In May the Philippines took many international observers by surprise when it posted the highest growth rate in Asia for the first quarter. The archipelago nation’s economy grew 7.8 percent from the same period last year, narrowly edging out longtime pacesetter China’s 7.7 percent.

But a number of international law firms weren’t surprised in the least.

“In Southeast Asia, it’s by far our biggest revenue generator, especially on the capital markets side,” says James Grandolfo, the Hong Kong–based Asia capital markets group head for Allen & Overy. “We have more people involved in Philippines work than any other jurisdiction in Southeast Asia.”

Paul Hastings Hong Kong partner Patrician Tan Openshaw agrees. “It’s our number-one priority in Southeast Asia,” she says. “The quality of work we’re getting there is phenomenal.”

Other firms that are targeting work in the Philippines include Sidley Austin, DLA Piper, Cleary Gottlieb Steen & Hamilton, Linklaters, and Milbank, Tweed, Hadley & McCloy. The country doesn’t allow foreign firms to open offices there, much less practice local law, so domestic firms like Picazo Buyco Tan Fider and Santos, SyCip Salazar Hernandez & Gatmaitan, and Romulo Mabanta Buenaventura Sayoc & de los Angeles have also benefited from the Philippine boom.

Much credit for the boom goes to President Benigno Aquino, who took office in 2010 and has made both fighting corruption and upgrading the nation’s infrastructure top priorities. Public spending on infrastructure has attracted the participation of the country’s large business conglomerates like San Miguel Corp., which has been diversifying away from its core beer and food businesses. In April the company successfully bid around $250 million to build an airport expressway in Manila.

“San Miguel is switching the emphasis of their entire businesses into infrastructure to take advantage of the growth I think you’re going to see there,” Grandolfo says.

The Philippine economy is dominated by a handful of large family-run conglomerates. Along with San Miguel, these include Ayala Group, LT Group, JG Summit Group, and GT Capital Holdings, among others. Many of these already-listed companies have turned to the surging Philippines Stock Exchange over the past two years to restructure their holdings and “re–IPO.”

In April, Allen & Overy advised LT—known for its tobacco and spirits holdings—on a record $920 million equity offering, while Sidley Austin acted for the underwriters. The two firms had opposite roles a year before on GT Capital’s $440 million initial public offering. Earlier this year, Paul Hastings advised a division of Ayala on a $300 million share placement.

“The last two years has seen the most significant run we’ve had,” says Grandolfo of capital markets activity in the Philippines. “The deal sizes are getting pretty significant, which is also a good sign of the development of the market.”

But Alexander Lloyd, a Sidley Austin Hong Kong partner who oversees the firm’s Philippines work, isn’t so sure that the volume of deals is sustainable. He notes that almost all of the big deals have come from the handful of conglomerates.

“The limitations are there are only a limited number of families and businesses that need this type of restructuring,” says Lloyd. “My personal expectation is that there will be few of these mega re–IPOs going forward.”

He urges caution to firms and investors whose heads may have been turned by the strong growth figure. “I think it has a lot of potential, but I’m not naïve about this,” says Lloyd. “We have to be cautious about the level of resources we dedicate to the Philippines. I think one has to be careful about getting overexposed.”

Indeed, despite the growth, the economy of the Philippines is still relatively small. According to World Bank 2012 figures, the country of 97 million people has a gross domestic product of around $250 billion. That compares to Indonesia’s GDP of $878 billion, divided among 247 million people.

The relatively low level of foreign investment in the country is also concern for law firms. According to the United Nations Conference on Trade and Development, foreign direct investment in the Philippines totaled just $2.8 billion in 2012. In Indonesia, the comparable figure was $19.9 billion; in China, $121 billion.

There are restrictions on foreign ownership of assets in the Philippines, and regulatory uncertainty also discourages overseas investors. Roderick Salazar, a partner at local firm Fortun Narvasa & Salazar, says a number of his international mining clients are hesitant about moving into the Philippines because the government has yet to finalize a long-awaited update to regulations in the sector.

“It’s tough to sell projects to prospective investors,” he says. “I think they want the certainty of rules and regulations in place.”

There are also still questions about how much progress Aquino can really make tackling the country’s infrastructure and corruption problems.

“Corruption remains a problem, as it is in the rest of Southeast Asia,” says Christopher Stephens, general counsel of the Manila-based Asian Development Bank.

Nervousness about the sustainability of the Philippines’s boom has played a role in the country’s stock market tumble over the past two months. From May 15 to June 25, the Philippines Stock Exchange index fell some 22 percent.

Openshaw says many international investors have decided to turn back their attention to an apparently resurgent U.S. economy. “It’s not surprising for international investors to want to take profits where they can, to shift their investments into more stable markets,” she says.

But Openshaw says the stock market drop isn’t going to derail the larger growth story. “The good thing about the Philippines is that the fundamentals are still there and local players are still very liquid,” she says.

Though he says there has been lull in deal activity, Grandolfo is similarly confident. “People are just saying, well, we need to wait for things to settle down,” he says.

That may not be long. The stock market is already partly recovered from its June low, and new deals continue to enter the pipeline. Robinsons Retail Holdings, a division of JG Summit, last week filed an application to hold an IPO that expected to raise $924 million—a new record for the country.

“It may not be as crazy as it has been in the past year, but that’s okay,” says Grandolfo. “It’s been a crazy last year and half."

Email: tbrennan@alm.com.