1

OUTPERFORM IN

EMERGING MARKETS

International Enterprise (IE) Singapore

iAdvisory Session – Philippines

November 12th 2014

Executive summary

The Philippines has made remarkable progress in recent years. Companies that have not re-evaluated its place in

their ASEAN portfolio should do so now.

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Heads of APAC and GMs for the Philippines should use this report to:

■ Understand the current trajectory of the Philippines’ economy

■ Pinpoint the most important consumption centers around the country

■ Benchmark the development of Filipino industry and predict its future path

The Philippines’ economy has been

improving gradually for quite some

time. The Aquino administration has

bolstered this process by improving

domestic governance

Companies need not cover the entirety

of the Philippines to capitalize on its

growth; the economy is centered on

Luzon, which accounts for the majority

of consumption and manufacturing

The Philippines has lagged behind its

peers in industrial development.

Executives who want to understand its

future trajectory should monitor

developments in three areas:

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0

1

2

3

4

5

6

7

GDP Growth, (US$, %YOY)

GDP Growth, 3-Yr Moving Average (US$, %YOY)

PPP Program

(Infrastructure)

Pork Barrel Scandal

(Corruption)

Investment Regime

Rationalization

(Bureaucracy)

The Philippines island primer

Companies should think of the Philippines as three major islands, each with one major economic center, in order to simplify

the 7,107 islands that are categorized into 80 provinces and further categorized into 17 regions (see below)

LUZON

• Largest island by population and area; accounts

for around 73% of national GDP

• Economic and political center; home to the

national capital as well as the majority of industry

and manufacturing

• Major economic center: NCR (aka Metro Manila)

VISAYAS

• Smallest island by population and area; accounts

for around 12% of national GDP

• Major economic activities include agriculture,

BPO, and tourism

• Major economic center: Cebu City

MINDANAO

• Second-largest island by population and area;

accounts for around 14% of national GDP

• Major economic activities include agriculture and

food processing

• Major economic center: Davao City

Source: Frontier Strategy Group Analysis; National Statistics Coordination Board, National Census 3

Cordillera Administrative Region

Ilocos Region Cagayan Valley

Central Luzon

MIMAROPA

Bicol Valley

Western Visayas

Eastern Visayas

Caraga Region

Northern

Mindanao

Davao

Region

Zamboanga Peninsula

Autonomous Region in Muslim Mindanao

SOCCSKARGEN

Central Visayas

CALABARZON

National

Capital

Region

0

50

100

150

200

250

2004 2006 2008 2010 2012 2014

Over US$ 75,000

US$ 50,000–75,000

US$ 35,000–50,000

US$ 25,000–35,000

US$ 15,000–25,000

US$ 10,000–15,000

US$ 5,000–10,000

Middle- and upper-class incomes in the Philippines have picked up over the last decade

FSG View: As growth has accelerated and inflation has moderated over the last decade, the Philippines’ middle and upper

classes have seen significant increases to their incomes

■ While the Asian financial crisis undoubtedly weighed on the Philippines’ economy during the late 1990s, the country’s

growth did not start picking up until 2004, when its macroeconomic stabilization began to bear fruit

■ From 2004 to 2014*, the total income of households earning more than US$ 5,000 annually exhibited a CAGR of 12.5%,

significantly more than the 2.7% CAGR seen during the preceding decade (1994–2004)

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* Forecast

Source: Frontier Strategy Group, EIU

The Philippines’ middle class has experienced significant income growth over the last decade

Total income of households earning more than US$ 5,000 annually (US$ billions)

Luzon 67%

Mindanao 17%

Visayas 16%

Filipino expenditure is centered on Luzon, particularly in the regions around the capital

FSG View: Luzon currently accounts for the majority of Filipino spending and will continue to do so for the foreseeable future

■ The Philippines economy, which is driven largely by consumption, is centered on the island of Luzon, particularly in the

areas around the capital (NCR, CALABARZON, and Central Luzon). Luzon houses only 57% of the country’s households,

but these families spend at least 40% more on average than do households on the other islands

■ While the Visayas and Mindanao also hold substantial opportunities, particularly around Cebu and Davao, those regions

should be considered secondary to the main island

5 Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Luzon accounts for around two-thirds of the

Philippines’ consumer expenditure…

…And within Luzon, three regions account for over

three-quarters of the expenditure

Consumer Expenditure by Major Island, 2015 Forecast

(% of national total)

Consumer Expenditure, 2015 Forecast

(% of Luzon’s total, by region)

3%

3%

4%

6%

7%

19%

27%

31%

CAR

MIMAROPA

Cagayan Valley

Bicol

Ilocos

Central Luzon

CALABARZON

NCR

5,000

10,000

15,000

20,000

0 5,000 10,000 15,000

Avera

ge A

nnual E

xpenditure

per

Household

, 2015 (

US

$)

Total Provincial Expenditure, 2015 (US$ mn)

Companies need not cover the entire archipelago to tap into Filipino consumption

FSG View: Companies aiming to capitalize on Filipino consumption should focus on Luzon first and then target specific

provinces in the Visayas and Mindanao

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* Excludes Davao Occidental, Dinagat Islands, Romblon, and Tawi-tawi due to lack of data

Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Most of the Philippines’ largest consumer markets are located on Luzon

50,000

NCR

Cavite

Cebu

Bulacan

Rizal

First-tier

Consumption

Centers

Second-tier

Consumption

Centers

Islands

Luzon

Visayas

Mindanao

Laguna Pampanga

Pangasinan

Batangas

Davao Del Sur

Iloilo

Batanes

Benguet

Bataan

National

Capital

NCR and Surrounding Areas

The NCR and the provinces surrounding it present

companies with the largest consumption base in

the Philippines

These provinces have some of the highest total

expenditure levels in the country and also exhibit

high levels of spending on a per household basis

Outside this core, Bataan may also be worth

exploring; it does not have as many households

but is still quite wealthy

11,526

15,656

17,457

17,675

18,217

National Ave

Bataan

Rizal

Cavite

NCR

The national capital and the surrounding areas boast the largest consumer bases

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FSG View: Companies should tap into the consumer base in and

around the NCR before expanding to other parts of the country

Expenditure per Household, 2015 (US$)

Provinces with the highest-spending households

Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Gross Provincial Expenditure, 2015

(US$ Millions)

> 5,500

2,500–5,500

1,250–2,500

0–1,250

NCR

Cavite

Rizal

Bataan Laguna

Bulacan

Pampanga

Batangas

Outer Luzon

Northern Luzon hosts a number of wealthy

provinces; however, they are generally less

populous than those found around the NCR

Pangasinan is an exception to this rule; large

numbers of households drive expenditure two

times as high as other provinces in outer Luzon

Southern Luzon is generally less wealthy, though

places like Camarines Sur and Albay still hold

promise on account of high household levels

11,354

11,526

12,498

16,792

18,564

Ilocos Norte

National Ave

NuevaVizcaya

Benguet

Batanes

The rest of Luzon offers opportunities that can be tapped from the capital region

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FSG View: Companies with a presence in the capital should use their

operations there as a base from which to explore targeted opportunities in

northern and southern Luzon

Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Gross Provincial Expenditure, 2015

(US$ Millions)

> 5,500

2,500–5,500

1,250–2,500

0–1,250

Pangasinan

Batanes (small

islands north

of Luzon) Benguet

Nueva Viscaya

Ilocos Norte

Camarines Sur

Albay

Expenditure per Household, 2015 (US$)

Provinces with the highest-spending households

Visayas

Cebu is home to the Philippines’ “second city;” its

gross provincial expenditure levels are more than

twice that of any other province in the Visayas

Companies should be able to use Cebu as a base

from which to serve the rest of the Visayas, as it is

a major shipping hub in the Philippines

Once established there, they can effectively serve

provinces such as Iloilo and Leyte, which offer

relatively large consumer bases

10,112

10,787

11,526

11,814

13,404

Capiz

Iloilo

National Ave

Cebu

Biliran

Consumption in the Visayas is focused in Cebu and the surrounding provinces

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FSG View: Companies aiming to tap into the Visayas’

consumer base should establish themselves in Cebu

and then explore the surrounding areas

Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Gross Provincial

Expenditure, 2015

(US$ Millions)

> 5,500

2,500–5,500

1,250–2,500

0–1,250

Iloilo

Capiz

Biliran

Cebu

Leyte

Expenditure per Household, 2015 (US$)

Provinces with the highest-spending households

Mindanao

Mindanao’s economy is focused largely on

agriculture and suffers from an infrastructure

deficit. Household expenditure levels in all

provinces are well below the national average

The one exception to this rule is Davao Del Sur,

which has the Philippines’ 4th most populous city

Companies operating in Mindanao should monitor

the political situation closely; in the past, the region

has suffered from violent separatist movements

10,214

10,317

10,475

10,968

11,526

Davao Del Sur

Camiguin

South Cotabato

Misamis Oriental

National Ave

Mindanao is less wealthy on average than the rest of the country

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FSG View: Companies should take a targeted approach

in Mindanao, as it is a relatively poor island with

significant political and infrastructural challenges

* Davao del Sur includes Davao Occidental; there was not enough data available to conduct forecasts for the latter as a separate entity

Source: Frontier Strategy Group, BMI, EIU, Philippines National Statistical Coordination Board, Philippines National Statistics Office

Gross Provincial

Expenditure, 2015

(US$ Millions)

> 5,500

2,500–5,500

1,250–2,500

0–1,250

Davao

Del Sur

Misamis

Oriental

South

Cotabato

Camiguin Expenditure per Household, 2015 (US$)

Provinces with the highest-spending households

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