Southeast Asia has largely been sold aggressively due to fears of an emerging market crisis and risks involved with the Thai protests. However, throughout the current volatility, the Philippine markets (NYSEARCA:EPHE) have held up relatively well. The Philippines index is up 13.73% for 2014, while emerging markets (NYSEARCA:EEM) globally have sold off heavily. Due to a stronger balance sheet of foreign reserves, strong economic growth, and bullish technical momentum the Filipino economy seems to be in good shape. However, income inequality related tension and a high percentage of income arriving from foreign remittances complicate the Philippines growth story.
The first strength the Philippines has going for it is a more stable currency than neighboring competitors. The Philippine peso was one of the stronger performing currencies in 2013 with a 8% loss against the US dollar compared to double digit declines in the Indonesian Rupiah, Indian Rupee, Thai baht, and Singapore dollar. With a 2.8% current account surplus, the country is at no risk of exhausting its reserves. Strict investment regulations prevent foreign companies from owning more than 40% of an foreign direct investment project, so FDI is limited in the Philippines. This has historically caused the economy to underperform ASEAN competitors, but the lack of hot money outflows and the potential catalyst of deregulation and/or privatization of the Philippine economy have the potential to be bullish catalysts.
GDP growth has also been strong the past two years with real growth rates 6.5% and 7.2% in 2012 and 2013 respectively. These growth rates were sustained in spite of last year's vicious typhoon. Outside of GDP, the hard numbers for the Filipino economy are strong. Government debt is low at just 40.1% of GDP, business confidence is at five year highs, and the unemployment rate is at a twenty year low of 6.5%. New industries such as outsourcing and tourism have become bright spots for both the local economy and job market. Due to the country's history as a US colony, English skills are high and with low labor costs, the Philippines has surpassed India as the leading country for foreign call centers. The archipelago has also become a more popular travel destination with tourist arrivals have double over the past decade.
There are signs these gains are not translating to the vast majority of the population. Local surveys have indicated that half the population says they are now poorer than two years ago and a third claim to have lower nominal wages since 2011. Consumer confidence is also at multi-year lows and the national savings rate has fallen below 1%. The agriculture sector is also vastly underperforming due to the delays of needed land reforms that would increase local crop yields.
My main concern with the Philippines economically is its reliance on remittances from foreign workers. Due to the lack of local jobs, the Philippines biggest export historically has been its people. Filipinos across all educational levels have moved across the world for job opportunities. However, 80% of the remittances came from only 7 countries: United States and Canada, the United Kingdom, UAE and Saudi Arabia, Singapore, and Japan. Since remittances make up anywhere between 9-14% of GDP, any slowdown in the developed world would wipe out any economic prosperity. This is especially the case as immigrants are likely to let go of first over local citizens due to sponsorship costs and political considerations relating to local unemployment.
Overall, the picture in the long run is murky for the Philippines, but the outlook is better than it has been historically. With a technical breakout outside the previous base range between 5800-6200 on the PSEC, local stocks are likely a good buy. Due to the lack of liquidity and the high degree of financial corruption in the Philippines, investors are better off buying the iShares Philippines ETF (EPHE) over local stocks. Our timeframe is 2-4 months on this trade (as a disclosure I entered current position in February). Any major reversal in the unemployment rate in the US will likely cause us to exit the position due to likely remittance shortfalls.
Disclosure: I am long EPHE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.