Asia Times Online article
By David L Llorito
Posted Oct 26, 2006
MANILA - Philippine President Gloria Macapagal-Arroyo may be suffering politically, with allegations of vote-rigging and state-sponsored human-rights abuses darkly hanging over her embattled administration. But the economist-turned-president is simultaneously riding a rising tide of good economic news, which is significantly shoring up her government's staying power.
In the first seven months of this year, net foreign direct investments registered with the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, reached US$1.15 billion, a 60% jump over the same period last year. Led by US, Japanese, German and British investors, foreign funds are pouring into manufacturing, led by outlays into paper, chemicals, electronics and steel, as well as services, including business process outsourcing, tourism, engineering and construction.
Healthy capital inflows are boosting the local bourse. Francis Ed Lim, president and chief executive officer of the Philippine Stock Exchange, notes that the stock market has recently reached highs not seen since the heady days preceding the 1997-98 Asian financial crisis. "I am sure fiscal reforms in the government have made us an attractive investment alternative," Lim told Asia Times Online. He contends that listed companies are expected to turn in bumper profits this year, due largely to the country's improving economic fundamentals.
In the past two-and-a-half years, as measured by gross domestic product (GDP) figures, real economic growth has averaged between 5% and 6% and state economic planners are confident the trend will continue this year and over the medium term. Foreign remittances, which are on pace to top $12 billion this year, still contribute disproportionately to domestic consumption and total GDP. However, economists contend that recent economic growth has been more broad-based, with agriculture and industry contributing more in percentage terms than in the past.
That performance has set Arroyo's spin doctors in upbeat motion. "The economy is on an extended bull run and we are confident that the people can keep the pace going until we finally achieve economic takeoff," she recently said to a meeting of local and foreign business people, where she attempted to drum up $3 billion of new investments.
Romulo Neri, director general of the National Economic and Development Authority (NEDA), says that apart from the $30 billion export-oriented electronics and cyber-services industry, new growth drivers such as agribusiness, marine products, mining and tourism, among others, will boost average expansion to around 7% by 2010, potentially putting the Philippines on par with fast-growing China, India and Vietnam.
More soberly, multilateral agencies credit the government's reform policies for the improved performance, particularly those measures that Arroyo implemented soon after the controversial 2004 presidential election. The International Monetary Fund (IMF) recently noted that until recently the Philippines had suffered from "policy drift", which resulted in mushrooming public debt and unwieldy external financing obligations. That, the IMF said, had left the economy vulnerable to both internal and external shocks.
Since 2004, Arroyo has undertaken significant belt-tightening reforms, including boosting the value added tax rate from 10% to 12%, the corporate tax rate and excise levies, which combined have substantially narrowed the fiscal deficit and stabilized national finances. Non-financial public sector deficit was slashed from 5.3% of GDP in 2003 to 2% of GDP by the end of 2005. Those reforms have importantly freed up funds for priority spending, including badly needed outlays for new infrastructure.
They've also helped to rein in galloping inflation, which has dipped from around 7.5% last year to currently below 6%. Those improving fundamentals have made the peso one of Asia's best-performing currencies this year, up more than 10% against the greenback, year-on-year as of mid-October. Some local and foreign analysts predict that the country is due for a sovereign risk upgrade, which the country hasn't seen for over nine years.
Good news, bad newsAt the same time, independent economic analysts say there is a drastic need for further reforms, and some fear that the recent spate of good economic news could lead to complacency. "There are clear positive developments in the economy. However, the picture continues to be a mix of good news and bad news, marked with a number of puzzling contributions," said Cielito Habito, economist from the Ateneo Center for Economic Research and Development, and former NED director general during the presidency of Fidel Ramos from 1992-98.
"Of the three key variables that matter most - prices, jobs and incomes - prices and incomes are showing some improvements, but the already bad jobs situation has gotten even worse," said Habito. He notes that despite strong economic expansion, new employment grew by only 2.3%, lagging the annual 2.6% expansion of the labor force, which has resulted in higher unemployment, now at around 2.9 million potential workers.
Habito also notes that despite the improving economic fundamentals, consumer and business confidence are still in the doldrums, due to the ongoing political crisis, rising unemployment and, in places, ineffective government stimulus. According to the BSP, consumer confidence in the third quarter was a negative 37%, worryingly unchanged from the second quarter. Rising global crude prices and increasing local labor costs, meanwhile, have hit business confidence, which declined from 31.6% in the second quarter to 21.7% in the third quarter of this year.
Government officials contend that recent reforms will take time to trickle down. "I think it's a hangover from last year's political crisis," said Dennis Arroyo, executive director of NEDA's national policy and planning, who is not related to President Arroyo. Election rigging allegations against Arroyo have recently led to mass street demonstrations, the resignation of 10 cabinet members and widespread rumors of a military takeover, which motivated the embattled president to declare a state of emergency in February.
"Remember that investment decisions lag by at least six months. Those [political events] are still impacting us. So there's an investment lag," said NEDA's Arroyo, who contends that once government spending kicks in for the third and fourth quarters, the private sector would be encouraged to accelerate their investment decisions. "We are well on our way to a 5.8% to 6.6% growth in 2007 and about 7.3% by 2010," said the official.
Other independent economists, however, are less optimistic. Joachim von Amsberg, the World Bank's country director in the Philippines, contends that an unresolved "paradox" is adversely affecting the economy's performance.
The Philippines, he said, is located in a "great neighborhood" of booming East Asian economies, with educated and English-speaking people, abundant natural resources and some strong and dynamic sectors like electronics and cyber-services. "Yet its growth rate has been below potential," von Amsberg said, noting that until now growth has been driven more by foreign remittances than domestic investment or rapidly expanding exports.
"Output per worker in the Philippines is up 50% between 1961 and 2003 as compared to 450% in other East Asian economies. It's not due to differences in educational attainment or human capital, but it's due to lower physical capital accumulation and productivity growth," he said. He contends that Arroyo needs to pursue a clearer, deeper reform agenda, which aims to ensure the credibility of contracts, open and competitive bidding for infrastructure projects, deregulate key economic industries and liberalize the financial system.
"Continuous attention should be given to reducing transactions costs through eliminating red tape, simplifying the adjudication process, and strengthening the integrity and capability of key regulatory institutions," he said. Clearly there is still much work to be done before the Philippines enters the ranks of Asia's powerhouse economies. Yet, slowly but surely, barring another major political hic-cup, the economic picture is improving.
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