Political continuity key to sustainable growth

The Philippines can continue to outperform its Asian peers and see its stock barometer doubling to 13,530 by 2022 if the next presidential elections would bring forth a leader who can build on the achievements of the Aquino administration, investment house CLSA Asia-Pacific said.

In a research note titled “Make or Break” dated Oct. 7, CLSA Philippines country head and analyst Mitzi De Dios said political continuity into 2022—referring to the tenure of the next president—would make a tremendous positive difference to the country’s prospects.

De Dios said the current leadership had made almost all the right moves. While the achievements under this regime are “commendable,” President Aquino should raise the bar as he enters the last phase of his term, by stepping up the privatization process via public-private participation (PPP) projects and by resolving the pork barrel issue, he said.

“The younger Aquino’s presidency, like his mother’s, has brought some semblance of normalcy and has been relatively scandal-free, with medium-term-focused programs. The main priority of the current administration is the PPP infrastructure program, which has seen mild success, ensuring the rule of law and improving governance of institutions,” De Dios said.

“These will define Aquino’s legacy. But the next generation of leaders needs to maintain these reform and restructuring programs. A strong leader with a sense of urgency who gets the job done and is nimble and adept politically is key to a sustained market re-rating,” she said.

Re-rating refers to a change in view on stock valuations.

Bright prospects

The CLSA report said that if Vice President Jejomar Binay—the only one who had so far declared an intention to run as president in 2016—or someone equally capable would emerge victorious in 2016 and deliver on infrastructure build-up, strengthen institutions and governance, maintained neutrality in the business setting and focused on lowering poverty levels, it would be likely that the Philippines’ real gross domestic product (GDP) growth could average 7.5-8 percent over his administration’s term.

Coupled with a business process outsourcing (BPO) sector generating $30 billion in annual revenue and employing two million people by 2020, overseas Filipino remittance inflows steady at $25 billion per year and a revitalized tourism sector, CLSA predicted that the country’s nominal GDP could surge to $525 billion by 2020 from its estimate of $305 billion for 2015.

In the same vein, GDP per capita is seen nearly doubling to $4,625 in the same period. The middle class base was seen to broaden especially as GDP per capita breaches the $3,000 level, by 2016.

“Zoomtowns such as Cebu, Bacolod, Iloilo, Cagayan de Oro and Davao will see continued growth, resulting in a more equitable distribution of wealth geographically,” the research said.

CLSA assumed an 8-percent annual real GDP growth, average inflation of 3.5 percent and population growth of 1.9 percent over the next five years.

Sustainability in question

While the Philippines has been one of Southeast Asia’s star markets since 2010, De Dios said the sustainability of the country’s rising fortunes was now being questioned, given the President’s critical role.

“With the BPO segment going from strength to strength and OFW remittances remaining stable, a market-friendly leader would mean at least a decade of rising prosperity,” she said, noting that consumer, gaming, infrastructure and banks were CLSA’s top sector picks.

The report implied that Binay, the front-runner in the 2016 race who is however embattled with allegations of ill-gotten wealth, had a good track record as Makati mayor.

“Makati’s poor, who Binay strongly identifies with, do benefit as they enjoy the fruits of the city’s success through educational scholarships and free healthcare. Applying the same tactic nationwide may lead to lower poverty levels, further narrowing the rich-poor gap and fueling expansion of the middle class,” De Dios said.

“Having been born poor himself and orphaned early in life, he has a soft spot for the underdog. For him, the country comes first and his programs are aimed at benefiting the majority rather than the few—hopefully including his friends who have remained loyal. The question is whether Binay, if elected president, will remain steadfast in his resolve to lift the country to greater heights or succumb to the allure of power,” she said.

Assuming a political continuity through the next presidential regime, CLSA said the sectors likely to post double-digit compounded annual earnings growth from now to 2022 included consumer, retail, smaller property companies, infrastructure and media.

“If more PPP projects are awarded to the private sector—especially under the next administration—there is an upside to listed infrastructure plays. More infrastructure projects will mean more job creation and higher consumption, ” the report said.

Lessons from history

“A leader who puts the country’s interest ahead of his/her own personal agenda would yield dividends. This is particularly so in emerging markets where leaders who put personal interests first are the norm. Given that developing economies are not poster children for good corporate governance, having such a leader should be a blessing and political continuity would be a game-changer for the Philippines,” the CLSA report said.

The report noted that the Philippines had a difficult time shaking off the influence and legacy of the Marcos regime, which it said was marked by crony capitalism that led to corrupt practices by government officials, inconsistent policies, and a sense of entitlement by many leaders.

Thirty years after being one of Asia’s largest and brightest economies, CLSA noted that the Philippines filed for a debt moratorium in 1983 and turned to the International Monetary Fund for emergency loans.

After the ouster of strongman Ferdinand Marcos, the report noted that the Cory Aquino years were not smooth sailing as the latter had to deal not only with Marcos loyalists trying to reclaim power but the wave of daily power outages brought on by a resurgent economy.

“History teaches us that dictators don’t give up easily even if they are no longer in power. More difficult still is to change the ingrained questionable values of many politicians and public officials whose actions lead to the decay of institutions and values, which proves to be disastrous for the country and its people,” it said.

The report further noted that President Fidel Ramos had taken office at a time when the country needed a strong leader. A military general and a born leader, the report said Ramos steered the country through the transition years of Cory and succeeded in attracting investments from overseas and local groups. The telecom and banking sectors were deregulated under his administration and foreign groups were allowed to invest and grow with the country.

But as the Philippines was recovering from the Asian financial crisis, CLSA said President Estrada won the next election by a landslide.

“No administration did as much damage in such a short time as Estrada’s.