Is the Philippines really ready for take-off?
There is a lot of talk about the Philippines becoming the next success story for business and investment in Southeast Asia, based on assumptions the country might have overcome its damaged economic culture from which it suffered over the last decades.
By Arno Maierbrugger
In fact, there are signals that the global financial community has something in mind with the Philippines. Moody’s on October 29 upgraded the country’s foreign and local currency long-term bond ratings Ba1 from Ba2, bringing the Philippines on par with Turkey and Hungary and lauding peace efforts with regards to the Mindanao rebels in the South.
Standard & Poor’s in July raised the debt rating to BB+, one level below investment grade, citing “improved prospects for growth for the Philippines.”
Goldman Sachs has added the Philippines to its self-created “Next-11” country bloc, a group of eleven nations including Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Bangladesh, Turkey, South Korea and Vietnam, that have – according to Goldman Sachs – “high potential of becoming the world’s largest economies in the 21st century.”
Dutch financial giant ING sees the Philippine peso remaining strong against the US dollar for the next two years “on the back of favourable macroeconomic fundamentals.”
Flattering outlook
While the outlook of growth and prosperity is certainly flattering for Benigno Aquino III’s presidency, where much of a promotion exercise has been done to catch investors’ attention, for some critical observers it seems more like the financial powers of the world are preparing for a speculative attack against the Philippines.
There have been no notable large foreign investment in the Philippines over the last quarters, at least in comparison to ASEAN peer countries. The last multinational to pull out of manufacturing in the Philippines was Ford Motor Company, shifting production to Thailand and Indonesia and citing reasons of poor infrastructure and red tape. The last months have seen president Aquino on road shows to Europe, Australia, Japan, the Middle East – and, notably, at the same time to Israel – to promote his country as a new investors’ haven of the ASEAN region, with results that have yet to materialise.
Speculative attack
But while global financial institutions are pushing the Philippines as the “16th largest global economy by 2050” or something along these lines, the government in Manila has become busy fighting off speculative capital inflows from world markets that are looking for new playgrounds away from the US and EU. Stocks were surging, the peso was appreciating, bond yields were rising. So far, so good.
But who believes that Moody’s or any other rating agency is really concerned about peace in Mindanao? What the Philippines, with its economy still on weak fundamentals, is now experiencing are global carry trades by Goldman Sachs and their peers who are tired of low-profit and risky short-selling adventures in debt-ridden Europe.
Currently, investor make money in the Philippines by borrowing in a country with low interest rates such as from more stable EU countries, Japan or the US, converting the money into the Philippine peso where borrowing costs are higher and lending the amount at that higher rate, and this at a large scale. What remains is the profit minus currency float. Due to this speculative cash inflow the peso is appreciating and not due to underlying economic fundamentals such as growing exports. Goldman Sachs and their peers have done this with India before and will most likely be doing it with China as a major global economic face-off between the US and China in the near future.
A look at the facts
However, what investors who are into medium or long-term investment in the Philippines need to do is to weigh the facts.
On the plus side, the Philippines is now in a stage of transformation, even though it is transforming much slower than other ASEAN-5 countries. And due to its undiversified economy based on the power of just a few conglomerates it is no wonder that it frequently, after it has taken one step forward, it is taking two steps back.
Foreign cash inflow, even if speculative, is now allowing the government to put aside funds for much-needed infrastructure projects of which most are really basic ones such as the construction of a decent sewerage system in Manila.
Cash inflow from Overseas Filipino Workers has never been that high than in 2012. This year until August, almost $14 billion were sent home by Filipino expats, up 7.6 per cent from a year ago, according to official central bank statistics – plus most likely much more through informal channels. One the downside: The money is only to a limited extent helping to make the country a more prosperous nation: Most of it flows into consumer goods and real estate, and thus in the pockets of the oligarchs that are owning all the glitzy shopping malls and real estate companies that are building new “lifestyle” towers. And the more Filipinos decide to work abroad, the higher the brain drain weighs on the country’s economy.
The business elite in the Philippines can be counted on the fingers of two hands: The Ayala family and the Aboitiz family, both of Spanish descent, Henry Sy (SM Investment), the Gokongwei family (JG Summit Holdings) and the Tan family (alliance Global), all three from China. The two most influential Filipino business families are the Cojuangco family (San Miguel), former close allies of the dictatorial Marcos regime, and the Razon family, staunch allies of former president Gloria Macapagal-Arroyo, who since recently is facing charges of embezzlement of public funds.
The disadvantages
The era of cheap manufacturing in the Philippines is over. While wages alone are no longer determining the decision for foreign investors to set up factories in emerging countries, the Philippines have become a relatively expensive place to produce goods due to strong labour unions, but with low quality and low productivity remaining the standard. Another reason why investors are reluctant to tap into the manufacturing pool in the Philippines is that the country is actually too far off the trade track and too fractured, making shipping of goods more expensive. Infrastructure (transport, communication) is poor, even in the metropolitan areas, let alone on the islands. The country is disaster-prone, and a functioning business administration can only be found in Metro Manila, Central Luzon and partly Cebu.
The much-promoted Business Process Outsourcing industry in the Philippines is another sector that needs closer attention. It is a thriving sector that, however the numbers are read, has already taken over or is about to take over the Indian BPO industry by revenues. This is positive in terms of employment for English-literate and well-educated Filipinos, but the comparison with India is lacking a certain element. How come that the Indian BPO industry over the last decades has created homegrown multinational IT companies such as Wipro, Tata Consulancy Services and Infosys, while not a single genuine Philippines BPO company has made its way into the global top ten of the worldwide BPO industry with global majors IBM, Accenture or Cognizant just buying manpower in the Philippines and not building subsidiary industries that would create added value?
Tourism remains one of the most neglected sectors in the Philippines. While the country has some of the best beaches in the world, a mainly open-minded and friendly population, low prices for everything, legalised gambling and else, tourists give a wide berth around the country as touristic infrastructure is minimal, hotel standards outside the metro regions are poor and service levels low, and there is reason to be concerned about personal safety at certain places. Some visitors continue to complain about Filipino food but this is nothing the government can change by politics.
The outlook for the agriculture and aquaculture sector in the Philippines is bleak in terms of investment opportunities. During the Spanish occupation, land has been allocated to influential families, and the large haciendas owned by oligarchs today are partnering with multinational agriculture giants such as Monsanto and Dupont Pioneer in genetically modified food, with the result that the Philippines today have taken the lead in East Asia in GM food among a lot of criticism from environmental groups.
The same applies to mining. Multinationals might be eager to tap into the potential of minerals in the country, but uncertain mining laws and foreign ownership regulations as well as a lack of skilled labour might keep them off. Needless to say that an agricultural reform and and new mining investment laws are overdue in the Philippines, as is a structural reform to diversify the entire economy from an oligarchic to a more competitive system, otherwise the country will not be able to shrug off worrisome predictions that go beyond the government’s over-optimistic promotions.
[caption id="attachment_5015" align="alignleft" width="300"] The Filipino BPO industry is thriving, but no homegrown company made it to a major player on the global stage as it happened in with Indian BPOs.[/caption] There is a lot of talk about the Philippines becoming the next success story for business and investment in Southeast Asia, based on assumptions the country might have overcome its damaged economic culture from which it suffered over the last decades. By Arno Maierbrugger In fact, there are signals that the global financial community has something in mind with the Philippines. Moody's on October 29 upgraded the country’s foreign...
There is a lot of talk about the Philippines becoming the next success story for business and investment in Southeast Asia, based on assumptions the country might have overcome its damaged economic culture from which it suffered over the last decades.
By Arno Maierbrugger
In fact, there are signals that the global financial community has something in mind with the Philippines. Moody’s on October 29 upgraded the country’s foreign and local currency long-term bond ratings Ba1 from Ba2, bringing the Philippines on par with Turkey and Hungary and lauding peace efforts with regards to the Mindanao rebels in the South.
Standard & Poor’s in July raised the debt rating to BB+, one level below investment grade, citing “improved prospects for growth for the Philippines.”
Goldman Sachs has added the Philippines to its self-created “Next-11” country bloc, a group of eleven nations including Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Bangladesh, Turkey, South Korea and Vietnam, that have – according to Goldman Sachs – “high potential of becoming the world’s largest economies in the 21st century.”
Dutch financial giant ING sees the Philippine peso remaining strong against the US dollar for the next two years “on the back of favourable macroeconomic fundamentals.”
Flattering outlook
While the outlook of growth and prosperity is certainly flattering for Benigno Aquino III’s presidency, where much of a promotion exercise has been done to catch investors’ attention, for some critical observers it seems more like the financial powers of the world are preparing for a speculative attack against the Philippines.
There have been no notable large foreign investment in the Philippines over the last quarters, at least in comparison to ASEAN peer countries. The last multinational to pull out of manufacturing in the Philippines was Ford Motor Company, shifting production to Thailand and Indonesia and citing reasons of poor infrastructure and red tape. The last months have seen president Aquino on road shows to Europe, Australia, Japan, the Middle East – and, notably, at the same time to Israel – to promote his country as a new investors’ haven of the ASEAN region, with results that have yet to materialise.
Speculative attack
But while global financial institutions are pushing the Philippines as the “16th largest global economy by 2050” or something along these lines, the government in Manila has become busy fighting off speculative capital inflows from world markets that are looking for new playgrounds away from the US and EU. Stocks were surging, the peso was appreciating, bond yields were rising. So far, so good.
But who believes that Moody’s or any other rating agency is really concerned about peace in Mindanao? What the Philippines, with its economy still on weak fundamentals, is now experiencing are global carry trades by Goldman Sachs and their peers who are tired of low-profit and risky short-selling adventures in debt-ridden Europe.
Currently, investor make money in the Philippines by borrowing in a country with low interest rates such as from more stable EU countries, Japan or the US, converting the money into the Philippine peso where borrowing costs are higher and lending the amount at that higher rate, and this at a large scale. What remains is the profit minus currency float. Due to this speculative cash inflow the peso is appreciating and not due to underlying economic fundamentals such as growing exports. Goldman Sachs and their peers have done this with India before and will most likely be doing it with China as a major global economic face-off between the US and China in the near future.
A look at the facts
However, what investors who are into medium or long-term investment in the Philippines need to do is to weigh the facts.
On the plus side, the Philippines is now in a stage of transformation, even though it is transforming much slower than other ASEAN-5 countries. And due to its undiversified economy based on the power of just a few conglomerates it is no wonder that it frequently, after it has taken one step forward, it is taking two steps back.
Foreign cash inflow, even if speculative, is now allowing the government to put aside funds for much-needed infrastructure projects of which most are really basic ones such as the construction of a decent sewerage system in Manila.
Cash inflow from Overseas Filipino Workers has never been that high than in 2012. This year until August, almost $14 billion were sent home by Filipino expats, up 7.6 per cent from a year ago, according to official central bank statistics – plus most likely much more through informal channels. One the downside: The money is only to a limited extent helping to make the country a more prosperous nation: Most of it flows into consumer goods and real estate, and thus in the pockets of the oligarchs that are owning all the glitzy shopping malls and real estate companies that are building new “lifestyle” towers. And the more Filipinos decide to work abroad, the higher the brain drain weighs on the country’s economy.
The business elite in the Philippines can be counted on the fingers of two hands: The Ayala family and the Aboitiz family, both of Spanish descent, Henry Sy (SM Investment), the Gokongwei family (JG Summit Holdings) and the Tan family (alliance Global), all three from China. The two most influential Filipino business families are the Cojuangco family (San Miguel), former close allies of the dictatorial Marcos regime, and the Razon family, staunch allies of former president Gloria Macapagal-Arroyo, who since recently is facing charges of embezzlement of public funds.
The disadvantages
The era of cheap manufacturing in the Philippines is over. While wages alone are no longer determining the decision for foreign investors to set up factories in emerging countries, the Philippines have become a relatively expensive place to produce goods due to strong labour unions, but with low quality and low productivity remaining the standard. Another reason why investors are reluctant to tap into the manufacturing pool in the Philippines is that the country is actually too far off the trade track and too fractured, making shipping of goods more expensive. Infrastructure (transport, communication) is poor, even in the metropolitan areas, let alone on the islands. The country is disaster-prone, and a functioning business administration can only be found in Metro Manila, Central Luzon and partly Cebu.
The much-promoted Business Process Outsourcing industry in the Philippines is another sector that needs closer attention. It is a thriving sector that, however the numbers are read, has already taken over or is about to take over the Indian BPO industry by revenues. This is positive in terms of employment for English-literate and well-educated Filipinos, but the comparison with India is lacking a certain element. How come that the Indian BPO industry over the last decades has created homegrown multinational IT companies such as Wipro, Tata Consulancy Services and Infosys, while not a single genuine Philippines BPO company has made its way into the global top ten of the worldwide BPO industry with global majors IBM, Accenture or Cognizant just buying manpower in the Philippines and not building subsidiary industries that would create added value?
Tourism remains one of the most neglected sectors in the Philippines. While the country has some of the best beaches in the world, a mainly open-minded and friendly population, low prices for everything, legalised gambling and else, tourists give a wide berth around the country as touristic infrastructure is minimal, hotel standards outside the metro regions are poor and service levels low, and there is reason to be concerned about personal safety at certain places. Some visitors continue to complain about Filipino food but this is nothing the government can change by politics.
The outlook for the agriculture and aquaculture sector in the Philippines is bleak in terms of investment opportunities. During the Spanish occupation, land has been allocated to influential families, and the large haciendas owned by oligarchs today are partnering with multinational agriculture giants such as Monsanto and Dupont Pioneer in genetically modified food, with the result that the Philippines today have taken the lead in East Asia in GM food among a lot of criticism from environmental groups.
The same applies to mining. Multinationals might be eager to tap into the potential of minerals in the country, but uncertain mining laws and foreign ownership regulations as well as a lack of skilled labour might keep them off. Needless to say that an agricultural reform and and new mining investment laws are overdue in the Philippines, as is a structural reform to diversify the entire economy from an oligarchic to a more competitive system, otherwise the country will not be able to shrug off worrisome predictions that go beyond the government’s over-optimistic promotions.
Food for thought