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PHILIPPINES

NEWS REPORT
 

 

In-depth Business Intelligence

Key Economic Data 
 
  2002 2001 2000 Ranking(2002)
GDP
Millions of US $ 77,076 71,400 74,700 42
         
GNI per capita
 US $ 1,020 1,050 1,040 133
Ranking is given out of 208 nations - (data from the World Bank)

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REPUBLICAN REFERENCE

Area (sq.km) 
300,000

Population 
84,619,974

Capital
Manila

Currency 
Philippine peso (PHP) 

President 
Gloria
Macapagal-Arroyo
 

Update No: 011 - (01/12/04)

It is now six months since the presidential election which brought re-electionist candidate, President Gloria Macapagal-Arroyo back into Malacañang Palace to serve a full six-year term. The Philippine constitution provides for a one-term president and bans a president from seeking re-election. However, since Ms. Arroyo, the former vice-president, was appointed to serve out the unexpired term of Mr. Estrada when he vacated the office following massive "People Power" demonstrations in January 2001, the ban did not apply to her.
Ms. Arroyo won the May 2004 election by a convincing margin and there were high expectations of a sea-change in government. Gone were issues surrounding her legitimacy. She had received a strong mandate in her own right. 
The two critical issues that her government needs to deal with are the runaway fiscal deficit and the level of corruption that pervades all levels of government and all institutions in the country. Both issues need to be addressed concurrently if the Philippines is to make any headway in the battle against poverty - which remains on the increase in this potentially very rich country.
Yet, six months on, the pace of change has been glacially slow, to the point that many in the electorate are at the point of despair. 
Ms Arroyo is looking into the barrel of a fiscal crisis and has blinked. As a result, the country is facing the prospect of a credit-rating downgrade by the major international agencies. The magnitude of the crisis facing her government bears repeating:
The government is running a budget deficit which this year is expected to be around PhP200 billion ($3.57 billion or £1.9 billion)
Accumulated government debt as of the end of 2003 stood at Php3.5 trillion ($62.5 billion or £33.3 billion) and amounted to 76 percent of GDP.
Accumulated public sector debt at the same time stood at PhP5.9 trillion ($105 billion or £56 billion) and amounted to around 137 percent of GDP.
Upon assuming office, her new administration cribbed together a series of fiscal reform measures that embraced both improvements in tax collection efficiency (tax collections as a percentage of GDP have been falling since the mid-nineties, largely as a result of corruption within the tax office) as well as new measures to stem the hemorrhaging that is taking place in government coffers until the improved collection efficiency starts to bite.
Certainly, it was widely understood that "time was of the essence" in dealing with the problem and that the package of reform measures could be improved upon with the benefit of time - which the government did not have. The call went out for all sections of society to do their share in bringing discipline back to the country. Salaries of employees in the state sector were frozen or rolled back, especially within the loss-making government corporations, congressman were called upon to give up a portion of their country-wide development fund - a "pork barrel" fund which is widely seen to be the source of much corruption in the country. Supposedly meant to provide funds for development at the disposal of the congressional members and for dispersal within their legislative districts, it is widely held that more than half the money allocated to any given project, on average, goes to line the pockets of elected and appointed government officials (often, in rural areas, the appointed officials are family members of the elected ones).
The business sector and ordinary citizens would also have to tighten their belts with increases in electricity costs, higher fuel prices and increased taxes on items such as cigarettes, tobacco and liquor.
That of course was the grand plan and for a while the country appeared ready to swallow the bitter pill that was needed to restore the Philippines to economic health. But as is so often the case in this country, the reality is proving to be somewhat different.
Increasingly the government looks to be in a state of panic with its reform programme looking more and more shallow. While President Arroyo was attending the APEC summit meeting in Chile during the final week of November, legislators used the opportunity to reinstate their full country-wide development fund allocations back into the 2005 budget and were obviously using this as a bargaining chip in obtaining a concession from government in return for passage of the budget bill and the tax reform measure sought by the administration which, in any event have been watered down from their original intent. 
As of end-November, not a single reform measure had been passed by Congress, yet the government was still putting a positive spin on the result, claiming that things were "on track" and that the crisis had passed. Nobody is fooled by such statements. While some headway is indeed being made, the pace is excruciatingly slow and the end result is likely to fall way below expectations.

Mining and energy to provide major growth drivers
The administration may yet have a rabbit to pull out of the hat - that is if the country's Supreme Court rules in favour of allowing foreign investment into the country's mining sector. The Philippines is rich in metallic and non metallic minerals, principally copper, nickel and gold and many within the business sector are urging the government to follow the Australian path to development rather than slavishly follow the East-Asian growth model based on export-led manufacturing. Many believe that the country has already missed the boat as far as becoming a manufacturing economy is concerned.
Government planners agree. The latest report from the government's National Economic and Planning Authority believes that the sources of growth for the Philippine economy in coming years will be mining, power, and information and communications technology industries. Major investment is being sought for the mining and power sectors but much of it awaits a favourable ruling from the Supreme Court. This at least is the view of Socio-economic Planning Secretary, Romulo Neri. The message is a simple one: for the life of this administration, the government is putting its hopes in the mining and energy sectors to provide major inputs into the investment drivers. With a Supreme Court decision on the mining law now considered to be imminent, many see Mr. Neri's statement as sending a positive signal to the energy and mining communities ahead of the formal announcement by the Supreme Court.
The Philippines Constitution only allows foreign companies a maximum of 40 percent equity in large scale projects and previously the private sector has used work-around arrangements such as financial and technical service agreements (which basically involve transfer pricing arrangements) as the means to obtain foreign capital and expertise. The constitutionality of such arrangements has been questioned and it is on this issue that the Court is set to rule in early December. 

Moody's warns on Philippines debt
Moody's Ratings
Country           Rating           Outlook
Indonesia          B2                Stable
Malaysia            Baa1            Possible upgrade
Philippines         Ba2              Possible downgrade
Thailand             Baa1            Stable
Vietnam             B1                 Positive
Moody's Investor Services has warned the Philippines that it must take quick action to reduce its debt burden or face the likelihood of a ratings downgrade. The warning came in a statement from Hong Kong, which noted that the rating agency had placed the country's credit ratings under review for a possible downgrade. Such warnings are often given ahead of an actual downgrade as a means of cushioning the blow although the agency was at pains to state that no final decision had been taken.
Moody's warned that the country's fractious political system was hampering the government's efforts to pass much-needed revenue-raising legislation that would enable the government to balance its budget and reduce reliance on overseas borrowings. The government was originally aiming to balance its budget by 2009 but has already moved that out by one year to 2010. 
The agency noted that critical fiscal indicators in the Philippines including debt to revenue as well as interest payments to revenue are much weaker than those of other governments with similar ratings. It added that there were only "limited prospects for a fundamental turnaround on revenue performance."
Moody's has had a negative outlook on all of the Philippine government's long-term ratings since they were last lowered in January. 
Malacañang Palace responded to the news by expressing optimism that Moody's Investor Services would keep its credit ratings on the Philippines, hoping that it would recognise the government's efforts to improve its finances. "Our efforts to achieve fiscal stability are on the right track and we hope that the Moody's review team will recognize these in the conduct of its assessment next month," Press Secretary Ignacio R. Bunye said in a prepared statement. He may well have had his fingers crossed when he made that statement.
The Palace official said Congress had pledged to approve eight Palace-backed revenue-related bills that were expected to raise PhP80 billion in revenues, and PhP20 billion in savings for the government yearly. However, he admitted that aside from revenue measures, the government has much to do to improve its finances, and "put our fiscal house in order." This includes the restructuring of the power sector, and other measures to address capital market reform, investments, infrastructure, and trade. What went unsaid was the time-frame for passing these measures. We will be lucky if any of them see the light of day before the end of the year.

Exchange Rate
As of 30 November 2004, the exchange rate of the peso to the US dollar stood at 56.306. Against the British Pound the rate stood at 105.889 and against the Euro the rate was 74.228. Generally while most major trading currencies appreciated against the dollar during November, the Philippine currency has been effectively pegged to the US currency and has followed it downwards.
According to Central Bank governor, Rafael Buenaventura, the continued strength of overseas remittances in the run-up to the Christmas holiday season is expected to contain any further weakening of the peso and there are prospects for a mild appreciation in coming weeks. At worst the currency is expected to trade flat to the end of the year but there is increasing expectation of a fall below the 57 level in the New Year. 

Supreme Court rules on the Mining Act
In an en banc decision taken on 30 November and released on 1December, the Philippines Supreme Court has ruled by a vote of 10 to 4 with on abstention that the Philippine Mining Act, RA No. 7942 is constitutional. This ruling sets aside a contrary decision promulgated only last January.
The ruling penned by Justice Artemio V. Panganiban likewise ruled that the mining law's implementing rules and regulations (IRR) crafted by the Department of Environment and Natural Resources, as well as the Financial and Technical Assistance Agreement (FTAA) between the government and Western Mining Corporation Philippines (WMCP) executed in 1995 does not contravene the Constitution.
The majority decision was supported by the Chief Justice Hilario Davide. In view of its importance to the country and the international business community, the majority decision was issued in advance of the release of the minority opinions led by Justice Carpio. President Arroyo and her Cabinet members are due to meet with representatives from Moody's Investor Services in Manila on 2 December and the timing of the release was seen as critical to efforts to prevent a downgrade in the sovereign rating of the Philippines.
The decision is decisive and, as observers have pointed out, the Supreme Court is highly unlikely to reverse itself a second time. Therefore the business community now believes it can move ahead with confidence. Some negative reaction from the NGO sector can be expected, but the government and the mining industry believe this can be contained.
The mining industry, speaking through the President of the Chamber of Mines, Mr. Philip Romauldez, congratulated both the government and the Supreme Court on the decision which he said was the best possible outcome for the country since it covered not only the mining sector per se but other important elements of the extractive sector, including oil and gas.
Already the Chamber of Mines, working with the government, is planning an international road show to promote the opportunities for investment in the Philippines. The first such road show - to China, could take place before the end of the year. A major international conference on the mining sector is also planned for early February, probably between February 2 and 4 in Manila.
Other commentators have pointed out that the importance of the decision goes well beyond RA 7942: the Supreme Court has shown that it will take the economic well-being of the country into account when ruling on issues of national importance and constitutionality.
Other issues remain to be addressed including the role of local governments (at the present time local governments can use their powers to obstruct legitimate mining operations) and the issues of concern to the National Council of Indigenous Peoples. Nevertheless, the industry believes that these issues are minor as compared to the important decisions which have now been taken.
Since the government of the Philippines is now supportive of the development of a world-class mining industry for the country and since the Supreme Court and the administration are now in agreement in the manner in which that policy is to be progressed, remaining hurdles can be overcome. Indeed speaking before the Chamber of Mines on the evening of December 1, DENR Secretary Mike Defensor, himself a pro-mining advocate, pledged the full support of his department in dealing with issues at both the national and the local level.

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FOREIGN COOPERATION

Japan, Philippines open FTA talks

Delegates from Japan and the Philippines started their fifth round of negotiations recently for a new economic partnership, Kyodo News.
The closed-door talks, which are hoped to culminate in the signing of a free trade agreement covering goods, services and investment between the two countries may finally see a breakthrough, some informed officials said, although a lot still depends on what compromise each side is willing to make. 

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