Philippines: From “Sick Man of Asia” to “the Next Asian Miracle”

In his 2014 State of the Nation Address, Philippine President Benigno Aquino III painted a convincing picture of an economy poised for takeoff: Standard & Poor’s recently upgraded the country’s rating to a notch above investment grade — the highest rating ever for the country, national revenue collection has improved, the poverty rate has declined, and spending in critical infrastructure is expected to double this year from last year.

Regional analysts and finance industry leaders have heralded the former “sick man of Asia” as “the next Asian miracle.” But that’s not how Philippine central bank governor, Amando Tetangco, Jr., would like describe this economic turnaround. At the recent Philippine Retail Investment Conference organized by CFA Society Philippines, Tetangco said there’s nothing miraculous about the economy; it is the result of hard-fought reforms.

The question now is, can the economy keep on going? The central bank forecasts GDP growth of between 6.5% and 7.5% this year, from 7.2% last year. Tetangco identified three sources of risks to the economy:

1. inflation,
2. the impact of the Fed taper, and
3. rapid growth in domestic liquidity and credit.

Prices have been relatively steady even after the devastating Typhoon Haiyan last year. However, Tetangco sees potential price pressures, notably from increases in power rates and higher food prices, resulting from the El Niño weather phenomenon, in the second half of 2014. But, he assured investors, the central bank will act preemptively if it sees this year’s inflation target of 3–5% at risk.

The central bank is watching the Fed taper’s impact via foreign portfolio investment outflows and foreign exchange rate volatility. The bank is also monitoring such external factors as weak domestic activity in advanced economies and the sustainability of reforms in the eurozone, as well as protracted weak growth in certain emerging market economies, the slowdown in China, and geopolitical risks.

Some analysts have previously warned about signs of frothiness in money supply and a rapid rise in property prices. But Tetangco allayed concerns of an asset bubble. “The indicators, as of now, show that we are not in one — but because it is our job to worry, we are mindful that pressures from excessive market exuberance can lead to a bubble,” he said.

Succession Issue

Although the Philippine economy has come a long way, daunting issues remain. Despite efforts toward building good governance, corruption at all levels of government continues to drain precious resources for public services. Job creation has yet to keep up with the growth of the labor force in this country of 100 million people, prompting many Filipinos to seek employment opportunities overseas.

Previous periods of economic optimism in the Philippines have fizzled out as quickly as the political tectonic plates shifted. The term of President Aquino, whose administration has been credited for the current political and economic stability, ends in 2016. (The Constitution only allows a single six-year presidential term.) The big question is, will the reforms end with his term too? With several personalities already aiming for the top job and the mudslinging heating up, the succession issue could bring unwanted turbulence to this economic takeoff. As Aquino himself asked in his State of the Nation speech: “Who will, without a shred of doubt, continue the transformation we are achieving?”

If you want to learn more about the outlook of the Philippines, CFA Society Philippines and CFA Institute will host the Philippines Investment Conference in Manila on 22 October. Hear from top government policy makers, local business industry leaders, economists, institutional investors, and many others. Find out more or register for the conference here.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: CFA Society Philippines