Morgan Stanley's Daniel Lian: Philippines: Political Uncertainty Stirs Fiscal & Economic Reforms

Previously Morgan Stanley economist for Southeast Asia Daniel Lian saw bullish prospects in the country, today with a brewing political storm, Mr Lian, does a turnaround to cite a ‘decisively bearish political economy’ and sees significant headwinds for the country, quoting Mr. Lian’s entire article…

Philippines: Political Uncertainty Stirs Fiscal & Economic Reforms

Daniel Lian (Singapore)

Growth Expected to Retard

Several macro economic indicators point to a slowdown in economic growth in 2005, following robust momentum of 6.1% YoY last year. Government spending remains low, in line with the fiscal consolidation strategy. Meanwhile, consumption growth hinges on household spending (80% of GDP), supported by soaring remittances from overseas Filipino workers (the second-largest source of foreign currency following export earnings). Given the weak macro fundamentals of towering prices, high unemployment (11.9%) and reduced government spending on social development projects, the shield provided by these remittances is likely merely to delay the coming economic slowdown, in our view.

Another strong indicator of slowing growth is the decline in export growth. Exports are a key driver of GDP growth (50% of GDP). A slump in the global electronics cycle and falling demand from key export destinations – also adversely affecting other export-led Asian economies – are likely to lower both export earnings and allied private consumption significantly, in our view.

No Structural Change in the Deficit

We believe the recent improvements in the budget deficit are due largely to the continued squeeze in government expenditure. As a percentage of GDP, government spending has fallen from 19.6% to 18.7% in the period 2002 to 2004 accounting for 68% of the improvement in fiscal balances, as revenue collection has expanded by a mere 0.4% of GDP. In addition, what increase there has been in tax revenue has resulted from culmination of the cyclical upturn, whereby increased income levels have generated higher tax. However, the 1Q05 GDP slowdown to 4.6% YoY vs 6.1% in 2004 marked the end of this cyclical upturn, in our view, and we expect 2005 growth to shrink to 4% YoY.

The lack of structural improvement in the country’s fiscal accounts is reflected in the low tax effort ratio. Improving GNP in 2004, due to 6.1% growth in GDP and increased remittances from overseas workers, hasn’t improved tax revenue and the tax effort ratio remains low. Any positive impact from structural reforms to the tax structure would have been reflected in a rising tax effort ratio.

Heavy Debt Burden Raises Concerns

Another serious concern as regards the deficit is its unproductive use to finance consumption rather than investment. Government borrowing reached PHP 242.5 billion in 2004 to meet its financial requirements (27.5% of total expenditure). Thus additional tax revenue is required to cut the country’s dependence on borrowing and reduce the debt stock.

Persistent budget deficits since 1998 have resulted in the accumulation of both domestic and external debt (PHP2.0 trillion and PHP1.8 trillion, respectively, in 2004). The pinch has been the sudden surge in public-sector debt service payments. Interest and principal payments on the public-sector debt stock have doubled from 32.1% of total national government expenditure in 1998 to 67.8% in 2004.

Moreover, the Philippines’ ability to repay debt is considered low, because of its moderate growth path, high inflation and low saving rate. Poor tax collection is exaggerated by tax evasion, with corporates alone evading around 45% of taxes due (see our report Pulling Up Its Fiscal Socks at Last?, April 1, 2005). This makes it tougher to reduce the foreign debt burden. Consequently, government debt as a percentage of revenue exceeds 500%, substantially more than the country’s indebted Asian counterparts.

Fiscal Constraints Hamper Development Plans

We believe declining public expenditure could cause infrastructure investment bottlenecks, jeopardizing the Philippines investment appeal. Poor infrastructure increases the cost of doing business and reduces the country’s attractiveness to investors. Hence we think an increase in productive expenditure is required.

However, limitations such as high interest payments and the need to lower the budget deficit, are keeping productive expenditure low. The country’s soaring outstanding debt has raised its interest payment liability to 29.4% in 2004 and consequently lowered the share of other expenditure. The increase in the cost of servicing public debt has sharply reduced national government expenditure, particularly on social services (social service expenditure is reported to have fallen from 35% of total national government expenditure in 2000 to 23% in 2004).

Education, health and poverty and unemployment eradication programmes are among the public disbursements that are contracting to meet the government’s conservative expenditure targets. This has led to sluggish growth in the skilled labour pool and widespread unemployment (as high as 11.9%), forcing Filipino workers to seek jobs overseas. Moreover, high levels of corruption further increase the cost of doing business in the country.

Political Economy Is Decisively Bearish

Following Ms. Arroyo’s decisive electoral victory (she won by 1 million votes) last year and the commencement of her reform programme (which centred on raising sin taxes and VAT, as well privatizating the key state energy producer), the market turned decisively bullish on the Philippines. The economy’s relative outperformance since the beginning of 2Q04 and a small rebound in investment inflows have strengthened the bulls’ resolve that this story is finally turning around.

However, we remain cautious on the structural outlook (see Upgrading Growth and Upping the Ante on Reform, September 3, 2004). We were not surprised that President Gloria Arroyo upped the ante on reform or that she chose to focus on the fiscal sector – we view this as the primary structural economic malaise of the republic and a worthy priority for the government. Nevertheless, the financially strapped government has caused a significant drag on the country’s saving rate, and in turn slowed capital formation and economic growth.

We would note that, while fiscal reform is a critical first step, the structural impediments confronting the republic stretch beyond mere government finances. In our view, Ms. Arroyo must strengthen the rural development platform and engineer a new economic strategy that places emphasis on the long-term development needs of the urban poor, resources, SMEs, and the government and corporate sectors. We believe that Thailand’s dual track strategy, for example, has a lot of relevance for the Philippines. Concomitantly, Ms. Arroyo needs to overcome the institutionalized rent-seeking complex that permeates Philippine society. We also see a danger that the country’s powerful oligarchic interests could derail the President’s efforts.

The political events of the past three weeks strengthen our belief that the country’s structural impediments stretch far beyond mere economics. The oligarchs remain extremely powerful, and the market has begun to speculate over the political future of the President. Whether or not Ms. Arroyo survives this latest challenge, the country’s economic outperformance may already be coming to an end as exports across Asia are rapidly slowing down and the recent political uncertainty may once again hamper remittances and domestic investment. In a nutshell, we think the republic continues to face significant economic and political challenges.

Bottom Line: Political Uncertainty Stirs Fiscal and Economic Reforms

The Philippines’ two strong pillars of economic growth stand on unstable fundamentals, pointing towards an economic retardation this year, in our view. The Asia-wide export slowdown is likely to cause a drop in export earnings and allied private spending. Private consumption is being supported largely by overseas Filipino workers’ income, deferring an economic slowdown.

The low tax effort ratio implies that improving tax revenue has been due not to structural factors, but to the culmination of the cyclical upturn, with increased income levels generating higher tax and curbing the deficit. We expect this to fade with the slowdown in economic growth.

Successive deficits have led to the accumulation of a large debt stock and doubled the country’s debt service payments over the last six years. Besides a moderate growth path, high inflation and a low saving rate limits the Philippines’ ability to repay debt. Additional tax revenue is required to cut the dependence on borrowing and lower debt.

Interest payments on debt have lowered the share of productive expenditure on infrastructure and social development projects. A lack of such development programmes has led to sluggish growth in the skilled labour pool and higher unemployment. Moreover, rising business costs due to the lack of infrastructure facilities and widespread corruption make the investment climate less favourable.

While fiscal reform remains the critical first step, political events unfolding over the past three weeks strengthen our belief that the structural impediments stretch far beyond mere economics. Looking ahead, we perceive political uncertainties as well as significant economic challenges for the republic.

Learning from the Africans: World Bank Commentary: 'How to Empower Africans'

Learning from Africa’s experience

There have been numerous unsolicited advices on how the Philippine Government should be run coming from the extreme left to the far right, from establishing a rule of the proletariat to a military junta led ‘revolutionary government’. So far none of these political solutions seems to address how these forms of governance would uplift the domestic economy.

The article below by Moeletsi Mbeki, brother of South Africa’s president Thabo Mbeki, published in Wall Street Journal Europe and quoted by the World Bank writes of their experience; the structural ailments and proposed cures…something quite relevant to the Philippine experience. I guess we should take a leaf or two from them…

World Bank Commentary: How to Empower Africans

In a commentary published in the Wall Street Journal Europe, Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs and the brother of South Africa's president, Thabo Mbeki, writes that as the G8 summit approaches and the leaders of the developed world contemplate huge increases in aid to Africa, we must ask ourselves what has become of the billions of dollars already poured into the continent. Africa remains wracked by poverty and disease. At the root of Africa's problems are ruling political elites that have squandered the continent's wealth and choked its productivity over the last 40 years.

The list of abuses is long and impressive. African political elites have systematically exploited their positions in order to line their own pockets. They have given favors and won influence through the funding of huge loss-making industrialization projects. They have exploited the natural resources of their countries and then transferred profits, taxes and aid funds into their own foreign bank accounts at the same time that they ran up enormous debts to finance their governments' operations.

What were the results of those predatory policies? According to the World Bank and the International Monetary Fund, Africans are poor and getting poorer. The World Bank noted, "Despite gains in the second half of the 1990s, Sub-Saharan Africa enters the 21st century with many of the world's poorest countries. Average per capita income is lower than at the end of the 1960s. Incomes, assets and access to essential services are unequally distributed. And the region contains a growing share of the world's absolute poor, who have little power to influence the allocation of resources."

Successful development in Africa will not be achieved by throwing more fuel on the flames. Merely handing more aid money to African governments only reinforces the pattern of abuse. The key to development lies in a dynamic private sector. For a country to produce more, private individuals must generate savings and plow those savings back into the production process in the form of new and improved techniques, processes and products. Africa's private sector is predominantly made up of peasants and, to a lesser extent, subsidiaries of foreign-owned multinational corporations. But those groups are exploited by the unproductive political elites who control the state. Africa's private sector is powerless because it is not free to decide what happens to its savings. Were the peasants free to retain that surplus capital, they could invest it in improving their production techniques or diversifying their economic activities.

Future development in Africa requires a new type of democracy -- one that empowers not just the political elite but private-sector producers as well. It is necessary that peasants, who constitute the core of the private sector, become the real owners of their primary asset: land. Private ownership of land would not only generate wealth but help to check rampant deforestation and accelerating desertification. The so-called communal land tenure system, which is really state ownership of land, ought to be abolished. Moreover, peasants need direct access to world markets. The producers must be able to auction their own cash crops rather than be forced to sell them to state-controlled marketing boards.

Africa needs new financial institutions that are independent of the political elite and can address the financial needs not only of peasants, but of other small- to medium-scale producers as well. In addition to providing financial services, those institutions could undertake all the other technical services that are not being provided at present by African governments, such as crop research, extension services, livestock improvement, storage, transportation and distribution to make agriculture more productive. Such changes could for the first time bring into being a genuine market economy that answers to the needs of African producers and consumers.

African governments currently acknowledge the role of good governance in stimulating economic growth. However, they are still doing little to address the fundamental problem of the enormous power imbalance between the political elite and private sector producers. African governments must spend more time addressing that problem rather than impressing foreign governments, including those of the G8, with inflated accounts of democratization on the continent, writes Mbeki.

Moral Ascendancy, Legitimacy and Revolutionary Government

Moral Ascendancy, Legitimacy and Revolutionary Government

``A revolutionary government! There are two words which sound very strange in the ears of those who really understand what the social revolution means, and what government means. The words contradict each other, destroy each other. We have seen, of course, many despotic governments, -it is the essence of all government to take the side of the reaction against the revolution, and we have a tendency towards despotism. But such a thing as a revolutionary government has never been seen, and the reason is that the revolution-meaning the demolition by violence of the established forms of property, the destruction of castes, the rapid transformation of received ideas about morality, is precisely the opposite, the very negation of government, this being the synonym of "established order", of conservatism, of the maintenance of existing institutions, the negation of free initiative and individual action. And yet we continually this white black bird spoken of as ifs "revolutionary government" were the simplest thing in the world, as common and as well known to all as royalty, the empire, and the papacy!- Peter Kropotkin(1842-1941), known as “the Anarchist Prince”

When the still beautiful widow of the deceased defeated presidential candidate, Fernando Poe Jr. (FPJ), and movie icon to millions of adoring Filipino fans, Ms. Susan Roces Poe bellowed ``The gravest thing you have done is that you stole the presidency, not once but twice”, this statement made me wonder what the gist of the political crisis is all about.

While most pundits in the political spectrum imputes the adverb ‘TWICE’ to the Supreme Court’s ruling that have sealed the fate for doomed presidential hopes for the deceased aspirant-candidate, aside from the actual election exercise itself, ‘TWICE’ could have also meant that the first incident could have been the ascension of power by the present incumbent via the EDSA II revolt which ousted FPJ’s dearest friend, the disgraced former President Estrada.

However for both instances, it appears that the underlying motivation for the ‘TWICE’ word has LESS to do about the alleged cheating but rather MORE of as retribution to the personal affront by the couple after having lost the elections, cheated or NOT. In other words, the alleged cheating has been merely utilized as an excuse to expound on their desires for personal vengeance.

Analyst Ronald Meinardus in the Japan Times aptly writes that ``“You either win elections, or you are cheated," is a popular explanation in a country in which electoral fraud and vote manipulation remain a depressing routine.” In Philippine setting, it would be quite naïve for one to believe that election frauds are attributable to a single party who would be entirely culpable for any caper. In the local level alone, elections are usually conducted by the traditional ‘guns, goons &/or gold’ routine by the contending parties. Put differently, the question should not be the simplistic case of ‘if there is cheating’ but rather ‘has there been cheating enough to subvert the sovereign will of people?’

The recent wiretapped debacle underscores this relative conflict of perceptions…for the opposition the tapes represent as the absolute culpability of the Mrs Arroyo that she cheated, much as what was declared by Mrs. Roces-Poe and in the words of a Bishop ``The government has turned itself away from the people. It has lost moral and legal authority...it must step down to avert the imminent bloody confrontation growing out of the people’s sufferings.”

As to the defenders of the administration, to quote economist Solita Monsod in her latest article, ``are adamant in insisting that nowhere in those conversations can we find even a hint of an order from Ms Arroyo for Garcillano to cheat in her favor. Furthermore, they ask: How could the two possibly have been conspiring to cheat when by the time those conversations took place (May 25 and after), all the certificates of canvas, or COCs, (except for seven municipalities in Lanao Sur) had already reached Congress, and were beyond Garcillano's reach? In other words, how could Garcillano alter those COCs?”

It is further argued that the margin of votes between Mrs. Arroyo and Mr. Poe was about 1.1 million, such that even if the entire votes led by the President in Mindanao of about 400,000 were transferred to FPJ’s tally, the outcome would NOT have been altered. And to vouch for the validity of the electoral victory Malacañang claims that that NAMFREL, Parish Pastoral Council for Responsible Voting (PPCRV), the US embassy and over 100 foreign observers have confirmed that Mrs Arroyo won ‘fair and square’. In addition, that the opposition during the canvassing period had not file ANY case before the precinct and municipal levels to contest any anomalies but sounded all the fury of ‘manipulation’ during the canvassing of the COC or the Certificate of Canvass’s at the august halls of the Congress. Finally, that the Supreme Court twice affirmed the victory of the incumbent.

So which is which? Obviously in the perceptions game, the opposition has clearly gained so much ground to undermine the effectiveness of the incumbent’s governance who is left on the defensive, however, does the wiretapped hullabaloo, which is subject to arbitrary interpretations, serve as sufficient grounds enough to overwhelm the previous processes or evidences to justify the call on the administration as illegitimate?

Why has the impeachment case submitted by Atty. Oliver Lozano pooh-poohed by the mainstream opposition as a ‘MORO-MORO’? If it is thus illegitimate why haven’t the proper charges been filed to the courts of law by the mainstream opposition? As the Philippine Daily Inquirer correctly observes, ``The opposition thinks it won't be able to impeach the President because impeachment is a political process, and as far as the political configuration in Congress is concerned, everything is stacked against it. This is a defeatist attitude and foolhardy. Surely the President cannot be expected to chop her head off and offer it on a silver platter to the opposition. We simply have a lazy opposition.”

According to another bishop, ``The basis for [replacing Mrs. Arroyo] should be on legal and moral grounds. If there are questions and doubts [regarding the results of the 2004 polls] then the succession will also be immoral." Does the ‘hallowed representative of the God’ also imply that votes for the 12 senators, mayors, governors, and the local councilors which emanated from the same sacrosanct ballot on May 10 of 2004 be likewise considered as lacking the ‘legal and moral grounds’? What would be the basis for such distinction then? The words of Christ through them?

What if the current ‘consensus perception’, triggered and shaped by mostly emotions, are wrong? Doesn’t it do more injustice than what is called for? What then is morally ascendant? Is the proposed ‘national council’ to be chaired by former President Estrada to take governance once PGMA resigns as espoused by Senator Jinggoy Estrada morally ascendant?

Or what in particular would represent as legitimate, the mere fickle perceptions of the crowd? Wasn’t the 1987 constitution ratified by the overwhelming majority? So why the unjustified aversion towards VP Noli de Castro when he was duly elected in accordance to the 1987 constitution, and has not tainted by the recent wiretapping scam? Why then the clamor for a revolutionary government when the constitutional grounds provides sufficient provisions for leadership changes?

Where at least for President Estrada was delivered a semblance of due process via the impeachment process, what deviates today from then? Because he or she says so?

Former President Cory Aquino’s appeal to observe the constitutional process has been scoffed at by several quarters, mostly by leftist groups, including a defeated presidential candidate who said that even she benefited from it (which means that because she benefited then the opposition should benefit too!). Unfortunately for the evangelist turned politician, it appears that political ambitions has clouded his reasoning such that he promptly forgets that Cory’s revolutionary government was formed arising from the transition from an authoritarian ‘dictatorial’ government to a democratic one. Post EDSA II was likewise an extension of the 1987 constitution. Today, we essentially or technically have a democratic government don’t we? In transition, according to the self-righteous messiahs, to what type of government do we turn to?

Here is what former UP President Francisco Nemenzo has to say about the proposed provisional revolutionary government, “What we really need to do is call for a provisional revolutionary government…We have to reduce the power of the elite. Only then can democracy have a chance to flourish in this country.” Wow, the rule of the proletariat, which is typical of most of the Revolutionary Governments, as enshrined in the Marxist-Lenin doctrine.

Of course, there are some notable successful revolutionary paradigms pre Marxist-Lenin eon such as the American Revolution which was an independence movement against colonialist Britain and the French Revolution which was a movement against the French monarchy of King Louis and Marie-Antoinette, the rest contemporary revolutionary governments were largely anachronisms to economic development such as Sudan, El Salvador, Cuba, Lithuania, Libya and of course, as reminded by a dear client our favorite bugaboo Juan and Evita Peron’s rule of Argentina.

In short, the proposed revolutionary government simply means taking inherently bigger risks for something that does not guarantee the amelioration of our dire economic straits or for the satisfaction of the people but rather for the interests of the select few who intends to lead. Be careful of what you wish for.

As for me, I would prefer that the incumbent, encumbered by too much political baggage to govern effectively, pave way for a new beginning, a healing through the constitutional process and not because of legitimacy or ascendancy concerns which are all perceptions based, unless a dramatic reformation can occur (which would take miracle!).

In the perceptions game, one can do no better than thespian personalities with their histrionic acts who accordingly would move in the pursuit for the betterment of the ‘people’. Previously, they functioned to perk up the crowd for the politicians, while today, they are the country’s self-righteous saviors. This vividly reminds me of ‘two signs of times’ axioms, one, that ‘the Road to hell is paved with good intentions’ and second, Samuel Johnson, as one of England’s greatest literary figures once wrote, ‘Patriotism is the last refuge of the scoundrel’.

IMF: Statement by IMF Staff at the Conclusion of the Post-Program Monitoring Mission to the Philippines

For the buffoons, who incessantly attempt to portray the country as in a state of ETERNAL PERDITION, this statement from the IMF shows of the recent progresses and as well as the risks we face. Unfortunately, for the politically polluted mind, this development is a virtual anathema...probably the IMF is in cahoots with the present administration…any wiretaps please?

Statement by IMF Staff at the Conclusion of the Post-Program Monitoring Mission to the Philippines

The following statement was issued today in Manila by an International Monetary Fund (IMF) mission:

"A Post-Program Monitoring mission visited Manila during June 9-22, 2005. The discussions focused on the macroeconomic and structural policy issues facing the Philippines. The mission's findings will be reported to the IMF Executive Board in September 2005, but the preliminary assessment is as follows:

"Considerable progress has been made with economic reforms in the last year. The passage of the expanded VAT law marks a major breakthrough in the reform process. Other significant achievements include long-overdue increases in alcohol and cigarette excises and power tariff hikes that will substantially stem the National Power Corporation's (NPC's) losses. With steadfast implementation, this package of measures should permit a major stride towards balancing the budget, reassure markets about the authorities' commitment to tackling the fiscal problem, and create room for needed development expenditures.

"The economy has also performed well, with GDP growth boosted by surging remittances and new-found vigor in tourism and business process outsourcing. Although high oil prices weigh on activity, GDP growth of about 4¾ percent is expected in 2005. The fiscal deficit has been placed on a downward path through resolute control over expenditures, while revenue collection is being assisted by the current crack-down on tax evaders. Foreign portfolio investment has responded favorably to the better fiscal news, while a pivotal ruling by the Supreme Court on foreign ownership of mining projects has improved prospects for FDI.

"Nonetheless, there are a number of risks in the outlook, including the potential for further increases in oil prices and a softening of foreign demand for Philippine exports, as well as the continued potential for adverse developments in international capital markets. Moreover, recent events have demonstrated the sensitivity of the economy to political uncertainty.

"Inflation remains above target, reflecting in large part the impact of supply shocks, and will likely remain elevated in the near future as the impact of transport fare hikes and VAT reform filters through to prices. The mission welcomes the Bangko Sentral ng Pilipinas' (BSP's) stance, as indicated when the policy rate was last raised in April, that monetary policy will be used to manage inflationary expectations and contain the impact of any second-round effects on prices. Given that inflationary pressures are expected to remain, the BSP should monitor price developments carefully and take action as appropriate.

"Looking ahead, successfully implementing the fiscal reform agenda will be important for reducing vulnerabilities and initiating a virtuous investment-growth cycle. While a significant reduction in the fiscal deficit is in prospect for 2005 and 2006, additional fiscal measures, such as the rationalization of tax incentives, will be needed to ensure achievement of the medium-term plans to balance the budget. It will also be important to increase the VAT rate as envisaged in January 2006 and to sustain the courageous campaign being waged against tax evaders. Moreover, other parts of the public sector, such as the government-owned and controlled enterprises (GOCCs), should be monitored closely to avoid shifting the burden of fiscal adjustment disproportionately onto the national government.

"Another priority is to press ahead with privatization of generation and transmission assets in the power sector and to continue to strengthen the regulatory framework to attract needed new investments into the sector.

"The mission welcomes the encouraging developments in the financial sector with the ongoing implementation of the Special Purpose Vehicle (SPV) framework, and particularly looks forward to early passage of the amendments to the BSP Charter that will strengthen legal protection for bank supervisors.

"The mission also welcomes the recent improvements that have been made to the statistical data, including the progress in consolidating the non-financial public sector debt data. Efforts to extend these data to earlier years as well as to complete the reconciliation of debt flows and stocks will be useful.

"The IMF will continue a close policy dialogue with the Philippine authorities in the period ahead in the context of Post-Program Monitoring."

CaseyResarch.com: FALLACIES OF NON-SKEPTICS

Fallicies, from caseyresearch.com, to avoid...

FALLACIES OF NON-SKEPTICS

Optimist or pessimist, atheist or believer—whatever your life philosophy, it can never hurt to apply an ounce of skepticism to everything you read, see and hear. We stumbled over the wonderful “Skeptic’s Dictionary” at http://skepdic.com and found some fascinating phenomena everyone should be aware of.

Forer Effect/Barnum Effect

This effect, discovered by psychologist Bertram R. Forer, lends itself especially to the field of commercial fortune telling, astrology, the enneagram, etc. Forer found that people have a natural tendency to strongly identify with vague and generalized statements about themselves.

In 1948, Forer gave his psychology students a personality test and then gave each one the same evaluation, which he had copied from a newsstand astrology column. The “evaluation” was filled with platitudes such as “You have a need for other people to like and admire you, and yet you tend to be critical of yourself. While you have some personality weaknesses, you are generally able to compensate for them. You have considerable unused capacity that you have not turned to your advantage. Disciplined and self-controlled on the outside, you tend to be worrisome and insecure on the inside.” And so forth.

Forer asked his students to rate the accuracy of the evaluation with grades from 0 to 5, with 5 being an “excellent” assessment, and 4 a “good” one. The class average was 4.26. The test has been repeated many times over the decades, with an average of 4.2, or 84% accuracy.

Forer explained this phenomenon with human gullibility; the Skeptic’s Dictionary offers hope, wishful thinking, vanity and “the tendency to try to make sense out of experience” as explanations. It is also called “Barnum Effect” in reference to P.T. Barnum’s notoriety as a psychological master manipulator.

Concorde or Sunk-Cost Fallacy

The human tendency to throw good money after bad, even though it has become clear that there is nothing to gain. “When one makes a hopeless investment,” says the Skeptic’s Dictionary, “one sometimes reasons: I can’t stop now, otherwise what I’ve invested so far will be lost.” To us, this seems to be especially true for gambling of all sorts… which is why so many gamblers on a “bad streak” proceed to lose their shirts.

The SD explains such behavior as “a pathetic attempt to delay having to face the consequences of one’s poor judgment… a way to save face, to appear to be knowledgeable, when in fact one is acting like an idiot.”

Famous examples are Lyndon B. Johnson, who kept submitting troops to Vietnam, even long after he had determined that the war was a lost cause, as well as France and Britain financing the construction of the Concorde, a beautiful and great-working airplane, but financially a bottomless pit… in which the two countries nevertheless kept pouring their resources.

Texas Sharpshooter Fallacy

Named after the storybook Texan who shoots at a barn and then draws a bull’s eye around the bullet holes.

“Politicians, lawyers, and some scientists tend to isolate clusters of diseases from their context,” states the Skeptic’s Dictionary, “thereby giving the illusion of a causal connection between some environmental factor and the disease. What appears to statistically significant (i.e. not due to chance) is actually expected by the laws of chance.”

A good example is the 1999 New Yorker article by Dr. Atul Gawande, “The Cancer-Cluster Myth”. He describes various incidents of “neighborhood cancer clusters” that prompted official investigation. For example, in the ‘80s, the California farming town McFarland made headlines “after a woman whose child was found to have cancer learned of four other children with cancer in just a few blocks around her home.” Investigators found six more cases in the small town with a population of 6,400. The presumed culprit was a groundwater well contaminated with pesticides, which led to lawsuits against six chemical companies.

McFarland is not an exception, says Gawande, who cites other examples of neighborhood cancer clusters. But it’s a fact that clusters of disease—even those six or seven times higher than expected—in any one neighborhood may well be within statistically normal limits… especially with a hard-to-pin-down disease like cancer. In the case of McFarland, for example, it turned out that the eleven sick children had nine different forms of cancer. Even though it’s counterintuitive, stresses Gawande, clusters like this are most likely just a coincidence.

Most people think it’s strange when they toss a coin and heads comes up four times in a row, says the SD. But there is really nothing strange about it—in a series of 20 tosses, there’s a 50% chance of getting four heads in a row.

Remember: Reality can sometimes be stranger than illusion. Maybe that’s why so many people prefer the illusion.

***
The recent wiretapping controversy looks very much like the 'Texas Sharpshooter Fallacy'.

ResourceInvestor.com: The Time Is Now - Philippines Ready for Mining Resurgence

A treatise on our local mining industry by a foreign entity www.resourceinvestor.com (registration required). Need I say more?

The Time Is Now - Philippines Ready for Mining Resurgence
By Stephen Clayson

21 Jun 2005 at 08:00 AM EDT

LONDON (ResourceInvestor.com) -- Senior government figures from the Philippines have been addressing the European investment community in order to sell the highly mineralised archipelago as once more a viable destination for mining investment, thereby bringing to a close a recent period of animus towards the industry.

In an impassioned oration to manqué London investors, the honourable Jose de Venecia, Speaker of the Congress of the Philippines, reaffirmed his personal commitment to the further liberalization of foreign investment in developing the mineral wealth of the Philippine archipelago.

In the face of significant opposition, the Speaker has been instrumental in creating the legal framework within which foreign miners are now able to effectively control 100% of a project within the Philippines, with the proviso that the investment value of that project is greater than $50 million. However, the Speaker intends to attempt to extend the applicability of this status to projects of below this value. Under current regulations, projects of under $50m investment value must be at least 60% held by Filipino partners.

The process of reopening the Philippines to foreign investment in mineral development began with the Mining Act of 1995, but this legislation was then assailed by a legal challenge to its constitutionality. The constitutionality of this act was finally upheld by the Supreme Court of the Philippines late last year, as was the right of foreign miners to enter into Financial or Technical Assistance Agreements (FTAA) with the government in order to exploit mineral resources within the country.

It is under an FTAA that foreign firms can control 100% of a mining project requiring upwards of $50m of investment, though strictly speaking ownership of resources remains that of the Filipino government. Benjamin Phillip Romualdez, President of both the Philippine and ASEAN Chambers of Mines and also President of Benguet Corporation, the largest Philippine mining company, sees this as a mere technicality, and asserts that in practice, mining projects can be as securely held by foreigners as in any comparable nation. Crucially in addition, repatriation of capital and freedom from expropriation are explicitly guaranteed to investors under the 1995 Mining Act.

The only overt restriction on mining ventures of over $50m in investment value is that they strictly adhere to policies of sustainable development, id est those facilitating economic growth, social equity and environmental protection. The substance of these policies is enshrined in the Minerals Action Plan of 2004, which reportedly contains 57 strategies and 126 activities intended to serve to moderate the negative impact of large scale mining.

The government of the Philippines has also undertaken several other measures to encourage foreign investment in mining. These include the streamlining of the permitting process for all types of project, the invalidation of mineral claims to land identified as being made by speculators in favour of re-licensing these areas to parties willing to commit to their active development and various reforms of taxation, immigration and customs protocols.

Romualdez ascribes the positive change in attitudes towards mining on a political and popular level to the belief encouraged by the current government that foreign investment in mining can contribute significantly to the overall economic prosperity of the Philippines.

Indeed, for each new mining job created, it is estimated that between four and ten jobs will be created in other industries via multiplier effects. It is now widely accepted in the Philippines that there is quite significant potential for an enhanced mining sector to contribute to general economic growth. The Filipino government believes it cannot achieve this without substantial foreign investment, much of which will come from the global mining industry.

It is also notable that despite the recent hiatus, the Philippines has a long history of mining, and has retained some suitably skilled personnel and useful infrastructure. In addition, the country can claim to have the world’s third largest English speaking population. In terms of mineral resources, the Philippine archipelago is particularly prospective for nickel and for gold, though other metals are also present in abundance.

In the long term, the key issue for the mining industry will be the durability of the popular and political commitment to it. This seems well entrenched at present, but a political upheaval towards the radical left or an unfortunate series of disastrous incidents at mining operations could turn sentiments towards mining sour. However, there is no indication of the former at present, and western mining firms should by now have developed the procedures necessary to almost eliminate serious mishaps.

It does though seem vital to the industry’s future that as in many other locations, the operational imperatives prescribed by the Philippine government to mitigate the negative effects of large scale mining are followed to the letter. If this is truly recognised by the foreign firms that choose to move into the Philippines with the aim of tapping the archipelago’s mineral wealth, then the mining industry there may well have a bright future.

Financial Times' John Kay: Only the poor can make poverty history

I simply have to highlight on this very RELEVANT and timely topic by John Kay, Financial Times columnist, about economic upliftment. The LESSON: ECONOMIC salvation is NOT about politics but about ourselves....

Only the poor can make poverty history
By John Kay
Published: June 21 2005 03:00 | Last updated: June 21 2005 03:00

Published by the Financial Times

People in rich countries are not rich because people in poor countries are poor, nor vice versa. Rich countries are rich mainly because they have benefited from two centuries of evolution of political, economic and social institutions. Poor countries are poor mainly because they have not.

If this is even partly true, the capacity of rich countries to "make poverty history" is very limited. Rich countries can damage poor countries, by destroying their social structures or looting their resources, and they once did. But they have largely ceased to do this and when de-colonisation occurred there was widespread optimism about what could be achieved. Modern technology was available, so poor countries could be spared the long, unpleasant process of development experienced by existing rich countries. With sufficient investment in infrastructure, plant and machinery and education they could progress rapidly towards higher standards of living. Aid could bridge their funding gap. In retrospect, this all seems naive. Some still argue that these measures failed because of insufficient resources, but there is general acceptance that the principal weakness of the programme was inadequate attention to institutions.

But the modern mantra that institutions matter became equally simplistic. The complexity of historical experience was discarded in favour of the belief that the necessary institutions could be described in a few phrases - free markets, limited government, private property and fiscal prudence. Most poor countries given this medicine spat it out before it had time to take effect, which enables those who administered it to continue to argue for its efficacy. It does not really matter whether the drug fails because it is ineffective or because the patient cannot accept it.

Since then analysis and policy have focused on small-scale issues that make a demonstrable difference, such as the provision of malaria nets and pure water, free elementary education and the prevention and treatment of HIV/Aids. It is daunting to discover how many other changes are needed to make even these measures effective - nets must be re-impregnated with insecticide, education needs committed parents and educated teachers, HIV treatment requires a public health infrastructure and water systems maintenance. Even if such measures do not lead to rapid economic growth, and mostly they will not, they will make impoverished lives better.

But while thoughtful observers of international development have moved from advocating broad political programmes to targeted intervention, Sir Bob Geldof, for whom the lines "full of sound and fury, signifying nothing" might have been coined, has moved in the opposite direction. The first Live Aid concert sought funds for famine relief and was profoundly moving, but the supposed purpose is now to raise consciousness, not money. What should we do when our consciousness has been raised? The UK's Make Poverty History coalition offers advice: wear a white arm band, go to Edinburgh, send an e-mail to Tony Blair.

It is time to get serious. The good news about extreme poverty is that more people have been lifted out of it in the past 10 years than in any decade in world history; that this is mainly the result of rapid economic growth in China and India, which is in turn principally due to internal reform not external action; that the real contributions of rich countries have mainly been through trade and investment, not aid; and that world leaders have played only a minor though constructive role in that process. The lesson is that world poverty will be ended by the actions of poor people themselves.

We in rich countries can make a modest contribution but if the United Nations' millennium development goals to eradicate poverty are met, which is unlikely, it will be the achievement of the poor, not the rich, and the achievement of individuals, not politicians. The idea that leaders have the power to "make poverty history" but have been insufficiently engaged to exercise that power is ludicrous. Suggesting that political action is the source of economic advance reinforces the mistakes that have made poverty all too prevalent.

Philippine Daily Inquirer's Editorial Caricature: 'In Aid of Legislation'

The Quest for Power

I just love this caricature from today’s Philippine Daily Inquirer editorial page.

I think that the attendant controversies surrounding the recent wiretapping issues have been lucidly condensed by this cartoon; succinctly the message is…the quest for power.

While the mobs have been mesmerized by the recent drama (we Filipinos simply adore dramas and would find any event to make up our heart’s desire), it appears that the underlying factors driving today’s rumpus have been largely ignored. I do hope that we wake up before the drama does turn into a tragedy.

Asian Wall Street Journal: The myth of India's liberalization

The article from Asian Wall Street Journal highlights how intricate an economy like India functions under an equally complicated government ‘democratic’ system. There has been no facile solution despite the phenomenal growth seen with country lately while the negative aspects such as corruption, inefficiencies and rent seeking complexes are likewise as deeply rooted as can be seen in any emerging market country. India’s case should give our country’s improvers and messianic leader/s wannabe’s a lucid example how progress DOES NOT come with revolutions or illusionary salvation through the snap of the finger...

The myth of India's liberalization

Indian Prime Minister Manmohan Singh is due to visit Washington in a few weeks, and editorialists and commentators have already started writing about the emerging economic power of India. New Delhi’s decision to start liberalizing its economy in 1991 is touted as a seminal event in India’s history, the moment when it threw off the shackles of Fabian socialism and embraced free markets. It is the stuff of myth--and to a large extent, it is exactly that.

While part of India has benefited from being opened up to foreign products and influences, most of the country is still denied access to free markets and all the advantages they bring. India opened its markets in 1991 not because there was a political will to open the economy, but because of a balance-of-payments crisis that left it with few options. The liberalization was half-hearted and limited to a few sectors, and nowhere near as broad as it needed to be.

One would have expected India’s growth to be driven by labor-intensive manufacturing but, almost by default, it instead came in the poorly licensed area of services exports. The manufacturing sector, ideally placed in terms of labor and raw material to compete with China, never took off. India’s restrictive labor laws, a remnant of the socialist infrastructure that India’s first prime minister, Jawaharlal Nehru, put in place in the 1950s and 1960s, were politically impossible to reform. It remains excruciatingly difficult for most Indians to start a business or set up shop in India’s cities.

This is painstakingly illustrated in “Law, Liberty and Livelihood”, a new book edited by Parth Shah and Naveen Mandava of the Center for Civil Society in New Delhi, which documents the obstacles in the way of any Indian who wishes to start a business in one of India’s big cities. Messrs. Shah and Mandava write: “Entrepreneurs can expect to go through 11 steps to launch a business over 89 days on average, at a cost equal to 49.5% of gross national income per capita.” Contrast the figure of 89 days with two days for Australia, eight for Singapore and 24 for neighboring Pakistan.

But often, even this figure is just a notional one, and entrepreneurs find it next to impossible to get a legal permit to start a business at all. Street hawkers and shop owners in the cities often cannot get a license at all. (Even those who do have to comply with draconian regulations that offer so much discretion to the authorities that corruption is inevitable.) They survive by paying regular bribes to municipal authorities and policemen, which are generally fixed in such a way by this informal market that they can barely survive on what they earn, and cannot expand their business or build their savings. They are trapped in a cycle of enforced illegality and systematic extortion by authorities, which results in a tragic wastage of capital. It serves as a disincentive to entrepreneurship, as well as to urbanization, the driving force of growing economies.

Another disincentive to urbanization is how hard it is for poor people to get legal accommodation in the big cities. In Bombay, for example, an urban land ceiling act and a rent-control act make it virtually impossible for poor migrants to rent or buy homes, and they are forced into extralegal housing. The vast shantytowns of Bombay--one of them, Dharavi, is the biggest slum in Asia--hold, by some estimates, more than $2 billion of dead capital. For most of the migrants who live in these slums, India hasn’t changed since 1991. As that phrase from India’s pop culture goes, “same difference.”

India’s policymakers are aware of these anomalies, but it is an acute irony in India that any proposal to reform the bureaucracy has to first wind its way through the bureaucracy. Arun Shourie, a former disinvestment minister and a respected journalist, wrote in his recent book “Governance” that, “proposals for reforming [the] system are adopted from time to time, and decrees go out to implement the measures ‘in a time-bound manner.’ But in every case, the proposal is put through--some would say, it has to be put through--the same mill.”

It is in the nature of bureaucracies, Mr. Shourie points out, to endlessly iterate. He charts how the apparently simple task of framing a model tender document took the government more than 13 years, as drafts of it circulated between different committees and ministries. Anything even slightly more complicated, and with pockets of political opposition to it, like economic reforms, becomes almost impossible to implement. Dismantling state controls is only possible if there is political will and a popular consensus. None of these exist. On the contrary, there is a popular belief that the economic inequalities in India are caused or exacerbated by free markets.

The socialist left, a natural proponent of such views, believes that free markets are the problem and not the solution. India’s communist parties have blocked labor reform, opposed foreign investment and prevented privatization of public-sector units. They naturally have a vested interest in the “license-permit-quota raj,” as the web of statist controls is called. On all these issues they are supported, surprise surprise, by the religious right.

The Hindu right wing, led by the Bharatiya Janata Party and collectively known as the Sangh Parivar, also fears globalization. Its sustenance comes from identity politics, the impact of which is diluted by the opening up of the cultural mindspace to “foreign influences.” If people are busy chasing prosperity and gaining Western liberal values, they will naturally have less time to focus on “the Hindu identity,” and suchlike. Rabble rousers need the masses to be disaffected.

In between the socialist left and the religious right is the Congress, a party which occupies the center of the political space almost by default. Its position on issues is always malleable, and although it is currently the party of government, it leads a coalition that depends on the left for survival. The pace of reforms has not increased since it came to power last year, and is not likely to do so anytime soon. While the world focuses on the metaphorical bright lights of Bangalore, most of the country--indeed, much of Bangalore itself, which has been plagued by power and infrastructure problems recently--remains in darkness.

thisislondon.com: "Children Sacrifices in London"

And you probably thought human sacrifices can only be seen in the episodes of Indiana Jones or in the Jungles of Africa...

Well, this article/news from thisislondon.com "Children Sacrifices in London" says that the archaic rituals are actually being practiced in London by Christian fundamentalists, according to the article (press on this link)…

"Boys from Africa are being murdered as human sacrifices in London churches.

They are brought into the capital to be offered up in rituals by fundamentalist Christian sects, according to a shocking report by Scotland Yard.

Followers believe that powerful spells require the deaths of "unblemished" male children.

The Power of Suggestions

The Power of Suggestions

One of the farcical things that the administration has done lately is to restrict to airing of the controversial tapes while ignoring the fact that traditional or downstream media isn’t the only source. Downloading the transcripts from the PCIJ (Philippine Center of Investigative Journalism), I was able to ken on the alleged ‘smoking gun’.

Before I continue, I would like to share you this analogy. For example, I show you a portrait of spiffed up svelte young lady, what would be your immediate impressions about her? Probably just as what you see. But if I tell you that this lady sells her pleasurable services you would probably conclude that she is a slut as I have suggested, presumably on the thought that I have this personal knowledge over my declarations. Moreover, a similar conclusion could be derived if I showed you first her picture, then an album of ladies belonging to a brothel. In other words, the lady’s stature becomes inconsequential and what shapes your thought processes would now be as what I have painted her to be…a hooker.

This I think is an example of the ‘power of suggestion’ or in behavioral finance called framing. According to Charles Baudouin a Swiss-French psychiatrist and author of Suggestion und Autosuggestion is ‘defined as the force that presses an idea toward realization through feelings and images that enter the subconscious from an external source’. Or have it another way, Nietschze’s lumpen denken or as Bill Bonner explains, ‘instead of thinking about things you know, you are thinking about things you cannot know and cannot explain.’ In other words, it could be a case of passing judgments on things that we hardly understand or have no authority to. It is the same argument that ex-justice Isagani Cruz mentioned in his ‘Moro-moro at the Senate’ argument where the public is treated into a spectacle where the rules of evidences as required by the courts of law have been totally disregarded.

I asked my mom who resides in Hong Kong, untainted by the political bedlam, to read the allegedly controversial transcripts of the President and the Comelec commissioner and to give me her impressions about it. She says nothing anomalous but rather of a normal rational conversation.

What I am trying to drive at is that if one has no personal knowledge about what the controversies are all about then one would have ignored the conversations as plain jejunity whereas if I suggested that the tapes are about the election fixing then our thought process would naturally hunt down words or phrases that would confirm these ‘framed’ biases.

I would urge you to read the following alleged conversations by the President and the Comelec commissioner from PCIJ by clicking on this link. However, before proceeding, since your thoughts have been geared toward searching for the ‘cheat’ associated words, my suggestion is to ask to yourself in each of every transcripts if it can themselves mean ANY OTHER THING ASIDE FROM THE PURPORTED.

If your answer is YES, then myriad things comes into play, aside from the polemics of the message, its authenticity, the source, the medium and others. If your answer is NO, then this means that the messages for you are stark clear, and heads must roll.

Now again in the same context, the ‘mother of all tapes’, please press on this link to download the pdf files (67 pages) shows that the messages of the President have been mixed with all the other messages (remember the album analogy).

While it is true that the entire script could be seen as obnoxiously corrupted as seen by the rent seeking complexities by a senator, some local officials and to even party lists organizations, this merely shows that the extent of government inefficiencies has fostered undue discretionary powers to an electoral official who could possibly engage in prestidigitation to serve vested interests. In other words, the possible wretchedness seen within the tapes could be a simulacrum of systemic inefficiencies that nurtures these rent seeking or ‘patronage’ and graft ridden complex that continues to hobble the country’s progress.

In my humble opinion, while the tapes could be a ‘wake up call’ to electoral reforms, a change of administration is not the qualified solution unless we address the systemic infirmities that go with it. Otherwise, all these repertoires of mudslinging could only be construed as simply politically induced or ‘setting up for a power grab’. Plus Ca Change, Plus C'est La Meme Chose or The more things change, the more they remain the same.

Ronald Meinardus: 'Poor losers fan Filipino disenchantment' published by Japan Times

Ronald Meinardus comments in Japan Times 'Poor Losers fan Filipino disenchatment' that the current 'destabilization' in the Philippines could actually be all about "vendetta", an excerpt of the article (press on title to link to article)....

It is not surprising that most Filipinos blame the government and particularly President Gloria Macapagal Arroyo for the dire straits they see themselves in. Barely a year after her re-election to a six-year term, her popularity has dropped to the lowest level since she assumed power in early 2001.

In a democratic context, low popularity ratings and disenchantment with political leadership are not unusual. On the other hand, political rule is always bound by time limits; elections give the people the opportunity to judge and replace leaders they dislike or find ineffective. Political elections assume a stabilizing role as they provide the opposing forces a chance to assume power in a constitutional manner. One crucial condition for this political stability is that political contenders play by the basic rules (usually codified in the constitution). Conceding defeat after the elections and acknowledging the winner is one important element in what may be termed the consensus of democrats.

In the Philippines, this consensus does not exist. "You either win elections, or you are cheated," is a popular explanation in a country in which electoral fraud and vote manipulation remain a depressing routine. Up to this very day, the opposition forces have refrained from publicly accepting their defeat in the presidential elections held well over a year ago. Politicians of the opposition constantly challenge the political legitimacy of the presidency. Worse still for the incumbent: Many Filipinos seem to believe that Arroyo cheated her way into the presidential palace in May 2004.

In these days, the efforts of the opposition to undermine and eventually bring down the president are focused on allegations that members of the first family are being paid off by syndicates running illegal lotteries. Opposition lawmakers claim to have witnesses willing to testify that Arroyo's family members have taken kickbacks from criminal gangs running an illegal numbers game popularly known as jueteng.

Political irony lies in the fact that Arroyo's predecessor, Joseph Estrada, was ousted in 2001 in the course of a popular uprising after being accused of accepting money from jueteng lords. Not a few Filipinos continue to support the disgraced former leader. It is safe to assume that they are just waiting to take revenge for the ousting of their political idol.

Lepanto Consolidated A: The Next Market Darling?

MARKET Timing is an extremely difficult task, but successful traders do not actually ‘time’ the market but executes entry and exit points based on strategies derived from the technical picture, possibly in confluence with some fundamental reasons.

In the case of Lepanto Consolidated, the country’s largest gold producer, the technical picture as seen above shows of the following:

• The stock has undergone a full cycle. At the present setup it appears that the issue has broken out of its declining phase and at the moment is consolidating or bottoming out. This means the next phase could most likely be an advancing phase.
  
• Technical indicators appear to show some positive divergence meaning that while the chart is at the moment most probably at the ‘bottoming’ phase, signs of increased accumulations are beginning to emerge. As can be seen above, the higher upper window shows that the Money Flow index is rising in conjunction with a rising Chaikin Money Flow Index seen at the lower upper window.

The Chaikin Money Flow Oscillator is premised on the accumulation/distribution level. This indicator measures whether a particular security is undergoing accumulation (buying) or distribution (selling) activities. While the Money Flow Index is a momentum indicator that compares ‘positive’ to ‘negative’ money flows in order to identify the state of a trend.

Further, it could be noted that the volume (number of shares) seems to be rising during the past week as shown by the lower window (blue line) in the above chart. Friday’s volume of 21 million shares was last seen during February of this year. Since volume precedes price, the current activities seem to indicate that a brewing upside breakout could be seen anytime soon.

On the fundamental side, it is public knowledge that Canadian Mining Ivanhoe Mines , whom has extended to Lepanto Consolidated a 180-day $3 million loan, is presently at the maturing phase of its due diligence. This means that Ivanhoe Mining could be expected to formalize its proposal, whose package could possibly include the investments as well as Lepanto’s current hedged/forward sales position, anytime soon. So it appears that the current accumulation could possibly be in anticipation of this development.

That’s the way it looks from here.

Yahoo News: Philippine USD Bonds Improve, Some Still Worry

Philippine Bonds of late have manifested signs of dramatic improvements until the recent scandals. This yahoo report shows of how investors reacted to the latest political imbroglio and their corresponding outlook. Quoting the entire yahoo article…

Philippine USD Bonds Improve, Some Still Worry

By Oliver Biggadike
Of DOW JONES NEWSWIRES

SINGAPORE (Dow Jones)--Political uncertainty in the Philippines in recent days has stemmed a strong run in the country's dollar-denominated debt, but some analysts say the securities will resume their strengthening trend once the instability passes.

They say that the government's progress on fiscal reform is helping narrow the spread between yields on U.S. Treasurys and dollar debt issued by the Philippine government.

The Philippines, which is one of the most prolific Asian issuers of U.S. dollar bonds, passed tax laws on May 24 that cut from July most exemptions to the country's value-added tax and raise the tax rate in January 2006 to 12% from 10%.

That, together with improving sentiment for Asian high-yield issues, helped narrow the spread on the Philippines sovereign component of JPMorgan's Asia Credit Index to 388 basis points over U.S. Treasurys on June 6, its tightest since March, from its recent widest level on May 18 of 424 basis points.

"The worst seems to be over," said Lloyd Ong, credit analyst at BNP Paribas in Hong Kong. "The last few months (of underperformance) was due to the drawn out debate about the VAT bill."

Two days after the tax laws were passed, Fitch Ratings lifted its outlook for the Philippines to stable from negative. Fitch rates the Philippines at BB, one notch higher than Standard & Poor's BB- and two notches higher than Moody's B1.

But since June 6, the JACI Philippines spread has ballooned out to 423 basis points as of Thursday, following allegations that President Gloria Macapagal Arroyo rigged her 2004 election win and that her family received kickbacks related to an illegal numbers game.

Between Monday and Thursday, when the Philippine peso bucked the trend in other Asian currencies and weakened against the U.S. dollar, the JACI Philippines spread widened 33 basis points compared with a 14 basis point widening for the overall Asia Sovereign component of the index.

Arroyo has strongly denied the charges and has asked the Philippine justice department to investigate her family's role in the kickbacks.

Political analysts say that the president will probably survive the controversy and traders say that the spread widening is likely temporary.

"The only real downside is if the opposition is successful in convincing the people," said a Singapore-based trader. If the spread widens further, "it's probably a buying opportunity," he said.

On a more fundamental level, Martin Hohensee, head of Asian fixed income and credit research for Deutsche Bank, said Asian credits - including the Philippines - are improving their credit metrics.

"We're very encouraged by the low central bank rates (in the Philippines)," he said, noting that it improves the government's finances by keeping inflation at a high 8.5%.

"The fastest way for the Philippines to get out of its debt problem is real currency appreciation," he said, which is what happens when the exchange rate remains steady amid rising prices.

Some Say Govt Needs To Do More On Fiscal Reform

But some long-term investors aren't as positive, not because of the fuss swirling around Arroyo, but due to concerns of whether the Philippines has really turned the corner in long-term fiscal reform.

"The Philippines is the only large country in Asia where one has seen no structural improvement," said Nicolas Schlotthauer, who helps manage $2.5 billion in emerging market bonds at Deutsche Asset Management in Germany.

"The Philippines pay a higher interest-rate premium, but we see an extreme downside" due to the government deficits, he said. Of the money that Schlotthauer helps manage, around $200 million is in Asian U.S. dollar bonds.

Philippine bonds pay roughly 125 basis points more than Indonesia, another high-yield Asian issuer, Schlotthauer noted. "That's also required, given the risk," he added.

The Philippine government has said that this year it will use the additional VAT revenue, which it has estimated at PHP31 billion, to cut the deficit. In 2006, 70% of an estimated PHP105 billion in VAT revenue is earmarked for deficit reduction and Arroyo's goal is to balance the government budget by 2010.

"It's good that (the VAT hike) happened at all...but over the long-term, it's just not enough," Schlotthauer said. "Next to the low tax rate, (the losses at) the national power company is the central problem."

Ratings agencies have also cited losses at the state-owned utility National Power Corp. as an area of concern. Moody's Investor Service said in a June report that "the elimination of operating losses and restructuring of National Power Corporation...would also be positive factors" which could change the rating.

Others aren't as pessimistic and say that the long tenor of Philippine bonds gives the country time to fix its fiscal problems before the bonds mature.

Of the $15.3 billion Philippine U.S. dollar bonds on the JACI index, $12.7 billion have maturities longer than five years. Most recently, the Philippines in May sold $250 million of 10-year bonds and $500 million of 25-year bonds.

"Every time they do another $1.5 billion to $2.0 billion deal...it gives them more time to fix their deficit situation," said BNP Paribas' Ong.