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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: 014 - (08/03/04)

To a casual observer it was not a good month!
A casual observer of the local scene could be forgiven for thinking that the country was beyond redemption. After all, if the international press is anything to go by, February did not treat the Philippines at all well.

A two-notch downgrade from Moody's

Credit Standing Spread of US Treasury Notes (as of January 18, 2005
Country	Bond Maturity	Spread over US T-notes
Philippines	2015	444.8bps
Brazil	2014	410.5bps
Columbia	2014	435.8bps
Indonesia	2014	234.6bps
Thailand	2007	55bps
Source: MCA Research

First came the news of a two notch downgrade by US-based Moody's Investors Service which placed the country four notches below investment grade. It was a severe blow and locally there was the usual gnashing of teeth and even a call by some within the Congress to boycott the ratings agencies (if such were possible), but in reality locally, the news was really a non-event and affected neither business sentiment nor the financial markets. Perhaps the local stock market could have gone higher without news of the downgrade but it continued to rise anyway. The same thing with the currency (thanks really to a weakening of the US dollar rather than any intrinsic strengthening of the peso); the peso continued a slow recovery against its American counterpart.
Moodys lowered the county's foreign currency rating for government bonds to B1 from Ba2, the long-term foreign currency country ceiling for bonds to B1 from Ba2, the long-term foreign-currency ceiling for bank deposits to B1from Ba3, and the local currency rating of the government to B1from Ba2. The outlook was stable, the credit ratings agency added. 
In fact, the markets had already factored in the uncertainties of the market and the Moody's downgrade did no more than align the ratings with the spreads already being applied commercially. Hopefully though, the Philippines has seen the last of the downgrades and has nowhere to go but up from this point.
Moody's Investors Service also lowered the foreign currency debt and deposit ratings of 10 Philippine banks to B1, which means that the bonds lack characteristics of the desirable investment and the assurance of interest and principal payments may be small. The rating agency, however, maintained the outlooks for the banks' credit ratings at stable, in line with that of the sovereign. Ratings of private debt issuers cannot be higher than the ratings of the sovereign. 

Security again becomes an issue
But the country received a second kick in the shin with the Valentine Day bombings. Three bomb blasts on February 14 appeared to be retribution by Muslim extremists for recent military operations in southern Mindanao aimed at flushing out terrorist enclaves. Two of the bombs went of in succession in Mindanao, in Davao and in General Santos City. The third which followed shortly afterwards rocked the Central Business District of Makati. The Abu Sayyaf Islamic militant group, which is allied to al Qaeda, claimed responsibility. A total of 13 people were killed in the triple blasts and more than 150 were injured. 
A key risk for the country to consider is whether these blasts were isolated occurrences born of desperation or whether they signal a new wave of bomb attacks that could have a negative impact on potential investment just at the time that international investor sentiment is perhaps becoming more positive about the Philippines. In the aftermath of the attacks, President Arroyo warned that there would be no let up in the attacks against domestic terrorist groups. At one point she toyed with the idea of declaring a state of emergency in Mindanao but appeared to back away from that concept.

But look behind the scenes!
Look beneath the headlines and you will find that the government, is in fact making steady progress in its battle to restore fiscal health to the country. 

Bringing commercial experience to governance
Back in January, the president announced a new economic team which saw former trade secretary (and before that, head of the local affiliate of Ernst and Young), Cesar Purisima, move to the finance portfolio. Replacing him at Trade and Industry is former Nestle chief, Juan Santos while the Customs Bureau head is now Commissioner Alberto Lina, a former head of Airfreight2100, local affiliate of Fedex. All three have a strong track record within the private sector before joining government and can bring their commercial expertise to bear in their new portfolio responsibilities.

Progress in efforts against money-laundering
A second bonus came with recognition of progress made by the Philippines in its efforts to stop money-laundering. The Paris-based Financial Action Task Force (FATF), which monitors national compliance with international anti money-laundering efforts, de-listed the country from its list of Non-Cooperative Countries and Territories (NCCT), along with Indonesia and the Cook Islands. The Philippines has been in the list since 1999 initially in connection with drug trafficking.
According to FATF, the Philippines has anti-money laundering systems that "include strict customer identification, suspicious transaction reporting, bank examinations, and legal capacities to investigate and prosecute money laundering. FATF said the country, through the Anti-Money Laundering Council (AMLC) has "developed financial intelligence units - specialised units that analyse financial data, coordinate national efforts, and facilitate international cooperation." AMLC is the financial intelligence unit of the Philippines, which implements Republic Act No. 9160 as amended, the AntiMoney Laundering Act of 2001.
One immediate benefit will be that the country's 8 million overseas workers will find it easier to remit money to the Philippines and it may indeed encourage more remittances to flow through the banking system rather than through informal channels.

Calpers stays the course
Yet there was more good news to come. The giant California Public Employees' Retirement System (Calpers), the largest U.S. public pension fund and long considered a bellweather for portfolio investment funds decided not to withdraw from the Philippines and to retain its local investments.
Back in 2002, Calpers pulled out of Indonesia, Malaysia and Thailand, citing concerns about corporate governance, political instability and labour standards. Yet as analysts noted at the time Calpers had no qualms about investing in companies like WorldCom Inc. and Enron Corp.- companies that later proved to be role-models of bad corporate governance. The biggest losers weren't the economies Calpers vacated, but its shareholders. Calpers missed out on a 17 per cent rise in Thai stocks back in 2002 and a 117 per cent jump in 2003. It also lost out on an 8 per cent rise in Indonesian shares in 2002 and a 63 per cent increase in 2003. Malaysian shares rose almost 23 per cent in 2003. Malaysia has since been reinstated as an investment destination.
Evidently with this experience in mind, Calpers decided to stay the course in the Philippines, especially as the local stock market continues to be one of the best recent performers in Asia and with a slew of IPOs expected this year, there may well be more gems to be had in coming months.

Senate approves the national budget
While no new revenue raising measures were passed during February, the president did at least see the national budget for 2005 finally passed by both chambers of the Congress without compromising the pending VAT bill. Earlier there had been concern that passage of the national budget would be held hostage to concessions on the question of increasing the VAT.
In fact, the Senate adopted en toto the lower House' version of the 2005 budget bill, bypassing the bicameral conference committee in the process. The Senate's action was reportedly made to prevent a plan by some members of the lower House to restore their pork barrel allocations from PhP40 million to PhP70 million during the bicameral conference committee debate. For three weeks, members of the Lower House have failed to show up at the budget bicameral conference committee, giving the impression to some that the congressmen were toying with the idea of forcing another reenactment of the 2003 national budget just so that they could have in full their pork barrel funds. 
Except for some minor amendments e.g., an increase in the allocation of the Office of the Ombudsman from PhP140 million to PhP675 million, the lower House adopted the PhP907.6-billion budget proposal submitted by Malacañang. Under the 2005 budget, interest payments of debts account for 33.24 per cent of the total; personal services, 31.87 per cent IRA, 17.17 per cent, maintenance costs 9.77 per cent and capital outlays, 7.94 per cent. 
Among the national agencies, the Department of Education gets the biggest allocation at PhP111 billion, followed by the Department of Public Works and Highways at PhP49 billion, Department of National Defense at PhP46 billion, and the Department of Interior and Local Government at PhP44 billion. 
Nevertheless it is an austere budget with little room to provide the fundamentals needed to bring the economy to a higher level of growth. Instead the government will, for the time being, need to rely on the private sector to pick up the baton. Already there are signs of revived interest. The privately (Chinese) funded Northrail project will get underway in 2005 and there appears to be strong interest being shown in a number of other infrastructure projects including various rail and road networks as well as port developments. Indeed private investment could provide a pleasant surprise in 2005. Already there have been six consecutive quarters with a positive contribution of private investment to GDP growth, a pattern not seen since 1997. 
Meanwhile, portfolio inflows continue to show strong growth suggesting that the government is indeed calling the fundamentals correctly and laying the foundation for a solution to the fiscal problems so that the administration can move forward to dealing with the other obstacles to stronger long-term growth.
President Arroyo should be in a strong position. Despite some lapses in judgment that have been ascribed to the need for payment of political debts, she has a strong and competent team within the top levels of her administration that can lead by example. She certainly controls the Supreme Court (or to put it more tactfully, the majority of Supreme Court justices have been appointed under her watch) and has the numbers in the Lower House of Congress. The Senate, a nationally elected body of 24 members, continues to play a somewhat maverick hand but when push comes to shove appears to be willing to cooperate. With a half senate election due in 2007, it may just be a matter of time before she is able to bring all branches of government into step with one another. In the meantime, we have no option but to accept that the pace of reform will be slower than many would like to see although the country is certainly moving in the right direction.
As for March, the next item to watch is what happens to the VAT issue. 

February inflation rises to 8.5 per cent
Yet it is no bed of roses just yet. Inflation continues to rise. The National Statistics Office has reported that the February inflation figure has reached 8.5 per cent, slightly above the 8.4 per cent inflation rate recorded in January. The Bangko Sentral ng Pilipinas identified the high oil prices as the main cause of inflation. Despite the high inflation, incoming BSP governor Amando Tetangco rules out inflation to reach double-digit this year, nor does it see a need to tighten the monetary policy at the present time. 
The government's revised inflation target for 2005 as a whole remains in the band between 5 per cent and 6 per cent. Other analysts are projecting higher inflation figures: the Bank of the Philippine Islands has forecast a rate of 7.1 per cent for full-year 2005. Much will depend on where oil goes since it is the oil price factor that is feeding much of the higher inflation levels. At this juncture the official inflation target looks unduly optimistic although there remains hope that inflation could revert to around 5 per cent in 2006 once current inflationary pressures have worked their way through the economy. This may prove to be an overly optimistic projection.

Market Movements
As of end February 2005, the exchange rate of the peso to the US dollar had risen to a new high. On February 28 one US dollar purchased 54.690 pesos As of 31 January the rate against the peso had been 55.08. Against the British Pound the rate stood at 105.10 (104.1894) and against the Euro the rate was 72.795 (71.9596). 
The Philippine composite stock index continues to rise and closed the month at 2065.40.

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