Since the 2008 financial crisis, the economy has grown at a rate of over 6 per cent, much faster than the 10 years before the crisis.

In the Philippines, one of the world’s emerging markets, there’s opportunity.

There’s the opportunity to lift millions out of poverty, the opportunity to hugely improve infrastructure, the opportunity to capitalise on tourism, and the opportunity to grow exports. In short, there is the opportunity to make the Philippines one of the leading economies in South East Asia.

And this change is happening fast. Earlier this year, UK-based Oxford Economics projected the Philippines’ gross domestic product (GDP) to grow by an average of 5.3 per cent between 2019 and 2028. This is outpaced only by India’s, at 6.5 per cent.

The country’s set to have the highest increase in its labour force of any of the top 10 emerging markets, Oxford Economics says.

Alongside its GDP growth and growing labour force, this means it will soon be one of the world’s fastest growing economies.

So, what does this mean for investors?

Growth is strong

In the Philippines, the average age of the 106 million population is 24 years – among the youngest population of the South-East Asian countries.

Since the 2008 financial crisis, the economy has grown at a rate of over 6 per cent, much faster than the 10 years before the crisis.

It has an inflation rate of about 4 per cent, at the upper end of the Central Bank’s target 2 to 4 per cent range. But it’s much lower than historical figures and not overly concerning, given the high growth rate.

Interest rates are 4.75 per cent – again, at the upper end of the 3 to 5 per cent range over the last 10 years. But this still shows an impressive level of stability, compared to many of the other emerging market countries.

The Philippines has run a trade deficit for many years – it’s importing more than it exports – and this has led to some weakness in its currency, the peso.

The peso has depreciated by about 10 per cent compared to the US dollar over the last 10 years but again, this is not dramatic for an emerging market.

The result of all this is that the economy has been growing strongly, without overheating. The Philippines also has an independent central bank that seems committed to keeping inflation, interest rates, and the currency stable.

What’s driving growth?

Domestic spending on goods and services is driving economic growth. In 2018, it accounted for 74 per cent of total GDP.

With a young and still growing population, and an unemployment rate close to 10-year lows of 5 per cent, many households in the Philippines have been prospering.

But the low starting-point of salaries (the average Filipino family makes just US$500 per month), means these households are only just entering the middle class, and buying their first car or their first home.

Rising prosperity is also helped by the large number of Overseas Filipino Workers, or OFWs. English is taught in school from an early age, so many people go overseas and send the money they earn home.

In 2018, people working overseas sent home nearly US$29 billion, almost double the amount of 10 years earlier. This increasing spending power led Pie Funds to invest in Cosco Capital, a Philippines investment company that owns most of the Puregold Price Club supermarket chain.

It’s one of the largest supermarket chains in the country and analysts suggest it has a long runway for growth. The company has 351 supermarket stores, and is planning to add 25 stores a year.

Call centres

The low cost and English-speaking ability of Filipinos has meant the country has been a hot spot for call centres. Call centres have been one of the fastest-growing industry sectors in the Philippines, and the country has the most call centres in the world.

A report by Reuters showed the sector was worth US$23 billion to the country in 2017, although the rise of artificial intelligence remains a threat.

“The Philippines’ business process outsourcing (BPO) industry is an economic lifeline,” the report says.

“It employs about 1.15 million people and, along with remittances from overseas workers, remains one of the top two earners of foreign exchange,” the report says.

Contact centres make up four-fifths of the Philippines’ total business outsourcing industry, which accounted for 12.6 per cent of the global market for business outsourcing in 2017, says the IT & Business Process Association of the Philippines.

A tough year in 2018

Certainly 2018 was a tougher year for investors in the Philippines, with the main market index falling 13 per cent.

Investors were worried about weakness in the currency, and delays in passing the government budget to finance all the infrastructure projects in 2019 (an issue which is still not solved).

Then there’s president Rodrigo Duterte, who remains very popular among the locals due to his crackdown on drugs, but who has also made many controversial comments since his election. He’s rumoured to be in poor health.

What’s the future?

Investing in emerging markets is never a one-way street, and the Philippines does have challenges ahead. It needs to rapidly build up more export-oriented industries, such as textiles and electronic manufacturing, to compete with countries like Vietnam and to relieve pressure on the currency.

Residential property needs to be kept strong, but not too hot. The country needs more airports, roads, and bridges.

These are perfectly surmountable challenges, and if the backdrop of stable and low interest rates and inflation remains in place, growth outlook is very healthy.

With foreign ownership of shares on the stock exchange of the Philippines at seven-year lows of just 23 per cent, I believe opportunity is knocking at the door quite loudly right now.

Definitions

Emerging markets: An emerging market country has an economy that’s becoming more advanced, with local debt and share markets, some form of market exchange and regulation. MSCI includes 24 countries in its EM index: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

Gross domestic product (GDP): GDP is a measure of a country’s market value. It covers all goods and services produced within a timeframe and can be used to compare nations.

Published 30 May 2019

Guy Thornewill is the Head of Research UK and Europe and Senior Investment Analyst at Pie Funds Management Limited. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. Before relying on it, we recommend you speak with a financial adviser.