Nomura sees increased Philippine infra projects

INFRASTRUCTURE development in the Philippines and its regional peers would continue to accelerate in the coming years as they improve project execution, Nomura Global Markets Research said.

In a note dated June 5, the research firm said states that prioritize infrastructure development have been making significant progress in project execution, especially in India and parts of Southeast Asia.

“We see a few reasons to remain optimistic that infrastructure development will accelerate in the medium term, particularly in India, Indonesia and the Philippines,” Nomura said.

India, Indonesia and the Philippines have addressed underspending issues, improved planning, simplified procurement rules, increased the participation of state-owned enterprises and strengthened project monitoring systems, it said.

“We remain optimistic that infrastructure development in these countries will accelerate in the next few years,” the research firm said. “Despite the recent improvement, there remains substantial scope for more progress, and governments are setting more ambitious targets to narrow this gap, building on earlier successes.”

It added that concrete progress in executing public infrastructure plans is boosting private sector participation from both local and foreign sources, helping to ease fiscal funding constraints that have increased after the coronavirus pandemic.

This year, the Philippines plans to spend 5.3% of its gross domestic product (GDP) on infrastructure, equivalent to about P1.29 trillion. Infrastructure spending is expected at 5-6% of GDP until 2028.

“While comparable data on infrastructure are not consistently available, proxy indicators such as the GDP share of the construction sector are showing increases in Indonesia, India and the Philippines,” Nomura said. “Specifically on spending by the public sector, capital outlays on infrastructure have similarly improved.”

In the first quarter, Philippine infrastructure spending rose by 7.3% to P196.7 billion from a year earlier, data from the Budget department showed.

Transport-related infrastructure makes up the bulk of projects in Indonesia and the Philippines, such as toll roads, airports, seaports and railways. “The overarching goal of their governments is to decongest economic centers and to support poverty reduction targets,” Nomura said.

Road infrastructure projects of the Public Works department and foreign-assisted rail transport projects of the Transportation department boosted infrastructure spending in the first quarter.

Nomura said fiscal constraints have forced India, Indonesia and the Philippines to increase public-private partnerships (PPP) and change regulations.

In the Philippines, PPP schemes are planned to finance about 30% of flagship projects.

In March, the government of President Ferdinand R. Marcos, Jr. approved 194 flagship infrastructure projects with total investments of P8.2 trillion. PPPs are expected to fund P2.5 trillion of the projects. 

As of May 9, there were 68 of such projects, 25 for implementation, nine for approval, 52 under project preparation and 40 under pre-project preparation.

The government has also come out with the rules that will enforce an amended Build Operate Transfer (BOT) law to improve transparency.

The revised rules, which aim to attract more private investments in infrastructure projects by addressing concerns on financial viability PPPs, took effect in October.

Meanwhile, Nomura said there is room to improve government spending without adding pressure to the national budget.

“Governance has been improving, and this could support public investment spending efficiency, which is key to increasing the growth impact of infrastructure projects in the face of higher fiscal constraints,” it said.

Closing the “efficiency gap” would increase Philippine economic growth by about 1.1 percentage points, Nomura said, citing data from the International Monetary Fund. However, a wider current account and fiscal deficit could affect infrastructure development.

“Governments in emerging markets in Asia after the pandemic have set ambitious fiscal consolidation targets that may be difficult to achieve, given a slowing economic environment and spending priorities, including infrastructure,” it added.

In the first four months of the year, the National Government’s fiscal deficit narrowed by 34.57% to P204.1 billion. This year, the government has set a budget deficit ceiling of P1.499 trillion, equivalent to 6.1% of GDP.

“In addition, imports are likely to surge with faster infrastructure implementation, widening current account deficits, as we have seen in the Philippines recently,” Nomura said.

The country’s current account deficit hit $17.8 billion last year, higher than $5.9 billion in 2021, according to central bank data.

The Bangko Sentral ng Pilipinas expects the current account deficit to end the year at a $17.1 billion, equivalent to -4% of GDP. — Keisha B. Ta-asan