‘‘I think they are turning the corner,” said Warner Manning, the British president and chief executive officer of HSBC in the Philippines, wearing a barong tagalog, the traditional Filipino dress shirt, in his office in the Makati business district of Manila. That was in May. A few months later, the picture is less clear. President Gloria Macapagal Arroyo is under siege over a publicised tape of her talking inappropriately to an election official in 2004. Her husband and son have been sent into exile over allegations of payments in a numbers game. Demonstrations against her and for her occur weekly.
Yet, despite all this drama, overall the situation remains more encouraging than the news reports imply. “The macroeconomic fundamentals have remained generally sound,” says Amando Tetangco Jr, the central bank governor, speaking in his office with the ubiquitous Bloomberg, Reuters and Telerate screens. “The improvements, particularly on the fiscal side, are intact. What we need to do is build on our recent economic gains by sustaining our economic reform efforts.”
His words were underlined by the posting of a modest fiscal surplus of 242m pesos ($4.3m) in June, when banks such as Citigroup were instead expecting a low single-digit gap of 3bn pesos. The central bank lowered its forecast GDP growth to 5% in 2005 on the back of higher oil prices and the slowdown in world economic growth, although this still represents a healthy performance compared with its neighbours.
Heavy debt burden
Of most concern is that the political brouhaha distracts from solving the country’s severe fiscal problems. The Philippines is labouring under a record $69bn debt, making public sector debt 110% of GDP.
The government will need to access the international bond markets before the end of the year to complete its external funding target of up to $3.5bn. A successful $1.5bn, 25-year bond was launched in January at one of the darkest moments in fiscal terms, so bankers, although cautious, believe it can be done without too disastrous a consequence for the yield. This is despite the rating agencies placing Philippine bonds on negative credit watch.
The fact that foreign exchange reserves of $16.7bn cover short-term debt based on residual maturities 1.7 times, while public foreign debt has an average maturity of 20 years, probably stopped the agencies from downgrading the country.
On the back of a series of reforms, the 2005 budget deficit is now estimated at 151.25bn pesos, 16% below the official target for the year, the government announced in May.
Raising tax levels
The reforms, which have been building up speed in the past five months, are mainly concerned with raising the government’s tax take through more and higher taxes and improved collection. The Philippines has one of the lowest tax collection rates in Asia at 12.5% of GDP.
Taxes on alcohol and tobacco have been increased but the law lifting VAT exemptions is stalled in the Supreme Court – although as The Banker went to press it looked as though it would be declared constitutional. Ms Arroyo has been granted the power to raise VAT from 10% to 12% in January 2006 – although this may be a political casualty – and corporate taxes have been raised from 33% to 35%.
What is even more exceptional, in a country where tax avoidance is as common as the jeepneys (customised taxis) that populate its streets, are the record takings from the Bureau of Internal Revenue (BIR). The day after the interview with The Banker, Ms Arroyo appeared at the BIR to share in the limelight as the agency announced its highest, year-to-date tax collection growth rate since 1998 at 13.6%.
Former BIR head Guillermo Parayno increased the tax take through automation, lowering the opportunities for corruption. He was one of the professionals chosen over career politicians by Ms Arroyo to spearhead her reform agenda. Then in July, along with nine other members of the Cabinet, he resigned. The ministers said too much time was being spent on the election scandal rather than in governing the country.
Reassurance on reform
Markets were reassured when within a week Margarito Teves, the former head of a state-owned bank, was appointed finance secretary. This was taken as proof that Ms Arroyo had not abandoned her reform agenda, even as she set up a truth commission to investigate the electoral fraud claims, while Congress is preparing for an impeachment process.
Although agriculture is still one of the most important parts of the economy, and light industry and tourism are also important, it is the eight million overseas Filipino workers, a weighty 10% of the population, that are the country’s best asset. At times of unrest, their contribution is even more important. With their steadily growing remittances from all over the world – officially $8.54bn in 2004, unofficially $14bn, according to the Asian Development Bank – they are mainly responsible for the consumer demand underpinning growth.
Ayala Corporation, one of the dominant, family-held conglomerates in the Philippines, notes that a major part of its growth strategy is maximising the potential of the overseas Filipino market as a source of demand for the products of its key subsidiaries, namely telecoms company Globe, property company Ayala Land and Bank of the Philippines Islands (see Philippine Banks).
Investment in jobs
Meanwhile, the phenomenal growth of call centres and outsourcing, with revenues of $850m last year, is providing job opportunities for educated workers that allow them to stay in the Philippines.
Jaime Zobel de Ayala II: foreign capital needed for infrastructure projects
Consumer demand is not enough, however. Investment is also necessary. Jaime Zobel de Ayala II, president of Ayala Corporation, notes that foreign capital is necessary to develop infrastructure projects. Political upheaval will slow foreign direct investment from new sources, but probably not as much as newspaper headlines might imply because traditional investors, mainly from the US, Japan and China, are more than accustomed to it. With unemployment at 11.8% and 40% of the population living on less than $1 a day, according to the World Bank, Ms Arroyo is intent on creating jobs for the lesser-skilled as well as educated Filipinos. “I want to create six to 10 million jobs in the next six years so we can wipe out unemployment. How do we do this? By investment. Of course, we need the infrastructure and the business climate to bring investors in,” she said in an interview in May (see Karina’s Kolumn in this issue).
Corruption also needs to be tackled. According to Transparency International, the Philippines continues to be one of the most corrupt countries in the world. “It is a perception we work under,” admits senator Mar Roxas, a member of the Liberal Party who is often mooted as a presidential contender in the next elections.
“The challenge before us now is, while we have addressed the revenue-generating side by imposing new revenues, [that] does not address the leakage everyone admits exists. We want to be able to plug those leaks,” he says, in an interview in the crowded, chaotic Senate building.
“The Philippines is trying [to turn the corner]. Everyone has that intention. It is just that in our culture things are pretty slow,” says Tessie Sy, heir-apparent to the SM Prime Group, the leading retailing group in the Philippines, and chairman of Banco de Oro.
Political upheaval, part of the soap opera that is Philippine governance, will slow things down. But slow reform is still an accomplishment. The hope is that it will not stall completely.
