The Philippines: Telling a new story

"Differentiation" was a much-used word as investment bankers pitched the Philippines story to European investors in February. The marketing-speak succeeded in placing $350 million of Republic of the Philippines bonds, giving the country the distinction of being the first Asian sovereign to issue a euro-denominated bond.

Investors still required a fair bit of convincing, though - and a pretty attractive spread - to take on the sub-investment-grade paper. Much of the sales pitch was an education process for investors unfamiliar with the Philippines credit, said bankers close to the deal, but nevertheless there are plenty of pointers that the republic has managed to buck the trends of the rest of region and really does have its own story to tell.

"The Philippines is one of the countries in the region that did not go down to the low points that other countries did," says a Hong Kong-based investment banker. "It was the only country that has not been downgraded, and much of Asia had a lot further to fall."

However it is perhaps a sign of an economy that's past the worst when analysts and bankers offer such a diverse range of views on the state of the country. "The economy is bottoming out," says Robert Wilson, head of corporate finance at Paribas in Manila. "But the engine of growth - bank lending - has not started to pick up. The central bank is leading interest rates down, but it is not going to kick-start the economy. The Philippines never really had the crisis in its banking and property sector that many of its Asian neighbours have experienced," he adds.

Inevitably comparisons are drawn between the Philippines and its neighbours. Although in many cases the Philippines comes out better, particularly on the fundamentals, there are still doubts about its attraction for equity investors. "There is probably better value in Thailand or Korea," says Wilson. "Lack of liquidity in the Philippines means it does not come near the top of that list. There are no great bargains."

Foreigners account for around half of the stock market's investment and tend to lead trends, but a small burst of activity in March was the only real sign of foreign interest and turnover remained pretty low. Daily turnover is around $25 million to $50 million, which, reckons Wilson, is "pretty pathetic" compared with turnover of three times that much at the market's height.

"There is not much excitement although the leading blue chips are fairly strong with some foreign buying," says Wilson. "The foreign money coming in thinks the economy is on the up and more are waiting to see bank lending on the increase and first-quarter GNP in positive territory."

Barclays Capital's head of research for Asia, Desmond Supple, identifies "business cycle dynamics" as a leading factor that distinguishes the Philippines from other economies in Asia. "Bank system credit crunches and consumer price deflation undermine future incentives for private investment," he says. "The Philippines is different because it is going to be one of the first economies to emerge from its downturn in its business cycle for several reasons. Its banking system is stable structurally and it can mobilize savings into investment capital, which is noticeably absent in other countries."

Supple also points to government measures to regenerate the economy, with interest rates being cut, and an easing in fiscal policy that is expected to spur stronger demand. Barclays expects growth of 1.7% for the coming year, with the rest of Asia flat or negative.

The latest figures from the central bank indicate a 2.1% increase in commercial bank loan portfolios for last year and a reduction in non-performing loans to 10.37% in December, from an 11.82% past-due ratio a month earlier.

Real GNP growth is forecast by the government at 3% to 3.5% for this year, with inflation expected to be 8% to 9% and a current account surplus of 1.1% of GNP.

Return of the dealmakers

At a time when the stock market is edging back up, the corporate finance business is also starting to revive. Jardine Fleming Exchange Capital Securities research director Joven Babaan says: "I think people are becoming more positive and more optimistic. In the past people were resigned to a crisis situation here, now they are more hopeful and that gives birth to a lot of transactions." Mergers and acquisitions, recapitalization and selling of assets are all on the rise. "Capital mobilization is a good sign and a good basis for recovery," he says.

There are investors looking for opportunities, such as in the cement industry, where the world's leading players including Cemex, Blue Circle and Lafarge, are making strategic investments.

Wilson at Paribas laments the lack of new issues both in equities and bonds, with the only sign of activity a convertible private placement by San Miguel subsidiary La Tondena Distillers, which is selling Ps1 billion ($26 million) of five-year convertible preference shares to BancAmerica Equity Partners and US-based private equity firm Orchid Asia Holdings, matched by a further Ps1 billion being bought by San Miguel itself. The deal was arranged by JP Morgan and proceeds will be used to reduce existing debts. Property conglomerate Ayala was expected to come to the market with a share issue to raise "a substantial amount of cash" in order to fund a proposed strategic acquisition.

Many deals are on hold until the country's economic situation becomes clearer. "Policy has been crafted quite well and the policymakers have responded appropriately to the crisis and are doing their best not to stunt growth, but investors are reluctant to come in until they see signs of recovery," says Luz Lurenzo, vice-president of research at ATR Securities.

The government's official forecast for GDP growth for this year is between 2% and 3%, but ATR is more optimistic suggesting 3% plus. Many commentators point to the relative strength of the Philippines' banks as one of its saving graces when compared with Thailand, for example, and they also act as a useful pointer to economic recovery.