By Elliott R. Morss with the assistance of Renzie Doem Agutaya
In late February, I was contacted by Mr. Agutaya, a Philippine Certified Public Accountant. He asked what I thought of investing in the Philippines. I knew nothing. So we started by writing an article on how the Pilippine economy has performed relative to other Asian countries during and after the global recession. Our findings:
- Like other Asian nations, the Philippines was hit hard by the global recession. Exports fell 17% and the stock market went down 56%.
- But the economy has bounced back, with real GDP growing 7.4% in 2010 with the IMF projecting 5% real GDP growth for both 2011 and 2012.
- The stock market is now 2% higher than it was at its peak before the global recession. But with a price/earnings ratio of 12, it is not high relative to other Asian stock markets.
- The government deficit is reasonable (2.4% of GDP in 2011) and the IMF estimates it will fall to 1.9% in 2012. Government debt is also manageable at 46% of GDP.
- The country runs a current account surplus, led by growing manufacturing exports of machinery and electronic equipment. A high level of income remittances also helps.
- Inflation is running at around 4%. The government is more worried about a strengthening Philippine peso and its effect on the country’s competitive position.
- The Philippines' banks have a captial adequacy ratio of about 15% with non-performing loans at only 4%.
In short, the Philippines is growing again with the global recession only a faint memory. Is there corruption? Yes. In 2010, Transparency International ranked the Philippines 134th out of 178 countries. However, President Benigno Aquino III is doing more than earlier administrations to reduce corruption, and government policies are friendly to private investors. The government has allowed private sector participation through build-operate-transfer schemes, privatization, and deregulation of major industries such as energy.
Philippine Investments – The Energy Sector
In this and a following article, we will highlight three attractive investment opportunities in the energy sector. But first, a brief introduction to energy in the Philippines.
As Table 1 indicates, the Philippines imports 50% of its energy fuels, with coal and oil dominant. It is government policy to reduce this dependency and to develop its own renewable energy supplies. It already has some natural gas and geothermal. The government is also working to make the energy sector more efficient. And to that end, it enacted two major reforms: the restructuring of the electric power industry and privatization of the National Power Corporation (NPC). The restructuring calls for the separation of the electric power industry into three major sectors: generation, transmission, and distribution while the privatization of NPC involves the sale of the state-owned assets to private investors. The privatization started in 2004.
In 2008, the Philippines had a peak demand of 9,226 MW with a dependable capacity of 13,319 MW. Between 2009 and 2030, peak demand is expected to grow 4% - 5% annually. This means that by 2030, the Philippines will need 17 GW of new capacity to meet the projected demand for electricity. 1,338 MW of the required capacity will be provided by already-commissioned power projects and the remaining capacity requirement of 15,662 MW is still open for private sector participation.
The energy sources for Philippine electricity generation are presented in Table 2. The government is encouraging new energy sources via a "feed-in tariff" allowance. This allowance assures any renewable energy producer in commercial operation priority in getting connested to the national grid after its implementation. Once connected, renewable energy suppliers will get all the electricity they can provide purchased before other suppliers. Equally important, it provides renewable energy electricity suppliers with a fixed payment schedule for 15 years.
The Philippine electricity industry is recession-proof. It continued to grow during the 1997-1998 Asian financial crisis and the 2008-2009 global financial crisis. With this as background, we turn to an energy investment opportunity in the Philippines.
Aboitiz Power Corporation
The Aboitiz Power Corporation [PSE: AP] was incorporated in1998 as a subsidiary of Aboitiz Equity Ventures, [PSE: AEV]. AP has major investments in power generation. AP received a total of P10.4 billion from its initial public offering in July 2007. By the end of 2007, AP had a total cash position of P14.9 billion which is four times its long-term debt. AP used its cash to purchase six power plants from the government. Fourteen other power plants have also been sold, leaving only 8.2% of the rated capacity in government hands.
Through acquisition and investments in power generation, AP’s revenues grew from P12 billion in 2007 to P23 billion in 2009. AP’s aggressive participation in the public bidding of state-owned assets and strategic ventures in power generation projects is expected to continue. The substantial increase in revenues in 2009 resulted from increasing its generating capacity from 578 MW in 2008 to 1,745 MW by the end of 2009. In 2010, AP will have increased its generating capacity by 18% to 2065 MW.
According to a new AP report, AP will have approximately 709 MW of additional capacity coming on line over the next four years. This will result from the rehabilitation of:
- Ambuklao-Binga hydro power facilities (225 MW) and
- Tiwi-Makban geothermal power facilities (484 MW), which is pictured in the caption photo.
AP has other power plants under construction that will be operational in the next three to five years:
- 300 MW coal-fired power plant in Subic;
- 300 MW coal-fired power plant in Davao, and
- 25 MW from 3 hydro power plants.
In 2010, AP reported a net income of P25 billion, an increase of 343% over 2009.
Buying Equities in the Philippines
Previously, I have urged readers to bet against the US dollar and have a hedge against higher oil prices. Investing in AP accomplishes both objectives.
Disclosure: I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset. Neither Mr. Agutaya nor I own shares of AP nor are we associated with either of the brokerages mentioned.
Note: This is a later version of an article that appeared in Seeking Alpha.
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.