A series of reforms initiated by President Benigno Aquino III in the last few years have pumped spending into infrastructure and opened key industries to outside investors. The reforms prompted a series of upgrades to the Philippines’ credit ratings and echo initiatives taken in the region as it prepares for the inauguration of the ASEAN Economic Community (AEC) in 2015.
Pace Of Reform
With many tariff barriers already reduced to zero in 2010 as part of the ASEAN Free Trade Area, much of the recent reform effort has focussed on legislative change and improving competitiveness to ensure that Philippine companies are open to the opportunities provided by regional integration.
As the deadline for the implementation of the AEC draws closer, campaigning for the Philippines’ presidential election in 2016 will intensify (see overview). “Aquino is now in the last two years of his term,” said Eugenia Fabon Victorino, an economist at ANZ in Singapore. “Presidents cannot be elected for a second term, so if you look at history the past few presidents started to lose their mandate because that is when you see politicians start to shift their loyalties. That could hinder Aquino’s attempts to carry through on his reforms.”
The Department of Trade and Industry has dubbed its plan for the AEC the 4Cs – compliance, competitiveness, communication and collaboration. Introducing 439 measures by April 2014, with a compliance level of 87%, the Philippines is among the ASEAN member states with the highest rate of compliance. The focus on competitiveness has included not only the administrative practices of the national government, but also the regional, district and local levels. The Cities and Municipalities Competitive Index, first introduced in 2013, assesses the performance of local governments on three measures: economic dynamism, administrative efficiency and infrastructure. Some 136 cities and 399 municipalities took part in 2014, with Makati City emerging as the most competitive. It showed regional governments in IloIlo and Davao performing well in terms of efficiency and infrastructure, respectively.
Road Maps For Development
For industries, the Board of Investment has been devising a series of developmental road maps since 2012. The joint chambers have called on the government to craft similar plans for the agricultural sector, which employs about a third of all Filipinos, but lags the wider economy. Drafted in discussion between government officials, industry experts and business leaders, the road maps are designed to chart the future strategy of each sector. So far 24 plans have been agreed on covering key sectors such as electronics, the country’s leading manufacturing export, and the automotive industries.
The documents are also intended to provide a foundation for the government’s annual Investments Priorities Plan, which provides incentives to industries seen as key to future growth. The expectation is that the private sector will take the lead, supported by a government prepared to address policy failures and make any necessary institutional changes.
Communication is also crucial, as some 90% of Philippine businesses and the country’s largest employers are small and medium-sized enterprises (SMEs). Outreach would explain free trade agreements (FTAs) that the Philippines has signed, as well as on the potential benefits from the AEC, amid concerns that regional integration could crowd out domestic companies. For example, senior officials have urged clustering for SMEs, supporting a policy of so-called “coopetition” rather than competition among individual companies.
Credit Rating
The government’s broader reform efforts have already caught the attention of the credit rating agencies, and the Philippines’ ratings have returned to investment level. Standard and Poor’s, which upgraded the country to BBB in May 2014, has put the Philippines above countries like Russia, India and Brazil. According to the governor of the Central Bank of the Philippines, Amando Tetangco, the upgrade was “recognition that the structural reforms we have put in place continue to gain traction, as demonstrated by the significant improvement in the country’s position in international governance and competitiveness surveys.” Those indices – from the World Bank’s Ease of Doing Business Survey to the World Economic Forum’s (WEF) Global Competitiveness Index – tell a story of steady improvement. Even so, the Philippines continues to lag behind its ASEAN neighbours. In both the World Bank and WEF surveys, for instance, it ranked only sixth out of 10 ASEAN states. Indeed, when it came to indices related to innovation and logistics its overall performance had actually declined.
Tackling Corruption
ost importantly, corruption remains an urgent obstacle to the government’s agenda. As President Aquino himself put it in his 2013 State of the Nation address, in reference to the notorious Bureau of Customs, “instead of collecting the proper taxes and preventing contraband from entering the country, they are heedlessly permitting the smuggling of goods and even drugs, arms and items of a similar nature into our country.” The public shaming of the service underlined Aquino’s determination to reform the agency, widely blamed for hampering the growth of trade and investment in the Philippines.
Demonstrating his resolve, the president replaced the agency’s top leadership, redeployed intelligence staff and restructured the organisation to limit opportunities for graft. The authorities also initiated investigations into those suspected of illegal dealings.
At the same time, the authorities introduced a series of efficiency initiatives designed to streamline import and export procedures and make Customs activities more transparent. For example, the creation of the Philippines National Single Window is a key component of each ASEAN state’s commitment under the AEC.
The Philippines has begun a phased implementation involving 40 different government agencies including the Bureau of Customs and Board of Investment. As well as a website to track imports, it aims to have a fully electronic processing system by June 2015 as well as pre-shipment checks for all goods packed by container, as well as a central valuation reference for commodities. “The successful implementation of the reforms will go a long way in addressing the perennial problem of smuggling, which contributes to revenue losses for the Philippine government and, more importantly, deters the proliferation of legitimate businesses,” the Joint Foreign Chambers of the Philippines said in a statement. “As the Philippines moves into the AEC and in the future expands its trade and investment treaties with the Asia-Pacific and European economies with the Trans-Pacific Partnership or an EU-Philippine FTA, a corrupt Bureau of Customs will not be acceptable to the country’s regional as well as global trading partners.”
Limits On Investment
The impending inauguration of the AEC has also turned attention to other issues that have long hampered the Philippines, for instance its entrenched and dominant business elite. Attempts to introduce competition in telecommunications and the local aviation market had some success in the 1990s, but successive governments have found it difficult to pass a competition law. As a result, the Philippines remains the only founding member of ASEAN without clear laws to counter unfair trade practices and monopolistic activities. Given that such a legal framework forms part of the Philippines’ commitments under the AEC, President Aquino has championed proposals for a Fair Competition Law. However, as political allegiances begin to shift in the run-up to the 2016 elections it is by no means certain the bill will become law.
Further to this, the 1987 Constitution sets out strict limits on foreign participation in the economy – the “negative list” includes mass media, engineering and professions such as medicine – with the cap set at 40% in many other industries. The Philippines attracted just $3.86bn of foreign direct investment (FDI) in 2013, a tiny fraction of the $122bn invested in the ASEAN region as a whole. Despite these challenges, Aquino has had some success in bringing down barriers, for instance passing legislation to enable foreign investment in the domestic banking sector in the middle of 2014. There has however been little progress in opening other sectors to foreign investors.
Energy Woes
Although the country’s electricity network was privatised after a major crisis in the 1990s, the law was not fully implemented, Prices remain high and service is erratic. Power prices are among the most expensive in Asia at $0.22 per kWh. Under the Philippine Energy Plan 2012-30, capacity is expected to rise to 25,800 MW by 2030, from 16,250 MW in 2012, but demand is projected to rise to 29,330 MW over the same period. The extra capacity will require major improvements in infrastructure for distribution and transmission. At present, power grids across the archipelago are not connected, according to business advisory firm KPMG. It estimates the energy sector will require investment amounting to $25bn by 2030. The firm notes that Philippine power companies – which are mostly drawn from the country’s dominant conglomerates – could learn from the examples of more competitive markets elsewhere. Manila’s dominant power company Meralco, for instance, has a 70% stake in an 800-MW combined cycle gas plant in Singapore in a joint venture with Hong Kong’s First Pacific.
Regional Connections
The Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area ( BIMPEAGA) is designed to deepen cooperation between the neighbouring regions of the four ASEAN nations and to share natural resources in addition to infrastructure. The Malaysian state of Sarawak has invested heavily in controversial hydropower in the past two decades and is likely to have far more electricity than it needs.
The BIMP-EAGA has already had some success in improving connectivity. A more direct shipping route between the Mindanao cities of Davao and General Santos with Manado in Indonesia began operations on August 31 2014 – a few months later than anticipated – reducing costs by more than half and cutting the journey time by a third. This is expected to be useful for the Philippines’ food exporters. Authorities are also looking at a route connecting Palawan with Sabah and Brunei, while regional air links and an undersea fibre optic cable are also on the drawing board.
Across the Philippines, limited liberalisation has helped in some areas, notably in aviation, where the privatised national carrier, Philippines Airlines (PAL), has faced competition from low-cost carriers such as Cebu Pacific and Philippines AirAsia. Malaysia-based AirAsia, which operates in the Philippines as a joint venture, is seeking official approval to secure nearly complete control of the Philippines AirAsia to expand routes and buy more planes. However, despite being in private hands, PAL benefits from the fiscal incentives and guarantees it had previously enjoyed as a state-run airline. Moreover long-term underinvestment in infrastructure means the airport and terminal facilities cannot support this expansion. Compared to its ASEAN rivals, which are counted among the world’s best, Manila’s Ninoy Aquino International Airport is a by-word for congestion and delays. While the ASEAN Single Aviation Market should help smooth out some of these issues, a recent report from the CIMB ASEAN Research Institute noted that Indonesia and the Philippines have yet to accept terms on third, fourth and fifth freedom flying rights.
Forever Young
With a median age of 22.2 years, the Philippines has one of the youngest demographic profiles in the region. While limited job opportunities at home and persistent underemployment have prompted many to head overseas, better jobs are slowly becoming available. The biggest success in this regard has been the business process outsourcing industry. From humble beginnings at the turn of the century, it is now a world leader, providing work for more than 900,000 people, revenues of around $15 billion a year and innovations going beyond the traditional call centre, such as research and financial back-office services. The industry is expected to benefit significantly from the integration of the ASEAN economies.
As the Philippines becomes more integrated over time into regional and global supply chains, the electronics sector also stands to gain, although progress will be hindered by the poor infrastructure and regulatory constraints. Fellow ASEAN members Cambodia, Vietnam and even Myanmar are aggressively marketing their textile and footwear products, while also boasting lower labour costs than the Philippines. Under the AEC, they will also have longer to open their markets.
Free Movement
With the official launch of the AEC drawing ever closer, some of the Philippines’ better known brands have begun to venture overseas, mostly into ASEAN, but also further afield. The fried chicken company Jollibee has outlets in Brunei, Vietnam and Singapore and is planning to move into Malaysia and Indonesia as part of a two-year expansion strategy. The fast good giant, one of the Philippines’ most recognisable brands, plans to take advantage of the proposed free movement of labour that will come with the AEC to deploy Filipino managers to open new stores and train local staff. The onus will now be on the government to deliver stronger laws and institutions, thereby putting the Philippines in a position to benefit from the opportunities of ASEAN’s single market and production base.
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