Gloria Macapagal Arroyo: Politics is the problem

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The president of the Philippines, Gloria Macapagal Arroyo, speaks to Euromoney's Asia editor Chris Cockerill about the state of the economy, the battle against corruption and the future of the country after her term of office finishes.

Gloria Macapagal Arroyo,
president of the Philippines:
an uncertain legacy.

GLORIA MACAPAGAL ARROYO swept to power as the Philippines' president two years ago on a wave of middle-class protest against the corrupt incumbent Joseph Estrada. Many hoped her country would at last ditch the tag of Asia's under-achiever. But today the promises to stamp out corruption, substantially increase tax revenues, rein in the ballooning budget deficit, restructure and privatize the woefully inefficient public sector and make life a little more bearable for the desperately poor remain unfulfilled. Just what will Arroyo's administration's be known for other than a wasted opportunity?

Because of her government's inability to deliver the necessary changes, Arroyo announced at the end of December that she would not be seeking re-election. She was stepping aside, she claimed, because of a poisonous atmosphere and high-level political infighting that had made it impossible to push through tough policies. Cynics suggest the decision had more to do with the president's slumping popularity and likely defeat at the ballot box. But whatever the reasons, Arroyo has, if she doesn't decide to jump back into the electoral ring, just over a year in which to pep up a faltering legacy.

International investors have found such manoeuvrings unsettling. They suggest that by taking herself out of the political fray so soon Arroyo has become a lame duck. Who, they ask, will follow her now? After all, she doesn't have any plum political positions to hand out in return for desperately needed support.

Arroyo believes she is already disproving the lame duck analogy. She is quick to give examples of successes since her statement, such as her efforts to stamp out money laundering. On March 7, a week before a deadline that could have meant painful sanctions imposed by the Financial Action Task Force, she was able to push through a bill addressing the main legal deficiencies in the Philippines' anti-money-laundering regime. The Philippines will remain on a country blacklist until the new legislation is effectively implemented and it's unclear how long this will take. But David Fernandez, head of Asia sovereign research at JPMorgan, says: "The compliance with the FATF should certainly be noted and applauded. It means it will finally be sorted out and removes an important uncertainty."

There are, however, many more uncertainties that still need to be removed. The main problem Arroyo has to address is the country's budget deficit. To many it appears to have spiralled out of control. And it is this issue that has severely stretched the credibility of the Arroyo administration in the eyes of nervous foreign investors.

In 2001 everything looked to be going so well. Under Estrada the deficit was getting worryingly large. Following his removal, Arroyo, although not reducing it, held it steady at 3.3% of GDP. Buoyed with overconfidence, targets were set for 2002 that proved totally unrealistic. And despite indications early in the year that these targets were going to be missed by a large margin, the administration, and in particular secretary of finance Jose Isidro Camacho, maintained that the objectives would be met, or only just missed.

By the end of the financial year, the P130 billion target was missed by P82 billion to leave the deficit at P212 billion ($4 billion) or 5.4% of GDP. The good work of the year before lay in tatters.

During president Arroyo's interview with Euromoney, she points out that she believed the targets were unachievable from the start and blames her economic manager, Camacho. But as one analyst says of these comments: "It won't reflect too well on her for not taking responsibility. She is after all the chief executive."

This year's target is supposedly more achievable at P202 billion (4.7% of GDP). But many economists doubt this will be hit either.

The numbers released for the first quarter of this year have not been disastrous. The deficit reached P58.9 billion instead of the projected P55.2 billion. Collections by the Bureau of Internal Revenue are still causing problems and coming in under forecasts.

On April 24, Standard & Poor's finally lost patience and downgraded the Philippines from a BB+ to a BB. The country had been on negative outlook since October. S&P says that the reason for the downgrade was "the growing debt burden and fiscal rigidity that increasingly portray the country at the BB rating".

The finance ministry was quick to say that it was undeterred by the rating agency's decision. It claims: "The government has pointed out that the positive macroeconomic and fiscal developments of late will likely weaken S&P's observations in the next few months."

Dominique Dwor-Frecaut, an analyst at Barclays Capital in Singapore, says of the statement: "The only way S&P will change its observations is if the Philippines is able to hit its targets every month for six months. We need to see deeds."

Arroyo and her team of technocrats have just over 12 months in which to deliver.

Investors are questioning the credibility of the Philippines because of the budget deficit. How do you respond to these criticisms?

That is the only target that we didn't hit. [We hit targets on] the growth rate, the inflation rate, interest rates, the export growth, the tourism rates, dollar reserves. Even now our peso has strengthened. I don't think it's fair to say that we didn't comply with our promises. That was just one target. And that was because that target was set before September 11 2001. I wanted to change the target after 9-11 but my economic manager said 'no'. We made our target in 2001, so let's go for it in 2002. And they weren't able to do it.

But we have diagnosed why and we are working on the problem. And three months into the new year and in the last month of last year we have been hitting our targets.

The budget deficit is still seen as the litmus test. Do you agree it should be?

I don't agree with that because the bottom line is that the economy is growing. And that the economy is growing much better than other neighbouring countries and trading partners.

The economy is growing at around 5.2% a year, but the population growth is quite substantial as well.

Yes, but population growth is around 2% - much lower than the GNP growth rate.

Back to the deficit, you managed to hit your targets in the first three months of this year. But last year it is suggested that the targets were unrealistic.

But we did such a good job the year before, against my better judgement I said OK, and sure enough we would not make our original target. But it's because we did not change the target from before 9-11, whereas most other targets were changed.

But merely making the target bigger doesn't really solve the problem, does it?

Everyone else adjusted their targets after 9-11. We are doing that adjustment now and most economies made adjustments after 9-11. We didn't. We made all the other targets without adjusting growth rates and inflation. The deficit was the only one we didn't hit.

Was your decision not to run again for the presidency made out of frustration at not being able to get things done?

It was a realization that indeed I became president during a great period of political turmoil. In fact it is good that I was able to stabilize the political situation after I became president. Notwithstanding the disturbances even after I became president, such as 9-11 and the war against terrorism. Also the internal divisions that erupted in society in 2000 are still there, which means that very much poison is in the political air. And if I am going to succeed in the last half of my tenure then I must reduce that poison to the minimum.

I trace this problem to a common denominator - too much politics. And the best way to reduce the level of politics is for me to set the example. And I am very happy that after I set the example other sacrifices have been made. There was a lot of politics in our stock exchange and the president has said he will not re-run for election. The moderate labour unions have said that during this Iraq crisis they will not demand wage increases.

Analysts and banks are not so sure of your decision not to stand again. Some have said it makes you a lame duck. How do you respond?

Well I am not a lame duck. I got my money-laundering bill passed after my announcement. I have heard it said before and that is why I have to make the announcement early because I am still president. And I can use my power and authority to carry out reform free from the burden of politics. An example was the money laundering law and the computerization bill. So you can see that reforms that might have been difficult if I had so much political pressure bearing down on me were easier to accomplish since I could overcome the pressure and get the reforms through.

Corruption is often described as endemic in the Philippines. You have 15 months left to run and you want to tackle corruption. It is not a long time.

Well that is if you assume that I didn't do anything in the first two years of the administration. I have been working on it, but the results don't show themselves until some time later. But I am very happy the Economic Political Risk Consultancy has shown us this year to be lower in the corruption index and also lower in the ranking. We are one of the few countries where corruption has become less serious, so my efforts are starting to pay off. If we continue to improve the electoral process that is one big source of corruption taken away. I have also signed into law the new procurement system and objective bidding procedures. I have also started to work on a lifestyle check, especially on the Bureau of Internal Revenue.

What do you mean by a lifestyle check?

If there are officials who are living way beyond their means and cannot explain their wealth, then that is pretty much evidence they have been getting income from somewhere that was not correct.

We have passed the anti-money-laundering law. That has taken many administrations to get passed. So I would say that we have made headway. Corruption is endemic and it cannot be changed overnight and so you have to have some showcases. And the showcase is the Bureau of Internal Revenue. So as well as the lifestyle check, we have computerized the system so our revenue collection increased substantially. So much so that we are no longer behind our deficit targets. But at the same time we are working on congressional reform to corporatize the bureau to transform it into a lean and mean corruption-fighting machine. So these are things I have been doing for the last two years so I don't think that it is a case of what I can do in a year and a half, but in three and a half years.

Isn't there a fear that the next person to come in will undo your good work?

Well I hope not. That is why I intend to endorse a candidate.

Who will you be endorsing?

Since I don't want to do politics now, I will not answer that question. But I will be endorsing soon enough, maybe in the middle of the year or in the third quarter.

Are there any barriers that you can put up that will prevent an administration like that of your predecessor Joseph Estrada taking power?

Well if you are talking about corruption, while you cannot eradicate it overnight, we have put in a procurement law, we have put a money-laundering law in place, we have put the electoral power reform law in place, and we have put the asset management law in place. All of these reforms were done through the legislature and therefore they take on a character of irreversibility because it would have to go to another legislative process if they are to be revised. That is why I said it was very important that macroeconomic reforms should be legislative and not done by executive order.

What progress is there on electricity company Napacor and the privatization of transmission assets? International investors have been waiting for news.

It is on the block now. And we should be doing something in the middle of this year. We have divided Napacor into the power generation plants and the transmission network. So we are selling the transmission network first. And the power generators soon after.

Won't it be a tough sell in this environment?

Well it depends on the price. We do not need to sell it like a Rolls-Royce. We can sell it like a Cadillac. The important thing is not the price but the fact that we are going to privatize it, so that it doesn't continue to bleed our budget and contribute to the deficit.

Isn't there a temptation to wait until equity investors are more comfortable coming to the markets, rather than just giving it away?

It is not how much are we going to sell it for, it is the reforms that matter. I would rather sell it on schedule. We are a little behind in terms of the transmission company but on schedule with regards to the generating company.

How can the Philippines economy position itself against Chinese competition?

Well, I think experience is the best truth. Since China entered the World Trade Organization we went from a trade deficit to a trade surplus and we have seen great advances in tourism numbers coming from China. We sell a lot of tropical fruits and industrial equipment. We have a 10-year head start over many countries in terms of our English client. The bottom line is that we have enough to complement each other. We have turned our trade numbers to a surplus from a deficit so we have been able to position ourselves. We had our fears, but we didn't let them gobble us up. We looked for the complementaries and worked on them and they are paying off.

What effect did the war in Iraq have on the Philippines and on the economy? And what contingency plans do you have if conflict in the Middle East should persist?

We do have contingency plans. We have been planning for this since September, since the first ultimatum was made. There were all these announcements about oil shortage, the peso moving up to 60 or 100 to the dollar, spiralling inflation, but none of that has happened because we planned for it early enough. In the case of oil we stocked up on reserves. We now have the highest reserves of oil in our history - enough for about 80 days. And there is still more on the way. That is why we have been able to reduce our gas prices. This will keep our inflation rate down. It is the most stable we have had for a very long time in our history.

What do you want this administration to be remembered for?

I want to be remembered for being a transition from the old political system to the new political system. That is why I am working very hard to do the electoral reforms. I believe that I will be able to computerize the elections for 2004. And now we have the absentee voting law in place, which will give us a very good pool of very educated and aware voters amongst our overseas Filipino workers. We are also working on voter education.

After all I am the president at the beginning of the new century. And I became president on the crest of defiance of the old system of politics. So the political reforms will set in place a society that can begin to go back to the economic developments that we should have been having had our country not been interrupted by the different problems of authoritative dictatorship and modern corruption that led to the upheaval of 2000 and 2001.

Knowing what you do now about being president, what would you have done differently?

I would have adjusted the budget target earlier. But apart from that I would have done things the same way because the country was in political and economic turmoil.