Opinion | Columnists

Philippines’ turn to break with the past

The stock market and peso have both rallied strongly and after last week’s peace deal with MILF, the country seems poised for better times

  • By David Pilling, Financial Times
  • Published: 00:00 October 17, 2012
  • Gulf News

  • Image Credit: EPA
  • Moro Islamic Liberation Front (MILF) Chief Al Haj Murad, Malaysian prime minister Najib Razak, Philippine President Benigno Aquino III and Teresita Quintos-Deles, adviser on the peace process witness the exchange of documents after signing of a framework agreement between the Philippines government and Muslim separatist rebels inside the Malacanang presidential palace, Manila, Philippines, 15 October 2012.

There can’t be many weeks when both the Moro Islamic Liberation Front (MILF) and the World Bank have good news for the Philippines. But that is what has just happened.

On October 7, the MILF, the secessionist group, agreed in principle to peace on the southern island of Mindanao after 40 years of civil war.

The following day, the World Bank, which has been busily downgrading growth projections around the world, said the Philippines was bucking the trend. It raised its growth forecast to 5 per cent after the country expanded 6.1 per cent in the first half — among the best performers in the region after China.

Growth of 5 per cent — or 5.5 per cent if you believe the Asian Development Bank — is nothing to write home about for a developing country, particularly one in which the population is growing at nearly 2 per cent a year.

Still, after decades of patchy, not to say dreadful, economic performance, there are signs that things may finally be going the Philippines’ way. In July, Standard & Poor’s upgraded its sovereign debt to one notch below investment grade, following a similar move by Fitch last year.

That reflects a steady improvement in the country’s finances. Foreign exchange reserves have risen five fold since 2005. The fiscal deficit is just 2 per cent of gross domestic product and inflation, at 3.2 per cent, is well under control.

The Philippines is the least export-dependent country in Asia, which is no bad thing given a slump in August shipments. Consumption makes up 70 per cent of GDP (gross domestic product). Expectations of further promotion to investment grade have pulled money in.

The stock market and the peso have both rallied strongly. Cesar Purisima, Secretary of Finance, says the economy, which has grown for 54 straight quarters, has left behind the 3 per cent growth trend of the 1990s. Now it is at 5-6 per cent. The task, he says, is to raise it, by degrees, to 7-8 per cent.

Against this brighter backdrop, some perennial problems are beginning to look less intractable. One is the population, whose fast growth has traditionally outstripped the country’s ability to create jobs. But the fertility rate is dropping and could fall further if President Benigno Aquino gets his way — against the wishes of the Catholic Church — to make birth control more readily available.

Either way, the Philippines is about to enter what economists call its “demographic sweet spot”. With a median age of 22, the lowest in Asia, more than half the population will be of working age by 2015. That is precisely the point at which growth in other Asian economies took off.

There are even tentative signs that some decent jobs are being created. The government reckons the booming back-office industry could double its workforce to 1.2 million. It already contributes $10 billion-$11 billion (Dh36.78 billion to Dh40.45 billion) to the economy.

Tourist numbers are also surging — thanks to a recent open-skies agreement. The aim is to more than double the number of arrivals — with the attendant job opportunities — to 10 million by 2016.

Remittances have long been viewed in a negative light because they are a result of a chronic lack of jobs and investment. Author F. Sionil Jose says the sight of thousands of maids gathered in Hong Kong on their day off is “the shame of the Philippines”.

Still, remittances from foreign workers have nearly tripled to $20 billion from 2004, defying the international financial crisis. And as Diwa Gunigundo, Deputy Governor of the central bank, says: “$20 billion is $20 billion.”

Attitudes have changed. These days, foreign workers are sometimes referred to as the “new heroes”. Not only do they send back money, they bring skills. There is now a shipbuilding industry of sorts — thanks to welders trained on Middle East construction sites.

Two casino complexes that will open in the Philippines next year will be staffed largely by Filipino managers and other employees. What has been a brain drain could become a “brain gain”, says Purisima.

The use of remittances has also changed. Surveys taken in 2007 showed families used money mainly for consumption and to pay off debt. Now, nearly 60 per cent of respondents say they save, invest and set up small businesses.

It would be wrong to suggest that everything is going the Philippines’ way. One of Aquino’s less impressive initiatives has been the public-private partnerships that are meant to improve woeful infrastructure. Little has come to fruition on that front.

The reliance on private money is largely a result of a pathetically low tax base. Though an anti-corruption drive has helped collection, tax still accounts for a miserable 14 per cent of GDP, half the level of Malaysia.

Low tax receipts is one consequence of the Philippines’ deep social divide in which a handful of oligarchs run the country and the rest of the population gets next to nothing. A strung-out archipelago of once-disparate tribes, colonised first by the Spanish and later by the Americans, the Philippines has lacked the sense of common national purpose that has pushed other Asian countries to prosperity.

Aquino belongs to the ruling class that has done fabulously well despite the country’s failings. His first two years as president have been promising. He now has a once-in-a-generation chance presented by demographics, better fiscal management and last week’s peace deal to break with the past and build a country that can begin to serve the interests of all Filipinos.

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