Current Event "Vignettes" and Unfolding Stories Toward 2015
The World Economic Forum on East Asia ended on a high note last May 23 with Founder and Executive Chairman Klaus Schwab summarizing the key messages of 3 ASEAN leaders, “Economic development without social progress is not sustainable. Social progress without economic development is not possible. That is the challenge we have in front of us all.”
The Philippines hosted the World Economic Forum (WEF) with the theme “Leveraging Growth for Equitable Progress.” WEF Southeast Asia head Sushant Palakurthi Rao noted that the Philippines has grown economically and has had substantial efforts at promoting good governance. Last year, the country secured investment grades from 3 major international credit rating agencies –Standard & Poor’s, Fitch Ratings and Moody’s Investor Service.
On the horizon, the Philippines will host another prestigious event, the Asia-Pacific Economic Cooperation Summit (APEC) in late 2015. Pronove Tai & Associaties (PronoveTai) CEO Monique Cornelio-Pronove sees the themes and talking points of APEC will follow the dominant issues of rethinking economic growth, trade liberalization, disaster risk resilience and infrastructure discussed in WEF.
In a meeting of the Department of Trade and Industry (DTI) and Department of Foreign Affairs (DFA) with representatives from APEC Business Advisory Council and the ASEAN Business Advisory Councils last February, Trade Undersecretary Adrian Cristobal Jr. stressed that government and private sector must remain in dialogue “through sustained and constructive engagements that will help us in identifying areas of concern in the ASEAN and APEC economies. Both are our markets for exports, raw materials and intermediate goods as well as a source and destination of investments.”
The road to APEC and regional integration is quite a circuitous one. As 2015 draws near, PronoveTai sees a number of challenges arising which may prod many to ask if the Philippines is indeed ready for regional integration. The following themes and talking points are drawn from recent events, news, field work and conversations with clients providing us with ‘vignettes’ or unfolding stories that help provide some context and understanding on the huge impact that ASEAN integration has on our nation.
1. Anti-Corruption and the Challenge to Global Business Ethics
‘Integrity initiative is a private-sector led effort to help the Philippines escape from the vicious cycle of corruption that not only has exacerbated poverty but also prevented the operation of a level playing field for business.’ This initiative is spearheaded by the Makati Business Club and the European Chamber of Commerce and was launched in late 2009. Participating businesses sign an Integrity Pledge promising to prohibit bribery in their organization and promote integrity among their employees. CEOs, COOs, Managing Directors, Country Reps, or other senior company officials sign the Integrity Pledge as a clear commitment to changing business culture for the better.
2. Increase in Foreign Direct Investments
The Bangko Sentral ng Pilipinas said that the sustained increase in net inflows continued to reflect strong investor confidence in the country’s solid macroeconomic fundamentals. Net inflows of foreign direct investment (FDIs) reached $597M in April after falling to $350M last February. FDIs this April rose more than four-fold from 2013 levels. From January to April, FDIs reached $2.4B, closing in on the BSP’s official forecast for the year of $2.6B.
In 2012, the Philippines’ share in ASEAN’s net foreign direct investment flow is a marginal 2.6%, which is smaller than Indonesia’s 18.7% and Malaysia’s 9.4%. NEDA Director General Arsenio Balisacan said that the Philippines needs to improve infrastructure, ease business conditions and strengthen human capital first before it fully opens up its economy.
3. Strategic Infrastructure
Strategic infrastructure, according the WEF, “is the backbone that interconnects our modern economies. The most strategic investments are functional and create the greatest impact in terms of economic growth, social uplift and sustainability.” Ideally, 5% of GDP should be the target for infrastructure spending / investments. In ASEAN, it is currently only at 1-2%. The capital markets of Asia are not that developed and there are no alternatives for huge reserves to convert to productive assets. These reserves need to be invested in productive infrastructure.
Energy Secretary Carlos Jericho Petilla expressed that around Php300B of fresh investments will be needed for sufficient power supply of electricity. This amount can build up to 16,676 kilometers of 4 to 6 lane expressway or more than 100 Luzon expressways, 1.5M classrooms, or 1.25M km of farm to market roads. However important roads and classrooms are, power is still needed to drive growth in infrastructure and education.
4. ASEAN Integration
“The Philippines has committed to integration by 2015, which aims to create single market and production base and to develop ASEAN as a highly competitive economic region.
The areas of cooperation under the ASEAN Economic Community (AEC) are: human resources development and capacity building; recognition of professional qualifications; closer consultation on macroeconomic and financial policies; trade financing measures; enhanced infrastructure and communications connectivity; development of electronic transactions through e-ASEAN; integrating industries across the region to promote regional sourcing; and enhancing private sector involvement for the building of the AEC.”
5. Urbanization and Poverty Reduction
According to the Global Monitoring Report 2013, “Urbanization matters. In the past two decades, developing countries have urbanized on a massive scale and this trend will continue in the future, with 96% of the developing world’s additional 1.4 billion people, by 2030, expected to live in urban areas. Urbanization has helped speed progress towards MDGs, including the reduction of poverty. However, urbanization is not a cure-all. If unregulated and poorly planned, it leads to growth of slums, and increase in pollution and crime.
Jointly produced by the World Bank and the IMF, the report stresses far reaching implications for unregulated urban growth in terms of access to basic services, sanitation and water supply, carrying capacity of the environment and human development.
6. Foreign Ownership
One of the critical points that may be up for discussion is the trade and investment restriction on foreign ownership. With favourable investor sentiment in the Philippines, now may be the best time to seriously discuss and consider opening the economy.
7. SME Development
One drawback for SMEs on harnessing the benefits of a single ASEAN market is little knowledge and awareness of support mechanisms available. The DTI noted most SMEs reluctant or are not equipped with the capabilities to harness mechanisms in financing, 24/7 support facilities and trade assistance. SMEs account for more than 90% of business enterprises in the ASEAN region, and employ between 50 to 99% of its respective country’s workforce.
In the Philippines, SMEs represent 99.6% of the operating business enterprises, and a large percentage of these are micro-entrepreneurs. For every 100 businesses, only 4 are considered large business so SMEs really play a significant role in providing jobs and generating income for local economies. Pronove sees immense growth potential for the SME sector and the 32% contribution to the country’s GDP can still achieve double-digit growth in the coming years.
8. Labor Mobility
“The Philippines has been very successful compared to the other ASEAN countries in terms of services and this is because of its strong English language skills and strong education system,” Jayant Menon, principal economist of ADB said. He warned that the Philippine education system may be focusing too much in developing overseas workers.
“There’s a lot of benefits that come from overseas workers through remittances and the like, but in a long term development plan, is the educational and training systems being too skewed towards exporting your greatest resource,” he said. “What you need to do long term is to create conditions to train your workers to stay at home and contribute to growth at home,” he added.
9. Inclusive Growth and Human Development
“The Philippine economy is consumption-based. We are ‘wired’ to acquire. Just look at how we are surrounded by malls!,” Pronove observes. Our economy is propped up by consumer spending fuelled by remittances. It is expected to remain robust this year, growing buy another 5% from last year’s total inflow of $22.8B. According to the BSP’s recent survey, “more families with members working abroad are now saving and investing. Those that apportioned their remittances to investment went up to 9.1% from 8% in the first quarter. Some 96.1% used the money to buy food. The number of families that bought appliances or consumer durables also went up to 28.4% from 22.9% “
10. Food Security, Resource Use & Sustainability
The Bureau of Soils and Water Management (BSWM) issued a warning that the Philippines is at risk of desertification, land degradation and drought due to climate change. The Department of Agriculture added that 45% of the arable lands in the country are eroded. Approximately 5.2 million hectares are severely eroded and 8.5 million hectares are moderately eroded.
The National Land Use Policy of the Philippines (National Land Use Act) has yet to be passed into law. This enables a Land Use Policy Council to prepare a National Physical Framework Plan to consolidate and harmonize regional physical framework plans and land use plans of cities and municipalities. Land use planning will be categorized into 4 major functional uses: a) protection land use, b) production land use, c) settlements development and d) infrastructure development.
11. Disaster Risk and Adaptive Capacity
In an interview with Ashvin Dayal, AVP and Managing Director for Asia of the Rockefeller Foundation, he notes the impact that urbanization has with the surrounding environment. He said that the impact of climate change is changing the frequency and intensity of storms and typhoons. Last year, there were 23 storms that hit the Philippines alone. The storms are also compounded by dramatic sea level rise, which create issues like coastal erosion and salinization of the ground water supplies.
“We’re seeing now that a diagnostic by the Economic Development Board of Asia estimated that close to $54 billion in damages per year on average over the last few years. We saw that in Bangkok in 2011 with the floods that hit Bangkok and the surrounding areas. The damage estimates were around $45 billion just from that flood incident. So we’re getting to numbers of economic impact, in addition to the terrible human impact, that I now think are of macroeconomic significance.
I was at the World Economic Forum in Asia in May and spoke directly to the Philippines Minister of Finance about this, and he was very worried about ultimately what effect these frequently occurring climate-related events are going to have on the not only GDP growth in his country, but also the region more generally.”
As a real estate services provider, Pronove sees an important role for the real estate industry in framing the discussions so they are more integrative. “We are talking about infrastructure, land, capital assets, living spaces - all of which impact heavily on human development. This is a good time to think hard about long term visions of good governance, peace and security and what our values are as a people. The ASEAN Integration challenges many of our beliefs, our way of thinking which deepens our awareness on how interdependent we all are. Even up to this point, we cannot grasp the full impact of regional integration in our lives but if we are able to start responding to the challenges now. This, I think, is already a big step forward.”