Monday, March 26, 2012
A tale of two taxes, two presidents
Business World
Introspective
President Aquino's leadership and resolve is at a test as he and his congressional allies are lobbied, bombarded and Noynoyed by divergent interest groups on two very live tax policy issues: a) the rollback of the VAT on oil products, and b) reform of excise taxes on cigarette and tobacco (sin taxes). Having just co-authored a case study on the political economy of the reformed VAT for the ADB, I think there are lessons in the field of tax policy reform that can be learned by the President from his predecessor and former teacher, including what not to do.
THE EXPANDED VAT - IT TOOK PRESIDENTIAL BACKING
The reform of the VAT in 2005 has been credited with reversing the alarming deterioration in fiscal numbers during the first part of the Arroyo administration and made the economy more resilient to the global financial crisis of 2008/2009. It also introduced structural reforms to the VAT system, making it more robust, broader and fairer, while plugging major leakages.
The process of getting the legislation through was not an easy one - it involved not only players in both houses of Congress and civil servants but academic institutions, development partners, business groups and civil society pushing for it, on the realization that this was the essential medicine needed at that time to forestall a fiscal crisis.
Ultimately, what made it happen though was full support of President Arroyo. After initial reluctance, she pulled all stops to get her congress and senate allies behind it. While there was a later knee-jerk attempt to back-track, after the hello Garci episode weakened her politically, the dire consequences of such flip-flopping on our the country's credit rating - and perhaps more viscerally, her own credibility - returned policy making to sobriety.
SPECIAL VAT TREATMENT FOR OIL PRODUCTS?
Fast forward to present: This 2005 VAT reform law with the desirable feature of having a broad base that was passed with great difficulty is under attack by transport groups, mass organizations, media columnists, and a few academics clamoring for special treatment of oil products. The reasons why it would be wrong to cave in were excellently argued in this space by my fellow IDEA director and Introspective columnist, UP Professor Noel de Dios (The right thing is doing nothing, March 18 ).
The crux of it is that there are no good reasons to tinker with the VAT rate for a product like oil. Moreover, similar policy, like the preferential, i.e. lower excise tax on diesel compared to gasoline, has led to wasteful distortions in consumption and production.
The recommendation of former UP professor and Planning secretary, now Monetary board member, Philip Medalla is not to tinker with the VAT system, but for the government to give rebates to jeepney operators/drivers. This is both more effective and more equitable in that it does not give tax cuts to car owners, a privileged minority in our society. Under Energy Secretary Rene Almendras' watch, this is exactly what the administration is doing.
(Lesson 1 for the current administration: Stay the course. Don't undo a good thing.)
As to how to respond to anNoynoyers? I second Prof de Dios's recommendation - Ignoy them!
SIN TAX REFORM, IT'S TIME!
There were serious shortcomings in the law amending tobacco and alcohol excise taxes passed in 1997, as a result of successful lobbying by dominant tobacco and alcohol manufactures. These flaws included - no automatic indexation mechanisms (the tax is eroded by inflation); and heavy discrimination in favor of existing dominant players.
As a consequence, the government's take from sin taxes dropped progressively over a decade, contributing importantly to its deteriorating fiscal position.
This, even as the Philippines with among the cheapest cigarettes and alcohol products tops the list of countries with high incidence of the young taking up smoking and drinking, with its attendant high social costs.
Efforts at remedial legislation to correct these flaws yielded only watered-down versions of the DoF proposals being passed. Though this can be traced again to the enormous lobbying power of the dominant players, at the heart of it, what doomed reform was lukewarm support of President Arroyo for this, a sharp contrast to her vigorous sponsorship of the VAT reform law.
(In truth, sin tax reform where potential adverse impact is concentrated on a few big players who have been experts in the game of influencing legislators has turned out to be more politically difficult than the VAT reform where the tax incidence is broadly shared by the general public.)
Fast forward to today: There is a new sin tax reform bill being deliberated in Congress that has garnered tremendous support from civil society, business groups, including former secretaries and undersecretaries of Finance and Health across administrations. The bill brings compelling benefits - it will raise revenues of about P60 billon, the bulk of which will be for universal health care, a key pillar in the government's inclusive growth agenda.
The P-Noy administration has a critical window before the next election to pass this long-delayed reform legislation and mark a game chance in being able to overcome entrenched interests that have captured Congress in the past.
(Lesson 2 from the VAT experience in 2005 - The President needs to pull all stops to get this bill passed.)
The passage of such a law may well be the acid test for credit rating agencies and investors on government's seriousness and ability to deliver on its governance and economic reform agenda. It addresses concerns over the sustainability of government's long-term fiscal position and financeability of its social and infra spending program.
An upgrade to investment grade level, where all our original ASEAN neighbors are, can unlock a virtuous circle of investments, job creation, and confidence, including for bolder reform, that can finally bring us to a higher growth path. Tuwid at maunlad na daan!
Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis. He was undersecretary of Finance during the Aquino 1 and Ramos administrations.
Monday, February 20, 2012
Dragon, or drag-on?
Business World
Introspective
One would think the year 2012 should be a particularly auspicious one, as it belongs to the dragon, a symbol of might and intelligence and the only creature of myth and legend among the Chinese animal signs. But global recovery is expected to stall in the near term with the euro zone likely falling into a mild recession, and it may be just the mythical nature of the beast that would be relevant to describing economic activity in the New Year and not delivery of good fortune.
Introspective
One would think the year 2012 should be a particularly auspicious one, as it belongs to the dragon, a symbol of might and intelligence and the only creature of myth and legend among the Chinese animal signs. But global recovery is expected to stall in the near term with the euro zone likely falling into a mild recession, and it may be just the mythical nature of the beast that would be relevant to describing economic activity in the New Year and not delivery of good fortune.
From a slow 3.7% in 2011, we expect economic growth to improve moderately to about 4.5%, though an expansion that relies on continued remittance flows and some recovery in exports will unavoidably be fragile because of intensifying risks elsewhere in the world. The steadier engine this year should instead be public spending, as the government seems fully committed to reversing the underspending that had occurred last year when it stepped up its anti-corruption drive.
Looking at purely domestic events, the impeachment proceedings against the Chief Justice offer a temporary distraction to both Houses of Congress, taking lawmakers' attention away from important economic bills. Even if the trial does drag on a bit, we do not think it presents any real political risk owing to the popularity of the current government.
ACTIVITY: FRAGILE GROWTH
While the outlook for the global economy remains bleak in the new year, we believe GDP growth of 4.5% remains achievable, though this forecast depends crucially on private consumption remaining strong, exports reviving even moderately, and government making the appropriate policy responses.
Personal consumption, which grew by 6% in 2011, appears to be supported by a number of factors - rising remittances in peso terms, declining inflation, and credit activity sustained by high liquidity. However, as we had seen in the last global crisis, private spending can, despite sustaining factors, very easily be cut as a precautionary measure by households.
There should be some revival in exports, which dropped by 3.8% in real peso terms last year, as electronics and semiconductors fell 18.5% annually. Industry experts note the technology sector may well post double- digit gains this year by simply returning to 2010 volumes, which is quite likely as inventories have already begun to decline. But like domestic spending, it is clear that this recovery also hinges on the global economy not falling into another slump.
Much depends on whether government will be able to step up to the plate to give the economy the needed boost in 2012. We are quite optimistic about a revival in public spending based on recent actions of the budget department, which has already started to frontload expenditures, particularly on infrastructure. This should help counter an expected slowdown in private activity, with the real estate cycle, which industry experts say lasts six to seven years, already starting to turn.
We are less hopeful however about the ability of the trumpeted Public- Private Partnership (PPP) program, even in its hybrid form (i.e. tapping ODA loans), to jump-start private investment owing to continued difficulties in setting up and executing well-crafted projects that fit the government's governance framework and funders' requirements.
There currently seem to be signs of stronger activity with the government's leading economic indicator index predicting expansion in the first quarter on the back of stronger tourism, stock market and new business indicators; domestic credit still expanding at a double-digit rate; and corporate earnings expected by the market to grow by over 10% this year.
All in all, while there may be higher growth in 2012 and while upside surprises may even abound, there continue to be very potent downside risks on account of the uncertainty about the future of the global economy. Given the unknowns, from moderate growth this year, we are penciling in only a mild upturn in 2013, with GDP expected to grow by about 5%.
THE PUBLIC SECTOR: WAITING FOR AN UPGRADE
The national government's budget gap likely fell below 2% of GDP in 2011 (to about 1.6% in our estimate), or some two years earlier than originally planned by economic managers. The sudden shrinkage of the national deficit traced mainly to the current administration's housecleaning efforts, particularly an overhaul of the government's disbursement procedures that led to initial delays in public spending.
With the startup hitches of good governance reforms over, we anticipate a rebound in public spending this year. Apart from base effects, this belief is bolstered by what appears to be the Budget department's determination to reverse last year's trend. Officials recently announced they have already released nearly half of the budget for 2012, while unspent funds from last year would be carried over to the present period.
This should lead to an increase in the fiscal deficit this year. However, with revenues set to continue growing through administrative efforts, the national government should be able to meet its set deficit target (2.6% of GDP).
The Bureau of Internal Revenue (BIR) performed commendably in 2011, hitting targets despite low economic growth, and will likely be able to maintain its good showing this year. The Customs bureau, in contrast, has been missing its targets (by nearly P60 billion or about 0.6% of GDP) with documented reports of wholesale oil smuggling and of several thousands of containers disappearing, hallmarks of the past administration that remain unchecked today. Clearly, intensifying the anti-corruption drive in this agency and more skilled and experienced leadership could greatly improve the government's revenue haul.
Citing fiscal improvements, the country's economic managers continue to campaign for credit upgrades, where the hope is to see Philippine debt finally gaining investment grade status. Positive developments to this end include S&P's change in outlook from stable to positive and the recent successful borrowing of the Philippine government from the long-term debt market at just 5% or better than the rate fetched by Indonesia despite the latter's newly minted investment grade rating.
We believe a change in credit ratings is likely within the year, though not yet to a lower medium grade rating. Only Fitch currently rates Philippine issues at one notch below investment grade. S&P and Moody's are at two notches below. In any case, traders typically note that Philippine sovereigns have already been trading at investment grade levels, making a credit upgrade or change in outlook basically a catch-up move.
While rating agencies recognize the country's high external liquidity and relatively steady growth, they claim to be still looking for improvements in the fiscal and debt profile, specifically in terms of a steeper downward tilt of the debt trajectory. In our own computation, without a pronounced increase in sustainable revenue sources, the near-term reduction in the public-debt-to-GDP ratio will not be enough for the country to attain levels approaching those of similarly rated peers.
Tax effort has recently also been whittled down by the implementation of several revenue-eroding laws. Unfortunately, with Congress currently very much preoccupied with the impeachment trial of the Chief Justice, we are not too optimistic, at least in the near term, that progress will be made towards passing much-needed revenue-generating legislation, e.g. reform of tobacco and alcohol taxes and fiscal incentives rationalization, that can help bring back the ratio even to recent pre-crisis levels.
This article is an excerpt from the Feb. 11 report written by Margarita Gonzales and this columnist for GlobalSource, New York based network of independent analysts. Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Monday, January 23, 2012
Build it and they will fund
Business World
Introspective
Introspective
Ever since President Aquino announced his administration's PPP thrust during the first State of the Nation Address, a lot of thinking has gone into creating an infrastructure fund for the Philippines. The premise behind creating such a fund is that the domestic financial market is failing to provide the right sort of financing that infrastructure projects need, i.e., long-term (think 25 years), fixed-rate and peso-denominated. Hence, investors end up with increased risks associated with rolling over short-term debts and/or unfavorable currency movements that raise their cost of capital and ultimately increase the cost of infrastructure investments.
While the premise was defensible, it
was at the same time difficult to ignore criticisms raised against it in light
of overwhelming interest among private sector players to mobilize their huge
sums of idle money (P1.7 trillion parked in the BSP's Special Deposit Account)
for infrastructure investments as well as the overtures of development partners
pledging financial support of varying maturity, interest and currency profiles.
Moreover, the design and structure
of the national government-driven proposed fund, which was envisioned to be
catalytic yet commercially oriented, fell short of capturing the full support
of either government or international financial institutions tapped to
contribute to it. Many of these privately voiced the view that they can
generate superior returns by directly investing in projects of their own
choosing rather than in a pooled fund to be managed by a new, untested
institution. Thus, despite much ado, the infrastructure fund to date remains on
the drawing board.
While the nationally directed
infrastructure fund continues to undergo tweaking, one of the chosen funders,
the public pension fund Government Service Insurance System (GSIS), has
announced a plan to create its own infrastructure fund. Unlike earlier versions
with their confusing mandates of balancing developmental and commercial
objectives, the GSIS-led fund is designed primarily to meet GSIS goals, i.e.,
diversification of fund assets, better matching of assets and liabilities as
well as potentially higher returns.
Indeed, pension funds around the
world have increasingly been attracted to infrastructure assets on the assumption
and some evidence that these assets have a risk-return profile falling in
between bonds and equities, i.e., they offer higher risk/returns vs. bonds
while lower risk/returns vs. equity investments. Hence, from mere buying of
listed stocks of companies in the infrastructure sector, pension funds have,
depending on their individual risk appetite (which is also a function of their
demographic profiles), moved into investing in listed or unlisted
infrastructure funds managed by third parties, buying portions of
infrastructure assets directly, or in the case of one Canadian pension fund,
setting up an investment arm dedicated to finding suitable infrastructure
assets. Many have opted to invest not only domestically but internationally.
Increasingly too, pension funds are not only looking at mature assets with
stable cash flows but a recent The Economist article (from which the title of
this piece is borrowed) reported on a plan in the UK for pensions to invest in
higher-risk greenfield assets.
This appears to be the thinking
behind the GSIS infrastructure fund as well. In light of the Aquino
administration's ongoing efforts to develop a pipeline of PPP projects, there
are significant opportunities for an entity that takes a long view of
investment returns to participate in the program. More so if the entity is
well-placed to handle political and regulatory risks that investors typically
associate with infrastructure projects in the Philippines.
News reports reveal that the
initiative for the infrastructure fund is being pursued by GSIS with the Asian
Development Bank and International Finance Corp., the private sector arm of the
World Bank, as cosponsors (Infrastructure fund eyed, BusinessWorld, Nov. 16,
2011). This brings international professional expertise in finance and the
highest degree of governance in its management, and insulates it from harmful
political interventions beyond the term of this administration, a clear
commitment to structural reform of a lasting nature which deserves public
commendation. Moreover, it is expected that fund management will be outsourced
to professional infrastructure experts with global track record which will help
ensure that investment decisions are anchored on arms-length, transparent and
non-political criteria and processes.
On the face of it, investing in
infrastructure is a wise move for GSIS which needs to diversify its investment
portfolio. The pension fund, with an asset base of about P600 billion (7% of
GDP) has limited investment options. Based on its 2009 financial statements,
over three-fourths of its investments was equally divided in only two asset
types - government securities and loans, largely to members (and this was at a
time when a portion of its portfolio was still invested overseas). Given its size,
forays into the relatively small and illiquid local stock market through direct
share purchases had tended to attract governance-related controversies.
Likewise, the attempt to diversify its portfolio internationally in 2008 was
short-lived as it coincided with the global financial crisis. The funds were
redeemed last year and invested locally.
Such a diversification move is also
in line with the recommendations of an international team of consultants
commissioned by the World Bank and the Department of Finance that included
pension gurus Estelle James and Alberto Musalem. Filipino actuary Ernie Reyes,
financial analyst Christine Tang and I were privileged to join that team. Our
200-page report, Structural and governance reform of the Philippine pension system,
2007 had this to say on the need for diversification:
Diversification of portfolios is a
significant issue for each institution (referring to GSIS, SSS, et al.). A
basic problem is the diversification of investments within the relatively few
opportunities offered by the local financial markets (both commercial and
government securities). Pension related institutions already play a substantial
role in the Philippines' capital market, with a capacity to move market prices.
Part of the problem is that pension institutions tend to hold and manage stocks
in individual companies, so even if their share in the overall stock market is
not so great, they are able to move market prices for specific companies.
Greater diversification domestically, and investing through pooled instruments
would reduce the impact of investment by these institutions on price movements.
Romeo L. Bernardo is managing director of Lazaro Bernardo
Tiu & Associates, Inc., Philippine advisor of GlobalSource, and a board
member of the Institute for Development and Econometric Analysis, Inc.
Build it and they will fund
Business World
Introspective
Ever since President Aquino announced his administration's PPP thrust during the first State of the Nation Address, a lot of thinking has gone into creating an infrastructure fund for the Philippines. The premise behind creating such a fund is that the domestic financial market is failing to provide the right sort of financing that infrastructure projects need, i.e., long-term (think 25 years), fixed-rate and peso-denominated. Hence, investors end up with increased risks associated with rolling over short-term debts and/or unfavorable currency movements that raise their cost of capital and ultimately increase the cost of infrastructure investments.
Introspective
Ever since President Aquino announced his administration's PPP thrust during the first State of the Nation Address, a lot of thinking has gone into creating an infrastructure fund for the Philippines. The premise behind creating such a fund is that the domestic financial market is failing to provide the right sort of financing that infrastructure projects need, i.e., long-term (think 25 years), fixed-rate and peso-denominated. Hence, investors end up with increased risks associated with rolling over short-term debts and/or unfavorable currency movements that raise their cost of capital and ultimately increase the cost of infrastructure investments.
While the premise was defensible, it was at the same time difficult to ignore criticisms raised against it in light of overwhelming interest among private sector players to mobilize their huge sums of idle money (P1.7 trillion parked in the BSP's Special Deposit Account) for infrastructure investments as well as the overtures of development partners pledging financial support of varying maturity, interest and currency profiles.
Moreover, the design and structure of the national government-driven proposed fund, which was envisioned to be catalytic yet commercially oriented, fell short of capturing the full support of either government or international financial institutions tapped to contribute to it. Many of these privately voiced the view that they can generate superior returns by directly investing in projects of their own choosing rather than in a pooled fund to be managed by a new, untested institution. Thus, despite much ado, the infrastructure fund to date remains on the drawing board.
While the nationally directed infrastructure fund continues to undergo tweaking, one of the chosen funders, the public pension fund Government Service Insurance System (GSIS), has announced a plan to create its own infrastructure fund. Unlike earlier versions with their confusing mandates of balancing developmental and commercial objectives, the GSIS-led fund is designed primarily to meet GSIS goals, i.e., diversification of fund assets, better matching of assets and liabilities as well as potentially higher returns.
Indeed, pension funds around the world have increasingly been attracted to infrastructure assets on the assumption and some evidence that these assets have a risk-return profile falling in between bonds and equities, i.e., they offer higher risk/returns vs. bonds while lower risk/returns vs. equity investments. Hence, from mere buying of listed stocks of companies in the infrastructure sector, pension funds have, depending on their individual risk appetite (which is also a function of their demographic profiles), moved into investing in listed or unlisted infrastructure funds managed by third parties, buying portions of infrastructure assets directly, or in the case of one Canadian pension fund, setting up an investment arm dedicated to finding suitable infrastructure assets. Many have opted to invest not only domestically but internationally. Increasingly too, pension funds are not only looking at mature assets with stable cash flows but a recent The Economist article (from which the title of this piece is borrowed) reported on a plan in the UK for pensions to invest in higher-risk greenfield assets.
This appears to be the thinking behind the GSIS infrastructure fund as well. In light of the Aquino administration's ongoing efforts to develop a pipeline of PPP projects, there are significant opportunities for an entity that takes a long view of investment returns to participate in the program. More so if the entity is well-placed to handle political and regulatory risks that investors typically associate with infrastructure projects in the Philippines.
News reports reveal that the initiative for the infrastructure fund is being pursued by GSIS with the Asian Development Bank and International Finance Corp., the private sector arm of the World Bank, as cosponsors (Infrastructure fund eyed, BusinessWorld, Nov. 16, 2011). This brings international professional expertise in finance and the highest degree of governance in its management, and insulates it from harmful political interventions beyond the term of this administration, a clear commitment to structural reform of a lasting nature which deserves public commendation. Moreover, it is expected that fund management will be outsourced to professional infrastructure experts with global track record which will help ensure that investment decisions are anchored on arms-length, transparent and non-political criteria and processes.
On the face of it, investing in infrastructure is a wise move for GSIS which needs to diversify its investment portfolio. The pension fund, with an asset base of about P600 billion (7% of GDP) has limited investment options. Based on its 2009 financial statements, over three-fourths of its investments was equally divided in only two asset types - government securities and loans, largely to members (and this was at a time when a portion of its portfolio was still invested overseas). Given its size, forays into the relatively small and illiquid local stock market through direct share purchases had tended to attract governance-related controversies. Likewise, the attempt to diversify its portfolio internationally in 2008 was short-lived as it coincided with the global financial crisis. The funds were redeemed last year and invested locally.
Such a diversification move is also in line with the recommendations of an international team of consultants commissioned by the World Bank and the Department of Finance that included pension gurus Estelle James and Alberto Musalem. Filipino actuary Ernie Reyes, financial analyst Christine Tang and I were privileged to join that team. Our 200-page report, Structural and governance reform of the Philippine pension system, 2007 had this to say on the need for diversification:
Diversification of portfolios is a significant issue for each institution (referring to GSIS, SSS, et al.). A basic problem is the diversification of investments within the relatively few opportunities offered by the local financial markets (both commercial and government securities). Pension related institutions already play a substantial role in the Philippines' capital market, with a capacity to move market prices. Part of the problem is that pension institutions tend to hold and manage stocks in individual companies, so even if their share in the overall stock market is not so great, they are able to move market prices for specific companies. Greater diversification domestically, and investing through pooled instruments would reduce the impact of investment by these institutions on price movements.
Romeo L. Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc., Philippine advisor of GlobalSource, and a board member of the Institute for Development and Econometric Analysis, Inc.
Monday, October 31, 2011
Resilient, not immune
Business World
Introspective
The global outlook has become infinitely gloomier over the past couple of months, with the euro zone in a sovereign debt crisis and the US in what could be another recessionary environment. This puts a heavy cloud over the Philippine economy, whose fortunes are still in some ways tied to these countries, and opens up another period of uncertain growth.
In our central scenario, assuming global financial troubles can be contained, we bring down our growth forecasts from 4.8% to 4.3% in 2011 and from 5.5% to 4.8% in 2012. Activity would be mainly consumption-driven in our projections, with net exports likely to decline this year and not see a major resurgence the next. At the same time, government spending especially on infrastructure may remain weak, limiting the country's investment growth, though should eventually rebound.
In the worst case where European debt troubles coupled by US weakness lead to another global financial crisis of the same scale as 2008, the Philippines could remain as resilient to recession and financial volatility as it had been back then. This is in light of robust domestic demand, continued remittance and BPO inflows, historically high FX reserves, a generally healthy bank sector, and greater fiscal space this time to help counter a downturn in the real economy.
Reflective of the sound fundamentals of the country are the recent string of credit upgrades by international rating agencies and a jump in world competitiveness ranking (up by 10 slots in the World Economic Forum's latest Global Competitiveness report). These observers noted the country's strong macroeconomic management that has led to improvements in the country's debt situation, narrower interest rate spreads, and reined-in inflation.
In our best scenario, there could be a brightening in the outlook for the world economy if international efforts succeed at preventing a financial contagion coming from the euro zone and if effective measures to stimulate the US economy are put in place. Domestically, we could see a bump in economic activity if government actually succeeds in accelerating infrastructure spending as it hopes to, though the contribution of PPP to this will not likely be close to nil.
We had already cut our growth forecast for 2011 to 4.8% in our last quarterly report considering the threat posed at the time by surging global oil and food prices, weakened purchasing power of dollar remittances due to peso appreciation, and government's odd spending restraint. Supply-chain disruptions brought about by Japan's tsunami and nuclear crisis had also further weakened our outlook for exports, then expected to naturally decelerate from a recovery pace.
Based on first half performance (4.6% in 1Q2011, as revised, and 3.4% in 2Q2011), even this downscaled number has begun to look a bit optimistic, as it required the economy to grow upwards of 5.5% in the second half. The more likely figure, in our view, would be about 4.3% in 2011 (and around 4.8% in 2012) for a few important reasons.
First, while the government has vowed to redouble its spending and meet spending targets before the year ends, it may find it increasingly hard to do so. The big surprise during the second quarter had been the drop in public construction outlays, which fell by over 40%, a drastic reduction even coming from an election year. Fiscal accounts show that government (non-interest) spending during the first six months fell short of what was programmed by nearly P120 billion (about 17.5%) as wasteful projects were shelved and operating expenses cut. This presumably barred any front- loading to take place and make the most of the summer months as had been trumpeted by economic managers after early passage of the budget.
Second, in relation to this, we continue to see slow movement in the public-private partnership (PPP) program which should further stall the country's much-needed infrastructure boost. As we had discussed in earlier reports, delays traced to the lack of well-crafted feasibility studies; weak technical and institutional capacity; and overly tight scrutiny of unsolicited proposals, especially those put in the investment pipeline by the previous administration. With government's housecleaning efforts beginning to dilute investor interest rather than promote it, in the short run at least, we are doubtful PPP projects would be able to take off anytime soon.
Even the new scheme recently proposed for mass transport projects under the PPP may not yield the desired quick results. This approach, which hopes to tap cheap development loans to build the fixed component (e.g., tracks) while allowing private firms to bid for providing the rest of the system, including rolling stock and operations and maintenance, may be even harder and take longer to pull off as it introduces another layer of complexity in reconciling policies and procedural requirements of government, official funders, and private investors.
Third, the world economy has already entered what the IMF calls a dangerous new phase marked by weakened activity especially in advanced economies (the US and in Europe), falling confidence, and growing downside risks. This means another period of uncertain growth for the Philippines in view of the potential impact on exports and remittances.
On the upside, however, inflation risk has abated which helps support consumer demand and also lessens the unspoken bias for peso appreciation. Remittances while slower than expected continue to be resilient at 6.3% in the first semester. The government has vowed to make use of the extra fiscal space created and frontload spending on projects due for implementation next year.
Credit activity remains high on account of liquidity created by continued portfolio flows. Notwithstanding minimal holdings to the new troubled euro zone (only 1.4 % of total assets) and high concentration of assets in Philippine government paper and a handful of domestic conglomerates, banks are generally healthy. As in the last global financial crisis episode, we believe the Philippine economy will likely remain resilient compared to many of its neighbors in the region.
This article is an excerpt from an October 3 report written by Margarita Gonzales and this columnist for GlobalSouce, a New York based network of independent analysts. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Introspective
The global outlook has become infinitely gloomier over the past couple of months, with the euro zone in a sovereign debt crisis and the US in what could be another recessionary environment. This puts a heavy cloud over the Philippine economy, whose fortunes are still in some ways tied to these countries, and opens up another period of uncertain growth.
In our central scenario, assuming global financial troubles can be contained, we bring down our growth forecasts from 4.8% to 4.3% in 2011 and from 5.5% to 4.8% in 2012. Activity would be mainly consumption-driven in our projections, with net exports likely to decline this year and not see a major resurgence the next. At the same time, government spending especially on infrastructure may remain weak, limiting the country's investment growth, though should eventually rebound.
In the worst case where European debt troubles coupled by US weakness lead to another global financial crisis of the same scale as 2008, the Philippines could remain as resilient to recession and financial volatility as it had been back then. This is in light of robust domestic demand, continued remittance and BPO inflows, historically high FX reserves, a generally healthy bank sector, and greater fiscal space this time to help counter a downturn in the real economy.
Reflective of the sound fundamentals of the country are the recent string of credit upgrades by international rating agencies and a jump in world competitiveness ranking (up by 10 slots in the World Economic Forum's latest Global Competitiveness report). These observers noted the country's strong macroeconomic management that has led to improvements in the country's debt situation, narrower interest rate spreads, and reined-in inflation.
In our best scenario, there could be a brightening in the outlook for the world economy if international efforts succeed at preventing a financial contagion coming from the euro zone and if effective measures to stimulate the US economy are put in place. Domestically, we could see a bump in economic activity if government actually succeeds in accelerating infrastructure spending as it hopes to, though the contribution of PPP to this will not likely be close to nil.
We had already cut our growth forecast for 2011 to 4.8% in our last quarterly report considering the threat posed at the time by surging global oil and food prices, weakened purchasing power of dollar remittances due to peso appreciation, and government's odd spending restraint. Supply-chain disruptions brought about by Japan's tsunami and nuclear crisis had also further weakened our outlook for exports, then expected to naturally decelerate from a recovery pace.
Based on first half performance (4.6% in 1Q2011, as revised, and 3.4% in 2Q2011), even this downscaled number has begun to look a bit optimistic, as it required the economy to grow upwards of 5.5% in the second half. The more likely figure, in our view, would be about 4.3% in 2011 (and around 4.8% in 2012) for a few important reasons.
First, while the government has vowed to redouble its spending and meet spending targets before the year ends, it may find it increasingly hard to do so. The big surprise during the second quarter had been the drop in public construction outlays, which fell by over 40%, a drastic reduction even coming from an election year. Fiscal accounts show that government (non-interest) spending during the first six months fell short of what was programmed by nearly P120 billion (about 17.5%) as wasteful projects were shelved and operating expenses cut. This presumably barred any front- loading to take place and make the most of the summer months as had been trumpeted by economic managers after early passage of the budget.
Second, in relation to this, we continue to see slow movement in the public-private partnership (PPP) program which should further stall the country's much-needed infrastructure boost. As we had discussed in earlier reports, delays traced to the lack of well-crafted feasibility studies; weak technical and institutional capacity; and overly tight scrutiny of unsolicited proposals, especially those put in the investment pipeline by the previous administration. With government's housecleaning efforts beginning to dilute investor interest rather than promote it, in the short run at least, we are doubtful PPP projects would be able to take off anytime soon.
Even the new scheme recently proposed for mass transport projects under the PPP may not yield the desired quick results. This approach, which hopes to tap cheap development loans to build the fixed component (e.g., tracks) while allowing private firms to bid for providing the rest of the system, including rolling stock and operations and maintenance, may be even harder and take longer to pull off as it introduces another layer of complexity in reconciling policies and procedural requirements of government, official funders, and private investors.
Third, the world economy has already entered what the IMF calls a dangerous new phase marked by weakened activity especially in advanced economies (the US and in Europe), falling confidence, and growing downside risks. This means another period of uncertain growth for the Philippines in view of the potential impact on exports and remittances.
On the upside, however, inflation risk has abated which helps support consumer demand and also lessens the unspoken bias for peso appreciation. Remittances while slower than expected continue to be resilient at 6.3% in the first semester. The government has vowed to make use of the extra fiscal space created and frontload spending on projects due for implementation next year.
Credit activity remains high on account of liquidity created by continued portfolio flows. Notwithstanding minimal holdings to the new troubled euro zone (only 1.4 % of total assets) and high concentration of assets in Philippine government paper and a handful of domestic conglomerates, banks are generally healthy. As in the last global financial crisis episode, we believe the Philippine economy will likely remain resilient compared to many of its neighbors in the region.
This article is an excerpt from an October 3 report written by Margarita Gonzales and this columnist for GlobalSouce, a New York based network of independent analysts. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Friday, September 9, 2011
De-monopolizing telecommunications
Business World
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
Monday, August 1, 2011
The President's speech
Business World
Introspective
If the SONA had a theme, it would be to end what the President called the culture of entitlement in the country, as symbolized by the wang-wang (a word mentioned 11 times in the report) - notoriously used by government officials to bypass traffic - and to put in its place a new system of meritocracy.
Judged solely as a political document intended to inspire and inform his constituents about his accomplishments, the President's SONA must be counted a success. It was written in Pilipino, spoken with confidence, and mostly adhered to issues that resonate strongly with the broad public, such as corruption, poverty, security, and social services programs.
As a document that lays down clearly the economic, political, and legislative agenda of the current administration - as some hoped it would - it is notable for its many omissions. The President rather referred listeners to the proposed budget for next year, submitted the day after the SONA, for a more comprehensive plan for the coming year. [One could also refer to the Philippine Development Plan 2011-2016 (http://devplan.neda.gov.ph/http://devplan.neda.gov.ph/) originally made public in May.]
The SONA made no explicit mention of Public-Private Partnership (PPP) projects, after touting them as the lynchpin of the government's ambitious investment program in the first SONA. The nearest mention of the PPP was when the President talked about the need for all projects to have clear work programs and to undergo transparent bidding. This is perhaps understandable after the huge hype that followed PPP after the first SONA and the delays currently being faced by the scheme. The omission may be viewed as the administration's means of managing expectations. Finance Secretary Cesar Purisima has been quoted as saying that he expects the economy to follow a J-curve growth path, with growth first dipping as solid foundations are being laid, and then to pick up and be sustained afterward.
The SONA was also quiet about tax policy reforms and fiscal sustainability, apart from an admonition to the self-employed and professionals to pay the correct amount of taxes, and the vow to convict and jail tax evaders. The implicit assumption appears to be that improvements in collections, as a result of taxpayers toeing the line, a more streamlined system (e.g., better cross-checking of records within government), and better use of available funds (e.g., PAGCOR, Malampaya), will be sufficient to ensure fiscal sustainability without raising new taxes. This remains to be seen.
For the first four months of the year, tax revenue collections grew by 11% compared to last year. But given inflation and economic growth, this hardly made a dent on the tax effort ratio - estimated at less than 12% based on first quarter figures (and using the revised GDP numbers). Longer- term, once the government starts catching up to its spending program (currently slowed down by governance reforms), this may pose a problem and may affect public infrastructure investment and social spending, including plans for universal health care.
On the other hand, House of Representative Speaker Feliciano Belmonte has said, post-SONA, that the House Leadership will act with haste on fiscal measures aimed at shoring up government revenues, including the rationalization of fiscal incentives, review of VAT exemptions, and the restructuring of excise taxes on tobacco and alcohol. It may be that the administration's strategy is to push for tax measures behind the scenes and not to refer to them as new taxes. In the past, tax reforms were only achieved through strong sponsorship by the incumbent President (as was the case in the terms of President Ramos and President Arroyo). It will be interesting to see whether the current strategy, if it is indeed the strategy, will succeed, especially where the tax system has been characterized as a leaky pail that may need to be replaced, rather than simply plugged.
On agriculture, the President may be setting himself too lofty a goal by aiming for rice self-sufficiency within his term. Analysts have noted that the increase in rice production so far this year is mainly due to an increase in area planted and favorable weather conditions compared to last year. Given the fickleness of weather and the country's robust population growth, zero rice importation appears nearly unachievable in the near term. And even if achievable, rice self sufficiency may be expensive and sub- optimal from a budget point of view. The government's own Development Plan acknowledges that in terms of land productivity in rice, the country trails Vietnam, Indonesia, and Malaysia.
The saber-less rattling gesture directed at China is intriguing but may be potentially costly, depending on how China perceives it and reacts to it. Will China look at it as mere political posturing? Could it have an impact on tourism and investments from, and trade with China? The buildup in military hardware necessary to lend a sliver of credibility to the gesture could also be financially steep.
Underlying the two SONAs of President Aquino is a clear and simple framework. End the culture of entitlement and corruption and this will lead to better use of public funds and an increase in investor confidence. In turn, this will translate to the improvement of physical infrastructure that will enhance economic growth. Enhanced growth will create jobs and generate the revenues that will finance the social services to ensure no one is left behind.
One may argue, and many have, that this framework is overly simplistic, that far more than a strong anti-corruption thrust is needed to propel growth. One could also easily quibble about the achievements reported in the SONA. According to Social Weather Stations, from which the SONA figures on hunger incidence were obtained, self-reported poverty has been essentially flat and unemployment has been rapidly increasing instead of declining so far in President Aquino's term. Still, there is a general sense that the country is making significant strides, if in nothing else at least in the rebuilding of governance institutions. Whether and how long before this translates to growth, however, and whether the government can put in place the other necessary ingredients, remain important questions.
This article is based on a July 27 Global Source report written by the columnist and Jeff Ducanes. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Introspective
If the SONA had a theme, it would be to end what the President called the culture of entitlement in the country, as symbolized by the wang-wang (a word mentioned 11 times in the report) - notoriously used by government officials to bypass traffic - and to put in its place a new system of meritocracy.
Judged solely as a political document intended to inspire and inform his constituents about his accomplishments, the President's SONA must be counted a success. It was written in Pilipino, spoken with confidence, and mostly adhered to issues that resonate strongly with the broad public, such as corruption, poverty, security, and social services programs.
As a document that lays down clearly the economic, political, and legislative agenda of the current administration - as some hoped it would - it is notable for its many omissions. The President rather referred listeners to the proposed budget for next year, submitted the day after the SONA, for a more comprehensive plan for the coming year. [One could also refer to the Philippine Development Plan 2011-2016 (http://devplan.neda.gov.ph/http://devplan.neda.gov.ph/) originally made public in May.]
The SONA made no explicit mention of Public-Private Partnership (PPP) projects, after touting them as the lynchpin of the government's ambitious investment program in the first SONA. The nearest mention of the PPP was when the President talked about the need for all projects to have clear work programs and to undergo transparent bidding. This is perhaps understandable after the huge hype that followed PPP after the first SONA and the delays currently being faced by the scheme. The omission may be viewed as the administration's means of managing expectations. Finance Secretary Cesar Purisima has been quoted as saying that he expects the economy to follow a J-curve growth path, with growth first dipping as solid foundations are being laid, and then to pick up and be sustained afterward.
The SONA was also quiet about tax policy reforms and fiscal sustainability, apart from an admonition to the self-employed and professionals to pay the correct amount of taxes, and the vow to convict and jail tax evaders. The implicit assumption appears to be that improvements in collections, as a result of taxpayers toeing the line, a more streamlined system (e.g., better cross-checking of records within government), and better use of available funds (e.g., PAGCOR, Malampaya), will be sufficient to ensure fiscal sustainability without raising new taxes. This remains to be seen.
For the first four months of the year, tax revenue collections grew by 11% compared to last year. But given inflation and economic growth, this hardly made a dent on the tax effort ratio - estimated at less than 12% based on first quarter figures (and using the revised GDP numbers). Longer- term, once the government starts catching up to its spending program (currently slowed down by governance reforms), this may pose a problem and may affect public infrastructure investment and social spending, including plans for universal health care.
On the other hand, House of Representative Speaker Feliciano Belmonte has said, post-SONA, that the House Leadership will act with haste on fiscal measures aimed at shoring up government revenues, including the rationalization of fiscal incentives, review of VAT exemptions, and the restructuring of excise taxes on tobacco and alcohol. It may be that the administration's strategy is to push for tax measures behind the scenes and not to refer to them as new taxes. In the past, tax reforms were only achieved through strong sponsorship by the incumbent President (as was the case in the terms of President Ramos and President Arroyo). It will be interesting to see whether the current strategy, if it is indeed the strategy, will succeed, especially where the tax system has been characterized as a leaky pail that may need to be replaced, rather than simply plugged.
On agriculture, the President may be setting himself too lofty a goal by aiming for rice self-sufficiency within his term. Analysts have noted that the increase in rice production so far this year is mainly due to an increase in area planted and favorable weather conditions compared to last year. Given the fickleness of weather and the country's robust population growth, zero rice importation appears nearly unachievable in the near term. And even if achievable, rice self sufficiency may be expensive and sub- optimal from a budget point of view. The government's own Development Plan acknowledges that in terms of land productivity in rice, the country trails Vietnam, Indonesia, and Malaysia.
The saber-less rattling gesture directed at China is intriguing but may be potentially costly, depending on how China perceives it and reacts to it. Will China look at it as mere political posturing? Could it have an impact on tourism and investments from, and trade with China? The buildup in military hardware necessary to lend a sliver of credibility to the gesture could also be financially steep.
Underlying the two SONAs of President Aquino is a clear and simple framework. End the culture of entitlement and corruption and this will lead to better use of public funds and an increase in investor confidence. In turn, this will translate to the improvement of physical infrastructure that will enhance economic growth. Enhanced growth will create jobs and generate the revenues that will finance the social services to ensure no one is left behind.
One may argue, and many have, that this framework is overly simplistic, that far more than a strong anti-corruption thrust is needed to propel growth. One could also easily quibble about the achievements reported in the SONA. According to Social Weather Stations, from which the SONA figures on hunger incidence were obtained, self-reported poverty has been essentially flat and unemployment has been rapidly increasing instead of declining so far in President Aquino's term. Still, there is a general sense that the country is making significant strides, if in nothing else at least in the rebuilding of governance institutions. Whether and how long before this translates to growth, however, and whether the government can put in place the other necessary ingredients, remain important questions.
This article is based on a July 27 Global Source report written by the columnist and Jeff Ducanes. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
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