Books on The Philippines
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
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.