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Books on The Philippines
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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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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