ROLANDO ANDAYA Secretary of the Department of Budget & Management

Reforms boost investor confidence and growth

The Philippine economy is growing at its fastest rate for 17 years, boosted by a record level of remittances, electronics exports, the call centre industry and domestic consumption. In the first quarter of this year, gross domestic product increased by 6.9 per cent, while the interest rate fell to an all-time low of 2.9 per cent. Last year, GDP rose by 5.4 per cent – above 5 per cent for the third consecutive year.

Together with fiscal reforms, sustained growth and declining inflation have strengthened market confidence and raised the country’s competitiveness as a destination for foreign investment. In the first four months of the year, investments approved by the Department of Trade and Industry rose by 194 per cent to 73.3 billion pesos (£79 million).

There has also been a significant increase in employment and the creation of new jobs. According to the National Statistics Office, the unemployment rate dropped in April to 7.4 per cent, or 2.7 million unemployed, from 8.2 per cent the previous year. Underemployment, which affects a further 6.4 million Filipinos was also down, to 18.9 per cent, from 25.4 per cent.

Fiscal consolidation has been a priority and the government succeeded in reducing the national deficit from a historic peak of 5.4 per cent of GDP in 2002 to just 1.1 per cent in 2006. President Arroyo’s reform programme has involved prudence in government spending and moves to improve tax collection. There have been efforts to improve efficiency, cut red tape and eliminate corruption.

A landmark development was the increase in the value-added tax (VAT) rate from 10 per cent to 12 per cent and the broadening of the VAT base. “The biggest economic driver is the extended VAT,” says Rolando Andaya, Secretary of the Department of Budget and Management. “After that was implemented everything followed. The stock market gained confidence when they saw that we were serious about putting this into effect.”

The need to cut debt has to be balanced with the need to spend in order to spur further investment and job creation. Last year, expenditure on vital infrastructure was limited when the government was forced to reenact the 2005 budget. This year, spending on infrastructure has been increased by 75 billion pesos, while a further 134.7 billion pesos is being directed towards improving the education system.

According to Mr Andaya, there are plans to spend 527 billion pesos on infrastructure over the next four years. He says it is essential to prioritise areas such as transportation, irrigation and energy to stimulate growth. “The aim of the government is to have a balanced budget by next year, but everything that can be spent on infrastructure this year will be spent.” Education and health services are other priorities.

Finance Secretary Margarito Teves says he is confident of meeting this year’s deficit target of 63 billion pesos, despite an underperformance in revenues of 52 billion pesos in the first six months of the year. He says tax collection will be intensified and any shortfall will be covered by the proceeds from planned sales of state assets during the second half of the year.

Bourse breaks all records

One of the clearest signs of confidence in the economy at home and abroad has been the exuberant performance of the Philippine Stock Exchange. Stocks posted their fastest growth rate in 13 years last year. Net foreign buying almost tripled and total market capitalisation of listed companies reached an all-time high.

Similar, if not even better, results are expected this year. In July, the index went above 3,800 points, breaking through the previous all-time high of 3,447.60 points set in 1997, just prior to the Asian economic crisis. In the first half of the year, listed companies raised almost 46 billion pesos, a 78 per cent increase compared to the same period in 2006. A further boost to the market is expected in the second half of the year with the launch of a number of big initial public offerings (IPOs).

The government expects to raise around 105 billion pesos from privatisations, including the sale of state holdings in San Miguel, the country’s largest beverage and food firm, power utility Manila Electric and PNOC-EDC, the geothermal subsidy of Philippines National Oil Company.