Population gains need FDI boost

By Bettina Faye V. RocReporter



THE PHILIPPINES must improve its ability to attract investments to take advantage of its favorable demographic, according to Bank of America — Merrill Lynch (BofA).

In a report, “Asia in Focus: Demographic Divide and Peaks”, BofA said that based on the United Nations’ (UN) latest population estimates, the demographic divide among Asian countries over the next decade will become more stark, which could have implications on the region’s economy.

“The UN revisions bring forward the demographic peaks of several countries in terms of working-age population, including China (2015), Thailand (2017), Malaysia (2047) and India (2050); while deferring the peaks of Indonesia (2058) and Philippines (2085),” the bank noted.

“The next decade for Asia will therefore be very different from previous decades when most of Asia was still experiencing demographic dividends, including China and Korea,” it said.

The bank said that based on the demographic peaks noted by the UN, labor forces of the majority of Asian countries will likely shrink significantly over the next decade.

“This will have important implications on GDP (gross domestic product) growth, consumer spending and asset prices, judging from Japan’s experience,” it said.

The Philippines’ demographics, though, look encouraging, BofA noted, as its peak — projected by the UN to be reached in 2085 — remains far off. This means that the population remains young, with more people expected to enter the labor force in the coming years.

“Demographic peaks will be the most favorable and distant for the Philippines (2085), Indonesia (2058), India (2050) and Malaysia (2047),” it said.

“Philippines, Malaysia, Indonesia and Singapore — in that order — will likely see the strongest labor force growth in Asia over the next decade,” BofA said.

Meanwhile, Thailand — whose demographic is seen to peak in 2017 — is emerging as the “old man” among Southeast Asian economies, the bank noted, and will see its working age population shrink, along with those of Japan, Hong Kong, Korea and China.

“Still, Philippines, Indonesia and India have struggled to attract FDI (foreign direct investments) despite their resource advantage,” stressed BofA.

Thus, there is much room for improvement, it said, as Asia continues to rebalance its economy.

“This is the opportune time for the Philippines, Indonesia and India if the governments can capitalize on their abundant labor resource and lower labor costs to attract greater foreign direct investment,” the bank said.

“Barriers to foreign investments however remain daunting. The outcome has been more an outflow of workers and talent to a growing diaspora outside their borders, rather than investments flowing in,” it said.

This is especially important as production, consumption, and investment patterns across Asia continue to change amid the availability of labor, BofA noted.

According to data from the Bureau of Labor and Employment Statistics, the country’s labor force as of April stood at 40.905 million, up 0.6% annually from 40.645 million in the same month in 2012. The labor force participation rate stood at 63.9% as of the same month this year, slightly lower than the year-ago rate of 64.7%.

Meanwhile, net FDI inflows stood at $1.522 billion as of May, lower than the $1.666 billion recorded in the comparable 2012 period, based on Bangko Sentral ng Pilipinas (BSP) data.


S&P warns PH of possible downgrade


The Philippine government may lose the “investment grade” rating it worked so hard to achieve if a debt default by one of the country’s handful of major conglomerates should erode investor confidence.

In a report released Friday, debt watcher Standard & Poor’s (S&P) said that while the Philippines remained one of the strongest markets in the region, the structure of the country’s economy—being dependent on family-owned conglomerates—was a source of vulnerability.

“We may… lower the ratings if problems at one of the large conglomerates impair investor confidence,” S&P said in a supplementary analysis report on the Philippines. S&P rates the Philippine government’s long-term debt at the minimum “investment grade” with a stable outlook, a reflection of the stability of the local economy.

S&P became the second major rating firm to give the Philippines an “investment grade” rating after Fitch Ratings. Moody’s Investor Service still considers Philippine government debt as “junk” investments, although the country is on positive watch for a possible upgrade.

Other risks that threaten the country’s “investment grade” status include the possible spillover of weak global economic conditions that could affect the domestic economy.

S&P’s concerns over banks’ exposure to conglomerates echoed the International Monetary Fund’s own assessment of the structure of the Philippine economy. The IMF said in its April country report that a default by any major, highly leveraged conglomerate could lead to a significant increase in bad assets held by lenders. This, in turn, could lead to banks restricting lending to other sectors of the economy.

The IMF and S&P did not name any specific conglomerate in particular. In contrast, the BSP had said that its period stress tests showed that even if all major conglomerates defaulted on half of their loans, local banks were strong enough to absorb these losses without affecting their operations.

S&P also raised concerns over the Bangko Sentral ng Pilipinas’ (BSP) ability to manage capital flows from abroad that could cause overheating in the economy and create asset price bubbles.

“Low level of bank intermediation and underdeveloped capital markets constrain the effectiveness of monetary policy transmission,” S&P said in its report. It said the BSP’s main focus, given low inflation in the first half of the year, had become managing capital flows to prevent potential bubbles. “Ample domestic liquidity is giving rise to concerns over overheating in the property sector and banks’ exposure to it, in particular via related lending,” S&P said.

The rating firm, however, recognized efforts by the central bank to curb this risk by limiting loans and guarantees between property companies and their parent conglomerates.

Political developments that could throw the Aquino administration off its current course of promoting good governance and fiscal stability could also lead to a downgrade, S&P said.

One of the upside, S&P said the Philippines could earn another upgrade if revenue reforms that facilitate improvements in infrastructure and human capital would be passed.