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The Philippines - a good investment?

The Philippines, a Southeast Asian emerging economy, has attracted substantial investment in recent years even though the economy is small in comparison to markets like Indonesia, Malaysia and Thailand. While by definition it is emerging, one should also bear in mind with it comes a set of uncertainties typical to such types of economy; unemployment, income inequality and a degree of poverty are prevalent. Despite these issues, it is already well documented that emerging Asia has offered significant investment returns in the past – current Asian economic growth is estimated to be almost 5 times faster than its developed global counterparts in 2013 [1]). The economic upturn however in the majority of these Asian countries commenced some time ago. The Philippines by comparison is starting to emerge from its poor cousin status, and the IMF has now raised the growth predictions and is expecting that the economy will expand 6% this year and 5.5% next year [2]. An illustration of this upward trend can also be recognised by the fact that the Philippines Stock Exchange Index (PSEi) is up 28% YTD, making it one of the best performing markets globally.

In March 2013, Fitch Ratings raised the nation’s sovereign rating to investment grade BBB- for the first time, officially recognizing the progress the Philippines has been making, and pointed also to a resilient economy, which expanded 6.6% in 2012 amid a weak global economic backdrop. Less than 2 months later, Standard & Poor’s also lifted the rating to investment grade, explaining its decision: ‘’The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government’s declining reliance on foreign currency debt”. Among other factors, there is an improved fiscal situation, enhanced revenue collection and macroeconomic stability. The S&P upgrade can be seen as a crucial one for boosting investment potential, as normally two such ratings are needed for any external fund managers to consider investment into a country’s bonds. ‘’For the Philippines, this is yet another confirmation that the reforms have borne fruit, which would help in attracting not just short-term flows, but long-term direct investments,” said a Credit Suisse Group AG economist. Moody’s Investors Service, which currently rates the Philippines one step below investment grade, ‘’is keeping a close eye on developments on the ground’’, said their Singapore-based official. Higher ratings signal to foreign investors that a country is a suitable place for business, and that its government and private enterprises have a good ability to meet their obligations, resulting in lower borrowing costs. Moreover, data from the Heritage Foundation [3] indicate that when metrics such as economic freedom, freedom from corruption and land freedom are combined, the Philippines scores significantly better than other Southeast Asian economies such as Indonesia and Vietnam. The Philippines also tops Greece, China, India and Russia. All of these factors are expected to pave the way for boosting capital inflows into the Philippines.

The country's main economic indicators responded positively to the latest rating upgrade, with the Philippine Stock Exchange index (PSEi) closing at new high level. On the subject of equity markets, iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE) is perhaps the best way for small investors to tap into the Philippine market without incurring unnecessary single stock risk. EPHE debuted two and a half years ago and now has over $495 million in assets under management, a sum that indicates investors have at least been interested in what the Philippines has to offer. Those investors have already achieved gains - EPHE is up 25% YTD, making it one of the best single country tracking funds in any region of the world.

Another exciting and well known way of investing into the Philippines for retail foreign investors is the property market. There are plenty of new developments and this growth is supported by $17 billion of infrastructural investments planned for this year alone.

From the above it is fair to say there is a strong case for an investor to diversify and add a measure of exposure into the Philippine market; while there may be an element of risk the potential rewards may more than make up for it.

Tihana Ibrahimpasic
Investment Analyst

[1] IMF: Regional Economic Outlook – Asia and Pacific: Shifting Risks, New Foundations for Growth; April 2013

[2] - II -

[3] The Heritage Foundation: Index of Economic Freedom 2013


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