GOING GLOBAL: Filipino competitiveness is NOT GOOD, IT’S GREAT!

Illustration by REY RIVERA

By James Michael Lafferty

MANILA, Philippines -I was a panelist last week in the Euromoney Philippines Investment Forum along with many dignitaries, including President Benigno Aquino III and Secretary of Finance Cesar Purisima. One of those "standard" questions came up concerning, "What can the Philippines do to improve competitiveness?" I think many people were shocked at how bullish I am on the Philippines. And I am not saying there is nothing to improve upon. It is just that, from my vantage point of leading multinationals in this country, this nation is incredibly competitive! Let me tell a few stories to explain why.

I have worked for some of the biggest and most respected consumer goods companies: Procter and Gamble. Coca-Cola. And now BAT. And on five continents and over 40 countries.

In every country, there are indeed competitors — some local, but typically the ones concerned being other multinationals. Like when I was at Coke, my biggest worry was Pepsi most of the time, not the local cola brand.

There is, however, one nation that stands out. Where the local companies are so good, so well run, that they represent the big competitive risk. And that country is right here, the Philippines!

Let me give some examples.

P&G is the biggest laundry detergent company in the world. By far. And in normal cases, the key competitors are companies like Unilever, or Henkel, as examples. But not here. In my time leading P&G, the leader of the laundry detergent bar segment, which was nearly half of the market, was a great brand called Champion from Peerless. A local company. Well run. A very formidable competitor. They were winning market shares. And they deserved it, doing a better job of delivering real consumer value. I respected them. And they made me better.

You can see the same in many, if not most, consumer categories. Diapers have EQ, a brilliant local brand. Toothpaste has Hapee. And there are many more: Splash Corporation, Belo Skincare, Alaska Milk — all local Filipino companies that are well run, hyper-competitive, and winning market shares.

I have never seen a market like this. So competitive. So good at turning out world-class companies and talent.

My two favorite examples start with iced tea. I can only imagine if I was a consultant, and a local company came to me and asked, "Do you think we can win if we enter a category dominated by Coca-Cola, Pepsi Cola, Unilever, and Nestle?" My answer would be, "Don't be crazy, you are taking on four monsters. Go find something else to compete in!"

Well, I am glad my friend Lance Gokongwei and his colleagues at URC never asked me. Because what they did is extraordinary. They entered. They had the unique name, flavors, and distribution strategy of C2. And in a few short years, they took the lead from the big boys. It's about as impressive a story as there is. In fact, it's a lot more impressive in my view than the story of Bill Gates starting up in a garage!

Finally, when I retired from P&G and left the Philippines, sadly, for my new role in Nigeria as CEO of Coca-Cola, I met in my first week in Lagos with my top customer, an owner of the largest fast-food chain called Chicken Republic. We were chatting and he asked me where I came from. I answered, "The Philippines." And I will never forget his answer.

"Oh, my gosh! That's neat! My hero is a Filipino."

So I, of course, asked, "Who is that?"

His answer was, "Tony Tan, the founder of Jollibee. And let me tell you why. I am today the biggest fast food chain in Nigeria. But we know McDonald's is coming. And it is scary, all their money and might and PR. But we have hope. Because somewhere out there in this world, there is a local chain that has succeeded in beating McDonald's, and keeping leadership. And that is Jollibee."

I loved it. Even in the middle of Nigeria, the excellence of Filipino business is recognized and cheered.

Nine months later, upon the gracious invitation of Tony Tan and his team at Jollibee, I escorted my Nigerian customer and his team to Manila for a one-week visit with Jollibee to learn. It was a wonderful experience, and the entire group could not say enough good things about Jollibee, their leadership, and their commitment to excellence. It is a great, great company.

I could go on and on. This country has amazing competitiveness. Yes, we can do more. We can continue to truly knock down barriers to free market competition, to level the playing field like was recently done in tobacco, to allow more companies to enter and invest. We can continue to push for investment-grade ratings, to open up more capital markets to our businesses. We can upgrade more infrastructure.  The administration is pushing all the right buttons. Anyone can see it.

And I tell you this: with the amazing base of talent, skill and competitiveness this nation has right now, if we fix these things, it will be downright exciting — and scary to some — how competitive this country's businesses can be.

The Philippine Star

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Rating Agencies 'Behind the Curve' on Philippines - the fastest growing economies in ASEAN

One of Southeast Asia's fastest growing economies - the Philippines - got a ratings upgrade last year, but its finance secretary Cesar Purisima told CNBC the agencies were still "behind the curve" and the Philippines deserved a higher credit rating.

All three agencies Fitch, Moody's Investors Service and Standard & Poor's have kept the Philippines at one notch below the coveted investment grade. The latter two agencies upgraded the rating to that level only last year.

"The market rates are two notches above investment grade already, so we're borrowing at a much cheaper cost than our credit rating. So I think they [the credit rating agencies] are way behind the curve," said Cesar Purisima.

The Southeast Asian economy has benefitted from strong growth in recent years. It grew by 6.6 percent in 2012 and the government is targeting similar growth in 2013.

Answering a question on why the Philippines was "obsessively" pursuing a credit ratings upgrade Purisima said: "No it is not obsessive. It's just making sure that they recognize what is the proper rating of the Philippines."

The finance secretary also said he was planning to develop the local bond market by trying to encourage more corporates to borrow from the market rather than from banks.

"Economies have cycles. And in a down cycle if the majority of borrowing is through banks, then you risk creating problems in the banking system. But if you have a big share in the bond market then it is just asset prices," he said.

Purisima said Philippines' turnaround has been fueled by a transformation in the quality of governance.

"Good governance equals good economics. Basically that is what held back the Philippines in the past - bad governance," he said.

However, unemployment levels remain a sticking point for the growing economy. The Philippines' unemployment rate increased to 7.1 percent in the final quarter of 2012 from 6.8 percent in the third quarter.

The government is directing resources into the tourism, agriculture, business process outsourcing (BPO) and infrastructure sectors to create more jobs, said Purisima.

CNBC News

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Bloomberg: Philippines Beats Indonesia as Aquino III Finds Favor: ASEAN Credit

The yield on the junk dollar bonds of the Philippines is at a record discount to higher-rated Indonesian notes as confidence in the nations' leaders diverges.

Philippine President Benigno Aquino III, 53, halfway through a six-year term, increased taxes and ousted the country's top judge last year for illegally concealing his wealth, impressing Pictet Asset Management and Kokusai Asset Management Co. Indonesian President Susilo Bambang Yudhoyono, 63, who is in his final year in office, failed to cut fuel subsidies in 2012 as the annual shortfall in the current account rose to a record.

"In terms of fundamental reforms, the Philippines is improving while Indonesia is not," Wee-Ming Ting, the Singapore-based head of Asian fixed income at Pictet Asset, which oversees $29 billion of emerging-market debt globally, said in an interview last week. "The yield gap between their hard-currency bonds is likely to stay or widen until Indonesia starts to implement real reforms."

Philippine debt due 2037 yielded 3.97 percent on March 5, 91 basis points less than similar-maturity securities from Indonesia, according to data compiled by Bloomberg. The spread, which was 72 as of 1:12 p.m. in Manila, increased from 26 basis points a year ago. The outperformance raises question marks over why Moody's Investors Service and Fitch Ratings have left the Philippines' rating unchanged after raising Indonesia from junk status more than a year ago.

Dollar Sales

The Philippines may shun the global bond market this year, breaking a run of sales that stretches back a decade as it boosts domestic borrowing, Treasurer Rosalia de Leon said this month. Indonesia said in February it would sell dollar debt in the first half of 2013.

Aquino's government recorded a current-account surplus of $7.2 billion for the first nine months of last year as remittances from overseas workers increased 6.3 percent in 2012 and revenue from foreign companies outsourcing functions, including call centers, to the Philippines rose 18 percent.

In Indonesia, the broadest measure of trade swung to a deficit of $24.2 billion in 2012, the biggest annual shortfall since Bloomberg began compiling the data in 1989, from an excess of $1.7 billion in 2011. The government spent 211.9 trillion rupiah ($22 billion) on fuel subsidies last year, discouraging the energy saving required to reduce its import bill.

It has been cheaper to insure Philippine debt against non- payment than Indonesia's since July 2011. Five-year credit- default swaps on the former's bonds dropped 40 basis points to 96 basis points in the year through yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. Those on Indonesia's notes fell 20 basis points to 131.

'Policy Slippages'

Standard & Poor's said in April 2012 it refrained from awarding Indonesia investment-grade status as the country's push to lure investment was at risk from "policy slippages" such as the failed attempt to cut fuel subsidies earlier that year. President Yudhoyono said this week that his government is weighing the pros and cons of raising fuel prices or choosing another method that would more effectively target the subsidies at poorer consumers in a nation where almost one in five people lives on less than $1.25 a day, according to the World Bank.

Both countries have the highest junk rating of BB+ from S&P, which raised the outlook on the Philippines rating to positive in December, saying a revision is possible this year as public finances and governance improve. Aquino said in January the nation "is on the cusp" of winning an investment-grade rating. Moody's rates Indonesia at its lowest investment grade of Baa3, while it assesses the Philippines one level below that at Ba1.

Corruption Perceptions

"The Philippines' credit has been improving while there are some short-term concerns about Indonesia's macroeconomic management," Takahide Irimura, Tokyo-based head of emerging- market research at Kokusai Asset, which runs Japan's biggest mutual fund, said in a March 5 interview. "Political situations in both countries have been stable, but Yudhoyono's term ends soon" raising concern about what will happen next, he said.

Yudhoyono, who campaigned on promises to reduce corruption in 2009, has been beset by recent scandals within his own Democrat Party. Last year, Muhammad Nazaruddin, the former treasurer of the party, was sentenced to four years and 10 months in prison for taking 4.68 billion rupiah in bribes.

The Philippines is now seen as less corrupt than Indonesia, according to Transparency International's Corruption Perceptions Index. It improved to 105th place in 2012 from 139th in 2009, a year before Aquino became president. Indonesia was ranked 118th last year, slipping from 111th three years earlier, according to the Berlin-based watchdog's website.

Priced In

Indonesia's dollar bonds are "slightly more attractive" than its neighbor from a valuation perspective because Philippine bonds have already priced in an investment-grade status, Jonathan Liang, a Hong Kong-based senior portfolio manager for fixed income at AllianceBernstein LP, which oversees $437 billion globally, said in a March 7 e-mail interview.

Gross domestic product in Indonesia will increase 6.3 percent in 2013, while the Philippine economy will expand 5.9 percent, according to the median estimates of economists in Bloomberg News surveys. Authorities in Jakarta plan to invest more than $300 billion by the end of next year on infrastructure and manufacturing facilities, Coordinating Minister for the Economy Hatta Rajasa said in December.

"Indonesia continues to devote a meaningful amount of capital towards fixed-asset investment, helping to alleviate bottlenecks in its economy, which we believe will help them sustain long-term economic growth and lower inflation," Liang said.

'Weak Momentum'

Pioneer Investments said it prefers the Philippine's local- currency debt due to the "weak momentum" for the rupiah notes. The Philippine 10-year peso bond yield slumped 87 basis points this year to 3.53 percent today, while the Indonesian rate added 26 basis points to 5.45 percent, data compiled by Bloomberg show. Indonesia's securities returned 0.6 percent this year, compared with 7.8 percent for the peso-denominated notes, according to indexes compiled by HSBC Holdings Plc.

The peso will strengthen 2 percent against the dollar in 2013 after rallying 6.8 percent last year, according to the media estimate of economists surveyed by Bloomberg. It strengthened 0.1 percent today to 40.597. The rupiah will advance 0.7 percent this year after weakening 5.9 percent in 2012. It was little changed at 9,701 today.

Hakan Aksoy, a fund manager at Pioneer in London, which oversees 156 billion euros ($203 billion) of assets, said his company was short against its benchmark for rupiah bonds, meaning the firm holds less than the index it follows.

'Inflow Bandwagon'

"After the election in Indonesia, we may increase our position," he said in a March 5 interview. "We also expect to see lower rupiah levels in the meantime."

Developing-nation bond funds have attracted inflows of $15.3 billion in the first two months of this year, compared with $10.1 billion in the same period in 2012, according to EPFR Global. Overseas investors raised their holdings of Indonesian local-currency government notes by 46.1 trillion rupiah in the six months through March 13 to 284.8 trillion rupiah, according to finance ministry data. There are no equivalent figures available for the Philippines.

"We are still more positive on the Philippines than on Indonesia," Pictet's Ting said. "Indonesia is riding on the emerging-debt inflow bandwagon and benefiting from that. If they do not take the opportunity to address their structural problems, it will not be nice when outflows start."

As published in Bloomberg read more here

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