Philippines and Indonesia: the new ‘tigers’

MANILA, Philippines – Step aside economic powerhouses of the past, and get ready to share the spotlight.

In a special report, business news site Market Watch christened the Philippines and Indonesia as “the new tigers” or economies that have been overlooked in the past and are now “poised to drive future growth and grab more economic power.”

“In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as the region’s ‘New Tigers’ with the potential to leave a bigger imprint on global growth for years to come while the developed world struggles with excess debt and traditional regional heavyweights China and India lose momentum,” said the report.

Market Watch said it selected Indonesia and the Philippines because of several shared characteristics:

1.Large, young and dynamic populations
2.Relatively low levels of national debt
3.Expanding middle classes
4.Diversifying economies
5.Stable, elected governments with policies that inspire investor confidence
6.Top performing stock markets

Once plagued by inefficiencies and corruption, the Philippines has been ignored by investors in the past. But recently, several analysts have given the country their vote of confidence, heralding it as the next breakout nation, the strongest and safest place for funds in the region, and Asia’s bright spot.

According to Market Watch, neighbors Indonesia and the Philippines have come full circle. Once borrowers of the International Monetary Fund (IMF), both recently became lenders.

This 2012, they each pledged USD$1 billion to IMF’s crisis fund mostly for wobbly European countries, after relying on the same body to bail them out during the Asian Financial Crisis in the late 1990s, right after Asian economies stalled in their original quests to become ‘Tiger’ economies.

The borrower-to-lender transition is only one example that shows how both countries are righting their economic ships. Investors are encouraged to keep their eyes on the Philippines and Indonesia as the countries set sail, especially as traditional economies sputter and slowdown.

Why Philippines may finally take off

The mood in the Philippines is upbeat, explained Market Watch. After a lackluster 2011, the country has one of the fastest growth rates in Southeast Asia.

While inflation and high food prices remain a concern in other Asian countries, the Philippines has avoided that problem. The country’s average inflation is at the low end of the central bank’s 3% to 5% target, coming out to just 3.2% over the first 9 months.

And an Asian Development Bank (ADB) report on inflation and food prices showed that, while the retail cost of rice increased in 10 other developing Asian countries, the price of the staple food actually decreased nearly 1% in the Philippines between 2010 and 2011.

Under President Aquino’s government, the budget deficit was cut, and he promised to bring it down to 2% of gross domestic product (GDP) by 2013 from 3.9% when he took office in 2010. The article noted that while some view Aquino’s fiscal moves as prudent, others believe he is too cautious with spending — a vital ingredient for fueling a developing economy.

Still, Market Watch said, “With low debt and a government working hard to get its financial position in order, the Philippines represents the opposite of Europe.”

The local stock market has also become more attractive amid uncertainty in former safe havens. Though relatively small and expensive by Asian standards, the Philippine Stock Exchange has grown an impressive 24.4% year-to-date. An investment upgrade for sovereign debt issues is in reach now more than ever.

“Any concern about the small size of the Indonesian and Philippines markets has been put aside in the past few years by investors in part seeking safety from European debt turmoil by buying into ‘stable stocks and stable markets,'” Khiem Do, head of Asian multi asset at Barings Investment Management, told Market Watch.

The Philippines has been relatively sheltered from the global economic slowdown. Filipinos abroad continue to pump money back into the local economy in the form of remittances, which are estimated to account for 9% of GDP. Though growth has slowed, each year remittances hit another record high.

Market Watch pointed out that a prospect that is even brighter than remittances is the homegrown call center industry. After all, the Philippines boasts of a young, ready-to-work, English-speaking population — perfect employees for the business process outsourcing (BPO) industry.

“Revenue from the industry, which employs almost 650,000, accounts for about 5% of GDP. At the current annual growth rate of about 25%, analysts estimate industry revenues will top remittances within 5 years,” wrote Market Watch.

People are constantly praised as the Philippines’ best asset. Market Watch pointed out that the Filipino people have the potential to help the country unlock tourism as a key to future growth.

Challenges ahead

The country seems ready to make a new name for itself in the global arena but several challenges threaten to hold the country back.

Market Watch points to a few: low infrastructure spending, red tape for potential growth sectors like mining, a higher cost base for manufacturing and not enough foreign investments. Not solving those issues will stifle the country’s next high growth industries.

“The key reason tourism is underperforming in the Philippines is infrastructure,” Credit Suisse economist Santitarn Sathirathai told Market Watch.

“A bigger tourism sector would help absorb labor in its swelling population, as it nears 100 million. Rapid population growth has not been matched by infrastructure expansion. Aging roads and inadequate airports have frustrated economic development and made getting around difficult for visitors,” said the news site.

Big-ticket infrastructure projects have been delayed as the government takes extra measures to insure transparent and fair bidding. For years the country has needed new infrastructure and the rollbacks exacerbate existing problems, like the capital’s notorious traffic jams.

Southeast Asia broker CLSA told Market Watch that since the 1990s, “infrastructure spending in the Philippines has averaged around 1.8% of gross domestic product — well below the regional average and the World Bank’s target of 5%.”

Market Watch also highlighted mining as an industry that could help raise the Philippines’ economic prospects.

“Beyond tourism, mining is another potential growth driver for the Philippines. The country is rich in minerals including copper, gold and nickel, but development of the mining industry has been stalled by political resistance and layers of red tape,” said Market Watch.

“Those obstacles are likely to push the meaningful development of the country’s mining sector out by at least 5 to 10 years,” it added.

The Philippines is the 5th most mineral-rich country in the world thanks to its large supply of gold, nickel, copper, and chromite. The Mines and Geosciences Bureau estimated that US$840 billion worth of mineral wealth lies untapped beneath the ground.

The Aquino administration has tried to provide mining firms with new clear guidelines only to receive a backlash of negative comments from industry players.

“Regardless of which industries the Philippines seeks to develop, international backing will be crucial,” said Market Watch.

International funding may not be too far off with investors eyeing the country with so much renewed interest.

However, the country has been praised for its potential before, only to fall flat. From its reputation as “the Pearl of the Orient,” the Philippines dropped in international esteem until it was known as the “Sick Man of Asia.”

Now the country has the tools it needs to be a standout economy: low debt, a stable government, mineral wealth, a strong stock market and a large youthful population.

It just has to unleash them. -Katherine Visconti, Rappler.com