Philippines Business Forecast Report Q2 2014

Philippines Business Forecast Report Q2 2014

Core Views

Despite the fact that the Philippine economy likely slowed in Q413
as a result of Typhoon Yolanda’s devastating impact on the Visayas,
we believe momentum remains solidly positive heading into 2014.
Informing our sanguine medium-term view on the Philippine economy
is the country’s manageable credit-to-GDP ratio, as well as ongoing
political stability and prudent monetary and fiscal policies.
H eadline inflation in the Philippines jumped to 4.1% year-on-year
(y-o-y) in December 2013, as food prices soared following the impact
of Typhoon Yolanda in November 2013. While we do not believe
that the Bangko Sentral ng Pilipinas (BSP) will look to address such
event-driven price increases with monetary policy adjustments, we
nevertheless retain our expectations for the central bank to hike its
benchmark interest rate by a total of 50 basis points (bps) towards
the latter part of the year.
The Philippines is set to pass into law its fourth straight on-time
budget, once again marking the increased policy-making efficacy of
the government since Benigno Aquino III took office in 2010. Notably,
the 2014 budget will drop the controversial Priority Development
Assistance Fund (PDAF), a pork barrel-spending program that was
recently ruled unconstitutional by the Supreme Court. While the move
will have a minimal effect on the overall fiscal health of the country,
it nevertheless is a positive step forward in terms of anti-corruption
efforts as well as efficiency in fund allocation. We expect the Philippines’
2013 and 2014 budget deficits to come in at approximately
1.9% of GDP, down from our previous forecasts of 2.2% and 2.0%,
respectively.

Major Forecast Changes

We have upgraded our 2014 real GDP growth forecast to 6.3% (from
6.0% previously), and also see scope for the economy’s long-term
trend growth rate to increase as long as the aforementioned factors
remain in play.
In light of continued strong economic growth, as well as planned utility
price hikes, we are upgrading our 2014 average inflation forecast
to 4.0% from 3.5% previously, with our end-year forecast likewise
getting a bump to 4.5% from 4.0% previously.
Given the peso’s huge appreciation in real effective terms over the
past eight years, a further correction in the near term is not outside
the realm of possibility. Likewise, sentiment towards EM currencies
in general remains tepid at best, and our expectations for a resurgent
US dollar over the coming year suggest little upside potential for the
peso in 2014. As a result, we have downgraded our end-2014 target
on the peso to PHP44.70/US$ from PHP42.00/US$ previously.

Key Risks To Outlook

The Philippines remains at risk of substantial hot money outflows in
the event of acute global credit or financial market stresses.
Growth slowdowns in oth China and Japan, to which the Philippines
is heavily exposed in both investment and trade terms, could
undermine the country’s strong domestic growth story should they
be more severe than expected.
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
FDI Inflows Reflect Improvements, But Work Still To Be Done 8
The undeniably positive political and economic trajectory in the Philippines is drawing increasing foreign investor interest to the country,
as reflected by rising foreign direct investment (FDI) inflows so far in 2013 While we believe this phenomenon is set to continue over the
coming years, we note that further political reforms are likely needed in order for the Philippines to catch up to its regional peers in terms
of FDI realisation
Table: Philippi nes Politic al Overview  8
Long-Term Political Outlook 9
Prospects For Improving Governance 9
The Philippines faces a number of political challenges over the coming years that, if handled successfully, could improve governance
However, given low income levels and high levels of inequality, we expect the political scene to remain vulnerable to intermittent
instances of turmoil
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Solid Momentum To Carry Over Into 2014 14
Despite the fact that the Philippine economy likely slowed in Q413 as a result of Typhoon Yolanda's devastating impact on the Visayas,
we believe that momentum remains solidly positive heading into 2014 Informing our sanguine medium-term view on the Philippine
economy is the country's manageable credit-to-GDP ratio, as well as ongoing political stability and prudent monetary and fiscal policies
We have therefore upgraded our 2014 real GDP growth forecast to 6 3% (from 6 0% previously), and also see scope for the economy's
long-term trend growth rate to increase as long as the aforementioned factors remain in play
TABLE: ECONOMIC ACTIVITY 14
Fiscal Policy 16
2014 Budget Reflects Progress With Pork Barrel Cuts 16
The Philippines is set to pass into law its fourth straight on-time budget, once again marking the increased policy-making efficacy of
the government since Benigno Aquino III took office in 2010 Notably, the 2014 budget will drop the controversial Priority Development
Assistance Fund (PDAF), a pork barrel-spending program that was recently ruled unconstitutional by the Supreme Court While the
move will have a minimal effect on the overall fiscal health of the country, it nevertheless is a positive step forward in terms of anticorruption
efforts as well as efficiency in fund allocation We expect the Philippines' 2013 and 2014 budget deficits to come in at
approximately 1 9% of GDP, down from our previous forecasts of 2 2% and 2 0%, respectively
Table: FISCAL POLICY 16
Monetary Policy 17
Rising Event-Driven Inflation Unlikely To Sway BSP's Course 17
Headline inflation in the Philippines jumped to 4 1% y-o-y in December, as food prices soared following the impact of Typhoon Yolanda
in November While we do not believe the Bangko Sentral ng Pilipinas (BSP) will look to address such event-driven price increases with
monetary policy adjustments, we nevertheless retain our expectations for the central bank to hike its benchmark interest rate by a total
of 50 basis points (bps) towards the latter part of the year
TABLE: MONETARY POLICY 18
Exchange Rate Forecast 19
Peso Weakness Belies Strong Fundamental Story 19
TABLE: CURRENCY FORECAST 19
Business Monitor International Ltd www businessmonitor com 3
Contents
TABLE: CURRENT ACCOUNT 20
Chapter 3: 10-Year Forecast 21
The Philippine Economy To 2023 21
Uncovering A Forgotten Gem? 21
The Philippines holds significant economic growth potential and has begun to come into the investment spotlight as a result Although
the country has in the past been hampered by political instability and poor investor perception, we believe President Benigno Aquino
III has been able to make progress on both fronts Moreover, consumerism is expected to pick up in a big way towards the end of the
decade as income levels rise
TABLE: Long-Term Macroeconomic Forecasts 21
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions 26
Table: BMI Business And Operation Risk Ratings 26
Table: BMI Legal Framework Rati ng 27
Table: Labour Force Quality 28
Infrastructure 29
TABLE : ASIA - ANN UAL FDI INFLO WS 29
Market Orientation 30
TABLE: Top Export Destinations 30
Operational Risk 31
Chapter 5: Key Sectors 33
Autos 33
TABLE: Philippines Auto Industry - Sales, 2011-2017 34
TABLE: Auto Industry - Production, 2011-2017 35
Food & Drink 36
TABLE: Food Consumption Indicators - Historical Data & Forecasts, 2010-2017 37
TABLE: Hot Drinks Value Sales - Historical Data & Forecasts, 2010-2017 39
TABLE: Mass Grocery Retail Sales - Historical Data & Forecasts, 2010-2017 40
Other Key Sectors 43
Table: Oil and Gas Sector Key Indicators 43
Table: Pharma Sector Key Indicators 43
Table: Infrastructure Sector Key Indicators 43
Table: Telecoms Sector Key Indicators 44
Table: Defence and Security Sector Key Indicators 44
Table: Freight Key Indicators 44
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Momentum To Continue In H114 45
Table: Global Assumptions 45
Table: Developed States, Real GDP GrowtH , % 46
Table: BMI VER SUS BLOO MBER G CON SEN SUS REAL GDP GRO WTH FORE CASTS, % 46
Table: Em ergi ng Markets , Real GDP Growt h, % 47
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