Moderator: Richard M orrow, editor, Asiamoney
Jeffrey Lim, chief financial officer, SM Prime Holdings
Rolando Tanchanco, executive vice-president, consumer lending group, BDO
Vicci Tomas, chief financial officer, Splash Corp.
Victor Abola, programme director, strategic business economics programme, University of Asia and the Pacific
Felicitas Agoncillo-Reyes, assistant secretary, Investments Promotion Group, Board of Investments, Department of Trade and Industry
Hans Sicat, president and chief executive officer, The Philippine Stock Exchange, Inc.
Asiamoney [AM]: We’ve seen good economic growth this year after a slightly disappointing 2011. The latest figures are that the economy will expand by 5%-6% this year which is encouraging. How much of this growth depends on the consumer sector?
Victor Abola, University of Asia and the Pacific [VA]: Growth this year will be domestically driven, specifically from the construction sector and a resurgence in manufacturing, as well as tourism and the BPOs [business process outsourcing centres] getting some traction. Consumer spending should easily reach 6% growth this year, with my prediction on overall economic growth being 5.5%.
We are seeing that already in the first quarter, with electricity sales growing by 10%. That’s usually a good indicator or proxy of economic growth.
Asiamoney [AM]: Splash is at the sharp end of the consumer sector. Are your sales improving in line with market predictions?
Vicci Tomas, Splash Corp. (VT): The core brands of our personal care business are already number one in the segments we participate in. So while we felt there was opportunity for growth in personal care we also felt there was a lot of opportunity for growth in the food industry, because as the professor said consumer spending is rising and 43% of consumer spending is related to food. That is why we bought the popular food brand Barrio Fiesta.
The second reason is that Splash saw is really strong in distribution and brand building and we saw that outlets for personal care products are also the same ones as where food items are sold. So we thought it was a sensible strategy to expand into food.
AM: Jeffrey, what are your views on growth in consumer lending?
Jeffrey Lim, SM Prime Holdings [JL]: I have to disagree with you when you said 2011 was disappointing. We grew the company’s net income by 15% during that year, largely through strong same store rental revenues and our expanding operations in China.
Moving forward, we think the growth should be sustainable given several factors. Firstly, OFW [overseas Filipino worker] remittances increased 5% in the first quarter. We believe that this growth will persist on the back of increasing job orders. Secondly, the BPO industry will continue to grow. In 2006, the sector accounted for US$3.5 billion in revenue and has now risen to about US$11 billion. Lastly, the government is looking to increase tourist arrivals and if they can achieve their target of 4.6 million visitors this year, more jobs will be created that will result in increased consumer spending.
We all agree that the government also under-spent last year. They have announced that they would spend more this year and launch several PPP [public-private partnership] infrastructure projects. Again, these should provide employment opportunities and boost consumer spending.
AM: Faye, the government’s been under-spending. What can the Board of Investments and DTI do to help improve consumption?
Felicitas Agoncillo-Reyes, Department of Trade and Industry [FAR]: We are looking to catch up with the public spending. That’s one area where we can see growth especially in infrastructure. Already the first PPP project has been awarded, and the LRT [rail] line one Cavite Extension [from LRT 1 Baclaran Terminal to Niyog Station in Bacoor Cavite] which will bring an additional three million consumers into the centre of the city is an opportunity for consumer retail.
I agree with Mr. Lim that it’s not true that we are not happy with our performance. Considering what happened last year 3.7% GDP [gross domestic product] growth is quite decent and the [credit rating] upgrades we got from Moody’s, Fitch and Standard & Poor’s is a testimony of the confidence of the international market when it comes to the Philippines.
Last year we saw a rise of 38% of investment registrations. One thing in particular is that one of the top investment sectors we saw was agribusiness. This is linked to what Vicci was saying, is that the biggest product is actually food. So we see Thailand investing in agriculture and food production, so we need to seize this opportunity.
Secondly real estate construction is one of our top drivers and thirdly what Jeffrey mentioned is tourism. The advertising campaign ‘It’s more fun in the Philippines’ was really brilliant I must say, and the global footprint that we had in the Asian Development Bank meeting really caught the attention of the world. We now really have a good problem when it comes to infrastructure. When they come we hope the airports will be ready to receive the influx of tourists.
AM: Hans, do investors believe that consumption in the Philippines is on the rise, and are they investing accordingly?
Hans Sicat, Philippine Stock Exchange [HS]: We’ve seen that investors are flocking to the Philippine capital markets to take a look at participation rates. The average daily trading volumes of the PSE [Philippine Stock Exchange] have risen in the quarter compared with the first quarter of last year by about 50%. Last year we were trading at an average of PHP5.7 billion (US$131.91 million) a day, while yesterday despite the market having dropped 2.3% the daily volume was PHP8.1 billion. So there’s a lot more robustness in terms of participation rates.
Additionally, net foreign participation in our market for the first quarter this year versus the first quarter of 2011 has grown by nearly six-fold. But market activity is not being driven by foreigners; Philippine retail and institutional investors have pumped in more money to the point that they are about 60% of total daily trades while foreigners are 40%. That compared to about 10 years ago when the foreign investor participation in the PSE was about 70%.
And if you consider the types of issuers coming, we have the successful listing of GT Capital, a holding company that includes some retail stores and is involved in banking, real estate, and the manufacturing side. For example EastWest Bank did a successful IPO, and its thrust is in consumer finance. And this week we’ll see the IPO of Calata Corp., a retail agricultural play, which tells you something is successful on the ground.
Our internal model suggests that, barring any unforeseen negative externalities, issuance on the exchange this year will probably be close to twice as much as last year. And last year was a record year in which there was PHP107.5 billion of issuance in the capital markets through 90 plus transactions. This year our internal model suggests we’ll raise PHP198 billion; probably more.
AM: BDO lends money to people to buy consumer goods. Where are you seeing pockets of demand or are you seeing demand across the board in terms of consumer lending?
Rolando Tanchanco, BDO [RT]: Consumer loan demand is up across all types of retail product, whether it is auto loans, home loans, credit cards, personal loans, even small business loans.
2010 was a good year for growth and we felt that 2011 was disappointing because there were opportunities missed. For example auto loans last year could have grown more had it not been for the calamities that occurred in Japan and Thailand, which affected the supply of vehicles. Despite this, banks overall still grew from the high teens to low twenties [in terms of revenues] due to strong demand.
As a bank we are always there to support our clients who are on the frontline. For example we have been lending more to real estate companies because the real estate industry is growing by about 20% [a year]. We benefit because not everyone who is interested in buying real estate has the cash to do so, and we are there to provide them with the necessary financing at a low rate.
When you have high liquidity in the market, as we do now, competition among the banks increases, which drives down the interest rates on loans. That in turn improves the consumer demand for loans.
AM: How much have the rates changed?
RT: Compared to the previous year, rates have dropped by two [percentage points]. It’s a good time to borrow money.
AM: In other parts of the world people got rather too addicted to borrowing money with some unpleasant consequences. What’s been the level of household debt now?
VA: Actually we don’t have the data on household debt, it’s not monitored carefully. The base problem is that a lot of consumers are still in the informal sector. They’re not in banking; they don’t have credit cards, so you have difficulty in getting the real data. But I think as a percentage of GDP it’s very low.
Total lending of the commercial banking sector is PHP22.5 trillion or thereabouts, which is one-quarter of GDP, and perhaps 30% of that is household lending. So we are very far from the situation in advanced countries where not only the public sector borrows heavily but also private consumers borrow way beyond their means.
AM: Rolly, does the lack of information about household debt make it a challenging process in terms of risk assessment when people want a new car or mortgage?
RT: I’d prefer to regard them as opportunities. In terms of the risk, one good thing about not just the Philippines but Asian countries in general when it comes to credit practices is that consumers are more credit conscious. People are very conscious when borrowing money even when times are good.
We offer loans for up to 20 years, but borrowers still prefer to choose [an average of] 10 years, and those that choose longer maturities tend to pay up once funds become available after a couple of years. We are optimistic because that demonstrates consumer discipline.
This is related in part with the nation’s demographic cycle. The Philippines is still a very young country, and younger people don’t tend to want bank loans. Instead they prefer to spend, which has been made easier because BPOs and call centres are paying young employees above-average salaries. And as they mature they become more conscious about saving and that’s when they become more aware about the value of applying for loans and the discipline behind owning credit cards.
AM: This growth in income and lending obviously benefits the consumer sector, but that must increase competition.
VT: We saw that last year. We saw opportunities in consumer spending but they [local consumers] are also looking for value, which means they are looking for products that are priced well for this market. Of course that means that the margins will be lower than our traditional products but this is where the bigger growth in terms of the Philippines market is going to come from. We’re coming out with value-based products that are meant to address the more discerning consumers.
JL: Customers are now more sophisticated and as a consequence, their spending preferences have changed over the last few years. So we introduced new concepts to address the changing needs of our consumers. For example, we are bringing Uniqlo, the popular Japanese apparel brand, into the country and their first branch will open on June 15 at the Mall of Asia. We are very bullish on the Philippine economy and we believe there are a lot of opportunities as rising disposable incomes become a reality. Competition is a given in this scenario and we just have to be prepared to stay ahead of other players.
AM: Faye, is enough of the population getting to experience this consumption growth, and what can the DTI do to expand it?
FAR: We’ve reviewed the data on who is investing and as I said earlier there is growth of 38% on project approval and curiously enough about 95% of investors are Filipinos. So we are less dependent on foreign money for investments. And these investments are not only in the metro [Manila]. There are power projects in Mindanao, soya bean, rubber plantations and also other projects in areas outside Metro Manila to address the supply chain and opportunity gap.
We are hosting Yokohoma Tires in Clark, the company’s hub in the region. It used to be that we also imported sheets, but now [they are made] in Mindanao. Relatedly, we see a lot of energy [projects] in the provinces to support the growing power demand in the countryside. As [president Benigno Aquino III] says, we focus on industries that are job-rich and push development in the local areas for inclusive growth. That’s why tourism, infrastructure, agriculture and manufacturing would be the key drivers.
AM: Vicci, are you seeing more opportunities outside the tier one cities?
VT: Definitely yes. Our biggest market today is admittedly metro Manila so there is an opportunity to expand in the provinces.
To give some statistics the total number of outlets including sari sari stores and market stalls is about one million. The most successful FMCG [fast-moving consumer goods] companies that I know are present in about 80,000 outlets are multinationals. Today Splash is present in only 30,000 to 40,000, so if we really do a good job of distribution then we can grow further in the provinces.
AM: Jeff, is that something that SM has been expanding throughout the country?
JL: Yes. In fact, we like to be a catalyst in developing local entrepreneurs in the provinces by providing them with venues where they can do business. We are expanding all over the country to bring more choices to the communities we serve, and offer better opportunities in terms of livelihood and employment.
AM: Professor Abola, how much limitation is there in the consumption story in the Philippines given the income disparity in the country?
VA: The main constraint we have in terms of market expansion is really the high poverty rate in the country. The new official statistics places the poverty rate at 22% of the population but it’s probably more than that. That’s double that of Indonesia. That’s very much related to your unemployment and underemployment.
Poverty is really located in the rural areas so the expansion in this region is dependent on the way we spread the wealth around and also in terms of growing faster. It’s important to grow faster than we’ve been growing in the past decade or so.
AM: What can be done to improve the wealth of people in the country and thus promote more consumption?
VA: Our policy makers tend to be enamoured by a strong and appreciating peso, which in all my studies shows there is a negative effect on employment. Imports then become more attractive. Our balance of trade record for 2011 was a net positive US$12 billion. So instead of spending that money we spend it employing more people abroad. To me that makes no sense, given that employment is the number one issue here.
FAR: Poverty has long been with us but this administration recently started doing the conditional cash transfer. I know that this is only a temporary remedy, just to get them out of that helplessness, but now they are really focusing on that. Poor people are only able to get cash under the condition that they get healthcare and send their kids to school.
Why are we doing this? We are doing this to prepare for the next generation of employable people in the countryside. We are bringing in investors and they always ask about the talent pool in that area. Even if I push them into those areas if you do not have the proper talent they will not come. And they are very much encouraged by what we are doing for the conditional cash transfer and our thrust for education and also health.
AM: Turning to competition again, will rising competition lead to more acquisitions?
HS: Clearly, there has been a lot of acquisition activity and we’re seeing it around. Recently Alaska Milk was bought into by a Dutch partner. What that tells you is that there is a larger retail market here that makes this market appealing for other companies. Change of control situations in corporate Philippines is going to be a huge driver of increased capital requirements simply because of new capex [capital expenditure] plans. And also as the new companies have to revisit their capital structures, they will not just do debt restructuring deals but also equity capital market transactions to rebalance their individual capital structures.
AM: Is that something Splash is looking at?
VT: Today Splash is underleveraged. We don’t have enough debt and have the capacity to raise more. In fact we’ve raised capital since last year through debt due to our capital expenditure plans for the next five years. Is there an opportunity for us to go back to raising equity? Yes, but today we’re looking more at raising debt than equity.
JL: I think the Philippines is in an interesting stage now given these positive developments. We attended a series of roadshows in the first quarter and I had meetings with about 100 investors from different countries all over the world. The feedback was very positive and it's now up to us to take advantage of that. Like Splash, SM Prime is not leveraged enough. There is so much liquidity in the market that our cost of funding has gone down significantly over the last year and we will just continue to tap the debt market.
Currently, we don’t have any plans to raise equity. But seeing Hans here, perhaps the PSE can introduce new investment products that could attract foreign investors into the country and allow us to raise capital to develop more shopping malls.
AM: Vicci, is your company entirely domestically focused or is there any interest in going international?
VT: We are still looking at the Philippines as our major market but we see major opportunities in the international market. In fact over the last two years our share of international sales has grown from 8% of our total to 14%, and based on our strategy we will grow the share of the international market to about one-quarter of the revenue of Splash.
There is a natural market for Filipino products for the Middle East and the Asian countries, but of course we are also exporting many products to Africa. They love our products because they help make their skins smoother and they help to lighten skin tones too, which has proven to be popular.
AM: SM Prime has some operations in China. What was the reason you opened those and where do you see the greatest opportunities for growth?
JL: Our development in China is part of our long-term growth path for the company. We will continue to concentrate on the Philippines and improve our China business to reach its full potential over the next five years. We are convinced China is the best market other than the Philippines, that we can go into and succeed.
Our China operation accounts for about 10% of total revenues but there are a lot of opportunities given its population and the size of the market. We project consumer spending will rise despite weaker economic growth prospects in China compared to previous years. In fact in the first quarter of this year, retail sales went up by 15%.
AM: There is a desire in the Philippines to increase trade with its important partners. But you must want to keep companies investing onshore too. Do you have incentives for them to do so?
FAR: Investment follows opportunities and should a Filipino company feel it has better opportunity investing overseas we help them as it remains a Filipino company and it brings the profits back to the country.
I was talking to Jeffrey and SM Prime is building one of the biggest multi-purpose arenas in the Mall of Asia and is also going into hotels. And when president Aquino went to China we were happy to note much the Philippines had invested there. The Philippines invests more in China than it invests in the Philippines and we’re trying to correct that. And after the president visited China the Ministry of Commerce of China for the first time seconded a Chinese investment officer to the Board of Investment to help Chinese investors invest in the Philippines. It’s the first time in their history that they have seconded a government official to another government.
AM: There has been antagonism between China and the Philippines over the Scarborough Shoal, which has led to talk of trade rebuttals such as bananas not being allowed through Chinese customs before they go bad. Is it a concern, and will it crimp what has been a thriving trade relationship that is expected to double to US$60 billion by 2016?
FAR: We see this as a political process. Right now they are discussing it at the multilateral level. From our point of view when it comes to business, we leave the politics to the politicians and leave the business to the businessmen. We are still doing well and receiving investors, including from China. Just for this quarter alone we received 185 foreign companies wanting to invest in the country. That means we are briefing two companies a day.
And I wanted to say that there are very good projects in Mindanao but no [foreign investors] know what they are and whether they are any good. So we have a project we’ve put together called Invest Mart, which is a market of investment projects from the regions. We’ve put together 200 projects worth about PHP60 billion. In November we will bring those projects here and I’m inviting the finance group and everyone in the panel to participate and see which of these projects are good.
AM: Have the media headlines about antagonism between China and the Philippines impacted investor sentiment to the stock market?
HS: It has been a common question over the last two days. But the answer is no. The China situation has not factored into the investment calculus of fund managers. The larger issue looming is the fact that the eurozone issue basically demonstrates how interlinked global capital markets are and sentiment issues can overtake market fundamentals.
AM: What is your biggest challenge to further growth and what is your biggest opportunity?
JL: For SM Prime, the greatest risk is really the major natural calamities that the Philippines is prone to. It usually slows down spending in affected areas. However, we try to introduce new developments in our malls to mitigate the risk and make it environmentally compliant. As an example, in SM Masinag, we built a water catchment facility that can hold up to three million gallons of water. This was built to help prevent flooding in the area during heavy rains. This proved to be very effective during typhoon Pedring last year, wherein the mall and nearby areas were not flooded.
In China, the challenge is human resource. Turnover is high given the vast opportunities for qualified managers. We have addressed this in a way by developing a pool of managers in the Philippines and sending them to China to help run the malls.
We are very optimistic that both the Philippines and China will generate good growth for SM Prime over the next three to five years due mainly to its stable and sustainable economic prospects.
FAR: Our biggest challenge is to put in more projects for investors. They are very convinced the that Philippines is the place to be. Our leaders say we are really in a sweet spot and the world’s attention is on us. Our biggest challenge is to come up with more projects that are on offer to investors and to make sure that they are satisfied with the projects that they have. That’s why we’re going to have InvestMart in November.
RT: For BDO the opportunity and challenge is mixed. In terms of the opportunity we are dependent on the domestic market, which will not stop. But we will not forget that there are many Filipinos living abroad, and in fact if you consider the level of remittances that they send here it’s a huge market for consumer lending.
Also a lot of demand for real estate comes from foreign Filipinos. Domestically that is the case too, for foreigners and Filipinos who’ve lost their citizenship who want to buy real estate but technically cannot with financing. That’s something that the BSP should be able to look at.
I told you about expanding on a provincial basis and we will continue to do that. When there is a new branch it increases our ability to develop and as we expand we should have enough resources to build the branches, set up new business centres etc to go to the market.
Additionally, the banks are only really catering to the ‘A’ market going down to the broad ‘C’. We’ve not really gone down as much as the telcos have done down to the ‘D’ and ‘E’ markets, or true micro-lending. There’s a huge market there. The bank’s challenge is to find a way to underwrite these people. They don’t really have a lot of information like in the US where there are credit bureaus for example. But there must be a way to resolve this, and make these people bankable and financially dependent one day.
The last point is e-commerce or mobile commerce. Other countries are using cell phones in lieu of credit cards. There is a huge infrastructure cost in setting this up so it won’t happen here tomorrow, but the telco companies here are aware of this and one day transactions will come from here. And the banks will back the financial side of these services, including the credit lines and limits.
AM: Can the banks work with the government to set up a basic credit bureau in the Philippines?
RT: Yes, there's already a recently ratified law creating a credit bureau – owned and managed jointly by the government and private sector.
AM: Vicci, what is Splash’s key challenge?
VT: I think one of the best things going for the Philippines is a genuine desire of the government to run after the crooks. The regulators are doing their jobs, as is the BIR [Bureau of Internal Revenue], and that has made the image of the Philippines more positive. And from our perspective we’ve had many foreign investors calling and looking to invest strategically in Splash Corp.
Our biggest challenge in a similar way to the consumer lending group is how to penetrate the broad ‘C’, ‘D’ and ‘E’ market as that’s where the growth will come from. A large number of the distribution outlets that I’ve mentioned are really made up of sari sari stores and small grocery shops. This is where the growth will really be coming from and it addresses the ‘D’ and ‘E’ market. To us that remains a challenge but also an opportunity.
The other way we’ve looked at [this distribution challenge] is our entry into the direct selling business. It provides us with an opportunity to tap housewives in the provinces that are not gainfully employed. It gives them a chance to earn more for their family and make Splash present in the broad ‘C’,’D’, ‘E’ markets.
In the international market one of the most important areas is Africa. The major challenge there is that regulations are not as sophisticated as in more developed countries. But while it’s more of a challenge is also represents a major opportunity. It’s a very big continent, there are 52 states and they vary from five million to 100 million. Of course we are focusing on certain specific areas.
AM: Hans, are there any major issues to maintaining the momentum on the exchange?
HS: From the equity capital markets point of view, we like to think of ourselves as the enablers for investors and issuers to come into the market place. On a smaller scale, the challenges for investors are access to products and to be a regular investor.
The larger challenge for the market is one of legacy regulation that has prevented the exchange from delving into new products. We are working with our regulators on that. We believe that in order to be a competitive exchange and to be attractive to all types of investors-- local, foreign, retail and institutional-- we need to have a regulatory framework that is also competitive not just with Asean [the Association of Southeast Asian Nations] and but also with some other countries around the world that employ best practices.
AM: Dr. Abola, is there any particular challenge for the Philippines when it comes to growing the consumer sector, and what is the greatest opportunity?
VA: I mentioned the poverty rate and related to that the unemployment rate, so I think the biggest challenge is the problem of creating jobs. That requires highly focused attention on the part of the policy makers and implementers and also apart from that the policy instrument which is not being used actively but being taken passively, which is the exchange rate which should not be overvalued. My own estimate is that it is overvalued by 20% to 30% at present levels.
Secondly we have a problem of implementation. We have a backlog in infrastructure. We are not moving fast enough to my taste. In terms of opportunity, we are enjoying economic growth momentum and 5% to 6% [annual GDP growth] is attainable if we put our acts together and act with greater urgency to solve the problem.