The Philippines' 7.5% GNP Growth is No Fluke

By , Money Morning •

By Mike Caggeso
Staff Writer

All the hot talk of China, India and even Vietnam’s soaring economies have overshadowed a country that has been making gains for the past decade — the Philippines.

Fueled by a steady economy and a surging service sector, the archipelago country posted a 7.5% GNP growth for the second quarter, its highest quarterly growth in 20 years.

This growth isn’t an isolated quarterly fluke. The country has averaged 5% annual GDP growth between 2002 and 2006. The government plans to accelerate it to 9% by 2009.

President Gloria Macapagal-Arroyo said she is confident the country will hit its full-year growth target of 6.1 to 6.7%.

And she wasn’t shy about crediting her administration for the progress.

“Our economic plan is working. Today we have the latest glowing indicators to show it,” the Philippine Star newspaper quoted Arroyo saying at a press conference yesterday (Thursday).

“Ours is the only administration that has not experienced any negative growth in any quarter. And it has been a six-year administration. So it has been sustained. In fact, the regular boom and bust cycle is three years so we should have gone through two boom and bust cycles by now but we never did.”

Bravado aside, she’s right. Her government slashed the budget deficit to less than 1% of GDP from 4% in 2004, halved inflation to 3%, managed three consecutive years of 5%-6% economic growth, and enabled the Philippine peso to strengthen 18% against the dollar. The CIA reports that the peso is said to be the best performing currency in Asia.

Its economic growth has allowed the central bank to leave interest rates alone in the face of the U.S. housing and credit scares, which have affected other countries by reducing our imports.

Modernizing the Philippines

Long an agricultural-based economy, the Philippines has become an industrial and outsourcing powerhouse. Demand for business-process outsourcing is surging, thanks to the country’s low-wages and millions of people who already speak English.

Outsourcing generated a cool $2.1 billion for the Philippines in 2006, good for third place behind India and China. Two years earlier, it was $1.3 billion. Seven years earlier, a paltry $24 million.

Outsourcing could be a $10 billion a year business in the Philippines by 2010, according to a CBS News special report.

Filipino workers are increasing doing the information technology enabled services once held by middle-class Americans. Outsourced jobs to the Philippines are across the board — accounting, payroll, credit card support, database management, warehousing, etc. And its foreign employers aren’t exactly corporate lightweights — Chevron, Shell, JP Morgan, Dell, IMB, Safeway and Siemens.

And last month, Texas Instruments announced it would plunk $1 billion down for a test and assembly site in the Philippines.

Investment Plays

Perhaps why the Philippines’ surging economy hasn’t made much news is because very few of the companies listed on the Philippine Stock Exchange and Philippine Dealing Exchange have filed the SEC requirements that give the green light to U.S. investors.

San Miguel Corp., a food, beverage and packaging company that accounts for 3.6% of the country’s GDP, is barred by Sarb-Ox. As is Manila Electric Co., which posted a 62% gain in second quarter profits. Nor is there a Philippine focused ETF.

Aside from investing in the Philippine peso, there are still some good options. First is the country’s largest company by market cap, Philippine Long Distance Telephone (PHI), a diversified telecommunications company that runs wireless, broadband, fixed-line and IT systems. Only 8 million of the country’s 88.8 million people (12th most populated in the world) use the Internet, says the CIA World Fact Book. As incomes rise, so, too, will the number of cell phone users and high-speed Internet users. And PLDT is first in line to accommodate the demand.

Investors wary of another market’s risk can take the backdoor by investing in companies that shave overhead via Philippines’ low-cost outsourcing. Texas Instruments (TXN) is one. Its plant in Baguio produces the chip that powers 100% of all Nokia (NOK) cell phones and 80% of Erickson (ERICY) cell phones. Computer giant Dell Inc. (DELL) picked this country for the site of its call centers to serve U.S. customers. And Intel’s (INTC) largest assembly line is in the Philippines.

A lesser-known company to watch is Convergys Corp. (CVG), a Cincinnati-based company that provides customer care, billing and human resource development. Basically, it’s an outsourcing middleman for huge companies. And one of its favorite spots is the Philippines.

The Outsourcing Effect

But all this economic progress comes at an expense to itself. The main beneficiaries of the Philippines economic growth are its metropolitan areas, namely Manila City and the rest of the Luzon Island.

Geographically, it can be physically impossible to pave and maintain roads up, down and around the steep inland mountains. The high levels of tough, thick rain don’t help either. This hampers local trade routes.

Now, multiple those problems by 7,101 — the number of islands that comprise the archipelago — and you have a better perch over the country’s socio-economic development as a whole.

What’s basically been happening in the last decade is an odd Catch 22: The government has given up on itself and looked outside the country to improve itself.

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