PUBLIC infrastructure spending can be the medium-term “game changer” for the Philippines, with the massive floodworks program alone potentially lifting per capita income to $3,500 within five years, a research from Citigroup said.
As investors reward economies which are undertaking reform initiatives, Citi said this meant that the stock market would be able to accept a higher valuation that could boost the Philippine Stock Exchange index to 6,700 over the next 12 months.
The Citi research paper “The Medium-Term Game Changer—Public Infrastructure” dated Nov. 9 said the below 20 percent investment to GDP (gross domestic product) ratio was being cited by rating agencies as a key constraint for an upgrade to investment grade rating.
With better fiscal health, Citi said the government was in a better position to be more proactive in stimulating the economy. And while the public private partnership (PPP) infrastructure agenda is still seen as the centerpiece program, Citi favorably noted the flood works and drainage projects worth P325 billion—larger than the P233 billion cost of the PPP projects.
“The floodworks program alone, if implemented over the next 10 years, has the potential to lift GDP growth by an increment of 0.7 percent,” Citi said, noting that from a per capita GDP of $2,111 in full-year 2011, per capita income could be lifted to $3,500 within five years (and to $5,200 within 10 years). Citi’s base forecast is it would otherwise take 10 years to hit $3,500.
“Higher per-capita GDP is seen to spawn conditions for generating non-farm employment, stronger discretionary spending and to support fiscal consolidation that strengthens the private investment outlook,” the research said.
Potential setbacks, however, are seen coming from weak government absorptive capacity, any loss of credibility of the present administration as a result of delayed implementation such as PPP and risks that the implementation of the projects would not be sustained by the next administration.
But under a “blue sky” scenario in which the financial markets would accept higher valuations of about 21 times price to earnings (P/E) ratio similar to historical peak ratios, the PSEi could target 6,700 in 12-months versus Citi’s base-case forecast of just 5,750 or 18 times P/E ratio. A P/E ratio of 21 means the market is willing to pay 21 times the amount of money a stock is making in a given year.
Under a blue sky scenario, Citi thinks banks, property, consumer, utilities and conglomerates would benefit from the investment spending dividend.
“Companies that have a first-mover advantage in retail expansion, that support expected growth in industrial production and those whose assets are located in the regional centers are the likely winners. Large cap companies who are in this position and should continue to be long-term winners are Ayala Corp., Ayala Land, SM Investments, Aboitiz Power, PLDT and Banco de Oro,” it said.
For banks, Citi said higher propensity for big ticket spending should continue to sustain robust consumer loan growth amid low penetration. The top banks, supported by their extensive branch network, access to low-cost retail deposits and ability to leverage on the businesses of their parent companies, are projected to continue dominating the consumer lending space over the mid-sized players.
Conglomerates, with their diversified investments across key economic sectors, are seen “best poised for growth opportunities in an investment driven economy.”
On the consumer sector, Citi said higher per capita income could prompt consumers to trade up to branded products and support expansion of modern trade, particularly outside the urban areas.
For this sector, it said branded consumer player Universal Robina and fast-food operator Jollibee Foods would likely continue to be winners while the biggest retailer, SM Investments and its mall developer SM Prime as well as supermarket operator PureGold were seen benefiting from increased penetration of modern retail, particularly outside Metro Manila.
For property, Citi said developers were poised to benefit from sustainability of robust demand for housing, better opportunities for retailers and improved valuations of land bank on better accessibility arising from infrastructure projects. It believes ALI was “still in the best position to benefit from these opportunities, given its extensive land bank and strong brand image of residential projects.”
“While the Philippine telcos had so far been exempt from benefiting from economic growth, we believe telco spending is set to rise with the normalization of the competitive environment with more stable pricing. The dominant operator, PLDT, is our preferred pick,” it said.
For utilities, Citi said the strong correlation between per-capita electricity consumption and higher income bodes well for utilities, more so with the current tight supply being felt in Mindanao. “While all companies in our coverage should benefit, we believe Aboitiz Power is best positioned, given its scale and diversified asset portfolio across the country,” it said.
For gaming, Citi said rising discretionary spending would be key to expanding gaming revenues given the large dependence upon the mass business, comprising 65 percent of total gross gaming revenue in contrast to Macau’s ratio of close to 30 percent.