Asian Financial Crisis

The Philippines hasn’t survived unscathed because it is well integrated into the rest of the region in terms of its trade flows. But the big plus has been that a lot of exports go to the US, and of course, the US has maintained good growth. This is good news. It means that the Philippines hasn’t had to rely on exports within the region, it can rely on US and European demand for its products. Its export growth has remained at 15-20% so its trade account has not been too disastrous.

However, the big problem for the Philippines is that it has a large amount of foreign debt compared to its gross domestic product and the size of its wealth. It’s not a very big country in terms of GDP, but it has big foreign debt from the past. Its currency has also slid with the rest of Asia’s currencies so the debt servicing bill is building up.
Perhaps more importantly it has started to run a budget deficit as the economy has slowed down and moved towards zero growth. It’s not been able to sustain a balanced budget domestically. Partly that’s due to the increased debt servicing and partly that’s because its governments have continued to spend on various favoured sectors.

The Philippines has a Congress which is very much one of pork-barrel politics where you invest to keep your constituency. Until recently Philippine Congressmen received a chunk of money which they could give to whoever they liked. So there was no central government control over the budget spending because of the way Congress was organised. Tax revenues were very small because nobody paid their taxes, particularly companies, and so the government was weakened in its ability to finance a lot of this pork barrel spending. And as the economy has slowed down, the deficit has grown.

The new government, under President Estrada, won the election on a populist political ticket, so that was a boost to the economy. He’s committed to helping the poor and righting the wrongs and inequalities within Filipino society while at the same time sustaining a stable budget and a prudent monetary policy. The question is: can you square those various circles to make it work? That remains to be seen. He plans to carry through across-the-board spending cuts but at the same time reduce the burden to the lower income sections in his budget.

The budget is being discussed with the IMF and it looks like the Philippines will continue to work with its programmes and targets. But the problem is that these spending measures by the President seem to be favouring his cronies, particularly cronies of the late President Marcos. So there are doubts among the business community that there is going to be a level playing field here on tax, spending and the budget. And with the economy slowing down, debts still high, the Philippines will have a tough year ahead.