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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: 057 - (27/09/08)

What price greed?
When you are riding a roller coaster it is rather difficult to find a reference point. So it is in times of economic and financial volatility. The severity of events of the past week have caught everyone by surprise. The collapse of Lehman Brothers has had a catalytic effect on other investment houses: Both Merrill Lynch and Bear Stearns have been sold off and over the past few days the U.S. Federal Reserve has announced that two more iconic institutions, Morgan Stanley and the Goldman Sachs Group will be converted into traditional bank holding companies. Now has come the announcement by Washington of a US$700 billion bailout package-more than US$2,300 for each man, woman and child in the USA-to buy up what has been quaintly termed "toxic assets" that threaten to poison the entire U.S. financial system. The veracity of that package is being questioned in Congress but at the end of the day is there any choice?

Over the past week, newspaper headlines, financial and stock markets have given a whole new meaning to the term "volatile." And while it is true as Philippine Central Bank Governor, Armando Tetango says, that the exposure of the Philippines to the present crisis is limited, that does not mean that the economy will not be affected in a fundamental way. Life will never be the same again. Not for a while anyway.

For a start, the lending market has all but dried up for the time being. Yes, problems in the United States and elsewhere (Europe and Russia are also seen to be suffering a fallout) may make emerging markets more attractive for cash-rich companies and funds (and there are still some around) but whether the Philippines will benefit is another matter. In many ways the past eight years has been a squandered opportunity for this country to put itself in order and become a truly competitive world-or at least, regional-player. 

So let's ignore the hype of the local press and try and find ourselves an anchor point. And the best such anchor point to be found is not to look outwards or upwards but back at the ground. What can we say about the fundamentals of the Philippines?

Over the eight years of the Arroyo Administration, poverty has become more acute. According to the NSCB between 2000 and 2006, the poverty threshold went from a annual PHP 11,458 (£135) to PHP15,047 (£177). This represented an increase of 31.41 percent over the six years period; in 2006 a family of five needed a monthly income of PHP6,274 to stay above the poverty threshold. During the same period, consumer price inflation increased by 35 percent.

Now these are the official figures; most people would regard an annual cash income of PHP 11,000 to be extreme poverty. Unsurprisingly, self-rated poverty is much higher. According to a recent United Nations team, "social and economic development in the Philippines remains uneven and poverty continues to be characterized by widespread disparities across regions and population groups. 

According to the July 2008 update from local pollster Social Weather Stations, self-rated poverty had climbed by nine points between the first and second quarter of this year. In July, fifty-nine percent of Filipino families, or about 10.6 million, rated themselves as " Poor;" a further 24 percent put themselves on the "Borderline;" and only 17 percent rated themselves as " Not Poor." More alarmingly the latest survey confirms a trend that has been evident for some time: people are lowering their expectations; food substitution from high nutrition diets to less nutritious continues to afflict poor and even middle income families.

Poverty of course is directly related to employment as well as, more generally, to economic growth. Sadly, in the case of the Philippines, "the rising tide does not lift all boats." The Philippines may have been experiencing a prolonged spell of high growth (which may now be coming to an end) but it has also been a period characterized as "jobless growth" whereby there has been a continued employment drift from formal sector jobs-those covered by the Labor Code of the Philippines and where employees receive salaries or wages for their labour-to informal sector work where safety nets are minimal or nonexistent, known in many countries as "the black". 

Recent studies have estimated that such informal sector employment may now embrace up to 70 percent of the workforce. And while officially unemployment hovers at around the eight percent mark; the official statistics hides the true situation in two ways: Firstly, the very definition of unemployment was 're-engineered' in 2006 so as to include only those who are in paid employment (and even one hour a week counts) or who are actively seeking work; secondly, when you add in the figures for "underemployment"-those seeking additional hours of work the combined figure is closer to 30 percent (underemployment hovers around 22 percent). And this staggering number would be much worse were it not for the ability of many to seek work overseas.

The dearth of quality jobs of course relates directly to the investment climate. Here again the Philippines brings up the rear within Southeast Asia when it comes to foreign direct investment. We hear almost daily press announcements about this or that investor bringing with them new jobs: but at the end of the day where are they? These jobs may indeed be created but do they do any more than replace jobs that have been lost? Employment growth in the Philippines, around 2 percent annually, scarcely keeps pace with population growth. And this is not quality employment but an increase in domestic helpers, drivers and self-employed ambulant vendors. 

The failure of investment is in turn linked to corruption. Here there is more bad news. Based on the most recent annual Corruption Perceptions Index of Transparency International, the Philippines ranked 131st out of the 180 nations surveyed this year and was ranked alongside Burundi, Honduras, Iran, Libya, Nepal and the Yemen. When it comes to petty bribery, the Philippines is right there among the world's "top 10." To provide a proper comparative basis the chart shows a "normalized" index based on the number of countries surveyed in each year. The ineluctable conclusion is that the Philippines has steadily drifted downwards (perceived to be more corrupt) in recent years and with the greatest "fall" between 2007 and 2008.

What does all this mean in the present climate of uncertainty? For a start, we can dismiss any political statements that smack of complacency. Any claim that "we are doing the best we can" has a rather hollow ring if we consider this over any respectable time period. Clearly the Government of the Philippines has squandered one opportunity after another to put this country onto a higher growth track. Neither has the private sector nor members of the privileged class of the country risen to the challenge, in terms of making local business more competitive, through an effective embrace of globalization and the rule of law. Whether it is a tourist development in Bohol funded by an enterprising expatriate or an international retail warehousing company wishing to enter the local market bringing with it real competition, so often local business partners end up stealing the company. Indeed why would anyone invest here when the rule of law and the Corporation Code of the Philippines continue to be flouted by those who feel they can get away with it?

Even without the present uncertainty it was already bad enough (and getting worse) but now another dimension has been added to the mix. In the responsible mining industry for example, which is supposed to be one of the cornerstones of the government policy to revive investment and provide a catalyst for sustained rural growth, strong words are coupled with failure to act. By way of example: In the case of the Didipio Copper and Gold project in Nueva Vizcaya, clearly there appears little will to act against a local governor who is determined to extort a heavy price in terms of rent-seeking in order to permit the project to proceed. This was to have been a showcase project. Investors are already fed up.
In recent years, the unprecedented worldwide growth has led to an equally unprecedented commodity boom.

But that is now fading and once again the Philippines will likely miss the boat. Those companies that have strong capital reserve positions and can self-fund their investments may weather the harsher environment intact. Those looking for equity or loan funds-whether mining or any other sector-to finance their operations will find the going that much tougher.
Consumer spending is already slowing with brand and product substitution evident in the market place If remittances collapse with the downturn of the US economy, then the ride could be bumpy indeed.

There are reports that in the new global financial order, the salaries and bonuses of top executives may plummet by 70 percent or more. Sadly we believe it unlikely that the elite of the Philippines will follow suit. Many within this country (but not all we hasten to add) are fuelled by greed, and greed is likely to continue to win out. Do not expect the corruption perception index to change for the better any time soon. The country will likely continue its downward drift. For foreign investors, the amber light is flashing.
 

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