BMI Philippines Business Forecast Report Q4 2013

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Published by BUSINESS MONITOR INTERNATIONAL LTD

BUSINESS FORECAST REPORT

Q4 2013www.businessmonitor.com

PHILIPPINESINCLUDES 10-YEAR FORECAST TO 2022

Growth Boom On Solid Footing

ISSN 1745-0659Published by Business Monitor International Ltd.

Copy Deadline: 5 July 2013

2 Business Monitor International Ltdwww.businessmonitor.com

PHILIPPINES Q3 2013 P

HIL

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MA

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630

2.4

335.

437

4.3

411.

845

1.2

493.

153

8.9

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.512

,640

.813

,854

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.316

,367

.217

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,353

.421

,044

.822

,884

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Nom

inal

GD

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7.1

210.

223

8.1

272.

731

1.9

343.

237

6.0

410.

944

9.1

490.

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19.4

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20.6

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411

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7.0

6.8

6.5

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6.2

6.1

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77.

77.

77.

77.

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5.9

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7.2

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rent

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61.

61.

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51.

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82.4

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810

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6.9

139.

615

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9.8

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9.5

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9.3

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3Business Monitor International Ltd www.businessmonitor.com

Contents

Executive Summary ................................................................................................................................. 5Core Views ......................................................................................................................................................................................5Major Forecast Changes ................................................................................................................................................................5Key Risks To Outlook ....................................................................................................................................................................5

Chapter 1: Political Outlook .................................................................................................................... 7SWOT Analysis .......................................................................................................................................................... 7BMI Political Risk Ratings ........................................................................................................................................ 7Domestic Politics ...................................................................................................................................................... 8Aquino'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 .................................................................................................................................... 8Prospects 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 ............................................................................................................... 11SWOT Analysis ........................................................................................................................................................ 11BMI Economic Risk Ratings ................................................................................................................................... 11Fiscal Policy ............................................................................................................................................................ 12Upgrades 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 ................................................................................................................................................ 13Exports 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 ................................................................................................................................................... 15Growth 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 ....................................................................................................................................................... 17BSP 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.


PHILIPPINES Q3 2013

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

Chapter 3: 10-Year Forecast .................................................................................................................. 21The Philippine Economy To 2022 .......................................................................................................................... 21Uncovering 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 ........................................................................................................ 25SWOT Analysis ........................................................................................................................................................ 25BMI Business Environment Risk Ratings ............................................................................................................. 25Business Environment Outlook .............................................................................................................................. 26TABLE: BMI BUSINESS AND OPERATION RISK RATINGS .............................................................................................................................. 26

Infrastructure ........................................................................................................................................................... 28TABLE: BMI LEGAL FRAMEWORK RATING ....................................................................................................................................................... 28TABLE: LABOUR FORCE QUALITY ..................................................................................................................................................................... 29

Market Orientation ................................................................................................................................................... 30TABLE: ASIA – ANNUAL FDI INFLOWS .............................................................................................................................................................. 30

Operational Risk ...................................................................................................................................................... 31TABLE: TOP EXPORT DESTINATIONS .............................................................................................................................................................. 32

Chapter 5: Key Sectors .......................................................................................................................... 33Telecommunications ............................................................................................................................................... 33TABLE: TELECOMS SECTOR – ARPU – HISTORICAL DATA AND FORECASTS, (PHP) ............................................................................... 34TABLE: TELECOMS SECTOR – MOBILE – HISTORICAL DATA AND FORECASTS ....................................................................................... 34TABLE: TELECOMS SECTOR – FIXED LINE – HISTORICAL DATA AND FORECASTS .................................................................................. 35TABLE: TELECOMS SECTOR – BROADBAND – HISTORICAL DATA AND FORECASTS, 2010-2017 ........................................................... 35

Pharmaceuticals ...................................................................................................................................................... 36TABLE: PHILIPPINES GENERICS DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017 ............................... 37TABLE: PHILIPPINES OVER-THE-COUNTER (OTC) MEDICINE MARKET INDICATORS ................................................................................ 38TABLE: PHILIPPINES PRESCRIPTION DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017 ...................... 39TABLE: PHILIPPINES PATENTED DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017 .............................. 40

Other Key Sectors ................................................................................................................................................... 41TABLE: OIL AND GAS SECTOR KEY INDICATORS ........................................................................................................................................... 41TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS ..................................................................................................................... 41TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS ................................................................................................................................. 41TABLE: FOOD AND DRINK SECTOR KEY INDICATORS ................................................................................................................................... 42TABLE: AUTOS SECTOR KEY INDICATORS ...................................................................................................................................................... 42

Chapter 6: BMI Global Assumptions .................................................................................................... 43Global Outlook ......................................................................................................................................................... 43Growth Has Troughed ..................................................................................................................................................................43TABLE: GLOBAL ASSUMPTIONS ........................................................................................................................................................................ 43TABLE: DEVELOPED STATES, REAL GDP GROWTH, % .................................................................................................................................. 44TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % .......................................................................... 44TABLE: 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 country’s nascent investment boom to power

forward on the back of strong domestic fundamentals, but note that

external headwinds continue to pose a risk.

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 GDP in 2013. While spending continues to

be limited by administrative difficulties, revenue growth will be sup-

ported by the government’s 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 country’s improved growth outlook and

the government’s increasingly consolidated fiscal position, and we

expect that further upgrades from the remaining agencies are likely

in the cards.

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.

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.

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 Philip-

pines is heavily exposed in both investment and trade terms, could

undermine the country’s strong domestic growth story should they

become more acute than expected.

Brief Methodology

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SWOT Analysis

Strengths The Philippines is one of Asia’s 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.

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 offic-

ers 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.

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 People’s Army, which also poses a threat in the

region, but progress in the talks has been slow.

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.

BMI Political Risk RatingsIn view of the Philippines’ long history of popular unrest as well as instability

due to the presence of the Abu Sayyaf and communist (New People’s

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.

Chapter 1: Political Outlook

S-T Political Rank TrendSingapore 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 TrendSouth 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 VIEWIn line with our expectations, Team PNoy's Senatorial team as well as

allies of President Aquino both scored wid e-scale midterm election vic-

tories. While we note that the victory will bolster Aquino's reform-mind-

ed 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.

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 of-

fice, with Team PNoy's strong results reflective of his broad

popularity amongst the electorate.

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

Long-Term Risks Still PrevalentAsia - BMI Long-Term Political Risk Ratings (out of 100)

40

45

50

55

60

65

70

Mal

aysi

a

Indi

a

Chi

na

Phili

ppin

es

Bang

lade

sh

Thai

land

Sri L

anka

Indo

nesia

Cam

bodi

a

Viet

nam

Laos

Source: BMI

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 CertainHowever, 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.

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. Howev-

er, given low income levels and high levels of inequality, we expect the

political scene to remain vulnerable to intermittent instances of turmoil.

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 ac-

tively seeking to change this perception and had some success

attracting foreign direct investment since he took office in 2010.

Threats And Challenges To StabilityPoverty 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 mo-

bilised for mass protest.

Family Dominated Political System: An oft-repeated criticism

of the Philippine political system is that all levels of government

are pervaded by 'political families' – that is, officials whose parents

or grandparents were former presidents, senators, representa-

tives 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 at-

tempted 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

TABLE: PHILIPPINES POLITICAL OVERVIEW System of Government Presidential republic, universal suffrage: 285-seat house of representatives, 24-seat

senate for the 15th congress. Executive power rests with president.

Head of State President: Benigno Aquino III – one six-year term

Head of Government President: Benigno Aquino III

Last Election Presidential: May 10 2010

Congressional: May 13 2013

Key Figures 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

Main Political Parties (number of seats in house of representatives) 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 Lakas-Kampi-CMD.

Next Election Presidential: May 2016

Congressional: May 2016

Ongoing Disputes 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).

Key Relations/Treaties 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.

BMI Short-Term Political Risk Rating 72.1

BMI Long-Term Political Risk Rating 62.8

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.

'Power Centres' Hold Key To StabilityHow 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 ChangeCharter 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 con-

frontational 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 presi-

dent 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

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 ad-

ministrations 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 Chávez, 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 politi-

cians. Former president Joseph Estrada and the 2004 opposition

presidential candidate, Fernando Poe Jr, were both action film

stars before entering politics.


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 country’s consumption and balance of payments.

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 broad-

ening the tax base and eliminating graft at the Bureau of Internal

Revenue.

Outsourcing could provide the Philippines, given its low-cost English-

speaking 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 invest-

ment.

The export sector is geared towards manufactured products, espe-

cially electronics, which are vulnerable to a weakening of the external

economic environment since late 2008.

BMI Economic Risk RatingsThe 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 country’s long-term economic prospects are still considerably

below its regional peers, with its long-term economic risk rating only 64.0.

President Benigno Aquino III’s administration has sought to address key

structural issues affecting the Philippines’ long-term economic prospects,

such as attracting more foreign direct investment for infrastructure pro-

jects, which may lead to score improvements in the future.

Chapter 2: Economic Outlook

S-T Economy Rank TrendSingapore 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 TrendSouth 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


PHILIPPINES Q3 2013

Fiscal Policy

Upgrades Well Deserved, But Fiscal Progress Becoming More Difficult

BMI VIEWThe Philippines continues to garner substantial sovereign credit rat-

ing 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 re-

forms will be necessary in order to solidify the country's strong fiscal

and economic trajectory.

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

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.

Debt Metrics Looking StrongIn particular, the Philippines has achieved a rapid reduction in

its exposure to external financing, with total external debt drop-

ping 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.

Heading In The Right DirectionTotal External Debt Stock & Total Government Debt, % GDP

0

10

20

30

40

50

60

70

80

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Total GovtExternal

2013-2017 = BMI forecast. Source: BMI, BSP

Well Balanced, But Room For ImprovementTotal Government Revenue & Expenditure, % chg y-o-y & Fiscal Bal-

ance, % GDP

-10

-5

0

5

10

15

20

25

2005

2006

2007

2008

2009

2010

2011

f

2012

f

2013

f

2014

f

2015

f

2016

f

2017

f

Balance

Revenue

Expenditure

Source: BMI, BSP

TABLE: FISCAL POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Fiscal revenue, PHPbn [2] 1,123.2 1,207.9 1,360.1 1,535.6 1,719.9 1,907.3 2,107.6 2,326.8 2,568.8

Revenue, % of GDP [2] 14.0 13.4 14.0 14.5 14.9 15.1 15.2 15.4 15.7

Fiscal expenditure, PHPbn [2] 1,421.7 1,522.4 1,558.9 1,777.2 1,976.2 2,164.0 2,369.5 2,582.8 2,789.4

Expenditure, % of GDP [2] 17.7 16.9 16.1 16.8 17.1 17.1 17.1 17.1 17.0

Budget balance, PHPbn [2] -298.5 -314.5 -198.8 -241.6 -256.4 -256.6 -261.9 -256.0 -220.7

Budget balance, % of GDP [2] -3.7 -3.5 -2.0 -2.3 -2.2 -2.0 -1.9 -1.7 -1.3

Primary balance PHPbn [1,2] -19.7 -20.2 128.6 149.4 158.6 197.8 212.0 234.7 281.4

Primary balance % of GDP [1,2] -0.2 -0.2 1.3 1.4 1.4 1.6 1.5 1.6 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.


ECONOMIC OUTLOOK

But Revenue Collection Still A ConcernHowever, 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 sub-

stantially 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 House In Solid FormThe 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

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 VIEWDespite 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 Phil-

ippine peso despite the country's current account surplus. While we

are retaining our end-year peso target of PHP41.55/US$ for the time-

being, we note that downside risks to this view are mounting.

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 semicon-

Japan A Bright Spot, For Now...Exports To Selected Markets, % chg y-o-y

-100

-50

0

50

100

150

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

JapanChinaUSSingapore

Source: BMI, NSO


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.

Following a surprisingly strong quarter in the world's third largest

economy (and the Philippines' largest export market), exports

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 electron-

ics 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 HeatAlthough 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

Respecting SupportExchange Rate, PHP/US$

38

40

42

44

46

48

50

52

54

Jan-

06

Jun-

06

Nov

-06

Apr-

07

Sep-

07

Feb-

08

Jul-0

8

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug-

10

Jan-

11

Jun-

11

Nov

-11

Apr-

12

Sep-

12

Feb-

13

Jul-1

3

Source: BMI

TABLE: CURRENT ACCOUNT2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Goods imports, US$bn [2] 46.5 61.1 62.7 61.5 65.4 72.2 79.7 87.9 96.8

Goods imports, % of GDP [2] 27.5 30.6 28.0 24.6 23.4 23.9 23.8 23.5 23.5

Goods exports, US$bn [2] 37.6 50.7 47.2 46.3 47.2 51.7 56.6 62.0 67.7

Goods exports, % of GDP [2] 22.3 25.4 21.1 18.5 16.9 17.1 16.9 16.6 16.4

Goods exports, % of imports [2] 81.0 83.0 75.4 75.3 72.2 71.6 71.1 70.6 70.0

Balance of trade in goods, US$bn [2] -8.8 -10.4 -15.4 -15.2 -18.2 -20.5 -23.0 -25.8 -29.0

Balance of trade in goods, % of GDP [2] -5.2 -5.2 -6.9 -6.1 -6.5 -6.8 -6.9 -6.9 -7.0

Services imports, US$bn [2] 8.9 11.3 11.9 14.7 16.7 18.8 21.2 23.9 27.0

Services imports, % of GDP [2] 5.3 5.7 5.3 5.9 6.0 6.2 6.3 6.4 6.6

Services exports, US$bn [2] 11.0 13.2 15.4 18.6 21.4 24.2 27.4 31.2 35.6

Services exports, % of GDP [2] 6.5 6.6 6.9 7.4 7.7 8.0 8.2 8.3 8.6

Goods and services exports, US$bn [2] 48.6 63.9 62.7 64.9 68.6 75.9 84.0 93.3 103.4

Goods and services exports, % of GDP [2] 28.8 32.0 28.0 25.9 24.6 25.1 25.1 24.9 25.1

Balance of trade in goods and services, US$bn [2] -6.7 -8.4 -11.9 -11.3 -13.4 -15.2 -16.8 -18.5 -20.4

Balance of trade in goods and services, % of GDP [2] -4.0 -4.2 -5.3 -4.5 -4.8 -5.0 -5.0 -4.9 -5.0

Income account balance, US$bn [2] -0.2 0.3 1.3 -0.7 -1.0 -1.3 -1.5 -1.7 -1.8

Income account balance, % of GDP [2] -0.1 0.2 0.6 -0.3 -0.3 -0.4 -0.4 -0.5 -0.4

Net transfers, US$bn [2] 16.3 16.6 17.6 19.2 20.5 22.3 24.2 26.3 28.7

Net transfers, % of GDP [2] 9.6 8.3 7.9 7.7 7.3 7.4 7.2 7.0 7.0

Current account balance, US$bn [2] 9.4 8.5 7.1 7.1 6.1 5.8 5.9 6.1 6.4

Current account balance, % of GDP [2] 5.5 4.2 3.2 2.8 2.2 1.9 1.7 1.6 1.6

Openness to international trade, % [1,2] 49.8 56.0 49.0 43.0 40.3 41.0 40.6 40.0 39.9

Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 Bangko Sentral ng Pilipinas, BMI.


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 VIEWEven in the face of a considerable slowdown in exports, the Philippine

economy continues to power on, with Q113 figures reflecting impres-

sive 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 Japa-

nese fiscal crisis are pertinent, we believe that strong domestic funda-

mentals 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

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 forma-

tion soared by 16.8% y-o-y in real terms in Q113, reflecting a

marked acceleration from Q412's middling -1.4% performance.

Investment Boom On CourseThe 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

country's investment story has been due for a cyclical pick-up,

particularly in view of the central bank's ongoing easy mon-

etary 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 below-

target headline inflation of 2.6% y-o-y and benign fundamental

inflationary pressures.

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 Philip-

pines' 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, out-

ward 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, sug-

gesting that, as we would expect, domestic demand continues

to outshine external demand.

Investment To The ForeGDP by Expenditure in Constant Prices, % chg y-o-y and pp. Contri-

bution

-10

-5

0

5

10

15

Q10

9

Q20

9

Q30

9

Q40

9

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Q31

1

Q41

1

Q11

2

Q21

2

Q31

2

Q41

2

Q11

3

Stat Error/Restocking NXCapital Formation Govt ConsumptionPrivate Consumption GDP

Source: BMI, BSP, NSO

TABLE: ECONOMIC ACTIVITY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Nominal GDP, PHPbn [1] 8,026.1 9,003.5 9,706.2 10,564.9 11,548.5 12,640.8 13,854.0 15,065.3 16,367.2

Nominal GDP, US$bn [1] 168.8 199.7 224.2 250.4 279.6 302.4 335.4 374.3 411.8

Real GDP growth, % change y-o-y [1] 1.1 7.6 3.6 6.8 5.9 5.5 5.4 4.6 4.5

GDP per capita, US$ [1] 1,841 2,141 2,363 2,595 2,850 3,031 3,307 3,631 3,932

Population, mn [2] 91.7 93.3 94.9 96.5 98.1 99.8 101.4 103.1 104.7

Unemployment, % of labour force, eop [3] 7.1 7.1 7.1 7.0 6.8 6.5 6.3 6.3 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.


PHILIPPINES Q3 2013

External Risks Pertinent, But Not OverwhelmingOver 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.

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, ship-

ments 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

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.

Fundamentals In Place For Medium-Term Growth Pick-UpWhile the Philippines bears considerable risk to external head-

winds 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 lit-

tle 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) anti-

Japanese Exposure A ConcernKey Export Markets, % of Total Exports

0

10

20

30

40

50

60

70

80

Jan-

01Au

g-01

Mar

-02

Oct

-02

May

-03

Dec

-03

Jul-0

4Fe

b-05

Sep-

05Ap

r-06

Nov

-06

Jun-

07Ja

n-08

Aug-

08M

ar-0

9O

ct-0

9M

ay-1

0D

ec-1

0Ju

l-11

Feb-

12Se

p-12

Apr-

13

Japan HK Singapore US China

Source: BMI, NSO

External Malaise Hitting ExportsTotal Exports & Imports, % chg y-o-y (LHS) & Balance, US$mn

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

-50

-40

-30

-20

-10

0

10

20

30

40

50

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

Balance Exports Imports

Source: BMI, NSO


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 politi-

cal 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.

Additionally, prudent monetary policy has allowed the Philip-

pines to reap the benefits of record-low lending rates. In com-

bination 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 BreakdownPrivate 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 expan-

sion in 2013 ahead of a 5.3% performance in 2014 (upgraded

from 4.5% previously).

Slow And Steady Wins The RaceTotal Outstanding Loans (Universal and Commercial Banks), % of

GDP

26

27

28

29

30

31

32

33

34

35

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Source: BMI, BSP

Public Consumption Outlook: While we do not expect govern-

ment 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 Philip-

pine 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.

Monetary Policy

BSP On Cruise Control, For Now

BMI VIEWWith headline inflation trending below its target range of 3.0-5.0%,

Bangko Sentral ng Pilipinas should remain comfortable with its mon-

etary policy settings over the near term, likely allowing for its bench-

mark 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 inflation-

ary 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.

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 UptickAs 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


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 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

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 pump-

ing 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.

As such, major monetary policy adjustments are unlikely to

A Non-Traditional RelationshipM3 & Total Outstanding Commercial Bank Loans, % chg y-o-y

-15

-10

-5

0

5

10

15

20

25

30

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3

CreditM3

Source: BMI, BSP

In Comfortable TerritoryHeadline & Core Inflation, % chg y-o-y

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

CoreHeadline

Source: BMI, NSO

TABLE: MONETARY POLICY2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Consumer price index, % y-o-y, eop [3] 4.4 3.6 4.1 2.9 3.5 4.0 4.0 4.0 4.0

Consumer price index, % y-o-y, ave [3] 3.2 3.8 4.4 3.1 3.2 3.8 4.0 4.0 4.0

Producer prices, % y-o-y, eop [3] -4.9 -6.2 4.2 4.2 4.2 4.2 4.2 4.2 4.2

Producer prices, % y-o-y, ave [3] -1.4 -5.0 3.0 4.2 4.2 4.2 4.2 4.2 4.2

Wholesale price index, % y-o-y, ave [3] -4.2 5.9 7.2 5.6 5.1 5.1 5.1 5.1 5.1

Wholesale price index, % change y-o-y, eop [3] 5.7 5.1 6.1 5.1 5.1 5.1 5.1 5.1 5.1

M1, PHPbn [3] 1,221.9 1,345.9 1,413.2 1,500.9 1,598.4 1,718.3 1,855.8 2,022.8 2,225.0

M1, % change y-o-y [3] 14.1 10.2 5.0 6.2 6.5 7.5 8.0 9.0 10.0

M2, PHPbn [3] 3,887.1 4,306.2 4,581.8 4,911.7 5,304.7 5,718.4 6,204.5 6,750.5 7,344.5

M2, % change y-o-y [3] 7.6 10.8 6.4 7.2 8.0 7.8 8.5 8.8 8.8

Central Bank policy rate, % eop [1,3] 4.00 4.00 4.50 3.50 3.50 4.00 4.00 4.00 4.00

Lending rate, %, ave [4] 8.5 7.7 8.2 7.2 7.2 7.7 7.7 7.7 7.7

Real lending rate, %, ave [2,4] 5.3 3.9 3.8 4.1 4.0 3.9 3.7 3.7 3.7

3-month money market rate, % eop [5] 5.0 1.1 2.2 - - - - - -

Real 3-month money market rate, %, eop [2,5] 0.6 -2.5 -1.9 - - - - - -

3-month money market rate, %, ave [5] 4.5 3.8 2.5 - - - - - -

Real 3-month money market rate, %, ave [2,5] 1.3 -0.0 -1.9 - - - - - -

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.


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 infla-

tion 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 expo-

sure 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 sup-

ply 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.


Chapter 3: 10-Year Forecast

The Philippine Economy To 2022

Uncovering A Forgotten Gem?

BMI VIEWThe 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 ex-

pected to pick up in a big way towards the end of the decade as income

levels rise.

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 na-

tion 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

may be nearer 7.0%) over the coming decade. This below-

potential 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.

Investment-Led Growth To Take Place FirstConditions 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

More Working, More SavingTotal Active Population, ‘000 (LHS) & % of Total Population

61.0

61.5

62.0

62.5

63.0

63.5

64.0

64.5

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2010

f

2011

f

2012

f

2013

f

2014

f

2015

f

2016

f

2017

f

2018

f

2019

f

2020

f

2021

f

2022

f

2023

f

2024

f

2025

f

Total Active Population '000 LHSTotal Active Population, % RHS

Source: World Bank

TABLE: LONG-TERM MACROECONOMIC FORECASTS2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f

Nominal GDP, US$bn [1] 335.4 374.3 411.8 451.2 493.1 538.9 588.9 643.6

Real GDP growth, % change y-o-y [1] 5.4 4.6 4.5 4.6 4.6 4.6 4.6 4.6

Population, mn [2] 101.4 103.1 104.7 106.4 108.1 109.7 111.4 113.1

GDP per capita, US$ [1] 3,307 3,631 3,932 4,240 4,563 4,911 5,286 5,691

Consumer price index, % y-o-y, ave [3] 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Current account balance, % of GDP [3] 1.7 1.6 1.6 1.6 1.5 1.9 2.2 2.4

Exchange rate PHP/US$, ave [4] 41.30 40.25 39.74 39.45 39.25 39.05 38.86 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.


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.

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.

Consumption Growth To Take Off LaterEssentially, 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

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.

Catalysts: Reforms And Political StabilityIn 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 govern-

ment 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.

Regarding the fight against corruption, President Benigno

Aquino III has taken some encouraging steps by trying to in-

vestigate 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

About Average In The RegionBMI Business Environment Ratings, out of 100

0

20

40

60

80

100Infrastructure

InstitutionsMarket Orientation

Philippines Region

Scores out of 100. Source: BMI

Heavy Bottom To Support ConsumptionPopulation By Age Group

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-75

75+2030f

2010e

Source: World Bank


10-YEAR FORECAST

BMI’s 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.

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.

Favourite Picks: BPO, Consumer PlaysThe business process outsourcing (BPO) industry in the Philip-

pines 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 competi-

tive edge by deregulating the telecoms industry and introduc-

ing 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 ap-

proximately 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

country's largest financial institutions and stating that it will

establish several regulatory changes and financial incentives

to attract investors to these PPPs.

Mining Potential UnderminedThe 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 Philip-

pines (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.


SWOT Analysis

Strengths A low-cost but educated, English-speaking workforce is the Philip-

pines’ 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 association’s 10 member

states are committed to reducing tariff and non-tariff trade barriers.

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 con-

cern 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 Eu-

rope 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 China’s rising economic influence presents opportunities to Philip-

pine 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.

BMI Business Environment Risk RatingsThe Philippines fares rather poorly in our business environment ratings,

scoring only 48.5, as it is dragged down by the country’s 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 country’s 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.

Chapter 4: Business Environment

Business Environment Rank TrendSingapore 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


PHILIPPINES Q3 2013

Business Environment Outlook

IntroductionDespite 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 per-

sist 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 in-

efficient, 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 RATINGSInfrastructure Rating Institutions Rating Market Orientation Rating Business Environment

Afghanistan 21.8 20.1 17.9 19.9

Australia 80.3 85.8 68.1 78.0

Bangladesh 40.5 35.2 39.1 38.3

Bhutan 28.8 43.3 29.0 33.7

Cambodia 37.4 31.8 52.0 40.4

China 66.0 56.6 55.7 59.4

Hong Kong 71.1 84.2 80.7 78.7

India 47.4 41.8 48.8 46.0

Indonesia 37.1 31.2 52.3 40.2

Japan 76.4 77.1 49.8 67.8

Laos 39.2 28.7 35.3 34.4

Malaysia 60.1 74.9 70.9 68.6

Maldives 42.7 43.7 41.3 42.6

Nepal 29.4 29.9 30.8 30.0

New Zealand 69.3 92.7 65.3 75.7

Pakistan 33.4 37.0 41.1 37.2

Philippines 48.6 36.8 60.1 48.5

Singapore 71.1 84.2 80.7 80.0

South Korea 63.0 79.1 71.3 71.1

Sri Lanka 54.3 51.8 47.9 51.3

Taiwan 56.1 68.2 61.4 61.9

Thailand 61.0 56.8 67.2 61.7

Vietnam 58.2 39.0 62.2 53.1

Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator


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. Inter-

national 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.

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 prop-

erties 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 gov-

ernment 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 invest-

ment 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.

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.

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'.


PHILIPPINES Q3 2013

Infrastructure

Physical InfrastructureThe 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 infrastruc-

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-

TABLE: BMI LEGAL FRAMEWORK RATINGInvestor Protection Score Rule Of Law Score Contract Enforceability

ScoreCorruption Score

Afghanistan 1.9 20.1 17.9 19.9

Australia 78.9 85.8 68.1 78.0

Bangladesh 59.1 35.2 39.1 38.3

Bhutan 14.8 43.3 29.0 33.7

Cambodia 31.5 31.8 52.0 40.4

China 64.4 56.6 55.7 59.4

Hong Kong 93.7 84.2 80.7 78.7

India 61.5 41.8 48.8 46.0

Indonesia 53.9 38.7 64.7 50.8

Japan 80.7 77.1 49.8 67.8

Laos 14.0 28.7 35.3 34.4

Malaysia 80.1 74.9 70.9 68.6

Maldives 24.3 43.7 41.3 42.6

Nepal 41.8 29.9 30.8 30.0

New Zealand 94.6 92.7 65.3 75.7

Pakistan 46.4 37.0 41.1 37.2

Philippines 36.4 36.8 60.1 48.5

Singapore 96.2 87.1 81.2 80.0

South Korea 68.5 79.1 71.3 71.1

Sri Lanka 63.2 51.8 47.9 51.3

Taiwan 67.2 68.2 61.4 61.9

Thailand 53.7 56.8 67.2 61.7

Vietnam 24.4 39.0 62.2 53.1

Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator



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 process-

ing has boosted the proportion of the workforce working in this

area. Labour is in abundant supply and is generally produc-

tive, 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 com-

plaints 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.

Employers must give the Department of Labour and Employ-

ment 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 Organiza-

tion 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, in-

cluding 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 best-

paid jobs with the best conditions, so their employees tend to

TABLE: LABOUR FORCE QUALITYLiteracy Rate,% Labour Market Rigidity Score Female Labour Participation, %

Afghanistan 28.0 20.0 33.1

Australia 99.0 0.0 58.4

Bangladesh 52.5 28.0 58.7

Bhutan 54.3 7.0 53.4

Cambodia 75.6 36.0 73.6

China 93.0 31.0 67.4

Hong Kong 93.5 0.0 52.2

India 65.2 30.0 32.8

Indonesia 91.0 40.0 52.0

Japan 99.0 16.0 47.9

Laos 72.5 20.0 77.7

Malaysia 91.5 10.0 44.4

Maldives 97.0 18.0 57.1

Nepal 55.2 46.0 63.3

New Zealand 99.0 7.0 61.8

Pakistan 54.2 43.0 21.7

Philippines 93.3 29.0 49.2

Singapore 94.2 0.0 53.7

South Korea 99.0 38.0 50.1

Sri Lanka 90.8 20.0 34.2

Taiwan 96.1 46.0 n/a

Thailand 93.9 11.0 65.5

Vietnam 90.3 21.0 68.0

Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score


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.

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 per-

mits full ownership of businesses in sectors not subject to legal

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 pri-

vatisation of state electricity generation and transmission assets.

As the result of a December 2004 supreme court ruling, foreign-

ers 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 re-

stricted 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

TABLE: ASIA – ANNUAL FDI INFLOWS2009 2010 2011

US$bn Per Capita US$bn Per Capita US$bn Per Capita

Australia 26.6 1212.4 35.6 1596.7 41.3 1827.7

Bangladesh 0.7 4.8 0.9 6.1 1.1 7.6

Cambodia 0.5 38.6 0.8 55.4 0.9 62.3

China 95.0 71.2 114.7 85.5 124.0 92.0

Hong Kong 52.4 7497.7 71.1 10076.2 83.2 11675.6

India 35.6 29.5 24.2 19.7 31.6 25.4

Indonesia 4.9 20.5 13.8 57.4 18.9 78.0

Japan 11.9 94.3 -1.3 -9.9 -1.8 -13.9

Malaysia 1.5 52.0 9.1 320.5 12.0 414.6

Mongolia 0.6 233.4 1.7 626.0 4.7 1725.2

New Zealand -0.8 -176.1 0.6 145.5 3.4 761.8

Pakistan 2.3 13.7 2.0 11.6 1.3 7.5

Philippines 2.0 21.4 1.3 13.9 1.3 13.3

Singapore 24.4 4937.2 48.6 9562.1 64.0 12336.9

South Korea 7.5 156.4 8.5 176.6 4.7 96.3

Sri Lanka 0.4 19.5 0.5 22.9 0.3 14.3

Taiwan 2.8 121.3 2.5 107.6 -2.0 -84.5

Thailand 4.9 71.6 9.7 142.8 9.6 139.7

Vietnam 7.6 87.5 8.0 91.1 7.4 83.7

Source: BMI, UNCTAD



linked to foreign investments.

Foreign Trade Regime The Philippines has been a member of the WTO since its incep-

tion 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 or-

ganisation, 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.

Tax RegimeCorporate 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 Philip-

pines. 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 zero-

rated, 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 Philip-

pines 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 Philip-

pine 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.

Operational Risk

Security Risk As in many major metropolitan areas, crime is a serious issue

in Metro Manila. Alongside non-violent crimes such as pick-

pocketing and fraud, which are common occurrences, there

have been several kidnappings and violent assaults – includ-

ing of foreigners – in Metro Manila as well as elsewhere in

the Philippines.

The terrorist threat in the Philippines is significant, with persis-

tent 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 pres-

ence 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. Dur-

ing 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. How-

ever, 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


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 Am-

patuan 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 gov-

ernment 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 2003 2004 2005 2006 2007 2008 2009Exports to US 8,690.77 7,274.81 7,208.66 7,429.25 8,607.58 8,601.40 8,216.44 6,924.20Exports to Japan 5,293.29 5,768.05 7,983.39 7,203.24 7,741.36 7,304.15 7,707.06 6,391.65Exports to Netherlands 3,054.91 2,921.71 3,582.95 4,031.80 4,753.10 4,149.52 3,708.37 3,712.31Exports to Hong Kong 2,358.53 3,093.90 3,145.61 3,338.85 3,675.76 5,803.52 4,987.49 3,296.84Exports to China 1,355.83 2,144.65 2,653.04 4,076.68 4,617.33 5,749.86 5,469.19 2,986.46Total 32,693.25 33,712.42 37,423.95 39,313.30 44,956.61 48,448.92 47,135.36 37,559.94Top 5 20,753.33 21,203.12 24,573.65 26,079.82 29,395.13 31,608.45 30,088.55 23,311.46% from top 5 trade partners 63.48 62.89 65.66 66.34 65.39 65.24 63.83 62.06

Source: IMF


Chapter 5: Key Sectors

Telecommunications

Executive Summary BMI VIEWThe Philippine telecoms market harbours low-term growth

opportunities in light of factors such as the high percentage of

prepaid subscribers and comparatively low broadband penetra-

tion rate. At present, the overall industry has not been negatively

impacted by the acquisition of Digital Telecommunications Philippines (Digitel) by the Philippine Long Distance Tel-ephone 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.

Key Trends And Developments

Latest data from PLDT and Globe Telecom showed the Philip-

pine 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

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 guide-

lines, 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 increas-

ingly healthy domestic consumer, and have upgraded our 2013

growth forecast to 5.5% from 5.0% previously.

Industry ForecastMobile: 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 pro-

motional 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 sub-

scribers in 2012, which dwarfed Globe Telecom's 2.8mn and

Sun Cellular's 791,000.


PHILIPPINES Q3 2013

Given that our previous end-2012 mobile subscriber estimate

was spot on, we have retained our forecast scenarios. We envis-

age 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 Telecommu-

nications 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. Neverthe-

less, 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 smart-

phones 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 Communi-

cations 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 sup-

port. 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. Addition-

ally, although the operator is actively trying to encourage the

TABLE: TELECOMS SECTOR – MOBILE – HISTORICAL DATA AND FORECASTS2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No. of mobile phone subscribers ('000) 86,147 93,737 102,985 110,194 115,704 118,018 119,789 120,986

No. of mobile phone subscribers/100 inhabitants 92.4 98.8 106.8 112.3 116.0 116.4 116.2 115.5

No. of mobile subscribers/100 fixed-line subscribers 2,075 2,245 2,479 2,665 2,813 2,898 2,971 3,031

No. of 3G phone subscribers ('000) 6,130 8,276 9,931 11,917 13,704 15,075 16,281 17,257

3G market as % of entire mobile market 7.1 8.8 9.6 10.8 11.8 12.8 13.6 14.3

f = BMI forecast. Source: BMI, NTC, operators

TABLE: TELECOMS SECTOR – ARPU – HISTORICAL DATA AND FORECASTS, (PHP) 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Smart Communications 171 153 137 126 118 115 112 110

Globe Telecom 225 186 177 172 167 163 159 155

Weighted Average ARPU 191 165 152 143 136 132 129 126

f = BMI forecast. Source: BMI, operators


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 fore-

cast. 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 num-

ber 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 sub-

scribers 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 pres-

sure 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 al-

lowing fixed accesses to their wireless networks. However, we

note that some fixed operators are launching their own fixed-

wireless 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 Telecommu-

nication 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 – FIXED LINE – HISTORICAL DATA AND FORECASTS2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

No. of main telephone lines in service ('000) 4,151 4,176 4,155 4,134 4,114 4,073 4,032 3,991

No. of main telephone lines/100 inhabitants 4.5 4.4 4.3 4.2 4.1 4.0 3.9 3.8

e/f = BMI estimate/forecast. Source: BMI, NTC, operators

TABLE: TELECOMS SECTOR – BROADBAND – HISTORICAL DATA AND FORECASTS, 2010-2017 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

No. of internet users ('000) 23,276 27,481 30,779 33,241 35,235 36,997 38,847 40,789

No. of internet users/100 inhabitants 25.0 29.0 31.9 33.9 35.3 36.5 37.7 38.9

No. of broadband internet subscribers ('000) 4,543 5,815 7,094 8,088 8,896 9,608 10,377 11,207

No. of broadband internet subscribers/100 inhabitants 4.9 6.1 7.4 8.2 8.9 9.5 10.1 10.7

e/f = BMI estimate/forecast. Source: BMI, ITU, NTC, operators


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 fore-

cast 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 in-

dustry 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 VIEWOpportunities 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 un-

derpinned 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 Phar-

maceuticals & 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 as-

sociations 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


KEY SECTORS

further deaths from smoking.

• In January 2013, the Philippine Charity Sweepstakes Of-

fice (PCSO) introduced new reforms to accelerate financial

transactions and assure faster repayments to drug suppliers.

The institution-wide reforms intend to reduce pharmaceuti-

cal prices by 20% and decrease repayment time to suppliers

from six months to 45 days. The new arrangement also al-

lows 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.

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 dis-

putes 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 ForecastGenerics: The country's generic drug market has registered

significant development in the past years. According to Ben-

jamin Liuson, the Generics Pharmacy's President, speaking in

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 Legisla-

tive 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 compli-

ance 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 hear-

ing 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-

TABLE: PHILIPPINES GENERICS DRUG MARKET INDICATORS, HISTORICAL DATA AND FORECASTS, 2009-2017 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Generic drug sales (US$bn) 0.36 0.44 0.50 0.56 0.63 0.69 0.77 0.87 0.97

Generic drug sales (US$bn), % chg y-o-y 12.0 22.7 13.7 12.1 13.2 9.1 12.1 12.9 11.1

Generic drug sales (PHPbn) 16.94 19.71 21.53 23.56 26.01 28.73 31.81 35.26 39.18

Generic drug sales (PHPbn), % chg y-o-y 19.9 16.4 9.2 9.5 10.4 10.5 10.7 10.9 11.1

Generic drug sales, % of prescription sales 20.14 22.99 24.51 25.94 27.83 29.66 31.61 33.69 35.91

Generic drug sales, % of total sales 14.00 16.00 17.08 18.16 19.45 20.75 22.15 23.63 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


PHILIPPINES Q3 2013

ucts and OTC medicines as their popularity increases. Doc-

tors' 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 doc-

tors are required to prescribe by international non-proprietary

name. Prices of some common medicines–including simvastatin,

amoxicillin and paracetamol–have 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 com-

panies 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 Baran-

gay (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 incen-

tives 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 authori-

ties 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 (lo-

ratadine) 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 pharmaceuti-

cals, 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 2010 2011 2012 2013f 2014f 2015f 2016f 2017fOver-the-counter (OTC) medicine sales (US$bn) 0.78 0.83 0.88 0.92 0.98 1.00 1.04 1.10 1.14Over-the-counter (OTC) medicine sales (US$bn), % chg y-o-y 1.5 7.1 6.2 4.3 6.1 2.0 4.7 5.5 3.8Over-the-counter (OTC) medicine sales (PHPbn) 36.89 37.46 38.20 38.94 40.31 41.60 43.03 44.56 46.24Over-the-counter (OTC) medicine sales (PHPbn), % chg y-o-y 8.7 1.6 2.0 1.9 3.5 3.2 3.4 3.6 3.8Over-the-counter (OTC) medicine sales, % of total sales 30.49 30.41 30.31 30.01 30.13 30.04 29.95 29.86 29.77

f = BMI forecast. Source: BMI, AESGP


KEY SECTORS

to-consumer (DTC) advertising, the rising importance of self-

medication 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 sub-

sequent, 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, nega-

tive 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 measures–such as those

stipulating that certain antibiotics can only be purchased by a

government-controlled company – will continue to hamper sec-

tor 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 encour-

aging 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 antibiot-

ics, 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, 2009-2017

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017fPrescription drug sales (US$bn) 1.77 1.90 2.03 2.15 2.27 2.32 2.44 2.58 2.69Prescription drug sales (US$bn), % chg y-o-y -6.2 7.5 6.7 5.9 5.5 2.4 5.1 5.9 4.2Prescription drug sales (PHPbn) 84.11 85.74 87.84 90.84 93.47 96.87 100.63 104.66 109.09Prescription drug sales (PHPbn), % chg y-o-y 0.3 1.9 2.4 3.4 2.9 3.6 3.9 4.0 4.2Prescription drug sales, % of total sales 69.51 69.59 69.69 69.99 69.87 69.96 70.05 70.14 70.23



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 pres-

sured 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 multi-

national 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 ex-

panding 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, 2009-20172009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Patented drug sales (US$bn) 1.41 1.46 1.53 1.59 1.64 1.63 1.67 1.71 1.73

Patented drug sales (US$bn), % chg y-o-y -9.9 3.7 4.6 3.8 2.8 -0.2 2.2 2.7 0.7

Patented drug sales (PHPbn) 67.17 66.03 66.31 67.27 67.45 68.13 68.81 69.40 69.91

Patented drug sales (PHPbn), % chg y-o-y -3.6 -1.7 0.4 1.4 0.3 1.0 1.0 0.8 0.7

Patented drug sales, % of prescription sales 79.86 77.01 75.49 74.06 72.17 70.34 68.39 66.31 64.09

Patented drug sales, % of total sales 55.51 53.59 52.61 51.84 50.42 49.21 47.90 46.51 45.01



KEY SECTORS

Other Key Sectors

Latest Forecast DataBelow are the latest forecast tables for our other core key sectors:

TABLE: OIL & GAS SECTOR KEY INDICATORS2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Oil Proved Reserves, mn barrels 139 139 139 139 143 144 146 144

Oil Production, 000b/d 27 32 25 22 32 37 37 38

Oil Consumption, 000b/d 309 316 302 303 304 307 310 313

Oil Refinery Capacity, 000b/d 273 273 273 290 290 290 290 290

Oil Net Exports, 000b/d -282 -284 -277 -281 -272 -270 -273 -275

Oil Price, US$/bbl, OPEC Basket 77 108 110 103 101 100 99 97

Value of Net Oil Exports, US$bn (BMI base case) -8 -11 -11 -11 -10 -10 -10 -10

Value of Net Hydrocarbons Exports, US$bn (BMI base case) -8 -11 -11 -11 -10 -10 -10 -10

Value of Net Oil Exports at constant US$50/bbl – US$bn -5 -5 -5 -5 -5 -5 -5 -5

Value of Net Oil Exports at constant US$100/bbl – US$mn -10 -10 -10 -10 -10 -10 -10 -10

Value of Net Hydrocarbons Exports constant US$50/bbl – US$mn -5 -5 -5 -5 -5 -5 -5 -5

Value of Net Hydrocarbons Exports constant US$100/bbl – US$mn -10 -10 -10 -10 -10 -10 -10 -11

Total Net Hydrocarbons Exports, 000boe/d -281 -284 -274 -280 -273 -272 -275 -292

Gas Proved reserves, tcm 0 0 0 0 0 0 0 0

Gas Production, bcm 3 3 4 4 4 4 4 4

Gas Consumption, bcm 3 3 4 4 4 4 4 5

LNG Price, US$/mn btu 12 16 16 15 15 15 15 14

Reserves/Production Ratio 14 12 15 17 12 11 11 11

e/f = BMI estimate/forecast. Source: BMI, National statistics, Industry sources

TABLE: DEFENCE & SECURITY SECTOR KEY INDICATORS2011 2012e 2013f 2014f 2015f 2016f 2017f

Defence expenditure, PHPmn 85,101 95,701 107,344 120,036 134,332 150,328 168,073

Defence expenditure, PHPmn % change y-o-y 11.4 12.5 12.2 11.8 11.9 11.9 11.8

Defence expenditure, % of GDP 1 1 1 1 1 1 1

Defence expenditure, PHP per capita of population 897 992 1,094 1,203 1,324 1,458 1,605

Defence expenditure, US$mn, constant prices 1,918 2,142 2,378 2,533 2,767 3,044 3,281

Defence expenditure, US$mn, constant prices % change y-o-y 11.9 11.7 11.0 6.5 9.3 10.0 7.8

Defence expenditure, constant US$ per capita of population 20 22 24 25 27 30 31


TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Construction industry value, PHPbn 551 535 629 703 782 866 960 1,062

Construction industry value, US$bn 12 12 14 17 19 21 24 27

Construction industry, real growth, % y-o-y 1.1 14.8 20.0 10.0 12.2 13.6 12.1

Construction industry value, % GDP 6 6 6 6 6 6 6 7



PHILIPPINES Q3 2013

This report is abstracted from BMI’s 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 BMI’s other 1,113 industry reports, please contact [email protected]

TABLE: FOOD & DRINK SECTOR KEY INDICATORS2010 2011 2012e 2013f 2014f 2015f 2016f 2017f

Food consumption, US$bn 31 36 39 43 44 48 51 54

Food consumption PHPbn 1,418 1,551 1,660 1,755 1,855 1,963 2,078 2,202

Food consumption, US$ per capita 337 378 407 434 445 469 498 519

Confectionery sales, US$mn 411 451 486 523 543 579 623 659

Confectionery sales, PHPmn 18,513 19,520 20,549 21,560 22,673 23,895 25,225 26,675

Alcoholic drinks sales, US$mn 534 604 650 714 756 815 884 943

Alcoholic drink sales, PHPmn 24,080 26,150 27,502 29,436 31,579 33,620 35,821 38,195

Soft drinks sales, US$mn 1,116 1,286 1,435 1,579 1,681 1,838 2,005 2,170

Soft drink sales, PHPmn 50,323 55,704 60,708 65,145 70,177 75,807 81,213 87,901

Total mass grocery retail sales, US$bn 11 12 14 15 16 17 19 20

Total mass grocery retail sales, PHPbn 480 536 579 617 659 704 751 801

Exports of food and drink, US$mn 2,793 2,915 3,034 3,196 3,413 3,648 3,904 4,174

Imports of food and drink, US$mn 4,032 4,122 4,327 4,678 5,114 5,578 6,084 6,637

Food and drink trade balance US$mn -1,239 -1,207 -1,293 -1,483 -1,701 -1,929 -2,181 -2,463


TABLE: AUTOS SECTOR KEY INDICATORS2011 2012e 2013f 2014f 2015f 2016f 2017f

Vehicle production, units 53,921 55,360 61,839 69,837 79,507 88,616 97,245

Passenger car production, units 45,751 46,390 52,421 59,760 68,724 76,970 84,667

Vehicle sales, units 141,616 156,649 173,864 187,360 196,806 205,687 216,074

Vehicle sales, units, % chg y-o-y -15.9 10.6 11.0 7.8 5.0 4.5 5.1

Passenger car sales, units 44,862 48,328 53,644 57,520 61,706 66,172 72,260

Passenger car sales, units, % chg y-o-y -23.6 7.7 11.0 7.2 7.3 7.2 9.2

Commercial vehicle sales, units 96,754 108,321 120,220 129,840 135,100 139,515 143,815

Commercial vehicle sales, units, % chg y-o-y -11.9 12.0 11.0 8.0 4.1 3.3 3.1

Passenger car density, cars per 1,000 of population 8 8 7 7 7 7 6



Chapter 6: BMI Global Assumptions

TABLE: GLOBAL ASSUMPTIONS2012e 2013f 2014f 2015f 2016f 2017f

Real GDP Growth (%)

US 2.2 1.8 2.7 2.6 2.4 2.4

Eurozone -0.6 -0.5 1.0 1.4 1.5 1.6

Japan 1.9 1.4 1.3 1.0 0.9 1.1

China 7.7 7.5 6.7 6.0 5.8 5.8

World 2.7 2.7 3.3 3.4 3.4 3.4

Consumer Inflation (ave)

US 2.1 2.1 2.1 2.1 2.1 2.1

Eurozone 2.4 1.8 1.8 1.7 1.8 1.8

Japan 0.0 0.0 0.6 1.3 1.8 2.3

China 2.7 2.8 2.9 2.8 2.7 2.7

World 3.5 3.3 3.1 3.1 3.2 3.1

Interest Rates (eop)

Fed Funds Rate 0.00 0.00 0.00 0.75 2.00 3.00

ECB Refinancing Rate 0.75 0.25 0.25 0.75 1.00 1.50

Japan Overnight Call Rate 0.10 0.10 0.10 0.10 0.25 0.50

Exchange Rates (ave)

US$/EUR 1.27 1.31 1.27 1.23 1.20 1.20

JPY/US$ 79.85 91.00 94.00 97.00 98.50 100.50

CNY/US$ 6.31 6.20 6.28 6.35 6.45 6.55

Oil Prices (ave)

OPEC Basket (US$/bbl) 109.5 103.0 101.0 100.0 99.0 97.0

Brent Crude (US$/bbl) 111.7 106.0 103.0 102.0 101.0 99.0

e/f = estimate/forecast. Source: BMI

Global Outlook

Growth Has TroughedOur 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 activ-

ity overall has troughed and will pick up in H213 and more so

as we enter 2014. Meanwhile, inflation will remain well con-

tained, as commodity prices – in particular industrial metals and

oil – appear to have topped out, in line with our long-standing

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


PHILIPPINES Q3 2013

TABLE: DEVELOPED STATES, REAL GDP GROWTH, %2012e 2013f 2014f 2015f

Developed States Aggregate Growth 1.2 1.1 1.9 2.0

G7 1.4 1.3 2.0 2.0

Eurozone -0.6 -0.5 1.0 1.4

EU-27 -0.3 -0.1 1.2 1.7

Selected Developed States

Australia 3.7 2.1 1.8 2.5

Austria 0.8 0.8 1.5 1.9

Belgium -0.3 0.1 1.6 1.9

Canada 1.8 1.5 2.1 2.4

Denmark -0.5 0.6 1.3 1.6

Finland -0.2 0.1 1.6 2.0

France 0.1 -0.3 0.7 1.6

Germany 0.7 0.5 1.9 1.6

Ireland 0.9 0.8 1.8 2.0

Italy -2.4 -1.3 0.1 0.7

Japan 1.9 1.4 1.3 1.0

Netherlands -1.1 -0.6 0.9 1.5

Norway 3.1 2.5 2.5 2.7

Portugal -4.7 -2.6 0.5 0.9

Spain -1.3 -1.7 0.2 0.9

Sweden 0.8 1.0 2.5 3.2

Switzerland 1.0 1.5 1.8 1.7

UK 0.0 1.1 1.4 2.0

US 2.2 2.1 2.7 2.6

e/f = estimate/forecast. Source: BMI

TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %US Eurozone Japan Brazil China Russia India

2013 Bloomberg Consensus 1.9 -0.1 1.7 3.0 7.8 2.8 5.1

BMI 1.8 -0.5 1.4 3.3 7.5 2.6 5.5

2014 Bloomberg Consensus 2.7 1.0 1.5 3.5 7.8 3.5 6.0

BMI 2.7 1.0 1.3 3.6 6.7 3.9 6.0

Source: BMI, Bloomberg

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. Mean-

while, 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 previ-

ous forecast of US$93.5/bbl.

Developed StatesOur 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 MarketsWe estimate emerging market (EM) real GDP growth of 4.7% in

2013, representing a slight downgrade from our previous 4.8%


BMI GLOBAL ASSUMPTIONS

TABLE: EMERGING MARKETS, REAL GDP GROWTH, %2012e 2013f 2014f 2015f

Emerging Markets Aggregate Growth 4.7 4.7 5.1 4.9

Latin America 2.8 3.4 3.7 3.7

Argentina 1.9 1.8 2.9 3.8

Brazil 0.9 3.3 3.6 3.5

Mexico 3.9 3.6 3.8 3.4

Middle East And North Africa 3.4 2.9 4.9 4.0

Saudi Arabia 6.8 4.1 4.6 2.3

UAE 4.1 3.3 3.8 3.9

Egypt 2.2 1.9 3.7 5.6

Sub-Saharan Africa 4.4 5.5 5.7 6.1

South Africa 2.5 2.3 3.3 3.8

Nigeria 6.6 6.7 7.2 7.3

Emerging Asia 6.1 6.2 6.0 5.6

China 7.7 7.5 6.7 6.0

Hong Kong 1.4 3.3 3.6 3.7

India* 5.0 5.5 6.0 6.2

Indonesia 6.2 6.1 6.4 6.5

Malaysia 5.6 4.6 4.4 4.2

Singapore 1.3 2.5 3.2 3.2

South Korea 2.1 2.6 4.6 4.6

Taiwan 1.3 3.0 4.0 4.1

Thailand 6.4 4.0 4.5 4.4

Emerging Europe 2.4 2.5 3.6 4.2

Russia 3.4 2.6 3.9 4.3

Turkey 2.2 4.0 4.7 5.2

Czech Republic -1.3 1.2 2.0 2.3

Hungary -1.7 -0.3 1.1 1.9

Poland 2.0 1.5 2.7 4.1

e/f = estimate/forecast; *Fiscal years ending March 31 (2012 = 2011/12). Source: BMI

projection, with a slight acceleration in growth in 2014 to 5.1%.

The most significant change to our EM macro country projec-

tions 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% previ-

ously. 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 emerg-

ing 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

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.

Analyst: Andrew WoodKey Sector Analyst: Jamie Davis, Jianwei SheEditor: Stuart AllsoppSub-Editor: Ahmad AlshidiqSubscriptions Manager: Katie PattonMarketing Manager: Sarah SutcliffeProduction: Neil Murphy, Reema PatelPublishers: Richard Londesborough, Jonathan Feroze

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BMI Philippines Business Forecast Report Q4 2013

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