The Report: The Philippines 2015

Economy

The Philippines’ emergence as a growth leader has been building gradually since the 1990s, following a long period of low growth and political upheaval. The country’s economy continues to enjoy a period of rapid, broad-based expansion as the business process outsourcing sector and rising remittances from overseas workers drive growth in consumer-oriented industries and construction. Although real growth decelerated in 2014 to 6.1%, it remained higher than South-east Asian peers, and is expected to stay near 6% for the remainder of the decade. The Philippine economy is in a strong position with many factors in its favour, from positive demographics and growing bank penetration to improving revenue collection and public governance. After too long spent as the slowest-growing economy in South-east Asia, the Philippines can finally look forward to catching up.

This chapter contains an interview with Cesar V Purisima, Secretary, Department of Finance; a viewpoint from Ramon R Del Rosario Jr, Chairman, Makati Business Club, and President and CEO, PHINMA; and a dialogue with Doris Magsaysay Ho, President and CEO, A Magsaysay, and Jaime Augusto Zobel de Ayala, Chairman and CEO, Ayala Corporation.

Trade & Investment

Although foreign direct investment (FDI) volumes are smaller than what countries in its peer group attract, the Philippines has been catching up at an impressive pace. FDI rose from $1.1bn in 2010 to $4.9bn in the first nine months of 2014 as economic growth has accelerated and business policies have improved. With seven investment promotion agencies offering a variety of tax exemptions and other benefits, the Philippines provides considerable incentives to attract foreign investment. FDI is likely to continue to grow as low oil prices benefit consumers of the Philippines’ electronics and business process outsourcing services exports. In the long run, the country’s success will depend on whether it tackles the tough issues of institutional reforms and infrastructure investment.

This chapter contains an interview with Alfred M Yao, President, Philippine Chamber of Commerce and Industry; and a roundtable with Arthur P Tugade, President and CEO, Clark Development Corporation; Deogracias G P Custodio, Chairman and Administrator, Freeport Area of Bataan; Lilia B de Lima, Director-General, Philippine Economic Zone Authority; and Roberto Garcia, Chairman and Administrator, Subic Bay Metropolitan Authority.

Banking

A positive feedback loop is at work in which banks are increasingly driving economic growth, supported by inflows of foreign investment and from Filipinos working abroad, while growing trust in the banking system is drawing greater volumes of savings. With real GDP roughly doubling between 1999 and 2014, bank deposits as a share of GDP also rose, from 40% in 1999 to 52% in 2014, while the number of bank deposit accounts per 1000 adults increased from 356 in 2004 to 542 in 2013. The 2014 reform, which is aimed at preparing for ASEAN banking integration, seeks to revive broader foreign investment in the banking sector by easing other obstacles that have put foreign banks at a disadvantage. Given the amount of ground that Philippine banks have covered in such a short period of time, it is inevitable that the pace of their growth will moderate from here. Still, Philippine banks have much going for them: rapid economic development; a young, consumerist demographic, a largely under-banked population; and a government that is boosting infrastructure spending.

This chapter contains interviews with Amando M Tetango Jr, Governor, Bangko Sentral ng Pilipinas; and Hikmet Ersek, President and CEO, Western Union; and a roundtable with Batara Sianturi, CEO, Citibank Philippines; Wick Veloso, CEO, HSBC Philippines; Herminio Famatigan Jr, President and CEO, Maybank Philippines; and Mahendra Gursahani, former CEO, Standard Chartered Bank Philippines.

Capital Markets

Despite having one of the oldest stock exchanges in Asia and a relatively advanced bourse for its level of economic development, the Philippines lags behind the leading South-east Asian exchanges. However, as domestic liquidity surged and foreign investors gradually returned after a general flight from emerging markets in 2013, the country’s capital markets were riding a wave of optimism in 2014 and early 2015. The Philippine market’s strong performance in a weak year for emerging markets bodes well for the capital markets sector and was an important show of confidence by investors in the country’s broader economic prospects. The development of a local corporate bond market is also a promising sign and will reduce the economy’s dependence on banks to finance investment. The expected consolidation of the two major exchanges would be in line with regional and international trends and should make for a stronger and more resilient exchange to compete with regional peers.

This chapter contains interviews with Jose Pardo, Chairman, Philippines Stock Exchange; and Eduardo V Francisco, President, BDO Capital & Investment Corporation, and Co-Chair, Capital Market Development Council.

Insurance

Although the industry remains somewhat crowded and highly competitive, a recent push for consolidation, including ongoing hikes in capital requirements, should keep the sector on a strong upwards trajectory in 2015 and beyond. The industry stayed resilient despite the destruction caused by Typhoon Haiyan in November 2013, with double-digit increases in investments and assets in 2014. While the life segment continues to drive growth, the non-life segment holds considerable potential. Meanwhile the industry remains open to foreign investment, despite a high tax burden and rising capital requirements. Recently enacted legislation, though painful for some smaller players, should improve industry stability and spur consolidation in 2015, keeping the industry on a steady long-term growth path.

This chapter contains an interview with Peter G Coyiuto, President & CEO, First Life Financial Company

Energy

With large, easily accessible oil and gas discoveries long since picked over, a continued decline in petroleum production has encouraged a heavy reliance on foreign imports. While new exploration blocks offered up in 2013 could provide potential for more technically challenging opportunities in the coming years, the majority of the coveted offshore areas remain off-limited due to acrimonious territorial disputes. Exploration in new, primarily frontier areas could mitigate the country’s increasing reliance on foreign energy sources to some degree. As the Philippines, along with the rest of the global energy market as a whole, shifts its energy priorities away from crude oil and towards cleaner, more plentiful natural gas, the Department of Energy has set out a road map to establish a new network of gas pipelines to transport gas around Luzon from 2017 to 2022.

This chapter contains interviews with Edgar O Chua, Country Chairman, Shell Companies in the Philippines; and Francis Giles B Puno, President & COO, First Gen Corporation.

Industry & Retail

The administration of Benigno Aquino III aspires to achieve inclusive, broad-based growth, a goal which necessitates a strong manufacturing base that presents employment prospects for skilled, semi-skilled and low-skilled workers. The country’s demographic dividend, attractive workforce, projected economic growth and the continued improvement of its business environment are combining to generate investor interest. ASEAN integration offers newfound market access to a wide and emerging consumer base, and the Philippines will need to ramp up its manufacturing competitiveness to ensure it becomes a net exporter, rather than a pure importer, of value-added products moving throughout the region.

This chapter contains interviews with Hikosaburo Shibata, President and CEO, Mitsubishi Motors Philippines; and Ben Chan, Chairman and CEO, Suyen Corporation.

Tourism

Under the current government, tourism has been identified as a vehicle to be prioritised for the positive impact it can have on inclusive economic growth, and efforts appear to be bearing fruit. Thanks to an aggressive and highly successful global marketing campaign, brand awareness is on the rise. Momentum looks to continue as 2015 has been designated the “Visit the Philippines Year” and is set to include a slate of events throughout the calendar year that commenced with a visit from Pope Francis in January 2015. With plentiful natural endowments and a cultural propensity for service and hospitality, the Philippines is fortunate to possess assets that serve as demand drivers. A boost to infrastructure could ensure more seamless and efficient movement for visitors throughout the country’s various islands.

This chapter contains an interview with Ramon R Jimenez Jr, Secretary, Department of Tourism; and a dialogue between Cristino L Naguiat Jr, Chairman and CEO, Philippine Amusement & Gaming Corporation, and Stephen Reilly, COO, Resorts World Manila.

Transport & Infrastructure

Transport and infrastructure is a key component of the national economy, which will be better able to achieve its potential through improved linkages between economic centres and cities across the archipelago. With public infrastructure spending rising to 4.1% of GDP in 2015, the need for greater private sector participation is crucial to ensuring efficient and effective delivery of projects. Regulatory uncertainty and convoluted bidding procedures have hindered the progress of public works, and righting these issues would ensure the advantages of private sector interest could be realised. Improvements to road infrastructure, investment in existing port facilities and the construction of new ports will take the sector to the next level.

This chapter contains interviews with Cosette Canilao, Executive Director, PPP Centre of the Philippines; William K Hotchkiss III, Director-General, Civil Aviation Authority; and Ramon S Ang, Vice-Chairman, President and COO, San Miguel Corporation.

Construction & Real Estate

The construction and real estate sectors make up around 20% of the Philippine economy, slightly ahead of manufacturing, and as of the first quarter of 2014 accounted for 7% of national employment. The industries have been thriving in a climate of political stability and upbeat business sentiment, spurred by growth in overseas workers’ remittances, investments into business process outsourcing and government spending on infrastructure. To alleviate the financing burden and free up funds for other priorities, such as reconstruction and subsidised social housing, the government is fostering greater private participation in strategic infrastructure projects. Although growth rates for the sector are unlikely to maintain the exceptional levels of the past 24 months, the long-term prospects remain solid and balanced.

This chapter contains interviews with Manuelo Paolo A Villar, President and CEO, Vista Land; and Jose E B Antonio, Chairman and CEO, Century Properties Group.

BPO

Having grown at a compound annual growth rate of around 10% over the past decade, the BPO sector has become the country’s largest source of private employment and the second-largest contributor of foreign exchange earnings after remittances. By 2020 the global BPO industry is forecast to be worth $250bn and the Philippines is seeking to cement its position as a preferred global service offshoring hub and expand and diversify its share in this lucrative, yet highly competitive field. Ongoing efforts to revamp the education system and better match the industry’s technical requirements should bolster its prospects.

This chapter contains an interview with Maulik Parekh, President & CEO, SPi Global

Telecoms & IT

Just two companies control the fixed-line and mobile telecommunications market; however, competition between these two providers is intense. The mobile network operators are beginning to shift their investment focus to providing more data capacity and related services, preparing networks for the 4G rollout. Despite the two incumbent operators enjoying an entrenched market position that makes them difficult to challenge, the propensity for Filipinos to consume online content and engage in social media presents opportunities for a range of technology firms involved in delivering media content, gaming, e-commerce and digital advertising. If harnessed effectively, the Philippines possesses a number of ingredients that position it to emerge as a globally competitive tech hub. While large corporates and business process outsourcing companies are still the mainstay when it comes to ICT spenders, efforts are under way to integrate and transform government agencies to more effectively deploy IT in delivering public services.

This chapter contains interviews with Mariels Almeda Winhoffer, Vice-President for Global Business Partners Asia-Pacific, IBM; and Maria Rosario Santos-Concio, President and CEO, ABS-CBN Corporation.

Agriculture

Directly employing more than one-quarter of all workers in non-service industries, agriculture provided a livelihood for more than 11m Filipinos in 2013. The sector continues to play a pivotal role in the economy, even as the government looks to develop other industries to lead the way in the future. Recent public and private efforts to boost output and efficiency have led to promising improvements across several segments, including a drive for self-sufficiency in the staple crops of rice and corn and expansion of the sugar industry, while continued investment has produced growth in export-oriented cash crops. Determining the most effective means of countering the effects of inclement and often devastating weather will be a key concern going forward.

This chapter contains interviews with Francis N Pangilinan, Secretary, Office of the Presidential Assistant for Food Security and Agricultural Modernisation; and John P Perrine, Chairman, Unifrutti Group Philippines.

Health

The Philippine experiment of combining public health care spending with private sector delivery continues to evolve. As health care remains central to the public interest, there is a heavy onus on improving access and efficiency in accordance with the goal of providing universal health care coverage for all Filipinos by 2016. The year 2015 is expected to focus on consolidation, as inefficiencies in PhilHealth and shortcomings in the investment environment are addressed with an influx of funding. The battle to improve the quality of care in rural areas remains pressing and efforts to keep qualified health care staff close to home should start having an effect on the sector overall.

This chapter contains an interview with Alexander A Padilla, President and CEO, Philippine Health Insurance Corporation.

Education

As of 2016 the Philippines will extend mandatory basic education to 12 years, up from the 10-year mandate that has been in effect since 1987. The increased role of the private sector in providing educational services is crucial to the realisation of this task, with growing opportunities on the horizon and the authorities taking slow but steady steps to define them. Challenges of access and quality remain, and the government continues to address them through a host of pragmatic initiatives. With the dialogue between the private sector and educational institutions increasing and accompanied by reforms aimed squarely at better preparing students for employment, the sector continues to move in the right direction.

This chapter contains an interview with Armin Luistro, Secretary, Department of Education.

Mining

The Philippines boasts some of the world’s vastest precious metals reserves, valued at around $840bn at 2010 prices. In 2013 the Philippines was tied with Indonesia as the largest nickel producer in the world, producing some 440,000 tonnes each. The country’s vast and largely untapped mining potential will continue to draw strong interest from foreign and domestic actors despite decreasing investment in the short term. Although overall output and revenue are being sustained by existing operations, new investment continues to lag, as mining companies wait out the finalisation of new mining regulations. The question is when the regulatory framework will catch up with demand.

This chapter contains an interview with Geraldo H Brimo, President and CEO, Nickel Asia Corporation.

Legal Framework

This chapter examines important legal and regulatory developments in the Philippines, with particular focus on the liberalised entry of foreign banks, Islamic banking and finance, merger control and data privacy. It also features an interview with Rafael A Morales, Managing Partner, SyCip Salazar, Hernandez & Gatmaitan.

Tax

This chapter examines the key elements of the Philippine tax regime, featuring an interview with Marivic C Espano, Chairperson and CEO, Punonbayan & Araullo.

The Guide

This chapter contains useful information for those considering travel to the Philippines, including hotel listings, phone numbers for government offices, business organisations and other important contacts, as well as tips for etiquette, transport and health. It also contains a features peace examining ecotourism opportunities across the archipelago.

Table Of Contents

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