Is Phl economy overheating?

CEBU, Philippines - Economic good news are everywhere, but once and for all, is the Philippine economy overheating—that is, is it simply growing at a pace that’s unusually high yet unsustainable?

The resounding answer to this question, if you ask Philippine Stock Exchange chief operating officer Roel Refran, is “no”. Economic fundamentals in the country remain at healthy levels that he pointed out this is yet the best time to be excited about being in the capital market.

“We don’t see it being the end of the bull market,” said Refran, “as more economic activities are seen to spur more growth.”

Economist Patrick Ella backed up Refran’s statements with a generalization: The country’s economy is performing positively and if there should be a fun-stopper, it will be coming from an external source.

Refran and Ella were both speakers at a recent economic forum on the impact of the investment grade in the local economy, jointly organized by the Cebu Chamber of Commerce and Industry and the Cebu Bankers Club as one of the highlights of the Cebu Business Month.

Mere upgrades

Refran said the year immediately preceding the upgrades was a critical period as the market actually re-rated itself already even as early as 2012. He said this was evident in the price-earnings ratio of companies back in 2012 which reached as high as 16 times.

Debt watchers Fitch and Standard & Poor’s earlier each handed the Philippines its investment-grade rating from BB+ to BBB- reflecting a strengthening external profile, moderating inflation and the government's declining reliance on foreign currency debt.

About a week later, the Japan Credit Rating Agency Ltd. also followed suit.

Ella, however, noted that “mere upgrades” won’t do all the math, especially knowing that some of the credit rating agencies have a spotty track record.

He cited a particular instance where one agency predicted one thing, and yet another thing happened, so “you can’t really totally rely on the upgrades.”

Even then, the re-rating was reportedly supported by the improvement in economic and political landscape, as well as the business process outsourcing (BPO) industry’s expansion and the increased attention from foreign investors.

Economy in 2013

The Philippines' 7.8 percent growth rate topped all Asian economies in the first quarter of 2013, outperforming China’s 7.7 percent and Indonesia’s 6 percent. The country’s strong economic showing came amid a backdrop of Asian economies seeing downhill growth trends.

Economists point to construction sector as the star of the show after it pulled off a robust 32.5 percent growth, fueled by upbeat spending in the public and private sectors.

The BPO industry’s continued expansion is also seen as a growth pillar.

Ella, previously connected with Deutsche Knowledge Services, said that although not entirely immune, the economy once again showed its proven resiliency that is anchored on sound fundamentals.

For instance, buffers in place are doing the job: remittances, BPO sector, domestic consumption and tourism receipts are all overflowing with optimistic returns.  The midterm elections were also a boost for the first half.

“If you take a look at the last six election cycles,” Ella said, “the country has averaged 6.8 to 7.0 percent growth in the last four seasons, with the exception of 1998, being the height of Asian crisis, and 2001, being the year of the second EDSA People Power and the World Trade Center bombing.”

To add, infrastructure spending for 2013 is at its largest ever. The peso is also seen to continue to hold up against the dollar during the next round of “risk off” environment. In fact, the peso tripping into the 40-level by year-end is a possibility.

And that the rate cuts are being on hold for this year also helps.

However, as it is still mid-way through the year, the economy could suffer from certain “tail-risks” during the remaining half that, as Ella put it, could potentially “disappoint.”

Among these tail-risks is the fact that the country is finishing off the year without elections anymore. Similarly, the Bangko Sentral ng Pilipinas may also reverse rate cuts due to weaker second half growth.

Capital controls are also forecast to become more aggressive, thus restraining peso strength.

Policy slippage in the new composition of the Congress and the economic legislative agenda that newly-elected solons will take may also pose risk, although recent changes in the Senate leadership bodes, Ella believes, will work well for the current administration.

External factors that might hamper second half growth include another financial crunch in Europe happening “because nothing fundamental has been done so far to address it”.

Ella likewise thinks that a strong US growth comeback means capital flow reversal in the equity market and an end to zero-bond interest rates.

Geopolitical issues like the shooting war between Iran and Israel may also be a problem, considering that the Philippines imports 85 percent of its petroleum needs and 80 percent of that come from the Gulf countries.

North Korea’s nuclear threat, on the other hand, may also contribute to a possible economic downturn.

Favorable demographics

For the next few decades, economically speaking, the demographics in the Philippines are seen to pay huge dividends, according to Ella.

Between 2015 to 2050, at least half of the country’s population will belong to the working age, meaning majority of the Filipinos will never be too old nor too young to work.

As those who are at working age outnumber those at dependent age, the Philippines will consequently be growing at its peak.

The demand for healthcare, housing, goods and services is then expected to skyrocket, depending on how the government and the private sector are going to take their respective roles.

“We have to exploit this advantage in favorable demographics. We’re entering that stage where we can sleepwalk naked, but can still make money,” Ella illustrated.  (FREEMAN)