Fairy land (Part 1)

I always knew the Philippines was a magical place. I first invested here because of that—and the people.

But I hadn’t realized how magical until I saw the proliferation of two-page spreads in the newspapers of the achievements of this administration. Some truly magical numbers from a fairyland I didn’t know existed. Let me, sadly, bring you back to reality, because it’s the real world we live in. And it’s the real world we must survive in. It is lovely to have flights of fancy from time to time, but it can’t last.

My analysis will be balanced, unlike the highly distorted ads.

Let me start with GDP growth. The 4.86 percent must be deflated for the statistical discrepancy in the 2007 number when a drop in imports created a double negative that artificially inflated GDP growth (I think you’d all agree nothing dramatically different occurred in 2007 that could have justified 7.1 percent. Our best estimate is that around 4.8 percent if imports grew at their historically normal rate). With that adjustment, average growth under President Arroyo has been 4.7 percent. Estrada matches it. Are we to assume from this that Estrada was as good an economic manager as Arroyo?

What was not included though is the more important number, the GINI coefficient, which measures the degree of inequality in a society. The Philippines’ GINI coefficient is 0.45. Only 39 countries are worse; 84 countries are better. Other Southeast Asian neighbors have better GINI figures—Cambodia’s 0.42, Laos’ 0.35 and Vietnam’s 0.34. Three years ago it was 0.46, so there’s no measurable improvement. The miserable GDP growth (yes, miserable, because it was the lowest in Asia) didn’t filter down to the poor. They didn’t see any of that growth, their situation worsened.

The government said the growth provided more income to the people, therefore more money to buy food. But the percentage of households that experienced hunger at least once in the past 3 months recently hit a record-high of 24 percent—or about 4.4 million households. The poor definitely have gotten no benefit from the “highest average GDP growth recorded since 1966” or the “highest quarterly growth posted in 30 years” proclaimed in the government ad.

Inflation, I’ll agree, is far lower and that is in part because of good management, but good management by the central bank, which is part of its role. Arroyo’s involvement has been to artificially control prices and create an economy where people can’t afford fair market value, so firms are forced to sell at lower margins. This is in the free market she espouses—but then doesn’t follow.

Gross International Reserves, I agree, are at a record high. This is the reason the Philippines can borrow so favorably in the world. But how much of that reserve was generated by overseas Filipino workers forced to leave their families because there were no jobs here? In 2009, remittances have grown to almost two-fifths the size of the gross reserves—an economic success but a social disaster.

The foreign debt as a percent of GDP has fallen from 67.46 percent in 2000 to 33.85 percent of GDP (as of September 2009) so there is lower debt payment to foreigners. But the domestic debt has risen. The total debt bill, which is what matters because that’s what you have to pay back, surged to P4.22 trillion in 2008 from P2.1 trillion in 2000.

The credit rating agencies have not changed their unacceptably low rating (Fitch’s BB rating, which is 2 levels below investment grade and Standard and Poor’s BB- and Moody’s Ba3, three notches below) since she came to power. A shift from “negative” to “stable” just means the agencies forecast is it won’t change, rather than it might go down. There’s no “increased investor confidence.” A number that surprisingly is not mentioned is the level of foreign direct investment. Maybe because it’s been so abysmally poor.

The Philippines attracted the least FDI amongst Asean-6 member countries during the past 8 years. The country got US$12.1 billion; next lowest was Indonesia at $29.7 billion; little old Singapore did best at $133 billion, 11 times the Philippine level; while Malaysia and Thailand got about the same at a little over $40 billion each. It’s the same when comparing to history, particularly the Ramos years, which would be the fairest comparison. The 6-year term of Ramos saw $9.5 billion enter the country while Arroyo’s 9 years attracted $12.1 billion. Pro-rated to 6 years, Arroyo’s becomes $9.1 billion. Converted to 1992 dollars (inflation must be factored in), FVR attracted $6.7 billion, Arroyo $3.4 billion pro-rated. Half the level, nothing could be more damning than that in an evaluation of the economy. There is decreased investor confidence.

There seems to be a clear correlation between how the international business community perceives the country’s state of competitiveness and the actual flow of investment. They are not impressed.

I mentioned migrant workers’ remittances. If I were president, I’d be ashamed that 8.5 million of my fellow Filipinos had to flee in desperation to earn enough to feed their families because I couldn’t provide a job for them here. I couldn’t attract the investment needed to give them a job.

Tourist arrivals is a good thing, this indeed is an achievement but is it really 5.2 million in 2009? It was officially 3.1 million (international tourists) in 2008. Could there really have been an impressive 68 percent growth this year? Where did they all stay? The accommodation doesn’t exist to accommodate the additional 2 million tourists that the government claims. It probably includes domestic tourism and migrants. It’s a very suspect number. Even if the 5.2 million were correct, it is dwarfed by Thailand’s 10.4 million, Malaysia’s 18.4 million, Singapore’s 10.2 million, and Hong Kong’s 20 million.

The call center industry is just out and out a great success. It is growing at 25 percent annually and is projected to employ 500,000 by 2010. But what specific actions did this government do that were different to justify credit for this? The talent of the Filipino for this role did it. What policies or actions did Mrs. Arroyo take to improve this sector? Creating a Department of Information and Communication Technology that this sector so urgently needs just hasn’t happened despite the fact that I raised the subject to her three months into her presidency. The high-level, focused attention can’t be there without it.

The government crows that the local auto sector breached its target last year and sold 132,444. But even with improved sales, the Chamber of Automotive Manufacturers of the Philippines (CAMPI) said the local industry still cannot be considered “fully recovered” as the total units sold is far lower than the 162,095 sold in 1996 in a much smaller economy with fewer consumers. Also the growth can partly be attributed to the fact that the local sector is still developing and has much room for growth. At present, the Philippines has a low car-to-people ratio of 22 cars per 1,000 people. Thailand has 110 per 1,000 while Malaysia has 254.

Total net income of the Top 1,000 Corporations grew from P116 billion in 2001 to P686 billion in 2007. The latest report (for 2008), however, noted a 40 percent decline in the aggregate net income of the Top 1,000 firms to P415 billion. The gross profit margins of the Top 1,000 Corporations dipped slightly from 20.2 percent in 2007 to 20.1 percent in 2008. –Peter Wallace, Manila Standard Today

(Concluded Tuesday)

Comments to my columns can be sent to wbfplw@smartbro.net