Business World
Introspective
A COMMON question raised at the height of the 2008/09 financial crisis was Why was the Philippines spared by the savage global financial storm in the high seas? The answer: The Philippine ship never left port. I may have actually first heard that during the 1997 Asian Financial crisis. I do not hear that half joke repeated too much these days; indeed, things are looking up.
The Philippines is better situated today than for as long as many of us can remember. Objective financial indicators show this - robust gross international reserves, manageable and declining public debt ratios, being a net external creditor to the world, healthy banking statistics. Our global competitive ranking has zoomed by a remarkable 10 places for the second year in a row. The ADB upgraded forecasts of Philippine growth, already among the highest in the region, even while downgrading everyone else (more recently, the World Bank and IMF did; as have we at GlobalSource, months earlier). A respected professor and monetary official has been quoted as saying we are practically invulnerable to external shocks.
Indeed, our consumption-based economy, driven by sturdy OFW remittances, a very competitive BPO sector and our growth-favored demographics, is expected to stay resilient even in the face of elevated risk warnings from the IMF (risks of a serious global slowdown are alarmingly high). This resiliency has been tested during the subprime triggered global recession of 2008/2009 where we continued to chug along during the worse of it.
We will likely continue to do so, short of severe fat tail risks materializing. Among such, a default of one of the periphery Eurozone countries and its contagion effects globally on confidence, financial market stability, growth, in a downward spiral, is probably what worries most. (There are others - Israel surgically attacking Iran's nuclear sites leading to oil supply disruptions, a flare-up in the contested Asian seas/shoals, etc.)
While we need to be conscious of possible disruptions such external shocks can inflict on our economy, what I worry about most is homegrown. That is, of us failing to fully seize as a nation, the opportunities that our comfortable fiscal and external finances, new windows for attracting investments, and most importantly - credible leadership - have opened for us to scale a higher growth path.
The President and his team are mindful of this. The Philippine Development Plan targets 7%-8% growth. Secretary Purisima has recently expressed the same target in a recent upbeat article about the country in the Financial Times. This is a growth rate twice as fast as in the last decade.
The challenge for the Philippines is to attract enough investment and job creation above the comfort zone of 3%-4% growth created by the remittances of our citizens who toil abroad to support their families at home and the growing BPO sector which can only employ a tiny fraction of our people.
An excellent document issued by the private-sector Arangkada Philippines: A Business Perspective (http://www.arangkadaphilippines.com) identifies the reform measures that are needed to achieve this kind of growth acceleration. From a presentation of its principal author, John Forbes of the Joint Foreign Chambers earlier this year, I believe the administration scores a good based on progress achieved in the 472 reform measures identified (details available in the Web site).
Where can such growth come from?
The administration has just adopted a mining policy that will discourage new projects for the next few years, so let's not count on mining for new jobs or tax revenue in the near term. But agribusiness remains promising if we can improve infrastructure and create a post-CARP environment that encourages corporate farming, alongside cooperatives and small farmers. The focus of the administration is on rice self sufficiency, whereby bulk of the DA (including a still unreformed NFA) budget is devoted to a low-value crop instead of infrastructure and services that would help farmers achieve income self sufficiency by creating opportunities in other areas in the rural sector. It's puzzling for every economist I have spoken with.
There is also immense opportunity in manufacturing brought about by major relocations from Japan and China due to such factors as higher energy costs and yen appreciation in Japan and anti-foreign (especially anti- Japanese) sentiments, rising labor cost, and the appreciating renminbi in China. Thailand faces shortages of young workers and threat of future flooding while Vietnam is struggling with macro-imbalances. Flexibility in labor policies to make the Philippines more competitive is critical.
The idea of Labor Employment Zones, propounded by Dr. Gerry Sicat would be a good way to attract large labor using enterprises in manufacturing and agricultural processing to establish here. Their main feature is that the zones will be exempt from the application of the minimum wage regulation and from other regulations against fixed-term contracts and on the regularization of workers.
Poor infrastructure, both hard and soft (education, health) is frequently cited as deterring investments. PPP can play a role in attracting private investment in some infra areas that are financially attractive, or can be made so through viability gap funding. However, government will need to have a coherent long-term infrastructure plan (the Public Investment Program is still not out) and be more deliberate and clear in identifying the areas where private sector involvement is sought, and move with judicious speed in developing bankable projects for bidding out such.
Durable public finances is a key element for providing the public funding components of PPP, as well as for fully government-funded projects. The latter are still expected to account for the much larger part of infra investments by far.
In this connection, passage of the sin tax reform bill, now in the middle of hot debate in the Senate, and in the public arena, is seen by many, notably credit rating agencies, as a test of the administration's resolve to achieve its economic and governance legacy. For over two decades, dominant tobacco and alcohol producers have been successful in blocking reform, such that the present system continues to yield low and declining revenues from sin taxes due to non-price indexation and a discounted tax rate.
Based on a case study Christine Tang and I did for a forthcoming ADB book, Political Economy of the Reformed Value-Added Tax in the Philippines (Chapter 2), I think it will take nothing less than the President's strong intervention with legislators to get this through in any form resembling what the DoF submitted to Congress. Such was successfully done by his predecessor in the case of the reformed VAT law, and in a likewise defining issue for his administration, by him, in the Corona impeachment trial.
Romeo L. Bernardo is Philippine advisor of GlobalSource and a board member of the Institute for Development and Econometric Analysis, Inc. He was Undersecretary of Finance during the Aquino 1 and Ramos administrations.
