Friday, March 25, 2016

A delicate Philippines dice roll, slow dancing in Thailand

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 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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