South-east Asia’s llama breaks into a trot

By David Pilling
Financial Times

How much money does the Philippines, that perennial economic laggard, owe the International Monetary Fund? The answer is nothing. After years of being in hock, Manila is now an IMF creditor. Thus the people of the Philippines, impoverished though many remain, are doing their bit to help Europeans maintain the living standards they doubtless deserve.

For years, the Philippines has been a bit of a laughing stock in south-east Asia. Gross domestic product of $2,200 per capita puts it in the same league as Bolivia, a poor Andean country. Thailand, with a GDP per capita of $5,400, is out its league.

A running joke – admittedly not a very funny one – is that the Philippines accidentally swapped places with Chile, the Latin American economy that most resembles a fast-paced Asian tiger. That makes the Philippines more like a llama, trudging dolefully along a dirt track.

Whisper it if you will, but the Philippines may at last be getting its act together. These are early days. But there are definite signs that the country – with its young population of nearly 100m people, the world’s 12th largest – has turned a corner. There are three reasons to be hopeful, if not yet exactly cheerful.

First, the external position has improved dramatically. The Philippines, after years of indebtedness, is a net creditor. Overseas remittances from the roughly 8m Filipinos working abroad have steadily added to foreign exchange reserves. At nearly $80bn, these are higher than the external debt.

Since 2004, remittances have grown from $7bn-$8bn to $20bn, nearly 10 per cent of GDP. The fact that so many people need to work abroad is a sign of the economy’s inability to generate enough jobs. But remittances are serving a purpose and have held up well since the financial crisis. The Philippines is emerging as a solution to the labour shortages of mature economies the world over."

Some jobs go the other way. Philippine call-centres have grown exponentially, trumping those in India. Revenues from back office businesses have quintupled over six years from $2bn to $11bn.

Second, the country is getting its fiscal house in order. The deficit has narrowed from a worrying 5-6 per cent a decade ago to a manageable 2 per cent. The tax net was widened under the previous administration, though the tax take remains at a lowly 13.5 per cent of GDP. Spending has been kept in check. Subsidies on fuel and power, the bane of many Asian finance ministers, were scrapped several years ago.

Third, the political situation is vastly improved. Benigno “Noynoy” Aquino, elected president in 2010, has made a creditable start. For one, his government has sent out a strong message that it will not tolerate corruption (a distinct change from past governments, which actively encouraged it). Mr Aquino has instructed tax officials to go after evaders. A few big scalps appear to be doing the trick. The tax take has edged up even without necessary tax reform.

The supreme court this week ruled that the huge sugar plantation belonging to Mr Aquino’s family must be redistributed among tenant farmers. That brings to a close decades of wrangling over one of the country’s biggest estates. The fact that a sitting president can be stripped of land is a hopeful sign that the separation of powers enshrined in the constitution is being honoured.

The Aquino government has also taken steps to restore rice self-sufficiency after the country was forced to import a fifth of its needs in 2008. It has established public-private partnerships to build the roads, railways and power stations that have failed to keep pace with an exploding population. Progress has been slow, but the legal regime is considered solid. Many economists are predicting a private investment boom, predicated on favourable demographics – half of Filipinos are under 25 – and the healthiest banking system in south-east Asia.

Reputations are hard to shake. For many, the Philippines remains a basket case. But that view lags behind reality. In 2010, the economy grew at 7.6 per cent – faster than Indonesia, Asia’s investment darling. Growth has slowed, but it has cleared 4-5 per cent every year since 2006, apart from in post-Lehman 2009.

Markets have not been oblivious. Last year, the Philippines stock market was the world’s seventh-best performing. In the year to date, the Philippine exchange is up more than 20 per cent, among the world’s top 10 performers.

The Philippines may still be the llama of south-east Asia. But, for the moment at least, the llama has broken into a trot.