Philippines: investment grade but could do better

Manila’s business elite give outgoing Philippines president Ninoy Aquino a B+ for economic management.
The Philippines has flourished under President Benigno Aquino but some of his election promises remain unfulfilled
The Philippines has flourished under President Benigno Aquino but some of his election promises remain unfulfilled

When Benigno “Ninoy” Aquino III hands administration of the Philippines to a new president in May next year he will be leaving behind an economy in good shape. Since assuming the presidency in 2010 the populist leader has guided the country to greater prosperity by eschewing the privileges of office and rejecting corruption.

According to World Bank and World Economic Forum rankings, the Philippines is now more transparent, more competitive, and more business friendly than it was five years ago. Annual economic growth between 2010 and 2014 averaged 6.2%, making the Philippines the second-fastest growing economy next to China out of 57 countries surveyed by Bloomberg. Foreign direct investment in that period is also up 479%, while the manufacturing sector has grown by 8% and and tax receipts are up by 62%.

Investor confidence in the country is reflected in the decision by the global rating agencies to elevate the sovereign to investment grade status in 2013 and the stellar performance of the local stock exchange. Starting at around 3,000 in July 2010, the benchmark PSEi index breached 8,100 in April this year, closing at new all-time highs on 119 separate occasions under the Aquino administration.

“The economy has clearly benefited from sound financial management,” Eduardo Olbes, head of wholesale banking at Security Bank in Manila, said. “A strong stance against corruption and a sustained focus on managing the budget have been viewed positively.”

Like any leader whose term coincides with an upswing in the economic cycle, Aquino has basked in the glow of momentum. But in reviewing his performance there are a number of specific election promises that require closer scrutiny.

One of these promises was to improve the country’s infrastructure. In 2010 Aquino announced a list of 50 projects to be built through a reinvigorated public-private partnership programme. By July this year he reported that his PPP team had awarded 10 of these projects – more new projects than the three previous administrations combined but well below target.

At least four of these are small social infrastructure projects such as school modernisation initiatives. Some of the more ambitious projects – like the $10 billion upgrade to Manila’s international airport – haven’t materialised and are unlikely to be put out to tender until after Aquino leaves government.

“Ten out of 50 projects is a success rate of 20% which I would hardly call a pass mark, especially when the list of 50 projects is only a sub-set of what actually needs to be completed,” said one investment banking head who has advised on some of the tenders but who declined to be named.

Bigger projects like the $1.2 billion 44.6km Cavite Laguna Expressway – which was awarded to Metro Pacific Investment Corp in June – have faced a number of delays in the approval process. Four pre-qualified bidders, including MPIC, waited nearly 12 months between submitting their technical bids and finally learning the outcome.

Investors voice concerns about the way government departments throw curveballs after final documents have been signed off. The legal environment is unpredictable and investors must wade through a morass of provincial and municipal regulations.

As an example, builders of the new Mactan-Cebu airport found they couldn’t break ground on the project earlier this year when it was revealed that the land where the terminal was to be built was still being used by the Air Force. Similarly, the long-awaited extension of the NAIA Expressway in Manila is currently running behind schedule because the winning concessionaire, San Miguel Holdings, wasn’t given full right of way to the site.

Aquino had hoped that VIP guests attending this month’s APEC Economic Leaders’ Meeting in the capital city would pass along the new road but now organisers are scrambling to find an alternate route.

“A lot more needs to be done to improve our infrastructure,” said Olbes at Security Bank. “The [poor] state of our roads, ports, airports, and mass transit systems impact the cost of doing business in the country.”

Manila’s business elite also want to see tax reforms that encourage further investment in capital markets. “Investors now pay a withholding tax on the interest income on bonds following a decision by the tax bureau to change its interpretation of the rules,” said the anonymous senior banker in Manila. “The bureau makes indiscriminate decisions on how the rules should be applied without changing the rules themselves, and 99% of the time the judgements are in favour of the government, not investors.”

Arbitrary tax decisions are blamed for the slow implementation of new financial products, such as real estate investment trusts. A legal framework for Reits has existed in the Philippines since 2009 but a hefty tax on asset transfers announced after the law was passed obliterated the attractiveness of the structure as a yield play.

“This issue has been on the table for years and so far our calls to have the tax removed have fallen on deaf ears,” Hans Sicat, chief executive of the Philippine Stock Exchange, told FinanceAsia. “We hope the next administration can see its way to a compromise.”

Aquino stood on a platform of increasing tax revenues, and on this promise he has delivered. Receipts are up 62% since 2010 to an estimated Ps1.67 trillion in 2015.

Though business leaders question whether this has been achieved at the expense of long-term forward planning.

Ed Francisco, who heads the largest local investment bank in the country – BDO Capital – believes the reason foreign companies choose to set up their regional headquarters in cities like Bangkok and Kuala Lumpur instead of Manila is because of the favourable tax incentives in those countries.

“The Aquino government has been vocal about its successful track record in attracting FDI and, while the figures are certainly higher than in previous years, it is still a lot lower than in other Asean countries,” Francisco said. “This would change if the tax regime was more investor-friendly.”

Francisco would also like to see a stronger commitment to fixing the miscommunication between national and local governments, and an improvement in the integrity of contracts. “Local governments aren’t in sync with the national government and there have been instances where projects approved at the national level have found themselves caught up in local red tape.”

He and others want the national government to take the lead on important investment issues and to force local authorities to toe the line. That would probably help in the effort to stamp out corruption.

Aquino promised to wage anti-corruption warfare and he did rail against several key legal figures, including the chief justice and the ombudsman, until they eventually resigned. He also fought off a threat of impeachment in 2013 around a long-running pork-barrelling scandal. But as Iker Aboitiz, agri-businessman and member of the powerful Aboitiz family, told FinanceAsia there hasn’t been one real high-profile conviction.

“To make a dent in corruption we need to see some eminent people caught and jailed for their activities. This would send the message to foreign investors that the Philippines is serious about wiping out graft,” Aboitiz said.

¬ Haymarket Media Limited. All rights reserved.
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