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PHILIPPINES

 

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REPUBLICAN REFERENCE

Area (sq.km) 
300,000

Population 
84,619,974

Capital
Manila

Currency 
Philippine peso (PHP) 

President 
Gloria
Macapagal-Arroyo
 

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Update No: 010 - (02/11/04)

This month has not been a particularly good one for the Philippines internationally. There have been some rather salutary reminders about how far the country has fallen from grace. On the domestic side however, there are tentative signs that the government reform programme may be finally starting to bite.
On the international front, first came the report from the World Economic Forum. That report suggested that over the past twelve months the Philippines has slipped 10 notches in the global competitiveness stakes and now ranks 76th out of 104 countries surveyed.
Secondly came the Transparency International Report. That placed the Philippines in position 102 out of 146 countries. Last year we were 92 out of a list of 133 countries.
A number of commentators in the Philippines have expressed indignation about such surveys and Malacañang adopted its usual dismissive approach - "What does a group of foreigners in London, Berlin or Washington for that matter know about what is happening here in the Philippines? But that approach is self-serving and really begs the issue. Even a cursory glance at TIs methodology would show that their data is obtained within the country and largely from local sources. 
What matters is perception, perception, and perception. And the perception throughout the world is that the Philippines is falling further behind others in the development race. If nothing else, it reinforces the need for the government and Congress to try harder to repair the damage that has been done to the country's image.
The pervasiveness of corruption has been identified as one of the major issues preventing the Philippines from moving forward economically, and especially in attracting new foreign investment. While the government claims (with some justification) that it is waging a battle against corrupt officials through lifestyle checks on senior officials, so far only minor level civil servants have been caught in the net. For some time now, the business community and non-governmental organizations have been urging government to go after the "big fish" - that section of the community that considers itself to be above the law in order to restore investment confidence that the government really means business. Critics of the present administration correctly point out that other Asian countries have made significant inroads into their battle against corruption by gaoling a few public figures caught with their hands in the till - or in receiving illegal kick-backs during the course of their work. 
In this regard, perhaps the tide is finally turning- but it will take some time before the actions resulting from present policy initiatives start to bite. Only then will international agencies reassess their opinion of the country. Meanwhile, the Philippines should not be written off just yet. The government is starting to make headway in the anti-corruption battle and the Congress does appear to realize the need to pass the financial reform measures - even if it will not give the government all that it asks for.

Philippine competitiveness falls
It is the season of the survey. The first to appear on the scene was the World Economic Forum's (WEF) Global Competitiveness Survey and it contained some bad news for the government. Over the past 12 months, the Philippines has slipped 10 notches in the 2004-2005 Growth Competitiveness Index (GCI) and now ranks 76th out of 104 countries surveyed.
The Philippines, which ranked 66th in the 2003-2004 survey, saw its standing slip due to perceived declines in the quality of its macroeconomic environment, the state of its public institutions and its technological readiness. The local business environment was also another source of grief, with the WEF's Business Competitiveness Index (BCI) placing the Philippines 70th, down five notches from 65th the previous year.
In its competitiveness survey, the WEF said "Countries showing the largest drops in rankings in 2004 - Bolivia, the Dominican Republic, Pakistan, Peru, Philippines, Poland, Vietnam, to name some - have witnessed significant deteriorations in one or more areas tracked by the Index." 
The GCI gauges the ability of the world's economies to achieve sustained economic growth over the medium- to long-term. It is composed of three "pillars" which are widely accepted as being crucial to economic growth: 
· The quality of the macroeconomic environment; 
· The state of the country's public institutions; and 
· Its technological readiness (given the increasing importance of technology in the development process) 
The Philippines also suffered a huge drop with respect to the strength of its public institutions, with the country slipping to 99th place from last year's 85th.

Transparency International survey on global corruption
The Berlin-based group, Transparency International has published its latest Corruption Perceptions Index based on various independent country surveys. The Corruption Perceptions Index 2004 charts levels of corruption in 145 countries. Seven out of ten countries score less than 5 out of a clean score of 10, while five out of ten developing countries score less than 3 out of 10.
Transparency International, founded in 1993, is considered by many to be the leading international non-governmental organisation devoted solely to curbing corruption. TI currently has close to 90 national chapters around the world 
Within Asia, Singapore - at 5th place is considered to be the least corrupt society while Bangladesh, alongside Haiti, is ranked equal last at 145 as the most corrupt country. The Philippines comes in this year at position 102.
Last year the Philippines occupied position Number 92 - alongside Pakistan - and remained ahead of Vietnam, Papua New Guinea, Indonesia, Myanmar and (of course) Bangladesh in last spot.
Rankings in the two survey years are not directly comparable because of the greater number of countries surveyed in 2004 as compared to 2003. Nevertheless we can gauge in some measure how the Philippines is faring by comparing it to other Asian countries as well as its peer group.
Leaving aside the newly emerging CIS economies of Central Asia, this year the Philippines ranked as the sixth most corrupt country in Asia - ahead of Vietnam, Pakistan, Indonesia, Myanmar and Bangladesh. Last year the Philippines was also in 6th bottom place but the other five last year included Papua New Guinea in place of Pakistan. As a percentile, last year the Philippines scored 0.316 while this year its percentile score was 0.301. (The lower the percentile score, the worse the average rank.)
This latest report was only made public on 20 October and so far there has been little by way of public comment. We may expect the government to shrug its shoulders as it has done in the past when bad news hits. In reality, the survey result is cold comfort for the government since the Philippines has now steadily slipped in terms of global corruption perceptions throughout the Arroyo presidency. While the government will claim with some justification that progress is being made (see below), it is the pace of progress that is worrisome and the gulf that often exists between public policy as reflected in legislation that is on the books and the practical implementation of that public policy. Clearly much remains to be achieved.

Philippines remains on FATF watch-list 
The third item of bad news is that the Philippines is still considered a safe-haven for money laundering. Following its most recent review, the international money-laundering watchdog Financial Action Task Force (FATF), has decided that the Philippines should remain on the blacklist of countries considered to be havens for "dirty money." According to the local interagency Anti-Money Laundering Council (AMLC), the Philippine agency responsible for enforcement of the anti-money laundering law, the decision was not unexpected since the country has yet to mount a successful prosecution of any person suspected of money laundering activities.
The council, however, now faces a major test case with its investigation of Armed Forces Major General Carlos F. Garcia (see below), who has been accused of amassing ill-gotten wealth and using this to buy properties and open several bank deposits.
The anti-money laundering law, passed in 2001, originally gave the council authority to freeze suspected accounts. However this was amended by the Philippine Congress last year. Now, the AMLC can investigate suspicious transactions but cannot go after dirty accounts. It has to submit a draft application for a freeze order to government lawyers, which will then be filed at the appellate court. It takes the court two to three days to issue a freeze order. As a result Major-general Garcia (see below) was able to empty many of his accounts before a court decision freezing them came into effect.

The very model of a modern major general
For the last month, a single issue has dominated the local press - that of the former Comptroller of the Armed Forces of the Philippines (AFP) Major General Carlos Garcia who is to be court-martialed for his alleged unexplained wealth. The case against Gen. Garcia came about as a result of the action by United States Immigration authorities, who stopped one of the General's sons as he was about to enter the USA late last year with $100,000 in cash in his bags and which he had not declared. The problem was further compounded by the general's wife who, by all accounts, acted somewhat bombastically when confronted by US officials ("Do you know who I am?" - Yes, they did and they didn't care it seems) and in a later affidavit explained that the funds in question were "legitimate" contributions (i.e. bribes) from grateful contractors of the armed forces. Further investigation by the US authorities showed that the family had a US$1.42 million bank account and several properties in the United States. This information was then passed to the Philippines authorities. All of this, on a basic salary of Php36,000 a month (US$637; £360).
Garcia has also had assets in the Philippines frozen - but not all of them. His family successfully emptied a number of his (more than 40) local accounts before a court freeze came into effect. Garcia is to be charged with violating Articles96 of the Articles of War for conduct unbecoming an officer and a gentleman and Article 95 for fraud against the government. The local press has been quick to point out that as the comptroller of the AFP, Garcia has a pivotal role to play in uncovering the web of graft and corruption which many believe to exist throughout the military and that became ingrained in the system during the Marcos years. General Garcia retires on 18 November and the public is expecting that the AFP will act with all due speed in his prosecution. 
Garcia also faces civil charges before the Office of the Ombudsman for dishonesty, gross misconduct and conduct prejudicial to the service. As this report was being finalized, the latest news is that all forty local accounts had been emptied of funds and all on the same day before the court-ordered freeze on those accounts came into effect.
There is the some small measure of hope that this time around, tough action will meet the tough words we have been hearing from senior government officials for so long. If General Garcia is successfully prosecuted it will be a "first" in the Philippines - and which should make future efforts to clean up corruption in high places that much easier. The bonus for government is that it might, at long last, put the country's military back in place under civilian control.

First of government tax reform measures appears set for approval
The Philippines House of Representatives has finally passed the bill increasing the tax on alcohol and tobacco products. Dubbed the "sin tax" bill, it was introduced originally during the life of the last Congress but remained inactive. Since her return to office in June 2004, President Arroyo has considered passage of the bill one of her key objectives in her tax reform programme.
By an overwhelming vote by the majority, House Bill No. 3174 was approved on third and final reading without any amendments. 
This means that the bill retains its salient features: 
· A 20 percent increase in the tax on alcohol and tobacco products next year; 
· A 3 percent increase in 2006; 
· A further 3 percent increase in 2007; and 
· The retention of the present multi-tier tax structure of these "sin" products. 
Earlier, local and international tobacco companies had sought to strike a last-minute compromise deal that removed the multi-tier structure and against claims that the government proposals were discriminatory against smaller players in the market.
Passage of the "sin" tax bill has been considered the most urgent by international creditors and international credit rating agencies. The increase in "sin" taxes is one of eight revenue measures the Arroyo government is proposing to help avert a financial meltdown.
"The bill will now be transmitted to the Senate. According to official statements, the government is on track to see final passage of this bill by December.

Fiscal incentives to be restricted to 10 industries
The government has identified 10 industries that, in the future, would enjoy special fiscal incentives available under the rationalized Investment Priorities Plan (IPP). A reduction in the number of industries eligible under the scheme is part of the remedy prescribed for reducing the problem of foregone revenue.
Under the revised Medium Term Philippines Development Plan (MTPDP), those industries able to enjoy incentives will be: information technology (IT) and IT-enabled services, automotive, electronics, mining, healthcare, tourism, shipbuilding, fashion, garments, jewelry and agribusiness. 
Companies within those 10 sectors will be able to obtain an income tax holiday on new investments of between 4 and 6 years and will be able to obtain duty-free privileges when importing capital goods. The new programme will be legislated in a new bill being prepared for Congress by the Board of Investments. Aside from reducing the number of industries covered by the IPP, the new bill will provide for a review of the applicable sectors every three years rather than annually as at the present time. If the revised bill can pass Congress this year the new measures will take effect from the beginning of 2005. The new bill also provides for safeguards to ensure that companies are not able to claim IPP coverage twice. In the past there have been instances where some IPP-covered companies close down immediately before their coverage expires and then register a new company to enjoy the same privileges.
Aside from the BOI Bill, the Department of Finance has also submitted two other draft bills to the Congress. One of these lifts the value-added tax exemption for a number of products and services while the other seeks the cancellation of tax and duty-free incentives under various industry specific laws.

Exchange Rates
As of 29 October 2004, the exchange rate of the peso to the US dollar stood at 56.351- and had spent the month trading in the narrow range between 56.3 and 56.4. Against the British Pound the rate stood at 103.0829 and against the Euro the rate was 71.7855. Generally most currencies appreciated against the peso during the month of October.
During October, the peso hit an all-time low of 56.45 against the US dollar before easing back. The dip was prompted by ongoing concern at the inflationary effects of the recent increase in oil prices as well as weaker regional currency markets.
According to Central Bank governor, Rafael Buenaventura, the continued strength of overseas remittances in the run-up to the Christmas holiday season is expected to contain any further weakening of the peso and there are prospects for a mild appreciation in coming weeks. At worst the currency is expected to trade flat in coming weeks. 

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FOREIGN COOPERATION

Japan, Philippines open FTA talks

Delegates from Japan and the Philippines started their fifth round of negotiations recently for a new economic partnership, Kyodo News.
The closed-door talks, which are hoped to culminate in the signing of a free trade agreement covering goods, services and investment between the two countries may finally see a breakthrough, some informed officials said, although a lot still depends on what compromise each side is willing to make. 

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