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RBS outlook on Philippines and Asia


SirMadrigal

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SirMadrigal

From a friend at RBS:

 






 

Emerging Markets | EM Alert | Asia
29 Aug 2013


 


EM_Alert_Asia_29Aug13.pdf  


Government spending proved to be the primary driver for growth in Q2.
Going forward we expect government spending and, therefore, growth to
slow. Despite this, we believe the overheating risks have not receded.
We are revising our full-year 2013 growth forecast
upwards to 7.2%.

In Q2, Philippines GDP grew 7.5% yoy (1.4% qoq sa), higher than our
expectations and the consensus (Bloomberg). This is the sixth quarter in
a row that growth has exceeded the consensus (Bloomberg). The strong
growth performance was due to increased government
spending. Government consumption grew 17.0% yoy (3.6% qoq sa) compared
to 13.2% yoy (3.7% qoq sa) in Q1. On top of this, public construction
grew 31.1% yoy after posting a 45.6% yoy increase in Q1 (Figure 3).
Private consumption growth held steady at 5.2%
yoy (1.3% qoq sa).


Going forward, we expect sequential growth to be lower. Government
spending is likely to slow in H2. The spurt in H1 was a result of
front-loading of spending (Figure 4). House elections, concluded in May,
also provided a small boost. We do not expect a significant
improvement in the other components either. Taking into account the
base effect (Q3 2012: 7.3% yoy), we expect Q3 2013 growth to come in at
6.6% yoy. We are also revising our full-year growth estimate to 7.2% yoy
from 6.9% yoy earlier. However, we are bringing
down our 2014 forecast from 6.9% yoy to 6.7% yoy (Figure 6).

 

While we expect slower sequential growth going forward, overheating
risks have not receded in our opinion. In Q2, the positive output gap
widened even further (Figure 5). As we discussed in
Is the economy overheating?,
Philippines has registered above-trend growth since 2012, primarily
driven by a booming construction sector and loose liquidity.
Construction activity is
largely debt-financed and indeed, real estate related lending has been
rising at around 25% yoy. Risks of overheating are predominantly to
asset prices.

 

 

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When do we get the translation?

 

No, seriously, thanks for that.  Is this a public assessment or is it a RBS internal note?  I for one am surprised that Q2 GDP reached 7.5% after reading that Q1's high was partly due to election spending.  Otherwise the commentary matches my feelings and observations.  There's some good additional comments from ADB

 

http://www.tribune.net.ph/index.php/headlines/item/18213-noy-s-leapfrog-economic-tack-won-t-work-adb

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SirMadrigal

its an internal mailer that is sent out on a list but its nothing secretive, just an email I received because they know I am in PH now and I dabble.

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SirMadrigal

the links in the email have PDF attachments, if you are interested in the local economy and also like to read financial data its a good read, the analyst is good at what he does.

This kind of data only strengthens my assumption about where the Peso is headed

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spooks

Growth growth everywhere but not a  peso seen 

 

water water everywhere but not a drop to drink

 

Growthless growth??  a new paradigm

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Growthless growth?? a new paradigm

 

I believe it has been defined as 'jobless growth' which is complete nonsense.  The lack of job creation - in fact the number of jobs has declined - and the rather tawdry performance with foreign direct investment are symptoms of what we all know: this country is awash with cash but is failing to provide for a long-term sustainable growth.  GDP figures are impressive but fueled mainly by the influx of OFW remittances and hot money, neither of which qualifies for inclusion in GDP until the money is spent domestically.  Hot money is fickle.  As world markets (particularly the USA) recover from 2008 some of this hot money will migrate elsewhere.  Not all of it of course since many of the top Filipino companies offer a good return on capital in Peso terms.  But then that last phrase is a cause for worry.  If hot money starts to flow out of this country the stock market will decline; I'm not predicting a crash or anything sensational but it will settle back.  As it does so the pressure on the Peso will increase and its value will decrease against the other major currencies.  Thus 'a good return on capital in Peso terms' becomes less good when measured say against the US Dollar.

 

I believe we are all watching the first signs of this happening as the major international currencies are gradually strengthening against the Peso.  The US Dollar has gone from 40:1 to 44:1 in eight months.  Likewise the Pound Sterling has gone from 60:1 to 69:1.  The BSP's attitude has done a complete U-turn.  Last year they were talking about buying dollars internally to stop the Peso becoming too strong.  Just lately they have been selling dollars to try to halt the Peso's decline.

 

So what's to be done?  The Philippines needs to concentrate more on its agricultural, raw material and manufacturing sectors.  It needs to change its attitude toward foreign investors and companies that want to operate here.  In the first instance it may need to offer really favourable terms in the form of tax breaks, etc.  This strategy has worked elsewhere; there's no reason why it can't work here.  However if this were to happen I anticipate the local businesses crying foul and complaining of unfair competition.  Restraining orders, temporary or otherwise, will abound.

 

To end on a more whimsical note I am reminded of that explanation why foreigners cannot own land here: the Filipinos are afraid they will dig it up and take it away.

 

P.S.  Sir M, I shall read the PDF attachments.

Edited by GoHuk
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stevensanph

So what's to be done?  The Philippines needs to concentrate more on its agricultural, raw material and manufacturing sectors.  It needs to change its attitude toward foreign investors and companies that want to operate here.  In the first instance it may need to offer really favourable terms in the form of tax breaks, etc.  This strategy has worked elsewhere; there's no reason why it can't work here.  However if this were to happen I anticipate the local businesses crying foul and complaining of unfair competition.  Restraining orders, temporary or otherwise, will abound.

 

There is already tax breaks for foreign firms coming to the Philippines for manufacturing and outsourcing purposes.  It is called the PEZA authority and they offer upto an 8 year tax break on all local taxes and all import/export taxes.  It is a good scheme which hasn't been marketed well IMO.

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You're correct about the marketing.  I know of PEZA, I know where their head office is along Roxas Boulevard on the Pasay/Manila border but I do not know how they operate or what incentives they offer apart from the fact that they only offer locations in the so called tax free zones: Clark, Olongapo and the like.  Am I right?  Can anyone enlighten me?  If I'm right then it sounds good for light industry but this still does not cover the mining, fishing and agricultural sectors.

 

PEZA is one of the organisations reporting more interest by foreign direct investors - a hopeful sign.

Edited by GoHuk
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spooks

There is already tax breaks for foreign firms coming to the Philippines for manufacturing and outsourcing purposes.  It is called the PEZA authority and they offer upto an 8 year tax break on all local taxes and all import/export taxes.  It is a good scheme which hasn't been marketed well IMO.

The good news is as this works so well the "stuff it up committee" has been formed

 

There has been a call by the BIR to slash the tax benefits and inducements as the BIR deems them as 'Passe'

 

Wonder if they will ever wake up to the reality that the whole country should be PEZA  zoned, if for no other reason than it works!!

 

 

As for the "Propoganda for growth"  it was quite interesting listening to some of the fund managers and investment strategists for Sout east asia who were asked to comment on the "Pinoy miracle" in light of events in Indonesia and India.

 

They were politely unenthused and suggested that as the market is so small it is already grossly over valued.  They suggest that they would have been far more impressed if there had been key structural reforms and that the Revenue department was able to align tax rates and collections that were more realistic and inclusive. ie stop shagging the few taxpayers to death and raise funds more evenly.

 

Many of these guys feel the buying opportunities have yet to present themselves..... real Hot money out look

 

Equally structural reforms in good Governance: ie laws being just that and enforceable swiftly. In addition getting to grips with corruption which was NOT overshadowed by the GDP figures as recent events show what value when wholseale plunder strips it out.  Last but  not least was the tacit agreement that the OFW phenomena plays too large a part in the figures. No one wanted to openly say it publicly, yet it was an almost tangible rebuff to Human trafficking on a grand scale being part of a nations fiscal salvation.

 

Yes the figures do read good

 

so does the ocean to a castaway after a few days......water water everywhere

Edited by spooks
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