Philippines Business Projection Industry Update Quarter 3 2012

  • April 2014
  • -
  • Business Monitor International
  • -
  • 44 pages

Includes 3 FREE quarterly updates

Core Views
Following 2011's disappointing Gross Domestic Product growth of 3.7%, we estimate that the Philippine economy will bounce back only incrementally, with 3.9% growth projection for 2012. Weak external demand as a result of a developing hard landing in China and the continued malaise in the eurozone and Japan will continue to weigh on exports, which we estimate will grow only 2.2% in 2012.
Following Bangko Sentral ng Pilipinas' two rate cuts totalling 50 basis points in Q112 (matching our target), we now expect the central bank to keep rates on hold through the rest of 2012. Inflation, which has ticked down considerably to 2.6% in March, is expected to remain modest through the end of the year, and we continue to projection it to increase only slightly over the course of 2012 to 3.4%. The Philippines' fiscal position continues to improve. We expect the budget deficit to widen to just 2.2% of Gross Domestic Product in 2012, compared with the government's projection of 2.6%, as spending continues to be limited by administrative difficulties. With its debt metrics also improving, the Philippines may be in line for a credit rating upgrade in 2012. However, we believe it will have to wait until at least 2013 before it achieves 'investment grade.'

Major Projection Changes
While we have no

Major Projection Changes
for the Philippines, we highlight our expectation for weakness in the archipelago's trade figures to contribute to below-par growth in 2012. This is further supported by our projections for a 0.5% contraction in the eurozone in 2012 and weak growth of 1.4% in Japan, two of the Philippines' largest trade partners.

Key Risks To Outlook
Risks to our Gross Domestic Product projection lie to the upside. A significant increase in government spending or a considerable pickup in exports on the back of an unexpected uptick in global trade are outside possibilities which could bring growth higher. A third round of quantitative easing from the US Federal Reserve remains a possibility. This, or a material improvement in the global economy, could see the Philippine peso outperform our bearish end-of-2012 projection of PHP46.00/US Dollar .

Table Of Contents

Executive Summary 5

Core Views
...5

Major Projection Changes
5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
Industry SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics. 8
Spratly Framework Increasingly Unlikely As China's Influence Grows8
The recent Association of Southeast Asian Nations (ASEAN) summit failed to make progress on the contentious Spratly Islands issue.
With still no actionable framework for naval disputes over the islands, we view it as increasingly likely that a rift may be developing within
the bloc with regards to China's involvement. We believe that the risk of escalating tensions over the disputed island chain will continue
to grow as long as ASEAN fails to develop a unified code of conduct on the issue.
TABLE: POLITICAL OVERVIEW....8
Long-Term Political Outlook .. 9
Prospects For Improving Governance...9
The Philippines faces a number of political challenges over the coming years which, if handled successfully, could improve governance.
However, given low income levels and high levels of inequality, we expect the political scene to remain vulnerable to intermittent
instances of turmoil.
Chapter 2: Economic Outlook.. 13
Industry SWOT Analysis .. 13
BMI Economic Risk Ratings.. 13
Economic Activity... 14
2012 Growth Comeback To Be Muted..14
We expect a slight uptick in Philippine economic growth in 2012 as increased government spending and a moderate rebound in exports
combine to return some momentum to the economy. However, the government's 5.0-6.0% growth target still appears to be extremely
optimistic. We projection the economy grow ing by a more attainable pace of 3.9% in 2012, with exports posting modest growth of 2.2%
amid a backdrop of weak external demand, and fixed capital spending growth remaining strong at 9.0%.
TABLE: ECONOMIC ACTIVITY....14
Fiscal Policy... 16
Fiscal Position Improving As Manila Continues To Rein In Spending16
The Philippines has made concrete steps towards the consolidation of its fiscal position, reducing its budget deficit to a manageable
2.0% of Gross Domestic Product in 2011 as total government debt as a percentage of Gross Domestic Product continues to contract. We expect this trend to continue, with the
2012 fiscal deficit hitting just 2.2% of Gross Domestic Product versus a government estimate of 2.6%.
TABLE: FISCAL POLICY....17
Monetary Policy.. 18
Following Interest Rate Cut, BSP To Shift To Neutral.18
In line with our projection, Bangko Sentral ng Pilipinas (BSP) cut its benchmark reverse repo rate by 25 basis points (bps) to 4.00% at its
March 1 policy meeting. It was the central bank's second rate cut in 2012 following a similar 25 bps cut in January and reflects BSP's
continued dovish shift amid retreating inflation and slowing economic growth. Following the cut, we believe that BSP will take a breather,
and we continue to expect interest rates to end the year at 4.0% as inflation ticks back up mildly to 3.4%.
TABLE: MONETARY POLICY.19
Balance Of Payments... 20
Current Account Surplus Weakening En Route To Long-Term Deficit....20
The Philippines posted a considerable current account surplus of USD 1.8bn in Q411, bringing the full-year surplus to USD 6.9bn.
However, this was a 24.9% decline from 2010's USD 9.2bn surplus, and we believe that this reflects the current account's long-term
trend towards a deficit as remittance growth moderates and the archipelago's trade deficit widens on outperforming imports.
TABLE: CURRENT ACCOUNT20
Chapter 3: 10-Year Projection 23
The Philippine Economy To 2021... 23
Uncovering A Forgotten Gem? ..23
The Philippines holds significant economic growth potential and may come into the investment spotlight within the next few years.
Although currently hampered by political instability and poor investor perception, we believe President Benigno Aquino III will be able
to make progress on both fronts. Moreover, consumerism is expected to pick up in a big way towards the end of the decade as income
levels rise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..23
Chapter 4: Business Environment 27
Industry SWOT Analysis .. 27
BMI Business Environment Risk Ratings 27

Environment Overview Outlook. 28
Institutions .... 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS..28
TABLE: BMI LEGAL FRAMEWORK RATING..29
TABLE: LABOUR FORCE QUALITY.30
Infrastructure 31
Market Orientation .. 32
TABLE: ASIA, ANNUAL FDI INFLOWS.32
Operational Risk 33
TABLE: TRADE AND INVESTMENT RATINGS....33
TABLE: TOP EXPORT DESTINATIONS34
Chapter 5: Key Segments ... 35
Defence and Security . 35
TABLE: AVAILABLE MANPOWER FOR MILITARY SERVICES, ('000, AGED 16-49).. 38
TABLE: GOVERNMENT DEFENCE EXPENDITURE.39
Freight Transport 39
TABLE: AIR FREIGHT...41
TABLE: MARITIME FREIGHT - THROUGHPUT ('000 TONNES).42
Other Key Segments ... 43
TABLE: AUTOS SECTOR KEY INDICATORS.43
TABLE: FOOD and DRINK SECTOR KEY INDICATORS..43
TABLE: TELECOMS SECTOR KEY INDICATORS....43
TABLE: OIL and GAS SECTOR KEY INDICATORS44
TABLE: PHARMA SECTOR KEY INDICATORS...44
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS44
Chapter 6: BMI World Assumptions. 45
World Outlook.... 45
World Economy Continues To Muddle Through ...45
TABLE: GLOBAL ASSUMPTIONS....45
TABLE: DEVELOPED STATES REAL Gross Domestic Product GROWTH FORECAST.46
TABLE: REAL Gross Domestic Product GROWTH CONSENSUS FORECASTS...46
TABLE: EMERGING MARKETS REAL Gross Domestic Product GROWTH FORECAST47

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