THE BANGKO SENTRAL ng Pilipinas (BSP) is currently in talks with other Southeast Asian central banks to adopt regional standards in testing latest financial technology (fintech) products.
Central banks from within the Association of Southeast Asian Nations (ASEAN) are considering a “regional sandbox,” BSP Governor Nestor A. Espenilla, Jr. said, which would essentially serve as a “one size fits all” scheme in trying out digital financial products.
“What’s being discussed right now at the ASEAN level is creating a regional sandbox… where providers can come in and basically experiment, and we regulators can learn from it,” Mr. Espenilla told reporters last week.
“When they (fintech firms) come to our jurisdictions, they don’t have to replicate the experiment. It’s more cost-effective.”
A regulatory sandbox provides emerging fintech firms some room to experiment in offering new products and services under close monitoring by the BSP, before they are covered by banking regulations.
Mr. Espenilla said the Philippines and Singapore were among the central banks that attended initial discussions held in Bangkok, but clarified that these plans are “not yet” a done deal: “Right now, it’s in the phase of convincing other ASEAN countries to join.”
Multilateral agencies have likewise expressed support for this region-wide initiative, the BSP chief added although declined to name these institutions. A regional sandbox means that the results of a tryout of a new fintech product under the watch of one central bank can be accepted and agreed to by another regulator in the region.
Mr. Espenilla said the BSP has been making use of sandboxes to assess the viability of digital banking products. It essentially involves allowing a fintech firm to offer a product “under defined parameters” such as time and location before they are allowed to provide the service on a wider scale.
The planned regional sandbox comes at a time of increased collaboration among Southeast Asian member-states with the ASEAN Economic Community in full swing, complemented by regional banking integration.
Introduced in December 2014, the ASEAN Banking Integration Framework seeks to allow qualified banks to operate freely within the region, subject to the regulations set by the host economy. The industry synergy is expected to unlock more opportunities for cross-border finance and regulatory cooperation, while also spurring increased intra-regional trade.
In November, the BSP partnered with the Monetary Authority of Singapore for “greater collaboration” on fintech. The agreement allows the two regulators to refer “promising” fintech firms to each other and share trends and discoveries about the digital space.
A similar deal on information exchange has been signed by Mr. Espenilla for the BSP and the Bank of Thailand in December last year.
The BSP has adopted a National Retail Payment System framework which allows more fintech players to offer electronic platforms, with the goal of raising the share of digital payments to 20% of all transactions by 2020 coming from a mere 1% share in 2013.
Online banking solutions are expected to bring down costs and spur increased economic activity, which would also encourage more Filipinos to use formal financial channels.
THE COUNTRY’S manufacturing sector continued to show robust growth last year, sustaining the optimism of its potential in generating employment and promoting inclusive growth.
The sector’s output growth based on gross value added (or GVA, at constant 2000 prices) expanded 7% for the entire 2016, up from the 5.7% recorded in 2015, data from the Philippine Statistics Authority (PSA) showed.
Most of the manufacturing subcomponents registered growth with double-digit increases seen in office, accounting and computing machinery (with a 43% growth), basic metal industries (40.5%), machinery and equipment except electrical (24.9%), transport equipment (24.4%), rubber and plastic products (24.4%); wood, bamboo, cane and rattan articles (18.5%); and electrical machinery and apparatus (12.5%).
Food manufactures, which made up more than a third of manufacturing GVA, grew 8.2% in 2016, an improvement over the 1.6% figure in 2015.
Analysts have long emphasized the importance of manufacturing’s “spillover effect” to other industries as a means to achieve sustained and inclusive growth, with the sector said to provide productive jobs to semi-skilled and skilled workers.
BW FILE PHOTO
As a result, the Department of Trade and Industry expected the sector to grow 8-10% each until the end of the government’s term, with Trade Secretary Ramon M. Lopez noting that momentum has been building in the sector since 2013.
Last year, factory output growth based on the PSA’s Monthly Integrated Survey of Selected Industries averaged 11.5%, well-above the 8-10% target.
“The Philippines is now on the verge of economic transformation; while services [sector] was the main driver of growth in the past decades, manufacturing has been playing an important role and has been contributing substantially to economic growth since 2013. In the third quarter of 2016, manufacturing grew by 6.9%, more than one percentage point higher than the rate posted in the same period in 2015 (5.8%),” Mr. Lopez said in his speech to delegates of the Manufacturing Summit at the Makati Shangri-La in November last year.
Mr. Lopez added that from 2013 onwards, third quarter manufacturing growth was 7.3% outpacing that of services which grew at an average of 6.7%.
Moving forward, Mr. Lopez said that the Trade department will focus on industries where the country is said to have comparative advantage in employment generation with manufacturing being one of the department’s priority sectors along with agribusiness, information technology-business process management, tourism, and infrastructure and logistics. — Jochebed B. Gonzales
OUTPUT growth by the electricity, gas, and water sector hastened in 2016 brought by increased demand for these utilities.
Philippine Statistics Authority data showed that the sector’s gross value added (GVA) increased by 9.8% to P271.22 billion in 2016. This was faster than the 5.7% growth rate recorded in 2015 and was the fastest since 2010, when the sector posted 9.91%.
The electricity subsector saw its GVA rise by 10.44% to P235.61 billion last year and accounted for 86.87% of the sector’s total value.
On the other hand, water companies’ output increased 6.1% to P23.92 billion, while the steam industry’s GVA expanded by 5.4% to P11.69 billion. Water and steam subsectors accounted for 8.8% and 4.3% of the sector’s aggregate output, respectively.
BW FILE PHOTO
Data from the Department of Energy (DoE) show total sales going up 9.4% to 74,153 gigawatt-hours (GWh) in 2016. Total electricity consumption also rose by 10.2% to 90,798 GWh. As of July 2016, households with access to electricity stood at 20.36 million, or 89.6% of the total.
In its 2016 Philippine Power Situation Report, DoE attributed the increase in electricity consumption to the rise in temperature made worse by the El Niño, national and local elections held in May, entry of power generating plants, and increase in demand brought by economic growth.
Power demand-supply remained stable in the first three months of 2016 despite the occurrence of El Niño, the Energy department said in its annual report. However, in April and May, yellow and red alerts were declared in Luzon and the Visayas. In Mindanao, hydro capacities declined.
According to the DoE, El Niño Mitigation Measures and preparation for the May elections stabilized the situation. The DoE said some of the measures were: “activation of the Interruptible Load Program, ensuring minimal force outages, management of power plant maintenance schedules and optimization of hydro capacities specifically in Mindanao.”
Manila Electric Co., the country’s largest power distributor, reported a net income of P19.2 billion last year, marginally higher than the P19.1 billion posted in 2015, citing an increase in electricity volume sales and higher financing income. Excluding exceptional items, core net income reached P19.6 billion, higher by 4% compared with P18.9 billion a year earlier due mainly to an 8% increase in electric consumption.
On the other hand, Maynilad Water Services, Inc.’s core profit fell 26% to P7.2 billion from P9.7 billion, while Manila Water Co., Inc. reported a 2% increase in net income in 2016 to P6.07 billion from P5.96 billion a year ago, with the company maintaining growth in its service connections at 3% as it breached the million mark at 1,008,918 last year. — Christine Joyce S. Castañeda
THE INCREASE in building projects amid strong demand in high rise residential and commercial properties made the construction sector one of the country’s growth drivers last year.
Philippine Statistics Authority data showed that the sector’s gross value added, or the contribution of a sector to gross domestic product (GDP), grew 13.7% to P519.70 billion, faster than the previous year’s 11.6%. This is the fastest among other sectors for the year as well as the only one that posted double-digit growth figures.
Leading the charge was public construction, which posted double-digit growth figures for the entire year — expanding as fast as 38.5% in the first three months of 2016 before tapering into the fourth quarter which recorded a lower albeit still robust 19.2% growth. For the year, it grew by 28%, surpassing 2015’s 25.5%.
The same trend could be seen in private construction, but it nevertheless posted 11.5% growth last year, beating the 7.6% reading in the year before.
On a quarterly basis, public construction has been growing by seven quarters straight (since the second quarter of 2015). This was after the time the government has cut back on infrastructure spending in 2014. On the other hand, private construction’s growth streak extended to 11 quarters as of 2016.
BW FILE PHOTO
In terms of its contribution to employment, the sector’s share to the country’s total employment is 8.2% with 3.37 million workers said to be employed in the sector during the period. The figure represented a 25% increase as compared to some 2.69 million workers in 2015.
In a report released by the Construction Industry Authority of the Philippines for the year, the robust growth figure in public construction was attributed to an increase in government spending “as it fast-tracks implementation of infrastructure projects of the Aquino administration and the Golden Infrastructure projects of the Duterte administration.” Similarly, the increase in demand for high-rise residential and commercial buildings were cited for the growth in private construction.
Looking forward, the sector is said to accelerate further as much hope is placed in the current administration’s “Build, Build, Build” program. This year, the government appropriated P847.2 billion (or 5.3% of GDP) in the 2017 National Budget for infrastructure projects.
Under this arrangement, the government will spend some P8 trillion-P9 trillion for the next six years, representing a rise to around 7.4% of GDP in 2022 from the planned 5.3% of GDP this year. The figure is a far cry to previous years when infrastructure spending averaged some 3% of GDP. The government has said that the program will be financed through expansionary fiscal deficits and through the planned tax reform which will increase higher revenue collection efforts. – Leo Jaymar G. Uy
GROWTH in wholesale and retail trade was sustained last year on strong consumption supported by the increasing presence of online platforms for buying and selling.
According to government data, gross value added in trade and repair of motor vehicles, motorcycles, personal and household goods grew 7.2% year on year, inching up from 2015’s 7.1%.
Accounting for nearly 80% of the total output in the sector, the retail trade sub-group expanded 6.5% last year, 0.4 percentage points higher than the year prior.
Growth in wholesale trade was strong as well albeit decelerating to 9.8% from the 11.2% it recorded in 2015. Meanwhile, the maintenance and repair of motor vehicles, motorcycles, personal and household goods was recorded at 11.3% from 13.1% previously.
Nevertheless, consumption, which accounts for around two-thirds of the country’s gross domestic product, remained one of the country’s growth drivers, rising 7% in 2016 from 6.3% in 2015. Remittances from overseas Filipinos, known to support local consumption, grew 5% year on year, the fastest since a 7.2% annualized increase posted in 2014, and beating the central bank’s forecast of a 4% climb for the year.
Analysts attributed this sustained growth in household consumption to high consumer confidence, modest inflation as well as favorable labor market conditions.
Another factor is the country’s modest interest rates fueling households’ and corporates’ propensity to borrow. Central bank data show household credit totaled P780.81 billion in 2016, soaring by 22.5% from the P637.51 billion extended by banks a year ago. Since 2010, consumer loans have been growing by double digits, with the total breaching the P1-trillion mark in 2015 given a surge in borrowings to acquire cars and homes.
Rising consumer credit comes on top of increased lending for corporates, especially now that the government is pursuing an infrastructure push with big-ticket projects on the pipeline. – Jochebed B. Gonzales
THE TRANSPORTATION, storage, and communication industry slackened in 2016, with decelerations observed almost across all sectors.
Contributing around 8% to economic output, the industry slackened to a 5.9% growth last year with a gross value added of P615.71 billion from the P581.29 billion posted in 2015.
Growth in communications grew 4.3% to P364.45 billion in 2016, slower than the 7.8% posted in the year prior although the subsector still comprise more than half of the industry’s gross value added.
Meanwhile, transport and storage kept steady at 8.4% to P251.25 billion.
Broken down, air transport was the top growth driver with 13.6% to P30.45 billion in 2016 although it was a slight slowdown from the 14.9% netted in 2015. Second place was “storage and services incidental to transport” which accelerated 8.5% to P68.24 billion from the previous 7.5%.
Growth of land transport was 7.6% (from 7.5%) while that of water transport was 6.2% (from 8.3%).
The sector’s mixed results was reflected in the performance of its big players.
BW FILE PHOTO
PLDT, Inc. reported a P27.85-billion consolidated core income in 2016, 20.9% lower than the previous year, due to lower earnings before interest, tax, depreciation and amortization or EBITDA and higher costs from its capital expenditures which was used to fund ongoing expansion in its fixed and mobile businesses. Its recurring core income — which strips out asset sales, depreciation, one-time provisions, and subsidies — reached P20.19 billion.
Ayala-led Globe Telecom, Inc., on the other hand, saw its core net income rise by an annual 6.1%, driven by growth in its data-related products and continued uptick in both its mobile and broadband subscribers. However, its net income dipped 3.75% to P15.88 billion in 2016 from the P16.48 billion recorded in 2015 amid a general slowdown in traditional legacy business and non-operating charges related to its acquisition of San Miguel Corp.’s telecommunications assets.
Meanwhile, PAL Holdings, Inc., the listed operator of Philippine Airlines saw total revenues and the number of passengers increase 7.1% and 12.2% in 2016, respectively.
Its profit during the period was down 38.8% to P3.59 billion from 2015’s P5.87 billion on account of rising operating expenses.
On the other hand, the country’s auto sales grew 24.6% last year, sustaining a run of double-digit growth for the industry.
Data jointly released by the Chamber of Automotive Manufacturers of the Philippines, Inc. and Truck Manufacturers Association showed that member companies sold a total of 359,572 units last year, up from the 288,609 units recorded in 2015. The two groups surpassed their 2015 sales total last October and beat the groups’ 2016 target of 329,300 units by 12.4%.
Broadcasting companies also saw earnings up last year on account of election-related advertisements. ABS-CBN Corp.’s net income was recorded at P3.52 billion for the year, up 38.5% from the previous year while that of GMA Network, Inc. rose 71.5% to P3.65 billion. — Arianne Kristel R. Pelagio
BANKS, insurance firms, and other financial companies posted higher output in 2016 in large part due to increased lending activities.
Data from the Philippine Statistics Authority showed that the gross value added (GVA) of the financial intermediation sector increased by 7.6% to P588.17 billion last year, outpacing the 6.06% growth in 2015.
Among the subsectors, banking institutions — which accounted for a chunk of the sector’s total output at 45.4% — posted the highest improvement in GVA at 9.2% to P267.26 billion last year. It was followed by other financial firms doing “activities auxiliary to financial intermediation” which grew by 7.4% to P32.30 billion and making up 5.5% of the sectoral total.
For its part, the insurance subsector saw its GVA rise by 7.2% to P101.08 billion while non-bank financial intermediation increased by 5.6% to P187.53 billion. The insurance and non-bank financial intermediation sectors, respectively, make up 17.2% and 31.9% of the sectoral total.
BW FILE PHOTO
The year 2016 was a good one for the Philippine banking industry as it was able to book a record profit during the year on the back of higher deposits and loans while having a lower share of soured debts from a year ago.
Cumulative bottom line among banks was P154.13 billion, 13.9% higher than the P135.34 billion recorded in 2015, according to data from the Bangko Sentral ng Pilipinas (BSP). In particular, universal and commercial banks (UK/Bs) accounted for the bulk of the amount with a P136.96-billion income, up 13.9% from the P120.28 billion in 2015.
Consumer loans continue to be the banks’ bread and butter with UK/Bs and thrift banks having lent P1.27 trillion in consumer loans to households last year, which was 19.9% higher than the P1.06 trillion recorded in the year prior. Loans booked for housing lots was up 17.1% to P519.90 billion, while motor vehicle loans increased by 27.8% to P388.36 billion last year due to increased demand for private transport and flexible payment options offered to buyers.
Consumer credit is widely expected to rise further amid the optimism arising from the government’s infrastructure push with big-ticket projects on the pipeline.
On the other hand, the insurance industry’s total premium income was flat last year according to quarterly reports submitted by the life and non-life insurance companies to the Insurance Commission. The industry’s total income from premiums for 2016 was P231.88 billion which was up 0.3% from 2015 — below the targeted P280 billion-P300 billion worth of premiums for the year.
The life insurance sector’s total premiums was down 3.0% in 2016, which was attributed to the decline of premium production in variable life insurance products which were allocated in the Philippine stock market.
Non-life insurance companies absorbed some of the losses as their net premium incomes grew 16.2% for the year. — Christine Joyce S. Castañeda
THE REAL ESTATE sector remained strong in 2016 driven by sustained demand for residential properties and office space against the backdrop of a booming economy.
The real estate, renting and business sector continues to be one of the main growth drivers with gross value added reporting an 8.9% growth to P930.56 billion in 2016, higher than the 7.1% expansion it registered in 2015, and the services sector’s average growth of 7.4% in 2016.
For real estate sector alone, it grew by 6.9% to P222.03 billion from P207.70 billion in 2015, while that of business process outsourcing, renting, and other business activities grew by 14.7% to P417.84 billion, higher than 9.6% in 2015. Likewise, ownership of dwellings grew by 2.8% to P290.69 billion.
In its fourth quarter report, real estate consultancy firm Colliers International attributed the sector’s robust growth to three major drivers: influx of offshore gaming companies, continuous expansion of information technology and business process management (IT-BPM) firms, and tenants’ search for “flight-to-quality” opportunities.
A total of 676,000 square meters (sq. m.) of office space was taken-up in central business districts in the metro in 2016, up 7% compared to 2015.
“The market was still primarily driven by IT-BPM companies. Close to 60% of take-up across Metro Manila came from IT-BPM companies. Non-BPO companies comprised 32%, while the balance came from off-shore gaming companies,” Colliers said.
Colliers added that around 85,000 square meters worth of office space was occupied by offshore gaming companies in 2016, most of which came in the fourth quarter.
“The Philippine Amusement and Gaming Corp. (Pagcor) has launched POGO (Philippine Offshore Gaming Operators) late last year, initially setting 25 POGO licenses but with a potential to increase to 50 in the next six months,” Colliers International said in its forecast for the local property industry this year.
On the heels of his oath taking last year, President Rodrigo R. Duterte planned to put an end to online gambling in the country. This led Pagcor to stop renewing online gaming licenses and since then has relied on offshore gaming licenses as a new source of revenue.
“In the last quarter of 2016, there was a surge in inquiries from offshore gaming companies, each with a minimum requirement of 10,000 square meters taking BPO spaces,” said Colliers.
In its quarterly residential report, Colliers noted that pre-selling take-up of condominium units — an indicator for future growth — picked up after four straight years of decline, with total take-up for 2016 reaching 38,800 units.
Total licenses to sell issued by the Housing and Land Use Regulatory Board rose 15.2% to 473,210 units last year from 410,834 units in 2015, with middle- and high-end condominium units increasing 44.6% to 94,142 units from 65,104 units.
“Take-up has been strong across unit sizes as previous years’ launches are also sold,” Colliers said, citing the favorable interest rate environment.
On the flip side, the real estate services firm reported soft sales take-up in Metro Manila’s secondary residential market amid the influx of new supply across submarkets.
For 2016, take-up only amounted to 2,000 units, 70% lower than the take-up the previous year with Colliers saying that developments in “fringe locations” have become viable alternatives to projects in the central business districts (CBDs). Fringe area completions in 2016 reached 4,800 units, higher than the 3,900 in CBDs.
A separate report by property services and advisory firm CBRE Philippines, Inc. shared a similar view, saying that the southern part of Metro Manila now poses itself as an ideal location for residential, commercial, and office projects.
Furthermore, “uncertainties” in the current administration did not induce unfavorable sentiments among the players in the office sector, CBRE said, adding that foreign investors remain confident about the country’s BPO industry.— Ranier Olson R. Reusora
THE COMMUNITY, business, and social services sector’s growth experienced a tempered uptick in 2016.
The sector’s gross value added(GVA) — a measure of the value of goods and services produced by a sector — increased by 7.3% to P841.70 billion in 2016, the Philippine Statistics Authority data showed.
The growth logged by the sector in 2016, however, was slower than the previous year’s 8.3%.
All subsectors posted growth, but slower pace was recorded for the recreational, cultural, and sporting activities and the health and social work, dragging the overall performance of the sector.
Recreational, cultural, and sporting activities’ output — accounting for a fifth of the total sector’s production — increased by 7.7% in 2016 to P182.11 billion, slacking the most from the 12.4% increment recorded in 2015.
BW FILE PHOTO
The Philippine gaming sector was in the spotlight last year after its casinos figured in the Bangladesh central bank hacking incident. Hackers in February last year transferred $81 million from the Bangladesh Bank’s account with the Federal Reserve Bank of New York to a Philippine bank. The stolen money was then withdrawn and transferred to casinos, where the money trail ended.
Out of the stolen $81 million, about $15 million has been returned to the Bangladesh government.
The incident prompted the government to include casinos under the coverage of the Anti-Money Laundering Act, the inclusion of which was signed into law (Republic Act No. 10927) in July this year.
Despite these developments, the gaming sector posted a P158.12-billion gross gaming revenues in 2016, 18.6% higher than the P133.28 billion in 2015, according to the Philippine Amusement and Gaming Corp.’s latest data.
Growth was likewise reflected in earnings of casino-resorts.
Melco Crown (Philippines) Resorts Corp., the operator of the City of Dreams Manila, reported a 63% jump in its net revenues driven by improved volumes across all gaming as well as its non-gaming segments. Bloomberry Resorts Corp., the owner and operator of Solaire Resort & Casino and Jeju Sun Hotel & Casino, reported a net profit of P2.32 billion last year, a reversal of the P3.38-billion net loss incurred in 2015, piggybacking on all-time high records in its gaming segments.
On the other hand, Travellers International Hotel Group, Inc., operator of Resorts World Manila saw earnings decline 15% during the period on account of lower revenues from its casino operations as well as increased financing costs due to the peso depreciation.
The health and social work subsector grew by 6.3% to P129.37 billion. Its growth, however, slowed from 9% in 2015.
The GVA of hotels and restaurants rose by 8.2%, the fastest growth among all subsectors, to P144.62 billion in 2016 from 6.9% logged in 2015.
Education — which comprised 40% of the sector’s total output — went up by 7.2% to P339.54 billion.
Output of other services activities grew by 6.8% to P42.68 billion, while that of sewage and refuse disposal sanitation and similar activities increased by 3.2% to P3.20 billion. — Mark T. Amoguis
WHEN President Rodrigo R. Duterte won the race to Malacañang last year, he didn’t just promise to wipe out the narcotics trade, criminality, and corruption — he also vowed to improve the country’s poor infrastructure to help spur the economy.
The former Davao mayor was right on the money.
After all, if the Philippines wanted to keep its growth engine humming, it needs to take care of, and even upgrade, its roads, bridges, and airports.
Obviously enough, that needs a lot of work.
Based on the UN Economic and Social Commission for Asia and the Pacific’s Asia-Pacific Countries with Special Needs Development Report 2017, the Philippines scored 0.336 in the Access for Physical Infrastructure Index (APII) for 2015. The ranking placed the country 24th out of the 41 Asia and the Pacific countries, putting it in between Pakistan’s 0.311 and Samoa’s 0.350.
Within the 10-member Association of Southeast Asian Nations (ASEAN), the Philippines fared no better.
Although the country’s APII score was above Indonesia’s 0.278, Lao People’s Democratic Republic’s 0.225, Myanmar’s 0.198, and Cambodia’s 0.186, it fell below Thailand (0.418), Vietnam (0.419), Malaysia (0.502), and Singapore (0.708). Brunei was not included in the ranking.
Workers descend from a scaffolding at a construction site for an expressway in Manila in this photo taken in March. Desperately-needed airports and trains are part of Philippine President Rodrigo Duterte’s envisioned “golden age of infrastructure”, but graft, red tape threaten the $170-billion plan. / NOEL CELIS / AFP
The Philippines’ crumbling infrastructure has also resulted in transport and economic woes. A 2014 study by the Japan International Cooperation Agency (JICA) showed that, without intervention, traffic costs will likely surge to P6 billion a day by 2030 from P2.4 billion. The same study also said transport cost will be 2.5 times higher by 2030 if congestion is not alleviated.
To address this, Mr. Duterte said he will upgrade the country’s dilapidated infrastructure, which his economic advisers qualified as one of the reasons why the Philippines, one of the world’s fastest-growing economies, had lagged behind its Southeast Asian peers for so long.
KEEPING ‘SHOVEL-READY’ PROJECTS
Philippine history has shown that a newly elected president has always delayed — if not outright abandoned — pet projects pursued by predecessors.
Recall the Estrada administration’s move to scrap the Ramos government’s practice of providing sovereign guarantees for build-operate-transfer (BOT) projects. The Aquino administration, during its incumbency, grounded the Arroyo government’s infrastructure portfolio, causing economic growth to slow sharply in 2011.
But Mr. Duterte’s aides gave an assurance that the current administration will not abandon the previous administration’s “shovel-ready” projects.
“You know in the past administration, they stopped all the projects for the first two years [to ensure systems are more transparent]… Here we did not; we approved everything. So we are continuing moving ahead,” Finance Secretary Carlos G. Dominguez III said in a press briefing in Malacañang on July 6, 2017.
Dubbed as “Build, Build, Build,” the Duterte government’s aggressive infrastructure program aims to jack up infrastructure and social spending to about 7.1% of gross domestic product until the end of its term, in a bid to boost the economy to 7-8% growth next year until 2022 from 6.9% in 2016, and slash poverty incidence to 13-15% from 21.6% in 2015.
Once underway, this “golden age of infrastructure” is expected toreverse the backlog left by previous administrations, the current government said.
“With sound macroeconomic fundamentals, effective policy reforms, and an aggressive infrastructure program, the Philippines is poised for an economic breakthrough. We now have the right ingredients and the right leaders to catch up with our ASEAN peers, and ultimately transform the Philippines into the ‘Asian tiger’ we are capable of becoming,” Budget Secretary Benjamin E. Diokno said in an opinion piece published by BusinessWorld on May 24, 2017.
THE BIG SHIFT
To bankroll this huge infrastructure push, the Duterte administration said it will shift from public-private partnership (PPP) as the primary mode of financing and will rely more on public funding and official development assistance (ODA) to avoid delays and higher project costs. The government will also employ a “hybrid” model, in which construction is financed by the government or ODA and operation and maintenance is entrusted to the private sector.
The sudden change in funding modes is a departure from former President Benigno S. C. Aquino III’s high reliance on PPPs for major projects, which the Asian Development Bank (ADB) said must be continued by succeeding administrations.
Besides the ADB, the Philippines’ PPP program has also earned plaudits from JICA and Moody’s Investors Service. The hospitable international environment for PPP is understandable. As many governments around the world struggle with fiscal deficits, the PPP model has become a preferred mode of meeting infrastructure requirements.
According to a June 28 report, BMI Research said the government’s decision to diversify financing for big-ticket projects from PPP to state or donor-funded schemes could initially hurt investor appetite, but should eventually bode well for the country.
“In the short term, ongoing revisions and modifications of proposed PPP projects will result in increased uncertainty in the Philippines’ infrastructure market, as projects previously launched under the PPP program are withdrawn and switched to other procurement modes,” BMI analysts said.
“We note while this will mean fewer opportunities for private investment in infrastructure. This shift will help reduce the likelihood of contractual disputes and uncertainty over financing that has weighed on proposed PPPs, thereby improving overall project implementation,” they added.
In May, the government removed the plan to develop five regional airports from the PPP pipeline in favor of “other modes” of funding. Last December, the Philippine Ports Authority also withdrew the Davao Sasa Port redevelopment from the PPP lineup to cut costs.
“We expect that other major projects currently part of the PPP program will be withdrawn and relaunched as government-financed or ODA-backed initiatives over the coming months, as the Duterte administration attempts to accelerate infrastructure development in the Philippines,” the Fitch Group unit also said.
However, the change in funding modes, despite its supposed advantages, has also been questioned by experts.
In an opinion piece published on BusinessWorld on June 2, 2017, Bienvenido S. Oplas, Jr., head of Minimal Government Thinkers and a Fellow of SEANET, identified “inherent problems and risks” with that change.
If hybrid model becomes the dominant mode in building important infrastructure projects, the financing scheme “[will] not bode well for Filipinos.”
Since an administration is limited to only six years, it has little political or corporate brand to build and protect, Mr. Oplas said.
As a result, “it can worry less of what the people would say after its term has ended especially if the project is later discovered to be of inferior quality and tainted with corruption.”
Moreover, ODA funding has tight strings attached, he added.
“A China-ODA [arrangement] would mean only Chinese contractors, suppliers, managers, and even workers would do the work. Local firms would be relegated to O&M (operation and maintenance) and their purchase of equipment and supplies might be constrained by the project specifications so that they will be forced to source these from China again,” Mr. Oplas said.
CAPACITY QUESTIONS
Meanwhile, analysts from international think tank GlobalSource Partners has taken a step back to see the bigger picture.
And so far, it’s not looking good.
There has been little sign of the Philippines’ capacity to implement its P8.4-trillion infrastructure spending plan over the next five years, it said. It also cited the uncertainty fueled by questions on the government’s change in preferred funding scheme for these big-ticket projects.
In a July 2017 report, GlobalSource analysts said that the policy shift would likely add to political risks under Mr. Duterte, even as they identified the merits of other financing schemes. They also joined other observers in questioning the national government’s ability to take on these projects — citing, among others lack of technical expertise.
President Duterte has tapped the Beijing-based Asian Infrastructure Investment Bank (AIIB) to help fund his government’s “unprecedented infrastructure buildup,” which aims to minimize traffic jams such as the one seen in this picture taken in September 2016. / NOEL CELIS / AFP
“While the lack of policy continuity would add to assessments of political risk under this administration, one can in fact see the merits of de-emphasizing PPP as the principal driver of the country’s infrastructure aspirations,” according to the report.
“[N]ot many projects lend themselves to a PPP structure; and as government pursues more and more higher risk greenfield projects, a PPP arrangement may not necessarily bring value for money for government, particularly if it is forced to absorb a big share of the demand risk in order to make projects bankable.”
In 2002, the ADB called on the Arroyo government, which was among the previous administrations rife with projects financed through ODA, to improve its use of foreign assistance as a means of easing poverty in the country. It noted that the state’s poor use of ODA continued to burden the government with additional costs while delaying program and(project benefits at that time.
In the meantime, as the Philippines starts building more roads and modernizing ports, the private sector is still finding it hard to carve out a niche in this “golden age of infrastructure” with Mr. Duterte favoring foreign money to fund his massive infrastructure program.
With the absence of PPP while large-scale projects are still under construction, companies have opted to offering unsolicited proposals to take part in the government’s infrastructure drive.
While these ODAs carry extremely low interest rates and easy repayment schemes, they mostly require goods and services to be procured from the donor country, leaving Filipino contractors feeling sidelined after initially becoming enthusiastic about the prospects of the government’s aggressive infrastructure push.
But unlike its predecessor, the Duterte administration is more welcoming of unsolicited proposals, while criticizing the slow progress of PPP initiatives.
With a large political capital and plenty of financing options at its disposal, the Duterte government must work double time toimprove its capacity to absorb big-ticket infrastructure projects.
Only after it does will it prevent a repeat of the previous administration’s slow infrastructure rollout.
Ian Nicolas P. Cigaral used to cover Malacañang for BusinessWorld.
THE DUTERTE GOVERNMENT’S P8-trillion infrastructure spending plan was what local lenders were waiting for.
When it was announced in April, it created a stir in the industry for obvious reasons.
By helping lend money to big-ticket projects, local banks would be able to deploy cash and earn more from loans, instead of just placing them in low-yielding instruments.
Over the past year, the Philippines’ money supply has been posting double-digit increases, thanks to rising deposits and banks’ bigger capitalization. As a result, amounts that were available for corporate and retail lending have also grown.
But this expansion drove borrowing rates lower, prompting the central bank to step in by capturing excess funds just to bring rates closer to its benchmark.
With the government’s “Build, Build, Build” initiative, banks would have the opportunity to cash in on the infrastructure boom while also fulfilling a sense of duty to help upgrade the country’s roads and bridges.
THINGS CHANGED A MONTH LATER
What would have been a golden era for bank lending took a sudden turn when economic managers bared that the so-called DuterteNomics plan covering 2017-2022 meant a shift away from the public-private partnership (PPP) mode towards grant-funded and state-sponsored projects.
National Economic and Development Authority (NEDA) Undersecretary Rolando G. Tungpalan said in May that two-thirds of the projects will be wholly supported by government funds, with the remainder to be supported by other modes of financing. Some 18% will rely on PPP arrangements, while 15% will depend on official development assistance (ODA).
“The thing about the PPP program is because it was private-public, there was significant opportunity for banks to lend to the private side of PPPs… Now, we noticed a shift to ODA financing, which is really a government-to-government type, and that potentially could reduce the opportunity for banks to lend directly to these projects,” Cezar P. Consing, president and chief executive officer (CEO) at the Bank of the Philippine Islands (BPI), said in an interview. “However, I will say that the infrastructure needs of the country are so great that there’s probably room for both approaches.”
For this year alone, the government wants to spend as much as P847.2 billion for public infrastructure, accounting for 5.3% of gross domestic product (GDP). By next year, it is looking to spend over P1 trillion on projects nationwide, with the amounts expected to rise annually and peak at a share of 7.3% of GDP by 2022.
In defending the shift to ODA, Socioeconomic Planning Secretary Ernesto M. Pernia said the government simply wants faster and more efficient results, given that the Aquino administration’s PPP program saw but four projects completed within his six-year term against 53 on the pipeline.
Lined up under the DuterteNomics program are the P255-billion North line of the Philippine National Railways to be funded by ODA from Japan, eyed to link Metro Manila to Clark, Pampanga in 55 minutes; while funding for the P285-billion South line — which will connect Manila to Bicol — will be sourced from the Chinese government.
A man works on a government project, a 300-meter flyover that will connect two main expressways in Manila. / NOEL CELIS / AFP
The first phase of the Mindanao Railway that was planned to start by the fourth quarter will also be supported by a grant from Beijing, with the Tagum-Davao City-Digos segment seen to cost about P31.544 billion.
But will the new route taken towards the so-called “golden age of infrastructure” leave banks out in the cold?
Despite the shakeup in project financing options, Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. said the lenders will not run out of chances to cash in on infrastructure opportunities. These are so huge that it’s beyond what the banking system can support by itself.
With wider project selection, there’s more than enough to go around as far as banks are concerned.
“There might be friction, but if we look at it more holistically and with a more long-term view, you’ll realize there’s really room for both,” Mr. Consing said, noting that the goal was to get the construction plans up and running.
Instead, the opportunity lies on what he calls the “second- and third-order benefits” drawn from getting more roads and transport systems, such as new business hubs which would need fresh funding as they sprout — new malls, offices, restaurants, housing sites, among others.
Developers are quick to put together townships, placing office buildings and condominiums around train terminals as communities rise with the new transport routes.
Colliers International cited Fairview; San Jose del Monte, Bulacan; Novaliches; and Commonwealth Avenue in Quezon City as good sites for development, especially with the construction of the Metro Rail Transit Line 7 in the works.
Outside the capital, the provinces of La Union, Pangasinan, Tarlac, Batangas, Naga, Iloilo, Bacolod, Cebu, Davao, and Cagayan de Oro are also seen as strategic locations for budding townships with blueprints for more link roads and local railways in sight.
Besides construction companies, the household sector, wholesale and retail trade, and food production are among those expected to benefit from higher infrastructure spending, the NEDA said.
For his part, Security Bank Corp. President and CEO Alfonso L. Salcedo, Jr. said that lenders can take part in the infrastructure story by lending to domestic contractors and suppliers, who would need to tap fresh funds for its working capital.
“As they participate in infrastructure development, their business with banks will also expand,” he said.
But this is not to say that Security Bank has limited resources to support government spending by way of lending to build more roads, bridges, and trains.
Currently, the Philippines’ fifth-largest bank in terms of assets boasts of fresh capital, giving it the capacity to lend more to conglomerates involved in big-ticket projects despite the 25% single borrower’s limit (SBL) imposed by the central bank.
“We are well-positioned to support the financing requirement of our large corporate customers because we have a higher SBL for our corporate customers as a result of the P37-billion capital investment by MUFG (Mitsubishi UFJ Financial Group) in Security Bank last year,” Mr. Salcedo said. The lender can also leverage on the expertise of its Japanese partner in terms of project finance, the executive added.
Both BPI and Security Bank see the construction boom as a net plus for the local economy, noting that the ODA financing track should not be viewed as competition.
Melissa Luz T. Lopez is a senior reporter of BusinessWorld. She covers the Bangko Sentral ng Pilipinas and the banking sector.
THE GENERAL INCREASE in prices of widely used goods and services sustained its pace in December from the preceding month, the government reported on Friday, even as core inflation eased to a four-month low.
Preliminary data from the Philippine Statistics Authority showed that the consumer price index (CPI) rose 3.3% year on year last month, unchanged from November, but faster than December 2016’s 2.6%.
December headline inflation matched the median in an analyst poll BusinessWorld conducted late last week and hovered around the midpoint of the Bangko Sentral ng Pilipinas’ (BSP) own 2.9-3.6% estimate.
For the entire 2017, inflation averaged at 3.2%, well within BSP’s 2-4% target band, at the same time, matching the central bank’s full-year forecast.
“Inflation in December 2017 was due to faster increases in food prices (corn, meat, fish, fruits, cereals), but tempered by lower non-food inflation (transport, housing, water, electricity, gas and other fuels),” the National Economic and Development Authority (NEDA) said in a separate statement.
OUTLOOK
BSP Governor Nestor A. Espenilla, Jr. said in a statement that inflation should likewise settle above above three percent until next year, but would still be manageable.
“The BSP expects inflation to remain manageable over the policy horizon as 2017 inflation settled within the National Government’s 3.0 percent ± 1.0 percentage point target range,” Mr. Espenilla said in a statement, even as he said that “inflation is projected to settle above the midpoint of the target range for 2018 to 2019”.
“Robust domestic economic activity, ample liquidity, and well-anchored inflation expectations continue to support within-target inflation,” he added.
“Looking ahead, the BSP will remain vigilant against any risks to the inflation outlook to ensure that the monetary policy stance remains consistent with the mandate of maintaining price stability conducive to economic growth.”
Socioeconomic Planning Secretary Ernesto M. Pernia said in the NEDA statement that the agency sees “inflation over the near-term to remain stable despite pressures that may be brought about by the newly enacted TRAIN (Tax Reform for Acceleration and Inclusion) program, weather patterns, and uncertainties in international oil markets”.
NEDA added that it expects steady supply of key agricultural commodities “within the near term”, with the crop outlook — according to the Philippine Statistics Authority as of October 2017 — showing increases in harvest areas across regions mainly due to sufficient water supply and continued government provision of fertilizer and high-yielding seeds.
Mr. Pernia said “any increases in prices in the first few months of 2018 will be tempered by the expected decline in power rates as capacity fees from power generators fell due to fewer power outages”.
SEGMENTS
The food and non-alcoholic beverages index, which account for nearly 40% of CPI, rose 3.5%, while the index of housing, water, electricity, gas and other fuels, which made up more than a fifth, was up by 3.8%.
Comprising 12% of the CPI basket, the index of restaurant and miscellaneous goods and services sub-group climbed by 3.0%.
Prices of alcoholic beverages and tobacco products grew increased by 6.4%.
“[F]aster price increases in food and beverages in December can be attributed to strong demand amid the holiday season as well as occurrence of typhoon ‘Vinta’ and tropical storm ‘Urduja’ disrupted supply of certain food items,” said Angelo B. Taningco, economist at Security Bank Corp.
“Also, the holiday season may have likely spurred demand for ‘sin’ products and prices in restaurant and other services, thereby raising their price inflation,” he added.
“The increase in global oil prices last month was also instrumental in the price hikes in fuels and utilities.”
Price increases were also observed on all other sub-indices namely: transport (2.4%), education (2.2%), furnishing, household equipment and routine maintenance of the house (1.9%), health (2.2%), clothing and footwear (1.8%), communication (0.4%) as well as recreation and culture (1.5%).
Holiday spending was also the main driver of December’s inflation according to Union Bank of the Philippines (UnionBank) chief economist Ruben Carlo O. Asuncion, even as he clarified that price upticks for the so-called “sin” commodities “might have been prompted by the anticipated tax increase particularly levied on tobacco products.”
SLOWING CORE
Core inflation, which is used in determining underlying price trends by stripping out volatile prices of food and fuel, stood at 3.0% in December, easing from 3.3% the preceding month.
It was also slower than the 3.3% and 3.2% clocked in September and October, respectively.
But for the entire 2017, core inflation averaged 2.9% compared to 2016’s 1.9%.
Economists interviewed held varying views on last month’s core inflation, but nonetheless suggested a more stable outlook on prices.
Security Bank’s Mr. Taningco attributed the slowdown to the transport sub-index whose price increase moderated to 2.4% last month from 4.4% in November.
Chidu Narayanan, Asia economist at Standard Chartered Bank, meanwhile, pointed to prices in housing. “Housing inflation dropped to a four-month low of 3.8% year on year, also driving core inflation down in December, after the rise in the past two months,” Mr. Narayanan said.
Land Bank of the Philippines (LandBank) market economist Guian Angelo S. Dumalagan, on the other hand, said: “The drop in core inflation might be attributed to the unexpected appreciation of the peso in December versus November. The decline in core inflation gives the BSP room to keep interest rates steady for now.”
UnionBank’s Mr. Asuncion agreed, saying the slowdown “indicates a more stable level of prices in the economy.”
“So, in this particular case, the BSP has basis to say that inflation will stay within their target of 2-4% at least in 2018,” added Mr. Asuncion.
STILL MANAGEABLE
For UnionBank’s Mr. Asuncion, “[T]he impact of the tax reform on inflation will be defined but largely minimal.”
“I see the BSP taking note of the impact of tax reform on inflation but the BSP will be largely prompted by the pace of the normalization of monetary policy in the US to temper the level of prices that can hamper further economic growth in the long-term.”
Landbank’s Mr. Dumalagan said “implementation of the tax reform coupled with the rise in government spending could potentially push inflation slightly higher, perhaps to 3.5% in the near term.”
“The BSP might keep its policy settings steady in the first semester, but it will be closely monitoring price dynamics as a result of the recently passed TRAIN law.”
Security Bank’s Mr. Taningco, on the other hand, sees a 25-basis point hike in key interest rates this year due to higher inflation risk. “I expect the BSP to closely monitor price developments and to adjust its monetary policy settings if the increase in inflation will make its inflation target unattainable,” he said.
