The Philippine Economy: Performance, Challenges, and Near-Term Outlook
Good morning.
First of all, I would like to thank the Management Association of the Philippines (MAP) for inviting me again in its General Membership Meeting. It is my pleasure to present the progress, challenges, and outlook of the Philippine economy in this meeting and MAP’s First Economic Briefing for 2014. This is also to provide you an overview of the Philippine Development Plan Midterm Update which spells out the government’s roadmap for inclusive growth.
I will begin by discussing our recent economic performance and our achievements vis-a-vis our targets. Then I will proceed to the challenges that need to be addressed in order to sustain the growth momentum and achieve inclusive growth. This then brings me to the framework we have adopted for the updated PDP, and the prospects for the Philippine economy in 2014 and beyond.
In a nutshell, we are on track with respect to our economic targets as laid out in the Philippine Development Plan 2011-2016. The country has achieved remarkable progress in being able to sustain its growth momentum, even exceeding Plan growth targets. Despite the series of natural disasters that hit the country in the latter part of 2013, the Philippine economy expanded by 7.2 percent, improving from the 6.8% achieved in 2012. This is above the DBCC growth assumption of 6.0-7.0 percent for the year, making the country one of the best performers among Asian economies during the period.
The country also enjoys an unprecedented level of confidence among the international business community. The investment grade status accorded by the three major credit rating agencies (Fitch, Standard and Poors, and Moodys) in 2013 and the improvements in rankings in several global competitiveness indices such as the IFC Ease of Doing Business (from rank 140 in 2009 to 108 in 2013) and the Global Competitiveness Report (from 75 in 2011 to 59 in 2013) is an affirmation of the increasing attractiveness of the Philippines as an investment destination.
In terms of composition of growth, the 7.2 percent growth in 2013 was largely contributed by household spending and fixed capital formation (FCF) on the demand side. It is worth noting that the contribution of FCF to the country’s economic growth started to improve in 2012 (2.0 ppts) and it increased further in 2013 (2.4 ppts). This is primarily due to stronger growth in investments in durable equipment and construction, owing to the upbeat level of business confidence, low interest rates, and manageable inflation rate. As you may well know, investment is key to the generation of remunerative, durable, high-quality employment.
On the supply side, services and industry sectors mainly contributed to real GDP growth in 2013, particularly the manufacturing subsector which provided more than three-fourths of the industry’s growth. Meanwhile, the slower contribution of agriculture in 2013 is due to the negative impact of numerous natural calamities that hit the country.
The remarkable performance of our economy is supported by strong macroeconomic fundamentals, marked by low and stable inflation, favorable interest rates, sustainable fiscal and external positions, and stable financial sector.
Notwithstanding gains achieved in the areas of economy and governance, we still need to do more to achieve inclusive growth. The proportion of the population deemed poor based on official poverty lines has remained high since 2003, with about a quarter of the population considered income poor. Figures from the World Bank (WB), which estimates poverty incidence using an internationally comparable poverty line of $1.25 dollars a day in purchasing power parity (PPP) terms, are slightly more encouraging with a steeper decline in poverty. The 2009 estimates (latest based on their website), however, would still indicate that roughly 1 in 5 Filipinos are income poor.
In addition, the generation of more decent, productive, and high quality jobs that provides adequate income for the Filipino workers continues to be a major challenge. Although our unemployment rate has been kept within the targeted range of 6.8-7.2%, a bigger challenge is reducing the underemployment rate, which is still close to 20%.
In taking stock of the first three years of the Philippine Development Plan (PDP) 2011-2016 implementation, the following lessons became clear: first, good governance is an effective platform upon which strategies should be implemented; second, macroeconomic and political stability fuels positive expectations that lead to growth; third, economic growth is necessary but not sufficient for poverty reduction; fourth, disasters can negate the gains and even push back development; and lastly, growth strategies need to have spatial and sectoral dimensions to ensure inclusivity.
The challenges and lessons identified were taken into account during the midterm updating of the PDP, which serves as the country’s roadmap to inclusivity.
Let me now describe the salient features of the overarching strategic framework we have adopted for the Updated Plan, with the ultimate goal of inclusive growth. Accomplishments will be measured primarily in terms of poverty reduction and massive creation of quality employment.
Accelerating job creation requires capital accumulation. Investments must continually rise for the economy to grow and absorb labor into productive jobs. Thus, we should maintain positive expectations of consumer and business sectors through macroeconomic stability, a strong financial system, and a healthy external sector.
At the same time, we will continue to raise productivity to sustain growth in the agriculture, industry, and services sectors. The performance of these sectors is a critical determinant of the economy’s growth potential and its ability to create jobs. In part this is influenced by macroeconomic policy, but sector-specific policies and other crosscutting measures also affect competitiveness.
Reducing the cost of doing business will continue to be a priority, consistent with the platform of good governance. Thus, we have been addressing infrastructure bottlenecks, improving connectivity, and increasing the availability of highly trainable and skilled labor. Access to technology is being facilitated and innovation is encouraged to further increase investments and generate jobs.
Moving forward, we strive to get growth going in 2014 and beyond.
The economy is targeted to grow by 6.5 to 7.5 percent in 2014, 7 to 8 percent in 2015, and 7.5 to 8.5 percent in 2016. Industry sector is projected to grow the fastest, as manufacturing and private construction are expected to gain momentum in 2014 up until the end of the Plan period. Similarly, public construction will pick up in 2014, as government addresses infrastructure bottlenecks and spearheads reconstruction efforts in the areas affected by recent disasters, including typhoon Yolanda and Bohol earthquake.
The service sector is expected to remain robust during the Plan period. Business process management, real estate, renting, and business activities are targeted to grow by an average of 9 percent beginning 2014.
On the supply side of the economy, growth will be driven by the following: more vibrant manufacturing, buoyed by food and chemical manufactures, garments, and wood furniture and fixtures; robust construction, led by the public sector as the government starts with the construction of major infrastructure projects and intensifies reconstruction efforts in disaster-affected areas; domestic and local tourism development, expected to accelerate with greater interconnectivity of regions; upbeat wholesale and retail trade; robust Business Process Management (BPM) fueling growth in the real estate, renting, and business activities sector, and agribusiness.
On the other hand, the demand side of the economy will be buoyed by the following growth drivers: fixed capital formation mainly due to higher public construction, including infrastructure and reconstruction, and robust private investment in construction and durable equipment; strong household consumption due to better employment opportunities, strong remittance inflows, and improved consumer confidence; stronger export of services with good prospects on business process management; and, improvement of external trade conditions.
Since achieving high economic growth is necessary but not sufficient for inclusive growth, we aim for a substantial improvement in the labor and employment situation in the country. Our goal is to reduce the unemployment rate from 7.0 percent in 2012 to 6.5 to 6.7 percent in 2016.
We are also committed to improving the quality of employment, and this will be reflected as a reduction of underemployment rate from the current 20 percent to about 17 percent in 2016 and in the structural transformation of the economy, particularly toward high income and employment growth drivers in industry, agribusiness, and services.
The twin problems of poverty and unemployment require no less than sustained high economic growth, deliberate programs and policies to enable the poor to participate in the growth process and reduce vulnerabilities to shocks.
Our target is to reduce income poverty to 18 to 20 percent by 2016, which admittedly, will fall short of the Millennium Development Goals (MDGs) target of 16.6 by 2015. This new target takes into consideration the slow response of poverty to economic growth beginning 2006 and the setback in 2013 due to the wide-scale destruction resulting from natural and man-made disasters.
With this updated PDP, our goal up to 2016 is to sustain if not surpass our growth performance in the past three years. We are positive that we can take advantage of available opportunities such as: improving global economic environment; improvement in demographic conditions; increased integration of the ASEAN Economic Community; and more financial resources available.
Finally, we acknowledge that the overall development of the country is ultimately a product of the dynamism of the private sector. The role of government is to set the necessary policy and regulatory framework and provide public goods and services to catalyze private initiative and encourage efficiency improvements.
The Plan emphasizes the government’s facilitative role in promoting competition and making it easy for firms and entrepreneurs, regardless of size, to do business in the country. At the same time, government will intervene strategically where the private sector cannot be relied upon to deliver the goods, services and facilities needed by the poor and marginalized.
The updated Plan specifies indicators of efficiency and effectiveness to measure success. The real measure of efficiency is the extent to which private effort has been steered towards the direction laid out in the Plan; effectiveness is the extent to which the well-being of Filipinos has been improved. In effect, we recognize that the implementation of the updated PDP calls for convergence of agency programs and coordination among agencies at different levels as well as the private sector and development partners to be able to make a significant impact.
Thank you and a pleasant day to all of us.
M.R. No. 2014-012
25 February 2014
