The Philippines’ Cinderella story

The Philippines is roaring ahead. After a 23% jump last year, the benchmark PSE stockmarket index has hit a new record high. Since 2009 it has risen fourfold, at a time when the MSCI Asia ex-Japan index has doubled. The latest gains are due to the falling oil price.

The country is a net importer of oil, and consumers account for 75% of its economy, more than most emerging Asian states. Those consumers are busy spending their windfall – every 10% drop in oil prices gives GDP a 0.3% boost, estimates Bank of America Merrill Lynch.

The underlying picture looks good too. Once “the sick man of Asia”, the Philippines has been a “Cinderella story” in recent years, says Wayne Arnold in Barron’s. Corruption, tax evasion, low investment and government profligacy sapped its potential.

But it has tidied itself up, and is now one of the few economies in the region where growth is expected to accelerate rather than slow down. Next year, growth should hit 6.5%, reckons the World Bank, from 6% this year.

The first step was to rein in spending and whittle down the public debt pile from 68% of GDP in 2003 to around 40%, one of the region’s lowest ratios. Annual overspending (the deficit) has fallen from 3.6% of GDP to under 0.5%. Business reforms followed – red tape was slashed and corruption targeted, boosting entrepreneurship.

The well-educated workforce has now carved out a niche for the country in high-tech manufacturing. The government is also trying to boost infrastructure investment, although this is taking time, says Arnold (59 public-private partnerships are on the drawing board, but deals have only been done for eight). The large, youthful population bodes well for long-term consumption.

Meanwhile, thanks to money received from Filipino workers abroad, worth around 10% of GDP, the country has a current-account surplus. This makes it far less vulnerable than most emerging markets to panic selling by investors pulling their money back to the developed world – as they tend to do when US interest rates are expected to rise.

What’s more, investors have noticed that an inflation rate of below 3% provides scope for an interest-rate cut to underpin growth. Earnings for the companies in the PSE index could grow by as much as 20% this year. Investors can gain exposure through the db x-trackers MSCI Philippines ETF (LSE: XPHG).

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