Philippine Macroeconomic Prospects: Whats in Store for 2014-2016?Cayetano W. Paderanga, Jr., PhDFounding Chairman, IDEA

Presentation Outline

Is Philippine economic growth sustainable?

Mindanao trade outlook

Is high economic growth sustainable?

The economy is on a higher growth path and is still among the fastest-growing in Asia

*Is high growth sustainable?Real Gross Domestic Product, QuarterlyRegional Performance, 1Q 2014Source: NSCBSource: NSCB

Selected EconomiesGrowth RateChina7.4Malaysia6.2PHILIPPINES5.7Indonesia5.2Vietnam5.0Singapore4.9India4.6Thailand-0.6

The economy is on a higher growth path and is among the fastest-growing in Asia

*Is high growth sustainable?GDP Trend, CycleSource: NSCB. IDEA calculations

On the demand side, remittance inflows support domestic consumption growth

*Is high growth sustainable?Top Remittance Recipient Economies, 2013Source: World Bank estimates*Using 2012 population estimates from the World Bank

EconomiesPer Capita Remittance*, in US$PHILIPPINES258.5Ukraine219.3Egypt, Arab Rep.210.6Mexico182.0Nigeria124.4Vietnam123.9Bangladesh90.5Pakistan83.7India56.6China44.4

government has sufficient room for increased spending, with the deficit consistently falling below target

*Is high growth sustainable?

and exports appear to be recovering

*Is high growth sustainable?Monthly Export Performance, Jan 2013 Mar 2014Source: National Statistics Office

though investment remains soft

*Is high growth sustainable?Source: National Statistics Office

and the savings-investment gap persists.

*Is high growth sustainable?Savings-Investment GapSource: NSCB, IDEA calculations

On the supply side, all sectors are contributing to growth led by manufacturing and industry

*Is high growth sustainable?Gross Value-added Growth Rates, by sectorSource: NSCB

Upward pressure on inflation means policy space has narrowed

*Is high growth sustainable?Consumer Price Inflation and ComponentsOvernight Policy RatesSource: NSOSource: BSP

but prices are seen to remain manageable in the medium term*Is high growth sustainable?Inflation and Interest RatesSource: BSP, IDEA forecasts

and a BOP surplus will support the peso.

*Is high growth sustainable?Current Account, Capital Account, and Balance of PaymentsPeso-Dollar Exchange RateSource: BSPSource: BSP

IDEA Macroeconomic Outlook

*Is high growth sustainable?

Risk factors

QE3 tapering and EME turbulenceGlobal economic recoveryNatural disastersGeopolitical tensions (South China Sea, Russia-Ukraine, etc.)

*Is high growth sustainable?

Trade outlook for Mindanao

In recent years, Mindanao has outperformed the Philippine economy

*Mindanao trade outlookSource: National Statistics OfficeEconomic Growth Rates (GDP, RGDP), in percent

Region201020112012Philippines (GDP)7.63.66.8Mindanao4.74.28.2IX-Zamboanga3.60.112.4X-N. Mindanao6.93.77.4XI-Davao Region5.05.37.4XII-SOCCSKSARGEN2.04.08.1XIII-CARAGA7.48.510.6ARMM2.30.31.2

Though the share to the national economy remains relatively low

*Mindanao trade outlookSource: National Statistics OfficeShare to total GDP (percent), in constant prices

Region201020112012Mindanao14.214.314.4IX-Zamboanga2.12.02.1X-N. Mindanao3.73.83.8XI-Davao Region3.83.83.8XII-SOCCSKSARGEN2.72.72.7XIII-CARAGA1.11.21.2ARMM0.80.80.8

Poverty incidence in Mindanao is still high

*Mindanao trade outlookSource: National Statistics OfficeFamilies below the poverty threshold (percent)

Region200620092012IX-Zamboanga4039.533.7X-N. Mindanao32.133.332.8XI-Davao Region25.425.525XII-SOCCSKSARGEN31.230.837.1XIII-CARAGA41.74631.9ARMM40.539.948.7PHILIPPINES21%20.5%19.7%

Mindanao trade outlookIndustry sector has seen strong growth in the past 6 quarters

Mindanao trade outlookConstruction has been the strongest driver in 2012 delivering impressive growth but has decelerated in 2013 manufacturing remains bright

Mindanao trade outlookServices have been consistently growing except for Public Administration & Defense; Compulsory Social Security which declined sharply

Mindanao trade outlookAnnual GDP per capita has been consistent for the respective regions, low are still low while high still high

Mindanao trade outlookPoverty incidence looks promising for the Davao region

Source: Commodity Flow, NSO; http://www.kagay-an.com/cagayan-de-oro-sparks-region-x-as-most-competitive-city-in-the-philippines/ (by Mike Baos)Mindanao trade outlook

Mindanaos exports grew 16.7% in 2012 and holds a 12.7% share to total Philippine exports

*Mindanao trade outlookSource: National Statistics Office

The region also has 60% share of total agro-based exports

*Mindanao trade outlookSource: National Statistics Office

Export recovery in the first quarter shows strong growth in select traditional products of Mindanao*Mindanao trade outlookSource: National Statistics Office

20142013Growth Rate (percent)Jan-MarJan-MarTotal Exports (FOB in thousand USD)14,262,89413,387,2176.54Total Agro-Based Products1,156,8301,132,5102.15Coconut Products351,477433,553-18.93Copra7325194.77Fruits and Vegetables439,702340,92528.97Bananas317,440206,79453.51Other Agro-Based Products288,484243,15118.64Fish, Fresh or Preserved of which Shrimps &146,434114,74227.62Seaweeds, Dried20,5606,590211.99

Strengthening growth in Mindanaos top markets (U.S., China, and Japan) ensures demand for the regions exports.

*Mindanao trade outlookSource: National Statistics OfficeTop Export Destinations (2012)

Mindanao accounts for almost 1/4 of container traffic and around 1/3 of cargo throughput in Philippine ports...

*Mindanao trade outlookSource: National Statistics OfficeContainer Traffic (in TEU)Cargo Throughput (in MT)

ASEAN integration poses challenges and opportunities, but Mindanao has possible areas of comparative advantage

TourismMiningAgribusinessBPOs

*Mindanao trade outlook

There is evidence of increasing opportunities for Mindanao exports to BIMP-EAGA, especially Brunei (as we have more similar products with Indonesia and Malaysia).

Total exports to Brunei, Malaysia, and Indonesia is income elastic, i.e. a unit increase in incomes in these countries lead to a 1.7-unit increase in exports. (Digal and Lunod, 2004).

*Mindanao trade outlook

Bottomline

The economy has what it takes to maintain at least 6% growth on the back of traditional growth driversBPOs, real estate, tourism, finance, and more recently manufacturing on the supply sideRemittance-driven consumption, increased government spending, and positive exports on the demand side

Sustained investments are needed to accelerate growth to surprise on the upside and there are nascent signs of improvement here

Increased economic activity suggests continued growth in Mindanao trade

Thank you.

Philippine Macroeconomic Prospects: Whats in Store for 2014-2016?Cayetano W. Paderanga, Jr., PhDFounding Chairman, IDEA

**********Recent inflation has been driven by seasonality (dry season exerts upward pressure on food prices and utilities), lagged effects of Yolanda (on agriculture and supply chains), and supply-shocks (power supply shortages).

Supply-side factors pose upward risk factors for inflation:Lingering effects of natural disasters on agriculture and on supply chainsWeaker pesoVolatile fuel pricesEl Nino in the latter half of the year*********n*n*n*n**********