Tuesday, 30 July 2013

Philippines poised to become important new Asian dynamo

Compared to the “Asian Tiger” countries of the 1990’s, the Philippines still has a long developmental route to travel before it too can enter such a guild. For now it will remain a “Tiger Cub”, and it does so during one of the most difficult international economic malaise of the modern age. But the signs are increasingly promising for an extended period of growth.

The Philippines surprisingly experienced greater first quarter growth in 2013 than China and while retaining an enviable budget surplus. Spurred on by a recent bout of encouraging credit rating upgrades - lifting the country to investment grade - the Philippine’s latest development spurt has the potential to continue as long as the healthy trends set in place by President Benigno Aquino persist.

In any growing economy, construction and real estate sectors must be healthy. Both of these industries made important contributions to the growth of the Filipino economy in 2012 as more demand appeared for office space and city dwellings. New buildings are also keeping the real estate price inflation much lower than during the rough pre-2000 period.

Construction is expected to continue in the last three years of Mr Aquino’s presidency as his huge strides in transparency reforms return greater dividends, and his attempts to increase honesty and lower corruption attract more foreign direct investment. Japan, whose growing regional power has received praise from Mr Aquino, is keen to participate in the Philippines’ infrastructure development which is still in desperate need of major upgrade.

On top of this, the Philippines see an impressive amount of remittances flowing into its economy, at the fourth highest rate in the world after India, China, and Mexico. They have performed a key function in the growth of the economy, doubling since 2005 to NZ$26.67 billion in 2012, and boosting the strength of the Filipino currency. Foreign exchange reserves have lifted to over NZ$104.69 billion as a result which is equivalent to 140% of its external debt.

With all this money coming into the country, and remembering the veritable symbol of corruption in the form of ex-President Ferdinand Marcos’ wife Imelda, the government is trying to weed out privilege among Philippine elites. Recently, the country leapt from 129th in corruption to 105th in the latest corruption index, but is still lags 25 points behind China.

Unless fiscal moderation is put into effect, any sudden influx of easy money could threaten the nascent economy. It can encourage overpriced assets and form economic bubbles. When other Asian Tiger economies experienced bursting bubbles in the 1990s, their systems were savaged virtually overnight as capital and foreign investment dried up.

As the Philippines grows in the second decade of the 21st century, this is precisely the time they should closely watch for signs of crony capitalism. Mr Aquino is setting high standards to change the mindsets of his fellow elites.
But changing generations can often be the best panacea for entrenched patterns of thinking, and the Philippines possess swarms of young people. According to the United Nations, the Philippines is one of the youngest countries on earth with a median age of 22. In contrast, both India and Malaysia, also considered “young” countries, boast only a median age of 25.

Rapid growth needs workers and innovation so as the Philippines enter their demographic window around 2015, the prominence of the working population should bring between 7-10% growth per year for approximately a decade. These are typical growth rates experienced in the past by Korea (1985-1995) and Thailand (1995-2005). The Philippines are the last major Asian economy to reach this stage where a very young population begins to deliver a demographic dividend.

A traditional connection with the US should boost this younger generation in ways not felt in other Asian economies. In some interesting data, social networking in the Philippines is reputedly penetrating close to 95% of the population and the country is being called the “world’s text messaging capital”. Filipinos are highly literate in English and also highly computer literate which is already escalating demand for outsourced Western business services, buoyed by a low-cost labour force.

And alongside Mr Aquino’s attempts to curb corruption, he has spent a great deal of time talking to the secessionist groups in the country’s south. In October 2012, after 32 rounds of negotiations, a new agreement between the larger militant groups and Manila recently put an end to the fighting which killed over 120,000 Filipino since the early 1970s.

Muslim rebels in the southern Mindanao region will now have a window of opportunity to form semi-autonomous livelihoods and take advantage of the rich mineral wealth. The Philippines is one of the world’s most resource-rich nations, with an estimated 21.5 billion metric tons of metal deposits and 19.3 billion tons of minerals. 

There is already increased interest in the region as mining companies notice their own window of opportunity with the lull in fighting. However, even though major groups of militants were included in the negotiations, some factions were not. Militant attacks on infrastructure and commercial enterprises could continue in the future from some remaining groups such as Abu Sayyaf.

The Philippines are in an envious position demographically and stand to gain many years of excellent growth. But significant obstacles remain in development, including residue militancy in the south and malignant corruption.

So while an estimated NZ$388 billion in mineral wealth should create thousands of jobs and attract significant foreign investment, fears that President Aquino successor might not continue his high standard wary investors from committing to a jump too soon.

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