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Economic and Political Review of Selected Asian
Countries
COUNTRY REPORT - PHILIPPINES
Prepared for "Asia and Pacific Review 2001"
Political developments
If life imitates art, political life in the Philippines in 2000 imitated nothing so much as a Mexican soap opera made for TV, which, coincidentally, is the favourite staple of the masses in the archipelago. Throughout 2000 the political climate continued a steady deterioration as investor confidence in the competency and honesty of the Estrada Administration ebbed away. This process led to the first ever impeachment trial of a Philippine President in November 2000 when President Estrada was formally accused of corruption by the Lower House, which sent the case to the Senate for trial. Conviction required the assent of two-thirds of the 22-sitting Senators; in other words, eight senators could block his successful impeachment. These hearings were broadcast daily on TV and all work stopped for them, much as it had twenty-seven years earlier for the Watergate hearings in the United States.
Despite overwhelming evidence of his acceptance of kickbacks from illegal gambling games, pocketing of tobacco taxes and the existence of massive bank accounts under fictitious names in the hundreds of millions (if not billions - an accounting of overseas assets has still be made) of US dollars, all from a salary of US 1,000 a month, some senators were reluctant to convict him. For a while, it appeared that he would buy his way out of trouble and stagger on as a crippled, non-functioning incumbent, presiding over a crippled economy supported by a solid base amongst the masses, whose gambling proceeds he was plundering.
This seemed to be confirmed when a narrow majority of senators refused on 16 January to consider some damning evidence on narrow legalistic lines as "non-relevant and immaterial". This outrage of the political process was, however, a step too far and it opened the legitimate floodgates of opprobrium from the upper and middle classes. A confluence of forces lead by the redoubtable Cardinal Sin and former Presidents Aquino and Ramos assembled peaceably in the streets of Manila demanding that Estrada step down. When the military switched sides, the second peaceful turnover of power in 15 years forced by a middle-class uprising resulted.
With Cardinal Sin calling the faithful into the streets to the final denouement for the disgraced ex-president took about 72 hours as he was forced to leave the presidential palace by the rear exit on a barge down the polluted Pasig River. The Vice President Gloria Macapagal Arroyo, was installed as President on 20 January 2001, after the Supreme Court unanimously declared the position vacant, saying that Estrada was incapable of governing. Ironically, given the intertwined nature of the two countries' histories, 13 hours later in Washington DC, George W. Bush was inaugurated as President of the United States at midday local time on 20 January 2001. The ironies were extended since President Bush was also promoted to his position as the result of a Supreme Court decision, and both presidents are the offspring of past presidents.
President Arroyo is a total contrast to the dissolute Estrada. Not only is she the daughter of a respected past President (her father was defeated for re-election by President Marcos in 1965), but she has a strong religious faith, an Ivy League education and experience as a top bureaucrat, Senator, Cabinet officer and Vice President. No single occupant of Malacang Palace has been as well prepared for the job.
She needs all that preparation since the tasks she faces are daunting. The institutions of Government (executive, judicial, legislative and military) are almost uniquely weak and subject to personal rule. Wealth is inordinately skewed in a poor country and she faces considerable unrest in the Muslim south, where Estrada tried to create a sideshow to divert attention from the failure of his other economic policies. Estrada may try and create further problems for the new Administration but, if so, it would be to distract attention from possible trials for economic plunder, which carries the death penalty. However, he has little or no effective remaining support amongst the population at large.
Her Cabinet reflects the diverse interests that placed her there. The military, particularly those parts loyal to former president Ramos, are prominent. The Spanish mestizo business elite, who did not support Estrada, is also back. Gambling, smuggling and drugs interests are the losers in the short run. At the same time, President Arroyo knows that she must address the problems of poverty, corruption and transparency if she is to have a successful presidency and this is a tall order. At the moment, politicians are supporting her and she should be able to create a solid working majority in the Congress in elections due to be held in May 2001. The Congress elected then will serve for three years until the next presidential elections in 2004. President Arroyo would be expected to stand for election also at that time, if she is deemed eligible. Whilst the constitution is grey on the matter, given the way she came to power the Supreme Court may well find her eligible if she is still popular at the time. This gives the promise of considerable policy stability.
The new Vice President is Teofisto Guingona, a senator from Mindanao and a political prisoner under the Marco regime. He should be helpful to the new President in healing the ethnic wounds reopened by Estrada. At 72 he is not a threat to the President.
The international community is also supportive of President Arroyo; it was never comfortable with the Estrada Administration and international organisations generally reduced their support for the country during his term of office. President Arroyo is keen to improve the international image of the country.
Most importantly, the United States can also be expected to be very supportive. Both the growth in the drug traffic through the Philippines and the growing Chinese naval presence in the South China Sea alarm it. Estrada's accommodation of these interests on the advice of his largely ethnic Chinese cronies, many of whom had close links to the Mainland, was especially galling. The United States will be expecting that the new regime will once again make its bases more easily available for the common defence of the region.
Economic developments
The raw figures show that the Philippines economy grew by between 3.5 - 4 percent in 2000, only marginally better than the 3.2 percent rate the previous year. Unfortunately, the official figures of the Estrada Administration are suspect and probably overstate the growth rate to some extent. Even if the figures are to be believed, they fail to compare with the economic rebounds in the other South East Asian nations such as Thailand, Malaysia and even Indonesia which, despite continued political instability, was able to grow through its natural resource exports. Furthermore, the population continues to grow at about 2.3 percent per annum meaning there is very little improvement in overall living standards. In fact, because of the skewed nature of income distribution, more people fell into poverty despite the slight economic rebound and the violence in the south only exacerbated a bad situation.
Agriculture again played a role in the figures with another good harvest. Exports in the electronics sector remained buoyant, at least through the end of the year. Industry, in general, however has declined as a share of total output in recent years in comparison with its ASEAN neighbours because productivity is not as high. This seems to be due to the regulatory framework and lack of investment in infrastructure.
The service sector, on the other hand, particularly the telecoms sector that grew at 18 percent, was the strongest parts of the economy. Once again the Filipino diaspora contributed to the strength with its remittances that through formal and informal channels are vital to sustaining living standards of many families. (Virtually no extended families are without members working abroad and sending funds home.)
There was a loss of control of spending and tax collections deteriorated as the government became increasingly diverted by the war effort in the south and the growing sense of loss of legitimacy as the year progressed. The budget deficit for 2000 was supposed to be 65 billion pesos (USD 1.6 billion at the January 2000 exchange rate). However, both spending control and revenue collection collapsed under Estrada and the outcome appears to be close to a deficit of 200 billion pesos or USD 4 billion and January 2001 exchange rates, almost 5 percent of GDP.
Whilst money supply grew rapidly in 2000 the inflation rate was officially only 5 percent. However, regrettably that figure again has little credibility. The country is one of the most dependent on imported oil in the region and that costs alone when fed through the system will give a further impetus to prices.
Banking sector
The Philippine-banking sector has been going through a quiet reform during the Estrada years, although much of the groundwork was established under president Ramos. The objective has been to consolidate the sector into fewer, stronger units and allow a more level, less protected playing field as international players have been allowed into the domestic market.
This policy of consolidation continued in 2000 with the merger of two of the largest banks, Far East Bank into Bank of the Philippine Islands, the 160 years old blue chip, part owned by the Catholic Church, the Ayalas and J.P.Morgan.
The sector is now much better capitalised with a capital adequacy ratio double the Basle targets and broadly inline with non-performing loans which seem to be holding in the 16 percent range, which is manageable and perhaps half Thai levels.
The new Government will, however, have to determine what to do with the deeply troubled Philippine National Bank, in which Estrada crony Lucio Tan holds a majority stake. Selling the Government share has been confounded until now by the unrealistic views of Tan and Government about the worth of the shares.
It will also have to handle the question of Bank Secrecy and the related question of money laundering. The country is on the OECD black list and has been resistant to lifting the old secrecy laws. However, necessity and the need to get at the Estrada funds will probably make the new administration try and move in line with global norms. Access to IMF funds may indeed be conditional on this.
Infrastructure development
Lack of funds is going to make tackling the Philippines infrastructure deficiencies a challenge. The picture is far from bleak if comparison is made with a decade ago. However, comparisons with its neighbours do tend to be invidious.
Continued investment in telecoms infrastructure seems likely to proceed at a satisfactory rate. Privatisation of the National Power Corporation may move forward more rapidly given the desperate need of the Government for funds. Development of the new airport terminal at Manila's international airport with the necessary access roads is also proceeding apace. Much of the new investment in water and public transport will have to be privately financed as, indeed, has been the case in recent years.
Economic prospects and challenges
President Arroyo has her work cut out restoring a healthy economy. She has inherited a Treasury that is bare, as noted previously, and has an urgent need to improve the nation's finances whilst finding funds for development. The old Hispanic culture is almost uniquely resistant to paying taxes, particularly on income. Some of this goes back to the wartime resistance against the Japanese when it was deemed patriotic not to pay. More probably is accounted for by greed and a belief that the funds will be wasted by corrupt administration.
This "weak state" syndrome requires a change of political culture and that, in turn, requires continued sustained good administration. This is perhaps best exemplified by the estimation that the tax collection rate could be as low as 10 -20 percent of the true amounts due, and even that will be shared between officialdom and the Government coffers. President Arroyo therefore needs to confront a culture of non-compliance and show that the government can deliver value for money. This, at best, is a long haul and little progress can be expected in a short time. The government has estimated that it may take until 2008 to reach a balanced budget.
In the interim, the government is likely to resort to increased borrowing from both official sources and the international bond markets. However, the country's debt/GDP ratio continues to creep up and stands at 65 percent. Therefore, continued resort to these markets must be managed carefully if a debt crisis is to be averted. Philippine Government bonds are the lowest investment grade and were threatened with relegation to junk status immediately prior to Estrada's ouster. The country now has a reprieve but it is on watch by the bond vigilantes.
Outlook for the stock market and investment
The outlook for the global economy is uncertain in 2001, primarily because of uncertainty in the United States economy as the long boom there threatens to turn into something much less pleasant. The Philippines is more exposed to the vicissitudes of the US market in general and the electronics cycle in particular than most of its neighbours. Virtually all its oil is imported. Despite the improved political climate, growth may be slightly lower than last year at around 3 percent due to the external environment. Any new adverse weather conditions would exacerbate the situation.
Once the new Government consolidates its economic position and begins to get its budget under control, foreign investors should be willing to look at the country again. However, the halcyon days of pre-1997 for South East Asia are long gone. It is now seen as a much less politically stable region. Fresh investment is likely to be selective and confined to niche areas of comparative advantage. The entry of China into the WTO and the emergence of India as credible international competitors reduce the attractiveness of SouthEast Asia for many traditional industries.
The country will have to concentrate on niche areas. One particular advantage for the country is its people. They are well educated for the country's level of per capita income. Consequently, they have a very high emigration rate - often as gasterbeiter - and are particularly well suited to the service industries that are chronically short of trained staff globally. Information technology is a sector that with enormous potential for the Philippines. Filipinos have a comparative advantage in low wage rates coupled with fairly high levels of English language capability. This should allow the country too become a prime location for international call centres, software maintenance and outsourcing of back office operations. These areas have already begun to grow in recent years despite the generally restrained levels of economic activity. The regulatory framework is also attractive for this type of investment, unlike the resource sector where the country should also enjoy a comparative advantage, but suffers from an out of date nationalistic regulatory and legal framework.
The Philippine stock market, for the second successive year, was one of the worst performing in the world being down about 50 percent in USD terms in 2000. This was a reflection of both international and domestic confidence in the Estrada regime. The currency collapsed by over 25 percent during the year. This collapse in prices to real levels below those at the height of the Asian crisis had the effect of creating real investment values.
As the likelihood of Estrada being removed increased the market bottomed around an index level of 1,250, stabilised and had an explosive rally on his removal. The potential for a rally back to the low 2,000 level is certainly there. It could even be exceeded if increased confidence on the part of foreign investors (particularly US investors) is coupled with portfolio asset reallocation. Achieving that will probably depend on the US slowdown progressing to a relatively benign soft landing. With a hard landing, the whole region is likely to catch a fairly severe cold.
Political and Economic Risk Ratings:
| Economic: | Improving |
| Political: | Improving |
| Regional Stability: | Satisfactory (but Fragile) |
| Stock Market: | Improving |
William R. Thomson 10 March 2001
Wt@momentum-asia.com.hk
Tel: 44 1483 440825
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