03 March 2016

Reform is a topic that features highly in most discussions about Asia. China, India and – to a lesser extent – Indonesia have implemented far-reaching and important reforms across a wide range of economic sectors. A number of other countries are just starting on their journey.

The Philippines gives us a slightly different angle. Once the ‘sick man of Asia’, the good governance of the Aquino administration has helped transform this 7,000 island nation to one of the region’s rising stars. However, a challenge awaits. Due to term limits, President Aquino is unable to stand in this May’s election and a new leader will be required to continue his impressive work.

Weeding out corruption

It’s worth first noting some of President Aquino’s achievements. When he came to power in 2010, the Philippines was considered one of the most corrupt countries in Asia, ranking 134th out of 178 countries and territories in terms of cleanliness. By 2015, and after strong anti-corruption measures were put in place, the country had climbed to 95th. Promoting the efficiency of government led to improved tax collection and, with that, increased spend on public infrastructure – an area in which the Philippines had been lagging badly. Other areas of focus for President Aquino was in improving the country’s fiscal position with reforms in 2013 including hiking funding for social services. This is the reform landscape Aquino’s successor will inherit. However, the run up to the election has raised concerns. With no obvious next-in-line candidate, and the campaign so far seeing persona outweighing policy discussion, the obvious risk is the next president could fumble the transition. This is coming at a time when infrastructure bottlenecks and delays in projects are increasing, highlighting that strong leadership will be required to remove obstacles to growth.

Structural strength

The Philippines benefits from several strong structural themes. GDP growth in excess of 6%* is sustained by robust consumer demand and a steady flow of remittances from Filipinos working overseas – an amount that continues to grow by ~5% a year.* This is a major advantage in a world where trade growth is slowing and global manufacturing is suffering from overcapacity. In addition, the Philippines’ sizeable population of fluent young English speakers, and their low cost of labour, is helping attract BPO (business process outsourcing) companies to the country.

Sector selection

Historically, much of the investment focus has been on Manila and the nation’s capital is now a vast megacity with a population of 14 million. However, there are plenty of opportunities for those companies willing to invest in other parts of the country. The area excluding metro Manila makes up 60% of GDP* and has lower but much faster growing income levels. This offers up fertile ground for some of our favourite sectors, such as property, banking and consumer staples.

Elections in focus

The long term potential of the Philippines is clear. While, as with most emerging markets, there will be bumps along the way, corporates have learned to manage their balance sheets in a prudent manner and it looks as if there will continue to be rewards for patient, savvy investors. The presidential elections still loom before us and the result will undoubtable impact the nation’s economy and medium term reform path. It is one we are keeping a close eye on.

* Source: Philippines Statistical Agency, February 2016

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 26/02/2016 and may change as subsequent conditions vary.

Once the ‘sick man of Asia’, the good governance of the Aquino administration has helped transform this 7,000 island nation to one of the region’s rising stars