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Analytics of the Philippine Economy Continuity++ Building & Sustaining Strength

Briefing on the Philippine Economy 9 March 2018 Davao

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Prospects for the Philippine economy remain bright

• PHL economy is expected to sustain growth momentum over the medium term

6.7% 6.9% 7.0 – 8.0% 7.0 – 8.0% 7.0 – 8.0% 2016 2017 2018 2019 2020 6.6%

(IMF)

6.7%

(WB)

6.7%

(ADB)

6.7%

(WB)

6.8%

(ADB)

6.7%

(IMF)

3

PH leads the ASEAN pack

“The Philippines will continue to be the fastest-growing economy in ASEAN, despite some stabilization of investment growth.”

World Bank Global Economic Prospects (Jan 2018)

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Prevailing narrative is favorable

Supportive macroeconomic environment: broad-based growth low inflation comfortable external payments Healthy banking system

Disciplined policy frameworks

Key Indicators 2005 – 2009 2010 – 2015 2016 2017 Strong growth

Real GDP growth (%) 4.4 6.2 6.9 6.7

Low inflation

Headline inflation (%) 5.5 3.4 1.8 3.2

Sustained fiscal discipline

Fiscal balance (% of GDP)

• 1.7
• 1.8
• 2.4
• 2.2

Ample liquidity & credit

Domestic Liquidity (% of GDP) (% y-o-y change) 47.2 15.1 55.6 13.2 65.6 12.8 67.3 11.9 Outstanding loans -U/KBs (% y-o-y change) 8.9 15.7 17.3 19.4

Sound & stable banking system

Non-performing loans (% of total loans) - U/KBs* 5.0 2.2 1.4 1.2 Capital Adequacy Ratio (consolidated basis) - U/KBs** 16.7 17.2 15.1 15.7 (end-Sep)

Robust external payments position

Current Account Balance ($ Bn) (% of GDP) 5.1 3.6 8.2 3.2

• 1.0
• 0.3

0.03 (Jan-Sep) 0.01 (Jan-Sep) Gross International Reserves (months of imports of g/s/inc) 6.4 10.8 8.8 8.3 External debt (% of GDP) 46.1 30.9 24.5 23.4 (end-Sep) External DSR (% of exports of goods, services & income) 12.3 7.9 7.0 6.2 (Jan-Nov)

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PHL economic growth has been sustained…

Real GDP Growth (year-on-year growth, in %)

Average: 5.2% (1999-2017)

Positive economic growth for 76 consecutive quarters

Average: 6.6% (2013-2017)

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…and is robust as well as broad-based

Source: Philippine Statistics Authority (PSA)

Services sector has remained the key driver of growth… …but share of industry (e.g., mfg., construction) has been expanding

GDP breakdown by expenditure (%)

Rising contribution of capital formation

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• Aggressive investment agenda is the springboard to

stronger growth

• !!" !!#$%&'

1.8 1.8 2.0 2.7 2.7 4.1 4.5 5.4 0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0 1,000.0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 2010 2011 2012 2013 2014 2015 2016 2017 Infrastructure budget (PHP bn) % of GDP

*

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Rising investments boost growth & create jobs

() (*' +,*' (' - . / - * 0 - " -#' !1 ! "!!#' , 2 *. ",2*#' ( . $ *. "( $*#' *. 3 * "*3* #' -* 4 $ $ " -*4$$#' !. , 2 *. "!,2*#

Real growth (%)

Growing investment pledges favorable for growth prospects Considerable foreign interest in manufacturing sector Economy increasingly supported by a vibrant manufacturing sector

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Stable inflation supports greater economic activity

Low and stable inflation Well-anchored inflation expectations

Source: PSA Source: BSP Sources: AP Consensus (February 2018), Bloomberg Contributor Forecasts (as of 8 February 2018), Oxford Economics Forecasts as of 8 February 2018

Inflation Forecasts for the Philippines 2018 2019 Bloomberg Consensus Forecasts 3.6 3.4 Oxford Economics 3.6 3.9 Asia Pacific Consensus 3.9 3.6

• !"# !$%&

!

"'!$%&!

(()*

+$%&,)*$-&

2017 BPO revenues based on IBPAP

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/(.0!$%&

11

Current account components (in US$ bn)

Strong imports growth has led to narrowing of current account surplus

• 3
• 2
• 1

1 2 3 4 5

• 30
• 20
• 10

10 20 30 40 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Goods Exports (lhs) Goods Imports (lhs) BPO receipts (lhs) OF remittances (lhs) Travel receipts (lhs) Current Account Balance (rhs)

• 30.0
• 20.0
• 10.0

0.0 10.0 20.0 30.0 40.0

• 20,000

40,000 60,000 80,000 100,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

in percent in million US$

Goods Imports, by major commodity

Capital Goods Mineral Fuels and Lubricant Mat/Acc. for Manufacture of Elec. Eqpt. Other Raw Materials/Intermediate Goods Consumer Goods Other Imports Total Imports Growth (in %, RHS)

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Source: BSP

Peso is flexible and competitive

Philippine Peso (PHP) per USD Rate

01 Jan 2016: 47.06 8 March 2018: 52.03

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end-December 2017: NPL ratio: 1.2 % NPA ratio: 1.3 % Sep 2017: CAR (solo): 15.0 % CAR (consolidated): 15.7 %

Source: BSP

Quality of assets & loan portfolios sustain improvement PHL banks are adequately capitalized, providing buffers to mitigate shocks

Banking system remains sound & stable

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13.8 14.4 15.6 16.5 15.6 14.0 13.4 14.0 14.5 14.9 15.1 15.8 15.2 15.7 17.5 17.0 16.7 16.7 16.5 17.7 16.9 16.0 16.8 16.3 15.7 16.8 17.6 17.9

• 3.7
• 2.6
• 1.0
• 0.2
• 0.9
• 3.7
• 3.5
• 2.0
• 2.3
• 1.4
• 0.6
• 0.9
• 2.4
• 2.2
• 3.0
• 3.0
• 3.0
• 3.0
• 3.0
• 5

5 10 15 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018P 2019P 2020P 2021P 2022P NG Revenues/GDP NG Expenditures/GDP NG Deficit/GDP

Tax reform => headroom for targeted social spending

& infrastructure upgrading

Infrastructure Program, Obligation Basis 2018-2022 Fiscal Expenditure, Revenue and Deficit (% of GDP)

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Source: Latest BSP staff estimates Source: PSA

Employment Share by Class of Workers Employment Share by Educational Attainment

Improved potential capacity helps sustain growth trajectory

Incremental Capital-Output Ratio Total Factor Productivity

9.5 6.4 4.2 3.7 0.0 2.0 4.0 6.0 8.0 10.0 1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2017 0.0 0.5 2.0 2.1 0.0 0.5 1.0 1.5 2.0 2.5 1989 - 1992 1993 - 2001 2002 - 2009 2010 - 2017

33.4 26.6 38.1 41.4 4.7 26.5 25.8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

College Post Secondary High School Elementary (w/ SPED) No Grade Completed

51.1 62.5 12.3 6.0 32.3 27.8 4.4 3.7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Employer in Own Family Self-Employed Unpaid Worker Wage and Salary Workers

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Philippine Credit Rating

BBB+

Affirmed BBB+ rating stable outlook 2 August 2016

BBB

Upgraded rating to BBB stable outlook 10 December 2017

BBB

Re-affirmed BBB rating stable outlook 28 April 2017

Baa2

Re-affirmed Baa2 rating stable outlook 27 June 2017

Credit rating upgrades: show of faith

17 Year Selected Structural & Policy Reforms 1994

Foreign bank entry liberalized

1995

Telecommunications industry liberalized

1997

Water services privatized

1998

Oil industry deregulated; consolidated bank supervision adopted

2000

Philippine E-Commerce Act passed

2002

Inflation targeting framework adopted by BSP

2003

Government Procurement Reform Act passed

2005

Value-added tax (E-VAT) expanded

2006

VAT rate increased

2007

Risk-based bank supervision fully implemented

2009

TransCo and NPC privatized

2013 2016

Excise tax rates on alcohol and tobacco (“sin taxes”) revised Further liberalization of FX regulations

A house built of bricks...purposeful structural reforms

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Dependency ratios: Philippines 2005-2050 (in %)

• 122

2

…and favorable demographic dynamics

*Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, Volume II: Demographic Profiles (ST/ESA/SER.A/380).

Median Age of the Population (2015): 24.1 years old Total dependency ratio to decline from 68.2% in 2005 to 50.8% by 2050

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Looking ahead… confident about prospects for expansion in coming years storyline of robust home demand alongside improving external demand remains intact …but with challenges What are the challenges to the positive narrative? Will growth be crimped by:

External factors? Domestic constraints?

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On external front: some reasons for caution Timing & magnitude of Fed interest rate policy hikes Geopolitical concerns How is BSP preparing for tighter global financial conditions?

Best defense is good offense: disciplined macroeconomic policies & prudent financial sector oversight help keep “house in order” Use full menu of instruments to respond to ebb/flow of capital, including: exchange rate flexibility interest rate action careful/clear communication to manage sentiment

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Overheating Infrastructure gaps Leverage Economic inclusion: Jobs challenge Natural disasters On domestic front: some potential stress points

Speed bumps

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Overheating concerns? Growth momentum accompanied by substantial rise in credit, raising concerns Fundamentally-driven growth: broadening growth drivers, rising incomes, growing middle class, favorable labor market dynamics Efforts underway to address infrastructure gaps and improve business environment

Growth momentum accompanied by a substantial rise in credit, raising concerns

242.2 216.5 186.6 183.2 158.0 154.4 154.3 138.6 123.3 66.2 41.0

HONG KONG CHINA JAPAN SOUTH KOREA SINGAPORE NEW ZEALAND AUSTRALIA MALAYSIA THAILAND PHILIPPINES INDONESIA

Domestic Credit as % of GDP Q4 2017

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Perceived risk of overheating

Solid demand for loans across key economic sectors Supportive liquidity conditions and upbeat bank lending

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Perceived risk of overheating

Current property prices broadly aligned with fundamentals

Source: BSP Source: BSP

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38.7% 36.4%

30.0% 32.0% 34.0% 36.0% 38.0% 40.0% 42.0% 44.0%

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun 2013 2014 2015 2016 2017

Outstanding General Government Debt (as percent of GDP)

National Government less BSF General Government

Source: Department of Finance

Asia: Nonfinancial Corporate Sector Debt (as percent of GDP)

Leverage in a rising interest-rate environment

4% 5% 6% 7% 8% 9% 10%

2011:01Q 2011:02Q 2011:03Q 2011:04Q 2012:01Q 2012:02Q 2012:03Q 2012:04Q 2013:01Q 2013:02Q 2013:03Q 2013:04Q 2014:01Q 2014:02Q 2014:03Q 2014:04Q 2015:01Q 2015:02Q 2015:03Q 2015:04Q 2016:01Q 2016:02Q 2016:03Q 2016:04Q 2017:01Q 2017:02Q 2017:03Q

Consumer Loans (as percent of GDP)

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Structural rather than cyclical story of economic growth Disciplined policies and purposeful structural reforms have yielded dividends. Economy is in position of strength to weather volatilities. What can bring PHL economy to the next level? Continued macroeconomic discipline (the ABC’s: ammunition, buffers, communication) It’s all about the I’s (infrastructure, institutions, inclusiveness) Key Messages

Analytics of the Philippine Economy Continuity++ Building & Sustaining Strength

Briefing on the Philippine Economy 9 March 2018 Davao