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PHILIPPINES

 

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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: 023 - (28/11/05)

On the face of it the worst is over for President Arroyo and her annus horribilis. She has survived a summer of extreme discontent and confounded her political opposition. The economy appears to have carried on regardless. Now the peso is showing signs of improvement against the US dollar; inflation appears to have levelled off and international reserves are increasing. Foreign investment too, while paltry by global standards it is at least moving in the right direction - both in terms of FDI as well as portfolio investment. As a result, the stock market too is at a recent high. The IMF has revised upwards its predictions for domestic growth for 2005 and for 2006. Yes, predictions of a doomsday scenario appear to have been a tad premature.
But while the president and her team would wish to paint the positive numbers in Christmas lights, it is worth reminding ourselves that nothing has changed fundamentally. The Philippines continues to muddle through much as it has done for much of the recent past.
The peso is holding its ground thanks largely to the solid inflow of inwards remittances from overseas - a salutary reminder that more and more Filipino workers despair of finding work at home. The growth in reserves is due entirely to the same factor. Export growth is disappointing. Export income is growing at a miserly 3 percent per year according to the latest data and manufacturing output has stalled and may be in decline.
In mid-October the Philippines Supreme Court ruled with finality on the legality of the expanded VAT and the law was implemented on November 1. While the government has been quick to point out that again those who predicted that its introduction would be tantamount to setting off a doomsday machine were wide of the mark, others believe that it will take at least 6 months for the full repercussions to be coursed through the economy. Then of course there is the fact that we are only yet in the first phase of the EVAT. It is widely expected that the general VAT rate will be increased from 10 percent to 12 percent in the New Year sending a further one-time inflationary surge through the economy.
If Finance Secretary, Magarito Teves is accurate in his numbers, the implementation of the new law will raise around US$1.5 billion (PhP81 billion) for the government in 2006 alone. With the budget deficit this year expected to come in at around PhP140 billion, additional income from the expanded VAT regulations could see significant progress towards balancing the books. Yet many believe much more needs to be done to achieve true fiscal reform. Only last week, James McCormack, the head of sovereign ratings at Fitch said that the Philippines continues to face a serious problem in its public finances despite the recent implementation of the VAT measure and more is needed in order for the country to get out of its fiscal woes with finality. With Congressional elections due in 2007, the key will be to make sure that the improvement continues and that there won't be strong pressures on spending, McCormack added in his statement. (Perhaps he had one eye on the pork barrel allocations that are being reinstated in the 2006 budget now being debated in Congress.)
Nevertheless there are hopes that the consolidated public sector debt which increased rapidly from 2001 to 2003 may at last start to contract. Credit Suisse First Boston, in a recent report believes that on current trends the consolidated public sector debt will fall steeply from a high of 101.3 percent of gross domestic product (GDP) in 2003 to 67.1 percent in 2010.
So far so good: But the global environment in 2006 may be even less benign than in 2005 and bears watching. China is slowly reigning in the unbridled growth of recent years and the US economy too may be going the same way. The smart money suggests that US house prices have peaked and that values may be pulled back a little next year. This will stunt consumer spending which has been tied in large part to home equity and the ability of consumers to borrow to finance their consumption patterns. While the Japanese economy is now showing signs of renewed life, we cannot expect Japan to make up for slowdowns elsewhere and every indication is that global trade expansion will slow further next year. The Philippines cannot afford to be complacent.
There are other worrying signs on the domestic front that don't appear in any economic data but which should be given note without sounding too alarmist. The heat generated by recent political turmoil appears to have taken its toll on the usual Filipino tolerance. Political polarisation appears to be on the increase and the middle-ground is becoming deserted. This week a number of soldiers were killed in an ambush by communist rebels in which an army vehicle was blown up with land-mines and then strafed with gunfire killing at least nine occupants and injuring a number of others. 
Barely two days later, the press reported the killing of a group of farmers in Samar by government troops. The army claims the farmers were communist rebels, others claim they were simple farmers. The truth of the matter is simply not known. We can only observe that the local press itself claims that political killings of left-wing labour activists appears to be reaching alarming proportions in some parts of the country.
"Political killings escalate" roared one newspaper headline last week - and so it seems to many local journalists who claim there has been an upsurge of political killings of late. Waging a war on terror is one thing, but it seems that some are using the opportunity to settle political scores or get rid of newsmen. The latest newsman to be killed was Roberto "Robby" Ramos, a reporter with the Cavite-based Katapat News, who was shot last weekend by two men riding a motorcycle. He was the ninth journalist killed in the Philippines this year. As the press observed, since the ouster of Ferdinand Marcos in 1986, 99 journalists have been killed in the Philippines and none of those responsible have yet been brought to justice.
In short, while on the surface the numbers look good and, indeed, should be acknowledged as such, we remain as far as ever from achieving true political and economic reform that would give closure to the turmoil of recent years and provide the paradigm shift needed to get the Philippines out of its present rut. With the country now closing down for the Christmas holiday season and with the New Year expected to emerge upon us with new life into the Constitutional debate, there are still many reasons for sounding a cautionary note.

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