By Richard Mills | Asia CEO Forum Chairman
WE all know the Philippine economy is one of the strongest in Southeast Asia over the past few years. Some even say it is the fastest-growing major economy in the entire Asian region with nothing but good times ahead.
At least, that is what we all believe.
But a recent paper written by a young researcher indicates the Philippine economy is due for a period of slower growth, and may have already been decelerating along with much of the rest of the world.
Christopher Mills analyzed the performance of seven of the country’s largest conglomerates and compared them to the overall economy. The data he used were publicly audited financial statements of Aboitiz Group, Alliance Global Group, Ayala Corp., DMCI Holdings, JG Summit Holdings, San Miguel Corp. and SM Investments.
He initially showed that the averaged revenues of the seven conglomerates are very highly correlated to the overall Philippine economy. In mathematical terms, they had a correlation coefficient above 0.95 (where 1 is perfect correlation). This makes complete sense, since the nation is dominated by these organizations, and their success is critical to the economic success of the Filipino nation and vice versa.
When the researcher next analyzed growth rates over the past few years, he found a striking divergence. While the general economy showed a trend of increasing growth rates, the audited statements of its seven large conglomerates showed decreasing trend lines. Clearly, the two cannot diverge for long based on mathematical analysis and common sense.
Mills also studied profitability measures for the seven conglomerates, and found similarly disturbing trends. Both return-on-assets and return-on-equity have been in clear decline over the same period.
Given the large spending by political candidates leading up to the recent election, the results make no sense. This spending should have powered up an already strong economy and the financial results of the large conglomerates.
The researcher’s analysis can only indicate the Philippine economy is headed for slower growth ahead. Now that the election spending is finished, this reality could become more apparent in the
coming months.
Ideally, the new president will not have to make revisions on past economic growth numbers but if that is the case, that bullet should be bit as soon as possible. We also hope he will be gentle on the past administration that is handing over a nation in the best condition it has ever been in history.
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Copies of the research paper by Christopher Mills are available (E-mail me at leaders@chalre.com). The author encourages others to both confirm and expand upon his results.
3 comments
Was government spending also considered? Although the correlation coefficient is indeed very true, the Philippines is not like most countries. For one, there’s a huge BPO/Outsourcing industry, which is not touched by most of the mentioned conglomerates and is growing. Second, OFW remittances plays a huge role in the capacity of the average Filipinos to spend. Which brings me to the last variable of Consumer Spending. The Philippines had not been known as a manufacturing/production hub, so basing the performance of the country on these companies alone, in my opinion, is not a good starting base.
The conglomerates are the main beneficiaries of the IT-BPO sector since they provide the office towers the workers work in. And, once the young workers get their paychecks, it becomes consumer spending that mainly benefits the conglomerates (condo, retail, restaurants, etc).
As well, remittances become consumer spending in the same way. The conglomerates are the beneficiaries in every step since they so dominate the economy. This is why the correlation is so strong. It is shown is math and common sense.
It is maybe a sign of a better future because more choices are being given to consumers. Better business-friendly Philippines has been generated by Pnoy-admin for everyone to participate, and not the few usual local conglomerates.