The Philippine structural reform story stands out in Southeast Asia but the reforms may not be enough to sustain growth over a longer period or beyond President Aquino’s term in 2016, a research from investment house Morgan Stanley said.
Analysts from Morgan Stanley said the outcome of the 2016 elections would be a key risk to watch out for in weighing the country’s long-term prospects and determining whether the reform momentum started during the Aquino administration would continue, stall or reverse, Singapore-based analysts Deyi Tan and Zhixiang Su wrote in a July 31 research note.
The analysts disagreed with the view held by others that the reforms introduced by Aquino would last beyond 2016. One influential institution that previously shared such optimism was Standard & Poor’s which, in May, raised anew its rating on the Philippine sovereign credit to above minimum investment grade, the first international credit watchdog to do so.
The Morgan Stanley analysts believed that the reform environment would deteriorate during the next administration. But as the country’s presidential elections tend to be personality-driven, the 2016 elections will be crucial, the investment house said.
“We think the Philippines’ structural story is not yet independent of politics and reforms,” the analysts said.
In Southeast Asia, the Philippines and Indonesia have the more attractive structural stories, with the Philippines being the “stronger” of the two, Morgan Stanley said.
It expects the Philippine economy to stay benign and grow by 6 to 6.3 percent for 2014-2015, roughly in line with forecasts of 6.2 percent for both years.
Morgan Stanley said the Philippines’ “unconventional” model—one that skipped the industrialization phase and jumped from agrarian to a service-oriented model—had brought strong growth so far. It described the economy to be consumption-heavy but investment-light.
“We believe an investment pickup is needed for sustainable, strong and inclusive growth,” the researchers said.
Beyond the Aquino administration, Morgan Stanley believes that further structural reforms are still needed to enhance investment for long-term sustainable growth, particularly in infrastructure.
“As the quality of the Philippines’ infrastructure is lower and the money spent on it is smaller compared with other [emerging markets], the need for catch-up is greater,” it said.
“The full remedy for infrastructure hurdles will likely require a reform-minded administration to continue beyond the Aquino presidency. The good news is that these challenges are comparatively easy to tackle compared to developed economies’ challenges of poor demographics and high debt—issues the Philippines does not face.”