Nestled in the Pacific with access to markets in both Asia and North America, the Republic of the Philippines is poised for tremendous future growth for this emerging market economy. The Asean market alone has over 500 million consumers plus China, India. With a population over 85 million spread over 7,107 islands in this pacific archipelago, the Philippines is moving forward after rapid growth during the 1990s including state privatizations. The Philippines has garnered the reputation as Asia’s most resiliant economy. The Asian financial crisis of 1997-98 had less economic impact on the Philippines when compared to many other Asian countries, but poverty does remain a problem in the rural regions. Surprisingly, the Philippines is ranked number one in the world in the availability of knowledge-based jobs and workers worldwide. It is the third largest English speaking country in the world and the Philippines is starting to become very popular for foreign firms for outsourcing their business needs in the areas of call centers, software development and business processes.
POLITICS: President Gloria Macapagal Arroyo is highly regarded by the West for her sound and prudent leadership, she was elected to a six year term on May 10, 2004 following her peaceful transition of power in January 2001 from former President Estrada who resigned (Arroyo was then the Vice-president). Her election victory was a contentious battle versus a popular left-leaning populist actor, Fernando Poe. Tragically, Poe recently passed away due to medical complications. The Philippines achieved independence in June 1898 from Spain. The country’s make-up consists of Roman Catholics at 83 percent, Protestants at 9 percent, Muslims at 5 percent. The northern part of the country is home to communist insurgencies while the south garners Muslim separatists.
Political risk has always been prevalent in the Philippines with a shaky track record of corrupt leadership mixed in with periods of instability of Muslim rebel uprisings in the southern part of the islands including the large Mindanao island which is rich in agriculture and in mining resources. The political risk that maybe prevalent is the Philippines history of political coups and attempted coups. Currently, BI.C sees this threat is minimal as American educated President Arroyo is providing strong leadership. Former Philippine Presidents that have had checkered Presidencies include Estrada and Marcos in particular.
Poverty affects 23.5 million Philippine citizens as they are considered to be living below the poverty line. The Arroyo government is competent and committed to responsible management in the pursuit of a growing economy. Her leadership is committed to cracking down on terrorism, drug lords and extremist threats including northern insugent communists. There are currently signs of a cyclical commodity resourced based economic recovery. Politically, this renewed economic growth will help her tighten command on power for the remainder of her term. Her administration’s sound political management will ultimately make the Philippines economy and peso that much stronger.
The Abu Sayyaf rebel group with links to al Qaeda terrorist network located in Western Mindanao is all but defeated as proclaimed by Manila in the summer of 2002. With the Abu Sayyaf under pressure from Manila, the focus by the Philippines military is now on the Islamic militants, New People’s Army and related communist militants. This Islamic threat is currently a challenge in many other countries in this era of terrorism as elements of Islamic terrorists are being rooted out by many countries from Europe to Asia. The government has made a prudent decision by allowing the U.S. military involvement on the Islands, primarily conducting joint training exercises to help train Philippines troops in counter terrorism (2002). The Philippines military have defense ties and security cooperation agreements with the United States military. The presence of a limited U.S. military involvement in the Philippines and in the region provides great stability.
The key Islamic threat in the southern Philippines resolves around a dispute going back to the 16th century when Catholics started settling into Muslim areas on Mindanao island (current population on Mindanao at 18 million). Today, Muslims are in the minority. From around 1970 and during the 1980s and through part of the 1990s, this area has witnessed domestic insurgencies and large scale violence. In 1996, a peace agreement with the Muslim rebels, the Moro National Leberation Front (MNLF) has been reached where Muslims have been given more power in the political affairs resulting in a significant cessation of violence. The MNLF agreed to end their campaign for an independent Islamic State on Mindanao. The other separatist group include the Moro Islamic Liberation Front (MILF) with 15,000 strong supporters (2002). The MILF and terrorist organization Abu Sayaaf have had direct sporadic clashes with the Philippines military, most recently in early 2005.
Current violence is minimal and is currently being contained to a few smaller outlier islands next to Western Mindanao Island and on the Western part of the island itself. The future for the Philippines with strong leadership in Manila with U.S. military support is for enhanced stability with outright civil war a limited small risk now unlike prior to 1996 when domestic violence was high. The Philippines sovereign stability risk is currently stable, the Philippines is overall a sound place for foreigners to invest and the outlook is positive in the long term. Political stability will be maintained providing the economy performs well. Key challenges include the countries high population growth rate at 2 percent which requires high GDP growth rates to maintain the stability, otherwise those unfortunate citizens may resort to insurgencies groups as an outlet. A key spinnoff from U.S. military presence is the U.S. engineers who build many roads, airports and other infrastructure support (2002).
ECONOMY: improving economic prospects. Historically, the Philippines has been plagued by low foreign investment, large public debts and poor infrastructure. President Arroyo’s administration is taking action to correct these deficiencies, but much work has yet to be done. During year 2001-02, these were turbulent times for much of the world economy although the Philippines have performed relatively quite well even with the collapse in the global information technology industry. Since year 2002, the global economy has now entered a massive commodities boom with a rebirth in the those sectors that mine and extract natural resources. The Philippines authorities are pragmatic and see great opportunities for demand with high commodity prices particularly for oil at $50 USD/barrel, copper now at $1.47 USD/lb, gold bullion now over $420 USD/ounce, etc..
The main risk to the Philippine economy is the chronic budget deficit but the authorities have now increased the VAT tax from 10 to 12 percent in a move to help cut the fiscal shortfall. The nation’s perceived heavy indebtedness is also a contributing factor to the overall economic risk with public sector debt at 110 percent of GDP with interest expenses alone for debt servicing accounting to 40 percent of national revenue. Previous difficulty in tax collection (government revenue only at 15 percent of GDP) has helped to contribute to recent downgrades by major credit rating agencies, but BankINTRO.com takes a different view on the Philippines. Credit rating agencies cite concerns over the nation’s growing debt load along with President Arroyo’s administration being too slow to enact reforms. Political gridlock hits most democracies in the world today. BankINTRO.com believes that increased foreign investment levels over the medium to longer term will help to reduce the need for future borrowings for public spending. Further, our view is that the country’s security situation is overblown, the Philippines is on the whole is a very peaceful, happy nation for this very large population base. To put things into perspective, the Philippines is ranked on par with Brazil, South America’s largest economy for risk and stability.
As a relatively low tax country sitting on some of the world’s greatest natural resources, the Philippines will inevitably realize a huge wealth boom for its people. President Arroyo has further made strides in opening up the Philippine economy in almost all sectors for foreign investment particulary in the area of mining and in proposals to privatize the energy sector. Economic strategy by the government includes emphasizing the following: improving the infrastructure, increase tax collection, further deregulation, increase trade, further privatization and to stregthen the banking system & domestic capital markets.
Semiconductor exports, motor vehicle production, electronics are areas of strong growth. Agriculture makes up 20 percent of GDP, light industry, supporting business services from cheap labor are other important segments of the economy. Manufacturing accounts for 20 percent of GDP, this segment grew five percent alone in 2004 with good demand for electronics and semiconductor exports. As of February 2005, the Philippine Stock Exchange is trading at a five-year high.
Increased foreign investment capital inflows into the Philippine economy is helping the country to gain credit at better terms. A significant part of foreign exchange for the Philippines is received in the form of remittances where upwards of 10 percent of the population work abroad and forward money home to relatives. Remittances received from 7 to 8 million Philippine workers abroad account for approximately $8 to $10 billion USD in annual hard currency income, the largest component of inflows into the nation which helps to stabilize the peso. Further, a major factor providing backbone to the peso is its strong balance of payments position.
The Nation’s Debt - Overblown?
External debt as of September 2004 stood at $55.6 billion USD. Net government debt is measured at 73 percent of GDP. In reviewing reserve adequacy, short-term debt is covered by reserves by 2.2 times on original maturity. Today, approximately 50 pecent of the debt is held in US-dollars (USD). The debt overhang for the Philippines is further eased due to much of debt porfolio having a long maturity for the bonds. The average maturity for these bonds stands at 17.3 years with medium to long term debt representing 85 percent of the Philippines bond portfolio. The USD itself is a disaster waiting to happen, BankINTRO.com forecasts lower trading levels for the USD ahead. As the peso appreciates to the USD, the real value of the USD debt is declining due to currency valuations. The recently appreciating peso will also help to cut foreign security debt servicing costs.
Economic Statistics
Total GDP is measured at $390 billion USD assuming purchasing power parity with corresponding GDP/capita at $4,600 USD, member G-24. GDP growth is estimated at 6.3 for year 2005 (the fastest in 15 years), year 2004 at 5.2 percent, year 2003 at 4.6 percent, 2001 at 3.4 percent. CPI inflation is moderate to low with year 2005 projected at 6.8 percent, 2004 at 5.4 percent, 2002-03 at 3 percent. Other years include 2001 average at 6.1 percent inflation, 2000 at 4.3 percent, 1999 at 6.6 percent, 1998 at 9.7 percent. Fiscal deficit figures include year 2005 estimated at 3.9 percent of GDP, year 2004 at 4.4 percent, 2003 at 5.0 percent, 2002 at 3.3 percent. The current account is in surplus with year 2005 projected at 2 percent of GDP, year 2004 at 2.8 percent and 2003 came in at 4.9 percent. Largest export markets include both the United States (30 percent of Philippine exports) followed by Japan. Official unemployment is at 11.4 percent while the unofficial figure is more like 20 percent. Economic composition includes services at 53 percent, industry at 32 percent, agriculture at 15 percent.
POSITIVES: structural reforms and government strategy to overhaul the tax system, privatization of the economy, electronics industry is well developed, updated Securities regulation code to increase investor confidence, high literacy rate at 95 percent, abundant natural resources, large merchant marine, well educated & skilled work force, Filippino’s have a strong desire for freedom and democracy. CONCERN: budget deficit, severe weather patterns - typhoon & earthquakes, graft & corruption, unequal income distribution.
BANKING SYSTEM: the capital markets have been strengthened and the banking system has been deregulated. The Philippines central bank ‘Bangko Sentral ng Pilipinas’ (BSP) have implemented a limited form of currency controls to discourage currency speculation and to avoid any direct threat to the Philippine economy. Official reserves stood at $16 billion USD as of December 2004. The central bank follows inflation targeting policy which was adopted in January 2002 with a mandate to promote low and stable inflation. Looking at interest rates, the repo rate stands at 9 percent. The banking system is highly competitive with banks offering peso PHP and USD accounts. America’s Citibank is a leader in the Philippines in the advancement of electronic banking. An important development is the decision by the Paris based Financial Action Task Force (FATF) that has removed the Philippines from the blacklist for non-cooperative countries. During February 2005, a major credit rating agency downgraded several Philippine commercial banks. The Philippines in time will further improve their capital markets to help self-finance its domestic corporate sector.
REGIONAL ANALYSIS: Japan, Korea, Indonesia, China, India
Located in the heart of Asia, the Philippines are a strategic base for U.S. military command for Asia. The Philippines have strong trade ties with stable countries such as Japan and the United States. At present, trade between Southeast Asian countries is growing with increased economic inter-dependency. The Middle East is vitally important as the Philippines are highly reliant on imported oil to the tune of $2.5 billion USD/year (2002), however, this may now change with development of its own resources. Over time, the Asian economies will become more integrated with the ASEAN Freee Trade Agreement (AFTA). The peso is highly correlated to other currencies such as Taiwan’s dollar, Korea’s won, Indonesia’s rupiah and particularly Thailand’s baht. Growing wealthier export markets in China and India will play a very important role going forward for future Philippines wealth.
KNOWLEDGE: Philippines Mineral and Energy Resources
The national treasure of the Philippines is the nation’s rich geology with estimated mineral resource alone valued at $1 trillion US-dollars. Some estimates have upwards of 30 percent of the country’s land value is mineralized. Of the 9 million mineralized hectares, only 500,000 have been explored of which modern Western mining techniques have not been fully utilized. The mining sector only represents 1.1 percent of GDP (2000) with current gold production at 1 million ounces/year with the ability in the medium term to increase this figure upwards to 3 million oz.
A key Philippine Supreme Court ruling took place on December 14, 2004 which may very well alter the path of the Philippines to much greater prosperity. The court decision opened up the Philippine mining industry now allowing 100 percent foreign ownership participation in Philippine mining ventures. This is a huge decision injecting much needed life into the domestic mining industry. This part of the world is home to the Rim of Fire and some of the largest mining discoveries known on earth.
Mining investment for year 2005 is now estimated at $3.07 billion USD with many international firms now quite interested in investing within the Philippines including those parties from China, Singapore, Canada, Australia, etc. Natural resources include gold, silver, copper, nickel, chromite, zinc, etc.. There are presently several junior mining exploration companies active within the Philippines particularly from Canada and Australia participating.
In BI.C’s view, the Mindanao region presents an interesting opportunity especially in the area of mining where tremendous wealth is present. The Philippines government now have a mandate to make the Philippines one of the world’s most attractive places for foreign investment in mining and such currently have one of the world’s lowest mining tax regimes for mining production. Foreign mining companies have taken notice and are taking action. In 1980, the Philippines ranked number five in the world for gold output and number nine for copper. Today, it has fallen to twenty-five for gold and twenty-six for copper. The potential is for the Philippines is to be in the top three for world production for both copper and gold. Tremendous outlook and potential exists if peace is sustained as mining can provide great prosperity to both the Catholics and Muslims particularly in the south.
With the Supreme court ruling opening up the mining industry, the Philippines are now going to receive a large foreign capital infusion into its economy. The government is clearly promoting the mining sector but it also states in a responsible environmentally friendly manner while creating employment, taxes and royalty revenue in order to boost the economy and cut its fiscal deficit shortfall. Some of the mining projects on the map include:
+ $650 million USD Tampakan Copper Project located in South Catabato spearheaded by Indophil Resources of Australia
+ China Chamber of Metals, Minerals and Chemical Importers (CCMMC) are planning a $1.3 billion USD investment within the next six years.
+ Crew Gold Corp of Canada is also investing upwards of $1 billion USD for its Mindoro Nickel Project.
+ The Pujada nickel project located in Davao Oriental by Asiaticus valued at $1 billion USD.
+King King copper-gold project by Benguet Corp and Nationwide Development Corp. in Compostela Valley valued at $532 million USD.
Some analysts think the Philippines in now on course to receive upwards of $7.5 billion USD annual investment into the country’s mining industry.
Within the Philippine’s energy sector, global energy conglomerates Shell and Texaco coupled with the Philippines State Petro company (minority holding) are dveloping the $4.5 billion USD Malampaya gas field located off of Palawan Island, Philippines. This offshore oil & gas project was discovered in 1992 with the goal of converting the natural gas into electrical power at plants located on Palawan. Electrical power output is massive at 2,700 MW projected over 20 years. Oil and natural gas exploration is now active with others throwing their hat in the ring including B.V. of Netherlands being awarded offshore exploration contracts in January 2004.
As new rich mineral and energy deposits get discovered and new large exploration successes proven up, the Philippine military may very well play a new role of security for these resources to allow for peaceful development. It is quite possible that insurgents from communist rebels or from Abu Sayaff may continue with a random act of violence that has taken place with the odd bombing scattered throughout the Philippines over the last few years. There presence is not a serious threat, but that of a nuisance as this is the opinion of BankINTRO.com. More recently on February 14, 2005, nine people were killed in a random sporadic terrorist bombing within Manila as Abu Sayaff claimed responsibility. These attacks occur two to three times a year throughout the Philippines.
CURRENCY: ISO Symbol ‘PHP’, Philippines peso. At time of review on February 18, 2005, the Philippines peso was valued at 54.65 PHP to 1 US-dollar (USD) and/or 71.25 PHP to the Euroland euro (EUR). A recent low for the peso occurred in February 2004 when the exchange was valued at 56.35 PHP to the USD. The peso has been quite stable over the last few years to the USD as the peso is currently experiencing appreciation to the USD. The exchange regime follows that of a float. As measured by purchasing power parity, the peso is considered to be one of the world’s most undervalued currencies in relation to the USD with some estimated showing an undervaluation upwards of 50 percent. This massive PPP undervaluation upwards of 60 percent has been the case for several years, the question is timing when a currency will turn. BankINTRO.com believes the peso is getting closer to that date towards a significant appreciation to the USD.
CURRENCY HISTORY: peso fell by over 60 percent during 1997-98 as a result of the fallout of the Asian financial currency crisis. Historical valuations include: September 13, 2002 at 51.98 PHP to the USD, December 2001 at 51.77, December 2000 at 49.94, December 1999 at 40.61, December 1998 at 39.05, December 1997 at 37.67, December 1996 at 26.25, December 1995 at 26.21. The 20 percent depreciation from December 1999 to December 2000 was correlated to the political uncertainty at that time with former President Estrada. The average exchange value from 1993-97 was 27 PHP to 1 USD. Currency crisis dates include February 1986, September 1997.
CURRENCY FORECAST: the peso to strengthen to 52 PHP to the USD by year-end 2005 and against several other currencies including the Thai baht. Slowing export markets in the United States and Japan will have the Philippines seeking greater access to new and established markets in ASEAN and in China where the economic forecast is good. Capital inflows have benefited emerging market countries like the Philippines with the recent successful $1.5 billion sovereign bond issued by the Philippines maturing in year 2030 as foreign investors divest their portfolios out of USD investments into other areas of the world seeking higher returns. BankINTRO.com predicts that the Republic of the Philippines will be the next Asian Tiger within 20 years supplying markets in India and China with its rich natural resources. The peso might well be considered as a commodity currency in the future, similar titles given to Canada, Australia, Chile, etc.
UPDATED: February 18, 2005
