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Manila set to replace “Jeepney”

, February 25, 2013, 0 Comments

Global financial media has been buzzing with positive news flow on The Philippines since more than a year. While India is struggling with slowing growth and threat of rating downgrade (due to budget deficit), China is losing momentum, USA is trying hard to stay on recovery path, Europe is still not out of sovereign debt crisis and Russia & Brazil is losing investor’s favor, the Philippines is set to be next economic tiger in Asia. The Philippines is being touted as new darling of global investors. After all what is this hype about? Let us ask better question: is this hype or something really happening on the ground?

1960s: The Philippines had the second highest per capita income in Asia; Manila based Asian Institute of Management (AIM) was reckoned as the best business school in Asia and Filipinos were considered fashionable and Asian trendsetter.
1970-2010: Many countries such as Thailand, Malaysia, South Korea, China and Taiwan surpassed the Philippines in terms of per capita income; IMF bailed out the Philippines during Asian Financial Crisis; AIM lost its charm; Political instability rose with at least half a dozen coup attempts; More than 10 million Filipinos left the country for better future abroad and “Jeepney” (coming from second world war time) continued to be preferred mode of public transport.
2011 onward: The Philippines grew by more than 6.5% in 2012, better than its peers in ASEAN; The Philippines pledged $1 billion to IMF; S&P upgraded rating of the Philippines to BB+; AIM launched plan to regain its position among top three Asian business school; Political stability seems to be back with president Benigno “Noynoy” Aquino III; The Philippines surpassed India as biggest BPO destination; The Philippines stock market has been amongst best performing stock market since last couple of years; Some Filipinos have started returning home and The Philippines now aspire to replace “Jeepney” with high speed train.

Like many other visitors, I took a brief tour of Manila’s business district Makati When I first visited this city in September 2011. Going to places like Greenbelt, Glorietta, Mall of East Asia and Bonifacio High Street, I asked myself a question: am I in the Philippines or Singapore or Hong Kong? Mentioned places have very high resemblance with shopping streets of Singapore and Hong Kong. The environment here was buzzing with various activities. Restaurants were pulsating to the beat of western songs, while young, hip Filipinos were enjoying their dinner with foreigners of different nationalities.

Later I also got opportunity to travel across other cities and destinations in the Philippines and the thinking was- the Philippines is probably rightly called as laggard of Asia. However when I stayed there for more than a year, I could see the transformation happening in the Philippines in real. There was not a single place where I couldn’t find an English speaking person. This is one basic advantage of The Philippines over many Asian countries—a well educated English speaking population. No wonder the Philippines surpassed India as number one BPO destination.

People were generally cheerful as endorsed by ranking of The Philippines among top ten happiest nations. People were optimistic about their recently appointed president Benigno “Noynoy” Aquino III; people saw him as an honest figure who can provide political stability and deliver on his mandate for change. President Benigno “Noynoy” Aquino III has got reputation of getting things done against all odds, e.g. impeachment of Chief Justice Corona, passage of the Reproductive Health Bill and Sin Tax.

Key economic indicators of the Philippines

If I have to summarize key advantages (also termed as Investment drivers) of the Philippines, it would look like as below:

Favorable demographics: The Philippines has large, young and dynamic English speaking population. Half of the population is under twenty four and two third of them live in cities. The country also has expanding middle class. Urbanization rate is also very high. These help them become productive nation on the one hand and drive consumption on the other hand-both are positive drivers for GDP growth.

Political/Government’s Commitment: President Aquino has expressed the need of clean government, being attentive to the need of global investors and giving overseas Filipino a reason to return home. President Aquino has also committed to reduce deficit to 2% of GDP by 2013, from 3.9% when he took office couple of years back. Increasing productive investments is also a priority for the government. This is against the traditional nature of the Philippines wherein Consumption is significantly higher at around 75% of GDP (even higher than USA’s average of 70% of GDP). Government’s policies have helped inspire investor’s confidence at large.

Tourism: The Philippines is home to world-class beaches and natural wonders with breath taking views. The country presents a cocktail of Asian, Spanish and American cultures. Yet number of tourists to the Philippines is much lower as compared to neighbor Thailand and Malaysia. Government’s push for infrastructure building, reduction in corruption, English speaking population and Filipino’s welcoming attitude will help exploit the hidden potential in tourism sector.

Mining: The Philippines has the world’s fifth richest store of natural resources including oil, copper, gold and silver. However, development is this sector has been very slow on account of political resistance and red tape. Huge amount of natural assets are untapped. Government’s reform will help unleash the hidden potential in this sector.

Infrastructure: While development of Tourism and Mining sector requires infrastructure in terms of roads, airports and seaports, rising middle class and urbanization require more number of homes and shopping centers to be built.

Fiscal discipline: The Philippines’s fiscal situation appears to be in order. The Philippines debt to GDP ratio was about 41% in 2011 as against Japan’s debt to GDP ratio of more than 200%. This gives the Philippines more room to boost her economy if that situation ever arises. Moreover, government’s commitment to reduce deficit to 2% of GDP by 2013 also speaks for fiscal discipline.

Manufacturing: Some experts are of view that manufacturing sector will also pick up especially in view of  transfer of operations from Thailand to the Philippines by flood-disrupted businesses and increasing tension between Japan and China. Japan increasingly looks at The Philippines as alternative manufacturing destination in place of China and Thailand.

Increasing investments, low inflation, low interest rate, favorable demographics and hidden potential in Tourism and Mining sector has led to virtuous cycle of stability and economic growth. Increasing investor’s confidence has been aptly reflected in recent Peso appreciation and performance of the Philippines stock index.

The Philippines stock index should continue its upward momentum in view of the positive factors mentioned above. Stocks from retail, infrastructure, mining, hotel industry are expected to be out performer.

While the Philippines seems to be on upward trajectory, there are occasional bumps on the road. Investors should keep an eye on
Key concerns mentioned below:

Low infrastructure spending: Infrastructure spending in the Philippines has been around 1.8% of GDP on average basis, well below the regional average. Infrastructure spending is key for growth in almost all sectors. Government is trying to use public private partnership (PPP) for funding infrastructure spending, but real implementation will take some time.

Volatility in GDP growth rate: GDP growth rate in last five to six years have been volatile.[ws_table id=”4″] This casts doubt on the sustainability of GDP growth rate above 6% going forward.

Corruption and Red tape The Philippines ranks miserably in Transparency International’s ranking (105 out of 176 countries in 2012). Inefficient bureaucracies act as a deterrent to foreign investment. The Anti-Red Tape Law 2007 has paved the way for improvement but real change is still not apparent on the ground.