>

Why Invest in the Philippines?

March 30th, 2011
in contributors

philippine flag   by Elliott R. Morss, with the assistance of Renzie Doem Agutaya

Introduction 

In late February, I was contacted by Mr. Agutaya, a Philippine Certified Public Accountant. He asked via e-mail what I thought of investing in The Philippines. It reminded me that in Asia, most Western attention has focused on China, Hong Kong, India, and Singapore. So I suggested a two-part series. In the first, we look investment prospects in a number of Asian countries. In the second, we look more closely at specific Philippine investment opportunities.

Background 

Geographic and other “size” data on Asia countries are presented in Table 1. It is not surprising to find that China and India are the largest, with the Philippines ranking fifth, just below Indonesia. The population density figures for China and India are somewhat misleading: even though raw data show India as almost three times as densely populated as China, the arable land of India (1.5 million sq. km.) is actually greater than that of China (1.2 million sq. km.).

 

Table 1. – Asian Countries: Population, Size, GDP

 

Country

Population

(in mil.)

Land area

(sq. km)

Population

Density

GDP

(mil. US$)

GDP/P

US$

China

1,341

9,596,961

140

5,745,133

4,284

India

1,196

3,287,263

364

1,430,020

1,196

Indonesia

238

1,910,931

125

695,059

2,920

Philippines

94

300,000

313

189,061

2,011

Vietnam

87

331,212

264

101,987

1,169

Thailand

67

513,120

131

312,605

4,639

South Korea

49

99,828

491

986,256

20,128

Malaysia

28

330,803

85

218,950

7,820

Taiwan

23

36,188

645

426,984

18,303

Source: World Bank

 

China’s GDP is four times as large as India’s, even though their populations are about the same. Per capita incomes of South Korea and Taiwan are much greater than other Asian powers, with Malaysia a distant third.

 

Over the last two decades, most Asian countries have grown rapidly. Table 2 provides the annual average growth rates for both GDP and by sector for Asian countries. Growth was interrupted in 1997 by the Asian financial collapse, but great gains have been made since then.

 

Table 2. – Average Annual Growth Rate, 1990 – 2009

Country

GDP

Agriculture

Industry

Services

Ratio

China

10.1%

4.2%

12.1%

10.2%

2.7

Vietnam

7.3%

3.8%

9.9%

7.4%

2.3

India

6.5%

2.8%

6.7%

8.0%

2.6

Malaysia

6.0%

1.7%

6.1%

7.6%

4.0

South Korea

5.6%

1.6%

6.1%

5.1%

3.6

Indonesia

5.0%

2.9%

5.4%

5.5%

1.9

Taiwan

4.9%

-0.1%

3.6%

4.1%

n.a.

Thailand

4.7%

1.8%

6.1%

4.2%

2.9

Philippines

3.6%

2.4%

3.0%

4.6%

1.6

Source: Asian Development Bank

 

In most developing countries, the industry and service sectors grow more rapidly than agriculture. The final column in Table 2 gives the ratio of the average growth rate in the industry and service sectors relative to agriculture. For most countries, the industry and service sectors grew by more than twice as fast as agriculture.

 

In the sixties, the Philippines was second only to Japan as the richest nation in Asia. However, the Marcos reign (1965-1986) brought in corruption and slower growth. In February 1986, the “bloodless revolution” (People Power Revolution) removed Marcos from power.

Recession Effects 

The Western banking collapse caused a global panic and launched the global recession. In most Asian countries, the initial impact was seen in falling exports and stock market collapses. These, in turn, led to further domestic reductions in aggregate demand.

 

Table 3 shows how exports of Asian nations fell off in 2009. Inasmuch as exports had been the primary “engine of growth” for most of these countries over the last two decades, the collapse in global demand hit them hard.

 

Table 3 – Percent Fall in Exports,

Asian Nations, 2009

Country

Percent

Vietnam

-10.0%

Thailand

-13.4%

Indonesia

-13.9%

India

-14.5%

China

-15.7%

Philippines

-17.4%

South Korea

-17.8%

Malaysia

-19.0%

Taiwan

-20.0%

Source: IMF Balance of Payments Database

 

Table 4 provides data on global stock market losses following the Western bank collapse. In the ensuing panic, virtually all markets lost 50% or more. The losses are calculated from stock market highs (usually some point in late 2007 or early 2008 to the bottom during the recession).

 

Table 4. – Global Recession Stock Market Performance

 

Index

Index High

Index Low

%

Loss

Asia

 

 

 

Malaysia  (FBMKLCI:IND)

1499

801

-47%

South Korea (KRX100:IND)

4,178

1934

-54%

Philippines (PCOMP:IND)

3,838

1,685

-56%

Taiwan (TWSE:IND)

7,067

2,544

-64%

Thailand (SET:IND)

916

383

-58%

Indonesia (JCI:IND)

2,838

1,089

-62%

India (Bombay 500 IDX)

8,910

2,961

-67%

China (Shanghai SE)

6,359

1,789

-72%

Vietnam (VNINDEX:IND)

1,171

240

-80%

Rest of World

 

 

 

Eurostoxx 50 PR

4,543

1,810

-60%

Nikkei 225 (Japan)

18,239

7,569

-59%

S&P 500 (US)

1,558

683

-56%

Brazil Bovespa

73,794

32,706

-56%

Source: Bloomberg

 

As I pointed out in an earlier article, global stock market losses totaled $36 trillion, and the resulting “wealth effect” cause a further reduction in aggregate demand.

Recovery 

It is remarkable how rapidly Asian countries have recovered from the global recession. Table 5 provides this information, along with data for Europe, Japan and the United States. While Western nations continue to struggle with unemployment and debt, Asia is growing rapidly again.

 

Table 5. - GDP Growth Projections

Country

2008

2009

2010 est.

2011 proj.

2012 proj.

China

9.6%

9.1%

10.5%

9.6%

9.5%

India

6.4%

5.7%

9.7%

8.4%

8.0%

Vietnam

6.3%

5.3%

6.5%

6.8%

7.0%

Indonesia

6.0%

4.5%

6.0%

6.2%

6.5%

Malaysia

4.7%

-1.7%

6.7%

5.3%

5.2%

Philippines

3.7%

1.1%

7.0%

5.0%

5.0%

South Korea

2.3%

0.2%

6.1%

4.5%

4.2%

Taiwan

0.7%

-1.9%

9.3%

4.4%

4.7%

Thailand

2.5%

-2.2%

7.5%

4.0%

4.3%

Japan

-1.2%

-5.2%

1.9%

2.0%

2.0%

United States

0.4%

-2.4%

3.1%

2.6%

2.4%

European Union

0.9%

-4.1%

1.0%

1.8%

2.2%

Source: International Monetary Fund, World Economic Outlook Database, April 2010

 

In the past, Asian countries depended on exports for growth. But now, growing middle classes are the primary engine for growth. In the Philippines, consumption is fueled by high level of remittances. These remittances account for about 5% of GDP.

Investing in Asia 

For foreign investors, there are two key questions to be addressed before getting to specific investment choices:

  • How is the stock market likely to perform, and
  • Whatwill happen to the currency?  

Looking Forward: How Are Stock Markets Likely to Perform?

Table 6 shows how much stock markets have recovered from their pre-recession highs. The European, American, Japanese, and even Brazilian markets still have a way to go.

 

Table 6. - Stock Market Recoveries

Index

Index High

3/28/2011 Index

% Below High

Asia

 

 

 

Indonesia (JCI:IND)

2,838

3,592

27%

Thailand (SET:IND)

916

1,036

13%

South Korea (KRX100:IND)

4,178

4,438

6%

Philippines (PCOMP:IND)

3,838

3,907

2%

Malaysia  (FBMKLCI:IND)

1499

1,520

1%

Taiwan (TWSE:IND)

9,763

5,887

-17%

India (Bombay 500 IDX)

8,910

7,318

-18%

China (Shanghai SE)

6,359

3,097

-51%

Vietnam (VNINDEX:IND)

1,171

458

-61%

Rest of World

 

 

 

Eurostoxx 50 PR

4,543

2,911

-36%

Nikkei 225 (Japan)

18,239

9,459

-48%

S&P 500 (US)

1,558

1,319

-15%

Brazil Bovespa

73,794

67,675

-8%

Source: Yahoo Finance

 

In Asia, Indonesia and Thailand are way ahead of their pre-recession highs. The markets of The Philippines, South Korea, and Malaysia have fully recovered, while China and Vietnam are still way off their earlier highs.

 

One measure of whether a market is over-bought is its price to earnings ratio (P/E). To get an approximation of these, I have taken the P/Es of Exchange Traded Funds (ETFs) that broadly reflect each country’s stock market. The results are presented in Table 7.

 

Table 7. – Price Earnings Approximations

Region/Country

ETF

P/E

Asia

 

 

South Korea

EWY

10

Philippines

EPHE

11

China

SXI

11

Thailand

THD

12

Taiwan

EWT

13

Indonesia

IDX

14

Malaysia

EWM

15

India

INDY

17

Vietnam

VNM

n.a.

Rest of World

 

 

Brazil

EWZ

10

Europe

FEZ

11

US

SPY

14

Japan

EWJ

15

Source: Yahoo Finance

 

The P/Es for India, Indonesia, and Malaysia suggest proceeding with caution, while the P/Es of South Korea, The Philippines, and China appear quite reasonable. 

 Looking Forward: What Will Happen to Currency Values? 

What happens to currency values is important because for overseas investors, capital gains or losses will be made on currency valuation changes. Consider the following concrete example. Suppose you invested $100 in Nikkei 225 on February 1, 2007 and liquidated it on February 1, 2011. As Table 8 illustrates, you would have lost 41% on the Nikkei 225. But because the Yen appreciated 46% against the US$, your net loss would only have been 14%. In short, when investing overseas, you can earn capital gains or losses on currency value changes as well as on stock market movements.

 

Table 8. – Capital Gains for Foreign Investor

 

Equity

Currency

Investment

Date

Nikkei 225

Yen/US$

US$

Yen

2/1/2007

17,519.50

120.71

100

12,071

2/1/2011

10,274.50

82.59

86

7,079

Gain/Loss

-41%

46%

-14%

-41%

Source: Yahoo Finance, Oanda

 

Consider first what has been happening to exchange rates.  In the global panic resulting from the Western banking collapse, the dollar gained value as a “safe haven”. But as Table 9 shows, all Asian currencies gained value relative to the US$ since 2009. This is causing concern in most Asian countries inasmuch as the appreciation of their currencies makes their exports less competitive in the US. Since 2009, both the Indonesian and Malaysian currencies appreciated 16% against the US$.

 

Table 9. - Currency Rates per US$

 

 

Currency/US$

 

 

2008

 

 

2009

 

 

2010

 

 

2011

 

2009-2011

%Change

Indonesia

9,225

10,395

9,087

8,710

16%

Malaysia

3.3

3.6

3.3

3.0

16%

Korea

1,018

1,277

1,157

1,125

12%

Thailand

33.4

34.3

31.7

30.3

12%

Taiwan

31.1

33.0

31.6

29.6

10%

Philippines

43.3

47.6

45.1

43.4

9%

India

45.9

47.6

46.1

44.9

6%

China

7.0

6.8

6.8

6.6

4%

Vietnam

16,450

17,800

18,792

21,037

-18%

Source: Oanda

 

Will these currency appreciations continue, or will these currencies lose value moving forward? What causes currencies to lose value? The biggest danger is that economies will overheat, driving up domestic prices and increasing imports with a consequent drop in the local currency value. For these concerns, there are several key indicators worth examining:  

  • GDP growth rates;
  • Government balances;
  • Government debt;
  • Current account balances, and
  • Inflation.

 GDP Growth Rates - The projected GDP growth rates reported in Table 5 for Asian countries are impressively high. But they are not out of line with past performance. No concern here.

Government Balances - Data on projected government deficits are presented in Table 10. With the exception of India, it appears that all governments are moving from stimulus to a more neutral policy. The projected deficits of Malaysia, Vietnam, and India are troubling.

 

Table 10. – Government Deficits

 

General Government

 

2008

 

2009

 

2010 est.

 

2011 pro.

 

2012 pro.

South Korea

1.7%

0.0%

1.4%

2.0%

2.3%

Indonesia

0.0%

-1.6%

-1.5%

-1.7%

-1.6%

Philippines

-0.3%

-3.4%

-2.6%

-2.4%

1.9%

Thailand

0.1%

-3.2%

-2.7%

-2.3%

-1.6%

China

-0.4%

-3.1%

-3.1%

-2.1%

-1.5%

Taiwan

-2.4%

-5.8%

-3.8%

-2.5%

-2.3%

Malaysia

-3.2%

-5.5%

-4.6%

-5.5%

-5.2%

Vietnam

-0.9%

-8.9%

-6.0%

-4.2%

-3.5%

India

-7.9%

-10.2%

-9.8%

-9.2%

-8.4%

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

 

Government Debt - Problems in the Euro area are indicative of what can happen when government debt is excessive. Table 11 provides data on the debt of Asian governments. Government debts lower than 50% of GDP are quite manageable, particularly if the government is not running large surpluses. The debt coupled with the deficits of India and Vietnam are a cause for concern.

 

Table 11. – Gross Government Debt, 2010

Country

% GDP

China

19.1%

Indonesia

26.7%

South Korea

32.1%

Taiwan

39.1%

Thailand

45.5%

Philippines

46.3%

Malaysia

55.1%

Vietnam

56.7%

India

75.1%

Source: IMF, International Financial Statistics

 

Current Account Balance - There is also the question of whether the countries’ current account balances are manageable. Large current account deficits are precursors of weaker currencies. Projections of the current accounts are presented in Table 12. The current account deficits of both India and Vietnam are notable.

 

Table 12. - Current Account Projections

Country

2008

2009

2010 est.

2011 proj.

2012 proj.

Malaysia

17.5%

16.5%

14.7%

13.8%

12.9%

Taiwan

6.8%

11.3%

10.0%

9.5%

9.1%

China

9.6%

6.0%

4.7%

5.1%

5.5%

Philippines

2.2%

5.3%

4.1%

3.4%

3.0%

Thailand

0.6%

7.7%

3.6%

2.5%

1.7%

South Korea

-0.6%

5.1%

2.6%

2.9%

2.3%

Indonesia

0.0%

2.0%

0.9%

0.1%

-0.5%

India

-2.0%

-2.9%

-3.1%

-3.1%

-3.1%

Vietnam

-11.9%

-8.0%

-8.3%

-8.1%

-7.8%

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

 

The Philippines is projected to run a trade deficit of 10.2% of GDP in 2010. However, its unusually high income remittances from workers abroad (4.8% of GDP) contributes significantly to its positive current account balance.

Inflation - Domestic inflation can also be a leading indicator of weaker currencies in the future. Table 13 provides historic and projected data on consumer prices. Once again, Vietnam and India are the most worrisome.

 

Table 13. – Consumer Price Increases, Asian Countries

 

Country

 

2007

 

2008

 

2009

 

2010

2011 proj.

2012 proj.

Taiwan

1.8

3.5

-0.9

1.5

1.5

1.5

Malaysia

2.0

5.4

0.6

2.2

2.1

2.3

Thailand

2.2

5.5

-0.8

3.0

2.8

2.5

South Korea

2.5

4.7

2.8

3.1

3.4

3.0

China

4.8

5.9

-0.7

3.5

2.7

2.0

Philippines

2.8

9.3

3.2

4.5

4.0

4.0

Indonesia

6.0

9.8

4.8

5.1

5.5

5.4

Vietnam

8.3

23.1

6.7

8.4

8.0

6.1

India

6.4

8.3

10.9

13.2

6.7

4.7

Source: IMF: WEO Database

 

A View from the Private Sector

One indication of how Asian countries are viewed by foreign investors are sovereign bond spreads: how much more these countries have to pay for loans than the US. This information is presented in Table 14.

 

Table 14. – Sovereign Bond Interest Rate Spreads, March 2011

(basis points over US Treasuries)

Country/Region

Spread

Developing Asia

191.6

South Korea

89.3

Malaysia

110.2

China

149.8

Philippines

168.4

Indonesia

204.2

Vietnam

327.6

Source: World Bank GEM Data

 

Conclusions 

This review of Asian nations suggests that investments in China, The Philippines, and South Korea should do well in the next few years. These countries are projected to grow at acceptable rates in the next few years with little chance of currency losses. At the other extreme, India and Vietnam appear risky. Both countries are projected to run large government and current account deficits and already have large government liabilities. The stock market runups in both Indonesia and Thailand makes one wonder how much further they will go. The estimated P/Es of India, Indonesia, Malaysia and Taiwan are very high.   

In the second part of this two part series, attention will be given to specific investment opportunities in The Philippines.



[1] http://www.imf.org/external/pubs/ft/scr/2011/cr1159.pdf, Projected external debt dynamics are stable, p. 32



elliott morss photo  Elliott Morss has a broad background in international finance and economics.  He holds a Ph.D. in Political Economy from The Johns Hopkins University and has taught at the University of Michigan, Harvard, Boston University, Brandeis and the University of Palermo in Buenos Aires.  During his career he worked in the Fiscal Affairs Department at the IMF with assignments in more than 45 countries.  In addition, Elliott was a principle in a firm that became the largest contractor to USAID (United States Agency for International Development) and co-founded (and was president) of the Asia-Pacific Group with investments in Cambodia, China and Myanmar.  He has co-authored seven books and published more than 50 professional journal articles.  Elliott writes at his blog Morss Global Finance.

 









Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.















Proud contributor to:


Finance Blogs
blog

Econintersect Website Search:

Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2015 Econintersect LLC - all rights reserved