The Philippines is “graduating” from five decades of extraordinary rut and now moving toward the right direction but the single-biggest risk is a slowdown in the pace of government reforms, according to a top strategist from Macquarie financial group.
In a presentation during the recent Fund Managers Association of the Philippines (FMAP)’s annual convention in Busuanga, Palawan, Macquarie head of Asian strategy head Viktor Shvets said the global economy was not yet experiencing a sustained recovery as many issues were unresolved.
He said the world was still “too leveraged,” constraining central banks’ ability to “inflate” or tighten the cost of money. Emerging markets like China and Asean – the Association of Southeast Asian Nations bloc of which the Philippines is part of – was showing signs of “being hooked on debt.”
At present, Shvets said there was not much favorable momentum across Asia, except for the Philippines.
For the whole region, he said this was not yet a replay of the 1997 Asian currency crisis, noting that external debt levels and currency mismatch of assets and liabilities were much greater previously. But in most cases, he noted that current-account deficits were higher today than during the last crisis.
The Macquarie group believes that the challenges facing emerging markets (EMs) today are in many ways “far more insidious” than in 1997 as some of the key catalysts–technology revolution, financial and trade deregulation and increasing labor market liberalization – seemed to have run their course. As such, EMs are described by Macquarie as mostly having a ”chronic disease” rather than a “heart attack” as what happened in 1997.
In Asean, he said there were a few “green shoots” where relative competitive advantage is improving. Still, he said the general conclusion was that Asean-4 – referring to Indonesia, Malaysia, Thailand and Philippines – was losing competitiveness in both high-end and low-end manufacturing.
The few exceptions cited were tourism in Thailand and Myanmar, automotive sector in Thailand, IT/BPO electronics in the Philippines and educational and finance services in Myanmar. For Indonesia and Myanmar, relative competitiveness was seen in the areas of crude materials and commodities like rubber, gas and palm oil.
In the case of the Philippines, Shvets said the country’s collapse from the 1960s to 1970s had been “exceptionally deep,” with average income sliding from just under 9 percent of the US level in the 1960s to less than 3 percent at the lowest point during the 2003 to 2006 period. Such pace of decline was broadly comparable to that sustained on a relative basis by countries like Ghana, Egypt and Argentina and steeper than that of South Africa.
“But there are early signs of improvement, suggesting potential for graduation,” he said, noting the improvement in business climate (albeit coming from a low base), rising foreign direct investments and savings. He added that the Philippines’ external competitiveness was starting to “improve and broaden.”
The strong internal momentum in the Philippines, he said, was reminiscent of the case in Turkey from 1995-2005 but execution was still seen limited.
What could threaten this momentum, however, would be stalling reforms and rising inflation. He said the biggest threat would be disappointment on the government if the pace of reforms would slow down. Under such a scenario, he said the country would be unable to maintain the current pace of growth.