It takes more than a coup to rattle investors in Asian emerging markets these days. On February 24 Philippine president Gloria Macapagal Arroyo declared a state of emergency following an alleged coup and public calls for her resignation. Recordings released to the public last year proved that she rigged the 2004 general election, her opponents claimed. A week later, and after a bit of government reshuffling, things went largely back to normal, without any serious violence.
Previously this kind of political turbulence might have sent shock waves through the markets. But market reaction was profoundly muted this time. “Forget the ratings agencies ... If there’s a military coup in the Philippines, I always say buy it,” Simon Treacher, a London-based fund manager at BlueBay Asset Management, said, half-jokingly, at a conference for emerging markets traders in London earlier this year.
Governments across emerging markets have put their macroeconomic house in order, and the political crises that erupt no longer pose a threat to how economies are managed, he argued. While the Philippines has seen two attempted coups and two popular revolutions in the last five years, economic growth has not dropped below 4% a year.
In fact, the Philippine peso rose to its strongest level in three and a half years against the dollar in March – one of Asia’s top performers this year – and the Philippines Stock Index has been rising gently.
Moody’s latest report on the country was cautiously optimistic, maintaining the country’s rating at B1. The ratings agency laid out reasons for remaining confident in the country’s economy: a flexible exchange rate policy combined with a “rapid rise in sizeable remittances from overseas workers” has strengthened the country’s external payments position.
Crucially, if the 2% increase in value added tax – which should remain in place whoever is in power – does its job, then an extra P75 billion ($1.46 billion) in tax revenues, and a reduction in the budget deficit from 3.6% to 2.1% of GDP this year will raise the country’s outlook from negative to stable.
RISK appetite
According to Joseph Tan, an economist at Standard Chartered Bank, the bad news came last summer when the political crisis first erupted. At the time, there were fears of a sudden move away from the fairly tight monetary regime. Now, the Philippines is cruising on the wave of risk appetite among global investors, and also fundamental changes in its politics and economics.
Exceptionally low EMBI spreads and loose US monetary policy have encouraged global investors to put their money to work across emerging markets. “There are few signs of reversal thus far, despite rising interest rates in the US and Asia over the past 12 to 18 months,” according to a recent Standard Chartered research report.
More importantly, however, “the fact that the political events in ... the Philippines have remained non-violent ... reflects the different ecology that Asian politics is conducted in these days. Not only are Asians more vocal now, and less tolerant of public office misdeeds, they are also more assertive and better organized in expressing their discontent.” The army and police forces, in particular, have improved their style of managing public protests, the report notes.
Biggest threat
The major threat facing the Philippines economy, says Tan, is that competitors in cost efficient China will hollow out its electronics export sector, which has so far remained at the low-tech level. “The country needs to improve its capacity and ability in this area. They’re at the level where there is minimal product differentiation,” he says.
Competitors like Malaysia and Singapore have moved on to producing high-tech products for multinational companies: markets in which they can exercise more pricing power.
One area in which the Philippines has been lacking to date is its intellectual property regime: “Multinational companies are very concerned about the property rights regime when they make these types of investments ... They need to be able to re-coup their R&D cost,” says Tan.
The ratings agencies agree that while remittance flows are strong, foreign direct investment inflows have not been enough to support the Philippines’ external position.
“Instability at the top level does impede progress,” says Steven Rood, Philippines country head of the Asia Foundation, a non-governmental organization that works to promote good governance and conflict resolution.
“It’s hard for the government to take actions to improve the investment climate and accelerate economic growth,” he says. Rapid economic growth in the Philippines has been “stymied” by a lack of investment in human and physical capital. “Infrastructure investments are held back by lack of funds; economic reform cannot be pushed through because of delays.”
Good progress
There has been steady progress in governance at the regional and local level, in the efficiency of government procurement, and in key institutions such as the courts, which instability at the top obscures, he notes. “Underneath the political froth there is a stable set of circumstances ... but that isn’t so apparent to the external audience,” which includes global investors.
For Rood, who has been in the country for 25 years, the biggest problem for the Philippines remains corruption, which deters foreign investors and acts as an “insidious drag on growth”.
The Philippines is placed 96th out of 117 countries on the World Economic Forum’s corruption index. In the Philippines, corruption reduces the government’s tax take, and also the quantity of goods and services it can buy. Revenue agencies in the country have launched a raft of anti-corruption measures, such as Rate (Run After Tax Evaders) and Rips (the Revenue Integrity Protection Service).
However, there is not yet enough evidence to say whether or not the measures have worked. “After you get over the political froth, this is the greatest block to the Philippines,” says Rood.