Books on The Philippines
Philippine peso (PHP)
Update No: 031 - (31/07/06)
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
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
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
"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.
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
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
"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
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
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.