Philippines - Turning the Corner?

By Scott MacDonald

The Philippines is turning the corner with its economy picking up momentum and the political situation becoming more stable. For Southeast Asia, mired with the problems of religious strife in Indonesia, a hardline military regime in Myanmar, and a tough recession in Singapore, a little good news out of the Philippines is welcome.

During the 1980s and early 1990s when neighboring countries Indonesia, Malaysia and Thailand enjoyed dynamic growth and were the darlings of the international financial community, the Philippines struggled with slower economic growth rates and the consolidation of democratic government following the ouster the Marcos regime. Just when it appeared that the Philippines was gearing up to join the march to the Asian century, the 1997-98 Asian financial crisis rocked the region. Indonesia plunged into political and economic decline following the fall of the Suharto regime, while Malaysia and Thailand struggled to restructure their economies. The Philippines weathered the storm relatively well. However, the potential of this Southeast Asian nation was not to be realized as the government of President Estrada detoured the country into corruption scandals, squandering many of the gains made by the Ramos administration. In 2000, after months of political instability, Estrada was forced to resign and Gloria Macapagal Arroyo, the Vice President, became the new head of state.

Although pro-Estrada forces sought to destabilize the new government, Arroyo moved quickly to bring in a well-respected and qualified cabinet. The Arroyo administration is providing badly needed political stability to the Philippines. A key factor is the shift of the economy to a stronger mode of growth in the medium term. At the same time, tough challenges lie ahead, which will require political will to resolve.

The Philippines has the following advantages:

While the Philippines has a number of positive trends, it faces some challenges that could contain the pace of recovery. First and foremost, the credit quality of the banking system is challenged by the continued increase of non-performing loans (NPLs). NPLs rose from 15.3% in December 2000 to 18.8% in November 2001 and are expected to peak in 3Qo2 at around 21%. The government is aware of the issue and is seeking to pass legislation to establish special purpose vehicles for the banks to offload NPLs and convert them into work-outs.

Another potentially worrisome trend is that external debt ratios are rising. Total external debt of the Philippines is around $54 billion, of which $22 billion is sovereign, the rest being owed by corporations. That debt level is equal to 78% of GDP. The debt service ratio is gradually increasing: in 2000 it was 15% and 18% at year-end 2001, with an expected peak in 2002 at 22.2%, with a gradual decline scheduled for 2003 (21.4%) and 2004 (18.8%). At this stage this should not present any problems, but if the trend continues it could complicate the country’s access to international credit markets. To counter the build up in external debt, the Philippines continues to have access to international capital markets, has built up adequate foreign exchange reserves and has a good working relationship with its multilateral banks.

Another concern on the economic front is that the track record for privatization has been slow and full of political complications. The upcoming privatization of Napocor is important because of the possible $4-5 billion in revenues that are expected to be generated by the sale of electrical assets. It is important to maintain momentum as there is regional competition for the privatization of generation assets from Korea and Singapore.

The Philippines must also contend with a high crime level. The country’s widespread poverty has helped maintain the option of criminal activity as a means of income supplement. One damper for foreign investment has been the highly publicized kidnappings of foreign executives.

The last point of concern is political. President Estrada did not leave office because he wanted to. Rather he was forced out by widespread public disgust with his involvement in high level corruption and poor economic management. Arroyo fulfilled the role as the constitutional successor, but her coalition faces the risk of factionalism, requiring continued political compromises to keep crucial allies in place. While Arroyo’s popularity has slipped slightly, the military, business community, judiciary and the major church institutions remain behind her. However, the political run-up to the presidential election in 2004, in which Arroyo is eligible to run, will mean a greater emphasis on competing political interests.

The Philippines faces a challenging time ahead on both the political and economic fronts. However, the trends are largely favorable. While some of the reforms have already been implemented, the Arroyo government appears set to embark upon a new round of structural changes, including reducing the fiscal deficit in absolute terms. What is really needed to deal with the challenges of the banking system, the Islamic rebels in the south, rising external debt levels and pro-Estrada forces is strong leadership and a consensus within the government’s coalition. President Arroyo may be small in physical stature, but she is certainly setting out to remake her country and this bodes well for the future.