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Asian Downturn Masks Philippines Investment Opportunity

The International Monetary Fund (IMF) has just given its stamp of approval to the economy of the Philippines, projecting a strong 6.75% GDP growth rate for the one Asian economy that albeit affected by the reversal of fortunes its peers have been facing over the past months, is nevertheless in a far better position today than most of them are.

That is largely because the country’s macro fundamentals have been on a positive course for a number of years now, according to Aaron Visse, portfolio manager of Forward Management’s Global Infrastructure Fund. Over the past decade, The Philippines has been steadily accumulating a current account surplus and its debt-to-GDP ratio also came down significantly during that time, to its current level of 2.8%.

Furthermore, the Philippines government has been relatively prudent with its finances for a long time, Visse said. This means that it’s now in a position to invest in various areas that would enable further economic growth. The infrastructure sector in particular should benefit from some significant public spending, and the government has actually unveiled an ambitious plan to that end that would include a $35 billion investment over the next few years, he said.

“The Philippines is in a good place right now with lots of things going in the right direction,” Visse said. “This is a domestic-driven economy supported by strong private consumption and it is a rising investment story.”

Regardless, at a time when emerging markets globally have been out of favor with investors, and currency slides across Asia have impacted all countries in the region, The Philippines hasn’t been spared.

Because investors have lumped all of Asia together, the MSCI Philippines Investable Index (EPHE) was also dragged down with the rest and fell steadily through the year, said Adam Koos, founder and president of Libertas Wealth Management Group, getting as low as $29 per share—a level at which Koos, despite his conviction in the underlying fundamentals of the Philippines economy, decided to sell.

The index is now heading back in the other direction, “but right now, the arm wrestling match between the developed and the developing economies is still going on and we are not going to buy back until we see some more sustained momentum in the EPHE,” Koos said. “Right now, the index appears to be in a consolidation phase where it looks as though a price is starting to form.”

Koos, however, said that on a relative basis, the Philippines makes for a great buy and is a better investment than countries like Russia and Switzerland. Even now, “it is performing better than Belgium, Austria and Brazil, which has been a huge name in the emerging markets over time, and it’s going to start looking better for more people going forward,” he said.

In July, Moody’s Investors Service placed the Philippines’ credit rating on review for a possible upgrade to investment grade status. Standard & Poor’s and Fitch Ratings both upgraded the nation to investment grade in the first half of the year.

Visse said the Southeast Asian nation is set for continued strong growth and that more investors will start to look at the country with greater interest once they start separating sovereigns and examining their fundamentals more closely.

“The sources of growth for the Philippines are stable because they’re almost all remittances from overseas workers and the business process outsourcing (BPO) business has really taken off as well,” Visse said. “The Philippines also has a lot less subsidies than other ASEAN [Association of Southeast Asian Nations] countries and China, and this is important.”

Nevertheless, the continued insurgencies in the south of the Philippines, where rebel Islamic factions have been fighting the military, are casting the shadow of a doubt over the country’s rosy future.

In September, several hundred rebels were in a face-off against the army, but although the insurgencies—and the government of the Philippines has been trying to come up with a peaceful solution to the problem—is certainly a concern for investors, its impact is still somewhat limited, Visse said, given that the uprisings are limited to a small part of the country.

 

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