THE PHILIPPINES, the former "sick man" of Asia, has fortified its economy, positioning it to weather storms engulfing the region's vulnerable emerging markets and to snap back faster when global growth recovers.

For sure, the June sell-off that battered Asian markets inflicted damage in Manila as foreign investors unloaded billions of dollars in Philippine shares. On June 25, the benchmark index was 22% below a May 15 peak while on June 21, the peso was down 7% for the year against the US dollar.

But the rout was more a reflection of global fears about higher US interest rates and the end of Federal Reserve stimulus than of worries about the Philippines' own fortunes.

Economists and investors say the Southeast Asian nation's prospects remain bright, insulated by strong government finances, a steady remittances and lower exposure than its neighbors to slumping global trade.

The Philippines is likely to produce "predictable" growth, said Patrik Brummer, founder and chairman of Stockholm-based fund management firm Brummer & Partners. On July 9, the firm said it aimed to raise $120 million for a private equity fund to invest in Philippine start-ups, its first investment in Southeast Asia.

The International Monetary Fund this month raised its forecast for Philippine 2013 economic growth to 7% from 6%, even as it lowered its projection for Asia.

Economists say Southeast Asia as a whole is better placed than in the past to weather financial storms, thanks to lower debt to foreign lenders and stronger domestic economies.

But the region's biggest economy, Indonesia, looks vulnerable due to a hefty current account deficit and high inflation. Bank Indonesia moved to halt foreign outflows and boost the weak rupiah, hiking the country's key interest rate in June and again this month.

Philippine authorities say they hope to keep rates at record lows as long as annual inflation — now 2.8% — remains low.

"Up until recently, it's only been Indonesia and the Philippines that have monetary policy favoring the equity market, that's why I think the peso will outperform," said Tim Condon, head of research at ING in Singapore.

In the first quarter of this year, the Philippines was Asia's fastest-growing economy, posting 7.8% year-on-year growth.

Since President Benigno S. C. Aquino III took over three years ago on an anti-corruption platform, the country's average annual growth rate has climbed to 6.1% from 4.7% in the last decade. Mr. Aquino has vowed to push growth to 8% before he leaves office in 2016, though he has enacted few of the structural reforms that economists say are needed to make that sustainable.

In recent years, the Philippines has moved far from being a financial basket case. The government has cut its debt, which soared as high as 74% of gross domestic product in 2004, to 51%, with the proportion owed in foreign currency down to 19%, the lowest in at least 16 years.

That belt-tightening helped earn upgrades by credit-rating agencies Fitch Ratings and Standard & Poor's which put Manila's bonds on the radar screens of the world's biggest pension and investment funds, a step that stands to help it lower its borrowing costs and cut debt further.

Private credit growth has surged in recent years, partially fuelled by easy global money, but the banking system is well-capitalized, central bank officials and analysts say, and external debt remains low, falling to just 23% of GDP at the end of March, less than half its 2005 levels.

A healthy current account surplus, among the region's highest at more than 5% of GDP at the end of March, will offset any capital outflows. The surplus is unlikely to shrink significantly thanks to the buffer of remittances from about 10 million Filipinos overseas. Remittances were a record $21.4 billion in 2012, and monthly amounts are running 6% bigger on average.

"The Philippines is generally better placed than other economies because of its high level of reserves, which could help cushion the exchange rate volatility," Shanaka Jayanath Peiris, the IMF representative in the country, said this month.

The Philippines has cut its dependence on exports thanks to strong domestic consumption. In 2012, exports were equivalent to 26% of GDP, compared with 32% for Indonesia, 78% in Thailand and 82% for Malaysia, according to the World Bank.

Philippine stocks are currently the most expensive in Southeast Asia, trading at 19 times one-year forward price-earnings against around 15 times for Indonesia, Thailand and Malaysia, according to Thomson Reuters data. But the strength of local corporates and the economy as a whole support the prices, analysts say.

Manila's benchmark stock index has climbed about 15% since a June 25 trough, and it is Southeast Asia's second best-performing market this year after Vietnam. And despite the June sell-off, Manila still saw $1.5 billion of net foreign-buying of shares in the first half, nearly double the year-earlier level.

By Reuters.com

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