Jun 2, 2012

Philippines - An Economic Thrilla in Manila

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Incredible. Amazing. While other Asian countries describe themselves with superlatives, the Philippines national ad campaign promises only "more fun."

Filipinos have reasons to smile. Asia's perennial underachiever is outperforming. This week saw more successes: Moody's upped its outlook on the country's credit rating to "positive," citing prudent fiscal management. An anti-graft drive notched a win with a guilty verdict in the impeachment trial of a former chief justice. And first-quarter gross domestic product growth of 6.4%, announced Thursday, defied most forecasts as well as the mood in the global economy.

But to build on the promise, the Philippines must deliver on three main growth drivers.

Business-process outsourcing is already booming due to strong English skills, cheap rent and low wages. A fondness for basketball and Hollywood movies is an advantage, too, when it comes to staffing call centers with workers who can make a cultural connection with U.S. customers. Starting from scratch a decade ago, the sector generated revenue of $11.25 billion last year. CLSA says that could double by 2015.

Government officials say tourism is a low-hanging fruit. They aim to triple arrivals to 10 million by 2016. A $5 billion gambling hub under construction will help. So too a surge in new planned hotel rooms and a rising tide of Chinese visitors, whose numbers were up almost 30% last year.

Arrivals hit a record high 1.2 million in the first quarter. But there are challenges. A regional economic slowdown would hurt. Manila's spat with China over potentially resource-rich areas of the South China Sea has raised diplomatic tensions that could stymie Chinese tourism too.

Poor infrastructure is a bigger issue. Security concerns at the country's airports have led to restrictions on its carriers. International aviation regulators won't let the nation's major airlines fly new routes to South Korea or the U.S.—their top two markets for visitors—until domestic airports improve.

Indeed, infrastructure spending is the third leg of the country's growth agenda. The government has pledged an extensive public-works program. The first quarter saw public construction jump 62% over last year. That pace must be sustained. Private investment activity also needs to pick up. RBS says weak private investment was a factor in disappointing first quarter construction overall, which was up just 0.3% from a year earlier.

Manila is more fun these days. But the Philippines must get serious on infrastructure to make the most of its time in the sun.

DUNCAN MAVIN


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