The Philippines knows plenty about false dawns: time and again through the last decade the country has seemed to be on the rise, shaking off its mantle as the sick man of Asia; time and again the progress has been undermined by political crises, attempted coups and unsuitable leaders.
The Philippines is, once again, looking much brighter. Gloria Macapagal-Arroyo’s administration has its critics – and attracts just as many coup rumours as its predecessors – but it has scored some unquestioned successes, mainly on the fiscal side.
This is crucial. In 2004, government debt was equivalent to 79% of GDP, with interest payments on the debt taking up 37.3% of all revenues – money desperately needed for spending on infrastructure, health and education. That burden stifles any attempts to improve the country’s overall position.
Arroyo was able to get several key initiatives through in order to combat this debt load: first, a “sin tax”, an excise on alcohol and cigarettes; second, an increase in electricity tariffs, to support the state-owned power utility Napocor, a perennial drain on the state; and most importantly, a two-stage revamp of the tax system, scrapping many exemptions from value-added tax, then lifting that tax across the board from 10% to 12%. In theory, the measures between them account for P100 billion a year – enough to balance the budget by 2008.
But, as finance secretary Margarito Teves explains in an interview with Emerging Markets, that’s just the start. “I describe it as like a basketball game,” he says. “It’s half-time and we’re ahead, but we still have to work very hard. The second half is just as crucial as the first.”
TRAVELLING IN HOPE
Of vast importance is improving the collection of revenues, rather than just passing the laws that increase it. How confident is he? “Hopeful, is the word. It’s a stressful target, in the sense that it’s historically high.”
Teves says he’d “like to see more quality spending for social services and infrastructure, but at the same time maintain the fiscal discipline of the deficit not exceeding 2.1% of GDP in 2006”.
But that’s exceptionally difficult, and epitomizes the problem facing any government trying to improve the country’s fiscal situation: it’s all very well to raise taxes to get the deficit down, but if people can’t see any tangible benefit to those tax increases – no quick fixes to their standard of living – they’re likely to vote that government out. Can a government have it both ways: fiscal reform and social spending?
“We’re trying to get the money,” Teves says; indeed, he says collection between January and May was 5.8 billion pesos ahead of targets. “We want to increasingly rely on collection to support our development programme. We have growth taking place, which will help us, with more revenues, which will allow us quality spending on social services and infrastructure. But it’s a challenging job.”
That growth is vital, as fiscal reform becomes impossible without it. “Economic growth is essential for the ultimate success of the Philippines’ fiscal consolidation intentions,” says Thomas Byrne, sovereign analyst at Moody’s. “It eases social and political strains in the economy, leads to higher employment, and everyone feels a lot better off.”
Moody’s is the most bearish of the rating agencies, holding a negative outlook on the country until it sees evidence of it meeting its 2006 fiscal targets; by contrast, Standard & Poor’s took it from negative to stable outlook in February.
Teves expects GDP growth to come in at about 5.3 %, but at the time of writing, things were being complicated by parliament stalling on passing the budget.
The Philippines also faces a great many challenges completely beyond its control, such as the oil price (it is an importer of crude) and US interest rates. In particular, this impacts the exchange rate, and since the Philippines has so much foreign debt, that’s a very big deal: a one peso appreciation in the exchange rate reduces debt service payments by 5 billion pesos, Teves says. “We’re hoping to have a more competitive exchange rate, but unfortunately we don’t have much control on decisions of the US government on interest rates, or on oil prices,” he says.
BRIGHT SIDE
That said, the behaviour of the Philippines’ debt, equity and currency markets has been consistently impressive over the last two years or so – the stock market doubled in two years from 2003 – and, just as important, seems to have decoupled from political shocks. A coup attempt earlier this year was met with brief jitters before markets resumed where they’d left off. “For as long as the political noise is manageable, investors will rely heavily on economic developments and performance,” says Teves. “In terms of domestic political shocks, the situation is much more manageable” than a year ago.
One of the brightest rewards the Philippines has received is in its borrowing in the international debt markets, under the admired stewardship of national treasurer Omar Cruz. Compare the $1.5 billion 20-year bond issued in January 2005 with the 25-year issue for the same amount a year later. Despite the longer tenor, the yield, spread and coupon were all significantly lower. That’s a strong vote of confidence, and a $1.4 billion swap deal which consolidated dozens of illiquid peso bond issues into three new tranches, was also well received.
But bond investors are cautious in their praise. “There are signs of improvement on the fiscal side in recent times, but if you want to talk about structural improvements, we need to wait to make sure they are not one-offs but are sustained,” says one emerging market bond investor in Singapore. “There are questions as to whether the improvement in revenues is due to the measures that were put in place or just a function of GDP growth. Investors are looking for sustained improvement in the long term.”
WORKLOAD
Teves has a bulging portfolio and there’s no end of things to occupy his time. “We have to do our part in improving the capital market environment and engaging in reforms,” he says. And then there’s power privatization, long seen as symbolic of a failure of Philippine administrations to get tough things done. “Power is one area where I also need some improvement from myself. We need to accelerate it, to make sure this time reality will match expectation.”
The National Transmission Corporation has made some progress in asset divestments lately giving modest cause for optimism, but there is plenty to do, starting with the untangling of numerous legal disputes between operators, creditors and land owners. “Admittedly we will have to work very hard on it; we’ve not been successful in this area,” he says. But he wants a balanced approach. “We have to be more responsive to requests from power companies, to strike a balance between the needs of the people, and enabling power companies to survive and even grow.”