Euromoney, June 2014
For many years, interviews with Philippine policymakers have tended to be full of defiance in the face of adversity, of catching regional peers and worrying about the banking system. But not this year. For once, the Philippines is leading the field, to the point that the only real headache it faces is the danger of asset bubbles in a thundering economy.
In an era in which Thai GDP shrank in the first quarter and may not reach 2% for the whole year, in which Indonesia has had to willfully slow its own economy in order to bring a damaging current account deficit under control, the Philippines beat its own projections last year and grew 7.2%. Inflation is under control, deficits within targeted limits, and it appears the country may finally be in a position to invest properly in its dismal infrastructure. This year the government is expecting 6.5% to 7.5% growth.
Euromoney has been interviewing Amando Tetangco Jr, governor of Bangko Sentral ng Philipinas, the Philippine central bank, throughout his nine year tenure and has never seen him with less to worry about – not that his equanimity ever seems to fade even in the midst of global financial crises or domestic banking catastrophes. “Our latest assessment is that this strong growth is likely to continue,” he says. “It is going to be supported by consumption. Consumption has always been an important driver of growth in the Philippines – even if you go back to the Asian financial crisis in 1997-8, it did not turn negative – and it has become even stronger now.” At the heart of it is the thriving BPO sector, which has been growing at 20% a year, and the long-standing bounty of remittances from overseas Filipinos.
It has fiscal space to move now, too. The budget deficit came in at 1.3% last year, lower than forecast, and since the objective is to keep it within 2%, “there is substantial room there,” Tetangco says. Tax collection and administration has improved, as has private sector investor confidence, and the current account has been in surplus for years. Meanwhile analysts are looking at the Philippines with uncommon generosity. Nomura makes it its preferred market in Asia for both FX and equity investors.
All good. So what’s the Philippines going to do with this unfamiliar positivity?
Tetangco admits that infrastructure development is a “long overdue programme” and notes that infrastructure spending, at 2.3% of GDP last year, was insufficient: “Yes, probably one of the lowest in the region.” The plan is to put it up to 3% this year and 5% by the time the Aquino government steps down in 2016. This has all been said before, though; what’s different now? “The government has got the fiscal space to do this, “ he says.
An infrastructure development programme has been underway for years without visible progress: the PPP policy came into place in 2010, and followed similar efforts from previous administrations. “It took some time for it to get off the ground,” Tetangco says, “mainly because of the efforts to make sure that the contracts are well and above board.” He says six PPP projects have been bid out so far, with others underway. Some – including a link between the North and South Luzon Expressways, and a school project – are well into the construction phase. This progress will be watched with interest by both local and international banks who have long hoped for better opportunities in infrastructure finance.
“In the short term, infrastructure development increases GDP,” he says. “In the medium to long run, it strengthens the base for sustainable growth in the economy. That is what we are trying to do.”
If there is a fly in the ointment, it is mounting concern about a real estate bubble which could damage the banking sector. Tetangco says he is considering a stress test on the banks later this year to work out how exposed they would be to a bubble and consequent collapse.
He claims, though, that concerns about an asset bubble are overdone. “There’s no evidence of overstretched valuations in the property sector,” he says. Prices are climbing, all right, but he says that’s just a function of genuine demand: that four million units of low to medium and socialized housing are needed. He also believes developers are smarter than they used to be. “In ‘97 the model was basically: put up four towers at the same time and hope you can sell them all,” he says. “This time developers have learned their lesson: they put up one tower first, sell that, and when 80% is sold they start building the next.”
Still, he wants banks to know he’s watching them, despite what he says is a sector-wide average consolidated CAR of 18%, an overall system NPL ratio below 3%, and improving profitability and return on equity. “We have sent a signal that we have to be watchful of any excessive exuberance in the property sector.”
As for the perennial bugbear of Asian economies – Federal Reserve tapering and, at some point, interest rate rises – Tetangco argues both are positive for the Philippines because they indicate improved economic performance in the US, a vital trading partner. “There will be some short-term effects obviously, but over the medium term we see this as something that would boost our trade.”
The Philippines was not one of the worst-hit markets when emerging assets were sold off last year after some casual Fed remarks about tapering, but nevertheless, Tetangco is hoping for some considerate thinking from the US in future. “What we are really watching closely is communication from the Fed, in terms of their forward guidance on the start of their policy tightening,” he says. “That’s still a source of uncertainty because we don’t know their timing. I believe we should see clearer communication from the Fed.”