Filipinos in South Korea

MarketWatch: Indonesia and Philippines come of age –Twin Economies

Confluence of positive factors laying groundwork for strong growth

During the Asian financial crisis of the late 1990s, Indonesia and the Philippines were bailed out by the International Monetary Fund.

This year, they showed the world how far they've come from those dark days by pledging a billion dollars each to replenish the IMF's kitty.

With rapidly growing economies and rising incomes, the two countries are home to a large and young labor force, an expanding middle class and have stable, elected governments with policies inspiring investor confidence. They also have sturdy banks and enough foreign exchange reserves — more than a year's imports in the Philippines's case — to rebuff a misguided run on their currencies.See: Banks in Indonesia and the Philippines flourish.

In an economically vibrant Southeast Asia, Indonesia and the Philippines stand out as the region's "New Tigers" with the potential to leave a bigger imprint on global growth for years to come while the developed world struggles with excess debt and traditional regional heavyweights China and India lose momentum.

"You have a real contrast, which is why these markets have been doing well," said Andrew Swan, head of Asian fundamental equities at BlackRock. "We've had 3 to 5 years of great growth. But because there is so much room for growth, this can go on for so many more years."

Each has also received credit rating upgrades since 2011, with Indonesia now rated investment grade by Moody's and Fitch. Their stock markets are among the world's best performing since the end of 2008 — Indonesian shares tripled during the period from beaten-down valuations, and are closely followed by Philippine equities.See: Global investors key into Indonesia and the Philippines.

Unlike the West, government finances are shipshape. Jakarta's gross government debt was 25% of GDP in 2011, and Manila's 41%, according to IMF data, leaving both enough room to boost their economies in case of need.

The Philippines has a current account surplus of 2.74% of its GDP, thanks to remittances from its vast diaspora. Indonesia swung to a deficit in the first half of this year as lower commodity prices hurt exports, and as imports of capital goods and machinery increased.

Agriculture employs at least a third of the workforce in both countries, and domestic consumption is an important driver of their economies. That protects them from external shocks to an extent — both escaped a recession in 2009, when the Thai, Malaysian and Singaporean economies contracted. But both also need tens of billions of dollars in foreign direct investment, especially to create infrastructure and pursue industrialization.

Stocks are more expensive than in north Asia, and the two nations are by no means immune to global shocks. But barring a post-Lehman Brothers'-like blowout crisis — in or outside the euro zone — potential reward is seen outweighing risk on balance.

(MarketWatch)

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