Optimism grows in Philippines despite corruption

ASIA BRIEFING:The government is also in a good position to provide stimulus to the economy because it does not need massive borrowings

THIS WEEK’S Asia Briefing comes from the Philippines, where the headline in the Philippine Daily Inquirer newspaper last week was “P-Noy bullish on economy”, a sign of how things are looking up since the top ratings agencies upgraded the Philippines lately.

The Philippines has one of the more frustrating economies in southeast Asia. On paper, the country should be wealthy, but it has never taken off as a tiger economy in the same way as neighbours such as Thailand, Malaysia, South Korea and China. This is despite abundant natural resources, a well-educated, largely English-speaking population and an excellent geographical position in a strongly growing region.

Much of this lack of wealth is down to political mismanagement and endemic corruption, but there is a sense of optimism in the Philippines today, underlined by upgrades by leading ratings agencies. The country’s popular president, Benigno Aquino – the P-Noy of the Inquirer headline – is bullish on his country’s prospects.

The economy is showing notable resilience in the face of global turbulence, with strong domestic spending off-setting a less buoyant export sector. Growth in the first quarter was 6.4 per cent, the fastest pace since 2010. Aquino is aiming for an expansion rate of 8 per cent annually in order to cut poverty.

This optimism was underlined last week by the decision to upgrade the Philippines’ credit rating to just below investment grade. Standard & Poor’s upgraded the long-term sovereign credit rating to BB+ from BB with a stable outlook, citing improved fiscal flexibility and strong external position – the country’s highest level since 2003.

Credit rating is a key condition in investors’ decisions on whether to buy government debt or invest in a particular country. Many foreign fund managers are restricted from holding debt below investment grade.

“The foreign currency rating upgrade reflects our assessment of gradually easing fiscal vulnerability,” Agost Benard, a Singapore-based analyst at SP said. “The rating action also reflects the country’s strengthening external position, with remittances and an expanding service export sector continuing to drive current account surpluses.”

Moody’s Investors Service boosted its outlook on the Philippines to positive in May, citing improving debt levels. Fitch Ratings raised the country’s debt to one step below investment grade in June 2011.

The stock market is hitting new highs on the upgrade, and the Philippine peso is strengthening against the dollar, making it the best performing Asian currency in emerging markets against the greenback.

The focus now is on getting investment grade status. This would lower the country’s borrowing costs, free more funds for government spending and widen the economy’s base of potential investors.

“We can now clearly make our case for an investment grade status,” finance secretary Cesar Purisima said. The central bank, Bangko Sentral ng Pilipinas, believes an investment grade rating is possible this year.

The popular president, while saying he was “bullish” on outlook , told local media he did not want to put a date on when investment status could be attained. “We have a saying that we shouldn’t say what we expect lest we jinx the whole thing, but we definitely would work hard to get there,” he said.

The economy grew 3.7 per cent last year, well below the government target of 4.5-5.5 per cent, but the Aquino government is confident the S&P upgrade boosts chances this year’s figures will improve.

The government is also in a good position to provide stimulus to the economy because it does not need massive borrowings.

Aquino is planning to boost spending to a record this year and is seeking €13 billion of investment in roads, bridges and airports to protect the economy from Europe’s sovereign-debt crisis.

“At a time when countries around the world are debating austerity versus stimulus, we have had the fiscal space to provide stimulus without weakening our fiscal position,” communication secretary Ricky Carandang said.

S&P’s move puts the Philippines one rung below its southeast Asian neighbour Indonesia, which was awarded investment grade ratings by Fitch last year and by Moody’s earlier this year. “The rating action also reflects the country’s strengthening external position, with remittances and an expanding service export sector continuing to drive current account surpluses,” S&P said.

Some old habits die hard, however, and the Filipino authorities need to remain vigilant for growth to be sustainable. S&P warned of potentially negative consequences if lending and investment activities are not accompanied by strict monitoring by the country’s monetary officials.