EMERGING MARKETS Archives

17/06/2014by EOS Intelligence EOS Intelligence No Comments

A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

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Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.
The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.
Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.

It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

29/04/2014by EOS Intelligence EOS Intelligence No Comments

Cambodian Healthcare – In Need of Strong Government Support

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Cambodia is a low income country (GNI per capita US$880 as of 2012) with a population of about 15 million (67th most populous country as of 2012). Though the country has witnessed concentrated efforts towards better healthcare infrastructure and services since gaining independence in 1953, the major push came only in 1993 after the establishment of a dedicated Ministry of Health (MOH). The MOH has been consistently working to overcome major healthcare-related challenges, such as widespread malnutrition, high mortalities from communicable diseases, and low access to healthcare. MOH’s Health Sector Plan (HSP) (2008-2015) focuses on developing healthcare infrastructure and ensuring that healthcare services reach the entire population.

This article is part of a series focusing on universal healthcare plans across selected Southeast Asian countries. The series also includes a look into the plans in The Philippines, Cambodia, Vietnam, Indonesia, and Thailand.

Social Health Insurance (SHI) is still in early stages of implementation, and will take some years before it is firmly established. The SHI Master Plan was launched in 2003 with an aim to develop a stable financing system, and to promote equity in healthcare access. Currently, people from poorer sections of the society and informal sector are covered through Health Equity Funds (HEF) and Community-based Health Insurance (CBHI) Plans. The government plans to introduce a single health financing system by 2015.

About 2.5 million poor and more than 500,000 individuals from the informal sector are covered by HEF and CBHI plans, respectively.

When implemented fully, SHI is expected to provide healthcare protection to urban and rural poor (among others). The success of SHI would depend on the government’s ability in establishing healthcare infrastructure in places where it is currently unavailable, devising a suitable taxation/financing mechanism to support it, and in ensuring an optimum coverage of health conditions. The current design and support infrastructure would determine the long term success of SHI.

INFRASTRUCTURE

Key Stakeholders

The Ministry of Health (MOH) is responsible for health policy and planning, coordinating among various sectors within the healthcare sector, and for securing external aid
The Provincial Health Department (PHD) connects the MOH to operational districts (OD) through the implementation of policies in the HSP via the annual operations plan (AOP)
OD is the primary entry point of the population into the health system; Each OD, comprising a network of health centers and a referral hospital, covers a population between 100,000 to 200,000; health centers are geographically located so as to serve a catchment area of between 8,000 and 12,000 people

Healthcare Service Delivery

Public healthcare service delivery is designed to offer services at two levels — a) minimum package of activity, available at health centres; b) complementary package of activity (CPA), available at referral hospitals
Minimum package includes (among others) initial consultations, primary diagnosis, emergency first aid, chronic disease care, and maternal and child care
Based on the CPA offered, referral hospitals are categorised into:
- CPA1: Basic obstetric services, provided mostly by district hospitals
- CPA2: Basic obstetric services, large scale surgery, ICU facility, and other specialized services, such as ENT, dental, etc.; services are primarily provided by district hospitals and a few provincial hospitals
- CPA3: More advanced than CPA2 with a wider range of specialty services; all national hospitals and most provincial hospitals come under this category
Current hospital infrastructure:
- Health Centres: ~1,100
- CPA1: ~33
- CPA2: ~ 31
- CPA3: ~ 26
- Private Clinics: ~ 1,500

KEY CHALLENGES

Lower Adoption of Public Healthcare Services

Despite an established referral system with primary care facilities, private clinics are the first point of contact for Cambodians. Poor access and inadequate service delivery have been major issues affecting the adoption of the public healthcare system
- Level of expertise is still low among public sector healthcare workforce; this is one of the key focus areas for the government if it intends to improve adoption of public facilities
- Cambodia has successfully experimented with the outsourcing of healthcare services; this can be continued to achieve efficiency at primary and secondary level, while investing public resources on tertiary level services

Less Efficient Procurement System

SHI may not serve the purpose if medicines covered under it are not available and patients continue to rely on private pharmacies; the procurement system needs to be overhauled with better demand estimation and/or more autonomy for purchase at the OD level
Bringing in technology into the procurement system should help in developing an efficient system

DESIGN

Beneficiary Classification

At the launch of SHI Master Plan, following four groups were envisaged:
- Wealthy (5% of the population)
- Urban Formal Sector (10% of the population)
- Urban and Rural Near Poor (50% of the population)
- Rural and Urban Poor (35% of the population)

Healthcare Insurance Financing

The expenditure on public healthcare services is provided through taxation revenues and external aid; MOH also funds (partially) the HEFs and CBHI schemes

Payment System

Cambodia follows a user-fee model for the payment of healthcare services; all public healthcare facilities charge user-fee for the provision of services
In case of HEFs, user-fee has been standardized across all ODs where the scheme has been implemented
CBHI pays to health centers/hospitals on either case per basis or on the basis of capitation system, depending on the arrangement with local OD

Benefits

Current health insurance schemes cover minimum and complementary packages offered by the public healthcare system

Co-payment (Reimbursement) System

The government subsidizes minimum and complementary packages (for equipment, facilities, and staff salaries) and medicines (covering essential medicines); service users have to pay for the consultation and treatment fee, and out of stock medicines
HEF covers partial or full costs of access to services for poor, including user-fees and cost of transportation
CBHI covers full cost of access to services for the informal sector population under coverage, including user-fees, cost of transportation, and the cost of referral and admission in provincial hospitals

Reimbursement System for Drugs

Drugs specified under the reimbursement list managed by the MOH are reimbursed; MOH is responsible for the procurement and distribution of drugs to the referral hospitals and health centers at operational districts
Drugs mostly covered are for in-patient services; for OPD patients, there is no such provision, except for the prescription of a cost-effective generic formulation

KEY CHALLENGES

Lack of Funding Mechanism to Ensure Long-term Viability of SHI

Success of the SHI would largely depend on its funding mechanism, which at present depends on taxation revenue and external aid; the government will have to look for increased funding for SHI, which may be in the form of a) increased healthcare budget allocation (from current 1% of the GDP), b) SHI-specific tax/surcharge, c) introduction of premium for top 15% (income-wise) of SHI beneficiaries
Participation of informal sector (with no fixed income) is crucial for the success of SHI – a review is required to assess what additional incentives that can be added to the current CBHI scheme (for informal sector) to encourage participation; this may be helpful once a unified financing system is implemented in 2015 (as planned)

Opportunities for Healthcare Companies

Healthcare Service Providers

Outsourcing healthcare services has proven to be an effective way to improve the performance of the healthcare system in Cambodia. Therefore, the outsourcing of services may continue in the future as well, providing opportunities to healthcare service providers
Experienced service contractors help in fulfilling the goals set-out in HSP (2008-2015, especially the Millennium Development Goals) where the country appears to be lagging

Medical Device Manufacturers

There is severe lack of medical devices, such as MRI, tomography scanners, mammography, etc. in public hospitals. SHI aims at providing such facilities, even if outsourced to private players
Increased in-patient coverage is likely to result in demand for devices such as patient monitoring equipment

Pharmaceuticals Companies

SHI implementation may not bring any additional benefits to pharmaceutical companies, as OPD drugs are not included as part of the benefits
Demand for in-patient drugs is likely to increase; the focus of pharmaceutical companies would remain on the inclusion of their drugs in the reimbursement list

A Final Word

The SHI system is still in early stages of development in Cambodia and the government needs to work on both infrastructure and design to ensure success of the scheme. SHI will be effective only if the people under coverage avail healthcare services through it, for which government healthcare services need to be at par with the private system. Provision of OPD services under SHI coverage will also help in greater adoption of the scheme.

Participation of the informal sector population is key to the success of the scheme from a financial perspective (ensuring adequate funds and lower reliance on foreign aid), and for meeting the key objective of ‘healthcare to all’.

From the perspective of healthcare industry participants, Cambodian healthcare service providers are likely to gain the most if the government expands services to a larger set of population (based on positive outcome from previous experiments). On one hand, lack of adequate equipment provides a strong opportunity for medical devices companies, while on the other hand, the expansion of in-patient services (as more people are covered by SHI) should provide an impetus to pharmaceuticals companies. For pharmaceuticals companies, the growth potential may not be fully realized unless OPD services are also covered under SHI.

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Notes:

Health Equity Fund (HEF) are schemes to support vulnerable groups, supported by the Health Sector Support Program and funds from various development partners and the national budget
Community-based Health Insurance is a voluntary, community-based and not-for-profit health insurance
About 35% of the total population lives below the poverty line, earning US$0.45-0.60 per day

08/04/2014by EOS Intelligence EOS Intelligence No Comments

Philippines’ Universal Healthcare – A Promising System Plagued by Inconsistent Quality of Service Delivery

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Over the years, governments across emerging markets have realised how critical universal healthcare coverage is for their population. While some countries have taken the challenge head-on, others have followed a wait-and-watch policy to see how such systems are being implemented, and gradually adopted a system that is based on the good practices of several healthcare plans.

In recent years, several Southeast Asian countries have adopted different forms of universal healthcare plans for their countries. Universal healthcare-related policies and delivery mechanisms were largely based on existing healthcare systems, a result of gradual development (based on local factors and priorities). Therefore, while theoretically universal healthcare exists (wherever applicable), it differs in terms of the actual benefits (e.g. quality and range of services and monetary advantage to patients).

We review these plans across a few Southeast Asian countries, to understand their infrastructure and design, and available opportunities for healthcare service providers, medical device manufacturers and pharmaceuticals companies. As part of this series, we start with Philippines, where about 80% of the population is currently covered under the universal healthcare plan, called PhilHealth.

This article is part of a series focusing on universal healthcare plans across selected Southeast Asian countries. The series also includes a look into the plans in The Philippines, Cambodia, Vietnam, Indonesia, and Thailand.

The Philippines is a lower-middle income country with a population of about 97 million. In spite of a strong focus on healthcare services, inequality in terms of healthcare access to various socio-economic groups and regions remains a persistent issue. Achieving universal healthcare access for all its citizens is a key objective of the government’s National Objectives for Health (2011-2016) program, and the government aims to fulfil three primary goals through this program – 1) financial risk protection; 2) better health outcome; 3) responsive healthcare system.

The first step towards universal healthcare was the launch of Medicare (1969), which provided health insurance to formal sector (public and private) employees. Coverage was extended to the poorer section of the population and the informal sector with the creation of PhilHealth (Medicare was merged with it) in 1995.

As of 2013, more than 80% of the country’s population was covered under the national health insurance program PhilHealth. The government aims to provide 100% coverage by 2016.

For a private sector healthcare player (pharmaceutical company, medical device manufacturer, or healthcare service provider), a country with 100% insured population presents strong incentives in form of greater access to diverse sections of the population with varied service and product needs, which will inevitably drive sales. However, to maintain the effectiveness of universal healthcare coverage, the government needs to work beyond simply the numerical (on paper) coverage of its population under the health cover to ensuring informal sector participation in the scheme, consistency in service delivery at primary care level, and adequate coverage of diseases.

The long-term success of social health insurance (and related with it, the prospects for healthcare sector stakeholders) will be determined primarily by how PhilHealth has been designed and what emphasis is being laid on infrastructure.

We take a closer look at these two critical aspects of the universal healthcare program.

INFRASTRUCTURE

Key Stakeholders

The Department of Health (DOH) is responsible for developing programs and policies, monitoring standards, and provision of specialized and tertiary level care
DOH is represented at the regional level by centres for health and development (CHD), which link national programs with local government units (LGU); provincial administration (including hospitals and primary care) fall under each LGU
LGU administers healthcare services through Health Boards at the provincial (led by the governor), city (led by the mayor), and municipal (led by municipal mayor) levels
Barangay (village) is the smallest administrative unit with primary health station/health centre

Healthcare Service Delivery

Public hospitals account for about 40% of approximately 1,800 hospitals in the Philippines
Based on the range and quality of services offered, hospitals are classified into four levels:
- Level 1: general hospital with maternity ward, dental clinics, 1st level X-ray, secondary clinical laboratory with consulting pathologist and blood station, and pharmacy
- Level 2: Level 1 facilities + respiratory units, ICU, NICU, HRPU, tertiary clinical laboratory, and 2nd level X-ray facility
- Level 3: Level 2 facilities + plus teaching/training, physical medicine and rehabilitation, ambulatory surgery, dialysis, tertiary laboratory, blood bank, and 3rd level X-ray
- Level 4: Specialty hospitals with treatment facilities for health conditions such as bones, heart, lungs, etc.
Current hospital infrastructure:
- Level 1: ~ 352
- Level 2: ~ 276
- Level 3: ~ 41
- Level 4: ~ 51
- Private Hospitals: ~ 1,120

KEY CHALLENGES

Overlaps in the referral system

Despite a highly decentralized healthcare delivery system, there are overlaps in the referral system in which district hospitals also act as the entry point into the country’s healthcare system. This may result in overcrowding of district hospitals, under-utilization of primary care centres, and loss of efficiency (patients being referred back to their local villages)

Variance in quality of healthcare service delivery

Provision and quality of services largely depend on the LGU administration, where local funding plays a crucial role. Healthcare is one of several areas that fall under the administrative regime of an LGU; it has been observed that healthcare prioritization varies by LGU, implying that the quality of healthcare service delivery by LGU, leading to variance in service levels across the country

DESIGN

Beneficiary Classification

PhilHealth members are classified into four groups
- Group 1: Formal sector employees
- Group 2: Self-employed professionals, members of the agricultural sector, and members of the informal sector
- Group 3: Retirees and pensioners who are at least 60 years old and have made 120 monthly contributions to PhilHealth
- Group 4: Poorest segment, belonging to the lowest 25% of the Philippine population and families listed in the National Household Targeting System for Poverty Reduction (NHTS-PR)

Healthcare Insurance Financing

PhilHealth is mainly funded through government taxation, and employer and employee contribution
Premium is fixed at 2.5% for formal sector employees (Group 1)
Group 2 members fall under the individual paying program – those with less than P 25,000 monthly income pay P 2,400 as yearly premium, and those with over P 25,000 cut-off pay P 3,600 annually
Group 3 and 4 are not required to pay any premium

Payment System

Hospitals work under fee-for-service system, and are paid by PhilHealth for a defined set of services; reimbursements are paid directly to service providers
DOH has identified 25 health conditions under case-payment (covers total cost per case) for PhilHealth cardholders

Benefits

A defined set of services at pre-determined rates are covered by the PhilHealth scheme, and patients are required to pay out-of-pocket beyond the rate ceiling; coverage includes cost of medicines, supplies, and diagnostics during hospitalisation
Outpatient consultations are not covered under PhilHealth; only a handful of health conditions, such as asthma, gastroenteritis, upper respiratory tract infection, and pneumonia qualify for treatment under the insurance plan

Co-payment (Reimbursement) System

The PhilHealth system does not work on the principle of fixed-percentage co-payment system; patients (irrespective of the beneficiary group it belongs to) are required to pay the balance if the cost-of-service goes beyond a pre-determined ceiling for a particular service
Ceiling rates may vary for the same service; higher ceiling rates are applicable for patients visiting specialty level hospital facilities
For the 25 health conditions under the case-payment system, baseline benefits can range from 50% to 100%; DOH is also implementing a zero co-payment policy for beneficiaries under the sponsored program (Group 4 beneficiaries) for the 25 disease defined under case payment

Reimbursement System for Drugs

Drugs, listed in the Philippine National Drugs Formulary, and required during hospitalisation are covered under PhilHealth; minimum ceiling rates (for single confinement period) for medicines according to the hospital level are the following:
- Level 1: P2,700
- Level 2: P3,360
- Level 3: P4,200

KEY CHALLENGES

Enrolment and recognition of actual beneficiaries by group

Enrolment of population representing the informal sector into PhilHealth is a challenge, as due to their irregular income levels, beneficiaries under this category do not enrol or pay the mandated premium
Also, identification of the poorest segment of the population, forming the sponsored category, is a grey area as the system is unable to ensure clear distinction between the entitled population versus those from other groups

Inadequate monitoring of service delivery

PhilHealth mainly provides in-patient benefit with low financial protection due to the ceiling system
Due to apparent lack of check on the fees charged by hospitals, even higher ceilings do not benefit patients, as hospitals raise their cost of services; consequently, the actual number of people availing its services appears to be significantly low
- For instance, in 2011, PhilHealth’s share in the country’s total healthcare expenditure was only 9.1% vis-à-vis out-of-pocket share at 52.7%; the rest 38% was government’s expenditure on healthcare other than PhilHealth

Opportunities for Healthcare Companies

Healthcare Service Providers

Significant Public Private Partnership (PPP) opportunities in exist in Philippines’ healthcare sector, to raise the level of services and to extend the coverage
Currently, only a 700-bed orthopaedic centre is being operated under the PPP model, and according to Philippine’s Health Secretary, there is significant opportunity for the PPP model in all DOH managed hospitals
The only roadblock for the adoption of PPP model is the perception of it being a move towards privatization of healthcare services (given that private sector already dominates the healthcare space in Philippines)

Medical Device Manufacturers

Public hospitals (especially those under LGU administration) usually are short of resources for the procurement of medical devices (mostly imported), which constraints them in providing patients with critical diagnostic services; this remains an area of concern as available devices will be inadequate to meet the 100% population coverage target of PhilHealth
At the same time, the demand for devices remains robust, and growth is expected on account of increase in the number of people under coverage as well as greater availability of healthcare services across the country. In order to further boost demand, medical device companies could explore ways to finance the purchase, so as to motivate hospitals to purchase equipment
The DOH has also hinted that critical equipment, such as CT scans and MRI machines, can be procured under a PPP model, providing an alternative option for device manufacturers to widen their presence

Pharmaceuticals Companies

In the current scenario, scope for pharmaceuticals companies is limited to medicines used for inpatient treatment. Sales potential is likely to increase as the government introduces zero co-payment policy for 25 health conditions for the sponsored category beneficiaries
Also, with the proposed widening of treatment coverage to include conditions such as hypertension and diabetes (was expected to come into effect in October 2013) which affect about 20% of the adult population, sales prospects is likely to improve

A Final Word

Philippines’ universal healthcare plan, PhilHealth, provides a strong foundation for access and quality enhancement of healthcare services to its population. With coverage of about 80% of its population currently, the country’s healthcare policy has tried to provide equality of service delivery to its citizens, and covers a range of common diseases and inpatient treatments. While there are obvious concerns around inadequate hospital facilities and diagnostics equipment, issues with accurate entitlement of benefits and inadequate monitoring of service delivery, the country’s healthcare administration is working with private partners to strengthen the system and focus on providing quality healthcare to its citizens.

From the perspective of healthcare industry participants, hospital services companies perhaps have a higher potential for growth in view of the shortage of hospital facilities across the country, while drugs companies must continue to rely on limited access to inpatient treatment facilities, providing drugs for the most common diseases (perhaps, also the cheaper product variants of their portfolio).

07/11/2013by EOS Intelligence EOS Intelligence No Comments

Global Pharmaceutical Market Scenario – Challenges, Action Plan and Potential Outcome

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Global pharmaceutical companies have suffered considerably on the face of patent expiry and lack of robust product pipeline in the last four-odd years. It is estimated that drug companies have on average seen a 20% decline in their revenues during 2009-2013 period.

The ‘patent-cliff’ is around the corner and major drug companies can expect a less challenging period in the next few years. However, there is a different kind of challenge emanating from generic drug manufacturers consolidating their position and governments across the world focusing on cost reduction and value realization in health care.

How the market evolves for global drug majors from this year onwards will primarily depend on how well they strike a balance between their business priorities and the concerns and expectations of other key industry stakeholders such as governments and consumers. From the drug companies’ perspective, product pipeline (awaiting approvals) looks healthy again. Also, instead of focusing on single (or few) mega drugs, drug companies are developing products targeting niche segments such as cancer treatment, neurological disorders treatment, infectious diseases, etc.

Another important realization of the last few years has been the need to cater to diverse expectations of consumers in developed as well as emerging markets. Consumers in mature markets are increasingly demanding a demonstration of value whereas there are still untapped consumers in cost-conscious emerging markets who are in need for the basic drugs for regular ailments.

Pharmaceutical companies must also monitor closely countries where the drug market is still under-developed and governments are working towards greater access to healthcare and better regulatory frameworks. This may help drug producers in gaining smooth access to the market as far as new products are concerned, clinical trials, and may also provide opportunities to collaborate with governments in raising overall healthcare standards in the country.

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

27/06/2013by EOS Intelligence EOS Intelligence No Comments

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

The global solar power industry was always viewed as one based on flawed business principle of artificial sustenance. With prolonged low economic growth, the artificial support base disintegrated, resulting in shutdown of multi-million dollar business across the globe.

Several leading players, such as Siemens, Solar Millennium, First Solar Inc, and SunPower Corp and Suntech Power, have either filed for bankruptcy or pulled out of their loss-making solar power businesses. Others, such as Germany-based Bosch, have decided to wrap-up solar operations at the end of 2013 after having “tried unsuccessfully to achieve a competitive position”.

A 60% fall in solar panel prices between 2010 and early 2013, as well as the rapid expansion of natural gas production in the USA and curtailment of subsidies in the EU were some of the key reasons for growing losses. What is also worth noting is the overcapacity in the market – global production capacity for photovoltaic panels reached about 60 GW in 2012, while expected demand was only 30 GW. Driven by such unsustainable market conditions, no wonder solar power companies went out of business.

Industry experts, however, view the above factors as simply the result of China’s growing dominance in the global solar power industry. Driven by government subsidies, China became the largest solar panel supplier, accounting for 60% of global solar power production capacity. This domination of the industry has, however, come at a price. Amidst growing unhappiness with China-made products leading to local companies becoming uncompetitive, USA imposed a 40% anti-dumping duty in 2012 while in May 2013 the EU imposed provisional duties of 12% (likely to increase to 47% in August) on imports of Chinese-made solar panels. Whether this will deter China or encourage local growth is unknown; this might however have a negative effect of pushing the industry further into crisis.

Beneficiary of the present situation are likely to be manufacturers in countries like Taiwan which are not yet subject to US/EU import tariffs. About 90% of solar cells manufactured in Taiwan are exported to the USA, Europe, and China. Taiwan might also benefit from the EU’s imposition of duties on China made products, driving Chinese investment into Taiwan for setting up manufacturing plants to then directly export to the EU from Taiwan without having to pay the duties. Recent activities of some Chinese companies have indicated Turkey and South Africa being possible destinations for setting up manufacturing units.

The Chinese will find ways to get their products into the US and EU markets, even if it means moving their operations to Taiwan or other countries which are not subject to the high duties. The real issue, however, is the state of the global solar industry – with some of the major players shutting down operations and funding of solar power depleting, is the end of the road? We doubt it.

There is still hope for the solar power industry, largely driven by favorable policy measures in emerging Asian and Latin American countries. The first half of 2013 witnessed solar power investments in several countries, including Kuwait, South Africa and Chile. The industry received a major boost from Middle-East when Saudi Arabia announced a US$100 billion investment plan in 2012, to generate one-third of the country’s electricity demand through solar energy. Although current demand in these emerging markets is relatively low and may take about 10-15 years to develop into a sizeable market, the scope for growth is immense.

15/05/2013by EOS Intelligence EOS Intelligence No Comments

As Myanmar Works Towards Stability, Communal Violence Holds The Nation Back.

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In mid-2012, we published a report on Myanmar, looking into its potential as a new emerging market with considerable investment and trade opportunities for foreign investors (see: Myanmar – The Next Big Emerging Market Story?). Almost a year later, we are returning to Myanmar, to check and evaluate whether the political, social, and economic changes envisioned and proposed by the quasi-civilian government have really translated into actions to push the country forward on the path to becoming the next big emerging market story.

Being plagued by uninspiring and inefficient governance for more than six decades, Myanmar for long has been proclaimed as Asia’s black sheep. The Chinese named it ‘the beggar with a golden bowl’, asking for aid despite its rich natural and human resources. However, having embarked on a momentous yet challenging political revolution, the nation is said to be on its way to open a new chapter in the Asian development story.

Contrary to what was believed to be just hollow promises and sham, the reforms initiated by the Thein Sein government have gathered much steam in quite a few cases. Bold moves over the last year have also immensely helped the country in gaining goodwill internationally. We are looking at some of the game-changing reforms enacted over the past present year in Myanmar.

Media Censorship

In August 2012, the government put in actions their proposed end to media censorship. As per the new system, journalists are no more required to submit their reports to state censors prior to publication. To further strengthen the power of media, in April 2013, the government abolished the ban on privately run daily newspapers – ban remaining in force for over 50 years.

Foreign Investment Law

In January 2013, the Thein Sein government passed a foreign investment law that was initially drafted in March 2012. The law allows foreign companies to own up to 80% of ventures across several industries (apart from activities mentioned on the restricted list –including small and medium size mining projects, importing disposed products from other countries for use in manufacturing, and printing and broadcasting activities). This acts as an important milestone in opening up the Burmese economy to heaps of foreign investment.

Opening Up Of Telecom Sector

Myanmar, one of the least connected countries in the world, has embarked on the deregulation of its much neglected telecom sector by initiating the sale of 350,000 SIM cards on a public lottery basis. It plans to offer additional batches on a monthly basis. As a more tangible effort to revolutionize the sector, the government is auctioning two new 15-year telecom network licenses to international companies. These companies are to be announced in June 2013 from a list 12 pre-qualified applicants, namely, Axiata Group, Bharti Airtel, China Mobile along with Vodafone, Digicel Group, France Telecom/Orange, Japan’s KDDI Corp along with Sumitomo Group, Millicom International Cellular, MTN Dubai, Qatar Telecom, Singtel, Telnor, and Viettel. Despite the current 9% mobile penetration claimed by the government, an ambitious goal has been set to reach 80% penetration by 2015.

The World Responding To Myanmar’s Progress

As Myanmar works towards attaining political stability, introducing economic reforms and easing social tensions, the world is also opening up its arms to increasingly embrace the otherwise banished land. In April 2013, the EU permanently lifted all economic sanctions against Myanmar, while maintaining the arms embargo for one more year. The USA, on the other hand, has not permanently removed the sanctions, but has had them suspended since May 2012. This allows US companies to invest in Myanmar through the route of obtaining licenses. The definite abolishment of these sanctions by the EU puts pressure on the USA to act soon and lift them as well, to avert the risk lagging behind in the race to tap this resource-rich market. The USA has already begun working on a framework agreement to boost trade and investment in Myanmar. Japan has also been improving its relations with Myanmar to gain a foothold in this market.

With the EU, the USA and Japan encouraging investments in Myanmar, several international companies have directed investments to this previously neglected country.

In August 2012, a Japanese consortium of Mitsubishi Corporation, Marubeni Corporation and Sumitomo Corporation contracted with the Burmese government to jointly develop a 2,400 hectare special economic zone in Thilawa, a region south of Yangon. The Myanmar government will hold a 51% stake, while the Japanese consortium will own the remaining share in the industrial park, which will also include large gas-fired power plant. In the first phase of the project development, the companies plan to invest US$500 million by 2015 to build the necessary infrastructure on the 500 hectares area in order to start luring Japanese and global manufacturers.
In August 2012, Kerry Logistics, a Hong-Kong based Asian leader in logistics, opened an office in Myanmar. Recognizing the immense potential in the freight forwarding and logistics sector (underpinned primarily by growing international trade), European freight forwarders, Kuehne + Nagel, also began operations in this country in April 2013.
To cash upon a booming tourism market, in February 2013, Hilton Hotels & Resorts initiated the development of the first internationally branded hotel in Yangon, which is expected to open in early 2014. The hotel will be a partnership between Hilton Worldwide and LP Holding Centrepoint Development, the Thai company that owns the 25-storey mixed-use tower, called Centrepoint Towers, which will house the hotel. Hilton has signed a management agreement with LP Holdings to operate the 300-room property.
In February 2013, Carlsberg, the world’s fourth-biggest brewer, announced its plans to re-enter Myanmar, after it left the country in mid 1990’s owing to international sanctions.
Fuji Xerox, a joint American-Japanese venture, set up its office in Myanmar in April 2013. The company, which is the first player in the office equipment industry to start direct operations in Yangon, looks to revive its internationally declining business through this venture.
In April 2013, JWT, an international advertising firm, entered into an affiliation agreement with Myanmar’s Mango Marketing, in anticipation of opportunities in this country, given an increasing interest in Myanmar expressed by a number of international players who are likely to seek advertising and marketing services.

Civil Unrest Still Stands As a Major Concern

While Myanmar has made great strides in reforms over the past year, the ongoing unrest between Myanmar’s majority Buddhists and minority communities (primarily Muslims), and the lack of a concerted effort by the government to address it, poses a major threat for the nation to descend into ethnic-religious war. In October 2012, the Rakhine riots between the Buddhists and Muslims claimed 110 lives and left 120,000 displaced to government setup refugee camps around Thechaung village. A similar case followed in April 2013 in Meiktila, where the death roll of Muslims reached 30. Strong international condemnation for the growing racial and religious violence in the region has caused concerns of losing international support gathered over the past few years. Moreover, the use of military force to suppress the Meiktila riots raises fear about the army once again seizing power in the name of restoring order to the nation.

Myanmar’s attempts to transition into a democracy from a highly repressive state have yielded positive outcomes over the past year. While Myanmar seems to be on the right trajectory for future growth and stability, the government must address internal conflicts immediately before the nation stands at risk of tumbling back into chaos, with possible outcomes similar to those seen in Yugoslavia. Therefore, it is safe to say that although political and economic developments are increasingly seeing the daylight, underpinned by the government’s pro-development course, the recent spate of religious, ethnic and communal violence as well as the magnitude of reforms still to be introduced, might still question the nation’s ability to attract and sustain foreign investments and economic development in the long run.

26/03/2013by EOS Intelligence EOS Intelligence No Comments

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough

As with several emerging markets, Turkey’s automotive market slowed down in 2012. The ongoing crisis in Europe limited export opportunities (declined by 8% y-o-y) while domestic economic woes drove vehicles sales down (by 10% y-o-y). Although this came as a setback to the industry, which recorded strong growth during 2009-2011, the industry has bounced back as sales rebounded in the first two months of 2013.

In the last few years, Turkey, to the surprise of many industry experts, has emerged as an attractive automotive production destination. Several international OEMs, such as Ford, Hyundai, Toyota, Renault and Fiat, have set up production units in Turkey, largely to cater to growing domestic demand and as an export hub to Europe. At the same time, leading automotive OEM, Volkswagen, which has a significant presence in Turkey, remains an exception – Volkswagen does not have any plans to establish production capability in Turkey, and this has led Turkey’s Economy Minister to threaten the company with a 10% tax on the company’s imports.

The emergence of Turkey as an automotive production hub has primarily been driven by government incentives and subsidies to this sector. At the turn of 2013, the Turkish government announced incentives to encourage investment in the automotive industry as it targets USD75 billion in automotive exports over the next decade. Salient features of the incentives are as follows:

The investment scheme is an extension of a programme launched in 2009 and will offer tax breaks of up to 60% for new investments, up from 30% in 2012
Projects eligible under the latest revision include vehicle investments of more than USD170 million, engine investments of more than USD43 million and spare parts projects of more than USD11.3 million
Incentives in the lowest band include VAT and customs rebates, employee cost contributions and subsidies on land purchases

Turkey’s path to success as a preferred destination for manufacturing and as a growing automotive market has not been easy. There are several challenges facing the industry that have the potential to severely impact growth and expansion of the sector.

The Challenges

Overdependence on Europe for Exports – In 2012, Europe accounted for 70% of Turkey’s automotive exports and the country suffered in 2012 due to weak demand from the continent. As an immediate step to curb the impact of the ongoing Euro crisis, automotive OEMs are expected to shift focus towards the Middle East and North Africa to reduce its dependence on the unstable European markets.
High Taxation – Special consumption tax and VAT raise the domestic purchase price of a vehicle in Turkey to 60-100% of the pre-tax price. For instance, the price of a Ford Focus 1.6 Trend without tax is EUR15,259 in Germany whereas the same vehicle costs EUR11,000 in Turkey. While the German government imposes a 16% tax, making the final price of the car EUR17,700, the Turkish government imposes a tax of 64.6% making the price EUR18,132. In this context, if Turkey becomes a full member of the EU, it will acquire a larger share of the European market because of lower price before taxation. Turkey also has a higher tax on luxury cars compared with the EU while tax on gas is also one of the highest in the world.
Resistance from Labour Unions in the EU – Labour unions in EU are against the transfer of automotive production to Turkey while some car producers prefer to move to other emerging economies such as China and India which have experienced rapid growth in productivity.

While automotive OEMs face several constraints in the Turkish market, the opportunities seem to outweigh the challenges. Using Turkey as a production hub to cater to regions beyond Europe, such as Middle-East and North Africa is a potentially significant opportunity for automotive OEMs. At the same time, booming domestic demand should continue driving growth of players such as Volkswagen, General Motors, Ford, Hyundai, Renault and Fiat.

Even though 2012 temporarily put the brakes on rapid expansion, the Turkish automotive industry is expected to remain an attractive destination for manufacturing and a promising market for sales.
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Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?
Part III of the series – South Korea – At the Crossroads!

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EMERGING MARKETS

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Strike On Syria – Potential Impact On Emerging And Frontier Markets

Future of Global Solar Power Industry – Tense, But There’s Still Hope.

As Myanmar Works Towards Stability, Communal Violence Holds The Nation Back.

Turkey – When Being ‘The Gateway to Europe’ Wasn’t Good Enough