During the Asian financial crisis of the late 1990s, Indonesia and the
Philippines were bailed out by the International Monetary Fund.
This year, they showed the world
how far they’ve come from those dark days by pledging a billion dollars each to
replenish the IMF’s kitty.
With rapidly growing economies
and rising incomes, the two countries are home to a large and young labor
force, an expanding middle class and have stable, elected governments with
policies inspiring investor confidence. They also have sturdy banks and enough
foreign-exchange reserves — more than a year’s imports in the Philippines’s
case — to rebuff a misguided run on their currencies. See: Banks in Indonesia
and the Philippines flourish.
In an economically vibrant
Southeast Asia, Indonesia and the Philippines stand out as the region’s “New
Tigers” with the potential to leave a bigger imprint on global growth for years
to come while the developed world struggles with excess debt and traditional
regional heavyweights China and India lose momentum.
“You have a real contrast, which
is why these markets have been doing well,” said Andrew Swan, head of Asian
fundamental equities at BlackRock. “We’ve had 3 to 5 years of great growth. But
because there is so much room for growth, this can go on for so many more
years.”
Each has also received credit
rating upgrades since 2011, with Indonesia now rated investment grade by
Moody’s and Fitch. Their stock markets are among the world’s best performing
since the end of 2008 — Indonesian shares tripled during the period from
beaten-down valuations, and are closely followed by Philippine equities. See:
Global investors key into Indonesia and the Philippines.
Unlike the West, government
finances are shipshape. Jakarta’s gross government debt was 25% of GDP in 2011,
and Manila’s 41%, according to IMF data, leaving both enough room to boost
their economies in case of need.
The Philippines has a current
account surplus of 2.74% of its GDP, thanks to remittances from its vast
diaspora. Indonesia swung to a deficit in the first half of this year as lower
commodity prices hurt exports, and as imports of capital goods and machinery
increased.
Agriculture employs at least a
third of the workforce in both countries, and domestic consumption is an
important driver of their economies. That protects them from external shocks to
an extent — both escaped a recession in 2009, when the Thai, Malaysian and
Singaporean economies contracted. But both also need tens of billions of
dollars in foreign direct investment, especially to create infrastructure and
pursue industrialization.
Stocks are more expensive than in
north Asia, and the two nations are by no means immune to global shocks. But
barring a post-Lehman Brothers-like blowout crisis — in or outside the euro
zone — potential reward is seen outweighing risk on balance. Investors have
embraced the local stock markets, driving shares in Indonesia up about 11%
year-to-date, while Philippine stocks have climbed 22%.
“The earnings growth in these
markets has also been very, very strong. That gives me the confidence that as
long as the earnings growth trajectory is sustainable, which we think it is,
the returns will be there to be made going forward,” said BlackRock’s Swan.
Indonesia
With a GDP of nearly $850 billion
and a population of 241 million people in 2011, Indonesia was by far the
largest of the ASEAN economies. But half the country’s population still lives
on less than $2 a day, according to the Asian Development Bank.
As the world’s largest
archipelago straddling the equator in the Indian Ocean, it’s spread far and
wide. The capital Jakarta is relatively more developed, but the country faces a
serious need for infrastructure and connectivity. And despite frustrating
delays to various projects, many observers seem confident President Susilo
Bambang Yodhoyono’s government is getting its act together. Read more about
Indonesia.
Jon Lindborg, country director
for the Asian Development Bank, said the ADB’s focus in Indonesia is on
infrastructure development, and helping nurture public-private partnerships for
various projects.
“This is a country that has moved
from being the backwaters of the world to the global stage now. I think you
have a government that is more confident and much more focused on what its
agenda is,” he said.
For equity investors, meanwhile,
the relatively small market size is a constraint. Despite being the ASEAN’s
largest economy by far, at about $410 billion, Indonesia’s market
capitalization is less than half that of Singapore and Thailand, and it is also
lower than Malaysia’s.
Although corporate earnings are
rising rapidly, the market needs breadth, and more stocks to ensure supply can
match potential demand.
Credit growth remains strong —
Bank Indonesia expects loans to grow 26% this year — but equity markets’
development is crucial for local firms to fund their long-term growth.
Between 2007 and the first half
of 2012, 103 new listings in Indonesia raised $11.06 billion, according to
Dealogic data. That is more than three times the amount raised by Philippine or
Thai corporations during the period, but less than the $23.07 billion raised by
Singaporean firms, and the $16.34 billion by Malaysian companies.
Alvin Pattisahusiwa, chief
investment officer for Indonesia at Manulife Asset Management, said the
country’s market capitalization has jumped tenfold in as many years as more
companies listed their shares. Although several well-established corporations
remain unlisted, the market now reflects the economy more accurately than a few
years ago, he said.
Unlisted firms include, among
others, palm oil major Best Agro International and detergents maker Wings
Group.
“The economy is driven by
domestic consumption, and so [is] the stock market. [It’s] mostly been driven
by consumer stocks over the last three years,” said Pattisahusiwa.
Philippines
After a weak 2011, the situation
is again looking rosy for the Philippines. The stock market is booming, growth
has improved, and the mood generally is upbeat, not least because of the
Standard & Poor’s upgrade of the country’s ratings in July to BB+ — just
one step below investment grade. Read more about the Philippines.
The change of pace is a welcome
development after GDP growth more than halved to 3.7% in 2011 from 2010, as
Manila cut expenditures to try to reduce its budget deficit. In the second
quarter, GDP rose a forecast-beating 5.9% from the year-ago period. The economy
is expected to slow in coming months unless the government loosens its purse
strings.
President Benigno Aquino has
committed to lowering the deficit to 2% of GDP by 2013, from 3.9% when he took
office two years ago. Although generally seen as prudent, some view such
austerity as unwise for a developing nation with a desperate need to create
more jobs.
“The Philippines is in need of
higher spending, not less. Tax-to-GDP [ratio] has to improve. Otherwise all
this cutting of spending is going to prove detrimental,” said Sanjay Mathur,
Royal Bank of Scotland’s head of research for Asia excluding Japan.
Mathur said a higher cost base
relative to some neighbors makes the Philippines less attractive for
manufacturing. But the business process outsourcing industry, where the country
has already overtaken India, is a bright spark.
With millions of young, educated
and English-speaking workers, the Philippines is a perfect place to host the
world’s call centers. Philippines is the second youngest country in the ASEAN
after Laos, with half the population under 23.1 years in 2012, according to CIA
World Factbook estimates.
Revenue from the industry, which
employs almost 650,000, accounts for about 5% of GDP. At the current annual
growth rate of about 25%, analysts estimate industry revenues will top
remittances within five years. Remittances from overseas workers make up about
9% of GDP.
“The BPO industry has made a
positive impact [on Philippines’ current account surplus]. It has really been
felt at the external position. The Philippine peso USDPHP -0.0084% has become one of the most stable currencies
in Asia,” Mathur said.
Still, others point to the crying
need to diversify.
“It needs employment generating
manufacturing,” said Santitarn Sathirathai, an economist at Credit Suisse.
Sathirathai said low commodity
prices are good for the country, a net importer of resources including crude
oil, and is another reason behind the brokerage’s positive view on Philippines
against the backdrop of weakening Chinese appetite for materials.
“We are most bullish about
Philippines of the ASEAN … [there is a] lot of low-hanging fruit there,” he
added.
Varahabhotla Phani Kumar and Virginia
Harrison
Business & Investment Opportunities
YourVietnamExpert is a division of Saigon Business Corporation Pte Ltd, Incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Healthcare and Life Science with expertise in ASEAN. Since we are currently changing the platform of www.yourvietnamexpert.com, you may contact us at: sbc.pte@gmail.com, provisionally. Many thanks.
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