Blowing hot and cold in the
Philippines By Scott B
MacDonald
Last week Philippine President
Gloria Macapagal-Arroyo gave her seventh State of
the Nation address. She took the high road,
stating that the country was "well on its way" to
becoming a developed country by the end of her
term in 2010.
Speaking before a joint
session of Congress, she provided her "blueprint
of development", which aims to push the
Philippines into the "First World". She
emphasized, "The elections and
politicking have ended; it is
time to serve the country unselfishly."
While the Philippines' political class
listened to the president's address, the rest of
the country was probably a little more concerned
about the authorities' urging of the public to
preserve water and electricity as a prolonged dry
spell in the traditional rainy season caused
blackouts. While the current situation can be
blamed on the delay in the seasonal rains and
typhoons, circumstances point to another severe
and growing problem - the country's power grid is
in dire need of repair and expansion. It is
estimated that the Philippines needs to construct
about 6,000 megawatts of new power-generation
capacity over the next 10 years to stave off a
similar round of power shortages that occurred in
the early 1990s.
There are two Philippine
economies - one with aspirations and promise of
regaining lost ground on the development front in
terms of upgrading infrastructure, reducing
poverty, and providing a stronger foundation for
sustainable economic growth; and the other that
remains mired in the same old tired politics of
corruption, a restless military, poverty, and two
insurrections that the security forces are
incapable of defeating and which leave an ongoing
law-and-order problem in the countryside. The
second Philippines has hobbled the development of
the first, leaving an inadequate infrastructure
both in human and physical terms. Michael Tan, a
medical anthropologist at the University of the
Philippines, stated in May: "We are a poor
country, but we do have resources. They just get
swallowed up by corruption."
In 2006 and
early 2007, the Philippines was more of the first
economy, characterized by strong economic growth
and robust exports, falling inflation, and some
significant strides in fiscal reform (through a
stringent implementation of value-added-tax
reform) and spending constraints. The government
also moved ahead on reforms encompassing the civil
service, tax evasion, the social-security system,
and efforts to monitor public enterprises better.
Remittances were also strong, and the government
was able to pre-pay external debt. Badly needed
foreign direct investment was close to US$2
billion in 2006, a substantial improvement over
the prior year.
However, political
pressures remain a factor. In particular, there
was some let-up on the fiscal side prior to this
May's elections. This month, the government
reported a budget deficit of P41 billion ($909.5
million) in the first half of this year, 31%
higher than its target, as tax revenue fell short
of expectations. Considering that the government
is seeking to narrow the gap to P63 billion this
year before it is completely balanced in 2008, the
miss was disappointing. The miss also evoked a
response from the London-based credit-rating
agency Fitch: "In the absence of a significant
improvement in tax collection, it will not be
possible for the Philippine government to
implement its ambitious - and much-needed -
infrastructure-development program."
The
infrastructure-development program remains the
government's main hope to lift the economy. In
Arroyo's speech, it was emphasized that the
government will invest more in human and physical
infrastructure to improve business confidence,
create jobs, and establish broader social safety
nets through a combination of education, cheap
medicine, housing, and better educational
facilities. She stated: "[In] the next three
years, we'll see record levels of well-thought-out
and generous funding for the following priorities:
investment in physical, intellectual, legal and
security infrastructure to increase business
confidence."
Yet in raising capital to
finance the infrastructure program, there has to
be a higher level of confidence in the
Philippines' ability to follow through with reform
and reduce corruption and political interference.
It is also necessary to avoid any systemic
vulnerabilities, as in the case of its banking
system, which is still burdened with a high level
of non-performing assets and poor transparency and
disclosure. The International Monetary Fund noted
in its Article 4 Report early this year that the
root cause of this vulnerability is that "progress
in resolving non-performing assets has been
relatively slow, a result of the fiscal situation
constraining the possible use of public money, and
bank supervisors being hindered in executing their
duties by a lack of legal protection".
The
Philippines' economic development is further
complicated by external factors. The housing slump
in the United States has raised (and is likely to
continue to raise) concerns about an economic
slowdown in the world's largest economy. This is
important for the Philippines, as it counts on the
US market for about 18% of its exports. Moreover,
the US subprime factor is causing global investors
to reassess their appetite for riskier assets,
which is certainly a factor for the junk-rated B1
(stable)/BB (stable) Philippines.
There
are plenty of exceptional companies in the
Philippines, but the recent downturn in the Manila
Stock Exchange may not be over, giving both
domestic and international investors pause. Over
the last week, some $1.56 billion was shaved from
their value. Those prices could go lower,
especially if there is an ongoing linkage to the
ups and downs of the US subprime market, a
financial drama that promises to take some time to
unwind.
The Philippines sits at another
crossroads in its economic development. While
there are strong aspirations to reform the economy
and improve the national well-being, serious
roadblocks remain. The most serious of these
include political pressures, corruption, and
vested interests. The ability of these factors to
erode confidence in the Philippines only
reinforces the country's vulnerability when faced
with the often fickle nature of international
investors. The combination of the two has the
potential to be a dash of cold water on the
Philippines' economic aspirations, just as the
country seemed to be making significant headway.
Scott B MacDonald is senior
managing director at Aladdin Capital and a senior
consultant at KWR International.
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