Philippines at a Glance: 2001-02

COUNTRY REPORT

Philippines At a glance: 2001-02

OVERVIEW The Senate trial of President Estrada is likely to finish in mid-February. A guilty verdict on any of the charges would result in his removal from office, putting the vice-president, Gloria Macapagal Arroyo, in his place. However, acquittal remains a distinct possibility and would lead to a prolonged period of political uncertainty. The political situation has already undermined the privatisation programme, and the outlook for the government’s fiscal position is not good. GDP is forecast to slow from an estimated 3.6% in 2000 to 2.6% in 2001 and 2.9% in 2002. Consumer price inflation has already started to accelerate, and will average 6.3% in 2001. A steady decline in the merchandise-trade surplus will bring the current-account surplus down to US$7.6bn in 2001 and US$5.9bn in 2002. The exchange rate will average PhP50.50:US$1 in 2001 and PhP51.75:US$1 in 2002. Key changes from last month Political outlook • Senators trying President Estrada have heard detailed allegations of secret bank accounts. Some suspect that a group in the security forces was behind the spate of bombings in Metropolitan Manila on December 30th. Economic policy outlook • The budget deficit in 2000 seems likely to have been double the original target, and the 2001 target has been reset. The Napocor privatisation has been put back further. Economic forecast • As a result of stronger than expected GDP growth in the third quarter of last year the EIU has revised upwards its 2000 growth estimate to 3.6%. But we now expect growth of just 2.6% in 2001, compared with a previous forecast of 3.1%.

January 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising conferences and roundtables. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent St The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7830 1007 Tel: (1.212) 554 0600 Tel: (852) 2802 7288 Fax: (44.20) 7499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: http://www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at http://store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office London: Jan Frost Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023 New York: Dante Cantu Tel: (1.212) 554 0643 Fax: (1.212) 586 1181 Hong Kong: Amy Ha Tel: (852) 2802 7288/2585 3888 Fax: (852) 2802 7720/7638

Copyright © 2001 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-428X

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Philippines 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 9 Economic policy outlook 10 Economic forecast

15 The political scene

19 Economic policy

22 The domestic economy 22 Economic trends 26 Manufacturing 27 Services

28 Foreign trade and payments

List of tables

10 Forecast summary 11 International assumptions summary 20 Budget performance 22 Gross domestic product and gross national product 23 Gross domestic product by expenditure 24 Gross domestic product by origin 25 Consumer prices 26 Exchange rate 26 Manufacturing production 29 Foreign trade 29 Exports of electronics and components 31 Balance of payments

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 2 Philippines

List of figures

14 Gross domestic product 14 Philippine peso real exchange rate 22 GDP growth 24 Consumer price inflation

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 3

Summary

January 2001

Outlook for 2001-02 The continuing political crisis is overshadowing prospects for economic growth. The president could be forced to stand down as early as February, but acquittal still remains a possibility. In this situation investment confidence will remain at rock bottom and the economic reform process will remain on hold. With demand growth in the US slowing sharply, the rate of GDP growth will slip below the 3% level in 2001-02. Inflation will initially continue at the higher rate registered at the end of 2000 but gradually ease down as oil prices fall and domestic demand growth remains subdued. Slower export growth will pull down the current-account surplus.

The political scene The president, Joseph Estrada, stands accused of receiving payoffs from illegal gambling. With intensifying demands that the president resign, or be convicted, leading figures—including the vice president—have distanced themselves from the administration. A House of Representatives, nominally dominated by the pro-government coalition, nevertheless voted through the articles of impeachment. The trial in the Senate has revealed evidence directly implicating the president. Tension rose further after a wave of bombs in the capital on December 30th.

Economic policy The budget deficit in 2000 will have been double the original target agreed with the IMF, owing to very poor internal tax revenues and low privatisation proceeds. The target for 2001 has already been revised upwards by almost one- half. The government has sold equity in a fertiliser company, but other sell-offs have failed. The Senate has shelved the bill to privatise the power utility because of the political turmoil.

The domestic economy GDP growth continued to accelerate in the third quarter of 2000, to 4.8%, as exports increased and investment picked up. The agricultural recovery continued and manufacturing expansion maintained momentum. Inflation rose sharply in the final months of 2000 but the average for the year remained low at 4.3%. Interest rates have recently eased as the peso has stabilised. Manufacturing output growth accelerated through to October, but the trend will not be maintained into 2001. A massive rescue package has been extended by the central bank to save the Philippine National Bank.

Foreign trade and The surplus on foreign trade has continued to rise, approaching US$5bn at the payments end of October last year. Exports registered the expected year-on-year fall in September and October, but growth in January-November reached 7.7%. Import spending was up only 1.5% in January-October. The current account remained in substantial surplus, but not by enough to prevent overall payments going into the red by end-September. International reserves have weakened from their August 2000 peak.

Editors: Sophie Lewisohn (editor); Graham Richardson (consulting editor) Editorial closing date: January 1st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 4 Philippines

Political structure

Official name Republic of the Philippines

Form of government Under the 1987 constitution, government is based on separation of powers between the executive presidency, bicameral legislature and independent judiciary

The executive President is chief executive, head of state and commander-in-chief; serves no more than one six-year term; may approve bills passed by Congress or may exercise veto, which can be overridden only by two-thirds majority of Congress; cabinet appointments are subject to approval by Congressional Commission on Appointments

Legislature Congress of the Philippines consisting of the Senate (24 members) and the House of Representatives (208 directly elected members and, since July 1998, up to 52 selected by party list); senators elected for six-year terms; representatives for three-year terms

Legal system Based on common law; 1987 constitution contains a Bill of Rights and prescribes a judiciary with the Supreme Court at apex

National elections May 11th 1998 (presidential, House of Representatives and half of the Senate); next election due May 2001 (mid-term congressional)

National government Joseph Estrada became president on June 30th 1998

Main political organisations Laban ng Masang Pilipino (Lamp), a pro-administration party, which was formed to back Joseph Estrada’s election bid in 1998 from a coalition of the Nationalist People’s Coalition (NPC), Partido ng Masang Pilipino (PMP) and Laban ng Demokratikong Pilipino (Laban); Lakas ng Edsa-National Union of Christian Democrats (Lakas), the government party under the previous president; Communist Party of the Philippines (CPP); Moro National Liberation Front (MNLF); Moro Islamic Liberation Front (MILF)

President Joseph Estrada Vice-president Gloria Macapagal Arroyo

Key ministers Agrarian reform Horacio Morales Agriculture Domingo Panganiban Budget Benjamin Diokno Defence Orlando Mercado Economic planning Felipe Medalla Education & culture Andrew Gonzales Energy Mario Tiaoqui Environment & natural resources Antonio Cerilles Finance Jose Pardo Foreign affairs Domingo Siazon Health Alberto Romualdez Interior Alfredo Lim Justice Artemio Tuquero Labour Bienvenido Laguesma Public works Gregorio Vigilar Tourism Gemma Cruz-Araneta Trade & industry Tomas Aquino ( acting) Transport & communications Vicente Revera

Executive secretary Edgardo Angara

Central bank governor Rafael Buenaventura

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 5

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at current market prices (P bn) 2,171.9 2,426.7 2,678.2 2,996.4 3,497.0 Real GDP growth (%) 5.7 5.2 –0.6 3.3 3.6 Consumer price inflation (av; %) 9.0 5.7 9.7 6.7 4.3 Fiscal balance (% of GDP) 0.3 0.1 –1.9 –3.7 –3.7 Population (m; mid-year) 71.9 73.5 75.1 76.8 78.4 Exports fob (US$ m) 20,543 25,228 29,496 34,210 37,430 Imports fob (US$ m) 31,885 36,355 29,524 29,252 31,167 Current-account balance (US$ m) –3,953 –4,351 1,546 7,910 8,900 Reserves excl gold (US$ m) 10,030 7,266 9,226 13,230 13,200 Total external debt (US$ bn) 40.1 45.4 47.8 52.2a 51.0a Debt-service ratio, paid (%) 13.4 9.2 11.8a 14.7a 12.1a Exchange rate (av; P:US$) 26.22 29.47 40.89 39.09 44.20

January 5th 2001 P51.00:US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Agriculture, forestry & fishing 17.5 Private consumption 72.4 Industry 30.5 Government consumption 13.0 Manufacturing 21.4 Fixed investment 19.0 Construction 5.6 Change in stocks –0.2 Utilities 2.9 Exports of goods & services 51.3 Services 52.0 Imports of goods & services –50.9 GDP at market prices 100.0 GDP at market prices incl statistical discrepancy 100.0

Principal exports 1998 US$ m Principal imports 1998 US$ m Electrical & electronic equipment 17,156 Semi-processed raw materials 10,415 Machinery & transport equipment 3,318 Telecoms equipment & electrical machinery 6,869 Garments 2,356 Parts for manufacture of electrical equipment 4,634 Coconut products 831 Semi-processed manufactures 2,806 Chemicals 339 Power generation equipment & specialised machines 2,568 Fish 306 Mineral fuels 2,021 Copper 203 Total incl others 29,524 Total incl others 29,496

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total US 34.2 US 21.8 Japan 14.3 Japan 20.4 Netherlands 7.9 South Korea 7.4 Singapore 6.2 Singapore 5.9 UK 6.0 Taiwan 4.8 Hong Kong 4.5 Hong Kong 4.4 EU 20.2 EU 8.9 a EIU estimate.

Quarterly indicators

1998 1999 2000 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Government finance (P m) Revenue 118,566 105,080 139,572 112,622 120,936 113,968 135,763 125,870 Expenditure 142,887 138,585 158,620 147,709 145,246 136,846 161,205 161,391 Balance –24,311 –33,505 –19,048 –35,087 –24,310 –22,878 –25,442 –35,521 Output GDP at constant 1985 prices (P m) 241,128 217,524 223,533 223,302 253,023 224,485 233,515 234,102 % change, year on year –2.2 0.7 3.6 3.8 4.9 3.2 4.5 4.8 Manufacturing value index (1985=100) 447.2 479.2 489.4 534.6 520.8 557.2 574.1 671.3 % change, year on year –10.5 –0.2 6.1 12.1 16.5 16.3 17.3 25.6 Employment and prices Employment ('000) 28,262 28,368 29,492 29,055 29,003 28,895 28,301 28,178 % change, year on year 1.3 2.5 5.9 4.3 2.6 1.9 –4.0 –3.0 Unemployment rate (% of the labour force) 9.6 9.0 11.8 8.4 9.6 9.3 13.9 11.1 Consumer prices (1995=100) 130.9 134.0 134.1 135.5 136.8 138.0 139.3 141.6 % change, year on year 10.6 10.0 6.8 5.6 4.5 3.0 3.9 4.5 Wholesale prices (1985=100) 256.7 258.1 254.2 252.1 254.5 258.5 254.6 258.1 % change, year on year 14.6 13.5 6.7 4.4 –0.8 0.1 0.1 2.4 Financial indicators Exchange rate P:US$ (av) 40.64 38.70 37.99 39.24 40.43 40.65 41.88 44.99 P:US$ (end-period) 39.06 38.77 38.02 41.11 40.31 41.06 43.15 46.28 Interest rates (av; %) Deposit 11.2 11.2 7.1 7.2 7.2 7.1 6.6 7.5 Lending 14.3 13.8 12.1 10.3 10.9 10.3 10.0 10.9 M1 (end-period; P bn) 286.0 289.1 297.9 311.7 395.6 341.5 346.0 n/a % change, year on year 7.4 17.9 18.7 30.4 38.3 18.1 16.2 n/a M2 (end-period; P bn) 1,626 1,605 1,652 1,709 1,900 1,832 1,866 n/a % change, year on year 8.1 10.5 9.1 10.4 16.8 14.2 13.0 n/a PSE composite index (end-period; 1985=100) 1,969.0 2,028.2 2,487.0 2,096.2 2,143.0 1,681.7 1,534.0 1434.0 % change, year on year 5.3 –9.4 41.3 66.4 8.8 –17.1 –38.3 –31.6 Foreign trade (P m) Exports fob 257,076 303,983 328,872 278,113 521,626 332,409 330,328 n/a Imports cif –296,018 –301,600 –311,458 –330,674 –328,716 –340,388 –341,513 n/a Trade balance –38,942 2,383 17,414 –52,561 192,910 –7,979 –11,185 n/a Foreign payments (US$ m) Merchandise trade balance 798 748 382 1,907 1,921 787 n/a n/a Services balance –743 –932 –745 –561 –475 –472 n/a n/a Income balance 835 1,614 1,580 1,124 853 1,098 n/a n/a Current-account balance 918 1,545 1,333 2,601 2,431 1,521 n/a n/a Reserves excl gold (end-period) 9,226 11,386 12,303 12,741 13,230 14,203 13,407 12,975 Sources: Bangko Sentral Ng Pilipinas, Selected Economic Indicators; IMF, International Financial Statistics; National Statistical Co-ordination Board, Economic Indicators.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 7

Outlook for 2001-02

Political outlook

Domestic politics Events in the Philippines have moved very rapidly in the past three months, and have contributed to a sharp deterioration in the political stability that had previously characterised the Philippines. There is a definite question mark over the continuation in office of the president, Joseph Estrada, with the Senate currently engaged in his impeachment trial. In the short term the political environment will remain profoundly compromised by the political scandal at the centre of power in the Philippines. However, the constitutional process is taking its due course and we expect that short-term political instability will ease over the outlook period. However, that stability will remain compromised if the president is acquitted.

Political effectiveness has been slipping since Mr Estrada took power in mid-1998, as the incoherence of policy formulation became increasingly evident. Political stability soon eroded as well, as the Estrada administration appeared to be assuming the characteristics of the Marcos regime that was overthrown in 1986. Subsequent developments also had a very damaging impact on perceptions of the quality of governance: a stock exchange scandal in which the president was alleged to have tried to protect a close friend from prosecution; and the launching of an armed onslaught on a major Muslim rebel movement in Mindanao which, while achieving its immediate military goals, undermined the prospects of a peaceful solution, and provided another example of policy incoherence and inconsistency.

The deterioration in political stability accelerated from mid-2000 on as the president himself became embroiled in corruption allegations. First came the revelation in July that the ownership of some assets by the president and his family and close female friends had not been reported, as required by law. Far more serious, however, was an allegation in early October that the president had been receiving monthly pay-offs since November 1998 from jueteng (illegal gambling) and a slice of tobacco fund allocations to the province of Ilocos Sur.

The allegations prompted the local leadership of the Catholic Church to declare that the president had lost his moral legitimacy. The demand that the president step down was joined by the business federations, by grass roots organisations opposed to the government and, significantly, by a growing number of defectors from the administration. The first to go was the vice- president, Gloria Macapagal Arroyo, who resigned from her cabinet post in the Estrada administration, but not from the vice-presidency. Ms Arroyo who was the candidate of the party of the outgoing Ramos administration in 1998, thus remained in place as the constitutional successor should the president leave office prematurely. She began talks with other opposition parties to try to bind them into a common “national agenda” with Lakas ng Edsa—National Union of Christian Democrats (Lakas), the party of which she is titular head.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 8 Philippines

As members of the government coalition party, Laban ng Masang Pilipino (Lamp), resigned, including the leaders of both houses of Congress, the impeachment bill won sufficient support in the House of Representatives to be sent up to the Senate. The trial began on December 7th, with Mr Estrada accused of bribery, graft and corruption, betrayal of public trust and culpable violation of the constitution. A guilty verdict on any one of the charges would be enough to remove the president from office. Extremely damaging evidence has emerged, directly implicating the president in operating a covert bank account under a false name, which the leader of his defence team is alleged to have tried to conceal.

However the verdict, which is expected to be reached by mid-February, may still be an acquittal. Presentation of both sides of the case is scheduled to end by January 30th, with a ruling by the Senate president expected by February 12th. As the figures currently stand, with 10 of the 22 sitting senators apparently set on Mr Estrada’s removal, 5 of the 7 independents would need to join them to secure a guilty verdict. Less than 15 votes for conviction would represent an acquittal.

This is a very difficult call to make. Half of the seats in the Senate will be contested in the mid-term congressional elections in May. Those standing for re-election can be expected to be sensitive to public opinion polls, which are not overwhelmingly in favour of a guilty verdict being returned on President Estrada. Campaigning for a senatorial seat is a nation-wide operation, not a single constituency one, and is therefore very expensive—support from the administration’s patronage network is extremely valuable. Moreover, replacing Mr Estrada with Ms Arroyo means that an incumbent could be running for the presidency in 2004, which would severely dent the hopes of a number of likely presidential aspirants currently in the upper house. Mr Estrada, by contrast, cannot stand for a second term.

Meanwhile, Mr Estrada has shown no readiness to go quietly. He is appealing to the constituency that voted him into power in 1998, claiming that it is the rich elite who are trying to remove him from office because his pro-poor policies threaten their interests. The mass protests organised against the president have been countered by pro-Estrada demonstrations, which have been sizeable if less convincing. There have been allegations—well-reported in the local press—of attempts by the security forces to intimidate some of Ms Arroyo’s supporters. Against this background, a widespread response to the spate of bombs in the capital on December 30th was to suspect that some group in the security forces was trying to generate a situation in which the president could declare a state of emergency. (Events similar to this took place during the presidency of Ferdinand Marcos.)

There are currently two scenarios for 2001-02. In one Mr Estrada is acquitted and remains in office for another three years, severely compromised and politically constrained, with segments of the opposition increasingly radicalised and possibly resorting to violent protest. The other scenario has Ms Arroyo assuming power for the remainder of the current term, in line with the constitution. As a politician with popular legitimacy, strong political backing— from Lakas, the pro-administration party of the Ramos presidency—and the

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 9

right economic credentials and experience, Ms Arroyo offers the prospect of a return to greater political stability for the Philippines in the near term and an improvement in political effectiveness over the medium term. However, it would take time for the dust to settle and investors, particularly foreign investors, will take a wait-and-see attitude.

International relations The Philippines will remain committed to deepening its integration within the region, particularly on the trade front. A priority will also be to develop contacts with the EU and, in this respect, underline the country’s independence from its former colonial master, the US.

One source of contention in the Philippines’ relations with its neighbours remains the disputed sovereignty of the Spratly Islands, claimed in part or in whole by six countries in the region. China has sought to advance its claim by building structures on the islands—ostensibly as fishing outposts—and there have been a number of skirmishes between Chinese and Philippine fishing vessels in the waters around the islands over the past year. The Philippine government will continue to protest formally at what it sees as incursions and will try to involve all claimants to the islands in a negotiated settlement.

Economic policy outlook

Policy assumptions The current political crisis has halted the economic reform process. The privatisation programme is languishing, confidence in the administration is at rock bottom and potential investors, both foreign and domestic, are waiting to see both the result of the impeachment trial and the composition of the legislature after the May elections. There is little prospect of early finalisation of the privatisation component of power-sector reform legislation. Before the corruption scandal broke, the hope was that the two houses of Congress would agree on bills incorporating the recommendations of international consultants. The upper house has now put power sector reform on the backburner while it pursues its impeachment investigation. Once this is over Congress can be expected to return to its consideration of power-sector reform—a core measure of economic liberalisation. When this will be completed is now even more uncertain than it was a few months ago. The advent of an Arroyo administration could breathe new life into the reform process as a whole.

Fiscal policy With clear signs that the fiscal deficit in 2000 would far exceed target, the government has had to abandon its P85bn (US$1.7bn at an average exchange rate for 2001 of P50.5:US$1) target for 2001. In early January the finance minister, Jose Pardo, cited a revised target for 2001 of P120bn, which would be little changed on the likely outturn for 2000 of some P130bn. This revision reflects both the much higher base and the very muted prospect for improvement in revenues this year. The government has lowered its GDP growth target for 2001 by one full point to 3.0-3.5%, in view of higher domestic interest rates and the poor investment outlook. At the same time no early improvement can be expected in tax administration and collection given that this is an election year when members of Congress standing for re-election will not want to be associated with tax increases. The proceeds of privatisation are

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 10 Philippines

likely to remain very meagre, with even the current P7bn target looking ambitious while the political situation remains clouded. There will also be pressure on the spending side given higher interest costs—arising from a weaker peso—than originally projected, higher domestic interest rates and a larger borrowing requirement. The gradual elimination of the fiscal deficit envisaged in the original budget programme for the Estrada presidency is therefore not likely to begin until 2002—if then. Under an Arroyo administration progress would most likely start earlier, but would not be felt much in the current year.

Monetary policy Monetary conditions were tightening for most of 2000, driven largely by peso weakness and growing inflationary pressures within the economy, but the process deepened in October when, in response to the collapse in the peso’s value following allegations of presidential corruption, the Bangko Sentral ng Pilipinas (BSP, the central bank) raised its key overnight rates by four percentage points. The stabilisation of the peso at around the P50-52:US$1 level in subsequent months allowed the BSP to embark on a well signalled week-by-week reduction in overnight rates. However, this still left interest rates at the beginning of 2001 well above pre-crisis levels, continuing to depress corporate investment and holding up government borrowing costs, undermining budget targets on both the revenue and spending side. The central bank governor, Rafael Buenaventura, has indicated that a return to pre-crisis rates this year is the aim, but this will require inflation to be kept within the government target (which is feasible) and the fiscal deficit to be “contained”, which is likely to prove more difficult.

Economic forecast

Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 3.3 3.6 2.6 2.9 Gross agricultural growth 6.0 3.2 0.5 1.6 Unemployment rate (av) 9.7 10.5 10.9 11.1 Consumer price inflation Average 6.7 4.3 6.3 5.6 Short-term interbank rate 11.8 11.4 11.0 10.9 Government balance (% of GDP) –3.7 –3.7 –3.4 –2.9 Exports of goods fob (US$ bn) 34.2 37.4 38.0 40.2 Imports of goods fob (US$ bn) 29.3 31.2 32.7 36.2 Current-account balance (US$ bn) 7.9 8.9 7.6 5.9 % of GDP 10.3 11.2 10.2 7.8 External debt (year-end; US$ bn) 52.2b 51.0 53.2 54.0 Exchange rates PhP:US$ (av) 39.09 44.20 50.50 51.75 PhP:¥100 (av) 34.32 41.09 46.54 49.52 PhP:¤ (year-end) 40.50 43.31 51.51 57.23 PhP:SDR (year-end) 55.33 61.41 67.58 72.20

a Actual. b EIU estimates. c EIU forecasts.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 11

International assumptions After estimated growth of 5.1% in US GDP in 2000—representing the peak in the current growth cycle in the US—the US economy has decelerated more rapidly (and somewhat earlier) than previously expected. The slowdown in 2001 represents a sharp reduction in external demand for Philippine exports, since the US is by far its leading export market, accounting for 30% of sales in 1999. Oil prices, which surged to an average of US$28.77 per barrel (dated Brent) in 2000—61.1% up on the year earlier—will fall back sharply in 2001-02, by around one-fifth in each year. The Philippines relies on imported oil for around three-quarters of conventional energy use and will initially be adversely affected by the relatively high price still prevailing in 2001.

US dollar interest rates rose sharply in 2000, but with the economy slowing dramatically in the final weeks of the year, the US Federal Reserve took the exceptional step of cutting its official Fed Funds rate by 50 basis points on January 3rd 2001. The EIU expects at least another 50 basis points of cuts in the first quarter, and there may be greater reductions. Interest rates are likely to start rising again from the first half of 2002. The cost of the Philippine government’s foreign borrowing will nevertheless remain high in 2001 and 2002 with its budget still in marked deficit and the margins demanded on Philippine paper expanded, at least in the initial period, by the current political crisis. The yen will weaken against the dollar this year but strengthen in 2002. This has mildly unfavourable implications for the Philippines’ current account, since the bulk of inflows is dollar-denominated and a large proportion of outflows (both trade-, investment- and debt-related) is in yen.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 5.0 4.2 4.1 OECD 3.0 4.1 3.0 2.7 EU 2.4 3.3 3.0 2.6 Exchange rates (av) ¥:US$ 113.9 107.6 108.5 104.5 US$:¤ 1.07 0.92 0.95 1.05 SDR:US$ 0.731 0.766 0.779 0.740 Financial indicators ¥ 2-month private bill rate 0.27 0.21 0.45 0.98 US$ 3-month commercial paper rate 5.18 6.32 6.25 5.25 Commodity prices Oil (Brent; US$/b) 17.9 28.8 23.4 19.1 Gold (US$/troy oz) 278.8 283.2 275.0 270.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.0 10.6 14.1 Industrial raw materials (% change in US$ terms) –4.2 14.2 4.2 9.6

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Growth prospects The political uncertainty generated by the impeachment proceedings has dented growth prospects for 2001. Despite some bright spots—a large current- account surplus, still healthy reserves providing almost five months of import

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 12 Philippines

cover, reasonably low, albeit rising, inflation—economic growth has been patchy in the past year, relying largely on external demand for exports while overall domestic demand has been relatively weak (growing by an estimated 2.1% in 2000 compared with 6.5% before the crisis, and with estimated growth of 5.5% in the foreign balance). Higher interest rates designed to underpin the still fragile peso will deter investment, raise debt-servicing costs and reduce corporate profits, leading to retrenchment in operations of which there were already reports in late 2000. The peso’s sharp depreciation has made imports expensive and substantially raised the cost of servicing foreign debt. At the same time the external environment is becoming less attractive, as US growth is forecast to slow by half between 2000 and 2002. We have thus revised downwards our growth forecasts for the Philippines to 2.6% in 2001 and 2.9% in 2002.

In the past, exports and investment were the pillars of growth. That pattern was interrupted in 1998-99 when investment contracted by a total of 13.2%. Investment growth has failed to recover in 2000—declining to an estimated 3.2%—owing largely to already poor perceptions and sentiment which were compounded in the latter half of the year by the scandals surrounding Mr Estrada. As there is little likelihood that the situation will improve much in 2001, we are forecasting a further 6.2% decline. Banks will only gradually shed their reluctance to lend to the private sector, while the improvement in domestic demand still has some way to go before spare capacity is used up and the corporate sector is ready to embark on new investment. The recent hikes in interest rates will have put an additional dampener on investment growth in 2001. We expect a slight rebound in 2002, particularly if a more credible president assumes power.

Government consumption will rise mildly by 1% in 2001 (from 0.7% in 2000), as the larger than planned deficit last year and depressed revenue from lower than expected corporate profits this year put constraints on spending growth, despite the exigencies of the mid-year elections. Private consumption growth will remain modest, at slightly under the rate of overall GDP growth in both 2001 and 2002, as agricultural growth is subdued and unemployment remains high (overall domestic demand will fall by 0.1% in 2001). Exports, which account for over half of GDP in nominal terms, will continue to provide an important, albeit diminishing, spur to growth in 2001-02 (the foreign balance will change little in 2001-02, growing by 0.1% in both years). We have revised downwards our forecast for export growth, to average around 2.5% in 2001-02, as demand for electronic goods and semi-conductors in particular—accounting for around 60% of total exports—falters. Imports will post marginal growth in 2001-02, after three years of decline.

On the output side, we expect agricultural growth to slow in 2001 to around 0.5% (as the El Niño weather phenomenon returns), which will be a factor depressing private consumption growth. The sector should recover somewhat in 2002 to expand by around 1.6%. Within the industrial sector, manufacturing performed well in 2000 on the back of strong export growth for much of the year, expanding by an estimated 5.9%. However, insufficient investment over the recent past has probably held back development of the

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 13

sector and will have dented its competitiveness. As external demand for exports also weakens, manufacturing growth will slow to 3% in 2001 and 4.2% in 2002. The construction sector will remain soft, affected by continuing depressed property prices and a reluctance by banks to lend.

Inflation Inflation rose steadily throughout 2000, but picked up more sharply in the final months of the year, reaching 6% in November and 6.6% in December. The comparatively low average for the full year, at 4.3%, reflects the high year-earlier base for the first four months of the year and the government subsidy on the price of state-supplied rice introduced in October 1999. As the latter effect dropped out of the food index in November 2000, consumer prices registered more markedly the impact of intensifying inflationary pressures—the steeper depreciation of the peso and the surge in world oil prices. Inflation will continue at around the November-December rate in early 2001, but should then ease down slowly as oil prices fall while domestic demand growth remains subdued. We expect inflation to average 6.3% in 2001 and 5.6% in 2002.

Exchange rates The peso depreciated in 2000 owing partly to trends in regional currencies (particularly the Thai baht), partly to the narrowing in the interest rate differential between US and Philippine securities for most of the year, and increasingly to deteriorating investor perceptions about the Estrada administration. We now expect the peso to fall to P52.50:US$1 by the end of the forecast period.

The 10% fall in the currency’s value against the dollar in October can almost exclusively be blamed on political concerns surrounding the gambling scandal involving Mr Estrada and his subsequent impeachment trial. The steep rise in the BSP’s overnight rates in mid-October and the prospect of an impeachment trial producing an early resolution to the political crisis, combined with a continuing current-account surplus to keep the peso relatively stable through the rest of 2000. Developments on the political front will continue to have a profound impact on the exchange rate in the short term. We would expect to see a sharp bounce back in the currency’s value, should Mr Estrada resign and Ms Arroyo assume the presidency. An acquittal would maintain pressure on the currency since this would be seen as a less stable resolution. Our forecast for the peso is therefore unusually tentative. On the assumption of an early change in the presidency, the peso would register a modest pace of depreciation over the forecast period of around 2-3% per year (end-year rates), owing to inflation differentials and, in particular, the need for the peso to remain competitive with the Thai baht.

External sector The external sector has been the bright spot within the Philippines’ macroeconomic outlook and we expect the current-account surplus to remain around US$6.5-7.5bn in 2001-02. However, while both the merchandise-trade and current account will remain in healthy surplus, export growth (in US dollar terms) is expected to continue below the rather lower pace registered in 2000. That reflected special one-off factors: the rebound after the surge in electronics purchases in anticipation of Y2K difficulties and

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 14 Philippines

correction in exports of electronics after the surge generated in September and October 1999 by the earthquake in Taiwan. The pace of growth will remain relatively slow in 2001 because of the weakening in US GDP growth. Given relatively weak domestic demand and the less dynamic market for Philippine goods with a high import component, the rise in import spending will be somewhat subdued. The trade surplus will thus remain in surplus, but at falling levels.

The combined services and income balance will remain in surplus in 2000¬02, buoyed in particular by remittances from overseas Filipino workers. However, the current political and economic climate in the country, combined with the weakness of the peso, will lead to some deferring of remittances. Income debits will rise steadily, as a result of a several factors: higher interest rates on both US dollar and yen debt; poor investor sentiment towards the Philippines, which has driven borrowing spreads wider; and higher total foreign indebtedness, as the government borrows overseas to fund its fiscal deficit.

International reserves (according to the BSP) stood at US$15.1bn at the end of 2000. This represents a slight fall on mid-year levels, following BSP intervention to support the currency in September, but is a marked improvement on the October outturn of $14.4bn, in part owing to government borrowing of US$200m in December. But reserves were well below the year-end target of US$16.1bn agreed with the IMF, after the Philippines forfeited the final US$310m tranche of its standby arrangement with the IMF together with attendant co-financing from the World Bank, the Asian Development Bank and the Japan Bank for International Co-operation. However, foreign reserves are still expected to provide just over four months of import cover in 2001-02, despite our forecast for a slowdown in export growth.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 15

The political scene

The country slips into In October 2000 the Philippine domestic political situation—which had been political crisis deteriorating since the beginning of the year—lurched into crisis with allegations by a former presidential crony that President Joseph Estrada had been receiving the payoffs of illegal gambling since early in his term of office. The crisis has been deepening ever since, with the prospect of the president being forced out of office as Congress voted articles of impeachment—for the first time ever in Philippine history—and took a sudden and potentially very disturbing new turn when a wave of bombs went off in the Manila area on December 30th.

President Estrada is The crisis was set off when Luis “Chavit” Singson, governor of Ilocos Sur and accused of corruption a drinking and gambling friend of the president, claimed that Mr Estrada had been receiving monthly payoffs from the proceeds of an illegal numbers game, jueteng, amounting to P400m (around US$10m) since November 1998 and had also skimmed off P130m from tobacco industry support funds destined for Ilocos Sur. Two of the president’s sons were also said to have been receiving payoffs.

The allegations, first brought to public attention in a privilege speech by an opposition senator, Teofisto Guingona, on October 5th, were serious ones which would be grounds for impeachment proceedings that could remove the president from office less than halfway into his six-year term. They were sensational but—significantly—came as little surprise to many observers. From its inception the Estrada presidency has been marked by allegations of corruption and cronyism, with repeated instances of special treatment given to close friends and financial backers of the president. Eduardo Cojuangco and Lucio Tan, both presidential cronies in the Marcos era, saw their corporate interests flourish as the result of government decisions. When another close friend and financial backer, Dante Tan, was charged with manipulating the share prices of his company, BW Resources, the president reportedly contacted the head of the investigating body, the Securities and Exchange Commission, to get him off the hook. Last July Mr Estrada’s integrity was directly impugned in a report by the Philippine Center for Investigative Journalism which listed undeclared assets held by the president, his family and his female friends. Mr Singson’s allegations indicated a likely source for these acquisitions—and other apparently covert assets were revealed in subsequent weeks.

Pressure builds for the As indicated above Governor Singson’s charges would be grounds for initiating president’s removal an impeachment. But with a very sizeable majority for the government coalition, Laban ng Masang Pilipino (LAMP), in the House of Representatives, which would have to vote the articles of impeachment, and a comfortable one in the Senate, which would conduct the subsequent trial, Mr Estrada probably felt he was secure. He did not issue a specific denial of any of the jueteng charges, which a Senate committee was attempting to investigate; he still has not—admitting subsequently that an account of which he is beneficiary had received funds from Mr Singson, but claiming that he had not drawn on them. The administration countered that this was an opposition plot to discredit the

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 16 Philippines

president and that Mr Singson had fabricated the story out of pique after a gambling licence was awarded to a rival.

As influence peddling and corruption is endemic in the Philippine political system and Filipinos have traditionally shown considerable tolerance of delinquency at high levels, this wave of outrage might have been expected to abate. But it did not. The underlying reason was that there were already too many echoes of the Marcos presidency, and the leaders of the “people’s power” movement which helped overthrow Ferdinand Marcos in 1986 were still active in politics. For a generation of Filipinos who took pride in the peaceful ending of autocracy and the restoration of democracy, the reversion to a disgraced past was unacceptable. A pastoral statement on October 11th from the archdiocese of Manila, which is headed by Cardinal Jaime Sin (who played a key role in the removal of President Marcos), called for Mr Estrada’s resignation as he had lost his “moral ascendancy to govern”. This set off a cascade of defections and disavowals and a wave of popular demonstrations over the following weeks.

The first, and politically most significant, defection came on the following day when the vice president, Gloria Macapagal Arroyo, resigned as secretary of social welfare and development but remained in place as successor to the president if he stood down. On the same day Senator Ramon Magsaysay resigned from LAMP, and his example was subsequently followed by two other senators, including the president of the chamber, eradicating the government majority in the upper house. An opposition coalition was formed to campaign for the president’s removal, headed by Ms Arroyo and winning the active support of two former presidents, Corazon Aquino immediately and Fidel Ramos after an initial attempt to get Mr Estrada to mend his ways. Twelve leading business groups signed a statement demanding that the president resign. On November 1st all five members of the Council of Senior Economic Advisers, which had been appointed in January to raise the credibility and quality of government economic policy, resigned because they no longer wished to be associated with the Estrada presidency. On the same day the trade secretary, Manuel Roxas, resigned.

Congress votes the articles Meanwhile support for the president was slipping in the House of of impeachment Representatives. When the motion for impeachment was filed on October 18th, only 41 congressmen, out of a total 215 members, had voted for it. A third (73) would be needed to endorse the articles for submission to the Senate. That threshold was achieved when on November 3rd the speaker of the house, Manuel Villar, and 40 other members of LAMP resigned from the party and declared themselves in favour of impeachment. Ten days later 115 declared their support, and the articles of impeachment were endorsed. The hearings in the Senate began on December 7th.

President Joseph Estrada stands arraigned on four counts, conviction on any one of which would remove him from his post. They are:

• bribery (relating to the jueteng proceeds received from November 1998 to April 2000);

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 17

• graft and corruption (relating to: the proceeds from tobacco excise taxes; inconsistencies in the president’s statement of assets and liabilities; and interests in companies not listed in that statement);

• betrayal of public trust (relating to: the president’s intervention in the investigation of the BW Resources scandal; violation of the inaugural pledge that there would be no favours for relatives and friends; the appointment of “hundreds” of friends and relatives as presidential assistants and consultants; and other charges); and

• culpable violation of the constitution (relating to: the distribution to cabinet members and senior officials of luxury cars impounded by customs; and multiple appointments of cabinet officials).

Whatever the claim by the president that he welcomes a trial to clear his name (his argument remains that his lawyers have instructed him not to answer specific charges elsewhere), the administration has been trying to kill the impeachment process, essentially through objections on legal technicalities. These have not so far held up the hearings, which are fully publicised in the local media.

Senate hearings yield very The trial is taking place against a background of new revelations and charges, damaging evidence not all of which can be tested in the impeachment process. A notable recent example was the allegation in the German press that the president had taken a slice of the ransom money that was paid by Libyan sources last August for the foreign hostages held by the extremist Muslim group, Abu Sayyaf (October 2000, page 13-14). There had been claims at the time by Abu Sayyaf members that Roberto Aventajado, the presidential adviser who conducted negotiations with the rebels, had bid up the price for the hostages and had taken a cut. True or not, this story adds to mounting charges against the president—and the evidence that has recently come before the Senate has been extremely damaging.

From early in the hearings the prosecution panel had alleged that the president had secret bank accounts, fed by the jueteng money and other illicit proceeds, which had funded corporate acquisitions and properties built for members of his family and his “wives”. One of the country’s leading banks, Equitable PCI, was said to hold 20 such accounts. Initially Equitable, which is controlled by George Go, who is a close friend of the president, had refused to provide documentation to the Senate hearings. Under intense publicity, and in an evident desire to shed the image of a “crony” bank, which could have set off a wave of withdrawals, Equitable agreed to co-operate. Mr Go stood down from his post as president, and Clarissa Ocampo, senior vice president and trust officer, appeared as a witness for the prosecution. She testified that on February 4th she had stood next to the president when he signed a document covering an initial deposit in a trust account in the name of Jose Velarde and paying from this account for a corporate acquisition. This was the first evidence of a direct link between the president and a covert bank account. The testimony of a high-ranking bank official, with no evident axe to grind, was far more credible than the claims of a spurned crony and his employees and

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 18 Philippines

associates about the transfer of sums of money to various presidential aides (even if the aides’ stories have been contradictory and unconvincing).

Ms Ocampo’s story received corroboration when the hearings resumed after the Christmas break. Another vice president of the bank, and head of its legal division, testified that he too had witnessed the president using the signature Jose Velarde at the February 4th encounter. A new twist was added when Ms Ocampo said that, on Mr Go’s instruction, she had arranged the assignation of the Jose Velarde account on December 11th to Jaime Dichaves, a businessman friend of the president, taking the documents to the office of the leading lawyer on the defence panel.

The quality of the evidence inculpating the president is important because when the hearings began the numbers in the Senate were in his favour. A majority of two-thirds (15 out of the current 22 senators) is needed to convict. There were then thought to be ten for impeachment, five definitely against and seven independent. If the evidence on the bribery and corruption charges is sufficiently damaging and robust, enough of the independents and the four pro-Estrada senators who are standing for re-election this May could feel that the only verdict is guilty. Given the other factors in play—above all the vast patronage resources at the president’s disposal in a year when senatorial hopefuls are having to finance nation-wide campaigns—this is by no means a certain or even highly probable outcome. But it is a real possibility.

A spate of bombs heightens It is indicative of the high state of political tension that the spate of bombings tensions in Metropolitan Manila on December 30th were suspected by many of being the work of some group from within the security forces. Bombs went off on a bus in Quezon City, at a Light Rail Transit station, outside the US embassy and on a jeepney in front of the aviation fuel depot at the international airport. A fifth bomb was detonated by the police at a gasoline station in Makati. The explosions killed 18 people and wounded around 100. The fear was that the bombs were designed to generate a climate that would justify a declaration of a state of emergency or a military coup—which would certainly bring a halt to the impeachment hearings.

The police authorities have so far not attributed responsibility. The bomb materials used and the timing (four exploded within minutes of each other) showed them to be the work of a single group. There was predictable speculation in government circles that Abu Sayyaf or a communist cell might be responsible. But the high number of civilian casualties argue against this being a communist action, while Abu Sayyaf lacks the structure to mount simultaneous explosions in four separate parts of the capital. That leaves the suspicion of some quasi-official involvement.

An early and positive What is certain is that the political crisis is deepening, and the ramifications for resolution is unlikely the economy will be more severe the longer it lasts. The president seems determined to hold on to power, however damaging the evidence against him, and is trying to strengthen his populist appeal by portraying the opposition as the uncaring elite which is prepared to undermine the economy in pursuit of a vendetta against the “president for the poor”. Certainly the business elite has

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 19

always had deep misgivings about the Estrada presidency, which its record has served to confirm, and leading business figures have joined the demand that the president now resign. But from the start the campaign to oust President Estrada has also involved trade union federations, grass roots organisations and both the leadership and the body of the Catholic church to which 90% of the population belong. If the president sticks to the line he has taken, there is no prospect of a harmonious resolution of the crisis.

This does not mean an early resolution is out of the question. That might still take the form of a vote for impeachment in the Senate before it adjourns in February for the mid-term congressional elections. This would bring Gloria Arroyo to power for the remainder of the Estrada term (to mid-2004), with the option of standing for another six years. A change of president by due process, and a change to one with much greater ability to do the job, would reinstate the political legitimacy and stability that had been a feature of the Philippines since the early 1990s. A resolution in the form of an acquittal would leave the country with an irreparably damaged president and continuing political tension, imposing a very severe constraint on the Philippines’ prospects of attracting foreign investment on the terms and to the extent that is needed to sustain growth over the long term. A resolution along different lines—and there are several possible scenarios—could be even more destabilising in the short term both politically and economically.

Pre-election changes in the Government ministers and official have to step down five months before they cabinet stand for an elective post. Thus, as Ronaldo Zamora hopes to win a lower- house seat this May, in early January he resigned from the post of executive secretary. This gave the opportunity to Edgardo Angara, a veteran politician who stood as Joseph Estrada’s running mate in 1998 and has been agriculture secretary since June 1999, to scoop this uniquely influential position. The role of executive secretary has been even more influential under a president who is disengaged from the running of an administration and who is currently spending every afternoon watching the television transmissions of the impeachment hearings in the Senate. Mr Angara’s appointment was a disappointment to Ernesto Maceda, another veteran politician who is currently ambassador to the US and who has been given the role of spokesman for the administration in the impeachment battle. The speculation is that he will be given the consolation prize of the Department of Trade and Industry, from which Manual Roxas resigned last November.

Economic policy

Budget deficit in 2000 may From early in 2000 there were predictions—initially by observers and be double the target subsequently by government sources—that the fiscal deficit would exceed target, and the forecast size of the overshoot has been steadily growing. Although there were pressures from the spending side, first from the military campaign initiated in March to flush out the Moro Islamic Liberation Front from its bases in Mindanao and then from the surge in interest costs as the financing requirement exceeded forecast and the peso weakened (and

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 20 Philippines

plummeted in October), the underlying reason is that since April revenue has been falling increasingly short of expected levels. The shortfall was in two categories: collections by the Bureau of Internal Revenue (BIR); and the proceeds of asset sales. As of end September the BIR was P28.3bn (US$667m) below target; a month later the shortfall had reached P33.5bn, far offsetting the excess income at the Bureau of Customs (P2.3bn) and the Treasury (P5bn). By the end of October privatisation proceeds had reached only P2.3bn—falling short of the target for the first ten months of 2000 by P19bn. Although the government has been reining in expenditure (spending excluding interest was in fact 1.1% down in January-September), the deficit at end September was already substantially above the full-year target of P62.5bn (US$1.49bn) with no likelihood of a reduction in subsequent months. By end-October the deficit had reached P95.5bn—already in excess of the revised target of P90bn—and by the end of November it was P114.4bn. At the end of the 11-month period, BIR revenues were P38.7bn below target and asset sales had reached P4.4bn. While total revenue was consequently P53.3bn below target, at P464.5bn, spending was held marginally below target (by P200m) to P578.9bn.

Budget performance (P bn) 1999 2000 Jan-Sep Jan-Sep % change Revenue 356.9 376.5 5.5 of which: taxation 323.2 337.4 4.4 Expenditure 444.9 459.4 3.3 of which: interest 78.2 96.7 23.7 Deficit 88.0 82.9 –5.8 Source: Press reports.

By early December government sources were speculating that the year-end deficit could be as high as P126.5bn—double the original target for 2000. The aim at this stage was to keep the deficit to the P110-120bn range, and this was to be achieved by withholding scheduled releases of P15bn in December. The BIR was also hoping to obtain P1bn in back taxes from the individuals and brokering firms involved in the BW Resources stock manipulation scandal. Meanwhile the official forecast was that privatisation proceeds would reach P6bn by year end: it is unclear how the proceeds of the Philphos sale (see below) fit into these figures, and whether the year-end forecast assumed any income from the sale of shares in the Philippine National Bank (PNB)—if so, it was not realised. So a deficit at around the P130bn mark seems likely; the finance minister recently stated that the worst case scenario was P139bn. Although this may be a case of lowering expectations to a level where the actual result seems good, it is now clear that every year of the Estrada presidency has seen a widening in the budget gap (although, when measured as a share of GDP, there was only a marginal deterioration in 2000).

The target for 2001 has The budget result for 2000 meant that the 2001 proposals have had to be been reset radically amended. The measure originally put before Congress envisaged a

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Philippines 21

deficit of P85bn, but on the assumption of a P62.5bn deficit in 2000 (October 2000, page 21). The budget also assumed a rise in GDP of 4-5%; current expectations are of 3-3.5% (essentially as the result of the impact of the political crisis on the peso’s value and interest rates). This means that, in the absence of much greater effort in tax administration, which is unlikely in an election year, BIR proceeds will not register the 11% rise forecast in the 2001 budget. Meanwhile there will be pressure on the interest bill. The 91- day Treasury bill rate will not average the 9.5% forecast by the government; in late December the planning minister, Felipe Medalla, forecast that the rate would be above 2000’s average of 12%. Calculations by the government suggest that every 1% rise in the Treasury bill rate represents a P1bn rise in interest spending.

Significantly at its review in mid-December the IMF mission predicted that the budget deficit would reach P130bn this year in the absence of improved administration and tax reform. If these reforms are implemented, the IMF estimates that the deficit could be held to the P85bn target. At about the same time the Finance Department was reported to be resetting its calculations for the borrowing requirement this year on the assumption of a deficit of P120bn. This figure was cited by the finance minister in the first week in January.

A small asset sale is realised One exception to the trend of depressing news on the budget finance front was the disposal in November by the government of 45% of its equity in the Philippines Phosphate Corporation (Philphos). The government had been trying for some years to sell off its 50% stake in the fertiliser company (the other 50% is held by the government of Nauru). The first auction of the 45% stake (the remaining 5% is due to be sold to small investors at a later date) took place in October and was a failure, with the highest bid still well below the P4.2bn indicative price. The bid at the second auction—at P3.03bn—was still below the new indicative price of P3.78bn, but came just within the 20% margin that permitted the government to accept the offer.

The record of the other items on the sales block in the past quarter followed the recent pattern. There were no bidders for the site of the International School in Manila or the government’s 85% equity in the Al Amanah Islamic Investment Bank, while the 89% equity in the Philippine National Construction Corporation (PNCC) attracted a single bid of only P1.28bn—a small fraction of the P7bn indicative price. The Committee on Privatisation, which set the indicative price, is expected to lower the minimum quite substantially but it did not act in time to get a new auction in place before the end of 2000.

Napocor privatisation is Meanwhile privatisation of the biggest ticket item, the generating assets of put back further the government-owned electricity utility, the National Power Corporation (Napocor), has been put back further. In early December the Senate energy committee shelved the bill to privatise Napocor, citing the “total breakdown of trust in the government”. At the beginning of the current session of Congress, last July, there was hope of some progress after the lower house agreed to the Senate’s demand that the different components of the Electricity Industry Reform Act be considered separately. The omnibus

measure covers the restructuring of the power industry and the regulatory structure within which a liberalised sector would operate, as well as determining the valuation of Napocor’s assets (including the complex issue of stranded liabilities) and the terms of their disposal. A consortium of Credit Suisse First Boston and SGV/Arthur Andersen completed a draft privatisation plan in September. Since then, however, the already deep suspicions about cronyism and backstairs dealing in the administration seem to have been borne out by the allegations against the president, creating a situation where otherwise very attractive assets would certainly get offers far below their potential value. So while the Senate is ready to go ahead with the restructuring of the sector, it will hold off the privatisation component for the time being.

The domestic economy

Economic trends

Third-quarter GDP growth To the surprise of many (including the economic planning minister), economic exceeded expectations growth once more picked up in the third quarter of 2000, with GDP rising by 4.8% year on year from 4.5% in the second quarter and 3.2% in the first. GNP growth reached 5.7% from 4.6% and 3.4% respectively. These results brought the rate for the first three quarters of the year to 4.7% for GDP and 4.5% for GNP. Growth in GDP was thus towards the upper end of the government’s 4-5% target range. The official forecast when these figures came out (in late November) was that, despite the very serious economic impact of the political crisis which set in during October, economic growth in the final quarter of the year would be sufficient to keep the full-year rate just within the target range, at 4%. Given that GDP growth in the final quarter would need to be only 3.4% to produce this result, the official hope would seem to be attainable. However, the signs were that the boost to growth from the export sector was easing off in the fourth quarter, while even the marginal recovery in fixed investment in the third quarter is unlikely to have been sustained in the rapidly deteriorating environment of the final months of 2000.

Gross domestic product and gross national product (% change year on year) 1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr GDP 0.7 3.6 3.8 4.9 3.2 4.5 4.8 Net factor income from abroad 17.2 11.0 4.2 10.5 5.9 3.6 20.3 GNP 1.5 4.0 3.8 5.1 3.4 4.6 5.7 Source: National Statistical Co-ordination Board (NSCB), National Accounts of the Philippines.

Export growth strengthens The expenditure breakdown of GDP shows faster growth in nearly all sectors and investment flattens in the third quarter. Private consumption growth picked up after its steadiness in the second quarter, while fixed capital investment flattened out after its

contraction in the first half of the year and export growth, which was in double digits in the second quarter, was up strongly, with the change in the net foreign balance contributing 1% to GDP from one year earlier. Finally a critically important component which is captured in the GNP measure, net factor income from abroad (which encompasses inflows from the large Filipino community overseas), registered its highest growth year on year since the final quarter of 1997. The picture was thus of broad-based and strengthening growth.

Nevertheless, weaknesses persisted—investment spending for the nine-month period was still down year on year, and the further contraction in import spending is not a good sign given the high import dependence of the manufacturing sector.

Gross domestic product by expenditure (% change year on year) 1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Private consumption 2.5 2.6 2.5 2.9 3.2 3.2 3.5 Government consumption 7.9 4.2 3.1 6.5 1.9 0.8 1.8 Fixed capital investment –10.1 2.3 –1.7 –2.6 –1.4 –2.8 0.6 Exports of goods & services –8.4 3.3 11.5 8.9 10.7 13.9 18.3 Imports of goods & services –16.8 0.1 1.5 6.6 1.4 –3.8 2.9 GDP 0.7 3.6 3.8 4.9 3.2 4.5 4.8 Source: NSCB, National Accounts of the Philippines.

Agricultural recovery One trend that would seem to justify the official optimism of late November continues strong was the strong upturn in agricultural sector GDP in the second and third quarters of last year. Favourable weather conditions have boosted output of rice, the major food crop, while coconuts, the most significant cash crop, continued in strong recovery from the El Niño-induced downturn in 1999. Both trends should have been sustained in the final quarter of 2000. The total rice crop is now expected to have reached 12.58m tonnes, 6.6% up on 1999 which was a year of strong recovery, and the latest industry estimates put output of copra 80% above the 1999 level.

Manufacturing maintains GDP growth in the third quarter was also buoyed up by the further momentum acceleration in manufacturing with year-on-year growth reaching 6.7%—the fastest rate in any quarter since 1995. As a result the January-September rate reached 6.3%, a marked improvement on 1999’s overall 1.4%. But there is no chance that growth in the final quarter will have matched this pace. The plummeting in the peso’s value in October, and the sudden rise in interest rates to arrest this fall, have greatly increased manufacturing costs and there was anecdotal evidence of some retrenchment in activity during the final months of last year. Employment in manufacturing was reported marginally down on the year-earlier in October. Construction, the further contraction of which

continued to hold down growth in the industrial sector as a whole, is likely to have performed poorly in the last three months of the year owing to sluggishness in private-sector investment and the tightening constraints on budget spending.

Gross domestic product by origin (% real change year on year) 1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Agriculture, fisheries & forestry 2.9 9.2 5.3 6.6 0.1 4.8 5.5 Industry –3.6 –0.6 2.5 3.8 4.4 3.7 4.4 of which: manufacturing –1.0 0.9 2.4 3.7 5.8 6.2 6.7 construction –12.8 1.8 5.2 1.6 –0.7 –8.6 –5.6 Services 3.2 3.8 4.3 5.0 3.8 5.0 4.9 GDP 0.7 3.6 3.8 4.9 3.2 4.5 4.8 Source: NSCB, National Accounts of the Philippines.

Inflation picks up As expected, the year-on-year rate of consumer price inflation, which had been edging up slowly since the beginning of 2000, rose markedly in the last quarter of the year. From an average of 3.7% in January-September the October rate was 4.9%, the November figure 6% and December’s 6.6%, resulting in an annual average exchange rate for the year of 4.3%.

Prices had been coming under pressure for much of the year from the surge in world oil prices (imported oil covers just over half of Philippines energy demand) as well as the pick up in private consumption growth. But the rate was unusually low for the Philippines for two reasons: still generally subdued growth in total domestic demand; and the price subsidy on state-supplied rice implemented in October 1999 to offset the impact of rising energy prices. Prices of food, which has a weighting of around half in the inflation index, thus fell during the early months of 2000 and only gradually picked up from the second quarter on. Once the year-on-year fall in rice prices was out of the statistics, as happened in November, food price inflation surged. Government sources stressed the impact of supply disruption from typhoons in that month,

but in fact food prices were also reflecting the delayed effect of rises in petroleum product prices and electricity tariffs in the third quarter of the year. A further sharp upward pressure was introduced with the peso’s steep depreciation in October.

Consumer prices, 2000 (% change year on year) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Consumer price index 2.6 3.0 3.3 3.7 4.1 3.9 4.3 4.6 4.6 4.9 6.0 6.6 of which: food –1.0 –0.2 0.7 1.1 2.0 1.8 2.3 2.7 2.6 2.9 4.5 5.2 Source: National Statistics Office.

Interest rates leap in After eight months of virtually no change the benchmark interest rate (on October 91-day Treasury bills) began to move up in early September in response to a steeper fall in the peso’s value and a rise of one full point in the central bank’s overnight rates to support the currency. The rise in interest rates was still relatively modest however. The weekly auction on September 11th saw a rise of 19.8 basis points (to 9.1%). The rate then drifted up very slowly, with the longer-term rates registering a steeper rise, to reach 9.3% on October 2nd. With inflation still low and high rates of liquidity among the commercial banks as credit demand from the private sector continued weak, the expectation was that the 91-day T bill rate would average around 9% in the full year.

All this changed after Chavit Singson accused the president of collecting payoffs from illegal gambling (see The political scene). As the political crisis deepened and the peso plummeted (see below), the Bangko Sentral ng Pilipinas (BSP, central bank) tried to arrest the currency’s fall by ratcheting up its overnight rates, by 400 basis points as from October 16th, bringing its lending rate to 17.25%. The very serious effect of such sharp rises in borrowing costs on domestic demand, and above all on still weak investment, means that it is not a sustainable policy. Fortunately the peso steadied in November and December, allowing a slight relaxation on interest rates and liquidity. The overnight rate was brought down by 50 basis points each time in three consecutive weeks in December. This relaxation, which was well signalled by the BSP, permitted a gradual fall in the 91-day T bill rate. It had surged from 9.89% on October 16th to 16.72% when weekly auctions were resumed on November 6th, but eased down again steadily to 12.93% on December 19th (the final auction of the year) and 12.88% on January 2nd. This still leaves interest rates well above pre-crisis levels.

The peso plummets—and The peso’s value had been weakening through the first three quarters of 2000 remains volatile in response to a mix of external economic developments and domestic political events. The rise in US federal funds rates, while Philippine interest rates held steady, eroded demand for peso-dominated assets, while disquiet about the quality of governance in the Philippines had risen after the stock exchange scandal in January, the flare up in the Mindanao conflict and widening allegations of cronyism. At the end of September the peso was valued at P46.28:US$1, representing a depreciation of 13% since the end of 1999. One month later, after the president stood accused of accepting bribes from

illegal gambling, it had fallen another tenth, to P51.43:US$1, so that the depreciation since the beginning of the year was then as great as that seen in the Indonesian rupiah.

The Philippine currency has since stabilised around the P50-52:US$1 mark with every twist in the impeachment trial which began on December 7th producing an immediate impact—positive when it seems the president will be removed, negative when he affirms his determination to hang on. At the same time the still strong economic fundamentals—the continuing surpluses on the merchandise trade and current accounts and strengthening growth in GDP in the third quarter—encourage profit-taking when peso assets are seen to be underpriced. At year-end the peso, at P46.943:US$1, was 14.1% down on its end-1999 value.

Exchange rate, 2000 (period average) % change % change on P:$ year on year preceding month Jan 40.427 –5.0 0.5 Feb 40.572 –4.4 –0.4 Mar 40.938 –4.9 –0.9 Apr 41.188 –7.2 –0.7 May 41.806 –9.5 –1.5 Jun 42.649 –11.4 –2.0 Jul 44.336 –13.6 –3.8 Aug 44.898 –12.6 –1.3 Sep 45.737 –12.2 –1.8 Oct 48.106 –16.2 –4.9 Nov 49.754 -18.9 -3.3 Dec 46.943 -14.1 5.0 Sources: IMF, International Financial Statistics; Bangko Sentral ng Pilipinas (BSP); press reports.

Manufacturing

The rise before the fall? Monthly data on manufacturing production derived from the survey of key manufacturing enterprises in 16 sectors bear out the national accounts results cited above, with the pace of growth picking up in the third quarter of last year. Fluctuations in the year-on-year rate of growth as between months remained sharp, but the average for the quarter was well above any registered since the recovery began in 1999. The preliminary figures for October nearly matched the July peak.

Manufacturing productiona, 2000 (% change year on year: volume) Jan Feb Mar Apr May Jun Jul Aug Sep Oct 14.3 7.2 2.6 –4.0 12.3 14.3 21.3 8.8 15.5 21.0 a Measured by monthly surveys of 550 enterprises; subject to continual revision. Sources: Bangko Sentral ng Pilipinas (BSP), Selected Philippine Economic Indicators; press reports.

The double-digit rise is not likely to have been maintained throughout the last two months of the year and into 2001. There will have been the predictable impact on manufacturing production costs of much more expensive imports (because of the peso’s sharp depreciation in October) and much higher interest rates. Meanwhile, demand is said to be weakening. In this situation manufacturers are reported to be cutting down the level of their operations, and the Federation of Philippine Industries forecast that the sector would begin to implement a four-day week in the course of January.

Services

Hard times for the banking The current political crisis is proving damaging for the Philippines’ sector as NPLs rise commercial banks, which had managed to get through the 1997-98 regional financial crisis relatively unscathed (essentially because the process of bank sector reform and consolidation was well established, if far from complete). Now the impeachment hearings in the Senate are raising the spectre of crony banks, highlighting the lack of transparency and the abuse that banking secrecy laws permit and indeed encourage. The depositors’ natural response is to withdraw their funds. So far no commercial bank has apparently had to seek emergency assistance from the Bangko Sentral ng Pilipinas (BSP, the central bank). Equitable PCI Bank, which the prosecution claims holds a multitude of concealed accounts of which the president is beneficiary, has repeatedly denied that it needs support, but it has clearly been tarnished.

Meanwhile the sharp rise in interest rates, as the BSP moved to arrest the decline in the peso’s value, will certainly have raised the level of non- performing loans (NPLs) at the commercial banks. Their NPL ratio had been rising steadily last year, owing to a rise in their non-performing portfolio at the same time as total lending was in decline. By the end of September the banks’ NPL ratio stood at 17.2%. This is still a low level compared with other economies in the region, but the movement has for some time now been in the wrong direction. At end-1999 the ratio was 13% and at end-1998 it was 10.4%. The general expectation is that NPL ratios will have moved up around one full point by the end of 2000.

A massive rescue package One commercial bank which has recently needed BSP assistance to keep afloat for PNB is the Philippine National Bank (PNB), but this came before the political crisis broke, and when the bank’s financial position had for some time been extremely poor.

The situation arose in the wake of the failure in September by Lucio Tan, the majority shareholder in the bank and a leading presidential crony, to pay the balance due on his purchase of the government’s 30.4% stake at the auction in July (October 2000, page 16). The government, which had been depending on the PNB receipts to help contain the growing fiscal deficit, was thus left with an equity stake neither it not anyone else wanted (Mr Tan’s had been the only bid) and which was diluted (to around 14%) after a

P10bn stock offer in late September in which the government did not participate but Mr Tan did, raising his stake in the bank to 86%. While that move was welcome, in that it improved the bank’s capital adequacy and was a first step towards the rehabilitation which the World Bank had set as a condition for disbursing the remaining tranches of its banking-sector reform loan, the government was still left with the problem of how to disengage from the bank. It continued to seek a way of getting Mr Tan to buy the shares, offering them at a discount from the P100 price agreed in July. It has proposed that it have a buy option on a 14% stake—which would almost restore its previous holding—at P60 a share (about 50% above the current market price) over a four-year period. Mr Tan has not signed up to any of these terms.

The uncertainty about the share sale was sapping the bank’s already weak financial position, generating heavy cash withdrawals. Not revealed until a month later, on October 6th the BSP and the Philippine Deposit Insurance Corporation (PDIC) extended a total of P25bn (P15bn and P10bn respectively) to meet these withdrawals. The credit was for 90 days, renewable, and was backed by real-estate collateral. This massive assistance is the largest ever in Philippine banking history and was justified by the BSP on the grounds of the dire consequences for the whole banking system if PNB collapsed. The bank accounts for some 7% of the sector’s assets—it holds a total of P33bn on deposit for government financial institutions and government-owned and controlled corporations, and P42bn of its deposits are insured by the PDIC, which could be dragged down by PNB’s collapse.

Then in late November the BSP agreed to a temporary absorption of up to P20bn in the PNB’s non-performing loans (NPLs), which were valued at P30.9bn at the end of June. The bank is required to repurchase the NPLs within eight years, beginning in the fifth year. It was expected that the new funds would be used to repay the 90-day emergency loan from the BSP—effectively converting it to a medium-term credit. However the indications in late December were that the BSP would roll over its emergency loan for another 90 days, as had the PIDC in the middle of the month.

Foreign trade and payments

The merchandise trade Export earnings continued to run ahead of import spending through the third surplus approaches $5bn quarter of last year and into October, maintaining the trend begun in late 1998. Over the ten-month period exports rose by 7.7% year on year, to US$31,252mm, while imports rose by only 1.5% to US$6,494m. The surplus, at US$4,758m, was two-thirds above the year-earlier level of US$2,864m. Preliminary figures for exports in November suggest another surplus was probably achieved that month.

Foreign trade, 2000 ($ m fob unless otherwise indicated) 1 Qtr 2 Qtr Jul Aug Sep Oct Nov Exports 8,595 9,009 3,219 3,529 3,502 3,398 3,317 % change on year earlier 9.5 13.4 12.9 9.9 –5.1 –1.7 7.9 Imports 7,890 7,460 2,676 2,643 2,972 2,853 n/a % change on year earlier 5.2 –6.7 0.6 3.7 13.7 9.2 n/a Balance 705 1,549 543 886 530 545 n/a Sources: BSP, Selected Philippine Economic Indicators: National Economic & Development Authority (NEDA) reported in press.

Electronics export growth While trade has continued in substantial surplus (the surplus for the full year is may be slowing certain to have exceeded $5bn), September and October saw a reversal of the trend through the first eight months of the year. In January-August exports were rising at double digits, while imports stagnated. In both September and October, however, exports were down on the corresponding 1999 figure, although they were above the monthly average for the year to date, while import spending was 11.5% higher in the two-month period.

Exports of electronics and components, 2000 (US$ m fob unless otherwise indicated) Jan-Mar Apr-Jun Jul Aug Sep Oct Total 4,368 5,196 1,865 2,194 2,166 2,046 % change on year earlier 1.9 18.2 22.5 27.0 –3.0 0.0 of which: semi conductors 2,675 3,340 911 1,202 1,277 1,007 % change on year earlier –8.7 10.0 –11.2 –18.3 –26.5 –33.4 microcircuits 869 1,057 351 391 281 360 % change on year earlier 31.5 46.2 32.5 74.6 –3.4 30.9 Source: National Economic Development Agency (NEDA).

The fall in exports in this period was predictable. It was in September 1999 that earthquake damage in Taiwan prompted a surge in demand for electronics from other suppliers—including the Philippines. In September 1999 Philippine electronics exports were up 45.3% year on year and in October 46.5%. As the table below shows, sales of electronics fell back year on year in September 2000 after registering strong growth overall in the preceding eight months. However, another factor which has constrained growth in this vitally important export category (electronics account for around 60% of export earnings) is the softening in prices of semi conductors, the major component. In the first half of the year, with demand weaker after the surge in purchases in anticipation of Y2K difficulties, sales of semi conductors stagnated; from July on they were considerably and increasingly below year-earlier levels. Even allowing for the distortion produced by the Taiwan earthquake this would indicate that growth in total electronic sales will be much slower over the full year, even though one second-ranking item, microcircuits, is doing extremely well. Over the ten-month period the rise in total earnings from electronics was only 10%; in 1997-99 growth averaged 28% a year.

The export of machinery and transport equipment was also performing much less dynamically over the ten-month period, with a year-on-year rise of 21.8% to $4,868m. In 1999 it had registered a rise of 49.3% over the full year and in 1997-99 an annual average of 60.1%.

Among leading exports an improvement in performance was registered by garments, which were up 12% to $2,111m compared with an average decline of 2.2% a year in 1997-99, and coconut products, where the surge in volumes (by 87%) more than offset the related fall in world prices to produce a 24.2% increase in earnings in January-October to $462m.

This mix of trends yielded a sharp fall in the rate of growth of exports in January-October, to only 7.7% compared with the annual average of 19.5% recorded in 1997-99.

Imports pick up from their The slackening in the growth of the trade surplus in September and mid-year lows October also owed something to an upsurge in imports in these two months. The trend in imports has been erratic through 2000, with a recovery in January-February (when spending was up 13% year on year) followed by a marked slackening and then decline in May and June; thereafter growth picked up, to reach a peak in September. The most dynamic sectors continued to be telecoms equipment and electrical machinery (registering $5.3bn, up 8.1%, in January-September), and mineral fuels and lubricants (up 70.5% at $2,816m). The former reflected the continuing expansion in the telecoms sector, the latter the rise in world oil prices. But imports of materials for the manufacture of electrical and electronic equipment were well down on year-earlier levels, with purchases of $3.1bn to end-September, down 17.1% on 1999.

The current account The sustained and higher surplus on merchandise trade meant that the current continues in the black account remained in substantial surplus through to end-July, the latest detailed statistics available. The balance was a positive US$4,403m, more than a third above the year-earlier level. By end-September, according to the central bank early in January, the surplus was “over $6bn”—a figure that will have been achieved owing to the $1,416m merchandise surplus in August and September and a surplus on invisibles and transfers at around, or even slightly below, the monthly average for January-July (some $400).

One notable feature over the seven-month period was the fall (of 22.6%) in inflows of earnings from employment overseas. With goods exports rising by 12.2% over the same period, the share of workers’ remittances in total earnings on goods and services narrowed from 21% to 15%. However the decline in workers’ remittances had eased very markedly from the first five months of the year (at end-May the year-on-year fall was $870m), and on the evidence of national accounts data for the third quarter (see The domestic economy) this trend would seem to have been maintained through August-September.

Balance of payments (US$ m) 1999 2000 Jan-Jul Jan-Jul Exports fob 18,148 20,366 Imports fob 16,903 17,416 Trade balance 1,246 2,950 Services balance –1,946 –863 Income balance 3,604 2,172 of which: inflows of employment earnings 4,476 3,466 Net transfers 270 244 Current account balance 3,174 4,403 Net direct investment 409 73 Net portfolio investment 2,715 21 Net other investments –1,348 –483 Net loans –5 21 Capital account balance 1,773 –369 Net unclassified items –1,350 –1,683 Overall balance 2,747 397 Source: BSP, Selected Philippine Economic Indicators.

Capital account stays in The surplus on the current account was sufficient to keep overall payments in deficit surplus, but only for another month. At the end of August there was a $65m deficit in payments, by the end of September this had increased to $532m. The capital account had been in deficit in nearly every month, with the extent of the net outflow only limited by the government’s bond issues in March and August, and a drawdown from the IMF standby facility, also in August. As the table above indicates both direct and portfolio investment have been very weak. This is not surprising given that investor sentiment has turned against the Philippines, with the stock exchange scandal early in the year and increasing misgivings about the quality of the Estrada presidency. The political crisis set off by the jueteng allegations in October will merely have convinced investors that they were right to reduce their exposure in the Philippines, and potential investors that they should hold off. The impact of the narrowing in the interest differential in relation to the US will not have been enough to induce a shift back into peso assets by the many Filipinos with dollar holdings or income.

International reserves Boosted by the US$318m samurai bond issue and the $314m IMF drawdown, weaken both in August, total international reserves (including gold) at the end of that month reached a record $15,422m. They have since declined overall, hitting a low of $14,412m in October after the central bank had intervened to try to arrest the peso’s fall and despite the government raising $400m from foreign currency deposit units (FCDUs) in the local banking system (dollar holdings which are not included in the country’s official reserve figures). After the Philippines failed to secure its final drawdown from the IMF facility, scheduled for November, and the scheduled attendant loans from the World Bank, Asian Development Bank and Japan, the BSP abandoned its year-end target for

reserves of $16.1bn. A private placement of $200m by the government in December (see below) made a significant contribution to some improvement in reserves, to $15.1bn at the end of the year.

The government plans As of early December the government had scheduled total foreign borrowing of another yen bond issue $1.9bn in 2001. It was then considering an issue of $400m in samurai bonds, the size and timing to be governed by market conditions, as well as another round of borrowing from FCDUs (no sum was indicated). The balance is intended to be met by official development assistance. As spreads on Philippine bonds have widened in response to the deterioration in the domestic political environment, and the government’s failure to rein in the budget deficit, there is an understandable wish to hold off the foreign capital market for the time being. However, with the prospect of the deficit exceeding even the revised expectation (see Economic policy), in mid-December the finance department issued a 13-year $200m bond, at a floating rate, at a much wider margin than the 162 basis points on the FCDU loan in September.

The central bank holds off The BSP had originally intended to raise $400m late last year to meet maturing obligations. In early December it rescheduled the borrowing to January. By the end of the year it postponed the borrowing “indefinitely” citing adverse market conditions.