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Over the past 40 years, the Philippines have enjoyed stable growth, with an increasing demand for the manufacturing of electronics for export.

Interview - August 8, 2011

It is also home to the 2nd largest BPO (Business Process Outsourcing) base in the world. It is clear that trade has and will continue to be an integral part of the country's economic growth.

MR. SERGIO ORTIZ | CHAIRMAN OF THE PHILIPPINES CHAMBER OF COMMERCE & INDUSTRY

Sergio R. Ortiz-Luis Jr. is a renowned management practitioner in the Philippines. He is the Chairman of the Philippine Chamber of Commerce and Industry (PCCI), the official chamber of commerce&

Having served under a number of administrations, you are one of the long-standing economists in the country, advising on policies on commerce and industry. Apart from being the Chairman of PCCI, you are also a Commissioner of the Social Security System, the President of PHILEXPORT, the Chairman of the EIB Realty & Development Corporation, and the Founding Director of the Manila Exposition Complex, Inc. (World Trade Center). An active member of various business, government, socio-civic, charitable, and non-governmental organizations, you have been appointed Honorary Consul General of the Consulate of Romania in the Philippines. Given your broad perspective on the Philippine economy, in your opinion, what have been the key factors that allowed you to successfully manage the country so that it survived the economic downturn?

One of the things that have helped us weather the financial crisis was the fact that we were not that deep into the problem. First of all, we were lucky to have an alternative market available to us. We were able to leverage on the Asian markets. A lot of our products were absorbed by Greater China. However, some industries did feel the impact of the global economic recession; particularly those that catered to the U.S. market such as the semiconductors industry. The services sector (particularly, the BPOs) were affected, but at a degree that still allowed for growth. The recession may have put a damper on the degree of growth, but it continued to post positive results, even at the height of the crisis (at about 20% a year). The semiconductor sector, on the other hand, retreated by 40%, but they have recovered now.

The segment that has had a hard time bouncing back from the downturn would be SMEs (small and medium-sized enterprises), and this has to do with so many other factors (e.g. exchange rates, cost of power and labor, etc.).

Overall, I think we were lucky because our economy was able to absorb the shock. We have made some headway over the last 4 years. The Administration that came in inherited a good agenda, as well as some previously set groundwork. Despite the political issues, the preparation for the economic table was done quite well.

Philippine Chamber of Commerce & Industry (PCCI) President Francis Chua recently conveyed that he wants the economy to "grow in a competitive and stable manner". He believes that "this mindset becomes even more relevant our country goes through a transformation under Pres. Noynoy Aquino". What immediate changes has Pres. Aquino made that directly affects PCCI's current policies (as far as trade is concerned)?

The policy that the new government has now to address the issue of corruption and red tape is something that is highly welcomed by businesses. Whether you are a local or foreign investor, these policies level out the playing field. I do not think that the Philippines is doing very badly; however, it cannot be denied that when it comes to measures of competitiveness, we end up ranking low. Personally, I think these poor results are unfair, but we are aware of what our shortcomings are. This includes corruption and red tape. I guess the President's campaign slogan will go a long way, provided that it is sustained and implemented properly.

In a recent trade event, the Philippine Department of Trade and Industry (DTI) Sec. Gregory Domingo mentioned that packaging is a key area for improvement. As a Filipino entering a new era under Pres. Aquino's administration, what are the crucial elements to the country's branding?

Country branding covers a whole range of issues. I think what DTI Sec. Domingo meant was real packaging as compared to the other players in the region. Our export products (particularly the processed food items) are not known for their good packaging. The immediate problem we have in that area is that most of our manufacturers and exporters are just trying to keep their head above the water. These manufacturers are more focused on content. The last thing on their list of priorities is an increase in their prices due to improved packaging. That is why we find ourselves in a chicken-and-egg situation. They cannot improve on their packaging, but they have to, and when they do, they have to increase the cost of each product that they are selling to the market. Having a higher price point in a highly price-driven market has the tendency to lower your level of competitiveness. They are, however, trying to improve the quality without spending much on packaging.

In other countries, the governments subsidize their local manufacturer's yearly expenses. We do not do that here. It is therefore not surprising when the packaging in places like Thailand is fantastic, even when their products are essentially copied from another competitor. This means that even when the content is better than the rest, because the packaging of your competitor offers better ease of use, people opt to buy their products instead. The same was said in the U.S. market. For instance, we may offer better quality fish sauce, but because the other brands have more convenient packaging, they opt for that instead even though the content is not as good. We are trying to address these issues. We have agencies in charge of R&D and packaging. We also have some one-stop service centers. For instance, some of our oriental food exporters would use stock bottles of San Miguel. Sometimes, it is even illegal. Then again, we do not have SMEs for bottle manufacturing. Because a number of food exporters are SMEs, it is not all that viable for them to go to large bottling companies and order at a massive scale.

International trade is all about the brand. How would you assess Philippine country branding? What are its key elements?

We do have country branding initiatives. This falls under a list of immediate needs. For instance, when it comes to the clothing industry, the Philippines handle a lot of prominent overseas brands. As you know, 40% of Ralph Lauren's Polo product line is made from the Philippines. There was also a time when 30% of the baseballs in the U.S. came from the Philippines. In Hollywood, big films like Braveheart and this Knight movie used swords that were made by SMEs in the Philippines. However, we cannot use these things in branding the country. It is not like we can market Kiwi and things like that.

Suffice to say, we realize that there is a real need to invest in a country branding effort. We do have some initiatives here at DTI from time to time. We have the "seal of excellence". That is the most that has been done so far. Country branding requires a more collective effort for it to be effectively executed in the international market.

You made a comment on the strength of the Philippine Peso and its kinetic effects on the Filipino community because more than half of the economy is dependent on the dollar earners (e.g., exporters and OFWs). What would you recommend to control the national currency?

As opposed to how some people project our advocacy, we do not want Central Bank to peg rates as it is not feasible to the country. However, the Government can do several things to address the issue. The trade of this market is very speculative. It is an arena where portfolio managers, investors, and offshore banks many times dominate the rate. Our dealing system (which determines the exchange rate) does not account for many exchange transactions. There is still a huge gray market where a lot of remittances take place.

When a big international financial institution predicts that the exchange rate will be PHP41.00 to US$1, I do not think that is a financial/scientific projection because anybody can make a guess. Anybody can come up with the same projection or opposite projection and justify it. Whether they predict it to be PHP39 or PHP43 to US$1, their guess is as good as anybody´s. It is all about how they are positioned and where they will make a profit. You have to be discerning enough to make the right choices.

It is unfortunate that predictions from big financial institutions have the tendency to be self-fulfilling. It is the Filipino's "hot pandesal" mentality. Literally translated, "pan de sal" means "bread of salt", but it is actually a soft bread with a nice crust that is about the size of your fist (although, some sell pandesal at smaller sizes). It is a favorite breakfast staple here, and goes well with morning coffee or cocoa. Anyway, the "hot pandesal" mentality means that when someone puts up a "hot pandesal" stall, everybody in that block will do the same thing. A driver saving US$100 in his pocket because it was sent by his daughter from the US will immediately have that changed when he hears that the rates are predicted to go down to PHP41 per US$1. After all, why would he settle for PHP41 to US$1 when it is now PHP43 to US$1? That becomes the trend.

Yesterday, Bangko Sentral ng Pilipinas (BSP) or the Central Bank of the Philippines, finally struck gold. They withheld from selling dollars, which caused a sort of frenzy among the speculators. This meant that they had to go outside to buy dollars. There are a thousand and one things that the government can do to arrest the peso appreciation it is to a large degree speculative.

It is true that for any country, it is easy to play on the heart strings of a proud government by predicting a so-called strengthening of the currency. When the nation's Central Bank proudly boasts of a low average inflation rate of 2.8%, it just means that there is deflation in a lot of sectors. If you are targeting a 7% to 8% growth, having an inflation of 2.8% will be counterproductive.

Furthermore, the exchange rate derived from remittances is worth US$20 billion every year. If you take away PHP1 from the exchange rate, you take away PHP20 billion from the consumption market, which drives the economy today. So far, in the last few months, they have taken away PHP3 to PHP4 from the exchange rate. That amounts to about PHP80 to PHP100 billion.

This contributes to about 12% of the country's GDP (Gross Domestic Product).

Yes, it does. If have a target GDP growth of 7%, and you rely heavily on the consumer market (particularly, in the area of housing where the main buyers are the OFWs) from which you have taken PHP100 billion from, you are creating the conditions for a subprime problem. Those who are developing all these residential projects are not going to sell to the OFWs if the exchange rate becomes that low, and the OFWs who initially bought properties from real estate companies will not be able to pay the remaining amortization because of the low exchange rate. As a result, these developers will default to the bank, and that is how the subprime problem in the U.S. started. If you look at what everybody is doing, you will be surprised at how we are taking the opposite route. During the last day of the recent Summit in Vietnam (when all of the Heads of State were there), Vietnam devalued by 5%. Thailand, on the other hand, before the Summit, implemented cap controls.

The Philippine FTA with the ASEAN was an inspired move, brought about by a collaborative effort between the PCCI, Philippine Exporters Confederation, Inc. (PHILEXPORT) and DTI. Which sectors of the economy are going to benefit the most from this FTA?

The mining and services sector should benefit. Unfortunately, we rank low in some areas like agriculture. Agriculture is a touchy area for both the Philippines and Japan. Within the ASEAN, however, I think there is room for us to be able to maneuver some of our agricultural products. Our mining products are certainly already getting investment and will fly once we have solved some of the remaining social and ecological problems. I would give it around 1 to 2 years. If we can get our act together, we can get these industries to drive our economy.

Tourism is set to be another driver of the economy. We have crossed the 3-million-visitor mark.

PCCI can trace its roots from La Cámara de Comercio de Filipinas (1890), which was the original Philippine Chamber of Commerce. Throughout the early part of the 20th century, Spain was an important trading partner, in the same manner as the U.S. is today. How would you describe the trading relationship between the U.S. and the Philippines? How important is it going to be for the country in the future?

Back in the 1970s, the Philippines only had traditional exports (e.g., coconut, copra, sugar, tobacco, and timber). It is nowhere near the kind of product mix that we have right now. These are all resource-based. This was because we have not discovered all the facets of trading at that time. The only trading that we knew of during the American regime was those with concessional quotas. Filipinos at the time were supported by the quota because it entailed a controlled exchange rate. Back in the 1950s, the rates were PHP2 to US$1. There were business men who were basically rent seekers. We had a controlled currency and only started relaxing in the 80's and 90's.

The export of other products started because of our people in the U.S. Almost every Filipino here has a relative in the U.S. Even I have several there. We have people asking if they can buy certain products from here to sell there. That is how it all started. You have friends and relatives selling whatever they think might sell there because they are there. Among the other Asian countries, we are the ones with the strongest ties (mostly familial) to the U.S. Other countries have British or European ties. There is no denying that a special relationship exists between the Philippines and the U.S. The diaspora of Filipinos living in the U.S. is close to 4 million.

One of the most exciting trade developments is the Save Our Industries Act (SAVE), which is designed not only to increase trade but also increase employment in the U.S. textile industry and the Philippine garment sector. What are your thoughts on the removal of the quota policy?

The removal of the quota policy hit the garment industry pretty hard. There is a movement that hopes to help the industry back to its serious past. I am not too worried about other sectors like the BPO. They can only touch the incentives, and even if they were to take out some of the incentives, the BPO industry would still find products in the Philippines as of the investment. The same goes with electronics. These are the major products that go to the US. It will make a small dent, but not to a degree that would make a difference to these industries.

Earlier on, you stated that the mining industry is set to be one of the key drivers of the Philippine economy. Kindly elaborate on its potential and its contribution to the GDP growth.

It is a well-known fact that the Philippines is endowed with a lot of minerals. It has high quality gold that is recognized in the sector, yet we are not known for our export of mining products. We passed the Mining Act a couple of years ago. Hopefully, this will solve some of the contentious problems that we have in terms a lot of resistance from the NGOs and the Church. We have had some problems in the past (such as Marinduque Mining, which really made a mess of things). It became rallying point for all those who were against mining.

A lot of new good mining companies are coming in. These sufficiently capitalised operations with high technologies that follow high standards. They are conscious about the impact their operations have to the environment. Through the will of the government and an increased effort to iron out some of the issues surrounding the sector, I think we can develop the mining sector to a degree that it significantly contributes to the economy. It can potentially retain its position in the past as one of the leading sectors in the country.

Thank you for your time.

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