RP Blessing

Commentary: For the Philippines, credit downgrades may be a blessing

By William Pesek Jr. Bloomberg News

ING Bank analysts recently made an odd announcement: Philippine dollar-denominated bonds are the "most attractive" among Asia's sovereign debt issues. Didn't they notice that two major international rating companies had recently downgraded the credit of the Philippines?

 

Actually, ING's analysts are well aware of the country's fiscal difficulties.

 

Budget deficits here are bloating the national debt, which has risen 75 percent since Gloria Arroyo became president in January 2001. Yet ING analysts may be justified in giving Arroyo, a trained economist, benefit of the doubt.

 

"We believe 2005 could be a breakthrough year for the Philippines, when growth breaks out on the upside and fiscal woes diminish," ING said in a recent report.

 

There are myriad reasons to be skeptical about an economy that is increasingly referred to as the Argentina of Asia. Investors do not soon forget when nations declare a moratorium on foreign debt payments, as the Philippines did 20 years ago and Argentina did in 2001.

 

Convincing markets that Philippine debt will not spiral out of control is a challenge in the best of times. But these are reasonably good times for the Philippines. The economy is growing at a pace of around 6 percent, a rate that the United States, Europe and Japan can only dream of. And Arroyo isn't facing an election, as she did in 2004.

 

The Philippines now has an opportunity to reduce the budget deficit and ensure that more of its 86 million people share in the economy's growth. It should also remind investors that the nation has solid, investment-worthy companies, as well as outsourcing industries with attributes they may not find in China, India or Malaysia.

 

The government should also inform travelers that Indonesia, Thailand and Vietnam don't have monopolies on beautiful tourist destinations. In short, this is an occasion to remind the world why it should not sell the Philippines short.

 

Will the government take advantage of this opportunity? There is reason to be optimistic, and, as counterintuitive as it may seem, the Philippines has Moody's Investors Service and Standard & Poor's to thank for that.

 

Both rating companies cited the nation's deficit when they cut their Philippine ratings this year. Just 10 days after the downgrade from S&P, the House of Representatives voted to increase the value-added tax to 12 percent from 10 percent. Doctors, lawyers and oil importers are being called upon to pay taxes for the first time.

 

A sense of crisis is sometimes needed to prod politicians into action. Only such pressure, it appears, will force this nation's bureaucracy to make necessary compromises.

 

Let's hope that dynamic stays in place. If the Philippines can't get things on the right track while its economy is growing at 6 percent, when can it?

 

Unfortunately, the Senate ended a recent special session without passing the House of Representatives' tax bill. Doing so would not only bolster tax revenue to narrow the budget deficit and ease concern that the nation will default on its debt, but it would also send a message that the government is committed to reform efforts.

 

Explaining why it didn't happen, the president of the Senate, Franklin Drilon, said: "We don't want to rush."

 

Yes, you do want to rush, Senator. Otherwise, markets will grow even more impatient.

 

So far, investors do not seem to be panicking. The difference in yield between the Philippines' 8.25 percent bond due in 2014 and comparable U.S. Treasuries has shrunk to 3.99 percentage points from 4.24 percentage points four months ago.

 

Yet investor tolerance is a finicky thing. When it comes to budget deficits, the Philippines really is different. The United States, which has no track record of default, gets the benefit of the doubt from investors even as its record budget deficit widens apace. The Philippines lacks the same fiscal latitude.

 

In January, the Philippines held its biggest overseas debt issue, selling $1.5 billion of 25-year debt. It may sell another $2 billion by the third quarter. Showing global markets evidence of fiscal progress would lower its financing costs.

 

A third of the annual budget now goes to interest payments. Lower borrowing costs would leave one of Asia's more fragile economies more money for schools, health care, roads and bridges. Considering that a third of its population lives on less than 60 U.S. cents a day, the Philippines could use all the extra cash it can find.

 

Like all windows of opportunity, this one may not stay open for very long. If the Philippines uses it wisely, its bondholders could be a happy bunch.

 

Zobel's View

In the Philippines, an Asian Success Story With a Difference

By Jaime Zobel de Ayala

Since the Cold War ended, East Asia has emerged in the public consciousness as the strongest challenge to the West's continued preeminence. The economic performances of Northeast and Southeast Asian countries are frequently lumped together and then compared to those of the United States and other Western nations.

Japan leads the Asian pack. Insofar as other Asian economies approximate its features, they are rated successes. So far it has surmounted every challenge to its primacy. Challenges that sapped the strength of other countries have only made it stronger.

Those challenges have included a currency that was too strong, an excessive dependence on foreign oil, and the hostility of major trading partners. As Japan spreads its influence beyond its borders through investment and trade, its self-reliant strength at home has not been diluted, despite its current short-term political headaches.

In "Looking at the Sun," the American writer James Fallows concludes that a Japanese-style partnership between the state and the private sector for national progress is the best way to succeed. He marvels at how Japan used a kind of economic judo to turn what were once seen as the West's defining strengths - private enterprise, free trade and liberal democracy - to the disadvantage of the West.

The image of the West has taken a beating from comparisons with East Asia. The Philippines, often seen as a pale imitation of the West, has thus also fallen in esteem. Democracy and free enterprise are blamed for the weak governments, confused societies, wayward citizenry and lurching eco nomies of the West, and of the Philippines. In stark contrast are the strong governments, disciplined societies, cooperative citizens and smoothly rising economies of East Asia.

The Philippines was the first country to shake off colonialism in Asia and the first to recover from the ravages of World War II. It was also the first Asian nation to stage a nonviolent revolution, setting a pattern of political development throughout Eastern Europe that brought the Cold War to an end. All this is in the past. Countries with economic strategies and political systems that are diametrically different from those of the Philippines are now held up for admiration.

The Philippines is now restructuring its economy, in cooperation with the World Bank and the International Monetary Fund, to bring it even closer to the Western model of free enterprise at home and free trade abroad, with the government involved in government and business in business only. The Philippines upholds individual rights at home and international law abroad.

The problem with a democracy is that it is a nice place to live in but you are not sure to eat. The problem with a dictatorship, as Filipinos discovered, is that you are not sure to eat or live. The authoritarian experience of other countries in the region has been different. They are lucky. But the Philippines has to live and act on the basis of its own sad experience.

The critics are right: Philippine democracy is having a hard time solving the problems that a dictatorship created. Half of the nation's revenues go to servicing a huge foreign and domestic debt inherited from the Marcos years. Democracy is expensive - but it is not a luxury. For the Philippines, it is a necessity.

Philippine democracy can hardly be described as a failure. Among Asian countries, we have solved the deadly problem of political succession without tanks in the streets. Communist insurgency in the Philippines is fast winding down. The liberal culture, while explaining the indiscipline of our society, also accounts for its extraordinary tolerance. We have no racial problems.

Philippine solutions are not neat, but they involve a sense of community and cooperation. The problem of policy inconsistency between administrations has been solved. Without skipping a beat, President Fidel Ramos took up the essential policies of the previous democratically elected administration.

The administration of President Corazon Aquino prepared, and the Ramos government has implemented, the deregulation of foreign exchange and other measures to open the economy, improve efficiency and competition, and strengthen the private sector. Mr. Ramos has called for stronger English-language instruction and education in basic skills to recover or retain the country's former advantage in these areas.

The Philippines is moving toward economic recovery. Interest rates are low. Inflation is in single digits. The foreign exchange rate is stable. Investments in housing and construction are rising. Consumption is increasing. There is vigorous development in new growth centers such as Cebu, in the central Philippines, and Davao in the south. The troublesome power shortages are almost over. The government budget deficit is being addressed with new tax measures. Economic growth will likely hit 5 percent this year, after adjustment for inflation.

The Philippines has made its choice - private free enterprise rather than the East Asian way of directed economies. But, like the rest of Asia, the Philippines will leapfrog economically where it can, in areas where it has comparative advantage. These include widespread literacy, competence in English, and superior skills, even if wages are higher than in most of Southeast Asia.

The Philippines would prefer a strong economy built from the ground up, complete with heavy industry and a thriving agriculture. But the country will harness growth areas wherever they can be found. This may buy time to acquire the scientific and technological culture essential to real, substantive development.

It is too soon to say that one way is best for all time, and another a hopeless failure. As they say in America, it ain't over until the fat lady sings. And she's not in the stadium yet.

The writer is chairman and president of Ayala Corporation, one of the largest companies in the Philippines. He contributed this comment to the International Herald Tribune.

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