Assessment: Macroeconomic Case for
A Country s Current Economic State
THE ECONOMIC CASE FOR PHILIPPINES
Philippines is now classified as a newly industrialized economy. This means a country is moving
away from being a resource-driven economy, forgoing using natural resources for means of
economic production, to an export-driven economy. Abandoning the natural resources as a major
potential tool for building a robust economic foundation has its cost. The decision for moving to a
new type of growing strategies has left the agricultural sector further in the bottom by not being
provided the highest priority to invest in machineries and initiatives to improve the assets to be
used in agrarian operations. The Philippines pride itself of tourist destinations, land and maritime
wildlife species and picturesque landscapes because of its abundance in forestry, mountains, hills,
volcanoes, seas, rivers, beaches and bay. A profound capital and untouched resources is either left
idle, in ruin by the drought and flood, or undergoing inefficient cultivating process and high
production costs. The stagnated state of productivity in the agricultural, forestry, and fisheries
section (see figure 1) hurts the population working for that sector, particularly the low-income
families residing in the rural states. The farmers and fishermen comprising the majority of the
population are trapped in earning low-to-minimum wages. This further fuels the income inequality
in the country.
Figure 1. Labor Productivity by Sector (Source: Philippine Statistics Authority)
Due to this process, migration of the rural population continued on to the urban cities in Luzon,
particularly in the capital of Manila wherein international and local business headquarters and top
performing Universities reside. Sudden pour of population in the developed states without the job
creation needed to swallow its increasing available supply of workers has led to discouraged
civilians and the rise of poverty slums around the main city. The speed of increasing working age
population (see figure 2) if then not be able to meet business standards of an above minimum wage
earner with reasons of an incomplete education or not obtaining any third level degree will
decrease the labor participation rate.
Agriculture, Forestry and
Figure 2. Summary of Projected Population by Five-Year Interval (Source: Philippine Statistics
Zooming in on the country s GDP in an industry origin approach, the country is being driven by the
services sector (see figure 3)1. Its champions are the Trade and Repair, Motor Vehicles and
Household goods sector, followed by the Real Estate business, and the other services (The other
services sector can be attributed to the arrival of Business Processing Outsourcing firms wherein
the Philippines surpassed India as the leading call center industry in Asia).
Figure 3. Gross National Income and Gross Domestic Product By Industrial Origin (Source:
Philippine Statistics Authority)
Although the biggest sector with economic production can be allotted to the service sector, the
industry s manufacturing sector exceeds both the motor vehicles & household sector and real estate
business (see figure 3a)2 altogether because of its rise in productivity. Granted that the advent of
1 Unit in million pesos and at constant 2000 prices
2 Unit in million pesos
technology managed its way to be utilized effectively, the colossal share of the manufacturing
industry is also credited to the country s export portfolio wherein the trade of machineries and
equipment comprises the majority of the products being sold to other countries (More of this topic
on trade on later pages).
Figure 3a. Gross National Income And Gross Domestic Product By Industrial Origin (Source:
Philippine Statistics Authority)
Then again, middle and upper class population are enjoying the growth of the industrial and service
sector of the country. From 3.3%, 'other services' grew to 8.0% in a year. The increase in demand of
Motor Vehicles and Household Goods boosted the sector from 5.7% to 6.9% (see figure 3b)3.
Adapting an open-economy style, joining global markets, and opening itself to trade, the industry
3 Unit in Percent Rate
2013 2014 2015
a. Agriculture and forestry
a. Mining & Quarrying
d. Electricity, Gas and Water
a. Transport, Storage &
b. Trade and Repair of Motor
Vehicles, Motorcycles, Personal and
c. Financial Intermediation
d. R. Estate, Renting & Business
e. Public Administration &
Compulsory Social Security
f. Other Services
and service sectors are driving the Philippines economy at this state. The population of urban cities
is meeting the demand, and the prosperity of these sectors is augmented and continuing.
Figure 3b. Gross National Income and Gross Domestic Product By Industrial Origin (Source:
Philippine Statistics Authority)
With the labor market getting opportunity from the upsurge of the industrial & service sectors, the
employment rate has increased from 88% in 2005 to 94% in 2016 (see figure 4). By economic
standards, the economy is operating at a current full employment rate. This, however, can later
spur on inflation, with aggregate demand increasing faster than supply.
Figure 4. Philippines Employment Rate 1995-2016
Concluding to the data that the population has increased its spending capabilities and along with
the rise of wages (see figure 5) and influx of remittances (see figure 6) from overseas Filipino
workers4, the population has more income equipped to be spent and more goods and services will
later on be consumed and thus filling the cycle of the nation at its expansionary phase.
Figure 5. Philippines Average Nominal Wages 2001-2016
Figure 6. Philippines Remittances 2006-2016
Meanwhile, the inflation as expected is a steady volatile uptrend and the Consumer Price Index
remains on an uptrend (see figure 7) due to a lot of dynamics. The wage to production ratio being
greater than one is an aspect; increase in the cost of production or the quality of the goods is also a
factor. The upturn in the standard of living must have been the consequence in improving the
education system, the hospitals, and infrastructures. Now that more people can afford a better
lifestyle, it has continued to race the prices up but it leaves a larger gap for the low-income families
to cross over. Increase in overall aggregate demand will further push inflation and shrinkage in
supply of labor due to an almost all time low of unemployment rate will then further increase
wages and prices.
4 The number of Overseas Filipino Workers who worked abroad at any time during the period April to
September 2014 was estimated at 2.3 million (Philippine Statistics Authority)
Figure 7. Philippines Consumer Price Index vs Philippines Inflation Rate (2006-2016)
Continuing on assessing the country s macroeconomic condition, the Philippines comparing to its
neighboring states and other countries who undergone the same economic transition as a newly
industrialized economy is currently performing at the lowest rank (see figure 8)5. If we re assessing
the Philippines growth alone, we can attest to the fact that the economy is indeed performing well
(see figure 9) but relatively speaking, the Philippines is underperforming. There are more
opportunities to grow, financial returns currently untapped, and social returns and labor market
waiting to be further cultivated. More of this topic, reasons cited for underperforming is the
infamous corruption and political instability6 and lack of proper governance. All of which is a
dominant determinant for economic growth and poverty reduction.
Figure 8. Philippines’ GDP vs India’s, Mexico’s Turkey’s Indonesia’s South Africa’s Thailand’s
and Malaysia’s (Source: World Bank)
5 Side note: Although China is also part of the newly industrialized country shift, comparing it to other
emerging markets surpasses the other countries standard
6 read the 10 Billion Peso Priority Development Assistance Fund scam in 2013
Going back to the Philippines GDP growth jump as it enters the 2000 era (see figure 9); there will
be a fine line between a GDP driven by increase of production and consumption and a GDP growth
powered by hyperinflation as it proceeds through the 2020s. Continual increase in wages as
discussed before and indulgent spending will trigger an economic bubble as a main driver of GDP.
To be able to combat massive inflation strike, aggregate supply must increase by progressing
forward with enhanced productivity and efficiency. Cumulative productivity will offset the inflation
and promote economic growth.
Figure 9. Philippines’ GDP growth -2012 (Source: World Bank)
In an investor s point of view, riding with the boom of the economy can do well for an investment
portfolio. Investing in the Philippine Stock Exchange index fund7 will generate positive returns
during an expansion phase and realize the benefit of growing with the inflation rate. The positive
pace of the annual GDP growth rate (see figure 10)8 guarantees the decrease of unemployment,
giving rise to consumerism and increase in profits of businesses in the industrial and service sector
in the long run.
7 Disclaimer: this is not a persuasion or a recommendation of investments, however, assuming the increase in
spending will eventually increase the profits of business sectors then all else equal, the increase of profit will
later on reflect the stock price.
8 At Constant 2000 Prices
Figure 10. Philippines GDP Annual Growth Rate 2006-2016
Furthermore, breaking down the composition of the Philippines Gross Domestic Product9 (see
figure 11) displays the lead of household consumption followed by the export and import of goods.
In the year 2008-2010 a decent trade surplus occurs but then shadowed by year 2011-2015 by a
trade deficit (see figure 12). The trade deficit associates with the expansion phase leading to an
increase demand for imported goods by household consumers.
Figure 11. Philippines’ GDP in Expenditures Approach 2008-2015 (Source: Philippine Statistics
9 2015 GDP only includes 1st-3rd quarter
Figure 12. Philippines’ Trade Balance -2015 (Source: Philippine Statistics Authority)
Looking closely to the export side, Philippines major exported products10:
2. mineral products
5. vegetable products
7. chemical products
8. precious metals
11. plastic products
12. animal & vegetable bi-products
13. wood products
14. miscellaneous items
15. concentrated milk
16. animal hides
17. glass bulbs
18. cigarette paper
20. footwear & headwear
Accdg to the Economic Complexity Index (Hidalgo, 2009) Philippine ranks as the 49th complex
country in 2013, meaning that the exported products by the country are not at most fully
diversified but less unstable. Able to garner sources of income frome different type of tradeable
products (see figure 13) will help the country to withstand unexpected hindrance in export
10 Arranged as largest % of export to smallest from 2013 data (Source: MIT Atlas)
2008 2009 2010 2011 2012 2013 2014 2015
Top Export Destinations accdg to MIT Atlas:
1. Asia (38-42 countries)
China, Japan, Hong Kong, Singapore,
South Korea, Thailand, Malaysia,
Vietnam, Indonesia, India being the
2. North America (14-25 countries)
US, Mexico, Canada are the top
3. Europe (32 countries)
Germany, Netherlands, UK, France,
4. Oceania (18 countries)
5. South America (12 countries)
6. Africa (14 countries)
production whether a slump in prices11 or an increase in sudden cost of manufacture or a decline in
demand caused by a recession.
Figure 13. Philippines’ Portfolio of Exported Products (Source: MIT Atlas)
Philippines top trading partners is something to watch out for. As the country joined itself to a
wider and interconnected web of network, problems arising from speculative crashes and other
financial crisis in the economy of a major exporter will cause ripple effects to the country s own
economy. Disruptions will affect businesses and job employment.
Now the imported products12 as follows:
2. Mineral Products
4. Chemical Products
8. Vegetable Products
10. Paper Goods
11. Stone & Glass
11 This refers to the oil supply glut in 2014-15 coinciding with the falling demand of China, the largest oil
importer, wherein oil prices went from $125 per barrel down to $30 below causing major oil exporter
countries to suffer due to its large dependence on oil as a revenue stream.
12 Ranked from largest %of import to smallest from 2013 data (Source: MIT Atlas)
Top Import Origins accdg. to MIT Atlas:
3. North America
5. South America
Top import countries are China, Japan, USA, South
Korea, Other Asian countries, Singapore, Thailand,
Indonesia, Malaysia, Saudi Arabia, Germany,
France, Hong Kong, Russia, Australia, Vietnam,
India, UAE, Qatar, and Brazil
13. Wood Products
14. Animal & Vegetable Bi-Products
15. Footwear & Headwear
16. Precious Metals
17. Animal Hides
Proceeding to more monetary subjects, Philippine s Central Bank has been increasing its foreign
reserves since the start of 2000. Initiative to accumulate foreign reserves is significant in
controlling fluctuations in the exchange rate. This inflow of remittances by the OFWs managed to
strengthen the peso against the dollar. The exchange rate of the Philippine peso stays within the
range of Php 40 to 48 in the last 5 years (2012-2016) comparing to the exchange rate back in 2006
where it was trading at Php 55 to a dollar (see figure 14), making the exports costlier and the
imports cheaper. The weakening of the dollar against the Philippine peso makes Foreign Direct
Investment elusive and fluctuated over time (see figure 15).
Figure 14. Philippine Peso to US Dollar Exchange Rate 2000-2016
Figure 15. Foreign Direct Investment in the Philippines 2001-2016
Tourists on the other hand are still benefiting from the dollar-peso relationship. The lenient
affordability of living in a developing country caused visits to climb (see figure 16) as other
countries are experiencing affluence more and more so because of GDP outputs growing faster than
the rate of the Philippines .
Figure 16. Tourist Arrivals in the Philippines 2006-2016
In 2002, the Central Bank lowered its interest rates to 8% rate from its sudden spike to 15% rate in
2001. From then on it has continued its slide until it reached its present 4% in 2016. Note the
relationship between the Interest rate and GDP growth rate of the country (see figure 17). From the
high employment rate, escalation in remittances, increase in tourist arrivals, and the leadership of
service sectors and household consumers, the economic activity is hitting its sweet spot from the
splurge of the Filipino consumers. Monetary policies are being maneuvered to accommodate this
fever as interest rates keeps on going down to spur more borrowing13 (see figure 17a) which in turn
amplifies the spending capabilities of the consumers to purchase more goods and services.
Figure 17. Relationship of GDP annual growth rate with Interest Rate 2001-2016
13 Bank lending rates moves with the Philippine interest rates set by its Central Bank
Figure 17a. Philippines Bank Lending Rate 2001-2016
Note in Figure 18 how consumer spending climbs with consumer credit leaving clues that most of
the spending are fueled by debt. In the data in 2011 to 2012 (see figure 19), we ve seen nominal
wages beating debt but its increase is not enough to surpass the inflation-driven prices of the asset
Figure 18. Relationship of Consumer Credit with Consumer Spending 2008-2016
Figure 19. Relationship of Consumer Credit with Average Nominal Wages
Businesses can also gain from the fall of interest rates as lending gets easier to acquire and an
access to finance to acquire machineries and equipment is a helping hand for the sectors to produce
more goods for the increasing demand of the population. The dip to 3.4% interest rate (see figure
20)14 managed to spark the lending activities to the private sector to an increase from 36015 to 460
in two years.
Figure 20. Relationship with Interest Rate and its effect on Volume of Loans to Private Sector
Increase in the money supply from 2006 to 2016 (as the expected effect of lowering interest rates)
adds to the expansion phase of the country (see figure 21a16 and Figure21b17)
Figure 21a. Money Supply M0 with M1 2006-2016
14 Data of loans to private sector in year 2014 and below are not publicly available
15 Units in Million
16 Data shows the M0 and M1 or the money classified as coins, notes, and cash
17 Data shows the M2 & M3 or the money clustered in savings, timed deposits and money market funds
Figure 21b. Money Supply M2 & M3 2006-2016
Performance of the PSEi Fund reflects the consumer activity of the country and has been riding
along the indulgence of buying (see Figure 22); P/E ratio already performing at 20 times the earning
back in 2015 (Rappler, 2015) is a determinant signal for an expensive stock. Interestingly, the P/E
of PSEi reflects the whole market; top industries are now selling at an all-time high and may result
to a bubble. Although consumer confidence is still low at a negative 5.7 (see figure 23), it has been a
positive performance from the negative 25 in 2015. Persistent advances in consumer confidence
will be the effect of the optimistic labor and consumer market.
Figure 22. PSEi Fund Market Price per Share 1992-2016
Figure 23. Consumer Confidence 2012-2016
Note in Figure 24-26: Due to a constant increase in GDP, the government debt is decreasing relative
to the size of its GDP. The government therefore receives more leverage to borrow and overspend
its revenue and distribute its income stream back to the lower income families. Poverty and low
education completion rates are two main problems still unsolved by decades of shifting powers
amongst politicians. Further research can determine whether the government is investing on
productive projects rather than one-time income stream for the people at the bottom of the trickle-
Figure 24. Debt to GDP 2006-2016
Productivity rate is growing in the three main sectors: agricultural, service, and industrial.
GDP is growing steadily. The country is at an expansion phase.
The Service (BPO, Household Goods, Motor Vehicles, and Real Estate) and Industrial Sector
(Manufacturing) are driving the economic engine; Main expenditures come from the
Household Sector and Export of Services (OFWs)
Economy is operating at a full employment rate. In a Philip s curve principle, low
unemployment rate will result to high inflation rate.
Aggregate Income and Demand will rise in the coming years sparking spending activities.
Nominal wages has been increasing. Increase in wages may push prices further upwards.
Economic Complexity Index or the export portfolio is positive or going into a more
Trade deficit resulted in the past years. Consumers demand and can afford more imported
Philippine peso is strengthening against the dollar due to influx of remittances. Meanwhile,
the Central Bank is increasing its foreign exchange reserves to prevent it from dipping.
Foreign Direct Investment still fluctuates. Tourist arrivals are growing.
Inflation rate is at a steady pace; Consumer Price Index has been increasing since.
Interest rates and bank lending rates are down to 4%; Money supply (M0, M1, M2, M3)
Consumer credit and spending climbs with the lowered interest rate.
Philippine Stock Exchange Index Fund is trading at 20 times the earnings.
Business cycle is currently at an inflationary/expansionary gap.
Government s external debt alone is still at large while Debt to GDP is decreasing.
Deficit spending aims to revitalize lower income families.
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