MBA Student: Kristel Ann A.

Plamenco Subject: International Business ARTICLE: Credit Suisse hikes Phl GDP growth forecast
By Lawrence Agcaoili (The Philippine Star) Updated March 18, 2012

Professor: Conrado V. Bergantinos, DBA

MANILA, Philippines - Zurich-based Credit Suisse has hiked its economic growth forecast for the Philippines to 3.5 percent instead of three percent this year on the back of higher government spending and recovering exports sector. Santitarn Sathirath, an economist of Credit Suisse, said in a study that both exports and government spending that served as key factors holding back growth last year are now showing signs of turnaround this year. We are increasing our 2012 real GDP growth forecast to 3.5 percent from three percent earlier, Sathirath said. The investment bank said the countrys merchandise exports would pick up starting the second quarter due to improving semiconductor book-to-bill ratios and would support both the GDP and current account balance assuming there is no full-blown European crisis. Furthermore, he pointed out that Credit Suisse sees improvement in the governments budget disbursement with the launch of the Public Private Partnership (PPP) scheme after cautious spending by the Aquino administration last year. We think the key tool for boosting growth is fiscal policy as the government is looking to put $16 billion or about seven percent of GDP in rail and airport projects. These planned expenditures form part of the governments spending plan, he added. The government hopes to keep the countrys budget deficit to 2.6 percent of GDP this year after trimming the shortfall to two percent of GDP last year due to cautious spending. While we remain cautious about the execution of policy, we have seen some promising signs that the government can deliver the promised spending when it really wants to, he said. The countrys GDP growth slackened to 3.7 percent last year from 7.6 percent in 2010 due to the weak global trade and government underspending. This year, the Cabinet-level Development Budget Coordination Committee (DBCC) sees the countrys GDP expanding between five percent and six percent. Sathirath also pointed out that Credit Suisse decided to slash its inflation forecast to 3.2 percent instead of 3.7 percent that could boost household real spending. While year-on-year inflation is likely to pick up in the second half of the year, the speed of increase will depend largely on global oil prices as the government will not subsidize fuel prices, he said. According to him, a Dubai oil price of around $120 per barrel is still manageable for the Bangko Sentral ng Pilipinas (BSP) that has set an inflation target of between three percent and five percent this year and next. After cutting interest rates by 50 basis points so far this year, the economist said the BSP would likely keep the overnight borrowing rate at a record low of four percent and the overnight lending rate at six percent this year. The BSP is likely to stay put for the rest of this year. We maintain our expectation that the BSP will keep the policy rate at four percent going forward. The policy rate is already at its lowest level, Sathirath said. Requirements: Opinion on the shared case. 1. 2. 3. Impact of GDP in attracting business investors. Is it worth it to invest in the Philippines? Consider the current credit rating of the Philippines in the world market.

MBA Student: Kristel Ann A. Plamenco Subject: International Business IMPACT OF GDP IN ATTRACTING BUSINESS INVESTORS.
Why is it important?

Professor: Conrado V. Bergantinos, DBA

Gross domestic product (GDP), is the measure of the value of the goods and services produced by a countrys economy within a given time period. GDP is one of the most comprehensive and closely watched economic statistics. This is because several government institutions make key decisions concerning the economy using it. The White House and Congress uses the GDP statistics to prepare the Federal budget, the Federal Reserve formulates monetary policy basing on the same. Wall Street and the business community also depend on the GDP to prepare forecasts of economic performance that provide the basis for production, investment, and employment planning. Due to the procyclic nature of the GDP as an indicator, it is the most obvious statistic to look up to when judging the present status of an economy any where in the world. This statistic is also used to determine the poverty index of an area and will thus influence in a great way the governments investment strategies towards improving the area. How is it compiled? GDP is composed of goods and services that are produced for sale in the market. It is however worth noting that there are goods that are produced but do not really go into the market directly. These include services such as the defense services provided by the Federal Government. Education services provided by local governments and other emergency housing or health care services provided by nonprofit making organizations such as the Red Cross also fall in the group of non-market productions, Homes or business structures that are owned and occupied by the same persons all have to be taken into consideration when computing these statistics. However, not all productive activity is included in GDP. Some activities, such as the care of one's own children, unpaid voluntary work and illegal or black-market deals are not included because they are difficult to evaluate, as no real documentation is available following such transactions. GDPs impact on Forex GDP simply portrays the way money is earned and spent on a regular basis, it is therefore has a very direct relationship to the foreign exchange rate. When the production is high and it translates into good revenue the currency grows stronger. There are however other factors that may lead to negative trends in the forex market. Take the situation of GDP getting high due to some factors such as illegal dealings such as money laundering or criminal activity such as huge ransoms in the case of piracy in the high seas. The effects would lead to inflation and the dollar may loose its purchasing power, as there would be too much money circulating that has not actually been earned. This would reduce the demand for the dollar and the forex rates would have to come down. If the inflation persists, the federal bank may be compelled to adjust interest rates in order to contain the situation. Such a move automatically affects the forex rates. There is a likely chance that a high GDP may attract foreign products into the country from other countries. If many countries target the U.S. as their export destination, it is likely that the country may surfer a balance deficit due to too many imports at the expense of local exports. The country may find itself importing more than their exports can match, a situation that may reduce the dollar rate internationally.

MBA Student: Kristel Ann A. Plamenco Subject: International Business

How does GDP affect the stock market?

Professor: Conrado V. Bergantinos, DBA

The performance of the stock market is always directly linked to liquidity among the players. It is thus directly linked to the GDP in the sense that a high GDP will mean increased activity at the stock markets and a low GDP will translate into a decrease in activity as many people shy away from the markets due to problems such as liquidity preference. Most investors like to hold onto cash when they are running low on the same. The reactions when the economy is registering a high GDP is the demand for shares going up as many people have some surplus money to put aside. They will always opt to put it into stocks and hold it there speculatively with the hope that it can be useful when the economy takes a down turn and they are in need of cash to bridge the gap. Introducing new stocks into the market should be done in a tactful manner. For this reason, many companies or smarter investors will tend to offload the shares they have held for some time during low seasons at times when the GDP is high as they are likely to fetch good prices. To make good profits in the stock market, a smart investor should be observant of the GDP performance. He/she should then be smart enough to buy stocks at low prices during periods when the GDP is low and then hold it strategically until the GDP improves and ordinary people start looking for stocks to act as stores of value. They are thus likely to buy them at profitable rates from the smart investor. A good GDP indicator attracts foreign investors into the economy. This trend will directly result in the improvement of prices of companies that these foreign investors may choose to invest. At that even long term investors are attracted into a market that has a steady and good GDP as these gives them the predictability that they need when making long term investments/. Erratic economies with an equally erratic GDP do not attract any long-term investments from foreigners for fear of the unforeseen eventuality.

IS IT WORTH IT TO INVEST IN THE PHILIPPINES?

I can say yes.. . to invest in the Philippines is worth taking during these times. Emerging market economies including the Philippines would continue to fuel global economic growth amid the projected slowdown in advanced economies led by the US and Europe. Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the economic growth story of the Philippines is not a fluke as a series of reforms helped the country survive the uncertainties in advanced economies led by the US and the debt crisis in the Europe. Tetangco told participants of the two-day Philippine Investment Forum titled The New Beginning sponsored by Euromoney Institutional Investor PLC that the Philippine economy is on an upward growth trajectory underpinned by stable macroeconomic conditions. This is not a false start, the Philippines has indeed come on its own. The growth story is not a fluke, it is the result of a series of reforms, reforms that were critically thought of and well executed, Tetangco said. Amid negative external developments led by the economic uncertainties in the US and the debt crisis in Europe, the Philippines managed to post a gross domestic product (GDP) growth of 3.7 percent last year or slower than the 7.6 percent expansion recorded in 2010. The Cabinet-level Development Budget Coordination Committee (DBCC) sees the countrys GDP expanding between five percent and six percent this year.

MBA Student: Kristel Ann A. Plamenco Subject: International Business

Professor: Conrado V. Bergantinos, DBA

The BSP chief stated in his keynote address that emerging market economies including the Philippines would continue to fuel global economic growth amid the projected slowdown in advanced economies led by the US and Europe. Global growth remains relatively unsteady and fragile. In fact, the global economic growth outlook for 2012 is expected to be tilting towards a further slowdown but emerging and developing countries will continue to outpace advanced economies in terms of economic growth, he added. The International Monetary Fund (IMF) stated in its January 2012 World Economic Outlook (WEO) that the US would book a GDP growth of 1.8 percent or the same as last year while the Eurozone would experience a contraction of 0.5 percent after expanding by 1.6 percent last year. Furthermore, the multilateral lender sees the GDP growth of the Association of Southeast Asian Nations (ASEAN-5) including the Philippines to expand by 5.2 percent this year from 4.8 percent last year while that of China would slowdown to 8.2 percent from 9.2 percent.

Tetangco said the Philippines would benefit from the countrys strong external payments position with its gross international reserves (GIR) hitting record levels and balance of payments (BOP) posting a surplus as well as demographic dividends.
While some countries are facing problems relating to their aging population, the Philippines is set to enter its demographic sweet spot. Studies have shown that extended periods of accelerated economic growth have coincided with the countries entering this period, he explained. According to the United Nations (UN), the Philippines is the last major Asian economy to benefit from this demographic dividend by 2015 as the median age of the country is only 22.2 years well below other young countries in Asia. On the basis of this potential to capitalize on these demographic dividends, the Philippines is well placed to ramp up its growth trajectory, he said. The BSP chief explained that the higher economic growth trajectory would be achieved amid a benign inflation environment and appropriate monetary policy supportive of growth.

Further more, Zurich-based Credit Suisse Group hiked anew its economic growth forecast for the Philippines, this time raising next years gross domestic product (GDP) growth on the back of improved political stability and the take off of the governments major infrastructure program. In a report, Credit Suisse economist Santitarn Sathirath said the investment bank raised its GDP growth estimate for the Philippines to 4.8 percent instead of 4.3 percent next year.

We have revised up our 2013 GDP growth forecast for the Philippines to 4.8 percent from 4.3 percent, but have
kept our sub-consensus 2012 estimate at 3.5 percent. We have become more optimistic about the countrys 2013 and longer-term GDP growth prospects in light of the improved political stability and positive developments in the infrastructure space, Sathirath said. Just last month, Credit Suisse raised the countrys GDP growth forecast to 3.5 percent instead of three percent for this year due to higher government spending and recovering exports sector.

MBA Student: Kristel Ann A. Plamenco Subject: International Business

Professor: Conrado V. Bergantinos, DBA

This reflects our view that some improvement in the structural drivers explained above will boost the long-term growth outlook while having little impact on 2012 GDP. We recently increased our 2012 growth forecast to capture the better cyclical export outlook, he added. This, according to him, would result in higher trend growth for the Philippines at around five percent instead of the current trend of 4.5 percent to 4.75 percent. We continue to view the governments emphasis on transparency and spending controls as being likely to put a lid on the cyclical growth outlook but also to benefit the longer-term growth outlook, the economist explained. The Cabinet-level Development Budget Coordination Committee (DBCC) sees the countrys GDP growth expanding between five percent and six percent instead of seven percent to eight percent this year. Weak global demand and cautious spending by the Aquino administration pulled down the countrys GDP growth to 3.7 percent last year from 7.6 percent in 2010. Sathirath is convinced that there are signs that the bottom of the economic cycle has been reached.

Better growth in the US and the apparent turn in the global electronics cycle bode well for the countrys export and investment outlook. The nature of the Philippines exports (mainly electronics) and investment makes its growth more vulnerable to the global economic cycle, he added. He said one of the structural drivers of long-term GDP growth is the rate of capital accumulation, often measured by the real investment to GDP ratio. The public private partnership (PPP) program of the Aquino administration is expected to finally take off this year. So far, the Bangko Sentral ng Pilipinas (BSP) has so far slashed interest rates by 50 basis points to boost the economy. The BSP slashed interest rates by 25 basis points last January 19 and by another 25 basis points last March 1 due to benign inflation outlook and fragile global economic growth.
This brought the overnight borrowing rate back to a record low level of four percent and the overnight lending rate to six percent.