Transcript mb-medalla-presentation

Philippine Economy:
In sweet spot, but facing
difficult global challenges and
has a lot of catching up to do.
Felipe M. Medalla
Monetary Board Member
Bangko Sentral ng Pilipinas
September 25, 2012
• 1. Philippine Economy is in a sweet spot, but monetary policy in the
advanced economies pose difficult challenges for Philippine
economic policy makers.
• 2. Weak advanced economies reduce our growth prospects in
second half of 2012 and in 2013
• 3. Weak economy in US means another round of QE
• 4. Rising sovereign bond yields for troubled economies in Euro
zone (e.g., Spain and Italy) mean ECB will have its own version of QE
(what Draghi called Outright Monetary Transactions).
• 5. #3 and #4 mean more portfolio inflows (which means lower
GS yield and upward pressure on the peso)
• 6. If non-residents are buying Phil GS, where will Filipinos and
Philippine Banks put their money?
• 7. Will #6 result in bubbles and too much credit growth than is
good for our macroeconomic and financial stability?
Philippines is in a “mini” demographic transition. The fastest
growing segment of our population is from age groups which
earn and save more.
Age Distribution of Household Population
Population
Age Group
1995
2010
0-14
26,141,749 30,717,524
15-19
7,186,725 9,676,359
20-24
6,401,280 8,370,398
25-34
10,509,534 14,134,090
35-64
15,668,613 25,193,409
65+
2,441,551 4,006,198
Total
68,349,452 92,099,988
Source: www.census.gov.ph
% Distribution
1995
38.2%
10.5%
9.4%
15.4%
22.9%
3.6%
100.0%
2010 2010/1995
33.4%
1.18
10.5%
1.35
9.1%
1.31
15.3%
1.34
27.4%
1.61
4.3%
1.64
100.0%
1.35
The demographic transition raised our savings rate....
and, together with OFW remittances, generated 10 consecutive years of
current account surplus in our balance of payments (which raised our GIR,
making our external balance virtually invulnerable to global shocks like the
collapse of Lehman). In short, we don’t need foreign funds.
Chart 3. CURRENT ACCOUNT (BPM5 Concept), annual, in US$ million and as % of GDP
10000
8
CURRENT ACCOUNT (left scale)
Average
As % of GDP (right scale)
8000
6
6000
4
4000
2
2000
0
0
1999
-2000
-4000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 p/
-2
-4
Passage of EVAT and our external surpluses moved us out of the vicious cycle of public
debt (high deficit and depreciating currency  high credit spreads  high interest
expense of the government high deficit…)
Real Per Capita Government Revenue, Taxes, Expenditures and
Interest Expense
18000
16000
14000
12000
10000
Total Revenues
Tax Revenues
8000
Expenditures exc. Interest
6000
Interest Expense
4000
2000
1996M12
1997M5
1997M10
1998M3
1998M8
1999M1
1999M6
1999M11
2000M4
2000M9
2001M2
2001M7
2001M12
2002M5
2002M10
2003M3
2003M8
2004M1
2004M6
2004M11
2005M4
2005M9
2006M2
2006M7
2006M12
2007M5
2007M10
2008M3
2008M8
2009M1
2009M6
2009M11
2010M4
2010M9
2011M2
0
6
Philippine Fiscal Deficit is very managable (especially if
congress passes the sin tax and fiscal incentives
rationalization laws)
Market perceptions of improving Philippine sovereign
credit risk are way ahead of credit rating agencies.
8
Both the slope and intercept (level) of
the GS Yield curve fell significantly.
Chart 4. Philippine Secondary Market Yields
In percent
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
12 September 2012
31 August 2012
30 September 2011
31 December 2007
31 December 2002
1-mo
3-mo
6-mo
1-Yr
2-Yr
3-Yr
4-Yr
5-Yr
7-Yr
10-Yr
20-Yr
25-Yr
Share of Interest Expense in Total Expenditures of
the National Government
(based on 12 mo running totals)
35%
30%
5%
0%
1996M12
1997M8
1998M4
1998M12
1999M8
2000M4
2000M12
2001M8
2002M4
2002M12
2003M8
2004M4
2004M12
2005M8
2006M4
2006M12
2007M8
2008M4
2008M12
2009M8
2010M4
2010M12
1996M12
1997M8
1998M4
1998M12
1999M8
2000M4
2000M12
2001M8
2002M4
2002M12
2003M8
2004M4
2004M12
2005M8
2006M4
2006M12
2007M8
2008M4
2008M12
2009M8
2010M4
2010M12
…significantly expanding the national government’s fiscal space.
Real Per Capita NG Interest
Expense (pesos per capita)
6000
5000
25%
4000
20%
3000
15%
10%
2000
1000
0
10
With the fall in interest rates and appreciation of the
peso, our economy has outgrown our public debt.
Chart 2. Total Public Sector Debt as % of GDP, 1998-2010
6000
100
90
5000
80
70
4000
60
2010: 58.5%
3000
50
40
2000
30
20
1000
10
0
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source:
Economic growth in the first two
quarters surprised most economists.
Even if the BOP crisis years (1984, 1985, 1991, and 1998), average GDP
growth between 1950 and 2010 was only 5%. Share of Industry in GDP fell
from a peak of 42% in the early 1980s to 32%. Moreover, seasonally adjusted
quarter on quarter GDP growth is quite low.
100
Chart 1. Real GDP Growth and Shares of AIS to GDP
12
90
10
80
8
6
70
4
60
2
50
0
40
-2
30
-4
-6
10
-8
0
-10
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
20
Services
Agriculture
Industry
Real GDP Growth (right scale)
The sectors that declined (in terms of employment shares) are
the sectors that have to compete with imports in the domestic
market or with exports from other countries in foreign
markets.
Employment Shares by Major Industry Groups:
January 1996 and 2012 Labor Force Surveys
60
50
40
Jan 1996
30
Jan 2012
20
10
0
Agriculture
Manufacturing
Rest of Industry
Services
Much of the increase in service sector employment is
associated with low wages or non-wage income.
Service Sector Share in Total Employment
30
25
20
15
Jan 1996
Jan 2012
10
5
0
Wholesale and Retail Trade and
Repair of Motor Vehicles and
Motorcycles
Transportation, Storage and
Communications
Financing, Insurance, and Real
Estate
Rest of Service Sector
Service Sector employment is in the non-tradeable sectors(does not compete with foreign
producers) and has strong links with the informal sector and coping with poverty (e.g., daughters
of farmers working as maids in the cities) and government payrolls (teachers, government
employees, police and military personnel).
Break down of Service Sector Share in Total Employment :Jan 2012 LFS
Services
Wholesale and retail trade; repair of motor vehicles and
motorcycles
Transportation and storage
Accommodation and food service activities
Information and communication
Financial and insurance activities
Real estate activities
Professional, scientific and technical activities
Administrative and support service activities
Public administration and defense; compulsory social security
Education
Human health and social work activities
Arts, entertainment and recreation
Other service activities
Activities of households as employers; undifferentiated goods and
services
52.7
19.3
6.9
3.2
0.9
1.3
0.4
0.5
2.3
5
3.4
1.2
0.9
2.3
4.9
The fall in the share of manufacturing and the rise in the share of
services in our country look more similar to what happened to the
sectoral employment shares in rich advanced economies than in
developing economies.
The “maturation” of labor export has resulted in a signficant drop in the
growth rate of OFW remittances. (Aside from BPO, what will take the place of
the high growth rates of remittances?)
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Figure 2. Gross Fixed Capital Formation as % of GDP:
Selected Asian Economies
Birth rates fell much less in the Philippines than in
Indonesia and Thailand
Fertility rates among well-off and better educated mothers is now close
to replacement rate. Those of poor and less educated mothers are
significantly higher than their desired fertility and are nearly twice
replacement rates.
ACTUAL VS WANTED FERTILITY (No. Of Children)
By Wealth Quintile and Mother’s Education
ACTUAL
WEALTH QUINTILE
Lowest
Second
Middle
Fourth
Highest
MOTHER’S EDUCATION
No education
Elementary
High school
College or higher
WANTED
DIFFERENCE
5.9
4.6
3.5
2.8
2
3.8
3.1
2.6
2.2
1.7
2.1
1.5
0.9
0.6
0.3
5.3
5
3.5
2.7
4.1
3.3
2.5
2.2
1.2
1.7
1
0.5
Parents with large number of children invest less in the
education and health of their children.
High birth rates among the poor have resulted in a less
educated labor force. 45.5% of the labor force have not
finished high school.
DISTRIBUTION OF EMPLOYED WORKERS BY EDUCATION AND AGE, JAN 2011
EDUCATION
15 - 24
25 - 34
35 - 44
AGE
GROUP 45 - 54
55 - 64
65 AND
OLDER
All Ages
Elem
HIGH
ALL
Grad or Below SCHOOL College
College EDUC
Lower HS Grad Grad
Undergrad Grad
LEVELS
25.7% 45.8% 31.5%
12.8% 10.0% 100%
20.5% 33.0% 29.0%
16.5% 21.5% 100%
29.9% 42.3% 28.7%
14.2% 14.7% 100%
38.9% 50.6% 23.3%
11.9% 14.2% 100%
51.4% 61.7% 17.7%
8.7% 11.9% 100%
73.1%
32.1%
81.5%
45.5%
8.9%
26.5%
3.8%
13.2%
5.7%
14.9%
100%
100%
Why according to Benanke, the academic, QE might
work (even in the absence of fiscal stimulus).
“He refers, of course, to the fact that the BOJ has for some time now pursued a policy of
setting the call rate, its instrument rate, virtually at zero, its practical floor. Having
pushed monetary ease to its seeming limit, what more could the BOJ do?.... Isn’t Japan
stuck in what Keynes called a .“liquidity trap.”? ….Far from being powerless,the Bank of
Japan could achieve a great deal if it were willing to abandon its excessive caution …
The argument that current monetary policy in Japan is in fact quite accommodative
rests largely on the observation that interest rates are at a very low level. I do hope that
readers who have gotten this far will be sufficiently familiar with monetary history not
to take seriously any such claim based on the level of the nominal interest rate.
However, as I will argue in the remainder of the paper, liquidity trap or no, monetary
policy retains considerable power to expand nominal aggregate demand. I will illustrate
by discussing a mechanism that is highly relevant in Japan today, the so-called
“balance-sheet channel of monetary policy.”.. Therefore money issuance must
ultimately raise the price level, even if nominal interest rates are bounded at zero. …..I
believe that a policy of aggressive depreciation of the yen would by itself probably
suffice to get the Japanese economy moving again… Suppose the Bank of Japan prints
yen and uses them to acquire foreign assets..
ECB is doing its own version of QE, to improve the
balance sheet of troubled banks and countries.
BSP purchases of forex have been
largely sterilized using our SDAs.