By Katherine Viscont
From Bloomberg Business Week
STANDOUT NATION. In an interview with Bloomberg Television, Michael Spencer, the Hong-Kong based chief economist for Asia at Deutsche Bank AG said strong export growth was helping the Philippines become a leader in the region. Screenshot from BloombergBusinessweek.
MANILA, Philippines – The Philippines is the brightest economic star in Asia now, according to an economist of multinational Deutsche Bank AG.
In an August 9 interview with Bloomberg’s Susan Li, Duetsche’s chief economist for Asia Michael Spencer touted the Philippines as the strongest as well as the safest place for funds to be.
“The strongest performing economy in Asia today is the Philippines,” he said when Li asked him where the best place to be across the Asia-Pacific region.
This southeast Asian country recorded an impressive 6.4% growth in the first 3 months, making it the best performing economy in the region next to China.
Spencer’s bold pronouncements is the newest addition to the long-awaited attention from foreign investors that had traditionally included only neighbors Thailand, Malaysia and Indonesia in their investment radar.
Already, eastward-bound hot money have made it to the Philippine Stock Exchange, which hit record highs almost 20-times since President Aquino took over in 2010.
Is Philippines safe?
Bloomberg’s Li quickly followed-up Spencer: “Safest, as well?”
It’s a question constantly considered by fund managers who have been stuck in western countries previously considered safe but are now in economic crisis.
To stress that the Philippines is indeed safe, Spencer cited the country’s relatively low trade exposure to the U.S. and Europe, both now experiencing fiscal pains.
“Historically it’s at least been very less dependent on the U.S. and Europe. Although what’s really been driving growth today is exports [which is] surprisingly enough for them,” said Spencer.
“There seem to be exports to Japan. I suspect there’s something of a Japan outsourcing after the earthquakes last year from the Philippines. They’ve suddenly have discovered a billion dollars a month almost is the last two or 3 months. For them it’s huge,” said the chief economist.
Other economists and investors have also noted the Philippines relatively low budget deficit of 2.6% of gross domestic product (GDP), a measure of the overall economy.
A low deficit-to-GDP ratio is a traditional indicator that the country has the ability to pay back its debts or repay its investors.
A day after Spencer’s interview, on August 10, official exports data for June and the first 6 months of the year was released.
Exports in June slowed to 4.2% and volume stood at USD$26.75 billion for the month. This was a reversal of the impressive 19.7% growth of the exports sector in the month of May.
Overall for the past 6 months, exports grew 7.7%, or better than the 4.13% experienced in the first 6 months of 2011.
These show the sector’s continuing vulnerability to conditions abroad.
A dampened global demand for trade products hit the Philippines hard in 2011, contributing the most to the deep cuts in the annual GDP growth to 3.7% in 2011 from 7.6% in 2010.
Nonetheless, Spencer focused on the Philippines’ top destination for exports, Japan. This north Asian neighbor absorbs over 16% of Philippine exports.
Japan was the destination for 16% of Philippine exports in June, higher than the US and China. Graph available at National Statistics Office.
Spencer surmised that after the earthquake and tsunami that devastated Japan in 2011, export orders poured into the Philippines to help support reconstruction efforts and fill the need for new products.
While exports to Japan shot up 81.5% in May, there was a sharp 24.7% drop in June.
“It’s back to reality. The initial euphoria brought by a 19.7% increase in [total] exports [in May] has been dashed back to a more realistic level in June,” noted former budget secretary Benjamin Diokno.
Another reality check was the goings on in China, also a key trade partner of the Philippines.
Spencer and Li discussed the political revamp among China’s top leaders, as well as inflation situation and monetary policy moves.
China’s economy grew at its slowest pace in 3 years, as investment slowed and demand fell in key export markets such as the US and Europe. It reported a 7.6% GDP growth in the 2nd quarter, down from 8.1% in the previous first quarter.
Cooling growth in China has been a concern for other Asian economies and the global recovery. China is the destination for 12% of Philippine exports and a key source of investments and aid.
Another source of dollars — bigger than exports — and also a major indicator of the strength of the Philippine economy is its resilient remittance story.
Millions of Filipinos working abroad have been sending about U$19 billion a year to loved ones abroad, fueling consumption, a pillar of economic growth.
Despite the global economic woes, which hit world trade, remittances to the Philippines maintained growth.
Remittance money has kept banks awash with cash (and helps them remain stable compared to peers in other crisis-hit countries), malls and other retail outlets active and thriving, and real estate investments thriving.
Remittances have also kept the country’s levels of balance of payments and international reserves healthy.
In his 3rd State of the Nation Address (Sona), President Aquino touted the economic gains of the country under his watch. He cited not just the impressive 6.4% first quarter growth, but also the 7 credit rating upgrades from international agencies and the historic highs achieved by the main stock index.
Can these be sustained?
The upcoming announcement of the Philippines’ 2nd quarter growth rate this August will be telling. The economic managers have expressed optimism another 6.4% is attainable, though they are keeping year-end targets of 5% to 6% growth.
Already, neighbor Indonesia has announced an impressive 6.4% in the second quarter.
On Monday, August 13, a key Philippine economic indicator – the performance of the agriculture sector – was not impressive.
Farm output in the first 6 months of 2012 only grew a mere 0.93%, way below the government’s year-long growth target of 4% to 5%.
The agriculture sector, hit by a fishing ban in the first two months of the year, makes up 1/5 of the economy and employs a third of the working population. Economists are mixed over whether the low initial figures will impact GDP growth for 2012.
Still, the Philippines has a number of factors working in its favor.
The country benefits from resilient consumers, a young population base that can boost consumption, and an expected pick-up in government infrastructure projcts this 2012 and 2013, financial analysts from COL Financial Group Inc recently told Rappler.
The government’s capital-intensive infrastructure projects under the Aquino government’s public-private-partnership (PPP) scheme was meant to take off in 2011 but were delayed due to good governance checks, officials said.
So far, the bidding for two big-ticket road projects — the P20-billion LRT-Cavite extension project and the P13-billion NAIA Expressway project — are scheduled to be finished this year.
When construction starts next year, the hope is these will spur economic activity through the supply chain and employment.
Meantime, the local stock market has been hailed the 2nd best performer in the world year-to-date, but also now the most expensive market in the region, twice as expensive as South Korea’s Kospi and twice as expensive as Hong Kong’s Han Seng.
The Philippines seems to be on an upward trajectory but there are bumps on the road.