Philippines the “New Tiger” in Southeast Asia, China and India lose momentum!

During the Asian financial crisis of the late 1990s, Indonesia and the Philippines were bailed out by the International Monetary Fund. This year, they showed the world how far they’ve come from those dark days by pledging a billion dollars each to replenish the IMF’s kitty.

With rapidly growing economies and rising incomes, the two countries are home to a large and young labor force, an expanding middle class and have stable, elected governments with policies inspiring investor confidence. They also have sturdy banks and enough foreign-exchange reserves — more than a year’s imports in the Philippines’s case — to rebuff a misguided run on their currencies.

In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as the region’s “New Tigers” with the potential to leave a bigger imprint on global growth for years to come while the developed world struggles with excess debt and traditional regional heavyweights China and India lose momentum.

“You have a real contrast, which is why these markets have been doing well,” said Andrew Swan, head of Asian fundamental equities at BlackRock. “We’ve had 3 to 5 years of great growth. But because there is so much room for growth, this can go on for so many more years.”

Each has also received credit rating upgrades since 2011, with Indonesia now rated investment grade by Moody’s and Fitch. Their stock markets are among the world’s best performing since the end of 2008 — Indonesian shares tripled during the period from beaten-down valuations, and are closely followed by Philippine equities.

Unlike the West, government finances are shipshape. Jakarta’s gross government debt was 25% of GDP in 2011, and Manila’s 41%, according to IMF data, leaving both enough room to boost their economies in case of need.

The Philippines has a current account surplus of 2.74% of its GDP, thanks to remittances from its vast diaspora. Indonesia swung to a deficit in the first half of this year as lower commodity prices hurt exports, and as imports of capital goods and machinery increased.

Agriculture employs at least a third of the workforce in both countries, and domestic consumption is an important driver of their economies. That protects them from external shocks to an extent — both escaped a recession in 2009, when the Thai, Malaysian and Singaporean economies contracted. But both also need tens of billions of dollars in foreign direct investment, especially to create infrastructure and pursue industrialization.

Stocks are more expensive than in north Asia, and the two nations are by no means immune to global shocks. But barring a post-Lehman Brothers-like blowout crisis — in or outside the euro zone — potential reward is seen outweighing risk on balance. Investors have embraced the local stock markets, driving shares in Indonesia up about 11% year-to-date, while Philippine stocks have climbed 22%.

“The earnings growth in these markets has also been very, very strong. That gives me the confidence that as long as the earnings growth trajectory is sustainable, which we think it is, the returns will be there to be made going forward,” said BlackRock’s Swan.

After a weak 2011, the situation is again looking rosy for the Philippines. The stock market is booming, growth has improved, and the mood generally is upbeat, not least because of the Standard & Poor’s upgrade of the country’s ratings in July to BB+ — just one step below investment grade. Read more about the Philippines.

The change of pace is a welcome development after GDP growth more than halved to 3.7% in 2011 from 2010, as Manila cut expenditures to try to reduce its budget deficit. In the second quarter, GDP rose a forecast-beating 5.9% from the year-ago period. The economy is expected to slow in coming months unless the government loosens its purse strings.

President Benigno Aquino has committed to lowering the deficit to 2% of GDP by 2013, from 3.9% when he took office two years ago. Although generally seen as prudent, some view such austerity as unwise for a developing nation with a desperate need to create more jobs.

“The Philippines is in need of higher spending, not less. Tax-to-GDP [ratio] has to improve. Otherwise all this cutting of spending is going to prove detrimental,” said Sanjay Mathur, Royal Bank of Scotland’s head of research for Asia excluding Japan.

Mathur said a higher cost base relative to some neighbors makes the Philippines less attractive for manufacturing. But the business process outsourcing industry, where the country has already overtaken India, is a bright spark.

With millions of young, educated and English-speaking workers, the Philippines is a perfect place to host the world’s call centers. Philippines is the second youngest country in the ASEAN after Laos, with half the population under 23.1 years in 2012, according to CIA World Factbook estimates.

Revenue from the industry, which employs almost 650,000, accounts for about 5% of GDP. At the current annual growth rate of about 25%, analysts estimate industry revenues will top remittances within five years. Remittances from overseas workers make up about 9% of GDP.

“The BPO industry has made a positive impact [on Philippines’ current account surplus]. It has really been felt at the external position. The Philippine peso USDPHP-0.3146%  has become one of the most stable currencies in Asia,” Mathur said.

Still, others point to the crying need to diversify.

“It needs employment generating manufacturing,” said Santitarn Sathirathai, an economist at Credit Suisse.

Sathirathai said low commodity prices are good for the country, a net importer of resources including crude oil, and is another reason behind the brokerage’s positive view on Philippines against the backdrop of weakening Chinese appetite for materials.

“We are most bullish about Philippines of the ASEAN … [there is a] lot of low-hanging fruit there,” he added.

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