Philippine stock market Asia’s bright light or black hole?

The Philippine stock market appears to be the darling of foreign investors at the moment, outperforming all regional markets and the majors alike.

Since the start of the year, the 33-share Philippine Stock Exchange Composite Index has risen some 22 percent followed by Jakarta at 18 percent, while Japan’s Nikkei 225 index has been struggling at around 1.5 percent.

In New York, the Dow Jones Industrial Average is down around four percent while in London the FTSE-100 is up by just over two percent.

In recent weeks the Philippine market has surged to highs not seen in more than four years, much of the rise being driven by inflows of foreign capital.

According to data from the Philippine Stock Exchange (PSE) and estimates by ATR Kim Eng Securities, net foreign investment up to Oct. 7 was worth nearly P7 billion or some 55 percent of total trade.

And all this in a country facing a budget deficit of some $3.5 billion, external debt worth just over $56 billion and where half of the country’s 84 million people live on less than two dollars a day.

Poverty has reached such a level the government recently announced it was considering giving out food coupons worth P1,200 (about $21.30) to some five million families nationwide.

The cost for this program alone will be P6 billion a month to a government struggling to pay its bills.

So what has changed?

According to Martin Enrile of ATR Kim Eng Securities, "in one word... it’s perception.

"Last year no one cared about the Philippines, least of all fund managers. The perception outside was one of great uncertainty. The country was facing an election and a huge fiscal deficit," Enrile said.

"We have had the election and President Gloria Arroyo is back in her own right. She has laid out her vision for the future while at the same time admitting there are problems.

"This honesty I think has given comfort to investors, especially those foreign fund managers who stayed away. Another factor has been the surprisingly good corporate earnings so far this year."

But Enrile did voice a note of caution: "Unless the government can deliver on its promises the foreign funds will go."

The International Monetary Fund (IMF) said recently the Arroyo administration with its new mandate had a "unique opening to break from the past by addressing long-standing economic weaknesses and boldly pursuing a vigorous far-reaching agenda of economic reforms.

"Seizing the opportunity will be crucial for addressing the Philippine economy’s vulnerabilities to external shocks while helping to underpin investor confidence and improve debt dynamics."

"This will lay the basis for stronger and more sustained economic growth and job creation and contribute to significant poverty reduction over the medium term," the IMF said.

This was echoed by rating’s agency Standard and Poor’s which warned last week that failure to pass key tax measures in the next three months would be crucial.

SP noted Arroyo’s admission in August that the country was in a fiscal crisis and the difficulty being faced in her efforts to cut costs and get Congress to pass eight key revenue measures to keep the deficit in check.

Despite Arroyo’s efforts and the growing concern over the issue, the passage of these remedial measures has been "slow," or even blocked by political pressures and Congressional squabbling, SP said.

This could be taken as a signal that "the political class is unwilling to swallow the bitter medicine," and that despite her victory in the presidential elections in May, Arroyo and her allies in Congress still could not carry out reforms, SP warned.

"The administration has said all the right things ... it has sent out all the right signals," ATR Kim Eng’s Enrile said. "The hard part will be the delivery."