A year of two stories
What an amazing year this has been. It was almost schizophrenic in the stark contrast between the first and second halves of the year. And as we ended the year, what can we look forward to in 2014?
The first half of 2013 was all about the good news on the Philippines. We went through credit-rating upgrades by major ratings agencies and gross domestic product (GDP) growth was flying, beating even China’s. Interest rates dropped to record lows and despite the massive liquidity inflation was under control. The exchange rate dropped to P41 to the dollar. The Philippine Stock Exchange index (PSEi) rose to an all-time high on May 15, breaching 7,400 before dropping back slightly as investors feverishly poured in funds and foreign money flowed in, making the Philippine stock market the best performing market in US dollar terms.
After May 15, however, the euphoria fizzled out, like bubbles evaporating from champagne and turning it flat. The US Fed announced the possible tapering of its bond-buying program, and the specter of an end to the supply of cheap money loomed. Foreign funds started to exit the Philippines. Indonesia, India, Thailand and Malaysia all started to encounter economic problems and much like a house’s price drops in a problematic neighborhood no matter how solid or beautiful the house, the negative sentiment led to further selling and the market went into free-fall, dropping over 20 percent from its peak.
The PSEi closed the year flat at 5,889.83, up just 1.33 percent year-to-date and actually down 6.23 percent in US dollar terms.
But nothing was to be as bad as the devastation wrought by the twin disasters of a strong earthquake followed by the most powerful typhoon to hit land in history. The Bohol earthquake flattened priceless and irreplaceable centuries-old structures and Supertyphoon “Yolanda” tore through the Visayas in November. We suffered billions of pesos in damage but more tragically, lost thousands of lives. While the economic impact may be fairly limited given these calamities hit some of the more disadvantaged areas in the country, the human cost has been heartbreaking. Like the proverbial sunshine after a storm, however, the response of both the international community and the ordinary Filipino has been extraordinary.
So what do we watch out for this new year?
Unfortunately, storm clouds lurk on the horizon. Inflation may creep upwards and this could trigger monetary tightening, curbing spending and threatening the property sector. To the ordinary Filipino, this simply means higher prices.
We may see higher local bond rates and lower aggregate earnings growth as the banking sector is expected to underperform. Like it or not, the absence of PDAF and DAP may also slow down government spending.
More consolidations may take place, particularly in the banking sector and media (possibly the long-anticipated merger of GMA 7 and TV5?). And as 2015 nears and the Asean Free Trade Area (Afta) is implemented, confusion remains as to what exactly this means and how it will impact our various industries, specially those where many companies are not at the scale required to be able to compete effectively with our Asean counterparts. For the financial services industries such as banking and insurance, regulations have not taken shape, making it difficult for companies to plan their strategies for an Afta world.
Climate changes taking place all over the globe may make natural disasters unavoidable, and indeed they have been increasing in both frequency and intensity. Another major calamity, specially one that hits Metro Manila, could be the wild card that wipes out any gains that we make. Hopefully, however, we can improve our preparation and ability to withstand them given the Philippines is high on the list of countries most prone to natural disasters.
Still, the Philippines remains a sweet spot in Asia and despite a possibly volatile first half of 2014, it is forecast to continue its rapid growth over the next few years.
We won’t have election spending to drive GDP growth in 2014 but rebuilding efforts may offset this. And we may see some positive surprises. Perhaps an acceleration of PPP projects being bid out, or the revival of the mining sector particularly if it is able to get past legal and regulatory obstacles and address concerns of environmentalists.
Manufacturing has been declining for years, from a peak of 43 percent of GDP in the early 90s to only 31 percent in first half of 2012, but this year saw improved performance and we hope to see its continued revival. Perhaps a sign of its resurgence is the increasing industrial electricity sales.
And with the opening of the Belle Casino this year, we expect to see renewed interest in the gaming sector.
The high liquidity and winding down of special deposit accounts (SDAs) have led many to look for alternative investment vehicles and hopefully this continues to drive wealth management businesses. The mutual fund industry is extremely under-penetrated and despite a 36-percent growth in the number of accounts in 2013, there are only 226,000 mutual fund accounts in a country of close to 100 million, or a penetration of 0.2 percent.
The insurance industry has likewise grown rapidly at more than 30 percent a year for the past four years, but still remains at very low penetration rates compared to our neighbors. Less than 20 percent of the population have any form of insurance and with premiums at only a little over 1 percent of GDP, many are severely under-insured. The year 2014 should see continued strong growth in these industries.
Last year has truly been an extraordinary year marked by spectacular highs and lows. But we continue to be hopeful about the country’s future as fundamentals remain good. As with anything, however, vigilance, persistence and an unyielding drive to succeed coupled with the will to do things the right way are what will lead us to sustained economic growth.
The author is chief executive officer of Sun Life Philippines.
