Trucks oust buffaloes as Aquino $6.5 billion adds roads: Freight

Farmer Rene Ravalo loads coconuts onto a truck in the Philippines for the 30-minute trip to market on a road built last year. It previously took half a day for a water buffalo to inch the goods down a mountain track.

“Selling our produce is much easier now,” Ravalo said in Magsaysay, his village 1,570 kilometers (975 miles) south of Manila. He’s gaining from record spending on roads, ports and airports, set by the government at 268 billion pesos ($6.5 billion) in 2013 to boost a transport network the World Economic Forum ranks the second worst in major Southeast Asian nations.

High-rise towers stand in Makati City in Manila. Fitch Ratings promoted the Philippines to investment grade for the first time last month, as President Benigno Aquino fights corruption and tax evasion to limit the budget deficit. Photographer: Brent Lewin/Bloomberg

The expenditure has helped remake the archipelago into the region’s fastest-growing economy after decades of lagging behind peers, International Monetary Fund data show. Fitch Ratings promoted the Philippines to investment grade for the first time last month, as President Benigno Aquino fights corruption and tax evasion to limit the budget deficit.

“Deficient infrastructure has been a key development constraint and Aquino is starting to address this,” said Norio Usui, senior country economist for the Philippines at the Asian Development Bank in Manila. He estimated total investment needs at almost $12 billion annually, mostly for transport and power generation, to support an economy that the IMF forecasts will expand more than 6 percent for a second year in 2013.

Aquino is trying to overcome a legacy of depressed investment, caused partly by contract disputes and regulatory reversals that led companies including Frankfurt, Germany-based Fraport AG, an airport services provider, to leave the country.

Cement, Pepsi

Construction and cement businesses such as Lafarge Republic Inc. (LRI), Holcim Philippines Inc. (HLCM), DMCI Holdings Inc. (DMC) and EEI Corp. (EEI) will gain from the infrastructure drive, said Paul Joseph Garcia, senior vice president at BPI Asset Management Inc. in Manila. He helps manage about $18.5 billion of assets.

Consumer businesses such as Pepsi-Cola Products Philippines Inc. (PIP) and San Miguel Corp. (SMC) will also benefit as better transport spurs growth and increases incomes, he said. Consumer spending accounts for more than 70 percent of the $225 billion economy, making it the key engine of growth.

Lafarge and DMCI are based in Makati City. San Miguel is headquartered in Mandaluyong City, Holcim in Taguig, EEI in Quezon City and Pepsi-Cola in Muntinlupa City.

“Aquino is capitalizing on the favorable sentiment surrounding the Philippines, recognizing you can’t sustain high growth rates of above 6 percent without accompanying infrastructure development,” said Christian de Guzman, a sovereign analyst at Moody’s Investors Service in Singapore.
Stocks Surge

Aquino’s agenda — which led Time magazine to select him as one of the world’s 100 most influential people this year — has buoyed stocks and the nation’s currency.

The Philippine Stock Exchange Index is the second-best performer in the world since he took power in June 2010, rising 107 percent. The peso has climbed 12 percent versus the dollar.

Key projects include the Laguindingan International Airport, due to open in June on the second biggest Philippine island, Mindanao. This year, Aquino’s administration is set to begin construction or expansion of three other airports and a port.

The push to bolster outlays includes 8.3 billion pesos in 2013 for farm-to-market roads, such as the new gravel link that helps connect Magsaysay to the town of Lupon.

The farm-to-market initiative cuts losses from rotting and aims to spread development more widely, Budget Secretary Butch Abad said in a statement last month. The World Bank estimates 18 percent of the 95 million population lives on under $1.25 a day.

Sari-Sari Stores

The benefits for Magsaysay, which is set among mountains in Mindanao, go beyond reduced use of buffalo as pack animals, a centuries-old practice still common among poor farmers.

Small convenience outlets, known as sari-sari stores, are flourishing as goods including Colgate-Palmolive Co. (CL) toothpaste and Unilever (ULVR) soap flow in more easily. The road has also spurred purchases of Honda Motor Co. (7267) and Kawasaki Heavy Industries Ltd. (7012) motorbikes, with over 40 buzzing around a village of 740 people.

“Before, we couldn’t even eat fish,” said Emelita Mawalik, who owns one of the sari-sari shops. “Now, merchants come to our village to sell us tilapia, round scads and ox-eye scads. Can you imagine? They climb to us now.”

After coming to power almost three years ago, Aquino identified more than $17 billion in projects from power plants to railways where companies can participate through public- private partnerships, aside from the outlays purely by the government.
Slow Pace

So far, only three such contracts have been awarded: an elevated highway connecting airport terminals in Manila, the construction of about 9,300 classrooms and a toll road leading to provinces south of the capital.

The pace has to pick up, according to Jeff Ng, an economist at Standard Chartered Plc in Singapore.

“They’re being selective in choosing the right proposals,” Ng said. “But the government needs to fast-track these projects. We’re watching out for more rollouts this year and next.”

The Philippines must also develop its capital markets further, especially the insurance industry, as “limited availability” of long-term financing in local currency hampers the funding of infrastructure projects, according to the ADB.

IMF data shows investment was about 19 percent of gross domestic product in 2012, down from more than 24 percent in 2002 and below the 30 percent in Asean-5 as a whole. That groups Indonesia, Thailand, Malaysia, the Philippines and Vietnam.

Vested Interests

The ADB’s Usui said infrastructure spending must at least double from the current 2 percent to 3 percent of GDP.

While reforms to move the economy away from consumption toward investment are necessary, such changes have “historically been difficult to implement, given the vested interests in the status quo,” the World Bank said in a December report.

Aquino’s predecessors, Gloria Arroyo and Joseph Estrada, were embroiled in corruption scandals that hurt efforts to liberalize the economy. Arroyo, who took power after Estrada was ousted by a popular revolt in 2001, has been charged with plunder.

Investor optimism under Aquino pushed stock valuations to an all-time high of 20.4 times projected 12-month profits on April 22, data compiled by Bloomberg show. That’s spurring concern the shares are too expensive, given past reform efforts have faced obstacles and flagged. The peso has dropped about 1 percent in the past month.

Investment Grade

Still, Aquino has been “successful in pushing policies that created a higher level of confidence in the Philippines, in contrast to the past when promises never came true,” said Edward Teather, a Singapore-based senior economist at UBS AG.

The president is now campaigning to increase his party’s share of the Senate in elections scheduled for May 13, seeking to buttress his popular mandate.

Fitch Ratings boosted the Philippines to BBB- in March, the lowest investment grade, citing remittances by overseas workers, moderate budget deficits and a “strong” policy-making framework.

Standard & Poor’s in July raised its rating to a step below investment grade, with Moody’s Investors Service following in October. S&P raised the outlook to positive in December.

GDP expansion averaged more than 6 percent in the three years through 2012, compared with 3.1 percent from 1980 through 2009. The figures for Asean-5 are 5.9 percent and 5.1 percent.

The Philippines placed 88 out of 144 economies in a World Economic Forum 2012-2013 index of transport infrastructure, behind Singapore, Malaysia, Thailand and Indonesia, and ahead of Vietnam. That’s up from 106 in 2010-2011.

Road Expansion

There’s a “medium” probability that the government will achieve its goal of increasing paved-road length by about 20 percent to 31,242 kilometers in 2016 compared with 2011, the National Statistical Coordination Board said last year.

The expansion is pivotal to spur commerce since about 50 percent of Philippine freight is transported by road, a Japanese assessment for a development loan shows.

Only 27.3 percent of the network comprises asphalt or concrete links in good condition, according to the Department of Public Works and Highways. Almost 20 percent is earth or gravel.

In Magsaysay, Ravalo, the farmer and a father of three children, takes a break from harvesting Chinese cabbage, okra and eggplant. Over a meal of bananas with shrimp paste and coconut, he ponders how even a new gravel link can change lives.

“We’ve been waiting for decades for the government to hear our pleas and give us a road,” he said. “Now, we’re able to save money. Slowly, our lives are getting better.” –Karl Lester M. Yap, Bloomberg

To contact the reporter on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net