Press Release
Sep 01, 2022

Citing the vulnerability to pandemics and lockdowns of businesses involving high-contact services, the lead economist of the Bank of the Philippine Islands (BPI) is encouraging business owners to get into manufacturing as well as explore bringing their businesses to the regions.


BPI Lead Economist Emilio “Jun” Neri advised business clients to explore possibilities outside high-contact businesses and outside Metro Manila, in his presentation titled, “Recovery Prospects Amid Mounting Headwinds: The Economy in the Next 18 Months,” during the recently held BizTalk Online by BPI Business Banking.


“It’s really time to rethink that maybe our business models are no longer working as well as  before. Maybe we can take a look at manufacturing as a possible prospect,” said Neri. 


He explained that one of the reasons the Philippines underperformed during the pandemic was because the country’s share of manufacturing output to Gross Domestic Product (GDP) at 17.2% continued to fall behind the rest of its ASEAN neighbors, trailing behind those whose manufacturing-to-GDP ratios were highest in the region: Malaysia (63.9%) and Thailand (61.7%), 


Neri also explained that the ASEAN neighbors did better than the Philippines during the pandemic because they have bigger manufacturing sectors. “Manufacturing tends to do well even with tight and strict health protocols, unlike services,” he said, referring to high-contact businesses that include restaurants, hotels, and other service-oriented enterprises.


As the country has remained at Alert Level 1 since the beginning of the year, the manufacturing output in the first quarter of 2022 has returned to the 2019 level, driven by food products, pharma, and basic metals and computer and electronic products. 


According to Neri, the basic pharmaceutical sector has a big potential, owing to garnering 30% bigger production than its pre-pandemic levels. “We can explore this business. I think it has a big potential,” he shared with BPI’s business clients.


“We are a services economy, that’s why high-contact activities were hit when pandemic happened. If monkeypox cases increase and becomes like COVID-19, we will be caught off guard again and our businesses will suffer significantly,” added Neri. 


MSME sector

Citing data from the Philippine Statistics Authority (PSA) and the Department of Trade and Industry (DTI), Neri said 47% of micro, small, and medium enterprises (MSMEs) are into wholesale and retail trade and repair of motor vehicles and motorcycles. He added that Vietnam or Indonesia, which were more resilient during the pandemic, would have a smaller wholesale and retail trade sector in the MSME space.


While more than 300,000 establishments had closed shop in 2021, more than 100,000 new companies have opened in the same period. However, Neri said many of them are still located in metropolitan areas. While this is natural since the demand here is strong, he advised businesses that if they want a more sustainable development, then they could consider doing businesses outside Metro Manila.


In terms of gross regional domestic product (GRDP), Neri added, some provinces are already above pre-pandemic levels, especially those in the south. 


BPI Business Banking Head Dominique Ocliasa, for his part, told their business clients, “It is important now more than ever to gear up and position our businesses to become more agile, resilient, and well positioned for continuous and sustainable growth.” 


“We, ourselves at BPI Business Banking, understand that we need to provide relevant business solutions that are responsive to your changing needs so that we can continue to support SMEs as you navigate through these unprecedented challenges,” Ocliasa added. 


Recovering amid mounting headwinds

According to Neri, the country is seen to post the fastest growth this year among ASEAN countries. “This year, we will be the valedictorian,” he said, adding that the country will grow faster than any other country in the Southeast Asia. “We will be strongest in terms of GDP growth. Next year, we will be salutatorian, second to Vietnam that will be growing by 7.2%.”


During this year’s first quarter alone, the country posted an 8.3% year-on-year growth in GDP, which was supported by very strong consumption growth of more than 10%, and investments growth of more than 20%, according to Neri, citing CEIC Data.


He said this robust economic growth will be faced by a number of headwinds in the second half of the year, saying the second semester will be a little bit more challenged, which businesses should need to navigate through in the next five or six months.


“Number one is the rapid inflation in the U.S.,” Neri said, which is also true in the European Union and in many parts of the world. The June 9.1% inflation rate is a 41-year high in the US inflation history. “The last time this happened was in 1981, and there doesn’t seem to be any clear evidence that this is already the peak,” he added.


Looking at the components of the U.S. inflation rate, Neri said, a good part of it is transport, food, and rent and housing. In addition, supply chains, freight costs, while no longer as high as in previous months, will continue to affect Philippine businesses and the country’s economic recovery, he added.


As the Philippines relies on coal for more than half of its energy production mix, the elevated coal prices may keep electricity costs high. “With high coal prices, expect your electricity bills to continue going up because our understanding is these [high coal prices] have not been fully factored in with the way our electrical suppliers have been pricing their products,” Neri explained, adding that price increases were held off until after the elections were done. “You can expect high electricity bills moving forward.”


In light of the worsening threat of food protectionism, with India banning exports of wheat, Malaysia’s partial ban on export of chicken to Singapore, and Indonesia’s palm oil export ban, food security is another issue, according to Neri. “In this kind of environment, you have to have foreign currencies if you want to survive because you cannot buy anything using pesos,” he explained.


Another challenge is the response of central banks to the rise in inflation. According to Neri, central banks almost everywhere are now tightening liquidity, except for Thailand and Malaysia. “They lowered interest rates significantly during the pandemic. Now they are adjusting it,” he said. “I think you still have a chance to prepare because they will probably be more tightening happening for the rest of this year, if not during a good part of 2023,” he said. 


Lastly, Neri said, China’s economy is a challenge as the last six months saw contraction more than expansion of their manufacturing performance. As a big trading and investment partner of the world, China was the only one among the big economies of the world that was contracting in the past six months, slightly recovering in June from a huge dip in April. “We are so dependent on the Chinese economy, Southeast Asia in particular,” he said.


Amid these headwinds, the Philippines is expected to have full recovery this year coming from a 5.6% GDP in 2021. “The Philippines saw the biggest decline in economic output, which saw it bottom back in the first quarter of 2021,” Neri said.


He added that because the economy has already reopened, and with more citizens being vaccinated and the country continuing with the vaccination drive, the Philippines should be back to 100% by the third quarter of this year and back to the 2019 level.


However, Neri noted that the high GDP rate in the first quarter of this year is such because the country is coming from a deep negative base. “It’s a little bit of an illusion because our strong numbers especially in 2022 are partly because we are coming from such a deep negative base. There’s no way to go but up in other words,” he said.


Neri also pointed out that economies are seen to go down naturally in an election year in the second semester. “Coming from a much stronger base in the fourth quarter in 2021, we should be seeing another meaningful slowdown in economic growth year on year. That doesn’t mean quarter on quarter there will be a decline, it means it’s just going be a little bit better. It will not be improving as much as the first half as we will be seeing improvement in the second semester,” he explained. 


Growth sources, no recession

If the country stays at Alert Level 1, recreation, restaurants and transport expenditures may grow even faster. “They should be returning to around 80% to 90% of their pre-pandemic levels at the end of this year, and next year, back to 100% hopefully for everyone,” Neri said.


Industries and services have yet to return to 100% by the third quarter of this year, according to Neri, adding that only agriculture is back to its pre-pandemic levels.


“The good news is that jobs are back,” he said. “People have found either new jobs or returned to their original work, and this is a good sign, a validation that our expectations that our recovery is underway and will probably continue regardless of the headwinds,” he added. 


This development also comes as the participation rate of the labor force has improved to 64% in May versus 63.4% in April this year. According to Neri, this means that a good portion of the workforce are joining the labor force again, when many of them gave up looking for work back in early part of 2020.


“We don’t think there will be a recession in the Philippines,” Neri noted. “There might be a recession in the developed world because of high inflation and aggressive rate hikes but we don’t think there will be a recession in the Philippines unless the the COVID-19 pandemic resurges or monkeypox cases rise returns or monkeypox happens, or some other unexpected event. But if things move along as it is, I think the Philippines will easily be able to avoid a recession,” he explained.


While the six-month inflation rate averaged at 4.4%, the inflation rate accelerated further to 6.1% in June. “6.1% is lower than our 2018 inflation peak of 6.7% or 6.9%. We’re not yet there, but we’re getting there, and it’s not just happening in food and energy, it is also spreading to services,” Neri said.


According to Neri, housing and utilities have grown bigger through time from practically zero in 2021 and now is the biggest drivers in the pesos’ weakening, along with food items and transport.


“It is one of the reasons why the Bangko Sentral ng Pilipinas [BSP] had to hike policy rates although a lot more aggressively than we anticipated,” he explains, citing the country’s delayed rate hike despite the rise in U.S. inflation.


The month-on-month (M-o-M) inflation surged by 0.9%, which according to Neri, is not something to ignore because the normal M-o-M increase in prices is about 0.35%. “So if it’s almost 1% M-o-M, it really means that prices are going up everywhere,” he said.


More demand for dollars

A 13.9% increase year-on-year of imports of capital goods was seen for the first five months of 2022. This is due mainly to telcos continuing to ramp up capacity and lifting of restrictions on aircraft, ships and boats, and land transportation. “We’re all competing with all sorts of importers, including the airline companies,” Neri pointed out, saying leases of airplanes have resumed as the economy is already reopening, which would need millions of dollars of spending every year to pay for these leases.


This increase competes with the dollar supply available to the economy, according to Neri. “Unfortunately, we cannot transact with the rest of the world using our own currencies,” he reiterated.


“We have more demand for dollars nowadays,” he added. Export growth is only 6% but total import is up 31% at USD 56.7 Bn in the first five months of 2022 compared to USD 43.9 Bn in the same period in 2021. 


“Importation has reached USD 12 Bn a month, which when annualized amounts to USD 144 Bn. Compare that with our gross international reserves (GIR) at only USD 100 Bn,” he noted, saying that the direction of the currency during the last five to 10 weeks was based on strong fundamentals.


GIR fell to USB 101.9 Bn in May from USB 105.4 Bn in April per BSP data, which can cover 8.7 months of imports. According to Neri, closing the door for more aggressive rate hikes can deplete forex reserves. 


Policy rate was up 75 bps to 3.25% in May. “BSP will not rule out another hike in August, but the need to do 50 bps is less now according to the BSP governor,” Neri said. “BSP has to adjust faster toward 4.25% by the end of the year if it has to keep with the U.S.,” he added.


The very low interest rates here is causing a flight of funds elsewhere, explained Neri, adding that “many investors who are looking for places to earn money will continue to shift their pesos out and put it in dollars. So, if that's the case the peso will continue to weaken.”


“The U.S. is increasing its interest rates faster than us. It’s causing a flight of funds outside of the Philippines,” he said.


Neri estimated that imports would reach close to USD 70Bn or more by end June, which when annualized would amount to more than USD 140 Bn per year. “Whereas our dollar inflow from [OFW] remittances and exports is only around USD 106 Bn,” he noted, citing data from CEIC, PSA, and BSP. “Our remittances are not growing so fast. It’s growing at a decent pace of 2-3%, maybe 5% at most,” he added.


The country’s operating cash flow in dollars has been negative in the last six years, except for 2020 when the pandemic hit, according to Neri, as he also pointed out that the Build, Build, Build meant a lot of imports by the government. “We had more deficits than surpluses in our operating cash flow versus the rest of the world,” he said, referring to the last six years’ performance.


The next 18 months

Businesses will have to grow by about 11.5% on average, Neri pointed out. “Depending on which sector you’re from, minimum of 5%, because if you add inflation and growth, 6.5% plus 5%, that’s about 11.5%,” he said, adding that cost of borrowing will probably continue to go up. “Better to secure your loan, the earlier the better,” he said.


“The peso will be weaker,” according to Neri. “It’s been weaker already the last six months. Because the peso is really going to get weak, our forecast of Php 55.30 is very conservative.” 


As to dollar requirements of businesses, Neri noted businesses should already lock in their profits by buying dollars now for transactions that will be made in the last quarter of the year even as the rate goes down to Php 52 to USD 1. “At least you feel secure that you’ve been able to lock in your profit if you buy dollars now for transactions that will be made in September, October, before Christmas happens,” he said. 


“So to make sure that your cost on your dollar expenses is locked in at Php 57 or Php 56 or Php 55 in a few weeks, hedge now, because if not, you might end up buying at Php 60/dollar by Oct Nov, when you need your imports to come in.” 


Moreover, Neri said that if businesses can lock in at a certain exchange rate where most of their imports are dollars, they can also try to look for other sources outside the U.S. “For example, if your inputs are from Taiwan, you're not that worse off than if most of your imports are from the U.S. because the Taiwanese dollar also weakened against the US dollar,” he told the BPI business clients present. 


Neri also mentioned a number of foreign exchange products offered at BPI. To know more, they can simply visit the BPI website or branch, or talk to their account officer.


The fast economic recovery is contributing to the weakening of the peso resulting in higher interest rates, according to Neri. 


“Interest rates will probably continue going up to defend the weakening peso, and it’s not just because the U.S. is hiking rates. It’s because our economy is recovering rather fast– local demand is picking up fast, unemployment is low, we are borrowing more, our loan growth is 10%–all of these point to a strong recovery in domestic demand, seen in tourism, restaurants demand but they’re contributing to the weakening of the peso, and therefore higher interest rates,” Neri explained.


However, he added, the Philippines had seen bigger hikes in the past, and the recent 75 BSP interest hike is “peanuts compared to the history of rate hikes in the Philippines, which we managed to survive.

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