Contents

THE MONTH’S HIGHLIGHTS Mining, Oil and Gas WORD FOR WORD COMMENTARY 47 Tampakan operations pushed SPECIAL REPORTS back to 2019 18 POLITICAL 47 Gov’t hopes to fi nish draft of mining bill by May 2013

18 The President signed the RH IT Update bill into law on December 21 22 19 Pres. Aquino names Marivic 48 ½ of the Philippine population Leonen as new SC justice seen own a smart phone 19 Mar Roxas to probe 48 Growth in tablet and smart Pangasinan governor’s alleged phone sales to continue involvement in ‘jueteng’ 20 Zaldy Ampatuan fi nally 38 arraigned BUSINESS CLIMATE INDEX

21 West Philippine Sea talks CORPORATE BRIEFS postponed INFRASTRUCTURE 21 Senators Legarda, Escudero top SWS survey 61 61 PH aviation safety upgrade THE ECONOMY expected soon 62 MAP proposes solutions to PH airport infra challenges 22 Filipinos more upbeat about economic prospects 65 P3-trillion investments needed 68 for suffi cient power until 23 Stock market reaches new 2030 highs in December 24 Gov’t sells $500Mn bonds to Online local investors CONGRESSWATCH h To read Philippine ANALYST online, go to http://www. wallacebusinessforum.com 68 Pres. Aquino signs 2013 h For information, send an email national budget to [email protected] or PHILIPPINE REGIONAL UPDATE [email protected] 69 President Aquino signs Sin Tax h For publications, visit our website: Reform law wallacebusinessforum.com BUSINESS 75 Asia Pacifi c Executive Brief 38 “More fun in the Philippines” 93 Asia Brief contributors falls behind 2012 tourist PUBLISHER: Peter Wallace target EDITOR-ECONOMICS: Bing Icamina EDITOR-POLITICS: Buddy Cunanan

40 PH tourists spend more for SENIOR- RESEARCH STAFF: accommodation and shopping Mae Aguinaldo 42 14 local airports to have night Joey Bondoc landing operations Ruzzella Quilla Jessica Peralta 44 Efforts for better protection Tootsie Duquiatan of intellectual property in the Francesca Rey PH PRODUCTION–LAYOUT Larry Sagun 45 PH joins ASEAN Sugar Alliance Dennis Cerda Efs Salita

Philippine ANALYST December 2012 the month’s highlights 1

Political Gov’t sells $500Mn bonds to local investors The government sold $500 million worth of 10.5-year bonds on- shore on Nov. 28 in an effort to gauge the local market’s capacity PAST DEVELOPMENTS to absorb dollar-denominated debt as it tries to further reduce reliance on foreign capital markets. (see story page on p24) The President signed the RH bill into law on December 21 FUTURE DEVELOPMENTS The Senate and the House of the Representatives ratifi ed the fi nal version of the Reproductive Health (RH) Bill that would provide government funding for contraceptives and sexuality Filipinos more upbeat about economic prospects classes in schools on Dec. 17. The President signed it into law. The 3rd quarter survey of the Social Weather Stations (SWS), on Dec.21. (see story page on p18) taken on August 24-27, disclosed a net economic optimism score of +17, the highest in 4 quarters, with 31% of Filipinos Pres. Aquino names Marivic Leonen as new SC justice expecting the economy to improve over the next 12 months President Aquino on Nov. 21 appointed government’s chief peace while only 14% expecting it to worsen (the other 55% see no negotiator Marvic Leonen as Associate Justice of the Supreme change in the economic situation). (see story page on p22) Court (SC). With his appointment, Mr. Leonen has become the youngest member of the high tribunal this century. (see story page on p19) Business

FUTURE DEVELOPMENTS PAST DEVELOPMENTS

Mar Roxas to probe Pangasinan governor’s alleged involvement in ‘jueteng’ “More fun in the Philippines” falls behind 2012 tourist target Interior Secretary Manuel Roxas II said Dec. 14 that he has been While the world recently reached the United Nations World ordered by President Aquino to conduct a thorough investigation Tourism Organization’s (UNWTO) target of 1 billion international into the alleged involvement of Pangasinan Governor Amado tourist arrivals for 2012 in December, the Department of Espino in the numbers racket “jueteng.” (see story page on p19) Tourism’s (DOT) 2012 target for the Philippines still has a long way to go. (see story page on p38) Zaldy Ampatuan fi nally arraigned PH tourists spend more for accommodation and shopping After almost a 3-year wait, a 3rd member of the political clan accused of masterminding the 2009 Maguindanao massacre Tourists in the Philippines spent a total of P1.1 trillion on was fi nally arraigned on Dec. 12. Like the 2 other relatives tourism products in 2011, according to the National Statistical arraigned before him, Mr. Zaldy Ampatuan, former Governor of Coordination Board (NSCB). Of this amount, 89% came from the Autonomous Region in Muslim Mindanao, pleaded not guilty local tourists and most was spent in accommodation services to 57 counts of murder fi led against him and 195 others at the and shopping. (see story page on p40) Quezon City Regional Trial Court Branch 221. (see story page on p20) FUTURE DEVELOPMENTS

West Philippine Sea talks postponed 14 local airports to have night landing operations The meeting of the 4 claimants in the West Philippine Sea (South In a bid to decongest key airports, the government has earmarked China Sea) to be hosted by the Philippines was postponed due approximately P1 billion for night landing operations. Final to confl icts in schedule, the Department of Foreign Affairs said. amendments to the Air Passenger Bill of Rights are expected (see story page on p21) to be released within the week to address other issues in the airline sector. (see story page on p42) Senators Legarda, Escudero top SWS survey Senators Loren Legarda and Francis Escudero remained the Efforts for better protection of intellectual property in the PH top choices for the Senate in 2013 based on the latest survey The Intellectual Property Offi ce of the Philippines (IPOPHL) is conducted by the Social Weather Station (SWS). banking on the following efforts to strengthen IP protection (see story page on p21) in the country: 1) the utilization of the Intellectual Property Automation System (IPAS); 2) Approval of amendments to the Intellectual Property Code (Republic Act 8293); and 3) Economy partnerships with state universities to create Innovation and Technology Support Offi ces (ITSO). (see story page on p44) PAST DEVELOPMENTS

Stock market reaches new highs in December The Philippine stock market index reached the year’s peak of 5,832 points on Dec. 11, a 33.4% increase from 4,372 at end- 2011. And up nearly 50% since Pres.Aquino came to power. (see story page on p23)

Philippine ANALYST December 2012 2 the month’s highlights

PH joins ASEAN Sugar Alliance Infrastructure Three Southeast Asian countries have established a sugar alliance to strengthen the bonds of sugar industry players in the region. The positive business environment in the ASEAN mirrors the local FUTURE DEVELOPMENTS sugar sector as it has increased local sugar production, saw the decline in smuggled sugar with improved customs regulation, PH aviation safety upgrade expected soon and is set to undertake an e-payment system. The current gains of the domestic sugar sector, however, are threatened by the The government expects to successfully address by early 2013 declining rate of ASEAN Free Trade Agreement (AFTA) tariff on the country’s remaining aviation safety issues identifi ed by the sugar imports, among others. (see story page on p45) International Civil Aviation Organization (ICAO) in its latest audit. Remaining concerns are in aircraft registration and fl ight Mining, Oil and Gas safety inspection. The government further expects to obtain a positive performance rating in the fi nal ICAO audit to restore Philippine aviation’s Category 1 status as determined by the US Tampakan operations pushed back to 2019 Federal Aviation Administration, and lift the European Union Sagittarius Mines Inc. (SMI), the local arm of Swiss miner ban on Philippine air carriers. (see story page on p61) Xstrata Plc., has announced that it will further push back the Tampakan copper-gold project’s start of commercial operations MAP proposes solutions to PH airport infra challenges to 2019. The decision was prompted by the existing regulatory The Management Association of the Philippines (MAP) recently and administrative challenges faced by the company including came up with a proposal seeking to address the interlocking denial of an Environmental Compliance Certifi cate (ECC) by challenges in Philippine airport infrastructure. The proposal the Department of Environment and Natural Resources (DENR). lists MAP’s suggestions for the designation of domestic and (see story page on p47) international gateways, for structural modernization of existing facilities, and system upgrades. It is aimed towards the goal Gov’t hopes to fi nish draft of mining bill by May 2013 of setting up modernized domestic and international gateway The Mining Industry Coordinating Council (MICC), an inter-agency airports. (see story page on p62) group designated to work on the proposed law to increase government’s share in mining revenues, is eyeing to fi nish the P3-trillion investments needed for suffi cient power until 2030 draft mining bill before the midterm elections in May. One of In his presentation during the launch of Philippine Energy Plan the issues to be settled in drafting the bill is how to tax the (PEP) 2012-2030, Energy Secretary Jericho Petilla revealed mining fi rms. (see story page on p47) that at least P3.174 trillion worth of investments is needed to provide 11,400 megawatts (MW) of additional capacity for the IT Update next 18 years. The Department of Energy (DOE) also unveiled during the launch its long-term plan that would enable the country’s power supply to cope with the growth of the economy. ½ of the Philippine population seen own a smart phone (see story page on p65) The Philippines is one of the fastest-growing markets for smart phones in the Asian region. Soon, it is projected that ½ of the CongressWatch population will own a smart phone, making it a primary access point to the Internet of many Filipinos. (see story page on p48) Pres. Aquino signs 2013 national budget Growth in tablet and smart phone sales to continue President Benigno Aquino lll has signed the P2-trillion national budget for 2013. Just like the previous budgets prepared by In 2012, shipments of smart phones accounted for 60% of the the Aquino administration (2011 and 2012), the 2013 national total smart-connected devices market, while tablets accounted budget was crafted using the zero-based budgeting scheme for 10%. IDC sees a continuation of this trend, predicting that that enabled the government to prioritize key initiatives and smart phones will account for 66% and tablets for 13% of total effective programs and terminate ineffi cient ones. worldwide shipments in 2016. (see story page on p48) (see story page on p68)

President Aquino signs Sin Tax Reform law President Benigno Aquino III signed into law the Sin Tax Reform bill (Republic Act 10351), which will increase excise taxes on alcohol and tobacco products. The measure is projected to raise additional revenues of around P34 billion for 2013, its fi rst year of implementation. (see story page on p69)

Philippine ANALYST December 2012 CORPORATE BRIEFS 3

WORD FOR WORD

“When I talk about your profession in public, I have been forthright about the shortcomings I see—not because I enjoy criticizing, but because I believe it can help.”

President Aquino defending his criticism of the media. He has often chided the Philippine press for its negative reports on his administration.

“We believe all parties should pursue their territorial and maritime claims in accordance with international law, including as refl ected in the 1982 Law of the Sea Convention.”

US Embassy spokeswoman Bettina Malone saying that while Washington is not taking sides between the Philippines and China in the South China Sea, it is urging claimant countries to “avoid provocative unilateral actions.”

“Today, reason triumphed over fanaticism; logic over dogma; and hope over fear.”

Albay Rep. Edcel Lagman, author of the Reproductive Health Bill, on the passage of the measure on its second reading.

“Historic and modern, rich and poor… fi lled with museums, shops, parks and churches, plus enough nightlife to last until dawn.”

Trip Advisor, an international travel website, on naming Metro Manila as among the “Top 10 Destinations on the Rise.”

Philippine ANALYST December 2012 4 COMMENTARYCOMMENTARYCOMMENTARYCOMMENTARY

t’s an interesting facet of Filipino culture sadly mostly lost in the West that sees life optimistically. Even a kid scrabbling for scraps in a garbage slump is optimistic about life. It’s a wonderful trait, and it shows up in the Istatistics too where +34% think things will get better, while only 7% thought they’d get worse. For a net score of +27. Yet in the reality of their lives, 28% said things had got worse, a lesser 21% said they were better off. For a net decline of -8.

Now if that optimism could be translated into reality – the task of government to provide the right conditions for that – the Philippines could truly take off. But the thing that is stalling that is the other, less desirable Filipino characteristic (at best amongst politicians) of believing a promise equates to action. If it’s said, it’s done. The list of government (not just this one) promises is endless. So is the list of things yet to be done. They match.

It seems like the place to put your money, but after some private losses in earlier years I’m making no predictions. Nonetheless, the growth since Benigno Aquino III came to power has been phenomenal, nearly 5% growth in the economy in 2011 and 2012 in a region (Asia) where improvement has averaged 4.3%.

Philippine ANALYST December 2012 SPECIAL REPORT 5

A STABLE GOVERNMENT

POLITICAL YEARENDER

This is a president who is successful when he wants to be. His position in itself gives him considerable power in this hierarchical society. His popularity makes that power almost overwhelming. But he is using it too sparingly, as where he has used it, it has had great effect.

He wanted a non-cooperating Ombudsman gone, she’s gone. He wanted a “midnight appointee” Supreme Court Chief Justice gone, he’s gone. He wanted a former president suspected of plunder and electoral fraud taken to court, she’s in court (and under hospital arrest). He wanted the arrogance of power reduced (no “wang-wangs” policy), it has been reduced.

PRESIDENTIAL POWER WORKS

Impeach Ombudsman Gutierrez – she resigned Impeach CJ Corona – impeached by House; convicted by Senate Take GMA to court – under hospital arrest Reduce arrogance of power – reduced via No “wang-wangs” policy Approve Sin Tax Reform Bill – Signed into law Pass RH Bill – Approved by the Bicameral Committee; signed into law Synchronize ARMM elections with May 2013 polls – enabling law approved Reform GOCC Governance – GOCC Reform Act signed into law Approve priority bills – Either signed into law or at advanced stages of legislation No picture/name on gov’t projects – Done; even inspired a nationwide campaign Approve national budget on time – 2011, 2012 & 2013 budgets passed on time

Even in Congress he’s had some effect despite he’s almost never met with them (2 LEDAC meetings in 2 years vs. 81 during Ramos’ term or 14 per year). He wanted a sin tax bill passed, it’s passed. And a bill (RH) to provide family planning services has broken a 14-year hiatus and was passed over some of the strongest opposition the Catholic Church has ever mounted. He’s achieved zero-based budgeting with a national budget approved on time each year; synchronized ARMM elections with the May 2013 midterm polls (required an enabling law); and got the 2 bills amending the Anti-Money Laundering Act approved that prevented the PH from being downgraded to “blacklist” by the Financial Action Task Force. Some of his priority bills have been signed into law (Institutionalization of Mandatory Kindergarten; Data Privacy; New AFP Modernization Act; Cybercrime Prevention; Sin Tax Reform Act; while the RH bill has been approved by the bicameral committee) while others are at advanced stages of legislation (3rd round of AMLA Amendment; Additional Benefi ts to Household Helpers; Fiscal Incentives Rationalization; Amendments to the Witness Protection Act; Whistleblower Protection Act; and Institutionalization of K+12).

Philippine ANALYST December 2012 6 SPECIAL REPORT

And he’s changed the mood; business is more confi dent, more optimistic after a long time. The improving economy confi rms that. But he’s not given the attention to business the country needs, and this is best highlighted in the still lackluster foreign investment infl ows—$2.2 billion in 2011 to mid-2012. Additionally, there is the overly slow improvement in job creation—only 1.2 million additional jobs were generated from October 2010 to October 2012 or 600,000 per year when a minimum of 1 million new, properly paying jobs are needed annually if the poverty trap is to be broken. The Philippines is a long way from that.

BUSINESS IS MORE CONFIDENT.

Still, there’s been a noticeable reversal of the overall situation in the Philippines. The last years of the Arroyo regime saw growing disillusionment with the leadership and deterioration of almost every factor that measures a country. Most of those measures are now in reverse and trending upwards.

A NOTICEABLE REVERSAL OF THE OVERALL SITUATION.

The economy is witnessing strong growth that appears to be sustainable. The President seems to be succeeding. Where he has been active and involved, he’s been remarkably effective: Fighting corruption.

REVERSAL AFTER “LOST DECADE” UNDER ARROYO SURVEY/INDICATOR PRE-GMA (2000) GMA (2009/2010) PNOY (2011/2012) Rank: 65/144 Global Competitiveness (WEF) 42/58 countries (72%) Rank: 87/134 (65%) Now in the top 50% of countries surveyed Rank: 72/132 countries (55%) Global Enabling Trade (WEF) Rank in ’08: 82/118 countries (69%) Rank: 92/125 (74%) Now near the upper half of rankings Rank: 107/179 countries (60%) 65/160 (41%) Economic Freedom (The Heritage 109/179 (61%) Score: 57.1 Score: 62.5 Foundation) Score: 56.3 Minimal improvement from 2010 (100 is best) ranking & score Asian Corporate Governance Rank in ’03: 9/10 countries Rank: 11/11 countries Rank: 10/11 countries Rank: 10/12 Asian countries Rank: 9/12 countries Bureaucratic Effi ciency (PERC) No data available Score: 8.37 (0 is top) Score:7.57 S&P (2001): BB+ (1 notch below S&P (2010): BB- or 3 notches S&P (July ’12): BB+ (1 notch below investment grade) below investment grade investment grade) Moody’s (October ’12): Ba1 (1 Credit rating upgrades Moody’s (2001): Ba1 (1 notch below Moody’s (2010): Ba3 (3 notches notch below investment grade) investment grade below) Breached the 5,800 level PSE Composite Index ~1,500 Mid-2010: around 3,300 Up 76%; More than 50 record-highs under PNoy 3.5 M in 2010 expected to reach at least 4.2M Tourist Arrivals 2 million arrivals 3 million in 2009 this year, projected gain in 2 years: at least 700K tourists ~ 500,000 MT in ‘12 Rice Imports 640,000 MT Record-high 2.4 million MT in ‘10 Rice self-suffi ciency next year or early 2014 2001-2009 nat’l budgets 2011 & 2012 national budgets Late approval of 2000 national Approval of national budgets late approval under Arroyo; some approved on time; 2013 budget just budget were reenacted awaiting PNoy’s signature

Philippine ANALYST December 2012 SPECIAL REPORT 7

A Philippine president has enormous power, a power far exceeding that of, say, an American president. A Philippine president is almost royalty. The strong hierarchical nature of Philippine society means that when the president wishes something he (or she) will invariably get it, particularly if he/she has the high level of popularity Pres. Aquino has. Even though this is a democratic system, the president tends to hold dictatorial powers. Here, you don’t question or disagree with “the boss”, just because he’s the boss.

The gridlock of a U.S. President with a Democrat-dominated Senate but a Republican-controlled House where even desirable measures can’t be passed can’t happen here. The lack of almost any party discipline, let alone loyalty, only adds to that. His power is strengthened even more by the unbelievably high approval levels he continues to enjoy. No politician, or at least very few, will buck a popular leader. And those that do will be totally outweighed by the supporters—as the passage of the diffi cult Sin Tax and RH bills show.

President Aquino has retained these levels despite he’s actually done little, just the occasional action at the right time. Much of his success is due to personality, he comes across as a decent, nice guy who people want to help. In sharp contrast to his predecessor, whose unpopularity plumbed new depths (net satisfaction rating of -53% at one point). Personality in a personalistic society is critical to success.

So he doesn’t have to do much to achieve much, particularly if he has, as in the main he has, competent lieutenants.

HE HAS COMPETENT LIEUTENANTS.

More than 2 years into the offi ce, he’s learnt. We’re seeing a man whose popularity is through the roof, +67% net satisfaction rating according to the latest SWS survey. He has focused on the one issue that ranks in the top 3 of every business survey done: Corruption. And he’s been remarkably successful, putting a former, scandal-laden president in jail, successfully impeaching a questionable Chief Justice, kicking a non-performing Ombudsman out, and fi ling numerous tax evasion and smuggling cases. It’s a success unknown in past decades.

Philippine ANALYST December 2012 8 SPECIAL REPORT

PNOY’S NET SATISFACTION RATINGS (% satisfi ed minus % dissatisfi ed)

100

80 +67% +64% +60% 60 +58% +56% +49% +51% +46% +42% 40

20

0

SEP '10 JUN '11 SEP '11 DEC '11 AUG '12 NOV '10 MAR '11 MAR '12 MAY '12

Source: SWS

He is however not a man who is used to leading, or managing and still has trouble accepting the full responsibilities of being president of a country—he still considers having a private life important. And he is reluctant to step in if it doesn’t suit him, even if it would be in the country’s best interest for him to do so. The ban on open-pit mining is a glaring example, where a word from him could stop it but he won’t give that word. His no “wang-wang” policy was successful. It has had dramatic reverberations throughout society. It’s lasted some 29 months. His directive not to put his picture/name on government projects was also maintained. It even inspired a nationwide campaign against credit-grabbing politicians (colloquially called “epals”). Although amongst those in local government, this is not working too well as promotional posters of local politicians still abound in the provinces.

The President recently used this enormous popularity and power to call for a vote on the RH bill – and got it. His decision to push for this immensely popular and sensible bill, now approved, could further raise his satisfaction rating. He’ll save lives with his push for sin taxes; it’s just right that he endorsed a bill that will save lives through family planning. Let’s hope he’ll also push for the immediate passage of the Freedom of Information (FOI) bill (Update: Senate approved its version on 3rd and fi nal reading on December 17, while its counterpart in the House is expected to be presented to the plenary next year). These bills are critical to some major societal reforms.

Defi nitely it’s a sea change from the past decade where, as mentioned earlier, almost EVERY factor that measures a country deteriorated. One that GMA desperately sought but never achieved was a credit rating upgrade. In her term, it fell. Upgrades have been achieved already under President Aquino and investment grade seems inevitable next year, particularly now the sin tax bill was passed. This is something that will bring considerable benefi ts to the Philippines. If that level is achieved, the Philippines will enjoy lower rates when borrowing abroad and a signal will be sent to foreign investors that this is a safe place to invest. More foreign direct investments will come in. Jobs will be created.

What has deteriorated under this administration, though, is one of top concern to business, to investors: The ease of entry and doing business. In the latest Doing Business Report released by the World Bank and International Finance Corporation, the Philippines’ ranking dropped by 2 notches to 138th from 136th last year. The survey covered 183 countries. In the “starting a business” category the Philippines placed 161st from 158th. Businessmen have to complete 16 procedures to start a business here; this is in stark contrast to 3 procedures in Malaysia and 1 in New Zealand. Simplifi cation of bureaucratic procedures has been promised since day one, but hasn’t happened, as shown by the Philippines’ dismal ranking in WB-IFC’s Doing Business survey. The Philippines also fared poorly in terms of securing power connection, registering property, obtaining credit, paying taxes, and enforcing contracts (as our special report, Contract Sanctity highlights).

16 PROCEDURES VERSUS 1 IN NEW ZEALAND

Philippine ANALYST December 2012 SPECIAL REPORT 9

The Philippines’ ranking in Global Perceptions (95th from 78th) and Trade Logistics (52nd from 44th) also dropped.

PERC’S BUREAUCRATIC EFFICIENCY SURVEY 2010 2011 COUNTRY RATING COUNTRY RATING Singapore 2.53 Singapore 2.25 Hong Kong 3.49 Hong Kong 3.53 Thailand 5.53 Thailand 5.25 South Korea 6.13 Taiwan 5.57 Japan 6.57 Japan 5.77 Taiwan 6.60 South Korea 5.87 Malaysia 6.97 Malaysia 5.89 China 7.93 China 7.11 Vietnam 8.13 Philippines 7.57 Philippines 8.37 Indonesia 8.37 Indonesia 8.59 Vietnam 8.54 India 9.41 India 9.21

What this shows is that business is not getting the attention needed. No wonder FDI infl ows remain measly. The paltry $2.2 billion in the past 18 months pales in comparison to Singapore’s $92 billion, Thailand’s $15 billion, and Indonesia’s $27 billion.

Much of the reason for this can also be put down to the President’s reluctance to get involved in day-to-day management to force change. The Philippine bureaucracy is still one of the worst in Asia.

You still have to deal with other departments and local governments, and there the reports remain dismal. Except for some few outstanding exceptions, the reports are of local permits and approvals remaining a nightmare to obtain. An area that Mar Roxas, the DILG Secretary could address. Radical change to make government services work swiftly and effi ciently can’t be expected. Improvement will occur, but it will be a gradual process.

One thing that is needed is an integrated, comprehensive computerization system. Government services need to be fully computerized. It is the strongest argument for the creation of a Department of ICT, something Congress wishes to pass but the president is reluctant to accept (he thinks there are “too many departments” already). The Department of ICT has been approved on 3rd and fi nal reading by both the Senate and the House of Representatives. It could be signed into law but not while Pres. Aquino still opposes it.

The outstanding achievement of the past 2 years has been the President’s single-minded attack on corruption. It has happened at a level unimaginable in prior decades and will be the outstanding legacy of Pres. Aquino. He has started a true societal reform with impressive results. Apart from the high-level cases (Arroyo, Corona, Gutierrez), some 115 cases of large-scale tax evasion have been fi led before the DOJ and various courts, but with a court system that is so clogged with cases and short of personnel that there’s been little progress on the cases. Around 80 cases of smuggling have also been exposed and are awaiting trial. Many other big-time tax evaders and smugglers have yet to be convicted. Total taxes and duties covered by the tax evasion and smuggling cases reached P118 billion.

The Department of Public Works and Highways has made sure that infrastructure projects go through competitive bidding and in doing so has saved nearly P11 billion in just 2 years.

The GOCC Governance Act was signed into law (Republic Act 10149). Some 140 GOCCs will now be examined by the Governance Commission for GOCCs (GCG) created under RA 10149. The GCG will determine if a state-owned fi rm needs to be reorganized, merged, streamlined, abolished or privatized. Prior to the measure’s passage, President Aquino issued directives that effectively rationalized the (excessive) bonuses of GOCC offi cials.

Philippine ANALYST December 2012 10 SPECIAL REPORT

The Aquino administration launched the electronic Transparency and Accountability Initiative for Lump Sum Funds or eTAILS where the public can now access in real-time, through the DBM website, how senators and congressmen spend their pork barrel.

Part of the reform measures implemented by the Aquino administration in ARMM was the implementation of strict audit procedures, which enabled the regional DepEd and DPWH offi ces to save close to P200 million.

The 2011, 2012 and 2013 national budgets were crafted using the zero-based budgeting scheme that enabled the government to prioritize key initiatives and effective programs, and terminate ineffi cient ones that were prone to corruption. National budgets were passed on time. Under Gloria Arroyo, they—deliberately—weren’t.

These anti-corruption measures have helped the Philippines improve its ranking in the Transparency International’s Perception Corruption Index. The PH now ranks 105th out of 176 countries. Before Pres. Aquino came into offi ce it was worse, and worsening (the methodology was changed, so a direct comparison can’t be made). The government’s goal of breaking into the upper half of the rankings is attainable under Pres. Aquino.

However, approval of economic and business that which is crucial in fostering a policy environment that will be benefi cial for businesses has not progressed. More than 2 years into the 15th Congress (and with less than 20 session days left), passage of key reform bills for business is still wanting. Of the measures signed into law by President Aquino, only 4 have direct impact on business. These are:

1. Lifting of nightwork prohibition on women employees; 2. Data Privacy Act; 3. Anti-Money Laundering Act Amendments; and 4. Cybercrime Prevention Act. But it was poorly crafted with contentious provisions that resulted in the SC stopping its implementation by issuing a 120-day TRO. Bills that seek to amend/repeal the law’s controversial sections (e.g. electronic libel) have been fi led in Congress.

In the House of Representatives, 12 major eco/business bills have been approved on 3rd and fi nal reading. However, of the 12, only 3 have gained concurrence in the Upper Chamber so far. An Upper Chamber that is not performing. The Congress needs to prioritize economic and business bills. Not those converting municipalities into component cities. This must be done if a signal that the Philippines under the current administration is open for business is to be made.

MAJOR ECO/BUSINESS BILLS PASSED ON 3RD READING

HOUSE SENATE Department of ICT Department of ICT Sin Tax Reform Sin Tax Reform AMLA Amendments Intellectual Property Act Amendments Fiscal Incentives Rationalization Customs Modernization Intellectual Property Act Amendments Micro-Enterprise Development Insurance Code Amendments Rural Banks Act Amendments Rationalization of Taxes on Int’l Air Carriers Direct Remittance of LGU Share in National Wealth Taxes Real Property Valuation Act Source: Congress of the Philippines, as of 18 December 2012

Philippine ANALYST December 2012 SPECIAL REPORT 11

PROGNOSIS FOR 2013

What then does all this mean for next year? The simple answer: more of the same. A high degree of stability has been achieved and there’s a confi dence in business that has been lacking for many years. The Philippines is beginning to appear on the world map again. The turmoil in Europe, the turgidity in the U.S., the contretemps between China and Japan, and the rising cost and diffi culty of doing business in China are moving businessmen to look elsewhere, and the Philippines is becoming part of that elsewhere. So, on the economic side, sustaining the current, or even slightly better, growth levels seems highly possible.

The mid-term elections should bring little surprise. It will be the same old faces with the President having an even greater majority than he does now. But still being reluctant to use his enormous power on changes the country needs. The exception being what he personally cares about it.

The House will remain a strong majority for the President so will continue to follow the President. The Senate, however, will be more evenly split and will push its own agenda—unless PNoy fi nally agrees to meet far more often (LEDAC’s) to cajole for change. Juan Ponce Enrile is unlikely to retain the senate presidency, but Feliciano Belmonte may well hold onto the House. And the same old faces will be back again, with relatives in abundance.

Eco/business bills that could be signed into law before the end of the 15th Congress include:

1. AMLA amendments (3rd phase) 2. Department of ICT - but will Pres. Aquino veto it? 3. Intellectual Property Act amendments 4. Fiscal Incentives Rationalization-but 50:50 chance

Other key reform bills such as Mining Revenue Sharing and Anti-Smuggling will not make it so will be revived in the 16th Congress. Meaning it won’t be till 2015 (or even 2016) that mining investors may again take interest.

A review of the Constitution won’t now occur before the 2013 elections. And if there’s suffi cient public clamor for change, the President could be convinced to agree to it. Business lobby could be a major infl uence toward this review. A review, if it occurs, will almost certainly be a review by Congress working jointly, but voting separately (so the Senate vote isn’t overwhelmed) then to a plebiscite of the people.

President Aquino’s satisfaction ratings will remain high; but if he implements some needed, tough reforms as he may, then there could be a slight deterioration. But the catastrophic plunges of Joseph Estrada and Gloria Arroyo is not on the cards.

Moreover, With the passage of the sin tax law and strong fi scal position, upgrade to investment level would seem inevitable.

Infrastructure construction will fi nally start as the bidding process improves and projects get awarded. Based on the government’s national budget disclosures, we expect some P400 billion (around 3.4% of GDP from the 2%-2.5% average of the past decade) to be spent next year on PPP and government-funded projects. Still, however, not at the level it really needs to be. Nothing short of 5% of GDP (around P500 billion) is needed if real progress is to be achieved.

The infl ow of FDIs is not likely to improve much despite PNoy’s popularity and extensive campaign vs corruption. This is because some of the important deterrents to establishing a business aren’t expected to be addressed suffi ciently to make the Philippines competitive enough. And some, like power costs and infrastructure, can’t be changed immediately. And with the suspension of any new mining projects that area for FDIs has been closed until Congress passes a new tax law (a minimum 2-year event) or the President changes his mind and leaves the tax regime as is. Sadly, an unlikely event.

Philippine ANALYST December 2012 12 SPECIAL REPORT

More funding for the CCT, K+12, and Universal Healthcare programs will be provided as the government scrambles to achieve its MDG targets by 2015.

Rice self-suffi ciency in 2013, or maybe a little later, now seems achievable providing the weather cooperates.

Initial stages of the framework agreement with MILF are likely to be settled, but there are still a number of contentious issues that keep a successful outcome in doubt. And, consequently, investment pledges in ARMM won’t eventuate till after ratifi cation of a Bangsamoro Basic Law.

The PH’s anti-corruption and competitiveness rankings will improve as the President continues his focus on cleaning up society. This will include government’s efforts to pursue the fertilizer fund scam and other scandals (that will emerge) against GMA and tax evasion raps versus Renato Corona.

Overall, there will be a strengthened campaign against top-level corruption. But corruption within LGUs must also be attacked aggressively—it’s unlikely to be. More tax evasion cases will be fi led before the DOJ, but as it is now legal processes will still defeat the success of the cases as the needed reforms in the judiciary will take more time.

The President is growing more into the job, is more comfortable in the role, but changing his character to take a more hands-on approach is not too likely. So there will be no dramatic changes—but brighter prospects.

Philippine ANALYST December 2012

14 SPECIAL REPORT

ECONOMIC OUTLOOK FOR 2013

GLOBAL OUTLOOK AND IMPACT ON PH ECONOMY

Recent (October) downgrades in the global outlook by the International Monetary Fund (IMF) and other forecasting groups illustrate the diffi cult period the world economy is experiencing. And even though most see some improvement in the growth prospects in 2013, it is still fragile and is built on numerous assumptions that could simply and unexpectedly fall apart. Among these assumptions are the crisis-affected parts of Europe showing some capability (after failing to do so in 2012) to undertake reforms to fi x their fi nancial woes and the U.S. able to drive safely through a fi scal cliff. The foreseen uptick in 2013 is, in fact, weaker than the already weak results for the Western industrial economies in 2011. Japan has recovered in 2012 from the devastating effects of natural calamities the previous year, but will be back in a rut in 2013 as exports slump due to the strong yen. Even China has seen a massive slowdown, from annual growth range of 9-10% during the past 5 years to only an expected 7.6% in 2012, and may be headed for a similar performance in 2013.

WORLD ECONOMIC OUTLOOK (% over previous year) 2011 2012E 2013F World real GDP 3.9 1.8 3.0 USA 1.7 2.3 2.9 Euro area 1.4 -0.5 0.2 Asia-Pacifi c 4.3 4.3 4.4 NICs (KOR, TWN, HKG, SIN) 4.0 1.8 3.1 ASEAN-5 4.5 4.9 5.4 World trade volume growth 5.8 3.2 4.5

Source: IMA Asia

But just as it turned out in 2012, the Philippine economy is expected to post another good year in 2013, more likely even better than its performance in the previous year. While this appears contrary to what the consensus forecasts suggest, especially with the faster than expected growth in 2012 that will push the base higher and the still shaky global prospects for the year, this optimism is not without any basis.

THE COUNTRY ISN’T AS BADLY AFFECTED AS ITS MORE GLOBALLY-INTEGRATED NEIGHBORS.

The country isn’t as badly affected as its more globally-integrated neighbors by a downturn in world demand and adverse fi nancial developments. And whatever weakening export of goods undergoes as a result of the downturn, it will be more than offset by the resilience of its export of services, particularly business process outsourcing (BPO), tourism and remittances from overseas Filipino workers (OFWs).

THE DOMESTIC BANKING SYSTEM IS HEALTHY.

The central bank’s foreign exchange reserves now stretches up to the equivalent of 16 months of imports and exceeds the country’s foreign debt by a little over 30%, an unheard of level and one of the world’s best. Foreign indebtedness is down to just about 26% of the economy from a high of 67% in 2003. Government fi nances are sus- taining better-than-target defi cit despite signifi cant (but below target) growth in spending. The domestic banking

Philippine ANALYST December 2012 SPECIAL REPORT 15

system is healthy, more than meeting global prudential standards. In short, the country still has more than enough liquidity to push growth without having to rely on selling more exports and borrowing more from abroad. These resources can be harnessed to boost domestic demand for 1, 2 or 3 years more.

Public-private partnership (PPP) projects are still building momentum. Although the Socio-Economic Planning Sec- retary conceded only about 8 such projects are likely to be implemented in 2013 (WBF believes it will just be 6, including the PPP’s started in 2012 but are still in progress—Light Railway Transit Line 1 Extension, NAIA Expressway Phase 2, NLEX-SLEX Connector, etc.), it is a vast improvement from 3 in 2012 and zero in 2011. The new projects are also much larger in 2013. Add to this the offi cial development assistance (ODA) and locally funded projects in the national budget, which are programmed to grow by close to 50% during the year. Even if spending falls short of expectations, just like it did in 2012, it will still be a signifi cant growth over the previous year.

ODA PROJECTS ARE PROGRAMMED TO GROW BY CLOSE TO 50%.

On top of the infrastructure expenditures, property development will remain on an uptrend, driven by offi ce space, hotels and resorts, and commercial/retail plus residential especially outside of Metro Manila. Hence, the construc- tion boom will be sustained and broader based—both public and private—in 2013.

ECONOMIC GROWTH FORECAST

In summary, the foreseen acceleration in economic growth in 2013 will come from:

• Further pick-up in infrastructure spending that will reinforce the initially private sector-driven the construction boom

• A moderate improvement of the world economy that will sustain the growth of exports

• Some revival of manufacturing due to the mild recovery of world market demand and the relocation of some factories to the Philippines as back-up for deteriorating industrial relations and rising wages in China, disaster risks in Japan and elsewhere, and improvement in Philippine competitiveness in a number of product areas. This could also help boost lagging but much needed foreign direct investment.

GDP will grow by 6-7% in 2013 or slightly above the estimated 6-6.5% in 2012.

Construction activity will propel it, growing by near double digit (9-10%), at the same time providing support for the forecast increase in fi xed investment of near 6%. Investment in plant and equipment is foreseen to register a more modest increase (4-5%).

At the same time, exports will post volume growth close to 7% on slight recovery in world demand. The pace of growth will be slightly lower than recorded in 2012. But this year’s pace was unusually high and defi ed the general weakening of world trade during the period. So for 2013, the lift in demand resulting from the mild global recovery will be offset by a correction from lofty export growth in 2012.

Consumer spending will be sustained within the 5-6% range, almost 3-fold the population growth and indicates some improvement in standards of living. It is too early to tell, though, if growth is becoming inclusive on a more permanent basis.

COST OF BUSINESS OUTLOOK

The Bangko Sentral ng Pilipinas (BSP) has signaled that it will tighten rules on the infl ow of short-term foreign capital, an action which the IMF has endorsed, to limit if not arrest further gains of the peso against the US dollar, a worrying trend for exporters and OFW’s. Policy rates, already low by historical standards at 3% for the overnight borrowing rate, are expected to be maintained at their current levels, perhaps even lowered further, although it seems the central bank is now seeing the futility of further rate cuts in keeping the peso from appreciating. Hence, the BSP is reinforcing this measure with more direct controls over capital infl ows.

Philippine ANALYST December 2012 16 SPECIAL REPORT

Nonetheless, it will remain a challenge to minimize the peso gains given the recent credit boosts in the US and the Euro area, a signifi cant amount of which eventually fi nds its way into emerging market economies like the Philip- pines. The peso-dollar rate is expected to continue appreciating, to P39-41:$1 in 2013 vs. the average of close to P42 in 2012.

PESO APPRECIATING P39-41:$1

Monetary policy will continue to be relaxed and accommodative of growth objectives. This stance, coupled with stable government fi nances as additional revenues are generated from the amendment of the excise taxes on cigarettes and alcoholic beverages (now successfully concluded), collection effi ciency continuing its modest improvement, and some assets privatized, should lead to sustained low levels of interest rates. The average bank lending rate is fore- cast to stay at their present levels of 5-6%, while the 91-day T-Bill rate is expected to register at 1.5-2.5% in 2013.

BANK RATES 5-6%

An uptick in infl ation, however, is likely given its unusually sharp drop in 2012 largely induced by weak global de- mand for commodities including oil and the less-than-expected domestic crop losses due to adverse weather. But with some recovery in the global economy, sale of commodities are also expected to recover, so their prices will fi rm up. Moreover, the acceleration in the country’s economic growth will drive up prices of basic items including construction materials. The infl ation rate will rise to 3.5-4.5% in 2013 from about 3% in 2012.

INFLATION 3.5-4.5%

KEY ECONOMIC STATISTICS 2011 2012E 2013F Real GDP growth rate (%) 3.9 6.3 6.5 Consumer spending 6.1 5.8 6.0 Government current expenditures -0.7 7.5 7.4 Fixed investment 2.7 6.7 6.8 Export of goods and services -3.8 6.5 7.0 Import of goods and services 1.9 5.9 6.7 Agriculture 2.6 1.7 2.8 Industry 1.9 6.0 6.4 Services 5.0 7.4 7.3 Exchange rate (P:$ average) 43.3 42.2 40.0 91-Day T-Bill rate (%) 1.4 1.6 2.0 Average bank lending rate (%) 6.6 5.6 5.6 Infl ation rate (%) 4.7 3.0 3.5 Source: National Statistical Coordination Board; Bangko Sentral ng Pilipinas

Philippine ANALYST December 2012

18 POLITICAL

The President signed the RH bill into law on December 21. The Senate and the House of the Representatives ratifi ed the fi nal version of the Reproductive Health (RH) Bill that would provide government funding for contraceptives and sexuality classes in schools on Dec. 17. The President signed it into law on Dec. 21.

t the House, lawmakers ratifi ed the measure via ayes and nays voting, and Speaker Belmonte declared the ayes have it. AAt the Senate, 11 senators adopted the bicameral committee report on the bill while 5 senators reiterated their vote against it. The President signed it into law on December 21. The 11 senators were Pia Cayetano, Minority Leader Alan Peter Cayetano, Joker Arroyo, Edgardo Angara, Franklin Drilon, Miriam Defensor Santiago, Teofi sto Guingona III, Ferdinand Marcos Jr., Loren Legarda, Panfi lo Lacson, and Sergio Osmeña III. The 5 who reiterated their ‘no vote’ were Senate President Juan Ponce-Enrile, Senate Pro Tempore Jose Estrada, Majority Leader Vicente Sotto III, and Senators Aquilino Pimentel III and Gringo Honasan. What transpired in Congress on Dec. 17 showed us that our lawmakers can get something done if they really want to, and the President pushes it. The Catholic bishops had vowed to put up a strong fi ght after their defeat—by a slimmer using many of the same arguments espoused by the Catholic margin—last week, when 113 House members said yes to Church again and again. Nevertheless, the bill passed both the RH bill and 104 said no. Over the weekend letters were 2nd and 3rd reading in the Upper House by a vote of 13-8. read to the Catholic faithful from their Church leaders who Those belonging to the losing bloc insist that President reiterated that the measure was intrinsically evil. Despite this Aquino dangled incentives to those who would vote in (or because of it being overkill?), the margin got even wider. favor of the bill, or that the lawmakers who said yes to The bishops also hoped that the rabid opponents to the it were motivated by political gains. They refused to bill in the Senate would be able to sway their colleagues acknowledge that support for the bill grew because of its to block it upon 2nd reading. And indeed opponents of the own merit, not because of politics. Lawmakers crossed party RH Bill made a last-ditch effort to derail the legislation by lines in expressing their support or opposition to the bill.

Lawmakers can get something done if they really want to, and the president pushes it.

Philippine ANALYST December 2012 POLITICAL 191

Church leaders reiterated that the measure was intrinsically evil.

The passage of the RH Bill is as historic as it has been overdue.

Even Mr. Aquino was hesitant to show full support for the agreement this December (2012),” Ms. Deles said. Ms. Ferrer measure at the onset. He tried to change its name to responsible has been with the panel since 2010 and served as adviser to the parenthood and to forge a dialogue with the Catholic bishops. He technical working groups on power sharing and normalization. was not sure he could afford to alienate the men in robes who were She was among those involved in the Nobel Peace Prize- his late mother’s staunchest allies. The passage of the RH Bill is winning campaign to ban landmines. Ms. Ferrer co-founded as historic as it has been overdue. Now that it is signed into law, the Philippine campaign in 1995 and joined international fact- the government must make sure that it is properly implemented. fi nding missions investigating violence in Cambodia and human rights violations in East Timor and Nepal. The government and MILF are scheduled to meet soon to resume discussions on the annexes on power sharing, wealth sharing and normalization Pres. Aquino names Marvic Leonen as new that will make up the Comprehensive Peace Agreement. SC justice

President Aquino on Nov. 21 appointed government’s chief peace negotiator Marvic Leonen as Associate Justice of the Mar Roxas to probe Pangasinan governor’s Supreme Court (SC). With his appointment, Mr. Leonen alleged involvement in ‘jueteng’ has become the youngest member of the high tribunal this century. Interior Secretary Manuel Roxas II said on Dec. 14 that he has been ordered by President Aquino to conduct a thorough He will be turning 50 on December 29. Before Mr. Leonen, investigation into the alleged involvement of Pangasinan the youngest to be appointed Associate Justice of the Supreme Governor Amado Espino in the numbers racket “jueteng.” Court was Chief Justice Maria Lourdes Sereno. She was 50 when she joined the high court in 2010. Mr. Leonen will fi ll the This was after whistleblowers Mayor Ricardo Orduna of position vacated by Ms. Sereno after she was appointed Chief Bugallon town in Pangasinan and Barangay (village) Chairman Justice last August. He was credited for crafting the framework Fernando Alimagno claimed that Mr. Espino has been operating peace agreement between the Aquino government and the Moro jueteng in their province and had been receiving at least P800 Islamic Liberation Front (MILF). He has been the head of the million “protection money.” Mr. Orduna is said to be a self- peace panel since 2010. Prior to his stint as head of the Philippine confessed jueteng operative with whom Mr. Espino “had a recent peace panel, Mr. Leonen served as dean of the University of the falling out over their business arrangements,” while Mr. Alimagno Philippines College of Law. He graduated magna cum laude is allegedly a jueteng fi nancier and operator in the province. In his from the UP School of Economics in 1983 and obtained his sworn statement, Mr. Orduna claimed that he personally handed to law degree in the same state university in 1987. He became a Mr. Espino some P2.5 million every week for several years since member of the Bar when he signed the Roll of Attorneys on Mr. Espino became Pangasinan governor. He said Mr. Espino used May 28, 1988. Mr. Leonen also co-founded the Legal Rights to receive a smaller amount of P750,000 weekly when he was still and Natural Resources Center Inc.-Kasama sa Kalikasan, a legal only a congressman in the province. Mr. Roxas also promised a and policy research and advocacy institution focusing on giving swift and thorough investigation according to the provisions of legal services to the poor and indigenous communities. Mr. several applicable laws including the Anti-Graft Law, the Anti- Leonen will stay at the Supreme Court for 20 years or up to 2032. Money Laundering Act and the Plunder Law or Republic Act 7080. In related developments, senior government peace panel Political rivalry may be the principal motivation in the member Miriam Coronel-Ferrer on Dec. 8 took her oath as accusations hurled by Mr. Orduña against Mr. Espino. But the new chair of the government peace negotiating panel for political rivalry has led to the discovery of many anomalies in talks with the MILF, Presidential Adviser on the Peace Process government. Mr. Orduña’s accusations – denied by Mr. Espino – of Teresita Deles announced. “Professor Ferrer’s appointment the governor’s involvement in jueteng operations warrant a closer signifi es continuity and harmony in the peace talks, which look. Aside from his allegations against Mr. Espino regarding is crucial towards the completion of the comprehensive gambling payoffs, Mr. Orduña challenged the governor to bare

Government must still do more.

Philippine ANALYST December 2012 20 POLITICAL

Political rivalry may be the principal motivation.

PNP CHIEF QUITS AHEAD OF RETIREMENT DATE

President Aquino announced on Dec. 13 the early retirement of Philippine National Police (PNP) Director General Nicanor Bartolome to preempt an awkward transition in the national police leadership in the middle of the campaign for national elections next year.

In a simultaneous announcement, Interior and Local Government Secretary Manuel Roxas named PNP Deputy Director General Alan Purisima as Mr. Bartolome’s successor. Mr. Aquino also announced the appointment of Vice Rear Admiral Jose Luis Alano as the new Flag Offi cer-in-Command of the Philippine Navy to replace Rear Admiral Alexander Pama, who will retire on December 21. Mr. Bartolome was scheduled to retire in March next year, which will be inside the period when reassignments and reshuffl e of government offi cials were banned under the Omnibus Election Code. He will leave the service 3 months ahead of retirement day. Mr. Purisima is head of the PNP’s Task Force Election, an assignment that prepared him to implement an order from Pres. Aquino to keep the campaigning and the voting in the May 2013 elections clean and fair. Mr. Roxas said he offered Mr. Bartolome another post in government, but the general, who was scheduled to undergo knee operation, declined.

his statement of assets, liabilities and net worth (SALN) to prove At least 12 members of the Ampatuan family are accused in that the latter’s wealth is legitimately acquired. Mr. Espino is the case. Zaldy’s father, former Maguindanao governor Andal not a justice of the Supreme Court and the SALN is supposed Ampatuan Sr., and his brother former Datu Unsay Mayor Andal to be a public document so there should be no problem here. Ampatuan Jr. have also been arraigned in previous years, since Amid this scandal, authorities may want to look into the the hearing began in 2010. On Nov. 23, 2009, a convoy of 58 SALNs of other local government executives, several of whom people—including 32 journalists—were waylaid and killed in have also been implicated in jueteng and other illegal numbers Ampatuan town, Maguindanao, by more than 100 militia men, games as well as coddling illegal loggers and small scale allegedly on orders of the Ampatuans. The victims were on their miners, and criminal activities such as smuggling and even drug way to fi le the certifi cate of candidacy for governor of political traffi cking. If public offi cials cannot be pinned down for direct challenger Esmael Mangudadatu, then Buluan town vice-mayor. involvement in criminal activities, they can be investigated Mr. Mangudadatu’s wife and sister were among the massacre for accumulating wealth beyond their means. The Bureau victims. The Offi ce of the Solicitor General has asked the Supreme of Internal Revenue has started going after public servants Court (SC) to reconsider its decision banning the live broadcast believed to be involved in corrupt activities by checking their coverage of court hearings of the 2009 Maguindanao massacre. tax declarations and payments against visible manifestations In a motion for reconsideration, Solicitor General Francis of wealth. If warranted and using proper procedures, the Jardeleza said the live radio and television coverage of the trial money-laundering police can and should be brought in. will not be prejudicial to the constitutional rights of the accused. Even with amendments in anti-gambling laws, the penalties The SC also stood pat in its June 2012 ruling affi rming the are still inadequate to dissuade those who are believed to earn Court of Appeals decision ordering the inclusion of Mr. Zaldy billions annually from illegal numbers games. The country also has Ampatuan in the list of accused in the Maguindanao massacre. no laws against racketeering. But there are enough laws against tax In a 3 page resolution made public on Dec. 5, the high court evasion and false declarations in SALNs to go after corrupt public denied the motion fi led by Mr. Ampatuan for lack of merit. offi cials. Authorities should not hesitate in applying those laws. “No further pleadings will be entertained in this case. Let entry of judgment be made in due course,” the high court said. Mr. Ampatuan, in his 2nd motion for reconsideration said his right Zaldy Ampatuan fi nally arraigned to due process has been violated when the high court issued its June and August ruling denying his appeal without telling him up on what facts and law it was based. The high court, in After almost a 3-year wait, a 3rd member of the political clan its ruling said “when the court denies due course a petition for accused of masterminding the 2009 Maguindanao massacre failure to show any reversible error committed by the Court of was fi nally arraigned on Dec. 12. Like the 2 other relatives Appeals, there is no need to fully explain the Court’s denial.” arraigned before him, Mr. Zaldy Ampatuan, former Governor Moreover, another suspect in the Maguindanao massacre of the Autonomous Region in Muslim Mindanao, pleaded has fallen into government hands in a remote village in North not guilty to 57 counts of murder fi led against him and 195 Cotabato, the police said. The suspect, Mr. Bong Andal, a others at the Quezon City Regional Trial Court Branch 221. Maguindanao resident and said to be the operator of the backhoe that dug the common graves of the massacre victims, was cornered in an entrapment operation by the Midsayap police, soldiers

Philippine ANALYST December 2012 POLITICAL 212 from the 40th Infantry Battalion and elements of the Criminal policy, that will take effect in January, 2013. Mr. Aquino said that Investigation and Detection Group in the Autonomous Region the report may also have been exaggerated. He added that it would in Muslim Mindanao at about 10 a.m. on Nov. 24. Mr. Andal be very diffi cult for Beijing to implement the new policy, because was described as an employee of the Maguindanao provincial it would be a violation of the provisions of the United Nations government and driver of heavy equipment, backhoe included. Law of the Sea or Unclos, where China is one of the signatories. Vigilant villagers helped authorities by providing them with information and photos of Mr. Andal, who has reportedly been living in barangay Kapinpilan since 2009. While he did not resist Senators Legarda, Escudero top SWS survey arrest when presented with 3 warrants of arrest issued by a Quezon City Court, Mr. Andal denied involvement in the massacre. Senators Loren Legarda and Francis Escudero remained He is now under custody of the Philippine National Police. the top choices for the Senate in 2013 based on the latest survey conducted by the Social Weather Station (SWS).

West Philippine Sea talks postponed Of the 1,200 respondents polled by the SWS from November 29, 2012 to December 03, 2012, Ms. Legarda ranked Number The meeting of the 4 claimants in the West Philippine Sea 1 with 68% followed by Mr. Escudero with 61%, the United (South China Sea) to be hosted by the Philippines was Nationalist Alliance (UNA) said in a statement. Ms. Legarda postponed due to confl icts in schedule, the Department of and Mr. Escudero are running under the Liberal Party-led Foreign Affairs (DFA) said. coalition but they are also guest candidates in UNA. In both surveys, UNA Secretary General and Navotas Representative DFA spokesman Raul Hernandez said the 4 Association of Tobias Tiangco noted how their candidates dominated the top Southeast Asian Nations (ASEAN) members – the Philippines, 12 slots for the Senate. Among the UNA bets who made it in the Vietnam, Brunei and Malaysia – agreed to hold the meeting at top 12 in the SWS survey were San Juan Rep. Joseph Victor a later date, noting the challenge in scheduling of those who are Ejercito, who ranked 5th with 49%; Cagayan Rep. Juan Ponce attending. “It will not take place on Dec. 12 due to inconveniences Enrile Jr, who was for the 6th-7th place with 46%; re-electionist in the schedule,” Mr. Hernandez said. The meeting of the 4 Sen. Gregorio Honasan in 8th place with 43%; Vice President claimants, a Philippine initiative, is seen as the beginning of Jejomar Binay’s daughter Maria Lourdes Nancy Binay, who 4-party talks to explore how ASEAN members can resolve among was tied with former senator Juan Miguel Zubiri for the 9th themselves the dispute that presents the challenge to the claimants. to 10th places with 41%; and former senator Richard Gordon Foreign Affairs Secretary Albert del Rosario announced last month in 12th place with 37%. In the Pulse Asia survey, 7 out of the that the meeting of the Philippines, Vietnam, Brunei and Malaysia 12 senatorial slots in 2013 also went to the UNA candidates. at the vice ministerial level was pushed by President Aquino. In other developments, the Aquino administration’s net Tensions over the disputed areas are rising. Even as satisfaction rating as a whole bounced back to a “very good” Malacañang opted to remain cautious on Beijing’s latest policy +62 in August from a “good” +44 in May, according to a recent ordering its naval forces to “board and search” ships entering the SWS poll. The survey, conducted from Aug. 24 to 27, found contested waters in the West Philippine Sea, the more “hawkish” 72 percent of respondents satisfi ed with the performance of the lawmakers voiced a strong stand on the issue, as they pressed present government while 10% said otherwise, giving it a net the government to take appropriate action against “China’s latest satisfaction score of +62. The remaining 17% of respondents, provocation.” ASEAN secretary-general Surin Pitsuwan, an meanwhile, were ambivalent with the administration’s Indonesian, said Beijing’s latest action was a very serious turn of performance. The government’s last “very good” rating events and could escalate the tension in the region. Mr. Pitsuwan was in December 2011 at +56. It fell to +46 and +44, both said it was important to exercise restraint and approach the new categorized as “good,” in March and May this year, respectively. development with a level head. Pres. Aquino, meanwhile, ordered the DFA to verify if Beijing’s alleged new maritime policy has been adopted offi cially or was just a proposal from the leadership of Hanan province, that has direct control of Sansha City, a newly- built city located near the West Philippine Sea. According to the China Daily, it was the Hanan government that issued the new

The meeting is seen as the beginning of four-party talks.

Philippine ANALYST December 2012 22 ECONOMY

Filipinos more upbeat about economic prospects The 3rd quarter survey of the Social Weather Stations (SWS), taken on August 24-27, disclosed a net economic optimism score of +17, the highest in 4 quarters, with 31% of Filipinos expecting the economy to improve over the next 12 months while only 14% expecting it to worsen (the other 55% see no change in the economic situation).

he score, which SWS considered as “very high”, was up signifi cantly from the “high” +8 in the 2nd quarter survey T(conducted in May). SWS said the net economic optimism score has been “very high” (+10 and up) in 7 out of the last 10 surveys. Optimists exceeded pessimists in just 3-4 out of about 40 surveys during the term of Pres. Gloria Macapagal-Arroyo. The bullishness about the economy, however, has yet to be translated into the respondents’ personal circumstances. While expectations on personal quality of life over the next 12 months registered a “high” +27 in the August survey, with 34% expecting an improvement against 7% anticipating a worsening, this was a slight 3 points down from +30 in May. It was also the lowest net personal optimism score in 6 quarters. The assessment of whether or not lives actually improved during the past 12 months was worse. Those who said their lives Net economic optimism score was highest in Balance (rest deteriorated (“losers”, 28%) outnumbered those who felt their lives of) Luzon at “very high” +23 in 3Q12, a 9-point gain from were better off (“gainers”, 21%), resulting in a net loss score of -8 +14 in 2Q12. It was lowest in the Visayas at “fair” +10, a in 3Q12. This was little changed from the -9 score a quarter ago. 7-point increase from +3. Other areas also posted gains, to +20 The scores have never been positive since the survey started 28 from +11 in Metro Manila, and to +11 from +7 in Mindanao. years ago, except in two instances during the term of Pres. Corazon Net personal optimism was down in all geographic areas Aquino, and have in fact improved, i.e., registered smaller negative except Mindanao, where it rose slightly to +22 in 3Q12 from numbers, under the leadership of Pres. Benigno Aquino III. +20 in 2Q12. It down by a point to a still “very high” +36 in What it says is that Filipinos are an optimistic race. They Metro Manila and to a “fair” +18 in the Visayas. It dropped believe things will improve, even when, in reality they haven’t. sharply albeit to a still “high” +30 from +39 in Balance Luzon.

Philippine ANALYST December 2012 ECONOMY 232

Filipinos are an optimistic race.

SWS CLASSIFICATION OF SCORES NET ECONOMIC OPTIMISM AND GAINERS/ CLASSIFICATION NET PERSONAL OPTIMISM SCORE LOSERS SCORE +10 and up Very high +30 and up +1 to +9 High +20 to +29 -9 to zero Fair +10 to +19 -19 to -10 Mediocre +1 to +9 -12 to -20 Low -9 to zero -30 down Very low -10 down Source: SWS

Net loss scores were also better for Manila, to zero from PHILIPPINE STOCK EXCHANGE INDEX -5; Visayas, to -10 from -24; and Mindanao, to -10 from -20. JANUARY 2011 - DECEMBER 2012 But it slipped 10 points to -8 from +2 in Balance Luzon. The survey was conducted nationwide using face-to-face interviews of a sample of 1,200 respondents. Sampling error margins are +3%-points for national percentages and +6%-points for area fi gures.

Stock market reaches new highs in December

The Philippine stock market index reached the year’s peak of 5,832 points on Dec. 11, a 33.4% increase from 4,372 at end-2011. And up nearly 50% since Pres. Aquino came to power.

It was the year’s 37th record high, although the index Then on Dec. 6, the PSE index posted another high of 5,764 record was breached twice earlier during the month. on announcement by Pres. Barrack Obama that a “solution to The fi rst new high was registered on Dec. 4, when it reached the fi scal cliff is imminent.” This sent a signal that the modest 5,706 on selective, follow-through buying of index stocks driven U.S. recovery will be sustained. Fiscal cliff is the decline by the momentum of higher-than-expected economic growth. in government spending – which could result in the relapse The government reported just before the long holiday break in of a recovering U.S. economy – as tax breaks and spending November a surprising 7.1% growth of the Philippine economy in subsidies end in 2012 as prescribed by law, and as government 3Q12, leading to a 6.5% 3-quarter average, the 2nd best in Asia. The debt reaches legally-mandated ceilings. It needs prompt action stock market corrected briefl y on profi t-taking the following day. by the U.S. Congress to avoid the loss of fi scal stimulus.

Philippine ANALYST December 2012 24 ECONOMY

The second best performing market in Asia in 2012.

PER CENT CHANGE IN ASIAN STOCK MARKET INDICES COUNTRY INDEX CLOSE (DEC. 14) YR-TO-DATE CHG (%) Pakistan KSE 100 16,807 48.1 Philippines PSE Index 5,788 32.4 Thailand SET 1,354 32.0 India Sensex 19,229 24.4 Hong Kong Hang Seng 22,446 21.8 Singapore Straits Times 3,157 19.3 Japan Nikkei Stock Average 9,743 15.2 Indonesia Jakarta Composite 4,320 13.0 South Korea Kospi 2,003 9.7 Taiwan Weighted 7,757 9.7 Malaysia KL Composite 1,653 8.0 China CBN 600 18,507 -4.9 Source: Asian Wall Street Journal

The release of offi cial data showing that infl ation had eased to The local dollar bond sale was also a measure to manage 2.8% in November from 3.1% in October also helped lift share prices. the appreciation of the peso, as it meant increased demand But after breaching the 5,800 mark for its 37th record high for the country’s steadily building up dollar supply. It was the in 2012, the market underwent straight sessions of correction Bangko Sentral ng Pilipinas (BSP) who made the suggestion and dropped back to below 5,800 by mid-month. Subsequent that government fi rst tap available dollars in the country before pre-Christmas rallies were unable to break the new record set borrowing abroad to help ease the peso appreciation. Raising on Dec. 11. Nonetheless, the index approached the year-end funds abroad would only accelerate the peso gain vs. the dollar signifi cantly higher than it was on the last trading session of as it would increase the infl ow of dollars into the country. 2011 and was the second best performing market in Asia in 2012. The Philippine currency was the biggest gainer in Asia in 2012, appreciating by 7% since the start of the year. Gross international reserves also increased to $82 billion as Gov’t sells $500Mn bonds to local investors of the fi rst 10 months, equivalent to 16 months of imports based on central bank calculations (3rd highest in Asia The government sold $500 million worth of 10.5-year bonds in terms of import equivalent after China and Taiwan). on-shore on Nov. 28 in an effort to gauge the local market’s The Land Bank of the Philippines (LBP) was the lead arranger capacity to absorb dollar-denominated debt as it tries to of the $500 million local bond issue, with First Metro Investment, further reduce reliance on foreign capital markets. Deutsche Bank, Credit Suisse and HSBC joint issue managers. The government said it plans to source more dollars from the It was a successful bond issue as it was more than 3 central bank’s foreign exchange reserves, and will study if local times oversubscribed, with tenders reaching up to $1.74 investors can absorb additional dollar debt papers, as part of its billion. Maturing in 2023, the bonds fetched a coupon rate efforts to further reduce reliance on foreign borrowings and to of 2.75%, within the government’s indicative guideline borrow more from the local market. It is contemplating lowering price of 2.5-3% and were cheaper than it would have been its foreign borrowing program for 2013 to $1.5 billion to $2 billion had they been sold abroad, according to market watchers. from the original program of $3 billion. The government’s debt This followed a hectic month of bond transactions, with liability management strategy also includes debt buybacks, swaps, the government issuing 10-year global peso notes (GPNs) local currency denominated debts and other innovative deals. amounting to $750 million (P30.8 billion) on Nov. 9 to raise The bottom line of all these efforts is better management funds for the buyback of higher coupon U.S. dollar and euro- of its foreign debt load to win its fi rst investment-grade rating. denominated debts totaling $1.5 billion. Then it purchased another $750 million from the central bank’s reserves to fi nance the balance needed for the buyback. The pre- The bottom line of all these eff orts is termination of the $1.5 billion debts was carried out on Nov. 12. Proceeds from the $500 million local dollar bond issue will be better management of its foreign debt used to fund part of the national government’s regular budgetary load to win its fi rst investment-grade requirements and to re-lend to state-owned Power Sector Assets and Liabilities Management Corp. (PSALM). PSALM, the agency rating. tasked to manage the government’s power assets, needs P60 billion in 2013 to refi nance existing debt and fund operations.

Philippine ANALYST December 2012

26 ECONOMIC INDICATORS

INFLATION RATE DECEMBER INFLATION INCREASES TO 2.9% (%), 2006 = 100 In December, the annual headline infl ation slightly increased to 2.9% from 2.8% in FOOD AND NON- ALCOHOLIC CLOTHING November 2012 due to higher infl ation in the prices of food and non-alcoholic ALCOHOLIC BEVERAGES AND AND FOOTWEAR beverages (from 2.2% to 2.3%); and alcoholic beverages and tobacco indices (from BEVERAGES TOBACCO 5.0% to 5.1%). On the other hand, the annual uptick in the prices of housing, water, 2012 2011 2012 2011 2012 2011 electricity, gas, and other fuels decelerated from 3.7% to 3.6%, while infl ation in the price of transport decreased from 1.4% to 1.2%. Meanwhile, annual infl ation rate in Jan. 3.3 4.9 5.6 2.9 3.9 3.0 the National Capital Region (NCR) accelerated to 2.8% from 2.6% last month. As for the Areas Outside the National Capital Region (AONCR), annual increase in prices remained Feb. 1.4 6.0 4.7 4.0 3.7 3.2 at 2.9%. The average year-on-year headline infl ation rate in 2012 reached 3.2%, within March 1.4 6.2 4.3 4.6 3.6 3.5 the Development Budget Coordination Committee’s target of 3% to 5%. April 1.8 6.2 5.1 4.9 4.6 3.4 May 1.8 6.2 5.2 5.3 5.2 3.6 PRICE INDICES June 2.1 6.0 4.8 5.9 5.2 3.9 by commodity July 2.3 5.7 4.9 6.0 5.0 4.2 CPI WHOLESALE RETAIL Aug. 3.4 5.1 4.8 6.3 5.2 3.8 (2000 = 100) (1998 = 100) (1978 = 100) Sept. 3.7 5.1 4.8 6.1 5.0 3.9 2012 2011 2012 2011 2012 2011 Oct. 2.5 5.7 4.8 6.2 5.0 3.9 Jan. 128.2 123.3 231.3 220.7 154.0 151.4 Nov. 2.1 4.8 5.0 6.3 5.0 4.0 Feb. 128.1 124.7 231.8 225.4 153.6 152.2 Dec. 2.3 4.1 5.1 6.0 4.9 3.7 March 128.3 125.0 234.9 228.2 154.1 152.1 April 129.4 125.6 233.4 232.1 154.4 153.7 May 129.5 125.9 229.5 229.0 154.3 152.4 INFLATION RATE June 130.1 126.5 224.6 227.9 155.1 152.4 FURNISHING, July 130.5 126.6 225.7 226.5 155.6 152.6 HOUSEHOLD HOUSING, WATER, EQUIPMENT Aug. 131.5 126.7 230.2 224.1 157.8 152.5 ELECTRICITY, GAS HEALTH AND ROUTINE AND OTHER FUELS Sept. 131.4 126.8 231.3 225.7 158.5 152.9 MAINTENANCE OF Oct. 131.3 127.3 - 226.0 158.2 154.0 THE HOUSE Nov. 131.4 127.8 - 230.1 - 154.0 2012 2011 2012 2011 2012 2011 Dec. 131.3 127.6 - 229.4 - 154.0 Jan. 5.3 5.0 2.4 2.2 2.8 3.1 Feb. 4.6 5.1 2.1 2.5 3.2 2.9 INFLATION RATE March 4.5 4.7 2.3 2.5 2.8 3.3 PHILIPPINES METRO MANILA OUTSIDE MM April 4.7 3.9 3.2 2.4 3.3 3.2 2012 2011 2012 2011 2012 2011 May 4.3 5.1 3.3 2.5 3.2 3.7 Jan. 4.0 4.1 3.5 3.9 4.0 4.0 June 4.0 5.9 3.7 2.5 3.3 3.5 Feb. 2.7 4.8 2.3 4.6 2.8 4.7 July 4.9 5.4 4.1 2.5 3.2 3.3 March 2.6 4.8 2.7 3.9 2.6 5.1 Aug. 5.6 5.1 4.4 2.6 3.1 3.3 April 3.0 4.7 2.5 3.3 3.2 5.1 Sept. 4.5 5.7 4.6 2.6 3.1 3.5 May 2.9 5.1 2.2 4.4 3.1 5.2 Oct. 4.2 6.5 4.8 2.5 3.0 3.4 June 2.8 5.2 2.2 4.7 3.0 5.4 Nov. 3.6 5.7 4.8 2.3 3.1 3.1 July 3.1 5.1 3.1 4.0 3.1 5.3 Dec. 3.6 5.1 4.8 2.5 3.1 3.0 Aug. 3.8 4.7 4.5 3.3 3.6 5.1 Sept. 3.6 4.8 3.5 4.2 3.7 5.0 Oct. 3.1 5.2 2.9 4.9 3.3 5.3 INFLATION RATE RECREATION Nov. 2.8 4.8 2.6 3.5 2.9 5.1 TRANSPORT COMMUNICATION AND CULTURE Dec. 2.9 4.2 2.8 3.0 2.9 4.5 2012 2011 2012 2011 2012 2011 INFLATION RATE Jan. 5.5 2.5 -0.2 0.1 2.5 1.1 RESTAURANTSRestaurants and AND MISCELLANEOUS EDUCATION Feb. 3.9 4.8 -0.1 -0.1 2.6 0.9 Education MiscellaneousGOODS Goods AND SERVICES and Services March 3.4 5.3 -0.2 -0.2 2.2 1.1 2012 2011 2012 2011 2012 2011 2012 2011 April 3.3 6.3 0.0 -0.2 2.6 1.0 Jan. 5.0 4.1 3.5 2.1 Jan. 5.0 4.1 3.5 2.1 May 2.3 6.6 0.1 -0.2 2.8 1.1 Feb. 4.8 4.2 3.0 2.4 Feb. 4.8 4.2 3.0 2.4 June 1.5 6.8 0.1 -0.3 2.4 1.6 March 4.8 4.3 2.9 2.8 March 4.8 4.3 2.9 2.8 July 0.9 6.8 0.2 -0.3 2.6 1.6 April 4.8 4.2 3.3 2.4 April 4.8 4.2 3.3 2.4 Aug. 1.5 6.9 0.2 -0.4 2.8 1.5 May 4.7 4.3 3.4 2.8 May 4.7 4.3 3.4 2.8 Sept. 1.7 7.1 0.3 -0.4 2.7 1.6 June 4.8 5.1 3.4 3.0 June 4.8 5.1 3.4 3.0 Oct. 1.9 6.7 0.3 -0.4 2.6 1.7 July 4.4 5.2 3.5 2.9 July 4.4 5.2 3.5 2.9 Nov. 1.5 6.6 0.4 -0.3 2.6 1.8 Aug. 4.4 5.1 3.3 3.2 Aug. 4.4 5.1 3.3 3.2 Dec. 1.2 6.0 0.4 -0.4 2.6 1.8 Sept. 4.4 5.1 3.2 3.2 Sept. 4.4 5.1 3.2 3.2 Oct. 4.4 5.1 3.2 3.1 Oct. 4.4 5.1 3.2 3.1 Nov. 4.4 4.7 3.2 3.3 Nov. 4.4 4.7 3.2 3.3 Dec. 4.4 4.7 3.2 3.2 Dec. - 4.7 - 3.2

Philippine ANALYST December 2012 ECONOMIC INDICATORS 27

PESO MAINTAINS P41:$1 AVERAGE IN DECEMBER GROSS TREASURY BILL PESO-DOLLAR Peso managed to sustain an average dollar exchange rate of P41:$1 in December INTERNATIONAL RATE91-DAY, EXCHANGE RATE 2012 from P41.12:$1 last month. During the month, the peso market moved below RESERVE WAIR IN PERCENT PERIOD AVE. the P41:$1 mark. The highest close was recorded at P40.86:$1 in the 1st week of (US$B) (US$B) the month. According to the Bangko Sentral ng Pilipinas (BSP), the peso remains 2012 2011 2012 2011 2012 2011 competitive even at this level. Among countries in the region, BSP said that the Philippine peso is within the middle range of currency exchange rates. For the whole Jan. 77.36 63.54 43.62 44.17 1.55 0.70 year, the peso exchange rate has reached an average of P42.23:$1, well within the P42-P45:$1 forecast of BSP. Feb. 77.77 63.89 42.66 43.70 1.86 1.66

March 76.13 65.98 42.86 43.52 2.27 1.08

April 76.54 68.49 42.70 43.24 2.33 0.79 Php: US$ EXCHANGE RATE

May 76.08 68.85 42.85 43.13 - 1.10

June 76.13 69.00 42.78 43.37 - 2.68

July 79.76 71.88 41.91 42.82 1.90 2.40

Aug. 80.73 75.94 42.05 42.42 1.47 1.53

Sept. 82.03 75.17 41.75 43.03 1.00 0.56

Oct. 81.75 75.83 41.45 43.45 0.59 - Nov. 84.11 76.21 41.12 43.27 0.18 0.94

Dec. - 75.30 41.01 43.65 0.20 1.56 GROSS INT'L RESERVES

91-DAY T-BILL RATE AVERAGE INCREASES TO 0.2% IN DECEMBER

The 91-day Treasury bill (t-bill) average rate rose to 0.198% in December from an average of 0.18% last month. The yield for the 6-month t-bill also rose to 0.52% in December from 0.49% last month while the yield for the 1-year tenor slid to 0.61% from 0.62%. Only 1 auction was held for the month on December 10. The government sold P6.38 billion worth of each tenor, lower than the planned debt sale of P7.5 billion. National Treasurer Rosalia de Leon attributed the auction results to sustained confi dence on the country’s economic management. However, the low t-bill rates regime is expected to continue if the market manages to maintain a low infl ation BSP REFERENCE RATES environment. Peso equivalent per unit of foreign currency as of December 03, 2012 AVE. MONTH AGO % CHANGE Australian dollar 42.62 42.76 (0.3) Bahrain dinar 108.47 109.31 (0.8) Brunei dollar 33.37 33.52 (0.5) 91-DAY T-BILL RATE Canadian dollar 41.18 41.40 (0.5) E.M.U. euro 53.17 52.88 0.5 Hong Kong dollar 5.28 5.32 (0.8) Indonesian rupiah 0.0043 0.0043 - Japanese yen 0.50 0.51 (3.2) Kuwaiti dinar unquoted unquoted unquoted Saudi Arabian rial 10.90 10.99 (0.8) Singaporean dollar 33.50 33.66 (0.5) Swiss franc 44.12 43.82 0.7 Thai baht 1.33 1.34 (0.6) UAE dirham 11.13 11.22 (0.8) UK pound 65.51 66.03 (0.8) US dollar 40.89 41.21 (0.8) Others ( not convertible with BSP ) Brazilian real 19.39 20.30 (4.5) Indian rupee 0.75 0.77 (1.6) Korean won 0.04 0.04 - Malaysian ringgit 13.45 13.50 (0.4) Mexican new peso 3.16 3.16 (0.1) New Zealand dollar 33.51 34.03 (1.5) Norwegian kroner 7.22 7.19 0.4 Pakistani rupee 0.42 0.43 (1.6) South African rand 4.60 4.71 (2.3) Swedish kroner 6.15 6.15 0.0 Syrian pound 0.58 0.60 (3.1) Taiwanese nt dollar 1.41 1.41 (0.3) Venezuelan bolivar * 9.53 9.61 (0.8) * Effective 01 Jan. 2008 Venezuela’s offi cial exchanre rate was changed to 2.15 bolivars per dollar tyo 2,150 per dollar Philippine ANALYST December 2012 28 ECONOMIC INDICATORS

SELECTED INTEREST RATES BALANCE OF PAYMENTS GROWTH 2012 2011 Peso Deposit Rates (December 24-28, 2012) JJan.an. - Sept. 2012 (in US$ million) RATE (%) AVERAGE 2 WEEKS AGO Current Account 7,156 5,112 40.0 Saving Deposits 0.05 0.05 Goods and Services (6,092) (8,304) -26.6 Time Deposits Export 52,705 48,115 9.5 below 1 year 2.90 3.02 Import 58,797 56,419 4.2 1 - 2 years 3.97 2.99 Goods (9,057) (10,912) -17.0 Over 2 years 1.67 1.87 Credit: Exports 39,667 36,755 7.9 Dollar Deposit Rates (December 24-28, 2012) Debit : Imports 48,724 47,667 2.2 Saving Deposits 0.29 0.29 Services 2,965 2,608 13.7 Time Deposits Credit: Exports 13,038 11,360 14.8 60 days and below 0.77 0.79 Debit : Imports 10,073 8,752 15.1 61-90 Days 0.94 0.98 Income 55 541 -89.8 91-180 Days 1 1 Credit: Receipts 5,629 5,148 9.3 181 days and above 1.22 1.23 Debit : Disbursments 5,574 4,607 21.0 Bank Lending Rates (December 24-28, 2012) Current Transfers 13,194 12,875 2.5 All Maturities 4.5 4.7 Credit: Receipts 13,878 13,516 2.7 High 7.46 7.49 Debit : Disbursments 684 641 6.7 Low 5.26 5.24 CAPITAL AND FINANCIAL ACCOUNT 395 6,209 -93.6 Treasury Bill Primary Rates ( December 10, 2012 ) Capital Account 94 120 -21.7 91 days 0.020 0.463 Credit: Receipts 157 187 -16.0 182 days 0.520 0.700 Debit : Disbursments 63 67 -6.0 364 days 0.606 0.950 Financial Account 301 6,089 -95.1 Money Market Rates (December 24-28, 2012) Direct Investment 423 792 -46.6 Promissory Note 3.4 3.36 Debit: Assets, Residents Investment abroad 670 (10) -6800.0 Commercial Papers w/o recourse 4.43 4.49 Credit : Liabilities, Non-residents Investment 1,093 782 39.8 Manila Reference Rates (December 24-28, 2012) in the Phil MRR 60 3.25 3.31 Portfolio Investment 2,242 5,595 -59.9

MRR 90 4 4 Debit: Assets, Residents Investment abroad 1,291 (595) -317.0 MRR 180 3.56 3.63 Credit : Liabilities, Non-residents Investment 3,533 5,000 -29.3 GOVERNMENT FISCAL PERFORMANCE DATA YEAR-AGO GROWTH in the Phil JANUARY TO SEPTEMBER 2012 (in PM) (in PM) RATE (%) Other Investment (2,403) (1,212) 98.3 I. Revenues 1,118,947 1,037,037 7.9% Debit: Assets, Residents Investment abroad 3,448 2,295 50.2 Tax Revenues 996,312 888,360 12.2% Credit : Liabilities, Non-residents Investment Non-Tax Revenues 122,557 125,678 -2.5% 1,045 1,083 -3.5 in the Phil Grants 78 50 56.0% NET UNCLASSIFIED ITEMS (1,720) (1,600) 7.5 II. Expenditures 1,225,009 1,070,082 14.5% OVERALL BOP POSITION 5,831 9,721 -40.0 III. Surplus/Defi cit 36,357 21,932 -65.8% IV. Financing 266,503 -52,994 -602.9%

Domestic Financing 215,709 46,514 -363.8% BALANCE OF PAYMENTS Foreign Financing 63,531 60,350 5.3% V. Change-in-Cash 95,313 11,900 -700.9%

TOTAL EXTERNAL DEBT DATA YEAR-AGO GROWTH SEPTEMBER 2012 (in $M) (in $M) RATE (%) By Type of Debt 61,724 62,431 -1.1% Medium and Long-term 53,737 55,284 -2.8% Short-Term 7,986 7,147 11.7% By Borrower 61,724 62,431 -1.1% Banking System 10,306 9,679 6.5% Public Sector 41,776 42,881 -2.6% CURRENT ACCOUNT Private Sector 9,642 9,870 -2.3% By Institutional Creditor 61,724 62,431 -1.1% Banks & Other Financial Institutions 8,635 8,298 4.1% Suppliers 3,470 2,917 19.0% Multilateral 11,589 11,248 3.0% IBRD 3,324 2,814 18.1% IMF 0 0 ADB 5,862 5,934 -1.2% Bilateral 15,041 16,183 -7.1% Bondholders/Noteholders 22,257 22,832 -2.5%

Philippine ANALYST December 2012 ECONOMIC INDICATORS 29

JANUARY-OCTOBER TOTAL TRADE AMOUNTS TO $96Bn MERCHANDISE IMPORTS 2012 2011 % CHANGE Total merchandise trade from January to October 2012 grew by 3.7% to $95.75 billion JAN to OCT 2012 in US$ million but decelerated from the 4.8% growth recorded in the same 10-month period in 2011. CAPITAL GOODS 14,234 12,662 12.4 The reduction in total trade growth is largely due to the slowdown in the growth of aggregate import payments from 12.9% to 0.9%, amounting to $51.28 billion. Telecom eqpmt & elec's eqpmt 6,994 6,369 9.8 Meanwhile, merchandise exports continued to improve as it registered $44.48 billion of total export revenues, which grew by 7.1% from the same period in 2011. Trade Power generating & spec'd eqpmt 3,123 2,907 7.4 defi cit for the period decreased to $6.8 billion from $9.31 billion in 2011. Offi ce and EDP machine 1,669 1,542 8.2

For October 2012, total trade increased to $9.64 billion from $9.18 billion in October Transport 1,079 892 21.0 2011 refl ecting a 5.1% growth, which is attributed to the 4.3% growth in the month’s import payments and 6.1% increase in export revenues. Import payments for the Others 500 460 8.7 month amounted to $5.2 billion while export revenues registered $4.4 billion. Of the RAW MATERIALS & INTER. GOODS 18,697 21,222 (11.9) aggregate import bill, 25.7% accounted for Electronic products which rose by 8.7% as Components/Devices (Semiconductors) imports increased by 16.8%. Mineral Fuels, Semi-processed raw materials 16,405 18,929 (13.3) Lubricants and Related Materials emerged as 2nd top import (20.5% share to total imports) which had a 7.5% decrease in import payments due to the decrease in global Unprocessed raw materials 2,292 2,293 (0.0) prices for petroleum crude. Transport equipment was ranked 3rd (7.8% share to total imports) with a 21.4% increase in imports attributed to the 38% increase in shipments. MINERALS, FUELS & LUBRICANTS 11,529 10,356 11.3 Furthermore, 43.1% of merchandise export revenues accounted for Electronic products Crude petroleum 6,179 6,420 (3.8) which slightly grew by 0.3% in October with Components/Devices (Semiconductors) increasing by 7.5%. The 2nd and 3rd top exports for the month were Woodcrafts and Others 4,760 3,448 38.0 Furniture, and Cathodes & Sections of Cathodes and of Refi ned Copper with 14.3% and 44.8% growth, respectively. CONSUMER GOODS 6,277 5,895 6.5

Non-durable 3,325 3,194 4.1 FOREIGN TRADE Durable 2,952 2,700 9.3

SPECIAL TRANSACTION 538 704 (23.5)

TOTAL IMPORTS 51,275 50,839 0.9

MERCHANDISE EXPORTS GROWTH 2012 2011 January to October 2012 US$ Mn RATE (%) Total Agro-Based Products 3,006 3,381 (11.1) Coconut Products 1,177 1,576 (25.3) Sugar and Products 125 279 (55.2) Fruit and Vegetables 1,019 820 24.2 Fish, Fresh or Preserved of which: 371 296 25.0 MERCHANDISE BALANCE OF TRADE shrimps and prawn (in US$ million) Forest Products 49 38 28.0 EXPORTS IMPORTS SURPLUS/(DEFICIT) Mineral Products 1,922 2,448 (21.5) 2012 2011 2012 2011 2012 2011 Copper Metal 395 1,113 (64.5) Jan. 4,123 4,000 5,134 5,302 (1,010) (1,302) Petroleum Products 357 591 (39.6) Feb. 4,430 3,865 4,996 4,761 (566) (896) Manufactures 37,838 33,857 11.8

March 4,323 4,353 5,371 5,549 (1,048) (1,196) Electronic Products 19,318 20,673 (6.6) Garments 1,337 1,616 (17.3) April 4,635 4,302 4,773 5,497 (138) (1,195) Textile Yarns / Fabrics 145 153 (5.6) May 4,932 4,108 5,386 4,888 (454) (780) Furniture & Fixtures 152 141 7.7 June 4,314 4,127 5,089 4,503 (775) (376) Chemicals 1,647 1,625 1.4 July 4,727 4,429 4,963 4,999 (236) (570) Machinery & Transport Equipment 4,584 2,493 83.9 Aug. 3,798 4,123 5,057 4,925 (1,260) (803) Iron and Steel 218 170 28.4 Sept. 4,784 3,897 5,266 5,076 (482) (1,179) TOTAL EXPORTS 44,475 41,532 7.1 Oct. 4,408 4,088 5,240 5,020 (832) (932)

Nov. - 3,342 - 4,990 - (1,648)

Dec. - 3,407 - 4,548 - (1,141)

Philippine ANALYST December 2012 30 ECONOMIC INDICATORS

GROSS NATIONAL INCOME PERCENTAGE DISTRIBUTION OF TOTAL FAMILY EXPENDITURE YEAR- NATIONAL ACCOUNTS DATA YEAR- By major expenditure group ON-YEAR 3RD QUARTER 2012 (PB) AGO (PB) GROWTH EXPENDITURE GROUP 2009 2006 (at constant prices) 1,991.9 1,869.4 6.6% Percent 100.0 100.0 (at current prices) 3,376.5 3,094.9 9.1% Food 42.6 41.4 GROSS DOMESTIC PRODUCT (at constant prices) 1,525.5 1,424.9 7.1% Alcoholic Beverages 0.7 0.7 (at current prices) 2,555.2 2,332.6 9.5% Tobacco 0.8 0.9 GNP (at constant prices) by Expenditure Shares Fuel, Light and Water 7.1 7.6 1. Household Final Consumption 1,051.8 990.4 6.2% Expenditure Transportation & Communication 7.7 8.2 a. Food and Non-alcoholic beverages 446.9 423.1 5.6% Household Operation 2.3 2.3 b. Alcoholic beverages, Tobacco 15.0 14.0 7.2% Personal Care and Effects 3.8 3.7 c. Clothing and Footwear 18.0 17.5 2.9% Clothing Footwear & Other Wear 2.2 2.4 d. Housing, water, electricity, gas 113.1 107.1 5.6% and other fuels Education 4.3 4.4 e. Furnishing, household equipment 55.8 52.1 7.1% and routine household maintenance Recreation 0.4 0.5 f. Health 27.7 25.1 10.4% Medical Care 2.9 2.9 g. Transport 87.9 79.3 10.7% Non-Durable Furnishing 0.2 0.2 h. Communication 50.3 45.5 10.5% Durable Furniture and Equipment 2.7 2.7 i. Recreation and Culture 23.4 21.3 9.9% j. Education 34 33 3.0% Rent/Rental Value of Dwelling Unit 12.8 12.7 k. Restaurants and Hotels 46 43 7.4% House Maintenance and Minor Repairs 0.6 0.6 l. Miscellaneous goods and services 134 130 3.2% Taxes Paid 2.0 1.6 2. Government Final Consumption 156.8 140.0 12.0% Expenditure Special Family Occasions 2.7 2.8 3. Capital Formation 305.2 292.8 4.3% Gifts and Contributions to others 1.4 1.4 4. Exports 786.1 735.6 6.9% Other Expenditure 2.9 3.0 5. Imports 787.6 727.2 8.3% Other Expenditures 2.9 2.9 GNP (at constant prices) by Industrial Origin 1. Agriculture 158.6 152.4 4.1% TOTAL FAMILY EXPENDITURES 3,239 2,561 2. Industry Sector 483.9 447.6 8.1% a. Mning & Quarrying 13.7 14.0 -2.2% Source: Family Income & Expenditure Survey (FIES) Final Results 04 February 2009 b. Manufacturing 323.3 305.7 5.7% c. Construction 89.6 72.0 24.3% d. Electricity, Gas and Water 57.3 55.9 2.7% 3. Service Sector 883.0 824.9 7.0% a. Transport., Comm., Stor 107.7 98.8 9.0% b. Trade, Repair of Motor Vehicles, 273.7 255.7 7.0% Motorcycle & Household Goods UNEMPLOYMENT AND c. Financial Intermediation 101.8 94.0 8.3% UNDEREMPLOYMENT RATES d. Real Estate, Renting & Business 176.2 163.4 7.8% Activities e. Public Administration & Defense: 66.7 63.9 4.3% Compulsory Social Security f. Other Services 157.0 149.1 5.3%

LABOR AND EMPLOYMENT 2011 2012 (New Defi nition) Apr Jul Oct Jan Apr Jul Oct Total labor force 39,661 39,901 41,215 40,309 40,659 40,396 40,419 Labor force participation (%) 64.2 64.3 66.3 64.3 64.7 64.0 63.9 Employment (%) 92.8 92.9 93.6 92.8 93.1 93 93.2 Unemployment (%) 7.2 7.1 6.4 7.2 6.9 7 6.8

Underemployment (%) 19.4 19.1 19.1 18.8 19.3 22.7 19 OFW DEPLOYMENT hires and rehires

Philippine ANALYST December 2012

philippine regionalregional updateupdate 32 philippine regional update

NCR – NATIONAL CAPITAL REGION (METRO MANILA)

Metro Manila’s property boom best in 2 decades Reuters reported in late November that Metro Manila is in the throes of a property boom that is expected to be the best in 2 decades. The barometer is the present construction activity at Bonifacio Global City, where “so many tower cranes” can be seen and work is 24 hours a day. Among the major high-rise development at BGC is the 30-storey NAC Tower, which will be home to Nickel Asia Corp. and Aboitiz Equity Ventures Inc., and with only 6 fl oors remaining unlet but with potential takers; and Hyatt and Shangri-La hotels. Offi ce space development continues to grow in the metropolis with boosts from business process outsourcing (BPO). But the growth in demand from banks, insurance fi rms, and representative offi ces is also fueling the offi ce space boom. Outside of Metro Manila, the “re-emergence” of manufacturing is driving the development of industrial parks.

Bonifacio property up for bidding Terms of Reference for the bidding of a 33-hectare property in Taguig City is being fi nalized by the Bases Conversion Development Authority (BCDA). Bidding is set for early next year. SM Land actually submitted an unsolicited bid for the property for P20 billion, which BCDA rejected. Several developers have expressed interest in the property, including Filinvest Land, Ayala Land Inc., Jones Lang LaSalle-Leechiu, Megaworld Corp., Robinsons Land Corp. and Rockwell Land Corp.

BRT more cost-effective for NCR, says DOTC The Department of Transportation and Communications (DOTC) is contemplating putting up bus rapid transit (BRT) systems on Ortigas Avenue and Circumferential Road 5 (C-5), two of the most congested roads in Metro Manila. The DOTC said the BRT system is a cheaper alternative to train lines. The system involves the setting aside of lanes for the exclusive use of buses that operate strictly on specifi c schedules and stop only (!) at designated bus stops.

Study to help ease traffi c underway The government, through the Public-Private Partnership (PPP) Center, has commissioned Indian consultancy fi rm Feedback Infrastructure Services Pvt. Ltd. to conduct study on an Integrated Transport System (ITS) to help ease traffi c congestion along EDSA and Metro Manila’s other major thoroughfares. Specifi cally, the study will establish viable options under the ITS in relation to the Build-Operate-Transfer (BOT) Law, and identify and formulate a feasibility study on proposed projects for implementing ITS such as providing provincial bus terminals at the edge of the metropolis.

International travel website names Manila as ‘destination on the rise’ International travel website Trip Advisor recently named Metro Manila as among the “Top 10 Destinations on the Rise” in Asia. Metro Manila was ranked 4th after Jakarta (Indonesia), Katmandu (Nepal) and Calcutta (India). Other cities on the Top 10 list are Bangalore (India), Lubang Prabang (Laos), Phnom Penh (Cambodia), Chiang Mai (Thailand), Kobe and Osaka. The recognition for Metro Manila is due largely to the Department of Tourism’s international campaign promoting the city as an entertainment and lifestyle capital. The website describes Metro Manila as “historic and modern, rich and poor…fi lled with museums, shops, parks and churches, plus enough nightlife to last until dawn.”

Region I – ILOCOS

Ilocos Norte town launches PH’s fi rst solar power farm The country’s fi rst solar power farm that will feed the Luzon grid has been launched in the fi shing and farming town of Paguludan, Ilocos Norte province. Known as the Currimao solar power farm, the project proponent is Korean power fi rm Mirae Asia Energy Corp. (MAEC). The project’s generating capacity is 20 megawatts, and it will be constructed on a 60-hectare property. It is expected to be completed in May 2014, with an initial output of 10 MW in its fi rst phase.

Region III – CENTRAL LUZON

New Clark Metropolis planned The Bases Conversion and Development Authority (BCDA) is now bidding out the contract for the formulation of a master plan for a new Clark Metropolis covering 30,000 hectares of property from Porac, Pampanga to Capas, Tarlac. The master plan is expected to be completed by end-1Q13, maybe with the fi rst phase of mixed-use property development of about 200 hectares bid out by then. The project will be implemented in phases over 50 years.

Philippine ANALYST December 2012 philippine regional update 33

Region IV – SOUTHERN TAGALOG

Region IV-A - CALABARZON

Solar power plant to be established in Cavite The provincial government of Cavite and South Korean fi rm LG CNS Co. Ltd. signed a Memorandum of Understanding (MOU) for the development of a $180-million photovoltaic solar power plant in the town of Tanza. Under the MOU, the South Korean fi rm will fi nance the plant’s construction and operations and provide training to workers. The provincial government will provide the company with the information, assistance and cooperation needed to implement the project. Construction work is expected to commence within 12 months.

Region IV-B – MIMAROPA

Ro-Ro project moved to 2013 Implementation of a Roll-on, Roll-off (Ro-Ro) project that will link Brooke’s Point in Palawan with Kudat, Sabah, Malaysia has been postponed to June 2013 from end-2012 as the facilities are not yet in place. Malaysia has yet to put up the landing ramp and customs, immigration, quarantine and security (CIQS) station in Kudat. Batangas-based Montenegro Shipping Lines has expressed interest in serving the route.

Region VI – WESTERN VISAYAS

Iloilo to build modern convention center A modern convention center will be built by Megaworld Corp. on a 1.7-hectare in Iloilo City’s Mandurriao district. The lot is donated by Megaworld whilst the funding for the convention center will be sourced from the annual priority development assistance fund (i.e., pork barrel) of Sen. Franklin Drilon. The project is estimated to cost P450 million. Construction is expected to commence in early 2013.

Region VII – CENTRAL VISAYAS

NEDA-ICC approves, but NEDA Board defers Cebu BRT project The National Economic and Development Authority Investment Coordination Committee (NEDA-ICC) has approved the Cebu bus rapid transit (BRT) project despite not having exclusive bus lanes on a segment of the route and questions on the delivery mechanism of 4 components. The Cebu City Traffi c Operations Management (Citcom) explained that widening of the road in Talamban to accommodate exclusive bus lanes would take time, and that even without these lanes travel time for the entire BRT route would be reduced to 30 minutes from one hour. On the delivery mechanisms, NEDA-ICC suggested that outsourcing of bus deployment, ticketing, information dissemination and road maintenance be considered. Citcom responded this is not possible for certain routes that are economically viable but not fi nancially viable. The NEDA Board, with the President as Chair, however, deferred its approval of the project due to lack of roads in Cebu for effective bus segregation. Pres. Aquino said the government can’t afford to experiment on a project like BRT which costs P10 billion.

Region IX – ZAMBOANGA PENINSULA (WESTERN MINDANAO)

LGU’S appeal to Pres. Aquino to help keep mining fi rm operating Local offi cials of 3 towns –Siocon and Baliguian in Zamboanga del Norte, and RT Lim in Zamboanga Sibugay – sent an urgent letter of appeal to Pres. Benigno Aquino III to allow TVI Resources Development Phils. (TVIRD) to expand to an adjacent property to avoid closure of the mine. TVIRD, which has been operating in the 3 towns for almost 10 years now, are the towns’ major source of taxes, employment and basic social services. The expansion will enable the Canadian mining company to operate for several years more.

Philippine ANALYST December 2012 34 philippine regional update

REGIONAL ECONOMY GRDP REAL GRDP LANDAREA REGION POPULATION ('000) PERSONS/sq km GRDP/CAPITA (P) (PM at current prices) Growth Rate (sq km) 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Philippines 9,735,521 9,003,480 3.9 7.6 94,185 92,604 300,000 314 309 103,366 97,226 Metro Manila 3,479,905 3,236,353 3.5 7.6 12,080 11,888 619 19,515 19,205 288,072 272,237 Cordillera Administrative 210,079 197,994 2.1 6.3 1,646 1,621 19611 84 83 127,630 122,143 Ilocos Region 293,918 274,103 3.0 7.1 4,812 4,758 12974 371 367 61,080 57,609 Cagayan Valley 167,492 150,038 5.4 -1.1 3,278 3,236 28265 116 114 51,096 46,365 Central Luzon 882,806 788,898 7.5 10.7 10,363 10,170 22014 471 462 85,188 77,571 Calabarzon 1,644,843 1,557,069 2.6 11.1 12,994 12,665 16644 781 761 126,585 122,943 Mimaropa 176,176 162,002 -2.5 1.1 2,797 2,752 29620 94 93 62,987 58,867 Bicol Region 206,619 191,534 2.6 5.2 5,506 5,433 18139 304 300 37,526 35,254 Western Visayas 395,417 359,703 5.5 3.7 7,206 7,118 20794 347 342 54,873 50,534 Central Visayas 601,880 538,646 7.9 12.5 6,928 6,819 15885 436 429 86,876 78,992 Eastern Visayas 242,594 228,815 1.8 2.0 4,159 4,110 23253 179 177 58,330 55,673 Zamboanga Peninsula 200,883 187,255 0.1 3.6 3,475 3,417 17046 204 200 57,808 54,801 Northern Mindanao 367,100 340,457 2.5 6.9 4,390 4,311 20496 214 210 83,622 78,974 Davao 408,450 372,074 4.1 5.0 4,561 4,482 20357 224 220 89,553 83,015 Socksacksargen 261,548 237,814 4.0 2.0 4,213 4,125 22436 188 184 62,081 57,652 Autonomous Region of 86,048 81,688 9.6 7.4 2,468 2,435 33511 74 73 34,865 33,548 Muslim Mindanao CARAGA 109,765 99,037 -1.0 2.3 3,309 3,264 21412 155 152 33,172 30,342

RATE OF INFLATION FOR ALL INCOME HOUSEHOLDS IN THE PHILIPPINES BY REGION (2000 = 100) 2011 2012 REGIONS DEC AVE. JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AVE. PHILIPPINES 4.2 4.77 4.0 2.7 2.6 3.0 2.9 2.8 3.1 3.8 3.6 3.1 2.8 2.9 3.14 METRO MANILA 3.0 4.16 3.5 2.3 2.7 2.5 2.2 2.2 3.1 4.5 3.5 2.9 2.6 2.8 2.90 AOMM 4.5 4.94 4.0 2.8 2.6 3.2 3.1 3.0 3.1 3.6 3.7 3.3 2.9 2.9 3.18 CAR 3.0 - 2.7 2.3 2.7 2.8 3.0 3.6 3.8 4.9 5.2 4.7 4.4 4.3 3.69 I Ilocos 4.1 - 2.5 1.9 1.2 1.2 1.1 1.7 1.6 2.5 2.7 1.8 1.1 0.6 1.66 II Cagayan Valley 2.4 - 2.0 2.0 1.8 2.4 2.0 2.8 2.6 3.3 4.2 2.7 2.2 2.2 2.51 III Central Luzon 5.0 - 4.4 2.9 3.0 4.3 4.3 3.5 3.4 3.5 3.7 2.6 2.2 2.6 3.38 IV-A Southern Tagalog 4.8 - 4.5 2.7 2.5 2.9 2.7 2.5 2.8 3.1 2.8 2.4 1.9 1.8 2.72 IV-B Southern Tagalog 3.6 - 2.8 1.9 1.8 2.2 2.9 3.6 3.8 3.7 3.8 3.7 3.7 3.6 3.12 V Bicol 4.2 - 3.2 2.8 2.7 3.0 2.8 2.6 2.8 3.4 3.6 3.1 2.1 2.0 2.84 VI Western Visayas 4.7 - 4.0 3.1 3.0 3.6 4.2 4.3 4.5 4.6 4.4 4.5 4.3 4.0 4.04 VII Central Visayas 2.8 - 2.8 1.8 1.9 3.9 4.2 5.3 6.1 6.6 7.4 7.2 7.1 6.9 5.10 VIII Eastern Visayas 4.0 - 3.6 2.8 2.8 3.1 2.5 2.2 2.5 2.8 3.2 3.3 3.4 3.4 2.96 IX Western Mindanao 6.3 - 5.4 3.1 2.6 1.5 1.8 1.8 2.4 2.8 3.1 3.1 2.7 2.9 2.77 X Northern Mindanao 6.0 - 5.5 4.2 3.6 4.2 3.8 3.8 4.1 4.3 4.4 4.3 4.2 3.9 4.20 XI Southern Mindanao 4.6 - 4.5 3.4 3.1 2.7 2.0 1.7 1.8 1.6 1.8 2.3 2.6 3.0 2.54 XII Central Mindanao 4.2 4.1 - 3.5 2.7 2.6 2.8 2.4 2.6 2.3 2.8 2.8 2.7 2.8 2.73 ARMM 6.1 5.8 - 5.5 3.7 3.6 4.3 4.5 4.1 3.8 4.5 4.9 5.0 4.6 4.42 CARAGA 6.7 6.9 - 6.6 5.2 3.8 3.6 2.4 2.0 1.9 2.0 2.4 2.4 2.3 3.15

Philippine ANALYST December 2012 philippine regional update 35

FLOOR AREA OF PRIVATE BUILDING CONSTRUCTION (IN '000 SQM) 2011 2012 GROWTH GROWTH 3Q 4Q TOTAL 1Q 2Q 3Q TOTAL YR-TO-DATE YR-TO-DATE Philippines 4,392,484 4,673,061 19,918,293 288.5 5,416,460 6,094,589 6,374,133 17,885,182 223.4 Metro Manila 1,041,115 1,319,151 5,891,034 216.2 1,438,071 1,692,352 2,220,055 5,350,478 164.4 Cordillera CAR 59,487 63,726 253,115 293.8 154,654 72,376 53,764 280,794 322.5 1-Ilocos Region 186,431 175,520 849,430 278.1 211,347 219,420 163,951 594,718 150.3 2-Cagayan Valley 68,164 56,502 287,580 312.8 77,978 71,788 91,550 241,316 230.5 3-Central Luzon 566,324 422,901 2,136,859 296.4 845,329 654,684 568,530 2,068,543 272.9 4A-Calabarzon 928,223 800,027 3,542,115 262.0 972,002 1,274,447 960,896 3,207,345 246.2 4B-Mimaropa 49,980 38,904 252,288 214.0 78,839 75,873 59,815 214,527 123.8 5-Bicol Region 110,580 99,305 458,648 264.2 133,089 100,633 115,018 348,740 263.0 6-Western Visayas 204,106 210,009 762,424 162.8 133,517 174,650 256,170 564,337 206.8 7-Central Visayas 430,732 726,770 2,557,114 775.4 483,815 764,133 945,950 2,193,898 352.3 8-Eastern Visayas 75,310 79,991 333,104 301.0 112,199 83,379 114,837 310,415 198.3 9-Zamboanga Penisula 52,426 64,565 213,866 741.9 76,337 71,623 109,969 257,929 469.0 10-Northern Mindanao 132,721 160,023 595,410 389.9 188,269 218,426 169,804 576,499 235.1 11-DAVAO 289,950 248,481 1,060,054 335.5 275,538 298,327 371,350 945,215 203.8 12- SOCCSKSARGEN 88,654 117,684 390,579 429.3 88,630 120,151 94,233 303,014 225.2 CARAGA 105,255 87,906 327,329 533.2 68,206 75,197 77,079 220,482 269.9 ARMM 3,026 1,596 7,344 646.3 3,303 521 1,162 4,986 176.5

VALUE OF PRIVATE BUILDING CONSTRUCTION (IN ‘000) 2011 2012 GROWTH GROWTH 3Q 4Q TOTAL 1Q 2Q 3Q TOTAL YR-TO-DATE YR-TO-DATE Philippines 41,652,765 43,756,384 193,849,686 309.8 49,157,417 60,922,598 64,317,143 174,397,158 230.5 Metro Manila 13,375,554 16,067,468 79,756,608 241.2 16,837,178 19,418,031 29,650,227 65,905,436 162.1 Cordillera CAR 597,500 610,518 2,371,411 312.6 1,336,595 986,179 591,895 2,914,669 409.3 1-Ilocos Region 1,552,313 1,401,977 6,565,278 284.3 1,695,656 1,780,078 1,446,330 4,922,064 172.9 2-Cagayan Valley 482,937 469,782 2,206,862 347.9 601,484 554,007 731,969 1,887,460 249.9 3-Central Luzon 4,059,670 3,355,482 16,220,468 337.4 6,367,698 5,655,195 4,063,846 16,086,739 277.9 4A-Calabarzon 9,398,426 6,085,983 30,415,719 289.6 8,116,013 13,198,025 8,473,267 29,787,305 312.2 4B-Mimaropa 307,623 264,522 2,450,433 392.7 564,463 631,966 552,117 1,748,546 161.8 5-Bicol Region 705,738 796,947 3,388,203 335.0 778,884 748,521 736,152 2,408,501 164.9 6-Western Visayas 2,055,263 1,697,326 7,910,233 315.8 1,760,168 3,116,319 2,266,614 7,143,101 174.3 7-Central Visayas 3,007,842 5,199,462 18,204,005 696.8 3,916,301 6,227,128 7,720,937 17,864,366 435.6 8-Eastern Visayas 699,421 816,005 3,211,761 507.8 1,539,636 872,433 873,368 3,285,437 226.9 9-Zamboanga Penisula 265,801 463,376 1,189,184 689.6 458,048 516,393 764,604 1,739,045 673.7 10-Northern Mindanao 1,012,840 2,145,466 5,527,078 360.5 1,365,963 2,031,184 1,559,918 4,957,065 288.7 11-DAVAO 2,799,017 3,042,629 9,801,806 531.3 2,636,904 3,993,836 3,769,290 10,400,030 358.9 12-SOCCSKSARGEN 637,619 887,627 2,701,204 523.4 572,897 714,124 651,021 1,938,042 212.0 CARAGA 659,371 443,481 1,870,891 507.2 452,115 477,405 460,570 1,390,090 351.0 ARMM 35,830 8,333 58,542 811.0 12,470 1,774 5,018 19,262 91.4

Philippine ANALYST December 2012 36 philippine regional update

EMPLOYMENT RATE BY REGION (IN%) (New Defi nition) 2011 2012 JAN APRIL JULY OCT JAN APRIL JULY OCT PHILIPPINES 92.6 92.8 92.9 93.6 92.8 93.1 93 93.2 Metro Manila 88.0 88.4 89.1 89.6 87.8 89.6 90.1 89 Cordillera CAR 94.4 95.0 95.3 95.2 94.4 94.3 95.1 94.1 1-Ilocos Region 90.0 90.2 92.1 93.4 91.1 92 91.4 92.6 2-Cagayan Valley 96.9 96.7 97.6 97.2 97.6 97.2 96.8 97.6 3-Central Luzon 92.1 91.7 90.4 91.7 90.3 92 90.8 90.7 4A-Calabarzon 90.5 90.0 89.6 91.0 91.5 91.2 90.6 90.8 4B-Mimaropa 95.7 96.0 96.2 96.5 96.6 95.3 95.9 95.7 5-Bicol Region 92.9 93.4 94.6 94.7 93.2 93.1 94.4 95.1 6-Western Visayas 93.5 92.4 94.0 93.6 93.7 93 93.6 93.5 7-Central Visayas 91.7 93.8 93.7 93.9 92.5 92.8 92.9 93.5 8-Eastern Visayas 93.7 94.3 95.3 96.0 94 95 95.7 94.9 9-Zamboanga Penisula 96.9 96.8 96.7 96.6 96.6 95.9 95.9 96.6 10-Northern Mindanao 95.1 96.0 94.8 96.1 95.7 95.8 95.3 94.9 11-DAVAO 94.2 94.6 94.2 95.4 93.8 93.6 93.6 95.2 12-SOCCSKSARGEN 96.8 96.0 95.5 96.3 96 95.5 95.6 96 CARAGA 92.4 95.1 94.1 94.5 93.6 95 93.1 95.7 ARMM 96.1 96.3 96.3 97.7 97 97.1 95.7 96.5

UNEMPLOYMENT RATE BY REGION (IN %) (New Defi nition) 2011 2012

JAN APRIL JULY OCT JAN APRIL JULY OCT

Philippines 7.4 7.2 7.1 6.4 7.2 6.9 7 6.8

Metro Manila 12.0 11.6 10.9 10.4 12.2 10.4 9.9 11 Cordillera CAR 5.6 5.0 4.7 4.8 5.6 5.7 4.9 5.9 Ilocos Region 10.0 9.8 7.9 6.6 8.9 8 8.6 7.4 Cagayan Valley 3.1 3.3 2.4 2.8 2.4 2.8 3.2 2.4

Central Luzon 7.9 8.3 9.6 8.3 9.7 8 9.2 9.3

Calabarzon 9.5 10.0 10.4 9.0 8.5 8.8 9.4 9.2

Mimaropa 4.3 4.0 3.8 3.5 3.4 4.7 4.1 4.3

Bicol Region 7.1 6.6 5.4 5.3 6.8 6.9 5.6 4.9

Western Visayas 6.5 7.6 6.0 6.4 6.3 7 6.4 6.5

Central Visayas 8.3 6.2 6.3 6.1 7.5 7.2 7.1 6.5

Eastern Visayas 6.3 5.7 4.7 4.0 6 5 4.3 5.1

Zamboanga Penisula 3.1 3.2 3.3 3.4 3.4 4.1 4.1 3.4

Northern Mindanao 4.9 4.0 5.2 3.9 4.3 4.2 4.7 5.1

DAVAO 5.8 5.4 5.8 4.6 6.2 6.4 6.4 4.8

SOCCSKSARGEN 3.2 4.0 4.5 3.7 4 4.5 4.4 4

CARAGA 7.6 4.9 5.9 5.5 6.4 5 6.9 4.3

ARMM 3.9 3.7 3.7 2.3 3 2.9 4.3 3.5

Philippine ANALYST December 2012

38 BUSINESSBUBUSINESSSINESS

“More fun in the Philippines” falls behind 2012 tourist target

While the world recently reached the United Nations World Tourism Organization’s (UNWTO) target of 1 billion international tourist arrivals for 2012 in December, the Department of Tourism’s (DOT) 2012 target for the Philippines still has a long way to go.

n the latest data from the DOT, the growth of total non- resident tourists or international visitor arrivals in the IPhilippines within the period of January to October 2012 decelerated to 9.18% from the 11.96% growth recorded in the same period last year (see chart). During the 10-month period, total visitor arrivals in 2012 reached 3.48 million. This means that in order to reach the DOT’s target of 4.6 million visitor arrivals in 2012, total visitor arrivals must have registered an additional 1.12 million (32% of 3.48 million) international visitors in the last 2 months of the year. That seems unlikely. The DOT aims to improve the share of the Philippines in international tourist arrivals within the Southeast Asian region from 5% to 10% (equivalent to 10 million international tourists) by 2016. To achieve this, there must be more than 15% growth annually. However, compared to recent years, the rate of growth of international tourist arrivals in 2012 has slowed. ANNUAL GROWTH OF TOTAL VISITOR ARRIVALS (2010-2012) Only about 4.2 million total visitor arrivals this year can be expected based on the current infl ux of non-resident tourists. In general, there is a cautious behavior present in tourism markets due to the world’s economic circumstance. Among ASEAN countries, Indonesia, Vietnam, and Cambodia have also experienced a slowdown. With the U.S. and Japan as its top markets, the Philippines experienced a slowdown in tourist arrivals regardless of the efforts made by the DOT in promoting tourism in other markets through its campaign “It’s More Fun in the Philippines”.

Philippine ANALYST December 2012 BUSINESS 39

ASEAN INTERNATIONAL TOURIST ARRIVALS AND RECEIPTS INTERNATIONAL TOURIST SHARE TO TOTAL ASEAN SHARE TO TOTAL ASEAN GROWTH IN TOURIST ARRIVALS 2011 INTERNATIONAL TOURIST TOURIST RECEIPTS ARRIVALS, (IN MILLIONS) ARRIVALS (%) (%) JAN-OCT 2012 (%) TOTAL 76.940 100 100 -- Malaysia 24.714 32 27 0.7* Thailand 19.098 25 38 9* Singapore 10.390 14 26 9* Indonesia 7.650 10 12 5 Vietnam 6.014 8 8 11 Philippines 3.917 5 4 9 Cambodia 2.882 4 3 24 Note: *-January-September 2012

LOCAL AIRLINES FOR INTERNATIONAL NETWORK EXPANSION AIRLINES CURRENT COUNTRY DESTINATIONS RECENT/PLANNED EXPANSION U.S., Canada, Saudi Arabia, India, China, Korea, Japan, Taiwan, Hong Kong, Thailand, 3Q of 2013: Canada, Middle East, Paris, New Philippine Airlines Malaysia, Singapore, Indonesia, Australia, York Vietnam Japan, Vietnam, Cambodia, China, Korea, 3Q of 2013: Middle East, Australia, Eastern Cebu Pacifi c Brunei, Hong Kong, Singapore Europe, U.S. Zest Airways Korea, China, Malaysia 2013: Saudi Arabia Thailand, Singapore, Indonesia, China, Hong South East Asian Airlines (SEAir) 2012: Singapore, Hong Kong, Thailand Kong

THE ASEAN TRAVEL & TOURISM COMPETITIVENESS REPORT 2012 AIR TRANSPORT INFRASTRUCTURE GROUND TRANSPORT INFRASTRUCTURE RANK INTERNATIONAL QUALITY OF OVERALL AIR TRANSPORT OVERALL GROUND TRANSPORT NETWORK NETWORK ASEAN - 3.6 5.1 4.0 4.6 Singapore 1 5.0 6.8 6.6 6.6 Malaysia 2 4.2 5.8 4.6 5.3 Thailand 3 4.5 5.9 4.1 5.0 Brunei 4 4.0 4.9 4.2 3.8 Indonesia 5 3.3 4.6 3.2 4.3 Vietnam 6 2.7 4.1 3.3 4.5 Philippines 7 2.8 4.3 2.8 3.4 Cambodia 8 2.3 4.2 3.0 4.0

TOURISM INFRASTRUCTURE SAFETY AND SECURITY ATMS ACCEPTING RANK VISA CARDS RELIABILITY OF OVERALL OVERALL (PER MILLION POLICE SERVICES POPULATION) ASEAN - 3.1 276.6 4.9 4.4 Singapore 1 5.1 895.8 6.1 6.4 Malaysia 2 3.6 349.7 4.5 4.6 Thailand 3 4.9 548.2 4.4 3.8 Brunei 4 2.8 165.1 5.7 5.1 Indonesia 5 2.0 77.5 4.7 4.0 Vietnam 6 2.1 106.2 4.8 4.9 Philippines 7 2.6 46.7 4.1 3.4 Cambodia 8 1.4 23.2 4.6 3.2

Note: 7-highest score

Philippine ANALYST December 2012 40 BUSINESS

For many years, other obstacles in improving the industry have PH tourists spend more for accommodation been perception and infrastructure. In a CNN special report made and shopping early this year, it said that the country must be able to change the current perception of the international market to the country Tourists in the Philippines spent a total of P1.1 trillion on and improve the country’s “substandard” travel infrastructure. tourism products in 2011, according to the National Statistical Since the Philippines is prone to disasters like typhoons, fl oods, Coordination Board (NSCB). Of this amount, 89% came volcano eruptions, and earthquakes, and a high risk of terrorist from local tourists and most was spent in accommodation activity, the CNN report said that the Philippines is not easily marketable. Furthermore, travel to the Philippines is a “physical services and shopping. burden” and costly since there is not enough direct international fl ights to the country due to various bans that stem from the According to the Philippine Tourism Satellite Account (PTSA) country’s failure to comply with international aviation safety released on November 27 by the NSCB, tourists spent a total standards. Air, sea, and road connectivity is also inadequate. of P187 billion for accommodation services while spending Among the ASEAN-5, the Philippines had the lowest P186 billion for shopping (see table), P98 billion for food and number of tourist arrivals in 2011 (see table). In the latest World beverage-related services and P80 billion for guided tours. Economic Forum (WEF) report on tourism called “The ASEAN The Philippine tourism market is divided into 2 types Travel & Tourism Competitiveness Report 2012”, the Philippines of consumers: the local or resident tourist and the visitor ranked 7th out of the 8 ASEAN countries surveyed (see table). or non-resident tourist. For more than a decade, local This report showed that the Philippines had the lowest score tourists have dominated the Philippine tourism market in the quality of its ground transport network and in safety and (see chart). In 2011, 89% of total tourists spending were security from terrorists, crimes, and accidents. It also had one made by residents of the country. On the average, 82% of of the lowest scores in its international air transport network Philippine tourism demand is comprised of local tourists. and in tourism infrastructure, particularly access to money. For local tourists, accommodation services is the most The Philippines 2012 tourism performance important and highly demanded tourism product (see chart), illustrates just how crucial perception and infrastructure spending about P156 billion in 2011. The 2nd and 3rd top is to industry performance, given that it already had tourism product for local tourists are shopping with P150 a bigger (P1.9 billion) marketing budget of the year. billion and guided tours with P79 billion. On the other hand, To improve the international air transport network, the shopping is the top tourist activity for country visitors, spending DOT is working with the private sector to expand connectivity around P36 billion. The 2nd and 3rd tourism product for non- to the Middle East. In December 2012, major Middle East resident tourists are food and beverage-related services with airlines Etihad and Emirates started offering direct fl ights P32 billion and accommodation services with P30 billion. from Dubai to Manila. Meanwhile, local airlines are currently Among the country’s tourism products, the demand for expanding their international networks. Several budget shopping, accommodation services, entertainment and recreation carriers are also helping in the DOT’s efforts by extending activities, and transport services are expected to grow more in the their networks to countries outside the region (see table). next few years. As of 2011, the average growth in tourists’ shopping In order to change the perception on Philippine tourism, spending when adjusted to infl ation is 8% while the average growth the DOT has participated in major travel exhibitions in in the demand for transport services is 11%. Furthermore, the foreign counterparts showcasing its campaign. Its latest demand for entertainment and recreation is expected to improve by participation in a large fair was last September in the JATA 4.5% while the demand for accommodation services grows by 5%. World Tourism Forum and Travel Showcase in Japan. One of the industry’s large developers currently expanding is In an attempt to solve access to money, the DOT recently Ayala Land, Inc., which recently opened its new Centrio Mall in formed a partnership with the Bank of the Philippines Islands Cagayan de Oro. The P5-billion project is actually a 3.7-hectare (BPI) and Visa Credit Card that will place additional ATMs and mixed-use commercial community consisting of shopping malls, Point of Sale (POS) terminals in the country for easy access to hotels, residential condominiums, and some offi ces. Among funds and design other fi nancial products for tourists, like the others are Filinvest Development Corp., SM Prime Holdings More Fun Prepaid Visa Card – a prepaid card that functions as Inc., and Eagle Sky Amusement and Gaming Co. (see table). a reloadable debit and credit card for travelers without opening As for entertainment and recreation, Manila is already an account. The partnership will also provide an express looking to attract casino gaming tourists as 3 of the world’s tourist center for currency exchange services with more than largest gaming industry players are building casino complexes 800 branches to be established in the country and abroad. on the 120-hectare Entertainment City project of Pagcor For 2013, the DOT is eyeing a 22% growth in tourist arrivals to in Manila Bay, especially since non-resident tourists are around 5.6 million. The UNWTO, however, expects a slower growth becoming more interested in this type of activity. From 2008 ranging from 2% to 4% in worldwide international tourists in 2013. to 2011, non-resident tourist demand for entertainment and recreation activities grew by 122%, according to the PTSA.

Philippine ANALYST December 2012 BUSINESS 41

PH tourist demand for shopping, accomodation services, entertainment and recreation activities, and transport services are expected to grow more over the next few years.

PH TOTAL TOURIST EXPENDITURES, 2011 TOTAL TOURIST GROWTH RATES, % PERCENTAGE SHARE TOURISM PRODUCT/SERVICES SPENDING (ADJUSTED TO INFLATION) (%) (IN P MILLION) RESIDENT NON-RESIDENT Accommodation Services 186,524 16.7 18 22 Shopping 185,935 16.6 21 10 Food and Beverage-related services 97,499 8.7 19 0 Guided Tours 79,467 7.1 23 -50 Transport Services 65,087 5.8 34 19 Entertainment and Recreation 55,895 5 17 8 Miscellaneous 449,758 40.2 - -

RESIDENT VS. NON-RESIDENT TOURIST SPENDING (2000-2011)

TOURIST DEMAND FOR PH TOURISM PRODUCTS, 2011

Source: NSCB

SHOPPING MALLS AND HOTEL-RELATED DEVELOPMENTS PROJECT NAME/DEVELOPER LOCATION DESCRIPTION STATUS Centrio Mall Project cost of the 3.5-hectare mixed-use commercial Cagayan de Oro Opened in November 2012 (by Ayala Land, Inc.) complex amounted to P5 billion The largest mall development in Mindanao occupying SM Lanang Premier 144,000 square meters. The project amenities include Davao Opened in September 2012 (by SM Prime Holdings, Inc.) 5 cinemas and an IMAX Theater, a bowling center, and a Science Discovery Center. Mall expansion begun in the 1st Expansion of existing Ayala Center Cebu to house quarter of 2012. It is expected Ayala Center Expansion Cebu more stores. The project cost amounts to P2 billion. to be completed in the 2nd half of 2013. The P1.5-billion hotel and casino complex will be Eagle Sky Amusement and Gaming Clark Special Economic Begun construction in put up in a 1.5-hectare property near the Clark Co. (Estag) Zone November 2012. International Airport. Crimson Hotel The Crimson Hotel brand of FDC is a 5-star property FDC is still designing the plan Boracay (by Filinvest Development Corp.) development currently located in Cebu and Alabang. for the Boracay expansion. Philippine ANALYST December 2012 42 BUSINESS

In addition, budget airlines are expanding their horizons by The Department of Budget and Management (DBM) has bringing low fares to international networks and making travel more released approximately P933.8 million to fund night landing accessible. Market leader, Cebu Pacifi c, has announced that it will operations of 14 airports across the country. The 14 airports start low-cost long-haul operations to the Middle East, Australia, are located in Tuguegarao, San Jose (Mindoro), Busuanga, Eastern Europe, and the United States in the 3rd quarter of 2013. Naga, Legazpi, Roxas, Tagbilaran, Dumaguete, Dipolog, The PTSA also showed the growing contribution of the Pagadian, Ozamis, Cotabato, Butuan, and Surigao. These Philippine tourism industry to the country’s gross domestic airports will be equipped with an airfi eld lighting system, product (GDP), which amounted to a total of P571 billion in communications equipment, power supply system, and air 2011. This is 6% higher from 2010 when adjusted to infl ation. disaster management system, among others. The P933.8 According to the NSCB, the share of tourism in the economy million-budget is included in the Department of Transportation has grown from 5.7% of GDP in 2008 to 5.9% in 2011. and Communications’ (DOTC) lump-sum allotment for Private Public Partnership (PPP) transport infrastructure projects in 2012. 14 local airports to have night landing The implementation of the night landing operations resulted in the pursuit to decongest airports as local carriers swamp departures operations during daytime. Former DOTC Secretary Manuel Roxas had stated that, “All of them are in a hurry to come back before sunset, where In a bid to decongest key airports, the government has provincial airports stop operating due to the absence of runway earmarked approximately P1 billion for night landing lights or night-vision technology.” The bid to accommodate operations. Final amendments to the Air Passenger Bill of more passengers, especially during peak seasons, is also a major Rights are expected to be released within the week to address consideration in the night landing operations of airlines. During other issues in the airline sector. the Halloween break, passenger volume increased from 15,000 to 27,000 per day at the Ninoy Aquino International Airport Terminal 3. Passenger volume also shoots up during Christmas season.

OTHER KEY PROVISIONS IN THE LATEST VERSION OF THE AIR PASSENGER BILL OF RIGHTS h The right to be processed for check-in within the check-in deadline by providing a designated check-in area for queuing where passengers who are not yet checked-in shall not be considered late or no-show; h The right to be provided with compensation and amenities in case of cancellation or delay of fl ights, including refreshments or meals, hotel accommodation, transportation, communication, etc.; h The right to full, fair and clear disclosure of the service offered and all the terms and conditions of the Contract of Carriage; h The right to clear and non-misleading advertisements and important reminders regarding fares; h The right against misleading and fraudulent sales promotion practices; h The right to transportation and baggage conveyance; h The right to suffi cient processing time; h The right to compensation for delayed, lost, and damaged baggage; h The right to compensation in case of death or bodily injury of a passenger; h The right to immediate payment of compensation;

Source: DOTC, Press Releases

*in millions; 2012-January to October only Source: National Statistical Coordination Board (NSCB)

Philippine ANALYST December 2012 BUSINESS 43

The DBM released about P930Mn to fund the night landing operations of 14 airports.

*in millions Source: Department of Tourism

Other industry issues continue to beset the airline sector, Increased air travel has also bought in investment activity which had prompted a call for a congressional inquiry into the in the industry. Budget Secretary Florencio Abad stated that policies and practices of local airlines on February 8, 2012. In “… there’s greater tourist interest in our local destinations, our House Resolution 2131, San Juan City Representative Joseph airports are busier than ever. We are seeing a larger volume of Victor Ejercito cited the numerous complaints aired by both human traffi c and more fl ights weaving their way in and out domestic and foreign travelers, which include overbooking, of our runways.” In fact, the business sector has indicated it denial of boarding pass, fl ight delays and cancellation, denial will make major investments in the airline sector in a bid to of proper accommodation, such as meals and hotels during take advantage of the heightened infl ux of passengers. Ayala long fl ight delays and cancellation, surcharges in rebooking of Corporation and Aboitiz Equity Ventures inked a memorandum fl ights, fl ight diversions, and failure to inform the passengers of understanding with ADC & HAS Airports Corp. to reinforce on the cause of delays and fl ight cancellations. Bayan Muna their bid for the P10 billion Mactan-Cebu International Airport Representative Teddy Casino added that ill-treatment of terminal rehabilitation project. ADC & HAS Airports Corp. passengers by airline personnel is also a common complaint. is a global airport operator based in the United States. Cebu To address these complaints, the government is set to Pacifi c, meanwhile, is under negotiations for a ‘wet lease’ release the fi nal amendments to the Air Passenger Bill of option with a foreign carrier in order to mount fl ights to the Rights, which will be a Joint Administrative Order (JAO) by U.S. A foreign carrier provides aircraft, crew, maintenance, the DOTC and the Department of Trade and Industry (DTI). and insurance to another airline under a ‘wet lease’ agreement. The latest draft covers international airlines that fl y to and from Latest data from the Department of Tourism (DOT) showed the country as well as local airlines that fl y to international visitor arrivals to the Philippines rose by 9.18% to 3.48 million destinations. It also mandates that airlines get DTI’s approval in 2012 from 3.19 million in 2011 (January to October). The before implementing airline promotions, such as the sale of highest increase in tourist arrivals was posted in January, which discounted tickets. The latest draft also includes other key saw a 17.54% increase from 349,713 in 2011 to 411,064 in provisions (see table). Transportation and Communications 2012. Visitors from Korea and the U.S. accounted for about Secretary Joseph Emilio Abaya and Trade and Industry Secretary 40% of the country’s total foreign arrivals in both years. The Gregory Domingo signed the fi nal working draft on December DOT targets an estimated 6 million foreign arrivals by 2016. 7, 2012. The fi nal version of the JAO is expected to be released soon. At present, airlines only need the Civil Aeronautics Board’s (CAB) nod to implement its promotional campaigns.

The Airline Operations Council welcomes the planned night landing operation as it will add more slots for int’l fl ights and lessen the number of fl ight delays.

Philippine ANALYST December 2012 44 BUSINESS

Efforts for better protection of intellectual Moreover, approval of the proposed amendments in Republic property in the PH Act 8293, or the Intellectual Property Code, will further improve IPOPHL’s anti-piracy operations. Principal amendments in the The Intellectual Property Offi ce of the Philippines (IPOPHL) reconciled version of Senate Bill 2842 and House Bill 3841, which the bicameral conference committee approved, comprise of: is banking on the following efforts to strengthen IP protection in the country: 1) the utilization of the Intellectual Property (1) the creation of the Bureau of Copyright that will supervise Automation System (IPAS); 2) Approval of amendments to copyright policy formulation, rule-making, adjudication, the Intellectual Property Code (Republic Act 8293); and 3) research and education; partnerships with state universities to create Innovation and (2) the strengthening of the protection of IPR of artists, musicians, Technology Support Offi ces (ITSO). and writers; and (3) the exemption of visually and reading impaired persons The Intellectual Property Offi ce of the Philippines (IPOPHL) from security permission for the use of copyrighted works. has launched a new intellectual property (IP) system called the The reconciled version was ratifi ed in December 11, 2012 Industrial Property Automation System (IPAS). IPAS features and is expected to be signed into law by year end. an advanced information technology system that processes and When signed into law, the amendments in RA 8293 are registers trademarks, patents, and other documents online. It expected to pave the way for the removal of the Philippines also offers tracking, reception, and notifi cation of documents as from the Special 301 Report, which is a report on Piracy Watch well as import and export of data. The IPOPHL, in partnership prepared annually by the United States Trade Representative with the Infrastructure Modernization Division of the World (USTR) offi ce. Although the U.S. downgraded the country’s status Intellectual Property Organization (WIPO), completed the set- from Priority Watch List to Watch List in 2006, the Philippines up of the IPAS in 2 years. IPAS, which was provided free of has been in the Piracy Watch for more than a decade. This only charge to requesting IP offi ces, is one of the key components refl ects the insuffi ciency of government’s efforts in curbing of a global IP infrastructure that is being used by the WIPO. piracy. The latest Special 301 Report stated that despite the Signifi cant benefi ts are expected from the completion of the increase in enforcement efforts, printed and counterfeit goods IPAS. Processing and granting of trademarks, which usually takes remain widely available in the country. In order to address 6 months to 1 year, can now be done in 5 weeks, design in 5 days, the problem, a list of measures that includes the amendment and utility model in 2 weeks. Accuracy and integrity of IP assessors to the copyright law was presented by the report (see table). can also be ensured. Overall, “higher effi ciency and better The IPOPHL has also established Innovation and Technology transparency” in IPOPHL operations is expected to be achieved. Support Offi ces (ITSO) or “patent libraries” by partnering with state universities and colleges (SUCs) nationwide. IPOPHL recently signed a Memoranda of Agreement (MOA) with 16

PROPOSED MEASURES TO ADDRESS PIRACY IN THE PHILIPPINES INDICATED IN THE SPECIAL 301 REPORT 2011 (1) Enact legislation to amend its copyright law, which has been pending for many years. The legislation would, among other things, implement the WIPO Treaties. (2) Take steps to implement the IPR Action Plan 2011. (3) Continue the reform in the judicial system. Designate particular court to adjudicate civil and criminal IPR cases; Promulgate specialized IPR procedural rules that would streamline the judicial process for IPR cases. (4) Review the amendments, specifi cally the provision that limits the patentability of certain chemical forms unless the applicant demonstrates increased effi cacy, to the Patent Law.

*short term measures Source: Special 301 Report 2011

YEAR 2005 2006 2007 2008 2009 2010 2011 Estimated Value of 1.15 1.35 2.10 3.52 5.68 4.37 8.39 Confi scated Pirated products *in billions Source: Intellectual Property Offi ce of the Philippines

The latest Special 301 Report stated that despite the increase in enforcement eff orts, printed and counterfeit goods remain widely available in the country.

Philippine ANALYST December 2012 BUSINESS 45

SUCs that will become ITSO members. The MOA brings the The upbeat ASEAN sugar industry is refl ected in the country’s total number of ITSO members to 62 in the country. An ITSO sugar sector. Local sugar production recorded a signifi cant rise provides IP audit and evaluation services, licensing support, from 1.97 million metric tons (MT) in 2009/10 to 2.4 million and advice on patent-related documents, papers, and statistics. tons (MT) in 2010/11. The increase in production, however, Prominent universities, such as Ateneo University, University of could have led to a substantial drop for locally produced the Philippines, and De La Salle University are ITSO members. sugar if not for the swift action of the Sugar Regulatory Administration (SRA). The SRA successfully negotiated for an increase in sugar allocation in the United States, which PH joins ASEAN Sugar Alliance imposed a quota of 138,000 tons of sugar imports from the Philippines in 2011-2012. From September 3, 2011 to July 5, 2012, the country’s sugar exports to the U.S. totaled 163,900 Three Southeast Asian countries have established a sugar tons. On top of this, an estimated 361,663 tons of sugar was also alliance to strengthen the bonds of sugar industry players delivered to Japan, China, and Indonesia in the same period. in the region. The positive business environment in the A heightened campaign against sugar smuggling by the Bureau ASEAN mirrors the local sugar sector as it has increased of Customs (BOC) has contributed to the sugar industry’s buoyant local sugar production, saw the decline in smuggled sugar performance. Recently, the BOC seized illegally imported sugar, with improved customs regulation, and is set to undertake which was contained in 10 forty-footer container vans, in the port an e-payment system. The current gains of the domestic of Cebu. BOC Commissioner Ruffy Biazon stated that “fi ve of sugar sector, however, are threatened by the declining rate the 10 forty-footer container vans of the illegally imported sugar of ASEAN Free Trade Agreement (AFTA) tariff on sugar were consigned to Mobilla Products, Inc. and were misdeclared as imports, among others. marble and granite products, while the other fi ve containers were consigned to Muramoto Audio Visual Philippines, Inc. and were The Philippines together with Thailand and Indonesia has also misdeclared as plastic parts for eyeglasses.” The P7 million- formed the ASEAN Sugar Alliance (ASA). The ASA aims to sugar shipment, which arrived from Thailand in November 22, deepen the bonds between sugar industry players by assisting 2012, also lacked the required permits from the SRA. The BOC governments in removing industry obstacles and supervising is expected to auction the smuggled sugar by the end of the year. sugar sales around the region. It also intends to promote the use The improved customs intervention against smuggling of sugar of sugarcane, which is a raw material for food and energy, to has lessened the discrepancy in the country’s sugar import data sugar-related industries. The ASEAN, which has a population of with that of Thailand’s export fi gures, which indicates decreased almost 600 million produces approximately 17 million tons of smuggling. In November 2010 to October 2011, the SRA received sugar annually and consumes an estimated 14 million tons per year. an estimated 117,000 MT of sugar shipment from Thailand while

*MTCW (metric ton commercial value) in thousands Source: Sugar Regulatory Administration, Regulation Department

The missing 9,829 MT of sugar is considered to be smuggled, a substantial reduction from the previous estimate of an annual 200,000 to 300,000 tons of unauthorized sugar entry.

Philippine ANALYST December 2012 46 BUSINESS

*FOB value in $ millions Source: Sugar Regulatory Administration, Regulation Department

*MTCW (metric ton commercial value) in thousands Source: Sugar Regulatory Administration, Regulation Department

Thailand posted approximately 126,829 MT of sugar exports to the Present gains in the local sugar sector, however, are seen Philippines. The missing 9,829 MT is considered to be smuggled, to be threatened by the diminishing rate of ASEAN Free Trade which is a substantial reduction from the previous estimates of Agreement (AFTA) tariff on sugar imports. From 38% in 2011, an annual 200,000 to 300,000 tons of unauthorized sugar entry. the tariff on sugar imports will decrease to 18% in January 2013, To further lessen and eventually remove smuggling of sugar, decline to 10% in January 2014, and then further slide down to 5% the SRA has signed the module for the e-Payment system for the in January 2015. Another hurdle is achieving the production cost e-Permits/Clearances of imports/export sugar related cargoes. target set by the SRA Roadmap, which amounts to a bottom line The Memorandum of Agreement for the e-Payment system of U.S. 14 cents per pound. Nine sugarcane producing areas or was inked among the SRA, Bancnet, and the Landbank of the districts have posted average costs of production at about or below Philippines (LBP). Transactions allowed by the system include the targeted cost of production in the middle of 2012. The country (1) Application for Permit to Export Raw Sugar; (2) Application has 23 central milling areas. The SRA Roadmap, which started for Permit to Export Refi ned Sugar; (3) Application for Permit to in 2010, aims to achieve cost competitiveness and profi tability. Import Molasses; (4) Application for Release of Premix Sugar; The forming of the ASA is in preparation for the (5) Application for Permit to Export Muscovado; (6) Application conception of the Association of Southeast Asian (ASEAN) for Permit to Export Molasses, and (7) Clearance for Release Economic Community by 2015. Cherdpong Siriwit of of Imported Sugar. Sugar importers and exporters can use the Thailand and Pedro Roxas of the Philippines were elected as e-Payment system, which will be facilitated through the Philippine Chairman and Vice-Chairman during ASA’s organizational National Single Window (PNSW), starting January 3, 2013. meeting in Bangkok last November 7, 2012. Major sugar manufacturers in the region are the Philippines, Indonesia, and Thailand, whose annual sugar production reaches an estimated 2.5 million to 10 million tons of sugar per year.

Philippine ANALYST December 2012 BUSINESS 47

Despite numerous issues delaying the operations, the MINING, OIL, & GAS local communities in the host provinces remain supportive of the project as they are aware of the benefi ts the project Tampakan operations pushed back to 2019 will bring to their communities. Even before operations, SMI has been supporting host communities through social Sagittarius Mines Inc. (SMI), the local arm of Swiss miner and livelihood programs. “SMI has been working for more Xstrata Plc., has announced that it will further push back than 10 years with the affected communities, and remains committed to obtaining a social license to develop the project,” the Tampakan copper-gold project’s start of commercial Mr. Forrestal added. The $5.9-billion Tampakan copper- operations to 2019. The decision was prompted by the existing gold project in South Cotabato, which also straddles other regulatory and administrative challenges faced by the provinces (Saranggani, Sultan Kudarat and Davao del Sur) is company including denial of an Environmental Compliance expected to be the biggest foreign investment in the country. Certifi cate (ECC) by the Department of Environment and Natural Resources (DENR).

The recent change in schedule is already the 3rd time that Gov’t hopes to fi nish draft of mining bill by SMI is deferring Tampakan operations. The company initially May 2013 announced that start commercial operations was moved to 2016, then it was deferred further to 2018. In a statement, SMI The Mining Industry Coordinating Council (MICC), an President Peter Forrestal said that the company has submitted inter-agency group designated to work on the proposed law to the Mining Industry Coordinating Council (MICC) its latest to increase government’s share in mining revenues, is eyeing project development plan indicating start of construction in to fi nish the draft mining bill before the midterm elections 2015 that will enable Tampakan to fully operate by 2019. in May. One of the issues to be settled in drafting the bill is The biggest challenges faced by SMI are the long-pending how to tax the mining fi rms. legal and environmental issues between the local and national governments affecting Tampakan’s open pit mining. The DENR Stakeholders have been pressing the government to resolve the turned down SMI’s application for an ECC until the company uncertainties in the regulatory framework and policies governing addresses issues about open pit mining methods that the provincial mining activities. Among the urgent concerns is the adjustment government of South Cotabato raised. The national law allows on the share of government on mining revenues. However, the open pit mining but a provincial ordinance was instituted in South adjustment will have the go through legislation. According to Cotabato banning such method. The recent mining directive, Speaker Belmonte, the passage of the mining will not happen in the Executive Order (EO) No. 79, was initially deemed to solve 15th Congress due to insuffi cient time to discuss and deliberate the the confl icting laws as EO 79 provides for the supremacy of the bill. House Speaker Feliciano Belmonte Jr. earlier made a statement national laws over local laws. The SMI has already submitted an that the passage of the mining bill to raise the government’s appeal to the Offi ce of the President last July 27 regarding the issue. revenue share will have to wait until the next Congress. Speaker However, President Aquino has decided that the government will Belmonte pointed out that the Aquino government has yet to wait for the Congress to craft a new law on mine revenue-sharing pass its own version of the bill. When the MICC fi nishes its before acting on the appeal of SMI. The President also reiterated version of the draft bill, the group will submit it to the Ways and that the government does not want to rush decisions to ensure Means committees of the House and the Senate for sponsorship. that whatever will be imposed will be defi nite and need not be The council wants to ensure that the bill will increase the changed or revised afterwards. Meanwhile, the Department of increase government’s share in mining revenues without creating Justice (DOJ) issued their opinion last November 29 saying that a negative impact on the country’s competitiveness for mining the provincial ban is against national laws. This gives SMI or investments. The bill also intends to harmonize national laws and the Department of the Interior and Local Government (DILG), local ordinances, another contentious issue in the mining sector. which is the government agency tasked to ensure consistency MICC is reportedly studying 2 options for a new revenue- between national and local laws, the option to fi le a case in sharing scheme between the government and the mining industry court invalidating the effectivity of the provincial ordinance. that will both be benchmarked on world metal prices. The SMI also cited security issue as a major hurdle to Tampakan government earlier expressed its plan to adopt a single fi scal project. Violence recently erupted in the project area killing regime in the sector to eliminate issues on valuation of outputs members of the B’laan tribe, one of the indigenous communities and costs of production. There are currently 3 fi scal regimes for in the site. “The project has experienced a number of challenges large mines: mineral production sharing agreements (MPSA) since we submitted our Mine Project Feasibility Study. These have outside mineral reservations; MPSA within mineral reservations; included restrictions on fi eld activities resulting from security and fi nancial and technical assistance agreements (FTAAs). issues in the project area; the need to reconsider our preferred power According to the Department of Trade and Industry, supply options for the project,” SMI President Peter Forrestal noted. which is also a member of the council, the government

Delayed mining investments are foregone benefi ts.

Philippine ANALYST December 2012 48 BUSINESS

may take a percentage of mining companies’ gross margin To promote the growth of the mobile applications or gross revenue, where income tax paid is deducted after markets – an effective way to engage users to tap into the computing the government share. The council said that the Internet more – Google has mounted several apps-making government will base on international benchmarks for metals competitions targeting universities. This strategy is also prices available on the London Metals Exchange as well as used by the 2 dominant telcos in the country (PLDT and for internationally accepted cost for mineral ore production. Globe Telecoms), much to the benefi t of the local industry. In restructuring the tax system governing the mining industry, “This is the year to pay attention to the Internet in emerging the MICC intends the reforms stipulated in the bill to allow for the markets, whether you live in one or not—new users there are coming country’s entry to the Extractive Industries Transparency Initiative, online 7 to 10 times faster than in the United States,” says Google. the internationally-accepted practice that uses standardized At least 500 million new Internet users are expected to come disclosures to achieve a more transparent payment and collection from emerging markets like the Philippines from 2012 to 2015. of all mining-related fees to both the local and national government. Yahoo!, on the other hand, is pushing to make the country The MICC also proposes that the arrangement include the creation a hub for consumer electronics technology in Asia. In of a one-stop process in new areas designated as mining zones, early December 2012, it held its 1st consumer electronics similar to the Philippine Economic Zone Authority, which exposition “TechnoStorm” at the TriNoma Mall in Quezon city. would process and facilitate all mining industry requirements. Participating companies included big names in technology such A total of 1,828 mining applications in the country are as Samsung, Nokia, HP, Sony, Microsoft, Epson, Sharp, LG, reportedly directly affected by the moratorium as set in and Phillips. Local players included Smart Communications, EO 79, the government’s recent mining directive. Many PLDT, Sun Cellular, Globe Telecom, and Wi Tribe. companies have also decided to hold off new mining Meanwhile, PLDT and Globe Telecom are already in the investments in the Philippines until regulatory and fi scal process of modernizing their respective networks to service issues are resolved. Industry players are hoping for speedy the rising demand for wireless broadband internet. Smart passage of the reform bill that will allow the government to Communications’ LTE (Long Term Evolution technology) mobile fi nally lift the moratorium on granting of new mining permits. broadband services are already available in 10 cities across Metro Manila. Globe’s $790-million network expansion and IT transformation program is expected to be completed early in 2013. I.T. UPDATE

½ of the Philippine population seen own a Growth in tablet and smart phone sales to smart phone continue

The Philippines is one of the fastest-growing markets for In 2012, shipments of smart phones accounted for 60% smart phones in the Asian region. Soon, it is projected of the total smart-connected devices market, while tablets that ½ of the population will own a smart phone, making accounted for 10%. IDC sees a continuation of this trend, it a primary access point to the Internet of many Filipinos. predicting that smart phones will account for 66% and tablets for 13% of total worldwide shipments in 2016. Four out of fi ve or 80% of all phones to be sold in 2013 would be smart phones, rising from 24% in 2012, shared Peter Bithos Samsung and Apple hold the top spots in the smart- of Globe Telecom’s Consumer Business department. At this connected devices market, which consists of desktop rate, the smart phone penetration in the country will near 50%. personal computers or PC, portable PC, smart phones, and According to Internet giant Google, internet penetration need tablets. Next in line are Lenovo, HP, and Sony. Global only reach 50% in any country for everything else to follow. market intelligence firm IDC predicts shipments in this Currently, the country is not only a top market for short messaging market to reach $800 billion or 2.1 billion units in 2016. services but also for social media and mobile applications or apps “Both consumers and business workers are finding (see table for details), yet internet penetration stands at just 30%. the need for multiple ‘smart’ devices and we expect that

ONLINE SOCIAL ACTIVITIES IN THE PAST 7 DAYS (% OF RESPONDENTS) Activity Filipino Youth Registered to social networking sites 80* Playing games 60 Watching videos 53* Maintaining a blog 33 Uploading photos 33* Participating in forums 28 Tagging web pages and online photos 23* *the highest in Asia Source: Young Asians 2010, Synovate The survey covered China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam. Philippine ANALYST December 2012 BUSINESS 49

SMART-CONNECTED DEVICE MARKET (2012-1016, shipments in millions)

PRODUCT CATEGORY 2016 UNIT SHIPMENTS 2016 MARKET SHARE 2012 UNIT SHIPMENTS 2012 MARKET SHARE 2016/2012 GROWTH

Desktop PC 151.0 7.2% 149.2 12.5% 1.2%

Portable PC 268.8 12.8% 205.1 17.2% 31.1%

Smartphone 1405.3 66.7% 717.5 60.1% 95.9%

Tablet 282.7 13.4% 122.3 10.2% 131.2%

TOTAL 2107.8 100.0% 1194.0 100.0% 76.5%

Source: IDC Worldwide Quarterly Smart Connected Device Tracker, December 10, 2012. trend to grow for several years… The advent of cloud- to shift to new low-cost manufacturing centers and based services is enabling people to seamlessly move from invest in connected operations to increase efficiencies. device to device, which encourages the purchase and usage “2013 is going to be similar to 2012 with the economic of different devices for different situations,” said IDC. volatility and uncertainty continuing. We expect manufacturing A device category that is riding on the connectivity capabilities companies within the region to look for opportunities for either of smart phones, for example, are wearable mHealth devices. lower cost manufacturing or new markets in other emerging In 2012, some 30 million mHealth devices were shipped, economies, whether in Asia, Africa, or Latin America,” said IDC. growing by 37% from 2011. The market for these devices, which taps on the enhanced Bluetooth capabilities of smart phones, is seen to grow by 40% annually until 2017. Vendors such as Nike and Adidas have already expanded their wearable wireless sensor offerings; several start-ups in the U.S. have also picked up on the trend. The market is seen to expand into systems such as home monitoring for aging people and long-term remote patient monitoring over the next 5 years. The IDC Manufacturing Insights also predicts that in 2013, manufacturers in Asia Pacific will look

Philippine ANALYST December 2012 50 BUSINESS

PEZA APPROVED PROJECTS - 3RD QUATER 2012 INDUSTRY ACTIVITY PROJECT COST EQUITY (IN PHP MILLION) LOCAL/FOREIGN APPAREL AND TEXTILE MANUFACTURES 50% - American Manufacture of Socks, Leggings, Arm Warmer, Gloves, Scarf, Leg Warmer, Toe CAVITE SOXNET, INC. 35 45% - Korean Socks, Tights for Men, Ladies, Children and infants 5% - Filipino AUTOMOTIVE TRADE TEMIC AUTOMOTIVE (PHILS.), INC. Manufacture of MK100E (Electronic Brake System) 547 99.99% - German ITO MANUFACTURING (PHILIPPINES), Rebuilding of Automobile/Automotive Parts & Components - 100% - Japanese CORPORATION Manufacture of Equipments for Automotive manufacturing, CAD Drawing 75% - American TWTX CORPORATION 20 Engineering, Machining, Welding, Assembly and related Activities 25% - Japanese ELECTRICITY, WATER, AND GAS Acquisition, operation and maintenance of transmission lines (138 KV 3.4 km. sub-transmission line from the National Transmission Corporation) and 99.98% - British LIDE PASAR POWER CORPORATION transmission and distribution of power to the Philippine Associated and Smelting 25 Virgin Island and Refi ning Corporation (PASAR) located at Leyte Industrial Development Estate - Special Economic Zone (LIDE-SEZ), Isabel, Leyte AIR LIQUIDE PIPELINE UTILITIES SERVICES Installation of Additional Underground Pipelines to Supply Nitrogen Gas 15 99.99% - French (ALPLUS), INC. MITSUI-KINZOKU ENGINEERING KABUSHIKI- Supply, project management and technical support services in connection with KAISHA (MESCO, INC.) - PHILIPPINE BRANCH the installation, testing, commissioning and monitoring of a 4,000 nm3/hr 261 100% - Japanese (MI-PB) Vacuum Pressure Swing Adsorption (VPSA) Oxygen Plant ELECTRONICS TAIYO YUDEN (PHILS) INC. Manufacture of High Current Winding Chips Inductors or LQ 5-Sides 805 99.99% - Japanese

TAIYO YUDEN (PHILS) INC. Manufacture of multi-layer Ceramic High Q Mini-Chip Inductors or LGX Product 99.99% - Japanese 470 Line TAIYO YUDEN (PHILS) INC. 99.99% - Japanese Manufacture of multi-layer Ferrite Mini Chips Inductors 180

TAIYO YUDEN (PHILS) INC. 99.99% - Japanese Manufacture of multi-layer Chip Inductors BKH Series 100

TSUKIDEN ELECTRONICS PHILIPPINES INC. Printed Circuit Board Assembly for automotive Application 94 99.99% - Japanese ON SEMICONDUCTOR PHILIPPINES, INC. (a) Assembly and Test of Sanyo Thin SOIC8; and (b) Test of VR12 144 99.99% - American 68% - British 17% - Filipino Manufacture of Integrated Power Modules for Washing Machines and INTEGRATED MICROELECTRONICS, INC. 357 9% - Various Airconditioners 5% - Singaporean 1% - Japanese SAMSUNG ELECTRONICS PHILIPPINES Manufacture of Ultra Slim I-Deck 10 100% - Korean MANUFACTURING CORPORATION IBIDEN PHILIPPINES, INC. Manufacture of FCLGA14 (Flip Chip Land Grid Array), and FCBGA14 (Flip Chip 175 100% - Japanese Ball Grid Array 14) IBIDEN PHILIPPINES, INC. Manufacture of FCBGA15 (Flip Chip Ball Grid Array 15) 151 100% - Japanese Manufacture of various equipment, spare parts & electronic components PRO BOARD TECHNOLOGY SERVICES supplied to semi-con companies. Repair & maintenance services for various 19 100% - Filipino CORPORATION equipment 80% - Taiwanese OTKM SERVICES PHILS. INC. Battey charging such as Uninterruptable Power Supplies (UPS) 8 20% - Filipino PYTHOS TECHNOLOGY PHILIPPINES INC. Assembly of Printed Circuit Boards and Power Supply Repair 8 100% - Filipino TAIYO YUDEN (PHILS) INC. Manufacture of Multilayer Chip Power Inductors (LFR) 300 99.99% - Japanese 74% - American TELSIGMA CORPORATION Repair and/or refurbishment of cellular phones 1 26% - Filipino Provider of export services for electronic products Manufacturing Such as ALLIANCE MANSOLS, INC. - 100% - Filipino inspection, Assembly and Testing ALLIANCE MANSOLS, INC. Mounting Surface-Mount Technology (SMT) Components for Hard Disk Drive 100% - Filipino 111 (HDD) SUPREME COIL ELECTRONICS CORPORATION Manufacture of voice coil 6 99.96% - Korean PRICON MICROELECTRONICS, INC. Metal Stamping 12 99.55% - Japanese Electric Copper-Nickel-Tin plating process performed on hard disc drive parts NAKTP, INC. 10 99.99% - Japanese and other coated products and electronic parts of similar nature for export IBIDEN PHILIPPINES, INC. Manufacture of FC-MB (Flip Chip-Matrix BGA) Back End Process 344 100% - Japanese Manufacture of wiring harness, insulation parts, PCB YUMEX PHILIPPINES CORPORATION 114 100% - Japanese and other electronic and plastic products and parts TOTOKU PHILIPPINES, INC. Manufacture of HSA Sub-Assy (E-Block) 47 99.99% - Japanese GF MICRO OPTICS PHILIPPINES, INC. Assembly of Patch Cords (PACO-S-SA/SA-1-XR) 2 99.99% - American TDK PHILIPPINES CORPORATION Production of Actuator Flexcable Assembly (AFA) 22 99.99% - Japanese SCAD SERVICES (S) PTE. LTD. – (PHILIPPINE Manufacture of LED lighting 1 100% - Singaporean BRANCH)

Philippine ANALYST December 2012 BUSINESS 51

Manufacture, fabrication and design of microwave/emerging technologies REMEC BROADBAND WIRELESS components/ systems for export and the marketing distribution and sale of 18 100% - American INTERNATIONAL, INC. related goods, commodities, merchandise and services of IRFU (Indoor Radio Frequency Unit) Assembly, testing and installation of software of main boards [Semi Knock Down LEADERSTECH MFG. PHILS. INC. 8 100% - Korean (SKD) devices] of mobile phones, laptops and LCD monitors FOOD AND BEVERAGE MANUFACTURES SEAFOODS FUKUI PHILIPPINES INC. Processing of seafood and seaweed products 35 99.99% - Japanese FURNITURE AND FIXTURES LAMON BAY FURNITURE CORPORATION Manufacture of household furniture and furnishings, such as cupboards, 95% - Japanese 41 cabinets, tables, etc. with stained, poly urethane, or lacquer fi nishes 0% - Filipino IT AND IT-ENABLED SERVICES IT services related to creation, design, and development of software solutions REKURSV INC. 1 99.99% - American and web/mobile-based applications ANTHEM SOLUTIONS, INC. IT equipment and services to Transcom Worldwide (Philippines), Inc. (TWPI) 90 100% - Filipino TATE PUBLISHING AND ENTERPRISES Providing information technology (IT) and IT-enabled services related to the 6 99.99% - American (PHILIPPINES), INC. publishing industry IBM SOLUTIONS DELIVERY, INC. IT - Application Management Services 4 99.99% - Filipino WIDE-OUT WORKFORCES INC. Rich-Media Production, Web Application & Development - 100% - Filipino Rich Media Production (fl ash development), Web Development, Application WIDE-OUT WORKFORCES INC. 66 100% - Filipino Development, Quality Assurance, Campaign Management, Ad Traffi cking DEVICE DYNAMICS ASIA PHILIPPINES, INC. Engineering and Technical Support Services 5 100% - Filipino XBORDER INTEGRATED OUTSOURCING Website Design, Development and Maintenance - 99.94% - Japanese ENTERPRISES, INC. Non-Formal and Online Tutorial Services, to offer Technical Vocational 60% - Filipino BIZ COMMUNICATIONS CEBU JP, INC. 1 Education & Training (TVET) Programs 40% - Japanese ADVANCED JP 7, INC. Research and Experimental Development in Information and Technology - 99.7% - Japanese MACHINERY AND EQUIPMENT Production of specialized toolings and equipment, including fabrication of jigs JINGYE MANUFACTURING PHILS., INC. and fi xtures with the use of CNC machining centers, anti-static plastic products 8 99.9% - Chinese and LED processing enterprise MEDICAL AND HEALTH SERVICES MIRAMED PHILIPPINES GROUP LLC- Medical Coding and Medical Auditing 8 100% - American PHILIPPINE BRANCH GF MICRO OPTICS PHILIPPINES, INC. Manufacture of NPT-001 Medical Probe and Optical Video Receiver 3 99.99% - American METAL INDUSTRIES Subcontractor of MOOG Controls Corporation (Phil. Branch) (MCC-PB) on metal AUROCHS AEROSPACE PRECISION fi nishing operations particularly on removing rough edges from metal parts, 14 100% - Filipino MANUFACTURING CORPORATION sandblasting and buffi ng OHGITANI PHILIPPINES INC. Recovery of non-ferrous metal scrap from solid hazardous waste for exportation 22 100% - Japanese Manufacture of various iron works/metal and plating products with or without 66% - Japanese ONDA GROUP OF COMPANIES, INC. attachments, such as window grills, table legs, fences, gates, table tops with - 34% - Filipino artifi cial marble, leather or fabric upholstery YAMASHIN CEBU FILTER Manufacture and Assembly of Suction Strainers, Valve and other related Filter 99.99% - Japanese 288 MANUFACTURING CORP. products Manufacture, assembly and/or heat treatment of various types of precision INATEC CORPORATION 54 99.97% - Japanese springs APPLEGATE PERFORMANCE PRODUCTS, INC. 55% - American Aluminum Casting 1 45% - Filipino F-TECH PHILIPPINES MANUFACTURING, INC. Aluminum Die Casting of Motorcycle Parts 113 100% - Japanese Manufacture/assembly, exporting, selling of louvre galleries, made of aluminum and more commonly known as shutter mechanisms or jalousies, accessories VENTUS INDUSTRIES INC. and other goods of similar nature (such as fasteners, plastic screw caps, 17 99.99% - Australian

grommets, etc. used in the installation and assembly of the products), to redominantly foreign clients Manufacture of custom-made tool and die, pinch punch and timber-cut punched DIC SEIMITSU PHILIPPINES, INC. 26 99.99% - Japanese die plate FCC (PHILIPPINES) CORPORATION Engage in buying and exporting of various dies such as diecasting die, shaving 3 100% - Japanese die, molding die and blanking die for manufacture of motorcycle coreplate OMI SHEET METAL WORKS INC. Weaving, curving, polishing, cutting, coating, varnishing, assembly and 7 99.93% - Japanese packaging of wooden products MISCELLANEOUS MANUFACTURES Manufacture of various exterior housing, garden and decorative items made of 99.99% - Japanese KYOTO GLOBAL EXTERIOR, INC. 48 fi ber glass reinforced plastic (FRP) and/or aluminum casting 00.01% - Filipino CEBPACK CORPORATION Manufacture of Packaging Materials 5 100% - Filipino BANDAI PHILIPPINES INC. Manufacture of toys and related products 526 99.99% - Hong Kong Manufacture and/or production of various optical products such as sporting ASIA SCOPRO OPTICS CO., INC. 26 99.99% - Taiwanese rifl escopes, dot sight, laser, etc. FUJIFILM OPTICS PHILIPPINES INC. Manufacture of spherical glass lens elements 673 99.99% -Singaporean Manufacture and Supply of Hydroponics System Grow Kits, Cabinets and MKP INC. Facilities, and Supply of Hydroponics Nutrients, Seedlings, and its associated 1 99.99% - Japanese Hydroponics Supplies ARUZE PHILIPPINES MANUFACTURING INC. Manufacture of gaming machines 18 99.99% - Chinese

Philippine ANALYST December 2012 52 BUSINESS

60% - Filipino ADAPTIS MODULAR PRODUCTION, INC. Manufacture of prefabricated houses 6 20% - French

20% - Australian Manufacture of interior materials such as fi reproof and waterproof decorative KYOLITE CEBU, INC. 16 100% - Japanese tiles and wall panels for buildings, residences and ship accommodations Manufacture, Recycling and Trading of goods for import and export such as any GT GATSIS CORPORATION 100% - Filipino kind of hanger, plastic and metal parts and other related accessories on 7

wholesale basis EEF ACTIVATED CARBON INC. Coconut Activated Charcoal 6 100% - Japanese NEW ECOZONE Tourism Economic Zone with Information Technology -SM Seaside City Tourism SM PRIME HOLDINGS, INC. 12017 100% - Filipino Economic Zone CYBERZONE PROPERTIES, INC. Information Technology (IT) Center-Filinvest Cebu Cyberzone 5534 100% - Filipino GST ILOILO CORPORATION Information Technology (IT) Center-GST Iloilo Corporate Center 22 100% - Filipino STI EDUCATION SERVICES GROUP, INC. Information Technology (IT) Center -TechZone Building 2075 100% - Filipino ASEANA HOLDINGS, INC. Information Technology (IT) Center-Aseana Two 300 100% - Filipino 61% - Filipino LAGUNA TECHNOPARK, INC. Laguna Technopark-Special Economic Zone (LT-SEZ) 267 39% - Japanese FEDERAL LAND, INC. Information Technology (IT) Park-Metro IT Park. 4370 100% - Filipino ATLANTIC GULF & PACIFIC CO. OF MANILA, 96% - Filipino Special Economic Zone-AG&P Special Economic Zone II 1788 INC. 4% - Japanese 60% - Filipino GREEN ASIA RESOURCES CORP. Information Technology (IT) Center-Spark Place 1051 40% - British Virgin Island SM LAND, INC. Information Technology (IT) Center -as SM Cyber West Avenue 1005 100% - Filipino IT Facilities Enterprise, specifi cally for the construction, operation and ASIAN I-OFFICE PROPERTIES, INC. - 100% - Filipino management of CBP Superblock BPO to Cebu Holdings, Inc. (CHI) Registration of its additional projects as Economic Zone IT Facilities Enterprise, specifi cally, the construction of the following IT buildings located at Lot CYBERZONE PROPERTIES, INC. 2, Block 43, Northgate Cyber Zone, Filinvest Corporate City, Alabang, 1872 100% - Filipino Muntinlupa City for lease to PEZA-registered IT enterprises: a) iHub and b) iHub10 Take-over of the PEZA-registered operations of CHK Cavite Hosiery Knitting, Inc. 50% - American (CHK) at CEZ i.e, Manufacture of men's, ladies' and children's socks under PEZA 45% - Korean CAVITE SOXNET, INC. Registration Agreement dated 22 February 2008, and amendment - 5% - Filipino of its registered activity, to include the manufacture of arm warmer, knit mittens, scarf, beanie hats and wristband Registration as an Economic Zone Facilities Enterprise, specifi cally, to lease out its existing warehouse building with a gross fl oor area of 4,382 square 97% - Korean CHK CAVITE HOSEIRY KNITTING, INC. meters, more or less, which was constructed on a 5,525-square meter lot - 3% - Filipino identifi ed as Lot 3 located at Block 2, Phase 2, Cavite Economic Zone, Rosario, Cavite OFFSHORING AND OUTSOURCING TRANSCOM WORLDWIDE (PHILIPPINES), INC. Call center operations 14 99.99% - Canadian TRANSCOM WORLDWIDE (PHILIPPINES), INC. Business process outsourcing 64 99.99% - Canadian ALTISOURCE BUSINESS SOLUTIONS, INC. Business process outsourcing services 210 99.99% - Dutch OCWEN BUSINESS SOLUTIONS, INC. Business process outsourcing services 210 99.99% - Dutch Engage in development of Maritime IT Software NYK-FIL MARITIME E-TRAINING, INC. 175 99.99% - Filipino and IT-enabled Outsourced Training BPO ORCHID CYBERTECH SERVICES, INC. Call center operations 24 100% - Australian EVEB CORPORATION 60% - Filipino Call center operations 21 40% - Chinese 51% - British SHORE SOLUTIONS, INC. Call center operations 5 38% - Australian 11% - Canadian 91% - Dutch 5% - Filipino STREAM INTERNATIONAL GLOBAL SERVICES 3% - American PHILIPPINES, INC. Call center operations 291 1% - Bermudian MULTIRATIONAL CORPORATION Business process outsourcing and call center services 10 100% - Australian 90% - Filipino BPO TELEQUEST, INC. Business process outsourcing services 7 10% - American PROSPERITUS INTERNATIONAL PHILIPPINES, Business process outsourcing services 2 99.9% - Australian INC. TELETECH CUSTOMER CARE Business process outsourcing and call center operations 91 100% - Dutch MANAGEMENT - PHILIPPINE BRANCH OMNIGLOBE INFORMATION TECHNOLOGY Business process outsourcing 100 99.99% - American PHILIPPINES PVT. LTD., INC. SAPERIUM INC. Business process outsourcing 3 99.99% - American To offer a fully managed services facility for call center services and BPO of ANTHEM SOLUTIONS, INC. 77 100% - Filipino WHG Customer Service Philippines, Inc. ANTHEM SOLUTIONS, INC. Call center/BPO operations of AFNI Philippines, Inc. 6 100% - Filipino 95% - Dutch QUALFON PHILIPPINES, INC. Call center operations 61 5% - Costa Rican WHG CUSTOMER SERVICE PHILIPPINES, INC. Business process outsourcing services 40 99.99% - British

Philippine ANALYST December 2012 BUSINESS 53

99.99% - American GL ADVISOR SOLUTIONS INC. Business process outsourcing services 22 00.01% - Filipino CHAMP CARGOSYSTEMS PHILIPPINES, INC. Software development and product management in support of Champ 18 99.97% - Swiss Cargosystems' growing clients worldwide Software development and application, including programming and acquisition 99.99% - IVOCLAR VIVADENT, INC. and adaptation of system software for business, multimedia, e-commerce, 12 Liechtenstein education, entertainment and other IT-enabled services of similar nature AFNI PHILIPPINES, INC. Call center operations 10 99.98% - American PLAN BPO PHILIPPINES, INC. Business process outsourcing and call center operations 3 99.99% - Chinese OMEGA PARTNERS RESOURCING INC. Business processing outsourcing 2 99.99% - Australian CAPSTONE SOLUTIONS, INC. Business process outsourcing and call center operations 2 100% - Filipino Data entry and textual analysis of investors information including fi nancials, PROSYNC SOLUTIONS, INC. 2 100% - Filipino text and contact data on Canadian listed companies 93% - Macedonian GLOBAL LINK BPO INC. Business process outsourcing and call center operations 1 7% - Filipino 80% - American STARTEK PHILIPPINES INC. Business process outsourcing and call center operations - 20% - Filipino VENTECH INTERNATIONAL SERVICES Knowledge-based and computer-enabled engineering design services - 99.99% - American PHILIPPINES, INC. 97% - Japanese DISKE LIMITED INC. Software and data processing for fi nancial information - 2% - Filipino 1% - Korean ACCENTURE, INC. Software Development and Business Process Outsourcing 82 99.99% - Dutch ANTHEM SOLUTIONS, INC. Call center services and BPO of Amikat Services Inc. (AMIKAT) 28 100% - Filipino 99.99% - British Virgin AMIKAT SERVICES, INC. Call center operations 13 Island EMPLOYERS MUTUAL GROUP Business process outsourcing 13 100% - Australian RESULTS MANILA, INC. Call center operations 36 99.99% - Canadian SIMPRO SOLUTIONS PHILIPPINES, INC. Business process outsourcing 19 99.99% - Chinese TRUELOGIC ONLINE SOLUTIONS, INC. Outsourcing-Software and System Development 6 99.92% - Israeli IMPERA GLOBALTECH INC. 65% - Filipino Call center operations 2 35% - Chinese Business Process Outsourcing (BPO) activity such as Project management 99.99% - Filipino STELLAR PHILIPPINES, INC. Services, Account Management Services, IT Support Services, and Administrative - Support Services CITIGROUP BUSINESS PROCESS SOLUTIONS Call Center Operations 316 100% - Singaporean PTE. LTD. CONVERGYS PHILIPPINES SERVICES Providing outsourced contact-management services and other IT enabled 285 99.99% - American CORPORATION services (such as back-offi ce services) SERVICESEEKING MANILA Call Center Services 9 100% - Australian WNS GLOBAL SERVICES PHILIPPINES, INC. Business process outsourcing and call center operations 166 99.99% - Dutch KERNEL PHILIPPINES, INC. Software Development 8 99.99% - Japanese SPRASIA PHILIPPINES, INC. Software development and Information technology related services 1 99.99% - Hongkong 70% - South African Software Research and Development, IT related services and Business Process CLOUD121 ASIA CORPORATION 1 20% - Filipino Outsourcing 10% - Swiss EXIST SOFTWARE LABS, INC. Merger of Operations with EXIST QUEST, INC., and with ESLI engage in software - 99.99% - American development SOFTWAREONE PHILIPPINES CORPORATION information technology consulting services, software licensing and other related 3 99.99% - Swiss activities XBORDER INTEGRATED OUTSOURCING Language Translation Services and Business Process - 99.94% - Japanese ENTERPRISES, INC. Outsourcing (BPO) – Accounting and Payroll Services ANTHEM SOLUTIONS, INC. Business process outsourcing and call center operations 349 100% - Filipino Offshore staff leasing, website making and maintenance, web PRIMEOUTSOURCING.COM INC. - 100% - Filipino services including online marketing and call center solution IT Application Management, i.e., application support and Remote Server IBM SOLUTIONS DELIVERY, INC. 33 99.99% - Filipino Management, and Software Development and application services NEXUS RESEARCH INTELLIGENCE Data collection, research services and software development 25 99.99% - American PHILIPPINES, INC. OTHER BUSINESS SERVICES HAMMERULO DATA CORPORATION Data entry services and indexing - 99.98% - American

Provides technical services for Yazaki Corporation’s automotive 85% - Japanese PHILIPPINE EDS TECHNO SERVICE , INC. - Electrical Distribution Systems (EDS) development centers 15% - Filipino Render quality control and packing services to JISOO GARMENTS MFG. CORP. and S-A-N-G-T-O-P SOLUTIONS CO. LTD., INC. 9 99.91% - Japanese to other PEZA-registered ecozone export enterprises Supplies raw materials and provide services of supply chain management (SCM), I-FTZ TRADE PHILIPPINES INC. 9 99.99% - Japanese just-in-time delivery (JIT) and vendor managed inventory (VMI) PLASTIC PRODUCTS PACKING AND VACUUMING PRECISION, INC. 92% - Korean Manufacture of vacuum plastic packing industrial supplies 3 8% - Filipino

Philippine ANALYST December 2012 54 BUSINESS

WU KONG (S) PTE. LTD. Engage in plastic molding parts/profi le 191 100% - Singaporean Manufacture of various industrial plastic products such as polyethylene (P.E.) YJC INTERNATIONAL CORPORATION fi lms, P.E. bubble sheets, P.E. stretch fi lms, P.E. trash bags and other allied 35 100% - Chinese plastic products and goods of similar nature REAL ESTATE AND PROPERTY DEVELOPMENT Operate and maintain 2 existing factory buildings with a total fl oor area of 25,804.78 square meters, constructed on a 48,550-square meter lot located at SCPA PROPERTIES, INC. 90 100% - Filipino Lima Technology Center – Special Economic Zone (LTC-SEZ), in Barangay Bugtong na Pulo, Lipa City, Batangas Construction of a factory building which shall have a gross fl oor area of 7,517 square meters on a 10,738-square meter lot identifi ed as Lot 2, located at Block CASA ALMACEN VENTURES, INC. 109 100% - Filipino 9, Reliance Street, Light Industry & Science Park III – Special Economic Zone (LISP III-SEZ), Sto. Tomas, Batangas Construction of a factory building which shall have a gross fl oor area of 1,500 square meters, on a 5,416-square meter lot identifi ed as Lot 2, located at Block 60% - Filipino S & T REALTY CORP. 33 4, Light Industry & Science Park III – Special Economic Zone (LISP III-SEZ), Sto. 40% - Japanese Tomas, Batangas Construction and operation of two standard factory buildings with a combined fl oor area of 16,536 square meters, on an 11,427-square meter lot identifi ed as PRIMARY PROPERTIES CORPORATION 274 100% - Filipino Lot 8, located at Block 4, Cebu Light Industrial Park (CLIP), Basak, Lapu-Lapu City, Cebu Construction of a standard factory building on a lot located at Block 3, Cebu 60% - Filipino MACTAN MSA PROPERTIES, INC. 75 Light Industrial Park (CLIP), in Basak, Lapu-Lapu City, Cebu 40% - Japanese Construction of two (2) buildings with a combined fl oor area of 43,333.12 square meters, more or less, on a 96,980-square meter lot located at Lot 1, 84% - Chinese SHEN LONG PROPERTY MANAGEMENT, INC. 820 Block 8, Millennium Drive corner Quality Street, Light Industry and Science Park 16% - Japanese III-Special Economic Zone (LISP III-SEZ), Sto. Tomas, Batangas Inclusion of four (4) parcels of land with an aggregate area of 24,144 square LISP-II LOCATORS' ASSOCIATION, INC. meters located at Barangay La Mesa, Calamba City, Laguna, into the 42 100% - Filipino existing Light Industry and Science Park II – Special economic Zone (LISP II-SEZ) Construct, operate and maintain its proposed Seven (7) IT buildings to be established at the SM Seaside City Tourism Economic Zone within Cebu South SM LAND, INC. 9834 100% - Filipino Road Properties (CSRP) Complex, Cebu City to be collectively known as SM Seaside City Centers Establishment of high-end accommodation facilities and international SM HOTELS AND CONVENTION CORP. 3121 100% - Filipino convention center RUBBER PRODUCTS NAIGAI GOMU PHILIPPINES Manufacture of rubber products and other related items 31 100% - Japanese CORPORATION STORAGE AND WAREHOUSING KORCHINA LOGISTICS 99.5% - Filipino Warehousing /logistics operations 1 (PHILIPPINES) SERVICES INC. Additional warehouse facility att corner Road 1 and 10th Street, Phase IV, ORIENT GOLDCREST REALTY, INC. 11 100% - Filipino Cavite Economic Zone, Gen. Trias, Cavite Construction and operation of two (2) warehouse facilities with a gross fl oor area 3,000 square meters (1,500 square meters per building), more or less, ZHONGYAO REALTY CORPORATION which shall be established on lot identifi ed as Lot 8, with an area of 9,955 61 100% - Filipino

square meters, located at Block 1, Centennial Street, Light Industry and Science Park III, Sto. Tomas, Batangas Operation of warehouse facility, importation of raw material, adjustments to PHILKO-CHEM LOGISTICS, INC. 13 99.98% - Filipino customer specifi cation for Hydrogen Peroxide, sales activity, and delivery Construction and operation of three standard warehouse buildings with a combined fl oor area of 16,128 square meters, on a 24,675-square meter lot PANORAMA PROPERTY VENTURES, INC. 204 100% - Filipino identifi ed as Lot 3B, located at Block 10A, Light Industry & Science Park III (LISP III), Sta. Anastacia, Sto. Tomas, Batangas Construction of a warehouse building with a gross fl oor area of 2,484 square 65% - Filipino 3H INTERNATIONAL, INC. meters on Lot 11 with an area of 4,063 square meters, located at Block 5, 25 20% - Korean

Laguna International Industrial Park (LIIP), Mamplasan, Biñan, Laguna 15% - Japanese YUTAKA MANUFACTURING PHIL. Provide warehousing/logistics support services, particularly, importation/ 15 100% - Japanese INC. – WAREHOUSING DIVISION procurement, storage, deposit, transfer or disposition AGA PHILIPPINES, INC. Engage in warehousing, storage, deposit, safekeeping of goods particularly, 4 99.99% - Japanese gaming machine parts Construction of a 2-unit warehouse building with a gross fl oor area of 10,752 CCMC LAND, INC. square meters on lot identifi ed as Lot 3A with an area of 12,260 square meters, 123 100% - Filipino

located at Block 10A, Light Industry and Science Park III, Sto. Tomas, Batangas Registration of its newly acquired warehouse facility with a gross fl oor area of 2,312 square meters which was constructed on a 15,643-square meter EMS LAND SERVICES, INC. 87 100% - Filipino lot, located at Lot 1-A-1, Block 7, Phase 2, Technology Avenue, Laguna Technopark SEZ, Biñan, Laguna Engage in importation of materials (PC Sheet) for warehousing and distribution NIHON GARTER PHILIPPINES, INC. - 100% - Japanese to semiconductor and electronics company TOTAL 54945

Philippine ANALYST December 2012 BUSINESS 55

BUSINESS CLIMATE INDEX

FOREIGN DIRECT INVESTMENT FDI:BOP CONCEPT Balance of Payments Concept; JAN-SEPT. 2012 US$ million LEVEL (US$ million) YEAR-ON-YEAR SOURCE CURRENT YEAR AGO % CHANGE TOTAL FDI 1262* 1298 -2.8 of which: equity capital 513 -396 229.5 reivested earnings 365 182 100.5 * includes outfl ow of $384 Mn as other capital account.

INDUSTRIAL PERFORMANCE DATA YEAR-ON-YEAR YEAR-TO-DATE (2000=100) OCTOBER 2012 INDEX GROWTH GROWTH Volume of Production Index (VoPI) 107.4 22.2 6.4 a. Food 142.2 19.4 11.7 b. Beverage 110.7 8.2 1.3 MOTOR VEHICLE SALES YEAR-AGO GROWTH RATE c. Tobacco 6.1 -17.6 -22.1 DATA LEVEL (%) d. Textile 43.7 -15.1 0.3 MOTOR VEHICLE SALES 14,620 12,090 20.9 e. Footwear & Wearing Apparel 47.0 129.3 78.3 PASSENGER CAR SALES 4,963 2,504 98.2 f. Wood and Wood Products 68.4 15.3 24.8 COMMERCIAL VEHICLE SALES 9,657 9,586 0.7 g. Furniture & Fixtures 311.0 2.6 58.6 h. Basic Metals 104.4 33.8 -13.9 UNIVERSAL AND COMMERCIAL BANK’S i. Iron and Steel 78.7 9.9 17.0 LOANS OUTSTANDING TO THE REAL ESTATE SECTOR (P Bn) % TO TOTAL % TO TOTAL j. Non-ferrous Metals 170.9 64.0 -38.7 MARCH 2012 MARCH 2011 RE: LOAN RE: LOAN k. Fabricated Metal Products 239.0 6.3 -0.2 RESIDENTIAL 132.01 33 96.88 30.4 l. Machinery Excluding Electrical 25.2 12.0 7.5 COMMERCIAL 267.89 67 221.96 69.6 m. Electrical Machinery 97.4 75.2 13.4 n. Transport Equipment 134.5 13.5 34.9 o. Other Mfg Industries 175.9 -6.2 -12.4 p. Paper & Paper Products 82.1 6.8 -7.5 q. Publishing & Printing 42.2 -15.3 1.2 r. Leather Products 2.5 -13.8 26.6 s. Rubber Products 229.7 -7.1 5.1 t. Chemical Products 126.4 9.1 1.1 u. Petroleum Products 59.8 6.4 -14.1 v. Non-Metallic Mineral Products 137.1 -3.6 3.3 w. Glass & Glass Products 115.0 -7.0 8.8 x. Cement 165.1 2.6 4.5 y. Misc. Non-Metalic Mineral 97.1 -18.4 -3.6 Products VALUE OF PRODUCTION INDEX 173.2 18.9 6.5 (VAPI) AVERAGE CAPACITY UTILIZATION 83.4 -17.0 83.4

Philippine ANALYST December 2012 56 BUSINESS

BUSINESS CLIMATE INDEX 3 STRIKES IN NOVEMBER 2012

There were 3 strikes recorded in November 2012 involving 748 workers LABOR STRIKES and 2,314 man-days. Strikes accumulated to a total of 4 strikes for the STRIKES DECLARED WORKERS INVOLVED MAN-DAYS LOST (000) period of January to November 2012. On the other hand, workers involved 2012 2011 2012 2011 2012 2011 in strikes accumulated to 768 while man-days lost amounted to 2,474. Compared to the same period last year, there were 2 strikes held involving JAN 0 1 - 128 - 28 3,823 workers equivalent to 3,828 man-days lost. FEB 0 - - - - - MAR 0 - - - - - VISITOR ARRIVALS GROWTH DECELERATES TO 9% IN JAN-OCT 2012 APR 0 - - - - - Total visitor arrivals in the Philippines continued to decelerate as its MAY 0 - - - - - registers growth at 9.18% for the period of January to October2012, slower than the 11.96% growth registered for the same period last year. Total JUN 0 - - - - - visitor arrivals recorded for the period is 3,478,285. Of this total, 4.9% JUL 1 - 20 - 160 - are Filipinos residing abroad. Korea remained the largest source market followed by the U.S. and Japan. Arrivals from Korea decelerated to a 10% AUG ------growth from 27.9% last year. On the other hand, growth in U.S. visitor SEP - 1 - 3,700 - 3,700 arrivals accelerated to 4.4% from 3.8%, while growth in visitor arrivals OCT ------from Japan accelerated to 9.7% from 3.6%. NOV 3 - 748 - 2,314 - DEC ------STRIKES DECLARED TOTAL 4 2 768 3,828 2,474 3,828

HOTEL OCCUPANCY DECREASES TO 66.4% IN JAN-AUG 2012

Within the period of January to August, average occupancy rate of hotels slightly decreased to 66.4% in 2012 from 68.8% in 2011. De Luxe hotels posted the highest occupancy rate with 71%, down by 1.13 percentage points. Standard hotels registered the 2nd highest occupancy rate at 63.2%, which also slipped by 2.84 percentage points. Meanwhile, fi rst- class hotels outranked economy hotels with an average occupancy rate of 57.6%, lower by 2.54 percentage points. Economy hotels had the least occupancy at an average rate of 53.9%, down by 9.3 percentage points in 2011.

MAN-DAYS LOST TOURISM ARRIVALS

VISITOR ARRIVALS JANUARY - OCTOBER 2012 SURVEY ON THE MONTHLY OCCUPANCY RATES & LENGTH OF STAY COUNTRY 2012 2011 % CHANGE RANK 2012 2011 2012/2011 KOREA 832,437 756,863 9.99 1 JAN-AUG JAN-AUG GROWTH RATE USA 534,899 512,436 4.38 2 De Luxe Hotels JAPAN 341,676 311,402 9.72 3 Occupancy Rates 71.04 72.17 -1.57 CHINA 215,814 195,982 10.12 4 Length of Stay 2.96 3.06 -3.27 TAIWAN 188,862 153,575 22.98 5 First Class Hotels AUSTRALIA 147,237 133,501 10.29 6 Occupancy Rates 57.63 60.17 -4.22 CANADA 96,089 90,634 6.02 7 Length of Stay 2.36 2.30 2.61 SINGAPORE 119,885 111,200 7.81 8 Standard Hotels HONGKONG 98,967 93,567 5.77 9 Occupancy Rates 63.21 66.05 -4.30 UNITED KINGDOM 90,198 83,608 7.88 10 Length of Stay 2.39 2.39 0.00 MALAYSIA 91,230 74,826 21.92 11 Economy Hotels GERMANY 53,158 48,522 9.55 12 Occupancy Rates 53.85 63.18 -14.77 OVERSEAS FILIPINO 171,705 164,499 4.38 Length of Stay 1.95 1.88 3.72 OTHERS 496,616 455,251 9.09 TOTAL 3,480,785 3,187,877 9.19

Philippine ANALYST December 2012 CORPORATE BRIEFS 57

ELECTRICITY, WATER, AND GAS

Ayala Corp. acquires stake in Mariveles coal-fi red power plant Ayala Corp. has acquired the 17% stake of Denham Capital in GNPower Mariveles Coal Plant Ltd. Co. (GMPC) for $155 million. The acquisition was made through Ayala’s wholly-owned energy subsidiary, AC Energy Holdings Inc., in addition to Ayala’s growing portfolio of energy projects. The GMPC owns the 600-MW coal-fi red power plant in Bataan that is currently undergoing commis- sioning for full commercial operations in 2013. Ayala Corp. said that the Mariveles Power Plant is a major capacity addition that is critical to alleviating potential power shortages in the Luzon Grid. Ayala Corp shares the ownership of the power plant with Power Partners, Ltd. Co. and Sithe Global Power LLC.

Petron seeks tax perks for power plant expansion Petron is asking for tax incentives from the Board of Investments for the upgrade of its 70-megawatt solid fuel-fi red power plant located in Limay, Bataan. The P10.8-million power plant is expected to be completed by the end of 2012, which will form part of a planned 140-MW facility that will primarily serve growing refi nery operations. The company is seeking a non-pioneer status, which if granted will exempt the company from paying income taxes for 3 years, among other perks. Under the 2012 Investment Priorities Plan, energy projects are eligible for tax perks. Petron has implemented its $2-billion Refi nery Expansion Project (RMP- 2) in 2011, to allow the company to optimize operations of the 180,000 barrel-per-day Bataan refi nery. This can generate the nominal equivalent of up to 216 MW.

SMIC and Chevron form All First Equity Holdings SM Investments Corp. (SMIC) and Chevron Geothermal Philippines Holdings Inc (CGPHI) have partnered to form All First Equity Holdings, which will carry out geothermal energy projects across the country. SMIC owns 60% of All First Equity while Chevron holds the remaining 40% share. Through All First Equity, SMIC plans to join the auction for a geothermal project in Kalinga and intends to conduct exploration activities in Samar, Bohol, and Palawan. Chevron, meanwhile, is eyeing geothermal projects in Cebu. All First Equity is seen to rival Energy Development Corp, the country’s largest geothermal energy producer.

FOOD & BEVERAGE MANUFACTURES

Swift Foods sells P214Mn worth of properties Swift Foods, Inc. has sold 2 parcels of land with a total area of 507,202 square meters amounting to P214 million. The sale comprises 16 buildings, other land improvements, machinery, and equipment, which are located at Barrio Tungkong Mangga, San Jose del Monte City. Swift Foods has also sold other properties, such as its 3 properties in Mandaluyong City to DMCI Project Developers, Inc. and 3 properties in Manggahan Light Industrial Park in Pasig City to LBL Industries, Inc. Swift Foods, whose 9-month net loss declined by 72.78% to P19.03 million from P69.91 million in the same period last year, has been disposing vari- ous properties to settle debt obligations.

Jollibee teams up with Chevron Jollibee Foods Corporation (JFC) and Chevron Philippines Inc. (CPI) have teamed up to create a 1-stop shop, where consumers can buy JFC products as well as load up fuel. The 1-stop shop entails putting up JFC stores in Caltex sites across the country. JFC owns and supervises Jollibee, Greenwich, Chowking, Red Ribbon, Mang Inasal, and Burger King Philippines, among others. Caltex has around 800 service stations nationwide. Both companies are major players in their respective industry markets.

Coca- Cola FEMSA acquires majority stake in Coca-Cola Bottlers Mexico-based Coca- Cola Femsa, S.A.B. de C.V. (Coca-Cola Femsa), the largest franchise bottler of Coca-Cola products in the world, has signed an agreement with The Coca-Cola Co. to acquire 51% of Coca-Cola Bottlers Philippines, Inc. (CCBPI) for $689 million. As part of its expansion strategy, this is the 1st acquisition of the Coca-Cola Femsa beyond Latin America due to the strong economic conditions of the country. Coca-Cola Femsa has said that it has an option to purchase the remaining 49% of CCBPI within the 7-year period. The transaction is expected to close in early 2013. The acquisition will give the Philippine bottler a company value of $1.35 billion. Coca-Cola Femsa and The Coca-Cola Company will be in-charge of the day-to-day operations of CCBPI, which will enhance the bottling operations and contribute to the growth in the Philippine market. CCBPI has currently 23 production plants that serves 800, 000 customers. It is expected to sell 500 million unit cases of beverages in 2012.

Gardenia Bakeries projects 20% growth in 2013 sales Gardenia Bakeries Philippines Inc. sees a 20% growth in sales for 2013 on the back of a strong consumer demand for its products and the launch of new products. It expects a 10% increase in the demand for the existing products and expects a 15% increase in the demand from Visayas and Mindanao next year. To take advantage of this, the company said that it plans to tie up with shipping companies to cut costs and to ensure the fl ow of product distribution in Visayas and Mindanao. As for the company’s expansion plans, its new products are still under development while the rest of the plan remains undisclosed as the company is carefully working out the logistics.

Philippine ANALYST December 2012 58 CORPORATE BRIEFS

MINING AND QUARRYING

DMCI intends to raise share in Toledo mining DMCI Holdings, Inc. plans to increase stake in Toledo mining after it has bought a minority stake in one of Toledo’s major share- holders. A 17%-share has been bought by DMCI from Daintree Resources, which holds 22.01% of Toledo mining. DMCI intends to buy another 17% and eventually acquire a 60% share in the mining company. Toledo mining holds 4 large nickel deposits in Palawan, which contain an estimated 3.8 million tons of nickel metal.

OUTSOURCING AND OFFSHORING

UnitedHealth Group puts up support offi ce UnitedHealth Group Inc., one of the largest corporations in the United States, has set up a support offi ce in the country. The sup- port unit will provide labor-intensive, information technology-enabled business support functions to UnitedHealth’s main offi ces. It has started hiring local staff, whose qualifi cations include Filipino nurses with hospital experience, BPO exposure, and who have active U.S. licenses. The nurses will be hired as nurse associates, clinical quality analysts, and clinical managers. Medical billing coordinators, medical coding specialists, and healthcare experts, among others, are also set to be hired. UnitedHealth, which holds a network of 754,000 physicians and 5,400 hospitals, serves approximately 75 million people around the world.

PETROLEUM PRODUCTS

Unioil invests P1Bn for network expansion in Luzon Unioil Petroleum Philippines Inc. (Unioil) is spending P1 billion in the next 3 years to build more stations in Luzon, particularly in Metro Manila, as it sees an increase in fuel demand given a robust economic growth. The target is to build 10 to 12 stations per year, which will cost around P25 million to P30 million each. Currently, Unioil has a total of 30 service stations in Manila, Cavite, Pampanga, and Laguna, which accounts for 30% of Unioil’s revenues. For this year, retail sales are expected to grow by 15% due to higher demand and new stations. In 2013, Unioil expects a faster increase in retail sales as it continues to build more stations. It is scheduled to open 4 new branches in Makati and Quezon City in January 2013. On the other hand, Unioil has recently launched the EuroDiesel IV, which already complies with the Department of Environment and Natural Resources’ require- ment to sell Euro IV compliant diesel by 2016. The company expects to further improve revenues from the sale of this product.

PHARMACEUTICAL TRADE

Zuellig acquires Manchester’s drug, property units Pharmaceutical giant Zuellig Group has purchased Manchester International Holdings Unlimited Corp.’s (Manchester) entire investments in Interphil Laboratories, Inc. (Interphil) and Lancashire Realty Holding Corp. through Manchester’s affi liates: In- terpharma Holdings and Management Corp. and Mercator Holdings Corp. Zuellig said that Interphil’s manufacturing facilities, including the land on which the facilities are located, are still of strategic value in terms of providing support services to its pharmaceutical distribution business conducted through Zuellig Pharma Philippines and Metro Drug, Inc. Meanwhile, Interphil currently operates 2 plants in a 50,365-square meter lot at the Canlubang Industrial Estate in Cabuyao, Laguna, and has 23 transnational pharmaceutical client fi rms. Aside from Manchester’s property acquisition, Zuellig recently sold its 93% stake to Melco Crown Entertainment.

REAL ESTATE AND PROPERTY DEVELOPMENT

SMDC launches 3rd mid-rise brand in 2013 SM Development Corp. (SMDC) is planning to launch its 3rd brand of mid-rise low-cost residential segment in early 2013. The new project targets small families and will be located in Fairview, Quezon City, which will not be more than 500 meters away from the SM Fairview shopping mall. The new brand and 2 other new projects in 2013 are in line with SMDC’s target to sustain a 10% to 15% growth in sales and profi t. SMDC is optimistic that demand will continue to outstrip housing supply next year. With the 3 new projects together with new phases in existing projects, around 10,000 units will be added to its inventory. However, SMDC said that it will be taking a more conservative stance on new projects compared to the aggressive pace it took in the past years. Currently, it is eyeing to acquire lands in the province of Batangas and Cavite. It is also currently looking into expansion in ASEAN countries like Cambodia, Myanmar, and Laos.

Philippine ANALYST December 2012 CORPORATE BRIEFS 59

Robinsons Land, Okada group unveils details of casino resort complex project Okada-led Universal Entertainment Corp. and Gokongwei-led Robinsons Land Corp. (RLC) has disclosed the blueprint for the $1-billion world-class integrated resort to be built in Entertainment City along Manila Bay. The resort will have state-of-the-art gaming facilities, 3 hotels with 2,000 rooms in total, upscale residential towers, and an artifi cial beach club. All of which will cover 44 hectares of the reclaimed land in Roxas Boulevard. The partnership between RLC and Universal Entertainment was re- cently fi nalized and has agreed that RLC will have a 60% stake in the company that will own the property. RLC will also have the minority stake in the operating company that will manage the casino, hotel, retail, residential, and entertainment components of the resort. The project is slated to open in 2014.

SM Prime opens SM City Chongqing SM Prime Holdings Inc. has opened SM City Chongqing, its 5th shopping mall in China. SM City Chongqing, which features 5-lev- els, is located in Chongqing City’s Yubei district. It offers 149,080 square meters of gross leasable area, which is already 85% occupied. Its tenants comprise Vanguard Supermarket, Wanda Cinema, Vero Moda, Only, Jack & Jones, Kidswant, and Watsons, among others. SM Prime plans to open 2 more malls in China over the next 2 years. Overall, SM Prime opened 6 SM malls this year—SM City Olongapo in Zambales, SM City Consolacion in Cebu, SM City San Fernando in Pampanga, SM City General Santos in South Cotabato, SM Lanang Premier in Davao, and SM City Chongqing in China.

Premiere Horizon acquires 40% stake in First Ardent Dev’t Premiere Horizon Alliance Corp. has acquired 40%-stake in First Ardent Development Corp., a real estate developer. Premiere Horizon’s Board of Directors approved the investment in December 18, 2012. Seventeen e-Games stations, which are located in Metro Manila, Antipolo City, Bulacan, and Cavite are being managed by Premiere Horizon. These stations are operating 24 hours a day and 7 days a week. Film production is Premiere Horizon’s primary business. In December 2011, the Securities and Exchange Commission (SEC) approved the company’s venture in mining, real estate, information technology, and other related businesses.

Filinvest attains 10% minimum public ownership Filinvest Development Corp. (FDC) has attained the 10% public ownership requirement imposed by the Philippine Stock Exchange (PSE). FDC was able to achieve this after ALG Holdings Corp. sold 636 million FDC shares at a price of P5 per share amounting to P3.18 billion. This resulted in an increase of FDC’s public ownership level to 10.16% from 3.35%. According to FDC’s Top 100 shareholders report, ALG Holdings is the single largest stockholder of FDC, whose shares amounts to 8.85 billion that comprise a 94.97% stake. The PSE announced that listed fi rms have until December 31, 2012 to achieve the 10% minimum fl oat level.

Metro Pacifi c acquires majority stake in De Los Santos General Hospital Metro Pacifi c Investments Inc. (MPIC) obtains a majority share in De Los Santos General Hospital Inc. (DLGHI), operator of De Los Santos Medical Center (DLSMC). MPIC and DLGHI have signed a P250-million capital-raising agreement, which allows the former to acquire a 51% share in the latter. The share acquisition adds 150 beds to MPIC’s bed capacity, which will now total to 2,000 beds. Plans for reconstruction and expansion of hospital facilities, which are expected to enhance and add patient rooms, are in the pipeline. DLSMC, which is a tertiary teaching and training hospital, is founded by the late Dr. Jose De Los Santos Sr., the Father of Philippine Orthopedics.

STORAGE AND WAREHOUSING

ICTSI port contract extended Container Terminal Services Inc. (ICTSI) has seized a 10-year joint operation contract extension in South Sulawesi, Indonesia. ICTSI’s Indonesian partners namely PT Makassar Terminal Services (MTS) and PT Pelabuhan Indonesia IV (Pelindo IV) extended the joint operation contract from September 30, 2013 to January 31, 2023. In May, PT Karwell Indonesia, ICTSI’s wholly-owned unit, has also signed a partnership venture with PT PBM Adipurusa to operate a vital area of Tanjung Port in Jakarta. ICTSI manages port facilities in the Philippines, China, Ecuador, Poland, Brazil, Madagascar, Syria, Georgia, Brunei, and Indonesia, among others.

TOBACCO MANUFACTURES

BAT invests $200Mn in PH British American Tobacco (BAT) is investing $200 million in the Philippines over the next 5 years to expand its presence in the country after pulling out in 2009. The decision to push through with the investment came after the passage of the excise tax reform bill. Part of the investment may be allotted to the construction of a new manufacturing plant. Other plans for the invest- ment are yet to be disclosed. The company has said that the passage of the bill is expected to expand opportunities for industry stakeholders including manufacturers, distributors, retailers, and tobacco farmers. Aside from the investment, BAT was planning to introduce new brands in the country, on top of its existing cigarette brands: Lucky Strike, Dunhill, and Pall Mall.

Philippine ANALYST December 2012 60 CORPORATE BRIEFS

TRANSPORT SERVICES

Cebu Pacifi c dominates 48% of domestic cargo market Cebu Air Inc. (Cebu Pacifi c) cornered 48% or 70.4 million kilograms (kg) of total domestic cargo in the fi rst 3 quarters of 2012. It continued to emerge as the preferred cargo handler while Philippine Airlines and Airphil Express handled a total of 62 million kg of domestic cargo. According to Cebu Pacifi c, it currently serves more than 2,000 accounts and offers express cargo services, seamless transshipment, and 16 interline partnerships. In 2011, Cebu Pacifi c also had the largest market share with 89.5 billion kg of cargos carried. Meanwhile, Cebu Pacifi c fl ew 9.8 million passengers in the fi rst 9 months, which grew by 12% more passengers from the same period in 2011. It is currently on track with its 2012 target of servicing 14 million passengers.

Ayala, AEV forms consortium for airport project Ayala Corp. and Aboitiz Equity Ventures Inc. (AEV) have partnered with global airport operator ADC & HAS Airports Corp. (ADC & HAS) in bidding for the redevelopment of the Mactan-Cebu International Airport (MCIA). The companies have signed a memoran- dum of understanding to form the consortium that will participate in the public bidding of the project. Ayala and AEV highlighted ADC &HAS’s expertise in building and operating world-class airports as a necessary component in their endeavor to increase the standards of airport operations in the Philippines. The project involves the construction of the passenger terminal building and the operation and maintenance of airport facilities. The phase 1 of the project is estimated to cost around P17.5 billion and due for completion between 2014 and 2016.

WHOLESALE/RETAIL TRADE

PhilSeven posts 28% growth in net income Philippine Seven Corp. (PhilSeven), the country’s biggest convenience store operator, reported its net income to have reached P224.4 million growing by 28.4% in the fi rst 3 quarters of 2012, which was due to higher merchandise sales and franchise rev- enues. Total revenues grew by 32% to P9.46 billion, where sales improved by 26% to P9.7 billion due to an increase in its 7-Eleven store base and an improved average sale in matured stores. Of the company’s store base, the ratio of franchise stores grew to 40% from 39% in 2011, which boosted franchise revenues of the company by 28% to P487.4 million. As of September, 7-Eleven had a store count of 781, where 95 are new stores. Only 3 stores have closed down during the period. In 2013, PhilSeven plans to open more stores, particularly in Cebu, and plans to hit 1,000 stores.

Philippine ANALYST December 2012 INFRASTRUCTURE 61

PH aviation safety upgrade expected soon The government expects to successfully address by early 2013 the country’s remaining aviation safety issues identifi ed by the International Civil Aviation Organization (ICAO) in its latest audit. Remaining concerns are in aircraft registration and fl ight safety inspection. The government further expects to obtain a positive performance rating in the fi nal ICAO audit to restore Philippine aviation’s Category 1 status as determined by the U.S. Federal Aviation Administration, and lift the European Union ban on Philippine air carriers.

n late October 2012, the ICAO sent a Coordinated Validation Mission to the Philippines. This is for a preliminary audit Iof the improvements the country had made so far in civil aviation safety. During the mission, the ICAO validation team found 2 outstanding issues— aircraft registration and fl ight safety inspection— from the 88 areas of concern identifi ed in the 2009 audit. The 2009 ICAO Safety Oversight Audit identified a Signifi cant Safety Concern (SSC) in Philippine civil aviation. An SSC is issued when a state does not meet international standards in aviation safety, thus posing an immediate risk to international civil aviation. In the case of the Philippines, the 2009 ICAO audit revealed 88 safety concerns. According to the Civil Aviation Authority of the Philippines (CAAP), the ICAO found the recent validation mission “a announced that the government is confi dent the remaining success,” noting the “signifi cant progress of the Philippines” aviation safety issues can be addressed by the time ICAO in addressing the safety concerns. It clarifi ed that contrary to conducts the final audit. Specifically, the issues involve news reports the mission did not result in any failed rating for the lack of a defi nitive list of registered aircraft in the Philippine aviation. As explained, the validation mission only country and the shortage of qualified safety inspectors. sought to monitor progress. The fi nal audit that could lead to Indeed, it appears that the government is committed to the lifting of the SSC will only take place in February 2013. resolving these issues. The CAAP has released a circular In the Wallace Business Forum’s latest Quarterly Round instructing all commercial aircraft operators to update their Table held on November 19, Department of Transportation registration information with the agency by January 1, 2013. and Communications (DOTC) Secretary Joseph Abaya

It is expected that once ICAO clears the Philippines of safety violations, the US FAA and the EU will follow suit.

Philippine ANALYST December 2012 62 INFRASTRUCTURE

PHILIPPINE AVIATION SAFETY AUDITS

YEAR IMPLEMENTING CONDUCTED/ FINDINGS DECISION UPDATE BODY IMPLEMENTED Failure to comply with international safety standards set by the ICAO, in part due to - defi ciencies in*: As of the January 2012 FAA United States - Integrity of the issuance of certifi cates Downgraded PH pre-assessment audit, 23 Federal Aviation (ex. operating/compliance certifi cates or civil aviation from critical elements involving 2008 Administration airworthiness certifi cates) Category 1 to airline safety and aviation (US FAA) - Qualifi cation and training of inspectors and Category 2 status authority management still other critical technical personnel need to be addressed. - Conduct of safety oversight functions - Record-keeping, etc. As of the October 2012 International PH civil aviation 88 safety concerns involving 278 out of the 987 ICAO Coordinated Validation Civil Aviation was identifi ed as a 2009 audit protocols, indicating a 28% “lack of effective Mission, 2 out of the 88 Organization Signifi cant Safety implementation” score in aviation safety negative fi ndings still have (ICAO) Concern to be resolved. As of Vice President Binay’s meeting with EC offi cial Siik European Union Used as bases: PH-licensed carriers Kallas in October 2012, there (European 2010 - US FAA’s 2008 audit were blacklisted are still concerns in the Commission or - ICAO’s 2009 audit from EU airspace areas of professionalism and EC) the regularity of air safety inspections. *US FAA fi ndings derived from press statements on FAA’s pre-assessment audit conducted in January 2012 Sources: Presidential Communications Operations Offi ce, United States Federal Aviation Administration, press statements

As for the more diffi cult task— by Sec. Abaya’s own The U.S. FAA is the organization in charge of the much- admission— of addressing the need for more qualifi ed safety discussed aviation safety categorization. In 2008, the U.S. inspectors, CAAP Assistant Director General (DG) for Flight FAA downgraded Philippine aviation rating from Category Standard Inspectorate Services Beda Badiola said that the board 1 to Category 2, resulting in limited operations of Philippine already approved an increase in the salary of inspectors from 30% air carriers in the US. In 2010, the EU followed FAA’s lead of industry standards to 50%. Mr. Badiola did not go into the and blacklisted the Philippines from operating in EU airspace. specifi cs of the salary increase, but added that they are presently working for a further raise of up to 80% of industry standards. This is expected to attract more qualifi ed inspectors to join CAAP. MAP proposes solutions to PH airport infra Sec. Abaya said the CAAP currently has 120 inspectors, but that they have set an internal target of 200 qualifi ed inspectors. challenges The government’s confidence is further boosted by The Management Association of the Philippines (MAP) ICAO’s commitment made during the last mission to “hand- hold” the Philippines in the mean time to ensure that the recently came up with a proposal seeking to address the outstanding issues can be fully addressed by February 2013. interlocking challenges in Philippine airport infrastructure. Reports indicate that this will involve a monthly visit from The proposal lists MAP’s suggestions for the designation an ICAO representative until the time of the fi nal audit. of domestic and international gateways, for structural CAAP DG William Hotchkiss III previously said that modernization of existing facilities, and system upgrades. It ICAO compliance is the priority of the CAAP. This will be is aimed towards the goal of setting up modernized domestic followed by compliance with the United States Federal Aviation and international gateway airports. Administration (U.S. FAA) and the European Union or EU (see table). It is expected that once ICAO clears the Philippines of The proposal, entitled “A Total Systems Approach to Gateway safety violations, the U.S. FAA and the EU will follow suit. Airports Problems,” takes a holistic approach in tackling the While these are 3 different organizations conducting separate various issues hounding Philippine airport infrastructure. assessments, essentially all refer to ICAO’s safety standards. The As MAP explains, “(t)he problems… cannot be effi ciently effect won’t be automatic, but as Sec. Abaya explained, once approached piecemeal. An integrated system approached in ICAO grants clearance, “logically, they (U.S. FAA) should follow its totality is recommended.” (MAP members may inquire at because the downgrade merely stemmed from the SSCs. We the MAP offi ce on how to secure a copy of the full report.) expect them to immediately bring us up to Category 1 without any The recommendations include the designation of the Ninoy audit, likewise the ban in the EU was also triggered by the SSCs.” Aquino International Airport (NAIA) as the domestic hub, and the Clark Airport as the international hub; the relocation of general aviation to adjacent airports; the installation of night landing facilities in more provincial airports; and the

Philippine ANALYST December 2012 INFRASTRUCTURE 663

DOTC will come up with a decision on the NAIA-Clark gateway airport issue in 1Q13.

KEY EVENTS COMMUNICATIONS, NAVIGATION SURVEILLANCE AND AIR TRAFFIC MANAGEMENT (CNS/ATM) SYSTEM

YEAR EVENT Packages 1 and 2 of the CNS/ATM project were rolled out for pre-qualifi cation of interested bidders, under the Arroyo 2009 government 1H2010 Bids were submitted for Packages 1 and 2 Pres. Aquino assumed the presidency, and new DOTC Sec. Ping de Jesus subjected the CNS/ATM project to a “thorough Jun 2010 review”. The DOTC decided to proceed with the project. Nov 2010 Package 1 contract was signed with Sumitomo/Thales The Commission on Audit (CoA), in its audit report, called on the DOTC to re-evaluate the CNS/ATM project “taking into Dec 2010 consideration the redundancy with the completed and installed MACC (Manila Air Control Center) system” Dec 2010 Package 1 commenced implementation Apr 2011 Package 2 contract was signed with Sumitomo/Thales Jun 2011 Package 2 commenced implementation Jul 2011 Mar Roxas replaced Ping de Jesus as DOTC Secretary and ordered a fresh round of review of the CNS/ATM project Sep/Oct 2011 Implementation of both packages were put on slow mode Nov 2011 The CNS/ATM project was suspended Sources: Press statements, DOTC, Commission on Audit

“A TOTAL SYSTEMS APPROACH TO GATEWAY AIRPORTS PROBLEMS” (PARTIAL LIST OF PROPOSED MEASURES) MAJOR PROPOSALS COMPONENTS − Revert ownership of the Nayong Pilipino land area to the Manila International Airport Authority in order accommodate lateral expansion of NAIA − Link the 4 terminals of NAIA to create ease of movement during passenger transfer A. NAIA as domestic hub and gateway for Linking of Terminal 2 (T2) and Terminal 4 (T4) domestic travel Linking of T1 and T2 Linking of T3 and T4 − Expropriation of the Baltao Subdivision located in the middle of the aerodrome for future expansion of NAIA Structural works for the airport: − Construction of a new terminal for domestic and international low-cost carriers (without air bridges for quick aircraft turnaround) − Construction of a new international terminal for legacy airlines − Construction of new domestic and cargo terminals − Construction of a 3rd runway suited to wide-body aircraft B. Clark Airport as the international hub

Transfer services for passengers − Construction of a high-speed railway link between NAIA and Clark Airport − Construction of the NLEX-SLEX Connector to facilitate land travel − Provision of helicopter service pads and terminals − Provision of bus, taxi, and car rental terminals C. Relocation of general aviation to adjacent airports (e.g. Sangley or Lipa) (To free a wide area in NAIA needed for expansion and other modernization initiatives) to mitigate airport congestion D. Night landing facilities for more provincial airports E. Modernization of the Communications, Navigation Surveillance and Air Traffi c Management (CNS/ATM) System Source: Management Association of the Philippines

The Philippines is trailing behind its SE Asian neighbors in terms of quality of air transport infrastructure.

Philippine ANALYST December 2012 64 INFRASTRUCTURE

Source: National Statistical Coordination Board

*1 as the highest; Ranking against annual total of countries surveyed: 2008-2009 (total of 164 countries evaluated), 2009-2010 (133 countries), 2010-2011 (139 countries), and 2011-2012 (142 countries)

Source: World Economic Forum Global Competitiveness Reports

installation of the Communications, Navigation Surveillance share of 62.2% of total passenger movement (see graph on and Air Traffi c Management (CNS/ATM) system. Essentially Philippine passenger traffi c). As for Clark Airport, it has room these measures are envisioned to support the growth in the for major expansion that could handle the rapidly growing country’s domestic and international air traffi c. Between international traffi c. This supports the government’s target of 2001 and 2011, domestic and international passenger attracting 6 million tourist arrivals into the country by 2016. movement grew by an annual average of 10% (see graph on Earlier reports show that the government remains undecided Philippine passenger traffi c). These are also seen to mitigate on the NAIA-Clark gateway issue, particularly on making airport congestion, and ensure ease and safety of air travel. Clark the international gateway, given the concerns regarding The NAIA is currently the country’s primary international its accessibility and distance. During the Wallace Business gateway. There have been suggestions to shutdown this facility Forum’s last quarterly roundtable in mid-November, however, because of its limited capacity for expansion, and to transfer Department of Transportation and Communications (DOTC) its operations to the Clark Airport. While MAP acknowledges Sec. Joseph Abaya announced that his agency has set an NAIA’s limitations, it counsels against this suggestion. MAP internal deadline to come up with a proposal on the NAIA- explains that since the bulk of the domestic air traffi c is Clark gateway airport issue. This is expected to be fi nalized accounted for by travel to and from Metro Manila, the domestic for submission to the president within the 1st quarter of 2013. hub is best located within the metropolis. Over the last decade, travel to the national capital (NCR) accounted for an average

Philippine ANALYST December 2012 INFRASTRUCTURE 665

MAP’s recommendations were accompanied by proposals P3-trillion investments needed for suffi cient for structural works on the facilities (see table). For NAIA, in particular, it is proposed that the 4 terminals of the power until 2030 airport be interconnected to create ease of movement as In his presentation during the launch of Philippine Energy passengers transfer from one terminal to another. For Clark, Plan (PEP) 2012-2030, Energy Secretary Jericho Petilla the modernization will have to be complemented by the construction of an additional runway and other terminals, revealed that at least P3.174 trillion worth of investments and with the provision of convenient and effi cient transfer is needed to provide 11,400 megawatts (MW) of additional options for passengers going to and from Clark Airport. capacity over the next 18 years. The Department of Energy Additionally, MAP has called for the transfer of general (DOE) also unveiled during the launch its long-term plan aviation operations—air charter, air cargo, aviation training, and that would enable the country’s power supply to cope with corporate aviation operations— from NAIA to adjacent airports the growth of the economy. such as Sangley or Lipa. This will free up a wide area of NAIA needed for the expansion of commercial aviation operation. Under the 2012-2030 PEP, the domestic economy is forecast Another recommendation is the installation of night landing to grow at an average of 7%, requiring a total of 29,329 MW facilities in more provincial airports. At present, only NAIA of power by 2030. As of end 2011, the country has only has and 10 other provincial airports have night landing operations. 16,163 MW installed capacity and committed projects with Fortunately, there appears to be progress here with the government 1,766 MW capacity. To achieve the needed 11,400 MW, the recently allocating about P1 billion for the installation of night country would require P3.174 trillion worth of investments in the landing facilities in 14 provincial airports (see related article). energy sector “to put up the necessary production and logistical Without night vision technology in provincial stations, airport network to ensure availability and continuous supply of all forms congestion results as airlines “bunch” up scheduled fl ights within of energy in the economy.” To ensure that the private sector the day in order to beat sunset. Once equipped with the necessary will invest, the DOE will collaborate with concerned agencies technology for night landing, fl ight schedules could be spread and institutions to harmonize energy laws with other laws, across a 24-hour day, instead of the limited 12-hour stretch. especially those involving indigenous peoples’ rights and the MAP also emphasized the importance of the CNS/ATM National Integrated Protected Areas System. “We will streamline system in ensuring commercial aviation safety and security in business procedures and rationalize processing for energy project the country. The existing ATM system is outmoded. It has been applications at the national and local levels through a one-stop- in use for 16 years, with replacement parts no longer available. shop, and advocate the continuous inclusion of energy projects In 2010, a project for the installation of a modern and effi cient in the annual Investment Priorities Plan,” Sec. Petilla said. nationwide CNS/ATM system at par with international standards Sec. Petilla also noted that the reference of the new was launched under the Arroyo government (see table for PEP is the Energy Reform Agenda (ERA) formulated by key events of the CNS/ATM project). However, a few months the administration of President Aquino, which outlines after the contract was awarded to the Sumitomo/Thales joint the strategic action plan of the energy sector particularly venture, the Commission on Audit (CoA) claimed that the focusing on providing energy access to more Filipinos. The project was unnecessary in view of a parallel initiative—the ERA is based on 3 pillars: energy security, optimal energy setting up of a new Manila Air Control Center (but a DOTC pricing, and development of sustainable energy system. offi cial earlier explained that the 2 are different projects with Following the ERA, the PEP 2012-2030 will be guided different scopes), and subsequently the project was suspended by policy thrusts set by the department which are: 1) ensure when Mar Roxas assumed the DOTC post. Sources also energy security; 2) expand energy access; 3) promote law indicate that the CoA found the project to be too sophisticated carbon future; 4) climate proof the energy sector; 5) promote and expensive. Incumbent DOTC Sec. Abaya is reportedly investment in the sector; 6) and develop regional energy plans. urging CoA to issue a clearance for the suspended CNS/ATM Under its energy security thrust, the government is project, and thus allow the agency to continue with the project. eyeing an increased installed capacity in the 3 grids in MAP’s suggestions gain importance in light of survey the country, the upgrade and expansion of transmission results ranking the quality of the country’s airport infrastructure and distribution network, and the expansion of energy as among the lowest in the region. Between 2008 and 2012, market from Luzon-Visayas grid to the Mindanao grid. the annual survey conducted by the World Economic Forum The DOE will also formulate Geographic Energy Plans (GEPS) showed the Philippines trailing behind its Southeast Asian in coordination with local executives and regional development neighbors in terms of the quality of air transport infrastructure councils that will identify potential energy sources, which in turn (see graph on quality of Philippine air transport infrastructure). will be harnessed to address area-based energy issues and concerns.

Philippine ANALYST December 2012 66 INFRASTRUCTURE

The DOE chief said the government will also push for the development and use of energy effi cient technology and practices in households and industries; and the development of natural gas, alternative fuels and renewable energy. DOE aims to achieve 10% energy savings by 2030 as part of promoting low carbon future. “Apart from our effi ciency target, we are also eyeing the 30% by 2030 target or 30% of all public utility vehicles running on alternative fuels by 2030,” Sec. Petilla said. The government targets to hike threefold the country’s renewable energy-based power generation capacity with the addition of 9,931.3 megawatts by 2030, which would almost be enough to supply demand growth during the period. Before the PEP 2012-2030, the department formulated the fi rst long-term plan under the PEP 2009-2030. The newly-launched PEP (considered as the fi rst update of the plan), will continue the strategies provided by the previous one, and supplement additional plans to address the changing needs of the sector.

Philippine ANALYST December 2012 INFRASTRUCTURE 667

STATUS OF BIG TICKET INFRASTRUCTURE PROJECTS AS OF DECEMBER2012 IMPLEMENTING FUNDING CIVIL WORKS PROJECT TITLE PROJECT COST STATUS / ISSUES AGENCY SOURCE TIMEFRAME According to the PPP Center, Segment 1 (Junction Daang Hari- Daang Reyna to Sta. Rosa) has been under construction since June 2012, but Segment 2 (Sta. Rosa to Susana Heights Interchange) Daang Hari-SLEX Link Road DPWH PPP 2012 (start) P1.96 billion is still pending. Ayala Corp. has submitted design revisions Project for Segment 2 to accommodate future SLEX expansion. Cost adjustments are still being discussed with DPWH, while SLTC (SLEX concessionaire) has yet to approve the revised design. Construction is expected to commence in January. As of mid- PPP for School P16.4 billion December, DepEd was still in the process of bidding out the Infrastructure Project DepEd PPP 2013-2014 contract for the independent consultant who will approve the Phase I project design, and monitor and audit the implementation. 4 groups pre-qualifi ed to bid: Light Rail Manila Consortium, SMC Infra Resources Inc., DMCI Holdings Inc. and MTDC-Samsung LRT-1 South Extension DOTC-LRTA PPP/ODA 2013-2015 P59.2 billion Consortium. Submission of fi nancial bids is slated between Jan. and Feb. 2013, while awarding is eyed in 2Q2013. The project is currently in the pre-qualifi cation stage. Actual NAIA Expressway DPWH PPP 2013-2016 P15.86 billion bidding is expected to commence in January 2013. Modernization of the Bidding is ongoing. Bid submission deadline is set on March 26, Philippine Orthopedic DOH PPP 2013-2016 P5.69 billion 2013. Center The project involves the design and construction of 10,679 PPP for School classrooms in 14 regions nationwide. The Invitation to Pre-Qualify Infrastructure Project DepEd PPP 2013-2014 P13.1 billion to Bid was published on Dec. 20, with submission deadline set on Phase II Feb. 12, 2013. Mactan-Cebu International Invitation to Pre-Qualify to Bid published on Dec. 21, 2012. 2014-2016 P8.9 billion Airport Development DOTC-MCIAA PPP Interested fi rms include SMC, Ayala Corp.-Aboitiz Equity Ventures, (Phase 1) (Phase 1) (Passenger Terminal) and MPIC. Angat Hydro Electric Power Plant Auxiliary Turbines Invitation to Pre-Qualify to Bid published on Dec. 12, 2012. Bidding MWSS PPP 2013-2014 P1.2 billion 4 & 5 (Rehabilitation and is expected to be completed in July 2013. O&M) Approved in principle by the NEDA Board on Nov. 29, but still subject to further review of costs. According to the Offi ce of the CALA Expressway DPWH PPP/ODA 2013-2017 P43.3 billion President, Pres. Aquino called for a verifi cation of costing to see if this can be lowered. Approved in principle by the NEDA Board on Nov. 29, but still subject to further review of costs. The gov’t stepped in to resolve NLEX-SLEX Connector Road DPWH PPP 2013-2016 P25.6 billion the issue on the common alignment with Citra’s Skyway Stage 3 Project after MPTDC and Citra failed to reach an agreement by the Dec. 15 deadline. The government’s decision has yet to be announced. The project is still under consideration of the TRB Board, reportedly in the “fi nal stage” pending resolution on the common Skyway Stage 3 DOTC-TRB PPP 2013-2015 P25.4 billion segment shared with MPTDC’s NLEX-SLEX Connector. Once endorsed by the TRB, the project would still have to be approved by the President. It was also included in the PPP pipeline. Tacloban Airport DOTC PPP 2013-2016 P2.12 billion Approved by the NEDA Board in November 2012. O&M contract is still being fi nalized by DOTC. As of November, P7.9 billion (const.); Laguindingan Airport DOTC ODA/PPP 2008-2013 98.66% of civil works has been completed. According to earlier P1.8 billion (O&M) reports, soft opening is planned in January 2013. Puerto Princesa Airport Feasibility study for O&M contract is still ongoing. Korean ODA- DOTC ODA/PPP 2013-2015 P4.5 billion (const.) Development funded construction is expected to start within 2013. DOTC is bidding out the P350-million contract for consultancy LRT-2 East Extension DOTC/LRTA NG/ODA 2013-2016 P9.76 billion services. Bidding is limited to Filipinos or fi rms at least 60% Filipino-owned. Bidding ends on Jan. 7, 2013. The Department of Finance is fi nalizing the conditions governing MRT-7 DOTC PPP 2013-2016 $2.2 billion the revised contract. SMC said that it is ready to begin construction once the contract is approved. It was deferred by the NEDA Board in December due to the Cebu Bus Rapid Transit suggestions given by Pres. Aquino to include segregated roads and DOTC ODA 2013-2015 $211 million (BRT) dedicated bus lines in the BRT plan. The project implementation is scheduled in October 2013. Contactless Automatic DOTC/LRTA PPP 2013-2014 P1.72 billion Approved by the NEDA Board in November 2012. Fare Collection System Agus VI Hydroelectric Bidding is expected to push through in January or February 2013. Power Plant (Units 1 & 2) DOE-NAPOCOR NG 2013-2015 P2.6 billion The contract is scheduled to be awarded in April 2013. Uprating The P91.42-million feasibility study (FS) is still ongoing. It involves Leyte-Mindanao DOE -- 5-7 years P24 billion the preparation of an updated FS from 2001, survey about Interconnection Project transmission route, and the hiring of consultancy services.

Philippine ANALYST December 2012 68 CONGRESSWATCH

Pres. Aquino signs 2013 national budget President Benigno Aquino lll has signed the P2-trillion national budget for next 2013. Just like the previous budgets prepared by the Aquino administration (2011 and 2012), the 2013 national budget was crafted using the zero-based budgeting scheme that enabled the government to prioritize key initiatives and effective programs and terminate ineffi cient ones.

he Department of Education will receive the largest allocation among government agencies with P292.7 billion. TThe department’s budget for 2013 is 23% higher than last year. But the agency needs more funds to fully cover all education resource gaps (e.g. classrooms, teachers, textbooks, desks) by 2016. The 2013 allocation covers only 14.6% of the national budget and a mere 3% of GDP, still below the UNESCO-recommended 20% of national budget and 6% of GDP. Classroom and textbook shortage might be aggravated by the continued implementation of K to 12 Basic Education program. The Department of Public Works and Highways follows with P152.9 billion. The funds will be used to support the government’s goal of paving arterial roads and secondary roads and bridges by 2014 and 2016, respectively. The following are some key allotments in the 2013 national ALLOCATION BY DEPARTMENT

budget that could support expansion and job creation in priority Department of National Defense - P121.6 billion economic sectors such as agriculture and fi sheries, business Department of the Interior process outsourcing (BPO), electronics, tourism, micro and small and Local Government - P121.1 billion medium enterprises, and general infrastructure development: Department of Agriculture - P74.1 billion P3.5 billion for the construction, rehabilitation, and full Department of Health - P56.8 billion pavement of 15 airports and 9 ports and wharves; Department of Social Welfare and Development - P56.2 billion P1 billion for the Tourism department’s marketing campaign Department of Transportation for both domestic and international visitors; and Communications - P37.1 billion P22.8 billion to preserve the existing road network; Department of Finance - P33.2 billion Department of Environment P5.3 billion for LRT 1 and 2 Extension projects and P975 and Natural Resources - P23.7 billion million for Cebu Bus Rapid Transit System;

The bill mandates the COMELEC to adopt an internet-based voting system to enable some 10 Mn overseas Filipinos to register and vote online.

Philippine ANALYST December 2012 CONGRESSWATCH 696

The on-time signing of the 2013 budget complements the Aquino administration’s goal of accelerating spending next year to sustain the higher-than-expected GDP growth recorded in 2012.

P15.3 billion for the government’s banner agricultural President Aquino signs Sin Tax Reform law programs. The funds will be used to help local farmers produce 20 million MT of rice (amount needed to achieve President Benigno Aquino III signed into law the Sin Tax rice self-suffi ciency), 8.4 million MT of corn, 5.4 million MT Reform bill (Republic Act 10351), which will increase excise of fi shery products, and 3.1 million MT of coconut-based taxes on alcohol and tobacco products. The measure is products; projected to raise additional revenues of around P34 billion P3.3 billion for corn and coconut development programs; for 2013, its fi rst year of implementation. P1.3 billion to provide promotional, fi nancial and technology transfer assistance to 750 Micro, Small and Medium The incremental revenues will be used to fi nance the Enterprises’ (MSMEs); government’s universal healthcare program and provide livelihood support program for tobacco farmers. The newly-passed measure P136 million for the Department of Trade and Industry to is also seen to reduce the number of smoking-related deaths in develop a one-stop business registration, licensing, and the Philippines, provide a level playing fi eld for tobacco industry export documentation facility; players, and help the Philippines achieve investment grade status. A portion of Technical Education and Skills Development Additional “sin tax” collections are projected Authority’s (TESDA) budget of P3.1 billion will be allotted to reach P42.9 billion in 2014, P50.6 billion in 2015, for the operation of its administered schools and training P56.9 billion in 2016, and P64.2 billion in 2017. centers; Some 15% of the incremental revenues raised will be used P900 million for the Private Education Student Financial to fund alternative livelihood programs for tobacco farmers Assistance (PESFA) program and the Training for Work who may be affected by the law. Among the “economically Scholarship Program (TWSP). The funds will be used to viable alternatives” stipulated in the law are the following: subsidize close to 100,000 enrollees in the following courses: 1. Programs that will provide inputs, training, and other tourism, business process outsourcing, semiconductor and support for tobacco farmers who shift to production of electronics, and agri-fi sheries. agricultural products other than tobacco such as, rice, The December 19 signing of the budget bill marked corn, and coconut; the 3rd consecutive time the national budget was 2. Cooperative programs to assist tobacco farmers in approved on time under President Aquino. During the planting alternative crops or implementing other Arroyo administration, all annual budgets were late and livelihood projects; had to be partially reenacted, or even fully reenacted. 3. Livelihood programs and projects that will promote, The on-time signing of the 2013 national budget complements enhance, and develop the tourism potential of tobacco- the Aquino administration’s goal of accelerating spending next year growing provinces; and to sustain the higher-than-expected GDP growth recorded during the fi rst 3 quarters of 2012. However, while frontloading the P1.8- 4. Infrastructure projects such as farm-to-market roads, trillion budget, the government must also make sure that safeguards schools, hospitals, and rural health facilities. are in place to ensure the effi cient spending of public funds. After deducting the allocation for tobacco farmers, 80% of the balance will be allotted for the government’s Universal Healthcare program while the rest will be used to develop health facilities. The Sin Tax Reform is a measure critical to societal transformation. Aside from curbing smoking-related deaths (around 240 per day or 90,000 per year), it will help bolster government coffers that will finance the Aquino administration’s fl agship universal healthcare program. The measure is also expected to help the government achieve its health-related Millennium Development Goals by 2015. Enactment of the measure also improves the Philippines’ chances of achieving investment grade this year. The country is now just a step below that level. If the upgrade is attained, the Philippines will enjoy lower rates when borrowing abroad and a signal will be sent to foreign investors that this is a safe place to invest in.

Philippine ANALYST December 2012 70 CONGRESSWATCH

MAJOR REFORMS ACHIEVED THROUGH THE ENACTMENT OF THE SIN TAX REFORM LAW: 1. Removal of the price classifi cation freeze that has pegged tobacco products to 1996 prices as the basis for their tax classifi cation; 2. Removal of annexes of the previous law that have unfairly favored brands introduced at an earlier date; 3. Implementation of a unitary tax regime by 2017 for tobacco and fermented liquor, a shift from the current multi-tiered system that has allowed smokers to downshift to lower-priced products. 4. Indexation of the tax rates of tobacco and alcohol by 4% every year so that these products do not become more affordable over time, consequently exposing the poor and the young to the harmful effects of smoking and excessive drinking; 5. Increase in the excise tax incidence for tobacco products from 29% in 2012 to 63% by 2017, near the World Health Organization and the World Bank’s recommendation that tobacco products must be taxed excise at 2/3 their net retail price

Sources: Department of Finance, Offi cial Gazette

OTHER KEY PROVISIONS OF RA 10351: A special fi nancial support for displaced workers in the alcohol and tobacco industries will be allocated and included in the appropriations under the Department of Labor and Employment (DOLE) to fi nance unemployment alleviation programs; and to the Technical Education and Skills Development Authority (TESDA) to fi nance the training and retooling programs of displaced workers, to be included in the General Appropriations Acts for the Fiscal Years 2014 to 2017 The Departments of Budget, Agriculture, Health and the Philippine Health Insurance Corporation (PhilHealth) will each submit to the Oversight Committee a detailed report on the expenditure of the amounts earmarked under the Sin Tax Reform Act on the 1st week of August of every year. The reports must be simultaneously published in the Offi cial Gazette and in the agencies’ websites The composition of the Congressional Oversight Committee will include the Agriculture and Health Committee Chairpersons of the Senate and the House of Representatives as part of the four (4) members to be appointed from each House Upon receipt of the annual reports from the DBM, DA, DOH, DOLE, PhilHealth and TESDA, the Committee will review and ensure the proper implementation of RA 10351 as regards the expenditures of the earmarked funds. Starting the 3rd quarter of 2016, the Committee is mandated to review the impact of the tax rates provided under RA 10351

Source: Offi cial Gazette

HOW SENATORS VOTED ON THE BICAMERAL COMMITTEE REPORT ON SIN TAX:

YES NO Edgardo Angara Juan Ponce Enrile Franklin Drilon Jinggoy Estrada Miriam Defensor-Santiago Joker Arroyo Panfi lo Lacson Francis Escudero Lito Lapid Gregorio Honasan Pia Cayetano Ferdinand Marcos Jr. Sergio Osmena III Ralph Recto Francis Pangilinan Ramon Revilla Jr. Aquilino Pimentel III Vicente Sotto III Antonio Trillanes

*Senators Alan Peter Cayetano, Teofi sto Guingona III, Loren Legarda, and Manuel Villar were absent during the voting.www.senate.gov.ph

NEW TAX RATES FOR SELECTED ALCOHOL AND TOBACCO PRODUCTS:

Fermented Liquor (Beer) Net Retail Price (NRP) 2013 2014 2015 2016 P50.60 and below P15 P17 P19 P21 P50.60 and above P20 P21 P22 P23 *Uniform tax of P23.50 by 2017, increasing by 4% every year effective January 1,2018

Cigarettes Packed by Machine Net Retail Price 2013 2014 2015 2016 P11.50 and below P12 P17 P21 P25 P11.50 and above P25 P27 P28 P29 *Effective January 1, 2017 the tax on all cigarettes packed by machine will be P30; Rates will be increased by 4% every year thereafter effective January 1, 2018

Philippine ANALYST December 2012 CONGRESSWATCH 717

The Sin Tax Reform is a measure critical to societal transformation.

After the approval of Sin Tax Reform and Reproductive Health (RH) bills, President Aquino must also certify as urgent the following equally important measures that are currently stuck at various stages of legislation: 1. Freedom of Information 2. Anti-Smuggling 3. Anti-Trust/Fair Competition 4. Fiscal Incentives Rationalization 5. Mining Revenue Sharing 6. Customs Modernization and Tariff Act President Aquino must be commended for using his enormous popularity to push for this immensely sensible bill. This move will further improve his satisfaction ratings, which could lead to greater political capital he can use to push for more tough but essential reforms for the remainder of his term.

Philippine ANALYST December 2012 72 CONGRESSWATCH

PRIORITY BILLS FOR THE 15TH CONGRESS: AN UPDATE AS OF 22 DECEMBER 2012 BILL NO. TITLE SALIENT FEATURES STATUS HOUSE SENATE AGRICULTURE, ENVIRONMENT AND NATURAL RESOURCES Seeks to amend certain sections of the Comprehensive "HB 1726 Pending in Committee on Pending in Committee on Agrarian CARP Reform Agrarian Reform Law, such as expanding the defi nition of SB 883" Agrarian Reform Reform agricultural lands Pending in Committee on HB 1429 Seeks to strengthen the Clean Air Act and its Pending in Committee on Clean Air Act Amendment Environment and Natural SB 2909 implementation Ecology Resources Seeks to consolidate and strengthen the procedure for Pending in Committee on "HB 8 Environmental Impact Pending in Committee on fi ling and implementing Environmental Impact Assessment Environment and Natural SB 1362" Assessment Amendment Ecology and issuance of Environmental Compliance Certifi cate Resources Pending in Committee Pending in Committee on H B 4 Land Administration Creates the Land Administration Authority and institutes on Government Environment and Natural SB 2114 Reform Act reforms in land administration system Reorganization Resources Pending in Committee on "HB 2717 Mining Act Amendments Seeks to amend various provisions of the Mining Act Approved on 3rd reading Environment and Natural SB 1365" Resources Provides for the direct remittance to the host LGU of its HB 110 Remittance of the Share of Pending in Committee on Pending in Committee on Local 40% share of the gross collection derived by the national SB 1101 Local Governemnt Units Local Government Government government from national wealth taxes "HB 4840 Seeks to discourage and phase out the use of plastic bags Pending in Committee on Trade Plastic Bag Reduction Act Transmitted to the Senate SB 1543" in the retail industry and Commerce Establishes the People's Survival Fund to provide long- HB 6235 People's Survival Fund Signed into law term fi nance streams to enable the governement to SB 2811 (Climate Change) Republic Act 10174 effectively address climate change FINANCE AND CORPORATE GOVERNANCE Pending in Committee on HB 105 Government Procurement Seeks to enhance the transparency of the procurement Pending in Committee on Constitutional Amendments, SB 179 Reform Act process Appropriations Revision of Codes and Laws Seeks to exempt employees of the Bureau of Internal "HB 292 BIR/BOC exemption from Revenue and Bureau of Customs from the salary Pending in Committee on Pending in Committee on Finance SB 809" Salary Standardization standardization to promote the hiring and keeping of Ways and Means professionals within these offi ces Seeks to expand the authority of the BSP to supervise and Pending in Committee Pending in Committee on Banks, "HB 5394 regulate the operations not just of banks but also quasi- BSP Charter amendment on Banks and Financial Financial Institutions and SB 708" banks and other fi nancial institutions that perform quasi- Intermediaries Currencies banking functions; grants the BSP 'tax-exempt' status Customs and Tariffs Seeks to prescribe the guide for customs and tariff HB 3224 Approved on 3rd reading None Modernization Act modernization Seeks to establish a Medium Term Fiscal Accord (MTFA), SB 2177 set caps on national debt and personnel services, ensure Pending in Committee on Fiscal Responsibility Act Pending in Committee on Finance HB 2263 funding for enacted laws, and strengthen transparency Appropriations and accountability in government transactions. Seeks to enable the insurance industry to adequately "HB 4867 Insurance Code address the various issues and challenges in both local and Transmitted to the Senate Pending on 2nd reading SB 3280" amendment foreign insurance markets HB 4935 Rationalization of Fiscal Seeks to rationalize the grant and administration of fi scal Pending in Committee on Ways Transmitted to the Senate SB 2142 Incentives and non-fi scal incentives and Means Seeks to provide an uniform and equitable taxation by limiting the allowable deductions for self-employed Simplifi ed Net Income Pending in Committee on Ways SB 380 individuals or professionals and to grant self-employed None Taxation Act and Means individuals and professionals an optional standard deduction of 40% of gross income Seeks to enhance regulatory environment that will Pending in Committee on Banks, Stock Market SB 2009 allow the Philippine stock market to grow by taking out None Financial Institutions and Competitiveness Act unnecessary tax impediments Currencies Seeks to adopt a just, equitable, impartial and nationally "HB 6044 Pending in Committee on Ways Valuation Reform Act consistent valuation based on internationally accepted Transmitted to the Senate SB 2360" and Means standards, concepts, principles and practices Restructures the excise tax on tobacco products and HB 5727 Signed into law Sin Tax Reform Bill amends pertinent sections of the National Internal SB 3299 Republic Act 10351 Revenue Code Recognizes the tax exemptions under tax treaties and HB 6022 Rates on Income Tax on international agreements related to international carriers Approved on 3rd reading Pending on 2nd reading SB 3343 Foreign Operators the Philippines has entered into HUMAN CAPITAL DEVELOPMENT AND HEALTH "HB 479 Seeks to ban asbestos in all forms of construction Pending in Committee on Pending in Committee on Trade Asbestos Ban SB 89" materials to ensure the safety and health of Filipinos Ecology and Commerce Creative Industries Seeks the creation of the Creative Industries Development SB 3071 None Pending on 2nd reading Development Council Council Amends the Expanded Government Assistance To Students Pending in Committee "HB 88 and Teachers In Private Education Act; Provides for an Pending in Committee on GASTPE Act amendment on Basic Education and SB 2035" expanded voucher or coupon system in secondary and Education, Arts and Culture Culture tertiary education

Philippine ANALYST December 2012 CONGRESSWATCH 737

Seeks to reinforce the role of labor in Philippine economy by amending various provisions of the labor code; calls for Pending in Committee on Labor, "HB 3321 Omnibus reform for the Pending in Committee on partial amendment to Book V relating to labor cases at Employment and Human Resources SB 868" Labor Code Labor and Employment the NLRC, rights of workers to bargain effectively, and the Development right to strike HB 4276 Night Work Prohibition of Signed into law Lifts the ban on night work for women SB 2701 Women Employees Republic Act 10151 "HB 4244 Reproductive Health and Seeks to provide a national policy on responsible Signed into law SB 2865" Populace Development parenthood and reproductive health Republic Act 10354 INFRASTRUCTURE AND INFORMATION TECHNOLOGY Seeks to bring Philippine telecommunications, broadcast Pending in Committee communication, cable television and broadband HB 2858 Convergence: Telecom on Information and Pending in Committee on Public industry at par with global trends and standards through SB 229 Policy amendment Communications Services technology transfer, and to prescribe the entry capital for Technology both foreign and local companies Seeks to defi ne and penalize cybercrimes and computer- "HB 5808 facilitated crimes, which include data theft, online fraud, Signed into law Anti-Cybercrime Act SB 2796" hacking, online pornography, introduction of viruses, and Republic Act 10175 computer sabotage. Seeks to protect consumers, promote trust and user "HB 4115 confi dence in electronic commerce, and enhance the Signed into law Data Privacy Act SB 2965" competitiveness of the country as a hub for the BPO Republic Act 10173 industry Upgrades the Commission on Information and Communications Technology (CICT) and seeks to Creation of Department raise public sector focus and usage of e-governance "HB 4667 of Information and ; The DICT will be tasked to formulate national For Bicameral Committee Approval SB 50" Communications communication policies, standards, and specifi cations Technology (DICT) for telecommunications, automated data processing and management information systems Seeks to achieve a more self-suffi cient energy mix, SB 2027 Energy Effi ciency Act reduce consumption of oil and coal, and ensure long-term None Pending in Committee on Energy sustainability "HB 1291 Seeks to re-commission the Bataan Nuclear Powerplant to Pending in Committee on Nuclear Power Resolution Pending in Committee on Energy SB 1642" allow its commercial operation Energy Pending in Committee "HB 2848 Seeks to regulate the use of voice over internet protocol on Information and Pending in Committee on Public VOIP Act SB 1067" (VOIP) to avoid abuse and misuse Communications Services Technology Among the proposed amendmentsare the following: addition of new PPP variants or contractual arrangements, such as joint ventures, concessions, and management HB 4151 Technical Working Group Pending in Committee on Public BOT Law Amendments contracts; restructuring and tightening of eligibility SB 2710 (TWG) drafting bill Works requirement for unsolicited proposals; and the composition of the approving body at the national and local levels. PUBLIC SECTOR GOVERNANCE Amends the Anti-Money Laundering Act to enable the Anti- "HB 4275 Money Laundering Council to examine suspicious accounts Signed into law AMLA amendments SB 3009" upon court order even without certifi ying holders of such Republic Act 10167 accounts Provides that any person who provides, collects or uses Terrorism Financing HB 5015 property or funds to carry out or facilitate the commission Signed into law Prevention and SB 3127 of a terrorist act would face long prison term and Republic Act 10168 Suppression Act P500,000 to P1 million in fi ne Pending in Committee on "HB 588 Anti-corruption Seeks to extend the prescriptive period in graft and Pending in Committee on Constitutional Amendments, SB 472" amendments corruption cases Revision of Laws Revision of Codes and Laws HB 6410 AFP Modernization Signed into law Establishes the Revised AFP Modernization Program SB 3164 Program Republic Act 10349 Seeks to defi ne private armies, provide the executive "HB 2111 with the power to dismantle them and penalize leaders, Pending in Committee on Pending in Committee in Public Anti-private Armies Act SB 238" protectors, fi nanciers, suppliers and members of such Justice Order and Illegal Drugs groups Seeks to strengthen the drive against anti-smuggling by "HB 46 Pending in Committee on Pending in Committee on Ways Anti-Smuggling Act increasing the penalty and empowering the Commission SB 2408" Ways and Means and Means on Audit to perform post-entry audits. Intends to promote a level playing fi eld in trade, industry and all commercial economic activities, and rid the "HB 4835 Reconsideration of Anti-Trust Act country of abusive monopolies, cartels, and anti- Pending on 2nd reading SB 3098" approval on 2nd reading competitive behavior. Promotes easier and more effective entry of new players in the market. Seeks to systematize appointments and promotions in the Pending in Committee "HB 6320 Career Executive Systems government by providing for a systematized career rank on Civil Service and Transmitted to the House SB 3215" Act progression in the bureaucracy Professional Regulation Seeks to ensure public access to offi cial records, People's Ownership of "HB 53 documents and any other information of public concern Pending in Committee on Government Information Pending on 2nd reading SB 3208" and compel all government offi ces to comply with Public Information (POGI) Act of 2012 requests for information on matters of public concern Pending in Committee Government Classifi cation Seeks to reclassify positions and compensation of HB 1027 on Civil Service and None and Compensation Act government employees by providing step increments Professional Regulation

Philippine ANALYST December 2012 74 CONGRESSWATCH

Seeks to amend the Intellectual Property Code through "HB 3841 Intellectual Property the integration of comprehensive, swift, effi cient and For Bicameral Committee Approval SB 2842" Rights Act amendments adequate strategies designed to respond to the criminal onslaught of internet piracy. "HB 3248 Pending in Committee on Pending in Committee on Games, Jueteng Act Seeks to legalize jueteng SB 2548" Games and Amusements Amusements and Sports Seeks to protect consumers in the sale of motor vehicles "HB 4841 against sales and trade practices which are defective, Pending in Committee on Trade Lemon Law Transmitted to the Senate SB 1310" unfair and inimical to the interests of the consumers and and Commerce public "HB 846 Ombudsman Act Seeks to strengthen the powers of the Offi ce of the Pending in Committee on Pending in Committee on Justice SB 1447" Amendment Ombudsman Justice and Human Rights Seeks the creation of the Philippine Transportation Pending in Committee "HB 299 Philippine Transportation Pending in Committee on Public Security Authority which will consolidate civil aviation, on Government SB 970" Security Authority Services maritime, land and rail security programs Reorganization Allows foreign vessels to engage in coastwise trade in the Pending in Committee on HB 2562 Maritime Law (Cabotage) None country Trade and Industry Pending in Committee HB 1679 Water Regulatory Seeks to rationalize the fi nancial regulation of water Pending in Committee on Public on Government SB 611 Commission Act utilities and create the Water Regulatory Commission Services Reorganization "HB 5715 Whistleblowers Protection Seeks to set up a system of rewards and protection for Transmitted to the Senate Pending on 2nd reading SB 2860" Act whistleblowers and their families. Seeks to promote fi nancial viability and fi scal discipline in government-owned or controlled corporations and to "HB 4067 GOCC Governance Act Signed into law strengthen the role of the state in its governance and SB 2640" of 2011 Republic Act 10149 management to make the GOCCs more responsive to the needs of the public Appropriates funds for the operation of the government General Appropriations Act House Bill 6455 of the Republic of the Philippines from January 1 to Signed into law for FY 20123 December 31, 2013 and for other purposes

Philippine ANALYST December 2012

Asia Pacific Executive Brief December 2012 © IMA Asia

Editor: Richard Martin ([email protected]) Regional economist: Andrew Hordern ([email protected]) Consulting economist: Kostas Panagiotou ([email protected])

CONTENTS

CONFIDENTIAL Overviews Global Outlook Regional Outlook North Asia Japan China Hong Kong Taiwan South Korea Southeast Asia Indonesia Malaysia

Philippines Singapore Thailand Vietnam South Asia India Australasia Australia New Zealand www.imaasia.com

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Global outlook

Watch for a Our views have changed little since last month’s Global outlook and the November page is better 2013 worth reading for its outline of the 2013 recovery, the outlook from 2014, and the implications for strategy. Overall, we expect a steady recovery through 2013 with better growth in the US … think of it as and China than many expect. 2013 will be like 2012 in reverse, with weak demand and 2012 in reverse elevated levels of global risk in Q1, a fall in global risk levels from Q2 (with a partial solution for the US fiscal cliff, China’s new leaders in their government posts from March, and Italians hopefully backing a sensible government in late February), a broad demand recovery in Q3 led by the US and China, and a better balanced global expansion appearing in Q4.

A new energy Dramatic realignments are underway in the oil outlook with the rise of the US fracking world ahead industry, which should lift US oil output to more than 7m bpd (the highest production since 1992). As the FT notes, this involves the largest annual increase since the US started … has upside pumping crude commercially in 1859. Last month the International Energy Agency (IEA) for the global forecast that the US could replace Saudi Arabia as the world's largest oil producer by 2020. recovery The WTI oil price has been in a US$90-100 band since early 2011 and the outlook must now include a possible fall in price in 2013. This would be a big plus for the global recovery and … particularly for most of Asia (including Indonesia, which has become a net oil importer). Malaysia’s big in Asia spending government would have to pull back. Australia’s massive gas projects would be unaffected as they are tied to long-term energy demand, but fracking may also change the long-term gas supply outlook, which is an issue to watch in 2013.

The US recovery By Q3’12 the US was five quarters into a surge in fixed investment led by spending on plant, equipment and IT. Initially this delayed hiring as firms used the productivity boost to run with … watch for fewer people. But that phase appears to be ending, with a 146,000 rise in new non-farm housing to play jobs in November and a fall in unemployment to 7.7%. The lift in capex also points to a a bigger role in productivity rise that should help lift trend GDP growth from 2014 close to the 3% set for the 2013 decade up to 2008. Monetary stimulus for 2013 was nudged up a notch in early December with the Fed expanding its quantitative easing (QE) program and, for the first time, setting a … as 2012 goal of 6.5% unemployment alongside its inflation goal of 2%, which should ensure that the finishes on a recoveries in housing and autos continue. At our Asia Forecast Update conferences last strong upturn month, we noted the lag for US housing capex. This is set to reverse in 2013, providing a broad boost for production and helping household balance sheets (via home price rises). US housing starts jumped 35%yoy in September and the Improving Market index for US homes surged in December to almost double its October score, suggesting that housing will play a lead role in the 2013 upturn. If the US does go over a fiscal cliff in January, a recession would occur. But most Washington observers expect a piecemeal solution.

A Euro area The Euro area survived 2012 intact but risk is set to remain high in 1H’13. Most indicators recession with also point to a contraction that will lead into a 2013 recession. Unemployment rose to a new continued high high of 11.6% for the EU27 in September, Euro area car sales fell 12.4%yoy, retail sales risk (excluding fuels and autos) fell 0.8%yoy, and lending contracted 0.6%. A key question remains whether voters will continue to stomach this. Part of the answer will become clear in … watch the the Q1’13 Italian election, with Berlusconi attempting a return to power on an anti-German Italian election and anti-austerity platform after forcing the resignation of Mario Monti’s technocrat-led in Q1’13 government on December 8. Fortunately, Italians appear to be tiring of Berlusconi (his party’s support in polls has slid to 13.8%), with Bersani’s Democratic Party likely to do best.

IMA Asia’s forecasts 2009 2010 2011 2012 2013 World – Real GDP growth, % -0.6 5.1 3.8 3.3 3.6 - US -3.5 3.0 1.7 2.6 3.2 - Euro area -4.4 2.0 1.4 -0.4 -0.2 - Asia/Pacific (14) 0.8 7.2 4.3 4.3 4.5 - NICs (4) -0.6 8.1 4.0 1.8 3.3 - Developing Asia (7) 7.0 9.8 8.2 6.7 7.2 - ASEAN (5) 1.5 7.0 4.5 5.3 5.9 World goods & services trade volume, % growth -10.5 12.6 5.8 3.2 4.5 Interest rates, US Fed target rate, year end, % 0.25 0.10 0.10 0.10 0.10 Inflation, CPI, US, year avg., % -0.3 1.6 3.1 2.4 2.5 Inflation, CPI, Euro area, % 0.3 1.6 2.7 1.9 1.1 Crude oil, avg of 3 spot crudes, US$ 62 79 104 99 90 US$ / Euro 1, year average rate 1.39 1.33 1.39 1.22 1.22 Yen / US$1, year average rate 94 88 80 80 86

The Asia/Pacific 14 = the countries on the forecast summary page. NICs are the newly industrialised countries = Korea, Taiwan, HK, Singapore. The ASEAN 5 = Indonesia, Thailand, Malaysia, Philippines and Vietnam. Developing Asia = Asean 5 + China and India. IMA Asia forecasts.

Richard Martin, IMA Asia ♦ Email: [email protected]

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Regional outlook

Summary of forecasts in this month’s Asia Brief

GDP (Expenditure), real growth, % 2009 2010 2011 2012 2013 Japan -5.5 4.5 -0.8 1.6 0.8 China 9.2 10.4 9.2 7.7 8.0 Hong Kong -2.5 6.8 4.9 1.1 4.0 Taiwan -1.8 10.8 4.1 1.2 2.3 South Korea 0.3 6.3 3.6 2.2 3.5 Indonesia 4.6 6.2 6.5 6.5 6.6 Malaysia -1.5 7.2 5.1 5.2 4.7 Philippines 1.1 7.6 3.9 5.3 5.8 Singapore -1.0 14.8 4.9 1.7 4.1 Thailand -2.3 7.8 0.1 3.3 5.5 Vietnam 5.3 6.8 5.9 4.8 6.0 India (CY) 4.9 10.4 7.9 4.4 5.4 Australia 1.4 2.6 2.4 3.4 3.1 New Zealand -0.2 0.9 0.3 1.7 2.8

Inflation, CPI year average, % 2009 2010 2011 2012 2013 Japan -1.4 -0.7 -0.3 -0.1 0.5 China -0.7 3.3 5.4 2.6 2.3 Hong Kong (composite CPI) 0.6 2.3 5.3 4.0 3.8 Taiwan -0.9 1.0 1.4 1.9 2.0 South Korea 2.8 2.9 4.0 2.2 1.8 Indonesia 4.8 5.1 5.4 4.2 6.0 Malaysia 0.6 1.7 3.2 1.7 2.3 Philippines 4.1 3.9 4.6 3.2 3.7 Singapore 0.6 2.8 5.2 4.5 3.3 Thailand -0.8 3.3 3.8 2.9 3.6 Vietnam 6.7 9.2 18.7 9.1 6.5 India (CY CPI urban non-manual workers) 10.9 12.0 8.9 8.8 6.9 Australia 1.8 2.9 3.3 1.8 2.5 New Zealand 2.1 2.3 4.0 1.1 2.0

Exchange rate to US$1, year avg. 2009 2010 2011 2012 2013 Japan 94 88 80 80 86 China 6.83 6.77 6.46 6.31 6.19 Hong Kong 7.75 7.77 7.78 7.76 7.76 Taiwan 33.1 31.6 29.5 29.6 29.0 South Korea 1,281 1,159 1,108 1,126 1,084 Indonesia 10,356 9,086 8,776 9,391 9,888 Malaysia 3.52 3.22 3.06 3.12 3.06 Philippines 47.6 45.1 43.3 42.0 40.0 Singapore 1.45 1.36 1.26 1.25 1.20 Thailand 34.3 31.7 30.5 31.0 29.7 Vietnam 17,860 19,151 20,511 20,850 21,000 India (FY) 48.3 45.8 46.6 54.0 53.0 Australia 1.27 1.09 0.96 0.96 0.97 New Zealand 1.60 1.39 1.26 1.23 1.25

Sources: CEIC, central banks, and national statistics offices. Forecasts are by IMA Asia.

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Regional outlook

Political & policy issues to watch

Risk in the Asia enters 2013 with continued geopolitical risk over China’s aggressive claims in the South South China Sea China Sea. The biggest potential for a clash is with Japan or Vietnam as disputes with both escalated in 2012. Japanese firms are already finding their sales in China affected and they … a problem may be less inclined to move production there. Tension may ease once China’s new leader, for Japanese Xi Jinping, establishes his authority but an improvement (on China’s side) is uncertain. On firms Japan’s side there is the potential for less tension as PM Shinzo Abe, who won Japan’s mid- … which may December poll, must focus his energies on reviving the economy and will likely tone down ease in 2013 his aggressive foreign policy. Vietnam is expected to remain firm but cautious in pushing its claims. There’s no sign that regional business, shipping, or flights will be disrupted and Western companies should mostly sidestep this dispute.

Elections Japan’s mid-December lower house election could have a big impact on the Japan market with PM Abe leading the LDP back into office. He campaigned on a major realignment of … could bring economic policy in favour of bigger fiscal and monetary stimulus with the explicit aim of change to Japan forcing inflation up and the Yen down. This could help revive the Japanese economy but it … but not to may trigger a ratings downgrade on public debt concerns – a gamble Abe will take. Ms Park Korea or has a narrow lead in opinion polls heading into South Korea’s December 19 elections. Big Malaysia policy swings are not expected no matter who wins. PM Najib will likely call a snap election in Malaysia in the next few months (with the poll held within weeks of its announcement). The ruling UMNO-led coalition should be returned to office allowing Najib to push ahead with mild reforms and major projects.

The rising 2013 was notable in Asia for growing public demand for accountable government. It’s as demand for apparent in high-income markets as Singapore and HK as in low-income markets such as accountable India and Indonesia. There are many good aspects to this, including pressure to reduce governments in corruption, although this can stall government decision making (a factor in the Philippines Asia and India). Foreign MNCs operating in Asia should note that the rapid demise of state control over news has dramatically changed the public affairs environment. FMCG firms have moved quickly on this, but others are lagging and may suffer as a result.

Outlook for the market

Asia faces a Asia faces a mild lift in growth in 2013 after a weak 2012. Little sustained improvement is mild but steady expected in export demand until Q2’13 when stronger recoveries in the US and China should lift in growth lift export growth for most countries back into the 10-15%yoy range. Meanwhile industrial through 2013 production for the big exporting countries should climb back to 4-6%yoy by mid-2013 from near zero at the end of 2012. Fixed investment growth should recover from Q2’13 as global … with upside risks ease and companies become more confident in the demand outlook. The upside potential driven potential to this cautious forecast lies in the strength of the US upturn, which could provide a by exports sharp boost to Asia’s export growth. Economies like HK and Singapore have a track record of rebounds to 4-6% growth under such conditions. Korea, Taiwan, and Japan would also see their growth double. This view is reflected in this month’s forecasts.

Also watch for Two other factors could push Asia up faster in 2013. The first is a widely expected lift in strong capital capital flows into the region as global investors seek higher returns. This should keep inflows borrowing costs down but it will also put upward pressure on asset prices (from housing to equity deals) and currencies. Less expected but equally powerful is a potential lift in demand … & policy from some of Asia’s poorest households. This month’s Brief notes big minimum wage hikes changes that in Indonesia and Thailand, although tight labour markets in Thailand were set to push low- boost poorer skilled pay up sharply. Governments in China and India are also set to implement policies households that affect delivery of services and money to poor households. In India this involves direct welfare payments into individuals’ bank accounts. In China we suspect (nothing has been announced yet) that they will address the residency permit (hukou) issue in Tier 2 and lower cities, which would boost the financial position of up to 100m migrant workers.

Asia’s rising Asia faces a mild lift in inflation this year as demand recovers and the oversupply of goods currencies eases in 2H’13. Weak energy prices (see Global Outlook) should help moderate the rise in inflation. Asian currencies (x-Japan) will rise on the big global currencies (US$, Yen, Euro, and UK Pound), which have been weakened by quantitative easing.

Richard Martin, IMA Asia ♦ Email: [email protected]

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Japan

Political & policy issues to watch

What to expect The LDP has been swept back into office in the December 16 lower-house polls, winning from PM Abe more than two-thirds of the seats with New Komeito, its traditional ally, which will allow it to push legislation through the DPJ-controlled upper house. However, in Japan’s consensual-style of politics it is better not to ram bills through the upper house so PM Shinzo Abe (who was also PM for Sept 2006-Sept 2007) has two options. First, he can wait until the July 2013 upper-house elections and aim to win the 16 extra seats that would give him a majority. If he chooses this option then he’ll likely follow a simple policy agenda for the next seven months focused on passage of the FY2013 budget. His second option would be to pick up the 16 extra seats in the next month by winning over minority parties and a few DPJ MPs in the upper house, which would allow a bigger policy agenda.

Watch for more Abe has promised more aggressive policies to fix Japan’s problems. On the economic fiscal stimulus & front this includes increased government spending on infrastructure and raising the extra QE inflation target from 1% to 2-3% for the Bank of Japan. The additional quantitative easing (QE) required would weaken the Yen and help restore export growth. In expectation of a … bringing a LDP victory, the stock price of construction companies jumped and the Yen weakened weaker Yen from early December. On the downside, Abe’s policies mean that short-term plans to curb … & concern public debt (220% of GDP) will be ditched, which may trigger another sovereign rating over public debt downgrade. Abe’s gamble is that short-term public debt risk is low as almost all is held in Japan while the long-term solution to debt is to force up nominal GDP growth. On the foreign policy front, Abe had promised a more aggressive stand against China on territorial disputes, which will do little to help Japanese firms in China.

Hiking the sales It is increasingly unclear whether Japan will lift its sales tax from 5% to 10% in stages by tax from 5% to 2015. A lift to 8% is scheduled for April 2014 and real estate and car firms are already 10% is now in anticipating a surge in business from 2H’13 as buyers seek to avoid a higher tax. Yet the question law for the tax hike says that the tax increase can only take place if Japan is growing, and with a recession likely in 1H’13, that condition may not be met. Moreover, PM Abe’s government may seek to overturn the law as it focuses on policies to lift growth.

Outlook for the market

Plan for a 1H’13 Japan has dropped into a mild recession that could continue through 1H’13. The lift in recession with a 2H’13 will depend on export recoveries to the US and China and the impact of a major mild 2H’13 lift swing in policy towards aggressive stimulus under an Abe government. The OECD has just cut its 2013 forecast for Japan from 1.5% to 0.7% and we’ll leave ours at 0.8% with the … there is prospect of 1.5% in 2014 on stronger global demand. One issue to watch will be the drop upside if the Yen from this year’s stimulus for car sales, which likely lifted 2012 sales by 30% to 4.5m units. falls quickly & Without the stimulus Toyota thinks its 2013 domestic sales will fall 19% to 1.4m units, exports lift although it will still aim for 3m units of local production with exports accounting for the rest. GDP growth for the first three quarters was 2.1%ytd with just 0.1%yoy for Q3’12, which the government calculates as a real annualised fall of 3.5% in Q3’12.

A big fall in With this year’s car stimulus running out in early September, the industrial production manufacturing index, which had risen 3%ytd by August, plunged 8.2%yoy in September and 4.3% in October. If autos are taken out of the equation then a big fall in industrial production is … which could underway due to weak global demand and a strong Yen. The one growth area is high-tech continue in 2013 electronic components, helped by a lift in demand for smart phones. For 2012 we expect … and a small no growth in the IPI followed by a fall of 0.5% in 2013. There is some upside to this if the construction lift demand recoveries are stronger in the US and China and the Yen falls quickly in 1H’13. A decade-long fall in construction, which briefly eased with reconstruction work in 2012, may give way to a second year of mild positive growth under Abe’s stimulus policies in 2013.

A return to low If Abe’s plan is implemented, inflation should lift over 1% by the end of 2013 bringing a mild inflation and a increase in consumer spending. With October inflation at -0.4%yoy, the fifth consecutive weaker Yen fall, we’ll stick with our current 2013 inflation forecast of 0.5% with 1-1.5% for 2014. We’ve cut the 2013 Yen rate from 82 to 86 with further weakness likely in 2014.

2009 2010 2011 2012 2013 GDP, real growth (2005p), % -5.5 4.5 -0.8 1.6 0.8 CPI, year average, % -1.4 -0.7 -0.3 -0.1 0.5 Overnight call rate, year end, % 0.10 0.10 0.10 0.10 0.10 Yen to US$1, year average 94 88 80 80 86 Sources: 2009-2011 data from the BOJ and government sources; 2012-2013 forecasts by IMA Asia. 79

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China

Political & policy issues to watch

A stable change in China completed the main step in its once-in-a-decade leadership changeover in leadership November. Xi Jinping was made head of the Communist Party (China’s most powerful post), leading a new 7-member Politburo Standing Committee (PSC). Li Keqiang gained … leaves Xi the No.2 slot and will take over as state premier (in charge of economic policy) at the Jinping in-charge National Peoples’ Conference (NPC) in March, when Xi will become state president. Xi was also made head of the military, which removed a concern that retiring paramount … but limited by leader Hu Jintao (2002-2012) might hold onto this post for a year or more to limit Xi’s a balance of intra- authority. Xi and Li have a 5-year term in both their party and state posts and are highly party forces likely to gain a second term to 2022 before retiring. At least four of the seven PSC members are tied to former paramount leader Jiang Zemin (1989-2002). However, the 20- person Politburo is more evenly split between Jiang’s camp and Hu Jintao’s camp and Hu’s followers would hope to win more of the top PSC slots in the 2017 reshuffle.

Don’t expect a Xi Jinping has hinted that he’d like to run a reformist government with his first trip as party quick policy head to Guangdong, echoing Deng Xiaoping’s 1992 Southern Tour that relaunched swing to reform China’s reform program. But we don’t expect an immediate policy shift. The annual Central Economic Work Conference in December, which fine-tunes policy settings for the coming year, will stick with key directives in the current 5-year plan (2011-15).

However, the The macro-economic background to China’s policy options is laid out in a recent IMF macro path ahead working paper, which focuses on China’s plan to rebalance its economy. The IMF thinks is clear that China is over-investing by about 8% of GDP, a greater and more persistent disparity than other Asian countries leading up to the 1997 Asian Crisis. But in China’s case a … in a new IMF financial crisis is unlikely due to very limited off-shore funding. Still, capital worth some 4% paper of GDP is being wasted, a cost borne by households. By rebalancing towards a more consumption-based economy, China can reduce this inefficiency and lift national income. The paper is available at http://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf

Outlook for the market

A mild 2013 The economy appears to have bottomed in Q3’12, with signs of a recovery emerging in recovery to 8% Q4’12. Exports rose 7%yoy in the first two months of Q4’12, up from 4%yoy in Q3’12. growth Internal demand has also lifted on higher retail sales and housing construction growth. Electricity consumption grew 7%yoy in the first two months of Q4’12, up from 4%yoy in Q3’12. The Q4 recovery should lift 2012 GDP growth to 7.7%, with 8% expected in 2013.

Helped by a mild Residential property is improving, with house sales up 29%yoy in the first two months of property rebound Q4’12 after 7%yoy growth in Q3’12. With better sales, residential real estate investment grew 18%yoy in the first two months of Q4’12, up from 8%yoy in Q3’12. This recovery will likely support 7.5% construction growth in 2012 and 2013, down from 10% in 2011.

… and a weak Real personal consumption growth likely reached 8.2% in 2012 thanks to a modest Q4’12 consumer lift recovery. Consumer confidence reversed a recent downtrend to hit a 16-month high in October, with retail sales up 14.5%yoy in the first two months of Q4’12 from 13.8%yoy in Q3’12. Consumer real growth should edge up to 8.7% in 2013.

Manufacturing to Manufacturing lifted in November, with the HSBC purchasing managers’ index rising to strengthen in 2013 50.5 (over 50 means expansion), the first expansion this year. Industrial value added growth grew 9.9%yoy in the first two months of Q4’12 from 9.1%yoy in Q3’12. We expect full year growth of 8% in 2012, rising to 8.5% in 2013.

Little inflation and Inflation has been steady around 2%yoy since June with no change expected until 2H’13 a rising Yuan (higher food prices will likely be cancelled out by a government mandated cut in diesel prices). A mild lift in inflation is likely from 2H’13 with the Yuan expected to rise 2% on the US$ in 2013.

2009 2010 2011 2012 2013 GDP, real growth, % 9.2 10.4 9.2 7.7 8.0 CPI, year average, % -0.7 3.3 5.4 2.6 2.3 PBOC 1-year loan, at Dec., % 5.31 5.81 6.56 5.75 5.75 Yuan to US$1, year average 6.83 6.77 6.46 6.31 6.19 Sources: 2009-11 data from CEIC and government agencies; 2012-13 forecasts by IMA Asia.

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Hong Kong

Political & policy issues to watch

HK’s weak Chief Chief Executive CY Leung is in trouble. Six months into his first 5-year term he has been Executive unable to establish his authority amidst a series of scandals. His most persistent problem is the allegation that he lied about illegal structures on his property. His evasive handling of the issue has led to criticism from both pro-democracy and pro-Beijing Legislative Council (LegCo) members. Leung survived a no-confidence motion by just 7 votes in mid- December and he must resolve this problem before it undermines his administration.

Legislation has Leung’s problems have distracted LegCo from the passage of bills. A proposed increase stalled to the old age allowance was delayed after Democrats and some pro-Beijing LegCo members objected to means-testing the scheme. The government chose to remove the bill … watch for a and instead make it part of next year’s budget to ensure its passage. But, if LegCo budget battle members become enraged by this move, they could take the unprecedented step of voting down the budget. This would increase pressure on Leung to resign.

A 7% hike in the HK’s minimum wage, first instituted in 2011, will rise 7.1% on May 1, 2013 to HK$30 minimum wage in (US$3.90), which will affect some 10% of the workforce. The wage hike will nudge up 2013 unemployment in 2013 and keep inflation from dropping under 3%. The government is attempting to offset a steady fall in incomes for the poorest households (income for the poorest 10% of the population has fallen 16% over the last 10 years).

RISK: A sky-high The IMF latest Article IV report points to the property sector as the biggest domestic risk property market facing HK’s economy. A sharp fall from current record price levels would decimate the vital construction industry, undermine household balance sheets, and hurt the banks, as over half of their loans are in property.

Outlook for the market

Growth should lift HK’s export-dependent economy (exports are 206% of GDP) has yet to show consistent from mid-2013 signs of a trade recovery. After a 15%yoy rise in September, exports fell 3%yoy in October. While business sentiment is positive, with the purchasing managers’ index rising … with stronger to 52.2 in November from 50.5 in October (above 50 means expansion), a solid recovery is global demand unlikely until global trade strengthens in mid-2013. We expect GDP growth of 1.1% in 2012, down from 4.9% in 2011, with good construction growth offset by a weak trade sector. A gradual export recovery in 2013 should lift GDP growth to 4%.

Construction Construction is easing from a 1H’12 boom, as a weaker economy and a new tariff on growth will ease foreigner (including mainlander) purchases of property has softened developer sentiment. Growth in construction capex briefly surged to 14.5%yoy for 1H’12 from 7.1% for full 2011; … but still has but with slower growth through 2H’12, the full year rebound will be limited to 12%. In 2013, scope for good construction capex will likely grow 7%. Public construction will drive the sector, based on growth in 2013 large projects including the HK-Macau-Zhuhai bridge and MTR extensions. Residential building is expected to grow solidly, as strengthening property transactions suggest considerable underlying demand.

Retail sales Consumer sentiment has weakened through 2012 as companies have cut back on hiring slowed in 2012 and wage growth has slowed. Retail sales growth slowed to 6%yoy in Q3’12 from 13%yoy in 1H’12. Mainland tourists, a key driver, continue to flock to HK, but appear to be … with a mild spending less per person than in 1H’12. Together these factors will limit consumer growth recovery in 2013 in real terms to 3.7% in 2012 from 8.2% in 2011 before a rise to 4.6% in 2013.

Mild inflation into Inflation in October stayed at September’s 3.8%yoy level and we don’t expect much 2013 change in 2013 as rising food and housing prices offset falling prices for manufactured goods. The HK$ will remain linked between 7.75-7.85 to US$.

2009 2010 2011 2012 2013 GDP, real growth, % -2.5 6.8 4.9 1.1 4.0 Composite CPI (04/05), year average, % 0.6 2.3 5.3 4.0 3.8 Discount window base rate, % year end 0.50 0.50 0.50 0.50 0.50 HK$ to US$1, year average 7.75 7.77 7.78 7.76 7.76 Sources: 2009-2011 from Censtat, HKMA, and CEIC; 2012-2013 by IMA Asia.

Dr. Mark Michelson, Chairman, Asia CEO Forum (Hong Kong) Tel: (852) 2530-1115 ♦ Fax: (852) 2530-1125 ♦ Email: [email protected]

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Taiwan

Political & policy issues to watch

Pres. Ma pushes President Ma Ying-jeou is halfway through the first year of his second and final 4-year through some term. This is the perfect time to push through unpalatable policies and Ma has done just unpalatable that, with the result that the majority of voters disapprove of his 10 top policy steps this policies year while his approval rating has plunged to 17.5%. The KMT may, as a result, lose a key by-election for Taichung on January 26 with the opposition DPP planning massive anti- … most are a government rallies. But as the KMT has a sizable legislative majority (64 of 113 seats), Ma plus for reform can still push through policies although his move to slash generous year-end bonuses for retired civil servants, teachers, and some military staff triggered a backlash in the KMT’s support base that forced major amendments. Other policies that have annoyed voters include increases in fuel and electricity rates, approving US beef imports with a small amount of chemical residue, and a capital gains tax on securities which will start at minimal rates on January 1 next year and eventually step up to 15% by 2015.

Looking for better As in his first term, Ma is giving priority to improving Taiwan’s trade linkages with China trade ties and the rest of the world. He hopes to expand the trade agenda in 2013 by signing a services trade agreement with China early next year, which might open the way for a future … with China free trade agreement (FTA). With US beef imports now approved, talks with the US under and the US the Trade and Investment Framework Agreement will likely restart in early 2013.

Outlook for the market

Patchy growth in Taiwan’s growth remains patchy, with indicators giving mixed messages. The forward- 1H’13 looking growth monitor was upgraded to transitional from sluggish for Q4’12. However, exports fell 4%yoy in the first two months of Q4’12, down from 1% growth in Q3’12. We … with better expect the economy to remain soft until mid-2013, when a global recovery lifts the export growth from 2H’13 sector and takes GDP growth to 2.3% from an estimated 1.2% in 2012. The closely- watched Directorate-General of Budget, Accounting, and Statistics forecasts stronger growth of 3.2% in 2013, based on higher consumer spending and exports.

Weak consumer With factories slashing overtime work and weak consumer sentiment, retail sales growth demand in 1H’13 for the first 10 months of 2012 dropped to 2.6%ytd from 6.5% for full 2011. We don’t expect a significant lift until 2H’13, some 4-6 months after exports achieve a sustained lift in growth. As 2012 closes, companies are reporting little hiring and cuts to end-of-year bonuses. Real consumer spending is expected to rise 1.9% in 2013 from 1.5% in 2012.

A mild upturn for While manufacturing rose 4.6%yoy in October, the outlook is soft. The HSBC purchasing manufacturing managers index (PMI) fell to 47.4 in November, from 47.8 in October, on weak orders from mid-2013 (above 50 means expansion). Electronics is doing best thanks to global demand for the new iPhone and the Windows 8 release, while chemicals and food remain soft. This is expected to limit real manufacturing growth to 0.2% in 2012, down from 4.9% in 2011. A global trade recovery from mid-2013 is expected to lift manufacturing growth to 2.2%.

An almost flat Taiwan’s residential property market slowed in 2012 due to the weak economy and an anti- property market speculation tax imposed in June 2011. The latest indicators are mixed, with property prices edging up while house construction approvals fell. Overall, construction is expected to fall by 1% in 2012 with a weak 1% lift in 2013 supported by housing demand.

Little inflation Inflation eased to 1.6%yoy in November from 3.4%yoy in August as food price growth dropped following Typhoon Saola. Soft consumer demand and declining prices of … and a rising consumer durables are expected to keep inflation to 2% in 2013. The NT$ has NT$ appreciated rapidly against the US$ in Q4, with the central bank intervening to stem the rise. We expect the NT$ to appreciate a further 2% in 2013.

2009 2010 2011 2012 2013 GDP, real growth, % -1.8 10.8 4.1 1.2 2.3 CPI, year average, % -0.9 1.0 1.4 1.9 2.0 Official discount rate, year end, % 1.25 1.63 1.88 1.88 1.88 NT$ to US$1, year average 33.1 31.6 29.5 29.6 29.0 Sources: 2009-2011 government data and CEIC; 2012-2013 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Michael Boyden, Managing Director, Taiwan Asia Strategy Consulting Tel: (886 2) 8789 0978♦ Fax: (886 2) 8789 0877 ♦ Email: [email protected]

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South Korea

Political & policy issues to watch

A close race for South Korea goes to the polls to elect a new president on December 19. The conservative presidency on Ms Park Geun-hye of the ruling Saenuri Party has a slight lead over the liberal Moon Jae-in Dec 19 of the DUP. Both candidates have difficulties they need to overcome. Park faces concerns about corruption in her party, and the legacy of her father’s dictatorship (President Park Chung-hee, 1961-1979). Moon needs to unite liberals behind him after software mogul Ahn Cheol-soo initially split the left-wing vote before deciding to step aside. The new president will need to address a weak economy, calls for more inclusive growth, and high household debt. Ms Park favours more market-based reforms to fix the economy, with some support for the poorest households. Moon aims to reduce the power of the chaebol (Korea’s big firms) with a greater focus on wealth redistribution.

The North Korea The North Korean rocket launch in mid-December reflects the increasingly hard line nature challenge of the military in the rogue state. Since the US invasion of Iraq, the North Korean military has been comprehensively upgraded to protect against such attacks. They have appointed … watch for more hard line military leaders, including Kim Kyok-sik as Minister for Armed Services. more problems & Political progress between the North Korean leadership and the new South Korean little progress president is expected to be tough, especially if the UN introduces new sanctions. Moon would likely take a more conciliatory approach to North Korea, while Park would be more hard line (albeit not as hard line as current President Lee Myung-bak).

Outlook for the market

A weak 1H’13 The Korean economy bottomed in Q3’12 but remains in a weak position. Exports are recovery showing signs of a mild recovery, but the local economy remains soft. The purchasing managers index (PMI) remained below 50 in November (48.2), indicating that the … that builds manufacturing sector is contracting. Stronger exports from mid-2013 will likely lift 2013 from mid-2013 GDP growth to 3.5%, up from an expected 2.2% in 2012. The OECD expects 3.1% GDP growth for Korea in 2013, down from their prior 4% forecast.

Mild growth for Korea kept the fall in exports for the first 11 months to 1%ytd. A soft Won, export exports & diversification, and the use of new free trade agreements (FTAs) with Europe and the US industrial helped. In the first two months of Q4 exports rose 2%yoy after a 6%yoy fall in Q3’12. production However, a rising Won and a soft world economy are expected to keep export growth weak until mid-2013. Exports will likely grow 6% in 2013, from a 0.4% fall in 2012. Industrial production grew 2%ytd for the first three quarters from 7% growth in 2011 and will likely grow 1.8% for full 2012 followed by 5% in 2013.

Soft consumer Consumer confidence has been soft in 2012, with households battling high debt (about spending growth 70% of GDP) and cuts to overtime. Retail sales growth eased to 3%ytd to October, down in 2013 from 8% in 2011 as consumers cut back on durable purchases. Real consumer growth of 1.8% is expected in 2013, up from an estimated 1.4% in 2012, as a stronger global economy increases overtime pay and lifts household spending. Interest rate rises from 2014 will cap the consumer upturn, as households face higher debt repayments.

Little inflation but Inflation eased to 1.6%yoy in November and is expected to remain low through to mid- no more rate cuts 2013 due to weak demand. While inflation will lift from 2H’13, the full year rate of 1.8% will still be lower than an estimated 2.2% in 2012. Despite low inflation, an interest rate cut is unlikely in early 2013 due to the central bank’s concern over future inflation.

Capital controls to The Korean Won has risen over 8% on the US$ since May. To slow the rise, the Bank of slow the Won’s Korea has announced modest capital controls. From January 2013, the ceilings on banks’ rise currency derivative holdings will be cut by 25%. This, combined with the soft economy, will likely slow the Won’s rise to a more sustainable 4% in 2013.

2009 2010 2011 2012 2013 GDP growth, % 0.3 6.3 3.6 2.2 3.5 CPI, year average, % 2.8 2.9 4.0 2.2 1.8 BOK Overnight call rate, year end, % 2.00 2.50 3.25 2.75 2.75 Won to US$1, year average 1,281 1,159 1,108 1,126 1,084 Sources: 2009-2011 government data (NSO, BOK) and CEIC; 2012-2013 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Tony Michell, Managing Director, Korea Associates Business Consultancy Ltd Tel: (82 2) 335 7854/2614 ♦ Fax: (82 2) 323 4262 ♦ Email: [email protected] 83

Asia Pacific Executive Brief December 2012 www.imaasia.com

Indonesia

Political & policy issues to watch

Little clarity on A year and a half before the 2014 elections, there is broad dissatisfaction with the top who might lead politicians who might run for president, and a clear desire for alternatives. In the latest Indonesia from polls Gerindra’s Prabowo Subianto, PDIP’s Megawati, and Golkar’s Aburizal Bakrie each 2014 drew less than 10% support. Meanwhile, President Yudhoyono’s party, PD, which has no candidate so far, is losing its position as a king-maker due to a series of high profile … as an anti- corruption cases. In the latest of these, Youth and Sports Minister Andi Mallarangeng has corruption drive been forced to resign from cabinet as the Hambalang sports complex corruption scandal fells politicians widens. This is the first time that a serving minister in Yudhoyono’s cabinet has been forced out by an investigation by the Counter Corruption Commission (KPK).

The risk of rising Parliament needs to quickly revise the 2001 oil and gas law following the constitutional nationalism in court’s dissolution of oil and gas regulator BP Migas. Unfortunately, with the 2014 parliament elections approaching, MP posturing could delay the process while also leading to increased restrictions on foreign investment. This would do little to help reverse a steady … may block fall in oil production that weakens the trade balance and undermines government revenue. new FDI in oil & State oil company Pertamina (ranked third in production to Total and Chevron) hopes to gas tackle the production slide with a US$15bn plan to enhance oil recovery.

While an 18% hike Indonesia faces an average 18% hike in the minimum wage across all provinces in 2013 in the minimum led by a 44% jump in Jakarta. While some provinces have announced increases much wage in 2013 lower than Jakarta’s, workers elsewhere may resort to strikes to win parity with Jakarta. Jakarta’s minimum wage will rise to Rp2.2m a month ($229), which is roughly on par with … will hurt unskilled minimum pay in southern China. Labour-intensive industries such as plantations, some firms but lift clothing and shoe production, and even banking are expected to be hardest hit and some retail sales that can move (such as clothing) are likely to relocate. Meanwhile, consumer goods firms expect a boost to sales from higher wages in 2013.

Outlook for the market

Trend growth Trend growth in Indonesia should stay near the 6-6.5% range for the next two years driven stays at 6-6.5% by steady growth in consumer demand and strong growth in fixed investment. There are risks that could bring volatility and lower growth, including a jump in inflation as wages … but watch for climb and a blow-out in the trade deficit that might undermine the currency and force macro risks abrupt policy swings (notably higher interest rates). The country has the potential for 7-8% growth in 2015-2020 if reforms and infrastructure improve over the next two years.

A lift in consumer Real growth in consumer demand reached 5.3%ytd for the first three quarters from 4.7% demand is likely for full 2011. 6% is likely in 2013 as wage hikes flow through to spending. Retail sales growth reached 19%yoy in October from 13.1%yoy for Q1’12 and 9% for 2011. Vehicle sales rose 23.7%ytd by October and will break the 1m mark for the first time this year.

… and fixed Fixed investment growth lifted to 10.8%ytd for the first three quarters from 8.8% last year investment could and we think 13% is likely in 2013. BKPM, the investment board, expects a jump of 25% surge for combined local and foreign investment in 2013 with FDI contributing three quarters of next year’s US$40bn total. Pertamina’s investment plans (see above), new production capacity by car firms such as Toyota and BMW, and a broad-based lift in infrastructure spending that started in mid-2012 should all contribute.

But a trade deficit With growth close to capacity and out-of-step with the global slowdown, instability is a risk & rising inflation in 2013. The 2011 trade surplus of $26bn collapsed to a $0.5bn deficit by October as could hurt the imports grew 9.4%ytd while exports fell 6.2%ytd. While inflation was stable at 4.3%yoy for rupiah November, we expect it to rise in 2013. The Rupiah has slid some 6% this year; and given the macro risks, we’ve changed our prior view of a mild appreciation in 2013 to a 5% fall.

2009 2010 2011 2012 2013 GDP, real growth, % 4.6 6.2 6.5 6.5 6.6 CPI, year average, (2007=100), % 4.8 5.1 5.4 4.2 6.0 Central bank policy rate (BI rate) at Dec., % 6.50 6.50 6.00 5.75 6.50 Rupiah to US$1, year average 10,356 9,086 8,776 9,391 9,888 Sources: 2009-2011 government data (BPS, BI) and CEIC; 2012-2013 forecasts by IMA Asia The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: James Castle, Chairman, CastleAsia Tel: (62 21) 2902 1641 ♦ Fax: (62 21) 2902 1648 ♦ Email: [email protected] 84

Asia Pacific Executive Brief December 2012 www.imaasia.com

Malaysia

Political & policy issues to watch

The 2013 election Malaysia has been on an unofficial election footing for almost a year although PM Najib has delayed calling an early contest as opinion polls have indicated that the ruling Barisan … the Barisan National coalition would not regain the two-thirds majority of seats it lost in 2008 (this is the should win minimum needed to alter the constitution at will, a power that all prior Barisan governments have had). Public spending has been pushed to record levels for over a year in an effort to … at issue is win popular support, which has boosted consumer and investment spending. Some whether it gains pullback in public spending has to be expected from Q2’13 to prevent a budget blow-out. two-thirds of the The Barisan should win the poll but it will be unclear whether it has regained its cherished seats two-thirds majority until the vote is counted. An opposition coalition combines a purist Islamic Malay party (PAS), a secular ethnic Chinese party (DAP), and a multicultural liberal party led by Anwar Ibrahim, the de facto leader of the opposition. That the opposition could conceivably win has forced long-overdue reforms to the centre of the policy debate.

A big win should Since becoming PM in 2009, Najib has moved cautiously on reforms aimed at reducing encourage PM barriers to growth, including a long-standing affirmative-action scheme that favours the Najib to speed Malay majority (50% of the population) at the expense of other Malaysians of Chinese and reforms Indian descent and foreign investors. His reform agenda also includes cutting fuel and food subsidies, introducing a goods and services tax to reduce dependence on oil and gas revenues, and getting government-linked companies (GLCs) to divest from non-core activities. A big win in the 2013 election would help him overcome opposition to such reforms from Malay nationalists in his own party (UMNO).

Outlook for the market

Growth driven by GDP grew 5.3%ytd over the first three quarters with the help of an 11.8%ytd surge in local public spending in demand (thanks mostly to pre-election spending by PM Najib), which offset a 35.8%ytd fall 2012 in net exports. Local spending was led by a 21.6%ytd jump in fixed investment and solid growth in private and government consumption (8.3%ytd and 7.2%ytd respectively). US$- … will ease in denominated exports fell 0.5%ytd by October, compared to a 5.5%ytd rise in imports. This 2013 coincided with a rare breakdown in the normally tight correlation between manufacturing … cutting output and exports. Manufacturing grew 4.8%ytd by October, as a strong rise in domestic- consumer growth focused industries offset weak growth in export-focused industries. Fortunately for Malaysia, the retreat in public consumption and investment spending expected after the … while exports election should coincide with a lift in private fixed investment and exports. Real growth in & private capex consumer spending, which has been above 7% through 2011 and 2012, should drop will lift towards 5% in 2013, which will lower 2013 GDP growth to 4.7% from 5.2% in 2012 even as exports recover.

Big projects and a Fixed investment will remain a key driver of GDP growth as the government-sponsored surge in FDI US$444bn program moves into higher gear and foreign direct investors (FDI) look for opportunities. On a rolling annual sum basis, FDI inflows soared from US$1.4bn in Q4’09 to US$13.4bn in Q3’11, before easing to a still healthy US$9.5bn in Q3’12.

Low inflation, Bank Negara’s (BN) relatively hawkish monetary policy should take the credit for the steady interest current combination of fast-expanding domestic demand and low inflation. The CPI rates measure for inflation eased to 1.3%yoy in November from a relatively low peak of 3.5%yoy in mid-2011, giving BN little reason to change interest rates well into 2013. BN last moved … and a rising M$ its policy rate up to 3% (from 2.75%) in May 2011. The M$ is currently at the middle of the 3.00-3.20 range it established against the US$ since August 2011. We expect it to break out towards 2.90 by mid-2013 as exports lift on a global recovery and capital inflows accelerate.

2009 2010 2011 2012 2013 GDP, real growth, % -1.5 7.2 5.1 5.2 4.7 CPI, year average (2010=100), % 0.6 1.7 3.2 1.7 2.3 Central bank overnight policy rate, Dec, % 2.00 2.75 3.00 3.00 3.00 Ringgit to US$1, year average 3.52 3.22 3.06 3.12 3.06

Sources: 2009-2011 government, Bank Negara, & CEIC; 2012-2013 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Datuk Paddy Bowie, Managing Director, Paddy Schubert Sdn. Bhd. Tel: (60 3) 2078 4031 ♦ Fax: (60 3) 2078 7034 ♦ Email: [email protected]

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Philippines

Political & policy issues to watch

Pres. Aquino President Aquino’s administration continues to make inroads on a number of issues that slowly makes have made the Philippines a laggard in ASEAN. Building on fiscal reforms by the previous ground Arroyo administration, the government is in the midst of broadening the tax base, a crucial step to convincing credit rating agencies to lift the country’s rating one notch higher to … lifting the tax investment grade. In late November, the Senate passed a bill that will raise taxes on on cigarettes & cigarettes and alcohol. The bill, which aims to raise a projected P184.3bn (US$4.5bn) in alcohol revenue over the next four years, needs to pass the House of Representatives before it becomes law. The Senate is also debating a government-supported bill on reproductive … & allowing health, which provides universal access to contraception and sex education. This birth control legislation aims to curb excessive population growth, a key contributor to elevated poverty rates in the Philippines. The bill, which is opposed by the powerful Catholic church, narrowly passed the House of Representatives in late November.

Signs of peace in Good progress has been reported in power and wealth-sharing negotiations that followed Mindanao the signing of a peace deal in October between Manila and separatist Muslims in the southern island of Mindanao. The agreement, which provides limited autonomy to local … could unlock Muslims, still faces several legal and political obstacles, but has a better chance of success stronger growth than previous peace attempts. If successful the deal will end a 40-year conflict and could unlock part of the massive mineral deposits in Mindanao (although mining still faces a hostile regulatory environment across the Philippines).

Closer US military In response to China’s increasingly aggressive sovereignty claims over most of the South ties to counter China Sea, the Philippines aims to boost military ties with the US. Since 2002 a rotating China’s sea force of 600 US special forces has been operating in southern Philippines, training local claims troops and helping to combat Islamic rebels. There are currently talks between the two countries about lifting the number of visits by US troops, ships, and aircraft, and increasing US military aid to the Philippines.

Outlook for the market

A construction-led GDP was surprisingly strong in Q3’12, up 7.1%yoy compared to 6.2%yoy in 1H’12. Local upturn driven by demand grew 7.3%yoy, led by a 12%yoy jump in government consumption and an infrastructure 8.7%yoy rise in fixed investment. The latter was powered by a massive 24.8%yoy lift in construction, as several infrastructure projects got underway. Private consumption, which … and a lift in accounts for nearly 70% of GDP, was up a healthy 6.3%yoy with help from a 6.3%yoy industrial output increase in remittances from overseas Filipino workers (OFWs). Q4’12 started on a strong note, with an 18.9%yoy surge in industrial production after growth of 3.9%yoy in Q3’12. We’ve lifted our 2012 GDP growth forecast to 5.3% (4.8% previously) and kept our 2013 forecast at 5.8%.

OFWs drive OFW remittances equal about 10% of GDP and provide a steady stream of support for steady consumer both consumer spending and investment, particularly in vehicles and housing. OFW demand remittances have also helped to maintain a healthy current account surplus since 2004 by offsetting a large trade deficit. This has provided critical support to the Peso.

Record low rates The Philippines is finishing 2012 with near-record low inflation and interest rates, and & inflation strong economic growth. Inflation eased to 2.8%yoy in November while the official interest rate was cut to 5.5% in October from 5.75%. No further rate cuts are likely, with a lift in … and a rising rates expected from mid-2013 to help guard against inflation. The Peso was up 7.3%yoy Peso on the US$ by early December. The central bank introduced mild capital restrictions earlier this year and is about to announce new measures to further inhibit hot money inflows.

2009 2010 2011 2012 2013 GDP growth, % 1.1 7.6 3.9 5.3 5.8 CPI, annual average, % 4.1 3.9 4.6 3.2 3.7 Central bank overnight loan rate, year end 6.00 6.00 6.50 5.50 5.75 Peso to US$1, annual average 47.6 45.1 43.3 42.0 40.0

Sources: 2008-2010 BSP data and CEIC; 2011-2012 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Peter Wallace, Managing Director, The Wallace Business Forum Tel: (63 2) 810 9606 ♦ Fax 810 9610 ♦ Email: [email protected]

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Asia Pacific Executive Brief December 2012 www.imaasia.com

Singapore

Political & policy issues to watch

Balancing the As a market Singapore is all about some remarkable demographic and wealth parameters. “Big Singapore” Both reflect government policy, and not surprisingly, they are a hot issue with the public. plan After a decade of a high inward migration Singapore now has some 1.5m foreign workers alongside its 3.8m citizens in a land area that was originally less than a third of Sydney’s … against local (reclamation has increased the land area by 21% to 704 sq km). More land and more unease people have helped lift the economy to equal that of neighbouring Malaysia from 88% in 1990. Yet local citizens resent many aspects of the foreign labour surge, while a recent … means some strike by bus drivers imported from mainland China (all sent home) points to some cuts to cheap unhappiness on the other side as well. PM Lee sees the interlinked issues of a very low foreign labour birth rate, immigration, and economic growth as the main challenges for his administration. Easy access to cheap foreign labour in construction is being phased out, an array of productivity incentives has been made available, and in early 2013 new incentives will be provided for births (priority housing, cash benefits, and paternity leave).

A 14% jump in Singapore has also attracted lots of professionals, as well as internationally mobile millionaires in millionaires (to add to its many local millionaires). A recent survey suggests that one third 2011 of Asian millionaires who spend over 50% of their time outside their home country live in Singapore. This contributed to a 14% increase of Singapore’s millionaire households in 2011 (to 17% of total households), while local wages were relatively stagnant.

Letting growth dip With strong growth for most of its ASEAN neighbours, it’s worth asking why Singapore will was the best grow just 1.7% this year. In part it’s due to a much higher sensitivity to the global downturn course in 2012 as a global trade and services hub. It also reflects a government decision to use the global downturn to help cool an overheating property sector. Singapore has struggled with the flood of global liquidity, which contributed to a 56% surge in house prices since 2009 and kept local 3-month interest rates close to 0.4%.

Outlook for the market

Watch for a strong GDP grew 0.3%yoy in Q3’12, which lifted year-to-date growth to 1.4%. The low point of the lift in 2013 downturn is likely to be Q3 or Q4 of 2012, with the pace of activity picking up through 2013. The government expects 1-3% growth in 2013. However, last month we lifted our 2013 … as demand forecast to 4.1% in line with our (above consensus) view of the recoveries in the US and grows from the China. The latest data suggests Singapore may already be benefiting from stronger global US and China demand. Non-oil domestic exports were up 7.9%yoy in November after two months of decline and non-oil imports posted a healthy 6.3%yoy increase. The new orders component of the Purchasing Managers Index moved up to 49.1 in November from 46.5 in October, pointing to a likely turnaround in manufacturing output. The latter fell 2.2%yoy in October after a 0.6%yoy drop in Q3’12.

A construction Singapore’s construction sector has run hot since 2007 with surges in private construction surge should ease contracts (2007-08 and 2011) interspersed by a surge in public contracts (2009-10 to offset the GFC). Public and private contracts will post negative growth for full 2012 for the first … but more big time since 2008. Compound annual real growth from 2007 to 2012 was 10% but we projects lie ahead expect the pace to ease to 5-6% for the next two years, supported by continued work on expansion of the mass transit system and the relocation of a major part of the port to make way for new property development on the CBD’s western boundary.

Low inflation will Inflation eased in 2H’12, reaching 4.1%yoy in November after hovering above 5%yoy for lift by mid-2013 almost two years. Average monthly wages have similarly eased to 2.7%yoy in Q3’12 from 7%yoy in Q2’11. We expect inflation to drop towards 3.3% in 2013, but the MAS, … with a firm Singapore’s central bank, is unlikely to reverse the mild monetary tightening it adopted in S$ April 2012 (this is managed via a slightly stronger S$). Faster growth in 2013 will keep the MAS watching for inflation and will likely lift the S$ above 1.2 on the US$. The S$ hit a record high of 1.2 on the US$ in August 2011, before retreating into a narrow range of 1.22-1.30.

2009 2010 2011 2012 2013 GDP, real growth, % -1.0 14.8 4.9 1.7 4.1 CPI, year average, % 0.6 2.8 5.2 4.5 3.3 3 month interbank interest rate, Dec, % 0.69 0.44 0.38 0.38 0.45 S$ to US$1, year average 1.45 1.36 1.26 1.25 1.20 Sources: 2008-2011 government data and CEIC; forecasts for 2012-2013 by IMA Asia.

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Thailand

Political & policy issues to watch

Political stability PM Yingluck’s government has brought a degree of stability to Thai politics. Although the improves balancing act is sometimes precarious, she looks set to deliver sufficient political stability in 2013 for the passage of normal bills and the general operation of government. This should support economic performance. It also means her government’s policies will start to shape the country’s long-term outlook as well as its commercial environment.

PM Yingluck gains Her government easily survived a no-confidence vote in parliament in late November over ground its handling of the economy and alleged corruption in a controversial rice price support program. Moreover, an anti-government rally failed to attract enough demonstrators, … & the battle prompting the resignation of prominent anti-Thaksin leader, retired general Boonlert over Thaksin will Kaewprasit. These gains will encourage her to resubmit a proposed redrafting of the 2008 continue Constitution, which was rejected this year as a ruse to bring ex-PM Thaksin (her brother) back to Thailand and allow him to reclaim assets confiscated by the courts (he faces a 2- year jail term on a criminal charge). The government will likely use public hearings and a nationwide referendum to address earlier objections by the Constitutional Court.

FDI surges North Asia’s search for new production sites combined with better political stability saw foreign direct investment (FDI) applications surge 88%yoy for the year to October, while FDI approvals jumped 145%yoy.

Outlook for the market

A strong 2013 GDP rose a modest 2.6%ytd for the first three quarters as strong local demand (6.3%ytd) recovery was offset by falling net exports (-19.6%ytd). However, economic activity started moving into higher gear in Q4’12. Manufacturing production soared 36%yoy in October, although … as local this is measured off the steep flood-induced fall of Q4’12. Similarly distorted is the strong demand & exports turnaround in the growth of exports and imports (15.6%yoy and 21.6%yoy respectively) in lift October. Far less distorted is the Bank of Thailand’s private consumption index, which was up 9.2%yoy in October from 4.7%yoy in September, while tourist arrivals surged 60.6%yoy to a record high of 2m in November. We expect the pace of activity to accelerate into 2013, with a more even distribution between domestic and external demand. With a big hike in minimum wages in early 2013 (see below), the consumer demand outlook is strong. A more vibrant global economy should also allow strong exports to lower the trade deficit, which will help lift GDP growth to 5.5% in 2013 from an estimated 3.3% rise in 2012.

Cheap labour is Small firms are clamouring for help as a January 1 hike in the daily minimum wage to B300 disappearing (US$10) across 70 provinces approaches. A similar wage rise took place in seven provinces (including Bangkok) in April 2012, which pushed labour costs up by 40% for … with semi- some firms. However, the cost of semi-skilled labour was set to jump as unemployment is skilled wages set close to zero and firms have to rely on some 2m immigrant workers from neighbouring to jump in 2013 countries. The job market will get tighter in 2013 when infrastructure projects worth B500bn start and a new wave of factories relocated from Japan start up. Firms relying on cheap labour will need to lift productivity or relocate to lower-cost countries.

Watch for higher Inflation eased to 2.7%yoy in November from 3.3%yoy in October and an August 2011 inflation high of 4.3%yoy. This partly justified the October cut in interest rates (2.75% from 3%) by the Bank of Thailand. However, a combination of a tight labour market and accelerating … and a rising growth will likely result in higher inflation and rising interest rates in 2013. The Baht has Baht been gaining ground against the US$ in recent months, rising to 30.6 in December from a recent low of 31.8 in June. We expect it to head towards 29.2 by end 2013, on the back of favourable capital inflows and a stronger world economy.

2009 2010 2011 2012 2013 GDP, real growth, % -2.3 7.8 0.1 3.3 5.5 CPI (2002 index), year average, % -0.8 3.3 3.8 2.9 3.6 Central bank, policy rate, year end, % 1.25 2.00 3.25 2.75 3.75 Baht to US$1, year average 34.3 31.7 30.5 31.0 29.7 Source: 2009-2011 data from the IMF and CEIC; 2012-2013 forecasts by IMA Asia. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Christopher Bruton, Consultant, Dataconsult Ltd Tel: (66 2) 233 5606/7 ♦ Fax: (66 2) 236 8143 ♦ Email: [email protected]

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Vietnam

Political & policy issues to watch

A major political Vietnam’s painful slump from mid-2011 has prompted a realignment of rival factions within realignment the ruling Communist Party, more open public debate over policy issues, and a move towards greater accountability. From 2013, senior officials - including the PM, cabinet … leading to members, and the president - will be subject to a vote of confidence in the national better macro assembly, with failure to secure sufficient votes leading to dismissal from office. The policies realignment gives more power to President Truong Tan Sang at the expense of his rival, PM Nguyen Tan Dung and his associates in the state-owned enterprises (SOEs). The … curbs on latter came to symbolise the corruption and excessive expansion that gave rise to soaring SOEs & more inflation and a property boom & bust in recent years. These imbalances have now been opportunities for mostly corrected by the downshift in domestic spending. Under intense pressure from his foreign firms party rivals and the public, PM Dung has promised to speed up reforms of the SOEs and the fragile banking sector with help from foreign investors, cut banks’ non-performing loans … notably in (to 3-4% of total loans by 2015 from an official estimate of 8.8% in September 2012), and banking preserve the economic gains of the last 16 months. These include much lower inflation and trade deficits, a stable Dong exchange rate, and rising foreign reserves.

It will take 9-12 The domestic demand recovery has been delayed by an oversupply of property and months for better restrained credit expansion. The fall in construction activity has eased, but an early policies to have turnaround is being held back by lots of unoccupied buildings and depressed rents. Policy an impact interest rates have declined to 10% from a 15% peak, but have yet to revive credit growth. Outstanding loans rose 3.5%ytd by October, well short of the 2012 target of 8-10%. Business sentiment is downbeat, with a survey showing that only 1% of local companies expect a recovery in 1H’13 and 33% in 2H’13. To lift corporate spirits, the government has promised an unspecified cut to the company tax rate (currently at 25%) in 2013.

Wage pressures The government plans to lift the minimum wage by 22-25% in 2013, estimating that this will are on the rise add only 1% to business costs. But a market-driven wage hike of that level was already likely as skills shortages are putting upward pressure on wages across the economy.

Outlook for the market

Exports drove The 4.8%ytd expansion of GDP by Q3’12 (from 5.9% for full 2011) masks a steep fall in growth in 2012 local demand following a severe tightening of monetary and fiscal policies in 2011. GDP growth was sustained simply because net exports surged, which saw a spectacular … and will do so turnaround of the current account from a deficit of US$11bn in 2011 to a surplus of in 2013 US$7bn in 2012. With dozens of new electronic assembly factories coming on line (notably mobile phone factories relocated from Korea), exports surged 19%yoy for the first 11 months against import growth of 9%.

Local demand will With lower inflation and a return to a current account surplus, fiscal and monetary policy lift by mid-2013 were eased from early 2012. However, this has yet to lift domestic activity due to the usual time lags and a property overhang. Retail sales growth eased to 11%yoy in November (a rate last seen in mid-2003) from a recent peak of 42%yoy in February 2010, while passenger car sales fell 31%yoy in October 2012. Strong exports should drive GDP growth until a local demand recovery emerges in Q2’13. Next year should see more balanced growth, with GDP up 6% from 4.8% in 2012.

Inflation should After sliding from 23%yoy in August 2011 to 5%yoy in August 2012, inflation rose to ease 7.1%yoy in November as the government lifted restrictions on health care and education prices. Inflation should trend down again within a few months, allowing the central bank to … with lower continue rates cuts into 2013. After several years of devaluations, the Dong stabilised and rates & a stable has stayed close to the official rate of 20,828 on the US$ since late 2011. With better Dong macro policies in place and a stronger trade balance, we expect it to remain stable in 2013.

2009 2010 2011 2012 2013 GDP, real growth, % 5.3 6.8 5.9 4.8 6.0 CPI, yoy, % (2005=100 from 2007) 6.7 9.2 18.7 9.1 6.5 Central bank refinancing rate, year end, % 8.0 9.0 15.00 10.00 8.00 Dong to US$1, year average 17,860 19,151 20,511 20,850 21,000 Source: 2008-2011 data from the IMF and CEIC; 2012-2013 forecasts by IMA Asia.

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India

Political & policy issues to watch

A weak Congress- The Congress Party-led UPA coalition government looks set to run its second consecutive led government 5-year term to the 2014 elections. This superficial stability belies its weak political structure with the 10 coalition members lacking a majority and relying on support from three to more … which might outside parties. Apart from Congress, the other much smaller parties represent state-level win a 3rd term in interests, which has weakened policy making. While the outcome of 10 state polls in 2013 2014 may shift the political balance, the most important development before the 2014 general election may simply be a recovery in growth towards 7%, which would help the UPA win a … but it needs a third term. It is less clear who would lead UPA-3 as PM Singh (82 by 2014) is ready for strong new leader retirement and the Congress heir apparent, Rahul Gandhi, shows neither the inclination nor aptitude to step up. The opposition BJP, India’s only other national party, has struggled with internal divisions and divisive leaders. Whether Congress or BJP led, the likely outcome is another weak coalition government in Delhi. Reform momentum to support growth and commerce has shifted to some of the better run states.

Majority FDI in The outlook could improve if PM Singh can build on his recent breakthrough in opening up retailing approved retailing to majority foreign ownership. This would have many benefits, including: a lift in business confidence bringing stronger capex, stronger capital inflows to support the rupee, … are more and better conditions for the Reserve Bank of India (RBI) to cut interest rates. Watch to reforms coming? see if PM Singh can win approval to lift the foreign investment cap for the insurance sector and allow overseas firms to buy stakes in pension firms.

Watch for a cash Finance Minister Chidambaram has one budget left before the 2014 elections. He’ll aim to flow boost to low contain the deficit under 5% of GDP while pushing funds into pre-election spending on key income families in welfare programs. Also watch the launch of direct cash welfare payments to individual 2013 bank accounts in 51 districts over 16 states from January 2013 (this could go nationwide at the end of 2013). By slashing corruption and delivering a dependable and timely payment it could have a dramatic impact on spending by lower income households.

Outlook for the market

Growth in 2013 The 2013 recovery will be mild unless PM Singh can lift the pace of reform, and inflation drops significantly (at present we think the outcome in both areas will be modest). India’s … the only way traditional recovery path is led by a cut in the RBI’s policy rate, currently at 8%, by as much is up as two percentage points (200 basis points). Yet inflation on the widely used wholesale price index (WPI) has been stuck above 7.5% since January 2010. This appears to be due … with a mild to subsidies and welfare programs (such as the rural employment scheme) triggering a lift helped by less sharp rise in rural wages and spending. With little rise in productivity and an archaic inflation & rate distribution system, the outcome has been entrenched inflation. Inflation should drop cuts towards 6% by end 2013 allowing a 100bp cut in rates. GDP growth on the production side, which is normally used in India, fell to 5.3%yoy in the September quarter (Q3).

Weaker consumer Real growth in consumer spending fell to 3.7%yoy in Q3’12 from a high of 8.5%yoy for full demand & flat 2010. We expect a lift back to 5.2% growth in 2013 and 6% in 2014 (from a full year manufacturing estimate of 4.8% for 2012 and 5.4% in 2011). Passenger vehicles sales grew 11.3%ytd by November from 5.6% for full 2011. Two-wheeler sales have slowed to 5.9%ytd from 16% … both should for 2011 suggesting that while low income families are getting more pay, inflation is eating lift in 2013 into their spending power. Industrial production (manufacturing) edged back to 0.2%yoy growth in Q3 from -0.8%yoy in Q2. We estimate 2012 industrial production growth will be … as should the 0% from 5.3% in 2011, with 4.5% expected in 2013 and 6% in 2014. The Rupee was 54.8 Rupee for November, down some 8%yoy, but with lower inflation, reduced global risk, and some reforms it should return to a mild appreciation path on the US$ from 2013.

Calendar year starting January 2009 2010 2011 2012 2013 GDP (Production), real growth, % 6.4 8.2 7.5 5.3 6.3 GDP (Expenditure), real growth, % 4.9 10.4 7.9 4.4 5.4 Inflation - WPI, year average, % 2.4 9.5 9.5 7.5 6.4 Inflation - CPI, Indust workers, yr avg, % 10.9 12.0 8.9 8.8 6.9 RBI lending (repo) rate, year end, % 4.75 6.25 8.50 8.00 7.00 Rupee to US$1, RBI Ref Rate, yr avg. 48.3 45.8 46.6 54.0 53.0 Sources: 2009-2011 data from the government (NCI, RBI) and CEIC. 2012-2013 forecasts by IMA Asia with guidance from IMA India. The above forecast is by IMA Asia. Companies seeking local advice and forecasts should contact: Adit Jain, Chairman, IMA India Tel: (91 124) 459 1200 ♦ Fax: (91 124) 459 1250 ♦ Email: [email protected] 90

Asia Pacific Executive Brief December 2012 www.imaasia.com

Australia

Political & policy issues to watch

The 2013 polls PM Julia Gillard has survived a battering in parliament over charges of misconduct during her time as a young lawyer in the early 1990s. She is set to run her 3-year term to polls … a change in that are expected in 2H’13. But with her Labor-led minority government relying on government is independents for power and the Liberal-led opposition Coalition leading in opinion polls by likely 53% to Labor’s 47%, her party might still dump her in the hope that ex-PM Kevin Rudd would do a better job in 2013.

Fiscal policy Treasurer Wayne Swann is struggling to deliver on a commitment to return to a budget should move to surplus in FY2012/13. There’s little sense in the delivery of a surplus as the government is mild stimulus AAA-rated and the mild deficit is simply due to weaker taxes as growth has ebbed. We expect the surplus commitment to be ditched, which will allow the government to drop some planned spending cuts to keep fiscal policy mildly stimulatory.

Plenty of macro In its latest Article IV report, the IMF praised Australia for its sound financial stability and risks appropriate short-term policy mix (www.imf.org). The risks noted are a high dependence on China, banks’ reliance on overseas wholesale funding, and high household debt (96% … but plenty of of GDP) combined with elevated house prices. The risk for Australia is if problems emerge resilience as well in two or more of these areas. But even then the government’s strong fiscal position (almost no debt) and a strong central bank should cushion any downturn.

Outlook for the market

Growth dips until We don’t expect much change in growth in Australia until mid-2013 when the impact of mid-2013 stronger demand in China (on exports) and local interest rate cuts (on consumer spending) produce a mild lift in growth. Growth slowed to 3.1%yoy in Q3’12 from 3.8% in Q2, as … as mining mining slowed and public spending was cut. Coal and metal ore export prices fell 20%yoy, slows which slowed growth in the mining states (QLD, NT, WA) to 6%yoy in Q3’12 from 12%yoy in Q2’12. Growth in the non-mining states remained soft at 2% in Q3’12. National growth could drop as low as 2.2% in Q4’12 before a gradual lift from Q1’13 towards 3.6% in Q4’13.

Investment also Real investment growth eased to 5%yoy in Q3’12 from 12% in Q2’12 as the government slows cut its investment spending and growth in mining investment eased. With a lower but more sustainable path for mining capex ahead, overall fixed investment growth is likely to be a … but a big modest 4% in 2013 from over 7% in 2011 and 2012. This includes a mild upturn in housing mining capex helped by interest rate cuts. The long-term capex outlook remains strong, with the latest pipeline remains government tally identifying A$268b in committed projects in October and A$292b at the feasibility stage. We expect trend capex growth to lift to 5-6% from 2014.

Weak consumers The consumer sector grew 3.3%yoy in Q3, in line with the 10-year annual average. Retail focused on sales growth in the three mining states slowed to 6.3%yoy in Q3’12 (in current prices) from deleveraging near 10% for the prior four quarters. There was little change in the rest of Australia, with Q3’12 retail sales up a weak 2.2%yoy, down a bit from near 3% growth in the prior two quarters. Moderately high interest rates and continued global uncertainty have shifted households towards deleveraging and this will limit real consumer growth to 3% in 2013.

Another small rate The Reserve Bank (RBA) cut interest rates by 25bp to 3% in December. A further 25bp cut cut in 2013 is expected in Q1’13 as inflation dips. From mid-2013 a mild growth recovery will likely end the monetary easing, but no rate rises will be necessary until 2014. Inflation is expected to increase to 2.5% in 2013 from 1.8% in 2012, as the carbon tax and restrictions on the health care insurance rebate lift prices.

$A to stay above The A$ had defied the impact of a China slowdown and is expected to remain above parity parity on US$ with the US$ through 2013 on strong foreign demand for AAA-rated government bonds.

Year ending December 31 2009 2010 2011 2012 2013 GDP, real growth, % 1.4 2.6 2.4 3.4 3.1 CPI, year average, % 1.8 2.9 3.3 1.8 2.5 RBA cash rate, year end, % 3.75 4.75 4.25 3.00 2.75 A$1 = US$, year average 0.80 0.92 1.04 1.04 1.03 US$1 = A$, year average 1.27 1.09 0.96 0.96 0.97

Source: 2009-2011 data from the ABS; 2012-2013 forecasts by IMA Asia. Andrew Hordern, Regional Economist, IMA Asia Tel: +61-2-9252 4336 ♦ Email: [email protected] 91

Asia Pacific Executive Brief December 2012 www.imaasia.com

New Zealand

Political & policy issues to watch

PM Key leads a PM John Key of the National Party finishes the first year of his second 3-year term in a stable minority reasonable position. His minority government has been effective with the help of support government into from either the Maori Party (3 seats) or both the United Future and ACT parties (1 seat 2013 each). Despite some scandals, the government and its supporters retain a slim lead over the Labour/Green opposition in opinion polls. Key’s main problem has been slow progress on his medium-term policy goal of returning the budget to surplus in 2015, from a deficit of a 4.8% of GDP in 2012, as revenue growth has slowed on a weak economy.

Watch for Key could achieve his budget surplus if he could make progress on plans for a partial progress on privatisation of three power companies, a coal miner, and Air NZ (possibly worth US$5.6b). public asset The process stalled this year following a Maori rights claim over water use, but that sales roadblock has just been cleared by the High Court. An appeal against the decision should also go the government’s way allowing the sell-down to proceed late in 2013. Gross public debt is a moderate 39% of GDP; but as a small, trade-driven economy, NZ has ensured macro stability by keeping a low national risk profile. Of slightly greater concern is household debt, which, at 143% of disposable income, makes consumers sensitive to any rise in interest rates.

Outlook for the market

A sluggish year in The NZ economy has been sluggish this year with full year growth estimated at 1.7%. 2012 Exports were down 3%ytd by October as prices and volumes dipped on weak global demand after growing 10% in 2011. There are, however, early signs of a mild recovery. … with a mild Dairy prices have risen in recent auctions and the trend to higher export prices looks set to lift into 2013 continue in 2013. With construction also likely to recover on building in Canterbury and Auckland, we’ve raised our 2013 GDP forecast to 2.8% from 2.3% previously.

Construction will The construction sector is in a strong upturn, with Q3’12 building activity up 14%yoy in real lead a local terms, led by an 18%yoy rise in residential building. Reconstruction in Canterbury following demand recovery the February 2011 earthquake and strong population growth in Auckland are expected to lift real trend growth in construction to 7-8%yoy from 2H’12 through 2014 after a fall of 0.5%yoy in 1H’12. The upturn is not balanced across the country, however, as weak population growth limits construction in other regions.

Manufacturing The manufacturing sector showed positive signs in October, with the Purchasing Managers should also lift Index (PMI) rising to 50.5 from 48.5 in September (above 50 means expansion). Rising farm prices have lifted the agricultural sector since Q3’12. The non-agricultural sector should also start to benefit from better global demand by mid-2013. Manufacturing growth should edge up to 2.5% real growth in 2013 from an estimated 2.0% in 2012.

But a rise in Retail sales growth slowed to 2.4%yoy in Q3 from 4.8%yoy in Q2, but this easing was unemployment amplified by base effects from the 2011 Rugby World Cup. NZ’s consumer confidence holds back remains soft, as a weak jobs market saw unemployment rise to 7.2% in Q3 from 6.8% in consumers Q2. This will limit 2012 consumer growth in real terms to 2%, just below the 2001-11 average of 2.2%. Growth should lift to 2.5% in 2013 as the economy strengthens.

A bit more Inflation remained weak in Q3’12, with the CPI up 1.3%yoy, and a negative PPI. This has inflation in 2013 allowed the central bank to keep interest rates at a low 2.5%. Inflation is expected to rise to 2.0% in 2013, as a stronger economy runs into capacity constraints, particularly in … & a stable construction. Interest rate rises will likely follow from 2H’13. The NZ$ is expected to stay NZ$ near 80 US cents through 2013, based on improving commodity demand, a favourable interest rate differential, and low risk.

Calendar years 2009 2010 2011 2012 2013 GDP(Expenditure), real growth, % -0.2 0.9 0.3 1.7 2.8 GDP(Production), real growth, % -2.4 1.8 1.3 2.1 3.0 CPI, year average, % 2.1 2.3 4.0 1.1 2.0 Official cash rate, year end, % 2.50 3.00 2.50 2.50 3.00 NZ$1 = US$, year average 0.62 0.72 0.79 0.81 0.80 US$1 = NZ$, year average 1.60 1.39 1.26 1.23 1.25 NZ$1 = A$. year average 1.28 1.28 1.32 1.28 1.28 Source: 2009-2011 data from Statistics NZ; 2012-2013 forecasts by IMA Asia.

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Asia Brief contributors

The Asia Pacific Executive Brief is produced by a unique network of in-country experts who run briefing and advisory programs that are designed to help senior executives monitor and anticipate critical business developments through timely insights and analysis. Further information on the markets and the peer group briefing programs is available from the Country Directors listed below.

Asia & Singapore: Richard Martin, Managing Director, IMA Asia ♦ Web: www.imaasia.com Global Mob: (65) 9023 9642 ♦ Email: [email protected]

Australia Sydney: Katie Tucker, Client Support Manager, IMA Asia ♦ Web: www.imaasia.com Tel: (61 2) 9252 4336 ♦ Fax: (61 2) 9252 4339 ♦ Email: [email protected]

China Shanghai: James Loudon, China Representative, IMA Asia Tel: (86) 186 2153 7602 ♦ Email: [email protected]

Hong Kong Hong Kong: Mark Michelson, Chairman, Asia CEO Forum, Hong Kong Tel: (852) 2530 1115 ♦ Fax: (852) 2530 1125 ♦ Email: [email protected]

India New Delhi: Adit Jain, Chairman, IMA India ♦ Web: www.ima-india.com Tel: (91124) 459 1251 ♦ Fax: (91124) 459 1250 ♦ Email: [email protected]

Indonesia Jakarta: James Castle, Chairman, CastleAsia♦ Web: www.castleasia.com Tel: (62 21) 2902 1641 ♦ Fax: (62 21) 2902 1648 ♦ Email: [email protected]

Japan Canberra: Chris Nailer, Associate Director, IMA Asia & Director MBA program, ANU Tel: (61 2) 9252 4336 ♦ Fax: (61 2) 9252 4339 ♦ Email: [email protected]

Malaysia Kuala Lumpur: Datuk Paddy Bowie, Managing Director, Paddy Schubert Sdn. Bhd. Tel: (60 3) 2078 4031 ♦ Fax: (60 3) 2078 7034 ♦ Email: [email protected]

Pakistan Karachi: Babar Ayaz, Managing Director, Mediators (Pvt) Ltd Tel: (92 21) 565 6113 ♦ Fax: (92 21) 565 6112 ♦ Email: [email protected]

Philippines Manila: Peter Wallace, President, The Wallace Business Forum ♦ Web: www.dataphil.com Tel: (63 2) 810 9606 ♦ Fax 810 9610 ♦ Email: [email protected]

South Korea Seoul: Tony Michell, Managing Director, Korea Associates Business Consultancy Tel: (82 2) 335 2614 ♦ Fax: (82 2) 323 4262 ♦ Web: www.kabcltd.com Email: [email protected]

Singapore Singapore: Richard Martin, Managing Director, IMA Asia ♦ Web: www.imaasia.com Tel: (65) 6332 0166 ♦ Fax: (65) 6332 0170 ♦ Email: [email protected]

Taiwan Taipei: Michael Boyden, Managing Director, TASC Taiwan Asia Strategy Consulting Tel: (886 2) 8789 0978 ♦ Email: [email protected] ♦ Web: www.tasc-taiwanasia.com

Thailand Bangkok: Christopher Bruton, Managing Director, Dataconsult Ltd Tel: (66 2) 233 5606/7 ♦ Fax: (66 2) 236 8143 ♦ Email: [email protected]

Vietnam Bangkok: Christopher Bruton, Managing Director, Dataconsult Ltd Tel: (66 2) 233 5606/7 ♦ Fax: (66 2) 236 8143 ♦ Email: [email protected]

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