Nobody’s lame duck

A SUPPLEMENT TO EUROMONEY/SEPTEMBER 1997

PHILIPPINES: NO END TO PROGRESS

According to the constitution, Fidel Ramos’s term as Philippine president must end next year. Amid denials that he is seeking a second term, his government is pressing ahead with its programme of tax reform and deregulation. The country’s economic prospects continue to look good – even the recent devaluation of the peso may turn out a blessing in disguise. Maggie Ford reports

When the Philippines was in trouble after speculators attacked the peso and drained the foreign exchange reserves, the IMF was quick to respond, first with $710 million cash for the central bank and then with a public pat on the back. Michel Camdessus, fund managing director, commended the Philippines for its “timely and decisive action to safeguard macroeconomic stability”, in stark contrast to the weeks of dithering in Bangkok that were disturbing regional markets.

Manila’s ability to face reality may, in part, reflect the country’s rather puny official reserves – down to $9.5 billion after the defence of the peso – but it is also a legacy of its long association with the IMF. However, the decision to go quickly to the fund in July was not as easy as it might have been five or 10 years ago; for that month the Philippines was due to graduate from a period of IMF surveillance.

Completion of the fund programme is an achievement frequently cited by Philippine president Fidel Ramos and his officials as evidence of their skilled management of the economy. It also features as a key plank in the election platform of Ramos’s party, which faces considerable competition from other less financially experienced candidates in the presidential poll next year.

In fact, formal graduation from IMF tutelage was put off briefly, owing to a delay in passing tax reforms through the Philippine senate, but only until the end of this year. But, confident that the reforms will go through, local IMF representative David Nellor is preparing to depart for a new office in Japan, from where he will include the Philippines in an arm’s-length watching brief.

Nellor confirms Manila’s progress over the past few years. “When this three-year programme is completed with the passing of the tax reforms, it will be the first time the Philippines has been able to finally sign off a set of reforms,” he says. “In the past they have been thrown off the track of reform before the programme was completed. This time, there has been enormous change, especially in trade reform and in deregulation. The management of the macro economy has produced strong, stable growth, comparatively low inflation and a manageable current-account deficit. The markets appreciated it.”

The gains over the past five years have been outstanding. Gross national product has almost doubled, from $53 billion in 1992 to an estimated $93 billion this year. Average annual growth rates have risen from 0.3% to more than 5%. Per capita GDP has gone up from $833 to $1,250, despite an estimated 15% growth in the population over the period.

Growth in manufacturing has improved from a decline of 1.7% in 1992 to a rise of 7.5% this year. Inflation has been maintained in single figures throughout, and exports have jumped from $9.8 billion five years ago to a forecast $25 billion this year. A 24% increase in exports was recorded in the first quarter this year, the highest in Asia, and double-digit export growth has been recorded throughout the period.

Imports have also risen at double-digit levels as Manila brings in capital goods and raw materials to develop export industries. But the large number of Filipino workers who work abroad – and who remit $5 billion or more back home every year – have maintained the current-account deficit at a manageable level of around 4% of GDP. External debt has remained stable at just under $40 billion, but the debt-service ratio has dropped from 17% in 1992 to 12% today, in line with the expanding economy.

The government, resisting the lobbying inevitable in a democracy, has maintained fiscal rectitude: the budget has been in surplus since 1994 and revenues have grown strongly, from Ps243 billion ($8.5 billion) in 1992 to Ps480 billion this year.

The Ramos administration’s achievement in managing the economy of a democratic state in a technocratic style, reminiscent of more authoritarian countries in Asia, has not gone unnoticed. “The Philippine policy process includes all views,” says Nellor. “The government is strongly committed to transparency. The press, the congress and the business community, along with other interest groups, are all included in the debate. In other countries, views are sought and then the government takes a decision. Here, interested parties are involved right up to the final stages. It takes a long time, but the positive aspect is that once reforms are passed, they won’t be overturned. In the long run, it produces more stability.”

But on the ground it’s a rocky road. The media lambasted central bank governor Gabriel Singson and finance minister Roberto de Ocampo over the peso devaluation, blaming it on the latter’s alleged remarks to a reporter in Singapore. When vice-president Joseph Estrada accused Ramos of using advance knowledge of the devaluation to boost his election coffers by manipulating funds, even hardened brokers were open-mouthed at his chutzpah.

Fears of future political instability, or the election of an economically illiterate or irresponsible government next year, are likely to colour sentiment towards the Philippines until the poll results are known. Ramos comes to the end of the single six-year term he is allowed in June and already the political climate is heated, with a raft of presidential candidates lining up.

A realignment of party loyalties is under way and a new political landscape may take several months to emerge. The possibility of amending the constitution to allow Ramos himself to stand still lingers. The Philippine leader repeatedly denies that he has any intention of prolonging his presidency, a fundamental issue because the long period of authoritarian rule under the late president Ferdinand Marcos remains fresh in the public mind. “My one and only presidential term will end on June 30 1998. I will not seek another term, period,” Ramos told journalists late in July, repeating the pledge in his annual state-of-the-nation address a few days later. A former general who held office under Marcos but then backed his removal, Ramos is seen as an honest statesman, who has brought peace and the beginnings of prosperity to the islands and boosted the country’s poor international image. He regards his best achievement as the boosting of Filipinos’ confidence in their ability to succeed.

Most Filipino businessmen expect Ramos to endorse a candidate from his Lakas NUCD party nearer the election, perhaps as early as December. There are already three party candidates: defence secretary Renato de Villa, a former general regarded as something of a Ramos “clone” with clear military support; house speaker Jose de Venecia, a traditional politician with good national backing and a strong funding base; and finance secretary Roberto de Ocampo, a successful technocrat who lacks political support.

Outside the party, current vice-president Estrada, a flamboyant populist and former actor, commands strong popular support among poorer Filipinos, the majority of voters. Estrada is the figure most feared by the business community, which believes that in office he could revert to damaging, pork-barrel policies. Rumours that Estrada now has a team of former World Bank employees in place to improve his economic pronouncements have slightly allayed concerns. Senator Gloria Macapagal Arroyo, a popular politician with an economics background, is also reckoned to stand a chance, especially if she joins Ramos’s party; she has now eclipsed another woman politician, Miriam Defensor Santiago, who came a creditable second to Ramos in the 1992 election.

Ramos has started presidential training sessions for candidates in an effort to promote continuity. Trainees, who spend a day at the presidential palace watching Ramos in action, so far include de Venecia and de Villa. “I want to avoid backsliding during the transition,” Ramos says. “We need competent and visionary leaders to make sure these reforms aren’t reversed.” He has also signalled his intention to play the role of elder statesman – operating outside the government but available for advice if necessary.

Ramos is expected to work strongly for the election of his chosen candidate and will not allow electoral realities to turn him into a lame duck. In a speech studded with jibes about congressional delays, the president outlined in July a hefty legislative and policy programme for his last 12 months in office.

Top of the list is rationalizing an out-of-date and inefficient tax regime. The reforms involve corporate and personal income tax rates, incentives and improvements to administration. A start has been made in boosting government revenues through better collection of value-added taxes, now extended to services. But few Filipino companies pay corporate tax, largely because of corruption.

Planned changes include the rotation of tax collection officers to reduce opportunities for payoffs, and bank-endorsed accounts for paying taxes. Because tax assessment is difficult, one idea is to assess corporations on the basis of their return on assets. Tax would be calculated from a notional return on assets at a low rate, probably less than 1%. Companies that reported no return on their assets would be subject to audit. As an incentive to honesty, those admitting to income which would produce a tax bill higher than the return-on-assets figure would pay the lower rate.

Ramos’s determination to press on with nitty-gritty issues in the face of carping criticism and politically-inspired delay is perhaps one of the Philippines’ greatest assets. “He’s achieved in five years what Thatcher took 10 years to do in Britain,” says Keith Craig, managing director of WI Carr in Manila. “The policy environment is secure; everyone’s singing from the same songsheet.”

Nor has there been any let-up in the push to improve infrastructure, especially in the capital, where traffic is approaching gridlock. A large range of projects are under construction, including a light-rail commuter service and a series of big new expressways. There is a strategic plan to link the airport and industrial facilities of the two former US military bases, Subic Bay and Clark, to the capital.

The government’s infrastructure budget for this year of $4.6 billion represents a rise of 30%, and is targeted at power, transport, water and telecommunications. A report by Price Waterhouse identifies seven projects costing more than $500 million where foreign companies are likely to be involved. They include a railway project and a thermal power plant on Mindanao, an island in the south which is now being developed following years of political instability. A peace agreement between Muslim separatists on the island and the Ramos administration was signed last year.

Manila’s water supply has been privatized and will undergo substantial improvements, and a new terminal is planned to spruce up the capital’s crowded and outdated airport. Private operators are installing new telephone lines and cutting waiting times. Cellular operators have also made substantial strides.

Foreign direct investment, much of it in infrastructure, has increased strongly since 1992 when reforms started and the government moved to solve problems such as a power shortage that had caused continuous power cuts in the capital. An innovative build-operate-transfer scheme was put in place, designed to ease red tape for infrastructure investors. In 1996 foreign direct investment approvals reached $9 billion, up from just under $6 billion a year earlier and compared with less than $1 billion in 1991. Improvements in legislation governing public-works contracts are also planned, to open the way for more investment in this sector.

Meanwhile, analysts see little downside for the broad economy in the peso devaluation. To maintain the currency at its former level would have required higher interest rates and more central bank intervention, causing a fall in reserves and slower growth. The higher borrowing costs would have put a squeeze on the economy and on the banking system. By the end of July short-term interest rates were still at 25% as the bank mopped up after the peso raid, but were on a declining trend. By year-end they are expected to return to 15% or less, although further falls in the value of the currency could put paid to these calculations.

The currency decline is expected to affect growth and inflation. The government’s year-end inflation target of between 6% and 7% is still likely to be met after a low rate of 4.5% in the first half of the year, but the bottom end of the range has been revised up to 6.3%. Growth, originally forecast at between 7% and 8% this year, is now expected at the lower level.

A cheaper peso may boost exports, which are already doing well. In addition to a recovery in textiles and garments, there has been a surge in exports of electronics, a sector which is picking up substantial foreign investment attracted by a labour force that is well educated and speaks English. Import price rises following the depreciation could also help to narrow the trade deficit.

Import growth had already moderated by May to an annual rate of 9%, while exports rose 22%. Analysts believe the trade deficit will stand at $14.5 billion, rather than a forecast $14.9 billion. A reduction is forecast the following year. The improvement should flow through to the current account, where the deficit is forecast at 4.5% of GDP.

Ramos believes the peso devaluation may be a blessing in disguise, boosting competitiveness and export income, reducing the trade deficit and promoting a more global orientation. “It’s a small price to pay for long-term stability,” he explained in his state-of-the-nation address. Nellor of the IMF agrees. “Further defence would have meant sacrificing all the gains of the past few years. The decision to float the peso was correct.”

Gift of the gab

“Gabby is a good guy.” So says Philippine president Fidel Ramos. But after months of press criticism, a botched yankee issue and a failed attempt to prop up the currency, Gabriel Singson knows it’s a lonely job being a central banker. He talks to Maggie Ford

Gabriel Singson, governor of the Philippine central bank, has seen it all before. After 42 years as a career central banker, with only three years spent in other posts, his perspective on the currency markets is one of the widest in south-east Asia.

Nor is he any stranger to upheaval: in recent years assassinations, attempted coups d’état and the transition to democracy have created turbulence in the financial markets as well as on the political scene.

The recent exchange-rate turmoil, which spilled over from Thailand to the Philippines and other south east Asian countries, was not quite so traumatic in Manila as elsewhere. “In 1956 the peso was fixed at two to the dollar,” says Singson. “In 1965 it was devalued to Ps3.90 to the dollar. In 1970 it was floated and dropped to Ps5.10 to the dollar. Our currency has swung between Ps25 and Ps29 to the dollar three times this decade. That’s nothing compared with the situation in 1983, when capital flight pushed our reserves down to $600 million and we had no access to foreign funds. The Philippines almost went bankrupt.”

Happily there is little danger of that these days, but July’s attack by speculators trying to push down the value of currencies in south-east Asia came as a shock to the region. For most of the previous 18 months Singson and his colleagues in neighbouring countries had been battling against the opposite problem – trying to stop capital inflows causing an appreciation of their currencies.

“More than $13 billion flooded in over the past few years,” says Singson. “In 1996 we were net buyers of the dollar to the tune of $4.64 billion and this continued until the Thailand problem surfaced in April this year.”

The reversal of sentiment came so rapidly that many banks were initially left flat-footed. Coping with currency appreciation was becoming familiar terrain as currency traders tried to take advantage of well-managed high-growth economies and high interest rates in the region. Central bankers were focused on keeping their currencies down so that their export-driven economies did not become uncompetitive, rather than coping with rampant sellers.

Strategies varied: when the market decided that the dollar-peg path followed by Thailand was to blame for its faltering economy, sentiment quickly switched in other countries as well. Indonesia, which followed a managed float policy aimed at devaluing the rupiah by up to 5% a year, and supplemented this strategy with a wide intervention band designed to transfer risk to speculators, avoided some of the earlier turmoil.

The Philippine central bank had also avoided pegging its currency to the dollar for most of the decade. But intervention designed to stop the currency from appreciating since late 1995 had effectively stabilized the rate at a little over Ps26 to the dollar. The attempt to hold the currency down looked like an effort to establish a peg. “Oh no,” broker WI Carr wrote in a letter to clients displaying the tell-tale chart. The peso duly plunged, initially losing more than 11% of its value, later stabilizing, at least temporarily, 8% down.

But economic analyst Michael Taylor, reporting for WI Carr on the currency turmoil after the devaluation of the baht, detected a level of realism at the Philippine central bank that was not matched in Bangkok. His judgement that Manila would not “go to the mat” for the currency was soon proved correct. For the history of the plunging peso has given one clear advantage to governor Singson over his counterparts in the region: when serious trouble looms, he has no qualms about turning immediately to a key source of aid – the IMF.

Unlike Thailand and other countries where officials feel political or other constraints against seeking foreign help in a crisis, the Philippines decided to stop intervention and rapidly drew down a $710 million IMF facility to boost its foreign reserves. The central bank had spent almost $2 billion in its brief defence of the peso before abandoning the struggle.

The events of the past few months have raised Singson’s profile in the international and domestic markets, something that a central banker often wishes to avoid. In Shanghai late last month for a meeting of Asian central bankers to discuss the currency crisis, he talked to his colleague Rerngchai Marakanond of the Thai central bank, who had stood out against moves to seek IMF aid for the battered Thai economy.

“On the Friday, he seemed worried,” Singson says. “On the Saturday, he seemed fine. On the Monday I heard he’d resigned. In some ways I envied him – he’s been released. He’s a liberated man.”

Aged 68, Singson is a graduate of the University of Michigan law school and was appointed to run the central bank when its independence was boosted by president Ramos in 1994. He has two years to go before his term of office expires. For a conservative central banker, the rough and tumble of Philippine domestic politics is sometimes a heavy cross to bear. In the wake of the devaluation, activists set up a “Sack Singson” movement and press comment was derogatory.

“Politics don’t bother me much,” he says, “although I’d prefer not to be criticized.” Businesspeople have been supportive. The central bank has been voted the best government agency by the Makati Business Club and by the Philippine chamber of commerce and the house of representatives.

The governor also gets strong backing from the presidential palace. “Take a look at our peso notes,” president Ramos told critics last month. “The two people whose signatures are on it [Ramos and Singson] were born on the same day in the same place. The message is: Gabby is a good guy.”

Indeed, the democratic and open-minded attitude prevailing in Manila has even come in handy when dealing with fractious international investment bankers, whose behaviour can sometimes create the kind of highly charged political environment in which Philippine officials are used to working.

Following the peso devaluation, a queue of international bankers led by ING Barings, JP Morgan and Chase, lined up outside governor Singson’s office, offering to launch bond issues to raise money for the bank’s coffers. They are still queuing as governor Singson considers what will be the best way to approach his next foray into the international capital markets. The last one resulted initially in embarrassment and some unflattering publicity, but eventually achieved what the bank wanted: an above investment-grade yankee at a keen price, setting a benchmark for the country’s borrowers.

In February the central bank mandated six investment banks led by Salomon Brothers to raise up to $1 billion in the markets.

A debacle followed. The six investment banks squabbled over the terms of the mandate, including the size and division of the fee, the status of the underwriters, the format of the bond issue and the distribution. By the time the bank governor and his team had been taken on a roadshow to the US, market conditions had deteriorated and the bond issue was pulled in April amid recriminations all round.

The relaunch was arranged in late June, just before the currency drama hit the markets. Singson decided to apply the tried-and-true Philippine principles of transparency to the deal. All the bankers were asked to offer a fully-underwritten deal so there was no fighting over who got what.

The five banks, Salomon Brothers, Morgan Stanley, JP Morgan, Merrill Lynch, ING Barings – less Citibank, which declined to participate second time around – were invited to write down their offer and place it in a glass box. The bids were opened by central bank officers in the investment bankers’ presence and the most favourable, winning bid was circulated. The winner, perhaps unsurprisingly, was Salomon Brothers.

The yankee raised a total of $500 million in two tranches – one 30-year, $400 million tranche at 184.5 basis points over US treasuries and a 100-year tranche at 190bp over.

“To stop this bickering, we decided to ask the bankers to put their money where their mouth is and hold an auction,” says Singson. “It was open and transparent and after that there was no complaint. We were very happy with the result.”