Keeping the faith in bad times

The Philippines needs to attract more foreign direct investments to complement domestic market-driven investment which it do by easing systems in doing business and by providing better infrastructure.

The collapse of the stock market and the weakening of the peso has not diminished the faith of a New York-based think in the growth prospects of the Philippine Economy. Global Source said that it upgraded its growth forecast for the country by more than one percentage point to 7.2 percent for 2013.

In its latest Market Brief, Global Source said that it raised its growth outlook for the Philippines from its earlier forecast of 6.1 percent, with public and election-related spending, and the boom in private construction to carry the Philippine economy through and in fact make it grow.

“We are looking at significant upward adjustments to our growth forecasts for this year and next,” Global Source said.

“But this is mostly based on the business cycle rather than a permanent structural shift that prospective investors, including a new class of players that can only invest in investment grade markets, may be waiting for,” it added.

Last year, Global Source raised its projection for the Philippines to 6.2 percent from its previous forecast of 5.8 percent.

“OGDP revisions reflect largely the high current election-related spending growth, including likely frontloading in public infrastructure that may last only up to this quarter, and the ongoing private construction boom, a lagging indicator of past investment decisions in residential and business buildings that according to industry experts, take two to three years to complete,” the report said.

“The maturing of this cycle and rising interest rates will bring growth back to more normal levels, perhaps as early as late 2014 or early 2015,” it added.

Global Source said that the much-hoped for revival of investments in public private partnerships or in industrial zones may not be significantly large to keep growth high beyond 2015.

The think tank also said that the drop in the equity, bond, and peso markets are more of a reflection of portfolio flows going back to the U.S., rather than a change in internal fundamentals.

“Compared with other emerging markets, local financial prices may have been affected more because Philippine assets are among the most overvalued (e.g., very high price-earnings ratios) due in large part to past capital inflows attracted to the country’s growth story and prospect of investment grade ratings,” Global Source said.

“With the upgrade to investment grade already achieved and no clear further upside play, foreign players appeared to have decided to cash in earnings, with recent data releases showing poor numbers for FDI and exports as well as the World Bank’s downward revision of world growth used as reasons for players to exit,” it added.

Global Source also cited the Monetary Board’s decision to keep its policy rates unchanged, with key borrowing and lending rates at 3.5 percent and 5.5 percent, respectively and the special deposit accounts rate at 2 percent.

“In light of the capital outflows, the monies expected to be pushed out of the SDA facility are not expected to be inflationary and given their conservative risk profile, will likely have limited impact on prices of risky assets,” the think tank said.

“The peso’s depreciation is also welcome news. Both developments (SDA changes and weaker currency) will help to repair the BSP’s balance sheet and increase policy flexibility,” it added. –ANGELA CELIS., Businessworld