The Philippines Offers the Best Value Investing

Philippines Mining Boom

The Philippines will attract $18 billion in mining investments over the next five years as global commodity prices soar.

Mining output had already spiked 31 percent year on year in the six months to June to P63.92 billion ($1.48 billion), according to Environment and Natural Resources Secretary Ramon Paje.

A new mining law allowed foreign investments in 2005, and high metals prices were drawing even more investor interest.

“In terms of investments, the aggregate amount of $3.835 billion has been invested in the sector over the last six years. Total investments are projected to reach $18 billion by 2016,” he told a mining conference in September 2011.

The Philippines has an untouched mineral wealth estimated by Heffernan Capital Management at over $1 trillion, valuable metals like copper, gold and chromate deposits are among the biggest in the world.

Mining has had a checkered history in The Philippines, environmental issues, foreign investment restrictions, and accidents have slowed the industry for decades.

Ramon Paje said with just 30 major mines in operation, the Philippines was still not producing enough to take advantage of climbing gold, nickel, copper, iron and chromite prices.

Seven major projects should boost both mining investment and output over the next few years.

Xstrata PLC, LON:XTA $5.9 billion Tampakan project in the southern Philippines, one of the largest undeveloped copper-gold deposits in the Western Pacific, should start producing in 2016.

Tampakan project is estimated to yield an average of 375,000 tonnes per annum of copper and 360,000 ounces per annum of gold in concentrate over a 17 year life of mine.

Japan’s Sumitomo Metals, Australia’s Oceana Gold, and Britain’s FCF Minerals also plan to go ahead with separate nickel, copper-gold, and gold-molybdenum projects, according to Paje.

The three projects have a combined investment value of more than $1.8 billion.

Chamber of Mines of the Philippines president Philip Romualdez also told the conference President Benigno Aquino’s recent state visit to China drew $2 billion in mining commitments.

Economy starts bubbling

The Asian Development Bank (ADB) has slightly lowered its 2011 growth forecast for the Philippine economy amidst subdued government spending and exports, but increased public and private investment should see a pickup in economic activity next year.

In its latest Asian Development Outlook 2011 (ADO), ADB trimmed its gross domestic product (GDP) forecast for the year to 4.7%, from 5.0% seen in April.

Growth for 2012 is projected to pick up to 5.1%, with brighter prospects seen for investments, which since 2010 have been a major contributor to GDP growth.

“Job creation remains lackluster, with the youth unemployment rate more than double the overall jobless rate,” said ADB Chief Economist Changyong Rhee.

“Further increases in investment along with policy and governance reforms are needed to boost jobs.”

Government spending fell back in the first half of 2011 after high election and typhoon-linked outlays in 2010 with government agencies taking a more cautious stance amidst an anti-corruption drive.

However, private investment grew strongly, while private domestic consumption also increased, supported by a firmer labor market and remittances from overseas workers.

Merchandise export growth, in contrast, was weaker than expected. Electronics, which make up about half the economy’s exports, are still affected by insipid global demand and supply chain disruptions linked to the earthquake in Japan.

Inflation averaged 4.8% over the first eight months, driven by higher food and oil prices. In response, the central bank raised policy interest rates and banks’ reserve requirements twice. Net portfolio investments in the first seven months remained high, helping to push stock prices to record highs in August, but foreign direct investment remains subdued with delays in bids for planned infrastructure projects.

For 2012, increased investment supported by upgrades in sovereign credit ratings and resilient consumer spending will help GDP growth to pick up. Inflation forecasts are retained at 4.9% for 2011 and 4.3% in 2012, assuming that global oil and food prices moderate as expected.

“The Philippine Development Plan 2011-2016 focuses on improvements in the business environment to raise investment and employment with higher outlays on infrastructure supported by public-private partnerships,” said Neeraj Jain, Country Director for ADB’s Philippines Country Office.

‘Some of the public-private partnership infrastructure projects that have been planned must get under way to achieve the growth we forecast for 2012.”

Undervalued Real Estate in the Philippines

Foreign investors looking to invest in real estate-related businesses have ranked Manila as their last choice among various key cities in the Asia-Pacific.

According to the Emerging Trends in Real Estate Asia Pacific 2011 survey conducted by the Urban Land Institute (ULI), global real estate investors gave Manila a score of 4.56 points out of a possible 9, placing the city a few points below “fair” and somewhere within the realms of “abysmal.”

Topping the survey was Singapore with a score of 5.96 points, followed by Shanghai with 5.87, Mumbai with 5.79, and Hong Kong with 5.70.

In an interview with the Inquirer, ULI global trustee and South Asia chairman Simon Treacy said the Philippines, in general, was suffering from a negative image, prompting investors in publicly listed real estate firms to bypass the country when deciding on where to allocate their funds.

“Manila is at the bottom of the pack because the Philippines hasn’t gone to the next level. The country’s image hasn’t really improved. Even with the new administration, there’s still a negative perception of the country,” Treacy said.

“The Philippines rarely ranks when it comes to investment allocations. Since the Philippines doesn’t get a lot of airplay, its real estate prospects become undervalued. Marketing is very important, on a national level, because not a lot of real estate investors look to the Philippines when deciding where to put their capital,.”

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China Opposed India's oil exploration in West Philippines Sea

China strongly opposed to India engaging in oil and gas exploration projects in the disputed South China Sea, and warned Indian companies from entering into any agreements with Vietnam head of External Affairs Minister S.M. Krishna's visit to Hanoi this week.

“Our consistent position is that we are opposed to any country engaging in oil and gas exploration and development activities in waters under China's jurisdiction,” Foreign Ministry spokesperson Jiang Yu said, in reply to a question on reports that the Oil and Natural Gas Corporation (ONGC) Videsh Limited was considering exploration projects in two blocks that Vietnam claims.

While Ms. Jiang said she was not aware of reports of Indian involvement in any projects, she stressed China enjoyed “indisputable sovereignty” over the South China Sea and its islands.

“We hope foreign countries will not get involved in the dispute,” she said, without directly referring to India. “For countries outside the region, we hope they will respect and support countries in the region to solve this dispute through bilateral channels.”

China and Vietnam are among at least ten countries that hold competing claims over the South China Sea and the islands located in its waters. In June, tensions flared between China and Vietnam over the Spratly and Paracel Islands, following clashes between Chinese and Vietnamese boats.

External Affairs Minister Mr. Krishna will hold talks in Hanoi later this week. Among the issues slated for discussion, according to media reports, is an agreement for oil and gas exploration, in two blocks over which Vietnam claims sovereignty, by ONGC Videsh.

China had reportedly voiced its objections to India about the projects, saying that any projects would be “illegal” as China claims the sea's waters. India, however, is likely to go ahead with the projects in the two blocks, which Vietnam says it holds rights to under the United Nations Convention on the Law of the Sea.

Ms. Jiang said the UN convention of 1982 “did not give any country the right to expand their own exclusive economic zone and continental shelf to other countries' territories.” The convention, she said, did not negate “a country's right formed in history that has been consistently claimed.”

Disputes between China, Vietnam and other countries that hold claims to the South China Sea have flared in recent months. While China's neighbours have blamed an increasingly assertive Chinese navy for stirring tensions, with recent clashes with both Vietnam and the Philippines, Chinese officials have pointed the finger at the United States for fanning the flames with its renewing of military alliances in the region and its “return” to East Asia.

Ahead of Mr. Krishna's visit, India has also stressed its strong support for the “freedom of navigation in international waters, including in the South China Sea”, after the INS Airavat, on a recent goodwill visit to Vietnam, was asked by a Chinese vessel, on radio, to leave “Chinese waters.”

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Washington Military Analysis on China Security

The Pentagon annual report to the US Congress “Military and Security Developments Involving the People’s Republic of China, 2011” released to the public in August this year is a lesson how meticulously the Americans study China. Of course, more sensitive issues are not discussed in the open report, but there are pointers that need to be picked up by India and other Asian countries and reflect on them actively on a larger canvas.

It may be noted that India as a target of China is appearing increasingly in these reports. The current report, while taking note of improved India-China relations in trade and some confidence building aspects as well as military relations, also has words of caution for India. It briefly talks about China’s concerns over India’s rising economic, political and military powers, and steps taken to improve regional deterrence which include replacement of liquid fuelled CSS-3 Intermediate Range Ballistic Missiles (IRBMs) with more advanced solid fuelled CSS-5 Medium Range Ballistic Missiles (MRBM) covering India; investment of road and infrastructure development along the India-China border; plans to move airborne troops into the region and other developments. Of course, it is known that the PLA is conducting high altitude training of its troops including para-dropping in the high mountains of Tibet. It is also known that China has established missile silos along the Tibet railway line to ensure that short and medium range missiles can be quickly transported to Lhasa and from there on to borders with India. The Qinghai-Lhasa railway made a test run last year with full military cargo. The paper fell short of mentioning this.

The section on the “South China Sea”, though not specifically mentioning India, have clear ingredients which may be read together with the India section especially in the context of the recent incident in July when the Chinese navy warned INS Airavat to leave the South China Sea claiming the warship was in China’s territorial waters.

The South China Sea is a critical Sea Lane of Communications (SLOC) for India to execute its interest basically economic, cultural and political, in South East Asia and East Asia. The warning to INS Airavat was a Chinese test to see how far it can push the envelope to make at least some pliable countries including India to individually accept China’s claim of sovereignty over the this sea. In this context, the report also notes China’s increasing use of fishing vessels for military purposes. The use of such vessels against Japan and the Philippines in this space of last one year, and the recent sighting of another such vessel fully equipped with monitoring equipment just outside Indian waters is of concern. This particular Chinese vessel was reported to have slipped into the Colombo port according to a Sri Lankan media story, though denied rather mildly by the Sri Lankan army. This raises questions for Indian security. Has Sri Lanka been finally persuaded by China to become a covert military partner against India? China’s all round ingress into Sri Lanka is now quite evident. Reports have emerged about China bribing Sri Lankan President Rajapaksa and his son to promote Chinese interests in the country. Additionally, using fishing vessels covertly for military purposes can be very dangerous if a collision takes place with an Indian naval vessel.

Not new though, the Pentagon paper links the East China Sea to the South China Sea Chinese strategy to indicate the regional tensions that could escalate. According to estimates, the East China Sea holds approximately 7 trillion cubic feet of natural gas and 100 billion barrels of oil. The South China Sea, though not surveyed in detail contains equally substantive quantity of gas and oil. China has already demonstrated military intention with Japan (East China Sea) and with the Philippines and Vietnam in the South China Sea and its determination to bring these maritime areas under its full sovereignty. A recent Chinese official mouthpiece article (People’s Daily, August 30) warned the new Japanese Prime Minister Yoshihiko Noda, that Japan show enough respect for China’s national sovereignty, territorial integrity and core interest. The message was that the disputed islands in East China Sea under Japan’s control were Chinese sovereign territory. Similar is the case in the South China Sea.

If the two seas are looked at compositely, the enormity of their impact on the world at large can only be imagined. Till recent years these two seas were taken for granted as free international waterways, but China’s assertive claims on them from 2008 backed by a hugely growing military, stands to change the entire paradigm of Asia.

China’s strategy and forceful demands must be juxtaposed with its military development including area denial/access denial new armaments which have been comprehensively dealt with in the Pentagon report. East China Sea and the South China Sea are, in China’s strategic perception, would be contours of China’s sovereign territory from which to make further power projection overseas.

From India’s perspective, it would be essential to articulate its position in the Indian Ocean and the rim region and South Asia, as well on South China and East China Seas uncompromisable economic life lines.

Indian military planners would certainly be aware of China’s expanding maritime periphery which has everything to do with its great power status which in turn is dependent on its sustainable economic development which again in turn can be buoyed mainly by oil and raw material sources abroad. The main resource bases being in the Middle East and Africa, the Chinese navy would eventually want to secure the Indian Ocean with potential for conflict with India. Till now most of the free Sea Lanes of Communication (SLOCs) including in the Gulf were kept open by the USA. With America’s economic power in decline and domestic pressures to disengage militarily from abroad, it will seek partners to do the job. And China, which covets all, is not an ideal partner.

The Pentagon paper reminds us of the debate among the Chinese navy community of role in the “distant seas” and the need for bases overseas. In the near future, the PLA Navy (PLAN) is unlikely seek bases in the distant seas. They will need a much more expanded navy for that. But the PLAN and the Chinese leadership are certainly working towards that. Such facilities are there for the asking in Pakistan. The Sri Lankan government under President Mahinda Rajapaksa can work with China if the price is right. Beijing is making efforts in Bangladesh and Myanmar in different ways, but it will depend on India’s diplomacy if the Chinese are successful or not. Here comes issue of India’s Sea power and determined statement to protect its sea of interest, without acrimony.

Some other aspects like “Active Defense”, “Three Warfare’s” and sophisticated intelligence collection dealt in these paper (commented in earlier SAAG Papers by this writer) reminds us also of unstated threats India faces.

China’s professed military doctrine of “Counter attack” only if China is attacked is delusive. India is a victim of this deceptive strategy. Attack against India (1962), the Soviet Union (1969) and Vietnam (1979) were described as “Self-Defense Counter Attacks” by the Chinese. That is, it translates to the doctrine of “Forward Defense”-attack if it is perceived that the enemy may be planning an attack or deal it a psychological blow before it can even think of really challenging China. The 2011 paper finally acknowledged that the doctrine of “Active Defense” or “Forward Defense” does not mean a passive position of reacting following an attack, but an attack well outside its borders at a time of its choosing to debilitate a potential enemy even before an enemy has planned an attack. This can be applied to China’s official stance “no first use” of nuclear weapons.

There is an imperative need to understand and counter the “Three Warfare’s” strategy being mainly employed by the People’s Liberation Army (PLA) with assistance from other state media. Psychological warfare uses action to deter and demoralize the enemy including the civilian population through demonstrative action. Media warfare involves writings/media propaganda that even uses friendly international support apart from forcing the mindset of the target. For example, the daily Pakistan Observer, controlled by Pakistan’s ISI is an able supporter of China’s policies especially those connected with India. Legal warfare involves the various convoluted arguments used by China selectively using parts of international law, historical records (equally concocted), and diplomatic interactions. None of these should be new to India.

Information warfare and intelligence collection is the more recent challenge for India. Indian government entities have been subjected to Chinese internet attacks. The Huawei technologies, China’s biggest information technology company along with ZTE are known to closely connect with the country’s security and intelligence apparatus. It is not only military technology that China is seeking. High technology have dual use applications, and India’s information technology of world class levels. Technology transfer from China, joint ventures with Chinese companies and other such collaborations give a wide window to place “assassin mace” weapons – switches and gates which transfer information to China, and placement of software which can be activated when required to neutralize the brain center of communications.

Of course, India’s private sector, where the IT brain is located, are interested in profit from China deals. National Security is way down in their priority. They may also ask themselves why they have failed to enter China’s IT entities which deal with the government, communication hubs or the military. There are issues which a democratic country like India finds difficult to deal with, but the USA and some western countries which are equally democratic and capitalist are fighting their private sector to keep out Chinese incursions. The Pentagon report gives three examples of Chinese embedded espionage, and efforts to keep the Huawei out is the current battle.

Putting aside the foregoing for a moment, it would be essential to examine the Pentagon report on China’s military in India’s context. When such reports mention a country or a region it conveys its concerns. As usual, this particular report mainly focused on Taiwan’s security and US-China military relations. These are primary concerns as is the security of Japan and freedom and neutrality of East China and South China Seas.

The gradual inclusion of India in such reports convey the US sees India as a possible partner in keeping these international SLOCs free of Chinese control and domination. If the US wants India to be one of its frontline states to contain China, there would be a problem. The US has its own arithmetic with China. Front line states are the first to be sacrificed in such relationship.

India’s capacity in “Mind-warfare” is abysmally poor. There is nothing to compare with China’s “Three warfare’s”-psychological, media and legal. The US does it beautifully taking the media and think tanks into confidence. In India, the authorities try to keep these entities at a distance. “Mind-warfare’s” is indispensible in today’s world.

India is a non-aligned country and has an independent foreign policy. But non-alignment is no longer a passive concept, and independent foreign policy does not mean non-responsive to enlist support in case it is required against aggression. This has been done in the past. It is for the US to appreciate India’s position, a country that shares a 4000 Kilometers border with China. Beijing on its part must understand that 1962 is old history. At the same time, India must demonstrate that its frugality in public statements is not a sign of weakness. In terms of security, China has emerged as India first and main priority. Beyond a point, nothing can be said with certainty. The 1.2 billion Indians also have a say.

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