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Philippines could become a 'breakout nation'

Posted on May 29, 2012

IN A NEW economic era of crises and risk-averse investors, not all emerging markets will succeed in sustaining the high economic growth notched in the past decade, a Morgan Stanley executive said.

Only a few will turn out to be "breakout nations," distinguished by their ability to beat widely held growth expectations for their income class, said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley and author of Breakout Nations: In Pursuit of the Next Economic Miracles published recently.

The Philippines is "among the countries expected to do better than expectations," said Mr. Sharma, speaking by phone from Singapore yesterday, as long as the country focuses on reforms.

To qualify as a "breakout nation," the Philippines has to rise above its 5% growth potential and achieve a higher economic growth average in the next three to five years -- and over a decade.

Mr. Sharma explained that emerging market economies cannot be expected to post the high growth rates seen in a decade ago because the "easy money" that came in the wake of central bank rate cuts, and which drove growth higher, had dried up.

The prior decade was also marked by these emerging markets’ playing catch-up with the bigger economies after they were racked by crises in the 1980s to 1990s.

"The last decade is not likely to be replicated," Mr. Sharma said. "Not everyone will be able to grow rapidly and the challenge is to identify which countries can do better than the rest."

While interest rates in the United States and Europe are at historical lows at present, money is not going rapidly to emerging market economies because of risk aversion.

Banks there are also either "keeping money at home or bringing money back home" to repair balance sheets or comply with capitalization requirements. The situation is compounded by the ongoing euro zone debt crisis.

Indeed, net foreign portfolio investments to the Philippines fell 11% to $4.08 billion in 2011 versus the previous year while data as of May 11 showed "hot money" at a little over $1 billion, roughly half the previous year’s level. Foreign direct investments was at a minuscule $1.1 billion in 2010.

Emerging market economies will have to compete for the slow-flowing foreign capital and those that succeed are those that are able to demonstrate high growth vis-a-vis peers.

In the case of the Philippines, its peers include other lower-middle-income countries such as Indonesia, India, Nigeria, Pakistan and Sri Lanka. Lower-income-countries, based on the World Bank grouping, are those with $1,006 to $3,975 in per capita income.

The Philippines’ other neighbors, Malaysia, Thailand and China belong to the upper-middle-income grouping with $3,976 to $12,275 in per capita income. So do Turkey, Brazil and Russia.

"Indonesia looks good, Thailand looks good, also Turkey and Poland," Mr. Sharma said. "Frontier markets look decent from Nigeria to Sri Lanka."

"Likely to disappoint" are Brazil, Russia and China, whose growth rates have already fallen. It’s a "mixed view" for India, which has room to catch up in terms of per capita income, but whose government has "done little reforms or back-pedaling on reforms."

Increasing revenue and raising investments put the Philippines on the right track, said Mr. Sharma, noting how the country dashed expectations previously.

"It had a very high per capita income in the 1960s, but every other country surpassed it… Korea and Taiwan in the ’70s, Malaysia and Thailand in the ’80s, China in the ’90s and Indonesia in 2009. It was getting to be a joke," he said.

"When I came to the Philippines [in 2010], I saw signs of change with [President Benigno S. C.] Aquino [III]. There was a reform momentum, it was getting the investment cycle going again."

He also sees pluses in the country’s young population and the fact that more Filipinos are living in cities.

"Urbanization is better for productivity," he said.

The government, he said, can hit its medium-term 7-8% growth target as long as it keeps its reform momentum going.

"At the end of my book, I referred to a proverb that went ‘If there is no wind, row,’" Mr. Sharma said.

"The easy global conditions in the past decade are not there, there are no tailwinds to ride on, so emerging markets must invite the capital."

Politics and cronyism, however, can stall the Philippines’ momentum but "hopefully, changes ... [will be] for the better."

At Morgan Stanley, Mr. Sharma oversees $25 billion in assets. Half of this is invested in Asia, of which about $500 million to $1 billion is invested in Philippine assets, mostly stocks.

The amount might look small, "but for the size of the Philippines, it’s quite big," he said.