Big Manufacturers quitting China for Philippines – PHL rating ups

Philippine officials say rising labor costs in China's southern coast are driving big foreign manufacturers to relocate to the country.

Trade Secretary Gregory Domingo said Tuesday there has also been "very strong" interest from Japanese investors who are looking for tracts of land in Philippine export processing zones. They include electronics, ship building and steel companies.

He said investors relocating to the country include foreign garments factories closing in China. A big company which left the Philippines has decided to return, while another one is seriously considering coming back, he said.

Domingo told a government economic briefing that so far this year the country is seeing "the most we've ever seen" of investor fact finding missions.

China, which after economic liberalization in the 1980s became the world's low-cost factory, is now grappling with rising wages and production costs that have made it less attractive to some foreign manufacturers.

The Philippine officials did not have estimates of the value of the incoming investment or the jobs that would be created. Domingo refused to name the companies that are relocating to the Philippines.

Foreign direct investment in the Philippines totaled ₱87.3 billion pesos ($2.04 billion) in the first nine months of last year, up slightly from ₱79.4 billion pesos ($1.85 billion) a year earlier.

The Philippine economy is forecast to grow 5 percent to 6 percent this year, driven by increased spending on infrastructure and more efficient budget spending, Socio-economic Planning Secretary Cayetano Paderanga said.

Domingo thinks economic growth could exceed 7 percent this year with the stock market achieving a new record high Monday, and strong growth in exports, the outsourcing industry, tourism and investments.

Officials also said the Philippines is estimated to hit its demographic "sweet spot" by 2015, when majority of Filipinos will be of working age, a situation which usually fuels growth.

Philippines seen getting credit-rating upgrade from S&P

Philippines stands a good chance of getting a credit rating upgrade in the short term from Standard & Poor's, which expects the country's debt profile to further improve as the economy grows and revenue collection rises.

In its latest outlook report for Asia-Pacific, S&P cited the Philippine government's focus on shoring up revenue collection and plans to help pump-prime the economy by enticing private firms to invest in infrastructure projects.

Currently, S&P assigns the Philippines a credit rating of BB and an outlook of "positive." This is two notches below investment grade, while the outlook indicates probability of a credit-rating upgrade within the short term if expectations of better indicators materialize.

"The positive outlook is based on our expectation that continued adherence to fiscal consolidation, combined with improved medium-term growth prospects, will further moderate the Philippines' public debt and interest burden," S&P said in the report titled "Asia-Pacific Sovereigns: Mixed Outlook in an Uncertain Year."

The ratio of the Philippines' public sector debt to the country's gross domestic product stands at about 55 percent. The ratio has declined from more than 70 percent in the early 2000s.

The country's economic managers are hoping to bring the ratio down closer to 50 percent or even lower to get a credit-rating upgrade. Such an objective requires making economic growth consistently exceed the rise in the country's debts.

The officials are hoping the Philippines will get investment-grade rating by 2013, claiming that macroeconomic indicators of the country are improving and are just about the same as those of other developing countries that are already enjoying investment grade.

Indonesia, which the Philippines would like to consider as its counterpart, recently obtained an investment grade rating.

"The rating [of the Philippines] could be raised on material progress in achieving a sustainable structural revenue improvement or further strengthening of the public balance sheet, thus reducing fiscal vulnerability," S&P said.

The credit-rating firm said its baseline projection was that the Philippines would be able to post better fiscal numbers over the short term.

However, it stressed that should actual developments on the fiscal front veer away from the baseline projection, the country may see its current rating being kept, if not downgraded.

S&P said the Philippines would likely grow by 4.2 percent this year on the back of government commitments to raise public spending and likelihood of rising investments by the private sector in public infrastructure under the Public-Private Partnership (PPP) program.

Under the PPP program, the government invites private enterprises to invest in public infrastructure projects. The objective of the program is to fulfill the country's needs for infrastructure without derailing the government's goal of reducing its budget deficit and debts.

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IMF Lauds Philippine Economic Policies

The International Monetary Fund (IMF) praised the Philippines for sound monetary and fiscal policies, while saying the central bank could let the peso rise further if needed in response to capital inflows.

"Prudent policies…have underpinned a strong recovery and supported confidence," the IMF said in its annual Article IV report on the Philippines, released Tuesday in Asia.

"The outlook for the near term is broadly favorable, but subject to significant external risks," the lender said. "In this context, the key policy challenge is to safeguard macroeconomic stability while building the foundations for stronger and more inclusive growth over the medium term."

The National Statistics Office (NSO) said Tuesday that inflation decelerated to a 29-month low in February, as price increases in food, beverages and most other commodities moderated,

The consumer-price index, the country's main inflation barometer, rose 2.7% in February from a year earlier, its slowest pace since September 2009, when inflation stood at 2.2%. Annual inflation in January was revised up to 4.0% from the initial estimate of 3.9%, and was 4.7% in February last year.

The central bank projected inflation in February settling within the 2.7%-3.6% range, while the median forecast of 10 economists polled by Dow Jones Newswires tipped the annual increase in the CPI at 3.3%.

Despite the easing inflation, economists doubt the Bangko Sentral ng Pilipinas (BSP) will lower policy rates further, given the two 0.25 percentage point rate cuts it has implemented this year and the three-percentage-point reduction in banks' reserve requirement effective next month.

"This supports our assessment that inflation is manageable. Over the policy horizon, we expect inflation to be below the midpoint of our target range [for the year] of 3%-5%," said Bangko Sentral ng Pilipinas Gov. Amando Tetangco in a statement.

Economists expect the central bank to leave overnight rates at the current levels for the rest of the year, unless the global economy slows further.

"Besides the influence of base effects, inflation is expected to remain nonthreatening for the year barring a sharp upswing in global crude prices," said Forecast Singapore Economist Radhika Rao. She noted that because of subdued demand-pull cost pressures and the policy scope available to the central bank, any unexpected spurt in retail fuel prices could be mitigated by temporary administrative measures.

"We expect the BSP to leave rates unchanged for the year, after last week's cut," Ms. Rao said.

Philippine monetary policy is "appropriately supportive" of the economy, the IMF said in its report, with inflation "firmly in the middle of the target range," while fiscal policy is "appropriately focused" on supporting growth in the near term while curbing the budget deficit over the medium term.

The lender expressed support for the Philippine central bank's policy of "allowing orderly adjustments of the exchange rate to market pressures." It said, however, that the bank has "scope for further flexibility of the exchange rate in response to sustained inflows" and could draw down its ample foreign reserves, suggesting Manila could intervene less to curb rises in the peso when investors pile into Philippine assets.

The IMF said the report was based on discussions with the Philippines that ended Dec. 13.

By WILLIAM MALLARD And CRIS LARANO - Write to William Mallard at william.mallard@dowjones.com

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China grabbing "Reed Bank" 50 Miles off Palawan Philippines

Colliding China and the Philippines in West Philippines Sea (South China Sea) over oil surveys

The looming conflict in the Philippines waters as china's aggression and assertiveness in invading neighboring territory flared over the oil race in the sea. The conflict begun last year 2011 when Lieutenant-General Juancho Sabban received an urgent phone call from an oil company saying two Chinese vessels were threatening to ram its survey ship, the Philippine commander's message was clear: "Don't move, we'll come to the rescue."

Within hours, a Philippine surveillance plane, patrol ships and light attack aircraft arrived in the area of Reed Bank in the West Philippines Sea (South China Sea). By then the Chinese boats had left after chasing away the survey ship, Veritas Voyager, hired by UK-based Forum Energy.

But the tension had become so bigger; Forum Energy chief Ray Apostol wanted to halt two months of work in the area.

"They were so close to finishing their work. I told them to stay and finish the job," Sabban, who heads the Western Command of the Philippine Armed Forces, said at his headquarters in Puerto Princesa on Palawan Island, the main Island of the Province of Palawan that administer the Spratlys Archipelago.

Reed Bank or Recto Bank is an undersea territory of the Philippines located 50 miles or 80 Kilometers from the province of Palawan believed to rich in oil and natural gas deposits

Over the next few days, Philippines President Benigno Aquino III would call an emergency cabinet meeting, file a formal protest with China, and send his defense secretary and armed forces chief to the Western Command in a show of strength.

The March 2011 incident is considered a turning point for the Aquino administration. The president hardened his stance on sovereignty rights, sought closer ties with Washington and has quickened efforts to modernize its military capability by spending billions.

A year later, Forum Energy is planning to return. Top company executives said the company intended to sail to Reed Bank within months to drill the area's first well for oil and natural gas in decades, an event that could spark a military crisis for Aquino if China responded more aggressively.

The US military has also signaled its return to the area, with war games scheduled this month with the Philippine navy near Reed Bank, Palawan Province of the Philippines that China is bound to view as provocative.

"This will be a litmus test of where China stands on the South China Sea issue," said Ian Storey, a fellow at the Singapore Institute of Southeast Asian Studies. "They could adopt the same tactics as they did last year and harass the drilling vessels, or they might even take a stronger line against them and send in warships."

A decades-old territorial squabble over the South China Sea is entering a new and more contentious chapter, as claimant nations search deeper into disputed waters for energy supplies while building up their navies and military alliances with other nations, particularly with the US.

Reed Bank, Palawan Province is claimed by China in which is under the province of Palawan Philippines, it's just one of several possible flashpoints in the West Philippines Sea (South China Sea) that could force Washington to intervene in defense of its Southeast Asian allies.

US President Barack Obama has sought to reassure regional allies that Washington would serve as a counterbalance to a newly assertive China, part of his campaign to "pivot" US foreign policy more intensely on Asia after a decade of war in Iraq and Afghanistan.

Obama brought up the South China Sea at an Asia-Pacific summit in Bali in November. He had a surprise one-on-one with Chinese Premier Wen Jiabao on the subject, although Beijing had insisted the issue should not be on the agenda at all.

"As Southeast Asian countries run to the US for assistance, Beijing increasingly fears America aims to encircle China militarily and diplomatically," said Stephanie Kleine-Ahlbrandt, Northeast Asia director for the International Crisis Group.

"Underlying all of these concerns is the potential that discoveries of oil and natural gas beneath the disputed sections of the West Philippines Sea (South China Sea) could fuel conflict."

The area is thought to hold vast untapped reserves of oil and natural gas that could potentially place China, the Philippines, Vietnam and other claimant nations alongside the likes of Saudi Arabia, Russia and Qatar.

Manila is beefing up its tiny and outdated naval fleet and military bases, adding at least two Hamilton-class cutters this year and earmarking millions of dollars to expand its Ulugan Bay naval base in Palawan.

It's no match for China's fleet, the largest in Asia, which boasts 62 submarines, 13 destroyers and 65 frigates, according to the International Institute for Strategic Studies.

China last month launched the fourth of its new 071 amphibious landing ships that are designed to quickly insert troops to trouble spots, for example, disputed islands.

The US Navy has announced it will deploy its new amphibious assault vessels, the Littoral Combat Ships, to the "maritime crossroads" of the Asia-Pacific theatre, stationing them in Singapore and perhaps the Philippines.

Washington's renewed presence in the Philippines – a former US colony that voted to remove US naval and air bases 20 years ago – follows the US announcement last year of plans to set up a Marine base in northern Australia and possibly station warships in Singapore.

Manila is talking about giving Washington more access to its ports and airfields to re-fuel and service US warships and planes. The two countries will conduct war games off Palawan Island in late March – focusing on how to deal with a take-over of an oil rig in the West Philippines Sea (South China Sea).

China has warned oil companies not to explore in the disputed South China Sea, over which Beijing says it has "indisputable sovereignty". Chinese ships have repeatedly harassed vessels that have tried.

After ExxonMobil discovered hydrocarbons off the coast of Danang in central Vietnam, an area also claimed by China, one of China's most popular newspapers warned in October nations involved in territorial disputes should "mentally prepare for the sounds of cannons" if they remain at loggerheads with Beijing.

Despite the threats, the Philippines and Vietnam have continued to explore for oil and natural gas further offshore in the West Philippines and  South China waters, driven by persistently high oil prices and more advanced deepsea technology.

The Philippines had reported as many as 12 incidents of Chinese vessels intruding into its sovereign waters in the past year, an unusually high number, Sabban said.

In one of the most serious incidents last October, a Philippine navy ship seized Chinese fishing boats after colliding with one of them, prompting protests from China for their return. At least 12 Chinese fishermen have been arrested over the past year. Half of them remain in detention in Palawan.

"China has no right to tell us we should first ask for permission from them to explore the area," Sabban said. "We have explored that area back in the 1970s, so why can't we explore it now? We knew there was a substantial deposit of natural gas even before all of these things started."

Manila said Reed Bank, about 80 Kilometers or 50 nautical miles west of Palawan Island at the southwestern end of the Philippine archipelago, was within the country's 200-nautical-mile exclusive economic zone.

But Beijing believed it was part of the Spratlys, a group of 250 uninhabitable islets spread over 265 542km2, claimed entirely by China, Taiwan and Vietnam, and in part by Malaysia, Brunei and the Philippines.

While China prefers to solve the disputes one on one with its smaller Southeast Asian neighbor, Washington has sought to internationalize the issue, given half the world's merchant fleet tonnage sails across the sea and around these islets each year, carrying $5 trillion (R37.35 trillion) worth of trade.

"If we don't develop our positions in our exclusive economic zone, then we will only be giving it away and will be at the losing end," Saban said. – Reuters 

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