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Thursday, 26 April, 2001, 17:21 GMT 18:21 UK
Hope for Philippine recovery
Former president Joseph Estrada
Former president Joseph Estrada faces charges of economic plunder
The new president of the Philippines, Gloria Arroyo, has a considerable burden weighing on her shoulders.

The country is suffering from the US economic slowdown and faces an uphill struggle to win back investor confidence.

Only a few months ago the attempted impeachment of former president Joseph Estrada prompted foreign investors to leave in their droves, and threatened to arrest economic growth.

Gloria Arroyo, president of the Philippines
Gloria Arroyo: a cheerleader for economic reform
Mr Estrada's fortunes have since sunk to all-time low as he faces charges of economic plunder.

By contrast, the country's luck has shifted with the appointment of a new leader. As a trained economist, Ms Arroyo is welcomed by many as a cheerleader for economic reform.

"She has made all the right noises," says Edith Hodgkinson, a contributor to the Economist Intelligence Unit's country report on the Philippines.

"The International Monetary Fund is very pleased with her... and investors are far happier with this government."

In the 'firing line'

However, Ms Arroyo does face a serious problem in the shape of the US slowdown.

The Philippines ships about 30% of its exports to the US and is extremely vulnerable to any downturn experienced by its major trading partner.

"It's increasingly likely that there is going to be a hard landing, and the Philippines is in the firing line," says Paul Rawkins, a senior director in sovereign ratings at Fitch IBCA.

Exports on the decline

Most importantly, the country's thrusting electronics industry - which accounts for 60% of exports - has been severely dented.

The growth of the electronics sector was stagnant in first two months of the year, says the EIU's Ms Hodgkinson.

Over the last two years, exports have provided a big stimulus for the economy and contributed to a trade surplus of about $9bn in 2000.

Export growth
1999: 17%
1998: 16%
2000: 8%

In 1999, exports grew at 17% ($29.5bn), dropping to 16% in 1998.

Estimates for 2000 put export growth at 8%, while the forecast for this year is a mere 4%.

The sharp dip in demand for electronic goods, low commodity prices and a high oil price have together applied the brakes to the export sector.

As a result, the government is expecting economic growth to be at the lower end of its 3.3% estimate for 2001.

The EIU is forecasting lower growth of 2.7%. Last year, the economy achieved a 3.9% increase.

Congressional elections

The president also faces a more immediate problem.

Any changes she might have embarked on have been delayed by the closing of the Philippine parliament in February for Congressional elections.

The vibes are still good, but there has not been much scope to introduce new measures

Edith Hodgkinson

"The vibes are still good, but there has not been much scope to introduce new measures," says Ms Hodgkinson.

The country's budget for this year is still pending and there has been no landmark legislation.

Capital flight

Nevertheless, since Ms Arroyo took over, there has been some indication that the capital flight of last autumn has tailed off.

Between January and September, overseas fund managers sold 18.6bn pesos ($341m) in Philippine stocks, according to the Far Eastern Economic Review.

Meanwhile, consumers, who were slow to recover from the Asian crisis of 1997-98, practically stopped spending, while the more wealthy shipped their money out.

Economic neglect

National unrest during the latter period of Mr Estrada's presidency diverted attention away from economic policy.

Ironically, the Philippines survived the Asian crisis better than some of its fellow Asian countries.
The country has been slow to embrace economic reform

However, Mr Rawkins believes that the country was slow to embrace reform because it missed out on the wake-up call in 1998 that stirred Thailand, Korea and Malaysia into activity.

As a result the major challenges for the new government revolve around liberalising different sectors, particularly agriculture, and privatising industry.

The power industry, which suffered severe under-investment during the Marcos years, desperately needs private funding.

Already, Ms Arroyo has indicated that she will go ahead with the privatisation - a move that has cheered international observers.

In a recent country report, the ratings agency Standard & Poor's also pointed to "weak economic management", particularly the government's fiscal policy.

"Exemptions, as a result of cronyism, have allowed big businesses to slip through without paying tax," agrees Fitch's Rawkins.

But again, Ms Arroyo's stance against cronyism and her stated commitment to corporate and public governance promises reform in this area.

Hope for the future

Additionally, Ms Arroyo's supporters are expected to do well in the Congressional elections, giving her greater scope to overhaul economic policy.

However, until she can get back into the driving seat, observers are watching the Philippines with cautious optimism.

"It is still early days to make a clear assessment," says Fitch's Mr Rawkins.

"The country will be bounced around a bit by the US (economic slowdown) but at least we now have an administration that can handle it."

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See also:

22 Jan 01 | Asia-Pacific
Estrada faces state plunder inquiry
20 Jan 01 | Asia-Pacific
Challenges confronting Arroyo
20 Jan 01 | Asia-Pacific
In pictures: People power
02 Jan 01 | Business
Philippine economic crisis deepens
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