Phl economy needs better absorptive capacity – analysts

MANILA, Philippines - The Philippine economy needs to hike its absorptive capacity in order to utilize large inflows expected as a result of the country’s promotion to investment grade status, analysts said.

“Given that investment grade has been bestowed, one needs to ask, where will all these funds go as this tidal wave hits our shores?” Bank of the Philippine Islands (BPI) economist Emilio Neri Jr. said in a research note yesterday.

Romeo Bernardo and Marie-Christine Tang, analysts at think tank GlobalSourcePartners, said in a separate note that the Philippines needs to channel inflows to “productive investments” such as infrastructure to avoid asset bubble formations.

Last week, Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the country has not achieved its full growth potential and that private sector investment will be needed to avoid plunging into the “middle income trap.”

The Philippines, which grew an above-target 6.6 percent last year, bagged investment-grade status from Fitch Ratings last March and Standard & Poor’s Ratings Services last week, opening the gates for more investments and credit inflows.

One of the upgrade’s benefits, Neri said, is that the country will no longer be the “first hot potato” that investors will dump once a crisis similar to the 2008 crush of investment bank Lehman Brothers evolve into a full-scale financial meltdown.

While at first portfolio inflows would be attracted to the country, investors placing long-term capital would find its way to the Philippines to increase our “glaringly low” foreign direct investments (FDI) at $576 million in January.

To be able to do this though, the economy “must see a substantial increase in investment spending to ready the outlets for all this funding,” Neri pointed out.

One way to achieve this, Bernardo and Tang said, will be to fasttrack infrastructure projects lined up for bidding for the government’s Public-Private Partnership (PPP) program launched in November 2010. So far, only three projects have been bid out.

“Considering high uncertainties associated with PPP timetables, we expect a continuing slow process of getting projects to market,” they explained. This will mean limited economic growth effects, with an accelerated government spending, driven mainly by good budget profile, taking up the slack. Infrastructure spending, for instance, would likely be hiked.

Both BPI and GlobalSourcePartners forecast economic growth to hit 6.1 percent this year, falling at the low-end of the government’s target range of six to seven percent.

Neri said moving beyond the “pedestrian investments” in small roads, business process outsourcing and services would be needed to allow growth to put a dent on unemployment.

The worst case scenario, Benardo and Tang said, is that the Philippines would be “ill-prepared” to absorb tons of credit as a result of the upgrade and will risk raising asset prices beyond market rates or be prone to capital reversals.