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Key Economic Data 
  2003 2002 2001 Ranking(2003)
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



Update No: 036 - (03/01/07)

It has been called the "billion dollar blunder". That is the possible impact on the country's investment credibility of the last-minute decision or President Macapagal-Arroyo to postpone the December Summit meeting of ASEAN leaders. The decision was taken on the afternoon of 8 December after the meeting series had already got underway. It left those already assembled in Cebu gasping in disbelief that such an action could even be contemplated.
Ostensibly postponed because of the danger to leaders of an alleged super-typhoon that was heading in the direction of Cebu, often referred to as the "second city of the Philippines" after Manila, in fact the typhoon provide to be no more than a tropical storm that simply dampened a few hapless delegates who happened to be caught outside without an umbrella.
A number of other factors, alone or in combination, may have influenced the decision to postpone the ASEAN leaders meeting: claims of a terrorist attack by al Qaeda on the sidelines of the meeting and designed to embarrass the president as well as allegations of a fresh coup attempt in Manila as rage mounted over the brazen attempts by members of the lower congressional chamber to change the rules of procedure and ram through Constitutional changes while media attention was diverted to Cebu have been cited by many as the "real reason" for the president's decision.
But the simple truth may be that late in the day, the leader of the Philippines realised that the organising committee was simply not ready. Sure enough the Cebu International Convention Center (CICC), the planned venue for the meeting, was declared completed and open for business in late November but the truth was that the building-rushed to completion for the December Summit meeting (work only started in September with the turning of the first sod)-was anything but complete as those business delegates who attended the very first function to be held inside the Center found out to their chagrin. The building leaked! The light drizzle that accompanied the tropical storm drifting over the Visayas was sufficient to dump puddles of water in the main entrance foyer and in the comfort facilities. Typhoons and terror attacks pale into insignificance when compared to the national loss of face had ASEAN leaders and those of China, India, Japan and Korea been forced to wade through puddles of water to get to their meeting.
The summit series was scheduled to kick off on the 6th December and last through until the 14th. The major event during the first week was the Business and Investment Summit designed to engage the business communities of Southeast Asia in the process of economic integration that will build a single community within ASEAN along the European model. The business summit which attracted more than 400 participants was into its third day of a four-day meeting when news of the cancellation came through. Delegates were less than happy that the final day and highlight of the event which was to have been a dialogue session with the ASEAN leaders proved to be a non-starter. 
It left many wondering about the real level of commitment of both the Philippines and the wider ASEAN leadership to the integration process. The business sector, according to many, felt it had been snubbed.
Beyond that, the postponement also called into question the credibility and resolve of the leadership of the Philippines under President Arroyo. "Quixotic and unpredictable" was the conclusion of many and what could have been her finest hour quickly turned into a rout. Thankfully (for the president) Christmas was just around the corner and the attention of the media was quickly diverted to other matters including the conviction of one US marine who had been tried in a Philippines court of law for raping a young lady while on shore leave in Subic Bay. More on that later.
The president and her administration have done an excellent job in damage control from the Summit postponement but it remains to be seen whether there will be any longer term fallout. At the very least it provides another pointer to the precarious position in which the government finds itself and which is largely of its own making. The government is unable to maintain a steady course. "Unpredictable" is how many see the present Philippines administration. The gains made on the economic front could yet unravel. This is a government that often seems hell bent on shooting itself in the foot.

Not a bad year for the economy - or was it?
Not surprisingly the government has been upbeat on its economic achievements for the year just ended. Officially this past year's growth forecast had been set in the range of 5.5 and 6.1 percent. This is lower than is being achieved by the likes of China and India and also-closer to home-of Vietnam and, while respectable enough when benchmarked against recent growth of the domestic economy, it is insufficient to put the Philippines on the higher growth trajectory needed to make a significant impact on the poverty that pervades so much of the country.
In fact because of the impact of four major typhoons that hit the country during the latter part of the year (Milenyo, Paeng, Reming and Seniang) the expectation is that the final figure GDP growth will come in at around 5.6 percent, at the lower end of the forecast. The government is forecasting a 5.7 growth performance for 2007.
At the macro level the government has made some impressive gains this year. The budget deficit has been significantly clawed back and is expected to be around Php90 billion-well below the target ceiling of Php125 billion and the current account surplus for the first nine months of the year stood at a healthy US$929 million. This was almost three times that of a year earlier. Dollar reserves now (November 2006) stand at US$22.6 billion as compared to $18.5 billion at the end of 2005.
December inflation is likely to be below 4.7 percent. The average CPI for the fist 11 months of the year was 6.4 percent as compared to 7.7 percent in the same period last year.
Outstanding Philippine external debt approved and/or registered by the Bangko Sentral ng Pilipinas stood at US$54.1 billion as of end-September 2006, up by US$0.2 billion (0.3 percent) from US$53.9 billion in June. On a year-on-year basis, the debt stock declined by more than US$1.4 billion (2.6 percent) from US$55.5 billion in September 2005, mainly due to net loan repayments, including prepayments of US$1.8 billion. 
As the year ended, the government announced early repayment in full of its US$220 million debt to the IMF, a move that is designed to enable the country early exit from the IMF's post-programme monitoring arrangement. While again seen as being a further positive step towards fiscal consolidation, the repayment is unlikely to make much impact with the credit rating agencies, since the amount involved is a drop in the bucket compared to the total debt stock of the country.
A further sign of improved investor confidence can be seen in the stock market. The main market index was up by 42 percent this year and closed 2006 at its highest point since April 1997-before the onset of the "Asian economic flu". The currency has also performed rather well, appreciating by some 7.6 percent against the US dollar and ending at 49.03, it's highest in six years. Of course this may have more to do with the weakness of the greenback than with any intrinsic rallying of the peso. But whatever the cause, a gain of 7.6 percent will slice a hefty chunk off the debt repayment schedule and free up further funds for domestic spending. And with an election due in May 2007, the government is looking for all the money it can lay its hands on.
Growth in 2006 was fed by a better than expected performance of agriculture, by strong exports of semiconductors and electronics goods and by a high inflow of remittances. Remittance income during the first ten months of the year was up by 16 percent when compared to the same period in 2005. Preliminary reports suggest that the strong inflow was maintained to the end of the year and therefore there is every expectation that this level of growth will be sustained. This would bring the year-end figure to something close to US$12.4 billion for the year as a whole.
When converted to pesos at the average exchange rates (2005=55.0855 and 2006-51.4822) as reported by the Central Bank, the results are not quite so impressive. In peso terms, the likelihood is that remittance income into the economy increased by only around 8 percent last year-barely keeping ahead of inflation. Perhaps this explains why consumer spending is growing less than expected! 
Not that mall owners would either notice or worry. The buoyancy of the stock market and the renewed interest of fund managers in the Philippines attest to the fact that many within the business community are doing rather well. The Philippines is often considered to be the "home of the mall" and new shopping malls continue to burgeon as much in Manila as in the remote provinces. But ask any trader renting space from the mall owners and it can quickly be determined that the decks are stacked against small business. Small business in the Philippines is between a rock and a hard place.

Smoke and mirrors?
And that goes to the crux of the problem. While the macro picture painted by the government suggests a robust and improving economy, many analysts see the gains as illusory and believe that without political reform and improved governance by the leadership, the economy could yet unravel. A little delving into the micro picture shows the extent of the malaise that continues to bedevil the Philippines. 
The impressive improvement in current account surplus and deficit reduction has been achieved more at the cost of expenditure compression than through revenue growth. Indeed, during the first nine months of the year, spending cuts accounted for 92 percent of the improvement. Under the Arroyo government, public infrastructure spending has dropped from 1.8 percent of GDP in 2001 to a paltry 0.73 percent last year. Education expenditure has gone from 3.4 percent of GDP to 2.4 percent in the same period while health expenditure has declined from 0.4 percent to 0.19 percent of GDP. In per capita terms these ratios look even worse. There is little stimulus to growth coming from the public sector and real spending on capital formation continues to decline.
According to the employment data, some 33.2 million Filipinos were employed as of October 2006 as compared to 32.9 million the same time one year ago. This is less than a one percent increase and in a country that continues to grow its population by around 2.3 percent annually, it is not difficult to determine why so many Filipinos seek greener pastures elsewhere. 
Indeed even this number is a pea and thimble trick as only half of these jobs are in the formal sector and full-time salaried employment is actually declining. By the government's own estimate, average family incomes in real terms fell by 10 percent between 2000 and 2003. There is a widespread belief, based on recent consumption patterns, that for many people, real incomes continue to decline.
According to social agencies and survey data more than 10 million Filipinos go hungry and more than 35 million are living below the poverty line. The Philippines has one of the highest incidences of poverty in Southeast Asia and malnutrition, especially among children is above 30 percent.

Poor performance in attracting FDI
While overseas Filipino workers may be keeping the economy afloat, remittance income does no more than buy time for domestic growth drivers to kick in. Remittances are hardly a long-term salve for the economy. The OFW boom is sustained at enormous social cost to the country that is not brought to account in the official statistics: these factors include separated families and a rapid rise in single-parent households, broken homes and a brain drain that is already exacerbating poor service delivery in the education and health sectors.
The solution of course is to change the paradigm and produce greater regular domestic employment that would widen the tax base. This in turn depends on attracting greater levels of foreign direct investment (FDI). The mining industry and tourism development are often touted as being the new sunrise industries that will aid in creating new opportunities away for the under-employed rural workforce. But the Philippines is not doing well here either. 
Certainly the figures for the past year show a significant increase in FDI-from US$1.14 billion in 2005 to around US$2 billion this past year. But compared to the amounts flowing elsewhere in Asia, this is a drop in the bucket. Malaysia, and Thailand have done much better. The performance of the Philippines is on a par with Cambodia. As a percentage of GDP, the figure for the Philippines is only 0.8 percent as compared to 3.3 percent for China, 2.3 percent for Malaysia and 4.5 percent for Vietnam (based on 2005 figures). 
The situation was summed up cogently by one analyst "foreign investors are still being turned off by corruption, high energy costs, high tax rates, uncertain regulatory policies, crime and stringent labor laws".
The World Bank has told the Administration publicly that the country could grow by seven to ten percent if is sends strong signals to the international business community regarding its commitment to improved governance. Sadly, nobody is expecting this to happen any time soon and the Philippines enters 2007 in a condition where the best that President Arroyo can deliver may already be behind us. The prognosis is not a good one.

Improved governance is indeed the key
Clearly the recent improvements in the economy have, for the most part, benefited the business elite and the fund managers, those within the formal salaried workforce and government officials who, despite the low level of service of most government agencies continue to live a charmed life. It has been announced that all government workers are to receive a 10 percent salary hike ahead of the May election. The benefits of growth have yet to trickle down to the masa.
The administration is hoping that the economy will do at least as well and hopefully even better 2007 than it did last year. Central to the strategy is the higher revenue from VAT payments which, for the full year 2007 are projected to increase by 19 percent from the Php75 billion collected last year. But this of course will be dependent on a continued propensity to spend and that, in turn assumes continued consumer (and investor) confidence. As one recent study has put it: the government is "walking on a knife edge". 
A dysfunctional political system is believed by many to be the root cause of much of the problem. An elitist political class that continues to garner much of the country's wealth to itself and to the exclusion of the broader population, dynastic politics at the national and regional level are just part of the problem. Rent-seeking behaviour by those who control the levers of power has not improved under the present administration. Neither has the tax collection system helped level the playing field. According to reports, the tax system in the Philippines remains among the most regressive in Asia with the tax burden falling primarily on small business and on wage and salary earners. 
Added to this list of problems related to governance can now be added the widespread belief that the administration governs in a "spirit of expediency". Or as one editorial in a national newspaper recently described it: "[a] disturbing pattern of behaviour-call it the impunity of incumbency-that has marked the conduct of the Arroyo administration in legal matters since the President's crisis of legitimacy erupted in 2005." The rule of law in the Philippines is in grave danger.
To cite one statistic that will not show up in the macroeconomic danger: The year 2006 was considered to be one of the deadliest worldwide for journalists where 81 were killed worldwide according to the Paris-based Reporters sans Frontieres. Of this total 49 were murdered in the Philippines alone. 
The agencies that monitor human rights violation claim that there have been 818 political killings in the Philippines since President Arroyo came to office in 2001 and 206 of these occurred in 2006. According to one commentator "what is legal is what you can get away with."
Few would disagree that an overhaul of the political system is long overdue and that the Constitution written in 1987 in the heady aftermath of the martial law period was unduly idealistic. It is the manner in which change is being proposed that worries many. While constitutional revision is ostensibly for the purpose of removing dysfunctionality in the system of government system (by changing from a presidential system to a single chamber parliamentary form) and by opening the economy to the winds of globalization by eliminating most of the patrimony provisions of the existing constitution, it is widely seen to be a self-serving exercise designed to perpetuate the hold on power of the ruling elite. Many also see behind the proposed changes, a scheme to allow President Arroyo to continue to hold power after 2010. The fact that she has come out openly saying that part of the problem of the Philippines is its frequent change of leadership has fed these suspicions.
President Arroyo came to power in 2001 not through winning an election but by virtue of occupying the vice-presidency at the time President Estrada was forced to step down through the withdrawal of support by the armed forces. Her promise made in December 2002 not to contest the 2004 election because she was a "divisive" figure was not honoured. She entered the race in late 2003 and she won the 2004 contest in what was believed to be a rigged election. Many believe that she probably would have won anyway. But her appointment of controversial figures known to be expert in vote-rigging as commissioners of the Commission on Elections and subsequent revelations that she contacted at least one commissioner seeking assurances that she would win the poll by 1 million votes (the "Garci tapes") have led to an ongoing crisis of legitimacy ever since and have eroded support from those who would have given her the benefit of the doubt.
Thus, political opponents of the president see in Mrs. Arroyo an unelected leader seeking to perpetuate her grab on power through opportunistic means and by destroying legal principles of governance in the process. Her supporters of course take a view that is diametrically opposed to this and claim that much of the problem of the Philippines has come about because of weak and changing leadership and an all too readiness to compromise.
And there you have it! Can government actions over the past twelve months be seen as strong and disciplined government or as a cabal seeking to rewrite the rules in order to perpetuate their hold on power? To answer this it is necessary to review the catalogue of actions that has acerbated the political decisiveness and alarmed foreign investors? 

A questionable track record?
In her State of the Nation Address in June 2005, President Arroyo heaped praise on those within her political circle who had given her unquestionable support and signaled that the issue of Constitutional Reform, a long-time ambition of House Speaker, Mr. Jose de Vencia, would henceforth be on the "front burner." That speech, intended in part to deflect demands for her resignation by emphasizing the need for political reform, appeared also to signal a change of strategy from appeasing the opposition to one that took the line that "those who are not with us are against us." This approach appears to have informed public policy since that time. 
First came Executive Order 464 (EO464) back in September 2005 which, followed on from the political crisis stemming from revelations of taped phone conversations between the president and an election official and which implied a rigging of the polls. EO464 prohibited senior government executives and military officials from appearing before Congress without the president's explicit permission. This was widely seen as being unconstitutional and illegal.
Following quickly on the heels of EO464 was the announced policy of "Calibrated Preemptive Response" to replace the policy of "Maximum Tolerance" in handling demonstrators and street protestors. Described by one political commentator as a "systematic strategy to gradually increase the use of force even ahead of a rally; that is, to head off a rally by means calculated to hamper such efforts with a show of force. In other words, a deliberate, official policy of thwarting the rights of the people is in force."
The hard-line, give no quarter approach has been a facet of public policy throughout 2006.
In February, claiming it had uncovered a potential coup attempt, the government sought to curtail civil liberties through Presidential Proclamation 1017 (PP1017) which declared a state of national emergency and authorized the use the military forces of the country to "suppress all forms of lawlessness". Under PP1017, the government has the power to take over media facilities, whose operations are deemed a risk to national security. Shortly after the issue of the proclamation, one newspaper office-that of the leftist Daily Tribune-was taken over by police and military personnel were stationed outside major broadcast network studios. A number of journalists and other activists, critical of government, suffered harassment and no less than 35 militant leaders and academicians were arrested by police for allegedly inciting sedition after they formed a "coffee group". The (then) Director of the Philippine National Police, Arturo Lomibaro warned publicly that the police would take over news groups that did not conform to "standards set by the government."
EO464 and PP1017 were subsequently struck down by the Supreme Court as was the policy of calibrated preemptive response. According to the Supreme Court "The so-called CPR policy has no place in our legal firmament and must be struck down as darkness that shrouds freedom. It merely confuses our people and is used by some police agents to justify abuses." At the same time, the high court upheld BP 880, a 21-year-old law on public assemblies, which requires organizers to secure a permit for rallies in public places. The high tribunal also gave local governments 30 days to designate "freedom parks" where demonstrations could be held without a permit under the same 1985 law.

Constitutional reform as a watershed issue
At the time President Arroyo announced her intention to move ahead with Constitutional reform congressmen and local government officials enthusiastically supported the call for a move towards a unicameral parliamentary government to supplant the existing presidential system. Of course, by abolishing the 2007 elections and extending their own terms to 2010 (with indefinite term extensions mooted as part of the "reform" package) they were widely seen as having a vested interest in giving their support.
On the other hand, Senators across party lines strongly opposed the proposal because it involved abolishing the Senate. In addition, the Church, segments of civil society, and some within the business community also were in opposition to the proposed reforms.
The 1987 Constitution provided for three means to effect political change. First, through a Constitutional Convention that is popularly elected. Secondly, through a Constituent Assembly composed of both Houses of Congress, and thirdly, through a "People's Initiative", which requires the support of at least 12 percent of the total registered voters, and at least 3 percent of voters in each legislative district
The first option was considered to be both expensive, time consuming and-perhaps most importantly-would be difficult to control while the second option that of a Constituent Assembly, faced its own problems given the hostility of the Senate to reform measures that, inter alia, included the abolition of the upper house. This left proponents of Charter change with only one other option to get what they wanted.
At the beginning of 2006, it was clear that the pro-Administration political forces were lining up behind the so-called "people's initiative" as the most expedient means of seeking constitutional reform. Advocates of charter change therefore opted to collect signatures nationwide. The nationwide campaign was initiated by Sigaw ng Bayan ("Voice of the People"), a grass-roots organization formed precisely to push for charter change. It was later backed by ULAP (Union of Local Authorities of the Philippines), an organization of local government officials, mostly local politicians supportive of President Arroyo. 
Despite collecting some 10 million signatures over a six month period and far more than the 5.5 million required under the Constitution, the initiative was struck down by the Supreme Court in early November. By a vote of 8-7, with the Chief Justice casting the decisive vote, the Supreme Court decreed the government-backed petition for a People's Initiative void and unconstitutional. In an 8-7 ruling that angered political leaders expecting compliance from the Court it ruled that the petition was "void and unconstitutional" because "an initiative that gathers signatures from the people without first showing to the people the full text of the proposed amendments is most likely a deception, and can operate as a gigantic fraud on the people." In passing judgment on the People's Initiative case, Chief Justice Artemio Panganiban declared, "there is a right way to do the right thing at the right time and for the right reason. Unfortunately, the right thing is being rushed in the wrong way and for the wrong reasons." A motion for consideration was also rejected on the same lines in early December.

Recent times and recent crises... 
Faced with an initiative that lay in tatters, Speaker de Venecia opted to introduce "Plan B": the convening of a constituent assembly with only the Lower House members present and changing its own rules of procedure. On December 7th at 5am in the morning, the House of Representatives passed a resolution filed by the majority bloc (House Resolution 1450) calling on all members of Congress (both Senate and the Lower House) "to convene as a constituent assembly and propose amendments/revisions to the 1987 Constitution of the Republic of the Philippines; upon a three-fourths vote of all its members." The vote was conducted without the concurrence of the Senate. It had been intended that Congress would sit on December 12 (during the ASEAN Summit) as a joint assembly to amend the Constitution. Included in the provisions was a postponement of the May 2007 elections until November 2007 thereby extending the term of incumbent officials for a further six months and a removal of term limits on members of the proposed interim parliament that would operate from that time.
Reaction to the actions by the House came swiftly. Members of the opposition described the entire procedure as "unconstitutional, patently illegal, and immoral." The Philippines Senate immediately served notice that the chamber was prepared to fight the House-only constituent assembly (Con-ass) on all fronts. Former senator John Osmeña, who lost his 2004 re-election bid, asked the Supreme Court to "stop the alleged railroading by the House of Representatives of a move to convene Congress into a constituent assembly (Con-Ass) without the participation of the Senate."
Similar reactions came from other quarters. Archbishop Angel Lagdameo, president of the influential Catholic Bishops' Conference of the Philippines, reiterated his call for vigilance against lawmakers who only want to take advantage of the power. Manila Archbishop Gaudencio Cardinal Rosales called on pro-administration lawmakers "to abscond and break away from sinful and immoral acts since it is dividing the nation." The CBCP also called on the public to participate in the prayer-rally against Con-Ass and for the people to pray for the enlightenment of government leaders and for "character change" among the leaders rather than Charter change. Newspaper columnists almost universally, condemned the actions of the house.
Faced with a suggested turnout of half a million people at the weekend prayer rally that could have escalated quickly into a further Peoples Power movement, Speaker de Venecia-apparently rattled by widespread objection to con-ass-announced that Resolution 1450 was "dead" after he and other House leaders decided to shelve it. President Arroyo also quickly backtracked from her previous support for the people's initiative announcing also that the initiative would be "shelved". At the same time, she announced the postponement of the ASEAN Summit because of the approaching "typhoon".
But that is not the end of the story. As we enter 2007, it appears that the shelving of the charter change proposals was merely a tactical move to dispel public anger. It appears likely that when Congress reconvenes, the issue will be back on the agenda and already by Sigaw ng Bayan is talking up a new petition that would meet the standards set by the Supreme Court.

Another divisive year ahead
Much of the political maneuvering of 2006 was designed to bolster the President's security of tenure. At the legislative level-and especially within the compliant lower house-the administration used its numbers, as well as its executive actions cited earlier, to fend off attempts by opposition forces to uncover evidence of wrong-doing by the Administration. Thus were issues such as the "Hello Garci" tapes and the truth behind the Php728 million fertiliser scam buried along party lines.
Much of the effort was devoted to avoiding the need for mid-term elections and thus ensuring the President retained her two-thirds majority within the lower house of Congress. Her support for Mr. de Venecia's charter change amendments needs to be seen against this backdrop. But these elections are now almost a certainty and as such we may expect that the pro-administration camp will pull out all stops to ensure they retain their electoral advantage. 
Analysts therefore expect that for the first six months of 2007 at least, politics will again take front stage at the expense of the economy and further reform measures. With automated elections already ruled out given the lead time, many are expecting the upcoming polls to be among the dirtiest and perhaps the bloodiest in Filipino history. 
Rent-seeking behaviour by government officials, especially those who are standing for political office or whose position depends on the patronage of those who are, can be expected to increase to the point of brazenness especially for those seeking licensing or contracts from government. New policy initiatives will definitely be on the back-burner and some policies and decisions, especially in controversial areas such as mining, may actually be put on hold or turned back. Much of it will be political noise of course, the usual playing to the gallery that surrounds any democratic election process but in the Philippines and at this time, expect the noise to be particularly intense. Nationalistic sentiment will be high and foreigners, including foreign investors may well find themselves sidelined. 
Indeed the decision of President Arroyo to release into US custody, a convicted rapist in defiance of a local court order could give rise to a fresh wave of anti-foreigner (and especially anti-US) sentiment. The decision to move the prisoner to the US embassy, late on the evening of December 31 was almost calculated to provoke a harsh reaction from many Filipinos and such was the case. Leaving aside the issue of interpretation of the Visiting Force Agreement, the presidential act was seen by most Filipinos as a deliberate snub to the judiciary and displayed what many observers believed to be an unduly sycophantic attitude towards the United States. She may have solved a short-term problem with Washington but in the manner of doing so she has given fresh ammunition to the opposition forces 
In the run up to the election, the president will indeed be walking on a knife-edge. One miscalculation of the public mood could see further large-scale street demonstrations supported by major religious groups including the Catholic church, the local Iglesia ni Cristo , Jesus is Lord Church and the charismatic Catholic El Shaddai movement. Each of these groups carries significant influence at the political level and the president cannot afford to have them offside-at least not all at once. 
Restiveness within the military remains a concern, especially within the lower ranks and if large-scale street demonstrations do resurface then a split within the military ranks is a distinct possibility.

More optimism for the second half
With an expected slowdown in key markets during 2007 (and especially in key markets such as Japan, Europe and the United States) the Philippines will be hard pushed to sustain the momentum of recent export growth. A further expected weakening of the US currency will not make export sales any easier unless of course the peso is allowed to slide back below the 50 level. This may well occur. Many believe that a slight weakening of the local currency would both aid exporters who, at the moment, are caught in a cost squeeze while at the same time boosting local remittance income and encouraging further consumption expenditure, which is expected to become even more important as a driver of growth in the short to medium term. An easing of interest rates would have the same effect.
A tightening of monetary policy and higher interest rates in the OECD area will mean that emerging markets generally will find it more difficult to attract investment. Countries such as the Philippines will have to fight that much harder just to remain where they are and the Philippines needs much more investment and not less of it. A significant downturn in remittance income would prove disastrous for the country at this time and could well send the economy into a tailspin. Present levels of foreign exchange reserves, while healthy by historic norms are insufficient to weather any major storm.
Nevertheless, if the additional funds available to government as a result of higher tax revenue and lower interest charges is wisely spent, there will be some greater freedom to manoeuvre in terms both of physical as well as social infrastructure. The pending completion of the new highway between Clark and Subic will provide a welcome impetus to investment in Central Luzon but the government will need to resist pressures from vested local interests to turn back the globalisation clock as evidenced recently by attempts from local airline interests to close the Diosdado Macapagal Airport at Clark to foreign budget carriers. That could prove disastrous to the nascent tourism boom in the area.
The outlook therefore is for 2007 to produce much the same bill of fare as we have seen this past year. Two steps forward, one step back appears to be a characteristic of life in the Philippines and about the only thing we can predict with certainty is the unpredictability of the road ahead. Investors need to proceed with caution.

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