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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)

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Update No: 044 - (28/08/07)

In her State of the Nation Address delivered before Congress in late July, President Macapagal-Arroyo described the final three years of her term as her "legacy years." Somewhat optimistically, she said that she would lay the foundation for the Philippines to become a "first world" country by 2020. It was an unfortunate remark because of its brazen incredulity and it tended to become a focus of attention rather than looking at her true legacy.
Mrs. Arroyo has never been, nor will she ever be a popular president. Her photo opportunities with the masa appear far too contrived and stilted to convince any but her most fervent supporters, that she is anything other than a patrician-the daughter of a former president who remains wedded to her class, and to her privileged status in life. So be it. She is not the only president in the world who acts and thinks in that way and provided she does step down in 2010 (which many still question), she may yet be able to remain in the Philippines and not have to flee as President Marcos did 20 years ago (and to whom she is most often compared).

Back to the notion that the Philippines could become a first world country in 20 years. 
At present, the Philippines is categorized as a low- to middle-income country among the ASEAN group. With a per capita GDP (at Purchasing Power Parity) of around US$5,000 per year, the Philippines is only slightly ahead of Indonesia and Vietnam and well below that of Thailand and Malaysia. Singapore at more than $40,000 streaks ahead of everyone else and must already qualify for the elevated status of a first-world country.

Whilst inwards investment into the ASEAN region as a whole has been increasing at a rapid rate in recent years, The Philippines continues to bring up the rear and is actually well below that of even Indonesia and Vietnam. Of even greater concern is that on the most recent estimates of the Economist Intelligence Unit, FDI into the Philippines, having increased slightly over the past two years, is expected to remain flat for the next five years while others in Southeast Asia continue to do much better. Even Thailand, which has stalled in recent times, is expected to have a flatter investment path going forward but at a much higher level.

Then there is the issue of overall GDP growth. The Philippines is doing better here than it has in some time. The Arroyo Administration for all its faults has produced the most sustainable period of growth since the 1970s, and for the past three years has been above the "magic" five percent level (this being the average rate of growth of ASEAN countries in the decade prior to the 1997 financial crisis). For the first quarter of 2007, the growth rate of the Philippine domestic economy was ahead of the rest of the region aside from China and India-and led amongst the ASEAN group. With provincial figures for the second quarter recently released, the Philippines appears to be set to have a growth level for 2007 as a whole of around 6.5 percent-within the target range set by government. When per capita GDP growth is considered, the picture is not quite so rosy. With population growth still well above the 2 percent per annum level, what can you expect?

Can the Philippines sustain the recent momentum?
First the good news: the macroeconomic fundamentals of the Philippines continue to improve. Public sector debt is diminishing; international reserves are the strongest they have been in recent history thanks to the continued high level of remittance inflows-around 18 percent growth when measured in US dollar terms; somewhat less when measured in pesos because of recent appreciation but still healthy enough (around 10 percent in peso terms) to continue to prime consumption expenditure. Thankfully, more appears to be going into fixed assets such as property development. Small business start-ups also appear to be on the increase.

The inflation rate remains benign. The non-performing asset levels of the commercial banks continues to decline. Asset prices, in terms of both real estate and share prices remain well below their 1997 levels when inflation is taken into account and, of greater significance, recent gains have been driven by genuine economic activity rather than speculation, as was the case prior to 1997.

Against this has to be set a number of choke points that raise question marks in the minds of investors and potential investors. Most prominently this is expressed in the views of the rating agencies which, for the most part, have taken a more positive view of the outlook for the Philippines while leaving present sovereign risk ratings untouched. Evidently, they too ask questions about the sustainability of the recovery.

What then are the choke points? 
First and foremost has to be the prospect of a looming energy crisis that is expected to hit the Visayas (Central Philippines) and Mindanao (Southern Philippines), sometime in 2008 or 2019 and the Luzon grid (Luzon accounts for more than 65% of all economic activity in the country) sometime around 2010, unless new generating capacity comes on stream. In the energy sector there may be light at the end of the tunnel.

The divestment by U.S. Mirant Corporation in May of its generating assets in the Philippines (for reasons that had more to do with its domestic US operations than anything to do with the Philippines), was something of a watershed. Mirant receiving some US$3.242 billion for its 2Gw of generating capacity, signaled the value of Philippine energy assets to the investment market and had a direct bearing on the sale price of the government-owned Masinloc plant a month later. The sale of Mirant represented a price of approx. $1.6 million per Mwe. As a result the Masinloc power plant in Zambales province was sold for US$930 million (representing a value of $1.55 million per Mwe). The proceeds from the sale of the latter plant go directly to government as a much-needed windfall. It has also given government an added incentive to dispose quickly of its remaining generating assets. If it does so, then not only will it receive much needed revenue which will provide a breathing space while it builds its revenue collection, but it will also enable much needed reinvestment from the private sector into the energy industry to get underway, since most of the power plants at present being sold have expansion plans attached to them. 

At this stage it looks that through sheer good fortune, an energy crisis in the Philippines is avoidable.

Other choke points that hinder investment, include poor perception of government and governance and the ongoing issue of transparency. There is no easy answer to this one. Corrupt officials in high places continue to live charmed lives. Just recently, there were revelations that four members of the President's Cabinet are on a list of 35 cases, against which the Presidential Commission on Good Government has urged action, but on which the President has failed to move.

Above all else though, it is the question mark over the ability of government to maintain the fiscal balance that holds the country back. Revenue collections continue to fall short of targets and at present the balancing of the books (including debt reduction) is being achieved through asset sales. This cannot continue indefinitely.

At best we can say that the Philippines appears to have bottomed out, and has nowhere to go but up. A developed economy in 12 years time by 2020? An impossible target to achieve; but by 2020, the Philippines may no longer be bringing up the rear among Southeast Asia. That at least is the best we can hope for if we are to anticipate current trends into the longer term.

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