A Dose of Reality for Philippine Euphoria

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THERE is a growing sense of euphoria in the Philippines these days that is hard to deny. Such over-optimism needs to be tempered by a dose of reality.

“The Philippine economy is definitely on an upswing and will be riding the wave of success and prosperity if this trend is sustained,” wrote columnist Jose Rojas in Manila’s Business Mirror newspaper last week. President Benigno Aquino seems to agree, citing the booming stock market as proof that his reforms are bearing fruit.

Some private sector analysts have been equally bullish. According to regional investment house CLSA Asia-Pacific, the Philippines “is undergoing a renaissance that looks set to bring the economy to higher growth and power stocks to new heights”. Economic growth, it said, was being driven by political stability, rising business confidence, low interest rates, a robust balance sheet and the country’s long-term demographic potential.

Compared to the economic crises faced in many Western countries, the Philippines is indeed doing well. One statistic recently cited by National Economic and Development Authority director-general Cayetano Paderanga illustrates the point. The official unemployment rate of 7 per cent is now lower than that in the United States (8.3 per cent).

A closer look at the figures, however, suggests that while the immediate outlook is positive, the current euphoria is misplaced. A more realistic assessment would be that the economy is starting to return to its previous growth level after experiencing a series of setbacks last year.

Typhoons Nalgae and Nesat ravaged Central and Northern Luzon last year, causing considerable damage to the agricultural sector. Exports were hit by the global economic slowdown. Government spending dropped as President Aquino’s crackdown on corruption inadvertently resulted in delays in the implementation of major construction projects.

Building on last year’s relatively modest 3.7 per cent growth, government economists have forecast that the economy could expand by up to 5 per cent or 6 per cent this year. Private sector economists generally regard this projection as overly optimistic. But even if it proves correct, the nation’s economic performance will still be below the 7.6 per cent achieved in 2010.

The stock market boom is a significant development, of course. According to the Bangko Sentral ng Pilipinas, the country’s central bank, the net inflow of foreign portfolio investments into the country totalled US$586 million (S$740 million) in January, a sharp 250 per cent increase from the US$167 million net inflow in the same month last year. It was also four times the US$140 million recorded last December.

But the economic crises in the developed world has reduced available alternatives for international fund managers. It is difficult to argue that these inflows represent a significant endorsement of the country’s long-term economic prospects.

As in the case of Indonesia last year, most of the foreigners now buying Philippine stocks appear to be betting that the country will achieve an investment grade rating some time this year.

A variety of statistics imply that such an upgrade is imminent. Manila’s public foreign debt to gross domestic product ratio is now a respectable 22 per cent. And at US$77 billion in January, international reserves are more than enough to cover the US$50 billion in foreign debt. Currently, the Philippines is just one notch below investment grade with rating agency Fitch, and two notches below according to Moody’s.

The path to rapid growth, however, is unlikely to be smooth. Infrastructure weaknesses remain a concern, and official efforts to overcome them inadequate. “It is not government policies, but their execution that is holding the economy back,” noted Ms Luz Lorenzo, an economist with Maybank ATR Kim Eng Securities in Manila.

She pointed to President Aquino’s much vaunted private-public partnership (PPP) scheme – Manila’s latest attempt to promote infrastructure development – as an example. More than 18 months into the President’s term of office, only one project has so far received all the necessary official approvals.

Up to 16 PPP projects are slated to be undertaken by various agencies this year, providing jobs to an estimated 1.3 million Filipinos between this year and 2017. Past experience, however, suggests that only a fraction will be implemented. Ms Lorenzo’s forecast for this year is a GDP growth of just 3.5 per cent.

Meanwhile, exports continue to underperform. According to the National Statistics Office, export receipts fell for the eighth consecutive month in December. One problem, noted Ms Lorenzo, is that the country does not produce components for consumer products in high demand, such as smartphones.

Overall, the Philippine economy should perform creditably this year as the economy recovers from last year’s setbacks. But after years of disappointment and missed opportunities, now is the time for cautious optimism, not euphoria.

(C) Singapore Press Holdings Limite

Key Political Risks

President Benigno Aquino has stepped up efforts to lure foreign investors into the country, so far without much success. The country continues to be hobbled by widespread corruption and several long-running insurgencies. 

However, the government has had some success in reducing the budget deficit. The president also remains popular with voters. 


  • Extent to which foreign and domestic investors show interest in big ticket infrastructure projects.
  • Increased spending on the air force and navy to counter Beijing's territorial claims in the disputed Spratly Islands. The issue could become an important point of contention at the East Asia forum in Indonesia in November.
  • The implementation of the "framework agreement" between Manila and the insurgent Moro Islamic Liberation Front announced in early October. If all goes well, a final peace deal may be signed by 2016. 

About Me

My name is Dr Bruce Gale and I am a senior writer with the Singapore Straits Times. I studied at  LaTrobe University (BA Hons) in Melbourne and later at the Centre for Southeast Asian Studies at Monash University (MA). My PhD thesis, which focussed on Malaysian political economy, was completed at the Malaysian National University (Universiti Kebangsaan Malaysia) in 1987.

From 1988 to 2003 I was Singapore Regional Manager for the Hong Kong based Political and Economic Risk Consultancy (PERC). 

I have written several books and articles on Southeast Asian affairs, including Political Risk and International Business: Case Studies in Southeast Asia (Pelanduk Publications, 2007). Books on language include Mastering Indonesian: a guide to reading Indonesian language newspapers (Pelanduk Publications, 2008)

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