BMI Philippines Business Forecast Report Q4 2013

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Q4 2013
PHILIPPINES
BUSINESS FORECAST REPORT

INCLUDES 10-YEAR FORECAST TO 2022
Published by BUSINESS MONITOR INTERNATIONAL LTD
Growth Boom On Solid Footing
ISSN 1745-0659
Published by Business Monitor International Ltd. Copy Deadline: 5 July 2013
2
2012e
250.4 10,564.9 197.1 2,595 2,043 6.8 74.2 6.6 10.5 12.2 19.4 10.4 96.5 7.0 3.1 7.2 3.50 42.20 53.59 -5.7 -2.3 64.9 76.2 -11.3 -4.5 7.1 2.8 70.5 11.1 76.6 11.2 2.2 6.1 -4.8 -5.0 5.8 1.9 82.4 10.9 -13.4 -15.2 82.1 91.1 68.6 75.9 84.0 100.9 -16.8 -5.0 5.9 1.7 88.2 10.5 -2.2 -2.0 -1.9 -6.2 -6.1 -6.3 54.94 53.09 50.80 48.30 -6.4 -1.7 93.3 111.8 -18.5 -4.9 6.1 1.6 94.3 10.1 41.31 41.80 41.30 40.25 3.50 4.00 4.00 4.00 7.2 7.7 7.7 7.7 7.7 4.00 39.74 47.69 -5.6 -1.3 103.4 123.8 -20.4 -5.0 6.4 1.6 100.8 9.8 3.2 3.8 4.0 4.0 4.0 6.8 6.5 6.3 6.3 6.2 6.2 4.0 7.7 4.00 39.45 47.33 -5.1 -1.1 114.4 136.7 -22.3 -4.9 7.2 1.6 108.0 9.5 98.1 99.8 101.4 103.1 104.7 106.4 9.5 8.5 7.5 6.2 6.2 6.2 20.0 20.6 21.0 21.4 21.7 22.0 22.4 6.2 108.1 6.1 4.0 7.7 4.00 39.25 47.10 -5.1 -1.0 114.4 136.7 -22.3 -4.5 7.2 1.5 108.0 9.5 6.5 4.3 4.5 4.0 4.0 4.0 4.0 10.6 10.5 10.4 10.3 10.3 10.2 10.2 5.5 5.3 5.2 4.5 4.5 4.5 4.5 4.5 10.1 4.0 22.7 6.2 109.7 6.0 4.0 7.7 4.00 39.05 46.86 -5.7 -1.1 140.5 165.8 -25.3 -4.7 10.4 1.9 126.9 9.2 73.9 73.8 73.6 73.6 73.6 73.6 73.5 73.5 5.9 5.5 5.4 4.6 4.5 4.6 4.6 4.6 2,143 2,387 2,689 3,026 3,277 3,534 3,802 4,092 4,405 4.6 73.4 4.5 10.1 4.0 23.1 6.2 111.4 6.0 4.0 7.7 4.00 38.86 46.63 -7.2 -1.2 155.7 182.4 -26.6 -4.5 12.7 2.2 139.6 9.2 2,850 3,031 3,307 3,631 3,932 4,240 4,563 4,911 5,286 210.2 238.1 272.7 311.9 343.2 376.0 410.9 449.1 490.8 11,548.5 12,640.8 13,854.0 15,065.3 16,367.2 17,797.8 19,353.4 21,044.8 22,884.0 24,884.0 536.3 5,691 4,743 4.6 73.4 4.5 10.0 4.0 23.5 6.2 113.1 0.0 4.0 0.0 0.00 38.66 46.40 -8.8 -1.4 172.8 200.6 -27.9 -4.3 15.3 2.4 154.9 9.3 279.6 302.4 335.4 374.3 411.8 451.2 493.1 538.9 588.9 643.6
PHILIPPINES MACROECONOMIC INDICATORS

2013f 2014f 2015f 2016f 2017fd 2018f 2019f 2020f 2021f 2022f
Nominal GDP, US$bn [4]
Nominal GDP, PHPbn [4]
PHILIPPINES Q3 2013
Nominal GDP, EURbn [4]
GDP per capita, US$ [4]
GDP per capita, EUR [4]
Real GDP growth, % change y-o-y [4]
Private final consumption, % of GDP [4]
Private final consumption, real growth % y-o-y [4]
Government final consumption, % Total GDP [4]
Government final consumption, real growth % y-o-y [4]
Fixed capital formation, % of GDP [1,4]
Fixed capital formation, real growth % y-o-y [2,4]
Population, mn [5]
Unemployment, % of labour force, eop [6]
Consumer price index, % y-o-y, ave [7]
Lending rate, %, ave [8]
Central Bank policy rate, % eop [3,7]
Exchange rate PHP/US$, ave [9]
Exchange rate PHP/EUR, ave [9]
Budget balance, US$bn [10]
Budget balance, % of GDP [10]
Goods and services exports, US$bn [7]
Goods and services imports, US$bn [7]
Balance of trade in goods and services, US$bn [7]
Balance of trade in goods and services, % of GDP [7]
Current account balance, US$bn [7]
Current account balance, % of GDP [7]
Foreign reserves ex gold, US$bn [7]
Import cover, months [7]
Business Monitor International Ltd
Notes: e BMI estimates. f BMI forecasts. 1 Includes Intellectual Property Products from 1998 onwards; 2 Includes Intellectual Property Products from 1998 onwards; Base Year = 2000; 3 Repurchase Rate. Sources: 4 National Statistical Coordination Board/BMI; 5 World Bank/UN/BMI; 6 National Statistics Office, BMI; 7 Bangko Sentral ng Pilipinas, BMI; 8 IMF, BMI; 9 BMI; 10 Bureau of the Treasury, BMI.
Contents
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5 Major Forecast Changes.................................................................................................................................................................5 Key Risks To Outlook.....................................................................................................................................................................5
Chapter 1: Political Outlook..................................................................................................................... 7

SWOT Analysis........................................................................................................................................................... 7 BMI Political Risk Ratings......................................................................................................................................... 7 Domestic Politics ...................................................................................................................................................... 8
Aquino's Midterm Victory Provides Medium-Term Clarity..........................................................................................................8
In line with our expectations, Team PNoy's Senatorial team as well as allies of President Aquino both scored wid e-scale midterm election victories. While we note that the victory will bolster Aquino's reform-minded agenda over the next three years, we caution that Philippine politics nevertheless remain largely dominated by the same political dynasties of old, and that a backslide in 2016's general elections is possible if the current government fails to pursue more structural, long-term reforms.
Long-Term Political Outlook..................................................................................................................................... 8

Prospects For Improving Governance..........................................................................................................................................8
The Philippines faces a number of political challenges over the coming years that, 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. TABLE: PHILIPPINES POLITICAL OVERVIEW...................................................................................................................................................... 9
Chapter 2: Economic Outlook................................................................................................................ 11

SWOT Analysis......................................................................................................................................................... 11 BMI Economic Risk Ratings.................................................................................................................................... 11 Fiscal Policy ............................................................................................................................................................. 12
Upgrades Well Deserved, But Fiscal Progress Becoming More Difficult................................................................................12
The Philippines continues to garner substantial sovereign credit rating upgrades, and we believe that there is a strong possibility that the country could finish 2013 with an investment grade rating from all three agencies. That being said, the government's path to fiscal prosperity will likely prove to be more difficult now that the low-hanging fruit has largely been plucked, and we note once again that more structural reforms will be necessary in order to solidify the country's strong fiscal and economic trajectory. TABLE: FISCAL POLICY........................................................................................................................................................................................ 12
Balance of Payment................................................................................................................................................. 13
Exports Continue To Disappoint, Peso Under Pressure...........................................................................................................13
Despite a pick-up in external trade, including a cyclical bounce in the global semiconductor industry, Philippine exports continue to struggle. Indeed, total exports in May shrank by 12.8% in year-on-year terms, with electronic shipments contracting for the fifth straight month, this time by -0.4%. Over the near term, we expect export performance to continue to disappoint, placing some downside pressure on the Philippine peso despite the country's current account surplus.. TABLE: CURRENT ACCOUNT............................................................................................................................................................................... 14
Economic Activity.................................................................................................................................................... 15
Growth Boom On Solid Footing...................................................................................................................................................15
Even in the face of a considerable slowdown in exports, the Philippine economy continues to power on, with Q113 figures reflecting impressive real GDP growth of 7.8% y-o-y. Although we reiterate that the Philippines is indeed vulnerable should external conditions continue to worsen, and that medium term risks stemming from a potential Japanese fiscal crisis are pertinent, we believe that strong domestic fundamentals will be enough to power the country on to strong growth over the immediate future. TABLE: ECONOMIC ACTIVITY.............................................................................................................................................................................. 15
Monetary Policy........................................................................................................................................................ 17
BSP On Cruise Control, For Now.................................................................................................................................................17
With headline inflation trending below its target range of 3.0-5.0%, Bangko Sentral ng Pilipinas should remain comfortable with its monetary policy settings over the near term, likely allowing for its benchmark interest rate to stay pegged at its all-time low of 3.50% through the end of 2013. While we have downgraded our end 2013 headline inflation forecast to 3.4% from 4.0% previously, we note that inflationary pressures should begin to creep up over the medium term in line with rising money supply growth, and we continue to expect some form of tightening in 2014. Business Monitor International Ltd www.businessmonitor.com
PHILIPPINES Q3 2013
TABLE: MONETARY POLICY................................................................................................................................................................................ 18
Chapter 3: 10-Year Forecast................................................................................................................... 21

The Philippine Economy To 2022........................................................................................................................... 21
Uncovering A Forgotten Gem?....................................................................................................................................................21
The Philippines holds significant economic growth potential and has begun to come into the investment spotlight as a result. Although the country has in the past been hampered by political instability and poor investor perception, we believe President Benigno Aquino III has been 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.................................................................................................................................... 21
Chapter 4: Business Environment......................................................................................................... 25

SWOT Analysis......................................................................................................................................................... 25 BMI Business Environment Risk Ratings.............................................................................................................. 25 Business Environment Outlook............................................................................................................................... 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS............................................................................................................................... 26
Infrastructure............................................................................................................................................................ 28
TABLE: BMI LEGAL FRAMEWORK RATING........................................................................................................................................................ 28 TABLE: LABOUR FORCE QUALITY...................................................................................................................................................................... 29
Market Orientation.................................................................................................................................................... 30
TABLE: ASIA ANNUAL FDI INFLOWS............................................................................................................................................................... 30
Operational Risk....................................................................................................................................................... 31
TABLE: TOP EXPORT DESTINATIONS............................................................................................................................................................... 32
Chapter 5: Key Sectors........................................................................................................................... 33

Telecommunications................................................................................................................................................ 33
TABLE: TELECOMS SECTOR ARPU HISTORICAL DATA AND FORECASTS, (PHP)................................................................................ 34 TABLE: TELECOMS SECTOR MOBILE HISTORICAL DATA AND FORECASTS........................................................................................ 34 TABLE: TELECOMS SECTOR FIXEDLINE HISTORICAL DATA AND FORECASTS................................................................................... 35 TABLE: TELECOMS SECTOR BROADBAND HISTORICAL DATA AND FORECASTS, 2010-2017............................................................ 35
Pharmaceuticals....................................................................................................................................................... 36
TABLE: PHILIPPINES GENERICS DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017................................ 37 TABLE: PHILIPPINES OVER-THE-COUNTER (OTC) MEDICINE MARKET INDICATORS................................................................................. 38 TABLE: PHILIPPINES PRESCRIPTION DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017....................... 39 TABLE: PHILIPPINES PATENTED DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017............................... 40
Other Key Sectors.................................................................................................................................................... 41

TABLE: OIL AND GAS SECTOR KEY INDICATORS............................................................................................................................................ 41 TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS...................................................................................................................... 41 TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS.................................................................................................................................. 41 TABLE: FOOD AND DRINK SECTOR KEY INDICATORS.................................................................................................................................... 42 TABLE: AUTOS SECTOR KEY INDICATORS....................................................................................................................................................... 42
Chapter 6: BMI Global Assumptions..................................................................................................... 43

Global Outlook.......................................................................................................................................................... 43
Growth Has Troughed...................................................................................................................................................................43
TABLE: GLOBAL ASSUMPTIONS......................................................................................................................................................................... 43 TABLE: DEVELOPED STATES, REAL GDP GROWTH, %................................................................................................................................... 44 TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %........................................................................... 44 TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.................................................................................................................................. 45
Executive Summary
Core Views
Following a blowout 6.8% performance in 2012, we forecast the Philippine economy to expand by 5.9% in 2013. Leading the way forward, we expect the countrys nascent investment boom to power forward on the back of strong domestic fundamentals, but note that external headwinds continue to pose a risk.
With headline inflation trending below its target range of 3.0-5.0%, Bangko Sentral ng Pilipinas should remain comfortable with its monetary policy settings over the near term, likely allowing for its benchmark interest rate to stay pegged at its all-time low of 3.50% through the end of 2013. While we have downgraded our end 2013 headline inflation forecast to 3.4% from 4.0% previously, we note that inflationary pressures should begin to creep up over the medium
Despite the fact that the Philippines has passed another expansionary budget for 2013, we expect the budget deficit to widen to come in at a manageable 2.2% of GDPin 2013.While spending continues to be limited by administrative difficulties, revenue growth will be supported by the governments increasing tax collection efficacy and the introduction of a wide-ranging sin tax. As we expected, the Philippines has finally achieved an investment grade rating from a major credit ratings agency in view of the countrys improved growth outlook and the governments increasingly consolidated fiscal position, and we expect that further upgrades from the remaining agencies are likely in the cards.
term in line with rising money supply growth, and we continue to expect some form of tightening in 2014.
Key Risks To Outlook

Risks to our end of period 2013 peso forecast of PHP41.55/US$ have shifted to the downside, as hot money outflows have effected a substantial sell-off in the currency. While we are not yet convinced that the currency will remain weak over the rest of the year, we note that continued EM equity weakness could keep the peso depressed.
Growth slowdowns in both China and Japan, to which the Philippines is heavily exposed in both investment and trade terms, could undermine the countrys strong domestic growth story should they become more acute than expected.
Major Forecast Changes

We believe that strong domestic fund amentals will be enough to send the Philippines on to above-trend growth over the immediate future. As such, we note that that risks to our 2013 real GDP growth forecast of 5.9% are to the upside, and have upgraded our 2014 and 2015 forecasts to 5.5% and 5.4%, respectively.
Chapter 1:
Brief Methodology Political Outlook
SWOT Analysis
Strengths
The Philippines is one of Asias oldest and liveliest democracies. The current constitution, framed in 1987 following the ousting of dictator Ferdinand Marcos, guarantees life, liberty and property in a US-style bill of rights.
BMI Political Risk Ratings

In view of the Philippines long history of popular unrest as well as instability due to the presence of the Abu Sayyaf and communist (New Peoples Army) groups, the country receives a relatively low score of 62.8 (out of 100) in our long-term political risk ratings. A peace agreement with the Moro Islamic Liberation Front has paved the way for an upgrade in the Philippines short-term political risk rating, which now stands at 72.1 versus 70.0 previously. The trajectory of the rating remains positive, and further upgrades are possible should President Benigno Aquino III maintain his popularity, ushering in a new era of political progress and stability.
Weaknesses
The executive often faces delays getting its bills through a legislature dominated by the Philippines old landed families, business tycoons and showbiz celebrities. Rumours of military coup plots are frequent. Disaffected junior officers have staged a series of mutinies in recent years, while the top brass played a decisive role in the people power uprisings of 1986 and 2001.
S-T Political
Rank
Trend
= = = = = = = = = = = = = = = = = = = + =
Opportunities
President Benigno Aquino III of the Liberal Party has promised to root out the excesses of the preceding administration, which could help to recover resources lost to corruption in past years. Tentative plans to adopt a parliamentary-style constitution, a process referred to locally as charter change, or cha cha, could reduce the concentration of executive power. Plans to eventually move towards a federal structure would decentralise political power and very likely improve regional governance. The resumption of peace talks with the Moro Islamic Liberation Front has significantly raised the prospect of decreased violence in the south. The government is also seeking a peace agreement with the communist New Peoples Army, which also poses a threat in the region, but progress in the talks has been slow.
Singapore 94.8 1 Brunei Darussalam 90.6 2 Hong Kong 84.8 3 Taiwan 83.3 4 Laos 80.4 5 South Korea 77.7 6 China 77.3 7 Sri Lanka 77.1 8 Vietnam 76.9 9 Malaysia 75.6 10 Philippines 72.1 11 North Korea 71.9 12 Thailand 69.2 13 Indonesia 68.8 14 Bangladesh 68.3 15 Mongolia 67.7 16 Cambodia 66.0 17 India 65.4 18 Bhutan 61.0 19 Myanmar 57.7 20 Pakistan 51.7 21 Papua New Guinea 45.2 22 Regional ave 73.3/Global ave 65.2/Emerging markets ave 62.7
L-T Political
Rank
Trend
= = = = = = = = = = = = = = = = = = + = = =
Threats
Efforts by former president Gloria Macapagal Arroyo and her allies to change the constitutional charter has brought on a high degree of uncertainty about the political system, with knock-on effects on investor sentiment. Kidnappings and bombings by separatist groups, such as the Abu Sayyaf, are expected during our forecast period. The existence of more than 100 private militias controlled by local warlords poses an additional security risk, as evidenced by the Maguindanao massacre in 2009.
South Korea 84.2 1 Singapore 80.6 2 Taiwan 75.4 3 Hong Kong 72.9 4 Malaysia 67.2 5 Mongolia 66.7 6 India 65.7 7 Brunei Darussalam 65.6 8 China 62.9 9 Philippines 62.8 10 Bangladesh 62.6 11 Thailand 61.8 12 Sri Lanka 60.2 13 Indonesia 60.0 14 Cambodia 58.9 15 Vietnam 57.7 16 North Korea 55.2 17 Papua New Guinea 54.8 18 Pakistan 53.7 19 Bhutan 51.0 20 Laos 46.9 21 Myanmar 40.9 22 Regional ave 62.8/Global ave 63.1/Emerging markets ave 59.5
PHILIPPINES Q3 2013
Domestic Politics
Aquino's Midterm Victory Provides Medium-Term Clarity
BMI VIEW
In line with our expectations, Team PNoy's Senatorial team as well as allies of President Aquino both scored wid e-scale midterm election victories. While we note that the victory will bolster Aquino's reform-minded agenda over the next three years, we caution that Philippine politics nevertheless remain largely dominated by the same political dynasties of old, and that a backslide in 2016's general elections is possible if the current government fails to pursue more structural, long-term reforms.
dominant performance in the Senatorial elections in particular will provide a boost to Aquino's policy-making efficacy over the next three years, which in BMI's opinion will help to maintain the country's demonstrably positive political trajectory that has largely been responsible for the Philippines' recent investment grade endorsements.
Long-Term Outlook Far Less Certain

However, it remains to be seen whether or not Aquino and his allies are willing to implement the structural reforms that will be necessary to maintain the positive political momentum over the long-run, and Aquino himself has thus far remained cool to the possibility of charter change (colloquially referred to as 'chacha'). Furthermore, old political dynasties remain heavily entrenched within the system, as evidenced by former president Joseph Estrada's election as the Mayor of Manila. Estrada, who was forced to resign from the Presidency after wide-ranging corruption allegations in 2001, also came in second in 2010's presidential elections, indicating that Philippine politics remain dominated by personality rather than party affiliation. As such, we note that the Philippines' longer-term political outlook is still clouded, and although Aquino's strong midterm showing suggests that his favoured candidate will stand a considerable chance at election in 2016, the political process generally remains the province of the same elites by which it has long been dominated. As such, our long-term political rating for the Philippines is a middling 62.8, which compares with a regional average of 61.7.
The Philippines held mid-term elections on May 13th, and, in line with our previous expectations, President Benigno Aquino's 'Team Pnoy' locked up a majority of the 12 Senate seats up for grabs. Team PNoy was able to claim nine seats in the Senate, and allies of Aquino's Liberal Party secured a majority in the House of Representatives, in which all 229 seats were contested. As we wrote previously (see 'Midterm Elections Set To Bolster Aquino Administration,' April 16), the election can be viewed as a referendum on President Aquino's first three years in office, with Team PNoy's strong results reflective of his broad popularity amongst the electorate. Long-Term Risks Still Prevalent
Asia - BMI Long-Term Political Risk Ratings (out of 100)

70 65 60 55 50 45 40
Long-Term Political Outlook

Prospects For Improving Governance
BMI VIEW:
The Philippines faces a number of political challenges over the coming years that, if handled successfully, could improve governance. However, given low income levels and high levels of inequality, we expect the
Malaysia
China
Bangladesh
Indonesia
Philippines
Cambodia
Thailand
Sri Lanka
Vietnam
India
Laos
political scene to remain vulnerable to intermittent instances of turmoil.
Source: BMI
Likewise, the results will also serve to strengthen Aquino's hand in the formation of government policy, as his Liberal Party and its allies now boast a commanding majority within both the House of Representatives and the Senate. Team PNoy's
Although the Philippines is one of Asia's longest-established democracies, it is arguably one of the less mature ones. More than most other Asian states, the Philippines is prone to public unrest and either attempted military coups or rumours of such disturbances. In addition, politics tend to be a glitzy affair, with celebrities elected largely on name recognition. Furthermore, the government has had to grapple with an insurgency in the south for decades. All this conjures up the image of an unstable
POLITICAL OUTLOOK
country. That said, President Benigno Aquino III has been actively seeking to change this perception and had some success attracting foreign direct investment since he took office in 2010.
Threats And Challenges To Stability

Poverty And Unemployment: The Philippines is a poor country, with a per capita GDP estimated at around US$2,526 in 2012. In addition, income distribution is highly uneven, as reflected by a Gini coefficient of 0.48, which is one of the highest in Asia. Furthermore, the Philippines' rapid population growth means that per capita GDP increases less rapidly than in countries with lower birth rates. Indeed, around 54% of the Philippines' population is younger than 25, and a high proportion of young people has traditionally been linked to political instability. The inability to create enough new jobs has led to 'brain drain, with around 10% of the population working abroad. Taken together, these factors mean that there is a substantial segment of society which can create demand for populist measures or can be mobilised for mass protest. Family Dominated Political System: An oft-repeated criticism of the Philippine political system is that all levels of government
TABLE: PHILIPPINES POLITICAL OVERVIEW
System of Government Head of State Head of Government Last Election Key Figures
are pervaded by 'political families' that is, officials whose parents or grandparents were former presidents, senators, representatives or mayors. In addition, the close overlap between politics and big business means that there exists an oligarchic elite. While not in itself destabilising, the 'family factor' fosters the impression that the political system consists of self-perpetuating elites, making it difficult for outsiders to gain influence. This dimension in politics also reinforces vested interests, which in turn mitigates economic or political reform. Military Discontent: The Philippines has seen dozens of attempted military coups (or rumours to that effect) over the past 20 years, but none have succeeded. Coup attempts are usually linked to disaffected junior- or mid-level officers rather than the top brass and thus reflect hierarchical schisms within the military. However, incumbent presidents cannot automatically be guaranteed the support of the high command, which was pivotal in the removal of former presidents Marcos and Estrada. Under highly adverse circumstances, the president has the option of declaring martial law. Security Situation: The Philippines has experienced a number
Presidential republic, universal suffrage: 285-seat house of representatives, 24-seat senate for the 15th congress. Executive power rests with president. President: Benigno Aquino III one six-year term President: Benigno Aquino III Presidential: May 10 2010 Congressional: May 13 2013 Vice President Jejomar Binay; Senate President Juan Ponce Enrile; Speaker of the House Feliciano Belmonte Jr; Finance Secretary Cesar Purisima; Foreign Affairs Secretary Alberto Romulo; National Defence Secretary Voltaire Gazmin; Interior and Local Government Secretary Jesse Robredo Central Bank Governor: Amando Tetangco Jr Liberal Party (110); Nationalist People's Coalition (43); Nacionalista Party (17) Political affiliations in the Philippines generally do not adhere strictly to party lines. Many legislators defected to Aquino's Liberal Party following the general elections in May 2010, while others expressed support for the president's policies, enabling it to become the ruling party despite winning fewer seats than the opposition LakasKampi-CMD. Presidential: May 2016 Congressional: May 2016 Separatist groups namely Abu Sayyaf and the Communist Party of the Philippines continue to pose a threat to government stability. Ongoing territory disputes persist with neighbouring countries, namely over Sabah (with Malaysia), Scarborough Shoal (China and Taiwan), Spratly Islands (China, Taiwan, Malaysia, Vietnam and Brunei) and the Sulawesi Sea Islands (Malaysia and Indonesia). The Philippines is a founding and active member of the UN and is also a founding member of the Association of Southeast Asian Nations. In addition, the Philippines is a member of the East Asia Summit, an active player in the Asia-Pacific Economic Cooperation and a member of the Group of 24. The country is a major non-NATO ally of the US, but also a member of the Non-Aligned Movement. 72.1 62.8
Main Political Parties (number of seats in house of representatives)
Next Election Ongoing Disputes
Key Relations/Treaties
BMI Short-Term Political Risk Rating BMI Long-Term Political Risk Rating Enter table source
PHILIPPINES Q3 2013
of terrorist attacks over the past decade, linked either to Muslim or communist rebels. However, the Philippines has received solid backing from the US, which officially designates the country a major non-NATO ally. This provision allows for increased military assistance to the Philippines and ensures that the country has access to external expertise in combating domestic insurgencies.
Northern Mindanao. Supporters of the plan argue that devolving power to the regions would improve governance, which has been micro-managed or neglected by 'imperial Manila'. Indeed, critics of the existing framework say that the highly centralised system has afforded preferential treatment to localities whose officials are on friendly terms with the incumbent presidential administration. Thus, the federal system would give locals more control of their resources and livelihoods, according to former house speaker Jose de Venecia. While federalism clearly has its merits, opponents fear that it could encourage regions to secede from the Philippines in the same manner as East Timor from Indonesia and Kosovo from Serbia ie, through armed conflict. Radical Change: A third scenario for the Philippines entails radical political change. Under this scenario, successive administrations fail to raise living standards and enact political or economic reform. Increasing public disaffection could, meanwhile, lead to a new political movement, possibly backed by the church or centred on junior military officers, in a similar fashion to Venezuela's left-wing President Hugo Chvez, who attempted to seize power in 1992 before being elected president in 1998. The possibility of a populist president emerging cannot be ruled out given the Philippines' propensity for celebrity politicians. Former president Joseph Estrada and the 2004 opposition presidential candidate, Fernando Poe Jr, were both action film stars before entering politics.
'Power Centres' Hold Key To Stability

How Philippine politics develop over the coming years depends very much on the key 'power centres'. These are congress, the urban middle class, business leaders, wealthy landowners, the military establishment and the Catholic church. The church in particular is very important as a moral voice, given that a large proportion of the predominantly Catholic population is devout. Indeed, the church played an important role in both Marcos's and Estrada's removal from power. The Catholic church could potentially serve as a trigger for mass mobilisation given the appropriate circumstances.
Scenarios For Political Change

Charter Change: For some years now, Philippine politicians have been discussing charter change. Proponents of this change argue that replacing the executive president-centred structure with a parliamentary system headed by a prime minister would reduce the concentration of power and thus lead to less confrontational politics. However, it is unclear how a parliamentary system would operate differently from the existing framework. It is also unclear how power would be divided between the president and prime minister. If all executive power is transferred to the prime minister, then matters will be clear. However, if the president retains power over foreign affairs and especially the military, then he or she could end up clashing with the prime minister, thus raising the prospect of instability. Federal Republic: Also linked to constitutional change, but perhaps of greater significance, are proposals for the Philippines to adopt a federal system. The plan calls for the creation of 11 federal states and one federal administrative region (Manila). The federal states would be: Northern Luzon, Central Luzon, Southern Tagalog, Bicol, Minparom (formed from Mindanao, Palawan and Romblon), Eastern Visayas, Central Visayas, Western Visayas, Northern Mindanao, Southern Mindanao, and Bangsamoro. State governments would share 70% of their resource allocation with provinces and municipalities. While the executive branch would remain in Manila, the legislative branch would move to Central Visayas and the judiciary to
10
Chapter 2:
Economic Outlook
SWOT Analysis
Strengths
Private consumption is a major driver of economic growth, generating more than 70% of GDP. A youthful and rapidly expanding population is likely to support these dynamics. Home-bound remittances from the 8mn overseas Filipino workers are a key source of national income and provide much-needed support to the countrys consumption and balance of payments.
BMI Economic Risk Ratings

The Philippines short-term economic risk rating is 71.3, with a healthy external score of 83.3. Indeed, the Philippines proved to be somewhat immune to the global trade slowdown in 2012, and could see a rebound in electronics exports as we move further into 2013. That said, we caution that the countrys long-term economic prospects are still considerably below its regional peers, with its long-term economic risk rating only 64.0. President Benigno Aquino IIIs administration has sought to address key structural issues affecting the Philippines long-term economic prospects, such as attracting more foreign direct investment for infrastructure projects, which may lead to score improvements in the future. S-T Economy Rank Trend
= = = = = = = = = = = + = = = = = = -
Weaknesses
Although the government has done well to decrease its fiscal deficit (particularly under the Aquino administration), spending inefficiencies as well as revenue collection efficacy remain substantial concerns. The jobless rate will remain high as long as economic growth falls short of the level needed to create jobs for the fast-expanding labour force.
Opportunities
The government could ease pressure on its fiscal accounts by broadening the tax base and eliminating graft at the Bureau of Internal Revenue. Outsourcing could provide the Philippines, given its low-cost Englishspeaking workforce, with a valuable source of foreign exchange.
Threats
Concerns persist over the underperformance of revenue collection agencies. Failure to improve tax collections will constrain further ratings improvements, which in turn threatens to curb foreign investment. The export sector is geared towards manufactured products, especially electronics, which are vulnerable to a weakening of the external economic environment since late 2008.
Singapore 89.4 1 China 86.0 2 South Korea 85.6 3 Taiwan 84.8 4 Hong Kong 78.3 5 Malaysia 75.0 6 Thailand 74.4 7 Philippines 71.2 8 Indonesia 70.6 9 Vietnam 62.3 10 India 62.1 11 Bangladesh 57.5 12 Brunei Darussalam 56.9 13 Sri Lanka 54.6 14 Myanmar 53.5 15 Cambodia 46.5 16 Pakistan 46.2 17 Mongolia 44.6 18 Bhutan 39.0 19 Papua New Guinea 38.3 20 Laos 36.2 21 North Korea Regional ave 63.0/Global ave 54.4/Emerging markets ave 52.7
L-T Economy
Rank
Trend
= = = = = = = = = = = + = = = = = = -
South Korea 81.1 1 Singapore 79.9 2 Malaysia 77.5 3 China 76.4 4 Taiwan 74.7 5 Hong Kong 74.3 6 Thailand 72.5 7 Indonesia 65.6 8 Philippines 64.0 9 Bangladesh 58.4 10 Vietnam 57.3 11 Brunei Darussalam 57.2 12 India 56.1 13 Sri Lanka 52.4 14 Myanmar 49.4 15 Pakistan 46.9 16 Mongolia 43.1 17 Cambodia 41.2 18 Laos 39.6 19 Papua New Guinea 38.9 20 Bhutan 37.2 21 North Korea Regional ave 59.3/Global ave 53.7/Emerging markets ave 51.2
11
PHILIPPINES Q3 2013
Fiscal Policy
Upgrades Well Deserved, But Fiscal Progress Becoming More Difficult
BMI VIEW
The Philippines continues to garner substantial sovereign credit rating upgrades, and we believe that there is a strong possibility that the country could finish 2013 with an investment grade rating from all three agencies. That being said, the government's path to fiscal prosperity will likely prove to be more difficult now that the low-hanging fruit has largely been plucked, and we note once again that more structural reforms will be necessary in order to solidify the country's strong fiscal and economic trajectory.
countries as a result of its manageable external debt dynamics and generally positive fiscal trajectory, this notion was only recently reaffirmed for the first time by major ratings agencies Fitch (in March 2013) and Standard & Poor's ( S&P , in May). Likewise, rhetoric from the last major ratings agency to hold the Philippines below investment grade, Moody's , continues to indicate that an upgrade to investment grade is likely in the offing. Heading In The Right Direction
Total External Debt Stock & Total Government Debt, % GDP

80 Total Govt External 70 60 50 40 30 20 10 0
Total Government Revenue & Expenditure, % chg y-o-y & Fiscal Balance, % GDP
25 Balance Revenue Expenditure 20
Well Balanced, But Room For Improvement
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
15 10 5 0 -5 -10
2013-2017 = BMI forecast. Source: BMI, BSP
Debt Metrics Looking Strong

In particular, the Philippines has achieved a rapid reduction in its exposure to external financing, with total external debt dropping to an estimated 30.5% of GDP by the end of 2012 versus 59.8% just seven years prior. In addition to more responsible borrowing initiatives, the sovereign's debt position has been strengthened by the economy's above trend expansion (real GDP grew by 6.8% in 2012), which has not only helped to reduce debt in GDP terms, but also by supporting government revenue intakes. Since 2005, revenue growth has averaged 10.5% per annum, even in the face of a 6.6% decline in 2009.
2005
2006
2007
2008
2009
2010
2011f
2012f
2013f
2014f
2015f
2016f
Source: BMI, BSP
The Philippines has enjoyed a surging economic profile over the past twelve months, and the sovereign's position has been bolstered considerably as a result. While we have long held that the Philippines had acceded to the pantheon of investment grade
TABLE: FISCAL POLICY
2009
Fiscal revenue, PHPbn [2] Revenue, % of GDP [2] Fiscal expenditure, PHPbn [2] Expenditure, % of GDP [2] Budget balance, PHPbn [2] Budget balance, % of GDP [2] Primary balance PHPbn [1,2] Primary balance % of GDP [1,2] 1,123.2 14.0 1,421.7 17.7 -298.5 -3.7 -19.7 -0.2
2010
1,207.9 13.4 1,522.4 16.9 -314.5 -3.5 -20.2 -0.2
2017f
2011
1,360.1 14.0 1,558.9 16.1 -198.8 -2.0 128.6 1.3
2012e
1,535.6 14.5 1,777.2 16.8 -241.6 -2.3 149.4 1.4
2013f
1,719.9 14.9 1,976.2 17.1 -256.4 -2.2 158.6 1.4
2014f
1,907.3 15.1 2,164.0 17.1 -256.6 -2.0 197.8 1.6
2015f
2,107.6 15.2 2,369.5 17.1 -261.9 -1.9 212.0 1.5
2016f
2,326.8 15.4 2,582.8 17.1 -256.0 -1.7 234.7 1.6
2,568.8 15.7 2,789.4 17.0 -220.7 -1.3 281.4 1.7
Notes: e BMI estimates. f BMI forecasts. 1 Fiscal balance stripping out interest payments on government debt. Sources: 2 Bureau of the Treasury, BMI.
12
2017
2017f
ECONOMIC OUTLOOK
But Revenue Collection Still A Concern

However, the government still has a long way to go in shoring up tax revenues, and faces a particularly tall task in its efforts to crack down on rampant tax evasion. In 2011, the government estimated that approximately PHP40bn is lost each year to tax evasion, representing approximately 3.5% of the government's total revenue for the year. According to the National Economic Development Authority (NEDA), this figure is likely to be substantially larger in consideration of the fact that approximately 43% of the economy's output originates in the 'underground economy' in which businesses are not registered with the Bureau of Internal Revenue (BIR) and therefore do not pay any taxes. In order for the government to continue to achieve such high rates of revenue growth, the BIR will also need to sharpen its efforts in broadening the tax base. According to Finance Secretary Cesar Purisima, 61% of the government's revenue in 2012 came from the country's largest 2,000 companies or individual tax payers, out of a nationwide total of 820,255 businesses. Similarly, only about 22% (or 403,000) of the country's 1.8mn 'self-employed persons' were tax payers, indicating another large and untapped pool of potential revenue. Notably, we expect the government to see continued high rates of growth in tax revenue over the next five years, at a forecasted average clip of 11.4% per annum through to 2017. However, this rate is in large part a result of low base effects, with total government revenue currently comprising just 12.9% of GDP. With expenditures set to rise by a forecasted average of 9.4% per annum through to 2017, we continue to believe that the government will maintain a healthy spending balance, and project the fiscal deficit to average a moderate 1.8% of GDP through this period. That being said, the government still needs to prove that it can be more aggressive in increasing its revenue intake as a proportion of the economy. Government spending in critical areas such as healthcare, education, and infrastructure remains insufficient in light of the Philippines' deficiencies in these areas, as well as for the country's development level.
broader fiscal, political, and economic position. However, we also continue to note that substantive improvements to the country's fiscal and sovereign outlook will become progressively more difficult over the coming years, with a greater emphasis on structural, long-term reforms that can lay the foundation for an extended period of rapid economic expansion.
Balance of Payment
Exports Continue To Disappoint, Peso Under Pressure
BMI VIEW
Despite a pick-up in external trade, including a cyclical bounce in the global semiconductor industry, Philippine exports continue to struggle. Indeed, total exports in May shrank by 12.8% in year-on-year terms, with electronic shipments contracting for the fifth straight month, this time by -0.4%. Over the near term, we expect export performance to continue to disappoint, placing some downside pressure on the Philippine peso despite the country's current account surplus. While we are retaining our end-year peso target of PHP41.55/US$ for the timebeing, we note that downside risks to this view are mounting.
Japan A Bright Spot, For Now...

Exports To Selected Markets, % chg y-o-y
Japan China US Singapore 150
100
50
-50
Nov-11
Nov-12
Sep-11
Sep-12
Jan-11
Jan-12
May-11
May-12
Mar-11
Mar-12
Jan-13
Jul-11
Jul-12
Source: BMI, NSO
Broader Fiscal House In Solid Form

The aforementioned concerns will be somewhat more difficult to tackle than the relatively low-hanging fruit that the government has, to some extent, already plucked. To be sure, we believe that there is a strong possibility that the Philippines will finish 2013 with an investment grade rating from all three major ratings agencies, and rightfully so given the solid form of the country's
Philippine exports put in another disappointing performance in April, shrinking by a worse than expected 12.8% year-on-year (y-o-y) against consensus estimates of a 5.3% decline. As we wrote recently (see 'Underwhelming Trade Performance Defies Regional Pick-Up,' May 28), the Philippines' trade performance has yet to benefit from a cyclical rebound in global semiconwww.businessmonitor.com
Mar-13
-100
13
PHILIPPINES Q3 2013
ductor demand, with electronics exports having declined in y-o-y terms for the fifth straight month (-0.4%) in April. That being said, the rate of decline in electronics shipments was vastly improved from the -22.4% y-o-y print in March, and the category appears to be enjoying a renewed tailwind as a result of buoyant Japanese demand. Respecting Support
Exchange Rate, PHP/US$
54 52 50 48 46 44 42 40 38
to Japan have proven to be the outlier in the archipelago's trade story, expanding by 10.0% in the first four months of the year compared to the same period in 2012. Given its position in the semiconductor value-chain, the Philippines may continue to benefit from a boost in demand from Japan over the coming months, potentially giving rise to a broader recovery in electronics exports. However, we continue to believe that the bounce in Japanese economic activity will be a transitory one, with our full-year 2013 real GDP growth forecast of 1.4% implying a substantial slowdown in H213, and, in turn, diminishing support for Philippine exports.
Peso Feeling The Heat

Although the Philippines enjoys a current account surplus as a result of substantial remittance inflows, a contraction in exports nonetheless effects a drag on the peso. With hot money outflows also surging in recent weeks as a result of a substantial sell-off in foreign holdings of Philippine equities (the benchmark PCOMP index has fallen by 14.9% from its peak in May 16), the peso has been hard-hit, depreciating by 5.0% over the same time period. Technically, however, the unit has respected long-term trendline support (as depicted on the chart above), and we continue to forecast for the peso to meet our end-year target of PHP41.55/ US$ as a result of the fact that net fundamental pressures on
2011
62.7 28.0 47.2 21.1 75.4 -15.4 -6.9 11.9 5.3 15.4 6.9 62.7 28.0 -11.9 -5.3 1.3 0.6 17.6 7.9 7.1 3.2 49.0
Nov-06
Nov-11
Jan-06
Jun-06
Jan-11
Jun-11
Jul-08
May-09
Feb-08
Mar-10
Sep-07
Dec-08
Aug-10
Source: BMI
Following a surprisingly strong quarter in the world's third largest economy (and the Philippines' largest export market), exports
TABLE: CURRENT ACCOUNT
2009
Goods imports, US$bn [2] Goods imports, % of GDP [2] Goods exports, US$bn [2] Goods exports, % of GDP [2] Goods exports, % of imports [2] Balance of trade in goods, US$bn [2] Balance of trade in goods, % of GDP [2] Services imports, US$bn [2] Services imports, % of GDP [2] Services exports, US$bn [2] Services exports, % of GDP [2] Goods and services exports, US$bn [2] Goods and services exports, % of GDP [2] Balance of trade in goods and services, US$bn [2] Balance of trade in goods and services, % of GDP [2] Income account balance, US$bn [2] Income account balance, % of GDP [2] Net transfers, US$bn [2] Net transfers, % of GDP [2] Current account balance, US$bn [2] Current account balance, % of GDP [2] Openness to international trade, % [1,2] 46.5 27.5 37.6 22.3 81.0 -8.8 -5.2 8.9 5.3 11.0 6.5 48.6 28.8 -6.7 -4.0 -0.2 -0.1 16.3 9.6 9.4 5.5 49.8
Sep-12
Feb-13
Apr-07
Oct-09
Apr-12
Jul-13
2010
61.1 30.6 50.7 25.4 83.0 -10.4 -5.2 11.3 5.7 13.2 6.6 63.9 32.0 -8.4 -4.2 0.3 0.2 16.6 8.3 8.5 4.2 56.0
2012e
61.5 24.6 46.3 18.5 75.3 -15.2 -6.1 14.7 5.9 18.6 7.4 64.9 25.9 -11.3 -4.5 -0.7 -0.3 19.2 7.7 7.1 2.8 43.0
2013f
65.4 23.4 47.2 16.9 72.2 -18.2 -6.5 16.7 6.0 21.4 7.7 68.6 24.6 -13.4 -4.8 -1.0 -0.3 20.5 7.3 6.1 2.2 40.3
2014f
72.2 23.9 51.7 17.1 71.6 -20.5 -6.8 18.8 6.2 24.2 8.0 75.9 25.1 -15.2 -5.0 -1.3 -0.4 22.3 7.4 5.8 1.9 41.0
2015f
79.7 23.8 56.6 16.9 71.1 -23.0 -6.9 21.2 6.3 27.4 8.2 84.0 25.1 -16.8 -5.0 -1.5 -0.4 24.2 7.2 5.9 1.7 40.6
2016f
87.9 23.5 62.0 16.6 70.6 -25.8 -6.9 23.9 6.4 31.2 8.3 93.3 24.9 -18.5 -4.9 -1.7 -0.5 26.3 7.0 6.1 1.6 40.0
2017f
96.8 23.5 67.7 16.4 70.0 -29.0 -7.0 27.0 6.6 35.6 8.6 103.4 25.1 -20.4 -5.0 -1.8 -0.4 28.7 7.0 6.4 1.6 39.9
Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 Bangko Sentral ng Pilipinas, BMI.
14
ECONOMIC OUTLOOK
the currency remain appreciatory. That being said, a convincing break through technical support could presage yet another leg lower for the peso, at which point we may look to downgrade both our average and end-year targets.
Economic Activity
Growth Boom On Solid Footing
BMI VIEW
Even in the face of a considerable slowdown in exports, the Philippine economy continues to power on, with Q113 figures reflecting impressive real GDP growth of 7.8% y-o-y. Although we reiterate that the Philippines is indeed vulnerable should external conditions continue to worsen, and that medium term risks stemming from a potential Japanese fiscal crisis are pertinent, we believe that strong domestic fundamentals will be enough to power the country on to strong growth over the immediate future. As such, we note that that risks to our 2013 real
country's investment story has been due for a cyclical pick-up, particularly in view of the central bank's ongoing easy monetary policy campaign. The Bangko Sentral ng Pilipinas (BSP) continues to find itself in a policy sweet spot, with its record low benchmark interest rate of 3.50% supported by belowtarget headline inflation of 2.6% y-o-y and benign fundamental inflationary pressures.
GDP by Expenditure in Constant Prices, % chg y-o-y and pp. Contribution

15 10 5 0 -5 -10
Investment To The Fore
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
GDP growth forecast of 5.9% are to the upside, and have upgraded our 2014 and 2015 forecasts to 5.5% and 5.4%, respectively.
The Philippine economy is by all measures in the midst of an impressive growth boom, with real GDP growth hitting a new cyclical high of 7.8% y-o-y in Q113. While the boom was largely kicked off by robust growth in the production of consumer goods (private consumption expanded by an impressive 6.6% in real terms in 2012, contributing 4.6 percentage points (pp) to the headline growth figure), signs now point to its continuation on the back of an investment renaissance. Indeed, capital formation soared by 16.8% y-o-y in real terms in Q113, reflecting a marked acceleration from Q412's middling -1.4% performance.
Stat Error/Restocking Capital Formation Private Consumption

Source: BMI, BSP, NSO
NX Govt Consumption GDP
Investment Boom On Course

The surge in investment activity in Q113 owed mainly to a massive increase in construction activity, which itself expanded by a hearty 33.7% on strong demand from both the public and private sectors. As we have been writing for some time now, the
TABLE: ECONOMIC ACTIVITY
2009
Nominal GDP, PHPbn [1] Nominal GDP, US$bn [1] Real GDP growth, % change y-o-y [1] GDP per capita, US$ [1] Population, mn [2] Unemployment, % of labour force, eop [3] 8,026.1 168.8 1.1 1,841 91.7 7.1
The Philippines' 7.8% headline growth rate made it the fastest growing economy in the region in the first quarter, outpacing perennial favourites China (7.7% y-o-y) and Indonesia (6.1%) even as external demand faltered. The rude health of the Philippines' domestic economy has contrasted significantly with the slowdown in regional and global growth, which was reflected by a 7.0% contraction in real exports in Q113. Since then, outward bound shipments have continued to struggle, with total exports slipping by 12.8% y-o-y (in nominal terms) in April. While imports also contracted in the first quarter, they posted a relatively strong nominal gain of 7.4% y-o-y in April, suggesting that, as we would expect, domestic demand continues to outshine external demand.
2010
9,003.5 199.7 7.6 2,141 93.3 7.1
2011
9,706.2 224.2 3.6 2,363 94.9 7.1
2012e
10,564.9 250.4 6.8 2,595 96.5 7.0
2013f
11,548.5 279.6 5.9 2,850 98.1 6.8
2014f
12,640.8 302.4 5.5 3,031 99.8 6.5
2015f
13,854.0 335.4 5.4 3,307 101.4 6.3
2016f
15,065.3 374.3 4.6 3,631 103.1 6.3
16,367.2 411.8 4.5 3,932 104.7 6.2
Notes: e BMI estimates. f BMI forecasts. Sources: 1 National Statistical Coordination Board/BMI; 2 World Bank/UN/BMI; 3 National Statistics Office, BMI.
Q113
2017f
15
PHILIPPINES Q3 2013
External Risks Pertinent, But Not Overwhelming

Over the coming quarters, we nevertheless point out that poor external conditions could begin to weigh on the Philippine growth story, and that headwinds are broadly based. Indeed, the state of the regional economy is highly reliant upon China, where an ongoing credit crunch is reflecting the mainland's pressing need for painful economic reforms. With the new Chinese government likely to, at least to some degree, embrace these reforms, we continue to believe that Chinese economic growth will cool substantially over not only the coming quarters, but the next few years as well, dragging on demand in a country that has consistently accounted for approximately 12% of total Philippine exports. External Malaise Hitting Exports
growth of just 1.4% for 2013 following a Q113 performance that saw annualised real growth surge to 4.1%), we stress that, over the medium term, the threat of a Japanese fiscal meltdown is the external risk that poses the highest potential threat. Japanese Exposure A Concern
Key Export Markets, % of Total Exports
80 70 60 50 40 30 20 10
50 40 30 20 10 0 -10 -20 -30 -40 -50
2,000 1,500 1,000 500 0 -500 -1,000 -1,500
Source: BMI, NSO
Fundamentals In Place For MediumTerm Growth Pick-Up

While the Philippines bears considerable risk to external headwinds over both the short and medium term, it is undoubtedly one of the best positioned countries in the region in terms of fundamental growth drivers. Firstly, debt ratios across the board are low, with total external debt at a manageable 30.5% of GDP (end 2012 estimate) and credit to GDP at 34.3% of GDP in February. The first metric is a reflection of the country's increasingly responsible fiscal management; indeed, the figure has nearly halved since 2005, when it stood at 59.8%. The Philippines' low credit to GDP ratio suggests that, while both credit and economic growth have been impressive, there is little indication that the economy has entered bubble territory, as new credit is being directed efficiently towards the production of each new unit of GDP. Secondly, as we have noted previously, President Benigno Aquino's consolidation of power in May's mid-term elections bodes well for political stability over the next three years, as well as a continuation of the popular president's successful reform drive. While Aquino may not be the structural reformer that the Philippines needs to truly unlock its long-term growth potential, we nevertheless see promise in the final three years of his term-limited six-year presidency. Thus far in his term, the president has led an effective (if not overwhelming) antiBusiness Monitor International Ltd
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
May-08
May-09
May-10
May-11
May-12
Sep-08
Sep-09
Sep-10
Sep-11
Balance
Source: BMI, NSO
Exports
Imports
Furthermore, as we wrote in May (see 'Sovereign Risk Rating Japan Poses A Major Risk,' May 30), Japan's increasingly untenable fiscal position poses a considerable (and growing) risk to the Philippines. In the 12 months through April, shipments to Japan made up approximately 20.0% of total outbound shipments, making Japan the Philippines' largest export market (while at the same time making the Philippines the most exposed regional economy to Japan) as well as its largest foreign investor. Although markets have thus far largely cheered 'Abenomics', which has been credited with providing a boost to Japanese economic growth as well as asset prices, we believe that there is a growing risk that the government eventually buckles under its growing debt burden and that monetary authorities lose control of the bond market. While the main Japan-related risk in the near-term for the Philippines is that of an expected slowdown in economic activity (we expect Japan's economy to post real GDP
16
Sep-12
Jan-13
-2,000
Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13
Japan HK Singapore US China
Total Exports & Imports, % chg y-o-y (LHS) & Balance, US$mn
ECONOMIC OUTLOOK
corruption drive, while also working to consolidate government expenditures and approve budgets on time, both areas which were often shrouded in the past shrouded in mystery. The political and fiscal stability that Aquino has helped to usher in have greatly augmented confidence in the country, leading to greater foreign investment potential as well as an improved domestic business environment.
Public Consumption Outlook: While we do not expect government consumption growth to match 2012's heady 12.2% print, we do see strong growth of 6.5% in 2013 ahead of a moderate slowdown to 4.3% in 2014. Investment Outlook: The Philippines is in the midst of what we believe to be an investment boom, and with credit metrics still moderate, we believe that there is little reason for momentum to fade drastically in the near future. We are forecasting real fixed capital formation growth of 9.5% in 2013, with the category slowing slightly to 8.5% in 2014. Net Exports: Net exports are acting as the key drag on Philippine growth, especially as domestic demand is easily outpacing external demand. We expect exports to grow by a weak 2.0% in real terms in 2013 (versus import growth of 3.0%), but note that risks to this forecast are likely to the downside.
Total Outstanding Loans (Universal and Commercial Banks), % of GDP

35 34 33 32 31 30 29 28 27
Slow And Steady Wins The Race
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
May-07
May-08
May-09
May-10
May-11
Jan-12
May-12
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
26
Monetary Policy
BSP On Cruise Control, For Now
BMI VIEW
With headline inflation trending below its target range of 3.0-5.0%, Bangko Sentral ng Pilipinas should remain comfortable with its monetary policy settings over the near term, likely allowing for its benchmark interest rate to stay pegged at its all-time low of 3.50% through the end of 2013. While we have downgraded our end 2013 headline inflation forecast to 3.4% from 4.0% previously, we note that inflationary pressures should begin to creep up over the medium term in line with rising money supply growth, and we continue to expect some form of tightening in 2014.
Source: BMI, BSP
Additionally, prudent monetary policy has allowed the Philippines to reap the benefits of record-low lending rates. In combination with the expected take-off of the highly anticipated Private-Public Partnership (PPP) programme (under which our infrastructure team expects as many as eight projects to be awarded by the end of 2013), as well as a major boost to government infrastructure spending (US$10.0bn slated for 2013, a 19.3% increase from 2012), this suggests that the country's investment boom has plenty of room to run. As a result of these factors, we not only see upside potential to our 2013 real GDP forecast of 5.9%, but have also upgraded our 2014 and 2015 forecasts to 5.5% and 5.4%, respectively, from 4.5% and 4.6% previously.
Expenditure Breakdown
Private Consumption Outlook: Strong private consumption growth continues to be a key pillar of the Philippine growth story, and we expect the category to notch a 5.5% real expansion in 2013 ahead of a 5.3% performance in 2014 (upgraded from 4.5% previously).
Bangko Sentral ng Pilipinas (BSP) continues to find itself in somewhat of a sweet spot regarding its monetary policy stance and inflationary forces. Indeed, headline inflation remained flat in May at just 2.6% y-o-y, posting below the central bank's target range of 3.0-5.0% for the second straight month. Meanwhile, fundamentals remain benign, with credit growth printing at a mild 13.1% y-o-y in May and core inflation coming in at just 3.0%.
BSP Comfortable Despite Money Supply Uptick

As such, we continue to see little reason for the BSP to abandon its easy monetary policy stance in the near future, and expect the central bank to retain its record low benchmark interest
17
PHILIPPINES Q3 2013
rate of 3.50% through at least the end of 2013. That being said, there are some indications that inflation has likely bottomed, with incipient signs indicating a pick-up in price growth is ahead. Notably, broad money supply (M3) growth accelerated somewhat dramatically in May, increasing to 16.3% y-o-y from 13.3% previously and notching its highest rate of expansion since July 2007. In Comfortable Territory
on the back of the strong capital inflows that the Philippines witnessed through the first five months of 2013 (which imply that the central bank was selling local currency, thereby pumping up the money supply). However, following the sell-off in Philippine (and, indeed, regional) assets that occurred beginning in late May (culminating in a peak-to-trough decline of 23.1% in the benchmark PCOMP bourse), we believe that net pressures on M3 growth, at least in the near-term, will be to the downside.
Headline & Core Inflation, % chg y-o-y

5.5 5.0 4.5 4.0 3.5 3.0 Core Headline 2.5 2.0
M3 & Total Outstanding Commercial Bank Loans, % chg y-o-y

30 25 20 15 10 5 0 -5
A Non-Traditional Relationship
Nov-10
Nov-11
Nov-12
Sep-10
Sep-11
Sep-12
Jan-10
Jan-11
Jan-12
May-10
May-11
May-12
Jan-13
Jul-10
Jul-11
Jul-12
May-13
Mar-10
Mar-11
Mar-12
Mar-13
Credit M3
-10
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
May-07
May-08
May-09
May-10
May-11
May-12
Jan-13
Source: BMI, NSO
Source: BMI, BSP
In fact, the robust increase in money supply at a time when credit growth is declining presents somewhat of a unique case, but is likely attributable to the BSP's accumulation of foreign reserves
TABLE: MONETARY POLICY
2009
Consumer price index, % y-o-y, eop [3] Consumer price index, % y-o-y, ave [3] Producer prices, % y-o-y, eop [3] Producer prices, % y-o-y, ave [3] Wholesale price index, % y-o-y, ave [3] Wholesale price index, % change y-o-y, eop [3] M1, PHPbn [3] M1, % change y-o-y [3] M2, PHPbn [3] M2, % change y-o-y [3] Central Bank policy rate, % eop [1,3] Lending rate, %, ave [4] Real lending rate, %, ave [2,4] 3-month money market rate, % eop [5] Real 3-month money market rate, %, eop [2,5] 3-month money market rate, %, ave [5] Real 3-month money market rate, %, ave [2,5] 4.4 3.2 -4.9 -1.4 -4.2 5.7 1,221.9 14.1 3,887.1 7.6 4.00 8.5 5.3 5.0 0.6 4.5 1.3
As such, major monetary policy adjustments are unlikely to
2010
3.6 3.8 -6.2 -5.0 5.9 5.1 1,345.9 10.2 4,306.2 10.8 4.00 7.7 3.9 1.1 -2.5 3.8 -0.0
2011
4.1 4.4 4.2 3.0 7.2 6.1 1,413.2 5.0 4,581.8 6.4 4.50 8.2 3.8 2.2 -1.9 2.5 -1.9
2012e
2.9 3.1 4.2 4.2 5.6 5.1 1,500.9 6.2 4,911.7 7.2 3.50 7.2 4.1 -
2013f
3.5 3.2 4.2 4.2 5.1 5.1 1,598.4 6.5 5,304.7 8.0 3.50 7.2 4.0 -
2014f
4.0 3.8 4.2 4.2 5.1 5.1 1,718.3 7.5 5,718.4 7.8 4.00 7.7 3.9 -
2015f
4.0 4.0 4.2 4.2 5.1 5.1 1,855.8 8.0 6,204.5 8.5 4.00 7.7 3.7 -
2016f
4.0 4.0 4.2 4.2 5.1 5.1 2,022.8 9.0 6,750.5 8.8 4.00 7.7 3.7 -
2017f
4.0 4.0 4.2 4.2 5.1 5.1 2,225.0 10.0 7,344.5 8.8 4.00 7.7 3.7 -
Notes: e BMI estimates. f BMI forecasts. 1 Repurchase Rate; 2 Real rate strips out the effects of inflation. Sources: 3 Bangko Sentral ng Pilipinas, BMI; 4 IMF, BMI; 5 BMI.
18
May-13
-15
ECONOMIC OUTLOOK
be necessary over the next two quarters. While we continue to believe that over the medium term, inflationary pressures are likely to begin showing through, we have downgraded our 2013 end of period headline inflation forecast to 3.5% from 4.0% previously, implying a full-year average of 3.2% (against our previous average forecast of 3.7%). This forecast keeps inflation well within the BSP's target range, and, indeed, we expect the central bank to retain its benchmark interest rate at a record low of 3.50% in result.
Real Estate Appreciation A Growing Concern?

One area over which the BSP has shown concern is the Philippine real estate market, which has exhibited some signs of overheating as price levels continue to rise. As we have written before, the BSP maintains a 20% target cap for banks' total lending exposure to real estate, and following a revised set of guidelines on the definition of such loans, it found that total exposure in the banking sector had breached this level by late 2012 (coming in at approximately 20.9%). However, in order to dispel fears that the central bank would act on this data by implementing curbs on real estate lending, BSP governor Amando M. Tetangco, Jr. on July 2 announced that he did not believe that the sector is nearing bubble territory, and that no such cooling measures are in the works. Indeed, according to data from Colliers International, a real estate consultancy, vacancy rates in the prime Makati CBD district of Manila continue to fall despite a rise in both the supply of new units and psf prices, which rose by a healthy 2.3% quarter-on-quarter (q-o-q) in Q113. Furthermore, while the total expected supply of new residential units across the five main regions within Manila that Colliers tracks will reach 7,181 in 2013, we believe that the market should continue to benefit over the medium term from pent-up demand owing to below trend supply growth dating back to the Asian Financial Crisis in the late 1990s, as well as record low interest rates and robust real economic growth.
19
Chapter 3:
10-Year Forecast
The Philippine Economy To 2022

Uncovering A Forgotten Gem?
BMI VIEW
The Philippines holds significant economic growth potential and has begun to come into the investment spotlight as a result. Although the country has in the past been hampered by political instability and poor investor perception, we believe President Benigno Aquino III has been 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.
may be nearer 7.0%) over the coming decade. This belowpotential growth projection underpins our concerns about the country's ability and willingness to enact reforms, longer-term political stability, and investor perception. While President Aquino's administration has done well to unlock the country's near-term growth potential thus far, we believe that he has not yet tackled the structural reforms necessary to maintain such growth over the long-term.
Total Active Population, 000 (LHS) & % of Total Population
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 61.5 61.0 63.5 63.0 62.5 62.0 Total Active Population '000 LHS Total Active Population, % RHS 64.0 64.5
More Working, More Saving
We believe the Philippines is a forgotten gem of South East Asia which, as a result, has begun to come into the investment spotlight. The former US colony was the most developed nation in the region just after World War II, but mismanagement over the last few decades has caused the Philippines to languish as one of the poorest economies. However, we note that the country has vast economic potential which has yet to be tapped. Unfortunately, owing to the inordinate amount of attention that Indonesia (the current investment destination darling of the region) is getting from foreign investors, we believe that the Philippines has often been overlooked. With ongoing reforms and increasing investor awareness, the Philippines is arguably just beginning to fulfil its potential to be the 'next big thing' in South East Asia. At this point, however, we are only projecting real GDP growth to average a conservative 4.9% (we believe that potential growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
2015f
Nominal GDP, US$bn [1] Real GDP growth, % change y-o-y [1] Population, mn [2] GDP per capita, US$ [1] Consumer price index, % y-o-y, ave [3] Current account balance, % of GDP [3] Exchange rate PHP/US$, ave [4] 335.4 5.4 101.4 3,307 4.0 1.7 41.30
2010f
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
2020f
2021f
2022f
2023f
2024f
Source: World Bank
Investment-Led Growth To Take Place First

Conditions for an investment-led boom are becoming more favourable. The Philippines has enjoyed relative monetary stability over the past five years (barring the sharp run-up in food prices in 2008) and this is likely to translate into a greater
2016f
374.3 4.6 103.1 3,631 4.0 1.6 40.25
2017f
411.8 4.5 104.7 3,932 4.0 1.6 39.74
2018f
451.2 4.6 106.4 4,240 4.0 1.6 39.45
2019f
493.1 4.6 108.1 4,563 4.0 1.5 39.25
2020f
538.9 4.6 109.7 4,911 4.0 1.9 39.05
2021f
588.9 4.6 111.4 5,286 4.0 2.2 38.86
2025f
2022f
643.6 4.6 113.1 5,691 4.0 2.4 38.66
Notes: f BMI forecasts. Sources: 1 National Statistical Coordination Board/BMI; 2 World Bank/UN/BMI; 3 Bangko Sentral ng Pilipinas, BMI; 4 BMI.
21
PHILIPPINES Q3 2013
savings rate. Moreover, the country is unlikely to face inflation concerns in 2013, underscoring the central bank's credentials. We expect monetary stability to be maintained, translating into a higher savings rate over the longer term. About Average In The Region
Infrastructure 100 80 60 40 20 0
better served as per capita GDP more than doubles from the estimated US$2,490 in 2012 to US$5,630 in 2022. This will be facilitated by the fact that the banking sector remains decidedly underleveraged, implying ample room for credit expansion over the longer term.
BMI Business Environment Ratings, out of 100
Catalysts: Reforms And Political Stability

In order to reach a higher growth plane, we need to see more reforms and a period of political stability in order to bring about a shift in investor perception in the Philippines. Political stability is a big impediment to investment-led growth in the Philippines. Indeed, this component of our long-term political risk ratings scores an uninspiring 62.8 (out of 100), held down by high levels of poverty and income inequality. These points have manifested in the form of conflict between the government and Muslim and communist rebels, who have regularly launched attacks within the country. Moreover, the country also has a high propensity for unrest, with rumours of military coup and popular uprising all occurring fairly frequently over the past three decades. Heavy Bottom To Support Consumption
Population By Age Group
75+ 70-75 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 2030f 2010e
Market Orientation
Institutions
Philippines
Scores out of 100. Source: BMI
Region
Demographics are also favourable for an increase in the savings rate in the Philippines. Much of the 95mn-strong population is youthful (implying a greater level of savings compared with an ageing population) and we expect the proportion of active population to increase from around 62.0% in 2010 to around 64.0% in 2025. In absolute terms, the labour force is expected to increase by around 18.3mn to 2025. With these dynamics in mind, the accumulation of aggregate savings over time is likely to translate into a channelling of funds into investment, improving productivity over the longer term. Gross fixed capital formation (GFCF) makes up 19.3% of GDP, down from a peak of 26.0% in 1997 (GFCF growth averaged just4.6% annually from 2000-2010) and quite low relative to the country's level of development. We expect GFCF to continue to grow as a percentage of GDP, projecting average GFCF growth of 6.7% through to 2022. The increase in the savings rate has also manifested in the country's external balances; the current account balance increased from 0.4% of GDP in 2003 to an estimated 3.2% of GDP in 2012.
Source: World Bank
Consumption Growth To Take Off Later

Essentially, an investment-led boom would pave the way for a rise in consumption as a share of GDP towards the later years of this decade. Currently, consumption loans make up less than 10.0% of total loans, and we expect this segment to be
Regarding the fight against corruption, President Benigno Aquino III has taken some encouraging steps by trying to investigate alleged graft by former president Gloria Macapagal Arroyo. However, these efforts appear to be largely thwarted (see 'Another Setback In Fight Against Corruption', December 8 2010) and we believe that progress will continue to be slow. Given these issues, it is unsurprising that investors do not view Philippines as a prime destination in South East Asia. However, investor perception may change in the coming three or four years
22
10-YEAR FORECAST
if political stability continues through Aquino's term, possibly culminating in a peace treaty with rebel groups, and steady progress is made in combating graft.
country's largest financial institutions and stating that it will establish several regulatory changes and financial incentives to attract investors to these PPPs.
Favourite Picks: BPO, Consumer Plays

The business process outsourcing (BPO) industry in the Philippines has the potential to grow exponentially over the coming decade. Indeed, the country has a very high literacy rate of more than 90% and a population that speaks English with a neutral accent. The government has also leveraged on this competitive edge by deregulating the telecoms industry and introducing tax breaks, leading to a rapid expansion of this sector. In 2012, BPO revenues in the Philippines are estimated to have reached US$13bn, easily surpassing India. Encouragingly, Tata Consultancy Services (a leader in the industry) announced in December 2010 that it will set up a BPO centre in Manila, its first in South East Asia. Industries that cater to consumer demand are also attractive for the longer term. This is starting to play out, with a trend of foreign companies indicating their willingness to invest in the country. Notably, US soft drinks giant The Coca-Cola Company has announced plans to invest another US$1bn into the country in the next five years. Meanwhile, the autos industry also holds significant promise. In 2010, vehicle sales surged to a record 168,490 units, surpassing the previous peak set in 1996. Should the Motor Vehicle Development Programme, which has been a source of uncertainty for automakers, be approved after missing its deadline in December 2010, we would expect investment in this segment to increase significantly. Infrastructure: Will PPP Work? The public-private partnership (PPP) programme continues to disappoint, failing to launch approximately half of the projects slated to begin in 2012. Once again, however, the government has pledged to speed up progress on PPP bidding and awarding procedures, and the PPP centre claims that 2013 will be a watershed year. We are encouraged that the government has taken initiatives such as involving the
Mining Potential Undermined

The Philippines is well endowed in terms of mineral resources (mineral deposits total around US$1trn), but growth in the sector has consistently underperformed. As a measure of its resource wealth, the Philippines has the world's second largest gold deposit and one of the world's largest copper deposits. In addition, it is also rich in nickel and zinc. However, government efforts to attract foreign investment in the sector have been hampered by staunch opposition from several groups; in particular, Maoist rebels from the longstanding Communist Party of the Philippines (CPP), which accuses large, foreign mining companies of destroying the environment and exploiting local communities. In recent years, the New People's Army, the armed wing of the CPP, has raided and damaged equipment at mines throughout the country. At this point, we are by no means optimistic about the mining sector, but this view can change quickly if Aquino manages to secure stability in the coming years.
BMIs long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment, demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants, our forecasts also reflect analysts in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption, fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates, external account balances and interest rates.
23
Chapter 4:
Business Environment
SWOT Analysis
Strengths
A low-cost but educated, English-speaking workforce is the Philippines greatest business strength. A number of Western firms have shifted their operations, particularly call centres, to the Philippines. The Philippines is a member of the Association of South East Asian Nations Free Trade Area, under which the associations 10 member states are committed to reducing tariff and non-tariff trade barriers.
BMI Business Environment Risk Ratings

The Philippines fares rather poorly in our business environment ratings, scoring only 48.5, as it is dragged down by the countrys score of only 36.8 on the institutions component. Indeed, corruption and red tape have been perennial challenges to companies wishing to do business in the Philippines. Even with recent initiatives introduced to clamp down on graft, we do not expect the countrys business environment to improve overnight. That said, the country scores reasonably well in the market orientation component, with 60.1, indicating a conducive environment for investment and trade flows. Business Environment Rank Trend
= = = = = = = = = = = = = = = = = = = = = Singapore 80.0 1 Hong Kong 78.7 2 South Korea 71.1 3 Malaysia 68.6 4 Taiwan 61.9 5 Thailand 61.7 6 China 59.4 7 Brunei Darussalam 57.8 8 Vietnam 53.1 9 Sri Lanka 51.3 10 Philippines 48.5 11 Mongolia 47.9 12 India 46.0 13 Cambodia 40.4 14 Indonesia 40.2 15 Papua New Guinea 40.0 16 Bangladesh 38.3 17 Pakistan 37.2 18 Laos 34.4 19 Bhutan 33.7 20 North Korea 18.7 21 Myanmar 22 Regional ave 49.4/Global ave 48.5/Emerging markets ave 45.1
Weaknesses
Political and security concerns are often cited as reasons not to do business in the Philippines. Much-needed economic reforms remain stalled, while rebel insurgencies continue in many parts of the country. Ageing infrastructure, particularly in the power sector, is a key concern for would-be foreign investors. Efforts to attract greater private funding through build-operate-transfer schemes have met with only limited success.
Opportunities
The move towards outsourcing by North America and Western Europe provides the Philippines with an opportunity to attract greater foreign investment. The government is targeting the mining sector for a major revival. The Philippines has considerable metal and mineral resources, and permits 100% foreign ownership of its mines.
Threats
Chinas rising economic influence presents opportunities to Philippine firms but also threatens to starve the country of much-needed foreign investment. Corruption remains a problem. Transparency International ranked the Philippines 105th out of 178 countries in its 2010 Corruption Perceptions Index.
25
PHILIPPINES Q3 2013
Business Environment Outlook

Introduction
Despite substantial improvements in its investment climate in recent years, there is still substantial work to be done if the Philippines is to continue attracting foreign direct investment (FDI). Regulatory inconsistency and lack of transparency persist in many sectors, and regulatory authority remains weak or ambiguous. Foreign businesses often cite corruption as a serious impediment to investment, and commercial disputes are often difficult to resolve quickly or satisfactorily in the understaffed and complex judicial system. In addition, the Philippines has not sufficiently addressed other key issues such as inadequate public infrastructure. However, the government acknowledges the importance of foreign investment to economic development and, despite the numerous obstacles, many foreign investors maintain long-term commitments to the Philippines and have prospered there.
Institutions
Legal Framework
The legal system is a blend of Roman civil law, US common law, Islamic law and indigenous law. The supreme court is the highest judicial court and the court of last resort. Below this are courts of appeal, regional trial courts at municipal and metropolitan levels, district and circuit courts, and shari'a courts. Islamic law is highly influential in parts of the country, notably the south. A Code of Muslim Personal Laws has been developed and special shari'a courts created. The legal system is often characterised as being weak and inefficient, creating logjams in processing cases and producing inconsistent decisions. It is now in the process of being reformed, though much work remains to be done. The constitution guarantees an independent judiciary. However, the system has been plagued by concerns over the courts' tendency to go beyond legal interpretation into areas of policymaking. Allegations of bribery are also rife.
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS

Infrastructure Rating
Afghanistan Australia Bangladesh Bhutan Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Maldives Nepal New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam 21.8 80.3 40.5 28.8 37.4 66.0 71.1 47.4 37.1 76.4 39.2 60.1 42.7 29.4 69.3 33.4 48.6 71.1 63.0 54.3 56.1 61.0 58.2
Institutions Rating
20.1 85.8 35.2 43.3 31.8 56.6 84.2 41.8 31.2 77.1 28.7 74.9 43.7 29.9 92.7 37.0 36.8 84.2 79.1 51.8 68.2 56.8 39.0
Market Orientation Rating

17.9 68.1 39.1 29.0 52.0 55.7 80.7 48.8 52.3 49.8 35.3 70.9 41.3 30.8 65.3 41.1 60.1 80.7 71.3 47.9 61.4 67.2 62.2
Business Environment
19.9 78.0 38.3 33.7 40.4 59.4 78.7 46.0 40.2 67.8 34.4 68.6 42.6 30.0 75.7 37.2 48.5 80.0 71.1 51.3 61.9 61.7 53.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
26
BUSINESS ENVIRONMENT
Byzantine court rules allowing much room for delays and appeals, together with the tendency of the supreme court to take on more cases than it is equipped to deal with, mean the legal system can work very slowly. Businesses have complained that the courts have issued temporary restraining orders too freely in some cases. Furthermore, those involved in commercial disputes say judges are often inadequately trained to deal with business-related cases. Investment disputes can take years to settle. Competition law is sketchy. The government has pledged to reform the bankruptcy law, but concrete results have yet to emerge. Reforms currently under way may improve this situation. International organisations have been supporting reform efforts in areas including improving judicial capacity and integrity, legal education, bar reform and anti-corruption measures. Moves such as 2004 legislation clarifying foreign investment legislation for the mining sector are helping to boost confidence in the system, but investor scepticism remains.
Intellectual Property Rights

Protection of intellectual property rights (IPRs) is seen as weak. Counterfeit DVDs, CDs, branded designer clothing, handbags, cigarettes and other goods are widely available. The country is party to the WTO Trade-Related Aspects of Intellectual Property Rights agreement, the Paris Convention for the Protection of Industrial Property and a number of other relevant organisations. The Philippines is also a member of the World Intellectual Property Organization but has yet to fully ratify key elements of the associated treaty. The Optical Media Act regulates the manufacture and trade of optical media. An Optical Media Board was established in 2005. Enforcement has since been stepped up, but prosecutions policy against IPR infringement is still seen as lacking.
Property Rights
The 1987 constitution bars foreigners from owning land in the Philippines. The Investors' Lease Act of 1994 allows foreign companies to lease land for 50 years, renewable once for another 25 years, for a maximum of 75 years. The dual-citizenship holder is entitled to full rights of possession of land and property as a Philippine citizen. Deeds of ownership are difficult to establish and ill-regulated. The legal framework is ambiguous, making the establishment of clear ownership difficult. Property disputes can take a long time to resolve within the court system. Private individuals or firms have the right to buy and sell properties or business interests. Business mergers and acquisitions involving foreign equity must meet foreign nationality cap requirements. Philippine law allows expropriation for public use or in the interest of national welfare or defence. In such cases, the government offers compensation for the affected property. Most expropriation cases involve acquisition for major public sector infrastructure projects. In the event of expropriation, foreign investors have the right under Philippine law to remit sums received as compensation in the currency in which the investment was originally made and at the exchange rate at the time of remittance. However, agreeing on a mutually acceptable price can be a protracted process.
Corruption
Corruption within the government and business community is holding back investment, in spite of efforts to stem the tide. The Philippines stood at a lowly 105th out of 183 countries in Transparency International's 2012 Corruption Perceptions Index, although this represents a marked improvement from 139th place in 2010 and 129 th place in 2011. Measures to combat corruption and other anti-competitive business practices include the Philippine Revised Penal Code, Anti-Graft and Corrupt Practices Act, and Code of Ethical Conduct for Public Officials. A US$330mn telecommunications deal with Chinese firm ZTE , which was meant to create a broadband network to link government agencies, has redirected focus back on corruption in the Philippines. Allegations emerged that the contract signed between the Philippine government and China's second largest telecoms equipment manufacturer was over-priced, and progress on the initiative was halted. The alleged involvement of former president Gloria Macapagal-Arroyo's husband, Michael Arroyo, made the scandal particularly noteworthy. Meanwhile, former president Joseph Estrada was pardoned by Arroyo just six weeks after he was given a life sentence on charges of plunder. State prosecutors who helped convict Estrada have criticised the decision, saying that it 'totally demeans the prosecutor efforts to combat graft and corruption'.
27
PHILIPPINES Q3 2013
Infrastructure
Physical Infrastructure
The Philippines lags behind many of its regional peers with respect to the level of basic infrastructure. In recognition of this, the government has allocated PHP404.6bn to infrastructure projects for 2013. This represents a 19.3% increase over 2012, and the funds will go towards building much-needed highways, railways, ports, airports and other transport facilities that will link strategic areas and business centres crucial to trade and investments. According to latest estimates, the Philippines has a total of 199,950km of highways, but only 39,590km (19.8%) of these are paved. Meanwhile, although rail is a growing means of transport for passengers and cargo, the country's rail network (which stretches approximately 900km) is largely confined to the main island of Luzon. Commuters in the Metro Manila region do, however, benefit from the Manila Light Rail Transit System and the Manila Metro Rail Transit System. Transport, including nautical highways and tourism infrastrucTABLE: BMI LEGAL FRAMEWORK RATING
Investor Protection Score
ture, will be given priority, but the government is also planning to provide for digital infrastructure, with more schools set to be equipped with computers both servers and workstations and receive assistance in reducing connectivity costs. The Philippines also has an estimated 3,219km of navigable waterways, although these are limited to shallow-draft (less than 1.5m) vessels. The main gateway to the Philippines from the sea is through the Manila International Cargo Terminal and the Eva Macapagal Port Terminal, both located in Manila. In addition, the country has 266 airports, although just 76 of these have paved runways and only four are more than 3,047m in length. On the back of the government's increased focus on infrastructure investment, as well as consistent demand for office space from the business process outsourcing industry, the construction industry remains strong. The industry also has the distinct advantage of having competitive price and quality, environment-friendly operations, customer orientation, sales and delivery reliability and post-sales service commitments.
Labour Force
The labour force amounts to around 62.7mn out of a total popu-
Rule Of Law Score

20.1 85.8 35.2 43.3 31.8 56.6 84.2 41.8 38.7 77.1 28.7 74.9 43.7 29.9 92.7 37.0 36.8 87.1 79.1 51.8 68.2 56.8 39.0
Contract Enforceability Score

17.9 68.1 39.1 29.0 52.0 55.7 80.7 48.8 64.7 49.8 35.3 70.9 41.3 30.8 65.3 41.1 60.1 81.2 71.3 47.9 61.4 67.2 62.2
Corruption Score
19.9 78.0 38.3 33.7 40.4 59.4 78.7 46.0 50.8 67.8 34.4 68.6 42.6 30.0 75.7 37.2 48.5 80.0 71.1 51.3 61.9 61.7 53.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
28
lation of some 96.5mn. Around half the workforce is employed in the service sector, just over a third works in agriculture, with the remainder in industry. The official unemployment rate in Q213 came in at 7.5%, with considerable under-employment at 19.2%. This has led to more than 10% of the population to seek jobs overseas, leading to a potentially destabilising 'brain drain'. The shift towards export-oriented manufacturing and processing has boosted the proportion of the workforce working in this area. Labour is in abundant supply and is generally productive, especially within foreign-owned companies. Workers are regarded as highly trainable; many speak good English, and skilled professionals are fairly easy to find. The wage bill is relatively cheap by international standards in both skilled and non-skilled sectors. Labour laws are reasonable and do not generally bring complaints from investors. The Labour Code of the Philippines of 1976 and its subsequent revisions house all labour-related legislation. Grounds for termination of employment include neglect of duties, fraud and installation of labour-saving devices, redundancy or retrenchment to prevent losses or cessation of operations, among others.
TABLE: LABOUR FORCE QUALITY
Literacy Rate,%
Employers must give the Department of Labour and Employment one month's notice of the termination of employee services. All new workers serve probation usually not exceeding six months. Minimum wages are determined regionally by wage and productivity boards. Recently, these boards have adjusted the minimum wage rate around once a year. The minimum wage in Metro Manila is currently PHP426. The country fully participates in International Labour Organization conventions. However, failure to comply with minimum wage regulations is quite common, as is failure to pay social security and other contributions. The constitution gives workers the right to form and join trade unions. Management-labour relations are generally good, including those with all but the most politically motivated trade unions. There are more than 25,000 unions in the Philippines, but they are generally not militant. Plant closures in the past in industries vulnerable to falling trade barriers have made unions more prepared to accept productivity-based job packages. Foreign companies are generally considered to provide the bestpaid jobs with the best conditions, so their employees tend to
Labour Market Rigidity Score

20.0 0.0 28.0 7.0 36.0 31.0 0.0 30.0 40.0 16.0 20.0 10.0 18.0 46.0 7.0 43.0 29.0 0.0 38.0 20.0 46.0 11.0 21.0
Female Labour Participation, %

33.1 58.4 58.7 53.4 73.6 67.4 52.2 32.8 52.0 47.9 77.7 44.4 57.1 63.3 61.8 21.7 49.2 53.7 50.1 34.2 n/a 65.5 68.0
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
29
PHILIPPINES Q3 2013
have good attendance records. The Labour Code recognises a number of unfair practices, such as discrimination against women and bargaining stalemates, as grounds for strikes. Suppression of labour rights is a criminal offence.
restrictions. All investors have to register with the authorities. In the case of corporations or partnerships, the relevant body is the Securities and Exchange Commission. A number of incentives are available in certain sectors. The basis for these is established in the Omnibus Investment Code of 1987. The Board of Investment deals with many of these. In particular, incentives are extensive in the energy sector, where private sector reform plans are extensive. The Electric Power Industry Reform Act of 2001 provides the framework for privatisation of state electricity generation and transmission assets. As the result of a December 2004 supreme court ruling, foreigners are now allowed 100% ownership of companies involved in large-scale exploration, development and utilisation of mineral resources. Approximately US$500mn in investments were registered in 2007, which is about 60% of the capital invested in new mining projects since 2004. However, foreign investment remains partially or entirely restricted in a number of sectors, among which are engineering, medicine, accountancy, environmental planning, small retail trade firms, most of the mass media, small-scale mining, private security, management and use of marine resources. There are generally no restrictions on the full transfer of funds
Market Orientation
Foreign Investment Policy
Attracting investment has been a stated government priority. Significantly, FDI has begun to recover from the effects of the global economic downturn owing to encouraging capital inflows and higher reinvestments. That said, the major obstacle in attracting FDI to the Philippines remains corruption, with businesses complaining that graft remains a serious issue, while legislative reform is needed and IPRs are in urgent need of improved protection. Furthermore, the continued growth of China as a manufacturing centre continues to siphon off investment from other Asian countries, including the Philippines. The Foreign Investment Act of 1991, amended in 1996, sets the framework for foreign investment in the Philippines. This permits full ownership of businesses in sectors not subject to legal
TABLE: ASIA ANNUAL FDI INFLOWS
2009
US$bn Australia Bangladesh Cambodia China Hong Kong India Indonesia Japan Malaysia Mongolia New Zealand Pakistan Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Source: BMI, UNCTAD 26.6 0.7 0.5 95.0 52.4 35.6 4.9 11.9 1.5 0.6 -0.8 2.3 2.0 24.4 7.5 0.4 2.8 4.9 7.6 Per Capita 1212.4 4.8 38.6 71.2 7497.7 29.5 20.5 94.3 52.0 233.4 -176.1 13.7 21.4 4937.2 156.4 19.5 121.3 71.6 87.5
2010
US$bn 35.6 0.9 0.8 114.7 71.1 24.2 13.8 -1.3 9.1 1.7 0.6 2.0 1.3 48.6 8.5 0.5 2.5 9.7 8.0 Per Capita 1596.7 6.1 55.4 85.5 10076.2 19.7 57.4 -9.9 320.5 626.0 145.5 11.6 13.9 9562.1 176.6 22.9 107.6 142.8 91.1
2011
US$bn 41.3 1.1 0.9 124.0 83.2 31.6 18.9 -1.8 12.0 4.7 3.4 1.3 1.3 64.0 4.7 0.3 -2.0 9.6 7.4 Per Capita 1827.7 7.6 62.3 92.0 11675.6 25.4 78.0 -13.9 414.6 1725.2 761.8 7.5 13.3 12336.9 96.3 14.3 -84.5 139.7 83.7
30
linked to foreign investments.
Foreign Trade Regime

The Philippines has been a member of the WTO since its inception in January 1995 and, as a member of Association of South East Asian Nations (ASEAN), the Philippines is on schedule to comply with the trade bloc's harmonised tariff targets. Other members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam. The Philippines is also a member of the Asia Pacific Economic Cooperation organisation, which aims to foster growth in the region. However, the government remains reluctant to open up some sensitive areas of the economy to unfettered foreign competition. Free trade agreements (FTAs) with the US and the EU (via ASEAN) remain under negotiation. The Philippines signed a bilateral FTA with Japan in September 2006.
Operational Risk
Security Risk
As in many major metropolitan areas, crime is a serious issue in Metro Manila. Alongside non-violent crimes such as pickpocketing and fraud, which are common occurrences, there have been several kidnappings and violent assaults including of foreigners in Metro Manila as well as elsewhere in the Philippines. The terrorist threat in the Philippines is significant, with persistent reports of ongoing activities by known separatist groups. Although a ceasefire remains in place with the Moro Islamic Liberation Front (MILF) and peace talks with the government were resumed in August 2009, groups including the Abu Sayyaf Group (ASG) and Jemaah Islamiyah as well as the Communist Party of the Philippines and its New People's Army continue to present a nationwide threat. However, the groups' main presence remains concentrated in the south of the country. In August 2009, the government and the MILF resumed peace talks after a one-year hiatus. To date, the talks have focused on establishing a common ground between the government and the rebel group's wishes to establish a Muslim region across southern Mindanao: the Autonomous Region in Muslim Mindanao. During the 2008 talks, the government confirmed that both parties would draft memoranda of agreement on the issue but a peace agreement was deemed unconstitutional by the Supreme Court in August 2008. With the help of the US, government operations against the ASG have led to a dramatic fall in the group's membership since mid-2005. The army has stated that counter-insurgency campaigns have been largely successful in recent years. However, the ASG has remained active and has conducted several high-profile attacks in 2007. More recently, the group was behind the kidnapping of three Red Cross workers in January 2009. Twenty-three Filipino soldiers and more than 30 rebels were killed when the army attacked an Abu Sayyaf camp on the island of Basilan on August 13 2009. While Abu Sayyaf has suffered several setbacks in recent years including the death of its leader Albader Parad following a military raid in February 2010 it remains a threat to foreigners and Filipinos alike in the southern parts of the Philippines. Moreover, the presence of local warlords outside the control of
Tax Regime
Corporate Tax: Rate is 30%. Resident foreign corporations foreign corporations carrying out trade or business in the Philippines are taxed on net income sourced in the Philippines. A foreign corporation with a branch in the country is taxed as a domestic corporation on taxable income from sources in the Philippines. Individual Tax: Levied progressively from 5-32%. Resident individuals are taxed on global income. Non-residents are taxed on Philippines-sourced income only. Indirect Tax: VAT is chargeable on most transactions at 12%. Registration is obligatory for firms with turnover greater than PHP1.5mn. There are various exemptions. Exports are zerorated, as are services related to processing, manufacturing or repackaging goods for export. Capital Gains: Usually taxed as income. Gains from share deals and gains of individuals from property sales are handled separately. Gains from the sale of property located in the Philippines are liable to a 6% withholding tax. Individuals are exempt on tax on the sale of a main residence, as long as the proceeds are used to buy another main residence. A stock transaction tax of 0.5% is levied on the sale price of shares listed on the Philippine stock exchange. Net gains on the sale of unlisted shares are liable for a 5% withholding tax on the first PHP100,000 and 10% on amounts above that.
31
PHILIPPINES Q3 2013
the central government in the restive south has also added to security concerns within the region. In November 2009, more than 50 people including supporters of Ismail Mangudadatu who won a gubernatorial election in May 2010 and journalists were killed in a politically motivated attack in Maguindanao, south-western Mindanao. The perpetrators were allegedly militiamen affiliated to the rival Ampatuan clan. Andal Ampatuan Jr (former mayor of Datu Unsay, Maguindanao), who was accused of being the mastermind, was arrested soon after the murder took place. The Foreign & Commonwealth Office (FCO) of the UK government advises against all travel to the Mindanao region the country's hub for separatist and terrorist movements because of ongoing terrorist activity. There are frequent terrorist attacks against foreign businesses, particularly foreign mining interests, such as the one that took place on March 7 2008 when the Apex Mines Company site, which is partly owned by Norway-listed Intex Resources, was attacked by around 50 men, who disarmed security guards and set fire to equipment. The FCO also advises against all travel to the Sulu archipelago, also located in the south, where there are ongoing military and police operations against insurgent groups.
TOP EXPORT DESTINATIONS

2002
Exports to US Exports to Japan Exports to Netherlands Exports to Hong Kong Exports to China Total Top 5 % from top 5 trade partners Source: IMF 8,690.77 5,293.29 3,054.91 2,358.53 1,355.83 32,693.25 20,753.33 63.48
2003
7,274.81 5,768.05 2,921.71 3,093.90 2,144.65 33,712.42 21,203.12 62.89
2004
7,208.66 7,983.39 3,582.95 3,145.61 2,653.04 37,423.95 24,573.65 65.66
2005
7,429.25 7,203.24 4,031.80 3,338.85 4,076.68 39,313.30 26,079.82 66.34
2006
8,607.58 7,741.36 4,753.10 3,675.76 4,617.33 44,956.61 29,395.13 65.39
2007
8,601.40 7,304.15 4,149.52 5,803.52 5,749.86 48,448.92 31,608.45 65.24
2008
8,216.44 7,707.06 3,708.37 4,987.49 5,469.19 47,135.36 30,088.55 63.83
2009
6,924.20 6,391.65 3,712.31 3,296.84 2,986.46 37,559.94 23,311.46 62.06
32
Chapter 5:
Key Sectors
Telecommunications
Executive Summary BMI VIEW
The Philippine telecoms market harbours low-term growth opportunities in light of factors such as the high percentage of prepaid subscribers and comparatively low broadband penetration rate. At present, the overall industry has not been negatively impacted by the acquisition of Digital Telecommunications Philippines (Digitel) by the Philippine Long Distance Telephone Company (PLDT) even though several market segments have become a duopoly. Key Data: Although the mobile penetration rate has reached 100%, we believe that there are still relatively strong growth opportunities, particularly higher value services as LTE services are being deployed. The number of fixed-line subscribers could be experiencing a sustained period of contraction due to mobile substitution. We forecast 4.0mn subscribers by end-2017, representing 3.8% penetration rate. Despite the mobile market effectively being a duopoly, mobile ARPUs continue to trend lower. Based on the current market situation, we envisage the average market ARPU (weighted based on market shares of PLDT and Globe Telecom) to fall to PHP126 at end-2017.
coverage expanded to key cities in Metro Manila and major areas outside the metropolis. A new draft of guidelines governing foreign ownership in sectors such as telecoms, real estate and other utilities was released by the Philippines Securities and Exchange Commission. The guidelines, which are based on a ruling passed by the Supreme Court in 2011, were released after a previous draft of such guidelines was criticised. The guidelines are less strict and provide more flexibility in determining foreign ownership compared to the definition mentioned in the Supreme Court ruling, according to Hans Sicat, president of the Philippines Stock Exchange. The Philippines remained in 10th position in BMI's Asia Pacific Telecoms Risk/Reward Ratings with a telecoms rating score of 51.3. The Philippine real GDP growth smashed consensus estimates, coming in at 6.6% in 2012 and marking the country's fastest growth rate since its 2010 post GFC-rebound. We expect the Philippine economy to continue to outperform as a result of a robust investment environment as well as the country's increasingly healthy domestic consumer, and have upgraded our 2013 growth forecast to 5.5% from 5.0% previously.
Industry Forecast
Mobile: The Philippine mobile market experienced a sharp spike in net additions in Q112, outpacing the numbers of subscribers added in Q311 and Q411 combined. The momentum continued in the remainder of 2012, although it was slightly weaker. By end-2012, there were 103.0mn mobile subscribers, which were in line with our estimate of 103.1mn. As we had previously said, we do not expect the recent strong performance to be replicated in the long term given that the Philippine mobile market is approaching saturation. The strong growth in Smart Communications' mobile subscriber base, which is primarily prepaid subscriptions, could be due to promotional efforts, particularly lower tariff rates to Sun Cellular subscribers, in addition to an increasing incident of multi-SIM ownership. Smart Communications gained 5.0mn prepaid subscribers in 2012, which dwarfed Globe Telecom's 2.8mn and Sun Cellular's 791,000.
Key Trends And Developments Latest data from PLDT and Globe Telecom showed the Philippine telecoms market continued on its robust growth trajectory, particularly the mobile and wireless broadband sectors. The industry is moving towards next generation technologies after operators embarked on major network programmes over the past two years.PLDT's two-year network transformation programme cost PHP67bn and delivered improvements such as increasing 3G population coverage to 71% and deploying 1,000 LTE-ready sites. Meanwhile, Globe Telecom has announced that its LTE
33
PHILIPPINES Q3 2013
Given that our previous end-2012 mobile subscriber estimate was spot on, we have retained our forecast scenarios. We envisage 110.2mn mobile subscribers in the Philippines at end-2013, representing a penetration rate of 112.3%. We continue to see prepaid subscriptions forming the main growth driver due to multiple SIM ownership and expansion into untapped rural regions, although some of the momentum would be eroded by operators' efforts to encourage migration to postpaid services. The tapering of the growth momentum through 2017 is also a reflection of market saturation. By end-2017, we envisage 121.1mn mobile subscribers in the country, an equivalent of 115.5% penetration rate. Meanwhile, 3G subscriber data continue to be unavailable from the NTC and mobile operators. The Philippine Long Distance Telephone Company, Globe Telecom and Digital Telecommunications Philippines reported that they had a combined mobile broadband subscriber base of 3.7mn at the end of December 2012, although these figures include fixed-wireless and fully mobile broadband subscribers and therefore are not an exact representation of the 3G market in the Philippines. Nevertheless, it provides a rough insight into the growth momentum, and the impressive annual growth rate (14% as of Q412), as well as strong demand for smartphones, indicates that 3G services are becoming increasingly popular in the Philippines. Operators have recently stepped up efforts to promote smartphones such as Apple's iPhone, BlackBerry devices and Android-based devices, and we believe that these mobile handsets are well received by the Philippine consumers. The launch of low-cost devices will also play a significant role as the majority of the consumers are still price-sensitive. We estimate that there were 9.9mn 3G subscribers in the Philippines at the end of 2012,
and we expect this number to increase to 11.9mn by end-2013, representing 10.8% of the mobile market. By end-2017, we envisage 17.3mn 3G subscribers in the country. ARPU: Both the Philippine Long Distance Telephone Company (PLDT) and Globe Telecom have not provided their recent blended ARPUs, although they have released a breakdown based on subscription type. In the previous quarter's update, we revised our data set for Globe Telecom given that the operator has stopped providing its net ARPUs. Instead, our ARPU forecast for Globe Telecom is based on its gross ARPUs. According to our calculations, PLDT-owned Smart Communications saw its blended ARPU continue trending downwards in 2012. By Q412, we believe that Smart Communications had a blended ARPU of PHP137. Although the operator has a significantly higher postpaid ARPU, its postpaid subscriber base accounts for only 1% of its total. Smart Communications' prepaid ARPUs have been trending downwards due to a variety of factors such as expansion into rural regions and focusing on the lower end of the market. We expect this trend to continue as Smart Communications continues to focus on this market segment. We also do not expect the adoption of mobile data to fully compensate for the decline in voice revenues, as seen in other countries. Likewise, Globe Telecom's prepaid ARPUs have been trending downwards while its postpaid segment has been providing support. While the operator's postpaid subscriber base is gradually increasing, its percentage of the total is still small. Consequently, this means that Globe Telecom's blended ARPU is most likely to be influenced by changes in its prepaid ARPUs. Additionally, although the operator is actively trying to encourage the
TABLE: TELECOMS SECTOR ARPU HISTORICAL DATA AND FORECASTS, (PHP)

2010
Smart Communications Globe Telecom Weighted Average ARPU 171 225 191
2011
153 186 165
2012
137 177 152
2013f
126 172 143
2014f
118 167 136
2015f
115 163 132
2016f
112 159 129
2017f
110 155 126
f = BMI forecast. Source: BMI, operators
TABLE: TELECOMS SECTOR MOBILE HISTORICAL DATA AND FORECASTS

2010
No. of mobile phone subscribers ('000) No. of mobile phone subscribers/100 inhabitants No. of mobile subscribers/100 fixed-line subscribers No. of 3G phone subscribers ('000) 3G market as % of entire mobile market f = BMI forecast. Source: BMI, NTC, operators 86,147 92.4 2,075 6,130 7.1
2011
93,737 98.8 2,245 8,276 8.8
2012
102,985 106.8 2,479 9,931 9.6
2013f
110,194 112.3 2,665 11,917 10.8
2014f
115,704 116.0 2,813 13,704 11.8
2015f
118,018 116.4 2,898 15,075 12.8
2016f
119,789 116.2 2,971 16,281 13.6
2017f
120,986 115.5 3,031 17,257 14.3
34
KEY SECTORS
adoption of mobile data services, it will not completely negate the decline in voice ARPU. Coupled with competition from PLDT, which became stronger after the acquisition of Digital Telecommunications Philippines (Digitel), we envisage Globe Telecom's blended ARPU to trend lower in the future. Globe Telecom reported a blended gross ARPU of PHP177 in Q412, down from PHP186 in Q411. Meanwhile, PLDT has started to provide Digitel's ARPU data, but there are insufficient historical figures to formulate a forecast. We calculate that Digitel had a blended ARPU of PHP92 in Q412, up from PHP82 in Q112. Digitel saw its blended ARPU increase throughout 2012, which could be attributed to its higher proportion of postpaid subscribers and a net loss of 408,000 prepaid subscribers in Q412. BMI estimates the weighted average ARPU (based on market share) of Smart Communications and Globe Telecom to reach PHP152 in Q412. Thereafter, we expect the average to decline to PHP126 in 2017. At present, we have yet to incorporate ARPU data from Digitel due to a lack of historical data. Fixed Line: BMI's forecast for the Philippines' fixed-line sector is based largely on data published by PLDT, Globe Telecom and Digitel. Although the National Telecommunications Commission has provided 2010 and 2011 data, the figures are incomplete as PLDT's data were as of September 2011. Additionally, a number of smaller operators did not submit their 2011 results. We estimate that there were about 4.176mn fixed-line subscribers in the country at the end of 2011, higher than the regulator's estimate of 3.556mn. By end-2012, we estimate there were 4.155mn fixed lines.
In many parts of the world, fixed-line operators are experiencing downward pressure on their customer numbers because of the increasing popularity of affordable, convenient and sophisticated mobile services. However, in the Philippines, operators have been reporting an increase in their fixed-line subscriber bases in the last few years. We attribute the increase to companies' efforts to bundle other telecoms services with the basic fixed-line service, expansion into the country's rural regions and consumer demand for non-fibre-based broadband services. However, the uptrend is unlikely to sustain in the long term. This view has started to play out as PLDT reported declining fixed-line subscribers in 2012 while Digitel's fixed-line subscriber base has been contracting since mid-2011. In future, a number of trends are expected to put further pressure on the traditional fixed-line market. These include the spread of VoIP, which is often provided free, and the rising use of fixed-wireless connections, with mobile operators allowing fixed accesses to their wireless networks. However, we note that some fixed operators are launching their own fixedwireless services and the ongoing expansion into rural parts of the country should continue to provide some growth support in the short-to-medium term. W e have revised down our forecasts due to PLDT's declining fixed-line subscriber base. We forecast that there will be 4.1mn fixed-line subscribers in the Philippines at the end of 2013, representing a penetration rate of 4.2 %. By the end of 2017, we forecast there will be 4.0mn fixed-line subscribers in the country. Broadband: Latest data from the International Telecommunication Union showed that there 27.481mn internet users in the Philippines in 2011, up from 23.276mn in 2010. This was largely in line with our previous estimate of 27.930mn internet users at the end of 2011. By end-2012, we estimate that this
TABLE: TELECOMS SECTOR FIXEDLINE HISTORICAL DATA AND FORECASTS

2010
No. of main telephone lines in service ('000) No. of main telephone lines/100 inhabitants 4,151 4.5
2011
4,176 4.4
2012e
4,155 4.3
2013f
4,134 4.2
2014f
4,114 4.1
2015f
4,073 4.0
2016f
4,032 3.9
2017f
3,991 3.8
e/f = BMI estimate/forecast. Source: BMI, NTC, operators
TABLE: TELECOMS SECTOR BROADBAND HISTORICAL DATA AND FORECASTS, 2010-2017

2010
No. of internet users ('000) No. of internet users/100 inhabitants No. of broadband internet subscribers ('000) No. of broadband internet subscribers/100 inhabitants e/f = BMI estimate/forecast. Source: BMI, ITU, NTC, operators 23,276 25.0 4,543 4.9
2011
27,481 29.0 5,815 6.1
2012e
30,779 31.9 7,094 7.4
2013f
33,241 33.9 8,088 8.2
2014f
35,235 35.3 8,896 8.9
2015f
36,997 36.5 9,608 9.5
2016f
38,847 37.7 10,377 10.1
2017f
40,789 38.9 11,207 10.7
35
PHILIPPINES Q3 2013
number increased to 30.779mn due to the growing adoption of fixed internet services such as broadband as well as mobile solutions such as 3G and WiMAX services. By 2017, we forecast 40.789mn internet users in the Philippines, representing a penetration rate of 38.9%. Meanwhile, we continue to estimate that the Philippines had a little more than 7mn broadband subscribers at the end of 2012. The exact size of the market is difficult to estimate given that many of the providers do not release their subscriber data. However, we believe that PLDT and Globe Telecom are the market leaders with 2.6 mn and 1.7 mn broadband subscribers (fixed and mobile) respectively at the end of December 2012. Meanwhile, Digitel had about 707,000 subscribers. Mobile broadband has been the main driver of subscriber growth for all three companies, and we expect this trend to continue in the long run, especially when the sector is still in its infancy stage and presents substantial growth potential. We hold an optimistic view on the Philippines' broadband industry due to operators' efforts to improve coverage and spur subscriber growth by offering competitively priced services. PLDT and Globe Telecom have clearly stated that mobile broadband services play a vital role in their companies' growth from 2012 onwards and they have committed significant capital expenditure for network expansions and upgrades. Both operators have launched commercial LTE services for smartphones and mobile broadband, and are in the midst of expanding coverage. We expect this to help fuel the overall growth for broadband services in the country. Additionally, the operators have been upgrading their network infrastructure, which should help to cope with the growing demand and ensure that network congestion would be minimised. This should enhance the attractiveness of mobile broadband services. Unlike the increasingly marginalised WiMAX sector, LTE has garnered greater support from telecoms operators and device manufacturers globally, which will ensure that low-cost devices will be available. At the end of 2013, we expect 8.088mn broadband subscribers, representing a penetration rate of 8.2%. By 2017, we forecast the number of fixed and mobile broadband subscribers in the Philippines to increase to 11.207mn, a 10.7% penetration rate.
Pharmaceuticals
Executive SummaryBMI VIEW
Opportunities in the Philippines pharmaceutical and healthcare markets are currently supported by a lack of governance over drug pricing, providing short-term revenue growth opportunities for pharmaceutical firms. Expansion of expenditure is also underpinned by overall economic stability , as well as the eventual implementation of universal healthcare coverage. However, potential threats to political stability may threaten overall growth in the sector in terms of policy continuity. Headline Expenditure Projections Pharmaceuticals: PHP129.78bn (US$3.07bn) in total sales in 2012, rising to PHP133.78bn (US$3.24bn) in 2013; +3.1% in local currency terms and +5.7% in US dollar terms. Healthcare: PHP399.54bn (US$9.45bn) in sales in 2012 rising to PHP440.99bn (US$10.69bn) in 2013; +10.4% in local currency terms and +13.2% in US dollar terms.
Risk/Reward Rating: The Philippines' Pharmaceutical Risk/ Reward Rating (RRR) score for Q213 is unchanged from the previous quarter. This is also the case for all other countries in BMI's proprietary system that ranks pharmaceutical markets according to attractiveness to multinational drugmakers. A minor re-weighting of one of the RRR components is being implemented to improve the tool, and the adjusted scores for all markets will be published in the Q313 updates of the Pharmaceuticals & Healthcare reports. The Philippines has a RRR score of 45.7 out of 100, making it the 14th most attractive pharmaceutical market in Asia Pacific. On the whole, there is evidence that the market is maturing, with some sectors calling for the expansion of the socialised healthcare system to serve the entire nation. It is thought that such changes will boost volume consumption in particular. Key Trends And Developments A 'sin tax bill' has received support from 12 medical associations in the Philippines, as well as by a survey. The survey results, revealed in December 2012, showed that teenage smokers would quit smoking if cigarette prices were increased by PHP10.00 (US$0.24). The medical fraternity described the bill as a 'good compromise'; generating more tax revenues for the Filipino healthcare system and avoiding
36
KEY SECTORS
further deaths from smoking. In January 2013, the Philippine Charity Sweepstakes Office (PCSO) introduced new reforms to accelerate financial transactions and assure faster repayments to drug suppliers. The institution-wide reforms intend to reduce pharmaceutical prices by 20% and decrease repayment time to suppliers from six months to 45 days. The new arrangement also allows medicine suppliers to identify key points near PCSO assistance centres (such as clinics and provincial branches) for easy access to and availability of medical supplies.
January 2013, the generic drug market is now larger than the branded medicines market. However due to their lower price point, BMI estimates that in value terms, generics account for around 20% of the overall drug market. Spending on generic medicines was calculated to have reached PHP23.56bn (US$0.56bn) in 2012, representing a modest but growing 18.2% of the total market's value. While we expect this share to improve further, the price control strategy employed by the authorities lowering the costs of branded drugs has also restricted the supply of inexpensive generic drugs, as those products are now facing competition from lower-priced brand-name drugs, according to Edward Isaac of the Philippine Chamber of the Pharmaceutical Industry. Some drug retailers have put their expansion plans on hold due to a decline in their profits. Additionally, the non-government Centre for Legislative Development (CLD) conducted a study in 2009, which concluded that the enforcement of 50-70% drug price cuts had only benefited the middle class, while the poor failed to benefit from cheap medicine. Nevertheless, by 2022, the generic drug sector is forecast to have a value of PHP68.25bn (US$1.69bn), posting a CAGR of 11.2%, significantly above the growth rate expected for the pharmaceutical market (+4.2%) as a whole. Key drivers of the generic drug sector over the forecast period include the increasing need for low-cost drugs, budgetary increases, new legislation, patent expirations and the push to increase compliance with public sector generic prescribing and substitution. Additionally, Secretary of Health Enrique Ona recommended the compulsory use of generic drugs for users of PhilHealth to help cut the prices of medicines in March 2012. During a hearing of the Quality Affordable Medicine Oversight Committee, Ona stated that the government might not pay PhilHealth if prescribed drugs are not generics. Despite an entrenched preference for branded products, we project demand for generic drugs will outpace patented prod-
BMI Economic View: By nearly all accounts, the Philippine economy experienced a solidly above consensus year in 2012, expanding by at least 6.0% even as the rest of the region slowed. While we expect headline growth to moderate somewhat to 5.0% in 2013, we believe that the economy will continue to be an outperformer in the region on the back of strong investment activity and a resilient consumer. However, we also note that the Philippines will need to more effectively address its structural inefficiencies and barriers to foreign investment in order for the economy to achieve consistently high rates of growth. BMI Political View: In view of China's ongoing ascendancy to the position of Asia's regional hegemon, the Philippines has found a natural partner in Japan as a potential counterbalance in increasingly contentious territorial disputes with the mainland. While we expect Philippine security relations with Japan and the US to continue to strengthen, we note that territorial disputes between China and the Philippines are as of yet unlikely to cause anywhere near the scale of economic damage seen in the Japan-China row, even in the relatively likely event that confrontation re-emerges.
Industry Forecast
Generics: The country's generic drug market has registered significant development in the past years. According to Benjamin Liuson, the Generics Pharmacy's President, speaking in
TABLE: PHILIPPINES GENERICS DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017
2009
Generic drug sales (US$bn) Generic drug sales (US$bn), % chg y-o-y Generic drug sales (PHPbn) Generic drug sales (PHPbn), % chg y-o-y Generic drug sales, % of prescription sales Generic drug sales, % of total sales 0.36 12.0 16.94 19.9 20.14 14.00
2010
0.44 22.7 19.71 16.4 22.99 16.00
2011
0.50 13.7 21.53 9.2 24.51 17.08
2012
0.56 12.1 23.56 9.5 25.94 18.16
2013f
0.63 13.2 26.01 10.4 27.83 19.45
2014f
0.69 9.1 28.73 10.5 29.66 20.75
2015f
0.77 12.1 31.81 10.7 31.61 22.15
2016f
0.87 12.9 35.26 10.9 33.69 23.63
2017f
0.97 11.1 39.18 11.1 35.91 25.22
f = BMI forecast. Source: BMI, Pharmaceutical and Healthcare Association of the Philippines (PHAP), IMS Health Combined Philippines Pharmaceutical Index and Philippine Hospital Audit
37
PHILIPPINES Q3 2013
ucts and OTC medicines as their popularity increases. Doctors' prescriptions are typically written using generic names, although prescribers can also stipulate brands (in parenthesis) below generic names. We therefore believe there are significant opportunities for manufacturers of generic medicines operating in the Philippines. In fact, a 2008 questionnaire found that six out of 10 consumers had purchased low-cost generic medicines. State-employed doctors are required to prescribe by international non-proprietary name. Prices of some common medicinesincluding simvastatin, amoxicillin and paracetamolhave already dropped significantly, with more preparations having fallen under the maximum retail price scheme in H110. A major driver of the generic drug sector has been the Universally Accessible Cheaper and Quality Medicines Act of 2008, which aimed to increase the use of affordable generic medicines while simultaneously reducing reliance on foreign-patented medicines. Specifically, the legislation stipulates that pharmaceutical companies cannot apply for patents based on newly discovered uses of a known drug. Local companies can test, manufacture and register generic versions of patented drugs so they can be sold immediately after expiration of intellectual property protection. It also gives the government powers to put price ceilings on various medicines, as is the case in many emerging markets. According to a government survey, generic drugs can be up to 80% cheaper than the original, patent-protected medicine. Moreover, the Botika ng Bayan (BNB) and Botika ng Barangay (BnB) outlet schemes have also boosted the availability of generic drugs, despite a slow roll-out and unequal distribution. The programme provides medicines at very low prices to people that previously had only minimal access to healthcare. More recently, the government approved legislation for compulsory licensing as well as for Bolar-style legislation, which will allow extra generic medicines to enter the market earlier. A factor limiting growth of the generic drug market is that doctors are often neglectful when it comes to using generic
names in prescriptions, forcing patients to purchase brand-name products. Additionally, pharmacies do not always inform the consumers accurately about the possible choices available. This last obstacle could be overcome if the government offered incentives for generic dispensing. Another problem is that parallel imports are, for the most part, restricted to lower-cost branded drugs and not generic products, although Norvasc (amlodipine) is a notable exception. OTC: OTC drugs account for around 30% of the total market, with the percentage remaining relatively constant over the past decade, but forecast to fall in the medium term, as the authorities strive to make prescription drugs more affordable. OTCs can be sold in non-pharmacy outlets, such as supermarkets and convenience stores, according to the Cheaper Medicines Act, Section 25. Switching of prescription medicines to OTC status is supported by the government, for a variety of reasons, including costs and the fact that there is a trend towards self-medication. In recent years, some of the switches included Roche's obesity drug Xenical (orlistat) and Unilab's antihistamine Allerta (loratadine) and cold treatment Allerin AH (dipehndyramine HCl). Non-prescription medicines can be advertised to the public through all media channels. PHAP members conform to the voluntary code of practice, which was originally created in 1995. New retail establishments are reversing a previous trend that has seen OTCs found behind the counter, through the creation of self-serve areas, which should have a positive impact on OTC market development. However, compulsory licensing, the encouragement of parallel trade and the government programme to boost the use of generic drugs will strive to lower OTC market share in relation to its prescription counterpart. Additionally, the plan to cut drug prices is likely to encourage wider use of prescription pharmaceuticals, although the OTC sector will be encouraged by economic improvements, posting a 2012-2022 CAGR of 3.9% in local currency terms, in comparison to 4.3% for prescription drugs. OTC sales growth will be driven by a combination of direct-
TABLE: PHILIPPINES OVER-THE-COUNTER (OTC) MEDICINE MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017
2009
Over-the-counter (OTC) medicine sales (US$bn) Over-the-counter (OTC) medicine sales (US$bn), % chg y-o-y Over-the-counter (OTC) medicine sales (PHPbn) Over-the-counter (OTC) medicine sales (PHPbn), % chg y-o-y Over-the-counter (OTC) medicine sales, % of total sales f = BMI forecast. Source: BMI, AESGP 0.78 1.5 36.89 8.7 30.49
2010
0.83 7.1 37.46 1.6 30.41
2011
0.88 6.2 38.20 2.0 30.31
2012
0.92 4.3 38.94 1.9 30.01
2013f
0.98 6.1 40.31 3.5 30.13
2014f
1.00 2.0 41.60 3.2 30.04
2015f
1.04 4.7 43.03 3.4 29.95
2016f
1.10 5.5 44.56 3.6 29.86
2017f
1.14 3.8 46.24 3.8 29.77
38
KEY SECTORS
to-consumer (DTC) advertising, the rising importance of selfmedication and the low cost of OTC products, as well as more extensive distribution channels (including the entry of foreign chains and the establishment of mobile pharmacies), which were made possible by the 2000 decree allowing foreign investment in the retail market. Chains such as Watsons have generated supply chain efficiencies, enabling drugs to be sold at lower prices. For example, some stores sell OTCs in smaller pack sizes to reflect low disposable income in the country. Others make it possible for consumers to fill their prescriptions one day at a time. Analgesics are expected to perform well in the OTC market over the next five years, with many multinationals exploring business opportunities in this field and consumers increasingly becoming accustomed to treating pain with consumer health products. The increased prevalence of 'Western' style working habits and subsequent, associated rising levels of stress and related ailments, such as headaches, should see the segment continue to develop. The most popular ingredient is acetaminophen/paracetamol. Marketing and branding remain an important determinant of OTC purchases. Herbal medicines are estimated to be worth around PHP100mn (US$2mn), according to the Department of Trade and Industry. They have posted strong growth in recent years, boosted by cultural factors and the high price of conventional medicines. Recent legislation giving consumers more choice in purchasing OTCs should aid the development of the market. However, negative press from PMA, which has criticised herbal medicines as unscientific, could cause confidence to fall. Herbal producers have responded by pointing out that they perform stringent tests with regard to toxicity. With large sections of the population unable to gain access to healthcare, this sector should remain buoyant. Prescription: Prescription medicines will continue to account for the majority of the market, at over 70% of the total by value. Key drivers of growth will be demographic changes, IP improvements and the government's desire to improve public health. On the other hand, government measuressuch as those
stipulating that certain antibiotics can only be purchased by a government-controlled company will continue to hamper sector development in value terms. An increase in the amount of parallel trade medicines and the introduction of a price ceiling for more products also have the potential to negatively impact prescription values. By 2017, the prescription medicine sector is forecast to be worth PHP109.09bn (US$2.69bn), posting a five-year local currency CAGR of 3.7%. Foreign companies account for the majority of sales in all therapeutic categories, apart from hospital solutions. According to IMS Health data from September 2007, foreign companies supply over 80% of the drugs used in the following therapeutic areas: dermatological, antineoplastic and immunomodulating agents, sensory organ, diagnostic agents and parasitological preparations. Domestic manufacturers have a 40-45% share in the alimentary tract and metabolism, musculoskeletal system and anti-infective categories, which is indicative of the basic nature of local production. The rising number of HIV/AIDS patients recorded in the country has encouraged the use of ARVs, and vice versa. According to Mario Villaverde, an undersecretary to the Department of Health, one of the reasons for the increasing number of cases, which is currently being verified by the Department, could be the free availability of antiretroviral drugs, which are encouraging more people to declare their HIV status. Antiretrovirals have been dispensed free of cost in the Philippines since 2006. With regard to other therapeutic areas, health specialists in the country have warned about the over-prescription of antibiotics, which in other Asian markets has resulted in high levels of resistance. On a more positive note, central nervous system (CNS) drugs and cardiovascular treatments are also beginning to show signs of development, as conditions extensively treated in 'Western' nations such as depression and heart disease are better understood. However, the growth of those segments will be hampered by the low purchasing power of the majority of the population.
TABLE: PHILIPPINES PRESCRIPTION DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 20092017
2009
Prescription drug sales (US$bn) Prescription drug sales (US$bn), % chg y-o-y Prescription drug sales (PHPbn) Prescription drug sales (PHPbn), % chg y-o-y Prescription drug sales, % of total sales 1.77 -6.2 84.11 0.3 69.51
2010
1.90 7.5 85.74 1.9 69.59
2011
2.03 6.7 87.84 2.4 69.69
2012
2.15 5.9 90.84 3.4 69.99
2013f
2.27 5.5 93.47 2.9 69.87
2014f
2.32 2.4 96.87 3.6 69.96
2015f
2.44 5.1 100.63 3.9 70.05
2016f
2.58 5.9 104.66 4.0 70.14
2017f
2.69 4.2 109.09 4.2 70.23
39
PHILIPPINES Q3 2013
Another issue currently discussed in the Philippines with regard to prescription medicines is the fact that many drugs are wasted or not used properly. Esperanza Cabral, former health secretary, said the majority of Filipinos do not complete prescribed courses of medication, despite the availability of cheap generic and branded medicines. She added that people tend to discontinue their medication once they feel well and the symptoms of illness disappear. Cabral also added that this practice might complicate patients' illnesses, leading to more expensive treatment in the longer term. On the other hand, the Philippine government has been pressured to subsidise prescription medicines for the poor after an informal think-tank survey found that only 2.7% of 547 respondents were able to buy the complete amount of required medicine, BusinessWorld Online reported in March 2010. The survey, conducted in six Metro Manila settlements, found that medicines remain expensive despite recent mandated price cuts. Clearly, the balance between the two extremes the inequitable medicines access and the failure to use the drugs correctly will need to be addressed in order to optimise public health and public funds outcomes. Patented Drug Market Forecast Despite the promulgation of the Generic Law in 1998, most drugs available in the Philippines are branded pharmaceuticals that are too expensive for the typical patient. Even though over 90% of medicines listed on the country's formulary are off-patent, 90% of drugs sold through retail channels are branded goods. According to the government, this is because a cartel of multinational drug makers controls the marketing channels. Cheap and high-quality drugs made by local firms exist but they are not promoted effectively, although this is expected to change. Generic drugs represented just 18.2% of the total market by value in 2012, although this figure is expected to have improved to as much as 25.2% in 2017. In contrast, patented drugs represented
51.8% of the market in 2012. By 2022, the patented product sector is forecast to grow to PHP69.84bn (US$1.72bn), posting a low CAGR of 0.4% in local currency terms well below what is expected for the overall pharmaceutical market (+4.2%). By 2022, we expect patented drugs' share of the total market by value to have fallen to 35.8% about level with generic medicines. Over the coming years, the patented market will be negatively affected as the government continues to put pressure on the industry to lower drug prices. The latest policies include expanding the role of PITC as well as amending the patent regime. This includes using international patent expiries to trigger local expirations and implementing a Bolar-style division, which will aid the launch of generic drugs. In many ways, these moves are inevitable and multinational drug makers may decide to voluntarily lower prices themselves, rather than face a further backlash. An additional issue will be that of patent expirations. Multinationals' advantageous position in the branded segment will also be challenged by the government's plans to halve drug prices within the forecast period, through the combination of the increased use of generic drugs and parallel imports, as well as by the legalisation of compulsory licensing and the creation of a maximum drug prices system. While market revenue will certainly be negatively affected by the expected changes, patchy compliance with generic prescribing guidelines will benefit the continued usage of branded products, as will the failure of some retail outlets to adhere to the new price list. Multinational firms have also challenged the parallel import measures, claiming that allowing this trade would make the problem of controlling counterfeit drugs even more difficult.
TABLE: PHILIPPINES PATENTED DRUG MARKET INDICATORS, HISTORICAL DATA & FORECASTS, 2009-2017
2009
Patented drug sales (US$bn) Patented drug sales (US$bn), % chg y-o-y Patented drug sales (PHPbn) Patented drug sales (PHPbn), % chg y-o-y Patented drug sales, % of prescription sales Patented drug sales, % of total sales 1.41 -9.9 67.17 -3.6 79.86 55.51
2010
1.46 3.7 66.03 -1.7 77.01 53.59
2011
1.53 4.6 66.31 0.4 75.49 52.61
2012
1.59 3.8 67.27 1.4 74.06 51.84
2013f
1.64 2.8 67.45 0.3 72.17 50.42
2014f
1.63 -0.2 68.13 1.0 70.34 49.21
2015f
1.67 2.2 68.81 1.0 68.39 47.90
2016f
1.71 2.7 69.40 0.8 66.31 46.51
2017f
1.73 0.7 69.91 0.7 64.09 45.01
40
KEY SECTORS
Other Key Sectors

Latest Forecast Data
Below are the latest forecast tables for our other core key sectors:
TABLE: OIL & GAS SECTOR KEY INDICATORS

2010
Oil Proved Reserves, mn barrels Oil Production, 000b/d Oil Consumption, 000b/d Oil Refinery Capacity, 000b/d Oil Net Exports, 000b/d Oil Price, US$/bbl, OPEC Basket Value of Net Oil Exports, US$bn (BMI base case) Value of Net Hydrocarbons Exports, US$bn (BMI base case) Value of Net Oil Exports at constant US$50/bbl US$bn Value of Net Oil Exports at constant US$100/bbl US$mn Value of Net Hydrocarbons Exports constant US$50/bbl US$mn Value of Net Hydrocarbons Exports constant US$100/bbl US$mn Total Net Hydrocarbons Exports, 000boe/d Gas Proved reserves, tcm Gas Production, bcm Gas Consumption, bcm LNG Price, US$/mn btu Reserves/Production Ratio 139 27 309 273 -282 77 -8 -8 -5 -10 -5 -10 -281 0 3 3 12 14
2011
139 32 316 273 -284 108 -11 -11 -5 -10 -5 -10 -284 0 3 3 16 12
2012e
139 25 302 273 -277 110 -11 -11 -5 -10 -5 -10 -274 0 4 4 16 15
2013f
139 22 303 290 -281 103 -11 -11 -5 -10 -5 -10 -280 0 4 4 15 17
2014f
143 32 304 290 -272 101 -10 -10 -5 -10 -5 -10 -273 0 4 4 15 12
2015f
144 37 307 290 -270 100 -10 -10 -5 -10 -5 -10 -272 0 4 4 15 11
2016f
146 37 310 290 -273 99 -10 -10 -5 -10 -5 -10 -275 0 4 4 15 11
2017f
144 38 313 290 -275 97 -10 -10 -5 -10 -5 -11 -292 0 4 5 14 11
e/f = BMI estimate/forecast. Source: BMI, National statistics, Industry sources
TABLE: DEFENCE & SECURITY SECTOR KEY INDICATORS

2011
Defence expenditure, PHPmn Defence expenditure, PHPmn % change y-o-y Defence expenditure, % of GDP Defence expenditure, PHP per capita of population Defence expenditure, US$mn, constant prices Defence expenditure, US$mn, constant prices % change y-o-y Defence expenditure, constant US$ per capita of population 85,101 11.4 1 897 1,918 11.9 20
2012e
95,701 12.5 1 992 2,142 11.7 22
2013f
107,344 12.2 1 1,094 2,378 11.0 24
2014f
120,036
2015f
134,332
2016f
150,328
2017f
168,073 11.8 1 1,605 3,281 7.8 31
11.8 1 1,203 2,533 6.5 25
11.9 1 1,324 2,767 9.3 27
11.9 1 1,458 3,044 10.0 30
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS

2010
Construction industry value, PHPbn Construction industry value, US$bn Construction industry, real growth, % y-o-y Construction industry value, % GDP 6 551 12
2011
535 12 1.1 6
2012e
629 14 14.8 6
2013f
703 17 20.0 6
2014f
782 19 10.0 6
2015f
866 21 12.2 6
2016f
960 24 13.6 6
2017f
1,062 27 12.1 7
41
PHILIPPINES Q3 2013
TABLE: FOOD & DRINK SECTOR KEY INDICATORS

2010
Food consumption, US$bn Food consumption PHPbn Food consumption, US$ per capita Confectionery sales, US$mn Confectionery sales, PHPmn Alcoholic drinks sales, US$mn Alcoholic drink sales, PHPmn Soft drinks sales, US$mn Soft drink sales, PHPmn Total mass grocery retail sales, US$bn Total mass grocery retail sales, PHPbn Exports of food and drink, US$mn Imports of food and drink, US$mn Food and drink trade balance US$mn 31 1,418 337 411 18,513 534 24,080 1,116 50,323 11 480 2,793 4,032 -1,239
2011
36 1,551 378 451 19,520 604 26,150 1,286 55,704 12 536 2,915 4,122 -1,207
2012e
39 1,660 407 486 20,549 650 27,502 1,435 60,708 14 579 3,034 4,327 -1,293
2013f
43 1,755 434 523 21,560 714 29,436 1,579 65,145 15 617 3,196 4,678 -1,483
2014f
44 1,855 445 543 22,673 756 31,579 1,681 70,177 16 659 3,413 5,114 -1,701
2015f
48 1,963 469 579 23,895 815 33,620 1,838 75,807 17 704 3,648 5,578 -1,929
2016f
51 2,078 498 623 25,225 884 35,821 2,005 81,213 19 751 3,904 6,084 -2,181
2017f
54 2,202 519 659 26,675 943 38,195 2,170 87,901 20 801 4,174 6,637 -2,463
TABLE: AUTOS SECTOR KEY INDICATORS

2011
Vehicle production, units Passenger car production, units Vehicle sales, units Vehicle sales, units, % chg y-o-y Passenger car sales, units Passenger car sales, units, % chg y-o-y Commercial vehicle sales, units Commercial vehicle sales, units, % chg y-o-y Passenger car density, cars per 1,000 of population 53,921 45,751 141,616 -15.9 44,862 -23.6 96,754 -11.9 8
2012e
55,360 46,390 156,649 10.6 48,328 7.7 108,321 12.0 8
2013f
61,839 52,421 173,864 11.0 53,644 11.0 120,220 11.0 7
2014f
69,837 59,760 187,360 7.8 57,520 7.2 129,840 8.0 7
2015f
79,507 68,724 196,806 5.0 61,706 7.3 135,100 4.1 7
2016f
88,616 76,970 205,687 4.5 66,172 7.2 139,515 3.3 7
2017f
97,245 84,667 216,074 5.1 72,260 9.2 143,815 3.1 6
This report is abstracted from BMIs industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find out about BMIs other 1,113 industry reports, please contact subs@businessmonitor.com
42
Chapter 6:
BMI Global Assumptions
Global Outlook
Growth Has Troughed
Our global real GDP growth estimates for 2013 have been revised down since our last Global Assumptions update, from 2.8% to 2.7%, with our 2014 forecast remaining at 3.3%. Overall, we believe that global growth will improve going into 2014, but we are hardly exuberant over the prospects for the world economy. Trade, production and consumption growth have been relatively flat since the second half of 2012, mainly due to US and eurozone weakness. However, we believe activity overall has troughed and will pick up in H213 and more so as we enter 2014. Meanwhile, inflation will remain well contained, as commodity prices in particular industrial metals and oil appear to have topped out, in line with our long-standing
TABLE: GLOBAL ASSUMPTIONS
2012e
Real GDP Growth (%) US Eurozone Japan China World Consumer Inflation (ave) US Eurozone Japan China World Interest Rates (eop) Fed Funds Rate ECB Refinancing Rate Japan Overnight Call Rate Exchange Rates (ave) US$/EUR JPY/US$ CNY/US$ Oil Prices (ave) OPEC Basket (US$/bbl) Brent Crude (US$/bbl) e/f = estimate/forecast. Source: BMI 109.5 111.7 1.27 79.85 6.31 0.00 0.75 0.10 2.1 2.4 0.0 2.7 3.5 2.2 -0.6 1.9 7.7 2.7
view. Our 2.7% global real GDP growth forecast for 2013 is characteristic of a muddle-through scenario in the eurozone, a slowdown in China and a revival of growth in the US, with a range of economic trajectories among emerging markets. Monetary policy remains loose, but there are increasing signals from the US that the Federal Reserve may pare back its asset purchase programme in late 2013. Fed tightening presents significant risks to the near-term economic outlook, with local debt in emerging markets exhibiting bubble-like characteristics, in our view. Furthermore, bond volatility in Japan suggests that we are correct to be sceptical of the benefits of Abenomics in putting the Japanese economy and government debt load on a more sustainable path. We have adjusted down our forecast for the average US$/EUR exchange rate to US$1.31/EUR for 2013, from US$1.33/EUR
2013f
1.8 -0.5 1.4 7.5 2.7 2.1 1.8 0.0 2.8 3.3 0.00 0.25 0.10 1.31 91.00 6.20 103.0 106.0
2014f
2.7 1.0 1.3 6.7 3.3 2.1 1.8 0.6 2.9 3.1 0.00 0.25 0.10 1.27 94.00 6.28 101.0 103.0
2015f
2.6 1.4 1.0 6.0 3.4 2.1 1.7 1.3 2.8 3.1 0.75 0.75 0.10 1.23 97.00 6.35 100.0 102.0
2016f
2.4 1.5 0.9 5.8 3.4 2.1 1.8 1.8 2.7 3.2 2.00 1.00 0.25 1.20 98.50 6.45 99.0 101.0
2017f
2.4 1.6 1.1 5.8 3.4 2.1 1.8 2.3 2.7 3.1 3.00 1.50 0.50 1.20 100.50 6.55 97.0 99.0
43
PHILIPPINES Q3 2013
previously, predicated upon further US dollar strength in the second half of the year alongside a broadly stable euro. Beyond this year we hold to our view of gradual depreciation. Meanwhile, we have downgraded our 2013 average Brent crude oil forecast to US$106/bbl, from US$110/bbl previously, and we have upgraded our WTI forecast to US$94.5/bbl, from a previous forecast of US$93.5/bbl.
Developed States
Our developed state aggregate growth projection for 2013 has been revised down to 1.1% from 1.2%, while it remains 1.9% for 2014. We have lowered our 2013 real GDP growth forecast for Germany to 0.5%, from 0.8% previously, as first-quarter data show that business confidence was hit harder than expected
by several negative shocks early in the year. In Portugal, we now project growth of -2.6% in 2013 and 0.5% in 2014. Our previous 2013 and 2014 forecasts were for a slightly flatter economic trajectory of -2.4% and 0.3% growth respectively. As a result of these two downgrades, our eurozone growth forecast in 2013 has been revised down to -0.5% from -0.3%, with the 2014 projection remaining 1.0%. For Denmark, we have revised down our forecast for real GDP growth in 2013 from 1.2% to 0.6%, reflecting a worse-than-forecast contraction of economic activity in late 2012.
Emerging Markets
We estimate emerging market (EM) real GDP growth of 4.7% in 2013, representing a slight downgrade from our previous 4.8%
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %

2012e
Developed States Aggregate Growth G7 Eurozone EU-27 Selected Developed States Australia Austria Belgium Canada Denmark Finland France Germany Ireland Italy Japan Netherlands Norway Portugal Spain Sweden Switzerland UK US e/f = estimate/forecast. Source: BMI 3.7 0.8 -0.3 1.8 -0.5 -0.2 0.1 0.7 0.9 -2.4 1.9 -1.1 3.1 -4.7 -1.3 0.8 1.0 0.0 2.2 2.1 0.8 0.1 1.5 0.6 0.1 -0.3 0.5 0.8 -1.3 1.4 -0.6 2.5 -2.6 -1.7 1.0 1.5 1.1 2.1 1.8 1.5 1.6 2.1 1.3 1.6 0.7 1.9 1.8 0.1 1.3 0.9 2.5 0.5 0.2 2.5 1.8 1.4 2.7 2.5 1.9 1.9 2.4 1.6 2.0 1.6 1.6 2.0 0.7 1.0 1.5 2.7 0.9 0.9 3.2 1.7 2.0 2.6 1.2 1.4 -0.6 -0.3
2013f
1.1 1.3 -0.5 -0.1
2014f
1.9 2.0 1.0 1.2
2015f
2.0 2.0 1.4 1.7
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %

US
2013 2014 Bloomberg Consensus BMI Bloomberg Consensus BMI Source: BMI, Bloomberg 1.9 1.8 2.7 2.7
Eurozone
-0.1 -0.5 1.0 1.0
Japan
1.7 1.4 1.5 1.3
Brazil
3.0 3.3 3.5 3.6
China
7.8 7.5 7.8 6.7
Russia
2.8 2.6 3.5 3.9
India
5.1 5.5 6.0 6.0
44
BMI GLOBAL ASSUMPTIONS
projection, with a slight acceleration in growth in 2014 to 5.1%. The most significant change to our EM macro country projections is to Russia. Fiscal and monetary policy has been tighter than we had previously anticipated, prompting a downgrade of our 2013 real GDP growth forecast to 2.6%, from 3.6% previously. We have also pared back our outlook for neighbouring Poland, and now forecast real GDP to grow by just 1.5% in 2013 and 2.7% in 2014, from previous forecasts of 1.9% and 3.0% respectively. All in all, these revisions have pushed our emerging Europe growth forecasts as a whole down to 2.5% in 2013, from 3.0% previously. Meanwhile, in South Africa, in light of recent data and the increasing likelihood of industrial unrest in
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
2012e
Emerging Markets Aggregate Growth Latin America Argentina Brazil Mexico Middle East And North Africa Saudi Arabia UAE Egypt Sub-Saharan Africa South Africa Nigeria Emerging Asia China Hong Kong India* Indonesia Malaysia Singapore South Korea Taiwan Thailand Emerging Europe Russia Turkey Czech Republic Hungary Poland 4.7 2.8 1.9 0.9 3.9 3.4 6.8 4.1 2.2 4.4 2.5 6.6 6.1 7.7 1.4 5.0 6.2 5.6 1.3 2.1 1.3 6.4 2.4 3.4 2.2 -1.3 -1.7 2.0
the mining sector, we have revised downward our forecast for real GDP growth in 2013 to 2.3%, from 2.8% previously. This downgrade has reduced our estimate of Sub-Saharan African growth to 5.5% in 2013, from 5.7% previously. We continue to forecast a 5.7% growth rate in 2014, however. On a regional basis, emerging Asia will remain an economic outperformer, with 6.2% growth in 2013, and this is expected to moderate to 6.0% in 2014 as the Chinese economy cools.
2013f
4.7 3.4 1.8 3.3 3.6 2.9 4.1 3.3 1.9 5.5 2.3 6.7 6.2 7.5 3.3 5.5 6.1 4.6 2.5 2.6 3.0 4.0 2.5 2.6 4.0 1.2 -0.3 1.5
2014f
5.1 3.7 2.9 3.6 3.8 4.9 4.6 3.8 3.7 5.7 3.3 7.2 6.0 6.7 3.6 6.0 6.4 4.4 3.2 4.6 4.0 4.5 3.6 3.9 4.7 2.0 1.1 2.7
2015f
4.9 3.7 3.8 3.5 3.4 4.0 2.3 3.9 5.6 6.1 3.8 7.3 5.6 6.0 3.7 6.2 6.5 4.2 3.2 4.6 4.1 4.4 4.2 4.3 5.2 2.3 1.9 4.1
e/f = estimate/forecast; *Fiscal years ending March 31 (2012 =2011/12). Source: BMI
45
Business Monitor International Limited, 85 Queen Victoria Street, London, EC4V 4AB, UK Tel: +44 (0)20 7248 5162 Fax: +44 (0)20 7248 0467 Email: subs@businessmonitor.com Website: www.businessmonitor.com
2013 Business Monitor International. All rights reserved.
Analyst: Andrew Wood Key Sector Analyst: Jamie Davis, Jianwei She Editor: Stuart Allsopp Sub-Editor: Ahmad Alshidiq Subscriptions Manager: Katie Patton Marketing Manager: Sarah Sutcliffe Production: Neil Murphy, Reema Patel Publishers: Richard Londesborough, Jonathan Feroze
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IMPORTANT NOTICE:

BUSINESS FORECAST REPORT

Growth Boom On Solid Footing

PHILIPPINES MACROECONOMIC INDICATORS

Nominal GDP, US$bn [4]

Nominal GDP, PHPbn [4]

Nominal GDP, EURbn [4]

GDP per capita, US$ [4]

GDP per capita, EUR [4]

Real GDP growth, % change y-o-y [4]

Private final consumption, % of GDP [4]

Private final consumption, real growth % y-o-y [4]

Government final consumption, % Total GDP [4]

Government final consumption, real growth % y-o-y [4]

Fixed capital formation, % of GDP [1,4]

Fixed capital formation, real growth % y-o-y [2,4]

Unemployment, % of labour force, eop [6]

Consumer price index, % y-o-y, ave [7]

Lending rate, %, ave [8]

Central Bank policy rate, % eop [3,7]

Exchange rate PHP/US$, ave [9]

Exchange rate PHP/EUR, ave [9]

Budget balance, US$bn [10]

Budget balance, % of GDP [10]

Goods and services exports, US$bn [7]

Goods and services imports, US$bn [7]

Balance of trade in goods and services, US$bn [7]

Balance of trade in goods and services, % of GDP [7]

Current account balance, US$bn [7]

Current account balance, % of GDP [7]

Foreign reserves ex gold, US$bn [7]

Import cover, months [7]

Business Monitor International Ltd

Chapter 1: Political Outlook..................................................................................................................... 7

Long-Term Political Outlook..................................................................................................................................... 8

Chapter 2: Economic Outlook................................................................................................................ 11

TABLE: MONETARY POLICY................................................................................................................................................................................ 18

Chapter 3: 10-Year Forecast................................................................................................................... 21

Chapter 4: Business Environment......................................................................................................... 25

Chapter 5: Key Sectors........................................................................................................................... 33

Other Key Sectors.................................................................................................................................................... 41

Chapter 6: BMI Global Assumptions..................................................................................................... 43

Business Monitor International Ltd

Key Risks To Outlook

Major Forecast Changes

Business Monitor International Ltd

Brief Methodology Political Outlook

BMI Political Risk Ratings

Business Monitor International Ltd

Long-Term Outlook Far Less Certain

Asia - BMI Long-Term Political Risk Ratings (out of 100)

Long-Term Political Outlook

political scene to remain vulnerable to intermittent instances of turmoil.

Threats And Challenges To Stability

Main Political Parties (number of seats in house of representatives)

Next Election Ongoing Disputes

Business Monitor International Ltd

'Power Centres' Hold Key To Stability

Scenarios For Political Change

Business Monitor International Ltd

BMI Economic Risk Ratings

Business Monitor International Ltd

Total External Debt Stock & Total Government Debt, % GDP

Well Balanced, But Room For Improvement