Birgit Hansl [1 of 2] – The Philippines’ Economic Update by World Bank

Derek: Welcome to the Outsource Accelerator Podcast. This is a short format podcast where we explore business and outsourcing mastery. My name is Derek Gallimore, and I am really excited to bring you the leading podcast in outsourcing.

Hi. And welcome to another episode of the Outsource Accelerator Podcast. My name is Derek Gallimore, and this is Episode Number 183.

So today, I am super excited, really genuinely excited to be joined by Birgit Hansel of the World Bank. So, Birgit is the lead economist of the World Bank for this Asian sector. They release a biannual report called The Philippines Economic Update. And I have Birgit as a guest to discuss the content of that report. So of course, I try and angle it towards outsourcing. We explore the results of this report, the strength of the Philippine economy, and dig a little bit deeper into how that benefits outsourcing, but also how outsourcing directly benefits the economy. I had a super interesting discussion with Birgit. She is very tight on time, understandably. And we had to cut this conversation short because she had a call coming through from the IMF, but it is a little bit longer than usual, so I’ve actually broken this down into two parts. And I do encourage you to listen to both parts, which we are publishing this week. Also, I do encourage you to download the Philippine’s economic update, the report itself. We will have links to that in our show notes.

So, I’m sure you’ll enjoy this. I certainly learnt a lot by talking to her. And if you want any more details about any of this, if you want to download the Philippines’ economic update, then, of course, go to our show notes, which is at outsourceaccelerator.com/183.

Hi. And welcome, everybody. Today, I’m really excited to be joined by Birgit Hansel of the World Bank. Hi, Birgit. How are you?

Birgit: How are you, Derek? Thank you for having me?

Derek: Absolute pleasure. And thank you so much for sparing the time today. You are the lead economist of the World Bank. And I’m lucky enough to have you here. And we are talking about your recent report, Philippines’ Economic Update of April 2018. It’s a biannual. Is that correct?

Birgit: Yes.

Derek: A biannual publication that looks at the Philippines and its place in the Asian economic region. So really excited to have you. I suppose, initially, if you would like to introduce yourself.

Birgit: Sure. Well, thank you again for having me. I’m a German citizen. I’m with the World Bank for the last 15 years. I’m overseeing the program in the Philippines, in Thailand, Malaysia, and Brunei and mainly look at economic issues, governance issues, but also finance and market topics, competitiveness trait. So, I oversee a large team that works in all of these different offices, but I’m based here in the Philippines. And we are delighted that you’re interested in the World Bank reports. We, as you said, publish them every half year, and we usually look back on what happened in the last half year and what is the future of the economy in the next two years. And we always have a special focus topic where we discuss one topic in-depth, and this time, it is really featuring more on the inclusive growth agenda in the Philippines and why we don’t see that much poverty reduction and perhaps middle-class growth like in the neighboring countries.

Derek: Right. Fantastic. And we will, of course, have a link to this document, to the publication that anyone can download, of course, from the World Bank website. We’ll link to that. So, thank you very much. The Philippines Economic Update, it’s a huge publication. Got incredible amount of detail in there. Do you see that people stand up and take notice of these publications? Do you feel that the government here appreciates the input that you have and your presence here in the Philippines?

Birgit: Yes. Actually, it’s a very good relationship we have here with the economic team that is in the government. And we’re very lucky to have a close dialogue on the main reform priorities that, as you know, are covering many areas, from tax policy reforms, which is the hot topic in the Philippines, to public financial management reforms, but also in other areas more sector specific, like the BPO sectors. We do a lot of work, for instance, on the tax incentives now that is part of the tax policy agenda, but also in terms of SME ecosystem research. So, we are having a quite broad dialogue with the authorities here. And actually, the economic report is our flagship platform to really engage on the most important topics. And everything that we say is always picked up for good or for bad the next day. So, I think it is a very good instrument for us to engage, not just with the government. The audience is not just the government. It’s really the broader society, the investors abroad or in the Philippines, the banks, the companies, the civil society, and the ordinary citizen.

Derek: Because I imagine now its the foreign direct investment that is a significant contributor towards society here. And we need to see that sort of continually improving. And I imagine this report would have a huge sway on the decision making of those kinds of institutions, would it?

Birgit: Yes. It’s actually interesting. There are not many general economic reports in the Philippines that look into that detail countries specifically on the economy. We do, in the World Bank, have it in all countries we operate, but I know that here in the Philippines, there’s no IMF program, so there is no major report other than the article for consultations each year. And on the Asian Development Bank’s side, you have a more regional report, and it also focuses partly on the Philippines, but it’s not an in-depth report like this one. So, I think it gives you the most detail in terms of economic trends and outlook for the Philippines.

Derek: Great. So, we are certainly glad to have you here for that development. And so, we’re going to dive into the content of the report, obviously. And we’re going to link it back to, as much as I can, the relevance to outsourcing and the relevance to doing business here in the Philippines from a sort of outsourcing or business perspective. But very briefly, I suppose, initially, can you give us some perspective of how and where the Philippines sits amongst its neighbors in the region?

Birgit: Yes. In terms of growth and economic activity, the Philippines really remains one of the top performers in the region. If we look at 2017, the growth performance across the region in that year, we see that the Philippines really is still in the top three. It was before in the top, top together with China. Only last year, Vietnam caught up in the end. And we see that it remains really a key contributor to regional economic activity, which is great news for the Philippines and, of course, the people in the Philippines.

Derek: Right. And so, going into the report, there’s sort of three key messages, from what I’ve read. One of them, as you’ve just mentioned, is that it is top three in the region. And it’s no mean feat to [inaudible 00:08:30] China. And historically, it’s been up there leading. Just to sort of maybe not do justice to the figures, but typically, growth for the last few years has been high, 6%, 6.9%. And you’re also projecting, over the next few years, two years, for it to be equally at about 6.7%. And obviously, when you have high growth over a sustained period, that must have a huge impact generally and economically because of that kind of cumulative aspect.

Birgit: Yes. It is a great thing for a country to have longer periods of high and stable growth because that really creates then ultimately the environment for higher investors. High growth attracts investors. I mean, from the region, domestically too, but also from places further afar in Europe and the United States. And then ultimately, that investment has then the opportunity to create new productive capacity, but also bring in new knowledge, new technology, innovation, like for instance, in the services sector, the BPO sector does[?]. And that helps ultimately to create further sustainable long-term growth in the country. So, it’s a really very important figure for many investors. What is the growth of the country? It is also an indicator, of course, for many investors about, “What is my domestic demand,” which can be one very important reason to invest in a country. And you have a pretty large population in the Philippines that it is worth investing here because it’s not just that you could export from here, but you have a large population that you could service with the products or services that you provide. So, the growth number is a key decisive factor actually for many investment decisions.

Derek: And like any of these indicators, there’s a huge patchwork in a distribution curve underneath them of success stories. And I imagine there are some sectors that are booming at 50% a year and then some sort of negative growth and also, geographically distributed where a lot is happening in the main centers and not so much in the provinces. Where do you see the main success factors lying and the main, I suppose, catalyst for this sustained growth?

Birgit: Yes, of course. I mean, you can break it down, the growth, in various ways. And we, economist break it down into investment and consumption and how export and import has contributed to it. And here, you can see that most of growth last year was driven by consumption growth and export growth. So, the Philippines really benefited from a global economy that was very sympathetic to the exports that it has, so it could really massively increase its exports, which helped a lot to prop up growth. And we had pretty stable investment growth. I think the weaker point was investment growth. So, consumption growth was strong, but investment growth, unfortunately, was a bit weaker, which is, of course, partly the story of really high investment growth in 2016, so it provided a high base when during the election year, you had a lot of fiscal incentives and investments that died down a bit in 2017. If we look at growth split up by different sectors that you allude to, we have services sectors, we have manufacturing, and we have agriculture.

We could see actually a strong recovery in agriculture after the El Niño, but we also have continued strong services sector growth. And I’m sure that’s also what your audience, like in the BPO sector, can observe, that there’s a strong growth in the services sector in general. And that is really part of the growth story of the Philippines that is based in its big asset of having a young and large population that is able to adapt to new sectors that is ready to explore IT related businesses that is English speaking. So, these are really the points that make the Philippines competitive for investors that come from the services sector side. And these are, of course, also related to the skills that these people bring to the table and make the Philippines an interesting place for investors that are coming from the BPO sector or related services sectors.

Derek: And how do you see the… so we’ve had projections of continued growth certainly for the next two years at a relatively sustained pace. The report also says though that there are domestic risks, such as inflationary pressure, which I suppose slightly goes hand in hand with high growth rates. But in terms of an outsourcing and business context, do you see still a positive message here?

Birgit: Yes. Of course, we had slightly higher inflation over the last year. And a lot of it, of course, is driven by simply the interest rate changes and the global environment which make assets in the US and also Europe and other developing countries, again, attractive for investors. So, we see a lot of capital outflow back from emerging markets to what we call the stable or safe haven markets in the US and elsewhere. And that usually leads in an open small economy to a currency devaluation because they’re selling assets, so the peso loses in terms of value against the US dollar. And that filters ultimately through into higher inflation. So, it’s a lot driven by external factors, the peso devaluation, but also the higher inflation but also in part by local factors. For instance, we have very high food inflation in the Philippines, which is, in a way, surprising because you have very good conditions for agriculture. So, there are a lot of other factors that domestically impact food inflation. And of course, another factor that impact inflation is higher global oil prices, which ultimately for an oil importing country like the Philippines leads to higher prices.

But I think every country deal with these issues. And usually, prices can be elevated for some time. Around 4% is not a very high inflation level. It’s still a moderate level of inflation that people can factor in into their decision making on the consumption side but also on the investment side. And you can see that you have very strong institutions, like the Central Bank that is very reliable and transparent in monetary policy. They did twice already now a tightened monetary policy, which also should help to stabilize inflation. And as long as the markets have that knowledge that even if there are shocks from the external side or domestic side impacting inflation, for instance, that these institutions will manage it. That gives assurance to investors going forward that this is still a good place to invest.

Derek: Okay. That was Birgit Hansel of the World Bank. We do have Birgit back for part two, which is also being published this week. So, make sure you check in for that. In this next episode, we discuss about the rising inflation, the potential risks of inflation, and specifically, the inflationary effects of salaries in the BPO industry, which I’m sure everyone in the outsourcing sector is at least noticing. We also discuss the investment in human capital and the young potential of the Philippine workforce. So, a super interesting episode there. And of course, if you want the show notes, if you want to download the Philippines Economic Update, then just go to our show notes. All of the links are in there. That is at outsourceaccelerator.com/183. See you next time.