Eyeing the Tigers; The Rise of the Philippines and Indonesia

MANILA, Philippines - In 2005, Goldman Sachs proposed a list of the Next-11 countries: 11 successors to their 2003 “BRIC” (Brazil, Russia, India and China) hypothesis of nations they predict would become the largest economies in the 21st century. Among the N-11 were two of Southeast Asia’s current rising stars – the Philippines and Indonesia.

HSBC shared similar bullish sentiments in their January 2012 report “The World in 2050. The British financial services giant boldly forecasted the Philippines to become the 16th largest economy in the world by 2050, a 1,418 percent climb from its 2010 GDP of $112 billion to a staggering $1.7 trillion.  Using the same methodology, the global bank predicted Indonesia to have the 17th largest economy by 2050, a 448 percent increase.

To put these numbers into perspective, the report sees China’s economy to expand by about 622 percent, Canada’s economy by 156 percent, the US economy by 93 percent, and Japan’s economy by 28 percent by the year 2050.

Why are analysts so upbeat on the growth prospects of these two Southeast Asian nations, despite historical cases of political instability and poor infrastructure?

Improving political climate

Since President Aquino was elected in June 2010, the Philippine government has increasingly made movements towards curbing corruption and inspiring investor confidence. A recent survey of 826 company executives by the Social Weather Stations revealed a significant spike in the Office of the President’s net sincerity in fighting corruption rating, from a bad -37 in 2009 to an excellent +81 in the first half of 2012.

While Indonesia has also progressed in its quest to eradicate corruption and increase transparency, fraudulence among authorities is still a key issue, leading government spending to fall short of targets and creating road bumps in developing infrastructure. Indonesian President Susilo Bambang Yudhoyono has initiated the Acceleration and Expansion of Indonesia’s Economic Development Master Plan (MP3EI), which calls for more PPP (public-private partnerships) to help facilitate the improvement of infrastructure.

Expansion of population, consumerism and industry

Rapid workforce growth is the obvious linchpin in driving economic progress in the two nations. With a combined population amounting to nearly 10 percent of Asia’s total, both countries are also getting younger. According to a New York Times article, “about 61 percent of Philippine population is of working age, between 15 and 65. That figure is expected to continue increasing, which is not the case for many of its Asian neighbors, whose populations are aging.”

This, coupled with vast improvements in infrastructure, have led to the emergence of a new, larger middle-class, and in turn, a rise in domestic consumption.

In Indonesia, domestic consumption already constitutes about 60 percent of the country’s GDP, providing it with some protection from global fluctuations in supply and demand. Aided by local purchases of goods and services, consumer-focused firms, led by Unilever Indonesia, posted strong earnings in the first half of 2012, according to an article in The Jakarta Post.

Historically, the Philippines has had a very strong services sector, comprising almost 60 percent of its GDP in the first semester of 2012. The sector’s robust performance can be attributed to remittances from over 10 million overseas Filipino workers (OFWs) and an increase in BPOs (business process outsourcing). As of this year, the Philippines has surpassed India as the world leader in revenues generated from call-centers, fueled by a 24 percent year-on-year expansion of the country’s IT-BPO industry.

Looking forward, analysts at Deutsche Bank foresee an expansion in manufacturing, one of the nation’s weaker sectors at a 50-year low of 31 percent of GDP. These claims are made on the basis of rapidly expanding capacity in various industries, coupled with government policies offering sizable tax incentives to stimulate sector growth.

Surging investment

Indonesian President Yudhoyono’s increased measures to woo investors have begun to take effect. Earlier this year, the nation won credit rating upgrades to investment grade from Moody’s and Fitch. Furthermore, as of September 2012, the Bank of Indonesia has maintained its record low 5.75 percent benchmark rate, encouraging investment in higher-yield asset classes such as stocks, commodities, and properties.

This year, the Philippines also received credit rating upgrades – from S&P and Moody’s, to one notch below investment grade. Barclays Capital Ltd. economist Prakriti Sofat sees the 7,107-island archipelago receiving yet another upgrade in the next six months. The country’s stock market’s performance has mirrored this bullish outlook, climbing 21 percent as of end September – good for the second-best performing exchange in Asia.

A key limitation in maintaining foreign investment, however, is the relatively small market capitalization of the two countries. At the end of 2011, Indonesia’s market cap was a mere $390.1 billion, and the Philippines’ cap was even smaller at a meager $165.2 billion.

Political resistance and red tape, particularly in the mining industry, are significant issues holding the two economies back from tapping into rich mineral resources. Also, the dependence of their exports on China, which in the second quarter of 2012 experienced its lowest growth rate in three years, could hamper growth and disrupt the trade balance in both nations.

While there are several obstacles threatening to slow down the surge that the Philippines and Indonesia are experiencing, the legs are there, and the story is good. Favorable macroeconomic conditions and countless opportunities for growth have rendered both countries as attractive, stable areas for foreign investors to consider. Only time will tell if the trend continues.