Why our emerging markets team remains ‘zero-weighted’ on the Philippines

The Philippines is on a growth trajectory, but looming deficits raise concerns about its sustainability. Pendal’s Emerging Markets team explains why it has zero-weighted the region

• Loose fiscal policies have left the country vulnerable
• The sustainability of growth remains low
• Find out about Pendal Global Emerging Markets Opportunities fund

INVESTORS who follow Pendal’s emerging markets process know the team believes in buying equity for growth — and emerging markets for growth.

This means we focus on the economic growth environment and how that impacts revenue and earnings growth for listed companies.

It also means we focus on the sustainability of growth.

With this in mind, some investors may find it interesting that we remain zero-weighted in the Philippines.

Throughout 2023-24, the country’s GDP growth averaged 5.6% in 2023-24, which is higher than in Indonesia at 5.1%, where we are invested.

Annualised earnings growth for those two years was 12.7% — comparable to other strong growth stories we have been invested in: the United Arab Emirates (+13.6%) and India (+12.4%).

Yet, the Philippines doesn’t make it into our investment picture. Below we explain why.

A quick recap

To explain our view, let’s take a quick trip through recent economic and political history.

Although not hit as dramatically as Indonesia or Thailand during the 1997 Asian Crisis, the Philippines still suffered a collapse in its currency and stock market.

Similar to other countries in the region, this proved to be the trigger for economic reforms that drove strong growth in the 2000s.

Despite the Global Financial Crisis, the presidencies of Gloria Macapagal-Arroyo (2001-2010) and Benigno Aquino (2010-2016) saw GDP growth average 5.4%.

Crucially, the quality of this growth was high, with account surpluses from 2004 to 2016 and a fiscal deficit of around 2% for this period.

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The rise of populist politics in the mid-2010s affected the Philippines, leading to the election of Rodrigo Duterte in 2016.

Though his government’s economic policies contained numerous reforms — including liberalising foreign investments — he also cut taxes while increasing government spending.

This was positive for growth (GDP growth averaged 6.6% from 2016-2019) but came with several costs.

The first was inflation. The Philippines CPI increased from 2.1% in 2016 to a peak of 6.9% in late 2018.

The second was the fiscal balance, which steadily worsened from 2017 to 2019, reaching a deficit of 3.4% of GDP that year.

The third was the current account balance. As imports were sucked in by strong domestic demand, the current account moved into deficit in 2017 and remained there til 2019.

Then COVID hit. 

The global pandemic arrived with President Duterte not yet four years into his six-year term. Given the pre-pandemic focus of his government, a robust fiscal response was always the likely outcome.

The government borrowed heavily to fund pandemic relief efforts, pushing the government debt-to-GDP ratio from 39.6% in 2019 to 60.5% in 2021.

The budget deficit widened to 7.6% of GDP in 2021, up from 3.4% in 2019.

This helped turn round a deep recession in the Philippine economy and was undoubtedly crucial to many Philippine citizens.

Despite the end of the pandemic, fiscal policy settings have remained extremely loose.

The Duterte administration was followed by the current incumbent, President Ferdinand Marcos Jr, who seeks economic stabilisation (including stabilising government debt/ GDP), and a focus on controlling inflation.

That has not returned the fiscal and current account balances to pre-COVID levels, let alone pre-Duterte levels.

The latest data points show a fiscal deficit of 5.8% of GDP and a current account deficit of 3% of GDP (both in 3Q 2024).

Inflation remains benign, as excess capacity in the economy post-COVID is being consumed. But this is fundamentally an unsustainable policy setting.

GDP growth (5.2% in 4Q 2024) remains high but is vulnerable to what will have to be either a sharp tightening of fiscal policy, real weakness in the Philippine Peso, or both.

In that light, the strong earnings growth from Philippine companies is, in our view, being juiced by twin deficits that cannot continue indefinitely.

We remain zero weight in the Philippines and prefer equity markets with growth in countries with stronger fundamentals.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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