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PHILIPPINES


 

 
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)

REPUBLICAN REFERENCE

Area (sq.km) 
300,000

Population 
84,619,974

Capital
Manila

Currency 
Philippine peso (PHP) 

President 
Gloria
Macapagal-Arroyo
 


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Background:
The Philippines, a country of some 80 million people, is strategically located at the heart of Southeast Asia. Situated between Taiwan, China and Hong Kong in the North, Singapore, Malaysia and Thailand in the West, the Pacific Ocean in the east and Borneo in the South, this archipelagic nation is composed of 7,107 islands.
The Philippine Archipelago is one of the largest island groups in the world and is divided into three major areas that correspond broadly to the ethnicity of the human population. These three groups are Luzon in the north with a total area of 104,687.80 sq. km.; the Visayas in the central region, 57,201.92 sq. km.; and Mindanao in the south, occupying a further 94,630.10 sq. km.
This island chain stretches more than 1500 km from north to south and more than 1000 km from west to east. Less than 400 of the islands are permanently inhabited.
The majority of the people are of Indo-Malay descent although in many cases mixed with Chinese and Spanish ancestry. Many Filipinos take Spanish and derived Spanish family names. In most cases their name relates to the estate to which their ancestors were indentured. 
Around 40% of the population lives in urban areas of which 13% of the total population lives in Metro Manila alone. Manila accounts for over a third of the country's GDP.
91.5 percent of the population are of Christian Malay descent, almost 5 percent are Muslim Malay and live predominantly in the south, close to 1 percent are ethnic Chinese, and a further 3 percent are otherwise categorized and are mainly from upland tribal groups. 
In recent years there has been a rapid shift from an agricultural based economy to a service economy - much of which however is within government services. There are moves afoot at the political level to reduce and rationalize the myriad levels of government activity but equally there are entrenched political interests opposed to any fundamental change. It is hard to see such reform emerging under the present constitutional system unless there is a massive shift to federalism and an empowerment of resources to finance local decision-making and to make it accountable.
The service sector now accounts for some 43% of GDP while agriculture - which remains the largest employer in rural areas - has been reduced to some 19%. Manufacturing now accounts for a further 24% and is the most important sector in terms of foreign exchange earned through exports. Inwards remittances from overseas workers also play a big part in ensuring adequate international reserves.

Philippines History
The earliest human inhabitants of the islands that subsequently became known as the Philippines are believed to be the Negritos (also known as the Aeta) who arrived some 30,000 years ago having crossed via a land bridge from the Asian mainland. They clashed with other immigrant waves from Borneo and Sumatra, who also made their way across then-existing land bridges. Subsequently, people of Malay stock came from the south in successive waves, the earliest by land bridges and later in boats called balangays. The Malays dominated the lowlands where they settled in scattered communities of kinship, which became known as barangays and which were ruled by local chieftains known as datus.
Permanent Spanish occupation followed in 1565 and the country was then named "Filipinas" after then King Philip II of Spain. By 1571 the entire country aside from the Islamic Sulu archipelago was under Spanish control - often exerted via Mexico and without the knowledge of the administration in Madrid. At first the interest of the Spanish was more strategic than commercial and they viewed their control of the Philippines as no more than a stepping-stone to the rich Spice Islands of Indonesia.
Following Admiral Dewey's defeat of the Spanish fleet in Manila Bay, the United States occupied the Philippines. Spain ceded the islands to the United States under the terms of the Treaty of Paris (December 10, 1898), which ended the war. The United States continued as the colonial master of the Philippines during most of the first half of the 20th Century.
As a result of the Japanese occupation during World War II, the guerrilla warfare that followed, and the battles leading to liberation, the country suffered great damage and a complete organizational breakdown. Despite the shaken state of the country, the United States and the Philippines decided to move forward with plans for independence. On July 4, 1946, the Philippine Islands became the independent Republic of the Philippines, in accordance with the terms of the Tydings-McDuffie Act. In 1962, the official Independence Day was changed from July 4 to June 12, which commemorates the date of independence from Spain as originally declared by General Aguinaldo back in 1898.
After the Second Word War, the Philippines enjoyed one of the most prosperous economies in Asia. It was proud of a per capita GDP that was second only to Japan within the Asian region.
Yet the economic miracle that swept through Asia during the 1960s and 70s, for the most part, swept past the Philippines leaving it untouched. The reasons for the failure of the Philippines to grasp the opportunity to transform economically are complex. At risk of oversimplification, it could be argued that whereas elsewhere in Asia, political emancipation followed economic emancipation, the Philippines was already a "democracy" albeit one that had more in common with the political society of eighteenth century Europe than a modern post war democratic state. The political elite controlled the country and shared power and the spoils of power (and largely still do so). In these circumstances, fundamental economic reform never really had a chance.
In 1972, President Ferdinand E. Marcos (1965-86) declared martial law, citing growing lawlessness and open rebellion by the communist rebels as justification. Marcos governed from 1973 until mid-1981 in accordance with the transitory provisions of a new constitution that replaced the commonwealth constitution of 1935. He suppressed democratic institutions and restricted civil liberties during the martial law period, ruling largely by decree and popular referenda. The government began a process of political normalization during 1978-81, culminating in the reelection of President Marcos to a 6-year term that would have ended in 1987. The Marcos' government's respect for human rights remained low despite the end of martial law on January 17, 1981. His government retained its wide arrest and detention powers. Corruption and favoritism contributed to a serious decline in economic growth and development. 
The assassination of opposition leader Benigno (Ninoy) Aquino upon his return to the Philippines in 1983, after a long period of exile, coalesced popular dissatisfaction with Marcos and set in motion a succession of events that culminated in a snap presidential election in February 1986. The opposition united under Aquino's widow, Corazon Aquino, and Salvador Laurel, head of the United Nationalist Democratic Organization (UNIDO). The election was marred by widespread electoral fraud on the part of Marcos and his supporters and an uprising followed. Marcos was forced to flee the Philippines in the face of a peaceful civilian-military uprising now known as EDSA 1 that ousted him and installed Corazon Aquino as president on February 25, 1986. 
It was under the presidency of Fidel Ramos, the first Protestant to hold the office, who was elected as the 12th President of the Philippines in 1992 that the economy began to transform. During the early years of the last decade, the Philippines belatedly started to realize its potential and was spoken of by many as being Asia's next "tiger" economy.
While Ramos put the country on a path of economic growth, the results were uneven and many - indeed most - remained untouched by the success of government policies aimed at encouraging manufacturing investment. Ramos' vice-president was a former local film star and college dropout, one Joseph Estrada. Estrada had actually stood as part of the opposition ticket in the 1992 race but under the Philippines constitution, the President and Vice President are separately elected and not part of a joint ticket. Under Ramos, Estrada had served as Chairman of the PACC anti-crime commission.
Joseph Estrada won the 1998 election and took office on June 30 of that year. Following his election, President Estrada formed the LAMP party out of a tri-partite alliance that had helped him get elected. Some members of former President Ramos's Lakas Party defected to LAMP. President Estrada publicly declared that the battles against poverty and corruption would be his highest priority. Unfortunately, things did not turn out as optimists had hoped and during the Estrada period the country again went into decline. 

Present Political Environment
President Macapagal-Arroyo, the transitional president who came to power in January 2001 after former President Estrada "vacated" Malacañang Palace, is coming to the close of her three-year transitional term. Elections will take place for a new President, as well as for other branches of government in May 2004. 
The administration of her predecessor, President "Erap" Estrada was marked as a period in which the foreign business community was to all intents and purpose shut out from the consultative process. Famed for his mistresses and his nocturnal drinking habits, the Philippines was governed by a cabal of Estrada cronies known as the "midnight cabinet" - his drinking buddies. It was a period in which statesmanship and statecraft were consigned to the slagheap. 
This is the legacy that the hard-working, US-educated economist inherited. 
Her first State of the Nation address delivered in July 2001 outlined her vision for her administration with goals set in a ten-year time frame. Obviously during the three-year transition rule, she could do no more than lay the foundations. She called on all segments of society to put aside political bickering and unite behind the national agenda.
Her vision (some call it her "wish-list") called for massive new investment to pump prime the economy, to create new jobs and to eliminate poverty within ten years: Reduced to a one-liner her vision was for "jobs, education, home ownership as well as food on every table."
Unfortunately, her call to unity has not been heeded and, among the political core of society, she has remained a controversial figure throughout her presidency. Faced with such disunity, on December 30 2002 while vacationing in Baguio City she announced with much surprise to all that she would not seek re-election in 2004 and that she would pass the mantle to others to complete her vision. However, this announcement did not stop the politicking and the harassment she has received from known supporters of Estrada who have used their money and influence to destabilize the administration. 
Undoubtedly, her tenure in Malacañang has been the antithesis of her predecessor. She is known by all to be a hard-working president who, indeed, has sought to push through her reform program at every opportunity. She is intelligent, articulate and can handle herself with ease on the world stage. In many respects she represents the presidential ideal. However, she sits atop a political minefield in which she is often thwarted by vested interests who resist change at every turn and she works within a constitution which - framed in the aftermath of the martial law period - places unusual constraints on presidential powers.
It is a truism to repeat that in the course of an average lifetime, the Philippines has gone from a position as one of the most affluent of Asian countries to being one of the poorest. For that, the larger part of the blame can be placed on the Marcos years and the martial law period that not only saw the looting of the national treasury but also brought back corruption and nepotism as part of the way of life that exists until today. But there are other factors too. In part it is a legacy of the post-Marcos (1987) Constitution, which both reduced presidential powers and abandoned a two-party political system in favour of a multi-party one. It can also be blamed on the Filipino attribute to "forgive and forget." An attribute that is admirable in many ways yet which in the murky world of politics, is a liability and a millstone around the neck of any genuine reformists.

The Outlook
The Philippines is one of Asia's oldest democracies and the Filipino people have a long tradition of being outspoken and politically active. This free-wheeling democratic tradition can sometimes appear quite distinctive from the ordered political process in many other Asian countries, yet it is an essential part of the vibrancy of the Philippines to allow the free exchange and flow of ideas.
It is certainly true that the recent history of the Philippines has been marked by several periods of turbulence. Much of this turbulence can be directly traced to the Marcos period and the politicization of the military forces that occurred during that time. The present (1987) Constitution enshrines the principle that these forces - both the military and the police - are subject to the control and direction of a civilian commander in chief. This is the President of the Philippines.
Unfortunately a small group of former and present military personnel have not accepted this principle and continue to cause local disturbances. The verdict remains out on the root cause of the coup attempt of July 27 2003, however it came at a time during which the administration of President Arroyo was starting to bite into the vested interests that had controlled much of the wealth and political power for a long period of time. Many of these people were aligned with the Marcos family and with former President Joseph Estrada who, himself, is on trial for plunder - a charge which carries the death penalty. Yet to the amazement of many foreigners, he is allowed a benign form of detention in a hospital "cell" from which he continues to entertain his friends, give interviews to journalists and conduct broadcasts (and even visit his mother at her home in Metro Manila). His treatment has been contrasted with that of two former Korean presidents, Chun Doo-hwan and Rho Tae-woo who appeared in court in Seoul in prison garb and in chains for lesser crimes.
In fact the government of President Gloria Macapagal-Arroyo has enjoyed wide support from a cross section of local society including the business community, the national police and the armed forces. Increasingly, government officials are being subjected to lifestyle checks to ensure that their assets are in keeping with their positions. Significant progress has been made in the recovery of ill-gotten assets and their redistribution to the most needy sections of society. Progress has also been made in the battle against corruption and government inefficiency during her term.
Recent decisions relating to the redistribution of the funds from the taxes levied on the poorest farmers during the Marcos era as well as the recovery of part of the assets plundered from the country by Marcos could make a significant impact on poverty reduction in the Philippines if they are actually distributed as intended. At this stage however, while the first battle has been won, the war is far from over and the result remains indeterminate. 
The present administration has made a major effort to cut the "red tape" by simplifying government procedures and setting time limits on government transactions. In many agencies the number of steps required to obtain government permits has already been reduced significantly. However the results so far are patchy and standards of service in many government agencies remain far from ideal. "Fixers" are still required in most dealings with government. Certainly, there is fear that with a less vigilant administration there will be a roll-back of any improvement.
Importantly, the Department of Labor and the National Labor Relations Commission remains antagonistic towards foreigners and foreign companies and is cited by many companies as a deterrent to investing in the Philippines. 
Among the changes introduced by the Arroyo administration is the government purchase system. Government procurement has been simplified and the procurement process made more transparent. A new procurement law, Republic Act 9184 came into force in January 2003 although the enforcement rules are still being drafted. Much of the procurement process has been placed online with buyers able to compare prices offered by vendors.
The government has also set in place various feedback mechanisms making use of internet and cellphone technologies to encourage the public to report corrupt or errant government officials. The government is committed to the investigation and prosecution of government officials found to be involved in corrupt activities.
Despite the progress made on many fronts, it has yet to make any real impact on most foreign-owned operations in the Philippines. There remains a wide gulf between government rhetoric, which emphasizes the level playing field, and local practice, which is to protect local interests.
The export-manufacturing sector is heavily reliant on both the United States and the Japanese markets and indeed, during a period of shrinking foreign direct investment, those two countries remain the most significant foreign investors into the Philippines.
Yet both these economies have been sluggish. As a result, Philippines manufactured exports - much of which comes from the electronics sector - are not growing as intended. Exports currently make up around 40% of GDP with electronics accounting for two-thirds of this total. Earlier the government had forecast an export growth for 2003 of around 5% but based on the performance so far, is unlikely to meet this target. The prediction now is for a 3% growth target.

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Update No: 002 - (01/03/04)

It is a worrying time for the Philippines. It has been a worrying time for most of the past twenty years-so is anything any different now?
"Yes" and "No" would have to be the answer to that question. Allow us to explain a little more deeply.
In just two years time, the Philippines will celebrate the twentieth anniversary of the ending of martial law. How will the country assess the results of those twenty years? "A time of wasted opportunity" will be the most likely answer. 
With most of the final statistical data for 2003 now in, we can take a look at the Philippines as it is today: On the social front, the country continues to have a level of poverty that officially stands at more than 30 percent but which unofficial (and more realistic) estimates put it higher than 50 percent. It also has one of the highest population growth rates-not in Asia-but in the world thereby ensuring that such attempts as have been made to lift people out of poverty will be overwhelmed by the sheer weight of numbers. Around 1.3 million new jobs have to be created each year - just to maintain the status quo. Around half of the national budget goes towards interest payments on the national debt that is also at an all time high (and continuing to grow) and the Philippines has a currency which, if not in free fall, is certainly on a slippery slope downwards. At the time of writing the peso had fallen to 56.35 to the US dollar-an historic all-time low. Manufacturing output appears to be stagnating, investment is down-both foreign and domestic-and exports are stagnating. This latter statistic is especially worrisome because over the past twelve months the peso is one of the few currencies that have depreciated substantially against the U.S. dollar (almost 5.4 percent) meaning that the Philippines should now be super-competitive and riding an exporting (and manufacturing) boom.
Government officials of course are quick to dispel talk of "doom and gloom" and point to the achievements of the administration: the economy grew by around 4.5 percent in 2003, the best result in some time; consumer (and wholesale) price inflation is low by recent standards. Three million new jobs have been created. And yes, the security organizations are starting to achieve real results against both the domestic terrorist organizations active in the country and against the kidnap for ransom gangs that have been preying particularly on the Filipino-Chinese community.
The administration has a point. It has produced results and in many important areas has restored both economic health and competent governance. In fact there is a lot happening beneath the surface that rarely gets reported except in the economic or financial columns of the specialist press. Importantly the Supreme Court has shown that it is prepared to uphold the rule of law and that it is not beholden to any one political party. Indeed the Supreme Court is now one of the most respected institutions in the country. Unfortunately the same cannot be said of many of the lower courts.
So with the election campaign now well under way (the campaign officially started on February 10) why is not President Macapagal-Arroyo, the U.S. trained economist who was appointed in 2001 to serve out the remainder of the term of former President Joseph Estrada, not riding on a wave of popularity that would carry her back into Malacañang Palace to serve a full elected term?
There are six contenders for the presidential race (See our Report for January 2004). If the public opinion polls are to be believed then President Macapagal-Arroyo is trailing behind Fernando Poe Junior, a movie actor with no previous political experience. Poe, or "FPJ" as he is popularly known is the official candidate selected by the opposition for no reason other than his "winnability." His candidacy-or more correctly, his popularity with the poorer sections of the community (that comprise over 80 percent of the electorate- has spooked the business and investment community and is behind the recent flight of capital from the stock exchange and the slide of the peso.

Politics of Patronage
Indeed the upcoming election reflects the sad fact that politics Filipino style is more about entertainment than it is about political and social agendas that would develop the country and put it on the fast track to success. As one commentator aptly described it recently: whereas in the past politicians invited entertainers to their rallies, now the entertainers have become the politicians. The sad fact is that the Philippines is stuck in a time warp of "politics of patronage" where office is sought not for uplifting the country but rather for determining who gets to divide the spoils for the next three or six years.
The most recent public survey conducted in January 2004 shows that the two main contenders, President Arroyo and FPJ have pulled ahead of the rest of the pack but that FPJ still maintains a commanding lead (36 percent to 27 percent). At the present time moves are afoot to disqualify FPJ from the race on the grounds that he may not be a "natural born Filipino" as required by the Constitution of those who would run for the presidency. The matter is before the Supreme Court which has said it will issue its ruling on the issue by early March. Not unexpectedly, FPJ's supporters are up in arms at the prospect that their candidate may be disqualified on a technicality and have threatened massive street action if the Supreme Court rules against them. This threat comes from a group that claims that their candidate is the only one who can unite the people.
So why is President Arroyo less than unpopular? In part the answer may lie in the fact that she did seek to make a difference-but in many areas she failed precisely because she could not carry Congress with her on a number of important issues. Remember, that here politics is about the division of spoils and in the manner in which it is played out in the country laws can only get passed and the bureaucracy will only perform, if those spoils are divided by those who command the perquisites of power. In reclaiming the ill-gotten assets of the Marcos family and the Coco levy funds sequestered by one of the country's most powerful business leaders, in conducting lifestyle checks on bureaucrats who are found to be living way above their means and in nullifying contractual arrangements that were clearly rooted in overcharging and corrupt practices, she has made powerful enemies. 
At the same time, and damagingly she has not escaped charges of partiality-that people within her own circle were engaged in the same practices that elsewhere she avowed that she was committed to stamping out. 
Thirdly her failure to abide by her eaarlier decision of December 30 2002 not to seek re-election (in the interests of uniting the country) has caused many-even within her own camp to doubt her sincerity and her motive in seeking re-election. Is she seeking office for the good of the country or for the good of her own political dynasty? 
Finally and perhaps most importantly, President Arroyo-despite her good intentions and sound policies-has failed (so far) as a leader of the country. Many have sought to excuse her poor leadership performance on the grounds that she was learning the job, that her fundamental strengths were in her economic expertise (which no-one doubts) and with her workaholic practices, but the fact remains that the country's politicians have failed to pass much needed reform measures while supporters of former President Estrada as well as adventurist military groups have all been successful in destabilizing the government. That their motives were self-serving does not enter into the equation. While they have not succeeded in overthrowing the government (and there was little thought that they could), they have been successful in distracting the government from its prime purpose of promoting a sound investment climate and economic growth that would lift the whole society. They have (successfully) created a climate of distrust.
The May election will likely be a watershed for this country. Already it is unlike any other in the extent to which it has degenerated already into an entertainment and media spectacle. 
The country really has three options facing it:
· Further descent into the politics of "bread and circuses" in which the poor will be kept poor (but entertained), the rich will continue to reshuffle the pack and divide the spoils and the Philippines will slip from the ranks of "developing country" to join the group of "least developed countries;" alongside confirmation that it is a Failed democracy
· A system in which technocrats continue to govern and reform continues to be made, albeit slowly and with inroads into the politics of patronage being governed by the salami slice approach;
· A return to authoritarian rule-either through the ballot box or through subsequent military adventurism.

The danger with any of the above scenarios is that the Philippines will remain in the vice of decision-making that is governed by short-term political expediency rather than bold steps that would introduce far reaching reforms thereby changing fundamentally the social contract. Yet an even greater danger lies in a fourth scenario that is not much mentioned in polite circles but which is sometimes quietly whispered when local politics becomes the topic of after-dinner discussion: and that is that social unrest will reach eventually a point where armed insurrection becomes the only means of changing the system. The fact that many in the middle class are disillusioned with the present political process but feel powerless to change it-other than voting with their feet by emigrating. The warning signs are there to see, in the meantime Filipinos-and the rest of the world can only wait and watch to see how the present election campaign is played out. 
So how does one sum the "progress" of the last eighteen years of democratic government? If nothing else, the political system has shown resilience and that for the most part the people of the Philippines remain committed to democratic institutions however imperfect they may be. That has not changed. And "yes" people are anxious for real change and frustrated that the present political elite is not delivering on their promise. Will some populist silver-screen savior, perform the role of the knight in shining armor and rescue the masa from their poverty? "Probably not" is the answer that even the most impoverished would give to that question "but at least he is one of us" is the rider that is invariably added.
In less than three months we will know which road the Philippines is taking. 

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FINANCIAL NEWS

Philippines plans swap to cut costs

The Philippines, whose budget is deep in the red, plans to cut its debt servicing costs by swapping up to US$4.4bn in existing bonds with a new global issue, the Financial Times reported on 11th February.
With US interest rates at a 45-year low and emerging market risk premiums near seven-year lows, Manila stands to make significant savings through an exchange to longer-dated and more liquid paper. The offer covers US$3.3bn in existing short-dated debt and US$1.1bn in already restructured Brady bonds.
The government is also hoping to borrow US$300m to US$500m through an international bond issue to help plug its budget deficit before national elections in May.
Sergio Edeza, national treasurer, told the Financial Times the government aimed to fund this years remaining US$800m budget shortfall in the first quarter.
"The best is really to finish and financing in the month of February," Mr Edeza said. "We will probably go for US$300m to a maximum of US$500m. If there is no demand, we will just do a pure exchange.
Unlike other Asian governments that have accumulated large foreign exchange reserves and paid down debt, the Philippines has seen its risk premium rise sharply. Yield spreads on its 10-year dollar bonds were at 474 basis points over US Treasuries, up 1.2 percentage points from last year's lows.
The bond swap offer, managed by Citigroup, Deutsche Bank Securities and JP Morgan, expired on February 12th and the new seven-year issue was priced on February 13rh.
The government will offer a switch from bonds due in 2006, 2008 and 2009, years of heavy repayment, to paper due in 2011, which has no maturing bonds.
Economists comment the Philippines treasury for its debt management but its position continues to deteriorate because successive governments and legislatures have failed to cut budget deficits. The Philippines has a projected deficit of 197bn pesos this year and requires at least US$1.8bn in foreign borrowing to help cover the shortfall. It has already sold US$1.05bn in this fiscal year.
Mr Edeza admitted the target of achieving a balanced budget by 2009 was "ambitious." He said the Philippines planned to improve its debt ratio to 50 per cent of gross domestic product over five years from 70 per cent.
Citigroup said: "This is good timing - there are big outflows from (bonds issued by) countries like Brazil to other markets. The risk-reward ratio on the Philippines is better, given its higher credit rating."
In January Moody's down-graded its foreign currency credit rating from Ba1 to Ba2, saying this year's elections threatened to further weaken public finances. It rates Brazil, whose bonds trade roughly on a par with the Philippines, three notches lower at B2.

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