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  2003 2002 2001 Ranking(2003)
Millions of US $ 80,574 77,076 71,400 43
GNI per capita
 US $ 1,080 1,020 1,050 135
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Update No: 018 - (04/07/05)

President Gloria Macapagal Arroyo has now completed the first year of her six-year term and perhaps it is time to step back and take stock. With the political noise again ratcheting upwards in recent weeks, the casual observer of the Filipino scene would be excused for thinking that nothing had changed in this rambunctious environment. Surely it must be one of Asia's most free-wheeling of democracies-and one of precious few democracies in Asia. Yes, Filipinos have a masochistic tendency to air their dirty linen in public-or at least to try and expose others unwashed garments-but that would be to miss the point.
The 1987 post-Marcos Constitution was intended to strengthen democratic institutions in this country and prevent any successor from revisiting martial law or any semblance thereof. An unfortunate side effect is that it has produced one of the most dysfunctional political systems in the region. Democratic institutions did not evolve in the Philippines; they were thrust upon it as a veneer laid over a feudal system of patronage politics. For better or worse dynastic politics is still the norm in this country and anyone operating within the political system has to take account of that fact. Change will not happen overnight. It never does.
Current controversies surrounding the administration can be viewed on two levels. On the one hand, the "political opposition"-be it the left-wing groups outside of the formal structure or those within the political elite who are shut out from the present government, is seeking to incite the population to moral outrage on the basis (in large part) of hearsay or allegations made by people whose motives are suspect. The objective is to go outside the legal framework and once again use mob rule as the determinant of the political process.
Whichever controversy you choose to consider, the common denominator is the same: vested interests are seeking to stem any effort at moving forward on political on economic or social reform.
This is not to condone wrongdoing by any official of course but rather to put matters in their proper context. It is integral to the local scene that any government official who runs against vested interests will come up against powerful forces who seek a return to the status quo.
Given all the variables in play, we would prefer to focus on the fundamentals. And the fundamentals are looking better than they have in quite a while.
After a shaky start, the president has, in recent months, shown her resolve and a determination to be not swayed from her chosen policy course. President Arroyo has stated clearly the direction in which she wants to move the country and she has set benchmarks by which her performance can be judged. She has assembled around her a senior management team that is professional, dynamic and certainly capable of implementing those policies if given the chance. Together that team is confronting and dealing with the brutal facts laid bare by past mismanagement of the economy.
There is much that remains to be done and we have all seen false starts before. We all know what is wrong - we read about it in the world's press. However, there have been many positive achievements also and it is these that are the focus of this update. 
Could things be better? Certainly they could be. But in the calculus of endless possibilities, the Philippines could also be doing much worse than it is right now. Were there to be any change in government at this time, chances that things would improve more rapidly, appear slim indeed.

The social contract
Now that the key tax reform measures are in place designed to address the fiscal problem of government, President Arroyo is already gearing up for what is now termed "Phase 2" of the government agenda. Whereas Phase 1 focused on the new legislation measures needed (and which by no means can be considered yet to be concluded), Phase 2 relates to programme implementation especially in the areas of poverty reduction, nutrition and education.
The president has said her commitment under the Millennium Development Goals (MDGs) is to reduce the incidence of extreme hunger and poverty from 34.5 percent in 1990 to 17.25 percent by 2015. She noted that extreme hunger in the country has already fallen to 27.6 percent in 2004 (according to government figures). The president also said she wants a universal elementary participation rate of 100 percent in the Philippines by 2015. Other components of Phase 2, according to the president, include increased tax collection efficiency, increased anti-corruption drives, an energy conservation and independence campaign and keeping prices under control with consumer watch programmes. "But most importantly, Phase 2 will be defined by bringing the benefits of the tough economic reforms of Phase 1 to the people. With more revenues at hand, we can now invest more in the vital social needs to achieve the Millennium Development Goals (MDG)," she has said.
Whereas Phase 2 emphasises programme delivery, Phase 3, on the other hand, includes political and constitutional reforms that the president and others believe would spur further development in the country. "These reforms include the review of the Constitution and the shift in the form of government from the present presidential form to a form that would further improve the country's economy," her spokesman Ignacio Bunye has said. Secretary Bunye noted that President Arroyo has expressed her preference for a Constitutional Convention over a Constituent Assembly in studying the shift in the form of government. 
If it reduces the dysfunctionality of the present system then the measure is deserving of support, but it is a big "if". What this country needs more than anything is a proper party political system to replace the fragmented system of temporary strategic alliances that is the norm here. At best, the Philippines might progress better in the short-term under a federal system of government in which the different regions are given greater autonomy to run their own affairs and raise their own taxes.
Within government, current austerity measures are already starting to bite. The Department of Finance has reported a budget deficit of PhP67.8 billion in the first five months of the year, well below the PhP98.5-billion deficit programmed for the first half of 2005 and this should give reason for encouragement that things are moving in the right direction. The five-month figure was also 12.4 percent lower than the P77.4-billion shortfall recorded in the same period last year. The government now expects this year's budget deficit to come in at around PhP151.25 billion, below the official estimate of P180 billion or 3.4 percent of gross domestic product. This scenario takes into account revenues to be generated by the new value-added tax, officials said. 
An even more ambitious target is to bring the fiscal gap down to PhP89 billion or 1.5 percent of GDP in 2006. One member of the inter-agency Development Budget Coordination Committee (DBCC) has said such targets are achievable following the passage of newly enacted laws, including the amended Value Added Tax (VAT) law. However, many observers consider that government estimates of improved tax collection efficiency appear to be out of line with reality.
Before passage of the VAT law, Congress had already approved an increase in the excise taxes on tobacco and alcoholic products, and a system of rewards and penalties for revenue-collecting agencies that exceed or miss their collection targets. Personnel changes at the senior levels of both the BIR and the Customs Bureau appear to be having the effect of professionalising the management of both these major revenue collection agencies. Of course, computerisation and basic crosschecking of data has also helped.
After amending the Value Added Tax (VAT) law, the government has set its sight on reviewing the fiscal incentives it dangles to large investors, including those who bring in foreign capital. Next on the legislative agenda is the rationalisation of fiscal incentives. This was one of the eight legislative bills the government had earlier listed as priority measures along with the simplification of the net income tax system. 
Other proposed measures that the Arroyo administration is expected to include on its latest priority list to Congress are bills amending the Bangko Sentral ng Pilipinas (Central Bank) charter, revising the Securities Regulation Code, establishing a Credit Information Bureau System, putting in place a Personal Equity Retirement Scheme, establishing a "Preneed Code" for the insurance industry and enacting a Lending Investors Law. It is also pushing for the repeal of the law providing for automatic guarantees by the national government, an anti-smuggling bill and amendments to the Social Security System charter, Land Bank of the Philippines charter and the Cooperative Code of the Philippines. Other measures on the list are a revised proposal for a new tax on text messaging, restructuring of the Internal Revenue Allotment to local government units, and the establishment of the National Revenue Authority to replace the Bureau of Internal Revenue. 

It's the economy, stupid
Despite the hype, these are hardly boom times. Many businesses, especially smaller businesses, are struggling and profit margins are certainly being squeezed - both by domestic inflation and other costs associated with high fuel and electricity charges as well as by the burden of additional taxes. Nevertheless, most companies appear ready to accept that a measure of short-term pain is the needed price to be paid for longer-term gain. As long as the economy continues to head in the right direction, the public at large also appears prepared to accept a certain measure of belt-tightening. 
The Philippine domestic economy expanded by 6.2 percent last year and put in the best result in 15 years. When benchmarked against its own recent performance, the government appears to be doing rather well. The problem comes when analysts step beyond the shores of the Philippines in search of a broader yardstick. When measured against other Asian countries, the Philippines remains one of the region's under-performers-even when China is discounted from the equation. This is the real challenge for the economic planners.
This year, government agencies are forecasting a growth rate of around 5 percent. This is slightly below last year's level but in the present climate would still represent a pleasing result, since forecasts for growth rates are down in most Southeast Asian countries this year.
Overseas remittances continue to provide the main driver of growth and are likely to remain so for the immediate future. However, with a slowdown in the global economy already evident, over-reliance on the deployment of overseas workers brings with it new vulnerabilities. Leaving aside issues related to the quality of such growth, which arise as a result of separation of families for extended periods and the onerous working conditions of OFWs in some countries and economic sectors (domestic assistants in certain Middle Eastern countries and entertainers in Japan come readily to mind), the real danger to the Philippines comes from the depletion of its own skilled workforce through lack of employment opportunities within their home country.
Certainly the creation of new job opportunities is high on the government agenda but until such time as additional resources become available for the expansion and improvement of social services within the Philippines - including the key areas of education and health care - then for the present it appears that the country - from the national government to individual families - has little alternative but to rely on remittance income to supplement local earnings.
Job creation in fact could be the Achilles heel of the economy should there be any rollback in the demand for overseas workers. Even at one million new jobs created per year, this still leaves a shortfall of several hundred thousand in jobs needed to keep pace with those entering the workforce. No amount of juggling of the statistics or redefining what constitutes unemployment can disguise the fact that the economy at its present level cannot support the burgeoning population. Excess labour is exported. No matter what might be trumpeted about the advantages of a young and growing population, in a country where up to 40 percent of children are suffering from one form of malnutrition or another and where educational services have declined markedly to the point where less than 50 percent of children complete their primary education, the case for rapid population growth is somewhat overstated.
Importantly, the new economic team is confronting the brutal facts of past mismanagement and is prepared to do something about them. There is quite a list already: removal of cross subsidies in the power sector, parity pricing of oil (have you noticed what has been happening elsewhere in Asia - Indonesia, Thailand and Malaysia for example as fuel subsidies are clawed back?) and clamping down on tax evasion to mention but a few.
Less noticed has been the issue of Executive Order No. 428 directing all government agencies to streamline business applications in order to cut red tape and provide an environment that is more attractive to potential investors. The devil of course is in the detail and it will take time for the effects of new measures to filter through the system. We can at least take comfort from the fact mentioned above, that there is a professional and close knit economic team in the driving seat prepared to play a collegiate role in seeing the process through to finality. For the Philippines, in the context of its recent history, that is no small achievement.

Investment as a driver of future growth
The Philippine economy is nothing if not resilient, thanks largely to inwards remittances that continue to fuel domestic expansion on the basis of consumption-led growth. The problem lies in the area of capital formation and investment. High population growth and rising prosperity can go together provided there is adequate savings and investment. In the local context where population growth is still running at or above 2 percent per annum; average annual growth rates need to be equal or better than 7 percent per year in order to achieve levels of growth sufficient to make substantial inroads into the poverty problem. Assuming other growth drivers remain the same, achieving this level will require increasing investment levels to around 28 percent of GDP. Unfortunately domestic savings rates are only averaging around 20 percent at the present time which leaves a financing gap of around PhP400 billion a year. Clearly this amount is beyond the capacity of the local economy to invest at the present time which makes inwards foreign direct investment so important to the future of the country.
FDI was up by 179 percent in 2004 but at US$745 million it is still way below the level needed to make a real contribution to the economy. According to a recent report from the Bangk Sentral ng Pilipinas, FDI is expected to reach $1.2 billion this year - largely as a result of expansion in the business process outsourcing sector. More may be in the pipeline if the promised mining projects finally get underway.
But in order to attract greater FDI than is currently foreshadowed, the Philippines needs to get its house in order and that will not be achieved overnight. Nevertheless there are signs that this country is once again on the radar screens of both institutional investors as well as corporations seeking to hedge their Asian investments.
In this context it is worth noting that the Philippines government is seeking to jump start the process though a PhP2.13 trillion (US$39 billion) programme to fund its public investment projects over the next six years. This amounts to US$6.5 billion a year at current exchange rates and is close to the level needed to achieve the higher quality growth target. 
But where is this money to come from? According to Socio-Economic Planning Secretary, Romulo L Neri, it will be derived from a mix of domestic and external sources. Domestic sources include the selling off of selected government assets and the recycling of the money obtained into the infrastructure sector. 
External sources of funds includes grants, official development assistance and loans. In addition to this amount, the government also needs a further PhP262.5 billion (US$4.8 billion) for energy projects including power sector reforms.
At the recent Philippine Infrastructure Conference, the government announced that it intends to allocate an additional PhP100 billion annually (US$1.8 billion) towards infrastructure spending. 
According to Albay Congressman Joey Salceda, chair of the House committee on economic affairs, the government can expect additional funds from four major sources: privatisation, PhP300 billion; increase in the value-added tax, PhP125 billion; savings in lower interest rates, P40 billion; and administrative reforms, PhP20 billion for a total of PhP485 billion (US$8.8 billion). This would, in the words of Mr. Salceda represent "the biggest mobilisation of resources for the government since Ferdinand Marcos tapped petrodollar loans in 1974-79."

Let's look at the checklist
This list is by no means exhaustive but it is representative of the actions of government and the consequences of those actions.

Peace for Mindanao
Government and secessionist Moro Islamic Liberation Front (MILF) peace negotiators appear to have scored a major breakthrough in their quest for a lasting peace and put an end to the decades-old insurgency problem in Mindanao. Formal talks between the government and the MILF may resume and complete their final stage in Kuala Lumpur next month. A formal peace agreement will pave the way for the opening of Mindanao to further large scale development.

A new economic team
The appointment of the likes of Finance Secretary Cesar Purisima, Trade Secretary Juan Santos, Tourism Secretary Joseph Durano, Energy Secretary Raphael Lotilla, and Environment and Natural Resources Secretary Michael Defensor, Privitisation and Management Office chief Jose Vicente Bengzon III, Insurance Commissioner Benjamin Santos, Bureau of Internal Revenue Commissioner Guillermo Parayno Jr., Bureau of Customs Commissioner Alberto Lina, and Subic Bay Metropolitan Authority Chairman Francisco Licuanan III speaks well of the president's intention to improve the economy. Furthermore, these people appear to be staying the course, thanks largely to the fact that the president appears to be giving them a free hand to do what is needed within their portfolio responsibilities.
Hopefully these appointments presage further quality appointments and an end to political patronage that has infected the entire government system in the past.

Improvements to governance
As one of the key economic measures passed by Congress, a lateral attrition law has been passed that will assist in the downsizing of the public sector. However, many believe that this law is already flawed and that one unintended consequence may be that the more competent people- those who can obtain higher levels of remuneration within the private sector-will leave government. This could mean a talent drain from the public service- the opposite of that intended.
The good news of course, is that the administration is clearly intent on raising standards of service delivery to the general public. This includes greater transparency and accountability in transactions with the public and with companies - especially in the process of public bidding - and reduction in the levels of corruption at all levels. 
Tony Kwok, the former head of Hong Kong's Independent Commission Against Corruption (ICAC), has been appointed as the government's new chief anti-graft adviser. Mr. Kwok's appointment is actually part of a 20-month PhP203-million project funded by the European Union and the British Council to reduce corruption in 16 Philippine government offices. Mr. Kwok and his team will work to clean up the procurement and public works contracts award systems. The project also includes setting up a help desk for foreign investors and removing corrupt practices at Manila airport's air cargo handling system. For some time, investors have been complaining that excessive red tape in the country causes delays, raises costs, and encourages corruption. Mr. Kwok said the Philippines can reduce corruption drastically in public works projects by 2007 if it has the political will to do so. 

The Supreme Court and the mining law
The decision last December penned by Supreme Court Justice Artermio V. Panganiban, upholding the constitutionality of Republic Act No. 7942, or the Mining Law of 1995, has permeated not just the mining sector but has refocused attitudes towards the entire economy. That decision reaffirmed the constitutionality of 100 percent foreign participation in large-scale mining projects but the ramifications of that decision go much deeper. The decision effectively re-interprets the 1987 Constitution in terms of the inherent duty of the state to provide economic prosperity to its people, to wit: 

"The Constitution should be read in broad life-giving strokes. It should not be used to strangulate economic growth or to serve narrow, parochial interests. Rather, it should be construed to grant the President and Congress sufficient discretion and reasonable leeway to enable them to attract foreign investment, as well as to secure for our people and our posterity the blessings of prosperity and peace, (Supreme Court decision of 1 December 2004)."

This is an important declaration. It bespeaks of the judiciary's proper role in economic development - that is to level the playing field for businesses operating under the rule of law. On the part of the industry players, the SC ruling touched on a broad base of economic development issues, particularly on exploration, development and utilization (EDU) of the country's natural resources by foreign companies. That decision underpins a new attitude towards economic policies and development and, veers away from previous protectionist postures articulated under the guise of economic nationalism. 
According to the Department of Environment and Natural Resources (DENR), in the six months since the Supreme Court decision foreign companies have already pledged more than US$1.9 billion into the mining sector.

The Philippines is finally off the FATF watch list
Earlier this year, the Philippines was finally removed from the watch-list of the OECD-based Financial Action Task Force, an agency that looks at the transparency of the global financial system and scores countries on the basis of their actions to combat money-laundering. The removal of the Philippines from the list is both a vote of confidence in the country for its practices of financial governance but will also make it easier to integrate the Philippines into the global financial system by making monetary transfers that much more simple to effect.

Corporate earnings are up
The Philippine Stock Exchange (PSE) has reported that the combined net income of local listed companies surged by 51 percent year-on-year during the first quarter of 2005. Importantly, the California Public Employees' Retirement Scheme, the largest pension fund in the United States and considered a bellwether for overseas fund investors, has retained the Philippines on its list of one of 19 permissible countries in which it can invest. Neither China nor Russia made it to the Calpers list. The Philippines only just made it, but that is not the point - it is there on the list and from that point is well-placed to strengthen its position.

Portfolio investments have surged
Net portfolio investment inflows to the Philippines surged by 12 times to US$1.8 billion in the first 140 days of 2005, compared to only US$144.8 million registered a year earlier. The Bangko Sentral ng Pilipinas (Central Bank), which monitors the flow of foreign funds to the country, attributed the sharp increase to favourable outlook on the economy, given the government's gains in its fiscal reform agenda. Government data show that as of May 20 this year, a total of US$3.14 billion worth of fresh foreign portfolio investments flowed into the domestic market, which was about 4 times the US$813.6 million recorded during the same period last year. Of the total foreign funds, US$2.12 billion or 69.9 percent were invested in securities listed on the Philippine Stock Exchange, US$934.2 million or 29.7 percent in government securities, and US$21.6 million or 0.7 percent in peso bank deposits and money market instruments. The bank said strong first-quarter corporate earnings of select firms coupled with bright profit prospects for many industries boosted investments during the period. Outflows and capital repatriations of registered portfolio investments reached US$1.38 billion as of May 20, or double the comparable figure a year ago. This resulted in net inflows of US$1.8 billion as of May 20, which has already exceeded the US$486.6 million net inflows recorded for the whole of 2004. The government expects that net inflows would exceed US$2 billion in 2005, buoyed by bullish investor sentiments.

Balance of payments healthy
The country posted a balance of payments (BOP) surplus of US$1.64 billion in the first five months of 2005, or more than three times the US$477 million recorded during the same period last year. According to the Bangko Sentral ng Pilipinas (Central Bank), the five-month figure this year was the country's largest since 2002. It attributed the increase to capital and current account inflows, part of borrowings, portfolio investments and overseas Filipino workers remittances.

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