Philippines economy on wave of
success By Robert M Cutler
MONTREAL - The Philippines, long seen as a
sick man of Asia compared with the neighboring
economic tigers, has something to roar about of
its own, after consistent strong economic growth
was recognized this month by Standard & Poor's
increasing the country's debt rating to its
highest in nine years.
S&P raised its
rating on the Philippines to BB+, one level below
investment grade, from BB. The move, which will
help to cut borrowing costs, reflects "the
country's strengthening external position, with
remittances and an expanding service export sector
continuing to drive current-account surpluses,"
according to S&P analyst Agost Benard in
Singapore, as quoted by Bloomberg News.
Moody's, though still ranking the
Philippines two steps below
investment grade at Ba2,
raised its outlook in May to "positive" from
"stable", signaling the chance of an upgrade
within the next year. Fitch, the smallest of the
three leading debt rating companies, improved its
rating to a grade analogous with that if S&P
last year.
The Philippines is attracting
favorable notices on the back of strong exports
underpinned by an increasingly strong outsourcing
industry and a growing technology sector. The
country has overtaken India as the world leader in
the business support sector, according to an IBM
annual report - this despite Filipino workers
coming at a premium. There work now goes beyond
traditional call centers to process outsourcing
and shared services to groups.
Exports in
May surged almost 20% from a year earlier to hit a
17-month high of US$4.93 billion, the National
Statistical Office of the Philippines reported on
July 10. They rose 8.2% in the first five months
of the year compared with the year-earlier period
to $22.4 billion. The outlook is also remarkably
strong - the purchasing mangers' index (PMI)
compiled by the Philippine Institute for Supply
Chain Management, rose to a 12-month high of 59.8
in May. A level above 50 signals economic
expansion; below 50, contraction.
Government policies aimed at reducing the
budget deficit to 2% from 3.9% are also making it
easier for Manila to find both foreign and
domestic buyers for its debt, while the S&P
announcement came as the Philippines over the
weekend tightened rules to discourage speculative
capital inflows, making it illegal for foreign
funds to invest in special deposit accounts
(SDAs).
Surging capital inflows have
helped to drive up the value of the the Philippine
peso 5% against the US dollar in the five weeks
from May 25 until the end of June. It reached 41.6
to the dollar on July 4, the highest in over four
years, before backing off slightly over the course
of the past week.
The previous financial
regime had attracted carry trades by failing to
prohibit non-residents from investing through
SDAs. A "carry trade" occurs when an investor
borrows money in a country having low interest
rates, then lends it out again after converting it
into a currency where borrowers pay higher
interest rates.
The positive economic
environment helped the the main Philippine stock
exchange index climb to a historic high last week
before falling back slightly; the index is up a
remarkable 23% this year. In 2011, it was the
world's seventh-best performing stock market.
Equity capital has driven an increase in
net FDI. Net equity capital placements during the
first quarter this year were more than six times
their level during January-March last year,
reaching US$931 million, thanks in part to a large
beverage company buyout. Net total FDI for the
first three months of this year, the last quarter
for which full statistics are available, was up
more than 72% on the same period of 2011, at
US$850 million.
The currency gains,
however, may hurt exports, as President Benigno
"Noynoy" Aquino III, son of former president
Corazon Aquino, continues his economic policy of
making the country a manufacturing and services
dynamo. Services are key to Aquino's development
plans for the country and already account for over
half of the GDP in absolute terms as well as over
half of all employment.
Gross domestic
product (GDP) increased 6.4% in the first quarter
from a year earlier, well up on the 3.7% in
calendar 2011 and climbing back to the 7.6% annual
expansion in 2010. The growth of the country's
economy has exceeded 4-5% every year since 2006
with the exception of 2009.
Economic
growth in the Philippines is still complicated by
the relative newness of domestic manufacturing,
which has nevertheless grown to nearly one-third
of the national economy. On the downside, the
inability of the domestic economy to absorb
production makes the country over-dependent on the
global economic demand. Overall growth is also
hampered by the country's inability to resolve its
continuing power crisis, with major urban centers
suffering from three- to eight-hour rotational
power interruptions. Energy Secretary Jose Rene
Almendras has conceded that brownouts will worsen
without new investment.
Electronics and
mining industries are relative newcomers to a
national economy still based on traditional
agriculture, which produces only 12.3% of GDP but
employs 33% of the population, with over twice the
number of people in all industrial sectors
combined). The country also remains heavily
dependent on foreign remittances from workers
overseas. At US$20 billion their cash sent home
represents 10% of GDP.
Manufacturing was
nevertheless up an impressive 7.1% year on year in
April, given the stagnant global demand. This was
down from 8.9% expansion in February but up from
6.5% in March. By rank order, the most important
industries are: electronics assembly, garments and
footwear, pharmaceuticals and chemicals, wood
products, food processing, petroleum refining, and
fishing.
Semiconductors account for almost
60% of exports; the country hosts about 10% of
global manufacturing services, also including
mobile telephone chips and microprocessors. The
slacking of external demand in the sector is
therefore potentially troublesome. Its trade board
has cut expected export growth in the sector from
10-15% to 5-7% for the year.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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