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Philippine economy will soar -- if politics do not get in the way

MANILA (AFP) - The Philippine economy is expected to enjoy robust growth in 2007 -- provided the perennial problem of politics does not get in the way, analysts say.

A raft of positive economic figures in recent weeks and the passing of the 1.13 trillion peso (23 billion dollar) budget has been greeted positively by international investors.

The California Public Employees' Retirement System (CalPERS) recently raised its rating of the Philippines, placing it above China, India, Indonesia, Malaysia and Thailand in terms of the countries in which it invests.

With an investment portfolio valued at 194 billion dollars, CalPERS is the largest pension fund in the United States.

"This positive development is expected to encourage global fund managers to increase investments in the country as they take their cue from a global leader in the investment industry," Foreign Secretary Alberto Romulo said.

Stable inflation and interest rates, a stronger currency and revived investor confidence as reflected in portfolio investment trends all point to better prospects for the economy, a recent report by the Institute for Development and Econometric Analysis (IDEA) said.

The Philippine Stock Exchange composite index last week hit levels last seen before the Asian financial crisis 10 years ago.

Remittances by some eight million overseas Filipino workers last year rose 19.4 percent from 2005 to a record 12.8 billion dollars. This year remittances are expected to top 14 billion dollars, according to a report by the Economist Intelligence Unit.

Economic Planning Secretary Romulo Neri said he was confident gross domestic product (GDP) this year would grow at 6.1-6.7 percent, compared with 5.4 percent for 2006.

The budget for 2007 should see an increase in spending on infrastructure and services, which are expected to jumpstart economic activity, Neri said.

This is only the third budget President Gloria Arroyo has seen passed since she came to power in 2001.

Under Philippine law, if the budget is not passed by congress, the government is forced to revert to the previous budget.

Last year, for example, the government had to re-enact its 2005 budget, which limited its ability to increase spending on much-needed infrastructure projects, schools and social services.

But the slowdown in government spending did have a positive impact on the deficit, which last year fell to 62.2 billion pesos (1.27 billion dollars), less than half the government's 125 billion peso target ceiling for the year.

The government intends to limit its budget deficit this year to 63 billion pesos.

Even the private sector is bullish.

Jaime Augusto Zobel, chairman of Ayala Corp., one of the Philippines' largest conglomerates, said "the fundamentals are in place for sustained economic recovery and growth."

"Key sectors of the economy are presenting opportunities that are creating multiplier effects on other industries," he said as his company announced record net profits for 2006.

But while the budget problem seems to be out of the way, political roadblocks remain.

Arroyo is facing congressional and local elections in May, which are widely seen as a referendum on her administration.

Campaigning is expected to be fierce, raising concerns the government will start giving out cash to win votes.

Whoever wins the election, there are likely to be charges of cheating and political bickering for months afterwards.

"I think GDP should be on the high end this year, especially after the elections are over," said Alan Araullo of Regina Capital Development Corp.

"That's the only obstacle. Everyone is worried about the elections," he added.

The government also has earned an unfavourable reputation of reversing policies in the face of political pressure even though officials say such practices will not continue.

Henry Schumacher of the European Chamber of Commerce, told a recent forum of foreign correspondents that in 2007, "politics, as usual, clouds (Philippine) economic prospects. That's the overriding message, election year or not."

He cited pending bills changing tax laws and other government policies as "creating uncertainties which potential investors don't like.

"This drives investors away. This delays the construction of much-needed infrastructure," he said.

"Investors are deeply concerned about the sanctity of contracts," he added, warning that "the changing regulatory environment... (is) clear evidence that long-term investment in infrastructure is risky."

Despite opposition accusations of corruption and poll fraud, Arroyo has been credited with passing crucial fiscal reforms that have brought the once-ballooning budget deficit under control.

But even the International Monetary Fund, which expects 5.8 percent growth this year, warns Manila that it must "sustain the reform momentum" and maintain investor confidence in the markets to lessen volatility.

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