Positive prospects

A friend I met recently in a social gathering took me aside and said, “Hasn’t anybody told our current economic managers that government spending is an important part of our GDP (gross domestic product)?” He was obviously alluding to the second quarter slowdown in the economy that was caused primarily by a dramatic drop in public construction. I just smiled quietly, not inclined to go into an involved discussion of why GDP growth isn’t necessarily the best yardstick of our economy’s health, or why the quality of our economy’s growth had actually been better, even at the slower rate. I have already written in this space on both points before.

Later at dinner in the same gathering, I found myself among bankers at the dinner table. And while I began hearing the same lament about slow government spending dragging the economy down, I heard through the evening conversation enough positive news to convince me that good things lie ahead for the Philippine economy. And my banker friends felt the same way, even in the face of perceived external threats from the troubled European and US economies. Banks can indeed be a good barometer of economic activity. In particular, growth in demand for bank loans is clear indication of investment appetite in the business sector. The level and growth of consumer loans mirror consumer confidence, which in turn mirrors expectations of the consumers who would be more inclined to borrow if they feel more secure about their jobs, hence incomes. Loan repayment rates reflect the health of both businesses and consumers, directly affecting their capacity to service their bank loans. Thus, if the bankers are happy, it must be a sign that the economy is generally in good shape.

So what were my banker friends so happy about? Our encouraging dinner conversation spanned several topics that included China, BPOs, shipbuilding, housing and public-private partnerships (PPPs). Let me go over each in turn.

The good news with China—at least from our point of view—is the bad news within China.  Its labor costs have been rising, its prices are going up rapidly, factory workers are reportedly getting harder to find, and costs of doing business have generally risen. One reason, I am told, is that the one-child policy of recent decades has led to a generation of pampered young adults who have no desire to become factory workers, but prefer white-collar jobs instead. A banker spoke of a Filipino-Chinese client with a factory in China, many of whose workers chose not to return to work after a long holiday, prompting him to send buses to the workers’ homes just to get them back to work. In the face of such labor market developments in China, this banker is now seeing clients pull production operations out of that country and relocating back to the Philippines. The same has in fact been reported in the international press: more and more American companies in China are reported to be relocating operations back to the US mainland. It seems that China is becoming less and less the threat that many of our industrialists had heretofore feared, and more and more an opportunity as a huge market to sell our own products to. And yet it wasn’t too long ago that we were all describing China as factory to the world. Well, it won’t be for too long, and this bodes well for our own manufacturing sector in the medium to longer term. If we do things right, our own stunted industrialization may yet be able to take off.

The business process outsourcing (BPO) industry, our banker friends tell us, has been a consistent major source of loan demand. The rapid growth of this industry is now well known. At its peak, it saw an annual growth rate of 40 percent, and has stabilized in the 20s, still a brisk growth rate by anyone’s standards. And the BPO loan demand is not just seen in Metro Manila, but in banks’ countryside branches as well. The industry has been spreading out all over the country, wherever there are colleges and universities, and where telecommunications facilities are up to date. I recently wrote of the industry’s now significant presence even in Tacurong City, right at the doorstep of the Autonomous Region in Muslim Mindanao. The good thing about this industry, this banker observes, is that it gets better for us as the western economies get worse, as their companies turn to outsourcing to cut costs.  We are now the leading country in the world for voice-based BPOs (call centers), and second only to India for overall BPO (i.e. including design, transcription, animation, etc.).

I learned that the Philippines has also been making great advances in ship breaking and shipbuilding, and our major banks are providing substantial financing for this growing heavy industry.  Apart from a pioneering enterprise in Cebu, new companies have established much larger operations in Subic, and promise to put the country squarely in the international shipbuilding map. As an archipelagic country, we should have been into shipbuilding in a big way a long time ago. While somewhat belated, it is finally happening, and I expect the industry to be a major contributor to the country’s looming industrialization.

Finally, I noted how my banker friends prefer to look beyond the current hurdles slowing down the government’s PPP infrastructure projects and public housing programs, expecting these to be major drivers of growth once problems are sorted out. They see it not as a question of if, but one of when the projects will finally come on stream.  And when they do, they expect the economy to zoom ahead. Meanwhile, the ball is on our economic managers’ court, and we all hope they could come out swinging.

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