Philippines emerges from economic
shade By Joel D Adriano
MANILA - Is the Philippines emerging as an
investor safe haven against economic weakness in
the West and potential turbulence in China?
A Bank of America-Merrill Lynch survey
shows global fund managers have increased their
"overweight" investment positions in the
Philippines, making it the survey's third-most
preferred market in the world trailing only China
and Indonesia.
A series of sovereign
upgrades last year has boosted investor
confidence in President
Benigno Aquino's administration, which rose to
power in 2010 on a reformist platform. Financial
analysts here predict that the country will likely
be upgraded to investment grade later this year,
opening the way for institutional investors now
barred by their in-house operating rules from
allocating funds on the local bourse.
Fitch Ratings raised its credit rating for
the Philippines to BB+ from BB last June, just one
notch below the credit rating company's investment
grade. Standard & Poor's, another credit
rating company, raised its outlook to positive
from stable last November, citing the country's
strong external liquidity and improved fiscal
position. It indicated in that assessment that
another upgrade could come soon.
The
Philippines has been a byword for economic
underperformance and has seldom warranted a second
look among international equity investors scouring
global emerging markets for the next big thing.
Those poor perceptions are starting to shift with
improved economic fundamentals and prolonged and
potentially worsening economic weakness in the
West.
Jim O'Neill, chief economist at
Goldman Sachs, who in 2001 famously coined the
acronym "BRIC" when considering the grouping of
Brazil, Russia, India and China as up-and-coming
economies, now includes the Philippines in what he
calls the "next 11", a designation of economies
that have the potential to make fast leaps in the
decades ahead. (The "next 11" also include South
Korea, Mexico, Indonesia, Turkey, Egypt, Vietnam,
Pakistan, Nigeria, Bangladesh and Iran.)
Cash-rich Middle Eastern countries are
driving the trend in the Philippines. A ranking
official from the Department of Trade and
Investment disclosed that Qatar will invest US$1
billion, mainly for infrastructure projects, over
the next few years. A Kuwaiti firm recently
committed to invest $500 million on top of its
$200 million investment in a consortium building a
$2 billion logistics center in Clark, Pampanga.
At the start of 2011 - and for the first
time in the country's independent history - gross
international reserves eclipsed external debt.
Foreign reserves increased by 20.5% last year to
$75 billion, up from $63 billion at the end of
2010. The Philippines' debt-to-GDP (gross domestic
product) ratio is among the lowest in Asia at
under 50%.
Despite global economic
difficulties, the Philippines is on course for
another year of relative strong growth, according
to local and foreign economists. Miguel Varela,
president of the Philippine Chamber of Commerce
and Industry, believes the country's improved
fiscal position, strong bank balance sheets, and
manageable inflation will lure new investors,
including in the manufacturing sector.
Even so, some believe Aquino's fiscal
prudence has held back growth. Central bank
governor Amando Tetangco Jr at a forum this month
faulted the government for under-spending in 2011.
He argued that restrained government outlays
pulled down GDP growth to 3.6% over the first
three quarters of 2011, with growth in the third
quarter hitting a mere 3.2%.
Financial
upside The financial upside, however, was
that the government was able to dramatically trim
the deficit to just 96.25 billion pesos (US$2.2
billion) in the first 11 months of last year, down
from 267 billion pesos in the same period in 2010.
Spending was also way below the full-year target
of 300 billion pesos, or 3% of GDP, and undershot
the record 314 billion pesos, or 3.7% of GDP,
spent in 2010. The Aquino administration has
committed to trim the deficit to 2% beginning in
2013.
The government expects economic
growth to accelerate between 5% to 6% in 2012,
driven mainly by government spending on
infrastructure projects and household consumption,
which combined make up 70% of the economy.
Domestic demand is traditionally boosted by
overseas remittances, estimated as the
fourth-highest of any country.
Overseas
Filipino workers sent home $16.5 billion in the
first 10 months of 2011, up 7% from the same
period in 2010, Central bank data shows.
Remittances are projected to increase 8% this year
as demand for Filipino workers abroad remains
high, including a growing number of online-based,
cost-competitive Filipino workers.
New
York-based Moody's projects 5% growth for the
Philippines this year, while the London-based
think-tank Capital Economics Ltd wrote in a recent
report that the Philippines could achieve growth
as high as 8% if its business and infrastructure
spending targets are hit. Government economic
managers have promised to frontload many of those
projects.
A recent HSBC study projected
that the Philippines could become the world's 16th
largest economy by 2050 due to its "strong
fundamentals and powerful demographics". The study
forecast per capita income would rise from $1,215
at present to $10,893 by 2050. The International
Monetary Fund ranked the Philippines 46th in the
world last year by nominal GDP and 32nd in 2010
according to purchasing power parity.
Approximately 14% of this year's 1.8
trillion peso budget is allocated for
infrastructure spending and already 70%, or 99.3
billion pesos, has been disbursed. The Aquino
government has also promised to make up for lost
ground on its long-delayed infrastructure projects
under its public-private partnerships (PPP)
program. The program is the cornerstone of
Aquino's strategy to achieve annual growth of
7%-8%; this year his government aims to contract
out 16 projects worth 154 billion pesos by the
second quarter.
There are plenty of
downside risks. Central bank governor Tetangco
admits that the escalating debt crisis in Europe,
continuing economic weakness in the US and a
possible slowdown in China are all clear and
present risks that could weigh significantly
against Philippine growth. The three regions
account for half of country's trade, though the
Philippines is less reliant on trade and has more
diversified flows than many of its more
trade-geared regional neighbors.
Shifting
economic currents in China could actually boost
the Philippines' export sector. Local economists
note that China's gradual shift from serving as
the world's factory floor towards a more
consumer-based economy could be a plus for many
Philippine exporters, particularly for food
manufacturers and agriculture producers. They note
that rising labor costs in China could soon
encourage more manufacturing investments in the
Philippines.
At the same time, a bill now
pending in the US Congress could discourage
American companies from outsourcing call center
operations to foreign countries. The Philippines
is the world's second-biggest destination for call
center services after India, with industry
revenues reaching over $9 billion last year. Any
US ban on outsourcing would likely hit the local
call center industry - one of the country's
brightest economic spots - especially hard.
While Aquino has sounded all the right
notes on fighting corruption and improving
governance, some analysts warn that intense
political wrangling over high-level graft charges,
including against outgoing president Gloria
Macapagal-Arroyo, could distract his government's
needed focus on the economy.
But there is
a clear market consensus emerging that Aquino's
economic program is on the right track, one that
could see an unprecedented influx of capital to
the Philippines in 2012.
Joel D
Adriano is an independent consultant and
award-winning freelance journalist. He was a
sub-editor for the business section of The Manila
Times and writes for ASEAN BizTimes, Safe
Democracy and People's Tonight.
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