Turmoil in the debt markets gives pause to a country like the Philippines, which relies heavily on external borrowing. But the debtor - in the past one of the region's weakest links - has staged a determined comeback
Few countries demonstrate the pace of Asian revival quite like the Philippines. In 2004, government debt was equivalent to 79% of GDP, and interest payments on that debt took 37.3% of the revenues that year. Put another way, more than a third of all incoming money, in a country with between a third and a half of the population below the poverty line, was going straight to debt servicing rather than to roads, schools or hospitals.
The Macapagal-Arroyo government set about redressing that crippling problem, passing new tax legislation and revolutionizing tax collection. It aimed to cut the national government deficit to P180 billion in 2005, and ended up beating its target by more than P30 billion; flushed with confidence, it quickly decided it could balance the books by 2008. Everyone, from investors to rating agencies to investment bankers, started to look at the country afresh.
But then came headwinds: the government missed a (self-imposed) target for deficit reduction in the first quarter of this year, triggering concerns that the low-hanging fruit had been picked and that getting any further down the road of fiscal reform would be too difficult. But today, finance secretary Margarito Teves believes the job can still be finished.
The next target
“We’re trying to recover from the setback,” he says. “In terms of total revenues – tax and non-tax – we are still falling behind our revenue targets.” But the first two months of the second half did see tax revenue targets hit, which gives something to build on, and coupled with privatization efforts, that leaves Teves confident that this year’s P63 billion target can be met. “The key determinant will still be tax revenues. But we believe we can balance the budget and fund an expenditure programme, the best of both worlds.”
Tax collection alone won’t do it, and Teves is counting on revenues from the privatization of power utility PNOC by early November. But getting money out of power sector reform is a perennial battle, and PNOC will only be a part of it: the government also needs to sell several power generation plants as well as the distribution arm, Transco, which has already had several failed attempts for sale. Teves says there are qualified bidders in place and that the outlook for a sale is good. “We are more confident this time.” Teves also needs the money from the sale of a government-held stake in San Miguel, which is complicated by a labyrinthine dispute with a lobby of coconut farmers who believe the proceeds belong to them.
The troubles in the debt markets must give pause to a country like the Philippines, which relies heavily on borrowings, albeit with far greater sophistication now than in the past. “We have been relying more and more on domestic borrowings rather than foreign,” Teves says. “The amount of borrowing we need on a day-to-day basis has been declining because we’ve been able to reduce the deficit.” But the oil price doesn’t help: Teves reckons the Philippines is 43% dependent on oil, and would much prefer to be around the 30% mark.
Most people are happy to acknowledge the progress in Manila, but not all. Among the doubters is Ifzal Ali at the ADB. “The Philippines is a country that performs well in short bursts and then falls apart,” he says. “One swallow doesn’t make a summer.” In particular, he is referring to a $460 million broadband project with Chinese funding that was set to come to the Philippines and was subsequently scrapped, apparently undermining several billion dollars of potential FDI.
Tim Condon at ING is more optimistic. “Once the fiscal problem is removed, I think you lift a big constraint on growth,” he says. “Within five years, it is reasonable to think about an investment grade rating.” —C.W.