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121101 Asia - Indonesia-Philippines -The Search for New Emerging Markets

121101 Asia - Indonesia-Philippines -The Search for New Emerging Markets

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Published by Claude

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Published by: Claude on Nov 08, 2012
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The Search For New Emerging Markets
 Asia : Betting on Southeast Asia
Confluence of positive factors laying groundwork for strong growth
During the Asian financial crisis of the late 1990s, Indonesia and the Philippines werebailed out by the International Monetary Fund. Southeast Asia's two most populousnations are well placed to lead the region’s growth for several years to come, astraditional Asian heavyweights China and India lose some momentum.With rapidly growing economies and rising incomes, the two countries are home to alarge and young labor force, an expanding middle class and have stable, electedgovernments with policies inspiring investor confidence. They also have sturdy banks andenough foreign-exchange reserves — more than a year’s imports in the Philippines’s case— to rebuff a misguided run on their currencies.In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as theregion’s “New Tigers” with the potential to leave a bigger imprint on global growth foryears to come while the developed world struggles with excess debt and traditionalregional heavyweights China and India lose momentum.
Indonesia and Philippines come of age
Each country has received credit rating upgrades since 2011, with Indonesia now ratedinvestment grade by Moody’s and Fitch. Their stock markets are among the world’s bestperforming since the end of 2008 — Indonesian shares tripled during the period frombeaten-down valuations, and are closely followed by Philippine equities.Unlike the West, government finances are shipshape. Jakarta’s gross government debtwas 25% of GDP in 2011, and Manila’s 41%, according to IMF data, leaving both enoughroom to boost their economies in case of need.The Philippines has a current account surplus of 2.74% of its GDP, thanks to remittancesfrom its vast diaspora. Indonesia swung to a deficit in the first half of this year as lowercommodity prices hurt exports, and as imports of capital goods and machineryincreased. Agriculture employs at least a third of the workforce in both countries, and domesticconsumption is an important driver of their economies. That protects them from externalshocks to an extent — both escaped a recession in 2009, when the Thai, Malaysian andSingaporean economies contracted. But both also need tens of billions of dollars inforeign direct investment, especially to create infrastructure and pursue industrialization.Stocks are more expensive than in north Asia, and the two nations are by no meansimmune to global shocks. But barring a post-Lehman Brothers-like blowout crisis — in oroutside the euro zone — potential reward is seen outweighing risk on balance. Investorshave embraced the local stock markets, driving shares in Indonesia up about 11% year-to-date, while Philippine stocks have climbed 22%.The earnings growth in these markets has also been very, very strong. That gives me theconfidence that as long as the earnings growth trajectory is sustainable, which we think itis, the returns will be there to be made going forward.
With a GDP of nearly $850 billion and a population of 241 million people in 2011,Indonesia was by far the largest of the ASEAN economies. But half the country’spopulation still lives on less than $2 a day, according to the Asian Development Bank. As the world’s largest archipelago straddling the equator in the Indian Ocean, it’s spreadfar and wide. The capital Jakarta is relatively more developed, but the country faces aserious need for infrastructure and connectivity. And despite frustrating delays to variousprojects, many observers seem confident President Susilo Bambang Yodhoyono’sgovernment is getting its act together.For equity investors, meanwhile, the relatively small market size is a constraint. Despitebeing the ASEAN’s largest economy by far, at about $410 billion, Indonesia’s marketcapitalization is less than half that of Singapore and Thailand, and it is also lower thanMalaysia’s. Although corporate earnings are rising rapidly, the market needs breadth, and morestocks to ensure supply can match potential demand.Credit growth remains strong — Bank Indonesia expects loans to grow 26% this year but equity markets’ development is crucial for local firms to fund their long-term growth.Between 2007 and the first half of 2012, 103 new listings in Indonesia raised $11.06billion, according to Dealogic data. That is more than three times the amount raised byPhilippine or Thai corporations during the period, but less than the $23.07 billion raisedby Singaporean firms, and the $16.34 billion by Malaysian companies.The country’s market capitalization has jumped tenfold in as many years as morecompanies listed their shares. Although several well-established corporations remainunlisted, the market now reflects the economy more accurately than a few years ago.Unlisted firms include, among others, palm oil major Best Agro International anddetergents maker Wings Group.
 After a weak 2011, the situation is again looking rosy for the Philippines. The stockmarket is booming, growth has improved, and the mood generally is upbeat, not leastbecause of the Standard & Poor’s upgrade of the country’s ratings in July to BB+ — justone step below investment grade.The change of pace is a welcome development after GDP growth more than halved to3.7% in 2011 from 2010, as Manila cut expenditures to try to reduce its budget deficit. Inthe second quarter, GDP rose a forecast-beating 5.9% from the year-ago period. Theeconomy is expected to slow in coming months unless the government loosens its pursestrings.President Benigno Aquino has committed to lowering the deficit to 2% of GDP by 2013,from 3.9% when he took office two years ago. Although generally seen as prudent, someview such austerity as unwise for a developing nation with a desperate need to createmore jobs.

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