: Super User; Philippines; 27 November 2012; Hits: 1378

Growing Philippine Economy Inspiring more Confidence

THE Philippines has been the economic laggard in Asia for so long now that experienced foreign observers have acquired a habit of taking any positive news coming out of the country with a strong dose of scepticism. But recent developments suggest that it may be time to take the country seriously.

The world’s major credit rating agencies certainly have.

On Oct 29, Moody’s Investors Service upgraded the country’s foreign and local currency long-term bond ratings to Ba1 from Ba2, placing them one step below investment grade. The move followed a similar decision by Standard & Poor’s (S&P) in July and Fitch Ratings in 2010.

Moody’s decision means that, for the first time since April 2003, the world’s largest credit rating agencies have agreed on Manila’s credit rating. And the positive outlook on the Philippines they all share raises hopes that the country could achieve an investment grade ranking sometime within the next two or three years.

Such a development would be unprecedented. According to all three agencies, the Philippines’ credit rating hasn’t moved out of junk status since they began making their assessments.

S&P began issuing risk ratings on Philippine government bonds in 1993, followed by Moody’s in 1995 and Fitch in 1999.

An investment-grade rating would make government borrowing cheaper. It would also boost foreign investor confidence.

In announcing the upgrade, Moody’s cited the country’s improved economic and fiscal performance, better growth prospects and stable financial system. The economy grew by 6.1 per cent in the first half of this year, while inflation has averaged only 3.2 per cent in the first 10 months.

The country has also been implementing important debt buyback schemes. Earlier this month, for example, Manila paid about US$1.5 billion (S$1.8 billion) to retire US dollar and euro-denominated global bonds. The idea was to “reduce interest costs, avoid a bunching-up of maturities, and extend the duration profile of the republic’s outstanding debt portfolio”, National Treasurer Rosalia De Leon said in a statement.

Revenue collections, meanwhile, are continuing to rise faster than nominal gross domestic product (GDP). Foreign reserves are also being sustained at healthy levels as a result of dollar remittances and business process outsourcing revenues.

An agreement with Muslim rebels last month to end four decades of insurgency in the resource-rich south has also boosted the country’s appeal. The accord aims for a final peace deal by 2016, with the Moro Islamic Liberation Front controlling an autonomous region.

The optimism of the rating agencies is shared by the International Monetary Fund (IMF).

On Nov 16, IMF managing director Christine Lagarde noted at a press briefing at Malacanang Palace in Manila that the Philippines was the only country in the world where the IMF had upgraded its growth forecast for this year.

The IMF says the country’s economy will grow by 5 per cent this year. The Philippine government has set a growth target of between 5 per cent and 6 per cent for this year, and 6 per cent to 7 per cent next year.

Curiously, foreign investors have yet to get the message. Official data shows that the net inflow of foreign direct investment (FDI) in the country fell to a mere US$13 million in August, down by nearly 83 per cent from US$76 million in the same month last year. The amount was also 88 per cent lower than the US$108 million chalked up in July.

A central bank statement accompanying the figures said that the drop in the net FDI inflow “reflects investors’ relatively cautious stance due to weak global economic prospects and financial strains in the advanced economies”. A fall in the net inflow of foreign portfolio investment, meanwhile, was attributed to profit-taking.

Maybe. But the foreign investment boom currently being experienced in countries such as Indonesia also suggests there are many potential players who remain cautious. This is particularly so when neighbouring countries are perceived to offer better prospects.

One signpost to watch out for is the fate of the so-called “sin tax” reform, a measure which the current president has flagged as a priority. The Bill, which recently hit a roadblock in the Senate, aims to increase taxes on alcohol and tobacco products. It is seen as crucial to raising government revenues.

While revenues have grown strongly in recent months, they still amount to little more than 15 per cent of GDP. In similarly rated countries, the ratio is closer to 25 per cent. Last month, all three credit rating agencies warned that continued delays in approving the Bill would limit the government’s ability to pay for much-needed infrastructure projects.

Perhaps if President Benigno Aquino can break the logjam, investors will see it as an important signal that he has the political skills to ensure the implementation of the rest of his economic reform agenda. And maybe then, the sceptics will start taking the country seriously.

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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.