The Philippines – the New Rising Tiger in Asia

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Howoong Chun's picture

The Philippines – the New Rising Tiger in Asia

The Association of South East Asian Nations is an organization consisting of 10 South East Asian countries, created to accelerate economic growth and facilitate regional stability. A great divergence of growth strategy and political stability is observed within ASEAN. Ease of doing business is not an exception; ASEAN countries have different fundamentals and principles that set dissimilar rules for businesses. Among the 10 countries, the Philippines will enjoy the greatest advancement in business environment in the next five years, given the political momentum for reforms and positive macroeconomic outlook despite high electricity cost.

To examine the change in business conditions in the next five years, a comprehensive evaluation on each country’s status quo and future in consideration of momentum and timing must be made. The Doing Business project uses 10 criteria to evaluate how easy it is to start and direct a business in a given country. To project the criteria into future, the timing and momentum of government policies, changes in macroeconomic indicators, and fundamentals must be evaluated. Here, the duration of interest in this evaluation is five years, from 2013 to 2017. Any changes that yield results before or after the duration of interest should not be considered.

The Philippines suffers from chronically high electricity costs and there is no sign of alleviation in the next five years. ASEAN neighbors will not see much improvement in getting electricity either given that the energy sector changes very slowly. The electricity rate in the Philippines is the highest in South East Asia for multiple reasons.1 First, 80% of the power comes from fossil fuels that are pegged to international benchmarks. Due to the geographical limitation of being an island nation sitting on a tectonic fault, power delivery in the Philippines is very expensive and nuclear power is not an option. Government subsidy is unlikely because the government has been pushing for fiscal austerity. In contrast, Vietnam has been investing heavily in its energy sector. Vietnam is building nuclear power plants with the help of Japan and Russia. The problem is that the first plant to become operational opens in 2020, which is beyond the duration of interest.2 Until then, Vietnam will retain its title as the worst ASEAN country in supplying electricity for business. Much is the same for other ASEAN countries, and energy issues will continue to affect businesses without much improvement into 2017.

Despite challenges from the energy sector, the continued push for transparency and regulatory improvements spearheaded by President Benigno Aquino III will yield significant return within the duration of interest. The Department of the Interior and Local Government now requires all local government units to disclose financial activities. The Department of Budget and Management and the Department of Finance launched websites to make governmental information accessible to everyone.3 Deregulation of registration and construction permits by Quezon City cut out 78 procedures in the construction permit process and shortened the time required to get a Mayer’s permit to 30 minutes from 6 days in 2012.4 The Philippine Business Registry has now been founded to continue the success story of Quezon City across the nation.5 The Aquino administration proved its determination for transparency and justice when the Philippine authority arrested the former President and impeached Chief Justice of the Supreme Court for state fund misuse and undisclosed foreign assets. Multiple government agencies have started using bidding procedures and establishing internal control policies.6 The efforts were noted and the 2012 Corruption Perceptions Index now ranks the Philippines more transparent than Indonesia or Vietnam for the first time.7 The momentum to provide fairer and more supportive government services that has been building up since 2010 will start to make its return.

Two other countries in ASEAN, Malaysia and Brunei, are also making similar progress through political and legal reform. They will, however, witness smaller improvements in doing business than the Philippines due to the timing of reform and political conditions. Malaysia has simplified the business registration process and made governmental services available online.8 These measures, however, were implemented well before President Aquino began reforming his country, and many of them are already in place as of 2013. Brunei has also seen improvements in business conditions thanks to the reforms on reducing bureaucracy and decreasing the cost of running a business. Just like the Malaysia’s case, the reforms in Brunei have already factored into the current state of business environment. In addition, the new measures were easy fixes for the sultanate drenched with natural resources. Brunei has been on the state of emergency since 1962 under the leadership of Sultan Hassanal Bolkiah Mu’izzaddin Waddaulah; many aspects of business that rely on the consistency, transparency of government agencies and judiciary system will continue to suffer unless Brunei begins to prioritize economy and business over politics and religion. Improvement cannot be expected if Brunei continues to give Sharia cases precedence over business cases in courts.

The tides of macroeconomic trends in the Philippines are also turning; the benefit from the macroeconomic progress has begun to realize as demonstrated by the national credit rating. In 2012, both Moody’s and S&P have upgraded the Philippines’ rating to a notch below investment grade. Government budget deficit remained stable at 2-4% when the government was decreasing the debt-to-GDP ratio from 71.4% (2004) to 40.5% (2012). The foreign exchange reserves have reached an all-time-high level of $85.8 billion and the current account-to-GDP ratio has remained positive since 2004. The strength of foreign exchange integrity and trade indicators is important since the Philippines denominates a portion of its sovereign debt in US dollar. Sin tax introduction, estate tax enforcement and trade record reconciliation initiative for customs collection will further improve fiscal health and leave much room for tax break programs and infrastructure investments in future. S&P has already put the Philippines outlook to positive and expects to do another upgrade in late 2014 or early 2015.9 The exit from junk status gives a country access to a huge pool of capitals seeking investment-grade opportunities. Filipino entrepreneurs will soon enjoy cheaper capital from stronger financial market that comes with the exit.

The pursuit of noninflationary growth is another green signal for business in the Philippines. Volatile inflation rate at a high level increases uncertainty and costs of running business. The inflation rate has been fairly stable within the target of 3-5% in the past 3 years (2010-2012). The Philippian Peso has also been appreciating in the past 4 years thanks to the rush for high yield investments from developed countries, positive current account to GDP ratio and credit rating upgrade. The currency appreciation increases domestic purchasing power, decreasing inflationary pressure in the economy. The Philippines, in the past, has witnessed very high fluctuation in inflation rate ranging from 0.1% (2009) to 21.1% (1991). However, the M2 money supply pattern indicates that the volatility in inflation rate will decrease in future. The M2 supply velocity fluctuation has decreased substantially since 2006; in conjunction with sound fiscal policy and enhanced inflation targeting from the Bangko Sentral ng Pilipinas, businesses will have less concern with regards to inflation in the next five years.

Indonesia and Laos have also shown improvements in macroeconomic indicators. Due to timing of progress and poor credit system, the two countries will reap less benefit from macroeconomic trends than the Philippines. Indonesia saw the government debt-to-GDP ratio decreasing from 95.1% (2001) to 25% (2012) and inflation rate stabilizing to 5%. Foreign currency rate has stayed stable and foreign exchange reserves stands at $108.8 billion. Credit rating agencies have already taken notice of the trends and upgraded the Indonesia credit rating to investment grade in January 2012. This means the windfall benefit from acquiring the investment grade title has already been factored into the current state of business environment. Laos has also seen government debt-to-GDP ratio falling from 81.7% (2005) to 38.6% (2012). GDP annual growth rate has accelerated to 8% and inflation rate has begun converging to 5%. The magnitude of improvement, however, is smaller than that of the Philippines, and the Laos credit facilities remain elementary. Furthermore, the Laos government bonds are not rated. Laos must first establish a better financial system in order to see improvement in doing business at the level projected to be seen in the Philippines.

All ASEAN countries understand that they can unlock growth potential only if private sectors can function to its fullest. The pace at which each country is responding to the demands for business needs, however, is dissimilar. The Philippines began the comprehensive reform in 2010 with the inauguration of the Aquino administration. In contrast, 9 ASEAN neighbors have either taken reform measures before the duration of interest or have just begun picking up momentum to provide better environment for private sector. Given the timing and momentum of legal reform, push for transparency, and encouraging macroeconomic trends, the Philippines will outperform neighbors in providing most tangible results during the duration of interest despite high electricity cost.

References: 

1. Petra Gerlach-Kristen, Robert N McCauley, Kazuo Ueda (2012). BIS Working Papers No 389 Currency intervention and the global portfolio balance effect: Japanese lessons. Bank for International Settlements. Retrieved from http://www.bis.org/publ/work389.pdf

2. (2013). Quarterly Inflation Report Q&A 13th February 2013. Bank of England. Retrieved from http://www.bankofengland.co.uk/publications/Documents/inflationreport/co...

3. Jana Randow, Jeff Black (2013). Weidmann Warns Governments Against Trying to Weaken Euro. Retrieved from http://www.bloomberg.com/news/2013-02-11/weidmann-warns-governments-agai...

4. Philipp Hildebrand (2013) No Such Thing as a Global Currency War. Retrieved from http://www.ft.com/intl/cms/s/0/637ac3c8-7442-11e2-80a7-00144feabdc0.html...

5. John Maynard Keynes (1936). The General Theory of Employment, Interest, and Money, pp. 382-3. Palgrave Macmillan.