Philippines stocks, down 5% on the MSCI index
through February, were further roiled by the alleged involvement of casino
operators in the Bangladesh central bank hacking caper. Investors also are
hedging bets as they try to handicap the roller-coaster May presidential race
to succeed the anti-corruption incumbent Benigno Aquino.
Aquino’s favored candidate, Manuel “Mar” Rojas, is another scion of a
family dynasty and has vowed to follow Aquino’s “straight path,” but remains
aloof from average voters. The other contestants include the former Mayors of
Makati, the business district which houses the stock exchange, and Davao in the
southern islands which fought a Muslim insurgency.
A crowd favorite has been independent Senator Grace Poe, the adopted
daughter of a film star initially disqualified on citizenship and residency
grounds before the Supreme Court reversed the decision. She supported the
outgoing administration’s economic direction, which has paced ASEAN with steady
5-6% growth, but detailed anti-poverty and competitiveness platforms have yet
to be outlined by the campaigns as the race again hinges predominantly on
personality. The silence comes at a sensitive juncture when domestic demand and
remittances that served as bulwarks of good performance may be slipping, and
future infrastructure development and transparency are open to question as
continuing administration priorities.
Consumer
sentiment wavering
Despite an oversubscribed $2 billion 25-year external bond yielding just
over 3.5% in February for the investment-grade rated country, election-related
uncertainty may be taking a toll on consumer sentiment, as reflected in slowing
car sales. Inflation has been below the 2% target, but food prices have picked
up and the central bank is on alert and may tighten monetary policy, especially
if energy costs also rise.
The current account surplus may decline 1% to 1.5% of GDP this year on
weaker remittance and business process outsourcing earnings. Overseas worker
funds, which account for 8.5% of GDP, were flat through end-2015 with
China-related regional tumult and the elimination of low-wage services
employment in the oil-pressured Persian Gulf. Information technology may have
plateaued at $15 billion in revenue as companies look for cheaper Indochina
destinations despite the Philippines’ English-language advantage. Current
account inflows have recently offset direct and portfolio investment outflows
on the capital account, which has further deteriorated with estimated resident
money flight over $500 million in 2015. Peso depreciation was not as severe as
neighboring currencies against the dollar last year, but could re-accelerate
with this backdrop.
The stock market has been expensive at a 15 price-earnings ratio, and
casino listings were shunned before the Bangladesh Bank episode with Beijing’s
corruption crackdown deterring Chinese visitors. Banks are another important
category and have been hurt by the reports on lax money laundering practice
which allowed the stolen funds to move through branches.
A regulatory framework does not yet exist for Islamic-style sukuk
financing, even though agriculture and property companies based in Mindanao
especially issue such bonds inviting borrower and investor disputes.
Public-private partnerships, as the Aquino government’s chief
infrastructure-building technique, have also been unclear, and resulted in
sponsor misunderstanding and pullout. Big spending plans by the current
presidential contenders may also endanger the fiscal space needed for project
support, and again worsen deficit and public debt levels that the IMF described
as under control in its February Article IV report.
Thailand
Thailand has pursued this route under the army regime, with government
outlays up 20% in the last quarter of 2015 for construction and tax incentives,
and the stock market sizzled in the aftermath with an MSCI Index gain of almost
10% through February. However, underlying economic growth is only half the
Philippines at 3%, with sluggish exports and capital outflows despite a 2016
jump in tourist arrivals to strengthen the baht. With consumer debt at 90% of
GDP, bank non-performing loans may spike as the junta tackles the legacy of the
Yingluck administration’s auto and housing credit binge. The former prime
minister still faces criminal prosecution for abuse of office, and another
constitutional draft was floated with elections not on the short-term horizon,
as both countries gamble on new leadership with high fiscal stakes with foreign
investors mostly sidelined as spectators.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in
Washington, D.C.
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