William Pesek of Bloomberg: Is the Philippines a Buy? Don't Ask Calpers

Prudent Investor says despite all the woes and the prospects of a Calpers pullout according to Bloomberg's analyst William Pesek the Philippines is a buy!!!!!!!!

Is the Philippines a Buy? Don't Ask Calpers
by William Pesek Jr.

Jan. 21 (Bloomberg) -- The Philippines is a buy!

The California Public Employees' Retirement System, the largest U.S. public pension fund, didn't exactly say that this week. Quite the opposite, according to local press reports. Calpers is said to be mulling dropping Asia's No. 12 economy from the list of places in which it invests.

Yet considering Calpers' track record of calling Asian markets, the Philippines may be about to rebound. After all, some traders here don't consider the fund a giant contrarian indicator in Asian markets for nothing.

In early 2002, for example, Calpers pulled out of Indonesia, Malaysia and Thailand, citing concerns about corporate governance, political instability and labor standards. Odd thing, considering Calpers had no qualms investing in companies like WorldCom Inc. and Enron Corp. that proved to be poster-children of bad corporate governance.

The biggest losers weren't the economies Calpers vacated, but its shareholders. Calpers missed out on a 17 percent rise in Thai stocks in 2002 and 117 percent jump in 2003. It also lost out on an 8 percent rise in Indonesian shares in 2002 and a 63 percent increase in 2003. Malaysian shares rose almost 23 percent in 2003.

In 2004, Morgan Stanley Capital International's Asia-Pacific Index, which tracks more than 900 stocks, gained 16 percent. The Dow Jones Industrial Average gained just 3 percent.

Following Calpers

Calpers did reinstate Malaysia in February 2004, in time to benefit from a 14 percent jump in its stock market. The same is true of Indian stocks, which rose more than 11 percent last year. Calpers isn't in Sri Lanka, though. Even after Asia's Dec. 26 tsunami, Sri Lanka stocks are up over 10 percent so far this year.

Investors following Calpers' market calls in Asia may regret it. Piggybacking the strategies of the ``smart money'' is one of the oldest practices in the investment world, and Asia is hardly an exception. Consider what billionaire Warren Buffett's 2003 investments in PetroChina Co., China's No. 1 oil producer, did for its stock (it's up 140 percent).

Now, Calpers is thinking anew about scrapping its Philippine investments. Admittedly, it's hard to fault its investment committee, especially after Standard and Poor's earlier this week cut the country's junk debt rating.

Argentina of Asia

S&P cut the long-term foreign-currency rating to BB- from BB and the local-currency rating to BB+ from BBB- after President Gloria Arroyo failed to get lawmakers to pass tax increases needed to narrow the budget deficit. The foreign-currency rating is now the lowest since June 1993 and puts the Philippines on a par with Brazil, Turkey and Vietnam.

All this gets at why the Philippines is often regarded at the Argentina of Asia. Budget deficits since 1998 increased government debt, which in September rose 17 percent from a year earlier. S&P expects interest payments to account for about 40 percent of government spending this year, up from 22 percent in 1999.

Arroyo was re-elected last year amid pledges to curb debt. Her failure to do so has investors like Desmond Soon, who manages about $200 million of bonds at Pacific Asset Management Ltd. in Singapore, fearing ``serious fiscal problems'' and avoiding Philippine debt.

Looking for Positives

Convincing markets Philippine debt won't spiral out of control is a challenge in the best of times. They have a funny way of remembering when nations declare a moratorium on foreign debt payments, as the Philippines did 20 years ago and Argentina did in 2001. Some wonder if it could happen again in Manila.

It hardly helps that S&P also lowered its debt ratings for some of the largest Philippine companies, including state-owned National Power Corp. and San Miguel Corp. National Power, San Miguel, Philippine Long Distance Telephone Co., Globe Telecom Inc. and Universal Robina Corp. all had their foreign-currency ratings cut to BB-.

Yes, it's quite a feat to find constructive things to say about one of Asia's most fragile economies. Yet now that Calpers may be pulling out, perhaps the Philippine economy and markets have reached a bottom.

If you really search for it, there are some positive things going on in the Philippines. First, the economy may have reached a 15-year high of 6.2 percent last year thanks to growth in the service sector. Faster growth could boost tax revenue.

Bad Loans

Second, the bad-loan ratio at Philippine commercial banks may drop by almost half by year-end as lenders are expected to more than double the sale of loans not paid in at least 90 days, according to central bank Governor Rafael Buenaventura.

Bad loans may fall to 7.5 percent of total credit from 14.2 percent in October last year, Buenaventura said. Banks are expected to sell as much as 54 billion pesos ($971 million) of bad loans this year, compared with 26 billion pesos in 2004.

None of this detracts from formidable problems like corruption, high poverty and population growth. And for all the talk of going after tax cheats, the Philippines is still home to an amusingly high number of ``middle class'' actors and business people. Tax dodgers are a major cause of the Philippines' budget woes.

Calpers may have ample justification to leave the Philippines. Yet if history is any guide, such a pullout may signal a revival there.