Success Stories: Philippines, the Next Indonesia?

In contrast to the America #1 cheerleaders I am duty-bound to debunk day in and day out, I am actually rather guarded about my home nation's economic prospects. This despite it growing at rates that make the United States look lethargic by comparison. Indonesia has somewhat surprisingly become our region's most dynamic economic performer in recent years, but commentators believe the Philippines is posed to join it soon in being investment grade.

Already there's talk about it being one of the world's "New Tigers." Also, unbeknownst to me, the Philippine Stock Exchange has been the world's fourth-best performer in 2012. The FT's Lex further adds that the best-performing stocks are those of infrastructure firms which promise to fix the nation's famously crappy transportation system. (Fortunately, the Philippines' main international airport NAIA is now "only" second worst in the world after JFK, but that's not exactly an improvement.) That said, stock valuations are on the high end already...

A positive outlook from Moody’s in May sparked speculation it could follow its giant neighbour in reaching investment grade (two notches to go). Other reasons for excitement are clear enough: low inflation, a stable currency, growth above 6 per cent and to crown it all, a reform-minded government bent on improving the country’s terrible infrastructure with big public-private projects. On that basis, its one-quarter rally in local terms so far this year looks almost modest. Some of the best performances have come from developers such as Metro Pacific, involved in toll road projects along with San Miguel. Ayala, another toll road builder, has gained 50 per cent.

The risk is that the story is already priced in. Foreign inflows have been steadily climbing and local investors are rumoured to be bringing funds back home to catch the surge, according to HSBC. The rally has left [equity] prices at about 15 times forward earnings – the more expensive end of the country’s range over the past three years. And few [infrastructure] projects have yet been agreed.

While investment across most of south and east Asia grew at least 3 percentage points more than broad economic growth this year, it actually undershot growth by that amount in the Philippines, according to Morgan Stanley. Big projects could – and should – happen, but investors should pay attention to government announcements before betting that Manila’s past performance is a guide to its immediate future.

The last paragraph  is interesting in that the Philippines still lags other countries in the region in attracting FDI. That is, its rate of growth is still outstripping its FDI inflows, whereas the opposite situation holds in other South and Southeast Asian nations. What I think Lex may have forgotten to mention which speaks to this is its comparatively less attractive political risk situation. While its macro picture looks pretty good I do agree, the government remains prone to reversing itself every now and then. Don't forget its still-running conflicts with Communist insurgents and militant Islamic fundamentalists, too.

Bottom line: the political picture of the Republic of the Philippines is not quite as good as its macro economic picture. In fact, it is rather muddled.