A Nomura Holdings Inc. research note indicated recently that the promise for a continued economic growth for the Philippines will remain true, a vindication of earlier local and foreign experts’ upbeat growth assessments of the state of the country’s economy that is seen to expand at the second-fastest pace in Asia afer China.
Japan-based Nomura’s visiting experts, comprised of Euben Paracuelles, Robert Subbarraman and Craig Chan, made the declaration in a February 28 research note about the country’s growth that will likely reach 6.4 percent this year as compared to the government’s target of 6 to 7 percent. Last year, the country recorded a 6.6 growth in gross domestic product (GDP).
“We went to Manila to stress test our bullish outlook on the economy,” a portion of the research note read, adding that “We left Manila vindicated that our optimism is well founded and saw plenty of signs the story will remain positive.”
On the local currency, the Nomura team’s outlook is hovering at “restrained” eventhough the group sees the Philippine peso to appreciate further. It projected the short-term forecast of P39.20 against the U.S. dollar by the end of this year.
Meanwhile, the International Monetary Fund (IMF) in January cited the resilience of the country’s domestic consumption, government spending and low interest rates that will propel the fast growth in the country’s economy. Economic growth will push the country into a higher growth economy if the economic drivers will be sustained, according to the IMF officials.
The IMF’s growth projection for the Philippines is 6 percent this year, up from its earlier 4.8-percent economic growth target.
Sumitomo Coporation, the Japanese firm that operates and develops industrial parks, raved about the country’s attractive tax incentives, as well as the Philippines’ rich competitive workforce skilled in conversing using the English language as keys of the stronger than ever exporting potential of the nation.
The Star’s columnist, Boo Chanco noted of the wide attention that this positive news has sparked within the Japanese business community, including Japanese and international press.
Apart from Asahi Shimbun who reported about the investment of Sumitomo, the Financial Times noted of the firm’s bullishness to invest as a sign that “Japanese companies will continue to steer funds into faster growing, more dynamic economies – even as the recent depreciation of the yen makes investment back home that little bit more attractive.”
Chanco further noted of the FT report of the wage hikes and worker shortages that drive Japanese firms to consider diversification of production facilities. “And where better than the Philippines, where about 97 percent of Japanese companies with overseas operations are yet to venture?”
Sumitomo is not only interested to lure the likes of Hondas and Canons, reported by FT. The company is also keen at offering factory facilities for lease, with logistics and procurement support to make setting up shop attractive to small and mid-sized Japanese businesses.
The FT report even said: “a fair amount of this newer investment by Japan Inc is happening at the expense of China, as companies balk at spiraling labor costs after the flare up over a tiny chains of islands in the East China Sea.”
The foreign direct investment from Japanese manufacturers to the Philippines, according to Sumitomo, is already showing continued growth since 2011. The FT said that government data showed the country’s FDI since 2011stood at just over $10 billion at the end of 2011.
This FDI stock is more than five times the level of a decade earlier, said FT, further adding “(such) rate of growth exceeded only by investment in India (13x), China (8x) and Thailand (6x) over that period, within Asia.”
Compared to its Asian counterparts, the Philippines’ attractiveness to foreign investors as a strategic location for export-oriented industries will continue to improve. The Philippines has in fact raised exports by 7.7% year on year during the first half of fiscal 2012.
These factors led Sumitomo to launch its expansion projects further in the country, which the Japanese firm dubbed as the First Philippine Industrial Park, a 100-hectare expansion project together with the Lopez-owned First Philippine Holdings Corporation. The FPIP is already established in 1996 in Tanauan City, Batangas province, southern part of the capital Manila.
As well as sustainable growth of the Industrial Park, Sumitomo indicated the aim of the joint venture is to contribute to the progress and prosperity of local society through job creation, and more.
Among other big Japanese companies that Chanco mentioned in his column who are already in the country and some keen on investing in the near future. Murata, a chipmaker for semiconductor industry, Brother and Canon, both in the printer sector, Bandai, the big toy maker, Fuji Optical, makers of optical lenses, Furukawa, maker of wiring harness for automobiles are among the big ones.
Uniqlo, Japan’s biggest retailer, already opened its store in Mall of Asia and is reportedly planning to open 10 more stores in the coming year. Mitsubishi Motors, who already presented their plans for expansions in the country to the President, is also said to be interested to sign, Chanco quoted Manuel M. Lopez, the country’s Ambassador to Japan.
The press release stated that Sumitomo was responsible in handling the marketing while the Lopez Group was in charge of the operations side. Sumitomo’s role include using its global business networks and experience in the industrial park business to win locators in its FPIP. Compared to the times during the Arroyo regime when even Sumitomo’s clout couldn’t overcome the country’s poor reputation, this administration proved otherwise.
The Philippine government’s less reliance on foreign funds to support its operations reflects liquidity in its domestic economy and reduces exposure to foreign exchange risks, according to the latest report from Moody’s Investors Service.
Among other emerging markets in Asia, the Philippines was praised by Moody’s for their “low dependence on foreign-currenty-denominated external financing.” In its “Emerging Asia 2013 Government Financing Needs: Funding to Remain Mainly Local Currency” report, Moody’s says this “imparts stability to government finances.”
Factors that led to the declining reliance on foreign funds include the falling budget deficit of the country in the midst of growing economy. Moody’s explains the Philippine government now has the luxury to borrow more from domestic sources as a result of the enormous liquidity parked in the local banking industry.
The Philippines has very strictly limited the share of foreign borrowings to very low level relative to domestic borrowings since the nation encountered fiscal problem in 2004. Domestic borrowings last year reached 80 percent of the government’s total financing requirements, compared to foreign borrowings that only accounts to about 20 percent.
Moody’s predicts the total financing requirements of countries in the region will drop as a percentage of gross domestic product in 2013. This projection is based on expectations that the hike in their borrowing requirements will be slower when viewed against the growth in these nations’ respective economies.
The country’s borrowing requirement is seen declining to 6.6 percent of GDP this year, compared to 7.6 percent last year. The Philippines’ current Moody’s rating is Ba1, just a notch below investment grade.
Moody’s, among other capital market players, project an investment grade upgrade for the Philippines within the year. The foreign credit agency is optimistic the country’s image among investors will improve if it will carry out on improving its debt metrics and regulatory reforms.
“Additionally, sound government policies—most notably in Philippines, Indonesia, and Thailand—have helped bolster investor confidence as well,” Moody’s said.
Standard Chartered Bank, the longest serving foreign bank in the country, predicts that the Philippines will continue to experience economic growth this year, further adding that it is bullish the country will continue to post “above-trend levels over the next two to three years.”
In its latest report on the Philippines, the financial institution expresses its optimism that the country is well-positioned to record above-trend improvement over the medium term or above the 10-year average of 5.2 percent, driven by the local players.
Government-issued statements reported that Philippines registered 6.6 percent Gross Domestic Product (GDP) growth last year, higher than that of Thailand’s 6.4 percent. Other Asian nations that the Philippines’ growth rate surpassed include Indonesia’s 6.2 percent, Vietnam’s 5.0 percent and Singapore’s 1.2 percent.
The Philippines is now reaping the benefits derived from the previous economic policies that have helped put the country back on track, which so far has improved fiscal management, a structural current account surplus and stable administration.
As well as the rise of 24-hour food and beverage and retail businesses, Standard Chartered underscores in the report the progress being made in the business process outsourcing sector (BPO) industry. According to the bank, the increased adoption of technology, such as electronic non-bank overseas workers’ remittances inflows helped spur growth.
While Standard Chartered admits the perception about the country’s growth story appear to differ among local and international observers, the Philippines still continue to thrive amidst a lower international credit rankings when compared to other Asian countries.
The bank also stresses the need for more infrastructure development to spur and remove bottlenecks to growth in the construction and residential property sector of the country.
Government economic planners sees the growth target this year will be spurred by agriculture, industry and service sectors.
The passage of reform bills that will address fiscal incentives, investment and profit-sharing setup of certain sectors with the government, along with improved infrastructure development programs are keys to boosting the business climate of the Philippines.
The Trade and Industry Secretary Gregory Domingo echoed these sentiments during the Arangkada Philippines Forum 2013 organized by the Joint Foreign Chambers of the Philippines last February this year.
Domingo added DTI, along with the goverment’s socio-economic planners, are looking at the filing of the draft bills of certain regulatory reform bills at the start of the new Congress and pass at the end of the year.
The reform bills that the Domingo mentioned during the Arangkada Forum are: 1) the Foreign Investment Negative List (FINL); 2) fiscal incentives, and; 3) revenue-sharing scheme between the mining sector and the government.
Under the FINL, there are certain investment areas that are off-limits to foreign corporations. The review will allow the Congress to take a second look at which items to remove and retain, especially those that appear too prohibitive of foreign investments. The DTI, National Economic and Development Authority (NEDA) and the Finance Department will be in charge of the overall review of FINL.
The fiscal incentive rationalization is another key regulatory reforms that DTI was looking the 16th Congress will review to help boost the countrys chances of getting credit-rating upgrade.
The Philippines is wooing the three biggest international credit rating agencies – Fitch Ratings, Standard & Poor’s and Moody’s. Still rated a notch below investment grade by these credit watchdogs, an improved fiscal bill would help improve the country’s chances of getting credit rating upgrades.
The job creation potential of the country will be boosted when the business climate improves.
Meanwhile, the bill on the revenue-sharing schemes between the mining companies and the government is another area that the Congress is yet to enact. The bill should determine an appropriate and appropriate limit how much the government should get from mining contracts.
Safeway, one of the largest food and drug retailers based on sales in the United States is eyeing the Philippines as a strategic destination to expand its global operations, according to the Department of Trade and Industry.
The opportunities in the business outsourcing industry sector that can add significant value to the global operation of Safeway was also cited as reason of the expansion plans.
Safeway’s top-rank executives are said to be bullish about their investments in the country, following a due diligence conducted in February in connection to their plans of expanding its business and operatiosn in the Philippines.
Safeway is a Fortune 100 company that operates 1,641 stores in North America and Canada. Part of its strategy is to provide a unique shopping experience with a wide selection of high quality products at low prices.
The DTI statement added: “In support of its stores, Safeway maintains an extensive network of distribution, manufacturing, and food processing facilities. It also has business interests in the online internet grocer, prepaid gift cards, and financial services.”
The company entered the country since 2003 through an affiliate, the Safeway Philtech, which serves as its captive technology center. Its affiliate provides services such as application support and maintenance, application development and enhancements, technology and infrastructure support.
According to the Trade Department, Safeway Philtech has partnered with the Board of Investments and leaders of the BPO sector in organizing the visit of the top company executives to the Philippines.
Standard & Poor’s keeping its “stable” outlook on the Philippines’ banking sector, citing a vibrant economy that helped spur growth in the bank loans, including improvements in asset quality.
A stable outlook means that the international rating agency sees no pressing factors that can warrant either an upgrade or downgrade in the credit ratings of banks. In another positive note, S&P expects the country’s banking sector will remain resilient against external shocks, as well as enjoy the benefits that accompany an improving economy.
Further in its latest report on the Philippines, S&P says that the double-digit pace growth of bank loans would continue to increase this year as a result of the rising resources and banks’ low exposure to bad debts. The credit watchdog estimates that bank loans in the country will increase by 10.1 percent this year against the estimated 10.7 percent last year.
While prolonged economic slide leads to an increase in borrower defaults and credit costs, S&P adds that “this is unlikely in our base case.” Given the brisk business activities in the domestic side, the Philippines is seen unlikely to suffer from the dampened earnings as a result of the impact of a weak external global environment.
S&P says the “stable” outlook is appropriate in the view that banks might find it difficult to post faster profitability growth rate due to the challenges presented by the external economic slowdown.