The economy of the Philippines remains on a growth trajectory, but… James Syme, Senior Fund Manager, JOHCM Global Emerging Markets Opportunities, explains.
Investors who follow our process understand that we buy equity for growth, and buy emerging markets for growth. In practical terms, this means focusing both on the economic growth environment and how that impacts revenue and earnings growth for listed companies. It also means focusing on the sustainability of growth.
With this light, some investors may find it interesting that we remain zero-weighted in the Philippines. Throughout 2023-24, the country’s GDP growth averaged 5.6% in 2023-24, which is higher than in Indonesia at 5.1%, where we are invested. Annualized earnings growth for those two years in the Philippines (measured by the change in 12-month forward earnings estimates for the local currency index) was 12.7%, comparable to other strong growth stories we have been invested in: the UAE (+13.6%) and India (+12.4%).
Yet, the Philippines did not make it into our investment picture. To explain our view more fully, it is necessary to take a quick trip through recent Philippine economic and political history.
Although the Philippines was not hit as dramatically as, say, Indonesia or Thailand during the 1997 Asian Crisis, as, say, Indonesia or Thailand, the country suffered a collapse of its currency and stock market. Similar to other countries in the region, this proved to be the trigger for economic reforms that drove strong growth throughout the 2000s.
In particular, the presidencies of Gloria Macapagal-Arroyo (2001-2010) and Benigno Aquino (2010-2016) saw GDP growth average 5.4% even though the period included the Global Financial Crisis. Crucially, the quality of this growth was high, with account surpluses from 2004 to 2016 and a fiscal deficit of around 2% for this period.
The rise of populist politics around the world in the mid-2010s affected the Philippines, leading to the election of Rodrigo Duterte in 2016. Though his government’s economic policies contained numerous reforms, including liberalising foreign investments, he also cut taxes while increasing government spending. While this proved positive for growth, with GDP growth averaging 6.6% from 2016-2019, this approach also came with several costs.
The first was inflation, with CPI inflation increasing from 2.1% in 2016 to a peak of 6.9% in late 2018. The second was the fiscal balance, which steadily worsened from 2017 to 2019, reaching a deficit of 3.4% of GDP that year. The third was the current account balance. As imports were sucked in by strong domestic demand the current account moved into deficit in 2017 and remained there through to 2019. Then COVID hit.
The global pandemic arrived with President Duterte not yet four years into his six-year term. Given the pre-pandemic focus of his government, a robust fiscal response was always the likely outcome. The government borrowed heavily to fund pandemic relief efforts, pushing the government debt-to-GDP ratio from 39.6% in 2019 to 60.5% in 2021. The budget deficit widened to 7.6% of GDP in 2021, up from 3.4% in 2019. This helped turn around a deep recession in the Philippine economy and was undoubtedly crucial to many Philippine citizens.
Despite the end of the pandemic, fiscal policy settings have remained extremely loose. The Duterte administration was followed by the current incumbent, President Ferdinand Marcos Jr, who seeks economic stabilisation (including stabilising government debt/ GDP), and a focus on controlling inflation. That has not returned the fiscal and current account balances to their pre-COVID levels, let alone their pre-Duterte levels.
The latest data points show a fiscal deficit of 5.8% of GDP and a current account deficit of 3.0% of GDP (both in 3Q 2024). Inflation remains benign, as excess capacity in the economy post-COVID is being consumed, but this is fundamentally an unsustainable policy setting.
GDP growth (5.2% in 4Q 2024) remains high but is vulnerable to what will have to be either a sharp tightening of fiscal policy, real weakness in the Philippine Peso, or both. In that light, the strong earnings growth from Philippine companies is, in our view, being juiced by twin deficits that cannot continue indefinitely. We remain zero weight in the Philippines and prefer equity markets with growth in countries with stronger fundamentals.
Main image: maria-stewart-g6DmKxFoQfE-unsplash
