Philippines, the new Indonesia?

Aya Lowe

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What are the prospects of the Philippines when it is upgraded to investment grade level, which credit rating agencies have already granted to Indonesia?

MANILA, Philippines – As the Philippines continues to register strong GDP growth figures, many economists are increasingly pairing the country with the robust growth of its neighbor, Indonesia.

Both countries have shown remarkable economic growth against a sluggish global economy, almost catching up with Asia’s other economic powerhouses, China and India.

The two neighbors are considered Asia’s rising economic stars, have stock markets that have recently soared to historic highs, and among the most populous in Asia.  

In previous years, Indonesia — a nation of about 240 million people, mostly Muslims — has been attracting the second biggest chunk of foreign direct investments (US$19.2 billion in 2012) flowing into Southeast Asia, next to Singapore’s $54 billion). The Philippines — a nation of 100 million people, mostly Christians — remained a laggard, capturing only $1.5 billion.

With a big push for a credit rating upgrade this 2013 for the Philippines — currently at one level below investment grade — the Philippines is hoping to be in the same level as Indonesia, which has been bumped up to investment grade.  

Fast growing economies 

“Indonesia has been growing consistently for the last 25 to 30 years. Even during the financial crisis, there continues to be a really high growth so, if there is any single country we would compete with, it would be Indonesia,” said Socioeconomic Planning Secretary Arsenio M Balisacan at a recent press briefing anouncing the Philippine’s 2012 economic performance.

The Philippines grew 6.6% in 2012, surpassing the government’s own target of 5% to 6% for 2012. The country also registered a 4th quarter growth of 6.8%.

This growth, which was well above the expansion of 3.9% in 2011, boosted the country’s position among its ASEAN neighboring putting it on par with Indonesia, which grew 6.5% in 2011.

In the 3rd quarter of 2012, the Philippines recorded a growth of 7.1%, replacing Indonesia as the second-fastest in Asia next to China’s 7.7% and the fastest in Southeast Asia. Indonesia, which dropped down to 3rd position, registered a growth of 6.2%.

While Indonesia is due to announce its GDP data on February 5, the country’s central bank predicts that Indonesia’s economy could grow by 6.3% in 2012, slowed down by weak export performance caused by the global economic slowdown — an experience the Philippines shares.

‘New tigers’

In a recent report, business news site Market Watch christened the Philippines and Indonesia as “the new tigers” or economies that have been overlooked in the past and are now “poised to drive future growth and grab more economic power.” 

“In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as the region’s ‘New Tigers’ with the potential to leave a bigger imprint on global growth for years to come while the developed world struggles with excess debt and traditional regional heavyweights China and India lose momentum,” said the report.

To view the full UNCTAD report on Foreign Direct Investments (FDIs), please click here.

Market Watch stated that the two countries shared similar characteristics that have helped boost it economic ranking among its neighbors; 

  1. Large, young and dynamic populations
  2. Relatively low levels of national debt
  3. Expanding middle classes
  4. Diversifying economies
  5. Stable, elected governments with policies that inspire investor confidence
  6. Top performing stock markets

Best performers, borrowers to lenders

Philippine and Indonesian stocks have been advancing to all-time highs.

On Friday, February 1, the Philippine Stock Exchange Index climbed 1.21% to 6,318.61, breaching the 6,300 milestone and closing the week at another historic high — the 13th this 2013.

The Jakarta Composite Index rose 1.4% to 4,517.82. The two indexes were the biggest gainers on February 1 among Asian markets tracked by Bloomberg.

Indonesia and the Philippines are considered among the most attractive markets in Southeast Asia because of their improving economy and strong consumer base,” Jonathan Ravelas, chief market strategist at BDO Unibank Inc. told Bloomberg.

Proving their full recovery from the Asian Financial Crisis, Indonesia and the Philippines have also both come full circle. Once borrowers of the International Monetary Fund (IMF), both recently became lenders.

Part of this growth has put down to the reforms implemented by the current administrations. Presidents Susilo Bambang Yudhoyono in Indonesia and Benigno Aquino in the Philippines have both won upgrades from Fitch Ratings and Moody’s Investors Service in the past year as they pledged to contain their budget deficits, fight corruption and woo investment to spur economic growth.

In Indonesia, the nation’s parliament approved a land-acquisition bill in December that will allow Yudhoyono’s administration to accelerate road, port and airport projects. In the Philippines, Aquino is seeking $16 billion of investments in projects including roads in the capital and airports in the provinces to upgrade the nation’s infrastructure.

World renowned economist Nouriel Roubini have cited these reforms when he favored the Philippines and Indonesia over China and India, current members of the so-called BRIC economies (Brazil, Russia, India and China).

“They are actually doing more in terms of structural reform,” Roubini said. “The economies are growing more than 6%,” even higher than the average 5% global growth the developing economies are projected to grow this 2013, and way faster than the 1% estimated pace of growth for the advanced nations.

Roubini has promoted the Indonesia’s credit rating upgrade, and believes the Philippines deserves to be among the A-lister countries, too. 

Investment grade

In Southeast Asia, only 4 of the 10 ASEAN member states currently enjoy investment grade status: Malaysia, Singapore, Thailand and the recently upgraded Indonesia.

Indonesia received investment grade status from two of the 3 major credit rating agencies: Fitch Ratings in December 2011 and Moody’s in January 2012 .

According to studies conducted by Moody’s and Fitch’s, it is historically more difficult to reach an investment grade when a country’s GDP per capita falls under the $3,000 range. Indonesia’s GDP per capita is $3,508 in 2011, while the Philippines’ is still way below the mark of $2,223 in the same year.

“I have come to the conclusion that the rating to investment grade is certainly warranted and decision should be formally taken this year,” Roubini said during the Philippine Investment Summit 2013 in Makati City. “I hope that rating agencies will understand that sooner rather than later… and an upgrade will occur in the next few months.”

Getting an investment grade from credit rating agencies encourage more investments to the country, and in turn, supports economic growth.

Standard & Poor’s and Fitch Ratings rates the Philippines one notch below investment grade: BB+ with a positive outlook (S&P), and BB+ with a stable outlook (Fitch). Moody’s Investors Service rates the Philippines Ba1, also a notch below investment grade, with a positive outlook. 

The right direction

Is one country better than the other?

“In economics, it’s not a zero sum game,” replied Roubini. “It’s not like private business in which one will be successful in one sector and the other will lose. Both can successful.”

Roubini has been widely quoted for favoring the Philippines and Indonesia over China and India, current members of the so-called BRIC economies (Brazil, Russia, India and China).

“Investors are looking at the long-term prospects of the country. They look at macroeconomic policies [and] financial environment if these are sound, political risks reduced, policies, regulatory environment not changing rapidly. Countries build reputation over time. Overall, I would say certainly Philippines and other emerging economies are going to the right direction.”

In the same investment summit, businessman Manuel V. Pangilinan, who chairs Hong Kong-based conglomerate First Pacific Ltd, was asked which country he prefers, considering the group’s stakes in both countries. He shared a recent conversation with a large private equity fund manager.

“He noted that there is election this year (in Indonesia), so there is uncertainty on successor of SBY….He also noted that there are more happening in infrastructure investment in Philippines than in Indonesia. In his eyes, the Philippines compares favorably than Indonesia. And I tend to agree.”

Pangilinan also stresed that the Philippines has to keep this momentum going.

“I agree that governance have improved a lot, prospects have improved a lot. It is incumbent upon both the government and private sector to ensure that the perception is supported by fundamentals. You cannot defy gravity for long. You have to make sure that performance catches up with perception rather quickly.

“Otherwise, when other economies — China, Thailand, other countries within the region — will recover in due course, then there will be more competition with respect to investment dollars. We should be ready for that,” he stressed. 

As both the Philippines and Indonesia continue to grow nearly on par with each other, investors have been told to keep their eyes on the upcoming powerhouses. – with research from Lean Santos/

Update here: Philippines vs Indonesia: Which is ‘better’?

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