbledegook.