Financial Times Editorial: Philippine fiddling

Philippine fiddling
Published: February 24 2005 02:00 | Last updated: February 24 2005 02:00
Financial Times

It is not every day that government leaders warn that their countries are heading for an Argentina-style fiscal crisis. Gloria Macapagal Arroyo, the Philippines' president, has done so twice in six months, most recently last week, in an effort to goad lawmakers into acting to put its public finances in order. But is anybody listening?

Not, apparently, members of the national Congress, who are holding up Mrs Macapagal's proposals for badly needed tax reforms - yet who reacted indignantly when Moody's rating agency sharply downgraded the country's sovereign debt this month. Nor is the stock market, which remains strong. Nor, so far, do foreign investors seem any less tempted by the relatively high yields on Filipino issues.

The president's alarmism may seem overdone. Unlike Argentina when it hit trouble, the Philippines has a floating currency and less of its debt is short term. It has also sought to boost revenue by raising alcohol and tobacco taxes and beefing up tax collection.

Yet those measures have, at best, only slowed the sharp deterioration in the country's public finances since Asia's 1997 financial crisis. Lax fiscal policies, lower tariff revenues and corruption have cut its tax take to only 12 per cent of gross domestic product. Public debt, including guarantees to state companies, is about 130 per cent of GDP, while servicing costs may absorb a third of this year's budget.

The country is far from achieving a primary budget surplus large enough to stabilise debt levels - a goal Mrs Macapagal has set for 2010. Congress has put even that leisurely timetable in doubt by passing only two of eight emergency fiscal measures she had vowed to enact by last autumn.

The economy's outwardly robust performance has fuelled political complacency. It grew more than 6 per cent last year and the current account is in surplus. However, this was due largely to remittances and call-centre earnings. Manufacturing exports to China have trailed those of the rest of Asia, and the foreign direct investment needed to increase them remains scarce.

Those structural weaknesses increase the Philippines' vulnerability to external shocks, such as a steep rise in US interest rates, a sharp fall in the dollar or higher oil prices. That makes reforms essential well before campaigning starts for the 2007 elections.

Mrs Macapagal understands the urgency. However, she has too often vacillated in public and yielded too readily to opposition from vested interests. Her re-election last May handed her valuable political capital. She should now spend it by staking her future on ramming her fiscal programme through Congress.

Congress's dawdling is as hard to justify as foreign investors' willingness to indulge it by snapping up public debt. Although some investors sense a crisis in the making, they reason they can get out in time. The longer Filipino politicians procrastinate, the more likely that is to prove a delusion.

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Prudent Investor says...

While the current flow of regional economic developments tend to favor the recovery of the Philippines, complacency by the country's political leaders are likely to cause a setback on its recent gains.

The deep-seated problem with most politicians of all nations are that they tend to be short sighted and reactive instead of being pro-active and work for the long term interests of their constituents.

Political impediments would likely cause short term volatilities, until the domestic leaders realize that the 'crisis' is staring them on their face. As for the Philippine President, hasn't she learned from Aesop's fable "The Boy Who Cried Wolf"?