The Philippines was recently referred to as
the “comeback economy” in Asia. What that means is that it was once in the
league of good economic performers and that it is returning to the same league.
I have
written about the brightening prospects for the future and why opportunity
knocks. (See, for instance, Crossroads, March 7, 2012.) In the past, the
Philippine economy has been an average economic performer among many developing
countries. But in comparison with some East Asian dynamic neighbors, it has
been the one left behind.
But
now, it seems, the horizon has changed for the better. There is still much to
be done in the area of reforming the investment climate. However, recent
economic developments provide good prospects for growth even under conditions
of existing policy.
Two
factors account for this. First, good macroeconomic fundamentals have remained
in place over at least a decade now. Second, economic changes in the region are
making the Philippines an alternative site for relocation, given that
production costs are rising elsewhere and that the country has the essential
labor pool for future growth.
“Improved
economic fundamentals.” In the course of recent years, the Philippine economy
grew at an average rate of 4.5 percent per year. During the same period, the
fiscal balance was kept reasonably well under control. Also, favorable external
conditions also improved.
The
Aquino government, which is on its second year in power, kept a tighter fiscal
framework compared to the previous administration. Tax collections rose through
improved revenue collection efforts. Matched against the public spending that
was kept within range of revenues, the government fiscal deficit was kept low.
One
feature of this fiscal spending is the shortfall in public investment compared
to the planned expenditure. This produced a deceptive fiscal picture. Spending
on public investment was lower than expected. In view of the need to raise the
level of spending on infrastructure projects, this shortfall has an impact on
future performance.
The
external sector performed favorably during the same period. OFW remittances and
earnings from BPO outsourcing services have been strong performers as earners
of foreign exchange. Other exports and the inflows of foreign investments
contributed to the rise in the country’s reserve position.
International
reserves constitute close to a year’s imports and are equivalent to half a
year’s maturing short term obligations. These are sound numbers. Compared to
previous years, international reserves constituted a few months of imports and
the debt service was much higher.
“Sovereign
credit upgrades.” An outcome of the favorable macroeconomic conditions as
described above is the change in sovereign credit ratings for the country. The
country’s credit ratings have received upgrades.
These
credit ratings are, however, still below investment grade. But they have risen
from more dismal ratings in earlier periods. Lately, four credit rating
agencies have given the country positive outlook in their ratings. In
particular, these ratings are: Fitch (BB+), Moody’s (BA2), Standard & Poor’s
(BB and positive outlook), and the Japan credit rating agency (positive
outlook).
Such
ratings are likely to improve further. One day, such ratings could become
investment grade. Improved credit ratings mean that the country can get reduced
cost of borrowings from the international credit market once it looks for new
financing.
“Booming
construction and business process outsourcing (BPO) operations industry.” Two
sectors of the economy have been booming: construction and BPO operations,
especially call centers.
The
construction sector has been building up in terms of commercial and residential
construction. This has been essentially a private sector driven boom in
construction. The construction boom has been partly influenced by the demand
for office space, an outcome of the boom in the BPO industry and by strong OFW
remittances.
Government
infrastructure construction is still relatively weak but it could become the
leading sector in construction as more public infrastructure built along the
public-private partnership (PPP) model are contracted out.
The
Philippines has become a major country in the BPO industry. For the moment,
call centers dominate the BPO industry. The foundation for the BPO industry
transforming itself into a more knowledge-based industry is now taking root.
That would call for more requirements of science and engineering applications
in the BPO industry. Initially, call centers were set up to take advantage of
country’s pool of young skilled workers who can speak English.
These two
sector booms began during the administration of Gloria Macapagal Arroyo.
Politics aside, they began growing when the economy overinvested in
communications facilities as a result of the liberalization of that sector
during the 1990s. As the BPO sector opened up, demand for office construction
also perked up.
These
booms have continued unabated during the Aquino administration.
“Improved
economic indicators.” A number of investment banking houses and other
institutions monitoring country developments have been sounding out the good
notices about the country. Economic accomplishment affects perceptions. And
perceptions are infectious. They influence investors and public analysts in
their judgments about the country.
After
the impeachment of a sitting president (Joseph Estrada) for various reasons
including corruption, the country’s ratings on competitiveness as well as on
indicators of corruption practices worsened. As corruption scandals became a
major staple of media news during the succeeding years during the presidency of
Gloria Macapagal Arroyo, the country’s standing in these competitiveness
indexes did not improved.
Thus,
one result of the campaign of President Noynoy Aquino to pin down
accountability for corruption on his predecessor might be responsible for the
country’s improved ranking in the international competitiveness index as
reported by the World Economic Forum, however modest that is. The Philippines
moved ten positions in the country rankings, an improvement.
“Auspicious
factors will strengthen economic prospects.” There are developments that are
already happening that favor Philippine economic prospects. The gloom of Europe
and the still weak American economic recovery aside, these developments are
happening in the region.
Economic
adjustments in China and in Japan are the biggest factors that work to favor
the Philippines. And then, when ASEAN becomes a free trade area in 2015, the
country will move toward a more integrated and larger regional future and
competition.
To
maximize the economic gains, the Philippine policy makers cannot just remain
passive and predicate that current investment policies will suffice. For one,
there is need to maintain a continuing improvement of the country’s
macroeconomic management. In addition, contrary to the current view that policy
makers can simply reap the benefits of these new inflows of investment under
stable policies, it is important that policy makers work hard to improve the
investment climate to realize higher growth, greater employment and reduction
of poverty.
The
good news on the horizon about the economy comes from diverse sources that
monitor the country’s economic problems and performance.
These
assessments begin with work at home by those managing the economy. Getting the
major levers of policy right so that economic fundamentals are strengthened is
a major task. Thus, the government in charge is fully responsible for outcomes.
When positive outlooks dominate, the prospects are bright and perceptions about
the country become receptive to even better assessments.
As far
as the macro-fundamentals are concerned, the government of Noynoy Aquino has
done a good job in improving the framework. It has also been helped by
auspicious developments continuing from earlier governments.
“Role
of institutional observers.” Oftentimes, the International Monetary Fund and
the World Bank provide a useful channel. These institutions are in the business
of assessment and advice as well as action concerning a country’s economic
conditions. Reviewing a country’s macroeconomic and development prospects is in
line with their professional mandate.
As
development actors, they are not infallible, but their opinion carries weight
in influencing the actions of other institutions. What they say provide the
triggers for other opinions about a country’s forward motion. In recent
periods, those comments, including those from Asian Development Bank, have been
very encouraging and positive.
The
conclusions they make have wide implications. The credit rating agencies and
the investment banks take them seriously. Then the business consultants weigh
in with theirs.
Investors,
other development and financial institutions, lenders, consulting companies,
think tanks, and countries – all those with a stake in the country’s current
and future developments – try to make use of the information they gather and
then act according to their own assessments.
The
result is that an overwhelming set of optimistic reports have appeared in
recent weeks from all quarters. As result, the Philippines becomes among the few
countries that are weathering those economic difficulties.
“President
Aquino’s speech.” On the back of these developments, President Aquino airs more
confident optimism. Speaking before the Business Forum of Joint Alumni Clubs of
various graduate schools in the US (Harvard, Wharton, Columbia, Northeastern,
Cornell, Stanford, and MIT) in Makati last week, he cited, among others, the
following points:
•
Accelerating approvals of new foreign direct investments by the Philippine
Export Zone Authority (PEZA).
• The
new high levels of the Philippine stock exchange index which has breached 5,000
, indicating optimism.
• The
Philippines is now the 4th ranked shipbuilder in the world.• The new large
prospective investors – two more shipbuilders and two steel mill private
investors – are interested in coming to the country.
• The
reforms needed to make the investment climate improve, and
•
Scheduled lining up this year for contracting out of eight large PPP
(Public-Private Partnerships) in infrastructure projects.
“How
the future would evolve.” In the development game, nothing follows
automatically. The outcome is likely to be influenced by a number of forces
working together.
Favorable
causes could already be in place. Then, other external events of substantial
influence over which the government has no control could be transpiring.
Finally, there are constructive actions that the government could, by choice,
make.
“Favorable
factors already in place.” There are three important positive developments
already in place.
The
first is the existence of the ASEAN as a grouping that has decided to become an
integrated market by 2015 – in three years – with the final coming into being
of the ASEAN Free Trade Agreement. Tariffs among the ASEAN economies will
vanish, spawning deeper competition among the members within a larger regional
economy This is undeniably a strong enabler for the expansion of the community
and which has been encouraging the entry of foreign investments to the member
countries.
The
second is the change in production costs in some major countries, especially
China and Japan – as a result of massive currency appreciation and the economic
adjustments they have been experiencing.
In the
case of China, labor costs have risen so that labor using industries have
become subject to migration to other countries with lower costs. Foreign
investors in China (US, Japanese, Chinese, Korean, and even Philippine) are relocating
to new areas.
Third
is the existence of JPEPA (Japan-Philippine Economic Partnership Agreement),
which is a bilateral investment and free trade agreement between the two
countries. Japanese investments which have felt the need to diversify from overexposure
in a single country of investment destination now favor the Philippines.
“Where
government choice or action matters.” The Philippine economy is well-positioned
today compared to those of many other countries during these crisis-laden
times. Its balance of payments is healthy. External remittances, earnings from
business processing industries and exports have strengthened the country’s
external payments position.
The
banking system is liquid, thanks to years of reforms to strengthen the capitalization
of domestic banks. The inflows of international money in fact are becoming a
problem for balance of payments management because of the healthy position.
With
dark clouds hovering over the Euro debt problems, the Philippines is
traditionally less dependent on European trade. The country is more insulated
than most countries that have large trade volumes to the countries of Europe.
Opportunities
to pursue stronger economic performance are available to the government in at
least three major directions.
First,
the government has sufficient resources to engage in a public expenditure
program that is directed at reducing its backlog in infrastructure. Through the
prudent rise in budgetary resources and the backing of a healthy external
payments surplus, the government has more capacity to engage in public
investment expenditure. It can address the improvement of transport, ports and
airport infrastructure and to deal with the problems of expansion of public
utilities to improve their services.
The
overall improvement in international assessment of Philippine development
potentials could to provide a momentum for sustained economic growth. The
government can even permanently raise the scale of economic success by pursuing
deeper economic reforms in two other major directions.
The
first is to enhance the investment climate especially for foreign direct
investments. There are restrictions still in place that hinder the
participation of foreign capital in some economic activity. I have written much
on this issue that needs repeating.
The
second area is in the matter of labor market policies. There are critical
policy areas that need to be opened up in order to raise labor productivity and
encourage more employment in productive enterprises.
Gerardo
P. Sicat
The
Philippine Star
Business & Investment Opportunities
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