The Philippines has emerged as Asia’s second-fastest growing economy, but is its new-found prosperity alienating the support of institutions such as the Asian Development Bank? Jason McGee-Abe reports.
The World Bank’s president Jim Yong Kim hailed the Philippines as the next “Asian miracle” in July, describing the country as a global model in fighting corruption, as its economy emerges from decades of stagnation. GDP grew by 7.2% last year, its fastest in 15 years.
What’s more, Philippine exports are becoming increasingly competitive on the global stage, bank lending is on the up and the government has eased restrictions on foreign banks’ operations in the country.
In fact, the situation has improved to the point where the Asian Development Bank (ADB) no longer believes its financial support of the country is necessary. “Earlier this year we decided to pull the Trade Finance Programme (TFP) out of the Philippines, the reason simply being that demand for it has fallen and therefore our assessment was that the market gap for trade finance here was small,” Edward Faber, relationship manager, TFP, at ADB tells GTR.
“The TFP has a crisis response element to it, whereby if there was a dramatic change then we can look at re-establishing the programme here, but we don’t foresee that happening, because the economy is doing well.”
Not only are things looking up for the economy, but it is one of the few countries in the world where lending to small and medium-sized organisations (SMEs) has actually improved.
Ropi Dangazo, vice-president and head of investor relations, Security Bank, tells GTR: “The wholesale and retail trade/SME sector is one of the fastest growing economic sectors in the Philippines. In turn, loans by the Philippine banking industry to this sector has been amongthe fastest growing; in 2013 it grew by around 40%.”
Nevertheless, SMEs’ exporting abilities are still curtailed. In general, liberalisation has worked well in the region and has made sectors more competitive on a global scale. But Gregory Domingo, the secretary of trade and industry in the Philippines, recently stated at an event in Manila: “Rules and regulations are not designed for SMEs, but we’re looking at how we can simplify the rules for small firms to support them in their plans for exporting.”
In another trump for borrowers in the country, President Benigno Aquino in July signed into law a bill that eases restrictions on foreign banks’ operations in the country and allows them to acquire up to 100% stakes in domestic banks, as opposed to the 60% cap previously in place.
“At present, foreign banks own less than 15% of banking assets in the Philippines, largely due to restrictions imposed on foreign banks’ entry into the local market, including a moratorium since 2000 to establish new banks, including foreign banks’ branches,” explains Ruta Cereskeviciute, senior economist of banking risk service at IHS Global Insight. “However, the new bill provides new opportunities for foreign banks in the Philippines.”
Infrastructure problems threaten to hold the island country back from reaching the next level, economically speaking, and improving its manufacturing base. Many parts of the Philippines experience regular blackouts, and in the last few months the power failures have hit the capital, Manila, as well. Energy officials say an insufficient number of power plants, combined with increased demand, is straining the country’s grid.
President Aquino has seemingly galvanised the Philippines’ public-private partnership programme such that the country is now a sought-after destination for project finance capital. The government has identified 57 projects, including a natural gas pipeline, airport, highways and commuter train system improvements.
Philippine exports expanded 6.5% year-on-year in the first quarter of 2014, after increasing by 8.8% to US$56.7bn in 2013. While electronic products remain the top Philippine exports, their share in total exports continues to slip: down to around 40% in 2013 from 60% in 2010. Other major exports include machinery and transport equipment, agricultural products and minerals products.
“The country is in what some economists call a demographic sweet spot, in which millions of young people will be entering the work force,” says Frederic Neumann, managing director and co-head of Asian economic research at HSBC. “That makes the country a competitive destination for investments in export-driven manufacturing, which have propelled many countries in East Asia to prosperity.”
Whether the country will be the next miracle in the region remains to be seen but strong economic growth along with improving inflation and fiscal outlooks have allowed rating agencies Fitch, Standard & Poor’s (S&P) and Moody’s to upgrade the Philippines’ sovereign borrowing to investment grade. In May 2014, S&P upgraded the Philippines’ rating to “BBB”, the highest credit rating in the country’s borrowing history.