Accessibility links

Philippine Economy Makes Gains

  • Simone Orendain

Rows of condominium buildings are seen behind a middle-class residential district in Mandaluyong, Metro Manila, July 4, 2012.

Rows of condominium buildings are seen behind a middle-class residential district in Mandaluyong, Metro Manila, July 4, 2012.

MANILA — When the Philippines committed to loan $1 billion to the International Monetary Fund last month for money aimed at bailing out debt-ridden nations in Europe, the country had another thing to brag about to help boost its image as an emerging player on the financial world stage. While the loan remains controversial in a country battling poverty, it also marked a milestone for an economy that has been steadily strengthening in recent years.

On Wednesday the ratings agency Standard and Poor’s upgraded its credit-worthiness assessment of the Philippines to one notch away from “investment grade.” This follows ratings agency Moody’s “positive” mark in May of two steps below grade and a one-step below grade rating from Fitch a year ago.

European Chamber of Commerce President Hubert d’Aboville optimistically looks ahead to next year and what he predicts will be a step up to the coveted investment grade level. “You will see right away a move towards the Philippines because it’s… investment grade, which is parallel to stability,” he said.

Attaining investment grade means a developing country like the Philippines would have access to the international bond market. It would also demonstrate stability to foreign companies looking to locate here. D’Aboville says having an investment grade rating would calm leery investors who name corruption as the biggest deterrent.

Finance Secretary Cesar Purisima says under the Aquino administration, which just this month completed two years in power, two things have helped crack down on corruption and raise revenues. First, government is going after smugglers and tax evaders on a weekly basis. And second, it switched to zero-based budgeting, which should lessen chances for skimming off funds because budgets are planned only for the period in which they will be used.

“As a result, the increase in revenue year on year say from 2010 to 2011 was the highest in over 10 years without new taxes or asset sales," Purisima stated. "And we’ve continued that.”

Purisima says about $180 million dollars has been collected so far, which is less than one percent of the country’s GDP. Also, central bank foreign reserves hit $76 billion, which allowed it to invest the $1 billion in the IMF bailout.

These and several other measures caught the attention of credit rating agencies. In addition, economic forecasters have noted a number of record high days in the stock market this year among other positive indicators.

Hong Kong and Shanghai Banking Corporation Economist Trinh Nguyen says the Philippines has positioned itself well against potential hazards such as the eight month-stretch last year of lower exports. “The government ramped up spending to offset anticipated low external demand,” noted Nguyen.

Government spending on infrastructure projects bolstered growth to 6.4 percent in the first quarter of the year giving it the second highest growth rate in Asia for the period. Additionally, Nguyen says, major infrastructure should get a boost with projects between government and private entities. But those have been slow developing.

While the Philippines has its eye on a brighter economic picture, major economies such as the United States and some European Union countries continue to falter from a prolonged economic downturn. Purisima says this presents opportunities for the Philippines because during tough times companies streamline. “One of the proven ways of making companies more efficient is reducing their backroom costs and outsourcing to countries such as the Philippines has been proven to be very effective,” he said.

Purisima says the call center and knowledge-based support service industry has been growing by 25-percent each year, bringing in $11 billion last year. He also points to tourism and trade as areas where the Philippines could stand to be aggressive.

Trade and Industry Secretary Gregory Domingo says apart from Germany, European Union countries are not as active trade partners as the United States. In the region, China is less of an investor in the Philippines. Instead Filipino businesses invest nearly four times more in China than China does in the Philippines. But Domingo says his office is hard at work trying to lure more foreign direct investment.

“My team here at D.T.I. which takes care of investors who come here, they’ve never been so busy," noted Domingo. "This is the busiest year that I can recall ever. So we’ve had a continuous stream of investment missions from different countries.”

However, visits from potential foreign investors do not automatically result in commitments. Last year foreign direct investments came to about $1billion. Nguyen calls that “very low” compared to Vietnam, which drew $11 billion or the $13 billion that went to Indonesia. “The business environment in the Philippines relative to its size is significantly lagging,” she said.

The World Bank’s “Doing Business” report shows the Philippines in the bottom third among East Asian and Pacific peers in most of the categories, such as “Ease of Doing Business” and “Paying Taxes.”

While Hubert d’Aboville of the European Chamber likes the direction the country is headed, he says it has to last well beyond the current administration to get serious notice from foreign direct investors. This includes changing what he calls a backwards law that requires all businesses in the Philippines to be 60-percent owned by citizens and no more than 40-percent by foreigners.

“You cannot invest your hundreds of millions of dollars in a place where you will not have control of you investment,” said D’Aboville.

Foreign investors will have more to contend with than the statute commonly called the 60-40 law. Right now local banks flush with liquidity are loaning at a strong pace to big domestic players. As a result, the Department of Trade and Industry is seeing 50-percent investment from locals versus 30-percent from foreigners.