Numbers Don’t Lie
By Andrew J. Masigan
McKinsey and Company recently made public its outlook for the Philippine economy from 2021 to 2023. It appears that the Philippines growth trajectory did not and will not resemble a V-, U-, or K-shaped line but one that resembles a long MMMM, albeit on an upward trend. Our new reality is that the economy will continue to grow but will always decelerate once a new variant of the COVID virus disrupts everyday life.
The general prognosis — which I agree with — is that the economy will clock-in at a growth rate within government’s projections of 5-5.5% in 2021 and between 7-9% in 2022 and 2023. McKinsey rightfully forecasts that the economy could return to pre-pandemic levels by the third quarter of 2022 to the first quarter of 2023, depending on rate of vaccination and spread of new COVID variants. For context, Indonesia and China rebounded to pre-pandemic levels this year. This illustrates the depth and breadth of our five quarters of economic contraction. Regretfully, even when fully recovered, the Philippine economy will continue to show pandemic-induced scars, particularly in the tourism sector, manufacturing sector, and brick and mortar retail.
Which sectors will be the drivers of growth within the next 18 months?
Forty percent of the economy will be driven by four sectors. They are, IT-BPOs, OFW remittances, the energy sector, and the healthcare sector. The IT-BPO sector has shown great resilience and is forecasted to grow by 8% to 12% in revenues and 7% to 8% in headcount next year. OFW remittances have already recovered and will post modest growth this year and next. The energy sector will expand continuously as industrial and commercial demand picks up. Growth in capacity will come from renewable energy, but regulatory issues need to be sorted out. As for healthcare, COVID exposed the gaps in the system and both government and the private sector will be filling these gaps in the next 18 months.
Twenty percent of the economy will be driven by consumer goods and industrial manufacturing, combined. The demand for consumer goods will still revolve around the essentials — food, hygiene, and healthcare products. There will be a slight uptick in entertainment and home improvement products. As for industrial manufacturing, the sector will rebound as global demand and exports pick-up. However, it is stymied by raw material bottlenecks and unstable prices of raw materials.
Eighteen percent of the economy will be driven by the wholesale and retail trade. There will be an increasing shift from shopping in malls and supermarkets to online channels and neighborhood resellers. Whereas during lockdown, retailers benefited from stockpiling, the absence of panic will give rise to “per piece” purchases again.
Twelve percent of the economy will be driven by construction and real estate. Construction benefits from government’s infrastructure program going on high gear as well as pent-up demand due to delayed projects during the lockdown. For its part, real estate will be fueled by the high-end residential sector and those that cater to the OFW market.
Ten percent of the economy will be driven by financial services. Owing to the increasing popularity of e-commerce, many of the unbanked will start to enter the banking system. Bank’s shift to digital transactions will increase transactions exponentially.
Now that we know which sectors will be driving the economy, let me enumerate the industries seen to be the high growth superstars from 2022-2030.
The Philippines is positioning itself as a regional hub for Electric Vehicles (EV) and EV parts in ASEAN. At the moment, there are only 54 manufacturers and importers of EV parts and components. The industry is still at its infancy, with opportunities aplenty for parts manufacturing, assembly, electronics, battery charging infrastructure, and recycling.
Copper, nickel, cobalt, and lithium are vital components for manufacturing EV batteries. Fortunately, the Philippines is blessed with the world’s 4th largest reserves of copper with some 4.1 billion tons, and the world’s 5th largest cache of nickel with 298 million tons. At present, copper production is only at 287,000 metric tons per year while the output of nickel is at 12.5 million tons a year. Our copper and nickel output is minuscule when viewed against global demand and the amount of reserves we have.
Production can increase but three factors stand in the way. The ban on open pit mining. The power of LGU’s to enact ordinances banning mining even if it overrides government policy. And the zonal ban on mining, which is hyper-excessive. These three impediments must be removed in order for the mining industry to thrive.
Open pit mining has been over politicized in the Philippines but is actually an accepted means of extracting minerals that lie near the surface. The mining industry coordinating council (MICC) has adopted the latest Canadian standards for open pit mining, which are the world’s most stringent in terms of environmental protection. There is no reason to choke the industry just because of an archaic stigma.
Aerospace is another emerging industry for the Philippines due to our large supply of aerospace engineers. At the moment, the Philippines hosts three original equipment manufacturers (OEM) who collectively exported $470 million last year. There is much room for expansion.
In agro-processing, opportunities lie in coconut processing (VCO, MCT oil, coconut sugar, coco milk, etc), processed tropical fruits, carrageenan, cassava processing, natural health supplements, and fishery products.
The construction sector offers immense opportunities given the following factors: a housing backlog of 12.4 million homes; the need for 368,600 square meters of new office space until 2025; the government’s continued push towards infrastructure development; and $14 billion to be spent on modernizing logistics supply chains. Opportunities are rife for engineering services outsourcing, general contracting, electrical engineering, mechanical engineering, sanitary engineering, and project management.
Creative industries are making a comeback. Although exports of creative industries (which include furniture, fashion, homewares, toys, etc.) amounted to only $4 billion last year, the industry will soon get a shot in the arm when the Creative Industries Act is enacted into law. The bill was passed in the House on third reading and is presently awaiting deliberation in the Senate. When passed, the bill will open the floodgates of opportunity for creative entrepreneurs, what with financial and institutional support to be provided by government.
The Creative Industries Act mandates the creation of the Philippine Creative Industry Development Council. This will enable the centralization effort across government agencies and across the entire creative value chain. The Council will formulate and execute the Philippine Creative Industries Development Plan as well.
E-commerce offers enormous opportunities for wholesaler and retailers. With 94 million internet users and 89 million Filipinos active on social media, e-commerce in the Philippines grew by 93% last year, with 64.7% of all internet users having engaged in at least one e-commerce transaction. Merchandise trade over e-commerce in the Philippines is seen to reach $660 by the year 2030.
Finally, Artificial Intelligence (AI) has the potential to be the number one growth driver in the country. For this reason, the National AI Strategy was established to position the Philippines as a center of excellence in AI. The Philippines aims to be a producer, programmer, and provider of all products that utilize AI.
All these, coupled with our traditional money makers such as the electronics industry, tourism, and IT-BPO industry, means that our businessmen will not be short of opportunity for expansion and diversification. The next 18 months is the best time to take a position in a high-growth industry of your choice.
Andrew J. Masigan is an economist