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After Estrada: The Philippines in Transition

Will investor confidence recover with the economy?

by Ron Chepesiuk

January 22, around noontime in Washington, D.C., 54-year-old George W. Bush, Jr. took the oath of office that made him president of the United States. Meanwhile, at noon local time in Manila, Philippines, Gloria Macapagal-Arroyo, one year Bush’s junior, also took an oath of office, pledging to “accept the privilege and responsibility to act as president of the Philippines.”

The two heads of state are the offspring of former presidents, and both are moving on crises that divided their countries. George W. Bush, Jr. got off to a good start healing the political wounds caused by the 2000 election, while Arroyo has experienced a honeymoon after her predecessor, Joseph Estrada, was swept out of office last Jan. 21.

That honeymoon, however, is expected to be short-lived, as she gets down to the tough job of trying to revive the Philippines’ sinking economy, and getting the country back on the path that many thought would transform it into an Asian tiger. Vital for the Philippines’ recovery is implementing a reform program that will revive foreign investors’ confidence in the country’s economy.

Facts About the Philippines Population: 81,159,644 (July 2000 estimate). Population growth rate: 2.07 percent (2000 est.) Life expectancy at birth: 67.48 (total population) Literacy rate: 94.6 percent (total population) GDP real growth rate: 2.9 percent (1999 est.) GDP (per capita): $3,600 (1999 est.) External debt: $51.9 billion (1999 est.) Population below poverty line: 32 percent (1997 est.) Inflation rate: 6.8 percent (1999) Labor force: 32 million (1999 est.) Industries: fishing, textiles, pharmaceuticals, chemicals, wood products, food processing, electronics assembly and petroleum refining Natural Resources: timber, petroleum, nickel, cobalt, silver, gold, salt and copper Exports: $34 billion (1999 est.) Exports (commodities): garments, electronic equipment, machinery and transportation equipment Imports: $30.7 billion (1999 est.) Imports (commodities): fuels, capital goods, consumer goods, raw materials and intermediate goods Source: CIA Factbook

With Arroyo, the Philippines can do no worse, and, most likely, a lot better than Estrada, economists and political analysts told AsianWeek.

“Estrada squandered what was left to him,” said Dana Dillon, a policy analyst on Southeast Asia for the Heritage Foundation, a Washington D.C.-based think tank. “The Philippines was not affected as much by the 1997 Asian crisis as some of the other countries in the region, and, in terms of economic reform, the country didn’t have far to go. But Estrada is the major reason why the Philippines economy has nosedived.”

The country’s economy actually began rebounding this fall, that is, until the Estrada political crisis put it into reverse. According to reports, the economy picked up from July to September 2000, with the agriculture and industry sectors spurring the growth. Dr. Cayetano Paderanga, Jr., director of the Institute for Development and Ecometric Analysis Inc., a Philippine think tank, told the Philippines BusinessWorld that the manufacturing sector contributed 6.7 percent to the country’s growth rate. The list was headed by the electrical machinery and footwear/apparel sectors, which grew 1.9 and 1.6 percent, respectively.

The stabilizing peso and the good economic performance of the third quarter encouraged the Philippine central bank to cut key interest rates by 0.5 percentage points last December. Just two months before, the bank had increased interest rates by 4 percentage points to strengthen the peso after it fell to a historic low of 51 pesos to the U.S. dollar.

The rebounding economy was not a result of anything Estrada did, but rather in spite of him, according to analysts. “I don’t think he had any knowledge or interest in his country’s economy,” Dillon said. “The only things that interested him were gambling and stealing from the government.”

During Estrada’s two-and-a-half year administration, efforts were made to reform the economy, but according to Marcus Noland, a senior fellow at the Washington, D.C.-based Institute for International Economics, “While Estrada didn’t oppose those measures, he also never had the strength of leadership to push them through.”

Impeachment or Tragedy?

The former actor’s troubles began last October when a former drinking friend, Luis Singson, said he had given Estrada $12 million in bribes and kickbacks. Later, during Estrada’s impeachment trial, a bank officer testified that she saw Estrada give a false name on a secret bank account. Other tales about Estrada-related corruption came out during the impeachment trial.

Alfred W. McCoy, a professor of history at the University of Wisconsin, and an expert on Philippine history, described the corruption as “pretty sensational.” “As vice president, Estrada was head of the President’s Anti-Crime Commission, which was supposed to crack down on kidnapping and bank robbery,” McCoy explained. “But he had gangs working for him, which meant that, as vice president, Estrada earned a big income from crime. Estrada also used his control of the police while vice president to impose a take on the underworld.”

So, how devastating to the Philippines was the corruption during Estrada’s administration? “Estrada was the worst president the Philippines ever had,” was McCoy’s blunt assessment. “Corruption has always been a fact of political life in the Philippines, but it was done discretely and within the legal economy.”

A New Era

Arroyo already is considered a big improvement over Estrada. The experts describe her as capable, well-educated with a degree in economics from Georgetown University, and politically experienced in the ways of Philippine politics.

The Business Times of Singapore described Arroyo as an “economic liberal” in a profile appearing in the magazine last Jan. 31. “As a senator she played a key role in the Phillippines’ entry into the World Trade Organization and favors pro-competition policies, including competition from abroad… This bodes better for the Philippines’ relationship with the International Monetary Fund and for the priority Manila will attach to international investor concerns.”

Arroyo’s leadership abilities will be put to the test, and what he does in the coming months will have a big impact on foreign investor confidence. As Rob Guozden, sovereign research analyst for Lehman Brothers in New York City put it: “We believe that nothing will stimulate foreign investment interest in the Philippines as much as an immediate and consistent demonstration of the new administration’s ability to pursue legislative and administrative reforms.”

Arroyo has tried to get off to a good start and gain the trust of the Philippine people and the confidence of the international community. In a symbolic move to show that her administration would be different, Arroyo signed an exclusive order that bans all government agencies from transacting business with her family and members of the cabinet, and she has set up a search committee to get the best candidates for the top posts.

Her first act was to name the experienced Alberto Romulo as her finance secretary. Romulo holds a doctorate from the University of Madrid and has a long history of public service, including a stint as senate majority leader from 1992 to 1996. He is untainted in terms of corruption, and has budget experience working in the administration of Corazon Aquino.

“Arroyo is appointing competent people to key positions, several of whom served under former President Felix Ramos,” Dillon explained. “She hasn’t been appointing friends and cronies.”

Arroyo has acknowledged that the Philippines will be in for some serious belt-tightening in the coming months. Alex Magno, a senior adviser in the presidential transition team, told the press, “We have to cut 60 billion pesos ($2 billion) from the budget... That will be painful.”

Arroyo will also have to get the big public deficit under control, reduce inflation, and restore confidence in the currency that began a free fall last October, then stabilized after Estrada was impeached. She will also have to develop programs that will revitalize the country’s moribund business sector.

Recent economic indicators have been encouraging, but statistics show that the Philippines continues to lag behind its East Asian counterparts in growth rate. For instance, GDP posted a 4.5 percent growth in the second quarter of 2000, which was much lower than the growth performances of Hong Kong (14 percent) and Singapore (8 percent).

“There are a lot of interests pulling at her [Arroyo],” said Larry Niksch, a specialist in Asian Affairs at the Congressional Research Office in Washington, D.C. “Trying to put a workable reform program in place is going to be a test of her leadership ability and political skills.”

The Philippines does have many economic and political problems, but political analysts are optimistic about the country’s future. The Philippines remains a good place to invest compared to many other countries in Asia, they say. “A few years ago, several investors told me that the Philippines was the Asian country to invest your money in, but then Estrada came to power and the country went downhill,” Dillon said. “Investors will come back in droves if the country can get its act together.”

Romulo has said it will take two years for the Arroyo administration to turn the country around. If the administration fails to achieve its objective, it won’t be because of anything the international community might do. “Arroyo is going to receive a significant amount of goodwill from the international community,” Noland predicted. “The IMF (International Monetary Fund) is going to cut the Philippines some slack. Two years is a lot of time, and if Arroyo makes the right moves, we can see much substantial improvement in the Philippines during that period.”