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Thrilla in Manila

So who does embattled Philippines President Gloria Macapagal-Arroyo like to compare herself to?

So who does embattled Philippines President Gloria Macapagal-Arroyo like to compare herself to?

By Allen T. Cheng and Kevin Hamlin
June 2002
Institutional Investor Magazine

Try famed boxer Muhammad Ali. Early in his career the great fighter was in a tough bout, and a heckler kept barraging him with one insult after another. Finally, Ali strode over to ringside between rounds and yelled down at him: "Hey, you're down there shouting; I'm up here fighting!"

Arroyo related the tale to a crowd of businesspeople at the elite Makati Business Club in Manila in January. "That's how I feel,"she told her audience. "Like Ali, I'm up in the ring fighting."The remark drew loud applause - something Arroyo has heard precious little of since being thrust into the Philippines' presidency 17 months ago.

Critics ranging from her political opponents (and indirectly, a prominent member of her own party: former president Fidel Ramos) to members of the press to Jaime Cardinal Sin, the head of the Roman Catholic Church in the Philippines, have variously charged that she has no vision for the country, no coherent economic policy, no real interest in helping the poor and no stomach for stamping out the Philippines' congenital corruption. She is faulted for shying away from breaking up family cartels in major industries and for kowtowing to wealthy families, whose support she needs to win the 2004 presidential election.

"The Philippines is dominated by an oligarchy that controls not only the economy but also the election process,"declares business professor Romulo Neri of Manila's Asian Institute of Management, who quit Arroyo's transition team. "We have a vicious cycle of booty capitalism, and the president hasn't led a reform in this area at all."

Yet Arroyo, like the resilient Ali, should not be counted out prematurely. When she took over, the Philippines was in political chaos after a popular uprising forced out president Joseph Estrada. She quickly restored order, while slashing the country's bloated budget and implementing other firm economic measures. Within a year the Philippines had the fastest-growing economy in Southeast Asia.

"We made great strides in this past year,"Arroyo confidently told Institutional Investor in an interview in her ornate Malacañang Palace office (see box). "We tamed the budget deficit that I inherited not only by containing costs but also by surpassing revenue targets. The peso has stabilized, our interest rates are at record lows, and our growth rate last year was 3.7 percent, despite the worldwide slowdown and September 11. When I became president, employment was at 11.3 percent. It's still high, but we've been able to bring it down to 10.3 percent by creating 1.5 million jobs."

Arroyo may be, as her detractors contend, confrontational, headstrong and temperamental. Yet the Philippines' Iron Lady, as she is known, could conceivably turn out to be just the sort of Thatcheresque leader her country needs at this critical juncture as it grapples with economic sclerosis, on the one hand, and ascendant competitor China, on the other.

"She knows what needs to be done,"says Washington SyCip, founder of SGV Group, the Philippines' largest indigenous auditing firm. "If she cannot succeed, it's hard to think who can."

The 55-year-old Arroyo's résumé would appear to be tailor-made for the job. A former economics professor at the prestigious Ateneo de Manila University, she is the daughter of Diosdado Macapagal, president of the Philippines from 1961 to 1965. Arroyo served as an undersecretary of Trade and Industry from 1986 to 1992, as a senator from 1992 to May 1998 and then as vice president until January 2001, when she succeeded Estrada.

Arroyo had a surprisingly normal childhood for the daughter of a president. When Macapagal was elected, her down-to-earth mother, a physician, told Arroyo, then 16, "Don't get used to living in Malacañang Palace, because this is just temporary."Her father would lose the presidency after a single four-year term to the charismatic Ferdinand Marcos.

Like other sons and daughters of the Filipino elite, Arroyo attended college abroad , in her case Georgetown University in Washington, D.C. There she studied economics and befriended classmate Bill Clinton. But she quit after two years to return home to help with her father's 1965 reelection campaign. She stayed on in the Philippines to marry José Miguel (Mike) Arroyo, now 56, whose wealthy family owns sugar plantations in the province of Negros Occidental. They have three grown children.

As a young wife, Arroyo returned to school, finishing her bachelor's degree at Assumption College in Manila in 1968. She later earned a master's in economics at Ateneo and a doctorate at the University of the Philippines in 1985. An area of special emphasis for her was development economics.

Arroyo, says her finance minister, José Isidro Camacho, is "impatient and anxious"to get things done. He notes that she has several cell phones. "She wants to address problems immediately,"Camacho confides. "It's almost like instant gratification."But it is precisely because of "the [forceful] character of the president,"contends the former banker, that the Arroyo government "has a much better chance of getting things done than previous administrations."Another senior colleague more bluntly calls Arroyo "a confrontational person"and says that this makes her "unpopular"with her staff. Her New Year's resolution, Arroyo admits, was "not to lose my temper."

To make sure her orders are carried out, Arroyo set up a "directives monitoring unit"last July to check up on her cabinet ministers. Ric Saludo, a cabinet secretary in Arroyo's office who oversees the DMU, says it has had a bracing effect on cabinet members, who now know "they are being watched."Minister of Finance Camacho characterizes the unit as "like a shaming exercise , if you are not doing well, it is going to show."Ministers have squabbled over who is to blame for problems in the past, he says, and the monitoring unit "puts pressure on all of us."Given the inertia in the Filipino bureaucracy, Camacho concludes, the pressure is an excellent thing.

Aides describe Arroyo as fixated on accomplishing her goals. As soon as she took office in January last year, she boldly declared that she would eradicate poverty within a decade and rein in rampant corruption. She also promised to promote free enterprise and raise the moral standards of government and society. Her economic development ambitions center on promoting three key activities: information and communications technology, tourism and agriculture.

But some of Arroyo's agenda was rudely thrust upon her. She has pursued Manila's ongoing military campaign against the Abu Sayyaf Muslim extremist group, which operates on the southern island of Mindanao. She proved politically adept in her handling of Abu Sayyaf when she aligned herself with U.S. President George Bush's campaign against Osama bin Laden and his Taliban backers in Afghanistan.

Manila's relations with the U.S. are warmer today than at any time since before 1991, when the Philippine Senate antagonized Washington by voting to close U.S. military bases in the country. Despite considerable opposition, Arroyo even won broad domestic support for joint military exercises with U.S. troops. Some 650 U.S. Special Operations Forces soldiers are now helping in the battle against Abu Sayyaf, which has links with bin Laden's al-Qaeda network, according to the U.S.

Before Arroyo took office on January 20, 2001, foreign investors had more or less written off the Philippines until the next presidential election in 2004, when Estrada was to stand down after six years in power. The immediate fear was that his government's rash spending would cause the country's budget deficit to balloon from 2000's already excessive 134 billion pesos ($2.7 billion) to as much as P225 billion in 2001 , a 68 percent jump , and that this in turn would make the peso implode. The stock market had fallen 30 percent in the second half of 2000; the ethnic Chinese, who are a mainstay of the economy, were nervously shipping liquid assets abroad for safekeeping (a number of Chinese businessmen had been kidnapped); and foreign investors were withdrawing or holding back out of fear of political upheaval.

Arroyo quickly set about restoring fiscal discipline by slashing spending. Her finance team managed to hold the budget deficit to a creditable P145 billion last year, and it's on target to come in at P130 billion this year, down 10 percent from 2001. Amid global recession, economic growth has been remarkably resilient , a 3.4 percent rise in GDP in 2001, according to the World Bank. Inflation nevertheless eased from 6 percent in 2001 to an annualized 3.4 percent in January. The country's net foreign reserves, meanwhile, jumped 30 percent, to $13.7 billion at the end of 2001. As for the imperiled peso, it remained stable. The government forecasts GDP growth of 4 to 4.5 percent this year.

"The Philippines has seen a dramatic turnaround, mainly because the government is tackling the public finance issue,"says Steven Xu, head of Asia economic research at Société Générale in Hong Kong. "With the fiscal issue under control, the central bank has been able to lower interest rates and stimulate economic growth. The Philippines is moving from a vicious cycle to a virtuous cycle."

Adds Trade and Industry Minister Manuel Roxas: "We have demonstrated fiscal discipline. We have low interest rates, and our deficits are fully funded. If, say, the cloud over peace and order is removed, then it's an entirely different Philippines."

What about the China threat, which looms over all countries in the region, including the dynamic Singapore? "China's coming of age as a manufacturing powerhouse isn't something that will whipsaw us or blindside us,"Roxas contends. "We're not really competing with China, because we've moved up the value-added curve."

At any rate, investors have been impressed by the Philippines' new direction. As of mid-May they had pushed up the Philippine Stock Exchange composite index by 30 percent from November 2001, when it reached its lowest level since Arroyo became president.

Political stability and the improved numbers have helped to restore investors' faith in the economy and buttressed Arroyo's credibility. She has used her authority to push landmark power industry reform through Congress. The March 2001 Electric Power Industry Reform Act allows for the phased privatization of the National Power Corp., which buys electricity from local power plants and distributes it. Electricity prices in the Philippines are the second highest in Asia, behind only Japan's. The legislation's intent is to provide cheaper power not only for Filipinos but also for foreign companies contemplating building plants in the Philippines. It's too soon, however, for the privatization program to have produced results.

"This act languished in Congress for more than six years under both the Ramos administration and the Estrada administration,"notes Finance Minister Camacho. "Neither president had the political will to push it through."

So important was power reform that Standard & Poor's told Camacho that it would not even consider upgrading the country until the law passed. In April S&P recognized the accomplishments of the Arroyo administration by raising the country's foreign and domestic debt outlook from negative to stable. "The administration's track record in economic matters, including passage of energy reform and adherence to fiscal targets set in 2001, augurs well for both investor confidence and GDP growth prospects,"stated the S&P report.

The World Bank has also praised the Philippines, saying in an April report that Manila "has managed to lessen macroeconomic concerns by essentially meeting its budget deficit target, containing inflation and overseeing a return to financial market stability."The bank was also reassured that reforming corporate governance and reducing poverty "have been reinforced as national priorities"and that electricity privatization demonstrated a will to enact structural reforms. But the bank cautioned that "much still remains to be done."

That much remains on Manila's to-do list is hardly surprising. What is striking is how much Arroyo has accomplished in a relatively short time under less-than-ideal conditions. For a start, she assumed the presidency under tense circumstances. Her predecessor, Estrada, was accused of, among other things, receiving illegal gambling proceeds and was driven from power amid massive public protests that had the tacit support of the military and business community. Declaring Estrada unfit to rule, the Supreme Court swore in Arroyo on January 20, 2001.

From his jail cell, Estrada continues to insist that he is the Philippines' legitimate president, and the controversy over Arroyo's abrupt rise to power probably won't be settled until she can win the presidency in her own right in two years. Barely four months after being sworn in, Arroyo had to contend with a crowd of 1 million Estrada supporters who marched down Manila's Epifanio de los Santos Avenue toward Malacañang Palace to protest the former president's ouster. Declaring a state of rebellion, Arroyo ordered riot police to forcefully put down the protest (four died and hundreds were injured) and famously warned that she would "crush"her opponents, earning the Iron Lady epithet.

Such tough talk notwithstanding, the critics' persistent carping keeps Arroyo on the defensive. Influential Cardinal Sin publicly rebuked the president for bringing a media circus with her when she visited poor neighborhoods. Chastened, Arroyo said she'd henceforth visit the poor "without media coverage."

Former budget minister Salvador Enriquez, who heads the political group founded by former president Ramos, the People's Consultative Assembly, says of Arroyo, "Her supposed desire to serve the country is overwhelmed and obscured by her stronger desire to win in 2004."In a January poll 47 percent of Filipinos said Arroyo was governing the country poorly.

As if she didn't have troubles enough, Arroyo is constrained in her ability to act by a lack of funds. With the Philippines' external debt at 73 percent of GDP, or $52 billion, almost 27 percent of the annual budget must go just to pay interest; a further 59 percent is committed to the military, the bureaucracy, social welfare and other regular expenses, leaving only 14 percent for discretionary spending.

Why is it that Arroyo still seems to be accomplishing so much but getting so little credit? The question disturbs her closest advisers. "Despite a far greater achievement level than the previous administration, why is the opposition about ready to clobber us?"wonders cabinet secretary Saludo. The administration could communicate better, especially with the poor, he acknowledges. Arroyo "has done a good job in convincing the investment community, the business community, the educated elites, but when it comes to the masses, the hoi polloi, she has a more difficult job,"he says. "Perhaps they're hurting so much that they can't react positively until they feel a difference in their lives."

Arroyo's public relations problems aren't helped any by unsubstantiated allegations that her husband demanded money from a telecommunications company in exchange for getting his wife to approve its bid for a government franchise; in any event, Arroyo turned down the bid.

The more telling criticism of Arroyo may be that, for all she has done, she needs to do much more to revitalize the Philippines. "Arroyo looks very good after Estrada,"points out Andy Xie, chief economist for Morgan Stanley Asia in Hong Kong. "But everything is relative. The Philippines is in a big hole: no high savings, no resources, not competitive in manufacturing."Burgeoning China, meanwhile, is busily siphoning off foreign investment from all of Southeast Asia. Investment applications filed with the Philippines' Board of Investments plunged 82.5 percent in the first quarter of this year, to just $94.2 million.

"The Philippines needs revolutionaries and reformers, but our politicians want to paper things over,"says Nelson Navarro, a columnist with the Philippine Star newspaper. "If you reform, you're seen as a destabilizer. Arroyo is not the reformer that she paints herself to be."

The president's staunchest critics, like ex-aide and Asian Institute professor Neri, argue that Arroyo must sweep out the Augean stables of the political system by ending the domination of corrupt and oligarchic business groups. He urges that she liberalize shipping, rice distribution and port management to check monopolies. But as a card-carrying member of the ruling clique, says columnist Navarro, Arroyo is disinclined to adopt reforms threatening to the powers that be.

Her aides dismiss such talk out of hand. They point to power sector privatization as evidence of Arroyo's commitment to reform, and they note that she gave each government department one year to submit a plan to fight endemic corruption.

Arroyo holds that setting an example at the top is crucial to cleaning up government. Under Estrada every foreign investment contract worth more than $1 million had to be approved by the president's office. Arroyo has delegated that responsibility to the relevant departments. "I have not heard of any foreign investors saying I'm corrupt,"she says. "In fact, they have been happy with the fact that they don't need to hear the president say, 'Get this person as your partner, get that person as your partner.' It removes a very big source of corruption that came from the presidency itself."

Accounting firm founder SyCip and other businesspeople see promising signs that Arroyo is cracking, if not altogether breaking, the mold of Filipino politics. Consider, they say, the appointment of Camacho, 46, as Finance minister. The former head of Deutsche Bank in the Philippines, he met the president just twice before being named her top financial officer. In previous administrations, such important posts were typically doled out to party loyalists and cronies of the president.

"This is the first time I've seen such a thing , and it's good,"says SyCip. "She has brought in a lot of technocrats. She appointed four bankers to her cabinet."Says Camacho: "My appointment is a demonstration of how she's different from her predecessors. She's willing to hire strangers based on track record and referrals from people she respects."

Arroyo's preference for capability over cronyism is apt, since her development plans are ambitious. In information and communications technology, the goal is for the Philippines to become what Trade and Industry Minister Roxas calls an e-services hub for everything from back-office services to animation, design and manufacturing. Rather than fostering raw innovation, à la Silicon Valley, the idea is to promote value-added services, such as source-code writing and software integration, that U.S. companies now outsource to India or Ireland.

The Philippines has already established itself as a major back-office processing center for such companies as American Express Co., Citigroup and Procter & Gamble Co., and the government recently approved an eight-year tax holiday to attract more back-office operations. With its highly Americanized English, the Philippines has a major competitive advantage in such activities, argues Roxas. "English is so good here,"he says, "that Filipinos can do cold calls into the U.S."And wages are one tenth what they are in the U.S.

The Arroyo administration, however, is not all work and no play: It is also pushing tourism, which consulting firm McKinsey & Co. estimates could generate up to 10 million jobs in the coming decade. That projection, however, may be optimistic given that tourist arrivals slumped 10 percent last year. The Department of Tourism acknowledges that the perception of a worsening security situation and the reports of high-profile tourist kidnappings are scaring visitors off.

Just the same, hopes are high. "If we can get just one third of Thailand's tourism traffic, or even 20 percent, we'll gain a multibillion-dollar industry,"says cabinet secretary Saludo. "It's a no-brainer."Manila sees right now a huge opportunity to attract newly rich mainland Chinese.

The Arroyo rural development program consists of building country roads, corn-storage centers and fishing ports. But at its heart is a scheme to allow peasants to buy from three to seven hectares at concessional prices to induce more of them to take up farming rather than flock to the cities. (Manila plans to obtain some of the land to be sold cheaply by forcibly buying it at a discount from rich landlords.) The government claims to have created some 850,000 agricultural jobs in 2001.

Arroyo and her aides have faith that their strategy will reap results soon enough to silence critics. With strong macroeconomic fundamentals in place, they say, foreign investment , which slumped 47 percent last year to just under $1 billion , will pick up, and in time the benefits will flow to the poor, who make up one third of the country's 78 million people. "To fight poverty you must create jobs, and to create jobs you must attract investments, and to attract investments you must deal with structural and macroeconomic reforms,"Arroyo says. "So this is what we've been doing. We must just keep giving this message. I've only been president for a little more than one year. It takes time , it takes time for foreign investors to come back."

Most investors would welcome an Arroyo victory in '04 because it would represent continuity in economic policy. "If she continues her current performance, she would be a shoo-in,"suggests central bank governor Rafael Buenventura.

Arroyo, however, is keeping her intentions under wraps. Whether or not she runs , and it appears likely she will , one thing seems certain about her time in office. As she told the businesspeople at the Makati Business Club, "I'll be slugging away for the full 15 rounds."

Arroyo confronts her critics

When her father, Diosdado Macapagal, was president of the Philippines, young Gloria Macapagal-Arroyo explored every nook and cranny of Malacañang Palace, the grand presidential residence and office along the Pasig River in Manila. Now that she is herself president , and has reclaimed her old bedroom , Arroyo reports that her staff are "amazed at my knowledge of the geography of this place."

Her vociferous critics (story) might say this is symbolic: that the president, a member by birth and education of the ruling class, would be expected to know the palace better than she knows the rest of the country, especially the precincts of the poor. Arroyo's detractors charge that she is too much a product of the political and business elite to bring about the sort of radical, and unsettling, reforms that the Philippines needs to prosper in the global economy.

Still, Arroyo has accomplished a great deal in her first 17 months in office, despite the political and economic turmoil that engulfed the Philippines at the time she took over from the ousted Joseph Estrada. To her credit, fiscal control has been restored, and the economy grew faster than any other in Southeast Asia last year. "Our bonds are selling fantastically in the international community,"Arroyo boasts.

She wants integrity and fiscal discipline to be the hallmarks of her regime, and to be remembered for eradicating poverty, in large part by creating jobs. Arroyo recently spoke to Institutional Investor Hong Kong Bureau Chief Kevin Hamlin and Contributor Allen T. Cheng about her tribulations as well as her triumphs.

Institutional Investor: Some economists say the Philippines has fallen off investors' radar screens and needs to do something dramatic to reawaken interest.

Arroyo: We are doing well in the bond market, and in January Bloomberg ranked us the best-performing stock market. I believe we are on the radar screen. That's what American businessmen said when I went to the U.S. [in a fall 2001 visit that included a stop at the White House].

How should the Philippines compete with China?

We're not competing with China. China has a population of 1.4 billion. We have a population of 78 million. We're 5 percent of China's population. So if we get an equivalent of 5 percent of the investment, that's what proportionately we need. With China's entering the World Trade Organization, the whole world looks at it as a threat and as an opportunity. We already felt the pain many years ago, when China received most-favored-nation status from the U.S., our major market. We've already lost the labor-intensive industries to China, and we've already made our adjustments.

You've said that you'd be satisfied being merely a "good president."

Being a good president is challenging enough.

But some say that what the Philippines needs now is a great president, someone to really shake up the country, as Margaret Thatcher did to Britain.

[Former dictator Ferdinand] Marcos wanted to be a great president. What I want to guard against is the illusion of grandeur. There was a recent survey that showed the people prefer a leader with IQ rather than charisma.

Your detractors say that your supporter Luis (Chavit) Singson, the governor of Ilocos Sur province, has extended his gambling franchise from his home province throughout the nation.

Maybe you should talk to the bishops, because they say there's no more gambling in his province. I have not really seen any strong evidence of his being in gambling all over the country. But if there is, then he is not above the law. I chose as my secretary of the Interior for local government, who supervises the Philippines National Police, someone whose devotion when he was governor was against illegal gambling.

Does having a close supporter with a bad reputation like Singson detract from your efforts to clean up the government?

If he's doing what they say he's doing, then let them catch him, because I don't protect anyone, and he knows that.

The Senate has investigated allegations that your husband accepted a bribe.

Even though my political detractors try to paint my husband as a crook, they couldn't go half way to proving it because the truth is my husband is not a crook and he follows my standards of integrity.

Critics say you're neglecting governing to focus on preparing for the 2004 presidential elections.

What is the source of their evidence? Because I am meeting the people? Tell me about a president who doesn't meet the people. Tell me of a president who closets herself in this room. You've got to know how the people feel; you've got to go and see whether your instructions are being carried out.

Will you in fact stand in the elections?

That's for God to determine. He will let me know what he wants me to do when the time comes. My father said, "Do your best and let God take care of the rest."So let God take care of the next election.

If you ran for election and won, it would make for continuity of Philippine economic policies through this decade. So some say it's your duty to contest the election.

If I announce that now, then I would have more critics, and it's my duty to promote economic stability. So if I keep talking about 2004, I will not be doing my duty.