Monday, January 28, 2013

Shopping Mall Bubble: Will Manufacturing, Agriculture, Tourism and Infrastructure Cover the Supply-Demand Gap?

My concerns about the risks of a brewing shopping bubble has been fundamentally premised from basic economics: if supply grows more than demand then there will be an oversupply. The economic analogy can be applied to health, if a person smokes four packs a day, then that person has a high risk of contracting lung disease (emphysema or lung cancer). 

Notice that this is an “if, then” proposition. Since everyone’s actions have a consequence, then the risks of a shopping mall bubble is about prospective consequences from today’s economic actions.

So far, I have pointed out that from the supply side[1], at least 10% growth rate seem to function as the baseline rate by major mall developers-operators which I used as benchmark.

On the demand side, the average of 6% annualized growth rate in consumption as indicated by the NSCB suggest that there exist an imbalance which is likely to grow IF the current trends persist. This will also become a problem that could plague the industry and the economy overtime.

I have also pointed out that remittances and the informal economy will most likely be inadequate to fill in such deficiency, while BPO with current high optimistic projections may fall below expectations, or if does meet expectations, will be unable to provide marginal growth to cover the shortfalls of the other industries[2]. 

In a free market, current imbalances will likely correct itself. Unfortunately, the impact of a policy induced or extended artificially low interest rate environment has been to compound on such imbalances by distorting the mall developer’s economic calculation through the overestimation of demand and from the impetus to engage in competition to increase supply relative to other developers.

Also mall developers in sensing that low interest rates will continue to prevail, as well as, aggravated by the mistaken embrace of mainstream or the populist ideology of the sustainability of a consumption economy, have taken the path of expanding supply via credit lubrication that amplifies the supply side growth trend.

And the credit driven growth by the overall property sector, where shopping malls is a subset of, magnifies not only credit risks of these sectors, but includes the banking sector.

Again if today’s trend continues or even accelerates, then altogether this poses as systemic risks to a future property-banking crisis.

As Chair and Professor of Business and Economics at St. Louis University Madrid, David Howden writes[3],
The misallocation of resources along the temporal structure of production is a significant result of an Austrian business cycle. In the Austrian view, interest rates serve the important role of coordinating intertemporal consumption and production activities. By artificially lowering interest rates below their natural level, central banks skew the productive undertakings of firms, and facilitate the discoordination of the capital structure. Overinvestment in specific areas of the economy implies relative underinvestment in others. The bust requires these misallocations of capital to be reallocated to a more sustainable allocative mix.
I will continue to demonstrate why the boom will likely turn into a bust sometime in the future under the deductive “if, then” proposition through charts
The above represents Value added manufacturing which has been defined by[4] as “industries belonging to ISIC divisions 15-37. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources.

Manufacturing remains as the largest contributor[5] to the Philippine economy at 21% share. Unfortunately manufacturing growth has been erratic and seems unclear if the sector could spearhead consumption growth. That’s unless major reforms are made to reduce the hurdle rate of investing in the industry are dismantled.

One of the three industries cited by this administration as “rapidly growing sectors”[6] is agriculture

The agency’s statistics seem to contradict the executive pronouncement.

Based on two year growth trend, the Bureau of Agricultural Statistics[7] shows that most of the growth rate of the industry’s subsectors has been below 5% in 2011 and 2012. 

Although in my opinion since the agriculture economy has mostly been informal, the government bureau may have likely underreported its true growth rate. But I have no basis yet for this.

The other sunshine industry for this administration is tourism.


Philippine tourism reportedly grew by 9% in 2012 and hit a milestone of 4.3 million visitors in 2012 according to Department of Tourism[8].

While the growth rate has been impressive, it seems that tourism requires stronger growth ahead to at least keep up with the pace of shopping malls. Remember tourism has likewise been anchored on regional if not global productivity growth, or said differently, the industry’s risk profile has been associated with economic developments abroad.

The domestic tourism industry has a direct 2% contribution and indirect 8.5% contribution to the economy according to World Travel and Tourism Council[9]

Finally, the last of sunshine industry is infrastructure.


Perhaps infrastructure may deliver, since this looks like a pet project of this administration. But this will most likely depend on how the government will facilitate this. The devil is in the details.

So far, Philippine infrastructure spending in 2009 only accounted for a measly 2% to an advocacy paper by the Joint Foreign Chambers[10]. So mobilizing investors and logistics as well as going over regulatory obstacles will pose as major hindrance to infrastructure spending and such process will likely take time.

Of course, as said above what the government needs to do is to liberalize the economy, particularly from the byzantine regulatory environment for demand growth to surprise to the upside.

However, unless we see meaningful reforms towards economic freedom then  these supposed promising growth areas are likely to be more of soundbites than reality.

There has been a suggestion for me to look at electricity consumption.

Based on a per capita electric consumption[11] since 2000 until 2009 the average growth rate for the Philippines has been 1.78%.

Additionally with the National Capital Region as the main franchise area of Meralco, the monopoly electric distributor, the publicly listed firm sees 7% growth (actually 4-5%) for 2013 according to the Inquirer[12]. In short, there hardly has been ample evidence to back up the consumption growth story from the electricity consumption perspective.

Bottom line: Unless the above statistics has been tarnished by significant errors, or that informal economy should surprise to the upside or that substantial reforms will be undertaken to promote a business friendly environment by relaxing regulations, taxes and other forms of government interventions, the above industries and electricity consumption story seem insufficient to bridge on the chasm of the asymmetric growth pace between demand and supply of shopping malls.

Final word: I don’t deny that I can be wrong, which I hope I am. But what if I am right, as I have been most of the time?

[3] David Howden A New Year's Resolution for Macroeconomists January 24, 2013

[4] Manufacturing Value Added The Manufacturing; value added (annual % growth) in Philippines was last reported at 1 in 2011, according to a World Bank report published in 2012. Annual growth rate for manufacturing value added based on constant local currency. Aggregates are based on constant 2000 U.S. dollars. Manufacturing refers to industries belonging to ISIC divisions 15-37. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3.This page includes a historical data chart, news and forecasts for Manufacturing; value added (annual % growth) in Philippines.

[5] Manufacturing remains biggest GDP contributor, November 22, 2012

[7] Bureau of Agricultural Statistics Performance of Philippine Agriculture January to December 2012

[9] World Travel and Tourism Council Travel & Tourism Economic Impact 2012 Philippines

[11] ELECTRIC POWER CONSUMPTION (KWH PER CAPITA) IN PHILIPPINES The Electric power consumption (kWh per capita) in Philippines was 593.46 in 2009, according to a World Bank report, published in 2010. Electric power consumption measures the production of power plants and combined heat and power plants less transmission, distribution, and transformation losses and own use by heat and power plants.This page includes a historical data chart, news and forecasts for Electric power consumption (kWh per capita) in Philippines.


RNFranco said...

I don't know what you're smoking. And I don't want any. NSCB data shows that from 1981 to 2011, household final consumption expenditure grew at nearly 13% (CAGR). Specifically, in 1981, HFCE in current terms was P190.77B and it grew to P7,177.05B by 2011. See the links and do the math. Maybe your 6% was in constant terms which shouldn't be used in this case.

Moreover, going by the most recent available results of SM Prime, Robinsons Land and Ayala Land, you can see how healthy revenue growth has been. To cite:

SMPH rentals (9M2012): +14% YoY
SMPH cinema (9M2012): +17% YoY
Robinsons rentals (FY2012): +12% YoY
Robinsons cinema (FY2012): +21% YoY
Ayala rentals (9M2012): +19% YoY
Jollibee system (9M2012): +12% YoY

Furthermore, did you know that the per capita retail space in Metro Manila is only 4.7 square feet? MM is tied with Jakarta for LOWEST in the region behind Bangkok's 5.3, Singapore's 7.2 and Klang Valley's (Malaysia) 7.4. True the Philippines has the lowest GDP per capita but we also have the lowest annual rental per square meter at around $300. In Jakarta it's double, in Bangkok it's around $700. Obviously, there is no bubble. The current stock of mall space is just right. All of the above are from CBRE, Colliers, UBS research.

Even more, the average occupancy rates are about 95% or higher.

Lastly, the word "bubble" as you point out, has significant potential negative impact for the overall economy. It is hard to imagine, however, how such contagion can spread from the mall owners. SMPH has a net debt to equity ratio of 0.6x (09/12), RLC has a net debt ratio of just 0.13x and ALI has a miniscule 0.09x. Therefore, even if the new projects embodied in the capex you listed previously all fail, these companies can ride out such crisis without affecting the whole economy.

benson_te said...


Thank you very much for the link and for your comments.

I heeded your advice, took out my financial calculator and did the math

Here is what I found from this NSCB link

(First Two columns)
For Gross National Income and Gross Domestic Product by Expenditure Shares
1st Qtr 2008 - 3rd Qtr 2012
(in million PhP)

From 2008-2011 (or a compounding period of four years)

The CAGR was 5.75% (current) and 2.97% (constant)

Since the 2012 data covered only 3 quarters, I excluded it.

I even went further. I went down to the second and last column

Gross Domestic Product and Gross National Product
by Type of Expenditure
1st Qtr 2000 - 4th Qtr 2010

And computed for Personal Consumption Expenditure (PCE) from 2000-2010 (or for a compounding period of 11 years

Here is what I found out

The CAGR: 9.27% (current) and 4.45% (constant)

Oh, It was nice of you to send me the spread sheet too

I also computed for the 30 year compounding period HFCE (top column) and discovered a CAGR of 3.56%

2010 data (future value) 3,945,827.36
1981 data (present value) 1,382,076.59
Annual data= summation of 4 quarters

Without even computing, you can go to the fourth column which says:

Growth Rates

Based on table where the annual growth (quarter to quarter), the normal distribution seems at 3-5% and anything above or below are fat tails.

By the way I don’t smoke.

Best regards,