Letters from the morning of the world
Published: Thursday, December 23, 2010
For the first time in a number of years, the Philippines will begin the New Year in an upbeat mood. On both the political and the economic fronts, there is reason for optimism.
Let’s start by looking at the political environment. The nine years of misrule by former President Gloria Macapagal-Arroyo are at an end and the country has a new administration that has promised an era of openness, transparency and good governance. True, these are the same things Arroyo promised when she took over the reins of power from “the people’s president”, Josef Estrada, back in January 2001, but her government was flawed from the outset. An arrogant technocrat by nature, nobody doubted her ability or her workaholic pace but she lacked charisma and the popular support that goes with it. So she was dependent on other constituencies, particularly the generals, the bishops and the oligarchs for backing and that came at a heavy price. The result was backsliding from principled government, slow at first but accelerating after discovery that the 2004 election result – which returned her to office by popular vote – was rigged. Integrity was replaced by expediency and infected many who came into contact with – or sought positions in – government and its agencies.
President Aquino, who assumed the presidency on June 30 2010 is both popular across the country and comes from a family that has a track record of integrity. We do not doubt the monumental task he faces to bring good governance back to the Philippines but neither do we doubt that he is probably the best person for the job. As Tony Kwok, a former deputy commissioner of the Hong Kong ICAC and former anti-corruption advisor to the Philippine Government remarked back in 2006 “corruption in the Philippines can be beaten but it has to start from the top.” Shortly after making that statement he left the country, never to return.
Bringing Arroyo to account for her misdeeds is another matter. Now a member of the legislature for her home province of Pampanga, she thwarted established protocol in the dying days of her presidency to appoint friends to high places thereby making it difficult for any incoming administration to prosecute her. It may well be that history – and perhaps Transparency International – will have the last words on her presidency. In the global list of presidential kleptocrats of all time published by TI, the Philippines already has two in the top ten; will it soon have three?
These difficulties aside, the business community has given the new government its stamp of approval and appears upbeat about investment prospects. Both manufacturing as well as services are recording steady growth and this is more than compensating for the downturn this year in the agricultural sector.
The Asian Development Bank in its revised (October 2010) forecast has noted that the renewed emphasis on public-private partnerships to pay for much of the needed infrastructure with private sector financing will allow the government to focus its limited resources on debt reduction and human capital development. Outlays on social services will rise to around one third of all government spending – up by around 14 percent. Education spending alone is to increase by 18 percent, the largest increase in more than a decade; while the conditional cash transfer programme that provides income for the poorest of the poor (provided they meet certain criteria in terms of keeping children in school and accessing rural health services) is to be increased as well.
The government can be thankful that the external environment is proving relatively benign for the time being. And while the developed economies appear to be having some setbacks in fully recovering from the global crisis that hit two years ago, developing countries are faring much better and none so well as those in Asia. Recent data released by the IMF and reported in its World Economic Outlook suggest that high-income countries will grow on average this year by a modest 2.7 percent while the developing world will likely achieve a 7.1 percent GDP spurt. At 9.4 percent, Asia will fare even better – although of course, China weighs heavily in the Asian figures.
The Philippines did relatively well in 2010 with a stronger than expected recovery in the first half of the year – thanks in part to election-related spending by government. In the period January to June, GDP increased by 7.9 percent (compared to just 0.9 percent in 2009). Private consumption expenditure grew at a robust 5.1 percent and was again supported by remittances which grew in dollar terms by 7 percent to $9.1 billion although in peso terms the increase was much less (around 2.2 percent).
According to ADB, fixed investment is also once again making a significant contribution to GDP growth with outlays on fixed capital surging by 21 percent year-on-year and investment into plant and equipment rising by 30 percent over the period. Strong growth was recorded in spending on commercial vehicles, industrial machinery, and telecommunications equipment. Fixed investment as a ratio to GDP rose to 17.2 percent, the highest level in seven years. Remember, that data from the first half year reflects improved global conditions rather than improved governance and hopefully, these numbers may improve during the final half of 2010.
As a result of improved export demand, imports in September rose by 24.6 percent year-on-year to a high of $4.6 billion. As an intermediate producer, imports are regarded as a bellwether of export orders in the months to come. The country’s trade surplus was the largest in 10 years and now sufficient to cover more than nine months of imports. Significantly, electronics exports have seen a jump this year by more than 50 percent.
The improved trade position has led to a rebound in manufacturing although it is too early to tell what effect this will have on the dire unemployment and underemployment rates in the country. In the first half of 2010, manufacturing (which accounts for two thirds of the industry sector) grew by 16.2 percent – although admittedly this was from a low base in 2009. Nevertheless it shows that the economy is now regaining its health and is in step with the global recovery. The job now is to sustain the momentum.
Strong demand from the business process outsourcing sector has helped propel the service side of the economy which grew by 6.7 percent in the first half year and early indicators suggest that demand continues to pick up. A recent statement issued by the Contact Center Association of the Philippines predicts industry growth of 23 percent for the year as a whole – from $5.1 billion in 2009 to $6.3 billion in 2010. This growth translates to an additional 70,000 jobs bringing the total to 350,000 people.
The Central Bank has reported that gross inflows of foreign portfolio investments reached $11.6 billion in January to November, significantly higher than the $7.4 billion in gross outflows. These inflows more than doubled from the $5.9 billion seen during the same period last year. The central bank said the inflows were investments made by foreign funds, mostly from the United States, Singapore, United Kingdom, Luxembourg and Hong Kong. Of the total inflow, $7.7 billion was invested in stocks listed on the Philippine Stock Exchange.
There are both threats and opportunities ahead that will require skilful management. According to the latest global outlook published by the EIU, the US recovery is weakening, and concerns about job growth will continue to constrain demand. A similar pattern is found in Western Europe where problems in Greece and Ireland pose fiscal risks that could dampen recovery efforts there. Consumers in the OECD area – the main end purchasers of goods manufactured in the developing world – will remain cautious in their spending, dampening demand growth. With its high dependency on electronics exports (around 65 percent of manufactured exports), the Philippines will be especially vulnerable to any slowdown.
The opportunity comes from a revival in investment that leads to more decent work within the Philippines thus reducing the need for remittances as drivers of consumption. With the population of the country now approaching 100 million, there is (and always has been) this untapped resource that could – with the right investment and labour policies in place – stir internally generated demand growth.
For a welcome change, the political and economic landscapes are enjoying a rare period of sympathetic resonance. Allowing for the low base effects especially evident during the first half year, overall GDP growth for 2010 is predicted to come in at around 6.2 percent. For 2011, this is likely to ease back to 4.6 percent – still a respectable figure but not enough to make significant inroads into poverty in this country. Nevertheless it is a good beginning and people of the Philippines have a reason for cautious optimism. Now, if only the country could get a grasp on its unbridled population growth...
About the writer
Mike Clancy, founder and editor-in-chief of the Philippines Business Review and former CEO of a Manila-based company that ran the Corporate Network program of the Economist Intelligence Unit in Manila has been publishing monthly commentaries on Taiwan and the Philippines since 1998 having lived and worked in both countries from 1990 – 2009. Now living in Australia he continues to follow developments in Asia and publish his newsletters while working as an editor and trainer.
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