Economy tipped to maintain momentum
Growth fuelled by construction projects and state spending, writes John Cremer
The Philippines' economy has performed impressively over the last two years, and most experts are predicting a continuation of upward trends.
For instance, in early April, the IMF upped its forecast for GDP growth this year from 6.6 per cent to 6.7 per cent, citing such reasons as strong private construction activity and higher state spending. The Philippines government is even more optimistic, indicating expected GDP expansion of between 7 and 8 per cent, which compares very favourably with the 6.1 per cent achieved last year.
At the same time, most signs suggest that inflation will remain within the central bank's 2 to 4 per cent target range, while a generally prudent approach to policymaking has given potential overseas investors further cause for confidence.
"The Philippines used to suffer from too much consumption and not enough capital spending," says Stephen Corry, managing director and chief investment strategist of LGT Bank (Hong Kong). "But over the last three years, this has slowly changed in favour of the latter, with growth in private sector investment overtaking nominal GDP growth. The recent sharp decline in global crude oil prices has also helped, capping inflation and allowing [the central bank] to keep interest rates low at 4 per cent."
Several other pointers also give reason to believe the economy should continue to strengthen in the next couple of years. As Corry notes, the banking sector remains exceptionally liquid, with a loan-to-deposit ratio of 64 per cent. Property prices are rising, even though values in real terms are still some way short of their 1997 levels. There is also a sense that credit growth, inflation and any potential economic imbalances can be contained.
"We see more uninhibited growth ahead for the Philippines led by further developments in business process outsourcing [BPO], investment in infrastructure and manufacturing, and consumer demand," Corry says. "The economic strength is reasonably diverse. For an additional fillip, we hope that the government can release underutilised funds designated to the stalled public-private partnership [PPP] infrastructure programme."
This initiative began in 2010, but so far, very few of a possible 28 projects have been allocated. In other respects, there is also an understandable degree of caution.
"Many potential investors we speak to baulk at the PSE index's high valuations, which make equities in the Philippines one of the most expensive in the Asia excluding Japan region," Corry says. "However, the macro story appeals so strongly that we encourage our clients to buy on market weakness, if and when we see it."
For Soo Hai Lim, investment director for Asian equities at Barings Asset Management (Asia), the overall picture looks similarly bright.
He highlights the continuing importance of remittances from overseas workers as a pillar of the economy and a key engine of growth in sectors ranging from property to sales of consumer goods.
"Besides that, though, the BPO industry has also been growing at double-digit rates and is continuing to create employment domestically and attract more multinationals," Lim says. "It tends to hire younger people, and the centres usually operate on a 24-hour basis, so that is also having a positive impact on support sectors like property, telecoms and convenience stores."
As cost and space considerations see the BPO industry moving to more sites outside Metro Manila, the benefits are likely to spread. The automotive sector in particular has high hopes.
"Ever since the current president came into office in 2010, there has been a pick-up in business confidence," says Lim, noting that the next election is slated for 2016. "A lot more money has come from the private sector to help fund roads, airports and schools. And in the last two years, more companies have been raising money from the stock market, in some cases to support these infrastructure projects."
In addition, there have been concerted efforts to put new life into the travel and tourism sector. One scheme is to attract extra visitors by building up to four casinos as part of an "entertainment city" in the Manila area. City of Dreams, owned by Lawrence Ho and James Packer's Melco Crown Philippines, recently opened the first phase of development, with more to follow.
Other efforts will focus on offering the range of resorts and family attractions found in Thailand and elsewhere in the region.
"The authorities in the Philippines recognise they need to get their fair share of tourists, but in some cases, lack of necessary infrastructure has been holding them back," Lim says. "That is why some PPP projects are targeted to upgrade smaller airports."
He notes that income levels for the young urban population have hit something of an inflection point. The increase in spending power and disposable income is attracting the interest of brand-name chains and multinationals.
"The retail sector is underpenetrated in many respects. But now, for example, we are seeing store rollouts by Japanese mini-stores and family marts which is helping the drive for investment," Lim says.