SCB sees Phl as a positive outlier

Standard Chartered Bank had not always been top of mind among the foreign banks here. It isn’t as high up there with Citibank or even HSBC in terms of awareness for a lot of people.

I took notice of SCB five years ago as the world financial crisis took hold. Banks were cutting staff like there was no tomorrow. SCB looked firm… the only big bank that appeared immune to the crisis that brought HSBC and yes, Citibank to their knees.

What saved SCB is its conservatism. It essentially remained a bank and not one of the fancy mutations that infected everyone else. And SCB stayed true to its mission to serve the emerging markets, specially Asia. This is one bank that appears to know what it is doing. It is boring as a bank should be. But it is stable and certainly knows its business well.

I mention all these because I came across a recent report SCB sent to some of its clients. An economic team from SCB visited Jakarta, Manila and Hanoi over a recent two week period to conduct a health check of Asian sovereigns. They met with a number of experts on the ground, including multilateral agencies, independent analysts, banks and quasi-sovereign corporates in the three cities.

They came up with a report on the three countries. The one on the Philippines is so positive and upbeat I had to read it twice to make sure I was reading about my country. I generally agree with the positive conclusions except that their observations on the political atmosphere and PPP are a little too Pollyannaish for my taste. I would have been a little more careful about caveats specially as things may be starting to unravel.

But I am glad SCB sees my country the way it does. I remember some years ago when I asked my son, who works with SCB in Singapore, why he doesn’t visit Manila more often. His response was simply that there is little action here. His area includes South and Southeast Asia but I noticed he was spending a lot of time in Jakarta and Hanoi. Maybe, now that his bank is upbeat on the Philippines, we will see more of him here.

I agree with SCB that our high GDP growth looks sustainable. As it noted, our “GDP growth has exceeded expectations, in contrast with many other Asian economies.” I am happy to note that SCB thinks “growth will remain above trend in the near term, as domestic demand remains strong and investment activity has picked up.”

I just find it strange that they did not see the problem with government’s infra spending. I get the impression they just bought government’s press releases about its “push to increase infrastructure spending.” It would have been nice to hear a conservative banker have a realistic appraisal of how this is going to pan out.

Yikes, SCB actually thinks infrastructure investment is likely to pick up, believing that baloney the government “has streamlined the bidding process for infrastructure projects…” SCB should have talked to the foreign chambers and they should have taken into account on the ground experiences of the foreign investors already here which is one of hopeful frustration.

“While progress on Public Private Partnership (PPP) projects was slow until 2012, four PPP projects worth P90 billion are now underway. While we expect more projects to come on-stream in 2014, we think government expectations of a further P250-300 billion of PPP projects are slightly optimistic based on historical trends.”

It is clear to me the SCB team spent too much time with PPP alright… the Purisima Powerpoint Presentations. That’s really what our PPP program has been all these years and I am disappointed the local SCB guys didn’t warn their visiting firemen.

SCB is also positive about the ability of the DOF to keep our fiscal position stable. SCB did not contest DOF’s ability to maintain a fiscal deficit of two percent of GDP from 2013-16. Neither did SCB have any comment on DOF expectation to increase government revenue/GDP by 2.2ppt.

Most important and encouraging is the SCB view that our external position should remain robust, thanks to our OFWs. “FX inflows from overseas workers’ remittances and BPO services offset the Philippines’ trade deficit. In 2012, remittances total $21.4 billion and BPO services inflows were $18.1 billion, accounting for 15 percent of GDP.

“We think these FX inflows are structural, as more than 10 percent of Filipinos live or work abroad, supporting strong remittances. The Philippines also has the potential to graduate to value-added services from voice services in the outsourcing sector, which will drive growth in BPO services.”

I guess SCB is saying the strong consumer expenditure fueling our impressive GDP growth rate will continue indefinitely. I am not that sure. Granted OFW and BPO incomes will continue to be strong, I am hearing persistent reports of weak sales at the grassroots… the sachet consumer products don’t seem to be doing as well as they used to in the neighborhood sari sari stores.

Indeed, media companies specially the big broadcasters are experiencing weaker ad sales in recent months. The big advertisers selling those sachet-sized personal care products seem to be cutting back on adspend. Could that be because of a tougher marketing environment and they are facing a profit squeeze?

I suspect we are starting to see a manifestation of that problem we have with a lack of inclusive growth. Our economic elite is sucking off all the money to be had from economic growth and leaving the bottom of the pyramid with less than they used to have.

With a lot of the OFW remittances at the level of $200 a month, the strong peso has reduced the ability of OFW families to buy even sachets. No wonder the sachets are now a hard sell.

That is why it is essential to increase our FDI or foreign direct investments into local manufacturing. We need the job creating potentials of FDI if we are to employ the huge army of jobless Filipinos and put money in their hands to fuel a consumption-led growth of the economy.

Unfortunately, SCB noted that “the Philippines has lagged peers in attracting FDI, and received net FDI inflows of only $2.5 billion in 2012 (Indonesia received $14 billion). While FDI inflows to the Philippines have picked up recently, much of the investment has been in non-trade-related sectors such as real estate and BPO services and not in manufacturing.”

It is reassuring SCB noted that our “banking system is healthy, with a manageable NPL ratio of 2.8 percent, a capital adequacy ratio (CAR) of 18.4 percent and moderate credit growth of 12.3 percent y/y as of June 2013.

“The banking system also has ample liquidity to finance potential demand of P210 billion from PPP projects in 2014; this assumes a 70:30 debt:equity ratio for the P00 billion of projects that are expected to come on-stream.”

For those of us worried about the property sector, SCB reports that “Our conversations indicated that there is real demand for housing from the middle-income group and strong demand for commercial space from the BPO services industry. A multilateral agency echoed this view, and mentioned that the demand/supply gap is still wide in the property market, and that banks’ exposure to the sector is tightly controlled and LTV ratios are generally low.

“However, the agency mentioned that there may be potential tail risks in the luxury segment given rapid increases in supply and prices.” I think SCB got this wrong too. The elite are cornering the benefits of economic growth and are so liquid they gobble up those luxury condos to park their funds.

In politics, SCB sees President Aquino as a continuing positive influence. They like his focus “on better governance and strengthening of institutions, which is positive for medium-term economic prospects. We see some risk of policy discontinuity after the 2016 presidential elections.”

On the whole, I like the report. It gives a good snap shot of our economy today, its promises and risks. I like that SCB confirmed we are doing better than some of our peers in the region. It had been a while since we can feel good about where we are going.

Of course, a lot of things are happening on several fronts these past few weeks and things may prove to be more challenging than is good for this positive outlier. In a sense, the SCB report is both an inspiration and a challenge. No resting on our laurels… that’s for sure.

 Food cost

We are supposed to have the best diet plan in the world. It is called high food prices.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco