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Philippines Outlook 2011

2010 went particularly well for the Philippine economy as it is expected to have expanded by as much as 7.0% for the whole year. For the first 3 quarters of 2010, the economy already posted a 7.5% expansion which was well above the 5-6% growth target. GDP, as we know, is the total value of final goods and services in the country. At least for 2010, election related spending, soaring remittance and business process outsourcing (NYSE:BPO) revenue levels, jump in capital investments, and an uptick in exports all helped bring the Philippines into the green zone once again.

In May last year, the country held a national election. Several months leading to it, of course, spending took cue as wannabee officials court the masses with projects here and there in hopes of luring them for their votes. Media spending also rose during that period as candidates sell themselves through radio and television commercials, billboards and print ads. The success of the elections, of having a peaceful one, likewise boosted investor confidence. Optimism intensified when Noynoy Aquino, now President of the Philippines, stepped into the country’s driver seat. His administration’s platform of spending rationalization, plugging the leaks in collecting taxes, and its push for more public-private partnerships (NYSE:PPP) has so far worked and more so attracted additional capital placements.

Remittances, which accounts for roughly 10% of the country’s total output, reached a record level for the first 11 months of last year as it hit $17.0 billion from January to November of last year. For the month of December, remittance is seen to at least be at par with November’s amount of $1.613 billion as overseas workers send money back home for Christmas and New Year. For 2010, remittances are projected by the Bangko Sentral ng Pilipinas (NYSE:BSP) to reach $18.79 billion, a rise of 8% from 2009. The money that is sent home help finance domestic consumption (spending for cars, homes, food, etc.) which in itself takes up about 70-80% of the entire GDP. Additionally, the country’s BPO sector alone continued to show strength as it has been growing by an average of 25% annually for the last few years. The industry is now worth $7 billion which is about 2.5% of GDP. Capital investments, which produce about 17% of the country’s total output, grew by annualized 10.8% in the 2nd quarter and 8.9% in the 3rd quarter. Another 8-9% growth is seen for the last remaining quarter of the year.

As mentioned earlier, improved optimism in the Philippines, which was helped partly by President Aquino’s economic platform, the low level of interest rates, and an outlook and rating upgrade by international rating agencies on Philippine government- issued bonds attracted a lot of capital spending and inflows. Even the so called “hot money” hit a net record of $4.61 billion for 2010 which was almost 12 folds of its value from a year earlier.

One surprise came in the country’s export sector, which takes up about 40% of the GDP, when it grew by an annualized 29.1% in the 2nd quarter and 29.9% in the 3rd quarter of 2010. For the remaining part of the year, exports are seen to have remained at the same pace.  The country actually posted its first notable trade surplus in almost nine years in the 3rd quarter as the industry benefit from the upswing in the demand for electronics.

For 2011, the lack of election-related spending could cause a slower growth in the economy than 2010. However, renewed confidence in the market, which is anticipated to take place before the release of 2010 corporate earnings, will support further consumer spending and capital inflows. Hot money inflows, though, could be taper off a bit due to the higher valuations of Philippine financial assets. Nonetheless, the economy’s fundamentals at least from the present perspective still looks solid.

The Philippines’ financial markets at least have been taking a toll as of late due to some negative news from abroad. The credit issue in the euro zone and the threat of an all out war between North Korea and South Korea turned some of the investor confidence off. Recently, weak employment figures in the US and the inflation concerns in China have been putting a drag on our markets. However, I would like that these things for the most part have already been well priced in. Even an interest rate hike in China, which would indeed temper their domestic business activity and their trading partners’ as well could still end up to our favor. How? Well, a rate hike would increase the Yuan’s valuation against its peers which in turn would give them more purchasing power, making exports from the Philippines more enticing. For 2011, economists estimate that China will allow the Yuan to appreciate by another 6% or so against the US dollar as a move to fight inflation.

Another thing is that remittances and revenues from the BPO sector would continue to support the economy as companies abroad continue to optimize their operations by seeking cheaper but quality labor. Foreign investors have been recognizing the quality and quantity of our Filipino workforce. Given this, the BPO sector is seen to rise again by by 25% this year. In the same way, remittances from abroad could even be larger if country’s like South Korea (SK) opens its labor market for English-teaching Filipinos. According to South Korea’s Labor Ministry, SK could soon open its door for Filipino English teachers as Korea encourage their youth to learn the language. As you know, majority of the Filipinos could effectively speak and communicate in English.

Moving on, I personally like to highlight the corporate acquisitions and capital investments done recently since its gives us a big clue regarding the outlook of the country’s economy. Note that these companies would not engage in these projects if they do not see them resulting into positive equity to the company. San Miguel Corporation (SMC), for example, made a lot of press when it increased its stake in Petron Corporation (PCOR) to 68%. It also made several moves in its telecommunications and energy units. Recently, the company tapped the international bond market as it sought to finance $500 million for its power unit. Alliance Global Inc. (NYSE:AGI) also made some noise when it bought a majority of another publicly listed property firm in Fil-Estate Land (NYSE:LND). Manila Electric Company or Meralco (MER) also started with its own 120-megawatt to 150-MW peaking plant in Calamba which is said to be worth about $150 million. Business expansions like the above not only contribute to the companies’ bottomline line but also provides additional employment. These additional employment, as we know, would put money in the employees pockets, allowing them to spend for their needs. Such at the end would add on to the overall consumption in the economy.


On the technical side, the Philippine Stock Exchange Composite Index (NASDAQ:PSEC), which could be seen as the leading barometer of the Philippines’ economy, is also suggesting a slower growth for the country compared to the previous year. In fact, the index even started the new year on a bad note when it broke down from an ascending triangle pattern. After the breakdown, the PSEC attempted to rally but was halted by the triangle’s support and its 50-day moving average. At present, the index is hanging on to the 50% Fibonacci retracement level of the last up wave. A closing below its present level could send it towards 3,850 which is its 61.8% Fibonacci retracement mark which is also its downside target from its recent breakdown. Despite this somewhat bearish outlook in the near term, the index’s uptrend and its 200-day moving average remain unbroken. On that note, a fall below the 200-MA could be disastrous. Nonetheless, the bias continues to be positive for the medium term, assuming again the 200-MA does not get violated. Let’s just hope that the upcoming 4Q GDP and corporate reports could bring back buying interest in the market. The possible sovereign credit rating upgrade by Moody’s could likewise instill some confidence among investors.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.