Philippines; sick man of Asia once more?

After the Global Financial crisis the Philippines went through a period of fast growth. Being supported by an increasing call for business process outsourcing, a continuing stream of OFW remittances and a positively developing domestic demand, the Philippines was better able than neighboring countries to show its resilience and strengthen its economy.

The Philippines was the place to be as an investor and as an entrepreneur, it seemed that any venture was successful and the requirements for success were almost non-existent. In the past two years however, reality returned in most sectors and the time has come that the survival of the fittest will decide on who will be the champions of tomorrow.

The past two years are also the period in which a new leader and government have been installed. A new leadership that has issues to maintain its support because after a period of ongoing positive news, more and more negative developments need to be broadcasted. A depreciating peso, increasing interest rates, steep inclining inflation are having its impact on consumers and small entrepreneurs alike. And while the government agenda might shout build, build, build, the experience of the man in the street is more traffic, no improvements in public transport, increase in corruption and red tape and even more Filipino's below the poverty line.

For the current government it is hard to be measured against a period where many indicators were more positive, global trade was increasing and hurdles reduced, oil prices decreasing, interest rates kept at low levels to boost the economies. Many of these indicators have been changed partly due to Mr Trump's focus on claiming the benefits for his own America and that has a significant impact on our local economy. However, better than comparing the exchange rate of the peso and the PSEi now and 2 years ago, we can get a more objective picture by comparing both the performance of our currency and the stock market with the countries around us.

In the Graph above you can see that the past two years have been very bad for the Philippines compared to it's neighboring countries. Equity markets in the 4 countries around us performed 22% better than the PSEi and the currencies did 15% better than the peso. To make it clear; if you had invested 1million peso in the index on July 1, 2016 you would have lost 9% of your money, while if you had invested the same amount of peso in the Thai index the value on November 1 would have been almost 44% higher.

Not necessarily a great performance, although Trump would likely find a reason why it is actually great, and raising the question how did the past administration measure against the same countries. In the Graph below you can see that the Philippines did better than any of these other countries and became indeed the favorite of many fund investors after reaching investment grade rating.

Does this mean that you should withdraw your investments in the Philippines and put them elsewhere? I don't believe that that's the right solution as the key drivers behind the growth in the Philippines are still green. The demographic changes, the demand in BPO and the further potential to develop this, the flow of remittances will all be pushing the economy up and I'm sure that in the second half of their term the government will focus more on economic growth.

I do believe however diversification is the best advice as the current leadership is not fully predictable and might make some calls that bring the market back further. Do consider to add some locally available feeder funds on ETF's, investing in other Asian countries or in Europe and if you believe that the Philippine economy will recover, like me, and interest rates go down, do include a Philippine bond fund.