Books on The Philippines
Philippine peso (PHP)
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
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
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
Moody's warns on Philippines debt
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
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.
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
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.
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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