A Forbes columnist recently wrote an article that stirred  up a hornets’ nest. The post called out the Philippine economic miracle as a bubble in disguise. While the author has some valid points we should not ignore, many of us do not agree. The Philippine economy is the fastest growing economy in Southeast Asia and one of the fastest in the world!

So, is the Philippine economic growth really a bubble in disguise? Our answer is a flat no!

I recently had a conversation with my colleague, economist Dr. Alvin P. Ang who is also the President of the Philippine Economic Society. We both felt that the analysis is rather thin and is not very accurate. Truth to be told, his analysis seems to be delinked from our reality.

Here are 7 good reasons why the Philippine economic growth is not a bubble in disguise:

1. The Philippines has enough guarantees (learning even prior to 1998 Asian Crisis) on RE (real estate) bubbles.  Banks are not allowed to lend beyond 25% of their portfolios to real estate.  The RE market is clearly differentiated into segments and the large bulk affordable to people is not necessarily facing a bubble.

2. Debt to GDP ratio is now low.  Majority of the current debts are long term in nature.

3. Stock market already corrected more or less mirroring GDP growth valuation.

4. Our consumer spending has been growing for years – this is financed largely by OFW remittances.

5. OFW remittances are not coming mostly from the US. Our workers are spread all over the world – this is the reason why the 2009 crisis barely affected remittance growth.  Besides, BPOs also has a significant contributing factor and also spreading beyond call centers to higher value added outsourced work.  The current account position or the short-term foreign exchange payables are in surplus – a far cry from our situation in the 80s and 90s.  Are reserves are now in record high!

6. Car sales are increasing not only due to low interest rates, but also because car prices have become lower relative to total income.

7. We are not having a credit bubble when loans to GDP is only 51% one of the lowest in Asia.  Non-Performing Loans (NPL) as % of total loans is at all time low of only 2.7% – suggesting the better quality of loans.

Nonetheless, sustaining the current growth path and avoiding any bubble requires that the country take advantage of the low interest rate regime by shifting to productive activities.  The concern is the required structural adjustment to match the need for employment growth.

Furthermore, the rebuilding requirements of the devastated areas will push public spending higher cushioning any potential RE bubbles.  There is nothing wrong with government spending for infrastructure, as this is what is needed to sustain the growth.  With the rebuilding process, government will not be affected by external interest rate fluctuations as multilaterals like Asian Development Bank and World Bank will lend at concessional rates.  This will most likely be followed by ‘bilaterals’.

Finally, it is time for local investors and entrepreneurs to believe in this country and not be swayed by external opinions.  After all, we live here.  It is only us who can disprove opinions made from outside without coming here and studying the country in detail.

The Department of Finance issued a statement in reaction to the “bubble” article featured in Forbes:
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DOF ECONOMIC BULLETIN

25 November 2013

The Philippine economy is not experiencing a bubble, contrary to a Forbes article on 21 November 2013.

First, the current account in the BOP is in surplus, by 4.2% of GDP in the first half of the year. This implies that the economy has more savings than investment and is even a net lender to the rest of the world. Compared with the 1997-98 Asian crisis, all ASEAN countries except Singapore then had current account deficits. (Hong Kong and China were also in surplus.)

As a result of the robust current account, the country’s international reserves are piling up — rising from US$81.7 billion last year to US$83.4 billion in October 2013, equivalent to a year of imports of goods and services, one of Asia’s highest. Compared with 1997-98, ASEAN reserves were equivalent to 1-2 months of imports and were declining at a fast pace until the IMF stepped in to assist these economies.

Second, the inflation rate is manageable at 2.9% in October 2013 — still within the 3-5% Bangko Sentral target. In 1997, ASEAN economies had an average inflation rate of 6.1% and this rose to 15.1% the next year.

Third, the exchange rate continues to be stable, moving just slightly outside the P41-43/US$ range. The 4.2% peso YOY depreciation in October 2013 is far from the 13.1% and 53.8% ASEAN depreciation in 1997-98.

Fourth, the budget deficit is estimated at 1.2% of GDP as of September 2013 — lower than the targeted 2% of GDP. The 35.8% infrastructure spending in the first half of 2013 is due more to realignment of spending priorities than excessive spending.

The strong BOP and fiscal accounts and low inflation do not indicate that a bubble exists.

Colombo mentions some indicators showing a bubble, as follows:

1.   Soaring capital inflows –  The capital inflows he is referring to are OFW remittances and BPO revenues which have proven to rise even under the worst economic conditions in the West. Personal remittances of OFWs rose 9.7% last year and 6.6% as of September this year even if Europe was in crisis  and US was not growing.

2.   External debt spike –  External debt of the Philippines has been declining from US$60.4 billion in 2011 to US$60.3 billion in 2012 and US$58.1 billion as of June 2013.   As % of GDP, this are equivalent to 27.0%, 24.1% and 21.6%, respectively.

3.   FDI has boomed during the last 10 years – We would be happy if this were true. FDI has averaged less than 0.9% of GDP during the past 5 years.

4.   PSE has tripled since 2009 – The sharp PSE rise (32% average during the last 5 years) just mirrored the sharp rise in corporations’ net income (28.4% rise).

5.   Inflating property bubble – The rise in prices and rentals of residential properties in Manila CBD are not a sign of a bubble but are in fact due to rising demand and low supply. Eventually, prices and rentals will go down as new supply comes onstream. As of 2013 Q2, vacancy rate is 9.8% and 4.3% for residential and office space, respectively. When vacancy rates drop below 10%, prices and rentals rise. It is necessary to keep on building to reduce impact on prices.
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We must continue to pray with and for our nation: “Blessed is the nation whose God is the LORD, the people he chose for his inheritance.” – Psalm 33:12, NIV

Economic Growth. Credit Upgrade. Bullish Market. Transparency in Governance. Empowered Nation.

As we brace for explosive growth, we need to continue to have faith in our nation… it’s not just more fun in the Philippines, it’s also more exciting to be in the Philippines.

What do we need? More investments, more creativity, more ‘out of the box’ thinking, more competitiveness, better transparency and most of all unparalleled transparency.

How do we ensure sustainable growth? Let us always turn to the Lord.

Blessed is the nation whose God is the LORD, the people he chose for his inheritance.  – Psalm 33:12, NIV

Watch this video!

Question: Our economic fundamentals showed a lot of improvements lately—credit ratings upgrades, BSP rate cuts, lower inflation rates and stock market all-time highs. But it seems Juan dela Cruz doesn’t feel these improvements yet. The poverty and unemployment rates are still high according to news. How long will it take for our poor kababayan to feel the said improvements in our economy?

—Leo Manalaysay via Facebook

Answer: With all that we see and hear about the growth of the Philippine economy, there is real reason to be very optimistic about the future. I share the view of many that the Philippines will be among the most prosperous nations in the near future, all in God’s time.

Economic growth ushers many positive changes and if the government and the business sector will properly manage growth, the benefits will ultimately trickle down to the masses. Economic growth can manifest in different ways but not all of them will have the desired effect. Some growth can be unsustainable and without sound fundamentals. Managing the economy through growth can just be as tricky as managing it through recession. A properly managed growth should be able to create a healthier business environment that will generate more employment and more taxes, and should be sustainable. As more jobs are generated, our kababayans will be able to experience better income opportunities, lower unemployment and underemployment. It is through better employment that economic growth can really trickle down to the masses.

The big issue is when. Typically, it takes time before all the benefits of economic growth can be felt, and business and the government will be the main drivers. Unlike in the stock market, where a report on economic growth can cause an overnight spike in the bourse, it takes time before business can actually experience the gains.

A corporation will want to perform adequate study before going into an expansionary phase, ascertain first if current capacity can accommodate the growth in demand for its products or services.

Companies will not immediately go into hiring more employees because it will need to ensure that the new hires will actually contribute to a better bottom line and not the other way around. Businesses need time to expand as they would still have to raise more capital, study trends and build capacity.

There must be some effects in a year or two, but not in a quarter or two. Will the effects be felt by the masses? Only if growth will result in increased employment.

Another concern is, how ready are we for the change? While many of us will benefit from the growth, how we benefit will differ from one individual to another. Some individuals will use this as an opportunity to save and invest more money that will open more opportunities for wealth accumulation and long-term savings. However, some may opt to use the income improvement for short-term wants and a lifestyle upgrade– when we do so, we will miss the opportunity to have a better quality of life that is sustainable.

While waiting for positive changes to trickle down to us, it is best that we remain prudent with whatever we have. If we can manage the little we have now, we will also be able to manage our resources when they get bigger.

“If you are faithful in little things, you will be faithful in large ones. But if you are dishonest in little things, you won’t be honest with greater responsibilities.” —Luke 16:10, NLT