Feb 12, 2011

Philippines enjoys post-poll pick-up

By Jennee Grace U Rubrico
Asian Time Online
Sep 14, 2010

MANILA - Business sentiment is rising in the Philippines, buoyed by the May election of President Benigno Aquino and the rising tide of global economic recovery. Whether Aquino can sustain the economic good times amid signs of a slowing global rebound will depend largely on his ability to enact quickly badly needed reforms.

The latest quarterly Business Expectation Survey, conducted by the central bank between July 1 and August 10, showed that business confidence touched 45%, its highest level in two years and a dramatic improvement on the 18.4% recorded over the same period last year.

Indeed, there are reasons to be cheerful. The stock market jumped almost 5% in the first week of September to hit a 32-month high, while the Philippine peso continued to strengthen against the US dollar in line with several other currencies in the region.

Election-related spending, including on advertising and other recreational campaign activities, gave the economy a big first-half boost. After growing an anemic 1.1% in 2009, Philippine gross domestic product (GDP) expanded 7.8% in the first quarter this year and 7.9% in the second.

The World Bank noted that first-quarter growth was "far faster than expected", but in line with equally strong regional country recoveries, including 15.5% in Singapore, 12% in Thailand, 10.1% in Malaysia, 5.8% in Vietnam and 5.7% in Indonesia.

After contracting by 5.7% in 2009, investment grew by 24.3% in the first quarter. Remittances from overseas Filipino workers (OFWs), meanwhile, hit US$9.1 billion in the first half, a 6.9% jump over the same period last year, according to official statistics.

Before Aquino's election, sovereign analysts had raised concerns about the country's deteriorating fiscal position, which was aggravated by aggressive pump-priming to offset the negative impact of the global crisis. Fitch Ratings places the Philippines on the second-lowest tier of its bank systemic risk matrix, on par with Hungary, Sri Lanka and Ecuador.

Some analysts had earlier wondered whether the Philippines would follow in the footsteps of Vietnam, whose credit rating was downgraded in August due to a sharp deterioration in its external finances. Although still in surplus, the Philippine balance of payments weakened year-on-year in the first quarter, falling to 3.2% of gross domestic product (GDP) from 4.8% in 2009.

Aquino's strong reform message appears to have given the country at least a temporary reprieve. "The new administration of President Benigno Aquino III, who took office on June 30, has set the tone for accountability and transparency, reviving programs aimed at improving tax collections and emphasizing budgetary restraint," United States-based credit rating agency Moody's wrote in its most recent credit opinion on the Philippines.

"The departments of Finance and Justice have aggressively pursued legal means to deter tax evasion, while the president has outlined a 'zero-based budgeting' approach to expenditure outlays going forward," the Moody's report said.

The government has penciled in projects worth 180 billion (US$4 billion) to 200 billion pesos under the zero-based budgeting scheme, which would allow it to implement projects without state capital outlays through partnerships with the private sector. The plan aims to allow the government to implement crucial infrastructure projects without putting pressure on its fiscal position.

Aquino's early push to rationalize fiscal incentives has sent a positive signal to the business community, according to Donald Dee, vice chairman of the Philippine Chamber of Commerce and Industries, the country's biggest business organization.

"It's our belief that people invest in the country not just because of the incentives, but because they see value in the Philippines," Dee told Asia Times Online.

Benjamin Diokno, a former budget secretary, doubts that the recent rapid economic growth clip is sustainable and predicted the government's 7%-8% GDP growth target for next year would be "tough" to meet.

"Many growth drivers that were present in the first half of the year will be missed in the second half of the year," including election spending, front-loading of public infrastructure outlays and above normal government spending, he wrote in his blog.

"The decision of the Aquino administration to pursue a conservative fiscal policy and to calibrate spending as resources materialize could seriously slow the contribution of the public sector to stronger growth," he added, warning that the global economy was at risk of a double-dip recession.

"Perhaps they want to be conservative, or they realize that there are looming dark clouds in the horizon," Diokno wrote.

One potential cloud is a high budget deficit. Finance Department figures show that the deficit-to-GDP ratio reached 4.9% in the first half of the year, exceeding the 3.9% ceiling set for all of 2010. For the seven-month period ending in July, the national government posted a budget deficit of 229.4 billion pesos, comprising 70.6% of this year's ceiling.

Moody's, which has assigned a Ba3 rating with a "stable" outlook for Philippine sovereign bonds, says that pressure to revise the rating downwards "would arise from an inability to improve government finances or a structural weakening in the balance of payments".

Some economists believe the government still has room to maneuver. "Domestic interest rates remain low historically, suggesting there may be room to move around to finance the deficit," says University of Asia and the Pacific economist Peter Lee U.

"The deficit is manageable - the counterweight to that is the amount of liquidity in the system," said Roberto Juanchito Dispo, executive vice president of First Metro Investment Corporation. "The [government's recent bond] issue was well received by the market, and this acts as a buffer to the deficit."

Dee stressed that local businesses were not looking for a quick fix to the fiscal gap. "As long as we keep the deficit to 3%-3.5% of GDP next year, business will consider this as managing the deficit." He said that while the government's belt tightening measures were laudable, there was still a need to raise tax revenues, a perennial problem in the Philippines.

Aquino ran on the campaign promise that he would not raise taxes, but he has backtracked slightly since taking office. He has said his administrations would impose new taxes only as a "last resort" to address budgetary gaps. 

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