Philippines - Philippines emerges from economic shade

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

Asia Times

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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