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Books on The Philippines
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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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