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Philippine ANALYST July 2014

Contents

THE MONTH’S HIGHLIGHTS

WORD FOR WORD

COMMENTARY

SPECIAL REPORTS

POLITICAL

28 What the SONA wasn’t – again

(An analysis of President Aquino’s 4th State of the Nation Address)

34 Aquino admin satisfaction ratings down

35 House begins debate on economic cha-cha

36 Ombudsman creates investment protection team

THE ECONOMY

38 SONA cites Aquino accomplishments

39 First half budget defi cit: P54B, below ceiling

40 Truck ban bad for shippers and logistics providers, but…

41 BSP details real estate stress test

41 BSP to continue adopting pre-emptive moves vs. infl ation, excess liquidity

PHILIPPINE REGIONAL UPDATE BUSINESS

53 Retail sector growth to remain steady

54 U.S. power fi rm to invest $2 billion for expansion, storage facilities

55 Local cigarette fi rm under BIR probe

56 Sin Tax Law shows positive effects but limited by illicit trade and downshifting

57 Subsidies to state fi rms drop 76% in April

BUSINESS CLIMATE INDEX

CORPORATE BRIEFS

INFRASTRUCTURE

68 DOTC to address project backlogs by 2019

69 NAIA T3 fi nally starts full operation

70 Flood control projects funded by DAP to continue - DPWH

70 3 waterworks infrastructure projects planned for implementation in 2015

CONGRESSWATCH

73 FOI among President Aquino’s priority bills

75 Senate President endorses bill amending central bank charter

77 Asia Pacifi c Executive Brief95 Asia Brief contributors

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53

68

73

Philippine ANALYST

the month’s highlights 1

July 2014

Political

PAST DEVELOPMENTS

What the SONA wasn’t – again(An analysis of President Aquino’s 4th State of the Nation Address)“For me personally it was his best SONA so far. For the fi rst time I really felt his sincerity to do good for the country. It was a 180-degree turn. I was expecting him to lambast the Supreme Court once again, but he chose to be a statesman this time. P-Noy needs all the support that the business community can give him.” - A Filipino businessman (see story page on p28)

Aquino admin satisfaction ratings downPublic satisfaction with the general performance of the Aquino administration dropped to record low +29 in June from +45 recorded in March. Lower ratings for the president and his administration translate to less political capital to push for tough but essential reforms. (see story page on p34)

House begins debate on economic cha-chaThe House of Representatives has started deliberating on Speaker Feliciano Belmonte’s resolution that aims to amend the restrictive economic provisions of the 1987 Constitution. (see story page on p35)

Ombudsman creates investment protection teamThe Offi ce of the Ombudsman has created the Investment Ombudsman Team (IOT) to address corruption and entice more businessmen to invest in the country. (see story page on p36)

Economy

PAST DEVELOPMENTS

SONA cites Aquino accomplishmentsPres. Benigno Aquino III’s 5th State of the Nation Address (SONA) on 28 July turned out to be a reminder to his detractors of what he has done for his “bosses” (the ordinary Filipinos) instead of what many (including us) had expected to be how he intends to address critical issues like the pork barrel, impending power shortage and inclusive growth, and what he planned to achieve for the remainder of his term. (see story page on p38)

First half budget defi cit: P54B, below ceilingThe national government incurred a budget defi cit of P54 billion in 1H14, a slight widening from P51.3 billion in 1H13, but well below the ceiling of P192.6 billion for the period. Spending actually surged 44% in June whilst revenues grew minimally by 6%, but surpluses in April and May suppressed the fi scal defi cit. (see story page on p39)

Truck ban bad for shippers and logistics providers, but…A paper prepared by Dr. Enrico Basilio and presented in a Philippine Chamber of Commerce and Industry (PCCI) forum on June 19 disclosed the adverse impact of the Manila truck ban on manufacturers, exporters, importers, shipping companies, port operators and trucking operators. It admitted, however, that Metro Manila is congested and cargo traffi c coming in and going out of the Port of Manila is a major contributor to congestion. (see story page on p40)

BSP details real estate stress testThe Bangko Sentral ng Pilipinas (BSP) or central bank issued Circular 839, detailing the real estate stress test (REST) banks with real estate loans are now required to undertake as pre-emptive measure against potential property market bubble. (see story page on p41)

BSP to continue adopting pre-emptive moves vs. infl ation, excess liquidity Despite the relative calm in the global fi nancial market, Bangko Sentral ng Pilipinas (BSP) said it will continue to carry out pre-emptive measures to address possible re-occurrence of market volatility and domestic infl ationary risks. (see story page on p41)

Business

PAST DEVELOPMENTS

Sin Tax Law shows positive effects but limited by illicit trade and downshiftingA year-and-a-half since its implementation, the Sin Tax Law has been successful in reducing smoking prevalence and increasing the funds for health care. However, downshifting and illicit trade have reduced the potential gain for the BIR. (see story page on p56)

Subsidies to state fi rms drop 76% in April The national government has released a total of P253 million in subsidies to government-owned and-controlled corporations (GOCCs) and fi nancial institutions in April. The amount is 76% lower than the P1.06 billion released in the same month last year. The drop was due to GOCCs’ stable cash position during the month. (see story page on p57)

PRESENT DEVELOPMENTS

Local cigarette fi rm under BIR probe The Bureau of Internal Revenue (BIR) is auditing the tax payments of local cigarette company Mighty Corp. This was among a series of government investigations Mighty Corp. has been facing. (see story page on p55)

the month’s highlights 2

July 2014Philippine ANALYST

FUTURE DEVELOPMENTS

Retail sector growth to remain steadyThe Philippine retail sector will remain robust over the next few years as growth intensifi es in the convenience store and online segments. (see story page on p53)

U.S. power fi rm to invest $2 billion for expansion, storage facilitiesAES Philippines Power Partners, an American power fi rm, will invest up to $2 billion in the Philippines to support the country’s development and help stabilize power supply in the central provinces. This is allotted for the expansion of its power plant in northwestern Philippines and to create power storage facilities in central Visayas. (see story page on p54)

Infrastructure

PAST DEVELOPMENTS

NAIA T3 fi nally starts full operationIt took almost 2 decades to fi nally complete DOTC’s new international airport terminal in Manila. (see story page on p69)

PRESENT DEVELOPMENTS

Flood control projects funded by DAP to continue - DPWHThe Department of Public Works and Highways (DPWH) said most of the projects under its fl ood control master plan for Mega Manila will continue to be implemented despite the cancellation of the Disbursement Acceleration Program (DAP) that fi nanced some of these projects. (see story page on p70)

FUTURE DEVELOPMENTS

DOTC to address project backlogs by 2019The Transportation department said it plans to catch up on transport project implementation by 2019. But this will require much better efforts at preventing delays caused by complaints on the bidding process for projects as what has happened recently in a number of major projects. The department has had no major infrastructure projects implemented in the past 3 years except NAIA 1 and 3 rehabilitation, but even these were delayed. (see story page on p68)

3 waterworks infrastructure projects planned for implementation in 2015The government has 3 water projects lined-up for implementation in 2015 to address a projected water shortage in Metro Manila in 7 years. Those, however, might not be enough and given the implementing record of the government on water projects may not resolve the problem. (see story page on p70)

CongressWatch

FUTURE DEVELOPMENTS

FOI among President Aquino’s priority billsThe Freedom of Information (FOI) bill is among the 26 priority measures that President Benigno Aquino lll wants Congress to pass before he steps down in 2016. The FOI bill, which aims to improve transparency in government transactions, has been languishing in Congress for more than 20 years now. (see story page on p73)

Senate President endorses bill amending central bank charterSenate President Franklin M. Drilon supports the passage of a bill that would amend the charter of the central bank or Bangko Sentral ng Pilipinas (BSP). The proposed measure expands the regulatory and supervisory functions of the central bank and raises the bank’s capitalization to strengthen its corporate and fi nancial viability. (see story page on p75)

CORPORATE BRIEFS 3


“While I bow to the wisdom of the Supreme Court, I must say, with all due respect, that its decision on these issues may undo the progress we have achieved so far. “ Budget secretary Florencio ‘Butch’ Abad on the Supreme Court ruling declaring parts of the Disbursement Acceleration Program (DAP) unconstitutional.

“All of us want the BBL (Bangsamoro Basic Law) draft to be submitted to Congress as soon as possible. But we cannot substitute haste with prudence. Whatever delay we are experiencing now is intended to avoid further diffi culties after the bill is submitted to Congress.” Chief Negotiator Professor Miriam Coronel-Ferrer on the status of the draft Bangsamoro Basic Law.

“My problem here is quite simple. Those who have plundered the national coffers in billions get to stay in Sta. Rosa or any hospital much to their comfort. Those whose crimes pale so much in comparison with Napoles – the cell phone snatchers and the street snatchers – languish in cramped and dingy jails. It’s like teaching our children that if they must steal, steal big so at least you get to be jailed in the comfort of those special cells.” Sen. Francis Escudero on the special treatment accorded to pork barrel scam suspects.

“To accept his resignation is to assign to him a wrong and I cannot accept the notion that doing right by our people is wrong.”

President Aquino rejecting Budget secretary Florencio Abad’s offer of resignation.

“How does one regret a decision to help thousands of people, of our countrymen? How does one regret installing a doppler radar warning system? How does one regret the setting up of school buildings? These are noble projects which benefi ted the people.”

Presidential Spokesperson Edwin Lacierda stressing that Filipinos benefi tted from the Disbursement Acceleration Program (DAP), which the Supreme Court ruled as unconstitutional.

COMMENTARY

Philippine ANALYST

COMMENTARY4

July 2014

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The president has been under attack recently. Starting with the slow (despite what he said in his SONA) response to the catastrophe that was Yolanda, which is still moving too slowly. Bureaucratic norms have trumped emergency response. That was soon followed by revelation of what Napoles had been up to,

and the subsequent declaration of unconstitutionality of the PDAF (Priority Development Assistance Fund, or pork barrel) and then the unconstitutionality also of the DAP (Disbursement Acceleration Program). While the high level of infl ation – 4.4% - particularly of basic foods has hit consumers hard. Aquino was then criticized, even by the New York Times, for hinting at extending his term beyond 2016 through the amendment of the 1987 constitution. It was mitigated somewhat by the incarceration of 3 senators-Enrile, Estrada and Revilla.

Then there’s his SONA where there was next to nothing about what he intended to do in the coming 22 months. It was an emotional appeal that had only fl eeting positive impact. There was little the public could fi nd that would improve their daily lives.

The result of it all is, for the fi rst time, a plunge in the popularity and trust of the president. That, together with the loss of the power of the purse has led to a weakening of the powers of the presidency that will make reform more diffi cult in the remaining 2 years of his term. The plunge puts him level with Ramos and Cory at the same point in their presidencies. Erap wasn’t there, and Gloria was just a disaster.

So the drop in his popularity is something he’ll have trouble recovering from, particularly as political support will also waver as politicos look toward who the next president will be, and start currying favor there. This is a president who talks reform, but doesn’t do enough of it. He rarely makes tough decisions unless it suits his personal agenda. Fortunately some of that personal agenda was also in the national interest – Arroyo did need to be indicted, Chief Justice Corona was wrongly in place. At this point Aquino has no viable candidate to put forward, something that should worry him greatly.

The common, and growing wisdom is that opposition leader, Jojo Binay, is unbeatable. It’s why corruption accusations are being raised. Which, given the slowness of the law in the Philippines will have diffi culty having any effective impact in time to stop him. He’s not as easy a target as senators have been. But this doesn’t mean he’s home free, this is a country of the unexpected. So expect who knows what, someone might just rise out of the dust. That unexpected may even include the president endorsing Binay over Roxas. Still not likely, but now in the 50:50 realm. And Binay’s popularity has remained high, the highest of all those reviewed.

Philippine ANALYST

COMMENTARY5

July 2014

Aquino’s focus increasingly will be on the legacy he’s to leave. That, at the moment, is concentrated on reduction in corruption – but only at top levels. The day-to-day corruption of dealing with government has seen little diminishment. Nonetheless there’s been dramatic improvement, top people are in jail, not yet convicted, but in jail awaiting such trial. It’s an impressive change that he’s achieved, and reversion to the old ways will be diffi cult. The next president will be operating in a new, cleaner environment.

Aquino should also take pride in the passing of 2 trademark laws (the Sin Tax Reform Act and the Responsible Parenthood and Reproductive Health Act), laws that had been languishing in the Congress for decades and have only come to fruition during his administration. The fi rst has added P103.4 billion to BIR coffers so far. The second has yet to be fully put in place, but now will be.

His reluctance to meet with people is now coming home to roost. Had he met regularly with Congress (LEDAC or the Legislative-Executive Development Advisory Council), the DAP would have been constitutionally implemented – he’d have had the necessary Congressional approval that the Supreme Court used as a principal reason for it being unconstitutional. It means budgets will have to be much more carefully planned in the future. The reluctance of the president to meet also regularly with his cabinet and to listen to critical comment means change is diffi cult to argue for, and even when change is recognized fi nal approval is slow to come.

What the president must now do is get through some laws that will institutionalize change so the next leader cannot willfully reverse the progress to date. There are some 20 of them that should be passed, most won’t be. Of those that might the fi rst of these is the Freedom of Information Act to mandate that government activities are open to the public – something promised while campaigning, but never done. The pressure to pass this is strong, and passage now seems possible.

Of the priority bills that matter to business, only 4 are expected to progress before 2014 ends, including: the Fiscal Incentive Rationalization; the Build-Operate-Transfer (BOT) law amendments; the Cabotage Law amendments; and the Fair Competition/Anti-Trust Act. Some of the bills that are equally important but are unlikely to be passed soon are: the Department of ICT Act; the Customs Modernization Act; and the proposed amendments to the economic provisions of the Constitution.

Within the administration just getting more effi ciency, speed and simplifi cation is a major challenge where improvement will remain slow. So we won’t see any real improvement in dealing with the bureaucracy, the frustrations of getting approvals will remain.

Opening up the economy through constitutional change even if it does get through in a plebiscite in 2016 won’t have any impact until some years later as laws will have to be passed and given the still strong protectionist element, this will take time. So foreign investment will continue with its too slow growth, increasing at a little faster rate. But more because of troubles elsewhere than improvements here. And at nothing like the levels elsewhere in Asia. The reasons have been enumerated countlessly, the solutions ignored consistently.But despite these negatives, the positive aspects indicate that the Philippines is moving into a more fi rm, stable environment in a world that isn’t.

Moves to amend the constitution to open up the economic sections to greater foreign involvement are heating up with the House of Representatives now actively conducting hearings, this despite concerns about the president’s waffl ing on whether he’d support a change in the political sections to extend his term – ultimately he won’t.

COMMENTARY

Philippine ANALYST

CCCCCCCCOCOMMMMENENTATARYRYCOMMENTARY6

July 2014

The change being considered is a simple one, and a compromise from what should really be done, which is to remove the restrictions altogether. Instead the words “except as otherwise provided by law” will be appended to each foreign involvement restriction. Thereafter a law will have to be passed, a lengthy process. Not unexpectedly the public is largely unaware of the issue (largely unaware of most national issues). Only 39% are aware, and of those 44% support it, 36% don’t.

The constraints in the government’s fi scal operations prevent the national government from increasing its infrastructure spending program quickly enough. Hence, foreign equity participation is necessary to plug the fi nancing gap in the infrastructure sector’s investment requirements. The relaxation of the foreign ownership limit in the ownership and management of public utilities is one solution to strengthening the capital base of infrastructure service providers operating in the Philippines. The 40% foreign equity limit has prevented the entry of sizeable capital in public utilities. It’s a one major reason why foreign ownership restriction in public utilities must be relaxed.

Easing of foreign ownership restriction is important if the Philippines is to shift from a consumption-led economy to one that is driven by investments and exports. An economic growth anchored on investments and exports is more inclusive and has greater capacity to provide livelihood and jobs to 12 million unemployed Filipinos.

Four bills passed into law last month that will impact on business. The fi rst, and arguably the most important was one that gives foreign banks the same rights as local banks, which includes 100% foreign ownership.

It also is a necessary step in the Philippines joining the ASEAN Economic Community.Next was severe limitation on the promotion of cigarettes. The draconian measure restricting what can and cannot be on a cigarette pack mirrors much of what has been imposed elsewhere in the world, and includes graphic health warnings.

An almost amusing one is the “Lemon Law” which supposedly will protect buyers from being sold cars that “constantly give problems or are substandard”. A rare occurrence with today’s modern automobiles. A warranty of 12 months or 20,000km is required.

Finally there’s a law to help MSME’s get into and operate a business. The law provides for MSME’s in many of the external areas of MSME operations.

Philippine ANALYST

COMMENTARY7

July 2014

SPECIAL REPORT8


( A special report on saving power)

Let there be light

Secretary Pe lla has asked for emergency powers to address the looming power shortages. Those emergency powers are intended to handle the near term problem of probable shortages over the next couple of years. The longer term doesn’t need emergency powers only the real poli cal will to speed ac on through the normal bureaucra c processes. For the short term power barges, modular plants using diesel or bunker fuel are being proposed, but these should only be a last resort, a wise con ngency perhaps but a last resort. It’s an expensive, pollu ve solu on that should be avoided if at all possible. On top of that they are needed for only a couple of years, so you need to recoup that cost in that too short a me.

There are three things that can be done instead to resolve the shortage without resor ng to emergency powers—

1. Reduce demand, which is what this report is all about. This costs next to nothing.

2. Rehabilitate the Malaya plant more quickly to be able to operate reliably and reasonably effi ciently, which is now being done. But unless repair work can be speeded up it won’t be in me for possible blackouts in the second quarter next year. And think ahead—it takes 8 to 13 hours to bring the plant into opera on. Perhaps priva ze it with condi ons on how it must operate. Discussion is going on now to do this.

3. Convince the courts not to accept “Writs of Kalikasan”; override objectors, approve na onal and local permits in days, not months even years. More than 160 signatures are needed now! Absurd. Strong poli cal will to force ac on is all that’s needed. The bureaucracy needs its bu kicked to perform quickly and eliminate the complex, unnecessary procedures that maintain now.

If anyway, it’s decided to grant emergency powers they should be for a very limited me and for very specifi c, detailed purposes.

Is there enough electricity, or not? Let’s just s ck to Luzon so as not to too complicate an already very complicated subject. The government had been saying for a long me there’s enough, now it seems to be agreeing with those of us who have been saying equally as long, no there’s not. Whether there is or not all hinges on “reserves”.

There are 53 generators on Luzon that are connected to the grid. The smallest is 0.2 MW, the biggest has a capacity of 1,294 MW. Their ages range from 1 to 72 years. They can reliably supply an average of 8,100 MW to the grid daily, with 650 MW available from CBK (a reverse cycle hydroelectric plant in Caliraya) at peak load mes and 650 MW from bunker fuel-fi red Malaya (an old, expensive plant to run in emergencies).

Demand is from a low of 6,000 MW to a high of 8,700 MW, generally averaging 7,300 MW but growing. On average supply and demand there’s a reserve of about 800 MW or 10 percent of total, which means if any of the major plants unexpectedly goes off -line we’re short of power. It is generally accepted that you should have a reserve of 20-25% to be safe. We don’t have it as the a ermath of typhoon Glenda showed.

SPECIAL REPORT 9


The demand for power is growing at 4.8 percent per annum (on an annual GDP growth of 6 percent) but the faster the economy grows the quicker we approach shortages, and if the government’s desire to a ract more manufacturing eventuates the deple on of the country’s energy reserves will be even faster.

There are 17 plants planned for Luzon but they will provide only 1,876 MW of power. Five (477 MW) will be commissioned this year: four (386 MW) in the fi rst half of next year; fi ve (331 MW) in the second half of 2015; three (682 MW) have yet to start. And all this assumes they proceed as scheduled—a not too regular occurrence in the Philippines. We don’t get to the 20-25% reserve level un l around 2017/2018. And then only if the power plants are actually built as scheduled. So more blackouts (I can’t fi nd “brownouts” in my dic onaries. And anyway when I have no power the rooms in my house are black, not brown) as we’ve already seen.

PROPOSED PLANTS FOR LUZON

Of the 17 power facili es, 5 (477 MW) are to be commissioned this year: 300-MW SLPGC coal-fi red power plant Phase 1 Units 1&2; the 135-MW Pu ng Bato coal-fi red power plant Phase 1; the 24-MW San Jose City l Power Rice Husk-fi red Biomass power plant; and the 18-MW Bangui Bay Wind Power Project Phase 3.

Four (386 MW) are expected for tes ng and commissioning within the 1st half of 2015, which are: 87-MW Burgos Wind Power Project Phase 1; 81-MW Caparispisan Wind Energy Project; 18-MW IBEC Biomass Plant; and Unit 1 (200 MW) of Energy World Corp.’s 600-MW Pagbilao Combined Cycle Gas-fi red plant.

Five plants (331.3 MW) are ongoing construc on ac vi es which are expected to complete in the 2nd half of 2015. These are: 67.5-MW Pililia Wind Power Phase 1; CJ Global’s 18-MW Biomass Project; Green Innova on’s 10.8-MW Biomass Project; South Luzon Thermal’s 135 MW Pu ng Bato Coal Power Project Phase 2; and 100-MW Avion project.

Three projects (682 MW) that have yet to move forward to the construc on stages: Units 2 and 3 of the 600-MW Pagbilao plant, and Anda Power’s 82-MW Coal power plant.

The maintenance shutdown of Ilijan (1,200 MW) led to rota ng blackouts in mid-July and typhoon damage to Quezon Power (460 MW) followed by a breakdown of Masinloc (630 MW) placed many parts of Luzon in long hours of blackout the following week. With more typhoons expected, blackouts would seem inevitable.

I could delve into this in a lot more detail (as our ancillary report “The Story of PH Power Woes” does) but the bo om line is it’s ght. We could be OK—just OK, IF all goes well and as planned but as Robert Burns said “The best laid schemes o’ mice an’ men, gang a agley (o en go awry)” and they certainly do in the Philippines. It was maybe here he was thinking of when he wrote that. With depressing regularity power plants don’t get built on me, they don’t even get approved for years. Old plants breakdown unexpectedly. And there’s another thing: power plants like motor cars don’t last forever, maybe 25 to 30 years reliably. And we have about a dozen (and they are among the larger ones) that are within that age range with li le talk of replacing them. All plants, regardless of age, must shut down for annual maintenance. While natural calami es and interna onal disrup ons of fuel supply can take many megawa s out of the system. So we’ll have blackouts from me to me if urgent ac on is not taken.

That’s why Secretary Pe lla is asking for emergency powers from Congress to quickly bring in addi onal power-genera ng capacity. The idea is to rent, or maybe buy modular generators for the immediate term and rush contract of new plants for an early start of construc on. The Electric Power Industry Reform Act of 2001 (EPIRA) bars the government from pu ng up power facili es. However, Sec on 71 of the law s pulates that the President, upon the determina on of an imminent shortage of power supply (which we have), may ask Congress for authority to establish addi onal genera ng capacity.

SPECIAL REPORT10


This was done by Ramos when he inherited a na on in darkness, so the model is there. Certainly something needs to be done to break out of the bureaucra c iner a that is slowing growth today. But we don’t favor using those powers for the longer term problem because although new plant must be built, and built fast, it can be done within the exis ng system. All it needs, as we said at the beginning, is the resolve to force decision and ac ons quickly. And override objectors, what’s needed is the (in) famous “poli cal will”. But ordinary Filipinos can also contribute: conserve power.

There are four parts to power: genera on, transmission, distribu on and consump on. Genera on, the building of plants, the reserves needed, the cost, and on and on has been discussed interminably with recommenda ons made, but insuffi ciently done as the above shows. So with too few new plants being built suffi cient supply reliably remains at considerable risk.

For some reason all the focus has been on supply, I’ve seen far too li le said about demand. Yet demand is fl exible, it can be reduced taking pressure off supply. Rina David beat me to it (I was half way through this research) by coming up with some good sugges ons a few weeks ago. But let me expound on them some more as it’s an important area that can reduce, if not eliminate the risk of blackouts over the next couple of years. Because by reducing consump on it can give us the reserves that are essen al to reliability. That means the power plants we have now will be er handle supply of the power needed. The beauty of that is that it also reduces your power bill. It’s environmentally benefi cial too.

A fi rst step could be taken by government. I think it was Mon Paje who suggested to me once we go to “daylight saving”. Advance our clocks one hour. Australia does it in summer, we could do it year round. It would mean one hour less of darkness, of the need for power consuming lights. It’s easy, it’s costless, it saves electricity.

There are three main groups of users: Industrial, commercial and residen al. Big users are be er treated, fair enough they’re certainly paying for it. Also the kind of load they have is diff erent. More induc ve power, motors and so on where power factor becomes an important issue. One that is irrelevant to households. And their systems are more complicated, where more things can be done to lessen the load and where regular, even daily or hourly monitoring can make a diff erence.

Let me start with residen al because it aff ects us all. The key to using less electricity is, quite obviously, to know where it’s being used. But that’s not quite as obvious as you’d think. Take just one, aircons. Star ng the air condi oner with the lowest possible temperature se ng will not cool the room any faster. The speed at which an aircondi oner cools is a fi xed rate, it’s just where it stops that varies. And if you forget to reset it the room gets too cold. Adjus ng the thermostat to 23 or 24 degrees Celsius is about right. Every degree (Celsius) down results in P0.48 per hour added to your bill for a 1 HP aircon, that could be at least P110 per month saved.

On the commercial side malls and restaurants should set the temperature to be comfortable with no need to wear a jacket, as you need to in some places. 23-24 degrees Celsius is comfortable, the 20 degrees Celsius that some malls and restaurants are set at is not. Design is important too. Some SM malls, due to cube design, consume some mes up to 40% less electricity than similar sized but more elegant malls from other groups. Government needs to set standards here, and ensure they’re complied with.

And when we do need light shi to CFL’s that use only 20% of the power an old-fashioned fl uorescent does. Incandescents are gone, beau ful as they were. For fl uorescents replace the thick T12 with a thin T5, they fi t right in and use approximately 30% less power, that’s around P35 in savings per month for eight hours a day. Which at a cost of P350 (for T5) means you get your money back in less than a year.

But the new shi is to LED’s, Light Emi ng Diodes. They consume half the power, or less that a CFL does. These incredible creatures turn electricity into the same amount of light with almost none of it lost to heat while consuming only 10% of the energy of an equivalent incandescent bulb. Touch an incandescent bulb that’s on some me and you’ll see. A baby could cuddle an LED (its only 3.5 volts too, so it won’t kill the baby).

The trouble is they’re expensive and for a populace that won’t spend P1,700 for an E-Pass but will sit in toll traffi c consuming gas at a far higher annual cost they aren’t an easy sell. An idling car typically consumes 0.6 liters/hour per liter of displacement. So if you have to wait an extra 15 minutes a day, and that’s on a good day, and you have a 2 liter engine it will cost you P16/day or P5,000/year. This assumes you stay home on Sundays. You’ve paid for an E-pass in 4 months! For me the cut-off point as to whether to buy an LED is 10 hours on per day. But costs will come down and they will become ever more sensible to shi to. And I must admit this 10 hours per day calcula on hasn’t taken into account the much longer life.

SPECIAL REPORT 11


But there are LEDs and LEDs. The cheap Chinese ones look like a great deal. They’re not. One, they too o en don’t last the promised “up to 50,000” hours (which is about fi ve mes the life of a CFL), I’ve had them go out in a year and their light output (called Lumens) reduces over me, you get less light but you s ll use the same energy. A roman c glow perhaps, but I want to see what I’m doing. GE, Philips, Osram—these are names with a solid reputa on I trust.

Solar switches so you don’t have to remember to turn a light off in the morning. Mo on detectors to turn lights on only when you’re there. And that one simple thing: Consciousness, being aware, turning off lights as you leave the room. Or fans, they use power too. Remember TV’s and stereos use power too, don’t leave them on.

Also, some appliances consume power even while they are turned off . This is called phantom load, standby power or, an even more nega ve term, vampire load. It can represent as much as 10% of your total bill. Your TV cable tuner, for example, consumes approximately 30 Wa s while just si ng there. That is about P220/year, excluding the me you spend watching TV! Add TV’s and any other electronic device and the saving can be substan al. Do disconnect them from the wall socket as even when switched off modern electronics consume power. Actually what I do that is cheap (P120) and simple is buy a switch adaptor. These li le boxes plug into the wall, then your gadget plugs into that and there’s a switch on the side. So a simple fl ip of a switch is all that’s needed. Most hardwares have them.

Go to inverter refrigerators and aircons. Electric motors consume most on startup, like ge ng a car moving from the kerb. Older refs and aircons are stopping and star ng all the me. Inverter type aren’t. There’s a 20-50% saving in electricity consumed in both aircons and refrigerators. And with refrigera on be er insulated today they need to be cooling for less me daily. It makes money sense to replace units that are more than 4 or 5 years old.

Shi from an electric stove to gas, the oven too, or an induc on cooker. Induc on cookers use approximately 58% less energy, and with the cost of gas this may be the way to go. It’s safer too. Crea ng heat with electricity is a very expensive thing to do. When cooking your adobo, use enough heat to simmer. Turning up the power or increasing the fl ame with gas will not make the sauce any ho er, or thicker any quicker. Water boils at 100 degrees Celsius and this is a property of water that will not allow itself to be changed no ma er how much heat you apply. When cooking stews, use a pressure cooker. It will save you me and energy. Dry your clothes under the sun or use a gas-fi red dryer. Anything that uses electricity to produce heat does so very ineffi ciently. These include ovens, hair dryers, irons, and clothes dryers, use them as li le as possible.

Add rubber gaskets or silicone sealant to the air gaps of your doors, windows, and window air condi oners. Add insula ng fi lm and/or heat refl ec ve fi lm on your large glass windows or use blinds on the windows to reduce the warm sunlight coming in. Vene an blinds are good as they let in the light, but not the sun if angled correctly. All li le things that will bring the monthly bill down. Grow a tree or vines to provide shade to the side of your house facing the sun.

To take that further a be er building code requiring be er insula on of buildings as they are built to save on energy is needed. Apartments at present, for example, are op mized for low ini al cost rather than energy effi cient design. Other countries have much be er building standards, and regula on of them. We should adopt those standards.

An easy one to take advantage of is me-of-use (TOU) pricing. Meralco varies its cost depending on when and what day. Highest during peak demand mes, lowest when demand is low. But you need to change your meter to one that records me too. A one- me installa on fee for residen al customers ranges from P1,092 to P1,490. If you’ve installed a TOU meter, it’s much cheaper to do your power intensive chores, e.g. laundry, etc. during off -peak periods especially on Sundays when the off - peak rates are extended to 22 hours while peak rates are applied for 2 hours only from 6 to 8 pm.

You can also take advantage of using appliances with high power demand by enrolling in the peak/off -peak program of MERALCO (see table) since you will be able to manage your electricity usage and be charged accordingly .

According to its website, the Meralco POP “is designed to help corporate partners lower their total electricity expenses through rates based on peak and off -peak periods. Peak periods are hours of the day when demand for electricity and energy costs are high, while off -peak periods are when less plants require electricity and costs are low. With this pricing scheme, corporate partners can avail of lower genera on costs by opera ng even at full capacity during pre-defi ned off -peak hours, when electricity is cheapest.”

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If there were mandatory Times Of Use Rates for larger accounts, as there are in a number of countries peak capacity could be reduced signifi cantly. In Asia the Philippines is the only major country without mandatory Time of Use Rates for large loads. Factories with power hungry machinery that is operated by only a few staff could be run during off peak mes.

For techies, Meralco recently launched an updated version of its mobile applica on MoVe App. The app is equipped with a Usage Tracker feature that allows consump on monitoring of mul ple appliances. The app can also help customers es mate their monthly bill. The app is free for Android and Apple iOS users. Just visit Google Play or Mac App Store using your smartphone or tablet.

A good friend of mine, Bert Lina, recognized ahead of many of us that the future lay in renewable, clean energy. He went into solar power when it seemed quite uneconomic to do so. Since then panel prices have fallen by around 30-50% and effi ciency improved by about a third. And this trend will con nue. Solar power is free and has zero nega ve impact on the environment. What more could you want? It all comes down to the ini al capital cost, and with that coming down the ra onale to shi that way is growing rapidly. Already Canberra in Australia produces enough solar power to supply the equivalent of 4,400 homes. The solar power facility is built on a 50-hectare plot of land.

With net metering you could connect directly to the grid with no need for expensive, short life ba eries.

MERALCO’S PEAK/ OFF-PEAK (POP) PROGRAM

Meralco’s Peak /Off -Peak (POP) rates program (formerly known as “Time of Use” or “TOU” is an alterna ve energy pricing scheme that is based on the me of day electricity is generated and on the cost of supplying electricity during that me. With this pricing scheme, Meralco customers can avail of lower genera on costs in their total electricity rate during pre-defi ned off -peak hours:

PEAK OFF PEAK

Monday to Saturday

8 am to 9 pm(13 hours)

9 pm to 8 am(11 hours)

Sunday 6 pm to 8 pm(2 hours)

8 pm to 6 pm (22 hours)

b) Wet/rainy (July to December)

PEAK(Php/kWh)

OFF-PEAK(Php/kWh)

DRY

POP rate 7.48 3.55Non- POP rate 5.69 5.69

Diff erence 1.79 -2.14

WET

POP rate 7.28 3.55Non- POP rate 5.57 5.57

Diff erence 1.71 -2.02

Under the POP program, the peak rate will be Php 1.80/kWh more expensive than Meralco’s default non-POP rate, but to encourage customers to consume electricity during off -peak hours, the off peak rate will be lower than the non-POP rate by Php 2.14/kWh.

*With approval from ERC

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It’s like electric cars, they are the future and the future is upon us. Solar power will be a major source of electricity with other sources picking up the absence at night, when demand is low. So less pollu ng, costly power needed for the grid.

With Bert’s help I’m installing solar panels in my country home, I’ll let you know the result. It costs P240,000 for a 2-kw system that can connect directly to the grid. On a conserva ve basis it generates about 150-200 kWh a month which saves you about P1,500-P2,000 per month. So you get your money back in about 8-10 years. One of my friends there runs solely on solar the complete house, successfully. The ba ery pack for a 2 kw unit costs P60,000. For rural communi es far from any grid it’s the obvious way to go, no expensive transmission lines needed. 7,107 islands can be energized.

Government could help by removing the du es and taxes on solar panels and their peripherals. That could reduce cost by over 20%. To promote the use of this environmentally-desirable system that’s something government should do.

In researching this column for industrial users I asked Meralco because they’re the experts. You’d think they’d be the last people to ask seeing as how they make their money from distribu ng electricity. But, for me, they were one of the fi rst because I’ve known them a long me and know they want to help people get the best deal. They have a whole team, the Energy Solu ons Team dedicated to helping large users in analyzing and managing power consump on. Knowing where electricity is being over-used is a service Meralco provides.

For large users (with an average demand of at least 500 kW) and SME’s they can conduct an audit of your system to iden fy where savings can be made and to do this they appoint a Rela onship Manager.

Meralco has a subsidiary, Meralco Energy Inc. (MEI) that has a program that can do an audit of power usage and recommend where savings can be achieved. An interes ng one is a Shared Savings Scheme where MEI buys the equipment and fi ngs that will reduce power and you pay back in the monthly billings un l such me the total cost of retrofi t has been recovered.

For factories they can do the same on load profi ling to determine how to get savings. Of par cular benefi t is an analysis of electric motors, which are big power consumers, on how to get greater effi ciency. Power factor improvement can help where there’s a lot of induc ve power (motors, etc.).Properly-sized capacitors are normally used to improve this, and they can bring your cost down. For you at home, there’s an electronic version being peddled on the market, don’t be fooled by it, it doesn’t work. Using a lux meter they can determine the best ligh ng arrangement i.e. using the least number of lights and lowest wa age to give just the illumina on you need.

For those with their own generators the government has introduced what’s called an Interrup ble Load Program where if you use the generator during peak hours Meralco will reimburse you a por on of your fuel and maintenance cost to ease pressure on the system. There’s apparently some 1,500 MW available from standby generators. This is certainly something socially responsible companies should consider in coordina on with the DOE as to when it is really needed. During typhoon Glenda 110 MW was de-loaded from the grid through the use of self-genera on. A nega ve to be taken into account though is that these units are diesel driven so, pollu ve. Hence using only when blackouts seem inevitable should be the goal. Then there’s no blackout.

Pe lla says he needs emergency powers to mandate that generator owners must switch on when necessary. I don’t agree, tell us who won’t co-operate, we’ll shame them. But I can’t imagine any reasonable company not wan ng to help. Failing that I can think of many ways to force par cipa on. If the President and Pe lla sit down with the owners of standby generators and power companies I’m quite sure they’ll be able to persuade them all to co-operate for a few short months.

And that raises the point that the DOE needs a comprehensive, computerized system that can monitor power produc on, transmission and usage on an on-going basis and call for private sector ac on to reduce load or turn on generators. Hopefully eventually it’s a system that is wholly automa c—a technical possibility today.

Consump on in case of unexpected plant shutdown can be quickly reduced by allowing u li es (such as Meralco) to remotely shut down not so important loads, such as large air-condi oning systems etc. The right for the u lity to do so is usually fi xed in contracts with large factories etc. and off ers some power rate reduc ons in return. Implementa on of automated short me load shedding is very cost effi cient since few accounts can off er substan al load reduc ons. With implementa on of mandatory me of use rates for larger accounts peak capacity could be reduced signifi cantly.

If you’re a major user and interested in more detail Meralco regularly conducts lectures on how to reduce consump on, etc. that last half a day. It’s by invita on, but I’m sure if you express interest you’ll get that invita on.

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All of this will help get your bill down. But it will s ll be high compared to our neighbors. It is because the government is ac ng sensibly —it doesn’t subsidize cost, other ASEAN countries do at anything from 36% to 54% of cost. This is unfair, and the wrong thing to do. What the Philippine government could consider is reducing or removing taxes, if all are added up, there are about a dozen from VAT to real property taxes, they come to a tenth of Meralco’s bill. This needs a study with the basic goal of fi nding out if the direct loss to government in needed revenues is more than compensated for by the increased economic ac vity that could occur. I believe it could be because the high cost of power is one reason, a principal one in some industries, we get the lowest level of FDI. The cost of such a study is well jus fi ed, and something the DOE should do.

The beauty of all I’ve suggested is that it reduces our power bill, obviates power shortages, reduces pollu on, costs very li le to do. What more could you want?

All it needs is for the government to adopt it and ac vely promote, even enforce it. Will they?

And let’s get everyone to co-operate, let’s all fi nd ways to reduce our power, even a li le bit. An es mated 54 million Filipinos on Luzon doing it adds up to a lot of power saved.

Social coopera on for the good of all. Let’s do it.

Acknowledgments: I’d like to thank Meralco, Aboitiz Power, First Gen, Quezon Power, PPI Pazifi k, GE, and Philips for their assistance in compiling this report.

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The story of PH power woes

The Philippines has been hailed as the next “Asian miracle” by World Bank president Jim Yong Kim because of the op mism the World Bank has for the country’s economic prospects. Overall the global economic growth forecast has been reduced from 3.2% to 2.8%, but for the Philippines it was kept at 6.4% for this year. This is nice to hear, but the important point is sustainability. And that needs infrastructure. And in an era that depends on electricity to do business, power is cri cal. The current Philippine power infrastructure cannot support 6% growth let alone the 7%+ hoped for without eff ec vely increasing supply of electricity by at least 13,000 MW in the next 15 years.

The facts are:

1. Power reserves are too small, and shrinking. And ght reserves leave no room for system failure. Yet no one will invest only as a reserve plant.

2. Balancing reserves between available supply and power demand is diffi cult and has not been well-handled to date.

3. Old plants need regular maintenance. The reliability of the power sector is compromised.

4. To spread growth, electrifi ca on has to be expanded throughout the country.

The solu ons are:

1. Build more plants.

2. Improve governance and management of the power sector.

3. Reduce power demand (a separate report of WBF—Let There Be Light).

THE HISTORY

The Department of Energy (DOE) stated in WBF’s Quarterly Roundtable held on April 29 that the power situa on in the Philippines will not encounter problems un l 2018. Yet just a few weeks later in May the Visayas grid experienced a power shortage. What caused the power problem was the unexpected shut down of 3 power plants (200 MW) on May 19, which were Panay Energy Development Corp. (PEDC) 82-MW plant in Iloilo, the Energy Development Corp. (EDC) 36-MW plant in Leyte, and the Cebu Energy Development Corp. (CEDC) 82-MW plant. Luzon had to export at least 50 MW of power to help augment supply. Highligh ng that the confi dence DOE had was based on the (ques onable) premise that all will go well. What the DOE failed to men on is that reserves are too thin in this year’s summer months, roughly about 4% (317 MW) in Luzon and -3% (-357 MW) in Mindanao. Visayas on the other hand has an outlook of 26% (539 MW) for this year but had a 3% (57 MW) gross reserve in May which resulted in this unfortunate situa on. If there were enough reserves this would not have happened.

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And now the DOE Secretary has called for emergency powers to allow the government to tap addi onal power capacity next year. Shades of the me at the end of the late President Cory Aquino’s term when former President Fidel Ramos had to get emergency powers to resolve the daily blackouts the country was suff ering. In the 1980s it became evident that electricity supply was running low. The consump on of electricity was constrained to grow by only 2% per annum, which was not enough to support an economic growth that was expected to be higher than this. But the event that created the 1990-1993 power crisis was the decision to junk the 620-MW Bataan nuclear power plant in 1986 because of safety concerns and some allega ons of gra and bribery involved in the project without an alterna ve plant in plan. As the Philippines’ fi nancial standing fell in 1983 and 1984, opening the power market to private investors was the only good op on to secure enough electricity to support future growth. In 1987 the government issued Execu ve Order (EO) no. 215 to encourage private power projects. But only the contract with Hopewell Energy Management Ltd. for 3 units of a 70-MW gas turbine power plant was signed in 1989 and started opera on in 1991. That’s more than 50% below the planned capacity of the nuclear power plant. One of the reasons behind the private sector’s tepid response was the Na onal Power Company (NPC)’s monopoly over transmission grids, which allowed it to set a benchmark price for power purchases. The 2nd barrier to private power investments was the limita on on the size of a private genera ng facility under EO 215 at 10% of the NPC grid demand. Also provisions under EO 215 did not allow private genera ng facili es to connect directly to a distribu on u lity nor to be contracted as base load plants, only peaking plants. So who’d invest.

To get rid of the barriers to power investments, the Energy Crisis Act (Republic Act No. 7648) was introduced in 1991. The law empowered the execu ve branch to fast-track the implementa on of power projects, removed the restric on on the size of power facili es, permi ed self-power genera on, and allowed power supply contracts between private generators (a.k.a. independent power producers or IPPs) and private distribu on u li es. As a result, under Ramos’s guidance and the emergency powers granted him the NPC concluded 25 contracts by 1993 with a total capacity of more than 3,000 MW. Some large consumers were building their own power facili es to be less dependent on NPC’s supply. On the other hand, NPC con nued to nego ate with IPPs for back-up supply to the grid. The NPC also engaged in the Build-Operate-Transfer (BOT) scheme for building addi onal genera ng capacity with a diversifi ed fuel mix (hydro, geothermal, coal, and renewable fuel). Shortly a er the power crisis offi cially ended in 1993, the economy reached its expected growth.

THE PRESENT SITUATION

Again not enough new power plants are being built as fast as the increase in the demand for power, as projected reserves are no ceably thinner than needed for the whole Philippines (see Philippine Power Outlook of 2014-2020 on page 3). The generally accepted level is at least 20%. Thus, reserves should be at least 1,890 MW for Luzon, 410 MW for Visayas and 320 MW for Mindanao in 2014. They are only roughly 806 MW (8%), 539 MW (26%), and 82MW (5%). With these thin reserves it only needs 1 or 2 plants to break down and blackouts will occur. And given that 21% (3,182.2 MW) of the Philippines’ total dependable capacity comes from plants more than 30 years old it is by no means impossible that these breakdowns will occur (see Philippine Power Profi le as of 2014 on page 4). Anyone who must have con nuous power would be wise to have a back-up system.

Aside from addressing thin reserves, the country’s power transmission system also needs rehabilita on and expansion for it to handle conges on on the grid and be able to support the growing demand for power and the entry of new generators. With a good delivery system, the reliability and quality of power is improved. Also needed is for the archipelago to be fully interconnected and loop systems developed.

THE UNEXPECTED CAN BE EXPECTED.

FULL NATIONAL INTERCONNECTION IS NEEDED.

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The Na onal Grid Corpora on of the Philippines (NGCP), the country’s grid operator, admi ed that there are several things that need to be done to have a more effi cient transmission system. For the Luzon grid, the NGCP plans to build a 500-kilovolt (kV) backbone loop system from the exis ng 500-kV line (see Philippine Transmission Map on page 6). It also plans to develop new transmission lines and new 500-kV and 230-kV substa ons in Metro Manila, which currently accounts for 53% of the total load on the Luzon grid and 40% of the total load of the country. Meanwhile, the NGCP will establish a 230-kV Cebu-Negros-Panay line in the Visayas grid to strengthen the backbone since the current radial confi gura on is very long and makes it prone to grid failure by any incident along the line. For the Mindanao grid, it plans to upgrade old substa ons that need immediate a en on. Although Mindanao looks to have a stable power situa on in the next 4 years it badly needs addi onal transmission facili es.

A major transmission project that the government has been eyeing for over 30 years is the Leyte-Mindanao Interconnec on Project (LMIP). This 400-km project would connect the Mindanao and Visayas grids. Their plan is to start construc on of the project in 2016 and complete it by 2018. However, the NGCP and the government found in the feasibility study that the cost of the LMIP would have to be increased from P25 billion to P34 billion in order to provide a deep trench interconnec on. As an alterna ve, a feasibility study on a Negros-Zamboanga Interconnec on Project (NZIP) is being conducted, which is expected to be fi nalized by December 2014. Only when the study is completed will the NGCP decide which project to pursue. The applica on for implementa on may be submi ed to the ERC by end-2014 or early 2015.

165 SIGNATURES AND OVER 3 YEARS TO APPROVE A POWER PLANT

But why does it take the government 30 years to decide, let alone construct a transmission line and more than 3 years to approve the construc on of a power plant? In WBF’s Quarterly Roundtable, the DOE pointed out that there are 165 signatures needed to secure the necessary permits to build plants! Yes, you read it right: 165. This Red Tape entangled all over the country’s future power infrastructure is jeopardizing the country’s poten al growth. There is enough interest to build plants in the country, but building a power plant takes at least 3-5 years and in the Philippines many mes it is longer than that to even get started. Another problem is the inconsistency in the decisions made at the Local Government Unit (LGU) level brought by the frequent changes in the leaders (mayors), who have diff erent interests or priori es. As DOE Secretary Pe lla pointed out, “We need full- me jobs working in LGUs (to handle power projects)”. A specialized independent unit at the local level composed of long-term professionals who could be there for at least 5 years so that projects of the power sector would be handled consistently is needed.

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GRID TRANS/SUBTRANS LINES (CIRCUIT-KM) SUBSTATION CAPACITY (MVA)

LUZON

500 kV : 982+/-350 kV : 387230 kV : 5,179115 kV : 19469 kV : 2,697(& below)

21,110

VISAYAS

+/-350 kV : 518230 kV : 344138 kV : 1,91869 kV : 2,060(& below)

3,504

MINDANAO138 kV : 3,30269 kV : 1,844(& below)

3,317

TOTAL 19,425 27, 931

POINT INTERCONNECTION YEAR ESTABLISHED CAPACITY VOLTAGE LENGTH

A Leyte-Luzon 1998 440 MW +/- 350 HVDC OHL: 420 kmSub: 23 km

B Leyte-Cebu 19972005 (upgrade) 370 MW 230 kV OHL: 330 km

Sub: 32 km

C Leyte-Bohol 2004 90 MW 138 kV OHL: 152 kmSub: 17 km

D Cebu-Mactan 2005 200 MW 138 kV UGC: 8.5 km XLPE

E Cebu-Negros 19932007 (upgrade) 180 MW 138 kV OHL: 109 km

Sub: 19 km

F Negros-Panay 1990 80 MW 138 kV OHL: 167 kmSub: 18 km

G Panay-Boracay 2006 40 MW 69 kV OHL: 1.6 km

EXISTING INTERCONNECTIONS

Prepared by the Wallace Business ForumData and chart sourced from the National Grid Corporation of the Philippines (NGCP), 2014

EXISTING ASSETS

PHILIPPINE TRANSMISSION LINE

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Is the Philippine power infrastructure system on par with its neighbor countries? In terms of capacity and cost, it is not. In terms of management or governance, it is also a resounding no. Looking at similar countries to the Philippines in both economy and geographic profi le, there is Indonesia and Malaysia. Indonesia has the cheapest electricity with an average of $0.09/kWh, while Malaysia has an average of $0.12/kWh and the Philippines has $0.22/kWh. Indonesia is an archipelagic country like the Philippines, but its physical infrastructure for power has supported an average economic growth (GDP) rate of 5.9% over the past 5 years. The Philippines, on the other hand, can currently only support an average growth of 5.3%. Not so much diff erence, but Indonesia’s growth mostly came from power-intensive industries. Most of the Philippines’ growth is consump on driven. The Department of Trade and Industry wants to revive the manufacturing sector but how can that be possible with the current status of power infrastructure?

THE PHILIPPINES TRAILS ITS NEIGHBORS

COUNTRYAVE. GDP GROWTH

’09 ’13

GDP GROWTH OUTLOOK

’14 ’16

SYSTEM CAPACITY/

PEAK DEMAND

2014

ELECTRICITY RATES

GOVERNING BODIES

LENGTH OF TRANSMISSION

LINE PER 100 KM2ELECTRIFICATION

Philippines 5.26%(1%-7%) 6.67% 13,101 MW/

11,674 MW

Luzon = $0.22/kWh(Meralco = $0.26/kWh)(Palawan = $0.23/kWh)

Visayas = $0.24/kWhMindanao = $0.19/kWh

DOE, ERC, NEA, PEMC, TRANSCO, DENR, LGUs

6.91 km 83%

Indonesia 5.88%(5%-7%) 5.50% 28,264 MW/

27,283 MW $0.09/kWh

Ministry of Energy and Mineral Resources, LGAs

1.98 km 73%

Malaysia 4.26%(5%-7%) 4.97% 19,023 MW/

17,883 MW

Peninsula = $0.12/kWhSabah/Labuan = $0.11/kWh

Energy Commission 3.34 km 99%

Notes: DOE = Department of Energy; ERC = Energy Regulatory Commission; NEA = National Electrifi cation Authority; PEMC = Philippines Electricity Market Corporation; TRANSCO = Transmission Corporation; DENR = Department of Environment and Natural Resources; LGU = Local Government Unit; LGA = Local Government Authority.Sources: The Department of Energy, various reports

The Electric Power Industry Reform Act of 2001 (EPIRA) has covered the important elements in reforming the country’s power sector. There are 5 main objec ves of the law:

(1) Priva za on of power assets; (2) Improving compe on in the power sector; (3) Widening the scope of electrifi ca on; (4) Lowering of electricity rates; and (5) Increasing power supply and reliability of the sector.

Of these 5, lowering electricity rates and increasing supply and reliability of power seem to be the most diffi cult for the governing bodies to implement. DOE Secretary Pe lla has men oned that the reason why balancing reserves (which consequently lowers power rates) is diffi cult is because of our geographic profi le. Since many countries are landlocked, they can import needed power. The balancing of reserves is actually a common problem in other countries too. But the advantage of other countries is their geographical loca on. Thailand for example is a landlocked country so it can easily import its needed power from other landlocked countries like Laos and Myanmar – which it has done. Germany imports power from Belgium. Loca on is also one of the reasons behind the country’s high power rates. The Philippines’ geographic loca on cannot be changed but what can be done is to improve the implementa on of EPIRA (it does not need amendment as some sectors are clamoring for) and address bo lenecks in the implementa on of power projects. In improving supply and reliability of power, the main bo leneck is at the local level in ge ng permits and approvals.

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To improve the reliability of supply, the government indicated in its Philippine Energy Development Plan that it will:

promote indigenous fossil fuels, triple renewable energy capacity by 2030; increase installed capacity; upgrade and expand transmission and distribu on networks; interconnect island grids; expand the use of natural gas; achieve 100% si o electrifi ca on by 2015; achieve 90% household electrifi ca on by 2017; implement the Na onal Climate Change Ac on Plan (NCCAP) in the power sector; upgrade the standards for energy systems and facili es; mainstream energy planning in LGU development plans; advocate for the inclusion of energy in land use classifi ca on and declara on of energy projects as projects of na-

onal signifi cance; complete regional power plants; and promote power investment.

THERE ARE PLANS TO IMPROVE RELIABILITY—BUT WILL THEY GO BEYOND PLANS?

SELF-GENERATION IS ENCOURAGED

At present, the government is implemen ng the Interrup ble Load Program (ILP) in Luzon to help augment the supply situa on, similar to what has been done in the Mindanao grid. The ILP involves de-loading of large power users from the grid and using their own power genera on facili es to supply their own power needs. In return, these users will be paid for that use. The ILP in Luzon was readied in June and actual opera on started in July. In the week of typhoon Glenda DOE reported that some Meralco customers de-loaded 110 MW from the grid.

BETTER COORDINATED AND MANAGED SUPPLY IS NEEDED.

Aside from the ILP, another program that the government hopes to implement to temporarily ease the supply situa on in the grid is the Reserves Market. This would use untapped capacity of power plants to prevent frequent outages during cri cal periods and allow the NGCP to transmit reserve power to areas with power defi cits. DOE Secretary Pe lla said last year, “The reason is basically there is not enough reserves that’s why we’re pushing for a reserve market. Because there’s energy right now that you cannot contract.” The DOE said that the method of the Market Dispatch Op miza on Model used in the Wholesale Electricity Spot Market (WESM) is ready to be integrated into a power reserves market a er comple ng simula ons in September. The model can immediately be implemented and “co-op mize” the dispatch of regular power through WESM and reserves or ancillary services (AS) in the reserves market. The ERC has yet to approve the pricing and cost-recovery scheme of the market.

According to DOE, there are other projects and programs with ongoing feasibility studies that will help the power situa on of the grid. However, DOE declined to give any further informa on.

STATE OF EMERGENCY CALLED FOR—IT’S NOT DESIRABLE

As men oned earlier, DOE Secretary Pe llla has asked President Aquino to declare a state of emergency or crisis in the power sector. He said there is a projected defi cit of 200 megawa s (MW) for some days of April and May 2015, and the emergency powers would allow the government through the Power Sector Assets and Liabili es Management Corp. (PSALM) to contract addi onal power. Sec. Pe lla said he is recommending addi onal capacity of up to 500 MW, instead

SPECIAL REPORT26


of just 200 MW to provide a buff er in case the projected defi cit becomes bigger. The EPIRA prohibits the government from construc ng power plants. However, Sec on 71 of the law states that the President, upon determina on of an imminent shortage of supply of electricity, may ask Congress for authority through a joint resolu on, to establish addi onal genera ng capacity.

Another but unlikely solu on is the connec on to the ASEAN Power Grid. This is indicated under the ASEAN Plan of Ac on on Energy (APAEC) along with the Trans-ASEAN Gas Pipeline, coal and clean coal technology, energy effi ciency and conserva on, renewable energy, regional energy policy and planning, and nuclear energy. These will aim at establishing an integrated ASEAN Energy Market. For the Philippines, the advantage is the opportunity to connect to the ASEAN Power Grid and be able to import needed electricity. However, a fully interconnected transmission system within the country would need to be completed by then (see illustra on on page10). Thus, this cannot be implemented un l several years from now. The APAEC 2016-2020 is s ll being dra ed with its fi nal version expected some me in 2015. It won’t be cheap.

THE FUTURE IS BLEAK.

The future is bleak. The Luzon grid can have 11% reserves in 2015 and 2016 but it goes way down from there, unless new projects are built, star ng now. Visayas has a 21% buff er in 2015, 19% in 2016 and 13% in 2017, but shrinks to 6% in 2018. While the Mindanao grid will have suffi cient reserves as long as commi ed projects are implemented as planned otherwise reserves could fall to a too low 7% by 2020. The programs being implemented right now are only short-term solu ons, there’s li le a en on being given to longer term, more permanent solu ons. Unless such solu ons are enacted GDP growth will be constrained below 7%.

As in so much else it’s all up to government to do the right thing, to do.

SPECIAL REPORT 27


Southwest Luzon Coal Unit 1 (DMCI Power, Batangas) Coal 150 MW Jul 2014Pu ng Bato Unit 1 (Trans Asia, Batangas) Coal 135 MW Aug 2014Northwind Phase 3 (NorthWind Power Dev’t, Ilocos Norte) Wind 18 MW Aug 2014Southwest Luzon Coal Unit 2 (DMCI Power, Batangas) Coal 150 MW Oct 2014

SJCI Biomass (San Jose City I Power, Nueva Ecija) Biomass (Rice Husk) 20 MW Nov 2014

Nasulo Geothermal (EDC, Negros Oriental) Geothermal 50 MW Aug 2014San Lorenzo Wind (Trans Asia, Guimaras Island) Wind 54 MW Aug 2014

UR Biomass Cogenera on (JG Summit, Negros Occidental) Biomass(Bagasse) 31 MW Sep 2014

TPC Expansion (Global Business Power, Cebu) Coal 82 MW Sep 2014Villasiga HEP (SUWECO, An que) Hydro 8 MW Oct 2014Nabas Wind (Petrogreen, Aklan) Wind 50 MW Dec 2014

HPC Bagasse Cogenera on Plant (HPC, Negros Occidental) Biomass(Bagasse) 3 MW Dec 2014

SC Biomass (Bronzeoak, Negros Occidental) Biomass(Bagasse) 18 MW Dec 2014

Tudaya (Aboi z, Davao del Sur) Hydro 13.6 MW May 2014Mapalad (Mapalad Power, Iligan City) Diesel 15 MW May 2014Peak Power (A. Brown, General Santos City) Oil 26.1 MW Sep 2014Therma South 1 (Aboi z, Davao del Sur) Coal 150 MW Nov 2014

POWER PROJECTS IN THE PIPELINE

For Luzon, DOE said that 5 power projects (473 MW) will be coming on stream star ng in July 2014 and 12 projects between 2015 and 2017 (1,200 MW), which will cover the projected demand un l 2019. As for the summer months of 2014, they said there will be no problem as long as no major shutdown of large power plants occurs. DOE’s outlook for Visayas remains rela vely stable as the Unifi ed Leyte Geothermal Power Plant’s opera ons (588 MW) was back to normal in March, which provided enough available capacity to serve the total peak demand for summer 2014. The DOE further stated that Visayas is not in danger of rota ng brownouts as 10 power projects (570 MW) will be coming in to address power demand un l 2018. While Mindanao is expected to fi nally recover from shortages as the 150-MW Therma South 1 power plant comes on stream in November 2014. The DOE expects a total of 16 power plants (1,078 MW) to be commissioned between 2014 and 2017.

LUZON

VISAYAS

MINDANAO

Source: Department of Energy

28 POLITICAL


What the SONA wasn’t -again(An analysis of President Aquino’s 5th State of the Nation Address)

“For me personally it was his best SONA so far. For the fi rst time I really felt his sincerity to do good for the country. It was a 180-degree turn. I was expecting him to lambast the Supreme Court once again, but he chose to be a statesman this time. P-Noy needs all the support that the business community can give him.”

—A Filipino businessman.

Certainly the audience seemed to think so; the applause during his last 15 minutes was thunderous. The Cabinet even stood for him (they were at the back so the congressmen in the session hall itself didn’t follow the lead). I saw only four businessmen in the crowd, and it was the lack of support to business that bothered me most. But, perhaps, he got it right there was a need to recover the confi dence and the belief of the general public.

A belief decimated by the Disbursement Acceleration Program (DAP) controversy and his rants (some justifi ed) against the Supreme Court. The delay in the fi ling of cases against allies implicated in the pork barrel scam and the scandals on garlic prices and rice added to the disillusion. A disillusion evidenced by recent SWS and Pulse Asia polls.

That support had held so long was remarkable, and unprecedented, making the fall even more worrying.

His ability to relate to the people on their level is a principal reason the country has turned around from the decline of the last years of the Arroyo presidency to a growing confi dence of the public, but one that’s now under some threat.

However public support is one thing, public well-being is another. Nearly half of the 181-minute speech was directed to the wonders he’d achieved in the past year with praise for a number of

Public support is one thing, public well-being is another.

292POLITICAL


people and institutions – even Customs. No one was lambasted as in the past. And, wisely, he did not refer to the DAP controversy and his fi ght with the Supreme Court. He only mentioned that DAP funds benefi ted TESDA scholars. What the public saw was far from a combative president that, a few weeks ago, valiantly defended his administration’s use of DAP and even implied that the SC had also intended to implement a similar savings realignment scheme.

No single economic or business bill was mentioned. Key reform measures such as Customs Modernization, Anti-Smuggling, Build-Operate-Transfer law amendments, Department of ICT, Fair Competition/Anti-Trust, and Cabotage law amendments are still pending in Congress. Some of them, though, were included in a list of 26 priority bills (See Box 2) that was released 2 days later. But the impact mentioning in the SONA could have given them was lost.

The president’s request for Congress to pass a supplementary budget to fund DAP projects and approve a resolution that would clarify the definition of “savings” could further delay the approval of the aforementioned bills. With the campaign season expected to commence in 15 months (if it hasn’t started already) along with the president’s declining popularity getting some of the more controversial priority bills through Congress might just become a tougher assignment.

He could’ve used the SONA as an opportunity to call for more frequent LEDAC meetings. Here, President Aquino’s record has been dismal. Only 3 LEDAC meetings in 4 years versus 14 per annum under President Ramos and 3 per year under Arroyo. If he’d met with the senators and congressmen on DAP to get their agreement, even if informally, it would have given the SC less reason to knock it down.

President Aquino did not mention the 3 senators implicated in the pork barrel scam. There were no “marching orders” for the Justice department and the Offi ce of the Ombudsman to expedite the investigation and fi ling of cases against lawmakers (including political allies) who allegedly pocketed millions of congressional (pork barrel) funds.

The president, who was catapulted to power on the promise of transparency and good governance, should’ve, at least, pushed for the approval of bills that would expedite the resolution of cases involving erring public offi cials, such as the Ombudsman Reform Act and the bill amending the Sandiganbayan (Anti-graft court) charter. Enactment of the measures would further strengthen his anti-corruption program and send a strong signal to investors that the Philippines is serious in its fi ght against corruption. Businessmen are hesitant to invest in a country unable to prosecute corrupt offi cials. Having a clean and transparent bureaucracy is one of the primary pre-requisites in attracting more foreign direct investments that generate jobs for the millions of unemployed Filipinos.

President Aquino boasted that 42% of total PEZA investments came in during the 4 years of his administration, which may sound impressive but the Philippines’ total foreign direct investments during the period is dwarfed by its neighbors, and this is what he should have paid attention to – with solutions. During the same period (latest data up to 1st quarter of 2014) the Philippines attracted a “measly” $12 billion in FDIs, dwarfed by Singapore’s $245 billion, Indonesia’s $78 billion, Malaysia’s $49 billion, Thailand’s $43 billion, and Vietnam’s $36 billion.

The paltry level of foreign investments is a reason why the domestic economy has failed in providing enough decent jobs for its people.

President Aquino said that there were 1.65 million jobs created from April 2013 to April 2014. As a result, unemployment declined slightly from 3.1 million (April 2013) to 2.9 million (April 2014). But that’s still worse than 2011 and 2012 levels. The underemployed, or those currently working but looking for additional hours of work, are at around 7 million after peaking at 7.3 million in 2012. So there’s been minimal improvement.

The Conditional Cash Transfer (CCT) is a good program, but is an interim solution. An emergency program that can’t, and shouldn’t be maintained. There has to be an exit strategy otherwise it will become an expensive subsidy program (2014 budget of P62.6 billion covers 4.4 million household benefi ciaries). The program’s benefi ciaries, after all, prefer jobs. And as president Aquino highlighted in his fi fth SONA: “Give a man a fi sh and you feed him for a day. Teach a man to fi sh and you feed him for a lifetime.”

If the president truly wants to create jobs he’d support the approval of the Joint House Resolution that would amend the restrictive economic provisions of the 1987 Constitution. Easing foreign ownership restrictions in key sectors of the economy will result in more foreign direct investments that will generate more employment opportunities for 11.5 million unemployed Filipinos (Social Weather Stations figure).

He also needs to endorse the approval of a Department of Information and Communications Technology (DICT) that would promote and regulate the most dominant sector in the world today – ICT-BPO. The sector employs more than 800,000 people while the companies’ investments have exceeded $13 billion. The

No single economic or business bill was mentioned.

No mention of the pork barrel scam. A paltry level of foreign investments.

30 POLITICAL


sector is expected to employ 1.3 million workers by 2016 while investments are projected to reach $25 billion. The local ICT-BPO sector needs a dedicated department that can boldly oversee the orchestration of efforts, by both the state and private entities, to achieve the goals in a sector as critical and dynamic as IT.

Instead, the Aquino administration is bent on endorsing a bill that further raises mining taxes in the country (already among the world’s highest). The issuance of EO 79 turned away billions of dollars of mining investments while he has been reluctant to step in and affi rm the national law (Mining Act) over an ill-advised local ordinance banning open-pit mining. This administration’s decisions on mining have killed an industry that can generate hundreds of thousands of jobs – especially in the countryside where they’re most needed. President Aquino should’ve asked for the cancellation of the review of mining taxes and with the BIR just make sure that all miners pay the proper taxes.

He said that the country is now “more open for business.” But that’s not the reality, there was no mention of concrete steps on how to streamline the business permit application process for example. Business permit processing remains at 35 days while the number of procedures required to process permits is also unchanged at 15.The country’s overall ranking in Ease of Doing Business 2014 greatly improved to 108th this year from 138th in 2013. But this was attributed to reforms made in getting credit, paying taxes and resolving insolvency, not reducing the bureaucracy. MUCH remains to be done. The number of days and signatures must be reduced signifi cantly, perhaps aspire for the East Asia and Pacifi c average of 7 days. Set a deadline for critical permits like environmental clearances and if the deadline is not met, approval is automatic.

President Aquino questioned why the impressive GDP growth hasn’t translated into signifi cant reduction in poverty. And the answer is obvious, not enough jobs have been created. As we’ve argued endlessly it’s that simple. So one would expect that’s where he’d focus, but it’s becoming ever clearer he is discomfi ted by dealing with business. There have been innumerable attempts to get messages across to the President of the need for business-related reforms and actions, with little success. Which is not to say that improvement hasn’t occurred, there’ve been some truly worthwhile improvements as the economic results are showing, and as the improvements in international comparisons are confi rming. But it could have been and needs to be much, much better.

There was no mention of labor reforms. All the president announced was that only 1 strike pushed through in 2013. This despite various business groups’ calls to amend the 40-year old Labor Code. In global competitiveness surveys, the Philippines ranks poorly in terms of labor market effi ciency due to the lack of fl exibility in determining wages and rigid “hiring and fi ring” policies.

He dwelt extensively on the problems of rice given that it’s the basic staple of the Filipinos’ diet. He said the increasing rice prices is a gut issue (probably 80-90% of the diet of the poor is rice) and it’s appropriate that he addressed it. He acknowledged that the country needs to import more rice, practically abandoning his administration’s ill-considered rice self-suffi ciency goal. A Philippine Institute for Development Studies (PIDS) report authored by economist Roehlano Briones notes that the Aquino administration’s rice self-suffi ciency program could partly be blamed for the rising prices of rice. “It’s because of the self-suffi ciency policy, because you want the rice farmers domestically to be able to supply all of the rice requirements of the country. They can do it, but you have to pay them a much higher price than what is available in the world market,” Briones said. The study noted that the administration’s rice self-suffi ciency program must be re-evaluated and must only be pursued with “more cost-effective support mechanisms” such as research and development and new rice farming technologies. At present, the Philippines allots a measly 0.1% of its GDP to research and development; much, much lower than its neighbors Singapore (2.3%), Malaysia (0.6%) and Thailand (0.25%). President Aquino made no mention of an increase in R & D expenditure during his SONA.

While increasing imports to counter the rice hoarders and stabilize the price of rice in the market, President Aquino should’ve also pushed for the approval of two key reform bills that could signifi cantly reduce the amount of smuggled rice that enter the local market, which trigger spikes in rice prices: the Anti-Smuggling and Customs Modernization and Tariff bills. President Aquino bypassed the 2 measures. He could also do a simple, dramatic thing – close the National Food Authority (NFA). Allow market forces to determine the role of rice amongst the populace. Maybe just a small, but powerful offi ce to ensure no manipulation of that market.

In past SONA’s (and also with past presidents) the custom has been to extol past performance and to list promises for the future. Some of which get done, many of which don’t. This time there was nothing of the future. Yet he mentioned that “As the father of our nation… it is also my duty to prepare for the future.” Here PNoy failed miserably; No promises, no plans, no goals or ideas. Nothing. And that disturbs because SONA sets the baseline tone of the coming year.

Some of the fundamentals needed by business just aren’t occurring swiftly or determinably enough. Take power, we are headed for possible, even probable blackouts because tough

The CCT is a good program, but is an interim solution.

More jobs are needed.

The administration’s decisions on mining have killed it.

Impressive GDP growth – but has yet to trickle down.

No mention of labor reforms.

313POLITICAL


action wasn’t taken in his early years to force acceptance and construction of power plants. He asked Energy secretary Jericho Petilla to coordinate with the Joint Congressional Power Commission, the Energy Regulatory Commission, and other stakeholders. No concrete measures were presented.

There are measures that the President could’ve presented without asking for emergency powers (which Secretary Petilla has been proposing). These include:

1. Reduction of demand (see WBF Special Report: Let There Be Light)

2. Rehabilitation of the Malaya plant to be able to operate reliably and reasonably effi ciently. It takes 8 to 13 hours to bring the plant into operation. Perhaps privatize it with requirements on how it must operate.

3. Convince the courts not to accept “Writs of Kalikasan (nature)” and override objectors

4. Approve national and local permits in days, not months, even years. Some 160 signatures and procedures are required currently, this must be streamlined.

Although the infrastructure budget has more than doubled from the P 200 billion in 2011 to P404 billion this year, it is still only equivalent to a measly 3.1% of the country’s GDP. Previously, President Aquino said that infrastructure spending will improve to 5% in 2016, but that level of spending must be spent NOW! Other ASEAN countries such as Malaysia, Singapore and Thailand spend much more, about 6-9% of their respective GDP.

Subic and Batangas were built up to serve as alternate ports to Manila but there’s been no effort to make them work.

Close down the NFA.

Business fundamentals still needed.

Infrastructure spending doubled – more needed

The decision on the location of the next premier international airport hasn’t been made. Business-necessary bills in Congress haven’t been prioritized, yet easily could be with little effort. Some of the bills have been languishing in Congress for more than a decade, some more than 20 years as in the case of the tangentially pro-business Freedom of Information (FOI) Act.

PORT UTILIZATION RATE (AS OF 2012)

Batangas 4.2%

Subic Bay 5.6%

But the need to approve bills important to business might fi nally be recognized as 2 days after the SONA the president released a list of 26 bills he was giving priority to, 7 of which would directly help business. These are the following:

1. Build-Operate-Transfer (BOT) law amendments – adds new public-private partnership (PPP) variants such as joint ventures, concessions, and management contracts; restructures and tightens eligibility requirement for unsolicited proposals; and streamlines processes in evaluation and approval of projects.

2. Fair Competition/Anti-Trust – promotes a level playing fi eld in trade and rids the country of abusive monopolies and anti-competitive behavior.

3. Removal of investment restrictions in specifi c laws cited in the Foreign Investment Negative List (FINL) - removes the restrictions in specifi c laws cited in the FINL to attract more foreign direct investments and to prepare for the ASEAN Economic Integration in 2015.

4. Amendments to the law facilitating the acquisition of right-of-way, site or location for national government infrastructure projects - prevents delays fast-tracks the implementation of road projects by removing “roadblocks” in the process. The proposed bill requires the State to ensure that owners of real property for infrastructure projects are promptly paid adequate or just compensation while ensuring the expeditious acquisition of the land or property requirements for the projects.

5. Cabotage law amendments – allows foreign vessels to engage in coastwise trade within the country; and opens up the market, intensifi es competition, and lowers the cost of transporting goods.

6. National Land Use – clarifi es confl icting provisions of various laws pertaining to land use; and mandates rational and just allocation of the country’s land resources; groups land uses into four - the protection land use, production land use, settlements development, and infrastructure development.

7. Central Bank charter amendments – expands the supervisory and regulatory functions of the central bank to include credit card companies, money changers, e-money issuers, remittance agents, settlement system operators and other institutions performing similar functions; and raises the capitalization of the central bank from the current P50 billion to P200 billion to strengthen the institution’s corporate and fi nancial viability. (See Box 2 for the complete list)

In our review of last year’s SONA we said: It had little of what he’d like to accomplish for the remainder

of his term. It was a speech to appeal to the general public. It was also targeted to get the public’s understanding and

acceptance of what he’s done, and intending.

Where will the airport be?

32 POLITICAL


Left business out. Business is where jobs are created. He needs to provide his vision and goals for helping business grow much more widely so those jobs are created.

Cited macroeconomic fi gures. But what is emerging as a growing issue today is that that growth has not included the ranks of the poor and unemployed which are rising according to SWS. There was no discussion on this.

Of the 8 major issues important to business only 4 were addressed to any degree.

The 4 discussed: Infrastructure Rationalization of Fiscal Incentives Power crisis Corruption at the Bureau of Customs

No mention of business in his SONA.But in the following 12 months addressing them to

any signifi cant degree was far too slow and minimalist.The 4 not mentioned (where there was no progress, except

negative in the case of mining): Anti-trust and Fair Competition Mining Amendments to economic provisions of the 1987

Constitution Measures to improve the judiciary

Well (now) 18 business chambers wrote a second letter this year. The response was even worse – no mention at all of these issues (see Box 1) in his 5th SONA. In fact no mention at all of business and the role he’d like to play in the next 2 years.

He needs to reach out to business, yet rejects the invitations to meet with them. He needs to announce his action plans for the coming 2 years, in particular the laws needed out of congress. The distraction of DAP needs to stop, so his call in the SONA for a supplementary budget makes great sense, and could have obviated much of the problem DAP created if done earlier.

As it stands now we can take nothing away from this SONA as to his plans through 2016. Business has tried to meet him but without success. He is discomfi ted by interacting with businessmen, yet he must if far greater levels of investment are to occur.

It looks like it will be another year of only gradual improvement for business, but nonetheless improvement.

1. Focus on improving production in agriculture and implement roadmaps for specifi c subsectors.

2. Accelerate infrastructure development. Improve and expand NAIA and Clark and build a third airport; Speed up construction of the SLEX-NLEX connector road and connect it to the portof Manila; Shift cargo traffi c to Batangas and Subic and stimulate economic activity in those areas.

3. Reduce smuggling and approve the Customs Modernization and Tariff Act as quickly as possible; create a high level oversight committee of government and private sector personnel.

4. Don’t allow the SC ruling on DAP to weaken the administration’s efforts to pursue key reforms.

5. Good governance. Those involved in the PDAF, and other scams to steal the people’s money must be held accountable to the fullest extent of the law at the soonest time without fear or favor.

6. Government agencies and companies to sign the Integrity Pledge, and institutionalize it.

7. Improve competence, effi ciency and integrity in the justice system.

8. Increase foreign investment by opening up the constitution. In the meantime reduce the list of industries on the Foreign Investment Negative List.

9. Fully and properly implement EPIRA, don’t amend it as that will result in an unstable regulatory Framework; Look more carefully at attaining energy security and electricity price competitiveness as quickly as possible; Appoint capable, proactive and visionary staff in the DOE and ERC.

BOX 1: WHAT BUSINESS GROUPS WANT’S PRESIDENT AQUINO TO PRIORITIZE - 2014

*From the Philippine Business Groups and Joint Foreign Chambers’ letter to President Aquino;Signed by 18 business chambers (11 local, 7 foreign) on July 21, 2014

333POLITICAL


1. Amendments to the Build-Operate-Transfer Law - adds new public-private partnership (PPP) variants such as joint ventures, concessions, and management contracts; restructures and tightens eligibility requirement for unsolicited proposals; and streamlines processes in evaluation and approval of projects.

2. Cabotage Law amendments - allows foreign vessels to engage in coastwise trade within the country; and opens up the market, intensifi es competition, and lowers the cost of transporting goods

3. Amendments to the New Central Bank Act of 1993 – expands the supervisory and regulatory functions of the central bank to include credit card companies, money changers, e-money issuers, remittance agents, settlement system operators and other institutions performing similar functions; and raises the capitalization of the central bank from the current P50 billion to P200 billion to strengthen the institution’s corporate and fi nancial viability

4. Revisions to Foreign Investment Negative List (FINL) - removes the restrictions in specifi c laws cited in the FINL to attract more foreign direct investments and to prepare for the ASEAN Economic Integration in 2015.

5. Fair Competition/Anti-Trust - promotes a level playing fi eld in trade and rids the country of abusive monopolies and anti-competitive behavior.

6. Amendments to RA 8974, the law facilitating the “acquisition of right-of-way, site, or location for national government projects” - fast-tracks the implementation of road projects by removing “roadblocks” in the process. The proposed bill requires the State to ensure that owners of real property for infrastructure projects are promptly paid adequate or just compensation while ensuring the expeditious acquisition of the land or property requirements for government projects.

7. An Act Instituting Reforms in Land Administration - institutionalizes reforms in land administration to optimize its contribution to national development.

8. National Land Use Act - clarifi es confl icting provisions of various laws pertaining to land use; and mandates rational and just allocation of the country’s land resources; groups land uses into four - the protection land use, production land use, settlements development, and infrastructure development.

9. Freedom of Information – promotes transparency and good governance by mandating the disclosure of public documents; outlines the exceptions for public disclosure and the procedures for accessing public documents.

10. Tax Incentives Management and Transparency Act - enhances the current tax system by implementing measures that would ensure transparency in the management and accounting of tax incentives which are granted to government and non-government entities.

11. Amendment to the Human Security Act of 2007 - strengthens government efforts in fi ghting terrorism. Proposed amendments include defi ning terrorism as an act punishable under certain provisions of the Revised Penal Code.

12. Amendment to the Ombudsman Act – among the proposed amendments: allows the issuance of freeze orders on unlawfully acquired assets for 6 months and enables the Ombudsman to look into bank accounts even prior to the fi ling of a case in court

13. Amendments to the Anti-Enforced or Involuntary Disappearance Act of 2012 - criminalizes the practice of “enforced or involuntary disappearance” and punishable by life imprisonment.

14. Whistleblowers Protection Act - restores credibility, integrity, and accountability in public service by enabling citizens to speak up about any wrongdoing in government and sets up a system of rewards and protection for whistleblowers and their families.

15. Revision of the criminal code - repeals the Revised Penal Code and replaces it with the proposed Code of Crimes so as to make the law responsive to present times.

16. Delineation of the Philippine maritime zone - defi nes the Philippines’ maritime zone, including its internal waters, archipelagic waters, territorial sea, contiguous zone, Exclusive Economic Zone, and continental shelf.

17. Delineation of specifi c forest limits of public domain (Permanent Forest Limits Act of 2013) - establishes the country’s specifi c boundaries of forest lands in order to conserve, protect, and develop the forest resources.

18. Water Sector Reform Act - strengthens the local water districts by simplifying the governance regime in the water sector to optimize operations. It calls for the amalgamation of water districts into Local Water Supply and Sanitation Companies created under Provincial Water Resource Zones so that administration of water resources is elevated to the provincial level.

19. Philippine Civil Service Code Reform - amends existing laws in the Philippine Service Code to fully advance the professionalism of the bureaucracy. The bill addresses problems confronting the public service, including graft and corruption, red tape, violation of employees’ rights, and inadequate benefi ts and privileges, among others.

20. An Act Providing for a Magna Carta of the Poor - uplifts the standard of living and quality of life of the poor; among the bills vetoed by President Aquino during the 15th Congress.

21. Proposed act protecting the rights of internally displaced persons - protects the right of internally displaced persons in situations of armed confl ict, generalized violence, etc.; among the measures vetoed by the president during the previous congress.

22. Strategic Trade Management Act - institutes trade controls over the export, import, re-export, transfer, and transshipment of strategic goods and other related services.

Bills mentioned during SONA:

1. Bangsamoro Basic law – essential for the creation of Bangsamoro political entity that will replace ARMM

2. Uniformed personnel pension reform

3. Supplemental budget for 2014 and 2015 national budget

4. Joint Resolution to clarify the defi nition of “savings”

BOX 2: PRESIDENT AQUINO’S PRIORITY BILLS

34 POLITICAL


The president started by saying he inherited a country mired in despair due to dirty politics.

Then went on to list all great things he’d done, to wit:

Expanded the Conditional Cash Transfer (CCT) program – to P62.6 Bn this year

Improved the management of debt, and improved the fi scal position to where the country got an investment grade rating

Attracted 42% of the total investments into PEZA in just 4 years versus the 15 years it took to get the other 58%

Achieved the lifting of international air travel restrictions

Had only 1 strike

Massively built infrastructure, doubled the budget despite no new taxes (except the sin tax)

Approved 7 PPP projects worth P62.6 Bn, with more to come

Effected rehabilitation after the Zamboanga siege

“Your government wasted no time in responding” to the Yolanda disaster. And gave them back their jobs (he may be out of touch with reality here).

Upgraded the capability of the armed forces with new planes, helicopter, ships, and guns

Improved peace and order

Addressed corruption in Customs with a new Commissioner and 5 new deputies. Shifted personnel.

Cadastral survey to be completed by 2015

Finalizing the Bangsamoro Basic Law for Congress to approve

Erased the backlog in classrooms, desks, books, etc.

Recognized the likely power shortages and was doing something about it (failed to say why he hadn’t 4 years earlier when any potential shortfall could have been availed completely)

Complained of staggering increase in rice prices, and that the NFA was doing something about it

Assisted farmers with irrigation systems, farm machinery and equipment, and farm-to-market roads

Proposing a supplemental budget to replace the lost DAP funds

Attacked extensively those who just criticize for their own selfi sh motives

Wondered if one day someone would plant a bomb on stage and end his second life (he narrowly missed being killed in a coup against his mother when she was president)

Finally claimed he had reformed society

The last 10 minutes was almost a valedictory address. An emotional appeal to the people to support him, and how he’d done only things good for the people and the nation.

BOX 3: WHAT PRESIDENT AQUINO SAID-IN SUMMARY

Aquino admin satisfaction ratings down

Public satisfaction with the general performance of the Aquino administration dropped to record low +29 in June from +45 recorded in March. Lower ratings for the president and his administration translate to less political capital to push for tough but essential reforms.

The Social Weather Stations (SWS) poll was conducted from June 27 to 30. The survey showed that 56% of respondents were satisfi ed with the performance of the government while 26% were dissatisfi ed for a nest satisfaction rating of +29. Some 18% of the respondents were neither satisfi ed nor dissatisfi ed.

SWs noted that the +29 recorded by the current administration is a “new record low surpassing the previous record low.” The Aquino government’s previous record low was +44 posted in May 2012.

The poll noted that out of 17 specific issues, the National Administration received “good” net satisfaction ratings on 6 issues, moderate on 7 issues, neutral on 1 issue, poor on 2 issues, and bad on 1 issue.

The National Administration garnered “good” ratings on the following issues: protecting the environment; providing enough supply of electricity; defending the country’s territorial rights; promoting welfare of overseas Filipino workers (OFWs); foreign relations; and helping the poor.

It received “moderate” ratings on reconciliation with Muslim rebels; fighting terrorism; providing jobs; reconciliation with Communist rebels; fighting crimes; tax collection; and eradicating graft and corruption.

The respondents gave the Aquino government a “neutral” rating on ensuring that no family will be hungry while it was rated poor on fighting inflation and ensuring that oil companies do not take advantage of oil prices.

The Aquino administration obtained a “bad” rating in resolving the Maguindanao massacre case with justice.

This coincided with the decline in President Aquino’s trust and satisfaction ratings in the second quarter of the year. Another Social Weather Stations (SWS) survey showed President Aquino’s satisfaction rating drop from +45 in March to +25 in June. Meanwhile, a poll conducted

353POLITICAL


by Pulse Asia revealed that the President’s approval rating dropped from 70% in March 2013 to 56% in June. His trust ratings also dropped from 69% in March to 53% in June.

According to SWS, 65% of respondents said they were satisfi ed with President Aquino’s performance while 30% were not, for a net satisfaction rating of +25. The poll was conducted by SWS amid issues hounding the administration, such as the unconstitutionality of certain parts of the Disbursement Acceleration Program (DAP) which the Aquino administration implemented in 2011 to pump-prime the economy. The populace also complain about the slow progress of the government’s typhoon rehabilitation efforts and increase in the price of basic commodities.

With lower satisfaction ratings, President Aquino now has less political capital necessary to aggressively push for tough but essential reforms for the remainder of his term. Lower ratings also diminish the president’s endorsement power for 2016.

House begins debate on economic cha-cha

The House of Representatives has started deliberating on Speaker Feliciano Belmonte’s resolution that aims to amend the restrictive economic provisions of the 1987 Constitution.

Resolution of Both Houses (RBH) 1 principally authored by Speaker Belmonte proposes to insert the phrase “unless otherwise provided by law” in some sections of the Constitution [Articles XII (national economy and patrimony), XIV (education, science and technology, arts, culture and sports) and XVI (general provisions)] and then pass specifi c measures that would ease the restrictions.

Senate President Franklin Drilon said the upper chamber will review these economic restrictions to attract more foreign direct investments and create more jobs. Sen. Drilon recognizes President Benigno Aquino lll’s aversion towards constitutional amendments but stressed that the president must be convinced that only the restrictive economic provisions of the constitution will be amended.

Previously, President Aquino was asked about his position on the resolution fi led by Speaker Belmonte, to which the president replied: “I don’t think they (economic restrictions) are a necessary detriment to getting foreign investors in this country.”

Easing of foreign ownership restriction is important if the Philippines is to shift from a consumption-led economy to one that is driven by investments and exports. An economic growth anchored on investments and exports is more inclusive and has greater capacity to provide livelihood and jobs to 12 million unemployed Filipinos.

Meanwhile, a survey conducted by Pulse Asia showed that majority of Filipinos are unaware of any move in Congress intending to amend the economic provisions of the 1987 Constitution.

According to Pulse Asia, more than half of Filipinos (61%) have not heard, read or watched anything about the resolution fi led by House Speaker Feliciano Belmonte Jr. The resolution seeks to amend the restrictive economic provisions of the Constitution.

Of the 39% who are aware of the issue, the survey found that less than half (44%) are in favor of it, 36% are undecided while 19% are opposed.

36 POLITICAL


A massive information campaign must be conducted to inform the public of the various positive benefi ts that opening up key sectors of the economy could provide.

The Foundation for Economic Freedom (FEF) supports moves to amend the economic provisions of the Constitution.

“We want our growth transformed from a consumption-driven one to an investment-driven one because only an investment-driven growth will grow jobs and reduce unemployment, increase productive capacity, improve competitiveness, and put the country on a higher plane of sustainable growth. Timing is right because [Aquino] enjoys a high trust rating and there’s no fear he will use Cha-Cha to extend his power. Moreover, globalization has made liberalizing economic provisions in the Constitution more obvious and urgent,” FEF said in a statement.

Indeed, opening up the constitution is just one important factor amongst several that are necessary to attract more foreign investments into the country. Other factors such as corruption and ease of business registration must also be addressed. But relaxing ownership restrictions in key sectors of the economy through constitutional amendments is a major factor and must not be left out.

Ombudsman creates investment protection team

The Offi ce of the Ombudsman has created the Investment Ombudsman Team (IOT) to address corruption and entice more businessmen to invest in the country.

In a statement, Ombudsman Conchita Carpio-Morales said the conceptual framework for the team was a product of collaborative effort between the Offi ce of the Ombudsman and the European Chamber of Commerce of the Philippines (ECCP).

In a statement, the ECCP specified the duties and responsibilities of the IOT. Among which are the following:

1. Grievances involving delay committed by any of the Investment Promotion Unit (IPU) Network agencies in the delivery of frontline services relating to the establishment or conduct of business

2. Complaints containing verifi able leads or information involving the following the following allegations:

Solicitation, demand or request by a government offi cial in exchange of the issuance of licenses, permits and certifi cates, the release of shipments and cargoes, as well as arbitrary assessment of fees;

Issuance of licenses, permits and certifi cates to any person not qualifi ed for or legally entitled thereto; and

Any delay or refusal to comply with the referral or directive of the Investment Ombudsman emanating from the grievance proceedings.

3. The IOT will work in partnership with DTI, BOI and the business community. The business community is expected to commit to ethical business practices and good corporate governance, and report cases of corruption.

The American Chamber of Commerce of the Philippines (AmCham Philippines) said the creation of the IOT is a “concrete manifestation of the sincerity of the government to pin down corruption in the conduct of business, encourage foreign investments, and improve global competitive rankings.”

FOREIGN DIRECT INVESTMENTS, 2000-2012

COUNTRY $BN

SINGAPORE 343

THAILAND 90

INDONESIA 79

MALAYSI 74

VIETNAM 59

PHILIPPINES 22

“As the Philippines undergo political challenges today, business should not be disrupted and must continue to operate in a strong, dynamic and competitive environment to generate more decent jobs. There should be no more delays in the delivery of frontline services, issuance of licenses, permits and certifi cates, solicitation or any form of request in exchange of approval, and arbitrary assessments of fees in shipments and cargoes,” AmCham Philippines added.

The creation of IOT is one of the programs implemented by the Aquino administration that aim to reduce corruption and simplify the bureaucracy, two key pre-requisites in attracting more foreign direct investments.

In May 2013, President Benigno Aquino III created an inter-agency task force that will implement reforms to make it easier to do business in the Philippines. The move is the government’s response to several business groups’ call to improve the country’s investment climate and attract more foreign direct investments by streamlining business registration and improving the Philippines’ ranking in various global competitiveness surveys.

Administrative Order (AO) 38 creating the Task Force on Ease of Doing Business (EODB Task Force) was signed by President Aquino on May 21. The AO was drafted by the National Competitiveness Council (NCC).

373POLITICAL


The AO states that an inter-agency task force will implement the government’s ‘Gameplan for Competitiveness’ , a strategy which sets reform targets for concerned government agencies based on the 10 indicators (see table) that determine a country’s ranking in the Ease of Doing Business report. It also identifi es key areas for public and private sector participation to boost the global business competitiveness ranking of the Philippines.

The directive calls for the participation and assistance of concerned local government units, as well as private and public institutions, including government-owned and -controlled corporations (GOCCs), in the implementation and accomplishment of targets provided in the Gameplan for Competitiveness.

The business survey of the WB- IFC measures and tracks business regulations across 10 indicators, namely: 1) starting businesses 2) dealing with construction permits 3) getting electricity 4) registering property 5)getting credit 6) protecting investors 7) paying taxes 8) trading across borders 9) enforcing contracts and 10) resolving insolvency.

The AO directs the Ease of Doing Business task force to review and develop policies and programs to ensure appropriate implementation of the Gameplan for Competitiveness, re-evaluate and adopt measures to achieve goals set for 2013 and fi nalize the goals for 2014 onwards, and coordinate with the proper agencies for the inclusion of the targets in the performance goals of concerned departments in their respective performance-based incentive systems.

Despite President Aquino’s popularity and his campaign to foster good governance, the Philippines’ rankings in the Ease of Doing Business survey and other global competitiveness reports have essentially remained unchanged under his administration. The country has had some success in a number of surveys (e.g. IMD’s World Competitiveness report and Transparency International’s Corruption Perception Index) but much remains to be done if the Philippines wants to breaks into the Top one-third of all countries surveyed.

For the government to be successful in implementing ‘Doing Business’ reforms it needs the cooperation of various national and local agencies. And this is an area where President Aquino could use his massive political capital. He must encourage (even coerce) local government offi cials to streamline business registration and bring down the cost of doing business. Stories of foreign and local investors having to bribe local offi cials just so they could secure business permits are not new. Stern penalties must be imposed on erring offi cials. To combat these the government would need the active participation of the Offi ce of the Ombudsman and civil society organizations.

Issuing an AO to form a Task Force that will initiate, implement and monitor ‘Ease of Doing Business’ reforms is a step in the right direction. The directive is meant to promote effi ciency and transparency in government transactions. This must enable the Philippines to signifi cantly improve its ranking in global competitiveness and anti-corruption surveys. This is a vital pre-requisite to improving the country’s business climate and attracting more foreign direct investments that will help uplift the lives of an estimated 27 million Filipinos living in abject poverty.

38

ECONOMY


SONA cites Aquino accomplishmentsPres. Benigno Aquino III’s 5th State of the Nation Address (SONA) on 28 July turned out to be a reminder to his detractors of what he has done for his “bosses” (the ordinary Filipinos) instead of what many (including us) had expected to be how he intends to address critical issues like the pork barrel, impending power shortage and inclusive growth, and what he planned to achieve for the remainder of his term.

Faced with attacks on several fl anks due in large part to the Disbursement Acceleration Program (DAP) and how this was used to gain favors in Congress, Pres.

Aquino cited a popular local proverb, “if you don’t look back from where you came from, you’ll never reach where you’re bound to go” in setting the tone for his one-and-a-half hour State-of-the-Nation Address, consisting of a litany of selective accomplishments and tirade against his detractors.

A m o n g t h e a c h i e v e m e n t s h e r e c i t e d , t h e major ones wi th economic s ign i f icance were :

Training program under the Technical Education and Skills Development Authority (TESDA), benefi ting 224,000 youth, 66% of whom are now gainfully employed, of which half work in the business process outsourcing (BPO) industry. The P1.6 billion bill for training, which was funded by DAP, was more than recovered by the income taxes paid by those employed in high-paying industries like BPO.

The Expanded Conditional Cash Transfer (CCT) Program, which now provides support to children up to 18 years old, and is starting to pay off with the reduction in poverty incidence to 24.9% in 1H13 from 27.9% in 1H12.

A reminder to his detractors of what he has done for his “bosses”.

Increased delivery of social services without raising taxes, except for the Sin Tax Reform, as collections improved.

Increased investment approval of Philippine Economic Zone Authority (PEZA), with the amount of investment during the fi rst 3 years of Pres. Aquino’s tenure equivalent to 42% of total investments during the 18-year period since 1995.

393ECONOMY


Attainment of investment-grade status from the 3 major international credit rating agencies (S&P, Moody’s and Fitch) in 2013, and further increase to 2 notches above investment-grade from S&P in May 2014.

Lifting of signifi cant safety concerns on the Ninoy Aquino International Airport (NAIA) by the ICAO, removal of restrictions on PAL to fl y in Europe by the EU, and the restoration by the USFAA of Category 1 Rating on NAIA.

The more than doubling of the infrastructure budget from P200.3 billion in 2011 to P404.3 billion in 2014 without raising taxes, except Sin Tax Reform. The presentation included testimonials on video of a sampling

of benefi ciaries.The only items he took up with policy implications and

impact on the economy’s outlook for the rest of his term were his lengthy discussion on specifi c big-ticket infrastructure projects the government has already started or will start soon, his admission of possible power shortages in the summer of 2015, and his request for a supplemental budget in 2014 to continue the programs and projects that were disrupted by the Supreme Court decision on the unconstitutionality of DAP.

Among the mega projects he mentioned were the 7 public-private partnership (PPP) projects worth P62.6 billion, which include the Mactan-Cebu International Passenger Terminal; the NAIA Expressway Project Phase 2; the Metro Manila Skyway III. Other major projects launched were the Laguna Lakeshore Expressway Dike, the Circumferential Road 6 (C-6), water supply projects (Kaliwa Dam, Angat Transmission Improvement, etc.), Cebu Rapid Transit Project, LRT 1 South Extension, Line 2 East Extension, 2 Palawan airports and Clark Green City. All these seem to support WBF’s infrastructure catch-up scenario over the next 2-3 years.

While Pres. Aquino raised concern over the power shortage, he was silent on the proposed grant of emergency powers by Congress to allow him to solve the issue. The request for a supplemental budget indicates that the administration will continue its developmental spending even without DAP. But without DAP, the approval and disbursement processes will be slower.

Pres. Aquino then lambasted his critics, branding them as opposed to reforms and change as these have eroded their gains under the old system. He said his attackers chose to ignore the benefi ts and benefi ciaries, preferring to make some noise and plant the seeds of doubt. But he assured they won’t succeed because the benefi ciaries of his “straight path” policy are growing in numbers, and in criticizing him, Pres. Aquino said they’re actually hitting the benefi ciaries. He stressed that it is up to his “bosses”

to continue the fi ght for change when he steps down in 2 years.The President became emotional when he mentioned

that if he turns his back against the Filipinos, it will be as if he also turned his back on his parents (Senator Benigno “Ninoy” Aquino Jr. and former Pres. Cory Aquino), and all that they gave to him, which will never happen.

He declared that he and his constituencies will continue to prove that “the Filipino is worth dying for… the Filipino is worth living for… the Filipino is worth fi ghting for.”

The SONA sounded like a valedictory, when in fact the President still has two years to go in his term, and many things can still be accomplished in two years.

First half budget defi cit: P54B, below ceiling

The national government incurred a budget defi cit of P54 billion in 1H14, a slight widening from P51.3 billion in 1H13, but well below the ceiling of P192.6 billion for the period. Spending actually surged 44% in June whilst revenues grew minimally by 6%, but surpluses in April and May suppressed the fi scal defi cit.

Despite what Finance Secretary Cesar Purisima asserted as “efforts to speed up spending” in June, the expenditures of P987.7 billion in the fi rst 6 months were below the programmed level of spending of P1.178 trillion for the period. Nonetheless, actual spending was 10.9% higher than the P890.8 billion incurred in 1H13.

Part of the underspending, though, was due to lower-than-projected interest payments and suspension of releases from the contentious Disbursement Acceleration Program (DAP) that the Supreme Court eventually declared DAP unconstitutional in July.

Government revenues grew 11.2% to P933.7 billion in 1H14 from P839.5 billion in 1H13, but fell behind the P986.3 billion goal for the 1st half of this year. The Bureau of Internal Revenue (BIR) collected P643.2 billion, up year-on-year by 8% from P595.6 billion a year ago, but short of the fi rst half goal of P711.2 billion. The Bureau of Customs (BoC) contributed P173.4 billion, up 19% from P145.7 billion, but off the P198.9 billion mark set for the period despite a revamp in key customs offi cials a year ago.

The Bureau of Treasury (BTr) generated P62.9 billion, an increase of 27% from the comparable period last year, while other offi ces chipped in P54.2 billion, up 6%.

Pres. Aquino is requesting a supplemental budget from Congress to continue the programs and projects disrupted by the Supreme Court decision against DAP. If this isn’t passed on

The only signifi cant items he took up: the big-ticket infrastructure projects that started or will start soon; admission of power shortages in 2015; request for supplemental budget in 2014.

The SONA sounded like a valedictory.

40 ECONOMY


time, or isn’t passed at all, underspending will be sustained in the 2nd half of the year, keeping the below-ceiling budget defi cit for the whole of 2014. The whole year budget defi cit target is a manageable P266.2 billion or 2% of gross domestic product (GDP).

Truck ban bad for shippers and logistics providers, but…

A paper prepared by Dr. Enrico Basilio1 and presented in a Philippine Chamber of Commerce and Industry (PCCI) forum on June 19 disclosed the adverse impact of the Manila truck ban on manufacturers, exporters, importers, shipping companies, port operators and trucking operators. It admitted, however, that Metro Manila is congested and cargo traffi c coming in and going out of the Port of Manila is a major contributor to congestion.

The City of Manila issued Ordinance No. 8336 on February 4, disallowing trucks with gross weight of 4.5 tons or higher from plying the streets on Manila from 5:00am to 9:00pm, with a heavy penalty for violators. About two weeks later, the ban was partially and temporarily relaxed, providing a 5-hour window between 10:00am and 3:00pm for loaded trucks and for 6 months only (up to August).

According to the paper, the impact of the truck ban on shippers and logistics providers has been severe:

Congestion at the Port of Manila as outfl ow of cargoes was limited to 8 hours

Disruption in the operations of manufacturers especially those operating under the JIT (just-in-time) system as inputs (raw materials) are held up inside the port

Missed delivery deadlines of exporters, lost sales for those exporting perishable goods

Increasing transport cost – the cost of trucking almost doubled from an average of P18,000 to P34,000, whilst shippers imposed add-on fees (container detention/demurrage fees) as they could not deliver on time

Refusal by some international shipping lines to accept containerized cargoes bound for Manila; for those that still call in Manila, they are now charging additional fees, with the added charges ranging between P25,000 and P35,000 per TEU

Reduced number of turnarounds per truck per week, from 5 trips per week to 3

Limited space and duration of operation of cargo handling equipment due to congestion inside the port terminal The paper, however, noted that Metro Manila had been

congested for a few years now, and this congestion worsened with the development of a new berth to accommodate more cargoes at the Port of Manila. Meanwhile, the government has spent P128.6 billion to build alternative ports in Batangas and Subic and expressways to link these ports to industrial centers. But both these facilities are highly underutilized despite the fact that 60% of Port of Manila’s cargo volume comes from areas near Batangas. Utilization rate in Batangas port’s 300,000 TEU capacity is only 3%, while in Subic it’s only 6.4% of its 600,000 TEU capacity.

The paper said the government should have taken steps for the systemic transfer of cargoes to these ports a long time ago. Such transfer is in keeping with the long-term national objective of creating new economic magnets outside of Metro Manila, maximizing the use of the ports and the expressways supporting them in part to pay for the loans obtained to build them, improving the efficiency of the transport logistics sector, and decongesting Metro Manila.

But based on WBF research, the high cost of hauling and cargo handling, rendering exports and local import substitutes uncompetitive, is said to underpin the low utilization rate in these ports. These issues have to be addressed. As the Department of Trade’s new industrialization strategy noted, logistics and power costs are among the major obstacles to the revival of industry in the country.

Nonetheless, the long-term solution is still to shift container traffi c to Batangas and Subic ports, and incentives for the shift are justifi able in this case, according to the paper. The other suggestion is to impose a cap on the volume of cargo that may be handled in the Port of Manila. This policy was successfully implemented in relation to the promotion of Laem Chabang Port in Thailand, effectively decongesting Bangkok.

Meanwhile, the immediate, “palliative” solutions to the truck ban impasse, which could potentially raise product prices and create artifi cial shortages of imported raw materials and fi nished goods, putting pressure on infl ation, are as follows:

Request Manila to lift the ban for 1-2 months to alleviate port congestion and to prepare to put in motion the long-term solutions

Request international shipping lines to temporarily waive the add-on charges as the delay in cargo deliveries is not the fault of the shippers

Source: Bureau of Treasury.

ITEMFIRST HALF

ANNUAL % CHANGE ACTUAL AS % OF TARGET2014 ACTUAL 2013 ACTUAL 2014 TARGET

Revenues 933.7 839.5 986.3 11.2 -5.3

Bureau of Internal Revenue 643.2 595.6 711.2 8.0 -9.6

Bureau of Customs 173.4 145.7 198.9 19.0 -12.8

Bureau of Treasury & other offi ces 117.1 98.2 76.2 19.1 153.7

Expenditures 987.7 890.8 1,178.9 10.9 -16.1

(Defi cit) (54.0) (51.3) (192.6) -5.3 72.0

NATIONAL GOVERNMENT CASH POSITION (Billion Pesos, unless otherwise specifi ed)

1 “Port Congestion in a Congested Metropolis” by Dr. Enrico L. Basilio, Chief of Party, USAID COMPETE and former chair of the PCCI Transport Committee

414ECONOMY


Logistics and power costs are among the major obstacles to the revival of industry in the country.

Shift containers (especially the abandoned and seized ones) and move part of the foreign container traffi c to Subic Port via container barges. The Department of Transportation and Communications (DOTC) should consider subsidizing the cost of transfer. The Bureau of Customs (BoC) should also provide assistance specifi cally on the disposal of abandoned and seized cargoes.

Cargo owners should allow and provide for night time delivery facility

Establish additional container depot and truck holding areas near Manila Bad as it is for business and with costly economic implications,

it appears that the restriction on cargo trucks in using the streets of Manila might force the government to do what it should have done a long time ago and come up with long-term solutions to the problem.

BSP details real estate stress test

The Bangko Sentral ng Pilipinas (BSP) or central bank issued Circular 839, detailing the real estate stress test (REST) banks with real estate loans are now required to undertake as pre-emptive measure against potential property market bubble.

The BSP Circular specifi es that 25% of the bank’s real estate loans shall be automatically considered as soured, regardless of loan status. This means that the bank has to set aside funds for loss provisioning, which will reduce its capital.

After providing for allowance against possible loss, the bank is still required “at all times” by the central bank to maintain a capital adequacy ratio (CAR) of 10% and Tier 1 (cash equity) CAR of 6%.

If the bank is unable to meet the minimum CAR’s, it will be asked by the BSP to explain why it failed to do so. If the BSP is not satisfi ed with the explanation, the bank will be given up to 30 calendar days to submit a plan for meeting the required ratios. Failure to submit a plan within the prescribed time period and continued inability to comply with the REST requirements will mean that the bank is “engaging in unsafe and unsound practice” and will be penalized accordingly.

The BSP, however, emphasized that REST is just a pre-emptive action to generate certain levels of “capital buffer” to absorb potential credit risks. The situation remains “manageable”, according to the central bank. The measure is expected to result in reduced exposure especially among weaker banks to property lending and in more diligence in lending.

Nonetheless, the new stringent guidelines put pressure on banks to rein in lending to property development projects. This could be the beginning of the end of the present property market boom that has contributed to the growth of

the economy during the past 3 years. Private construction actually declined, by -6%, for the 2nd straight quarter in 1Q14.

The s t ress tes t appl ies to banks’ aggregate exposure in the form of real estate loans, including for socialized and low-cost housing, and investment in debt and equity securities that finance real estate activities.

Real estate loans outstanding reached P1 trillion at end-2013, equivalent to 21.8% of the banking system’s total loan portfolio, up 7.1% from P939 billion as of end-September 2013. Real estate non-performing loans were recorded at 2.8% of total real estate loan exposure at end-2013, down from 3.2% at end-September 2013.

BSP to continue adopting pre-emptive moves vs. infl ation, excess liquidity

Despite the relative calm in the global fi nancial market, Bangko Sentral ng Pilipinas (BSP) said it will continue to carry out pre-emptive measures to address possible re-occurrence of market volatility and domestic infl ationary risks.

International fi nancial markets have calmed down, according to assessments made during the meeting among central bank governors hosted by the Bank for International Settlements (BIS) in Basel, Switzerland in late June due to the improved world economic outlook. This has encouraged the return of funds to emerging market economies like the Philippines.

But the situation remains fragile, with policy moves by major entities like the US Federal Reserve still posing risks to the volatility of the global fi nancial system, according to the BSP. That’s why the central bank is maintaining vigilance over any shift in sentiment that could disturb the current calm state of fi nancial markets. It is adopting “pre-emptive” measures to ensure that the impact of any disruption within the fi nancial system is minimized and that the infl ation rate is kept within the target band set by the BSP. The infl ation target is 3-5% for 2014 (it averaged 4.4% during the 1st 6 months) and for 2-4% in 2015.

The other objective of the pre-emptive moves is to reduce domestic liquidity, which grew by 30% or higher since July 2013, albeit it has tapered down slightly to 28% in May 2014. The goal is to bring the growth average down to 15-18% in the 2nd half of the year.

So far, the BSP: Raised the reserve requirement twice by a cumulative

2%-points to reach 20% in May Increased the special deposit account (SDA) rate by 25 basis

points to 2.25% in June Required banks with exposure to real estate to undergo “stress

test” (see previous article above)

42 ECONOMY


This monetary tightening is expected to raise interest rates, but the BSP said globally they are going to rise anyway as monetary authorities try to maintain stability in fi nancial markets and as economic growth gains some traction. BSP Gov. Amado Tetangco explained that “the idea really is that when the time comes that we have to adjust policy rates if needed, then these actions would be more effective given the reduced level of liquidity.”

The BSP vowed to be ready to act to curb any excessive volatility if the need arises.

July 2014Philippine ANALYST ECONOMIC INDICATORS

ECONOMIC INDICATORS 43

inflation rate(%), 2006 = 100

price inDices by commodity

inflation rate

inflation rate

inflation rate

inflation rate

cpi WHolesale retail

(2006=100) (1998 = 100) (2000=100)

2014 2013 2014 2013 2014 2013

Jan. 137.6 132.0 238.38 228.7 162.5 158.8

Feb. 137.8 132.4 239.1 230.8 162.3 159.2

March 137.7 132.5 239.2 229.6 162.5 159.0

April 138.3 132.8 239.6 228.2 162.9 159.2

May 139.0 132.9 229.3 163.4 159.3

June 139.6 133.7 232.9 159.7

July 140.4 133.8 232.7 160.0

Aug. 134.2 232.0 160.5

Sept. 135.0 234.8 161.2

Oct. 135.2 234.3 161.9

Nov. 135.8 236.0 161.8

Dec. 136.8 238.5 162.0

Housing, Water, electricity, gas anD otHer fuels

furnisHing, HouseHolD equipment

anD routine maintenance of

tHe House

HealtH

2014 2013 2014 2013 2014 2013

Jan. 3.4 3.5 2.6 4.9 3.2 3.3

Feb. 3.6 2.5 2.8 5.1 3.3 2.9

March 2.7 2.1 2.8 4.7 3.3 3.2

April 3.1 1.3 2.4 4.0 3.0 3.1

May 3.7 1.5 2.5 3.7 3.0 2.7

June 2.3 1.5 2.6 3.3 3.0 2.8

July 2.4 0.6 2.6 2.9 3.2 3.0

Aug. -0.5 2.4 2.9

Sept. 1.1 2.3 2.7

Oct. 0.8 2.2 2.5

Nov. 1.9 2.3 2.5

Dec. 3.5 2.4 2.8

fooD anD non-alcoHolic

Beverages

alcoHolic Beverages anD

toBacco

clotHing anD footWear

2014 2013 2014 2013 2014 2013

Jan. 5.5 2.3 17.6 17.3 3.4 4.9

Feb. 5.5 2.9 7.1 29.0 3.7 4.9

March 5.8 2.8 4.9 31.5 3.7 4.9

April 6.2 2.2 4.1 31.4 3.3 4.2

May 6.7 2.4 4.0 31.1 3.4 3.8

June 7.4 2.3 3.7 31.2 3.4 3.3

July 8.2 2.4 3.5 31.1 3.3 3.1

Aug. 1.9 31.0 3.0

Sept. 2.5 31.2 2.9

Oct. 3.2 31.0 3.0

Nov. 3.9 30.7 2.9

Dec. 4.8 30.9 3.1

transport communication recreation anD culture

2014 2013 2014 2013 2014 2013

Jan. 1.2 1.4 0.0 0.3 2.5 2.0

Feb. 1.0 1.4 0.0 0.4 2.5 2.2

March 1.0 0.8 0.0 0.5 2.4 2.3

April 1.3 -0.6 0.0 0.3 2.4 1.8

May 1.5 -0.4 0.1 0.1 2.3 1.7

June 1.3 0.7 0.1 0.1 1.2 2.7

July 1.5 1.6 0.0 0.1 1.3 2.5

Aug. 1.0 0.1 2.5

Sept. 0.6 0.0 2.5

Oct. 0.5 0.0 2.5

Nov. 0.7 0.0 2.5

Dec. 1.2 0.0 2.4

eDucationrestaurants anD

miscellaneous gooDs anD services

2014 2013 2014 2013

Jan. 4.7 4.4 2.2 2.8

Feb. 4.7 4.4 2.2 2.8

March 4.7 4.4 2.0 2.9

April 4.7 4.4 2.0 2.7

May 4.7 4.4 1.9 2.3

June 5.0 4.5 1.9 2.1

July 5.1 4.8 1.8 2.0

Aug. 4.8 2.2

Sept. 4.7 2.2

Oct. 4.7 2.2

Nov. 4.7 2.1

Dec. 4.7 2.3

pHilippines metro manila outsiDe mm

2014 2013 2014 2013 2014 2013

Jan. 4.2 3.0 2.7 2.4 4.5 3.3

Feb. 4.1 3.4 2.8 2.3 4.5 3.8

March 3.9 3.2 2.9 1.9 4.2 3.6

April 4.1 2.6 3.3 1.7 4.4 2.8

May 4.5 2.6 3.8 1.9 4.7 2.9

June 4.4 2.8 3.6 1.6 4.7 3.0

July 4.9 2.5 3.9 1.0 5.1 3.0

Aug. 2.1 -1.0 2.7

Sept. 2.7 1.1 3.1

Oct. 2.9 1.1 3.4

Nov. 3.3 1.9 3.8

Dec. 4.1 2.6 4.6

inflation at 4.9% in July

The headline inflation accelerated to 4.9% in July from 4.4% last month, the highest since November 2011. The faster inflation was due to higher annual increment posted in the index of food and non-alcoholic beverage. The rise was also because of faster annual rise in the indices of housing; water, electricity, gas and other fuels; health; transport; recreation and culture; and education. Headline inflation in the National Capital Region (NCR) accelerated to 3.9% in July from 3.6% last month. Meanwhile, inflation in Areas Outside NCR climbed to 5.1% from 4.7% in June.

ECONOMIC INDICATORS44


peso-Dollar eXcHange rate at p43.47:$1 in July

The average peso-dollar exchange rate appreciated further to P43.47:$1 in July from P43.82:$1 last month. This was the strongest monthly average performance of the peso for the year. The peso was at its strongest level in July 11 at P43.28:$1 before ramming back to the P43.5:$1 level the next week, mainly because of lower-than-expected U.S. jobless claims. The peso rebounded to P43.29:$1 in July 24 with the news of a trade surplus in May. The peso began to depreciate again at the end of the month after the U.S. posted strong 2nd quarter GDP growth, which downplayed the gains the peso could have gained from the BSP’s raising of its policy interest rate. Investors are still expected

Bsp reference rates Peso equivalent per unit of foreign currency as of July 01, 2014

91-Day t-Bill rate rises to 1.16% in July

The 91-day Treasury bill (t-bill) rate rose to 1.16% in the lone auction held for July, 12.2 basis points higher than the rate last month. The rate for the 182-day t-bills was also up by 3.2 basis points at 1.51%. The yield for the 364-day t-bills declined 3.6 basis points to 1.72%. The government decided to accept higher rates for the short-term bonds following the central bank’s tightening of its monetary policy. A total of P20 billion worth of short-term treasury bills were raised during the auction.

gross intlreserves

(us$B)

peso-DollareXcHange rate

perioD ave.

treasury Bill rate

91-Day, Wair in percent(us$B)

2014 2013 2014 2013 2014 2013

Jan. 79.36 85.27 44.93 40.73 0.69 0.05

Feb. 80.54 83.62 44.90 40.67 1.46 0.05

March 79.65 83.95 44.79 40.71 1.00 0.08

April 79.84 83.21 44.64 41.14 1.44 0.04

May 80.24 81.97 43.92 41.30 1.35 0.22

June 80.73 81.26 43.82 42.91 1.04 0.90

July 83.17 43.47 43.36 1.16 0.67

Aug. 83.89 43.86 0.59

Sept. 83.51 43.83 0.87

Oct. 83.61 43.18 0.001

Nov. 83.57 43.55 0.001

Dec. 83.75 44.10 -

Australian dollar 41.17 40.78 1.0

Bahrain dinar 115.77 116.27 (0.4)

Brunei dollar 34.88 34.83 0.1

Canadian dollar 40.92 40.43 1.2

E.M.U. euro 59.78 59.76 0.0

Hong Kong dollar 5.63 5.65 (0.4)

Indonesian rupiah 0.0038 0.0038 -

Japanese yen 0.43 0.43 -

Kuwaiti dinar unquoted unquoted unquoted

Saudi Arabian rial 11.64 11.69 (0.4)

Singaporean dollar 35.02 34.97 0.1

Swiss franc 49.23 48.95 0.6

Thai baht 1.35 1.34 0.7

UAE dirham 11.88 11.93 (0.4)

UK pound 74.69 73.48 1.6

US dollar 43.65 43.83 (0.4)

0

0.5

1

1.5

2

2.5

3

3.5

4

91-DAY T-BILL RATE

-50

-48

-46

-44

-42

-40

Php: US$ EXCHANGE RATE

40

60

80

100

GROSS INT’L RESERVES

45ECONOMIC INDICATORS


Data(in pm)

year-ago(in pm)

groWtHrate (%)

By Type of Debt 58,341 59,046 -1.2%

Medium and Long-term 47,800 49,260 -3.0%

Short-Term 10,541 9,786 7.7%

By Borrower 58,341 59,046 -1.2%

Banking System 11,855 11,982 -1.1%

Public Sector 36,409 38,344 -5.0%

Private Sector 10,078 8,719 15.6%

By Institutional Creditor 58,341 59,046 -1.2%

Banks & Other Financial Institutions 10,687 10,245 4.3%

Suppliers 3,686 2,945 25.2%

Multilateral 10,565 10,984 -3.8%

IBRD 3,580 3,296 8.6%

IMF 0 0

ADB 4,917 5,592 -12.1%

Bilateral 11,256 12,615 -10.8%

Bondholders/Noteholders 20,917 21,292 -1.8%

Others 1,230 965 27.5%

2013 2012 groWtH rate

Current Account 1,961 1,732 35.6

Goods and Services (3,058) (2,719) 12.5

Export 15,724 14,638 7.4

Import 18,782 17,356 8.2

Goods (4,072) (4,158) -2.1

Credit: Exports 10,891 10,218 6.6

Debit : Imports 14,963 14,377 4.1

Services 1,014 1,439 -29.6

Credit: Exports 4,833 4,419 9.4

Debit : Imports 3,819 2,980 28.2

Income 22 (151) -114.5

Credit: Receipts 2,102 1,908 10.2

Debit : Disbursments 2,080 2,060 1.0

Current Transfers 4,997 4,603 8.6

Credit: Receipts 5,156 4,730 9.0

Debit : Disbursments 159 128 23.8

CAPITAL AND FINANCIAL ACCOUNT 3,084 3,021 2.1

Capital Account 26 26 0.0

Credit: Receipts 28 31 -9.0

Debit : Disbursments 2 5 -55.8

Financial Account 3,058 (2,135) -243.2

Direct Investment (722) (970) -25.6

Debit: Assets, Residents Investment abroad 1,130 1,126 0.4

Credit : Liabilities, Non-residents Investment in the Phil 1,852 2,096 -11.6

Portfolio Investment 2,013 (783) -357.1

Debit: Assets, Residents Investment abroad 865 (355) -343.7

Credit : Liabilities, Non-residents Investment in the Phil (1,148) 427 -368.9

Other Investment 1,785 (431) -514.2

Debit: Assets, Residents Investment abroad 1,773 13 13537.1

Credit : Liabilities, Non-residents Investment in the Phil (13) 444 -102.8

NET UNCLASSIFIED ITEMS (3,404) (2,356) 44.5

OVERALL BOP POSITION (4,475) 1,537 -391.1

government fiscal performance april 2014

total eXternal DeBt marcH 2014

selecteD interest rates

Source : BSP Key statistical Indicator

Balance of payments

JANUARY - MARCH 2014 (in US$ million)Peso Deposit Rates (July 21 - 25, 2014)

Saving Deposits 0.00 0.00

Time Deposits

below 1 year 1.04 0.97

1 - 2 years 2.22 2.36

Over 2 years 0.91 0.82

Dollar Deposit Rates (July 21 - 25, 2014)

Saving Deposits 0.24 0.24

Time Deposits

60 days and below 0.62 0.60

61-90 Days 0.72 0.75

91-180 Days 0.81 0.83

181 days and above 0.98 1.02

Bank Lending Rates July 21 - 25, 2014)

All Maturities 3.55 3.76

High 6.91 6.80

Low 4.36 4.42

Treasury Bill Primary Rates (July 07, 2014 )

91 days 1.157 N.I.

182 days 1.513 N.I.

364 days 1.718 N.I.

Money Market Rates (July 21 - 25, 2014)

Promissory Note 2.00 1.73

Commercial Papers w/o recourse 5.76 4.16

Manila Reference Rates (July 21 - 25, 2014)

MRR 60 1.13 1.31

MRR 90 1.88 2.31

MRR 180 2.19 2.56

i. revenues 622,860 554,335 12.4%

Tax Revenues 543,250 494,013 10.0%

Non-Tax Revenues 79,522 60,241 32.0%

Grants 88 81 8.6%

ii. expenditures 626,130 584,010 7.2%

III. Surplus/Deficit -3,270 -29,675 89.0%

IV. Financing 58,210 42,761 36.1%

Domestic Financing 59,612 92,049 35.2%

Foreign Financing -1,402 -49,288 -97.2%

V. Change-in-Cash -69,896 -135,176 48.3%

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000BALANCE OF PAYMENTS

-500

0

500

1000

1500

2000

CURRENT ACCOUNT

ECONOMIC INDICATORS46


eXports imports surplus/(Deficit)

2014 2013 2014 2013 2014 2013

Jan. 4,382 4,011 5,757 4,725 (1,376) (716)

Feb. 4,654 3,741 4.721 4,708 (66) (967)

March 5,227 4,329 5,425 4,922 (198) (593)

April 4,544 4,121 5,309 5,141 (765) (1,100)

May 5,483 4,893 4,765 5,258 718 (367)

June 4,490 4,860 (370)

July 4,836 5,486 (651)

Aug. 4,581 5,542 (961)

Sept. 5,056 5,711 (664)

Oct. 5,026 4,824 202

Nov. 4,292 5,236 (942)

Dec. 4,599 5,294 (695)

mercHanDise Balance of traDe (in US$ million)

Jan-may traDe at $51Bn

Total merchandise trade for January to May 2014 was $50.7 billion, up by 5.9% from $47.89 billion in the same period in 2013. The growth further narrowed from the 7.9% recorded in January to April. A 5.8% growth in exports contributed to the positive trade performance, posting $24.36 billion in total revenues. Meanwhile, imports posted $26.34 billion in total payment, up by 5.9% from the same period last year.

For April alone, total trade amounted to $10.25 billion, down by 1.5% from the same month in 2013. Aggregate export revenues registered $5.48 billion (up by 6.8% from May last year), while total import payments posted $4.77 billion (down by 9.6% from May last year). The top 3 exports for May were: Electronic Products ($2.05 billion or 37.3% of total exports); Other Manufactures ($633.14 million or 11.6% of total exports), and; Other Mineral Products ($485.18 million or 8.9% of total exports). Meanwhile, the top 3 imports were: Electronic Products ($1.27 billion or 26.5% of total imports); Mineral Fuels, Lubricants and Related Materials ($664.05 million or 13.9% of total imports); and; Transport Equipment ($423.24 million or 8.9% of total imports).

mercHanDise imports January-april 2014 (US$ M)

mercHanDise eXports January - april (us$ m)

2014 2013 % cHange

CAPITAL GOODS 6,077 6,454 (5.84)

Telecom eqpmt & elec's eqpmt 1,858 2,961 (37.27)

Power generating & spec'd eqpmt 1,668 1,544 7.98

Office and EDP machine 495 618 (19.87)

Transport 522 538 (2.82)

Others 218 203 7.63

RAW MATERIALS & INTER. GOODS 11,131 9,417 18.21

Semi-processed raw materials 10,308 8,208 25.58

Unprocessed raw materials 823 1,208 (31.88)

MINERALS, FUELS & LUBRICANTS 5,482 5,635 (2.70)

Crude petroleum 2,536 2,713 (6.55)

Others 2,657 2,619 1.45

CONSUMER GOODS 3,482 3,155 10.39

Non-durable 1,874 1,598 17.30

Durable 1,608 1,557 3.30

SPECIAL TRANSACTION 163 202 (19.16)

TOTAL IMPORTS 26,336 24,862 5.93

2014 2013 groWtH rate%

Total Agro-Based Products 1,978 1,822 8.6

Coconut Products 665 691 (3.7)

Sugar and Products 82 135 (39.4)

Fruit and Vegetables 763 607 25.7

Fish, Fresh or Preserved of which: shrimps and prawn 228 182 24.8

Forest Products 39 38 0.3

Mineral Products 1,563 1,249 25.1

Copper Metal 84 260 (67.9)

Petroleum Products 191 336 (43.2)

Manufactures 20,061 19,101 5.0

Electronic Products 9,692 9,372 3.4

Garments 741 709 4.5

Textile Yarns / Fabrics 99 78 26.9

Furniture & Fixtures 141 99 42.7

Chemicals 958 1,369 (30.0)

Machinery & Transport Equipment 2,009 1,676 19.9

Iron and Steel 49 106 (53.4)

TOTAL EXPORTS 24,287 23,025 5.5

3000

4000

5000

6000

FOREIGN TRADE

EXPORT IMPORT

47ECONOMIC INDICATORS


Source: Family Income & Expenditure Survey (FIES) Final Results 04 February 2009

percentage DistriBution of total family eXpenDiture national accounts 1st quarter 2014

laBor anD employment (New Definition)

2013 2014

apr Jul oct Jan apr

Total labor force (000) 40,914 41,195 40,327 39,412 41,580

Labor force parcitipation (%) 63.9 64.1 63.9 63.8 63.8

Employment (%) 92.5 92.7 93.5 92.5 93

Unemployment (%) 7.5 7.3 6.5 7.5 7

Underemployment (%) 19.2 19.2 17.9 19.5 18.2

Datayear-ago

level

year-on-year groWtH

GROSS NATIONAL INCOME

(at constant prices) 2,051.9 1,907.2 7.6%

(at current prices) 3,501.3 3,172.4 10.4%

GROSS DOMESTIC PRODUCT

(at constant prices) 1,688.6 1,597.4 5.7%

(at current prices) 2,868.1 2,640.5 8.6%

GNP (at constant prices) by Expenditure Shares

1. Household Final Consumption Expenditure 1,156.0 1,092.8 5.8%

a. Food and Non-alcoholic beverages 459.6 440.2 4.4%

b. Alcoholic beverages, Tobacco 13.4 12.6 6.6%

c. Clothing and Footwear 18.6 17.5 6.7%

d. Housing, water, electricity, gas and other fuels 126.8 120.9 4.8%

e. Furnishing, household equipment and routine household maintenance 64.0 60.0 6.5%

f. Health 28.8 25.6 12.4%

g. Transport 106.5 98.1 8.6%

h. Communication 67.6 63.6 6.4%

i. Recreation and Culture 26.1 25.0 4.6%

j. Education 36 34 6.3%

k. Restaurants and Hotels 53 49 7.3%

l. Miscellaneous goods and services 156 146 6.5%

2. Government Final Consumption Expenditure 187.2 183.5 2.0%

3. Capital Formation 372.2 345.6 7.7%

4. Exports 779.4 692.3 12.6%

5. Imports 790.1 731.3 8.0%

GNP (at constant prices) by Industrial Origin

1. Agriculture 179.6 178.1 0.9%

2. Industry Sector 562.9 533.5 5.5%

a. Mning & Quarrying 20.8 18.5 12.8%

b. Manufacturing 400.4 374.8 6.8%

c. Construction 89.6 88.9 0.9%

d. Electricity, Gas and Water 52.1 51.4 1.2%

3. Service Sector 946.1 885.8 6.8%

a. Transport., Comm., Stor 134.5 123.4 8.9%

b. Trade, Repair of Motor Vehicles, Motorcycle & Household Goods 251.8 238.5 5.6%

c. Financial Intermediation 126.1 118.7 6.2%

d. Real Estate, Renting & Business Activities 180.5 165.3 9.2%

e. Public Administration & Defense: Compulsory Social Security 69.3 65.2 6.3%

f. Other Services 183.9 174.7 5.3%

eXpenDiture group 2012 2009

Total Family Expenditures (in millions) 4,125 3,239

Percent 100.0 100.0

Food Expenditures 42.8 42.6

Alcoholic Beverages 0.6 0.7

Tobacco 0.9 0.8

Clothing and Footwear 2.4 2.2

Furnishings, household equipment and routine household maintenance 2.8 2.3

Health 3.7 2.9

Housing, water, electricity, gas and other fuels 20.7 7.1

Transportation 7.5 7.7

Communication 2.7

Recreation and culture 1.4 0.4

Education 4.1 4.3

Accomodation Service 0.2 12.8

Miscellaneous Goods and Services 6.6 0.0

Other Expenditure 3.7 2.9

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000000

OFW DEPLOYMENT

6

7

8

0

5

10

15

20

25

UNEMPLOYMENT/UNDER EMPLOYMENT RATES

UNDEREMPLOYMENT UNEMPLOYMENT

philippine regional update


48 philippine regional updatephilippine regional update

NCR – NATIONAL CAPITAL REGION (METRO MANILA)

Empty vans disallowed in Manila PortManila International Container Terminal (MICT) is no longer accepting empty containers starting July, citing congestion of its dockyard. It is instead encouraging the shipping lines, as well as those with overstaying containers (mostly the subject of smuggling and other legal cases), to shift to Subic Port for their storage needs. MICT is the largest port operator in the country. The pile-up of containers at MICT dockyard was exacerbated by the Manila truck ban. The Port of Manila presently has 7,000 overstaying containers, 2,000 impounded containers and 10,000 empty containers.

Megaworld spending P45B on Bonifacio projectMegaworld Corp. is investing P45 billion for the development of McKinley West, an “ultra high-end” township on a 34.5-hectare for JUSMAG (Joint US Military Assistance Group) property inside Bonifacio Global City. The township will house luxury residential estates that will be priced higher than its present high-end condominium units, with the fi rst cluster offering 98 units with fl oor areas ranging from 79sqm to 291sqm. McKinley West will also have a business park targeting multinational companies, with construction to start next year, and commercial and retail buildings.

Region I – ILOCOS

Vigan in the race for world’s 7 wonder citiesVigan in Ilocos Sur province made it to the list of 21 semifi nalists in the new Seven Wonder Cities of the World race organized by the New7Wonders Foundation of Switzerland (www.new7wonders.com). The next round of voting started on 14 July and will end on 7 October, where the list will be reduced further to 14 fi nalists. The winning 7 cities will be announced on 17 December. Vigan, an old trading port known for its Spanish-era mansions, cobblestone streets and culture, was declared a UNESCO World Heritage Site in 1999. Other cities in the Top 21 list include Bangkok, Barcelona, Beirut, Chicago, Doha, Havana, Istanbul, Kuala Lumpur, London, Mexico City, Mumbai, Perth, Reykjavik, Saint Petersburg, Seoul and Shenzhen.

Region III – CENTRAL LUZON

Renewable energy projects in SubicLocal fi rm JobinSQM plans to put up a 20-MW solar energy facility and a 50-MW wind energy plant at the Subic Freeport Zone for a total investment of P200 million. The fi rm signed a lease agreement with the Subic Bay Metropolitan Authority (SBMA) for an 800-hectare property that will host the facilities.

Region IV – SOUTHERN TAGALOG

Region IV-A – CALABARZON

JICA pushing for airport in Sangley PointThe Japan International Cooperation Agency (JICA) presented a long-term proposal to the Department of Transportation and Communications (DOTC) and the Manila International Airport Authority (MIAA) for the development of a new international gateway in Sangley Point, Cavite, Transportation Secretary Jun Abaya disclosed. JICA will start working on the feasibility of the project shortly, with the project expected to be completed by 2025. DOTC appears to be supportive of the project, but will fi rst present the long-term gateway options to Pres. Aquino for approval. In May, San Miguel Corp. presented its own proposal to build an airport beside Manila Bay to address the requirements of Philippine Airlines and PAL Express, which the conglomerate also owns.

Region IV-B – MIMAROPA

New Palawan airport completed by 2017The new Puerto Princesa airport, with terminals and taxiways being designed and built by Korean fi rm Kumho Co., is expected to commence commercial operations in 2017, according the city mayor. The airport is designed to accommodate the increase in passenger arrivals, which have reached 1.35 million in 2013, as the existing terminal can only handle 350,000 passengers.

49philippine regional update


Region V – BICOL REGION

Revival of Bicol Express plannedThe Philippine National Railways (PNR) plans to revive the 422-kilometer Bicol Express train service in September. It stopped operating almost 2 years ago due to a derailment incident in Quezon province in October 2011 which injured 9 passengers. A successful trial run was conducted in June. The train service carried 2,000-3,000 passengers weekly. Transportation Secretary Abaya, however, said the resumption of the service will depend on the fi ndings of CPCS Transcom Ltd. Of Canada.

Region VI – WESTERN VISAYAS

Cement shortage hampers Iloilo construction activityIloilo reportedly has experienced a cement shortage since the start of the summer season in April due to the high level of public and private construction activity, including the rehabilitation of infrastructure damaged by Typhoon Haiyan. This has led to delays in construction projects. Among the major public and private projects being implemented are the P1-billion Iloilo Convention Center, widening of the Sen. Benigno Aquino Jr. Avenue, the 14-kilometer Iloilo circumferential road and the 6-lane widening of the road from Jaro district to the Iloilo International Airport, and the property development projects of Megaworld Corp., Ayala Land, Inc., and DoubleDragon Properties Corp.

Megaworld fast-tracking 2 BPO buildings in Iloilo CityProperty development fi rm Megaworld Corp. is expediting the construction of 2 offi ce towers – One Techno Place and Two Techno Place – at the 72-hectare Iloilo Business Park. The two towers will have a combined leasable space of 19,000 square meters. The offi ce buildings will be dedicated to business process outsourcing (BPO), which has experienced strong demand for offi ce space that prompted Megaworld to advance the implementation of these projects from the original mid-2015 commencement.

Region XI –DAVAO REGION (SOUTHERN MINDANAO)

Davao mountain now UNESCO Heritage SiteMt. Hamiguitan Range Wildlife Sanctuary in Davao Oriental has been named a World Heritage Site by the United Nations Educational, Scientifi c and Cultural Organization (UNESCO) during the 38th Session of the World Heritage Committee in Doha, Qatar on June 21. Mt. Hamiguitan’s key features are the naturally stunted bonsai or pygmy trees, its rich biodiversity consisting of rare and threatened endemic species of fl ora and fauna, and the nest territories of the Philippine Eagle. The country now has 6 World Heritage Sites, including the Tubabataha Reef, the Puerto Princesa Underground River, Cordillera Rice Terraces, Vigan City and several baroque churches.

Davao to be promoted as eco-tourism destinationThe Department of Tourism (DOT) said sites listed under the National Integrated Protected Areas System (NIPAS) in Davao Region will be the priority under the community-based eco-tourism plan being developed for the region. The protected areas include Mt. Apo National Park, the highest mountain in the country, which will also feature the Tibolo Cultural Village at the foot of the mountain; Kapatagan in Digos City, a jump-off point for climbing Mt. Apo; and the Hamiguitan Range Wildlife Sanctuary, which has been recently included in the World Heritage List of UNESCO. Private investors and funds from the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) will bankroll the projects identifi ed under the eco-tourism plan.

Davao Gulf closed for fi shing for 3 monthsThe Department of Agriculture (DA) and the Department of Interior and Local Government issued a joint administrative order closing the Davao Gulf to commercial fi shing boats starting June 1. The 3-month commercial fi shing ban seeks to comply with the European Commission’s regulations on unreported and unregulated fi shing. The EC gave the Philippines a yellow card or a warning in relation to the Commission’s fi ght against illegal fi shing. Failure to comply with the regulations will result in a red card or a full trade ban into the European Union. Small pelagic fi shes spawn in the Davao Gulf from June to August, so the ban will signifi cantly improve the stock of fi sh, mainly smooth-tailed trevally, red-tail scad, big-eyed scad and skipjack tuna, and meet EC’s requirements to address illegal, unreported and unregulated fi shing, as well as to improve international seafood traceability practices.

50 philippine regional update


RATE OF INFLATION FOR ALL INCOME HOUSEHOLDS IN THE PHILIPPINES BY REGION (2000 = 100)

2014

REGIONS OCT NOV DEC AVE. JAN FEB MAR APR MAY JUNE JULY

PHILIPPINES 2.9 3.3 4.1 2.82 4.2 4.1 3.9 4.1 4.5 4.4 4.9

METRO MANILA 1.1 1.9 2.6 1.63 2.7 2.8 2.9 3.3 3.8 3.6 3.9

AOMM 3.4 3.8 4.6 3.33 4.6 4.5 4.2 4.4 4.7 4.7 5.1

CAR 2.5 2.3 3.4 3.35 3.4 3.2 2.7 2.7 3.7 3.6 4.4

I Ilocos 3.0 3.7 3.9 2.34 5.5 5.0 4.1 4.2 4.4 4.8 4.5

II Cagayan Valley 3.1 3.8 4.9 3.37 4.7 4.7 4.5 3.7 4.1 3.7 4.4

III Central Luzon 2.6 3.2 4.2 2.72 4.2 3.6 3.4 3.5 3.9 3.4 4.2

IV-A Southern Tagalog 2.9 3.5 4.5 2.66 4.3 4.2 3.7 3.9 4.2 4.1 4.7

IV-B Southern Tagalog 2.8 2.4 3.1 2.55 3.6 3.6 4.0 4.4 4.8 4.9 5.3

V Bicol 3.7 4.3 5.4 3.45 5.4 5.5 4.6 4.9 5.2 5.6 5.9

VI Western Visayas 3.4 3.5 4.6 3.82 4.5 4.6 4.4 4.3 4.6 5.1 5.6

VII Central Visayas 3.3 4.2 4.6 4.80 5.4 4.0 4.9 5.2 5.5 5.7 5.4

VIII Eastern Visayas 5.1 5.4 7.2 4.31 7.8 7.8 7.5 7.2 7.6 7.4 8.0

IX Western Mindanao 4.5 5.4 5.7 4.25 5.9 6.1 6.1 6.0 6.4 6.0 5.7

X Northern Mindanao 5.0 4.7 5.1 4.47 5.2 4.9 4.9 5.1 5.0 5.4 5.0

XI Southern Mindanao 3.4 3.5 3.3 3.22 3.3 2.7 2.9 3.0 3.6 4.1 4.1

XII Central Mindanao 4.5 4.6 5.0 3.67 4.6 4.0 4.2 4.6 6.4 6.8 7.5

CARAGA 3.7 4.0 4.0 3.85 5.5 6.0 5.6 5.6 6.0 6.2 6.3

ARMM 4.0 4.4 5.1 3.35 4.0 3.8 3.5 3.6 4.1 4.4 4.5

REGIONAL ECONOMY

REGION GRDP(at current prices)

REAL GRDPGrowth Rate POPULATION ('000) LANDAREA

(sq km) PERSONS/sq km GRDP/CAPITA (P)

Region 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

Philippines 10,564,886 9,706,268 8.8 7.8 95,770 94,185 300,000 319 314 110,315 103,055

Metro Manila 3,830,834 3,460,532 10.7 7.3 12,273 12,080 619 19,827 19,515 312,135 286,468

Cordillera Administrative 212,002 209,443 1.2 5.5 1,671 1,646 19611 85 84 126,871 127,243

Ilocos Region 326,245 299,258 9.0 7.0 4,867 4,812 12974 375 371 67,032 62,190

Cagayan Valley 187,847 166,109 13.1 11.1 3,319 3,278 28265 117 116 56,597 50,674

Central Luzon 958,792 885,784 8.2 11.3 10,557 10,363 22014 480 471 90,821 85,476

Calabarzon 1,770,603 1,640,006 8.0 5.0 13,323 12,994 16644 800 781 132,898 126,213

Mimaropa 180,176 173,546 3.8 9.1 2,841 2,797 29620 96 94 63,420 62,047

Bicol Region 216,873 199,234 8.9 7.2 5,579 5,506 18139 308 304 38,873 36,185

Western Visayas 421,697 387,723 8.8 10.7 7,296 7,206 20794 351 347 57,798 53,806

Central Visayas 666,214 590,823 12.8 9.7 7,037 6,928 15885 443 436 94,673 85,280

Eastern Visayas 228,212 240,671 -5.2 6.3 4,208 4,159 23253 181 179 54,233 57,868

Zamboanga Peninsula 216,610 197,574 9.6 7.4 3,532 3,475 17046 207 204 61,328 56,856

Northern Mindanao 409,598 379,475 7.9 10.2 4,469 4,390 20496 218 214 91,653 86,441

Davao 423,719 406,644 4.2 8.4 4,640 4,561 20357 228 224 91,319 89,157

Socksacksargen 299,689 272,933 9.8 9.9 4,302 4,213 22436 192 188 69,663 64,783

ARMM 93,314 108,440 5.9 5.2 3,354 3,309 33511 100 99 27,822 32,771

CARAGA 122,462 88,075 12.9 10.4 2,502 2,468 21412 117 115 48,946 35,687

51philippine regional update


EMPLOYMENT RATE BY REGION (IN%)

(New Defi nition) 2013 2014

APR JUL OCT JAN APR JUL OCT JAN APR

PHILIPPINES 93.1 93 93.2 92.9 92.5 92.7 93.5 92.5 93.0

Metro Manila 89.6 90.1 89 90.5 89.6 89.1 89.8 88.8 89.6

Cordillera CAR 94.3 95.1 94.1 94.6 95.9 94.9 96.2 93.5 95.0

1-Ilocos Region 92 91.4 92.6 92.4 90.6 91.5 92.4 90.7 90.8

2-Cagayan Valley 97.2 96.8 97.6 96.7 97.1 96.3 97.4 96.2 96.0

3-Central Luzon 92 90.8 90.7 90.9 91.1 91 92.2 91.2 91.4

4A-Calabarzon 91.2 90.6 90.8 91.1 89.4 90.9 91.9 91.1 91.0

4B-Mimaropa 95.3 95.9 95.7 95.9 95.8 96.1 95.9 94.9 95.4

5-Bicol Region 93.1 94.4 95.1 94.2 92.2 93.7 93.8 92.5 93.9

6-Western Visayas 93 93.6 93.5 94 92 92.5 93.8 93.4 92.9

7-Central Visayas 92.8 92.9 93.5 92.6 93.6 93.5 95.1 93.4 94.1

8-Eastern Visayas 95 95.7 94.9 93.9 95 95 94.0 0.0 93.8

9-Zamboanga Penisula 95.9 95.9 96.6 96.6 95.7 96.9 97.0 95.8 95.4

10-Northern Mindanao 95.8 95.3 94.9 94.4 94.5 93.9 94.5 93.0 94.7

11-DAVAO 93.6 93.6 95.2 93.7 91.7 93.5 93.3 93.6 95.0

12-SOCCSKSARGEN 95.5 95.6 96 95.2 95.9 94.3 97.0 96.0 96.6

CARAGA 95 93.1 95.7 91.7 93.4 94.5 96.1 92.4 94.1

ARMM 97.1 95.7 96.5 93 96.7 95.7 96.4 96.2 96.5

UNEMPLOYMENT RATE BY REGION (IN %)

(New Defi nition) 2013 2014

APR JUL OCT JAN APRIL JUL OCT JAN APR

PHILIPPINES 6.9 7 6.8 7.1 7.5 7.3 6.5 7.5 7.0

Metro Manila 10.4 9.9 11 9.5 10.4 10.9 10.2 11.2 10.4

Cordillera CAR 5.7 4.9 5.9 5.4 4.1 5.1 3.8 6.5 5.0

Ilocos Region 8 8.6 7.4 7.6 9.4 8.5 7.6 9.3 9.2

Cagayan Valley 2.8 3.2 2.4 3.3 2.9 3.7 2.6 3.8 4.0

Central Luzon 8 9.2 9.3 9.1 8.9 9 7.8 8.8 8.6

Calabarzon 8.8 9.4 9.2 8.9 10.6 9.1 8.1 8.9 9.0

Mimaropa 4.7 4.1 4.3 4.1 4.2 3.9 4.1 5.1 4.6

Bicol Region 6.9 5.6 4.9 5.8 7.8 6.3 6.2 7.5 6.1

Western Visayas 7 6.4 6.5 6 8 7.5 6.2 6.6 7.1

Central Visayas 7.2 7.1 6.5 7.4 6.4 6.5 4.9 6.6 5.9

Eastern Visayas 5 4.3 5.1 6.1 5 5 6.0 0.0 6.2

Zamboanga Penisula 4.1 4.1 3.4 3.4 4.3 3.1 3.0 4.2 4.6

Northern Mindanao 4.2 4.7 5.1 5.6 5.5 6.1 5.5 7.0 5.3

DAVAO 6.4 6.4 4.8 6.3 8.3 6.5 6.7 6.4 5.0

SOCCSKSARGEN 4.5 4.4 4 4.8 4.1 5.7 3.0 4.0 3.4

CARAGA 5 6.9 4.3 8.3 6.6 5.5 3.9 7.6 5.9

ARMM 2.9 4.3 3.5 7 3.3 4.3 3.6 3.8 3.5

52 philippine regional update


FLOOR AREA OF PRIVATE BUILDING CONSTRUCTION (IN ‘000 SQM)

2013 2014

1Q 2Q 3Q 4Q TOTAL GROWTH YR-TO-DATE 1Q

Philippines 4,792,067 5,655,573 6,202,599 4,904,336 21,554,575 297.9 6,251,715

Metro Manila 1,607,382 1,851,176 2,117,520 1,537,137 7,113,215 394.6 1,916,209

Cordillera CAR 61,012 193,078 61,540 46,964 362,594 134.5 102,646

1-Ilocos Region 230,328 218,821 189,627 184,975 823,751 289.8 239,691

2-Cagayan Valley 56,125 60,374 47,300 48,988 212,787 172.9 88,235

3-Central Luzon 477,040 560,193 567,793 474,426 2,079,452 146.0 743,248

4A-Calabarzon 948,425 1,074,796 1,294,249 877,236 4,194,706 331.6 1,034,061

4B-Mimaropa 50,737 87,322 94,055 76,776 308,890 291.8 130,489

5-Bicol Region 88,156 155,177 115,728 116,285 475,346 257.2 115,224

6-Western Visayas 205,742 237,304 308,167 214,636 965,849 623.4 410,642

7-Central Visayas 298,615 537,615 490,670 559,562 1,886,462 289.9 719,670

8-Eastern Visayas 73,424 82,161 117,673 60,710 333,968 197.7 54,917

9-Zamboanga Penisula 106,823 67,978 76,103 63,870 314,774 312.3 90,331

10-Northern Mindanao 104,994 125,376 177,723 139,898 547,991 191.1 166,207

11-DAVAO 333,456 216,125 315,110 307,119 1,171,810 325.3 257,369

12- SOCCSKSARGEN 71,537 126,598 139,720 104,966 442,821 399.6 117,201

CARAGA 75,496 59,427 88,394 85,185 308,502 352.3 61,607

ARMM 2,775 2,052 1,227 5,603 11,657 252.9 3,968

VALUE OF PRIVATE BUILDING CONSTRUCTION (IN ‘000)

2013 2014

1Q 2Q 3Q 4Q TOTAL GROWTH YR-TO-DATE 1Q

Philippines 58,650,381 66,395,194 71,406,227 53,414,307 249,866,109 408.3 61,146,770

Metro Manila 22,294,383 25,584,996 32,384,786 21,818,543 102,082,708 506.3 23,354,639

Cordillera CAR 634,837 1,698,666 610,409 1,703,258 4,647,170 247.7 935,796

1-Ilocos Region 1,923,479 1,828,485 1,684,876 1,495,595 6,932,435 308.8 2,119,620

2-Cagayan Valley 456,868 462,116 415,104 430,572 1,764,660 193.4 896,162

3-Central Luzon 4,052,246 4,330,087 4,446,642 3,878,241 16,707,216 162.4 5,319,530

4A-Calabarzon 8,281,225 16,079,432 13,375,707 8,552,478 46,288,842 470.3 9,666,779

4B-Mimaropa 348,249 1,566,460 940,122 755,238 3,610,069 539.6 745,219

5-Bicol Region 692,416 1,066,486 808,285 695,992 3,263,179 253.2 837,976

6-Western Visayas 1,942,943 2,349,127 3,108,529 1,833,191 9,233,790 424.6 3,998,580

7-Central Visayas 2,638,087 5,188,035 4,379,012 4,450,022 16,655,156 325.3 6,954,089

8-Eastern Visayas 663,863 652,514 996,831 278,164 2,591,372 68.3 443,372

9-Zamboanga Penisula 1,457,917 501,789 532,080 458,069 2,949,855 544.0 674,749

10-Northern Mindanao 690,105 1,035,881 1,494,661 983,694 4,204,341 207.8 1,105,776

11-DAVAO 11,447,281 2,456,851 4,418,565 3,690,235 22,012,932 734.8 2,652,363

12-SOCCSKSARGEN 439,251 1,172,517 1,004,825 889,967 3,506,560 512.1 851,621

CARAGA 675,619 409,168 799,309 1,460,371 3,344,467 639.7 569,094

ARMM 11,612 12,584 6,484 40,677 71,357 472.2 21,405

BUSINESS


53BUBUBUBUSISISISINENENENESSSSSSSSBUSINESS

Retail sector growth to remain steadyThe Philippine retail sector will remain robust over the next few years as growth intensifi es in the convenience store and online segments.

The retail sector remains an important part of the local economy, accounting for 13.3% of GDP in 2013 and 11.8% in 1Q2014. Retail sector growth was at 6.2% in 2013 and

5.7% in 1Q2014. Retail trade also accounted to 78% of the total trade in 2013. The growth in retail will continue to be supported by strong household consumption, which is one of the largest in the world (69% of GDP compared to the 63.5% global average in 2013). The rise in consumer spending in turn is attributed to remittances from Filipinos abroad, reaching a record high of $25.1 billion in 2013. This is also supported by the Philippines’ stable economic condition, heightened spending of the younger population and rising incomes in the middle and upper classes.

The current retail market is characterized by a shift from traditional units such as sari-sari stores to more organized forms like supermarkets and convenience stores. According to the Oxford Business Group report on Philippine retail trade, there are 700,000 sari-sari stores nationwide comprising 60% of the retail market and catering mostly to the low-income class. Sari-sari stores are expected to remain buoyant as they provide for their niche market – small, local communities, but they will be facing stiffer competition from convenience stores as these expand to more and more towns. Research-fi rm Kantar said that convenience stores are growing 4 to 5 times faster than traditional ones. Moreover, expansion plans of players indicate that about 4,000 to 5,000 convenience stores will be opening in the next 5 years (see table).

Supermarket and hypermarket chains are also expanding rapidly especially to less-served rural areas. SM Group, through its SM Food and Retail Group, will be putting up at least 20 Savemore and Hypermarket stores outside Metro Manila to add to its portfolio of 193 food stores and 48 department stores. SM Retail is also planning to venture in the convenience store sector through a foreign brand. Meanwhile, SM’s main competitor Puregold will be constructing 25 new stores in 2014 to add to its 218 stores. Robinsons Retail, the third largest retailer, is targeting Visayas and Mindanao for 300 new stores this year.

The growth in retail will continue to be supported by strong household consumption.

54 BUSINESS


EXPANSION PLANS IN THE CONVENIENCE STORE SEGMENT

Source: Various press releases.

Lawson Inc. - Puregold 2,000 in the long-term

FamilyMart Co. Ltd. 700 in 5 years

7-Eleven 950 in 3-4 years

Robinsons Retail Holdings Inc. (Ministop) 330 in 2014

According to the Oxford Business Group, leading retail chains take away a large share of the market from small independent retailers through actively acquiring smaller retail chains and luring away sari-sari stores from other distributors. However, the reduction in smaller vendors (sari-sari stores) may mean the loss of a strong customer base for giant retailers as these stores purchase their goods from supermarkets. Some areas where retailers could fi nd alternative growth include planned communities where consumer-oriented youth and business process outsourcing (BPO) companies thrive as well as online retailing. Online retailing has a niche market for gadgets such as smartphones, tablets and laptop computers. But this will inevitably expand as the worldwide trend to online buying expands.

The local retail sector is also expected to be more competitive as more foreign brands enter the market as a result of the incoming ASEAN integration. Local players could take advantage of franchising or partnering with foreign brands using their familiarity with the market and the consumers to their advantage. Heightened competition should also develop the productivity, creativity and innovation of retail players, thus posting developments in brands, concepts and retail trends.

However, foreign investments in the retail sector remain limited, even with the passing of the 2000 Retail Trade Liberalization Act. According to the Oxford Business Group, the law allows big foreign retailers to operate in the country but sets minimum limits that restrict those that can invest (see list). Since the passing of the law, only around 15 foreign fi rms had invested in the country’s retail sector. Investments are also limited by a slew of constitutional restrictions, including the ban on ownership of land by foreigners and companies with greater than 40% foreign ownership.

Supermarket and hypermarket chains are expanding rapidly especially to less-served rural areas.

U.S. power fi rm to invest $2 Bn for expansion, storage facilities

AES Philippines Power Partners, an American power fi rm, will invest up to $2 billion in the Philippines to support the country’s development and help stabilize power supply in the central provinces. This is allotted for the expansion of its power plant in northwestern Philippines and to create power storage facilities in central Visayas.

AES president and chief executive offi cer Andres Gluski said the company will spend $1.2 billion to double the current capacity of its 600-megawatt coal-fi red power plant in Masinloc, Zambales. The expansion of the Masinloc has already been granted its environmental permits, and is now undergoing consultation with local and international banks to fi nance the project. The power plant is targeted for commissioning in the 3rd quarter of 2017.

Aside from the expansion of its Masinloc plant, AES also plans to install a Battery Energy Storage facility in central Visayas, where there is a shortage in energy supply. This requires an investment of $300 million to $500 million and is expected to support renewable energy projects in the Philippines. Data from the Department of Energy (DOE) show that this 40-megawatt (MW) battery storage project in Negros is one of the indicative power projects for the Visayas grid and is expected to come online by March 2015. The energy storage facilities will be installed via lithium ion batteries, which, according to Mr. Gluski, “…work particularly well on islands, so we think they are very well adapted to the Philippines.” The project can be completed within 12 to 18 months.

Foreign investments in the retail sector remain limited.

Foreign companies (excluding retailers of luxury items) are allowed to invest in the Philippine retail business under the following terms:

A minimum net worth of $200 million;

Operate through a Philippine subsidiary with at least $2.5 million of paid-up capital;

Have been in business for at least 5 years;

Operate at least 5 stores globally, or at least 1 store with capital of at least $25 million;

Invest at least $830,000 in each store in the Philippines, and;

If foreign ownership exceeds 80%, divest at least 30% of the Philippine subsidiary’s equity within 8 years of starting operations through a public offer on a local stock exchange.

INVESTMENT CLAUSES IN THE 2000 RETAIL TRADE LIBERALIZATION ACT

Source: The Oxford Business Group Philippine Report 2014 and R.A. 8762, also known as “An Act Liberalizing the Retail Trade Business”.

55BUSINESS


A power capacity of at least 2,500 MW is needed by 2017 to sustain the annual economic growth forecast of over 6%.

In the Philippine Energy Development Plan, the country needs to add power capacity of at least 2,500 MW by 2017 to sustain the annual economic growth forecast of over 6%. Electricity consumption in the Philippines increased by 50% from 2002 to 2012, which is more than the 16% growth rate of the country’s generating capacity over the same period. U.S. Secretary of Commerce Penny Pritzker, who was in the Philippines as part of her 3-country tour to deepen the U.S.’ economic ties and trade in Southeast Asia, said that the Philippines’ power needs have to match the growth that is occurring. Last year, the country recorded a gross domestic product (GDP) of 7.2%, which creates “need and opportunity.”

Data from DOE show that the Philippine power outlook is critical, with a projected reserve for 2015 of only 11% for the Luzon grid, 21% for the Visayas grid, and 21% for the Mindanao grid assuming that committed power projects would push through on time (see chart). Without the committed projects, reserve for 2015 will be -0.03% in Luzon, 9% in Visayas, and -5% in Mindanao (see chart).

Immediate action is needed to address the growing needs of the Philippine power industry. AES’ investment is especially welcome, particularly at a time when President Aquino is seeking investments in the country to help resolve the current problems in power supply. More investments like this are necessary to sustain the growth in the country’s GDP, and to allow this growth to translate into more opportunities for the Philippines.

Local cigarette fi rm under BIR probe

The Bureau of Internal Revenue (BIR) is auditing the tax payments of local cigarette company Mighty Corp. This was among a series of government investigations Mighty Corp. has been facing.

The probe came amid allegations that the locally-owned tobacco company has been declaring lower production volume and has been involved in illicit trade, which could have resulted in foregone revenues for the government’s excise taxation efforts. An earlier study from the International Tax and Investment Center (ITIC) and Oxford Economics (OE) released by the Wallace Business Forum, estimated that illicit consumption of cigarettes in the country increased from 5.9% of total consumption in 2012 to 18.1% in 2013. A bulk of this was in the lower-priced cigarette segment where Mighty Corp. has gained a controlling consumer share since the implementation of the new tax regime.

BIR Commissioner Kim Henares said that a bureau personnel has been already assigned to monitor Mighty’s manufacturing facilities. Results of the BIR investigation are kept confi dential, as mandated by the Tax Code which said any unlawful disclosure is subject to criminal liability. Comm. Henares also refused to tell when the investigation will be concluded.

This was not the fi rst government investigation Mighty Corp. has been subjected to, as it was also under a Bureau of Customs’ reassessment of duties and taxes of entries earlier this year. The BOC demanded Mighty pay P852.9 million for the importation of raw materials used for cigarette production where taxes hadn’t been properly paid. Mighty settled in February 2014. According to the BOC report, Mighty’s reported imported raw materials did not match the volume of fi nished goods exported. The Department of Finance said P4.4 billion in excise taxes could have been foregone due to this operation. The BOC also ordered the shutdown of Mighty’s customs bonded warehouse which stops the tobacco fi rm from channeling duty-free export cigarettes into the domestic market.

Mighty Corp. had already been accused of tax evasion and smuggling that could have allowed them to sell cheaper tobacco products in the local market. The fi rm has been selling Mighty brands at P14.70 per pack, a far cry from the breakeven price including the cost of materials, VAT and excise tax levied for cigarettes. The latter 2 amounted to P13.58, leaving only P1.12 for production, sale and profi t. The issue was fi rst raised in a column


-15

-10

-5

0

5

10

15

20

25

30

2014 2015 2016 2017 2018 2019 2020

PROJECTED POWER RESERVE IN THE PHILIPPINES, 2014-2020

LUZON VISAYAS MINDANAO

-70

-60

-50

-40

-30

-20

-10

0

10

20

2014 2015 2016 2017 2018 2019 2020

PROJECTED POWER RESERVE IN THE PHILIPPINES, WITHOUT COMMITTED PROJECTS, 2014-2020

LUZON VISAYAS MINDANAO


56 BUSINESS


The Sin Tax Law resulted in 2.3 million less smokers and averted approximately 32,000 deaths.

by Mr. Peter Wallace where he pointed out the impossibility of manufacturing for only P1.12 and the huge discrepancy between Mighty’s buying price of new materials versus that of other manufacturers. Comm. Henares said that there’s no law prohibiting companies to sell at a loss but noted that the move is unsustainable in the long-term, so questionable. Since January 2013, the time of the passage of the sin tax law, Mighty’s share in the cigarette market has increased remarkably to 20% from the previous 3%.

Advocacy fi rm Action for Economic Reforms (AER) said that the practice of artifi cially-depressing the price of cigarettes could also force other tobacco manufacturers to follow suit as a means to protect their consumer base. This has led to a consumption shift from higher-priced to lower-priced cigarettes. The AER said that the increasing demand on fi rms to shift to underpriced products will eventually impair the health and revenue goals of the sin tax law if continued.

Mighty recently launched its premium brands King and Chelsea, which will be categorized in the highest tax bracket for cigarettes. Mighty said that the expansion of their product lines aims to fi rm up its position as the country’s 2nd-biggest tobacco manufacturer after Philip Morris – Fortune Tobacco Corp. Inc. (PMFTC).

Sin Tax Law shows positive effects but limited by illicit trade and downshifting

A year-and-a-half since its implementation, the Sin Tax Law has been successful in reducing smoking prevalence and increasing the funds for health care. However, downshifting and illicit trade have reduced the potential gain for the BIR.

Republic Act 10351 or the Sin Tax Law was signed into law by President Aquino on December 20, 2012. The bill had been pending in Congress for nearly 2 decades. The law’s ratifi cation had 4 objectives: (1) reduce tobacco and alcohol consumption, (2) generate additional revenue to fund the universal healthcare program and alternative livelihood programs for tobacco farmers, (3) improve fi scal health and macroeconomic stability, and (4) simplify the administration of excise taxes on tobacco and alcohol products.

The effects of the law were discussed by members of the public and private sector at the “Katas ng Sin Tax: Realizing the Law’s Gains for the Filipino People” forum on June 23. A year and a half after its implementation, the Sin Tax Law had signifi cant effects in terms of revenues, tobacco and alcohol consumption, and tax

Selling at a loss is unsustainable in the long term.

A shift to underpriced products will eventually impair the health and revenue goals of the sin tax law.

administration. Data from the Social Weather Stations’ (SWS) “National Survey on Usage, Attitudes, and Behavior of Filipinos Towards Tobacco” show that smoking prevalence among those aged 18 to 24 years old dropped by 17 percentage points to 18% in the 1st quarter of 2014, while smoking prevalence among those in class E dropped 13 percentage points to 25%. Dr. Antonio Dans, president of the Philippine Society of General Internal Medicine (PSGIM), added that the Sin Tax Law resulted in 2.3 million less smokers and averted approximately 32,000 deaths.

The implementation of the Sin Tax Law also led to higher excise tax collections, which had been relatively fl at over the past 16 years. Data from the Bureau of Internal Revenue and the Department of Finance show that collections increased by 82% from P56.8 billion in 2012 to P103.4 billion in 2013, well above the P85.8 billion target for that year. As a result, the Department of Health received a 57% increase in the 2014 national budget from P53.2 billion in 2013 to P83.7 billion this year, most of which went to the PhilHealth insurance coverage of the poorest families.

However, downshifting and illicit trade challenge the current system. Price differences effectively caused people to shift to lower-priced cigarettes, which are currently taxed less because of the existing multi-tiered system. A unitary tax rate won’t be applied until 2017, thus still limiting the effect of the Sin Tax Law. The prevalence of illicit cigarette consumption – which rose by 198% from 6.4 billion in 2012 to 19.1 billion in 2013 – also restrains the government’s efforts to fully implement tax reforms. The government reportedly lost P15.6 billion in 2013 because of this. Aside from this, companies such as Mighty Corporation and British American Tobacco (maker of Lucy Strike and Pall Mall) sell underpriced cigarettes as a way to increase their market share. This causes a decline in the market share of bigger companies such as Philip Morris Fortune Tobacco Corp., Inc. (PMFTC), who reported a notable decrease from 97% in 2012 to below 80% in 2013.

To address these problems in the system, BIR Commissioner Kim Henares suggested adopting a minimum fl oor price on cigarette products to prohibit tobacco manufacturers from selling at a loss. Ms. Henares called on Congress to help make this happen, saying: “The BIR has no power to stop any business enterprise to sell at a loss if this is part of their marketing strategies. There should be a law that will be prohibiting companies like cigarette fi rms to sell at a loss.”

57BUSINESS


Tax collections increased by 82% in 2013, while the DOH received a 54% increase in its budget.

While the Sin Tax Law displayed positive results in terms of its health and revenue targets, there are still issues that need to be addressed by the government so that effi ciency of the system would increase. The lost revenues last year could have been utilized for more health programs, thus allowing the law’s gains to benefi t more people. Also, as the sin tax is an example of earmarking taxes raised from cigarettes, wines, alcohol, and spirits, there is a need for civil society to closely monitor the use of these funds to ensure that they are used only for purposes that the law intended, which is for healthcare (85%) and support to tobacco farmers (15%).

Subsidies to state fi rms drop 76% in April

The national government has released a total of P253 million in subsidies to government-owned and-controlled corporations (GOCCs) and fi nancial institutions in April. The amount is 76% lower than the P1.06 billion released in the same month last year. The drop was due to GOCCs’ stable cash position during the month.

Data from the Bureau of Treasury showed that the Philippine Rice Research Institute was the largest recipient in April with P137 million. Other recipients that received large subsidies for the period were the Cultural Center of the Philippines (P68 million), Development Academy of the Philippines (P18 million), Philippine National Railway (P18 million), and Philippine Institute of Traditional Health Care (12 million). (see table)

AGENCYSUBSIDY

APRIL 2014 (IN MN PESOS)

Philippine Rice Research Institute 137

Cultural Center of the Philippines 68

Development Academy of the Philippines 18

Philippine National Railway 18

Philippine Institute of Traditional Health Care 12

TOTAL SUBSIDY

2013 (IN BN PESOS)

TOTAL SUBSIDY

2012 (IN BN PESOS)

TOTAL SUBSIDY

2011 (IN BN PESOS)

TOTAL SUBSIDY

2010 (IN BN PESOS)

TOTAL SUBSIDY

2009 (IN BN PESOS)GOCCs 66.33 42.64 53.71 21.01 17.44

For the 1st 4 months of the year, the total subsidy disbursed reached P1.48 billion, higher than P1.37 billion in the same period last year. The government is aiming at reducing its subsidies to GOCCs this year by 35% to P42.86 billion from P66.33 billion last year.

Meanwhile, GOCCs have remitted a total of P95.38 billion in dividends to the national government for the last 3 ½ years of President Benigno Aquino’s administration. During Gloria Arroyo’s administration, P81.54 billion was remitted to the government or an average annual GOCC turnover of P9.06 billion compared to P27.25 billion average annual turnover under the Aquino administration.

The increase in GOCCs’ remittances was attributed to the reforms implemented by the current administration, particularly the enactment of GOCC Governance Act of 2011.

The increase in GOCCs remittance was attributed to the reforms approved under Aquino’s administration.

17.4421.01

53.71

42.64

66.33

0

10

20

30

40

50

60

70

2009 2010 2011 2012 2013

NATIONAL GOVERNMENT SUBSIDY

NATIONAL GOVERNMENT SUBSIDY

GOVERNMENT SUBSIDIES TO STATE-LED FIRMS



58 BUSINESS


PEZA APPROVED PROJECTS

1Q 2014

INDUSTRY ACTIVITY EQUITY LOCAL/FOREIGN ZONE

APPAREL AND TEXTILE MANUFACTURES

F & Q NEOPRENE PRODUCTS CO., INC.Manufacture of diving suit, wind surfi ng suit, sports apparels, casual bags, bullet proof vests, and other products made of neoprene

99.95% - Hong Kong Mactan Economic Zone

JIO MHW GLOBAL CHANNEL MANUFACTURING CORP.

Manufacture of wearing apparel, such as bunny suit, cotton tops and blouses 100% - Korean People's Technology

Complex - SEZ

MARUKAME FASHION CEBU INC.Manufacture/Production of apparel or clothing, fashion accessories, footwear, bags, tents, seat covers and other related products

99.99% - Japanese Mactan Economic Zone

VERTEX ONE APPAREL PHILS., INC. Manufacture of garments and wearing apparel 99.98% - Samoan Cebu Light Industrial Park - SEZ

AUTOMOTIVE TRADE

DAIWA SEIKO PHILIPPINES, CORPORATION Manufacture motor vehicle transmission parts Laguna International Industrial Park - SEZ

METALCREST TECHNOLOGIES, INC. Manufacture of Automotive Parts Laguna Technopark - SEZ

MITSUBISHI MOTORS PHILIPPINES CORPORATION

Manufacture/assembly and distribution of motor vehicles and spare parts 100% - Japanese Greenfi eld Automotive

Park - SEZ

PANGEA PHILIPPINES, INC. Manufacture and assembly of electric vehicles, rechargeable batteries and their components

99.99% - American

Golden Mile Business Park - SEZ

TOYO SEAT PHILIPPINES CORPORATION Additional sewing line for production of new model (J36A) of automotive seats

Greenfi eld Automotive Park - SEZ

ELECTRICITY, WATER, AND GAS

MAJESTICS ENERGY CORPORATION 40 -MW Solar Energy Facility projects 100% - Filipino Cavite Economic Zone

ELECTRONICS

ALLIANCE MANSOLS INC. Surface Mount Technology (SMT) for the Production of Printed Circuit Board (PCB)

Laguna Technopark - SEZ

COOPER INDUSTRIES PHILIPPINES, LLC, PHILIPPINE BRANCH

Manufacture of Power Quality Equipment including Uninterruptible Power Supplies, Inverters, and Power Distribution Units

First Philippine Industrial Park - SEZ

FORTIFY TECHNOLOGIES ASIA, INC. (Formerly: Streamlines Asia, Inc.)

Manufacture of health and fi tness tracking devices, appliances, gadgets and kits and all related operations

99.98% - American Mactan Economic Zone

HYSONIC PHILIPPINES, INC. Manufacture of actuator (Smart-Toy) Light Industry & Science Park III - SEZ

KINPO ELECTRONICS (PHILIPPINES), INC. Manufacture of Graphing Calculators 99.99% - Taiwanese

Lima Technology Center - SEZ

LAGUNA AUTO-PARTS MANUFACTURING CORPORATION Frame Stator Assy (F/S Assy) Laguna Technopark

- SEZ

LAGUNA AUTO-PARTS MANUFACTURING CORPORATION Connector Assy Laguna Technopark

- SEZ

METALCREST TECHNOLOGIES, INC. Manufacture of round meter socket Laguna Technopark - SEZ

MIKUNI ELECTRONICS CORP. Assembly of electronic parts such as those for car remote engine starter, car black box recorder, and car security system

Light Industry & Science Park III - SEZ

MOLEX INTEGRATED PRODUCTS PHILIPPINES, INC. Manufacture of Temp-Flex and industrial products TECO Industrial Park

NIKKOSHI ELECTRONICS PHILIPPINES, INC. Manufacture of Remote Reset Switch Assembly (RRSA) Laguna Technopark - SEZ

ON SEMICONDUCTOR PHILIPPINES, INC. Plant 2 Probe Expansion - Custom Automotive Die Sales Golden Mile Business Park - SEZ

PANASONIC PRECISION DEVICES PHILIPPINES CORPORATION Manufacture of 3D Sensor Unit Laguna Technopark

- SEZ

SMART ELECTRONICS MANUFACTURING SERVICE PHILIPPINES, INC. Production of HME Deck for Health and Medical Equipment (HME) Calamba Premiere

International Park - SEZ

SMART ELECTRONICS MANUFACTURING SERVICE PHILIPPINES, INC.

Assembly of semi-fi nished products, particularly, PCB main, Assy PCB, and AssyDeck for export

Calamba Premiere International Park - SEZ

SMT PHILIPPINES, INC. Manufacture of USB Flash Drive Light Industry & Science Park II - SEZ

59BUSINESS


TDK PHILIPPINES CORPORATION Manufacture of MR Heads with Dynamic Flying Height (DFH) Laguna Technopark - SEZ

TSUKIDEN ELECTRONICS PHILIPPINES, INC. Authority to lease a 1,634 sq.m. area and a 1,142.77 sq.m. open space from EZP Development, Inc.


ZAMA PRECISION INDUSTRY MANUFACTURING PHILIPPINES, INC. Manufacture of Diaphragm Carburetors 100% - German First Philippine

Industrial Park II - SEZ

SUMI PHILIPPINES WIRING SYSTEMS CORPORATION Production of wire or wire cable Hermosa Ecozone

Industrial Park

YOUNG SHIN STARLINK PHILS., INC. Manufacture of various sizes and types of Low Voltage Differential Signal (LVDS) Cable Wire

Light Industry & Science Park III - SEZ

HOTEL, RESTAURANT, AND LEISURE SERVICES

SOUTH BY SOUTHWEST CORPORATIONEstablishment of an Amanpulo Villa consisting of four (4) hotel rooms - villas or casitas, living room pavilion, service building, and swimming pool

100% - Filipino Pamalican Island Tourism Ecozone

IT AND IT-ENABLED SERVICES

FURUKAWA AUTOMOTIVE SYSTEMS LIMA PHILIPPINES INC..

Engage in the business of design and development of criteria for wire harness and parts using computer aided design (CAD)

99.99% - Japanese


GEOS ONLINE ENGLISH PHILIPPINES INC. Provide online English tutorial 99.6% - Japanese CBP-IT Park

TECHNICAL PRECAST DETAILING SERVICES, INC.

Engage in the business of providing and particulars into such outlines, sketches, plans, designs, and drawings for the production and erection of precast pre-stressed concrete building components and structures for manufacturing and erection of structure abroad

66% - Filipino 34% - American BTTC Center

ERBAS ASIA, INC. (Branch Offi ce in the Philippines of Erbas & Associates Pty. Ltd.) information technology enabled technical design services 100% - Australian UnionBank Plaza

MACHINERY AND EQUIPMENT

RAMCAR TECHNOLOGY, INC. Manufacture of plastic injection moulds, customized tooling, jigs and fi xtures, and fabrication of industrial equipments 100% - Filipino Sta. Maria Industrial

Park

METAL INDUSTRIES

FCXTRA CORPORATION Industrial powder coating services for metal and other related parts

75% - Filipino 25% - Japanese

Calamba Premiere International Park - SEZ

JAPAN SP SOLUTION, INC. Screen stencil and laser plate making, cleaning and ink matching and mixing, silicon and silk screen pad printing Cavite Economic Zone

KASAI ADVANCED MFG. PHILIPPINES INC.Manufacture of metal pressed parts and resin mold parts, processing parts coating, harness processing, assembly and manufacturing of metal mold

99.99% - Japanese


KATAYAMA MACHINERY PHILIPPINES INC. Manufacture of precision parts and machinery products 99.99% - Japanese


KONGNGAI METAL TOOLING & STAMPING PHILIPPINES CORP. Manufacture of stamping die, metal part and prototype product 100% - Chinese Lima Technology Center

- SEZ

O.M. MANUFACTURING PHILIPPINES, INC. Electrolyzed refi ning of metal Cavite Economic Zone

RONG BO YU (MANILA) CO. LTD. Production of precision injection mold, injection molding, painting, printing and other assembly works 100% - Chinese Laguna Technopark

- SEZ

S & G PRECISION, INC. Fabrication of jigs and fi xtures, hot runner parts and accessories Light Industry & Science Park III - SEZ

URE-SHII TECHNOLOGIES INC.. Fabrication, installation and maintenance of industrial and offi ce equipment including its parts and components 100% - Filipino Golden Mile Business

Park - SEZ

VALOR MANUFACTURING CORPORATION Manufacture of fabricated metal 100% - Filipino Victoria Wave - SEZ

MISCELLANEOUS MANUFACTURES

AGC INDUSTRIAL FLAT GLASS PHILIPPINES, INC. Manufacture of industrial solar glass 99.99% -

Japanese Asahi - SEZ

BRIDGESTONE PRECISION MOLDINGS PHILIPPINES, INC. LFD (Lexmark Foam Development) for Laser Printer Cavite Economic Zone

BROTHER INDUSTRIES (PHILIPPINES), INC. Manufacture of BH11 Inkjet Cartridge First Philippine Industrial Park - SEZ

JL IMEX PHIL. CORP. Manufacture of ladies’ bags, wallets and leather handbags 100% - Korean First Cavite Industrial Estate - SEZ

PANASONIC PRECISION DEVICES PHILIPPINES CORPORATION Manufacture of Dichroic Prism Unit Laguna Technopark

- SEZ

60 BUSINESS


ZIR-CON LABS INC.Manufacture of Zirconium Blocks, Crowns, Bridges, Partials, Orthodontics and other Appliances for Restorative Dentistry; Dental Alloys, Materials and Supplies; Dental Technology Research Training

87% - American 13% - Filipino

Light Industry & Science Park I - SEZ

OFFSHORING AND OUTSOURCING

ACCENTURE, INC. Software development Gateway Tower

ACS OF THE PHILIPPINES, INC. Information Technology outsourcing and business process outsourcing (BPO) services Aseana One

ACS OF THE PHILIPPINES, INC. Information Technology outsourcing and business process outsourcing (BPO) services (data encoding and indexing) Cebu I.T. Park

ADVANCED WORLD SOLUTIONS, INC. Verifi cation of functionality for automobile software One Corporate Centre

AELOGICA (PHILIPPINES) INC. Software development and application, including programming and adaptation of system software and middleware

90% - American 10% - Filipino Ecotower

ANDERSON BUSINESS PARTNERS - PHILIPPINE BRANCH

Call center operations and business process outsourcing (BPO) activities and services 100% - English Ecotower

CASH FLOW OUTSOURCING SERVICES INC. Business Process Outsourcing offering Voice and Non-Voice services 99.5% - American Orient Square I.T. Bldg.

CONVERGYS PHILIPPINES SERVICES CORPORATION Call Center Operations Two Sanparq

E-WAY BUSINESS INC. Business Processing Outsourcing (BPO) using E-commerce technology and telemarketing services 100% - Filipino DPC Place Building

EXLSERVICE PHILIPPINES, INC. Business process outsourcing (BPO) services Northgate Cyberzone

EXLSERVICE PHILIPPINES, INC. Business process outsourcing (BPO) services Cebu I.T. Park

IBEX GLOBAL SOLUTIONS (PHILIPPINES) INC. Call center and business process outsourcing services SM Lanang Premier IT Center

IBM BUSINESS SERVICES, INC. Business Transformation Outsourcing services Eastwood City Cyberpark

IBM BUSINESS SERVICES, INC. Business Transformation Outsourcing services Lakeside Evozone

IBM DAKSH BUSINESS PROCESS SERVICES PHILIPPINES INCORPORATED Business Process Outsourcing and call center operations UP Science and

Technology Park (North)

IBM DAKSH BUSINESS PROCESS SERVICES PHILIPPINES INCORPORATED Business Process Outsourcing and call center operations Naga City Technology

Park

ING GLOBAL SERVICES AND OPERATIONS, INC.

Reconciliation Processing (Custody Fee Reconciliation, Brokerage Fee Reconciliation, Payment Reconciliation, Cash Receivables Reconciliation, Finance Reconciliation, Market Risk Reconciliation, Credit Risk Reconciliation); and inclusion of Market data services processing

W Fifth Avenue

KIZUNA FEELS KNOT INC. Business process outsourcing for web graphic design 100% - Japanese KRC IT Zone

MICROSOURCING PHILIPPINES INC. General Business Process Outsourcing (BPO) Services Eastwood City Cyberpark

MULTIRATIONAL CORPORATION

Contract IT development services, business process outsourcing and outsourced call center services PBCom Tower

ORCHID CYBERTECH SERVICES, INCORPORATED Call center operations Cyberscape Beta

QBE GROUP SHARED SERVICES LIMITED - PHILIPPINES BRANCH IT-enabled Business Process Outsourcing (BPO) operations CBP-IT Park

REVISION ZERO CONSULTING CO. Preparation of drawings, detailing components of engineering structures thru computer aided design software

48% - New Zealander

48% - Australian 5% - Filipino

One San Miguel Avenue Condominium

SALVO TRAININGS & CONFERENCES (Branch offi ce in the Philippines of Salvo Global Pte. Ltd.)

Telemarketing by calling existing and potential clients 100% - Singaporean E-Square I.T. Park

SPi HEALTHCARE, INC. Business Process Outsourcing services 99.99% - American

Pacifi c Information Technology Center

TELETECH CUSTOMER CARE MANAGEMENT - PHILIPPINE BRANCH Business Process Outsourcing/Call Center Operations Cebu I.T. Park

TELETECH CUSTOMER CARE MANAGEMENT - PHILIPPINE BRANCH Business Process Outsourcing/Call Center Operations Cebu I.T. Park

TERADATA GCC (PHILIPPINES), INC. Software development and consulting center Ecotower

61BUSINESS


TRANSCOSMOS ASIA PHILIPPINES, INC. BPO and IT-enabled services 99.8% - Japanese One Corporate Centre

V MONEY INC. Business of providing electronic payment processing solutions and electronic commerce 100% - Filipino Ecotower

VALTES ADVANCED TECHNOLOGY INC. Software development and care support 99.8% - Japanese Trafalgar Plaza

VXI GLOBAL HOLDINGS B.V. (PHILIPPINES) Business Process Outsourcing/Call Center Services The Annex-SM City Davao IT Center

VXI GLOBAL HOLDINGS B.V. (PHILIPPINES) Call Center Operations Waltermart-North EDSA

WAKUTO PHILIPPINES INC. Software development 99.8% - Japanese Burgundy Corporate Tower

OTHER BUSINESS SERVICES

DELTA DESIGN PHILIPPINES LLC Assembly and test of component parts for semiconductor test handling equipment

Carmelray Industrial Park II - SEZ

HIBU (PHILIPPINES) PRIVATE LIMITED, INC. Provision for production advertisement services Ecotower

PUBLISHING AND PRINTING

TMA GROUP PHILIPPINES INC. Printing activity Calamba Premiere International Park - SEZ

REAL ESTATE AND PROPERTY DEVELOPMENT

AYALA LIFE-FGU CENTER - CEBU CONDOMINIUM CORPORATION

Operate, maintain and manage a 14-storey offi ce building to be known as Ayala Life-FGU Center Cebu 100% - Filipino CBP-IT Park

GLOBE TELECOM, INC. Operate and manage its existing 7-storey building (with 2-level basement) IT enterprises to be known as Globe Telecom I.T. Plaza

70% - Filipino 22% -

Singaporean 8% - Mixed

Cebu I.T. Park

KYOCERA CIRCUIT SOLUTIONS PHILIPPINES, INC.

Authority to lease out a 4,630 sq.m. of its existing 13,000 sq.m. factory to NEC Tokin Electronics (Philippines) Inc.

Light Industry & Science Park II - SEZ

NIKKOSHI ELECTRONICS PHILIPPINES, INC. Authority to lease out a 755.86-sq.m. fl oor area of its existing building to Nikkoshi Philippines Corporation

Laguna Technopark - SEZ

PROPHILE SOUND INDUSTRIES, INC.

Authority to lease out a 551.50-sq.m. building space to Nakayama Seimitsu Mfg. Inc. Cavite Economic Zone

TOA KIKO CEBU CORPORATION Authority to lease out 455-sq.m. portion of its building to Showa Create Cebu Inc. Mactan Economic Zone

STORAGE AND WAREHOUSING

ALIGN AEROSPACE LLC - PHILIPPINE BRANCH Warehousing and supply chain/logistics facilities and services for the storage, deposit, & safekeeping of goods 100% - American Baguio City Economic

Zone

CBT REALTY & DEVELOPMENT CORPORATION Registration of its additional warehouse facilities Allegis I.T. Park

CQM MANAGEMENT, INC. Existing fi ve (5) units warehouse/factory buildings 100% - Filipino Cavite Economic Zone

HANKYU HANSHIN LOGISTICS PHILIPPINES INC. Additional warehouse site Mactan Economic Zone

HONDA LOGISTICS PHILIPPINES INC.. Manage and store PVC rolls and accessories 100% - Japanese First Philippine Industrial Park - SEZ

HTH SUNBO LOGISTICS (PHILIPPINES), INC. Warehousing and logistics services 99.99% - Singaporean


ITHACA INC. Construction of 3-units warehouse facilities Laguna Technopark - SEZ

ITHACA INC. Construction of 3-units warehouse facilities Light Industry & Science Park III - SEZ

ITHACA INC. Additional two (2) warehouse-type buildings Laguna Technopark - SEZ

IWS REALTY CORPORATION Additional 2-unit warehouse facilities Hermosa Ecozone Industrial Park

JIO MHW GLOBAL CHANNEL MANUFACTURING CORP.

Engage in resale of goods, packing, repacking, cutting or altering according to customer’s specifi cations, and assembling 100% - Korean People's Technology

Complex - SEZ

ROBELCHU CORPORATION Construct a warehouse building 100% - Filipino Light Industry & Science Park II - SEZ

SAKAMOTO PHILIPPINES CORPORATION

Warehousing/logistics support services particularly the importation/procurement, storage, deposit, inventory management of various machine tools, hand tools, manufacturing consumables, and industrial equipment

99.97% - Japanese Mactan Economic Zone

SLTI LOGISTICS SERVICE, INC.Additional area of operations to be undertaken in the 1,225 sq.m. area of storage/warehouse facility located in Toyota Autoparts Philippines, Inc. (TAPI)

Toyota Sta. Rosa - SEZ

62 BUSINESS


LIST OF BOI REGISTERED PROJECTS

JUNE 2014

INDUSTRY ACTIVITY PROJECT COST (IN PHP MILLION)

EQUITY LOCAL/FOREIGN

AGRICULTURE, FISHERY, AND FORESTRY

Sin Likas Import-Export Packaging, Inc. Producer of Vegetable & Fruit Juices 13 97% Filipino 3% American

Treelife Coco Sugar Producer of Coco Sugar 18 100% Filipino

Ada Manufacturing Corporation Operator/Provider of Rice Harvesting Services 1,840 100% Filipino

Sea Cage Industries, Inc. Producer of Milkfi sh (Aquaculture) 34 100% Filipino

ELECTRICITY, WATER, AND GAS

NV Vogt Philippines Solar Energy One, Inc. Renewable Energy Developer of Solar Energy Resources 555 60% Filipino 40% Foreign

Pagbilao Energy Corporation Operator of a 400 MW Coal-Fired Power Plant 39,903 100%Filipino

HOTEL, RESTAURANT, AND LEISURE SERVICE

Fort Bonifacio Shangri-La Hotel, Inc. Operator of Hotel and Serviced Apartments (Shangri-La at the Fort, Manila) 13,648 60% Filipino

40% Foreign

Ecosouth Hotel Ventures, Inc. Operator of Tourist Accommodation Facility (Seda Nuvali) 728 100% Filipino

MISCELLANEOUS MANUFACTURE

Primex Isle De Coco, Inc. Producer of Virgin Coconut Oil and Coco Flour 64 100% Filipino


Goshen Land Capital Inc. Developer of Low-Cost Mass Housing Project (North Cambridge Condominium Building 3 (Wharton) 159 100% Filipino

Communities Zamboanga, Inc. Developer of Low-Cost Mass Housing Project (Camella Pagadian) 356 100% Filipino

Communities Cagayan, Inc. Developer of Low Cost Mass Housing Project (Lessandra Heights – Cagayan De Oro) 392 100%Filipino

Communities Cagayan, Inc. Developer of Low Cost Mass Housing (La Mirande Crest) 279 100%Filipino

TOTAL 57,988

63BUSINESS


DATA INDEX

YEAR-ON-YEAR

GROWTH

YEAR-TO-DATE

GROWTH

Volume of Production Index (VoPI) (2000=100) 125.4 13.8 -1.6

a. Food 144.5 9.1 2.7

b. Beverage 138.5 31.5 22.2

c. Tobacco 7.3 30.4 -1.6

d. Textile 38.1 16.5 12.4

e. Footwear and Wearing Apparel 28.8 -17.7 -13.9

f. Wood and Wood Products 70.9 20.8 1.5

g. Furniture & Fixtures 727.4 -7.2 11.7

h. Basic Metals 146.6 12.8 -9.0

i. Iron and Steel 101.4 2.8 10.4

j. Non-ferrous Metals 254.4 23.3 -34.3

k. Fabricated Metal Products 323.1 58.3 42.6

l. Machinery Excluding Electrical 42.8 13.2 31.9

m. Electrical Machinery 93.1 13.1 0.3

n. Transport Equipment 126.6 12.7 3.8

o. Other Mfg Industries 105.5 4.7 -1.7

p. Paper & Paper Products 67.1 -2.9 -5.1

q. Publishing & Printing 147.2 227.8 103.4

r. Leather Products 3.9 0.0 5.1

s. Rubber Products 268.5 23.0 9.9

t. Chemical Products 215.8 -5.2 -35.3

u. Petroleum Products 58.2 19.0 0.3

v. Non-Metallic Mineral Products 127.3 -17.4 -10.1

w. Glass & Glass Products 152.2 6.5 7.8

x. Cement 165.0 2.6 -0.4

y. Misc. Non-Metalic Mineral Products 40.7 -71.7 -55.7

VALUE OF PRODUCTION INDEX (VAPI) (2000=100) 189.1 12.6 -1.8

AVERAGE CAPACITY UTILIZATION 83.5 -16.8 83.2

DATA YEAR-AGOLEVEL

GROWTH RATE (%)

MOTOR VEHICLE SALES 69,737 57,128 22

PASSENGER CAR SALES 24,824 18,702 327

COMMERCIAL VEHICLE SALES 44,913 38,426 16.8


UNIVERSAL AND COMMERCIAL BANK’S LOANS OUTSTANDING TO THE REAL ESTATE SECTOR (P Bn)MARCH 2014w

MAR-14 % TO TOTALRE: LOAN DEC-2012 % TO TOTAL

RE: LOAN

RESIDENTIAL 192.28 28.5 173.46 30.5

COMMERCIAL 492.28 71.5 394.95 69.9

MOTOR VEHICLE SALESJUNE 2014

000

500

0

500

000

500

000

500

000

FDI:BOP CONCEPT US$ Million

INDUSTRIAL PERFORMANCE (2000=100) MAY 2014

FOREIGN DIRECT INVESTMENTBalance of Payments Concept*; JANUARY- APRIL 2014

LEVEL (US$ million)

SOURCE CURRENT YEAR AGO YEAR-ON-YEAR% CHANGE

TOTAL FDI 1,377 1,829 -24.74

Equity Capital 357.26 791.33 -54.85

Reivested Earnings 131.42 146.33 -10.19

Debt Instruments 887.99 891.64 -0.41

* The BSP adopted the Balance of Payment, 6th edition (BPM6) compilation framework effective 22 March 2013 with the release of the full-year 2012 and revised 2011 BOP statistics. In BPM6, net FDI fl ows refer to non-residents’ equity capital (i.e., placements less withdrawals) + reinvestment of earnings + debt instruments, net (i.e.,net intercompany borrowings).

64 BUSINESS



SURVEY ON THE MONTHLY OCCUPANCY RATES & LENGTH OF STAY

67.2% HOTEL OCCUPANCY RATE IN 2013

The comparative average occupancy rates of hotels in Metro Manila hit 67.2% in 2013. The occupancy rate for accredited hotels hit 67.4% while non-accredited hotels posted a 54.85% occupancy rate. Deluxe hotels were the most popular with 70.82% occupancy. The guest’s length of stay averaged at 2.49 nights in 2013. On the average, guests preferred to stay longer on non-accredited hotels at 4.31 nights.

1 STRIKE IN JUNE

A strike was recorded in June 2013 which involved 400 workers equivalent to 1,200 man-days lost. Meanwhile, there is a total of 83 notices of strike/lockouts since January 2014. In 2012, 3 strikes were recorded involving 209 workers, which is equivalent to 797 man-days lost. Meanwhile, 184 notices of strike were fi led that year.

LABOR STRIKES

STRIKES DECLARED WORKERS INVOLVED MAN-DAYS LOST (000)

2014 2013 2014 2013 2014 2013

JAN 0 0 - - - -

FEB - - - - - -

MAR - - - - - -

APR - - - - - -

MAY - - - - - -

JUN - 1.00 - 400 - 1,200

JUL - - - - - -

AUG - - - - - -

SEP - - - - - -

OCT - - - - - -

NOV - - - - - -

DEC - - - - - -

TOTAL 0 1 0 400 0 1,200

0

500

1000

1500

2000

2500

3000

3500

4000

MAN-DAYS LOST

0

2

4

6

8

10

12

STRIKES DECLARED

VISITOR ARRIVALS SLIGHTLY UP IN MAY

Total visitor arrivals registered in May is 364,804 up by only 0.76% from 362,062 in the same month in 2013. Of this, 4.89% or 17,794 visitors were Filipinos residing abroad.

Korea remained the top source market followed by the U.S. and China. From January to May, visitors coming from Korea amounted to 453,227 (21.99% share of the 2.06 million total visitors for 2014). The U.S. market tallied 327,702 visitors (15.9%) while the Chinese market recorded 198,951 visitors (9.91%).

VISITOR ARRIVALSJANUARY-MAY 2014

0

100

200

300

400

500

TOURISM ARRIVALS

COUNTRY 2014 2013 % CHANGE RANK

KOREA 453,277 489,389 -7.38 KOREA

USA 327,702 306,056 7.07 USA

CHINA 198,951 163,879 21.40 CHINA

JAPAN 188,941 179,984 4.98 JAPAN

AUSTRALIA 96,655 88,190 9.60 AUSTRALIA

SINGAPORE 74,710 70,470 6.02 SINGAPORE

CANADA 67,929 61,086 11.20 CANADA

UNITED KINGDOM 60,305 52,379 15.13 UNITED KINGDOM

TAIWAN 55,543 79,297 -29.96 TAIWAN

MALAYSIA 54,420 45,447 19.74 MALAYSIA

HONGKONG 49,381 55,811 -11.52 HONGKONG

GERMANY 35,040 33,205 5.53 GERMANY

OVERSEAS FILIPINO 90,626 92,494 -2.02 OVERSEAS FILIPINO

OTHERS 307,655 293,833 4.70 OTHERS

TOTAL 2,063,149 2,013,533 2.46 TOTAL

2012 2011 2012/2011

JAN TO DEC JAN TO DEC GROWTH RATE

De Luxe Hotels

Occupancy Rates 70.82 71.49 -0.94

Length of Stay 2.87 2.92 -1.71

First Class Hotels

Occupancy Rates 60.14 58.05 3.59

Length of Stay 2.20 2.30 -4.17

Standard Hotels

Occupancy Rates 65.34 64.82 0.80

Length of Stay 2.46 2.38 3.47

Economy Hotels

Occupancy Rates 52.15 53.44 -2.41

Length of Stay 1.87 2.13 -12.44

Overall Average 67.20 67.25 -0.07

CORPORATE BRIEFS

Philippine ANALYST

CORPORATE BRIEFS65

July 2014

AGRICULTURE, FISHERY, & FORESTRY

Vitarich to relaunch product line

Vitarich Corp. plans to strengthen its consumer foods business through the relaunch of its core products this year. Vitarich’s approaching exit from a 7-year corporate rehabilitation program will boost customer and client confi dence. The company will relaunch core products such as hog, aqua and poultry feeds and introduce new products later this year including golden cream dory. The expansion program came after investment fi rms ADM Capital and Altus Capital partnered to invest on the rehabilitation and turnaround of the company. Vitarich aims to hit P5 billion in the next few years.

AUTOMOTIVE TRADE

HARI posts 6% growth in 1H2014

Hyundai Asia Resources, Inc. (HARI) posted a 6% growth in vehicle sales in the 1H2014 due to the robust sales of its Eon and the Accent models. The company sold 11,651 units from 10,992 units in the same period last year. Passenger car (PC) sales grew by 21% to 7,896 units, while light commercial vehicle (LCV) registered a 16% decline in sales to 3,755 units due largely to supply constraints. In the month of June alone, HARI has sold 1,928 units, up by 12% from 1,726 units sold 2013. Sales of PC increased by 28% to 1,349 units from 1,051 units in June 2013. Meanwhile, LCV sales were down by 14% to 579 units. The company targets sales growth of 10% this year.

Japan’s Mitsubishi Motors acquires PH transmission maker

Japan’s Mitsubishi Motors Corporation (MMC) acquired 90% stake of its local transmission maker, Asian Transmission Corporation (ATC), from Mitsubishi Motors Philippines Corporation (MMPC) and Sojitz Corporation (Sojitz). The acquisition was part of the company’s New Stage 2016 business plan which aims to expand its production base in ASEAN countries. Prior to the acquisition, MMC has a 5.29% interest in ATC, while MMPC has 79.42% and 5.29% held by Sojitz. The company did not provide the acquisition cost. Meanwhile, ATC will serve as an additional component assembler for MMC vehicle manufacturing plants such as Mitsubishi Motors Thailand.

ELECTRICITY, WATER AND GAS

AboitizPower to spend P90Bn in gen projects

Aboitiz Power Corp. (AboitizPower), the power generation unit of the Aboitiz Co., will venture into generation projects worth P90 billion. AboitizPower said it would be investing into 3 new power plants, including: P44 billion for the 400-MW pulverized coal-fi red expansion unit in Pagbilao, Quezon; P13 billion for the 68-MW Manolo Fortich hydropower project; and P32 billion for the 300-MW Cebu coal project. The 3 power plants would start operation by late 2016 or 2017. AboitizPower is in the midst of a 5-year plan that aims to double its generating capacity to at least 4,000 MW from 2,000 MW.

ELECTRONICS

Cirtek unit aims $100Mn in sales for 2015

A unit of semiconductor assembly company Cirtek Holdings Philippines Corp. (CHPC) said it is looking at $100 million in con-solidated sales by its fi scal year ending in 2015, days after announcing plans to acquire Remec Broadband Wireless Holdings, Inc. In a statement, Cirtek Electronics International Corporation (CEIC) said it will acquire 100% of privately-held Remec with a purchase price that will range from US$10M-US$12 million. Cirtek said it will manufacture Remec’s products under a long-term contract manufacturing relationship.

FINANCIAL INTERMEDIATION

AIG expects 20% growth in 2014

AIG Philippines aims 20% growth in its fi nancial lines business in the country this year, together with announcements on the pros-pects of Directors and Offi cers (D&O) insurance in the Philippines. D&O insurance currently includes 55% of AIG’s total fi nancial lines portfolio in the country, which amounted to $5 million as of end-2013 in terms of gross premiums written. D&O insurance is an insurance policy that protects the directors and offi cers of organizations against claims from the decisions or actions under-taken regarding their scope of responsibility. Meanwhile, the company also expects the growth to come especially from some of its newer product lines such as “CyberEdge,” which is a comprehensive risk management solution for cyber insurance.

CORPORATE BRIEFS66


MINING AND QUARRYING

Top Frontier to venture in mining

Top Frontier Investment Holdings Inc. will be starting mining and processing ores from several nickel and gold mining projects in the next 5 years. Top Frontier will use cash dividends from San Miguel Corp., on which it is a majority holder, to fund its mining projects. The investment company will conduct due diligence before putting up its planned plants. Top Frontier holds the mining rights for the Nonoc nickel project in Surigao del Norte, Mr. Cadig nickel project in Camarines Norte and Lo-oc limestone project in Cebu.

MISCELLANEOUS MANUFACTURES

D&L sales up by 45% in Jan-May 2014

D&L Industries Inc. posted a 45% growth in export sales for January to May 2014 period, driven by the specialty plastics and food ingredients segments. The company said its specialty plastics business, First in Colours and D&L Polymer and Colours, accounted for over 3 quarters of total exports. The increase in export sales contributed 17% in company’s revenue, up from 12% of total earnings in 2013. The company did not provide actual sales fi gures. In the 1st 5 months of 2014, sales of exported specialty plastics were 40% higher than that of the same period last year. D&L said that most products were raw materials used in the insulation of automotive wire harnesses. Meanwhile, the company also reported 67% increase in its exports of oleo-fats in January-May period. Most of the products were mainly exported to Asia-Pacifi c.


Megaworld to develop new township project in BGC

Megaworld Corp. will invest P45 billion on its new township project in Bonifacio Global City (BGC) that will offer premier and luxury residential units. The company is developing McKinley West into an “ultra high-end” township in the next 10 years. The project would consist Megaworld’s most expensive housing units yet, with company representatives saying the demand for the price range is sustainable. Aside from the residential village, McKinley West will have luxury residential estates and a business park offering modern offi ce towers and commercial and retail buildings.

Starmalls Inc. to venture into high-end retail

Starmalls Inc., the shopping mall development and leasing unit of the Villar Group of Companies, is set to venture into high-end retail in the next 2 years through its Prima brand. The Starmall Prima in Taguig City is undergoing construction, covering a gross fl oor area of 55,000 square meters. The 2nd phase of the project will be completed in 2015. A Prima mall in North Molino, Bacoor City is set to open in the 1Q2015, while the Prima mall in Santa Rosa, Laguna, will also open in 2015. Mr. Manuel Villar, chair of Starmalls Inc., said that the Starmall in Shaw Boulevard may be renovated and converted into a Prima.

Vista Land to build BPO offi ce building

Vista Land & Lifescapes, Inc. will venture into offi ce space development through the P1.5 billion offi ce building in Bonifacio Global City (BGC). The 15-story business process outsourcing (BPO) building has a gross leasable area (GLA) of 20,000 square meters (sqm) and is located adjacent to the Essenssa residential tower in McKinley Hills. Vista Land controller Cynthia Javaraz said that a construction plan has already been completed and is just awaiting a Philippine Economic Zone Authority certifi cation for tax incentives. Construction is set to start in November and is expected to be completed in the 2Q2016.

TELECOMMUNICATIONS

PLDT to invest $2 million for cable project

Philippine Long Distance Telephone Co. would invest $2 million in a cable project that will double its international bandwidth capacity to the U.S. The Asia-America Gateway (AAG) cable links Southeast Asia to the U.S. and runs 20,000 kilometers for a total cost of $500 million, 10% of which came from PLDT. The AAG cable will be upgraded to 100G per wavelength, which will “sup-port the delivery of high-bandwidth services and applications” and “give customers the benefi ts of a much faster and resilient global transport network.” PLDT also announced that it is expanding its 4th generation (4G) high-speed internet capabilities in the Philippines through the deployment of 5,000 new 4G base stations in order to increase the company’s fi xed wireless and mobile broadband network.

67CORPORATE BRIEFS


IPC to launch PH facility against internet attacks

IP Converge Data Services, Inc. (IPC) announced that it will launch a facility that would analyze Internet traffi c to remove malicious data. IPC, a unit of Philippine Long Distance Telephone Co., said the fi rst locally-hosted data scrubbing center would be launched this year in partnership with Hong Kong-based Nexusguard, the leading global DDoS (distributed denial of service) Mitigation service provider. Data scrubbing centers are centralized facilities which analyzes and fi lters Internet traffi c. The facility aims to protect local e-commerce websites from local and foreign DDoS attacks, which contributes for 50% of the global cybercrimes.

STORAGE AND WAREHOUSING

ICTSI raises $350 million for CAPEX program

International Container Terminal Services, Inc. (ICTSI) has raised $350 million for its capital expenditure program. The company of port and gaming mogul Enrique Razon Jr. signed an inaugural Loan Facility Program and a $350 million syndicated revolving credit facility with international and domestic banks. The program is a master platform from which other loan type fi nancing instruments could be issued and will also harmonize the undertakings across ICTSI’s capital structure. ICTSI vice president and treasurer Rafael Consing said the transaction highlights the core attributes needed by the company for its funding needs, includ-ing streamlined execution, reduced negative interest carry, incurrence-based covenant regime, and a diversifi ed funding base.

TRANSPORT SERVICES

Cebu Pac, Tigerair partner for interline fl ights

Cebu Pacifi c Air and TigerAir tied up for a mutual ticketing offer on their websites as well as offering joint check-in, connections, and baggage service. Cebu Pacifi c said that the 1st interline fl ights will be available on the Tigerair website starting July 23, while Tigerair fl ights will be available on the Cebu Pacifi c website from Sept. 24. The “interline agreement” will allow passengers to cross-book fl ights on a single journey within Asia-Pacifi c and Middle Eastern destinations. Tigerair said that the arrangement will strengthen both Tigerair and Cebu Pacifi c’s network and result to greater convenience to customers.


68 INFRASTRUCTURE

DOTC to address project backlogs by 2019The Transportation department said it plans to catch up on transport project implementation by 2019. But this will require much better efforts at preventing delays caused by complaints on the bidding process for projects as what has happened recently in a number of major projects. The department has had no major infrastructure projects implemented in the past 3 years except NAIA 1 and 3 rehabilitation, but even these were delayed.

The Department of Transportation and Communications (DOTC) expects the Philippines to suffer from a transportation gap for the next 5-10 years as a number

of key projects of the Transport department under the PPP program have been delayed due to complaints from losing or disqualifi ed private sector parties. Transport Secretary Joseph Emilio Abaya, however, said "We envision erasing the backlog in transportation infrastructure over the next 5 to 10 years, in such a way that the infrastructure we build will meet the country’s needs for the 10 to 20 years that follow."

Secretary Abaya added that “fairness, openness, and transparency” will be observed in bidding and procurement, in contrast to the previous administration. So that has required a thorough review of projects approved, delaying the awarding of projects. What he did not mention was that expertise and relevant experience has been missing at senior levels in the DOTC so that Terms of Reference (TOR) and even Request for Proposals (RFP) can be challenged. Out of the 57 projects (worth P530 billion) under the government's public-private partnership (PPP) program, 28 are under the DOTC. However out of the 28, only

2 have been awarded. These are the P1.72 billion Automated Fare Collection System to a consortium of the Ayala and Metro Pacifi c groups; and the P17.5 billion Mactan-Cebu International Airport Project to the GMR-Megawide consortium. Even these were delayed prior to awarding as disqualifi ed or losing bidders raised issues in the bidding process. These were resolved in favor of the winners and were eventually awarded, but it all took time.

Some key projects of the Transport department under the PPP program as well as smaller ones have suff ered delays due to complaints from interested private sector parties.


696INFRASTRUCTURE

Although the DOTC says it expects to catch up with the transportation backlog, there is no guarantee that delays in the awarding and implementation of future projects will now be avoided. History is not encouraging in this regard.

Nonetheless, the department is expected to award the P64.9 billon LRT Line 1 Cavite Extension and operations and maintenance (O&M) Project to another joint venture between the Ayala and Metro Pacifi c groups, and is bidding out the P2.5 billion Integrated Terminal System (ITS) Southwest Project and the P4 billion ITS South and North Project.

Other PPP projects under DOTC include:1. the O&M and extension of the Light Rail Transit Line 2;2. the O&M contract of the Laguindingan airport;3. the O&M of the New Bohol (Panglao) Airport;4. the O&M of the Puerto Princesa Airport; 5. the O&M of the Davao Airport;6. the O&M of the Bacolod Airport;7. the O&M of the Iloilo Airport;8. the Davao Sasa Port improvement;9. the Motor Vehicle Inspection Project;10. the Mass Transit System Loop;11. the North-South Commuter Rail, which would start from

Malolos in Bulacan to Calamba in Laguna;12. the LRT1 Extension to Dasmarinas Project;13. the Manila Bay –Pasig River-Laguna Lake Ferry System

Project;14. the C5 Transport Development Project;15. the Clark International Airport Project;16. the Manila East-Mass Transport System Project;17. the Central Spine RORO;18. the R10 Link Mass Transit System;19. the O&M of NAIA;20. the Road Transport IT Infrastructure Project Phase 2;21. the Ferry Passenger Terminal Buildings Development;22. the New Cebu Container Port and Redevelopment of

Existing Cebu BaseportSince the launching of its PPP Program in 2010, the Aquino

administration has awarded the following projects:1. P2.01 billion Daang Hari-SLEX Link Road;2. P15.52 billion NAIA Expressway;3. P16.42 billion PPP for School Infrastructure Phase 1;4. P8.80 billion PPP for School Infrastructure Phase 2;5. P5.69 billion Modernization of Philippine Orthopedic

Center;6. P1.72 billion Automatic Fare Collection System

(DOTC); and7. P17.5 billion Mactan-Cebu International Airport

Passenger Terminal Building (DOTC).

The National Economic and Development Authority (NEDA) said the PPP initiative would require investment of up to P740 billion through 2016 to boost the economy and the country’s investment rate.

NAIA T3 fi nally starts full operation

It took almost 2 decades to fi nally complete DOTC’s new international airport terminal in Manila.

After 17 years the Ninoy Aquino International Airport (NAIA) Terminal 3 is fi nally fully operational, having completed all the necessary repairs and upgrades to international standards on July 31. DOTC Secretary Jun Abaya said, “Our gateway airport will now be able to welcome 3.5 million more passengers with modern facilities every year, and Terminal 1 will now be considerably decongested to improve passenger convenience.”

The project was originally awarded to the consortium of German fi rm Fraport and the Philippine International Airport Terminal Co. in 1997 and was supposed to be completed in 2002. But the contract was nullifi ed in 2002 over allegations of irregularities in the bidding process and the scheduled completion of the project was moved to 2008. By 2008, it was assessed to be only 58% operational.

Former DOTC Secretary Mar Roxas initiated talks with Takenaka Corp. of Japan to complete its facilities despite the ongoing cases. This effort was continued by DOTC Secretary Abaya when he assumed offi ce in October 2012. The negotiation was fi nalized in July 2013 and a new $40-million contract was signed in August 2013. The DOTC said in a statement, “Over the past 1-year period, the Japanese fi rm has undertaken completion works for systems such as fl ight information displays, computer terminals, gate coordination, landing bridges, and fi re protection systems…Certain systems which are non-critical to full airline operations, such as the building maintenance system, will be completed within the year.”

Five major airlines are transferring fl ight operations to NAIA Terminal 3. These include:

Delta Airlines (July 31), KLM Royal Dutch Airlines (Aug. 4), Emirates (Aug. 15), Singapore Airlines (Sept. 1), and Cathay Pacifi c (2nd week of Sept.).

The DOTC noted that the transfer of the 5 airlines will reduce Terminal 1’s annual passenger throughput from the current 8 million annual passengers to its designed capacity of 4.5 million. This also means that lesser number of travelers will be affected by the ongoing rehabilitation works at Terminal 1.


70 INFRASTRUCTURE

Flood control projects funded by DAP to continue - DPWH

The Department of Public Works and Highways (DPWH) said most of the projects under its fl ood control master plan for Mega Manila will continue to be implemented despite the cancellation of the Disbursement Acceleration Program (DAP) that fi nanced some of these projects.

According to the DPWH, 70 projects from some 100 government fl ood control projects funded by about P4.96 billion from the Disbursement Acceleration Program (DAP) have been completed. These projects, which started in late 2012, are part of the DPWH’s fl ood control master plan for Metro Manila and areas in Central Luzon and Southern Tagalog.

Of the completed projects, 56 are for Metro Manila which include: 6 projects under the Upper Marikina River Improvement

Program worth P222.5 million; 4 projects under the East Mangahan Floodway Program

worth P190 million; 2 projects under the Mangahan Floodway Dredging Program

worth P100 million; the Marikina River dredging project worth P50 million; 5 projects out of 6 worth P113 million to include restoration of

damaged slope protection along Marikina River, rehabilitation of Tullahan River, repair of damaged slope protection along Lakeshore Dike, and construction and repair of Napindan revetment wall;

2 projects on the Manila Bay seawall strengthening project worth P211.05 million;

24 projects out of 46 under the Valenzuela-Obando-Meycauayan River program with a budget of P1.53 billion;

12 projects out of 18 covered by Phase 1 of the Kalookan-Malabon-Navotas Area fl ood control program with a budget of P600 million, among others.The DPWH also noted that it has begun a study on the

preliminary engineering and detailed designs of the Manila Bay breakwater extension.

In Central Luzon, 8 projects were completed: 4 of 6 projects under the Mitigation Measures for Breaches

in the San Fernando-Sto. Tomas-Minalin Tail Dike program in Pampanga with a budget allocation of P637 million;

2 of 3 projects under the rehabilitation works on the same tail dike with a budget of P139 million;

dredging work on the Orani River in Bataan worth P50 million; and

dredging work on the Del Carmen-Balimbing Creek San Fernando City, Pampanga, worth P30 million.In Southern Tagalog, the P780-million Laguna lake

fl ood control and river protection convergence program is currently being implemented by the DPWH and the Laguna Lake Development Authority. The 2 projects under the program – the construction of river control structures at the Sta. Maria-Mabitac and the Sta. Cruz-San Pedro-Biñan rivers – are almost complete. While 2 of 13 units of amphibious dredging equipment purchased by the agency for P136.5 million have already been delivered. There are 2 other units awaiting release from the Bureau of Customs. The remaining 9 units are expected to be delivered by the end of August 2014.

DPWH Secretary Rogelio Singson clarifi ed that since the DAP-funded projects were either already completed or in progress, these would not be dropped following a qualifi er in the Supreme Court ruling declaring the unconstitutionality of DAP that projects “already covered by contracts and funded” should continue. However undisclosed, the projects under DAP that have not yet started will have to be put on hold until DPWH secures funding from another government budgetary source. President Aquino is requesting a supplemental budget to implement critical projects supposed to be funded by DAP.

3 waterworks infrastructure projects planned for implementation in 2015

The government has 3 water projects lined-up for implementation in 2015 to address a projected water shortage in Metro Manila in 7 years. Those, however, might not be enough and given the implementing record of the government on water projects may not resolve the problem.

The government is set to auction off 3 dam and water facility projects worth nearly $1.1 billion to augment water supply in Metro Manila and Bulacan. These are the P18.7-billion Kaliwa Dam Project in Tanay, Rizal under the public-private partnership (PPP) scheme; the P24.4-billion Bulacan Bulk Water Supply Project also under PPP; and the Angat Water Transmission Improvement Project.

With the operation of NAIA T3, Terminal 1’s annual passenger throughput will be brought down from the current 8Mn annual passengers to its designed capacityof 4.5Mn.

70 projects from some 100 government fl ood control projects funded by about P4.96 billion from DAP are completed. Other projects under DAP that have not yet started will have to be put on hold.


717INFRASTRUCTURE

The Kaliwa Dam Project is expected to increase water supply in Metro Manila by 2.4 million liters a day over the next 30 years, equivalent to 60% of the existing supply from Angat Dam in Bulacan. The 2nd PPP project is expected to provide treated water to Bulacan province. Metropolitan Waterworks and Sewerage System (MWSS) will allot 5.5 cubic meters per second from its water rights in the Angat reservoir for this project. While the 3rd facility will involve the construction of a new tunnel from Ipo Dam to Bigte Basin in Bulacan in order to improve water transmission to Metro Manila. This 3rd project will be partly fi nanced by the Asian Development Bank (ADB).

The government aims to bid out the 3 projects within the next few months and fi nalize the procurement process by the 1st half of next year. With this timeline, the projects will be able to help augment the expected water shortage in 2021. PPP Executive Director Canilao downplayed investor concerns such as right-of-way acquisitions and risks that future administrations will not honour contracts stating that these projects have “a cost recovery system" in place. She added that a measure putting more teeth into a law governing PPP projects is now being reviewed in congress, although a new law has prospective application and might not apply to contracts concluded prior to the passage of the law.

4-decade old Angat Dam currently provides 97% of Metro Manila’s 12 million residents.

Angat Dam currently provides 97% of Metro Manila’s potable water requirement. However, the nearly 12 million residents depending on this water source suffer water service interruptions especially during the El Niño (dry weather) season, indicating low water elevation of the dam during this critical period.

The Asian Development Bank (ADB) warned the Philippines of a looming water crisis and urged the country to boost supply in its outlook report issued last year. The report showed the Philippines and 48 other countries are in varying stages of “water insecurity.” In Asia-Pacifi c, 3 out of 4 countries have a serious water supply problem. The Philippines together with Vietnam performed poorly in the National Water Security Index. Both countries received the lowest score of 1 in urban water security among ASEAN countries. The 2 countries also tied at 2nd to the bottom in overall water security.


72 INFRASTRUCTURE

STATUS OF BIG TICKET INFRASTRUCTURE PROJECTS AS OF JUNE 2014

PROJECT TITLE IMPLEMETING AGENCY

FUNDING SOURCE

CIVIL WORKS TIMEFRAME

PROJECT COST STATUS / ISSUES

ROADS

Laguna Lakeshore Expressway Dike DPWH PPP 2016 - 2021 P122.8

billion

Ongoing procurement process for a consultant on advisory services. A resettlement action plan is completed and will be presented to NEDA. Bidding is still targeted in 1Q2015.

Cavite-Laguna Expressway DPWH PPP 2015 - 2018 P35.42 billion

Ayala Corp.-Aboitiz Land offered the highest premium of P11.659Bn, followed by MPCALA Holdings with P11.33Bn. Awarding was expected in early July, but is now suspended indefi nitely due to the appeal of the disqualifi ed bidder (SMC) fi led before the Offi ce of the President.

RAILWAYS

LRT 1 South Extension – Construction and O&M DOTC PPP 2015 - 2020 P64.9 billion No notice of award yet because of the Temporary Restraining Order

issued by the Supreme Court over the Common Station.

LRT Line 2 East Extension – Construction DOTC ODA-NG TBD P9.7 billion

Preparatory works for the construction of the project has begun. This is needed for the detailed design of the foundation of pier, guideways, and viaduct and traffi c management plan.

O&M of LRT Line 2 DOTC PPP10-15 years (concession

period)- Currently fi nalizing qualifi cation documents. Target rollout in Sept.

2014.

AIRPORTS

Laguindingan Airport Development and O&M DOTC PPP 2015-2017

(Phase 1)P14.62 billion Target rollout of the project in 4Q2014.

Busuanga Airport Development DOTC GOP 2015 - 2017 P4.11 billion The DED will be bid out by the DOTC in 3Q2014, while construction

will be bid out in 2Q2015.

O&M of Puerto Princesa Airport DOTC-CAAP PPP - P5.13 billion To be presented to the next NEDA Board.

Enhanced O&M of New Bohol Airport DOTC-CAAP PPP TBD P2.34 billion Still fi nalizing project structure. Target rollout of the project in

4Q2014.

OTHER TRANSPORT PROJECTS

Cebu Bus Rapid Transit (BRT) DOTC ODA (WB) TBD P10.62

billionStill ongoing preparation of the DED. Bidding for construction is expected to be done in 2Q2015.

Integrated Transport System Project – South Terminal

DOTC PPP 2014-2016 P4 billion Interested groups can submit prequalifi cation documents until Oct. 6.

UTILITIES

Bulacan Bulk Water Supply Project MWSS PPP TBD P24.4 billion Ongoing prequalifi cation of bidders.

New Centennial Water Supply Source MWSS PPP 2015 - 2021 P18.72

billionFor issuance of invitation to bid. Awarding of the contract is targeted in Feb. or March 2015.

Angat Water Transmission Improvement MWSS ODA (ADB) 2014 - 2018 P5.8 billion

Approved by the NEDA Board in May. Invitation to bid expected in June. The project involves the construction of a new tunnel from Ipo Dam to Bigte Basin in Bulacan.

ROADS

Tarlac-Pangasinan-La Union Expressway (TPLEX) DPWH-TRB PPP 2010 - 2015 P18.13

billionPROPONENT: Private Infra Dev Corp.Section 1 (Tarlac City – Rosales Pangasinan) was opened in April 2014.

Basilan Circumferential Road DPWH ODA-NG 2000-2014 P1.57 billion Completion of the project is expected in December 2014.

Skyway Stage 3 DOTC-TRB PS 2014 - 2017 P26.6 billion

PROPONENT: Citra Metro Manila Tollways Corp.Completion is planned to be accelerated to June 2016. Construction of columns and islands are ongoing along Quirino Ave. The 1st phase of the project (Buendia to Plaza Dilaw) is expected to be operational by mid-2015. The proponent is just securing the necessary permits to build the segments.

AIRPORTS

Mactan Cebu International Airport Passenger Terminal Building

DOTC PPP 2015 - 2018 P17.52 billion

PROPONENT: Megawide-GMR ConsortiumDOTC allotted P122.6Mn for procurement of an independent consultant, who will act as the government’s representative in monitoring the project’s progress and the concessionaire’s compliance. Procurement process is ongoing.

OTHER TRANSPORT PROJECTS

Automated Fare Collection System (AFCS) DOTC-LRTA PPP 2014 - 2015 P1.72 billion PROPONENT: AF Consortium

Ongoing pre-operation activities.

UTILITIES

Jalaur Multi-Purpose Irrigation Project Phase II NIA ODA-GOP TBD P11.2 billion

The acquisition of consent of the Panay-Bukidnon indigenous people community for the construction phase of the project is currently ongoing. DED has already been completed. NIA targets to issue the notice to proceed by February 2015.

Pasig-Marikina River Channel Improvement Phase 3

DPWH ODA(JICA) 2013-2016 P5.54 billion Ongoing construction along Lower Marikina River.

73

CONGRESSWATCH


FOI among President Aquino’s priority billsThe Freedom of Information (FOI) bill is among the 26 priority measures that President Benigno Aquino lll wants Congress to pass before he steps down in 2016. The FOI bill, which aims to improve transparency in government transactions, has been languishing in Congress for more than 20 years now.

The list of priority bills forwarded by the Offi ce of the President to the House of Representatives also includes the pro-business Build-Operate-Transfer (BOT) law

amendments; Cabotage law amendments; Revisions to Foreign Investment Negative List (FINL); central bank charter amendments; Fair Competition/Anti-Trust; Reforms in Land Administration; National land Use Act; and Amendments to RA 8974, the law facilitating the acquisition of right-of-way, site, or location for national government projects.

The measure amending the Build-Operate-Transfer (BOT) adds new public-private partnership (PPP) variants such as joint ventures, concessions, and management contracts; restructures and tightens eligibility requirement for unsolicited proposals; and streamlines processes in evaluation and approval of projects.

The bill amending the existing Cabotage law would allow foreign vessels to engage in coastwise trade within the country. If enacted into law, the measure will open up the market, intensify competition among industry players, and lower the cost of transporting goods.

The Revisions to Foreign Investment Negative List (FINL) bill removes the restrictions in specifi c laws cited in the FINL to attract more foreign direct investments and to prepare for the ASEAN Economic Integration in 2015.

If passed into law, the measure amending the central bank charter would expand the supervisory and regulatory functions of the bank to include credit card companies, money changers, e-money issuers, remittance agents, settlement system operators and other institutions performing similar functions. It proposes to raise the capitalization of the central bank from the current P50 billion to P200 billion to strengthen the its corporate and fi nancial viability.

74 CONGRESSWATCH


1. Amendments to the Build-Operate-Transfer Law - adds new public-private partnership (PPP) variants such as joint ventures, concessions, and management contracts; restructures and tightens eligibility requirement for unsolicited proposals; and streamlines processes in evaluation and approval of projects.

2. Cabotage Law amendments - allows foreign vessels to engage in coastwise trade within the country; and opens up the market, intensifi es competition, and lowers the cost of transporting goods

3. Amendments to the New Central Bank Act of 1993 – expands the supervisory and regulatory functions of the central bank to include credit card companies, money changers, e-money issuers, remittance agents, settlement system operators and other institutions performing similar functions; and raises the capitalization of the central bank from the current P50 billion to P200 billion to strengthen the institution’s corporate and fi nancial viability

4. Revisions to Foreign Investment Negative List (FINL) - removes the restrictions in specifi c laws cited in the FINL to attract more foreign direct investments and to prepare for the ASEAN Economic Integration in 2015.

5. Fair Competition/Anti-Trust - promotes a level playing fi eld in trade and rids the country of abusive monopolies and anti-competitive behavior.

6. Amendments to RA 8974, the law facilitating the “acquisition of right-of-way, site, or location for national government projects” - fast-tracks the implementation of road projects by removing “roadblocks” in the process. The proposed bill requires the State to ensure that owners of real property for infrastructure projects are promptly paid adequate or just compensation while ensuring the expeditious acquisition of the land or property requirements for government projects.

7. An Act Instituting Reforms in Land Administration - institutionalizes reforms in land administration to optimize its contribution to national development.

8. National Land Use Act - clarifi es confl icting provisions of various laws pertaining to land use; and mandates rational and just allocation of the country’s land resources; groups land uses into four - the protection land use, production land use, settlements development, and infrastructure development.

9. Freedom of Information – promotes transparency and good governance by mandating the disclosure of public documents; outlines the exceptions for public disclosure and the procedures for accessing public documents.

10. Tax Incentives Management and Transparency Act - enhances the current tax system by implementing measures that would ensure transparency in the management and accounting of tax incentives which are granted to government and non-government entities.

11. Amendment to the Human Security Act of 2007 - strengthens government efforts in fi ghting terrorism. Proposed amendments include defi ning terrorism as an act punishable under certain provisions of the Revised Penal Code.

12. Amendment to the Ombudsman Act – among the proposed amendments: allows the issuance of freeze orders on unlawfully acquired assets for 6 months and enables the Ombudsman to look into bank accounts even prior to the fi ling of a case in court

13. Amendments to the Anti-Enforced or Involuntary Disappearance Act of 2012 - criminalizes the practice of “enforced or involuntary disappearance” and punishable by life imprisonment.

14. Whistleblowers Protection Act - restores credibility, integrity, and accountability in public service by enabling citizens to speak up about any wrongdoing in government and sets up a system of rewards and protection for whistleblowers and their families.

15. Revision of the criminal code - repeals the Revised Penal Code and replaces it with the proposed Code of Crimes so as to make the law responsive to present times.

16. Delineation of the Philippine maritime zone - defi nes the Philippines’ maritime zone, including its internal waters, archipelagic waters, territorial sea, contiguous zone, Exclusive Economic Zone, and continental shelf.

17. Delineation of specifi c forest limits of public domain (Permanent Forest Limits Act of 2013) - establishes the country’s specifi c boundaries of forest lands in order to conserve, protect, and develop the forest resources.

18. Water Sector Reform Act - strengthens the local water districts by simplifying the governance regime in the water sector to optimize operations. It calls for the amalgamation of water districts into Local Water Supply and Sanitation Companies created under Provincial Water Resource Zones so that administration of water resources is elevated to the provincial level.

19. Philippine Civil Service Code Reform - amends existing laws in the Philippine Service Code to fully advance the professionalism of the bureaucracy. The bill addresses problems confronting the public service, including graft and corruption, red tape, violation of employees’ rights, and inadequate benefi ts and privileges, among others.

20. An Act Providing for a Magna Carta of the Poor - uplifts the standard of living and quality of life of the poor; among the bills vetoed by President Aquino during the 15th Congress.

21. Proposed act protecting the rights of internally displaced persons - protects the right of internally displaced persons in situations of armed confl ict, generalized violence, etc.; among the measures vetoed by the president during the previous congress.

22. Strategic Trade Management Act - institutes trade controls over the export, import, re-export, transfer, and transshipment of strategic goods and other related services.

Bills mentioned during SONA:

1. Bangsamoro Basic law – essential for the creation of Bangsamoro political entity that will replace ARMM

2. Uniformed personnel pension reform

3. Supplemental budget for 2014 and 2015 national budget

4. Joint Resolution to clarify the defi nition of “savings”

PRESIDENT AQUINO’S PRIORITY BILLS

757CONGRESSWATCH


The proposed Anti-Trust bill, meanwhile, aims to promote a level playing fi eld in trade and rids the country of abusive monopolies and anti-competitive behavior.

Other pro-business bills that are among the administration’s priorit ies this 16th Congress are the following:

Amendments to RA 8974, the law facilitating the “acquisition of right-of-way, site, or location for national government projects” - fast-tracks the implementation of road projects by removing “roadblocks” in the process. The proposed bill requires the State to ensure that owners of real property for infrastructure projects are promptly paid adequate or just compensation while ensuring the expeditious acquisition of the land or property requirements for government projects;

An Act Instituting Reforms in Land Administration - institutionalizes reforms in land administration to optimize its contribution to national development; and

National Land Use Act - clarifi es confl icting provisions of various laws pertaining to land use; and mandates rational and just allocation of the country’s land resources; groups land uses into four - the protection land use, production land use, settlements development, and infrastructure development (see box for complete list of priority bills) .

The Senate has approved on 3rd and fi nal reading its version of the Freedom of Information (FOI) bill. But the measure still has a long way to go before it is approved into law as its counterpart in the House of Representatives remains pending on first reading (committee level).

House speaker Feliciano Belmonte has expressed support for the passage of the bill. “We must craft a viable FOI law to promote greater transparency and strengthen accountability in government, without unduly restricting the latitude of options for government action in the delivery of services to the public and in responding expeditiously to the needs of our people,” Speaker Belmonte said.

Just like the Reproductive Health and Sin tax Reform laws, the FOI needs President Aquino’s imprimatur so that it will fi nally go through Congress. Pro-FOI lawmakers and civil society groups are optimistic that the measure will fi nally be enacted this 16th Congress.

Senate President endorses bill amending central bank charter

Senate President Franklin Drilon supports the passage of a bill that would amend the charter of the central bank or Bangko Sentral ng Pilipinas (BSP). The proposed measure expands the regulatory and supervisory functions of the central bank and raises the bank’s capitalization to strengthen its corporate and fi nancial viability.

The proposed measure would enable the central bank to “effectively respond to the challenges and innovations of a globalized economy” by increasing its capitalization to P200 billion.

In a statement, the senate president said: “We have to support BSP in its constitutional mandate of ensuring a competitive, robust and inclusive economy. This additional capitalization and other amendments to the current charter will enhance its capability to perform its roles in protecting the savings of depositors, ensuring the smooth fl ow of transactions in the fi nancial market, and enhancing the corporate viability of the BSP.”

The capitalization being proposed by Sen. Drilon is 4 times higher than the P50 billion provided in the current BSP charter. The P150 billion in additional capitalization will be paid by the national government in 3 consecutive annual installments.

The proposed bill also expands the central bank’s regulatory function to include credit card companies, money changers, e-money issuers, remittance agents, p a y m e n t s a n d s e t t l e m e n t s y s t e m o p e r a t o r s .

The bill provides that the central bank must oversee the payments and settlements system in the country in accordance with sound and prudent practice.

“The Bangko Sentral must also have the power to obtain information for supervisory purposes on transactions between a supervised institution and a parent or other affi liate companies, and the authority to look into the main activities of companies affi liated with the parent companies that have a material impact on the safety and soundness of the bank and the banking group,” the bill added.

Senate Bill (SB) 1865 further strengthens the central bank’s monetary stability function by restoring its authority to issue negotiable certifi cates of indebtedness even during normal times, a power granted to the old Central Bank of the Philippines, but was not included in the current BSP charter. It also strengthens the central bank’s fi nancial stability function by enhancing the central bank’s supervisory authority and providing legal protection for the bank’s offi cials when performing offi cial duties.

The proposed measure also exempts the central bank from all types of taxes.

76 CONGRESSWATCH


In the case of bank closures, SB 1865 gives the receiver the authority to immediately dispose of any or all assets of the closed institution and cause quasi-reorganization of the institution in order to facilitate the rehabilitation and restoration of its operations. The bill states that the power of the Monetary Board to place a bank or quasi-bank under receivership may also be exercised over non-stock savings and loan associations.

The bill was introduced by Senate President Franklin Drilon on October 17, 2013 and is still pending with the Committee on Banks, Financial Institutions and Currencies.

The measure is still pending on first reading despite being among President Aquino’s priority bills.

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CONTENTS Overviews Global Outlook

Regional Outlook

North Asia Japan

China

Hong Kong

Taiwan

South Korea

Southeast Asia Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

South Asia India

Australasia Australia

New Zealand

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CONFIDENTIAL

Asia Pacific Executive Brief July 2014 © IMA Asia

Editor: Richard Martin ([email protected]) Regional economist: Andrew Hordern ([email protected]) Consulting economist: Kostas Panagiotou ([email protected])

Asia Pacific Executive Brief

July 2014 www.imaasia.com

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Global outlook The IMF trims its 2014 outlook … but expects a mild 2H’14 lift

In its July economic update, the IMF tempered its global growth forecast, trimming 2014 growth by 0.3pp to 3.4%, which is not much stronger than the 3.2% achieved in 2013. The cut reflects a weak start to the year, with bad weather in the US, a clamp down on credit growth in China, and weak commodity prices. However, global growth is expected to firm in 2H’14 with a stronger US recovery and a milder upturn in Europe. Growth in emerging markets should also improve, as China eases its credit restrictions and a pro-business government takes over in India.

The US recovery builds … its uneven … watch for tighter monetary policy

The US economy has started to recover after bad weather caused growth to slow in Q1’14. Industrial production grew by 4.2%yoy in Q2’14 from a 3.3%yoy lift in Q1’14, while retail sales rose 4.5%yoy from 3.2%yoy. The recovery is, however, uneven across the country. Although the national unemployment rate fell to 6.1% in June’14, nine states (including California, Illinois, and Michigan) retain unemployment rates above 7%, while 14 states have rates below 5%. This sets up a challenge for the Federal Reserve, as the economy firms over 2H’14 and 2015. Rising growth will lead to tight local labour markets in the better performing states, pushing up inflation, and forcing the Fed to tighten sooner than the high unemployment states will want. Despite this tricky challenge, we expect the Fed to end its QE program by October and to raise interest rates by mid-2015.

A weaker Euro areas recovery … political challenges lie ahead

The Euro area has strengthened in 2014, with retail sales and industrial production both experiencing mild 1%yoy growth in 1H’14 after falls in 2013. While stronger exports will lift these economies in 2014 and 2015, GDP growth is expected to be limited to 1-1.5%pa from a 0.5% fall in 2013. The highly leveraged private sector in some Euro area countries limits capacity for extra spending. Meanwhile, the rise of anti-market nationalist parties will lead to policies that inhibit growth. As a marker of the global realignment that is underway, we note that China’s economy will exceed the size of the Euro area in 2017.

The new normal … low growth, low inflation, & a hunt for yield

With 2014 being the third year in a row that global growth forecasts have been trimmed through the year, the question is whether assumptions of better growth just ahead are right. That is particularly the case as exceptional monetary easing comes to an end in the UK and the US in the next few months. The safe assumption is that we face a world of lower long-term growth with lower inflation and a desperate hunt for yield by those with capital to invest. That’s already triggered a surge in global M&A this year and it suggests risks like overvalued markets and asset bubbles. It should, however, also be a plus for portfolio capital inflows to emerging markets over the rest of this decade.

Commodity prices remain weak … which will help most EM

Despite the global recovery, the outlook for commodities remains muted. On the demand side, slower growth in China is impossible to offset by stronger growth anywhere else in the world. On the supply side, the rise of fracking will continue to transform energy markets for the next decade, with big implications for geopolitics (no one is that interested in fixing the Middle East) and for commodity-driven economies like Russia, Australia, Indonesia, and NZ. In general, this is a plus for Asia’s commodity-hungry emerging markets, as it will take pressure off trade accounts for countries like India and also leave emerging market households with more money for savings and spending on services like education and health.

IMA Asia’s forecasts 2011 2012 2013 2014 2015

World – Real GDP growth, % 3.9 3.5 3.2 3.4 4.0 - US 1.8 2.8 1.9 2.2 3.1 - Euro area 1.6 -0.7 -0.5 1.2 1.5 - Asia/Pacific (14) 4.5 4.4 4.4 4.3 4.4 - NICs (4) 3.9 2.0 2.7 3.5 3.8 - Developing Asia (7) 8.2 6.9 6.7 6.5 6.5 - ASEAN (6) 4.8 5.7 5.0 4.4 5.4

World goods & services trade volume, % growth 6.1 2.8 3.0 4.3 5.3 Interest rates, US Fed target rate, year end, % 0.10 0.10 0.10 0.10 1.25 Inflation, CPI, US, year avg., % 3.1 2.1 1.5 1.8 2.0 Inflation, CPI, Euro area, % 2.7 2.5 1.3 0.9 1.2 Crude oil, avg of 3 spot crudes, US$ 104 105 104 104 98 US$ / Euro 1, year average rate 1.39 1.29 1.33 1.36 1.34 Yen / US$1, year average rate 80 80 98 102 106

The Asia/Pacific 14 = the countries on the forecast summary page. NICs are the newly industrialised countries = Korea, Taiwan, HK, Singapore. The ASEAN 6 = Indonesia, Thailand, Malaysia, Philippines, Vietnam, + Singapore. Dev Asia = ASEAN 5 + China and India. IMA Asia forecasts.

Richard Martin, IMA Asia Email: [email protected]



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Regional outlook Summary of forecasts in this month’s Asia Brief GDP (Expenditure), real growth, % 2011 2012 2013 2014 2015

Japan -0.5 1.4 1.5 0.4 0.8 China 9.3 7.7 7.7 7.4 6.7 Hong Kong 4.8 1.5 2.9 2.7 3.7

Taiwan 4.2 1.5 2.1 3.0 3.6 South Korea 3.7 2.3 3.0 3.8 3.9 Indonesia 6.5 6.3 5.8 5.0 5.8

Malaysia 5.2 5.6 4.7 5.5 5.7 Philippines 3.7 6.8 7.2 6.0 5.8 Singapore 6.1 2.5 3.9 3.6 5.0

Thailand 0.1 6.5 2.9 1.2 3.8 Vietnam 6.2 5.2 5.4 5.0 5.7 India (CY) 7.9 4.9 4.4 4.9 6.8

Australia 2.6 3.6 2.4 3.0 2.5 New Zealand 1.2 2.8 2.4 3.3 3.7 Inflation, CPI year average, % 2011 2012 2013 2014 2015

Japan -0.3 0.0 0.3 2.7 1.6 China 5.4 2.7 2.6 2.5 2.8 Hong Kong (composite CPI) 5.3 4.1 4.4 3.7 3.6

Taiwan 1.4 1.9 0.8 2.0 2.6 South Korea 4.0 2.2 1.3 1.6 2.4 Indonesia 5.3 4.0 6.4 7.0 5.7


Thailand 3.8 3.0 2.2 2.3 2.9 Vietnam 18.7 9.1 6.6 4.8 5.8 India (CY CPI urban non-manual workers) 8.9 9.8 10.1 7.3 5.4

Australia 3.3 1.8 2.4 2.6 2.6 New Zealand 4.0 1.1 1.1 2.2 3.2 Exchange rate to US$1, year avg. 2011 2012 2013 2014 2015

Japan 80 80 98 102 106 China 6.46 6.31 6.20 6.14 6.14 Hong Kong 7.78 7.76 7.76 7.75 7.76

Taiwan 29.5 29.6 29.6 30.1 29.5 South Korea 1,108 1,125 1,095 1,025 996 Indonesia 8,776 9,384 10,460 11,974 12,375


Thailand 30.5 31.1 30.7 32.7 33.6 Vietnam 20,681 20,847 21,019 21,217 21,358 India (FY) 46.6 53.4 58.5 59.4 55.5

Australia 0.96 0.96 1.04 1.09 1.14 New Zealand 1.26 1.23 1.22 1.18 1.19 Sources: CEIC, central banks, and national statistics offices. Forecasts are by IMA Asia.



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Regional outlook Political & policy issues to watch PM Modi puts India back on the priority list

Asia’s biggest political event this year is the landslide win for PM Modi in India on a promise to restore growth, as it has the potential to bring one of the world’s two mega-population markets back onto the corporate priority list. Modi’s first moves have been all about restoring a capacity for public sector implementation, which was sorely needed. His bigger agenda is likely to involve reforms that will lift GDP growth back to 7%+ by deregulating markets (including for capital) and providing more room for foreign players. His anticipated reforms are timely as the world is searching for new export manufacturing capacity and new EM investment opportunities. In a recent series of meetings with IMA India clients we outlined why these changes should lift real growth for capex and construction in India to double the pace expected in China for 2015-20.

Jokowi’s win in Indonesia … he should win backing in parliament … but don’t expect reforms

A review of Indonesia’s outlook for our Singapore clients by Jim Castle left two strong impressions (look for a summary next week). Despite Jokowi’s narrow win he should be able to muster support in the legislature, even though the parties that backed him control just 37% of the seats. There are few ideological divisions in Indonesia politics and the next month should see enough parties desert Prabowo’s coalition to give Jokowi a working majority. Second, the dominant ethos of the entire political class (including bureaucrats) is, unfortunately, nationalist and statist. Jokowi has championed better government, but no one is interested in less state intervention or more foreign investment. This is not promising. Indonesia has, however, dodged the extreme danger of a Prabowo administration, which became clear with his wild gyrations after the election results.

President Xi’s campaign to change China … is tough on everyone

China is accustomed to policy campaigns that fade with the seasons and rarely disturb officials outside of Beijing. That is not the case under President Xi Jinping. Whether its campaigns against extravagant living and “naked officials” or a drive to force safer allocation of capital in more productive ways, there’s little sign of an end. This has brought downward pressure to global markets for commodities and luxury goods. Anti-corruption campaigns and a geopolitical push against US firms have become part of the process. For foreign firms it has brought an entirely new element to corporate strategy in China. It is not that much fun being a Chinese official or party member at the moment either.

Outlook for the market Our A/P forecast is unchanged … while we wait to assess El Nino

This month the IMF trimmed its forecast for global growth forecast by 0.3 percentages points (pp) to 3.4% (see the global page). Our estimate for growth in the 14 Asia/Pacific countries covered by the Asia Brief remains unchanged at 4.3% from last month. Underneath the stable top line for the region we’ve trimmed some forecasts – notably for Singapore – but also nudged up others, notably India. While there are hints from stronger trade data that we should revise up our 2014 estimate, we’ll have to wait until we see how much damage is done by this year’s El Nino weather event, which could slash farm incomes and trade balances across southeast and southern Asia.

Asia’s ever tighter ties to China … driving a shared growth cycle

China not only plays a central role in the regional GDP calculation by directly accounting for 45% of GDP this year (up from 19% a decade ago) but also through its role as an external demand driver for all its regional neighbours. Countries as diverse as HK, Australia, NZ, Japan, and Korea are becoming highly dependent on China for growth, mostly through export demand and China’s expanding tourism flows. For all these neighbours slower growth in China means slower growth at home, while a China financial crisis would mean a recession for many of its neighbours. Our China outlook is for slower growth but no crisis. Given China’s dramatic rise in regional scale over the last decade its slower growth can still translate into strong export growth for its neighbours.

Looking ahead to a lift in capital inflows … which will lift some A/P currencies

Some of Asia’s emerging markets should benefit from strong capital inflows over the next year, which will support growth. The Philippines has never done well at this game, but with a good sovereign risk rating and a decision in July to remove all caps on foreign investment in its bank sector, it is set to win a lot more foreign capital. India should also do well as will Indonesia as Jokowi’s new government settles down. However, uncertainty dominates the outlook for Vietnam, where FDI implementation stalled in 1H’14, and Thailand, where the military junta has brought stability, but has yet to show it can win investment. Asia’s EM currencies have steadily edged up since the global sell-off of 2H’13, and that trend looks set to continue, as growth and capital inflows pick up in the next 12 months.

Richard Martin, IMA Asia Email: [email protected]



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Japan Political & policy issues to watch

Abeism slows Abenomics

PM Abe is losing political momentum, which will make it harder for him to deliver on three big policies in 2H’14: restarting nuclear reactors, approving a second sales tax hike to 10%, and deregulation to boost growth (the 3rd arrow of “Abenomics”). His push to expand on Japan’s right of self-defence (so-called “Abeism”) has seen his cabinet’s approval rating drop below 50% and his government could lose a string of local elections as a result.

Making it harder to restart nuclear reactors … & to lift the sales tax to 10%

The first policy casualty could be the restart of the idled reactors that once contributed 30% of electricity. We had expected 2-4 to restart in 2H’14, with another 6-12 coming online in 2015, which would help curb rising power prices and reverse a swing from trade surpluses to deficits. Yet, local elections are particularly sensitive to rising popular unease over nuclear power, which will make it hard for Abe to approve a restart. A decision on the second sales tax hike, which is meant to be made after the economic impact of the April hike from 5% to 8% is assessed, may be similarly shelved.

Abe’s 3rd arrow … promises growth by reform … but we are cautious

Abe’s “3rd arrow” reforms will also require political capital if resistance from unions, farmers, and some industries is to be overcome. The scope is big, but also vague in parts and many key reforms are slated for several years out. They include cutting the corporate tax from 35% to at least 29%, easing labour market restrictions, and opening up domestic markets for health services and farm products. The most contentious reforms will be trialled in special economic zones that are quite big and include Tokyo and Osaka. If most reforms were delivered then growth would likely rise to 1.2%pa for 2015-20, which is above the 1%pa expected by the IMF and the 0.9%pa recorded for 1990-2010. We think some of the reforms will occur, which will nudge up fixed investment, but we also expect the headwinds of ageing and offshoring of manufacturing to cap 2015-20 growth at 0.7%pa.

Outlook for the market

All of 2014’s growth occurred in Q1

Growth lifted to 1.5% in 2013 and surged to 3%yoy in Q1’14, as three key elements of Abenomics kicked in: massive quantitative easing (QE), a big fiscal stimulus, and a hike in the sales tax from 5% to 8% on April 1, which pulled forward demand for big ticket purchases. This surge is over and we expect a mild GDP contraction over the final three quarters of 2014, giving a full year result of 0.4% before a lift to 0.8% in 2015.

Consumers weathered the sales tax hike … but sales were pulled forward

Early data suggests that the expected consumer slump in Q2 was not as bad as expected. Q2’14 car sales plunged 39% from Q1’14 but were down just 1.9%yoy from a year earlier. For full 2014 we expect a fall of 2-3%, which will put sales back near 2002’s 4.4m units. Retail sales, excluding vehicles, surged 5.5%yoy in Q1’14 from 1.3% growth for full 2013 before an estimated drop of 3%yoy for Q2’14, which suggests a full year result of -1% and a return to growth around 0.8% in 2015. Housing starts were hit harder by the sales tax and likely fell 10%yoy in Q2’14 after surging 11% in 2013 and 3.5% growth in Q1’14. We expect full 2014 to see a fall of 3-5% with another fall of 0.5% in 2015.

The big hole in exports … to the EU and China

On a US$ basis, exports fell 3.1%ytd for the first five months after a 10.5% fall in 2013 and a 2.9% fall in 2012. That puts May’s annual rate 18% below the 2011 level and roughly in line with 2006 shipments. The big loss is exports to Europe, with Q1’14 value flat on the low point set in the 2009 crash. In the last two years that has been exacerbated by a sharp drop in China shipments due to anti-Japanese campaigns in that country. The surge in car sales and housing starts offset the slide in exports to lift industrial production by 5.9%yoy in Q4’13 and 8.3%yoy in Q1’14, but as sales in both areas fall from Q2’14 onwards, industrial production growth will slump to 2% for 2014, with 0.4% likely in 2015.

Yen stability in 2014 with a mild fall from 2015

At 101 to US$1 Japan’s Yen is sitting about where the government, the Bank of Japan, and industry want it. It is weaker than the “break-even” of 92 yen estimated for exporters by the government in February while the BOJ sees the 18% fall in 2013 as sufficient to lift inflation towards its 2% goal next year. By next year, however, we expect the Yen to move to a 1-2% annual depreciation path, as investors move funds off-shore seeking a higher return.

2011 2012 2013 2014 2015 GDP, real growth (2005p), % -0.5 1.4 1.5 0.4 0.8 CPI, year average, % -0.3 0.0 0.3 2.7 1.6 Overnight call rate, year end, % 0.08 0.08 0.07 0.04 0.04 Yen to US$1, year average 80 80 98 102 106

Sources: 2011-2013 data from the BOJ and government sources; 2014-2015 forecasts by IMA Asia



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China Political & policy issues to watch Xi’s push for dominance … will support his reform drive

Chinese leader Xi Jinping is 18 months into an anti-corruption campaign that has cut lavish spending and led to the purge of top party officials. The campaign underscores Xi’s dominance while weakening other factions. It should ensure that his policies are followed, particularly reforms that challenge vested interests in the party, government, and in state owned enterprises (SOEs). The anti-corruption drive also boosts his legitimacy, resonating with calls for greater transparency from an increasingly internet savvy population (there is no hint of liberalism in this, just smarter autocratic control). Xi is, as a result, on track to have a second 5-year term to 2022 and is powerful enough to reshape China’s economy.

Changing China … means changing capital allocation

Xi’s primary tool in changing China is to move to market pricing and allocation of capital, which should reverse a collapse in return on capital that characterised the prior decade. Yet government directives on credit allocation will remain a critical policy tool. At present, credit is being kept tight for property developers and for industries with overcapacity, while being eased for small and medium enterprises (SMEs) and other approved sectors. This mix of restrictions and easing has produced a choppy and lower growth pattern.

Geopolitics is now part of business

Xi is committed to a more assertive foreign policy in dealing with its neighbours and in confronting the US (this also plays well domestically). Geopolitics is set to remain a critical element in commercial relations for the affected countries and their companies.

Edging the Yuan up for trade settlements

China is speeding up the shift of trade payments into Yuan. 1H’14 saw Yuan payments jump 60%yoy to Yuan 3.3tr (US$530bn) putting the Yuan on track to account for 22% of China’s trade settlements in 2014 (much of this would be with HK). Korea’s Won has just been added to a short but growing list of currencies for direct settlement.

Outlook for the market A mild lift in growth in 2H’14 … but reforms will cut growth under 7% in 2015

China’s growth slipped in Q1’14 due to steps to curb poor investment, weak export growth, and the campaign to slash conspicuous consumption including lavish public banquets. July has brought signs of a modest lift in growth for 2H’14. Export growth looks set to rise to 9%yoy in 2H’14 and for full 2015 from a 1%yoy in 1H’14 (US$ basis). Local demand will also get a lift from steps to boost the service sector, while urbanisation plans are expected to increase civil works. However, the cap on public banquets (at “four dishes and one soup”) looks set to remain. While steps have been taken to ensure growth close to 7.5% this year, Xi’s reforms will likely see growth drop below 7% in 2015.

Manufacturing lifts

Credit easing and better export demand lifted the June HSBC purchasing managers’ index (PMI) above the 50-expansion level for the first time this year. This recovery should build in 2H’14, lifting industrial value added growth to 9.4%yoy from 8.8%yoy in 1H’14. Reforms will likely slow industrial growth to 8.5% in 2015, as capacity consolidation picks up.

But construction faces regional variations

China’s property downturn saw sales falling 9%ytd by May. This led developers to reduce their land purchases (-29%yoy in Q2’14) and building starts (-19%ytd to May). The market is likely to reflect divergent trends in the next 18 months. A large oversupply of new buildings will hamper growth in Tier 3 and smaller cities. By contrast, Tier 1 and 2 cities will see strong demand, and along with a lift in civil works, this should sustain construction growth at 5.8% in 2014 and 5% in 2015 from a 9.5% lift in 2013.

Good growth in services

… with some exceptions

The services sector is doing best from recent credit easing, with the HSBC PMI for services at a 15-month high of 53.1 in June. Fast rising incomes and lifestyle changes drove medical spending up 15%ytd to May, while spending on environmental services is growing by 20%yoy or more. However sales growth for catering, alcohol, and luxury goods will be limited by the campaign against corruption and conspicuous consumption.

Keeping the Yuan steady

Stronger local demand and rising electricity prices are expected to lift inflation to around 2.8%yoy in 2H’14 and 2015 from 2.3%yoy in 1H’14. China is expected to keep the Yuan steady on the US$ to the end of 2015 to support the rebalancing of its economy.

2011 2012 2013 2014 2015 GDP, real growth, % 9.3 7.7 7.7 7.4 6.7 CPI, year average, % 5.4 2.7 2.6 2.5 2.8 PBOC 1-year loan, at Dec., % 6.56 6.00 6.00 6.00 6.00 Yuan to US$1, year average 6.46 6.31 6.20 6.14 6.14



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Sources: 2011-13 data from CEIC and government agencies; 2014-15 forecasts by IMA Asia.

Hong Kong Political & policy issues to watch Political crisis … could worsen … which may adversely affect HK-based regional operations

HK’s world-class operating environment is under threat due to rising tensions between the HK people and Beijing. Disagreements over the definition of “true” universal suffrage in the 2017 Chief Executive election and Mainland encroachment concerns are leading both sides to take divisive actions. Beijing has released a White Paper “reminding” HKers that the SAR is subject to Mainland authority, while pro-Democracy HKers staged an unofficial referendum on the election format, and held a large July 1 protest, which included a brief blockade of the central business district. Tensions will remain high over 2H’14, making it more difficult for a compromise to be reached. If the situation worsens, it could hurt HK’s economy and discourage MNCs from using the city as a regional hub.

Political disputes also delaying key legislation

Rising political tensions are disrupting HK’s Legislative Council, with pro-Democracy councillors trying to further their cause through filibustering. While this is not stopping the day-to-day funding of government, it is preventing the approval of financing for government assistance and projects. This situation may negatively impact public spending in 2H’14.

More curbs to mainland tourists expected

Most pro-Beijing and pro-Democracy councillors can agree on the need to reduce overcrowding of public transport, shopping centres, etc. HK officials are liaising with Beijing to introduce measures to curb mainland tourist arrivals. Measures introduced so far have been slight, including that Shenzhen residents’ entry HK visas have been “capped” at 50 entries per year. More wide-ranging measures are expected in coming months.

Outlook for the market Stronger external demand … but many domestic sectors weak

HK’s economy is showing signs of firming. Recovering Chinese demand helped to lift exports by 5.0%yoy in May from a flat first four months of 2014. Meanwhile, the HSBC purchasing managers’ index rose to 50.1 in June, its first month above the 50-expansion level since March. While solid export growth will likely boost HK’s external sector in coming months, weak retail sales and public construction are expected to limit GDP growth to 2.9%yoy in 2H’14 and 3.7% in 2015 from 2.5%yoy in 1H’14.

Jewellery pushes down retail sector

HK’s retail sector has been hit by a downturn in jewellery purchases, which made up 25% of total sales in 2013. The mainland’s softer economy, its corruption crackdown, and strong gold demand last year reduced jewellery sales by 32%yoy in April and May from a 23% lift in 2013. This reduced total sales by 7%yoy from an 11% rise. While a much lower base for jewellery sales will stabilise the sector from September, restrictions on mainland tourists will likely limit retail growth to around 3%yoy in 2H’14 and 5% in 2015.

Leung’s housing plan … to be only partially achieved

Amid the political chaos, Chief Executive CY Leung is trying to increase housing completions to 47,000 units pa over the next decade from 29,150 in 2013. He has made some progress, with private commencements up to 8,000 units in Q1’14 from 3,500 per quarter in 2013. However, anti-government protestors are making it hard for him to release more land. Overall, we expect Leung will not reach his target, but that his efforts will be sufficient to lift private construction by 7%pa in 2H’14 and 2015 from a 4% rise in 1H’14.

Public construction to fall

HK’s public construction rose by 21%yoy in Q1’14, but is expected to fall from a high base by 5-10%yoy in Q2-4’14 and 4% in 2015. Large construction projects - including MTR extensions, the HK airport third runway and high-speed rail connection - are facing delays, while the Legislative Council filibustering will prevent the approval of new projects.

Soft inflation, HK$ peg will be maintained

Soft consumer demand is expected to keep inflation below 4%pa in 2H’14 and 2015 from 4.4% in 2013. In early July, monetary authorities were forced to step in to defend the HK$ peg to the US$ for the first time in two years. Despite the need for intervention, HK’s large fiscal reserves will ensure that the peg is maintained.

2011 2012 2013 2014 2015 GDP, real growth, % 4.8 1.5 2.9 2.7 3.7 Composite CPI (04/05), year average, % 5.3 4.1 4.4 3.7 3.6 Discount window base rate, % year end 0.50 0.50 0.50 0.50 1.50 HK$ to US$1, year average 7.78 7.76 7.76 7.75 7.76 Sources: 2011-2013 from Censtat, HKMA, and CEIC; 2014-2015 by IMA Asia.

Dr Mark Michelson, Chairman, Asia CEO Forum (Hong Kong) Tel: (852) 2530-1115 Fax: (852) 2530-1125 Email: [email protected]



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Taiwan Political & policy issues to watch Policy gridlock … will likely continue in 2015

President Ma Ying-jeou has some 18 months left in his second and final four year term and he’ll struggle to avoid being a lame-duck in this period. The political debate in Taiwan is deeply divided, with one of the most contentious issues being the Cross-Strait Service Trade Agreement (CSSTA) with China that Ma signed in June 2013, but which remains unratified by the legislature. The legislature has barely functioned this year, with students occupying its building in June and the opposition disrupting most votes. It’s uncertain whether key bills and the CSSTA will be passed in Ma’s final 18 months.

How to turn a trade win into a trade loss

Despite policy gridlock, the government hosted the mainland’s Taiwan Affairs Office Minister, Zhang Zhijun, in June. He is the most senior leader from China to visit the island since 1949. The meeting wrapped up with both sides calling for stronger ties, including setting up joint representative offices and an end to China’s veto on Taiwan’s membership of regional trade agreements. That would be a big win for Taiwan, but it may not occur, as it hinges on Taiwan’s ratification of the CSSTA. Alongside China’s imminent free trade deal with Korea, failure to ratify the CSSTA would undermine Taiwan’s competitiveness.

Outlook for the market Exports will lift growth in 2H’14

With export orders on hand (a leading indicator for actual exports) surging 10.5%yoy in June, Taiwan’s trade dependent economy should get a mild lift from better external demand in 2H’14 after export growth of just 2%yoy in 1H’14 (US$ basis). Stronger exports will flow across the economy by end-2014, boosting job growth and overtime pay. However, the upturn will be tempered by cautious consumers and reduced growth in public spending (reflecting gridlock on legislation). These factors will likely limit GDP growth to 3.3%yoy in 2H’14 and 3.6% in 2015 from 2.8%yoy in 1H’14.

Manufacturing’s upturn should broaden

Manufacturing should strengthen in 2H’14. Growth in 1H’14 was restricted to chipmakers TSMC, UMC and associated firms with electronics parts production rising by 7.9%ytd by May from a 4.1% lift in 2013. But overall manufacturing growth was just 0.8%ytd, as weak growth in chemicals pulled down total sector growth. As export demand improves, the recovery should spread to other manufacturing sectors, boosting overall sector growth to 4-4.5%pa in 2H’14 and 2015 from 3.2%yoy in 1H’14.

But construction will slow with uncertainty over new taxes

Construction received a mild boost in 1H’14 from a lift in building starts, which sent real growth in the sector up by 1.8%yoy from 1.2% growth in full 2013. However, government plans to change property taxes are starting to worry households, and that saw property transactions slow in June. Uncertainty over the timing and content of tax changes, and whether the government can get them through the legislature, will discourage developers in 2H’14, trimming construction growth to zero. Weak population growth and empty investor homes will limit any recovery in 2015.

Good growth for services

Taiwan’s service firms have had a positive start to 2014. Solid foreign funds inflows boosted the financial sector, helping to lift the capital raised in the Taiwanese Stock Exchange by 68%yoy in 1H’14. Meanwhile, a 37%ytd rise to May in Chinese visitor arrivals lifted the tourism sector. Stronger local demand will likely provide a further lift to most service firms in 2H’14.

A bit of inflation and a firm NT$

A bit of inflation may emerge over the rest of 2014, as firmer local demand combines with ad hoc factors, such as heavy rains in May, which destroyed crops and will push up food prices from June to September. We expect the central bank to start edging up its policy rate from Q4’14. Solid foreign fund inflows helped the NT$ rise 0.7%qoq against the US$ in Q2’14. The stronger economy will likely continue to push up the NT$ in 2015.

2011 2012 2013 2014 2015 GDP, real growth, % 4.2 1.5 2.1 3.0 3.6 CPI, year average, % 1.4 1.9 0.8 2.0 2.6 Official discount rate, year end, % 1.88 1.88 1.88 2.13 2.63 NT$ to US$1, year average 29.5 29.6 29.6 30.1 29.5

Sources: 2011-2013 government data and CEIC; 2014-2015 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact:

Michael Boyden, Managing Director, Taiwan Asia Strategy Consulting Tel: (886 2) 8789 0978 Fax: (886 2) 8789 0877 Email: [email protected]



85

South Korea Political & policy issues to watch President Park struggles to rebuild support

President Park Geun-hye’s poll support has slumped to 40% from 60% last year after the Sewol ferry tragedy, which exposed corruption and poor government regulation. Park has attempted to relaunch her government with a cabinet reshuffle, but faces a fresh uproar over her nomination of a new education minister. By-elections for 15 parliamentary seats on July 30 will show how damaging all this has been as the ruling Saenuri Party must win at least four seats to retain its majority in the legislature. If it doesn’t, Park could become a lame duck leader just 18 months into her single 5-year term.

A mini-stimulus to lift growth in 2H’14

Park’s problems have been exacerbated by weaker growth in Q2’14, as local demand was hurt by a slide in consumer sentiment after the Sewol tragedy and exports have suffered from low growth in China (Korea’s biggest market) and a 6% rise in the Won on the US$ since March. Newly appointed finance minister Choi Kyung-hwan has announced a range of stimulus measures, including tax breaks for small and medium enterprises (SMEs), an easing in restrictions on home mortgages, and a Won 12tr fiscal stimulus (about 1% of GDP) that will push the budget into deficit. Pressure from exporters to lower the Won is building, but it is unclear if the government will act to halt the Won’s rise (see below).

New restrictions on working hours are likely

To rebuild popular support, Park may return to the anti-business themes that characterised her 2012 election campaign. This could include reviving plans to cut the maximum working hours for all workers to 68 per week from 52. As Korean firms are struggling with labour shortages, this would encourage a further move of production offshore.

Outlook for the market A slight lift in growth in 2H’14

GDP growth slowed to 3.6%yoy in Q2’14 from 3.9%yoy in Q1’14, following a drop in consumer sentiment and weak export demand in 1H’14. The recently announced stimulus measures (see above) and a mild lift in external demand in 2H’14 should lift GDP growth back towards 3.9%yoy for 2H’14, with about the same pace for full 2015.

Exports suffer from weak China demand … & offshoring

Export growth faces two challenges this year: weak overall demand and the impact of offshoring of labour intensive production. As a result of both trends, export growth was limited to 2.6%yoy in 1H’14, from a 2.1% lift in 2013 (US$ basis). A first half rebound in exports to the EU (up 11.2%yoy) and the US (up 8.1%yoy) was almost wholly offset by flat exports to China (-0.1%yoy). Better demand from China from Q3’14 should lift total export growth to 4.5-5%yoy in 2H’14 and 6% in 2015. An imminent free trade deal with China could further boost Korea’s export growth in the medium term.

A weak lift for construction in 2015

Korea’s construction sector grew by 3.6% in 2013, as stimulus measures led developers to rush projects onto the market. This year is likely to see almost no growth from the relatively high base set last year. The latest stimulus package for housing will likely see construction return to 1.2% growth in 2015.

Consumer demand will recover from Q3

Consumer spending growth is expected to firm to 2.7% in 2H’14 and 2.9% in 2015 from 2.0% in 1H’14. The negative impact of the Sewol tragedy, which depressed spending in Q2, is expected to end in Q3. Some 70% of pensioners (over 65) will also benefit from a new Won 100,000-200,000 (US$99-198) monthly pension payment.

Little inflation and a rising Won

With weak domestic demand and a strong currency lowering import costs, there is little inflationary pressure. Pressure on the government to halt the Won’s rise may stop it breaking above 1,000 before the end of 2014, although it looks set to push above that mark in 2015. An agreement with China to allow direct exchange of the Won to Chinese Yuan will help lower costs for Korean exporters.

2011 2012 2013 2014 2015 GDP growth, % 3.7 2.3 3.0 3.8 3.9 CPI, year average, % 4.0 2.2 1.3 1.6 2.4 BOK Overnight call rate, year end, % 3.25 2.75 2.50 2.50 2.75 Won to US$1, year average 1,108 1,125 1,095 1,025 996 Sources: 2011-2013 government data (NSO, BOK) and CEIC; 2014-2015 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact:

Tony Michell, Managing Director, Korea Associates Business Consultancy Ltd Tel: (82 2) 335 7854/2614 Fax: (82 2) 323 4262 Email: [email protected]



86

Indonesia Political & policy issues to watch Jokowi wins the 2014 election … but it will take several weeks for political debate to cool

Indonesia’s 2014 presidential election is mostly over, with the Election Commission (the KPU) confirming that Joko Widodo (Jokowi) won with 53.2% of the vote. A series of conflicting statements by the loser, Prabowo Subianto (with 46.9%), leave it unclear whether he’ll contest the result in the Constitutional Court. Prabowo claims there was massive fraud, but as most monitors agree that Jokowi’s win is genuine, the question is whether Prabowo can get the Constitutional Court to decide otherwise. While that court has a poor record (its most recent head has just been jailed for taking bribes) it will be under intense scrutiny from a vibrant local press. If Prabowo presses ahead it will hold hearings from August 4-21 before the KPU announces the final result by August 24. Meanwhile, the coalition of parties that supported Prabowo’s presidential campaign is fragmenting and Jokowi is preparing to take office in October as scheduled.

What to expect from Jokowi … few big policy changes … but better implementation … watch who gets key cabinet seats

The policy differences between Jokowi, Prabowo, and the retiring Yudhoyono administration are not big. All three are secular nationalists, with Jokowi’s campaign promising better government, while Prabowo focused on a strong-man image (harking back to the stability of the 3-decade long Suharto era). Moreover it will be hard to change the policy inclinations of a quite nationalistic legislature except, with some effort, on critical economic issues. A bigger issue is who will be in the cabinet. The 4-party coalition that backed Jokowi has just 37% of the seats in the legislature and a key issue is whether Golkar deserts Prabowo to join Jokowi’s government. With 14.5% of the seats, Golkar would give Jokowi a narrow majority (53%). Golkar could well ditch its controversial leader, Aburizal Bakrie, when it moves to the government camp. Jokowi will come under strong pressure to quickly name his economic team and outline policies in key areas such as the risk from large energy subsidies and kick starting critical infrastructure development.

Outlook for the market Growth slows to 5% in 2014 … as local and export demand weaken … with a mild lift into 2015

Jokowi will take over an economy that has dropped into low gear and will have trouble accelerating this year. GDP growth slowed to 5.2%yoy in Q1’14 and is unlikely to be any better until Q4’14 when a mild lift is possible if an expected El Nino weather event doesn’t derail the rural sector. The slowdown is across external and local demand. Despite a weaker Rupiah exports (in US$ terms) fell 3.9% last year followed by a 2.5% fall in Q1’14. Q2 and Q3 are likely to see falls of 5-6%yoy due to weak global demand for products like coal and some loss in mineral exports due to a policy dispute with mining firms. Exports should return to mild growth by Q4’14, as global demand lifts and the policy dispute is resolved. Local demand should also recover in early 2015. Industrial production, which slowed to 3.8%yoy growth in Q1’14 from 6% for full 2013, is likely to be close to 3%yoy for Q2 and Q3, before a slight lift by year end that should return growth to 5-6% in 2015.

Consumer demand ebbs … while capex remains weak … but could rebound in 2015

While election spending (and a peaceful election process) provided a mild boost for consumer spending, consumer demand has faded this year. Vehicle sales slowed to 6.6%yoy growth for 1H’14 from 10.2% for full 2013, while motorcycle sales slowed to 7.1%yoy from 9.6% for full 2013. Real consumer demand growth is likely to slip to 5% or lower this year from 5.3% last year with a recovery back to 5.3-5.5% next year. Fixed investment needs watching, as political uncertainty could stall both public and private capex growth. Last year’s 4.7% growth was notably weak, but this year is unlikely to be much better given weak demand trends and political uncertainty. A rebound to 10%+ growth is possible next year provided political uncertainty clears by October.

A weak Rupiah with a slow fall in inflation

Indonesia’s central bank is likely to be comfortable with the Rupiah at its current 11,600 level, as that will help exports and also curb the risk of a current account blow out. Given macro weakness (a higher inflation rate and a current account deficit) and political uncertainties the currency is likely to weaken into 2015.

2011 2012 2013 2014 2015 GDP, real growth, % 6.5 6.3 5.8 5.0 5.8 CPI, year average, (2007=100), % 5.3 4.0 6.4 7.0 5.7 Central bank policy rate (O/N rate) at Dec % 6.00 5.75 7.50 7.00 6.25 Rupiah to US$1, year average 8,776 9,384 10,460 11,974 12,375 Sources: 2011-2013 government data (BPS, BI) and CEIC; 2014-2015 forecasts by IMA Asia

The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact:

James Castle, Chairman, CastleAsia Tel: (62 21) 2902 1641 Fax: (62 21) 2902 1648 Email: [email protected]



87

Malaysia Political & policy issues to watch Malaysia’s 2nd airline tragedy … a better response helps PM Najib

Malaysia’s political outlook has been briefly transformed by the MH17 flight disaster. PM Najib moved with surprising speed in negotiating access to the downed plane and the retrieval of bodies and flight recorders. This has boosted his popular standing and won him unusual plaudits from opposition leaders some four months after his government was hammered over its bungled handling of the disappearance of flight MH370. In the wake of the two disasters, Malaysian Airlines (MAS) is likely to be taken private by the government’s investment company Khazanah (which already owns 69%) and extensively restructured. It is unclear if there will be fall out for Malaysia’s close commercial ties with Russia, which include major purchases of military equipment.

Policies for growth … favour public works & debt … rather than reforms

The lift in support for PM Najib should ensure that he isn’t toppled within the ruling UMNO party before contesting the 2018 election. However, many of his promised reforms to open up Malaysia’s cloistered economy have been ditched in order to appease the Malay nationalist wing of UMNO, led by ex-PM Mahathir. Instead, he has turned to plans for big projects to help revitalise growth, which is set to trigger a jump in public debt. 1MDB, a sovereign wealth fund set up by Najib in 2009, plans to raise US$3bn by listing its power generation assets later this year. The listing could be used to repay some of the fund’s US$13bn in debt, which is part of the government’s contingent liabilities. The IMF has warned that large and rising contingent liabilities, excluded from the official public debt figures (58% of GDP in 2013), could undermine Malaysia’s public finances.

Outlook for the market Sustaining growth … by switching from local to export demand

Malaysia’s economy is moving towards slower growth in domestic spending and faster growth in external demand this year. As exports equal some 90% of GDP, the net effect should be faster GDP growth of 5.5% in 2014 and 5.7% in 2015 from 4.7% in 2013. A similar development should emerge in the industrial sector, as growth for domestic-focused production eases from the 7%ytd rate set by April while it accelerates for the export sector from 5.9%ytd in the first four months. This should see overall industrial production growth lift towards 6% this year and 6.5% next year from 4.2% in 2013.

Less support for consumption … will trim consumer & capex growth

The government aims to achieve a budget surplus by 2020, after a string of deficits from 1997. To get there will require continued cuts to food and fuel subsidies and the introduction of a 6% goods and services tax (GST) in April 2015. Household finances are also under pressure from reduced consumption subsidies and elevated debt (Asia’s second highest after Korea, at 86.8% of GDP in 2013, up from 60.4% in 2008). Moreover, households face rising borrowing costs, and the prospect of falling home prices due to housing oversupply. We expect private consumption growth to ease to 5.0% in 2015 from 6.0% in 2014 and 7.2% in 2013. Fixed investment growth, much of it government financed, is also likely to ease to 6.5% growth in 2014 and 2015 from 11.5%pa in 2010-13.

But exports will help lift GDP

Slower domestic demand will be countered by improved net exports, as global growth gradually recovers. Malaysia’s exports (measured in US$ terms) have been doing notably better than those of neighbours this year, rising 10%yoy in the first two months of Q2’14 from 3.7%yoy in Q1’14 and 0.3% in full 2013. This helped lift the 12-month rolling trade surplus to US$28bn in May from US$22bn in 2H’13.

A rising M$ & a bit more inflation

With the trade surplus building the M$ has risen to 3.00 to US$1 from 3.35 in January this year after being undervalued during the EM currency retreat of 2H’13. Bank Negara lifted its policy interest rate to 3.25% from 3.00% in mid-July, with more tightening likely in 2015. Inflation is heading to 5.0% by 2H’15 from 3.4%ytd by May 2014.

2011 2012 2013 2014 2015 GDP, real growth, % 5.2 5.6 4.7 5.5 5.7 CPI, year average (2010=100), % 3.2 1.6 2.1 3.5 4.8 Central bank overnight policy rate, Dec, % 3.00 3.00 3.00 3.25 3.75 Ringgit to US$1, year average 3.06 3.09 3.15 3.21 3.06

Sources: 2011-2013 government, Bank Negara, & CEIC; 2014-2015 forecasts by IMA Asia.


Datuk Paddy Bowie, Managing Director, Paddy Schubert Sdn. Bhd. Tel: (60 3) 2078 4031 Fax: (60 3) 2078 7034 Email: [email protected]



88

Philippines

Political & policy issues to watch The pork barrel scandal rolls on

With the next presidential election due in May 2016, President Aquino will spend the last third of his single 6-year term trying to preserve his legacy as an anti-corruption reformer. However, his persistently high popularity (66% approval in March) could be dented by the “pork barrel” scandal, which involves the theft of some Peso 10bn (US$227m) by at least 120 sitting and former members of the Senate and the House of Representatives. Three high profile opposition senators (Ramon “Bong” Revilla, Jinggoy Estrada, and Juan Ponce Enrile) have been arrested, prompting criticism that the scandal is being used to target opponents only. It is doubtful that anyone will be convicted, given the country’s history of extreme leniency with corrupt politicians.

… and that means a cut to informal public spending

The pork barrel scandal will dent public spending this year. In early July, the Supreme Court found that President Aquino had acted unlawfully when he distributed funds to legislators to spend on projects outside the budget (this is the traditional pork barrel process, which only became corrupt when politicians used fake invoices to pocket the money themselves). The court has since outlawed this process and Aquino’s opponents have pounced on this ruling to mount an impeachment effort against him. While this will fail, as Aquino’s allies control both houses of parliament, it will weaken Aquino’s ability to nominate a successor. The 2016 front runner is currently Vice President Jejomar Binay, with a massive 82% approval rating.

Opening up the banking market

Foreign direct investment (FDI) to the Philippines rose 60% in 2012 and 20% to US$3.9bn in 2013. Yet these inflows remain well below those of its neighbours both in value and as a percentage of fixed investment. To help fix that the government has just removed the cap (set at 60%) on foreign ownership of local banks as well as a limit on foreign banks of 10. This should encourage consolidation and banks from neighbouring countries to enter.

… and the rice market

The government also plans to abolish a rice-price support scheme and lift rice imports to curb fast-rising food prices and rising debt of the National Food Authority, which runs the scheme. The Philippines, Asia’s second largest rice importer after China, may move to an open rice market with traders importing as much rice as they want.

Outlook for the market Fast growth cools to a stable 6%

After two years of headline-grabbing growth (6.8% in 2012 and 7.2% in 2013), we expect growth to ease to a more sustainable pace of 6.0% in 2014 and 5.8% in 2015. Private consumption growth should remain steady at 5.7%pa in 2014-15, with the help of remittance inflows from overseas Filipino workers, which were up 5.8%ytd to April.

Watch for strong capex … with a lift in construction

Fixed investment, which grew 11.4%pa in 2012-13, should continue expanding faster than GDP (9.8% in 2014 and 8.8% in 2015), as the pace of infrastructure building under the private-public partnership (PPP) arrangement gathers speed. Another 15 public private partnership (PPP) projects worth US$5bn are lined up for the next two years. Construction will also get a boost from an acceleration in housing, as building permits rebounded in Q1’14 after a 6-month decline. We expect real construction growth to lift to 9.3% in 2015 from 4.6% this year and 9.6% growth in 2013.

Rates rise to curb inflation

… while the Peso edges up

Since March 2014, the central bank has taken small tightening steps by lifting banks’ reserve requirements and the rate of on special deposit accounts. Higher interest rates are on the way from a current record low of 3.5%, as inflation rose to 4.4%yoy in Q2’14 from 2.4%yoy in Q3’13. The Peso has climbed to 43.6 on the US$ from 45.5 in early February. Favourable fund inflows are expected to lift it towards 40.0 by Q4’15.

2011 2012 2013 2014 2015 GDP growth, % 3.7 6.8 7.2 6.0 5.8 CPI, annual average, % 4.6 3.2 3.0 4.2 4.7 Central bank reverse rep. rate, year end 4.50 3.50 3.50 4.00 4.50 Peso to US$1, annual average 43.3 42.2 42.4 43.9 41.1

Sources: 2011-2013 BSP data and CEIC; 2014-2015 forecasts by IMA Asia.


Peter Wallace, Managing Director, The Wallace Business Forum Tel: (63 2) 810 9606 Fax 810 9610 Email: [email protected]



89

Singapore Political & policy issues to watch The big policy drivers for growth have slowed … as housing cools

Singapore’s rapid rise in wealth over the last two decades (with GDP/capita of US$54,480 in 2013, some 4% above the US) reflects an almost unique combination of a powerful export engine and strong local demand drivers. Both engines have depended on consistently sound policy decisions that have paid off over time. That policy-driven impetus to growth, which can produce remarkable surges, is now running in neutral and overall trend growth is slowing as a result. One of the biggest changes has been a policy swing to curb the growth of the property sector to prevent a housing bubble over the last 18 months. The private house price index fell 3.2% in Q2’14 from its Q3’13 peak, with public housing resale prices falling even faster and an outlook for a private property price fall of 20% by 2015. An associated lift in non-performing loans is likely over the next year, although Singapore’s cautious and well capitalised banks should easily manage this. However, the “wealth effect” of a surging property market on consumers is over for now.

While a surge in tourism ebbs … with slower gaming growth … & fewer Aussies

Singapore has benefited from a long-sighted policy decision almost a decade ago to establish a gaming sector via integrated resorts. The construction of two big resorts helped offset the global financial crisis from 2008 and the ensuing surge in tourism was a major contributor to overall growth after the resorts opened in 2010. However, tourist arrivals growth eased to 10% in 2013 from 20% in 2010, and turned negative in early 2014 (-2.3%yoy in April from flat in Q1’14). The casinos are no longer prospering, while jewellery sales plunged 16.3%yoy in April from 1.8%yoy in Q1’14 and 18.8% in full 2011. Casino operators blame overly strict regulations, but it is more likely a result of regional trends, such as China’s anti-corruption campaign and a decision by Qantas to shift its Australia-Europe stopover to Dubai from Singapore. Changi airport cut its aircraft parking and aerobridge fees (by 50% and 15% respectively) from July 1.

Outlook for the market We’ve cut our 2014 forecast to 3.6% … with a recovery to 5% in 2015

Preliminary figures show that GDP growth eased to 2.1%yoy in Q2’14 from 4.7%yoy in Q1’14 and 3.9% in full 2013. Softer top-line growth was mostly due to a steep slowdown in manufacturing (0.2%yoy from 9.9%yoy in Q1’14), while construction and services also lost momentum (5.0%yoy from 6.4%yoy, and 2.8%yoy from 3.9%yoy respectively). Supply constraints in manufacturing (see below) are preventing Singapore from taking full advantage of improving global demand. Weaker manufacturing, combined with slower tourist arrivals, the ongoing residential housing downturn, and household efforts to reduce elevated debt (77% of GDP in 2013), will likely result in weaker growth than we were previously expecting. We’ve cut our 2014 GDP forecast to 3.6% from 4.2%. With some of these problems likely to ease by late-2014, GDP growth should lift to 5.0% in 2015.

Manufacturing is in transition … as access to cheap labour ends

The manufacturing weakness reflects capacity relocation away from Singapore, as the sector is undergoing a difficult transition to a less labour-intense operating model. Growing unease with large inflows of low-skilled foreign workers and weak productivity growth prompted the government to curb migrant workers. This is forcing companies to either lift productivity through increased capex or relocate to lower-cost countries nearby. This process has contributed to a steady decline in the share of Singapore’s’ non-oil domestic exports (a proxy of manufacturing output) to total exports. It fell to 30% in May 2014 from 49% in January 2000. A reversal of this trend is unlikely, as Singapore keeps developing its services and oil and gas sectors at a much faster pace than its manufacturing.

A bit more inflation … & a firm S$

Inflation edged up to 2.7%yoy in May after a temporary dip to 0.4%yoy in February, and is likely to move just over 3% in 2015. Concerned about the inflationary impact of Singapore’s tight labour market, the MAS has been keeping its monetary policy moderately tight in the form of an appreciating S$ against an undisclosed basket of currencies. Against the US$, the Singapore currency has been stuck in a narrow band of 1.2-1.3 since May 2011, where is it likely to remain well into 2015.

2011 2012 2013 2014 2015 GDP, real growth, % 6.1 2.5 3.9 3.6 5.0 CPI, year average, % 5.2 4.6 2.4 2.3 3.1 3 month interbank interest rate, Dec, % 0.38 0.38 0.40 0.45 0.85 S$ to US$1, year average 1.26 1.25 1.25 1.25 1.22 Sources: 2011-2013 government data and CEIC; forecasts for 2014-2015 by IMA Asia.



90

Thailand Political & policy issues to watch Thailand settles down to army rule … with a lift in sentiment

After six months of street protests and gridlocked policy, the bloodless May coup has brought some relief to a weary Thai public. The consumer confidence index has recovered to 75.1 in June from a 13-month low of 67.8 in April. The stock market has also recovered all of its losses to be up 18.8%ytd by mid-July. Meanwhile, the military junta is trying to kick-start local demand with the release of US$2.8bn in overdue payments to rice farmers, a freeze of fuel prices, and the approval of B123bn (US$3.7bn) in projects. Draconian steps have also been taken to control the media and all comment on politics.

Plans to return to limited democracy in 2H’15

The King has approved an interim constitution that leaves the military firmly in charge while a new constitution is drafted, which coup leader General Prayuth suggests will be done by July 2015, with elections to be held three months later. The new constitution will establish a very limited democracy in which the military can keep the government in check. The interim constitution is the 18th since Thailand became a constitutional monarchy in 1932, with 54 of the last 84 years being under military rule.

Political risk drops … as Thaksin is snookered … but watch for stalled reforms & FDI from Japan

While Western governments disapprove of coups it’s very unlikely that any sanctions will be applied to the new government. There’s also little chance that ex-PM Yingluck or her brother, ex-PM Thaksin, can stage a comeback with both forced into exile by criminal charges. Military control should also stop Thaksin from fomenting popular unrest through his rural-based “red shirt” movement. There is a possibility of unrest among pro-Thaksin members of the army and police, but a purge of his supporters is likely in the annual round of appointments in October. The bigger risk from the May coup is that the junta will be less interested in the structural reforms needed to revitalise growth. Foremost among these is the establishment of a better governance environment that would support a lift in private investment, particularly in major projects. One key to watch is the reaction of Japanese industrialists who have played a central role in the rise of a strong export manufacturing sector, which has been central to growth and economic stability.

Outlook for the market Little growth in 2014 as local demand plunged … with a modest rebound in 2015

A recovery in government spending, better consumer demand, and a rebound in tourist arrivals should lift GDP growth to 2.2%yoy in 2H’14 from an estimate of zero growth in 1H’14. This would result in GDP growth of 1.2% in full 2014, down from 2.9% in 2013. With better political stability expected next year, there is scope for local demand growth to catch up after being suppressed for several years. This is expected to lift GDP growth to 3.8% in 2015, with upside forecast risk. Private consumption should recover to a still modest 2.6% growth in 2015 after a fall of 0.4% estimated for this year (retail sales plunged 8.5%ytd in the first four months). An even bigger swing is likely in fixed investment with a fall of about 4% this year replaced by growth of 4-5% next year. Government consumption should grow by 3.5% in 2015 from 2.9% this year.

A mild export recovery will lift growth in 2H’14

Despite exports staying weak so far this year (-1.2%ytd in May), there was a swift narrowing of the 12-month rolling trade deficit (US$7.9bn in May from US$28bn in February 2013) thanks to a steep import decline (-14%ytd). With a plunge in domestic demand and a small fall in exports, industrial production fell 6%ytd by May and for the year as a whole will likely be down 2.2% before growth of 4-5% in 2015.

Keeping rates low and the Baht weak

Inflation edged up to 2.5%yoy in Q2’14 from 1.7%yoy in 2H’13, and is expected to reach 3.3% by end-2015. This is unlikely to result in tighter monetary policy as the economy needs all the help it can get to recover. The Baht has shown surprising resilience in the last six months, hovering within a narrow range of 32-33 against the US$. A weaker Baht would be compatible with the need to boost exports and lift economic activity.

2011 2012 2013 2014 2015 GDP, real growth, % 0.1 6.5 2.9 1.2 3.8 CPI (2002 index), year average, % 3.8 3.0 2.2 2.3 2.9 Central bank, policy rate, year end, % 3.25 2.75 2.25 2.00 2.50 Baht to US$1, year average 30.5 31.1 30.7 32.7 33.6 Source: 2011-2013 data from the IMF and CEIC; 2014-2015 forecasts by IMA Asia.


Christopher Bruton, Consultant, Dataconsult Ltd Tel: (66 2) 233 5606/7 Fax: (66 2) 236 8143 Email: [email protected]



91

Vietnam Political & policy issues to watch Bad geopolitics eases (for now) … as China’s rig goes home

Anti-Chinese riots, which damaged 200+ foreign-owned factories in Vietnam, have ended, and conflict over disputed waters in the South China Sea, which triggered the unrest, should cool for now. China has pulled the rig at the centre of the controversy home one month ahead of schedule. However, China is expected to move other rigs into disputed areas in the years ahead as it claims 90% of the South China Sea. China’s aggression is forcing a geopolitical realignment in East Asia that will spill over into economic and commercial ties (and barriers) in the next few years.

But FDI has been hit by a jump in risk concerns … this should ease in 2H’14

Foreign direct investment (FDI) accounts for 22% of Vietnam’s fixed investment and represents the most dynamic and transformative part of its economy. However, despite some high profile announcements, such as Samsung’s new US$1bn plant of high-resolution displays, FDI inflows have dropped this year. Realised FDI was up only 0.9%ytd, and new FDI pledges were down 16.4%ytd by June. Weak realised FDI, despite a massive 82% rise in FDI approvals in 2013, suggests delayed project implementation, as investors were unnerved by the riots. FDI realisation should lift in 2H’14, with the end of the naval disputes. Portfolio investment inflows have already rebounded, with the stock market up and strong demand for Vietnam’s sovereign bonds.

Slow progress on fixing the credit squeeze … due to banks with bad balance sheets

Government efforts to partly privatise state-owned enterprises (SOEs), and thereby remove some non-performing loans (NPLs) from bank balance sheets, are stalled. And bad bank balance sheets mean weak credit growth of just 1.3%ytd to May, well short of the official target of 12-14% for 2014. VAMC, the asset management company assigned with helping banks to offload their NPLs, has been slow at reselling acquired bad loans to private investors, mainly due to unattractive pricing. Initial public offerings of SOE shares have been underwhelming, but larger listings, such as garments maker Vinatex and Vietnam Airlines later this year, could build up privatisation momentum.

Outlook for the market Growth slows in mid-2014 … but should revive during 2H’14

GDP growth edged up to 5.5%yoy in Q2’14 from 4.8%yoy in Q1’14, reflecting a broad-based pickup in activity. The Q2 recovery was led by a 9.1%yoy rise in manufacturing with services up by 6.1%yoy, and construction at 5.5%yoy. Despite the improved global environment, the economy faces headwinds, which are likely to keep GDP growth at 5.0% in 2014, lower than the 5.4% of 2013. These include a temporary fallout from the May anti-Chinese riots (already reflected in export growth easing to 8%yoy in the last two months of Q2’14 from 25%yoy in the previous three months), falling tourist arrivals (-4.9% in Q2’14 from Q4’14), softer FDI inflows, and weak credit growth. These headwinds are expected to ease over the second half of this year, allowing GDP growth to lift to 5.7% in 2015.

Consumers remain buoyant

While May’s riots caused foreign investors to pause, there’s little sign of damage to consumer spending. The official retail sales report suggests growth edged up to 13.9%yoy in Q2’14 from 11.1%yoy in Q1’14. Meanwhile, vehicle sales rose 24.1%yoy in Q2 from 29.1%yoy in Q1’14. Real consumer spending is expected to increase by 5.3% this year from a 5.2% lift in 2013.

Watch for a rebound in production

A combination of low inventories and rising new orders in the June HSBC Purchasing Managers Index (PMI) suggests there is scope for a rebound in production in 2H’14. The government’s own survey of business intensions paints a similar picture, with companies reporting higher expectations for capital spending, revenue, and profits than last year. Industrial production growth, which dipped to 8%yoy in Q2’14 from 10.3%yoy in Q1’14, should recover to 9%+yoy for 2H’14 with growth of 8-9% for 2015.

A stable Dong … & a rate cut ahead

The Dong has been trading on the weak side the central bank’s reference level of 21,216, as the market expects another small devaluation, following the 1% drop in late-June. The Dong is supported by relatively low and stable inflation, a swing to a current account surplus, and strong capital inflows. These factors could allow the central bank to cut its policy rate from 6.5% to 6.0% later this year.

2011 2012 2013 2014 2015

GDP, real growth, % 6.2 5.2 5.4 5.0 5.7 CPI, yoy, % (2005=100 from 2007) 18.7 9.1 6.6 4.8 5.8 Central bank refinancing rate, year end, % 15.00 9.00 7.00 6.00 6.50 Dong to US$1, year average 20,681 20,847 21,019 21,217 21,358

Source: 2011-2013 data from the IMF and CEIC; 2014-2015 forecasts by IMA Asia.



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India Political & policy issues to watch PM Modi aims for faster decisions … & less bureaucracy

PM Modi’s government has quickly got down to business with ministers being told to get decisions made and to avoid controversies. The many Groups of Ministers (GoMs) that mushroomed under the previous government have been disbanded. They were meant to resolve inter-ministerial issues but hardly met, and when they did, they solved very few issues. Power has been returned to the key cabinet committees under the PM. The goal of faster decisions has brought the many delays for projects in obtaining environmental clearances into sharp focus. The process will be moved online, with clear time limits set for approval and much greater transparency in the process.

A budget that aims to lift growth … by boosting construction … with a start to reforms

The government’s first budget also moves in the right direction. In reality it is the budget of the last government, with Finance Minister Jaitley and his team having just weeks to amend it. The goal of a 4.1% of GDP deficit was kept, reflecting confidence that enough can be done to lift the economy (and thereby tax revenues) by March 2015. Infrastructure and construction stand out as big winners and a lot will depend on how fast projects get underway (see below). Since the budget, the government has announced plans to accelerate asset sales (an area of notable failure under the last government) and to raise the cap on foreign investment in insurance to 49% from 26%. There’s no hint yet that this will lead into a broader program of breaking up public monopolies, substantial privatisation of state owned enterprises (SOEs), and majority foreign ownership in protected sectors, but such developments are likely if Modi is to deliver on his promise to revive growth.

Outlook for the market We’ve lifted our 2014 GDP estimate … as growth recovers from mid-year

Last month we outlined why Modi’s election justified a lift in our 2015 forecast to about 6% on the production measure. This month we’ve nudged up out 2014 estimate to 5.1% (previously 4.8%), as the latest numbers suggest that an upturn has started. Industrial production accelerated to 4.7%yoy growth in May from 0.5%ytd for the first four months, with capital goods production staging a strong recovery from April. Growth in motor vehicle sales also recovered to 12.1%yoy in Q2’14 from 7.6%yoy in Q1’14 and 1.6% for full 2013. A cut in the excise-duty announced in the interim budget in February appears to have worked. Export growth also rebounded to 10.8%yoy for Q2’14 from a fall of 2.1%yoy in Q1’14 and 5.5% growth in full 2013.

Construction will accelerate on infrastructure work

Modi has given priority to accelerating infrastructure, which has two great benefits: a short-term boost from rising capex and construction work; and a long-term boost as bottlenecks that cap growth in all other areas of the economy are eased. The budget included spending for thousands of kilometres of new highways and gas pipelines, as well as new port and subway projects. Incentives for private financing of infrastructure were also introduced, along with incentives for large scale investments in manufacturing.

… bringing a realignment in growth in Asia

It will be impossible to judge whether Modi will make a difference to India until late 2015. However our long-term forecasts indicate that a key result of the new policy framework will be to lift real growth in capex and construction in India for 2015-20 to double the pace in China. China’s base is 8-10 larger now, but the gap should narrow by 2020.

Less inflation

… & a rising rupee

The financial and currency markets like what they’ve seen so far, with the Rupee edging above 60 to US$1 and portfolio inflows rising to US$5.7bn and $5.2bn in May and June respectively. June inflation (CPI) fell to 7.3%yoy from 8.3%yoy in May, a greater easing than was expected. We expect one 25bp cut to the RBI’s policy rate by December from the current 8%, which will add to the recovery in demand in 2H’14.

Calendar year starting January 2011 2012 2013 2014 2015 GDP (FC, Production), real growth, % 7.7 4.8 4.6 5.1 5.9 GDP (MP, Expenditure), real growth, % 7.9 4.9 4.4 4.9 6.8 Inflation - WPI, year average, % 9.5 7.5 6.3 4.9 5.2 Inflation - CPI, (Ind Workers pre-2012), % 8.9 9.8 10.1 7.3 5.4 RBI repo rate, December, % 8.50 8.00 7.75 7.75 6.75 Rupee to US$1, year average 46.6 53.4 58.5 59.4 55.5 Sources: 2011-2013 data from the government (NCI, RBI) and CEIC. 2014-2015 forecasts by IMA Asia with guidance from IMA India.


Adit Jain, Chairman, IMA India Tel: (91 124) 459 1200 Fax: (91 124) 459 1250 Email: [email protected]



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Australia Political & policy issues to watch A new Senate brings policy uncertainty

Australia’s political landscape changed on July 1, with a new Senate moving the balance of power away from the Green party. PM Tony Abbott of the Coalition will now need the support of the Palmer United Party and three of five other independents to pass legislation. As the minor parties are generally aligned with the Coalition this helped him to axe the carbon tax. However, they are also populist and are opposing a range of reforms on Abbott’s agenda, creating uncertainty in some areas of business.

… and makes it hard to manage the Budget

The minor parties’ cherry-picking of Coalition policies also poses a budgetary dilemma for Treasurer Joe Hockey. While supporting bills that slash revenue (ending the mining and carbon taxes), they reject bills that would lift revenue (lifting the fuel excise and reducing pensioner subsidies and family benefits indexation). The result is an A$11bn hole in the budget over the next four years. Pragmatism may force Hockey to abandon plans to return the budget to a surplus, although there’s no danger yet to Australia’s AAA debt rating.

Outlook for the market Growth slows as the mining capex boom fades

The easing of Australia’s mining investment boom will have a large impact on economy for the next four years. It will lead to an 8-10%yoy drop in private non-housing investment in 2014, followed by a 5-6% fall in 2015, which will take one percentage point off GDP growth. While this will be partially countered by more house building and greater mining export volumes, GDP growth will likely drop from 3.5%yoy in Q1’14 to 2.5-3%yoy in Q2-4’14 and 2.5% in 2015.

… and that means less of a 2-speed economy

As the capex phase of the mining boom ends, the growth gap between the mining and non-mining states is narrowing. This is apparent not just in capex levels, but also in employment trends and that is flowing through to retail sales, which are up 6.9%ytd by May in the non-mining states while growth in the mining states, was just 3.2%ytd. Further job losses at mine sites will continue to limit the mining states retail sales growth.

Risk rises for mine exports … but volumes are set to surge

Big shifts in the global markets for energy and minerals have raised risks for Australia’s mining export outlook (commodities make up 62% of merchandise exports). In its latest report, the Bureau of Resource and Energy Economics believes key exports, including iron ore (28% of exports), coal (14%), and natural gas (6%) face double-digit price declines. Fortunately, the balance of payments impact will be moderated by volume increases in iron ore and natural gas exports. On a US$ basis, this should see the value of Australian exports grow by 0.5%yoy in 2H’14 and 2-3% in 2015 from a flat 1H’14.

Housing boom … almost country-wide

Private housing investment is expected to sustain about 6%pa growth in 2H’14 and 2015, from a 7.5%yoy rise in 1H’14. An 11%yoy lift in house prices to March has encouraged development, pushing approvals up 23%yoy in 2H’13 and 20%ytd to May’14. House building will be strong across most of Australia, with only Victoria having mild approvals growth due to a high base. Rising interest rates will likely discourage developers in 2015, but the current level of approvals will be sufficient to drive building to the end of next year.

Less inflation … & a slide for the A$

Inflation should ease to 2.3%yoy in 2H’14 and 1H’15 from 3.0%yoy in 1H’14. The repealing of the carbon tax is expected to trim growth in the CPI by 0.7pp, while base effects will ease import price growth. Soft inflation will allow the Reserve Bank to delay any interest rate rise until next year. With little upward pressure on interest rates and weaker growth in China, two of the biggest boosters for the A$ will fade and that should see the $A slip on the US$ in 2H’14 and 2015.

Year ending December 31 2011 2012 2013 2014 2015 GDP, real growth, % 2.6 3.6 2.4 3.0 2.5 CPI, year average, % 3.3 1.8 2.4 2.6 2.6 RBA cash rate, year end, % 4.25 3.00 2.50 2.50 3.25 A$1 = US$, year average 1.04 1.04 0.96 0.92 0.88 US$1 = A$, year average 0.96 0.96 1.04 1.09 1.14 Source: 2011-2013 data from the ABS; 2014-2015 forecasts by IMA Asia.

Andrew Hordern, Regional Economist, IMA Asia Tel: +61-2-9252 4336 Email: [email protected]



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New Zealand Political & policy issues to watch The September election … PM Key is set for a 3rd term

NZ will go to the polls on September 20, using a mixed-member proportional (MMP) voting procedure that has created minority governments since its inception in 1996. However, the strong economy, PM Key’s likeable personality, and his success in returning the budget to surplus in 2014/15 from a 4.9% deficit in 2010/11 have given his National party a 13 percentage point lead over the Labour/Green opposition in polls. This margin should secure Key a third 3-year term, although it might not allow the Nationals to govern in their own right and that could limit their ability to implement their business-oriented reforms.

Ever tighter links to China’s economy

In its latest country report, the IMF argues that a China crisis is the biggest external risk to NZ as China is NZ’s largest export destination, with 23% of exports, and second largest source of tourists, with 9% of arrivals. There would also be secondary effects, as the crisis would slow the closely-linked Australian economy. The IMF is right to highlight the fast rise in NZ’s dependence on China. However, our view is that China will dodge a crisis although its growth rate will slow. Slower growth for a dramatically larger Chinese economy still translates into a major driver for NZ growth for decades ahead.

More free trade deals … will help secure & diversify exports

NZ is one of the world’s best negotiators of free trade deals and that has been – and will remain – one of the biggest policy factors reshaping its economy and local commerce. The stalled Trans-Pacific Partnership (TPP) free trade deal, which it helped launch, is a blow, but meanwhile Wellington has shifted its focus to other deals. These include an imminent agreement with the Gulf Cooperation Council, plus deals in discussion with India, Korea, and Russia. A primary aim is to remove barriers to NZ’s highly competitive agricultural exports. While they leave the non-rural sector wide open to imports, most of the painful adjustments have been made in that area over a decade ago.

Outlook for the market Growth will slow as China cools & rates rise

NZ faces two economic challenges over the next 18 months. First, falling dairy prices will slow overall export growth. Meanwhile, households face higher borrowing costs, as interest rates rise. Despite these concerns, we expect NZ to maintain growth of around 3.7-4%pa on the GDP production measure. A building surge and higher wage growth will boost local demand, while rising dairy volumes will limit the impact of falling prices.

A good outlook for services

The service industries are expected to recover from a weak Q1’14, when real growth slowed to 2.1%yoy from 2.6% in 2013. An increase in employment and pay will encourage spending, lifting growth for the retail trade and accommodation services sector (which rose 4.1%yoy in Q1’14) and the recreation services sector (1.1%yoy in Q1). Solid GDP growth will also allow the financial and insurance sector to sustain 4-5%pa growth to 2015.

… and for construction

The 2011 Canterbury earthquake and strong immigration flows have created an urban housing shortage in NZ’s major centres. This pushed property prices up 9%yoy in May and increased housing consents by 23%ytd to May. Government plans to fast-track consents in parts of Wellington (and prior fast-track plans in Auckland and Canterbury) will continue to support new building. This is expected to sustain housing investment growth of 7-8%yoy in 2H’14 and 6% in 2015 from 15%yoy in 1H’14. Canterbury earthquake reconstruction will likely drive the non-residential building sector to 2015, with the region’s consents up 41%ytd to May.

Rising rates and a strong NZ$

Rising inflation is expected to force the RBNZ to raise interest rates to 4.25% at the end of 2014 from the 3.5% current rate and the 2.5% at the end of 2013. Higher interest rates will keep the currency near its historically high 85 US cent level to the end of 2015.

Calendar years 2011 2012 2013 2014 2015 GDP(Expenditure), real growth, % 1.2 2.8 2.4 3.3 3.7 GDP(Production), real growth, % 1.9 2.5 2.8 3.9 3.7 CPI, year average, % 4.0 1.1 1.1 2.2 3.2 Official cash rate, year end, % 2.50 2.50 2.50 3.75 4.25 NZ$1 = US$, year average 0.79 0.81 0.82 0.85 0.84 US$1 = NZ$, year average 1.26 1.23 1.22 1.18 1.19 NZ$1 = A$. year average 1.32 1.28 1.17 1.08 1.04

Source: 2011-2013 data from Statistics NZ; 2014-2015 forecasts by IMA Asia.

Andrew Hordern, Regional Economist, IMA Asia Tel: +61-2-9252 4336 Email: [email protected]



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Asia Brief contributors The Asia Pacific Executive Brief is produced by a unique network of in-country experts who run briefing and advisory programs that are designed to help senior executives monitor and anticipate critical business developments through timely insights and analysis. Further information on the markets and the peer group briefing programs is available from the Country Directors listed below. Asia & Global

Singapore: Richard Martin, Managing Director, IMA Asia Web: www.imaasia.com Mob: (65) 9023 9642 Email: [email protected]

Australia

Sydney: Katie Tucker, Client Support Manager, IMA Asia Web: www.imaasia.com Tel: (61 2) 9252 4336 Fax: (61 2) 9252 4339 Email: [email protected]

China

Shanghai: James Loudon, China Representative, IMA Asia Tel: (86) 186 2153 7602 Email: [email protected]

Hong Kong Hong Kong: Mark Michelson, Chairman, Asia CEO Forum, Hong Kong Tel: (852) 2530 1115 Fax: (852) 2530 1125 Email: [email protected]

India New Delhi: Adit Jain, Chairman, IMA India Web: www.ima-india.com Tel: (91124) 459 1251 Fax: (91124) 459 1250 Email: [email protected]

Indonesia Jakarta: James Castle, Chairman, CastleAsia Web: www.castleasia.com Tel: (62 21) 2902 1641 Fax: (62 21) 2902 1648 Email: [email protected]

Japan Canberra: Chris Nailer, Associate Director, IMA Asia & Director MBA program, ANU Tel: (61 2) 9252 4336 Fax: (61 2) 9252 4339 Email: [email protected]

Malaysia Kuala Lumpur: Datuk Paddy Bowie, Managing Director, Paddy Schubert Sdn. Bhd. Tel: (60 3) 2078 4031 Fax: (60 3) 2078 7034 Email: [email protected]

Pakistan Karachi: Babar Ayaz, Managing Director, Mediators (Pvt) Ltd Tel: (92 21) 565 6113 Fax: (92 21) 565 6112 Email: [email protected]

Philippines Manila: Peter Wallace, President, The Wallace Business Forum Fax: (63 2) 810 9610 Web: www.wallacebusinessforum.com Tel: (63 2) 810 9606 Email: [email protected]

South Korea

Seoul: Tony Michell, Managing Director, Korea Associates Business Consultancy Tel: (82 2) 335 2614 Fax: (82 2) 323 4262 Web: www.kabcltd.com Email: [email protected]

Singapore Singapore: Richard Martin, Managing Director, IMA Asia Web: www.imaasia.com Tel: (65) 6332 0166 Fax: (65) 6332 0170 Email: [email protected]

Taiwan Taipei: Michael Boyden, Managing Director, TASC Taiwan Asia Strategy Consulting Tel: (886 2) 8789 0978 Email: [email protected] Web: www.tasc-taiwanasia.com

Thailand

Bangkok: Christopher Bruton, Managing Director, Dataconsult Ltd Tel: (66 2) 233 5606/7 Fax: (66 2) 236 8143 Email: [email protected]

Vietnam

Bangkok: Christopher Bruton, Managing Director, Dataconsult Ltd Tel: (66 2) 233 5606/7 Fax: (66 2) 236 8143 Email: [email protected]

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