Investors’ wish list for the next 6 years
A NEW era has begun for the Philippines under the leadership of an unorthodox President who was catapulted to Malacañang by hopes of change for the better. Previously an enigma to foreign investors, the market has warmed up to President Duterte—the long-time Davao City mayor and the first from southern Philippines to become the CEO of the land—after he unveiled a business-friendly economic agenda that seeks to build on the gains of the Aquino administration. As continuity risk eased, about P28 billion in net foreign “hot money” flowed into the local stock market since he was elected, allowing the local stock barometer to hover close to the 8,000 level in intra-day trade on the day he was sworn into office.
Indeed, investors like what they are hearing from “President Rody” as well as what he has done so far—from the appointment of most Cabinet officials (except for a few controversial ones) to his 10-point economic agenda to his strong resolve to end drug trade and corruption in the country. Foremost in the investors’ minds is that the economy could remain in the sweet spot and thereby allow corporate Philippines to turn out good earnings.
During the time of former President Aquino, the Philippines shed its “sick man of Asia” stigma, grew at the fastest pace and obtained investment-grade rating from all three major global credit watchdogs for the first time in history. He was of course aided by the surge in global liquidity in the aftermath of the 2009 Wall Street financial crisis and his predecessor’s implementation of an increase in the value-added tax (VAT) rate, the single fiscal act that started the stabilization of the government’s fiscal position.
Under the Aquino regime, the Philippine Stock Exchange index (PSEi) reached multiple highs, more than doubling its level before President Aquino took over and outperforming many peer markets. Last year, the PSEi closed at 6,952.08, a far cry from 3,052.68 in 2009. Mr. Aquino ended his term in June with the local stock barometer at 7,796.25.
Clearly, the honeymoon period has started for the new President. But what will it take for the optimism to be sustained under the Duterte administration? We asked a number of market experts to come up with this wish list on how blue skies could prevail in the stock market in the next six years:
- Sustain a higher growth trajectory
Corporate earnings rely on how healthy the underlying macroeconomic fundamentals are. And higher corporate earnings expectations in relation to price per share make listed companies more attractive. When you are operating in an economy that’s growing at the fastest pace in the region—like when the Philippines posted a 6.9 percent growth in first-quarter gross domestic (GDP), beating even China’s—this territory stays on foreign investors’ radar screens even in times of global volatility.
The trend GDP growth rate under the Aquino administration (2010 to 2015) improved to 6.2 percent, led by the rebound in the industrial sector and the resilient services sector. This beat the numbers during all post-Edsa Revolution predecessors: 4.8 percent under Macapagal-Arroyo, 2.3 percent under Estrada, 3.1 percent under Ramos and 3.4 percent under President Corazon Aquino.
If trend growth could go higher under the Duterte administration, say exceeding 7 percent, that will attract more investments, create more jobs and make more dent on poverty reduction.
- Keep or improve the country’s investment-grade rating
Part of the run-up in the last few years was due to the investment-grade rating story. This makes Philippine assets eligible in the portfolio of discerning global institutional investors and allows both the government and the private sector access to cheaper funds. We won’t see the government crowd out domestic funds. We will see Philippine governments having more ammunition to expand not just locally but globally.
A lot of populist measures have been promised during the presidential campaign, especially given that the tax burden in the country is one of the highest in the region. As part of his 10-point socioeconomic agenda, Duterte’s economic team plans a reduction of the corporate income tax by 5 percent to 25 percent and the individual tax rate from 32 percent to 25 percent.There are also talks of increasing Social Security System pension benefits by P2,000 a month.
At the end of the day, what is taken away from government coffers goes to consumers’ pockets, creating a positive multiplier effect in the economy. Nonetheless, investors would not want to see the government’s fiscal condition deteriorate. As such, populist measures must be accompanied by other reform measures that will make up for the revenue decline. The government has announced plans to introduce official property valuation methods, impose additional tax on junk food and indexing the petroleum excise tax to inflation, among others.
The government aims to raise the fiscal deficit from 2 percent to 3 percent of GDP to make way for tax cuts and increased spending on economic and social services.
Victor Felix, an analyst at AB Capital Securities, said investors would look at the administration’s 10-point socioeconomic agenda—including the tax reforms and fiscal deficit measures—as guide for direction.
- Deepen drive against corruption
Former President Aquino’s good-governance-is-good-economics strategy has clearly paid off in terms of improving investors’ perception. But six years isn’t enough to lick corruption.
“In our view, Duterte’s first 100 days in office will be crucial and we will need to watch what initiatives he comes out with. Business people (including us) would like to see a continuation of the elimination of corruption and promotion of lean government, which characterized Aquino’s administration,” said Mark Mobius, executive chair of Templeton Emerging Markets Group and an influential fund manager specializing in emerging markets.
“Based on his track record and campaign statements, there is a good chance Duterte will not only continue Aquino’s stance but may even come out harder against crime and corruption. He has the reputation for cleaning up Davao and even executed a number of criminals (which caused concern among human rights groups). Clearly, the Philippine population would like to have a strong and clean anti-corruption and anti-criminal government that will come out hard against criminals and Duterte has the background to deliver that,” Mobius said.
Cleaning up the bureaucracy also reduces the cost of doing business. Imagine the day when we can no longer hear of any hanky-panky in such agencies as the bureaus of Internal Revenue and of Customs.
- Ease doing business
“One of the things that excites me is he would cut down bureaucracy and red tape,” said Grace del Rosario-Castaño, a Filipino executive who sits in the board of Switzerland-based Partners Group’s board, a leading private market firm outside the US, adding that she was likewise looking forward to the new President delivering on his commitment to curb graft and corruption and improving peace and order situation in the country.
Partners Group had chosen the Philippines to develop its newest global services hub for a number of things, including cultural fit, dynamism, vast English-speaking talent pool, central location and similar time zone with its base in Singapore. At the same time, the group is scouting for investment opportunities in the Philippines.
Carlos Ma. Mendoza, executive director and head of banking at JP Morgan Philippines, said he would like to see Duterte to follow through on his emphasis to make the country more competitive, especially with the onset of the Association of Southeast Asian Nations (Asean) integration.
“The devil is in the details on how we will make ourselves more competitive because we have to deserve investments from people abroad,” Mendoza said. While on international road shows with the government or corporate issuers, he said it was easy to see that there was so much foreign funds looking for a home out there.
- Honor the sanctity of government contracts
But to get large investments from the most discerning foreign investors, Mendoza said the country would have to prove deserving.
“Deserving means owning up on shortcomings and working on them and making sure that when somebody commits to you, the rules don’t change,” he said.
In cases of highly questionable contracts, Mendoza said the illegal activities must be addressed. “But if we want to play on the big stage—and we should and we can—we have to deserve it and we have to play by those rules,” he said.
For long-term concessionaires, there’s nothing worse than waking up one day to find that the rules have changed. One recent example was when water utility concessionaires Manila Water Co. and Maynilad Water Services Inc. had to go to international arbitration given their tariff increase disputes with regulators.
- Invest more in infrastructure and continue the PPP program
Whether it’s through the public-private partnership (PPP) framework or the government’s own undertaking, infrastructure bottlenecks are constraining the country’s growth. We can feel this when we see the crowded roads, airports and mass railway transits (MRT).
The Duterte administration has committed to boost infrastructure spending to 5-7 percent of GDP from less than 3 percent at present.
JP Morgan’s Mendoza said every Filipino knew the urgency of moving the infrastructure program forward. “We hope that type of political will can be pushed forward—that enables so many different things. That enables farm to market roads to be more efficient, enables airports to be built,” he said.
Citi Philippines economist Jun Trinidad cited some of the more innovative ways of plugging infrastructure gaps that Duterte had pledged to bring: 24/7 work on infrastructure projects of P10 million or less; cut down intervals between arriving coaches and add more units to improve efficiency and capacity of MRT; review and ease the cumbersome processes/approvals for PPP projects (targeting 17 PPP auctions worth P580 billion by 2017).
“Desired results may only be known several months from now but the mix of process change and bold ideas coming from Duterte’s team to address recurring problems and issues, instead of the usual slate of customary fixes and remedies, appear to embolden the outlook,” Trinidad said.
- Develop new sources of growth
Whether it’s tourism, manufacturing or mining or agriculture, the Philippines needs to develop new sources of growth aside from business process outsourcing (BPO) and remittances from overseas workers.
“People love the consumption story. People love the fact that there are two legs supporting the growth story. The next challenge is taking that a step further,” JP Morgan’s Mendoza said, adding that finding a new leg of growth for the economy would be good moving forward even if investors were content with what the country had right now.
Manufacturing is widely seen as a crucial area of focus since this is the sector that can create more jobs for people who did not attain the minimum educational level needed for them to land a job in BPO.
There is also a lot of buzz about Duterte’s thrust to develop the countryside, giving hopes for the farming and fishing industries. It’s about time that Visayas and Mindanao get more attention that they deserve, thereby lifting more Filipinos out of poverty.
- Liberalize the economy through constitutional amendment
Citi’s Trinidad said that now that constitutional amendment proposals have been filed by Duterte’s allies in Congress seeking to ease foreign ownership limit in infrastructure, utilities and other industries—from a maximum of only 40 percent at present—this should be a key foreign direct investment (FDI) signal.
“This should also pave the way for federalization that would allow for greater regional autonomy yearned for by the Filipino Muslims and other ethnic minority groups. Ushering relief from macro bottlenecks/stress along with the medium- to long-term impact of Charter change could potentially fortify domestic demand and sustain investment-driven gains as offshore headwinds intensify and risk-off sentiment prevails post-Brexit (Britain’s exit from the European Union),” Trinidad said.
JP Morgan’s Mendoza said if the Philippines were to level up and gain access to other people’s markets, they have to be given access to local markets as well—in a disciplined and orderly way.
Mendoza personally feels that by keeping those foreign ownership restrictions, Filipinos “were selling ourselves short.”
Fears of being crowded out by foreign investors, he said, were unfounded.
Keeping those restrictions, he said, only underestimated the Filipinos’ ability to compete locally and overseas. In industries like banking and retail trade, which had long been opened to foreign competition, he said Filipino-owned businesses continued to thrive.
“Post-elections, there’s always an inherent risk for any new government taking charge to ‘overpromise and under deliver.’ But what could hurt momentum and ruin sanguine prospects is market and investor disappointment. And with challenging bureaucratic bottlenecks/drag to reform sentiment and initiatives, Duterte may have to optimally sequence the policy agenda and reform actions while having a clear communication strategy to bridge or minimize the gap between performance and expectations,” Citi’s Trinidad said.
“We think the Philippines appears to be in a demographic sweet spot and the country should continue to grow as long as there is no dramatic change in government policies and the path toward reform continues. It seems likely Duterte will continue to make progress in many areas. I am hopeful Duterte will stay on track and work in the best interests of his citizens. Taking a long-term view, I am optimistic the country will remain a good destination for international investors,” Templeton’s Mobius said. TVJ
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