Investors’ Attention – To The Philippines

A 24-year-old graduate in hotel and restaurant management left the Philippine capital for Singapore two months ago and now sends over half her monthly pay – about S$500 ($394) – back home. Eileen Alcala, cashier in the Upper Crust sandwich shop in Singapore, is one reason the Philippines is suddenly looking like a rare investment bright spot after years as one of Asia’s persistent workers. Numbers like these highlight steady growth in remittances from the Philippine dispersion – and help explain why, last week, Standard & Poor’s became the latest rating agency to upgrade the Philippines, to BB+. That is the country’s highest grade for nine years and one notch below investment grade.

The move reflected the Philippines’ strengthening external position, with remittances and an expanding service export sector continuing to drive current account surpluses”, S&P said.

Foreign reserves of $76bn as of May exceed the country’s external debt of $63bn. Inflation is below 3.5 percent and gross domestic product growth, driven by robust electronic exports, is forecast by the government at 5-6 percent this year.

At a time when many economies are struggling, the Philippines is among only 10 sovereigns in the world with positive outlooks, notes Barclays. Indeed, since January foreign investors have pumped $1.8bn into the market, according to Bloomberg, a 265 per cent increase on the same month a year ago. Investors are taking note. Philippine share prices are up a quarter since the start of the year, making Manila the world’s fourth-best performing equities market on expectations that the country will win investment-grade credit status by next year.

A “public-private partnership programme” launched six months ago to overcome infrastructure bottlenecks has not only attracted foreign interest but is boosting the shares of companies seen likely to benefit from government contracts, such as Ayala and Metro Pacific Investment. According to Prakriti Sofat, regional economist at Barclays in Singapore “the government is very focused on accelerating the PPP programme”. Laggards on the exchange have been companies with broader exposure to the economy, such as Philippine Airlines and Manila Electric. Still, constituents in the stock market index are trading on an average price/earnings multiple of 18 times. That compares with 20 times for the Jakarta index and 15.6 times for the Kuala Lumpur index.

Hans Sicat, chief executive of the Philippine Stock Exchange, predicts funds raised through company listings and secondary activity will hit 107bn pesos ($2.6bn) this year. Yet investors may be glossing over the risk that the two-year-old administration of president Benigno “Noynoy” Aquino may take time to deliver.

“Investors are so bullish, they are forgiving many of the country’s structural sins,” says Luz Lorenzo, economist at Maybank ATR Kim Eng group.

The Aquino administration’s gains in lowering the budget deficit were achieved mainly through lower government spending, which fell as a proportion of GDP to 16 per cent last year, from 17.7 per cent in 2009.

Suppression on tax evasion has resulted in the filing of scores of complaints against suspected tax evaders. Yet, actual tax collection as a proportion of GDP has barely moved, up from 12.1 per cent in 2010 to 12.3 per cent last year, according to the central bank. The government’s tax take is being eroded by a series of exemptions approved by the former president but Mr Aquino does get credit for a planned new tax on cigarettes and liquor – so-called “sin taxes”. Rogier van den Brink, a World Bank economist, says: “They are closing the net on tax collection.”

Poor implementation has overwhelmed previous reform efforts, and analysts warn this is still an issue. “I remind [clients] how it went with power privatization. The law was passed in 2001 but the first assets were sold in 2004, and it was only in 2007 that the process really took off,” Ms Lorenzo said.

A rule forcing listed companies to have a minimum 10 per cent float by the end of this year has prompted a flurry of secondary market activity. That has spurred foreign participation, which accounts for 38 per cent of the market, says Mr Sicat. “What we’re seeing is a very strong local bid, which is helping improve confidence for anyone who is coming in from the outside.”

Investing has become easier after exchange trading hours were extended in January from a previous lunchtime close to 3.30pm.

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