Philippine Markets Newsletter

MONDAY MACRO: Corporate capex spending will likely be a strong tailwind to economic growth… in the mid- to long-term

July 25, 2022

Business investment spending is an important contributor to the Philippines’ total economic growth. With that, are there strong enough tailwinds in this area to offset current macro headwinds that are likely to slow down the country’s growth?

We turn to two indicators to determine whether optimism would be warranted in this case.

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The Monday Macro Report
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Considerable macroeconomic headwinds continue to pressure the Philippines’ economic growth.

As mentioned last week, the Ukraine-Russia conflict, China’s economic slowdown, the U.S.’ monetary policy tightening, rising inflation, and recurring supply chain hiccups all spell potentially slower growth than expected.

The question now is: are there any areas of growth that are bright spots? Today, we look at business investment spending, a component of GDP, to see whether that could be an answer.

The first thing we have to determine is where Philippine corporations are in the capex cycle—this tells us if businesses are due to replace older assets with new ones. And to do that, we have to understand the state of their Property, Plant, and Equipment (PP&E)

PP&E are the fixed assets that a company uses to run its daily operations. This includes buildings, factories, machinery, vehicles, and other equipment.

Over time, these assets depreciate—they lose more of their value the longer and more frequently they are used, until such time they become completely depreciated. Once these assets reach a low value point or have been obsolete, they are disposed of and replaced with a new one.

To quantify how much of the Philippine corporates’ assets are depreciated, and thus determine where they are in the capex cycle, we use the Net/Gross PP&E ratio as a proxy. The gross PP&E is the original cost of the machinery and buildings when it was new. Meanwhile, the net PP&E is what those assets are worth today.

If the Net/Gross PP&E ratio is trending down, this means that assets are growing older and more depreciated, and are likely to be replaced—this increases business investment spending. If the ratio is trending up, this means that businesses have begun investing in new assets.

In the decade between 2007 and 2017, businesses have ramped up their fixed asset investments, with the Net/Gross PP&E ratio rising from 52%-54% levels to 60%. Since then, businesses have steadily spent less on capex.

Looking at this alone, it tells us that corporate assets are growing older and businesses might start thinking about revitalizing their capex spending over the next few years.

To that point, we can also look at the total capacity utilization rate to see if this could be a possible motivation source for businesses to boost their fixed asset investments.

The capacity utilization rate compares a company’s current production relative to how much it can potentially produce without causing additional unit costs. At higher rates, the company would have to invest in additional fixed assets to increase production while remaining cost-efficient.

Capacity utilization rates have yet to reach pre-pandemic levels of about 80%-85%. However, it is steadily rising. Once demand comes back in full swing, and stays at elevated levels, capacity utilization will likely return to previous highs.

Overall, steadily depreciating assets and low, but rising capacity utilization rates signal that businesses are somewhere in the lows of the capex cycle.

This means that, while there may be some capex investment in the short-term, we are likely to see a more significant impact of business investment spending on total economic output in the mid- to long-term.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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