What's Powering Philippine GDP Growth? Construction is at a 20 Year High

Construction, both Public and Private, is definitely firing on all cylinders. For the entire 2018, Construction Gross Value as a Percentage of GDP reached 13.47% - the highest it's ever been since 1990, some 28 years ago.

Cumulative Construction Overhang, which measures how far Construction GV is above its historical trend, is now at 6.52% of GDP, more than what it was from 1990 to 2000, the previous boom years.

Private Construction as a Percentage of GDP is at an acute high - 9.62%. The cumulative overhang is even more acute - 5.31% in 2018.

Public Construction is only beginning to break out of its doldrums. Public Construction GV reached 3.85% of GDP, just slightly above the previous high of 3.81% in 1998 - in the height of the Asian Financial Crisis.

As a result, the Cumulative Overhang in Public Construction is much much more muted, only 0.55% of GDP, still way below the ratio from 1998 to 2002.

Public Construction, namely infrastructure, has room to grow. Public infrastructure begets private infrastructure,  and power Private Construction to new highs.

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine Public Construction as a % of GDP is at a 20 Year High! - As of September 30, 2018

Philippine Public Construction is way above its historical trend of 3.40% of GDP. As of the third quarter of 2018, Philippine Public Construction Gross Value as a percentage of GDP hit 4.15%. This is the highest ratio since 1998.

This boost in public construction, particularly in infrastructure, has led to the first cumulative overhang since 2003. 

As long as infrastructure spending is not done in white elephants, such as China's famous bridges to nowhere, this bodes well for the Philippine economy because the fiscal multiplier from such projects is very significant and will increase efficiencies in the entire Philippine economy.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 2nd Qtr 2018

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.59% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 2nd Qtr of 2018, Construction GV as a percentage of GDP now stands higher at 13.58% of GDP - up from an all-time high of 12.61% posted in 2016. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 6.8% above equilibrium.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Private construction as a percentage of GDP seems to have leveled off from its all time high. As of 2018 Q2, this ratio now stands at 8.97% of GDP, down from a high of 9.23% of GDP as of 2016.

The overhang in private construction continues to climb. It's now 5.16% of GDP as of the 1st Half of 2018.

So what's driving the overall upward momentum? Two words: Public Construction. Public construction gross value jumped substantially in the 1st half of 2018. It's now 4.61% of GDP, way above any level it has seen in the last 20 years.

Based on the graph of the cumulative overhang in public construction gross value, the Philippines seems to have been substantially underinvesting in public infrastructure from 2010 to 2017. The overhang now stands at 0.90% of GDP - levels not seen since the 1990's.

This bodes well for the country because a massive uptick in public construction usually involves public infrastructure, whose multiplier effect is substantially more than private construction. For example, a bridge or road benefits the general population, while a residential building or mall usually just benefits tenants and consumers within the locality.

Moreover, as private construction ticks down, public construction is poised to pick up the slack and maintain the GDP growth of the country.

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 1st Qtr 2018

Construction Gross Value as a Percentage of GDP Is Near All Time Highs! - Updated as of 1st Qtr 2018

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.59% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

 As of the 1st Qtr of 2018, Construction GV as a percentage of GDP now stands higher at 12.08% of GDP - down from an all-time high of 12.61% posted in 2016. But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 6.0% above equilibrium.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

 

Construction Gross Value as a Percentage of GDP Is at an All Time High! - Updated as of 2nd Qtr. 2017 

Have Philippine Real Estate and Construction Loans Reached a Permanently High Plateau? - As of September 2017

Have Philippine Real Estate and Construction Loans reached a permanently high plateau? Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011.  That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. This ratio has climbed back up to 19.40% as of September 2017.

Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know.  BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging. However, we do know that investment in construction as percentage of GDP is at an all time high of 13.01% as of September 2017, surpassing the previous all time high of 12.10% of GDP in 1990.

This has led to a substantial cumulative overhang in the construction sector. Investment in the construction sector has been way higher than normal, leading to a possible investment hangover sometime down the road.

Has the Philippine Real Estate Bubble Already Burst?

Is there a Real Estate Bubble in the Philippines?

Are Philippine Real Estate Loans Out of Whack?

Have Philippine Real Estate and Construction Loans Reached a Permanently High Plateau? - As of June 2017

Have Philippine Real Estate and Construction Loans reached a permanently high plateau? Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011.  That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. In 2016, this ratio has climbed back up to 19.65% as of June 2017.

Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know.  BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging as evidenced in this chart:

Has the Philippine Real Estate Bubble Already Burst?

Is There a Real Estate Bubble in the Philippines?


Are Philippine Real Estate Loans Out of Whack?

Construction Gross Value as a Percentage of GDP Is at an All Time High! - Updated as of 2nd Qtr. 2017

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 2nd Qtr of 2017, Construction GV as a percentage of GDP now stands higher at 14.31% of GDP - an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 7.2% above equilibrium, a rise of 7.1% in just eighteen months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Construction Gross Value as a Percentage of GDP Is Near a 25 Year High! - Updated as of 1st Qtr. 2017

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 1st Qtr of 2017, Construction GV as a percentage of GDP now stands higher at 12.01% of GDP -near the all-time high of 12.22% (posted in the 4th Qtr 2016) for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 4.9% above equilibrium, a rise of 4.9% in just fifteen months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Where are the Imbalances in Philippine Construction?

In our last post, Construction Gross Value as a Percentage of GDP Is at a 25 Year High! - Updated as of 4th Qtr. 2016, we came up with a chart showing this:




As of year-end 2016, this ratio stood at 12.22%, a 25-year high since 1990 and significantly higher than the average construction gross value ratio of 9.65% of GDP throughout this period. Now where are the imbalances taking place?

You'd be surprised by the results. No, not in Metro Manila or anywhere near there. As of the latest available data in 2015, Western Visayas tops the list at 23.86%, almost double the national average of 11.55%. So does Bicol, of all places. Why is that? We don't know. But we aim to find out soon enough.

Source: Philippine Statistics Authority

Construction Gross Value as a Percentage of GDP Is at a 25 Year High! - Updated as of 4th Qtr. 2016

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 4th Qtr of 2016, Construction GV as a percentage of GDP now stands higher at 12.22% of GDP - an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 2.9% above equilibrium, a rise of 2.6% in just one year.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Philippine Real Estate and Construction Loans Are Out of Whack As of September 2016!

It sure looks that way, judging from this chart:

It looks like Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011.  That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. In 2016, this ratio has climbed back up to 20.04% as of September 2016.



Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know.  BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging as evidenced in this chart:

Has the Philippine Real Estate Bubble Already Burst?

Is There a Real Estate Bubble in the Philippines?


Are Philippine Real Estate Loans Out of Whack?

Construction Gross Value as a Percentage of GDP Is at a 25 Year High! - Updated as of 3rd Qtr. 2016

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

.As of the 3rd Qtr of 2016, Construction GV as a percentage of GDP now stands higher at 12.54% of GDP - an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 2.9% above equilibrium, a rise of 2.9% in just nine months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Another Look at Construction Gross Value as a % of GDP as of the 1st Half of 2016

Last September 16, 2016, we noted that Construction Gross Value (Construction GV) at 12.48% as of the first half of 2016 was at a 25 year high, eclipsing its peak value of 12.10% as of 1990.  The ratio was well above its historical average of 9.65% of GDP since 1990. As a result, there has been a sizable "overhang" of investment since 2009.

But the historical average of 9.65% is static.  It does not change with the business cycle.  But how would this trend look if it were more dynamic? If it moved in tandem with the business cycle?  How would this overhang look.

One way to build a long-term macroeconomic trend line would be to use the Hodrick-Prescott Filter that "would remove the cyclical component of a time series from raw data." The historical trend line, then, would be more dynamic and move with the business cycle. So, how would the above graph look with a more dynamic trend line? Would it still reveal a massive overhang or underhang?

The answer is: no. Because the trendline changes with the business cycle, the overhang is less pronounced.  Nevertheless, an overhang still exists.

Moreover, massive investment in construction that began since 2009 has eaten away at the cumulative underhang that existed since the mid 2000's but has only gone past equilibrium in 2016.  As of the first half of 2016, there is a cumulative overhang in construction of only 0.39%.

So, which is it? Has there been a massive overinvestment in construction? Only time will tell.

Construction Gross Value as a Percentage of GDP Is Near a 25 Year High! - Updated as of 2nd Qtr. 2016

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.65% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 2nd Qtr of 2016, Construction GV as a percentage of GDP now stands higher at 12.48% of GDP - an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 3.3% above equilibrium, a rise of 3.1% in just six months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Construction Gross Value as a Percentage of GDP Is Near a 25 Year High! - Updated as of 1st Qtr. 2016

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.59% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 1st Qtr of 2016, Construction GV as a percentage of GDP now stands higher at 11.27% of GDP - near an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 2.5% above equilibrium, a rise of 1.6% in just a little over one year.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Philippine Real Estate and Construction Loans Are Out of Whack As of December 2015!

It sure looks that way, judging from this chart:

It looks like Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011.  That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. In 2015, this ratio has climbed back up to 19.59% as of December 2015.


Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know.  BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging as evidenced in this chart.

Philippine Real Estate and Construction Loans Are Even More Out of Whack As of September 2015!


Has the Philippine Real Estate Bubble Already Burst?

Is There a Real Estate Bubble in the Philippines?

Are Philippine Real Estate Loans Out of Whack?

Construction Gross Value as a Percentage of GDP Has Is at a 25 Year High! - Updated as of 4th Qtr. 2015

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.59% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 4th Qtr of 2015, Construction GV as a percentage of GDP now stands higher at 11.89% of GDP - near an all-time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 3.8% above equilibrium, a rise of 2.4% in just one year.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Philippine Real Estate and Construction Loans Are Even More Out of Whack As of September 2015!

It sure looks that way, judging from this chart:

It looks like Real Estate and Construction Loans as a percentage of Total Loan Portfolio (TLP) rocketed past its historical range of 12.6% to 16.6% of TLP sometime in 2011.  That ratio peaked at 20.55% as of September 2013 but has bottomed out at 18.61% of TLP as of December 2014. In the last nine months of the year, this ratio has climbed back up to 19.96% as of September 2015.

Now, are we up to the levels of the previous real estate boom? (as in mid 1990s to 1997?) Honestly, we don't know.  BSP data only goes as far back as 1999 when the previous real estate bubble had already burst and the financial system was most likely deleveraging as evidenced in this chart.

Construction Gross Value as a Percentage of GDP Has Is at a 25 Year High! - Updated as of 3rd Qtr. 2015

Has the Philippine Real Estate Bubble Already Burst?

Is There a Real Estate Bubble in the Philippines?

Are Philippine Real Estate Loans Out of Whack?

Construction Gross Value as a Percentage of GDP Has Is at a 25 Year High! - Updated as of 3rd Qtr. 2015

Last May 4, 2015, we noted that Construction Gross Value (Construction GV) at 11.21% as of the year-end 2014 was already well above its historical average of 9.48% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of the 3rd Qtr of 2015, Construction GV as a percentage of GDP now stands higher at 12.06% of GDP - an all time high for the past 25 years.  But the real story is that Cumulative Construction GV has gone well above equilibrium and now stands at 4.2% above equilibrium, a rise of 3.0% in just nine months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.

Construction Gross Value Added as a Percentage of GDP Has Now Surpassed Its Asian Financial Crisis Peak!

Last September 29, 2014, we noted that Construction Gross Value Added (Construction GVA) at 11.20% as of the 1st Semester of 2014 was already well above its historical average of 9.48% of GDP since 1990.  This ratio has run at an above average rate since 2009 and has already eaten away at the "cumulative underhang" or underinvestment in construction that has taken place since 2004, when the excessive investment in construction that took place in the mid to late 1990's was being absorbed.

As of year-end 2014, Construction GVA as a percentage of GDP now stands slightly higher at 11.21% of GDP.  But the real story is that Cumulative Construction GVA has gone well above equilibrium and now stands at 1.2% above equilibrium, a rise of 0.8% in just nine months.  Given all the planned new projects that are already at the execution stage, the momentum in Construction Investment will continue.