Investors dip toes, but don't dive into Indonesia, the Philippines

Investors dip toes, but don't dive into Indonesia, the Philippines

Jennifer Chen, Reuters, Singapore

Indonesia and the Philippines, long viewed by foreign investors as the untouchables of Asia, are quietly creeping back onto fund manager radar screens.

But retirees and their risk-averse kin should think twice before pumping their savings into these two countries, which have only taken a mere step or two away from the brink of economic and political crisis. These markets, especially Indonesia, are still strictly for the brave and risk-hungry, analysts say.

Economists are trumpeting the simmering down of political tensions in these two Southeast Asian hotbeds -- President Gloria Macapagal Arroyo just marked her first year in office -- and the resilience of their economies in the face of last year's slowdown.

That's a marked change from their earlier reprimands over these countries' enormous economic and social problems.

"The environment is improving dramatically given the gradual reforms that are taking place, in particular the moves towards privatization. There's good opportunity. Especially because prices have been beaten down so much," Mark Mobius, president of Templeton Emerging Markets Fund, told Reuters in a telephone interview from Sydney.

Mobius, who manages a portfolio of Asian equities worth US$4 billion, excluding Japan, said his fund was invested in both Indonesia and the Philippines.

He is not alone in seeing good value in these markets. J.P. Morgan Chase noted that portfolio inflows into the Philippines last year were 2.56 billion pesos ($49.8 million) compared to a 6.93-billion baht ($157.5 million) outflow from Thailand. So far this month, the Philippines has seen a modest 306 million pesos ($5.9 million) in inflows.

Notably, recent bond issues from the Philippine government has attracted some foreign investor interest. Earlier this month, the Philippines launched a $750-million 15-year sovereign note, increased from its original size of $500 million, and an additional $250 million worth of Eurobonds due November 2005.

Underpinning some of the rising confidence in the Philippines and Indonesia among fund managers is the growing strategic importance of these countries, especially in the eyes of major aid donors like the United States.

As with Pakistan, the September 11 attacks highlighted for Washington the strategic importance of political stability in Indonesia, the world's most populous Muslim nation, and the Philippines, which has been dealing with a Muslim insurgency in the south for decades.

Indeed, some investors viewed the deployment of U.S. troops in the southern Philippines to conduct joint military operations against Muslim rebels accused of having links with the radical al Qaeda network as a positive development.

"If they can solve the terrorist problem in the south -- and it's not that easy because it has been going on for generations -- yes, that's definitely bullish," said Mobius.

Besides military aid, the United States has also pledged economic assistance to Manila.

Some political analysts say Jakarta may be angling for the same sort of U.S. aid if they establish a link between homegrown radical Muslim groups and al Qaeda.

For now, the fact that 90 percent of Indonesia's 210 million people are Muslim will make multilateral donors such as the International Monetary Fund, less likely to pull out even as Jakarta drags its feet on privatization and other reforms.

But analysts are warning that foreign investors are still not ready to board planes to Jakarta and Manila quite yet.

That's because less stormy administrations and possible U.S. aid are still neither enough to alleviate painful memories of the Asian financial crisis nor mitigate the need, especially in Indonesia, for reform.

"I think one of the big lessons for investors in the last couple of years about being in Indonesia and the Philippines is what the policymakers say is one thing... And actions speak louder than words," said Peter Redward, a strategist at Deutsche Bank in Singapore.

Indeed, in Indonesia's case, few expect a reversal of the trend last year, when foreign investment approvals plunged 41.5 percent to $9.03 billion from $15.42 billion.

And a calmer situation in the southern Philippines could take the country's risk factor down a notch, but would not prompt a deluge of new direct investment.

"There are a lot of other things that have to be done, especially in regards to corruption... There are security issues in Manila and elsewhere that are quite independent from terrorism," said Bob Broadfoot, director of the Hong Kong-based Political and Economic Risk Consultancy.

Above all, the Philippine government had to win its battle with its bulging budget deficit.

Still, Manila can be relieved that its situation is much less precarious than Indonesia, which is dealing with external debt of over 100 percent of gross domestic product, several brewing political scandals, and a handful of separatist movements.

"Just look at the volume of distressed assets that Indonesia is holding and not selling," Broadfoot said.