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Focus on the Philippines: Challenges and Opportunities
Honorable Secretary Jose Trinidad Pardo
Asia's Choice: Open Markets or Government Control?
Asia Society's 10th Annual Corporate Conference
Shangri-La Hotel, Makati City
February 24-26, 1999
I. What is the Prognosis for the Philipine Economy?
The Philippine economy is very much alive, although admittedly slightly weakened in 1998 due to the crisis and the effects of the El Nino on our agricultural sector - which dropped 6.6%. While GDP declined by 0.5%, GNP managed a 0.1% growth - pushed by a 12.9% growth in net factor income from abroad
Our exports, however, continued to grow. Last year, our exports exceeded our target - reaching US $29.5 billion - a growth rate of 16.9%. This was the best rate among crisis stricken countries. This year, we are aiming for US $32-34 billion in exports.
In terms of project cost, BOI approved investments projects reached only P266 billion - 53% lower than the level generated in 1997. But we take comfort noting that the December level of P98 billion in project cost was 234% higher than the level posted in December 1997. This year, BOI is targeting P400 billion worth of investments in project cost, and a total of P600 billion from all four investment promotion agencies.
There may be reported closures of MNCs in the Philippines. However, such moves should be seen in the light of the softening of international markets - which is beyond our control as it is a world-wide phenomenon, and the consequent rationalization and streamlining of their worldwide operations - which includes subcontracting to local firms. Let me also point out that various MNCs are either making new investments or expanding production capacities. These include Robm Electronics Philippines, Temic RF-Technologies, Sharp Philippines, Matsushita Communications, Fujitsu, Intel, Hitachi, among others. Also worth citing are alliances or tie-ups between local and foreign companies such as Unilever in Salecta, Nestle in Magnolia, Carrier in Conception Industries, Siam Krait of Thailand in United Pulp and Paper, Hormel in Purefoods, Japan's Dukin Corporation in Allen Engineering, and Holderbank in Bacnotan Cement, among others.
Other positive signals include a strengthening peso, steady decline in 91-day treasury bill rates, and an average inflation rate for 1998 which was single-digit at 9.7% -- well within the target. We also posted a US $1.33 billion balance of payments surplus in 1998 - reversing the US $3.36 billion deficit in 1997. This brought our Gross International Reserves to US $10.8 billion in 1998.
We may have ended the year with a P52.7 billion government budget deficit - higher than the P40 billion target. But this was due to the necessary pump-priming activities we had to undertake to stimulate growth, and the payment of our outstanding loans to contractors of government projects.
Despite some setbacks, no less than the IMF cited the Philippines as the least severely affected among all the crisis-battered countries.
A WTO team recently came to Manila last week as part of a trade policy review every sex years focusing on our economic performance and policies. They ended by congratulating us for our impressive performance in managing the crisis, our quick response system, and the continuing liberalization efforts.
All of these indicators suggest that business and investor confidence in the Philippines is improving, and that our economy is in a position to attain a faster recovery. With the private sector working with us, we can accelerate the country's economic recovery.
II. How has the Philippines Answered the Question of Open Markets versus Government Control? Give Update on the Philippines' Promotion of Liberalization and Privatization.
While the Estrada administration is pro-poor, pro-SME, and pro-countryside, it is also pro-market, pro-investments, and pro-competition. We are making these thrusts work together and complement one anther.
More importantly, we will not backtrack on our commitment to liberalization, deregulation and privatization policies. These are sovereign commitments of the Philippine government to the WTO, APEC, and ASEAN. It is the only direction in the 21st century as globalization has become inevitable. We believe that the sooner we can adjust to its demands, the better off we will be in the end.
We have repeatedly admonished all Philippine-based enterprises - both foreign and local - that the era of globalization is upon us. The name of the game is "Compete or Perish."
We have pursued open market policies in most areas of manufacturing, in wholesale trade, telecommunications, shipping, power and energy generation, insurance, banking and finance, downstream oil industry, waterworks, investments in private domestic construction projects, airlines, and domestic ferry services.
Let me recall that the Philippines has made considerable gains in Build-Operate Transfer (BOT) schemes as a way of encouraging private sector investments in infrastructure development. Power, roads, and mass transit systems have all benefited from our progressive BOT scheme - which has been hailed as one of the more successful BOT efforts in the world and has become a model in Asia.
This year, we will aspire for more. With the Omnibus Power Bill, we seek to rationalize and restructure the local power industry. Some sectors are pushing for the full liberalization of the banking sector by lifting the remaining nationality restrictions on banks. There is, of course, the impending opening of the retail trade sector. There will be more.
Pending with both Houses of our Congress are proposed bills to amend certain investment-related laws such as the PEZA Law, the CEZA Law, the Regional Headquarters Law, and the Condominium Law.
A Task Force on the Rationalization of Fiscal Incentives is presently reviewing the Philippine investment incentive laws (such as the Omnibus Investments Code and other special laws) towards ensuring the uniformity of ecozone and non-ecozone incentives and to allow greater flexibility in granting them. The best feature of the various incentive laws will be put together under one unified code - noting the incentives being offered by our ASEAN neighbors.
At the same time, we are encouraging Philippine companies to aspire to become ASEAN Transnationals. ASEAN - with its affluent (A-B and High C) market of 50 million - could offer most of our industries a solution to the problem of economies of scale. We want our companies to look into ASEAN market opportunities and take advantage of AFTA's preferential tariff treatment which by the year 2002 will be at the 0-5% range.
Incidentally, regarding the Philippines' participation in the AFTA-CEPT, our existing program would allow for the number of tariff lines in the 0-5% range to reach only 3,868 or a compliance of 75.2% by year 2000. But because of our commitments under the ASEAN bold measures, we intend to add 850 more tariff lines in the 0-5% range to comply with the mandated 85% compliance by year 2000.
The Philippines is also signatory to the Framework Agreement on the ASEAN Investment Area (AIA) - wherein all industries are opened for investments, and national treatment is extended to ASEAN investors by 2003. This will usher in a freer flow of capital, skilled labor and professionals, and technology among ASEAN countries.
Incidentally, during the Hanoi Summit, the AIA Agreement was amended to allow non-ASEAN countries to invest in ASEAN manufacturing and services projects under the same terms given to ASEAN nationals but within a two-year window.
Thus, we want our firms to consider strategic alliances, possibly mergers, with ASEAN companies and hopefully, in the end, attain transnational status.
Regarding privatization, a total of 455 accounts have been disposed of or privatized from the Aquino administration up to the end of 1998 - with gross sales ammounting to P182.5 billion.
In addition, 23 government-owned or controlled corporations, among others, are in the pipeline for privatization - including the following: PASAR, Philippine Phosphate Fertilizer, PNOC Energy Development Company, National Power Corporation, Philippine Post Office, and Manila Gas Corporation.
The sale of the remaining government shares in National Steel, PNB, Meralco, San Miguel Corporation, Philippine Overseas Telecom, Eastern Telecom, IBC Channel 13, RPN 9, and Banahaw Broadcasting Corporation are also in the works.
The Philippine government is committed to making privatization fully transparent, with all potential bidders competing on a level playing field. We admit that within our free-wheeling democracy, minor oversights in policy interpretations may sometimes occur. But we have created necessary mechanisms for immediate redress.
While pursuing liberalization, we are also continuing to finetune our economic policies towards becoming even more business- and investor-friendly. There is, in fact, an ongoing review of all economic-related policies to make the country competitive by lowering the cost of doing business. The areas include labor, power, taxes, transportation, infrastructure, and the bureaucracy.
We can cite various initiatives that we mounted towards this end, and at the same time, support and assist industries that have been affected by the crisis. These include:
There are many more initiatives that government is undertaking. But in short, let me reassure you that the action driven Estrada administration remains fully committed to pursue its open market, liberalization, deregulation and privatization policies.
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