Bernardo M. Villegas
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Investment Grade for the Philippines

          The timing was just perfect.  After months of speculation that the Philippine economy would soon be getting investment grade rating, Fitch Ratings announced on March 28 that, as a report in the International Herald Tribune put it, the "Philippines manages its way to top tier of credit."  The day was Holy Thursday, the only festive day during the otherwise penitential Holy Week in the predominantly Catholic country.  The good news was a very welcome relief as the country was about to transition from the gloom of Good Friday to the glorious Resurrection on Easter Sunday.  The IHT article was aptly introduced with the opening lines:  "The Philippines was once the sick man of Asia:  badly managed, corrupt and poor."  The investment grade rating was confirmation of what had been announced by many international economists, foreign economic institutions and investment analysts that the former sick man of Asia was turning into the new Asian tiger, the "breakout nation," the "darling of investors," or a "leading emerging market."  In fact, as early as January 2012, an economic report from the Hong Kong Shanghai Bank announced that the Philippine economy will be the 16th largest economy in the world by 2050, implying that the country could register GDP growth rates of 7 to 9 percent annually for the coming decades.

          The announcement did not come as a surprise to most observers of Asian economies.  Just a few weeks back, Dr. Nouriel Roubini, who is usually on the pessimistic side of economic forecasts, told an audience in Manila that he considered the Philippines and Indonesia as the two countries in East Asia that will defy the global recessionary trends.  His remarks provoked me to declare that in my own estimates, Philippine GDP in 2013 can grow by as much as 8 percent, after a 6.6 percent growth in 2012.  During the open forum that followed Dr. Roubini's presentation, I explained the reasons for my high expectations.  I pointed out that all the engines of growth that made a 6.6 percent growth possible in 2012 will actually intensify in 2013, despite the continuing slowdown of most economies in the advanced world, including the former tiger economies such as Singapore, Hong Kong, Taiwan and South Korea.  Because of the unique combination of a growing and young population; an abundance of highly educated, English-speaking workers; improving infrastructures in the countryside; and a very strategic geographical location in the East Asian market, the Philippine will continue to count on significant increases in the number of workers in its business process outsourcing and knowledge process outsourcing sectors; in the remittances from the Filipino overseas workers (OFWs); the number of tourists--both foreign and domestic; the real estate and construction boom; and both public and private spending on infrastructures such as roads, bridges, airports, tollways, power plants and telecommunication facilities. All these would guarantee at least another 6 to 7 percent GDP growth.  Then add the usual one percentage point that results from massive consumer spending that always accompanies an election year in the Philippines.  I pointed out to the crowd listening to Dr. Roubini that most estimates of 5 to 6 percent for 2013 are very conservative.

          As reported by IHT, Fitch Ratings acknowledged that one of the major factors for the upgrade--improvements in fiscal management--began under the predecessor of President Benigno Aquino III, Gloria Macapagal Arroyo.  Indeed, the strong political will exercised by former President Arroyo to impose a Value Added Tax (VAT) on a wide range of consumer expenditures--despite objections from the masses-- almost immediately resulted in a drastic reduction in the fiscal deficit during her term.  Because of the "strong policy framework" already put in place in the last Administration, GDP grew at more than 7 percent in 2007.  This continuity in fiscal prudence illustrates the truth of what President Aquino has humbly acknowledged in some of his speeches:  that he is only standing on the shoulders of other leaders who had preceded him.  This is not false humility.  This is the truth.  It is important for long-term students of the Philippine economy to recognize that the present good standing of the Philippine economy in the international community is not exclusively attributable to the admirable efforts of the current President to combat corruption and to introduce good governance.  This positive trend should be considered as a culminating force in a series of other policy and institutional reforms over at least the last thirty years. 

          However imperfect was the authoritarian regime of former President Ferdinand Marcos, for example, his twenty-one-year rule contributed to a Philippine economy much less dependent today on imported petroleum than it was in the early 1970s when the first oil shocks shook the world.  Thanks to the long-term strategic efforts of then Energy Minister Geronimo Velasco, the Philippines can now boast of being a global leader in geothermal energy.  It has cut down its almost total dependence on petroleum to less than 50 percent of its total energy requirements with the development of hydro, dendro, coal and natural gas.  Then came the mother of the present President.  Cory Aquino was instrumental in restoring strong democratic institutions, sending the military back to the barracks after her Government withstood nine attempted coups.  It was also during her presidency that a strong foundation was laid for what is now one of the most modern and efficient financial systems in Southeast Asia.  The contribution of Fidel Ramos, who succeeded her, was without doubt the strengthening of free market forces through deregulation, liberalization and privatization of strategic sectors of the economy, especially in telecommunications and energy.  The Philippines would not be today a world leader in Business Process Outsourcing without the abundant broad band that resulted from the deregulation of the telecom industry.  Even the short-lived and turbulent years of the Estrada Administration contributed two significant institutional reforms:  the refocusing of government efforts away from the failed inward-looking industrialization efforts of the past towards rural and agricultural development under then Secretary of Agriculture Edgardo Angara.  It was also during this Administration when then Governor of the Central Bank Rafael Buenaventura started sharpening the tools of the Central Bank in inflation targeting.  Whatever corruption charges are being leveled against former President Arroyo, in addition to her laying the foundation for fiscal prudence, her Government also did much to improve rural infrastructures through the Philippine Nautical Highway program.

          To his credit, President Benigno Aquino III is creatively building on all these accumulated institutional and policy reforms to bring the Philippines to a higher level of GDP growth of 7 to 9 percent in the next decade or so.  Especially through the Private Public Partnership (PPP) projects and continuing governance reforms, his Government is addressing the three most critical factors for higher GDP growth:  better infrastructures, higher rates of investment and good governance.  The challenge to him now is to remove the remaining restrictions and obstacles to foreign direct investments so that the Philippines can attract an average of $5 to $7 billion of FDIs annually, a level that even Vietnam has already reached and that Indonesia surpassed years ago.  If these targets can be accomplished in the remaining three years of his mandate, together with the stronger institutions already in place, there will be no reason to fear that the next President who will take the reins in 2016 can reverse the sustainable growth already happening.  On the optimistic side, the next President will be highly motivated to capitalize on the many favorable conditions already in place for him to bring the Philippine economy to yet higher levels of development.  On the pessimistic side, if the next leader does not have the same strong commitment of President Aquino to combat corruption, there will be enough institutional safeguards against corrupt practices in place so that he will be obliged to practise good governance.  For comments, my email address is