Bernardo M. Villegas
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VIP Revisited

            About two years ago, Mr. Jesus Zulueta Jr., CEO of executive search firm ZMG-Ward Howell, coined the acronym VIP to stand for Vietnam, Indonesia and the Philippines.  Because of my own keen interest in these three populous ASEAN countries, I started following very closely developments in their economies.  With a total consumer market of more than 400 million, the VIP countries have a reasonable chance of competing with the two giant Asian economies, China and India, in attracting investors from all over the world looking for both domestic markets to sell to and as bases from which to exports.  The three countries are at the same stages of economic development, with per capita incomes ranging from $2,000 to $3,000 and with equally young labor forces still benefiting from the demographic dividend that has already disappeared in the Northeast economies as well as in Singapore.  In fact, as the leading industrial centers of China such as Shanghai, Beijing and Guangzhou suffer from labor shortages, these three countries are already benefiting from increased foreign direct investments from multinational firms exiting from China.

 

          The year 2009 sealed the attractiveness of the VIP countries to investors in the Asia Pacific region.  During that year in which most economies around the globe suffered the worst aftermath of the subprime crisis and the collapse of Lehman Brothers in 2008, only these three countries registered positive GDP growth rates in the whole of East Asia, with the exception of China.  Even their ASEAN colleagues Thailand, Malaysia and Singapore suffered serious declines in their GDPs because of their heavier dependence on exports. More than ever, the VIP countries demonstrated the advantages of a large population in insulating a country from the ups and downs of global markets.  A distinct advantage of the Philippines is the more than $20 billion of foreign exchange remittances from the close to 10 million overseas Filipino workers who have also proved to be very resilient to forces of unemployment and recession in their respective host countries.  It is already certain that at least Indonesia and the Philippines will have a repeat performance in 2012 when the U.S., the EU and Japan will suffer a slowdown in economic growth.  These two fortunate ASEAN countries can depend on domestic consumption and investment demands (especially from infrastructure spending) to continue growing at 5 to 6%.  They have tamed their inflation, accumulated strong foreign exchange reserves and maintained the stability of their banking sectors.

          Not so with Vietnam.  As Ben Bland wrote in the Financial Times (November 24, 2011), Vietnam is a country that just five years ago was the darling   of investors looking for the next China but  is now displaying the ill effects of deep distortions, which the Communist leadership shows few signs of being able to address.  This country of 90 million is suffering from inflation of more than 20%, the highest in the region.  Having grown at more than 7% annually over the last five years, Vietnam\'s focus on breakneck growth has been at the expense of economic stability.  In addition to soaring inflation rates, the country is suffering from a lack of confidence in its currency and fears of a banking crisis.   Recent visitors to the country are seeing a repeat of what happened in the 1990s when the U.S. dollar was preferred to the dong as payment for goods in the market.  As Mr Bland wrote:  "High inflation has undermined confidence in the dong, which is pegged to the dollar and has been regularly devalued in recent years to ease pressure on the government\'s limited foreign exchange reserves.  The currency\'s weakness has driven a flight to gold and dollars.  Purchase of gold by the Vietnamese are among the world\'s highest per head.  This has helped the Vietnamese to weather the recent storm, thanks to the long-term gold bull run, but puts further downward pressure on the dong." Given the difficulties of managing its macroeconomy and the adverse conditions in the global market, Vietnam may see a significant slowing of its growth in the foreseeable future.

          Indonesia, on the other hand, continues to shine as a "beacon with stable finances and the fastest growth rate in Asia outside China and India," as reported for Reuters by Neil Chatterjee (November 24, 2011).  This country of 240 million consumers, however, also faces some serious political challenges in its efforts to graduate from a middle-income economy to an advanced status in the coming years.  As Mr. Chatterjee reported, "Doubts are growing that President Susilo Bambang Yudhoyono, who\'s been in office seven years and has three left, can deliver on promised reforms that would improve creaky infrastructure and creating higher-value jobs for the young..."  There is a sense among outside observers that the initial efforts at reforms in governance, which proved quite successful in the first five years of President SBY\'s Administration, are running out of steam.  Anti-reform politicians seem to be gaining more ground, especially since the former Finance Minister, Tan Sri Mulyani, left to occupy a high position in the World Bank, an apparent victim of political infighting.  In a recent trip I made to Jakarta with a group of Filipino business men looking for trade and investment opportunities, I did sense a feeling of disappointment and frustration among members of the foreign business community who agreed with the following observations in the Reuter report:  "Reelected by a landslide in 2009, Yudhoyono has so far squandered a mandate to drive reforms and according to polls, has lost popularity.  His long-awaited cabinet reshuffle last month reflected a desire to shore up political support more than to initiate real change before a presidential election in 2014 which he cannot contest."

          The Philippines is not exempt from serious obstacle to sustain rapid economic growth in the coming years.  Because of an inability to implement much needed infrastructure projects under the so-called Public Private Partnership program and a slowdown in government spending, motivated by excessive concern for eradicating corruption, the Philippine economy is expected to suffer a significant decline in its GDP growth of 7.3% in 2010 to less than 4 % in the whole year of 2011.  Although the country enjoys a low rate of inflation, low levels of debt and fiscal deficit and high rates of domestic savings, it is having a hard time increasing the rate of investment from the low of 16% of GDP to a desired level of 25% or more because of bureaucratic red tape and an ambivalent attitude towards foreign investments manifested in constitutional and other legal restrictions against foreign ownership of business.  It has the lowest level of FDIs in the East Asian region.  Although many may disagree with my optimism, I think, however, that the country is reaching a critical mass of economic and governance reforms so that in 2012 both domestic and foreign direct investments can propel the economy to grow at 6 to 7%  through significant investments in such sectors as energy, mining, infrastructure, agribusiness, real estate and construction, tourism, health care, education, and IT and IT-related services.  Larger investments in 2012 will be complemented by continuing inflow of more than $20 billion of remittances from the overseas workers that can give a boost to domestic consumption.  It is not farfetched that in 2012, the Philippines may loom as the "dark horse" in Southeast Asia as Mark Matthews, Head of Research Asia at Julius Baer opined in a report for CBNC.com last November 17, 2011. 

          In an otherwise dismal environment for stock markets in 2012, the Philippines could really be a "dark horse."  As the Julius Baer report pointed out:  "Despite being one of the best performing stock markets in Asia this year, with gains of over 3 percent, compared to double-digit percentage losses in China, Japan and Singapore, the Philippine stock market is still attractive on a valuation basis.  The market is not expensive on 14.5X 2011 and 12.5X 2012 P/E, versus an average over the past 15 years of 12.5X."  It was also noted that Julius Baer is not alone in its bullish view of the Philippines.  A recent survey by Bank of America-Merrill Lynch showed fund managers increasing their overweight position in the country, making it the third most preferred market, behind China and Indonesia.  From its former reputation as the "sick man of Asia," the Philippines has gone a long way now that it is considered as the "dark horse" in the region. For comments, my email address is bernardo.villegas@uap.asia.