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The Philippines - a tale of growing too fast by Martin Conboy

The Philippines - a tale of growing too fast by
Article Posted: 06/21/2013
Article Views: 406
Articles Written: 4
Word Count: 910
Article Votes: 0
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The Philippines - a tale of growing too fast

Business News,Publishing,Advertising
A few years back, I met former President Arroyo of the Philippines, and she told me that the problem with the Philippines was that in the provinces you have rivers with no bridges and a metropolitan Manila that has bridges with no rivers. The point being that there was a disproportionate level of investment in the capital of the Philippines that was not being spread out around the nation. Philippine GDP grew 7.6% in 2010, spurred by consumer demand, a rebound in exports and investments, before slowing to 3.9% in 2011, and 4.8% in 2012 – still very respectable by world standards especially compared to Europe. The economy withstood the 2008-09 global recessions better than its regional peers due to minimal exposure to troubled international securities, lower dependence on exports, relatively robust domestic consumption, large inflows from overseas Filipino workers, and a growing business process outsourcing industry. In 2012, IT-BPO in the Philippines generated more than $13 billion in revenues. Furthermore, the sector employment expanded to over 700,000 people and is contributing to a fast growing middle class.

Many emerging economies rely on foreign creditors to bridge the gap between their exports and imports. The Philippines is a bit different; it relies largely on overseas employees. Over 10 million Filipinos equivalent to about a quarter of the country’s labour force live or work abroad. They are referred to as overseas foreign workers or OFW. The vast majority of these remit part of their salaries back into the Philippines to their families and villages. The appreciation of the local currency has also reduced the peso value of the dollar remittances sent by overseas Filipinos. In 2012, the Central Bank of the Philippines claimed that official remittances streamed through banks and agents were worth US$21 billion to the Philippine economy.

The remittances are equivalent to 8.5% of GDP, helping the country to plug its trade deficit and amass over $80 billion of currency reserves. As a result, the Philippines is becoming a net creditor to the rest of the world and not just a net supplier of Labour.

The Philippine Stock Exchange Index recently surged to a record high and the Philippine peso climbed to its highest level after Fitch Ratings raised its credit assessment of the nation’s long-term foreign-currency-denominated debt to BBB- from BB+. In contrast, Fitch joined Moody’s in downgrading the UK to AA+ “to reflect a weaker economic and fiscal outlook” that has caused both the budget deficit and national debt to soar above earlier forecasts.

The UK downgrade was blamed on “the weak growth performance of the UK economy in recent years, partly due to private and public sector deleveraging and the Eurozone crisis”. The Philippine upgrade may boost capital inflows further and confound the job of policy makers as they try to rein in an appreciating peso and curb asset bubbles. One only needs to look at the Fort Bonifacio area on the edge of the Makati business district to see that there is a property bubble in the making. Fifteen years ago there was nothing but fields where a brand new CBD is now standing, largely fueled by the ICT-BPO sector.

Both the current government and its predecessor have worked hard to put the country’s fiscal house in order, reducing its debt from 68% of GDP in 2003 to 41% last year. That’s less than half the rate of some European countries The Central Bank cut rates by 0.25 percentage points to 3.5%. The move was also seen as an effort to offset some of the capital inflows into the country that has been a favoured emerging markets play. There is no doubt that the government needs to broaden its tax base as weak tax collection, exacerbated by new tax breaks and incentives, has limited the government’s ability to address major challenges. Now the government is going beyond housekeeping too much needed repairs. The public finances rest on narrow foundations, and collected less than 13% of GDP in taxes last year, an insufficient ratio that helps explain why public investment amounted to less than 3% of the economy. To raise revenues, it last year passed a ‘Sin’ tax on tobacco and alcohol which survived the Senate by a single vote and came into effect on January 1 this year.

The Philippines does not suffer from a lack of foreign investor interest; indeed the Central Bank has been fretting about excessive capital inflows, which might push up the peso or lead to inflation or asset bubbles. The challenge for the ICT- BPO sector is maintaining its costs (as viewed from the outside world) as too much of a raise would see it becoming uncompetitive with other emerging players. Against the US dollar at the last trading day of 2012, the peso has gained nearly 7 percent since the start of the year. Reflecting the boom times in the Philippines is the fact that the peso was the second fastest appreciating Asian currency against the dollar last year. The rise of the peso has made Philippine-delivered services i.e. BPO work more expensive in dollar terms and slightly less competitive in the global market.

On a positive note monetary authorities have been successful in keeping the inflation rate at bay with the December rate at 2.9 percent, bringing the average pace of the price movement to 3.2 percent, within the lower end of the range target of between 3.0 percent and 5.0 percent.

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