TRANSCRIPT: (Reuters) Purisima, CVPs residence, February 10, 2012. On inflation Purisima: The main drivers of inflation in the Philippines are food and oil prices. On the part of the food, its been well maintained. Harvest has been good. In fact, the biggest part of the food component is rice. As you know, last year was a very good year for Philippine rice harvest. Its a priority of the president to improve productivity and reduce the vulnerability of our rice production by diversifying the areas of rice plantation to areas that are less prone to typhoons. For example, DA has started planting in the Iwahig colony in Palawan. Thats just an example of the moves of the president so that has kept rice prices in the Philippines stable.
Oil, of course, we import oil for mainly transport. We are not as dependent for power. As you know, we are worlds 2nd largest producer of geothermal energy. We have our natural gas and we do have our coal also but we still import coal. That has made oil as a component of our total power needs less than 10%. So obviously, that depends on what happens in Iran and Saudi Arabia and the rest of the major producers. But barring unforeseen events, I would expect inflation to be well-maintained. Last year, it was still within policy range. The BSPs doing a good job of controlling and creating the right environment.
The latest number is at 13-month low, at 3.9%, if Im not mistaken. Well, our policy range is really 3-5 percent.
On additional rate cuts this year
Purisima: Obviously, thats the decision of BSP. But I believe conditions are right for the consideration for additional cuts but thats just my view. The BSP will have to make that decision. Im a member of the BSP but Im one of seven, so my vote is only one. Ill refer to them; I think one voice in monetary policy is very important so that there is clarity and that we get the full benefit of policy actions. When you hear too many voices, you dilute the effect of policy pronouncements. The same with fiscal policy, Im just one voice for fiscal policy. We work as a team, we belong to one country; we have the same goals. The president of the Philippines wants to create an environment that would allow us to sustain growth at higher levels that would go beyond his term and a crucial component of that is stability. Therefore, empowering the BSP to use their institution, their power and skills to the benefit of the country is for our interest. So any pronouncements on my part tend to affect or confuse the market.
Inflation is down. One of the main concerns before is that inflation when you start embracing interest rates, obviously wed like to have higher growth rates, especially in view of the fact that Europe is still uncertain, US is going through an election process. The role of the domestic economy will be very important in making sure that were able to create enough increase in the economic activity that would support the programs of President Aquino in creating jobs, in reducing poverty, in making sure that we build a country that is more competitive, that would continue to attract more foreign investments. I believe that the circumstances is reviewed regularly by BSP. They have very bright people there in the team.
On import/ export struggling last year; expectations for 2012
Purisima: On the physical export, the Philippines is very dependent on electronics industry. As you know, the industry is highly globalized. Almost two thirds of our exports are electronics. In fact, if you remove electronics, the rest of the exports are up but because of the size of electronics as a component of our total exports, it reduced our GDP growth rate by 2.2%. And that was the biggest driver. The challenge for the Philippines is to continue to diversify its physical exports. Weve done well in terms of services. The BPO industry continues to be very strong. Its expected to continue to grow over 20% per year over the next few years. The OFWs remittances have shown resiliency. In fact, November was a record month despite what was happening in the rest of the world. That is why President Aquino is keen on building a third strong leg- and thats tourism. We have opened up the skies; Air Asia Philippines will start flying. In March, well see many more airlines.; will open up more flights in the country. Arrivals for 2011 was a record 3.9 million tourists, although the presidents goal is to reach 10 million by the end of 2016.
On the 10 million tourists in 2016 being a very ambitious goal
Purisima: I think if you look at where we are and where our neighbours are in the natural endowments of the country, I dont think its a very ambitious goal. In fact, the local tourism is over 35 billion already; thats been spurred by budget carriers within the Philippines that has made flights within the Philippines very affordable. Were building infrastructure, roads, airports, to support this initiative. Once we succeed in doing that, there will be three strong legs. Then of course, you have the fiscal exports that well continue to diversify.
Were gaining some traction in garments now again, with increased labor costs in China and transit problems in the west of China. Agriculture should benefit once tourism gets more traction. These agricultural products in remote areas will now suddenly have a market and will spur additional investments in that area.
On diversifying the economy
Purisima: Diversifying means both in services, not just BPOs but tourist services; in tangible exports and not just in conductors; not only in agriculture but also in minerals. Its noteworthy to mention that the Philippines is now number four in the world in terms of shipbuilding. Very few people know about that and theyre often surprised. It emanates from the strength of our human resource pool. Weve had for a very long time people working abroad has resulted to a transfer of skills from the country. In the Middle East, weve had over close to 3 million. The construction boom there since the 80s has built a very deep pool of welding skills which is the core skill in shipbuilding. That has attracted major players in the Philippines. In Subic, in Cebu, I think theyre putting up one in Cagayan de Oro.
On wanting to change compositions of exports
Purisima: We are working hard in diversifying not just from a product standpoint but also a geographic mix standpoint. Obviously, because electronics is the biggest component, our biggest farmers are those in danger of the electronics trade. China has the fastest growing component; intra-Asean is something were trying to grow; intra-Asia is something were hoping to grow. Especially with Asia as the primary consumer of products that belong to the category. The US is still the major partner, as well as Japan. Europe was the area of opportunity and is still the area of opportunity that wed like to develop.
On how the removal of tariffs in 2015 will affect the Philippines
Purisima: Positively. As you know, when you look at the demographic composition of Asean, the second largest in terms of population is the Philippines next to Indonesia. I believe the most mobile population is that of the Philippines and in a more integrated Asean, I would expect intra-Asean trade to increase; intra-Asean labor exchanges to increase and that should benefit the Philippines. Given our geographic position, once were able to build all the necessary infrastructure, we can position the Philippines as the northern gateway and the pacific gateway to Asean.
On PPP
Purisima: Its not personal. Its one of the key tools that were going to sue to tap private capital expertise and technology so that we can build our infrastructure. We have a very aggressive press; sometimes overly negative. We have set very ambitious goals and we will continue to set very ambitious goals because thats the only way to really get better results. But when you look at the facts of the performance of this country, weve actually done better than other administrations when it comes to PPP. The Ramos administration, their first non-power PPP took five years. And thats the computerization of LTO. The power project, it took them one year- Bauan Power-but that was with emergency powers. Im not criticizing any of the administrations but to get the facts straight. Estrada didnt even have any PPP project. Arroyo had her first PPP project was the computerization of the Bureau of Immigration and it took two years. We have privatized toll roads in about 16 months and we have actually many more in the pipeline.
First in terms of performance, I would like to set that straight. This administration has done much, much better and weve actually revised the policy environment. We are focusing on solicited rather than unsolicited. If you look back in the past, weve had so many failed or controversial, troubled PPPs and we dont want that. Thats not going to be a part of of the legacy of this administration. We dont want another NAIA3 PPP; we dont want another MRT3 PPP; we dont want projects such as the Laguna Lake Dredging, the French ports project, French/ British bridges projects- deals that are not going to help the country.
In fact, if you look at the performance of the government in terms of deploying our budget, weve been criticised as underspending. But if you analyze exactly what weve done, the component of our spending was the fact that we were able to take advantage of the low interest environment and weve reduced interest expense by P40 billion. I dont think thats bad. The DPWH was able to save over P10 billion by being more efficient in the bidding. When you look at what weve done, in the past they just kept spending – roads that werent connected to networks, roads that were not connected to each other. Therefore, we as a country were not benefiting the network effect of these infrastructures.
It looks good in numbers but in reality, in terms of improving the efficiency of the country, the competitiveness of our companies, we havent done anything much. So over the next year, I think you will see more going to be bid out. Weve announced already the public schools project. Theres more from the Department of Health; theres from DOTC. So, were confident that its gaining momentum.
As I said, we have ambitious targets and I dont think if we dont hit 15 that would be a failure given the historical track record of the country. I think we should measure performance relative to the past. We want to set ambitious goals so we energize the institutions and the bureaucracies to work harder and faster and be more ambitious.
On the number of PPP projects this year that would make CVP happy
Purisima: For me, Id be very happy once we are successfully in continuing to streamline the process; once were able to put more confidence in the process so that it is considered fair, level playing field and integrity in the process. The needs of the president of the Philippines is so great that we wont be able to finish in one year nor within the term of President Aquino. What the president wants to give as his legacy is a transformed bureaucracy; a transformed process; institutions that will be able to sustain his programs. Thats what President Aquino is trying to do. Hes trying to transform the mindset of the people from always being suspicious to being hopeful, trustful of government so that we can work together in building this country.
This impeachment, for example, is a major move that 1) it sends the right signals to the rest of government so that 2) peoples trust in the judiciary can be rebuilt.
On the original 10 PPP projects NG announced in 2010
Purisima: Yes, its still there. One of the things that very few people fail to understand is that we started July 1, 2010. We had to work with projects that were already there. As we worked along, we realized that some of the work done in the past wont stand in scrutiny under the standards of the Aquino administration. We couldve rushed some projects into building but risk defeating our objective of making sure that projects will stand scrutiny of the Aquino administration. Obviously, everyone wants to rush projects but the reality is if in doing so you do not deal with the fundamental issues then you will have hurt yourself more than serve yourself. Were not hoping to have just one successful year; were hoping that not only we have one successful administration. Were hoping that it will be a start of a series of successful projects because thats what we need.
On foreign interest in the PPP program
Purisima: Theres a lot of interest, period, in the PPP program. The last one was successfully bidded out; Ayala won. The schools projects, I think, there are 11 interest bidders. The other projects also have many other interested parties. The good thing that weve done is that weve centralized the PPP function. Weve gone to Congress with a bill to further improve the laws that support this PPP initiative; weve brought in international consultants in addition to IFC, Pricewaterhouse, and other experts in PPP. The UK PPP Center has gone here to support us and some of our projects.
On the bill being similar to investment protection laws
Purisima: Not just investment protection laws but laws that streamline the process; laws that allow us to be fair; process laws that minimize legal intervention post-bidding.
On the next big thing in the pipeline
Purisima: There are several airports in the pipeline thats being bidded out. You can ask DOTC. The LRT is going to be bidded out. In the list is the Cavite portion of the Cavite-Laguna Expressway. When I say bidded out, that means the process will be started. It may not end this year, not all of them, but the process would have commenced.
On the reason why PPP took so long
Purisima: To do solicited projects you have to do your homework, the feasibility studies. The feasibility studied that we inherited, some were very old, twenty years old. We needed to do the demand analysis; we needed to revisit the subsidy that we will have to grant. We needed to restructure as to how we were going to privatize it. Im sure, when you get the chance to run a PPP project, youll realize everything that Im saying. And youre welcome to go into an internship in our PPP initiative so you will be more appreciative.
On interested multinationals on the PPP
Purisima: Yes. You can ask the PPP center.
On infra spending on the 1st half of the year
Purisima: The DBM has made it a goal to release the budget in the first half of the year. The whole budget can be released, I believe, theyve actually done a good job in the first month of the year.
Were committed to our medium term fiscal program and thats to hit 2.6% this year and bring it down to 2% by the end of 2013. Were not deviating from that. In fact, if you ask me were ahead of that program because last year we were programmed for 4-3 percent, we ended with much less than 3%. I think weve shown based on our performance, 2011 was one of the good years. For example, our revenues rose to 13% which is the highest in over a decade without tax increases, without asset sales; purely from efficiency improvement – on an economy that grew much less.
On GDP for 2012
Purisima: Higher than last year. We want as high as we can get. As you know, you deal with the cards youre dealt with. What youll do is make the most of the cards youre dealt. Last year, there were so many black swans. Who wouldve thought about the tsunami. A tsunami can happen but the impact on the economy and the whole supply chain from the nuclear issue; the Arab Spring that was never predicted but affected the rest of the world; the flooding in Thailand that affected the global supply chain as well; and of course, Europe and US. 2011 couldve been a much better year for us. In fact, everything being equal if 2011 was the same as 2010 from an external environment, our growth rate couldve been much closer to 6.
Our aspirations are much higher than that. I believe our country is capable of doing much more in addressing the constraints to growth. One important message wed like to give is that were not hoping for just one good year. Were hoping for a sustained growth of higher levels. But to do so, you need to address the bottlenecks and sometimes in addressing bottlenecks, you have to make sacrifices where you need to slow down things to correct things. Thats what were going through. Im confident were on the right path because were addressing governance, corruption, processes, investing technology and people and listening to investors. We want this country to be ruled by law and people to abide by the laws and to start believing in government. I think once you do that, weve set the government for more investments to attract more foreign investments for the growth of the country.
On when he sees that translate to FDIs
Purisima: Well, we do have FDIs. BPO sector, in fact, we just inaugurated another yesterday. The president went to one, in ANZ. JP Morgan center here is fast approaching to 20,000 people. Theres a lot of interest in mining except were reviewing mining policy because in the past, it was too lax where government gets so little and environment is not protected. Obviously, we want responsible mining and once we do that, we believe we would be able to attract more of the right investments.
On potential for more involvement of foreign banks
Purisima: In the papers its been announced. Theres a Malaysian bank thats looking to acquire a local bank. For me, the bigger our banks, the better. That means additional consolidation. In the insurance industry Ive also said that. We want a stronger insurance industry with higher capital so they get better economies of scale, spread the risks bigger and be able to give and offer products to our consumers that are very competitive. We are helping create a more efficient capital market; weve been encouraging the equities and fixed income market to talk to each other and see if they can make sense of integration so that theyll be more efficient. We on our part have opened the longer end of the peso curve, making benchmarks out of 20 and 25-year paper affording private entities the opportunity to get locally in pesos funding longer term. Also affording insurance companies better matching between investment portfolios and their financial obligations.
On the Malaysian bank
Purisima: The BSP has involvement there. But as part of government we welcome more involvement. After all the financial systems of the world are so global already and the more integrated we are, the better.
On more bankers knocking on the countrys doors
Purisima: Im sure on your flight to Manila the flight was full. There are more suits coming into Manila.
On rice imports this year
Purisima: The president has been very vocal about the fact that his goal is to reduce our imports. When you look at the rice equation of the Philippines, over 4 million hectares are devoted to rice production with an average of 4 tons produced, making total production 16 million tons approximately, with a demand of about 17 million tons. And when you look at the wastage, storage they say results to 20-40 percent wastage. The fact that we use recycled seeds leads to another 10-20 percent reduction in production. The fact that irrigation is not as widespread, also affects productivity. Then storage also affects it.
When you invest on those things, I am sure we will see dramatic improvements in our rice production. Imagine, if were able to increase average production per hectare by a ton, so youre talking 4 million tons additional, which is no more than our requirement. The funny thing is, I think, we produce more rice than Thailand except that we consume more. You can check the facts, I may be wrong. Were one of the larger producers but with our population.
Imports last year was much less. Maybe theres smuggling that we didnt catch from Myanmar but thats something that were working on.
On developments in Myanmar vis a vis trade relations w/ PHL
Purisima: Asean as an integrated entity would have a population of over 600 million people but a GDP of close to 2 trillion. Thats a big market. I think that really is something that will work well for our country- being a part of Asean; being located in what is going to be the most dynamic economic region in the next 50 years. I f you look at our demography, its very favourable. If you look at the way were deploying our budget, a big portion is investment in people. The CCT, education, on health care- its about making sure we improve our peoples skills so that they can be productive participants in the global economy. In this world, theres nothing perfect. Unfortunately, we have the freest press in the country, or in the region, that likes to talk about the negative. Thats why Im happy to talk to Reuters. Youre the first Ive invited to my house because I respect organizations like you. You talk about facts. The rest dont talk about facts.
On revenues reaching over 13% on yoy growth
Purisima: Right now, we have two laws that were pushing to Congress- amendment of the incentives and amendments in sin tax laws. Were continuing to evaluate things as we go along. Just like a young lady, you cannot say no, never. Youll see what happens as you go along. So no new taxes should be taken in the context of the fact that there is substantial leakage and I fully support the presidents position. Its like a pail with a lot of holes. Why put water into it when its just going to leak? His mandate is to fix those loopholes and thats what were trying to do. Were continuing to assess to add more taxes, to increase taxes, to diversify the composition on the way we tax things. Its a very dynamic thing. Our budget continues to increase and thats my job.
On six tax being a prerequisite to a credit upgrade
Purisima: First, I believe were underrated. The CRAs are way behind the curve on this. If Indonesia is investment grade, we cannot be two notches below Indonesia. Were one notch on fitch. But on the others, no way were 2 notches below. On the CBS, the Philippines is tighter than Indonesia. We borrowed 25 years at 5%. They borrowed 30 years at 5.35-something. Clearly, the market is saying something. If you look at the maturity profile of the country, its very competitive than Indonesia. When you look at the political structure of the country, were even more until 2016 because theyre going to face a major election in 2014. The question is who will inherit the baton. The Philippines has had many years of successful transfers of power. Im not saying we should be rated higher but certainly not two notches below.
I believe we deserve an upgrade. Its not up to me to do that. Thats why Im continuously in a dialogue with CRAs.
Ill be meeting them in two weeks time when I do a non-deal roadshow. We havent announced but Ill be doing a road show just to show the Philippine story is out there. Were proud of what weve done and what were trying to do. Were confident well be able to do this. This is a rare occasion in the Philippines where you have a President who has the largest mandate ever.
On what the Phils is doing re: wage gap
Purisima: We dont want to look at it as a wage gap. We continue to invest in education, making sure the lack of classrooms is dealt with; making sure we invest in health care; making sure we have CCTs so the bottom of the pyramid gets to have the opportunity. We cannot just look at it as a wage gap because its going to create distortion. ITs about investing in skills and people; its about making the environment more conducive to investment so you create more opportunities.
