Republic of the Philippines The Philippine Economy: Cautious Optimism 22 February 2019 Deputy Governor Diwa C. Guinigundo Bangko Sentral ng Pilipinas 1
Outline I. The Operating Environment: Three Key Challenges II. The Philippine Case: A Sound Basis for Cautious Optimism III. Policy Direction and Outlook 2
The Great Divergence IMF 2019 Growth Projections, as of January-2019 (Difference from October 2018 WEO Update projections ,in percentage points) World Japan US Eurozone 3.5% 2.5% 1.1% 1.6% ( 0.2) (unchanged) ( 0.2) ( 0.3) India ASEAN 5 China 7.5% 5.1% 6.2% ( 0.1) ( 0.1) (unchanged) 3 Source: IMF. World Economic Outlook, October 2018 with updates in January 2019.
The Great Fragmentation Great Divergence Rise of protectionist US and China Trade Brexit policies Tension 4
The Great Disruption “An Era where new technologies merge and blur the lines of the digital, financial and physical worlds, impacting all disciplines, economies and societies …” Klaus Schwab Founder and Executive Chairman World Economic Forum 5
Outline I. The Operating Environment: Three Key Challenges II. The Philippine Case: A Sound Basis for Cautious Optimism III. Policy Direction and Outlook 6
The Philippines is Bucking the Trend 4.4 % -3.0 % 6.2 % (Jan-Sep 2018, % of (January 2019, (2018, 2000=100) GDP) 2012=100) GDP Growth Headline Inflation Fiscal Balance 15.8% 23.5% 9.2% (UBs and KBs, Sep (end-Sep 2018, % of (2018, % Growth) 2018) GDP) Capital Adequacy Domestic Liquidity External Debt Ratio US$82.1 US$28.9 billion billion (end-Jan 2019; (2018) 7.2 months import cover) Overseas Filipino Gross Reserves Cash Remittances 7 Sources: BSP, PSA
Sources of Optimism: Sustained Economic Growth Positive economic growth for 20 consecutive years Real GDP Growth (%) Average: 6.4% (2014-2018) 7.6 7.1 6.9 6.7 6.7 6.7 6.6 6.1 6.2 6.1 5.0 4.8 5.2 4.4 4.2 3.6 3.7 3.1 2.9 1.1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Demand-side driver: Consumption and Investment Supply-side drivers: Industry and Services Contributions to GDP Growth Contributions to GDP Growth Expenditure Side Production Side 14 8 12 7 10 6 8 6 5 Percentage Percentage 4 Point 4 Point 2 3 0 -2 2 -4 1 -6 0 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 -1 Household Consumption Government Consumption Capital Formation Net Exports Industry Sector Service Sector GDP Growth 8 Agri., Forestry, & Fishing GDP Growth Source: Philippine Statistics Authority (PSA)
Sources of Optimism: Higher Growth Potential Incremental Capital-Output Ratio Total Factor Productivity 10 3 8 2 6 2 9.5 4 1 2.0 2.0 6.4 2 4.2 1 3.9 0.0 0.5 0 0 1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2018 1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2018 Source: Latest BSP staff estimates Employment Share by Class of Workers Employment Share by Educational Attainment 100 100 4.4 4.3 4.2 4.1 3.9 3.6 3.6 3.3 3.2 3.1 3.3 3.7 3.6 90 26.5 26.8 26.9 27.7 28.4 28.5 24.4 24.7 24.9 25.4 25.1 25.8 26.2 32.3 31.5 31.3 30.6 30.1 29.6 28.3 28.0 28.2 27.7 26.9 27.8 26.9 80 80 4.2 4.5 4.8 4.7 4.9 4.7 4.3 70 5.6 8.0 6.0 9.9 12.3 12.1 12.2 12.0 11.5 11.6 11.0 10.3 10.7 60 60 38.1 38.4 38.8 38.9 39.4 39.8 39.9 40.3 40.9 41.1 41.6 41.4 42.1 50 40 40 51.1 52.2 52.4 53.3 54.5 55.2 57.2 58.4 57.8 59.3 61.8 62.5 63.8 30 20 20 33.4 32.8 32.4 31.6 30.5 30.1 29.7 28.9 27.9 27.3 27.0 26.6 25.9 10 0 2.0 2.0 1.9 1.8 1.8 1.7 1.8 1.6 1.5 1.5 1.4 1.5 1.5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Q1-Q3 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 College Post Secondary High School Employer in Own Family Self-Employed Elementary (w/ SPED) No Grade Completed Unpaid Worker Wage and Salary Workers 9 Source: PSA
Sources of Optimism: Manageable Inflation Environment Headline Inflation year-on-year in percent 12 10 8 Jan 2019 6 4.4 pct 4 2 Inflation (%) 13 Dec 2018 7 Feb 2019 MB Meeting MB Meeting 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019 3.2 3.1 -2 2020 3.0 3.0 Source: PSA and BSP Source: BSP 10
Sources of Optimism: Sound Banking System Quality of assets and loan portfolios Philippine banks remain adequately sustain improvement. capitalized providing buffers to mitigate shocks. Non-Performing Loans (Gross) and Non- Capital Adequacy Ratio of UKBs Performing Assets Ratios of UKBs (in (in percent) percent) 25 End Sept- 2018: End-Dec 2018: 14 CAR (solo): 15.2 % GNPL ratio: 1.3 % 12 CAR (consolidated): 15.8 % NPA ratio: 1.2 % 20 10 8 15 6 4 10 2 0 5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Dec '18 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sept '18 CAR (consolidated basis) CAR (solo basis) BSP standard (10%) BIS standard (8%) GNPL Ratio NPA Ratio 11 Source: BSP
Sources of Optimism: Adequate Buffers Against Global Headwinds Resilient foreign direct investments Sustained structural flows from remittances and BPOs Non-residents' direct investments, by instrument Overseas Filipinos' cash remittances and BPO revenues (USD bn, net) (USD bn) 11 6.0 5.7 6.2 10 35 9 28.1 28.9 30 8 7 25 22.1 6 20 16.4 5 15 4 4.0 3.7 3 10 2.7 2 5 1 0 0 2005200620072008200920102011201220132014201520162017 Jan- Jan- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -1 Nov Nov BPO revenues Remittances Equity and investment fund shares Debt 2017 2018 *2017 and 1H 2018 BPO data based on BOP concept *2017 and Jan-Sep 2018 BPO data based on BOP Concept Ample cushion from external headwinds Improved debt profile External debt (US$ bn) and external debt/GDP (%) FX reserves (USD bn) and months of import cover 100 14 90 81.6 73.1 76.4 80 12 79.2 80 70 10 60 60 8 50 7.7 40 6 7.0 40 30 4 20 20 23.3 2 23.5 10 0 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 end-sep 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 '18 FX reserves Import cover (RHS) External Debt External Debt Ratio 12 Source: BSP
Issue 1: Current Account Shortfall Narrowing of current account reflects rising capital goods imports impact tempered by sustained receipts from traditional sources Components of Balance of Payments - Quarterly (in US$ billion) 10 8 6 4 2.0 2 0 -1.9 -2 -2.9 -4 -6 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018 Q2 2018 Q3 2018 Capital & Fin'l Account Current Account Balance of Payments 5 40 Components of the Current Account – Quarterly (in US$ billion) 1.6 30 3 7.1 20 5.5 1 10 13.5 0 -1 -10 -2.9 -3 -20 -30 -5 -27.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 2018 Q2 2018 Q3 2018 Goods Exports (RHS) Goods Imports (RHS) BPO Receipts (RHS) OF Cash Remittances (RHS) Travel receipts (RHS) Current Account Balance (LHS) 13 Source: BSP
Issue 1: Current Account Shortfall CA balance also driven by rising private and public investments Savings and Investments in the Philippines 2000-2017 30 25 20 15 10 5 0 -5 CA Balance (as % of GDP) S-I Gap (as % of GDP) Total investment (as % of GDP) Gross national savings (as % of GDP) Source: IMF WEO Database, October 2018 14
Issue 2: Domestic Currency Weakening Current peso movement reflects a confluence of factors from both external and domestic environment. 15 Source: Bloomberg
Outline I. The Operating Environment: Three Key Challenges II. The Philippine Case: A Sound Basis for Cautious Optimism III. Policy Direction and Outlook 16
Our Arsenal: Adequate Policy Flexibility Appropriate monetary policy stance Source: BSP Ample fiscal space 17 p/ preliminary Sources: DOF, BTr
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