There is never a good time for a crisis. But for the
Philippines, which has known more than its share of
difficulties, the global economic downturn comes at a
particularly tricky moment. After decades of failed promise,
the country in recent years has registered some of its best
economic performances ever as a result of the fiscal reforms
and pro-business policies of President Gloria Macapagal-Arroyo.
Now those gains are threatened by the recession in the U.S. and
Europe, which has caused the countrys exports to plunge
and growth to slow sharply.
But Arroyo, who took office eight years ago when the
Philippines was on the brink of recession and turned the
economy around, is confident that the country can meet the new
challenges. Her government is taking advantage of its fiscal
reforms, which have dramatically lowered the deficit and the
national debt in recent years, to ramp up spending to combat
the economic slowdown. The 2009 budget, which Congress approved
in January, contains a stimulus package of 300 billion pesos
($6.4 billion) for infrastructure spending and tax breaks. The
president also believes that the Philippines
business-process outsourcing industry, which she has actively
promoted, stands to benefit from recessions abroad as
hard-pressed American and European companies look to cut
The important thing now is to work on the global
recovery together and to prevent the global crisis from
becoming a crisis in the Philippines, Arroyo tells
Institutional Investor in a recent interview in Hong Kong,
where she was attending a meeting of the Clinton Global
Initiative. Reform has been the central pillar of our
administration. Key among the reforms is the expanded
value-added tax, which allowed us to have the revenue to invest
in human and physical infrastructure as well as social
Although the country resisted the early stages of the
financial crisis, its economy like most across Asia
is feeling the global slowdown that followed the
collapse of Lehman Brothers Holdings in September. Exports
dropped by 11.9 percent in November, with shipments to the U.S.
the countrys biggest market plunging by
18.8 percent. Foreign direct investment, which had surged in
recent years, declined 47 percent in the first ten months of
2008, to $1.42 billion. Remittances from Filipinos working
overseas have held up well so far, but they too are likely to
be hit by recessions in foreign markets, the International
Monetary Fund warned last month.
The governments budget calls for growth of 3.7 percent
to 4.7 percent this year, compared with 4.6 percent in 2008 and
a record 7.2 percent in 2007, but economists have been rapidly
downgrading their forecasts. The IMF last month predicted that
the newly industrialized Asian countries, a group that includes
the Philippines, would see their output decline by 3.9 percent
this year. There is no question that growth will slow,
given that 60 percent of the nations exports are
electronics, says Robert Sears, executive director of the
American Chamber of Commerce of the Philippines.
Arroyo is no stranger to crisis, though. She took power in
2001 when the country was reeling from the forced resignation
of President Joseph Estrada over corruption allegations and
suffering from the global economic downturn sparked by the
collapse of technology stocks. By moving steadily to reduce the
government deficit and actively courting foreign investment,
Arroyo succeeded in bolstering confidence and putting the
economy on a robust growth track.
When President Arroyo took over, she wasnt dealt
the best of hands, notes Tom Byrne, head of sovereign
ratings in Asia for Moodys Investors Service. She
stabilized the worsening of the budget deficit. They managed to
hit their target in the past couple of years.
Moodys gives the Philippines a relatively low B1
sovereign rating but retains a positive
Neeraj Jain, Philippines country director at the Asian
Development Bank in Manila, is equally optimistic. She
has shown fantastic economic management and good economic
leadership, he says. They have a good road map.
They also built up a huge fiscal capacity in the past five
years to deploy to face off the global crisis.
The Philippines can also boast some positive employment
news, a stark contrast to the layoffs sweeping the U.S. and
Europe. Executives at global banking giant JPMorgan Chase &
Co. say they plan to hire an additional 4,000 Filipinos in 2009
for business-process outsourcing, bringing its total employment
in the country to 7,000.
India may be No. 1 in terms of providing back-office
support for global companies, but its important to
diversify and not concentrate risk, says Barry Marshall,
head of JPMorgans customer care center in the
Philippines. The level of English is fantastic here. They
speak American English.
The countrys banks are also in relatively good health.
Some 4 percent of all loans are nonperforming, down from 17.3
percent in 2001, when Arroyo took office. Banks came into
compliance with Basel II requirements in 2008 and boast an
average capital adequacy ratio of 15.5 percent.
Philippine banks are basically quite conservative,
asserts central bank governor Amando Tetangco. They are
still domestically oriented. They generate deposits, the bulk
of which are in pesos, and they extend loans, again in
The daughter of popular politician Diosdado Macapagal,
Arroyo first moved into Malacanang Palace at age 14, when her
father, known by his nickname the Incorruptible,
won election as president in 1961. Born to a peasant family,
Macapagal enacted land reforms that helped poor farmers,
boosted growth by floating the peso and changed the national
independence day from July 4 a legacy of U.S. colonial
rule to June 12, the date the Philippines declared
independence from Spain in 1898. He lost his bid for reelection
four years later to Ferdinand Marcos, whose embrace of
authoritarianism stunted the Philippines politically and
economically for the next two decades.
Arroyo spent two years at Georgetown Universitys
Edmund A. Walsh School of Foreign Service in the 1960s, where
she got to know classmate and future U.S. president Bill
Clinton, before graduating with a BA in economics in 1968 from
Assumption College in Manila. She earned a doctorate in
economics from the University of the Philippines in 1985,
became a professor and later chaired the economics department
Arroyo entered politics in 1987 at the invitation of
then-president Corazón Aquino, becoming an assistant
secretary and later undersecretary at the Department of Trade
and Industry. She won a Senate seat in 1992 and in 1998 was
elected vice president under Estrada, succeeding him on his
The presidents background is critical for a country
that has trailed economically for decades. In the 1960s per
capita income was $612 in the Philippines, well ahead of
Thailands $329 and Indonesias $196 and just behind
Malaysias $784, according to the Asian Development Bank.
But the Philippines was mired in corruption and political
turmoil during the Marcos era and beyond, while most of its
neighbors powered ahead. As a result, the countrys per
capita income stood at $3,400 in 2008, well behind
Thailands ($8,700) and Malaysias ($15,700),
according to the U.S. Central Intelligence Agency. China, which
had an average annual income of just $100 in the 1960s, has
leapfrogged ahead to $6,100.
The key to reviving growth has been Arroyos success in
getting control of the government budget. Initially, her
administration focused on cutting spending growth and boosting
revenues by setting targets for tax collectors.
In 2006, Arroyo overcame the opposition of many wealthy
Filipinos and pushed through Congress an increase in the
value-added tax, to 12 percent from 10 percent. This
allowed a lot of resources to come in and helped us fund a lot
of the social services and infrastructure expansion and cut our
debt-to-GDP ratio, Finance Secretary Margarito (Gary)
Teves tells II in an interview in his Manila office. The
government deficit was 1 percent of GDP in 2008, down from a
peak of 5.3 percent in 2002, and the national debt had declined
to 57 percent of GDP at the end of last year, from 76 percent
in 2004. The governments medium-term plan calls for
balancing the budget in 2010 and reducing the debt to 43
percent of GDP that year, but the stimulus spending will delay
that target, Teves concedes, without specifying a new date.
The new budget calls for the deficit to increase by P27
billion, to P102 billion, or 1.2 percent of GDP, this year. The
P1.4 trillion budget, up nearly 16 percent from 2008, contains
a near-tripling of infrastructure spending, to P260 billion,
and will finance many projects already under way, including 32
airports, 28 power plants, 27 seaports and nine railways.
The spending is targeted it is not just spending
for the sake of spending, notes Arroyo.
Arroyo is also ramping up investment in agriculture in a bid
to make the country self-sufficient in rice. She drafted the
program in response to a global rice shortage last year that
saw wholesale rice prices more than double, to P40 a kilogram,
inflation surge to a high of 12.4 percent and fights erupt as
hundreds of thousands of people queued up for scarce supplies
of the staple. The Philippines, whose population of 91 million
is growing by 2 percent a year, imported 2 million tons of rice
in 2007, roughly 10 percent of its consumption and 7 percent of
the global trade in rice.