Philippine economy: tailwinds and headwinds to growth

Transcription

1 Philippine economy: tailwinds and headwinds to growth Cebu Business Club Annual Mid-Year Economic Briefing Marco Polo Plaza Hotel 26 July 2013 Ma. Cyd N. Tuaño-Amador Bangko Sentral ng Pilipinas

2 The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails. - John Maxwell 2

3 Outline I. Recent developments II. Outlook for 2013 and risks to outlook III. Policy thrusts 3

4 At a glance: stronger macro fundamentals Key Macro Indicators Average Sustained growth Real GDP growth (%) (Q1) Manageable inflation Inflation (%) Robust external payments Sound and stable banking system Current Account Balance (% of GDP) 2.9 (YTD) (Jan-June) (Q1) GIR (months of imports) (end-june) External debt (% of GDP) (end-mar) External debt service burden (% of exports) Non-performing loans /total loans (%) n.a (Dec) Capital Adequacy Ratio(%) * n.a. n.a. Loan Growth (%) (May) Available fiscal headroom * Consolidated CAR for U/KBs NG deficit/gdp (Jan-March) Revenues/GDP (Jan-March) 4

5 Broad-based economic growth Gross Domestic Product (GDP) growth rate Q Q1 2013, 2000= average growth = YoY Growth Rate (%) average growth (Q Q1 2013) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Sustained GDP expansion, with broadening growth drivers 90% 70% 50% 30% 10% -10% GDP Breakdown by Expenditure (% of total) % 10.2% 70.5% (9.0%) Consumption Government Capital GDP Quarterly Breakdown by Expenditures Q Q1 2013, 2000= Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Consumption Government Capital Formation Net Exports & Others 5

6 Favorable alignment of solid growth and low inflation Headline Upper Bound of Target Inflation vs. Target January 2002 June =100, in % Lower Bound of Target Global inflationary cycle June % BSPPrivate Sector Economists' Survey Mean forecast for full year, in percent BSP Private Sector Economists Survey Inflation: mean forecasts, in% 2014/2015: : 3.1 J-12 F-12 M-12 A-12 M-12 J-12 J-12 A-12 S-12 O-12 N-12 D-12 J-13 F-13 M-13 A-13 M-13 J-13 Prudent monetary policy supporting economic activity RRP rate and Average Lending Rate January 2005 April 2013, in % Growth of Outstanding Loans of U/KBs January 2003-May 2013, in % Apr 13 = 3.5% in percent May % Apr pct Apr 13 = 5.9%

7 Robust external payments position Ample foreign exchange reserves Gross International Reserves 2004 June 2013; in billion US$ GIR (lhs) Import Cover (rhs) Jan'13Feb '13Mar '13Apr '13May '13 June ' Continuing current account surpluses Current account surpluses 2004-Q Current Account Balance of Payments Capital & Fin'l Account Q Sustained OF remittances Overseas Filipinos Remittances Declining external debt/gdp ratio External Debt $63 70 $62 $61 $60 $ % External debt in US$ billion (lhs) External debt as % of GDP (rhs) 60 US$59 billion $58 $57 $56 $ % $54 $53 20 $52 $51 $ Q Q

8 Sound and stable banking system Continuing deposit mobilization & asset growth Improved asset quality Strong capitalization Ample liquidity Credit growing in tandem with economic expansion May % May % NPL ratio declining Strong capitalization above international standards 105.0% 90.0% 75.0% 60.0% 45.0% 30.0% 15.0% 0.0% TLP, gross (RHS) NPL Ratio (LHS) NPL Coverage Ratio (LHS) Levels in PHP bn Ratio in Percent CAR, Solo CAR, Consolidated Tier 1 Banking System Capital Adequacy Ratio BSP Regulatory Requirement of 10% International Standard of 8% Source: Bangko Sentral ng Pilipinas 8

9 Some volatility of late but expect broad stability in domestic financial markets over longer term Peso US Dollar Exchange Rate January July 2013 PhP43.24/US$1 (22 July 13) Philippine Stock Exchange Index January July index pts (23 July 13) PSEi (in index points) 40.0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 5-year Credit Default Swaps (in bps) January July Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 EM Bond Index Spread (in bps) January July bps (16 July 13) 105 bps (22 July 13) bps (23 July 13) 80 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 9

10 Fiscal space: growing revenue base allows for more spending on critical social and economic priorities Revenue/GDP Projections (in %) Infrastructure and Other Capital Outlay in 2012 and 2013 Budgets (PHP bn) % National Government Fiscal Performance (in billion pesos) Program % 2012 Actualto 2012 Program Growth (%) 2012/ 2011 Jan May 2013 Growth (%) Jan-May 2013/ Jan-May 2012 Surplus/(Deficit) Revenues Expenditures Source : Bureau of the Treasury 10

11 Tailwinds: Demographic dynamics: supporting domestic demand & production Mindanao: unleashing its potential as producer & consumer ASEAN integration : expanding intra-asian trade Buy-in for reform Favorable business and consumer sentiments Gains in competitiveness 11

12 Youngest population in Asia supports a strong growth outlook Median age in the Philippines is 22.2 years, below other young countries in Asia (e.g., Malaysia (25), India (25.1), Indonesia (27.8) & Vietnam (28.2)) UN: in 2015, Philippines will enter its Demographic Window, when proportion of population that is of working age is prominent Philippines is last major Asian economy to benefit from demographic dividend, which is typically associated with accelerated economic growth Average growth over 10-year period from start of Demographic Window: 7.3% Japan Hong Kong Singapore Korea China Thailand Indonesia Vietnam Malaysia India Philippines Philippines has youngest population in Asia Demographic Windows in Asia Poised for strong future GDP growth Avg. GDP Growth for First 10-years in Dem. Window (%) China Korea India Japan Singapore Hong Kong Vietnam Indonesia Malaysia Thailand 12

13 2011 Mindanao Philippines GRDP growth (constant) GRDP, PHP bn (current) GDP per capita, PHP , , , ,366 Population (m) Labor force 2012 (m) Unemployment 2012 (%) ,000 25,000 20,000 15,000 10,000 5,000 0 Output of Main Crops: PHL, Mindanao (thousands of metric ton) 2011 Rest of Philippines Mindanao 22,093 6,285 12,796 1,630 3,325 8,959 6,284 7, ,888 3,646 1,987 Coconut Rubber Sugarcane Banana Pineapple Palay Corn (with husk) (cuplump) Development potential : Mindanao as consumer/producer Tourism: strategic location near SE Asian nations & natural features Halal food production: Muslim population & strategic location next to Malaysia make it ideal for Halal farming and food production Strong agriculture: fertile soils, tropical climate, rich biodiversity & extensive rivers Mining projects 13

14 Philippine bilateral trade with ASEAN has been rising Region/ Country Exports Share to Total (in %) Imports PHILIPPINES Asia ASEAN Japan China South Korea North America USA Europe Others

15 Business confidence & consumer sentiment are buoyant Business Expectations Survey of the BSP Current Quarter Confidence Index Q Q Consumer Expectations Survey of the BSP Current Quarter Confidence Index Q Q

16 PHL has shown improvements in governance & competitiveness indicators Reforms in past years are bearing fruit as shown in improved rankings by third party assessors Improved Institutional Environment World Economic Forum ( ) Increased Economic Freedom Heritage Foundation (2013) Reduced Corruption Perception Transparency International (2012) Improved Government Effectiveness Worldwide Governance Indicators (2012) * Change in the Philippines ranking 16

17 Affirmation/show of faith Credit rating upgrades: we earned them Philippine Credit Ratings BBB- (Investment grade) Upgraded credit rating to BBB-from BB+ with a stable outlook on 28 March 2013 BBB- (investment grade) Raisedcredit rating to BBB-from BB+ with a stable outlook on 2 May 2013 BBB (investment grade) Raised credit rating to BBB from BBBwith a stable outlook on 7 May 2013 Ba1 (one notch below investment grade) Raised Philippine and Foreign currency rating to Ba1 from Ba2 with a stable outlook on 29 October 2012 but while this is encouraging, it also comes with the challenge of sustaining macroeconomic discipline and advancing reform agenda 17

18 Third party assessments: sustained, non-inflationary growth outlook Growth to remain close to potential on robust domestic demand Inflation forecasts remain within target for 2013 Philippines is likely to emerge as the regional economy bestpositioned to post strong growth in 2013 and Source: ANZ Research Asia Pacific Economics dated 2 July 2013 GDP Growth & Inflation Forecasts (in percent) Period Real GDP Growth (%) Bloomberg 1/ IMF 2/ ADB 3/ ANZ Research Headline Inflation (%) Bloomberg 1/ IMF 2/ ADB 3/ / Bloomberg survey average forecastasof10june2013 2/ Article IV Consultation Mission to the Philippines, 18 April 2013 for inflation; July 2013 update for GDP growth 3/ ADB AsianDevelopment Outlook Update

19 Headwinds: Challenges to economic outlook & possible speed bumps Ebb & flow of foreign capital leading to volatility in financial markets Period of slow global growth: New Normal? Infrastructure gaps Financial inclusion 19

20 Ebb & flow of foreign capital leading to volatility in financial markets Sizable capital flows into emerging markets Private Capital Inflows to Emerging Market Economies with emerging Asia receiving half of flows Net Private Capital Inflows to Emerging Asia Source: Institute of International Finance, 2013 characterized by rapidity of surge & concentration in portfolio debt & equity flows 20

21 Successive rounds of quantitative easing in advanced economies have seen rising portfolio inflows in Philippines Gross Foreign Portfolio Investments (in US$ million) 2842 (June 2013) 21

22 Benefits of capital inflows are well known Benefits of favorable external financing conditions (reduced borrowing costs & wider range of financing sources): Support growth in capital-receiving economies Contribute to development of domestic financial markets Monetary easing by US Federal Reserve & other CBs has helped moderate economic downturn in their economies 22

23 but so are the risks. Risks could build up from the rapidity of flows & challenge economies capacity to absorb flows Prolonged accommodative MP conditions could lead to vulnerabilities that can undermine financial stability & harm economic growth Contribute to asset price misalignments/frothiness Induce risky lending & balance sheet mismatches Stoke inflationary pressures (though quiescent of late) Asia Financial Stability Heat Map 23

24 Some developments after Fed statements in May/June 2013 Volatile capital flows have unsettled domestic financial markets Markets continue to assess implications of Fed s exit strategy. Volatility is expected to remain elevated Philippine Stock Exchange Index (PSEi) (In index points, as of 23 July 2013) index pts (23 July 13) Peso per US dollar Exchange Rate (As of 22 July 2013) PhP43.24/US$1 (22 July 13) PSEi (in index points) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Philippines: 5-year Credit Default Swaps (in bps) January July bps (22 July 13) 5000 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 24

25 What happens when the music stops? Flow reversals can be quite costly Unwinding of accommodative policies & subsequent tightening of monetary conditions in advanced economies Interest rate hikes in developed economies can raise debt servicing cost & lower asset valuation Ensuing depreciation of currency can increase debt servicing cost and affect spending plans of firms/government Froth created by easy money could lead to bubbles that burst, causing instability/disruptions in financial markets Loss of confidence & contagion across financial markets Volatility will continue to challenge policymaking: many moving parts in the air Warren Buffett: You only find out who is swimming naked when the tide goes out. 25

26 How prepared is PHL economy for eventual unwinding of accommodative monetary policy MP in the US? A reading by the IIF, June 2013 Not a question of whether it will happen but when it will happen Has not been unanticipated although exact timing is data-dependent on certain thresholds (unemployment & inflation) Eventual unwinding is part of risk assessment of CBs 26

27 What is in the cards? Central scenario: stirred but not shaken Impact will be primarily on financial market volatility Partial unwinding, not overwhelming pullback: Don t think that all the funds that came in will be reversed Underlying narrative of PHL economy has not changed: will continue to expand although growth differential could narrow IMF July 2013 WEO Update: forecasts assume recent rise in financial market volatility will partly reverse, as they largely reflect a one-time repricing of risk due to the changing growth outlook for emerging market economies and temporary uncertainty about the exit from monetary policy stimulus in the United States. 27

28 What is behind this view? Domestic macroeconomic policies matter: pull part of gravity remains a powerful force Skimming off of froth makes growth process more sustainable: corrections help temper build-up of stretched valuations & reach-foryields that contribute to financial market imbalances More growth poles should be favorable for world economy & countries with strong linkages with US economy (including the Philippines) Japan s bold reflation policies could be an upside/tailwind PHL economy is well-positioned to ride out the volatility 28

29 In a volatile global environment, country-specific dynamics take center stage The ABCs of the Philippine economy A: Ammunition (Policy Arsenal) B: Buffers C: Communication 29

30 The ABCs of the Philippine economy A is for Ammunition Supportive macroeconomic policies are in place; not as if pursuing disciplined policies only now (ample policy space: monetary/fiscal) Soft readings in commodity prices diminish cost pressures & inflation risks, providing policy space B is for Buffers Cushion: reserves, prospects for CA surpluses, limited exposure to wholesale/external financing, manageable external debt dynamics Ample FX & peso liquidity Healthy banking system Contingency measures are ready: global shifts in sentiment can cause significant volatility in asset prices even in countries that have strong fundamentals 30

31 The ABCs of the issue (con t) C is for Communication Message board: Philippine economy has sufficient cushions to ride out the financial market volatility Liquidity is ample & BSP is prepared to maintain orderly market conditions as monetary policy settings in the US normalize away from extraordinarily accommodative monetary policies Major impact of recent developments is on financial market volatility: corrections may help put a brake on exuberance 31

32 Broad contours of policy responses to the ebb & flow of foreign capital: Structural reforms (trade, investment, financial policies): to improve economy s absorptive capacity, but this takes time Macroeconomic policies (monetary, exchange rate, fiscal policies): to guard against macroeconomic risks associated with inflow surges Macroprudential measures: defense against financial stability risks 32

33 Period of slow global growth New Normal New Normal : Sub-par growth in advanced economies Asia: bright spot in world economy but growth slowing Greater volatility in financial markets 33

34 Infrastructure: filling in the gaps Infrastructure spending capital formation as % of GDP Billion PhP Government Spending on Infrastructure and Other Capital Outlays Government Spending on Infrastructure and Other Capital Outlays Infrastructure and Other Capital Outlays (in billion PhP) Percent to Total Spending (in percent) Percent Government infrastructure program: "If you build it, they will come." (Field of Dreams, which starred Kevin Costner) 35.0 Capital Formation Share to GDP, Q Q (In percent (%)) CF Trend 0.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q

35 Financial inclusion: still very much a challenge Some key findings of the Consumer Finance Survey of the BSP (survey done in 2010/2011; survey results made public in 2012) Only 2 out of 10 household have bank accounts 8 in 10 deposit accounts are in commercial banks 3 most common assets held by households are home appliances, own residence and retirement insurance 35

36 Financial Assets Deposit/Cash Accounts Only two in ten households have bank accounts Main reason cited for absence of deposit account was that they did not have enough money for bank deposits Philippines Proportion of Households with Deposit Account, In Percent With Without Other reasons: do not need a bank account, cannot manage an account, minimum balance is too high, do not like to deal with banks NCR AONCR % 20% 40% 60% 80% 100% 36

37 Financial Assets Deposit Accounts Eight in ten deposit accounts are placed in commercial banks. Top reason in choosing a depository bank/institution was proximity to the place of residence Only 6 in 10 respondents had interest-paying deposit accounts Distribution of Types of Banks/Institutions Where Accounts are Maintained, In Percent Commercial Bank Rural/Cooperative Bank Savings/Thrift Bank Multipurpose/Credit Cooperative Microfinance Bank Savings & Loan Association (eg. AFPSLAI) Paluwagan 0.5 Others * * Includes associations (e.g., teacher's associations and others) 37

38 Laying the foundations for shared prosperity... BSP Policy Directions On monetary stability: sustain appropriate monetary stance Continued vigilance over inflation to safeguard non-inflationary growth On external sector stability: strengthen resilience to external shocks Maintain market-determined exchange rate Keep comfortable level of reserves Ensure manageable external debt profile On financial stability: continue to initiate key reforms Enhance corporate governance Support capital market development. Sustain advocacies: microfinance, financial inclusion, consumer protection but CBs must not overstretch the job of a central bank is to maintain reasonable prospects for price stability Paul Volcker 38

39 Laying the foundations for shared prosperity... There are other policies as well... Fiscal policy Accelerate fiscal spending for critical infrastructure investment and social priority expenditure Trade/industrial policy: e.g. product & market diversification Financial inclusion Regional/international cooperation Domestic policies are not enough 39

40 Glass half-empty or half-full? The optimist says: The glass is half-full. The pessimist says: The glass is half-empty. And while they are arguing, the pragmatist takes the glass and drinks it. 40

41 Key Take-aways: Philippine economy not immune but well-insulated (global spillovers manageable, given homegrown sources of resilience) There is policy space/flexibility to ride out headwinds: macrostabilizationthrough nimble and forceful policy responses, if needed Agenda is work-in-progress but in headway being made A thoughtful commentary: The US can learn how to boost long-run growth from successful emerging economies Emerging market growth shows the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability. - Bernanke, IMF GMM, 29 Sep

42 Philippine economy: tailwinds and headwinds to growth Cebu Business Club Annual Mid-Year Economic Briefing Marco Polo Plaza Hotel 26 July 2013 Ma. Cyd N. Tuaño-Amador Bangko Sentral ng Pilipinas