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Tomorrow Capital
Quarterly FX and Macro Update
Southeast Asia Deep Dive: Philippines and Indonesia
In our recent quarterly meeting with our Macroeconomics Adviser, Nick Stadtmiller, we delved into the economic and political landscapes of the Philippines and Indonesia. This deep dive highlights the key takeaways from the discussion, focusing on the opportunities and risks present in these Southeast Asian markets. The risks primarily relate to domestic politics and geopolitics, which will be the focus of the below.
Philippines
Political Landscape
The political landscape of the Philippines is to some extent defined by mild authoritarianism and dynastic tendencies. The Philippines have taken a more authoritarian turn over the last couple of administrations with president Ferdinand Marcos Jr. continuing the authoritarian tendencies of his predecessor, Rodrigo Duterte. The country's political scene is largely dominated by a few influential families, the Marcos, Duarte and Aquino families, leading to a complex governance structure with occasional instability. In contrast to Indonesia, central government control in the Philippines is less effective, with a number of regions or individual islands under the control of local leaders that hold significant sway.
From a geopolitical perspective, tensions with China are a key thing to watch as their various territorial disputes over the South China Sea unfold. Unlike Ukraine or the Gulf countries, for example, the Philippines is a treaty ally of the U.S., who has a treaty obligation to defend the Philippines if they're attacked, which makes the Philippines a potential flashpoint in the U.S.-China confrontation. Investment from the U.S. and its allies significantly outweighs that from China, despite strategic efforts by the Philippines to attract more Chinese investment by playing off the two world powers against each other.
Economic Overview
From an economic perspective, the Philippines has a large trade deficit, primarily driven by commodity imports which cannot be offset by their export of electronics and services, such as call centres. That said, the significant remittance inflows from overseas workers balances this deficit, as depicted in the graph below.
Source: BSP
Despite political challenges, conservative fiscal and monetary policies support macroeconomic stability, and inflation largely remains stable, as the currency has been depreciating steadily by about 3% per year against the U.S. dollar.
Source: Bloomberg
Implications for Investment
The Philippines' stable macroeconomic environment and conservative fiscal policies make it a relatively safe investment destination. Geopolitical risks, particularly related to the U.S.-China tensions require close monitoring to mitigate potential impacts on investments.
Indonesia
Political Landscape
Indonesia, under the leadership of President Joko Widodo, has maintained a stable and reliable partnership with the United States, a legacy dating back to the 1960s. In contrast to the Philippines, the government effectively controls the dispersed archipelago, managing occasional insurgencies without significant disruption to overall stability. Political manoeuvring around rising Islamic political movements could impact future policy directions, although the risk remains contained.
Economic Overview
Indonesia has a healthy trade surplus driven by commodity exports, including coal, palm oil, and nickel, coupled with low debt burdens and sustainable fiscal policies. The country's inflation rate is low, with the central bank maintaining a vigilant stance on monetary policy, particularly concerning exchange rate stability. The export profile is diverse, with significant contributions from energy commodities and increasing importance of nickel, especially for the EV industry.
Source: BI
Indonesia's interest rates tend to be higher due to historical reliance on foreign investment in local currency bonds, necessitating attractive returns to retain investors. The central bank has been gradually lowering its inflation target from 3% to 2.5% by next year. Additionally, Indonesia's status as a major commodities exporter makes exchange rate stability a critical focus for the central bank, which even preemptively hiked rates earlier this year to defend the currency despite well-contained inflation.
Source: Bloomberg
Implications for Investment
Indonesia's economic stability and strategic importance in the commodities market make it an attractive and relatively stable investment destination. Political risks related to Islamic movements and potential policy shifts should be watched, although they currently pose minimal threat to economic stability.
Compared to LATAM
Growth and economy size
Both the Philippines and Indonesia are outpacing their Latin American counterparts - Brazil, Mexico and Colombia - with projected growth rates of around 5-6% over the medium term as opposed to Latin America's growth rates of 2-3%.
Source: IMF
In terms of economy size, the Philippines' economy is slightly larger than Colombia's, while Indonesia's economy is somewhat smaller than Mexico's. However, on a per capita basis, incomes in Indonesia and the Philippines are lower than those in Brazil, Colombia, and Mexico. Despite this, the per capita real GDP growth in Indonesia and the Philippines stands out, reflecting substantial improvements in income per capita, adjusted for inflation.
Source: IMF
This disparity in growth rates and economic size highlights the potential of Southeast Asian markets compared to their Latin American counterparts, offering compelling opportunities for investors seeking high-growth environments.
Conclusion
The political and economic stability of both the Philippines and Indonesia relative to other emerging markets, coupled with the significant fintech opportunity created by virtue of the fact that they are both large dispersed island countries with often patchy relationships to the mainland, make these markets particularly appealing. However, geopolitical tensions and domestic political dynamics require vigilant monitoring to navigate potential risks effectively.
