RP economic reforms paying off

RP economic reforms paying off

By Cecilia Quiambao

MANILA (JP): After a spate of false starts, the Philippines
appears to be moving toward a period of sustained high growth,
analysts say.

The previously sheltered economy has begun to reap the fruits
of bold policy reforms. The gross national product (GNP) surged
7.06 percent from the previous year in the first half of 1996,
when the gross domestic product (GDP) also advanced 5.05 percent,
compared to a 4.8 percent increase for the whole of 1995.

Unlike in the past, when consumption drove the economy into
chronic boom and bust cycles and hope withered on the vine, most
economic experts agree that the current recovery is being driven
by investment and exports as well as a modest increase in worker
productivity.

"The Philippine economy is moving on to a higher growth path,"
the Asian Development Bank (ADB) said earlier this month in its
latest country review.

The U.S. investment bank Merrill Lynch said "the nature of
the current recovery has been favorable amid a strengthened
economic structure" and that structural changes since the last
boom period of the late 1980s "indicate sustainability of the
current recovery."

Morgan Guarantee Trust Co., the JP Morgan bank, concluded in a
report that Manila "has moved from Latin American-style
instability to become a newborn Asian tiger."

President Fidel Ramos inherited a basket case when he was
sworn into office on June 30, 1992, with the economy having
ground to a virtual halt with an acute energy crisis. The last
three years before him had all been downhill. Military
rebellions had chased away many foreign investors and stymied
the previous government of Corazon Aquino from making any
semblance of coherent policy.

Ramos, an engineer steeped in military strategy from a
lifetime as a soldier, used the electricity crisis as a crowbar
with which to open the previously closed sectors of the
Philippine economy, convincing a suspicious Congress to grant him
emergency powers and pass laws opening the power sector to
private and foreign investors.

Banking, telecommunications, shipping, insurance and oil soon
followed suit, as did other sectors. Two years into his term,
Ramos had shepherded the country back to the international
capital markets, ending 10 years in the wilderness after Manila
defaulted on its foreign debt service in 1984.

The thrust of his spadework was to open previously closed
sectors to foreign investors, get the government out of the
business sector and rid itself of costly subsidies.

U.S. credit rating agency Moody's Investors Service last
August reaffirmed its Ba2 rating, about two levels below
investment grade, for Manila and said the outlook was positive.

"The broad range of market-oriented, pro-competition reforms
that have recently been implemented have placed the country on a
more sustainable and higher growth trajectory," it said.

"A striking aspect of the Philippines' recent experience has
been a remarkable increase in private capital flows, especially
in foreign investment. This is the result of the liberalization
of controls on capital inflows as well as the broader impact of
reforms on the Philippines' economic prospects," Merrill Lynch
said in its country report in August.

The ADB said that unlike the boom-bust years of the 1970s and
1980s, the annual inflation rate has been kept at around 8
percent in aggregate over the past three years "because of the
financial deepening" that occurred.

Merrill Lynch said that modest increases in public consumption
underlying the current recovery were being used for
infrastructure maintenance rather than increasing wages.

And while aggregate employment has grown largely at pace with
the growth of the labor force, keeping the unemployment rate at
about 9.5 percent, the government is making headway into the
"underemployment rate" which declined to 20 percent in 1995 from
21.7 percent in 1993, the ADB said. It added that this
development was "in line with the expected trends in the initial
phase of an economic recovery."

Amid a general slowdown in exports among Asian economies,
Philippine exports maintained their double-digit growth in the
second quarter of 1996, rising 18.36 percent from a year earlier
and continuing to outpace imports for the second straight
quarter.

About 80 percent of Philippine exports are now of the
manufactured variety, compared with 47 percent in 1993, which
means less dependence on volatile commodity earnings, Merrill
Lynch said.

The ADB report forecast a 20 percent annual export growth
over the medium term.

Putting the country's finances in order was made easier by
continued capital inflows, including remittances from the
country's large overseas workforce of at least 4.2 million, led
to a narrowing of the country's current account deficit to $1.9
billion in 1995, from $2.9 billion in 1994, even as the external
debt service declined.

The ADB said GNP growth should average between 6 percent and 7
percent between 1996 and 1998, with investment providing the
impetus and with the government forecast to achieve "modest"
success in reducing the unemployment rate.

The government target this year is 6.5 percent.

Merrill Lynch said "an average real GDP growth of more than 6
percent is likely to be maintained through 1998." It forecast
that domestic demand, mainly fixed investment, would be one of
the main engines for growth, with infrastructure requirements
seen to be robust. However, the momentum would shift to the
private sector as the government cuts down on infrastructure
spending.

Goldman Sachs, in its September report, raised its projection
for Philippine GNP growth to 7 percent in 1996, up from 6.1
percent due to the strong net factor of income from workers'
remittances and the earnings of Filipino firms abroad.

However, it lowered its GDP forecast to 5.8 percent from 6
percent, anticipating a slowdown in agriculture which makes up 25
percent of the domestic economy.

The Merrill Lynch and ADB reports stressed the need for
further fiscal adjustment through revenue-enhancing measures
such as the controversial Comprehensive Tax Reform Package mired
in Congress. Merrill Lynch said its passage was crucial "to
maintain a sound macroeconomic framework" and alleviate the
public debt burden, while at the same time allowing for higher
levels of public investment on infrastructure.

Additionally, the ADB cited the need to ensure there would be
no repetition of infrastructure bottlenecks such as the power
crisis in the early 1990s.

It said the government would have to invest more in
agriculture, where production "has barely kept pace with
population growth." It cited the need for additional irrigation
and better support services such as roads and marketing
facilities.