April 2000

Economic Indicators

As shown below, the Philippines actually recovered fairly well from the crisis, at least compared to the rest of the Region.

As reflected in its per capita GDP of barely over US $1,000, the Philippines remains a poor country. The vast majority of the labor force is still engaged in traditional occupations in agriculture, fishing, and forestry. Extremes of wealth and poverty are an inevitable part of the sociocultural landscape, although the urban middle classes are slowly growing.

Economic and Business Prospects

As discussed in the Philippines country profile, the Philippines was more resilient than most of its neighbors in the wake of the crisis. Not all of the promise is lost and it would certainly be a mistake to stereotype the country as the "basket case" of Southeast Asia. In the first half of 1999, growth rates were at 2.4%, compared to the static 0.1% in first half 1998. Growth accelerated during second half 1999, when Philippines GDP increased by a much greater-than-expected 3.6%, led by rebounding agricultural production and strong growth in electronics exports. Felipe Medalla, head of the National Economic and Development Authority, states confidently: "The recovery of the Philippine economy is firmly established." However, remember that these figures are driven by large increases in agricultural production after one of the worst years ever (following the El Niño drought and devastating typhoons of 1998).

The key question: What will be the engine of growth in 2000 and beyond? Although foreign investment in the Philippines fell off substantially, from over $2 billion to $671 in the midst of the Asian crisis, it is gradually making a comeback. Many major players continue to make investment moves in the Philippines, including Intel, Texas Instruments, Fujitsu, Hitachi, National Semiconductor, and Epson. However, as a cautionary note, it should be noted that others (notably Johnson & Johnson) have recently pulled out in part out of concern for the perceived lack of transparency and the pointed little head of re-emergent cronyism.

Government policy under the Estrada administration has continued to stimulate manufacturing, particularly with the creation of export processing zones (EPZs) with major concessionary tax rates and tariffs. The former US bases at Clark and Subic Bay are important EPZs, while the Philippine Economic Zone Authority continues to do all it can to attract foreign investment. The administration has made a big show recently of setting up an all-purpose facilitation office to ease the paperwork burden for foreign investors.

The Philippines' financial sector remains generally strong. Foreign currency deposits remained stable throughout the crisis, although non-performing loans increased from 2.8% of total loans in 1996 to 14.4% in August, 1999, suggesting a certain weakening of banks' balance sheets. The Bangko Sentral recently raised the minimum capital requirements for banks again in an effort to encourage more consolidation in this crucial sector. There have been a number of bank mega-mergers/consolidations since 1997 (e.g., the merger of the Bank of the Philippines Islands (BPI) and Far East and Equitable taking a majority stake in PCIBank). This trend is expected to continue.

One promising sign is that Philippine corporations are not as indebted as their counterparts in most neighboring countries. In part, this reflects (a) the fact that they have traditionally had less access to domestic and foreign capital markets, and (b) their historical preference for relying on internally generated funds due to high interest rates. Indeed, the average debt-equity ration of the Philippines' Top 5000 corporations declined from 3.63 in 1997 to 2.14 in 1998.

The Philippines still needs to raise its investment rate. The annual savings rate in the country has historically been far below that of its neighbors (estimated in 2000 at 20.3% of GDP, compared to 49.0% in Singapore, 46.1% in Malaysia, and 33.0% in Thailand).

So what's the bottom line? Well, I'm not entirely sure, but maybe we should summarize by pointing out that:

• The structural reforms of the 1990s, begun by Ramos and continued by Estrada, have significantly strengthened key sectors of the economy.
• The massive capital flows that occurred elsewhere in the region were late coming to the Philippines, and their impact is slow being felt.
• The Philippines' banking and corporate sectors had strong balance sheets before the crisis, which is the primary reason the country weathered the crisis so well.

The government, not surprisingly, is optimistic and is predicting average growth rates of 4.7-5.3% in 1999-2004. However, most economists think the country will have a hard time sustaining growth rates above 4% due to the major structural and cultural problems discussed above.

Clearly, many key figures in international finance, business, and international finance agencies are taking a wait-and-see attitude on the Philippines. The recent concerns about transparency are well-founded in empirical reality, and it behooves the administration to somehow get beyond that and start concentrating on the fundamentals, little things like:

• Ensuring macroeconomic stability
• Containing the budget deficit and effectively managing foreign and domestic debt
• Continuing structural reforms (modernizing the financial system and especially improving the regulatory environment in a transparent direction)
• Paying careful attention to intermediate sector linkages, with an eye to attracting more foreign direct investment, perhaps based on mergers and acquisitions
• Bringing in more foreign capital, thus enhancing the efficiency of domestic firms and eventually helping them aspire to becoming regional or global "players"

Future economic prospects, then, depend on the administrations' ability to maintain social, economic, and political stability, while continuing to make progress in improving living standards.

Areas of Concern

This piece would not be complete without a few cautionary notes. Let's see...

We could start with the recent BW Resources stock market scandal, which I reported on in fictionalized form during its incipient phases in The Philippines Stock Exchange: Wild Wild West Meets Ninja Roller Coaster (heck, I didn't want to get whacked by somebody I didn't even know for naming names!). The not-so-graceful efforts of the President to salvage his image and protect his friends has contributed to increased international concerns about transparency and (quite concretely) huge outflows of hot money over the last few weeks. Continued paranoia is apparent in front page stories about incipient coups and the openly stated fears of economic and political instability that dominate the tsimis (pronounced "cheeze-mis," meaning gossip, the favorite past time of many Filipons) of the Manila coffee shop circuit.

Another major impediment to economic growth, grudgingly admitted by the administration and adamantly denied by the Catholic Church, are the rapid rates of population growth. Estimated at 2.8% per annum, that's by far the highest in the region and job creation is in no shape or form keeping pace. Over half the population is under age 19, average age 17.5 years, creating a dangerous demographic bulge and obstacle to longer-term economic and social development. Nearly a million people enter the job market each and every year, and unemployment and underemployment will be chronic concerns over the years to come.

The Philippines economy is heavily dependent on the electronics sector (currently constituting about 4/5 of exports, most of it in microchips and non-value added assembly work), which is okay as long as the world economy in general and the American economy in particular continues to boom. Growth in this sector was 33% in 1998 and 20% in 1999, blossoming from $3 billion in 1992 to $20 billion in 1998.

Once almost exclusively an agricultural commodities exporter, the Philippines may now realistically challenge other electronics manufacturing centers in the region (specifically Malaysia and Singapore). According to the World Bank, the Philippines has the highest proportion of high-tech products to overall export ratio in the world. The export structure, however, remains highly concentrated on US markets, making the Philippines vulnerable to eventual downturns in the states. This suggests that economic policy should encourage diversification into such areas as consumer electronics, auto components, and medical equipment, and that trade policy should encourage diversified trading partners in the EU and elsewhere in ASEAN.

The Philippines remains highly dependent on a limited number of trading partners:

Export concentration, however, is less than it used to be. In 1990, 57.6% of exports went to US and Japan, which decreased to 48.6% in 1998. One promising sign is that the share of exports going to Asian neighbors (Singapore, HK, Taiwan, Malaysia and Taiwan) rose from 13% to 23% over that same period. One would think that the continued economic recovery in the region will redound to the benefit of the Philippines.

It is also important to at least mention the long-term ecological problems facing the Philippines, although in fairness one should note that these same issues exist throughout Southeast Asia. As much of 90% of the forests have been cut down, and over 90% of the coral reefs are gone. The historical practice of kaingin (slash-and-burn) farming, prevalent among upland peoples throughout the country, involves the clear cutting of forests, then burning the remaining cover. While this facilitates the short-term growing of rice, corn, cassava, taro, and yams, those crops are mostly for subsistence or barter. After no more than 3-4 years, the farmers move on, leaving behind useless fields that are quickly overgrown with coarse grass. The resulting severe soil erosion has a lot to do with the increasingly more devastating ecological disasters (floods mostly) of recent years. To make matters worse, the country's rapid population growth puts tremendous pressure on this marginal land.

Note/Disclaimer