: Super User; Philippines; 19 January 2011; Hits: 1028

Philippines on growth path, but will it last?

“SO LONG as we continue to focus on the fundamentals, good things will happen,” Philippine Finance Secretary Cesar Purisima told reporters earlier this month. He was commenting on the decision by Moody’s Investors Service to upgrade its rating on Philippine government bonds from stable to positive.

Mr Purisima may have sounded a little smug, but all things considered, he probably had a right to engage in a bit of self-congratulation. The day before, his government had sold US$1.25 billion (S$1.6 billion) worth of 25-year global peso bonds. Asia’s first global local-currency issue, the offer attracted US$13 billion in bids.

Increasingly, the Philippines is being seen by investors as a good credit risk. Its improved fiscal position, coupled with unexpectedly strong economic growth, rising external reserves and a more stable political environment, certainly makes the Philippines look more attractive.

The situation was quite different this time last year, when international rating agencies were expressing concerns about increased government spending and political uncertainties ahead of last May’s election. Gross domestic product (GDP) expanded by an unexpectedly strong 7.5 per cent in the first three quarters of last year, largely because of a recovery in investments and exports. Inflation also remains low, with the end-December figure standing at just 3 per cent.

The country’s gross international reserves reached US$60.6 billion as of last November, significantly higher than the end-2009 level of US$44.2 billion, while the balance of payments (BOP) surplus totalled US$13.2 billion. In 2009, the country registered a BOP surplus of just US$5.2 billion.

The Philippines is also being lauded for its willingness to take advantage of the appreciation of the peso, which gained 5.7 per cent against the US dollar last year, to pay down debt. According to central bank figures, prepayments of foreign currency denominated debt reached US$3.57 billion in the first 10 months of last year, nearly four times higher than the US$1 billion prepaid by the national government and private companies in the same period in 2009. Partly as a result of this, the debt service ratio dropped to 7.9 per cent in September last year from 8.7 per cent in September 2009.

Apart from easing the nation’s huge foreign debt burden, the move should also benefit exporters by helping to moderate the appreciation of the peso.

Policy continuity – reflected in the fact that Mr Purisima, former president Gloria Arroyo’s finance secretary, now works under President Benigno Aquino – is also being seen positively. All told, the Philippines certainly has something to crow about.

But will it last? The strength of the peso is already having a negative effect on exporters. Some of the nation’s largest companies are expected to see their operating profits decline in the first quarter of this year. And while low inflation will probably allow the central bank to leave interest rates unchanged at their lowest levels since July 1990, consumer demand appears to be flagging. Consumer spending, which makes up two-thirds of the economy, slowed significantly in the third quarter of last year, the last quarter for which figures are available.

Plans to boost government spending to a record high this year could also create difficulties, particularly if economic growth falters and the expected increase in revenues fails to emerge. Traditionally, the Philippines has borrowed heavily from domestic and foreign creditors to cover its budget deficit, which was expected to reach an all-time high of 325 billion pesos (S$9.4 billion), or 3.9 per cent of GDP, last year. Meanwhile, tax evasion and tax smuggling remain rife.

And while the higher BOP figure registered last year was certainly welcome, the fact that much of it was due to a sharp rise in foreign portfolio investments or “hot money” suggests that the situation this year could be very different if international conditions change. Net inflows of portfolio investments hit a new record level of US$4.18 billion as of end-November last year, almost 10 times the US$431.4 million registered in the same period in 2009.

The situation regarding foreign direct investment – perhaps a better measure of an economy’s long-term viability – is less clear-cut. According to the Semiconductor and Electronics Industries in the Philippines, foreign direct investment in local electronics and semiconductor industries reached US$1.3 billion last year as the industry sprung back from the 2008 recession. But there is no reason to suggest this will be sustained. The Philippine semiconductor industry has seen investment in the sector exceed US$1 billion twice before, only to fall back when conditions became less favourable.

Things are certainly better in the Philippines these days – and it is important to acknowledge them. But there are also good reasons why ratings agencies continue to rate Philippine bonds three notches below investment grade.

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Key Political Risks

President Benigno Aquino has stepped up efforts to lure foreign investors into the country, so far without much success. The country continues to be hobbled by widespread corruption and several long-running insurgencies.

However, the government has had some success in reducing the budget deficit. The president also remains popular with voters.

WHAT TO WATCH FOR:

Extent to which foreign and domestic investors show interest in big ticket infrastructure projects.
Increased spending on the air force and navy to counter Beijing's territorial claims in the disputed Spratly Islands. The issue could become an important point of contention at the East Asia forum in Indonesia in November.
The implementation of the "framework agreement" between Manila and the insurgent Moro Islamic Liberation Front announced in early October. If all goes well, a final peace deal may be signed by 2016.