Zobel: Philippines' Growth Will Remain Stable

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David Ingles sits down for an in-depth discussion with the CEO and Chairman of the Philippines' oldest conglomerate, Ayala Corp. Jaime Augusto Zobel de Ayala talks about where future growth lies for the company and for the Philippines, and shares his thoughts on the leadership of President Benigno Aquino.

Var nreumq=nreumq||[];nreumq.push(["mark","firstbyte",new date().gettime()]); ? hello and welcome to "asia's business." i am david ingles.

If you have invested your money in the philippines stock market over the past two and a half years, you probably make yourself a lot of money.

A lot of that has to do with all the optimism surrounding the country's economic prospects, so today, we will be talking to one of the country's most well- known businessmen, mr.

Jamie augusto zobel de ayala, to really get a firsthand look and firsthand opinion of what is really going on on the ground.

Zobel heads the oldest and largest conglomerate in the philippines, ayala corporation.

Founded in 1834, the company has interests in banking, telecom, business process outsourcing, and property, among others, both inside and outside the country.

I asked zobel what he thinks is the primary reason people are so bullish on the philippines.

Right now, our economic equation as a country is mainly driven by consumption demand.

I would say consumption-led growth is about 70% of the gdp equation in the country.

I think that will stay stable.

Let's start with that.

We have 10 million filipinos working abroad.

I think they have entered a service space that is needed, and that is why the numbers, from the remittance point of view, have never decreased.

I think the consumption-led component is there to stay.

However, our foreign direct investment, which is a very small component of our economic equation -- in fact, we ran a calculation that our foreign direct investment is less than one month's worth of remittances to the country.

That is how small it is.

Or that is how big remittances are.

That is how big remittances are, but we are also small.

Because if we compare ourselves to vietnam, malaysia, and indonesia, we are about -- in the last three quarters of 2012, we had only about half the foreign direct investment that they had in the first quarter of their year.

In relative terms, we are low.

The reason i mention that is if we could just get that to move up a notch, i think our fairly robust economic growth numbers of, say, between 5% and 7%, have the chance to move up another percentage or two.

The fact that we are moving as a country towards investment grade -- we are just one notch below -- will probably open up the door to a whole range of new investors that would traditionally not have looked at our country.

If we are growing at 6% to 7% based on robust consumption growth that i think has legs, and we have almost nothing on foreign direct investment, it will just take a little bit of foreign direct investment to start coming into the country for that equation to then become more robust.

You alluded to the fact that obviously financial markets have given a lot of attention to the country.

One reason being is the likelihood of attaining investment grade.

You look at the country's finances.

You look at what has been happening structurally.

Does the country deserve investment grade at this point?

I think so, definitely.

If you ask me, the market has already taken that into account in the way bonds are priced, and the kind of attention that all the securities issued by both the country itself and the corporate sector are being priced already seems to take into account the fact that people are beginning to assume we will hit investment grade.

On many fronts -- i think on the fiscal and monetary side the government has done a great job -- both the central bank authorities and the finance secretary have done a great job.

We have interest rates at an all-time low.

We have borrowing rates between 3% and 5%. we've got inflation at negligible numbers.

I think we hit 2% in december of 2012. chances are if you take the whole year of 2012, inflation will be between 3% and 4%. that is driving, i guess, the ability of people to take out mortgages for housing.

That has driven the housing sector to grow.

Businesses have been able to borrow and expand and take risks in a way that they have not been able to take in the past at much higher interest rates.

The whole corporate sector in the philippines is alive and beginning to bid for some private-public partnership opportunities that the government is giving up.

The capacity of the business sector to put their balance sheet to work is at a whole different level.

One of the key challenges you pointed out -- this lack of infrastructure perhaps dwelling into energy, for example -- are you confident that all of this will be put in place in the right manner that will not lead to a rising debt pile for the government?

No, i think so.

I think what is happening is the debt pile will not be at the government level because the government is wisely allowing the private sector to take it on.

The debt will be at the private sector level.

I think the private sector's capacity to finance itself is at a much higher level than ever.

Has been, and as i mentioned earlier, our interest rates are at all-time lows.

For example, in the energy sector, our energy rates are still among the highest in asia.

I think it is important to bring that down.

We believe in the ayala group, there's still about 4,000 megahertz of capacity that is still lacking.

We are investing in that space in a significant way.

That is a key enabler, i guess, of industry in the future.

The government is also allowing some renewables to take place.

The ability for, i think, energy to be distributed more efficiently at better price points i think will only help the needs of the country at this time.

Ok, let's go back to the administration of president benigno aquino.

Obviously, a lot of applause has really been directed that way, but the reality is all these changes come 2016 when you do have a new leader coming into place.

Are you at all worried about what is beyond that point?

It is always a concern but not a high-level concern in my mind.

The reasons are i think when you see the kind of reforms that the president has made, you know, we have moved up, you know, in the metrics of, say, the world economic forum's competitive mix in significant ways.

That has led not only to increased interest in the country and a better competitive environment, it has also led to the president remaining very popular.

His popularity rating remains at the 75% to 80% level in independent polls.

Levels we have not seen in a very long time those levels.

Certainly not after two years in office.

If any future leader looks at that and says here is a situation that works -- he is progressive, he has strengthened the rule of law, his governance structures are serious, and he remains popular -- how can any future candidate not use that also as a mantra for their own success?

I think when people see things that work and see that good governance works, leads to our stock market increasing by 35%, our currency remaining strong, foreign investment coming in, people beginning to invest, low interest rates, low inflation -- when they see good governance leading to that, i think it is a model they will want to emulate.

I think the chances are high that any future leader will continue this path of progress because it has led to success.

Right now, is it possible to do business and run a successful one with the scale that ayala has without dwelling into corruption?


I do believe you can carve out your own spaces in the philippines.

While i will not deny that corruption exists in the country, i believe it has been falling in a significant way with every passing year.

If you also look at the equation of any country, as you see a curve of development and per-capita income increasing, corruption also generally comes down.

As a country progresses, as it gets more educated, as per capita income goes up, if you look at any example in the world, the corruption index also comes down.

As we move up this chain, people will hold public officials more accountable.

We also have an overseas community that keep coming back that have a whole different set of standards.

I believe that corruption will take steps to decline over time as the country progresses.

It is a natural continuity that takes place.

Certainly a group like ours has survived without it, as have many others.

Of course you can survive.

It is, i think, a matter of building a good reputation for yourself, doing things right, building a cadre of executives that can compete, i guess, on a global basis in an open market, and if you build that kind of culture, you can succeed in any environment.

If you were to choose just one, what with the single biggest risk be?

Is it corruption?

I do not think so, not all.

I think all of those issues will disappear with time.

I think the biggest issues are the kinds of black swans you see in the world today -- issues of the environment.

People do not pay attention to those things, but we are in the ring of fire in the philippines.

Our climate has begun to change.

There has been more flooding.

Our typhoons are changing paths.

The last one came through mindanao and affected a lot of the agricultural areas in mindanao.

That was completely unexpected.

So i think issues of climate change, of calamities we have to take seriously.

We have to prepare ourselves as a country to be able to withstand them.

I think we are not doing a bad job, but we can do it better.

I think those are the ones that concern me more.

Issues of climate change are fundamentally changing the way our country is affected.

Flooding, in particular, i think has been a little too prevalent the last decade.

2012 was a very good year for a lot of your business lines.

We have certainly seen that in how stocks have been driven up.

What can we look forward to in 2013? can you replicate what we have seen in 2012? we certainly hope so.

That is the easy answer.

The major driver, i guess, of the business is doing well, not only for ourselves but for other corporate groups in the philippines, is the fact that the economy is running well.

Consumption demand is strong in our country.

It is a major driver of our gdp growth, up to 70% of it.

These are the same people that are moving to buy houses, buy cell phone minutes, open bank accounts, and essentially drive many of our different business groups.

It is a matter of really staying competitive, having an edge, having products and services that people want, being innovative, but really, we have tailwinds in a way that are driving the economy, and that is helping all our businesses.

Add to that, the low interest- rate environment, which, for example in real estate, allowed people to start borrowing over longer and longer tenors to buy housing and move into the housing market.

I think the economy has legs, certainly, in 2013, and certainly, we hope to grow what we grew last year.

One of the business lines of ayala is ayala land, your property arm.

Are we at all near levels which would make you think we are nearing a property bubble?

Are you seeing any of that on the ground?

Any indication?

I do not think we have a bubble.

I think there is a backlog.

If you measure it as well from the lending, from the banking side, lending has only been growing at 15% to 20% on the banking side to the real estate sector.

That is far behind what it was back in 1996, 1997 where lending was growing at 50%, and 90% of that going to the real estate sector.

We are nowhere near those levels.

Is there a business you would not get into?

Obviously, apart from the obvious ones.

Gaming, tobacco, mining?

These have all been successful businesses.

It is all about resource allocation.

There's a lot that one can do.

We try as much as we can to align ourselves to businesses that have a nation-building capability.

We are keen on infrastructure.

We are keen on participating in the infrastructure needs of the country.

That is how we threw our hat in the ring in the telecommunications space that fundamentally, i like to think, transformed the way telecommunications services took place in our country.

When the water system was privatized in the city of manila, we felt we could do a great deal of good and make a profit by reformatting, recleaning, reinvesting in that space, and i think we have succeeded.

We are throwing our hat in the ring now in the energy and transportation space.

Those are where we like to give priorities to.

It is not to say that the others will not be successful.

It is just that, i think, from a group perspective, we have felt most comfortable aligning ourselves to these other opportunities.

Let's talk about the peso now, the strong peso.

Because obviously, a lot of this money coming from overseas filipino workers -- all 10 million of them -- that sort of has a -- dilutes the value of what they remit into the country.

I guess my question would be -- is a strong peso necessarily good for the ayala group?

I think a strong peso has pluses and minuses.

The ayala gets affected on both sides of the equation.

On the positive, i think the low interest-rate environment has helped our capacity, the balance sheets of the group companies, to be able to extend ourselves in a way we could not in a high-interest rate environment.

We have also been able to raise a whole range of different types of securities from equity to bonds that we were not able to in the past at very reasonable rates.

That is, i think, a big positive.

As you say, the purchasing power of an overseas worker sending remittances back loses value with a strong currency, and our export industries as well lose value.

Net/net, i think the fact that the country has built a whole new level of credibility with a strong currency at interest rates that are low with an inflation rate that is low has been beneficial to the whole ayala group.

Let's talk about growth now.


Are you looking at acquisitions?

Are you looking solely in the philippines?

Are you looking outside -- china?

Certainly, we try to build up management teams that create the possibility of robust organic growth, so the balance sheets are strong.

The management teams are strong.

I like to think that there's a renewed vitality in the innovativeness with which we put products and services to the market that is alive.

So that leads to organic growth by its very nature and a buildup of market share in all kind of industries.

However, we have always believed in the possibility of mergers and acquisitions as a way of expanding.

In real estate, it means acquiring new land or partnering with others.

In the financial sector, the bank of the philippine islands is where it is today through five or six different mergers over the last two decades, so we are open to that as well.

We are not averse to that, and the fact that our share prices are strong gives us the wherewithal to use our shares as well as currency in this possibility, so definitely, we are not closed to any of these opportunities.

But i think it is also an exciting time in the southeast asian region, and the skill sets we have begun to build in our group companies, i think, are best practice in many ways for emerging markets.

We have been able to take, for example, the skills we have built in our manila water group and parlay it into a major concession win in ho chi minh city, for example, in vietnam, where we are a significant player in the distribution of water in that city at this point in time.

We then won another concession in indonesia that we believe will also fundamentally change the water distribution and supply into jakarta.

We would not have been able to do that if we had not built strong best practice models in the philippines.

The same goes for the skill sets we built on the mobile telephone side, which are being used by the singtel group in many of their other operations.

I think the market is an exciting one.

We have begun to move into this space in vietnam and indonesia in particular as first steps, and we do not see why that has to stop with just those two countries.


We do have actually six manufacturing plants in china.

We have an electronics business called imi in our group.

Part of our operations are in the philippines.

Part are in singapore, but we have a big presence in china, so i guess we have a manufacturing arm there, and we are a major supplier to the telecommunication industry in china.

The products there are not firmly export generally, though we have some for export.

We do have a presence from a manufacturing point of view there, and we also have, i guess, a real-estate fund through a company called arch capital that is invested as well in real estate in china.

I'm sure you watch all these developments that are happening outside the philippines.

What worries you most?

Is it europe and its challenges to keep itself together?

Is it u.s. and its debt?

Is it these territorial disputes happening this side of the world?

One should never be complacent.

I think the u.s. in particular is a major driver of the global economy across a whole range of different sectors.

We are linked up to it in many different ways as are many others, so it is our fervent hope the u.s. economy moves back, has a chance to reinvent itself and become relevant again and clean up, i guess, their financial credibility across a whole range of different markets.

Europe, i think, is going to have a longer time in readjusting itself, but from a philippine perspective, it has been less of a worry.

There's very little exposure in our banking sector, for example, to the global markets, so to a certain extent, we are a little bit immune to all of this.

It is not something that keeps me up at night, but obviously, a robust global economy is a great help to everyone.

We are so interlinked these days.

Our economies trade with each other.

It is in our common interest that all these economies -- i am sure no one is going to complain.

You have been through both of these major crises.

You have been through the asian financial crisis in 1997. obviously, the global financial crisis in 2008. which one was worse?

Well, i think people forget that the asian crisis was quite bad back in 1997. it just did not affect the rest of the world, but it certainly affected all of us in asia.

It was a bit of a domino effect with devaluations beginning to take place across currencies, and credit beginning to dry up, and capital beginning to dry up.

It was not a pleasant period of time.

It took us maybe a good seven years to come out of that.

I think people forget that.

However, on the positive side, i think from that asian crisis in the late 1990's, all our banking institutions across the group in southeast asia were strengthened.

All our central banks put whole new levels of capital controls and capital strengthening measures that i think fundamentally changed the strength of the banking industry, and i think that has allowed us to withstand a lot of the issues that have faced the world in 2008. tell us about your philosophy in terms of corporate social responsibility.

The ayala group has been around over 150 years.

You have managed to keep it fairly relevant as far as the philippines is concerned.

Talk us through some of these efforts that you are -- first and foremost, one must understand we have been around for 178 years now, and i think part of our survival has been on account of the fact that we have had a chance to reinvent ourselves with every passing year.

The businesses we were in at the beginning of our history are not necessarily the businesses we are in today.

Our ability, i guess, as an investment holding company to move out of certain industries and move into new ones on a regular basis based on the changing patterns of consumption or industry trends has allowed us to remain relevant to the economic times of any particular period of economic history.

I'm sure giving back is one of your priorities.

Can you talk to us about your corporate social responsibility -- csr -- efforts?

I think csr has evolved in our group over time.

We used to see it as kind of an independent, distinct entity where we could contribute to the social development needs of the country by engaging in projects that helped the social and economic development agenda of the country, but increasingly, we are merging it into our business models.

One area is the fact that the ayala group as a whole and all our businesses are really trying to touch different price points and different customers at a whole different earnings level to what we did in the past.

That is our way of, number one, continuing to be relevant to the broader base of our population but at the same time, by giving that community access to products and services that were traditionally only in the hands of people at a different income level, i like to think we are also empowering them to participate in the economy.

There are so many examples of that.

By giving and extending, i guess, the strength of our brand in ayala land to housing units at the $10,000 level at the lowest possible level, it is really enabling people to buy an ayala product and live in an ayala community that they could not in the past with all the pluses that come with it.

On the banking side, by forming a joint venture between our telecommunications unit and the banking unit and a fully licensed new banking entity and being able to give micro credit at costs far below what the traditional commercial bank was able to do and empower people to have a savings account in an institution that once upon a time they had no access to, you know, will encourage savings and encourage investments at a level that never existed.

For us to participate in that is to empower a whole host of communities that traditionally we had no links to.

That is the way we see corporate social responsibility now.

Aligning our business goals to the social and economic development goals of the country and empowering a whole range of customers while at the same time making a return on that investment.


ayala, thank you for your time.

It's been a pleasure.

Thanks so much.

Thank you.

That was "asia's business." thanks for watching.

I am david ingles here in hong kong.

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