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The
Philippines: Outlook for Arroyo’s second term
By
Stephen F. Berlinguette
On
June 30th, Philippine President Gloria Macapagal-Arroyo
was declared the winner of the May 10th national elections
and inaugurated for another 6-year term in Manila. The
president returns to office with a strong support base
in Congress, the business community, the armed forces,
and the Catholic Church. Her first term was characterized
by both domestic security distractions and policies that
improved fiscal discipline in Manila, supported central
bank efforts to stabilize the peso, and stressed privatization
of major state holdings. President Arroyo is now expected
to exploit her recent victory by bolstering her administration’s
pro-business stance.
Economic management will be a critical determinant of Arroyo’s effectiveness
in her second term. Markets are expecting the government to make significant
progress on its vows to reduce the budget deficit and take long-term steps
to decrease public sector debt in order to strengthen the peso and drive down
interest rates. With a Philippine budget deficit of 4.6% of GDP and total government
debt at 126.2% of GDP in 2003, Manila presently spends approximately one-third
of its budget on debt servicing. Arroyo has prioritized increasing government
revenues to improve Manila’s fiscal position and enhance investor sentiment:
the administration’s successes in this area will depend on a mix of effective
policy, political stability, and security over the coming 1-2 years.
Central to the Arroyo’s two-track fiscal reform program is a drive to
increase tax revenues. The government currently has a debt burden of approximately
U.S. $61 billion, as compared to an annual GDP of about U.S. $79.3 billion.
Tax takings in the Philippines typically hover around 15% of GDP, though this
figure has been even lower in recent years. Past Manila attempts at improving
this ratio have emphasized enacting new and unpopular taxes, but Arroyo has
stated that the government will focus on reducing tax evasion and developing
its revenue collecting abilities in her second term. The administration’s
achievements in this decisive policy area will lay the groundwork for deficit
reduction and unlock funds for badly needed infrastructure investments.
The second pillar of Arroyo’s deficit policy concerns power sector liberalization.
This campaign has centered on the state-owned utility National Power Corporation
(NAPOCOR), which has been an enormous weight on public sector resources and
in 2004 is expected to exacerbate its six-years of severe underperformance
with a 100 billion peso loss. Though Arroyo unsuccessfully attempted to sell
off NAPOCOR assets in her first term, her reelection improves Manila’s
prospects for revisiting the problem and unloading the utility to infuse fresh
revenues into government coffers. Privatizing NAPOCOR will be a decisive indicator
of the president’s fiscal discipline in her second term.
Reconciling debt reduction with pro-poor election promises will be one of the
administration’s greatest challenges in its second term. In campaigning
against the film star and populist Fernando Poe Junior, Arroyo sought to offset
his appeal to the poor with pledges to create 6 million new jobs and 3,000
new schools, bring clean water to every village, and make fresh technology
investments in the countryside. Clearly, the government’s poverty reduction
strategy is contingent on its capacity to escalate tax revenue collection and
reinvigorate public investment. Given the obstacles in this sphere, Arroyo
will have to carefully square the demands of its economic revitalization program
with maintaining her delicate political support among disadvantaged Filipinos.
In the aftermath of the extremely close May 10th election, many Poe supporters
accused the president of widespread fraud and initiated sporadic street demonstrations
on his behalf. This defiance also found reverberation among a minority of restive
elements in the armed forces, which produced whisperings of a coup later in
the month. Much of this disquiet has now abated, but new questions have emerged
as to the effect that the government’s withdrawal from Iraq after the
July hostage incident will have on Arroyo’s support among the military’s
top brass, many of whom advocate close ties with the United States. New threats
to political calm in the Philippines during the coming months could also surface
from other quarters, such as renewed Abu Sayaf militant activity in Mindanao.
Barring unforeseen developments such as the above, however, it looks as if
Arroyo’s popular support will rest primarily on her government’s
performance on its reform and investment agenda. It is widely believed that
the president’s reelection has stabilized politics in the Philippines
for some time to come.
Assuming that this political equilibrium holds, there is a strong likelihood
that the president will have the flexibility to eventually take up other restructuring
proposals currently on the table, including efforts to lower tariffs, liberalize
foreign investment restrictions, and eliminate monopolies. The administration
also stands to benefit from steady and moderate economic growth. On Arroyo’s
watch the Philippines has shown notable resilience to internal pressures and
the global economic downturn. Driven by strong inflows from overseas worker
remittances and good agricultural performance, the economy grew by 4.7% in
2003. Inflation has been low despite high energy import prices and a weak currency,
and international conditions are expected to improve in the coming year. An
export recovery and higher private consumption levels in 2004 are together
projected to raise GDP growth to 4.8% this year. Many Philippines observers
agree, however, that growth rates of 7% or higher are necessary to support
the administration’s restructuring and reform ambitions.
By all appearances, President Arroyo’s agenda for her second term promises
sound economic management aimed at both fiscal reform and economic growth.
Yet past events in the Philippines have shown their ability to derail the visions
of the country’s most prudent planners. With the reelection victory behind
her, the president’s objective now is to avoid political conflicts and
contain militants in the south for a period long enough to lock in effective
tax collection and privatization programs during the coming year. This will
be the key test of the new administration’s fitness for skilled economic
stewardship in the Philippines.
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