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.