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Asia-PacificNovember 4 2004

The Philippines kicks off economic reform

The Philippine government is taking significant steps to improve the country’s economy. But much still needs to be done. Stephen Timewell reports.
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Buoyed by its re-election in May and robust economic conditions, the government of President Gloria Macapagal-Arroya is embarking on a series of economic reform packages designed to stabilise the economy, improve the tax base and develop the domestic capital markets. While GDP growth hit a healthy 6.4% in the first half of 2004, the government is well aware of some serious structural weaknesses, such as poor tax collection and a worrying budget deficit (4.6% of GDP in 2003). It is introducing a number of measures, including eight tax proposals, aimed at strengthening the overall economy.

Hopeful signs

Speaking at a road show in London, the minister of finance, Juanita Amatong, was optimistic that four of eight tax proposals will be passed by the end of the year. The eight measures, says Ms Amatong, are expected to bring in 80bn pesos annually and help confront the core fiscal problem. In 2003, according to the Asian Development Bank, chronic deficit spending was aggravated by low revenues and a low revenue-to-GDP ratio of 14.1%, the lowest among the Asian economies. Ms Amatong explains that the revenue projection for 2005 is 758.5bn pesos or 14.8% of GDP, based on existing tax measures. She hopes that when the new taxes kick in, the revenue-to-GDP ratio will increase to 17%, but much depends on getting the tax measures passed in congress and then getting them implemented.

With spending restraints, the government is on course to meet its target deficit of 198bn pesos, 4.2% of GDP, a big improvement on the 5% figure for 2002. Ms Amatong noted that, with the fiscal reform programme in place, the policy objectives are to reduce the deficit to 3% of GDP in six years and reduce the public sector debt-to-GDP ratio to 90% in the same period. Analysts are positive about the proposed reforms and the moderating of expenditure. Sailesh Jha of Credit Suisse First Boston (CSFB) noted in late September: “We maintain our 2004 and 2005 fiscal deficit forecast of 4.1% and 3.7% respectively.”

With the Philippines still having a non-investment grade rating with the major agencies, Ms Amatong hopes the new tax measures and the fiscal responsibility bill – which requires new revenues for new expenditure – will help boost the country’s credit rating and build a virtuous cycle, helping to reduce debt and attract investment.

While foreign investment rose tenfold in the first half of 2004 and analysts suggest new engines of growth are emerging in the economy – through back office and outsourcing services, mid-end electronics and transport components – the expected GDP growth of 6.0% this year is unlikely to be maintained. CSFB suggests that slower global growth conditions and higher oil prices will moderate growth to around 3.9% in 2005. The latest government forecast is 5.3%, followed by 6.3% in 2006.

Banking changes

On the banking front, Nestor Espenilla, assistant governor of the Central Bank of the Philippines, stressed both the reforms within the banking sector and efforts to develop the domestic capital market. He noted that the banking system non-performing loan ratio decreased to 14% in June 2004, still quite high, but down from 18% in 2002. He noted the move towards Basel II capital standards, the creation of credit bureaux and the expansion of microfinance, with 500,000 borrowers now on the books. He also mentioned the continued implementation of anti-money laundering directives and his desire to get the Philippines off the OECD Financial Action Task Force black list as soon as possible.

Reforms will be carried out to boost the local capital market, and in particular improve access to credit for small and medium-sized enterprises. These will include increasing corporate governance standards and establishing a credit information system to better assess creditworthiness. Mr Espenilla also wants to encourage more domestic savings (now at around 20%) with a broader array of investment instruments.

The new Arroya government is now well placed to bring in some much needed structural reforms, and it is making the right moves at home and abroad. But the proof of the proposed reforms will be in their implementation – especially those covering tax – and in their ability to survive global economic conditions that could stamp out the progress that has already been made.

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