Lopez Holdings

Mr. Sergio Ortiz-Luis, Honorary Chairman
Mr. Samie Lim, President
Mr. Miguel Varela, Chairman Emeritus
Mr. Jose Pardo, former Secretary of Trade & Industry
Officers and Members of the PCCI,
Fellow Guests,
Ladies and Gentlemen:

Good afternoon to all of you and thank you for giving me the honor of speaking before you.
When the government announced the latest economic indicators and emphasized that GDP growth during the first quarter of 2007 had reached 6.9% on an annualized basis, it took most of us by surprise. We had been accustomed to seeing annual GDP growth rates in excess of 5% over at least three years now and this level of growth appeared to jibe with the economic realities as we observed them on the street. Business had been improving, the Phisix had risen uninterruptedly to now record levels, Government had pursued a more aggressive reduction of its budget deficit and remittances from OFW's abroad had continued to buoy domestic consumption. But close to 7.0% growth! That gets us nearer to what our neighbors like Vietnam, Thailand and Malaysia have been doing, never mind China and India. The question you have posed to us today is: can we sustain this higher level of growth?

Our best economists, at least one of whom is with us today, all have their respective takes on this question. So I will not even try to decipher the economic principles behind why this level of growth can be sustained or not. Instead, I will take a businessman's viewpoint and share with you my thoughts on what I think it will take for our economy to grow at this steeper curve.

The phenomenon of 6.9% GDP growth, at least during the first quarter, has been explained from the perspective of expenditures, as opposed to production, as follows: first, our economy's growth continued to be propelled by consumption spending, which averaged 5.9% over Q1, and this was sustained to a large extent by the continued strength of overseas remittances. Second, government spending grew by 13.1%, lifted no doubt by pre-election spending like road building, etc. A third component, surprisingly, was robust 9.1% growth in exports. In contrast, investment expenditures posted negligible growth, a mere 0.6%.

Asking if we can sustain a higher rate of growth is asking if each of these components of expenditure can continue at the same levels. Let's take them one at a time. Can remittances from abroad continue at the same levels and higher? Well, our overseas partners and friends like Balfour Beatty and British Gas take the view that if the current rates of growth of major world economies continue at their present levels, there will be an increasing shortage of skilled human resources of all types all over the world. You hear of the nurses and caregivers, the domestics, the seamen, the musicians, the pilots and the professionals that we supply the rest of the world, currently running at an estimated eight and a half million strong. What you do not often hear about is that Philippine companies are continually being stripped of our best engineers; our environmental, safety and health specialists; our quality control people; our maintenance mechanics, our commercial contract specialists and many other such hard-to-find-and-train skills. We simply cannot compete with the sort of salaries and benefits they are being offered in such far-flung places like Dubai and Louisiana. Yes, Louisiana. After Hurricane Katrina, Meralco lost many of its senior linemen and leadmen to the southern US utilities.

I believe that as long as there is no global recession, no great bubble bursting in China, or other such similar phenomena, then demand for Filipinos all over the world will continue and that their remittances to relatives remaining in the Philippines will also continue to prop up domestic consumer spending. But let me pose this question to you: can our economy afford to continue losing our skilled manpower over the longer term? Remember, we're not educating and training them as quickly as we're losing them. I will leave that question with you.

The second component is government spending. Can it continue to grow at double digit rates? Judging by what is happening at our tax and duty agencies of late, it would seem that the only way the government can fund such a high level of spending is either by borrowing more and running a higher deficit, or by doing a better job privatizing some of its assets. There is, of course, a third solution --“ improve tax administration. But you cannot improve collections by beating up on those who are already religiously paying their taxes. You have to start really going after those who are not paying their rightful share of taxes and that is something that seems outside the capability, not only of this administration, but of every other administration that has preceded it. I would offer the same observation in regard to the privatization of assets.

The third component is exports. Our exports are driven by global demand for electronic and semiconductor components and assemblies. There are those who currently project a slowdown in the market. Yet, I am encouraged by the investments in new plant and equipment that I see taking place. The US.0 Billion new plant that Texas Instruments will be putting up at Clark has been well advertised. But there have been others. Sunpower, for example, has just opened its largest assembly facility in the world for high-tech photovoltaics at our First Philippine Industrial Park in Sto. Tomas, Batangas. At our own joint venture with Sumitomo Electric for the manufacture of flexible printed circuits, First Sumiden, we have had to ramp up capacity each year for the past two years. But these are not static industries. We continually have to reinvent ourselves by taking on new designs and generations of products as margins on older generations are squeezed till we become uncompetitive. Our continuing success in export manufacturing relies on our ability to reinvest in new processes and equipment, and to retrain our people to produce new products competitively. The need to continually reinvest can be daunting for our local businessmen. Every time you do a major retooling, it is like betting the house anew. Ask anyone who has been in electronics and semiconductors. Ultimately, our ability to sustain our exports will depend on our ability to sustain investment in export manufacturing.

Which leads me to the fourth component. Investment expenditures, or just plain capital investment. I don't mean the speculative money that flows into our stock market and just as easily and quickly flows out. I mean money invested for the long term in industrial capacity, whether utility, process or manufacturing, for which there is normally no quick payback. During the first quarter, this stood at 0.9%, hardly a contributor to growth.

So, can we sustain 7% annual GDP growth? My immediate reaction is to say NO, we cannot, not with the current mix of contributors. For the short term, say two years, we might probably sustain the 5.0% up to 5.8% level on the strength of remittance-supported consumption, but not 7%. I can't see government spending growing at double-digit levels and exports will ebb and flow with the state of the global markets for electronic products.

But let's consider two equally important questions: can 5% annual growth be sustained over the long term, and is it enough? My sense is that without a significantly higher rate of investment in industrial plant and equipment, even the 5% level cannot be sustained over the longer term. Is it enough? Well that depends. If we are growing at 5% annually and our neighbors are growing at between 8% and 12%, then we are falling behind them with each passing year. And if we are growing at a nominal 5% but real growth is eroded by a high birth rate and the uneven distribution of benefits, then that will clearly not be enough for the vast majority of our fellow Filipinos.

Let me now offer a few observations about investment in our country. Our economic managers seem to have taken the view that since we are, for the moment, competitive as a country in call centers and other forms of business process outsourcing, we should leapfrog the industrialization stage and move directly into the services stage of our economic evolution.

I don't know enough about this industry and phenomenon to have a sense of how quickly it can grow, how long that growth can be sustained and how competitive we can be over the long term. What I do sense, however, is that call centers and other BPO centers will never be able to employ people in really significant numbers. Those whom they employ will tend to be the young, the articulate and the well-educated, in other words, the crème de la crème of our educational system. Precisely the same people who, later, will be capable of earning a better living overseas. But what about the majority of Filipinos currently unemployed and those entering the employment market. Who will give them jobs? And if we have an ever growing population of unemployed and underemployed, will the remittances from overseas be able to prop up our economy? And what if something happens to either the market for our skilled people overseas, or to the BPO industry? What will we have to fall back on?

If the services sector appears like a good competitive bet for the country today, then I fully support exploiting this opportunity. But I also believe that we should hedge our bets by continuing to push for investments in process industry and manufacturing, to serve both our local needs, as well as export markets for products where we can be competitive. It is this type of investment that offers the widest base for employment and the highest positive multiplier effect on the economy. What our economists tell us is that over the past 3 decades, there has been a massive transition of labor and output from the manufacturing to the service sector --“ a phenomenon referred to as "deindustrialization". Compared to Indonesia, Malaysia and Thailand, only the Philippines has failed to increase the share of the manufacturing sector between 1980 to 2005. In that period of time the share of manufacturing to total output decreased from 27.6% to 23.4% and it is the stagnation of manufacturing that will prevent this country from attaining a growth rate of more than 6% this year and in the future

At First Holdings, we have taken that view that we should continue to invest in manufacturing as our third core business, following power generation and distribution and tollroads. We have established First Philec as an intermediate holding company for investments in manufacturing, bannered right now by Philippine Electric Corporation, or "Philec", which produces transformers for the utility and industrial markets, and First Sumiden, which produces flexible printed circuits for the export market. We have found that by selecting the right product-market combinations, and training our work force in higher productivity disciplines like Six Sigma, lean manufacturing, and different ISO certification, we can be competitive against even global competition. Further, we have found that globalization itself has created manufacturing opportunities for us. By partnering with the right global players and fitting into the manner by which they have diversified and dispersed their manufacturing base globally, we have opened opportunities for joint ventures in new manufacturing investments here to serve the regional market and, potentially, even the American market.

We should have been looking at a greater number of such opportunities if, as a country, we could be more competitive. But unfortunately, we're not, and it is always a struggle to attract new investment. In last year's survey of the competitiveness of 53 countries and 8 regions, the Philippines ranked number 49, a slight improvement from the ranking of 52nd that it received in 2004, but 49th out of 61 really doesn't cut it. Expectedly, we did poorly in a large number of significant categories, among them: domestic economy, international trade, international investment, employment, government efficiency, graft and corruption, risk of political stability --“ the list goes on. We ranked 61st and last in the category of basic infrastructure. In other words, the Philippines carries the perception overseas as a very difficult place to do business in, particularly in the eyes of those who have never invested here. Unless we can change that perception with actionable and committed government policy, I don't rate our chances high in terms of attracting much needed investment from either international or local sources.

Well, to answer my own question, we should always aspire for the highest rate of growth that we can possibly achieve. If that is 7%, then so be it; if it can be higher, so much the better. For the country to be able to do this, however, all of us, the private and the public sector, will have to do our share. Government must proactively address each and every stumbling block that makes us economically uncompetitive by developing and enacting the proper legislation and implementing such legislation. The courts must rule quickly and efficiently on questions raised in regard to the systematic elimination of roadblocks to investment. We, the private sector, have to put our money where our mouths are, by being the first to invest. We can start wherever we find our respective comfort zones. For some of you, it might be BPO and call centers. For us in FPHC, it will be power generation and distribution, infrastructure and manufacturing.

Thank you and good afternoon.

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Lopez Holdings Corporation (formerly Benpres Holdings Corporation)
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You are here: Home About the Company Speeches 2007 June 27, 2007: "Is the 7% Economic Growth Sustainable" by Oscar Lopez at PCCI