MANILA, Philippines—Dutch financial giant ING is “bullish” on four Philippines asset classes: property, main index stocks, peso and fixed income, as the country is seen entering a new phase of higher-trend growth and investor confidence.
In a press briefing on Wednesday, ING chief economist and head of research for Asia Tim Condon said the Philippines and Indonesia have been enjoying a “re-rating,” or a favorable change in market perception.
Despite being an illiquid asset class, property is at the top of Condon’s list as a favored investment outlet in the Philippines. He noted that this segment would benefit most from the “risk-on” mode attitude of investors on the country.
Strong risk appetite is likewise seen supporting the Philippine composite index, the second on Condon’s list of favored investments. This is despite an increasing view that the local stock market is no longer the playground for bargain hunters.
The peso is third on Condon’s list, ranked higher than fixed income, as the economist cited the Bangko Sentral ng Pilipinas’ (BSP) seeming shift to Korean-style intervention to prevent sharp currency appreciation against the US dollar.
“After the announcement on SDA [special deposit accounts], it seemed to me that BSP is moving away from more market-oriented approach to dealing with market pressure. It’s more of a defensive approach and when a central bank does that, it makes its currency attractive to speculators,” Condon said.
The BSP recently moved to prohibit foreign funds from investing in SDAs and slashed the rates on these SDAs by a minimal amount.
In the past, Condon said the BSP had mostly curbed currency appreciation pressures by letting short-term interest rates fall. “This is one place in the world where you can’t blame monetary policy. It shows you the benefits of inflation-targeting that works,” he said.
But the meager reduction in SDA rates, the economist said, might mean the BSP would resort to other measures like the Korean style of heavily buying US dollars from the open market. Condon was still on a “wait-and-see” stance and favored, instead, a cut in interest rates, given a benign inflation environment.
Fixed income was likewise cited as a “great trade,” Condon said.
On a bigger picture, Condon said the global economy has been entering a “good enough” phase whereby growth would likely be stuck at 3 percent in the years ahead compared to 5 percent before the 2008 US financial crisis. “It’s not the end of the world. It’s just bad compared to what we had before and you can blame central banks—especially in G3 (US, Japan and Europe)—for overly tight monetary conditions. But it’s good enough not to panic,” the economist said.
In this environment, Condon said China would no longer be the world’s most exciting story and it could have a hard landing or a pace of growth slower than 7.6 percent. ING forecasts another 25-basis point of policy interest rate cuts and 100-basis points of reserve requirement reduction by China’s central bank by the end of this third quarter.
For as long as China holds up, it would be a “defining year for Southeast Asia” and the region’s best bets are the Philippines and Indonesia, according to Condon.
For the Philippines, he said, nominal growth was steady at 12 percent before the global financial crisis and eased to 9.8 percent after 2008. “However, it’s coming from faster real GDP [gross domestic product] growth. That’s the good thing. It means slower inflation and faster real growth,” he said.
The economist noted that trend real GDP growth had gone up from about 4 percent in the decade after 1984 to 4.5 percent since 2005. “I think there’s a new normal here,” Condon said. “It’s a good story.”
But the last few quarters of growth in the Philippines were mostly driven by exports as the country benefited from increased trade with China. To attain a steady growth at a higher range of 7-8 percent, he said investment spending as a ratio to GDP must rise beyond 20 percent.
Joey Cuyegkeng, ING Philippines economist, said the bank was previously looking at a GDP growth forecast of 5.6 percent for the Philippines but given the surprisingly better export numbers, this forecast may be upgraded closer to the upper range of the government’s 5-6 percent growth target for 2012.
If investment spending accelerated significantly and, for instance, if the investment to GDP ratio were to rise to 20-30 percent, Cuyegkeng said the country’s trend growth rate could rise to 5-5.5 percent or even more.
“That’s why we’re closely watching the PPP [public-private partnership]. The bidding of LRT1 (Light Rail Transit extension from Baclaran in Parañaque City to Cavite province), if that happens, it will create positive investor sentiment and especially if followed by further successful bidding of other PPP projects,” he said.