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PHILIPPINES


 

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 80,574 77,076 71,400 43
         
GNI per capita
 US $ 1,080 1,020 1,050 135
Ranking is given out of 208 nations - (data from the World Bank)

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


 


Update No: 031 - (31/07/06)

"SONA" 2006 
President Gloria Macapagal-Arroyo delivered her sixth "State of the Nation" address (July 24th) amid unprecedented security. Some 16,000 police and military forces surrounded the Batisan (parliament) building in Quezon City to thwart any attempt by opposition forces to disrupt the occasion. In the event, even the weather was on the side of the President. Her address was delivered during a typhoon that dumped heavy rains on Metro Manila and kept away all but the hardened oppositionists and their presence was not even noticed.
Her address this year - which lasted a full 61 minutes - showed the president to be in a fighting mood. Gone was the humility and defensiveness that characterised in her address last year. At that time she was on the ropes being beset by scandals that many believed would cost her the presidency. This year it had all the hallmarks of a campaign speech in which she outlined her blueprint for the remainder of her presidency. She would, she said, step down in 2010. No more talk of a transitional presidency it seems. Of course, with a mooted change to a parliamentary system (which is still very much a matter of debate and by no means a foregone conclusion), many believe that she is hoping to be around well beyond that date - as prime minister under a parliamentary system.
As one newspaper put it "While the President undeniably gave the best Sona of her presidency (in terms of the confidence she displayed, and the rip-roaring style she used), it was also perhaps unprecedented in its internal contradictions." 
Ms. Arroyo, still under a cloud of legitimacy has little basis of popular support. Rather her power base lies with the military and with the local government units - the provincial governors and mayors - to whom she is beholden to deliver the vote on election day (and it seems increasingly likely that there will, after all, be an election in 2007 for a new lower house of Congress and for half the Senate). In a real sense she is hostage to both constituencies and despite her show of bravado, she remains vulnerable. In consequence, much of her address was about payback to her supporters. This explains much of the "wish list" nature of the 2006 State of the Nation address. Even her closest allies were befuddled as to where the money was to come from to pay for the projects she outlined to the nation. Among them:
-   More funds for health and education, for new roads,          bridges and airports
- The establishment of "super regions" comprising North Luzon, Metro Luzon 
Central Philippines, Mindanao and the "Cyber corridor"
- Five strategies for global competitiveness: make food plentiful, reduce the cost of electricity, modernise infrastructure, disseminate technology and reduce red tape in all government agencies.
President Arroyo steeped high praise on Major General Jovito Palparan, the controversial military commander who is suspected of being behind the high number of extra judicial killings of left-wing activists while at the same time she condemned political killings (could she have done otherwise?). She also reiterated the need for constitutional change saying that the most prohibitive red tape is within the Philippines' constitution. The Senate was totally ignored in her speech.
Her upbeat view on the economy helped boost the peso as well as local stocks and earned the praise of the business community. Ambassador Donald Dee, president of the Philippine Chamber of Commerce and Industry, particularly cited the economic road map detailed by the president. Mr. Tony Lopez, editor of BizNews Asia, a long-time critic of the Arroyo government, described the president's SONA as her best speech ever. Mr. Lopez listed 17 infra projects mentioned in the president's SONA, including 17 airports, six seaports, 13 major roads, two large irrigation projects, and three rail projects. 
But not everyone agrees. Benjamin Diokno, a former budget secretary, said what Ms Arroyo "has failed to address, time and time again, are the issues that block this country's growth: Corruption, violence, political stability, rule of law and population growth."
Raul Fabella, dean of the prestigious University of the Philippines School of Economics, said he doubted Ms Arroyo had enough time to complete the projects in the three and a half years left in her presidency. "Contracts have to be signed, environmental issues have to be resolved before the first bag of cement is poured.
"Filipinos have an oversupply of imagination, but an undersupply of implementation," Fabella said.

How is it to be afforded
Meeting after the SONA, Cabinet officials gave different estimates of the funds that would be needed to implement these projects. Estimates varied widely from a high of over PhP1 trillion, to a low of PhP200 billion. Given the dismal performance of Congress to enact budget laws, amid its failure to pass the 2006 budget, critics expressed doubt that the president and her economic team would be able the raise the necessary amount for the projects.
At present, one third of the government's budget goes to payment of debt interest, and another third goes to compensation for more than 1 million government employees. This leaves just a third of the budget for economic and social services, the bulk of which goes to education and to defence. Just how the government would raise significant additional revenue without recourse to a new round of borrowing is certainly an issue for debate. 
Infrastructure spending accounts for less than 3 percent of the country's gross domestic product (GDP) at the present time,. Even allocating an additional PhP1 trillion for infra development until 2010 would bring the level only to around 4 percent of the GDP, which is still way below the 6 to 7 percent infra spending by such countries as China or Vietnam. That single fact puts the president's wish-list in context.

The economy

RP economy seen growing at 5 percent
A new forecast by the Asian Development Bank (ADB) suggests that the Philippines' gross domestic product (GDP) would grow 5.0 percent in 2006 and 5.3 percent in 2007, despite external threats such as ongoing high oil prices.
"Despite the uncertain investment climate, monetary tightening, and high oil prices, the economy remains resilient and growth should be sustained at about a 5 percent pace in 2006. Inflation, however, could still hover around 7 percent, requiring continued vigilance," according to the semi-annual Asia Economic Monitor (AEM) published by the ADB.
This growth forecast for the Philippines is in line with the actual 5 percent growth registered in 2005, but below the official government forecast of between 5.5 and 6.2 percent for 2006. In the first quarter of 2006, GDP actually expanded by 5.5 percent, supported by the growth in consumption and exports.
"GDP growth for 2006 is forecast at 5.0 percent, supported by continued expansion of remittance-led consumption and by an improvement in information technology (IT) exports. Investment, however, will likely remain constrained by limited progress in structural reforms, such as in the power sector," the ADB said. 
It predicted that continuing remittance flows and restrained import expansion should keep the current account in surplus. It noted that inflation from January to June 2006 averaged 7.1 percent, mainly due to higher fuel prices and the recent two-percentage point increase in the value added tax rate.
The latest ADB report says that apart from inflationary pressures arising from further increases in energy prices, risks include a possible slowdown in remittances that would crimp consumer spending and an abrupt correction in global payments imbalances that could reduce export growth and further erode investment.
"Heightened global financial uncertainty would likely reduce capital inflows, create currency instability, erase recent gains in foreign reserves, and increase the sovereign spread on external debt," it said.
The multilateral lender said domestically, investor confidence could further decline with continued delays in structural reforms. However, it said that with the non-performing loan ratio down to 8.2 percent in April 2006, vulnerabilities in the domestic financial sector have been reduced. But it raised concern over the fact that the banking sector holds about 28 percent of the issuance of the public sector, exposing it to volatility in sovereign bond ratings and spreads.
On interest rates, the ADB noted that after three successive 25 basis-point hikes in the policy interest rate during 2005, the Bangko Sentral ng Pilipinas maintained its policy rates in early 2006 based on evidence that current and expected inflation suggest it is decelerating. "Policy rates will likely remain stable in the months ahead," it added.
It suggested that vulnerability can be further reduced through continued efforts to enhance revenues and maintain fiscal prudence.

DOF wants incentives trimmed
The Department of Finance (DOF) wants Congress to include the rationalisation of fiscal incentives as one of its priority measures when the bicameral legislative body opens its sessions this week. Finance Secretary Margarito Teves said he was hoping that the senators and congressmen will push for the measure, which is a part of the Arroyo administration's fiscal reform agenda.
Consultants hired by the DOF claim that the fiscal incentives granted by the Board of Investments to large Filipino companies are mostly redundant. Former Socioeconomic Planning Secretary Felipe Medalla and Dr. Renato Reside Jr. of the University of the Philippines' School of Economics explained that tax incentives become redundant if the investments the government intends to attract would have been made anyway, even in the absence of such incentives.
Dr. Reside said redundant incentives translate to forgone government revenues, which therefore burden society, particularly the poor. The BOI and other incentive-giving bodies such as the Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA) and Clark Development Corp. (CDC) spare companies registered with them from paying taxes and duties. Such incentives include four to six-year income tax holidays, tax and duty exemptions on imports of capital equipment and raw materials, accelerated depreciation, investment tax credits, and tax liability deductions.
Dr. Reside said that from a cross-country perspective, only incentives provided to efficiency-seeking electronics and semiconductor firms have actually induced investments into the Philippines that would not otherwise have occurred "Incentives given to investments for other motives were redundant, especially since these businesses were already expected to be very profitable at the time of registration," he said. He estimated that 90 percent of incentives given by BOI to mostly Filipino companies were redundant. He estimated that in 2004, the BOI alone granted redundant fiscal incentives amounting to PhP43.2 billion, representing 1 percent of the GDP.
"It is an illusion that more incentives can help us remain internationally competitive. It is the myopic view. It is time for long-term considerations to prevail. We must enhance the quality of education, infrastructure and other government services for all," he said.
For his part, Dr. Medalla said the income-tax holiday granted to Filipino companies is a form of redundant fiscal incentives, because such companies are expected to invest in the country anyway. 
The rationalisation of fiscal incentives is part of the larger tax reform package introduced as early as 1997. This seeks to streamline the fiscal incentive system by putting together all the special investment incentives provided in several laws; withdrawing all inefficient, irrelevant and duplicative special investment incentives schemes; limiting the time frame for granting incentives; selecting the investments that can avail of them; and abolishing fiscal incentives not consistent with the WTO.
This became the focus of attention after the BOI granted huge tax incentives to the PhP33.18 billion project of Smart and the PhP5.48 billion project of Globe that aim to introduce third-generation (3G) communication technology in the Philippines. Economists said the two telecom firms would have made such investment even in the absence of tax exemption.
Mr. Paul Cooper of financial advisor PriceWaterhouseCoopers noted that the Board of Investments (BOI), which administers incentives by virtue of Executive Order No. 226 (Omnibus Investments Code of 1987), registers mostly local companies. He said that a person seeking to register for BOI incentives must be a Philippine national, so that for a corporation, at least 60 percent of its capital must be "owned and controlled by Philippine citizens." The nationality rule is relaxed, however, if the investment is in a pioneer project, or more than 70 percent of the corporation's output will be exported (Article 32). 
No such nationality requirements exist under the laws governing economic zones.
He said that a draft Senate bill on rationalisation of fiscal incentives proposes the abolition of BOI and the reorganisation of PEZA into the Philippine Investment Promotion Administration. "If the Senate bill becomes law, locators in Clark will be entitled to incentives under the new PIPA framework. However, without separate legislation being passed, such as an amnesty bill, the question about how problems with the existing law should be dealt with would remain unresolved," he said.
The draft bill does not cover other agencies, which mean they will continue to administer investors that locate in their economic zones, and will be able to grant incentives.
Mr. Cooper, however, said that a significant development in the Senate bill is that the 5 percent on gross income will no longer cover VAT. Consequently, exporters face paying 12 percent VAT on many of their inputs, and claiming a refund from the BIR when they make zero-rated export sales.

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