Is the Philippines Finally Turning Around?

Growth is up. The deficit is down. President Arroyo has survived impeachment threats. The service sector is thriving. Yet much remains to be done

by Assif Shameen

Workers are hurriedly putting together the finishing touches on the International Convention Center in Cebu, one of the Philippines' oldest cities, ahead of a summit of East Asian leaders next month. No one, not even Philippines President Gloria Macapagal Arroyo, is sure whether the new convention center will be ready in two weeks to receive dignitaries from Japan, China, South Korea, and Southeast Asia. Indeed, a nearby hotel may be dragooned as a backup venue.

However the fact that the center is even close to completion is significant. It is all part of a concerted rebranding effort underway under Arroyo's leadership for this sprawling archipelago—long viewed as a politically unstable economic underachiever. "We want the region and the world to see that the Philippines has arrived," Arroyo said during an exclusive interview with BusinessWeek.com on Nov. 20.

Maybe Arroyo has arrived too, in a way. That she is even around to host the summit is nothing short of a miracle. A year ago, Arroyo's five-year-old administration was under siege. Almost daily street demonstrators called for her ouster in what was billed as "People Power III." That was not a good place to be, considering two previous people power waves of protest led to the removal of dictator Ferdinand Marcos in 1986 and Joseph Estrada in January 2001.

Deficits Almost Eliminated

Amid rumors of military coups (that never transpired), Arroyo also managed to narrowly avoid an impeachment trial in the Congress over allegations of government corruption and vote fraud. Along the way, though, she stayed focused on economic reforms, pushing through tax hikes to cope with the country's massive fiscal problems and ushering in other revenue-boosting measures. The economy is now in the best shape it has been since the 1950s. "I have said all along there is no gain without pain," she points out.

Economists have boosted growth forecasts this year to 5.6%—and to more than 6.5% in 2007. Chronic budget deficits have almost been eliminated in a nation that was under scrutiny from credit agencies as a government-default candidate. Moreover, foreign investors are testing the waters again. Foreign direct investments hit $1.2 billion last year and likely will grow to $2 billion this year based on preliminary data. "We are now ready for a take-off," Arroyo insists.

Analysts enjoy the Philippines turnaround story even though they say much more needs to be done. "Stronger economic fundamentals and growth are starting to feed off one another," notes Rob Subbaraman, an economist for Lehman Brothers in Hong Kong.

Long Way to Go

Indeed, he is so impressed with the turnaround that Subbaraman says "credit rating agencies should start rewarding the Philippines for its economic growth" with upgrades. "The reforms have reached a critical point where virtuous spirals are developing," he thinks.

Others warn against complacency. Manu Bhaskaran, a regional economist with consultancy Centennial Group in Singapore, believes that "although Philippines has made all the right noises, done a lot of the necessary things, and moved forward on painful restructuring and reforms, it still has a long way to go" because the rest of Asia hasn't stood still. "They need to build infrastructure, invest in education, deregulate, privatize state assets," he adds.

Still, none of this is to downplay Arroyo's successful shock therapy. She sold higher taxes to the public by declaring clearly the country was "in the midst of a fiscal crisis" about two and a half years ago. As a result, public sector deficit as a percentage of gross domestic product has fallen to 2%, from 5.5% in 2003. This year the Philippines budget deficit looks set to narrow and may be eliminated by 2008. A "balanced budget and lower public debt means there is money available to build infrastructure," says Cabinet Secretary Ricardo Saludo.