Books on The Philippines
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Update No: 008 - (02/09/04)
The new administration of President Macapagal-Arroyo has
correctly identified the twin problems of fiscal deficit and burgeoning public
debt as the most urgent issues requiring the attention of government. To this
end the president has made only minor changes to her line up of cabinet
officials and, importantly, has kept intact those in key economic portfolios to
ensure continuity of policy. Relations between the administration and the
legislature are reported now to be much better than before and with a regular
programme of dialogue and consultation implemented at two levels: on the one
hand the president is reported to be meeting weekly with leading key committee
chairs and other legislators while her Cabinet members are also meeting with the
legislature in an effort to shepherd key legislation through Congress. Whether
this can be translated into hard decision making remains to be seen. Already
there are signs that the legislators are seeking to engage in horse-trading and
in a watering down of the government's austerity programme.
Indeed, there appears to be growing impatience among many sectors of the
community at the slow pace at which the reform programme is coming together and
whether indeed there is an overall political willingness to make the necessary
Against this background, the local press has given considerable prominence to a
study released by a group of prominent academic economists from the University
of the Philippines who have sought to raise the level of debate over the deficit
problem and provide government with a road map for dealing with the fiscal
crisis facing the country. Unfortunately, many in government and Congress still
seem to be in a state of denial.
Generally the report from the University of the Philippines recommends a
specific action plan and timetable to raise more than Php140 billion in
additional revenue. It has been well received by those within government
although whether it will lead to a more sober assessment of the problems facing
the country is open to question. The president has said that sacrifice will be
needed by all sections of society and made the first move. A new executive order
being prepared within Malacañang Palace will suspend all overtime pay and new
benefits for government employees as well as cutting down on other perks
including foreign and local travel, training seminars and entertainment. The
government is targeting savings of up to 10 percent in salaries and in overhead
costs and to peg overall spending of government, social welfare and capital
outlays at 2004 levels for the next five years.
Indeed, faced with foot-dragging and attempts to shift the buck by a number of
groups, President Arroyo declared that the country was already in a state of
"fiscal crisis." While this may have been an overstatement in as much
as the country is not yet going to default on its debt payments. It served as
shock therapy and as a means of focusing on the urgency of dealing with the
problems the country faces.
So where is it all heading?
Already it seems the government may be going soft on the reform agenda and
is not prepared to take the really tough decisions necessary to make a real and
The UP paper suggested phased action on a number of fronts sufficient to stop
the immediate haemorrhage in public finances while at the same time changing the
paradigm in which revenues of government are collected and disbursed to pave the
way for an efficient (and smaller) public sector in the future.
Among the key measures suggested by the UP academics was an immediate reduction
in the Priority Development Assistance Fund (PADF) of the legislators - commonly
referred to as the "pork barrel" - to 50 percent of its current
levels. Some legislators (albeit a small minority) are even prepared to forego
it in its entirety. Instead, the government has opted to reduce the pork by only
40 percent - and even that level is still under negotiation by all accounts.
Secondly the report urged the government to reduce the Internal Revenue
Allocation (IRA) to local government units by some 30 percent. Instead it has
opted to freeze these allocations for 2005 at 2004 levels.
Both the PADF of the legislators and the IRA of local government are highly
anachronistic and do not sit well with a proper programme of governance. Rather
they reflect the system of patronage and privilege so entrenched in the
Philippines and which President Arroyo, had she the will to do so, could have
set out to dismantle.
The anachronisms in the pork barrel fund are well known and well rehearsed.
Basically each legislator in the lower house receives some Php65 million a year
while senators receive Php200 million each year. The money is set aside for
legislators to use in projects that they themselves nominate, select the
contractors and oversight the implementation. International agencies have
estimated that up to 40 percent of the value of contracts is lost in corruption
and kickbacks and the pork barrel is a major reason why so many facilities built
in the Philippines are sub-standard.
The internal revenue allotment scheme is equally flawed since it does not
discriminate between rich and poor areas of the country - every local government
unit receives the same proportion of national taxes paid within their
jurisdictions. Originally the IRA was set at 15 percent of tax gathered but
Congress, for political reasons, increased it to the current level ahead of the
1998 presidential election in order to garner favour with the electorate.
While the richer cities are in surplus as a result of the IRA, the majority of
local government units, especially those in rural areas, are hard pressed to
meet their immediate expenses. In such circumstances, the PDAF is often their
only recourse to developmental funds.
Taken together the two revenue allocation measures are a major factor in the
delivery of sub-standard services and projects throughout the Philippines.
Yet it is looking increasingly unlikely that the new administration will do
anything to fundamentally alter the situation. Let's face it; if the government
is going to do anything bold then it will have to be done before the end of the
year. What we appear to be seeing is the same "Band aid" approach to
problem solving that we have come to expect in the past.
The other side of the coin is the reform of the public corporations, starting
with the disposal of the energy generation and transmission assets of the
Napocor. Here again, the litany coming from government is that it wants a fair
market price and will not give into a fire sale. Fair market price depends on
having a willing buyer and a willing seller. While it is all very well to talk
about transparent international formulae for calculating asset value, the
external environment cannot be ignored either, especially when the future
earning potential of those assets are factored into the equation.
So while the president is pressing ahead with her reform agenda, everyone
appears to be waiting for someone else to make the first substantial move.
Judged by the benchmarks set by UP, the government so far appears likely to come
up short and from that it is not hard to draw your own conclusions.
Inflation forecast to exceed the yearly target
According to the latest survey data issued by the Bangko Sentral ng
Pilipinas (BSP), consumer prices in August will likely surge beyond 6 percent
and may go as high as 6.6 percent. While the inflation rate for the first half
year remained within the government's predicted band for the year as a whole -
based on the 1994 index, consumer price inflation in the first seven months of
the year stood at 4.3 percent, within the four to five percent target range - it
has been rising in recent months.
At the start of the year, the inflation rate stood (on an annualized basis) at
3.5 percent but since March it has been on a sharp upward trend. The rate rose
to 6.1 percent in July and will again be above 6 percent in August. BSP economic
modelling suggests that for the year as a whole inflation will now be in the
range between 5.2 and 5.5 percent and is likely to remain above the 6 percent
level in the coming months.
Aside from the higher expected prices of imported commodities and especially oil
and oil products, another factor impacting on the inflation rate at present is
the fluctuation in the price of agricultural commodities. Recent heavy rains and
flooding throughout the Philippines has sent prices soaring in the agricultural
and vegetable markets in recent weeks and this too will impact on the inflation
rate in coming weeks and months.
The Central Bank continues to take the view that the underlying inflation in the
economy is supply-side driven and as such has resisted pressures to tighten the
According to the latest government figures; total merchandise imports for the
first half-year rose to $19.938 billion resulting in a trade deficit of $1.204
billion. For the same period last year the deficit amounted to $1.344 billion.
Imports in June totalled $3.45 billion and were up 17.8 percent on June 2003
levels (in US dollar terms). Total trade for the year now exceeds $38 billion
and is up by more than 6 percent on levels in the same period of 2003.
Spending on oil imports (fuel and lubricants) rose by a massive 119 percent in
June as compared to June 2003 and totalled $517.54 million - around 15 percent
of the total import bill. Electronic components accounted for 41.4 percent of
imports and that category was up 6.7 percent on the same month last year. While
this was taken by government officials as an encouraging sign that the
electronic sector would remain buoyant and continue to expand, it has been
pointed out that the country's electronic exports are not growing as fast as
those of other Asian countries. As a result the Philippines continues to lose
out in terms of global market share.
According to Neda Secretary General, Romulo Neri, consumer demand is also on the
increase, despite the belt-tightening being urged on people by the government.
Imports of passenger vehicles expanded by 24.8 percent during June (on a
year-on-year basis) while consumer durables went up by 13 percent. Evidently
there is plenty of purchasing power still in the system.
Exports continue their climb
Export earnings in June rose by 8.2 percent as compared to levels in June
2003 to a total of $3.13 billion. However, the June increase was less than the
15.3 percent year-on-year rise recorded the previous month. The (relatively)
pleasing June result puts cumulative exports for the first half of the year at
$15.89 billion which is up by 9.4 percent over the same period last year and
places the government within sight of its goal of achieving at least a 10
percent enhancement of exports for the year as a whole.
While the result is a pleasing one when measured by recent past performance, it
pales into insignificance when compared to the performance of other regional
economies. Thailand's exports have risen by 29 percent in the same period,
Taiwan by 24.5 percent and Singapore's non-oil exports have risen by 20.9
percent. Even the Philippine Exporters Confederation (Philexport), the umbrella
organization of exporters, is reported to be unhappy with the country's export
performance in June, saying it was below expectation.
Reflecting global trends, export sales from the electronics sector' surged by
17.7 percent year on year in June to $2.275 billion from $1.93 billion a year
ago. Electronics goods accounted for almost 69 percent of total exports. However
some of the more traditional and labour intensive sectors of the economy fared
less well. The garments industry reports a decline by 15.9 percent in the same
period, textiles fell by 15.8 percent, footwear by 45 percent, wood manufactures
by 49.5 percent and travel goods and handbags by 42.8 percent.
In part, political unrest in the country and fears for safety played up by
reports in the international media have meant that fewer international buyers
travelled to the Philippines or placed orders with Filipino companies for fear
that orders would not be fulfilled due to political unrest. It will take some
time for confidence to be restored. Furthermore there are reports that some US
companies are refusing to place new orders with Filipino fears "out of
patriotic duty" and as retaliation for the withdrawal of Filipino forces
from Iraq. Such actions are usually transitory so long as orders are only
delayed, but if replacement sources are found, it could mean the permanent loss
of export opportunities for the country.
GDP Growth remains robust for now
Despite earlier fears of a slowdown in the second quarter, the final tally
by government suggests that the economy grew at a robust pace. Real gross
domestic product (GDP), based on 1985 prices, climbed at a faster rate of 6.2
percent from 4.2 percent recorded a year ago. In value terms, the figure rose to
Php279.037 billion from Php262.861 billion last year. At current prices, GDP
increased to Php1.153 trillion from PhP1.025 trillion.
Meanwhile, gross national product, or GDP plus net income from abroad, grew by
5.7 percent in the second quarter to Php302.276 billion (at constant prices),
from Php286.025 billion a year ago.
For the first half of the year, GDP grew by 6.3 percent to Php548.742 billion
from Php516.099 billion last year. GNP rose by 6.1 percent to Php593.137 billion
from Php559.098 billion.
Despite the pleasing result, economic analysts remain unimpressed since much of
the growth is fed by remittance-based consumption. For example the explosive
growth in cell phone services and the phenomenon of SMS (text-based) and
multimedia messaging makes a significant input into the overall level of GDP
without adding anything to the long-term industrial capacity of the country.
Increases in the price of oil and foreshadowed increases in the cost of
utilities and government services will fuel inflationary effects in the economy
during the second half year and prove regressive to the overall level of growth
in the economy.
Gross International Reserves Dip in June
The Gross International Reserves (GIR) of the Philippines Central Bank
dipped by 1.2 percent in June to $15.990 billion. This was the second straight
month in a row that reserves fell. The highpoint of the year was in May when
reserves stood at $16.55 billion. The all-time high of $17.3 billion was
achieved in March 2002.
As of 31 August 2004, the exchange rate of the peso to the US dollar was
56.216 while against the British Pound the rate stood at 100.992 and against the
Euro the rate was 67.8077.
Philippines leader sets out to halve poverty
The Philippine government recently presented the framework of an ambitious plan
to halve poverty in six years by attracting more foreign investment and
improving links between Manila and depressed regions, the Financial Times
reported on August 17th.
Romulo Neri, chief economic planner, said the scheme aimed to reduce the number
of poor Filipinos - those earning less than US$227 (€184) a year - from 34 per
cent to 17-20 per cent of the population by 2010.
Government economists said the new "medium-term development plan," a
version of which is presented by each new Philippine leader, would be completed
by October. President Gloria Macapagal Arroyo was inaugurated in June.
Mrs Macapagal's poverty reduction plan is the most ambitious yet. Former
president Fidel Ramos managed to reduce the number of poor people from 45.3 per
cent in 1991 to 36.8 per cent in 1997 after five years' growth.
Economists said Mrs Macapagal might find it harder to cut poverty because she
had pledged to wipe out the budget deficit - 200bn pesos (US$3.5bn, €2.9bn)
last year - within five years.
Mr Neri said the government was relying on higher economic growth, more foreign
direct investment and the implementation of infrastructure projects to realise
its goal. Programmes aimed at creating up to 10m jobs and granting subsidised
loans to at least 3m farm-based enterprises were also critical.
The government aims almost to double the average gross domestic product growth
rate between 2005 and 2010 from 3.9 per cent to 7.2 per cent.
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