By Bruce Gale
July 4, 2007
The Straits Times

PHILIPPINE President Gloria Arroyo wants to spend her last three years in office concentrating on the economy. Now that the disruptive legislative elections are out of the way, she has the chance to do just that. The bad news is that she is unlikely to accomplish very much.

At first glance, Mrs Arroyo's chances of getting the country's debt-hobbled economy back on its feet look good. Safe from impeachment as a result of the strong performance of pro-administration candidates in the House of Representatives, Mrs Arroyo now wants to leave behind a positive legacy upon which her successors can build.

In a country where good news can be hard to find, the economy does seem to be a promising place to start. The economy expanded by 6.9 per cent in the first quarter, the strongest growth since 1990. Merchandise exports are up, foreign direct investment is rising (although still low by regional standards), and the inflation rate now hovers near a seven-year low.

Not only that, but Central Bank figures also show that for the first five months of this year the country's balance of payments chalked up a surplus of US$2.4 billion (S$3.7 billion), already exceeding the bank's full-year forecast of US$2 billion. The stronger external balance means that the country can now begin paying off some of its foreign debt.

So far, so good.

A closer look, however, suggests that it will not be easy for the President to take advantage of the economic upturn to set the country on the path of sustainable growth.

Some of the stumbling blocks are political. The election results were not really an endorsement for the President. Patronage politics ruled the Lower House elections, with local political clans determining the outcome in most areas.

In the race for the Senate, however, it was a different story. The opposition won a clear majority of the 12 seats on offer, while anti-Arroyo independents won two more. Moreover, the pro-administration candidates who were re-elected, such as Mr Edgardo Angara and Mr Joker Arroyo (no relation), were seasoned legislators popular in their own right rather than because of their perceived association with the President.

As an institution, the opposition-dominated Senate poses no real threat to Mrs Arroyo's position. But it can make it difficult for her to set the national agenda. Senators can rail against the President, hold high-profile corruption probes, and block legislation, for example.

They may also add to the air of political uncertainty by lending their support to demonstrations by non-governmental organisations and other groups protesting against the cost of living or the latest scandal involving the President or her close associates. Already, the strong peso has made life difficult for the millions of citizens who depend on remittances from family members working abroad.

Such developments are likely to become particularly common after mid-2008, when senators - almost all of whom regard themselves as potential presidential material - begin focusing on the 2010 presidential elections. In such an environment, it will be increasingly difficult for Mrs Arroyo to push through economic reforms that touch on the privileges and vested interests.

All these suggest that the President has just a small window of opportunity to establish her legacy before the country's ambitious politicians come to regard her as little more than a lame duck.

Last month, Mrs Arroyo appeared to be on the right track, showing her concern over revenue shortfalls by sacking the head of the Bureau of Internal Revenue (BIR), the government's main tax collection agency. Revenue increases are crucial if the government is to have enough money to fund badly needed spending on infrastructure and thereby encourage private-sector investment.

But in order to make the move credible, she will have to show her determination in other ways as well. The BIR, which accounts for about two-thirds of state revenues, has yet to bring about the conviction of a tax evader since it launched a campaign against tax evasion in 2004.

There is also much to be done to improve bureaucratic efficiency. A recent World Bank study, for example, noted that Philippine port and terminal costs are the highest in Asia. And this in a region where port operations are becoming increasingly competitive.

The nation's electricity supply is also both expensive and unreliable. The point was underlined late last month, when a major transmission line tripped, bringing the Metro Rail Transit system in Manila to a halt and disrupting electricity supply to Bulacan, Pampanga and Tarlac. Pampanga is home to the Clark special economic zone, where Texas Instruments Inc has recently decided to set up a new US$1 billion plant to make mobile phone chips.

The Philippine government is trying to privatise the National Transmission Company (Transco), but Congress has not yet extended its 25-year franchise - a necessary prerequisite before a new round of public bidding can begin. The government has tried to sell the assets, estimated to be worth close to US$2.7 billion, at least four times so far, but has failed to generate enough interest.

Official corruption is yet another problem.

In the meantime, the economic turnaround could easily come unstuck. Officials may hail the current increase in foreign direct investment, for example, but much of the foreign money now flowing into the country is simply going into the stock market - from where it can quickly be withdrawn should circumstances change.

The bottom line is that the Senate elections have weakened the President at a time when she needs to be operating from a position of strength in order to implement the structural reforms necessary for sustainable growth. Unless Mrs Arroyo can somehow repair her relations with the opposition-dominated Senate and convince the nation's bureaucrats that she means business, little is going to change.

With the rest of the region far more responsive to market forces, it may not be long before the Philippines is left behind once again.

Dr Bruce Gale, a copy editor with The Straits Times, is the author of a forthcoming book entitled Political Risk Management: Case Studies In Southeast Asia.

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