Books on The Philippines
Update No: 037 - (25/01/07)
The year has started reasonably well for Philippine President
Gloria Macapagal-Arroyo although there are a few spoilers on the horizon that
could quickly dispel the present positive sentiment. Preliminary figures suggest
that economic growth was a healthy 5.5 percent last year (final numbers should
be released towards the end of January) and already the Administration is
pumping up the growth expectations for the coming year.
The main spoiler of course is the May election for a new Congress (lower house
and half the Senate plus local officials) and while everyone hopes for a clean
and honest election, few believe it will be so. Most people believe that the
vote has already been counted. All that remains is to announce the result. It is
called the Filipino way!
The second spoiler is the issue of Charter change-Constitutional change to adopt
a parliamentary rather than a presidential form of government and to allow
elected officials to stay in office indefinitely. The government and political
leaders claim there is a "clamour" for Charter change. Nobody else
thinks so with most polls showing a 2:1 margin against any tinkering with the
political system-especially in circumstances where those doing the tinkering are
the same as those who would be the principal beneficiaries of any change.
Thankfully, that issue is on the back-burner for a while but few think it has
gone away. When it does resurface, expect further tensions to boil over once
But for the moment, things are mercifully quiet.
One of Asia's best this year?
At least three financial institutions believe that the Philippines will be
among the best economic performers in Asia this year. For one, Dutch financial
giant ING listed the country as one of the top three investment sites in the
Asia-Pacific region for 2007, aside from Hong Kong and Taiwan.
ING Bank has predicted that corporate profits in the country would surge by
about 20 percent in 2007 and further lift the main-share Philippine Stock
Exchange index (PSEi). The index, now trading at its highest level in 10 years
is seen to climb further from the present 3,000 mark to a record level of 3,500
to 3,700 points by the fourth quarter of the year.
Credit rating firm Standard & Poor's (S&P) also expects Philippine
economic growth to pick up this year and stay ahead of a forecast average for
the Asia-Pacific region. In its report titled "The Best and the Rest: The
Asia-Pacific Sovereign League," S&P forecast that the Philippines'
gross domestic product will grow 5.8 percent in 2007, higher than the average
growth of 5.3 percent for the region.
New York-based investment firm Lehman Brothers, for its part, said the
Philippine economy is expected to stay on a positive growth path given the
declining public debt and strong trade growth expectations. "The main
reforms have been where the need was greatest - in the area of fiscal policy. If
anything, they are yielding the desired results faster than expected,"
Lehman Brothers senior economist for Asia Rob Subbaraman said. He added a
warning that the challenge for the Philippines now lies in lessening political
instability to maintain its strong economic showing, especially given the
upcoming elections in May. "The Philippines must stay on the course of
reform. Maintaining political stability is crucial, especially with legislative
elections to be held in May 2007," he said.
Hong Kong-based financial magazine "The Asset" named the Philippines
Asia's best borrower in 2006, for being a "disciplined" and
"Indeed, the Philippines is now regarded as a savvy issuer, exhibiting a
level of sophistication that was absent in the past. It is disciplined in not
upsizing its deals and is very careful when re-opening outstanding bonds,"
The Asset said.
Government raises economic targets
All of that is positive indeed and not before time. The Administration, for
all its faults, has been doing a lot that is right in terms of the macro picture
and deserves a moment in the sun.
As if to further build on the present positive attitude of markets and on the
strength of falling interest and inflation rates (plus of course the peso
appreciation against the US dollar) government has raised its economic growth
targets for 2007. The gross domestic product (GDP) growth target has now been
raised to a range of 6.1 to 6.7 percent for the year from the original target of
5.7 to 6.5 percent.
Other expectations for 2007 include an 11 percent export growth, which was
revised from the earlier target of 10.5 percent and a peso exchange rate of 48
to 50 per US dollar, which is stronger than an earlier estimate of 51 to 53
against the greenback. (Market sentiment appears to believe that both these
numbers may be overly optimistic.
Inflation is seen to average between 3.5 percent and 4 percent this year, also
lower than the earlier estimate of 4.3 percent to 4.8 percent. Inflation
averaged 6.2 percent in 2006, after slowing to a nearly three-year low of 4.3
percent in December. Lower oil prices will help contain inflation as the
previous surge passes.
The estimate for the average yield on the 91-day Treasury bill (T-bill) yield
has been lowered to a range of 4 percent to 4.5 percent after the benchmark used
by banks to price loans fell to a record low recently. The previous estimate for
the average benchmark rate was 5.5 percent to six percent.
The country's gross international reserves are expected to hit a record level of
US$24 billion in 2007, as overseas Filipino workers remittances are anticipated
to climb to US$14 billion this coming year.
The Central Bank, however, expects the country's balance of payments (BoP) to
hit US$1.6 billion at the end of 2007, down from the original target of US$2.8
billion. The more conservative BOP projection was made in light of the revision
in foreign exchange, which is seen to reduce the BOP surplus. A stronger peso
tends to encourage imports.
Despite revisiting these growth targets, government is sticking to its earlier
announced fiscal goals this year. The government hopes to reduce the budget
deficit to PhP63 billion or 0.9 percent of GDP in 2007 from the projected PhP80
billion or 1.3 percent of GDP.
What does it all mean?
We would agree that at the macro level, the Administration deserves praise
for the manner in which it has turned the economy around. It was only two years
ago that President Arroyo was declaring a fiscal crisis and commentators were
talking about an Argentina-style meltdown. The country was not in crisis
(although one was looming on the horizon at the time) and an Argentina reprise
was never on the cards but, as we pointed out in last month's report, the
benefits of the new growth have benefited only a few and have yet to be felt by
the great majority of the people.
Growth in the Philippines remains far too dependent on externally driven trade
and remittances (which now account for around 10 percent of the GDP growth
figure) and little has been done to encourage domestic investment into factories
and other ventures that would make a dent in the unemployment and
underemployment problems that beset the Philippines. While foreign investment is
on the rise, there is hardly the flood needed to change the paradigm and with
elections looming, there will again be a wait-and-see attitude on the part of
potential investors for the first half year at least.
Political outlook uncertain ahead of the election
Indeed, along with giving credit where it is due, investment banks and
business groups have warned that the excesses in politics because of the
upcoming national elections could erode recent economic gains. The Makati
Business Club and the European Chamber of Commerce both said these political
excesses, coupled with policy inconsistencies, risk undermining recent successes
in fixing the economic and fiscal front.
Makati Business Club chair Ramon del Rosario warned that many investors have
been turned off by a series of policy "flip-flops" involving aviation
policy, oil exploration and anti-corruption among others. He added that the
last-minute attempt to tinker with the 1987 Constitution without the consent of
the Senate had alarmed the business sector.
"The past two years have been particularly frustrating and discouraging in
terms of our country's aspirations towards a regime of greater accountability
and good governance," he said.
European Chamber of Commerce executive vice president Henry Schumacher also said
intense politicking was driving investors away and sidetracking infrastructure
programmes. "Be happy if you don't need government, like consumer-based
industries. If you need government for your business in 2007, take an extended
leave," he was quoted as saying.
Meanwhile the President thinks otherwise. "Filipinos have never had it so
good" she said. Then added "the problem is that they don't know it
yet." That statement left many gasping. More on this next time.