Has Islamic finance taken its opportunity?
1 June, 2008Get up to speed with online broking
1 June, 2008Euromoney, June 2008
It was all going so well. In the last three years the Philippines has been the poster child of emerging markets fiscal policy, turning a crippling deficit into an almost balanced budget. But having done all the hard work, it may all be derailed, thanks to the twin threats of the soaring oil price and rising food prices.
It’s worth recalling just how bad things once were in the Philippines. In 2004, government debt was equivalent to 79% of GDP, and interest payments on that debt were eating 37.3% of all revenues. That meant more than a third of all incoming money, in a poor country battling a host of challenges from El Nino to the oil price, was going straight to banks, rather than to roads or education. Fixing the situation involved a lot of pain: broadening the tax base, completely reforming the tax collection mechanisms, pushing through privatisations that had been deadlocked for years, shifting funding policy from G3 currencies to the local debt markets, and dedicating money that could have been spent on social services on bringing down the debt load instead.
But by the end of 2007 it was done: a budget deficit of just P12.4 billion, or 0.2% of GDP. And then came the food price crisis, with rice prices hitting US$750 a tonne in April, more than double the rate a year earlier. “We don’t know what will happen in the months to come… it’s going to be stressful,” says Margarito Teves, finance secretary for the Philippines. “The issue of balancing the budget is not a sacrosanct goal at this point in time. Some of these things are really beyond our control.”
That’s a sad admission. But the problem the Philippines has is that it is self-sufficient in neither of the commodities whose price has so dramatically escalated. “We are not as fortunate as other countries who have oil, and we have challenges with food,” he says. “It’s a double whammy.” At just under 90% self-sufficiency in food, it’s better placed than some; but when the tradable stocks of rice disappeared from the market earlier this year, the Philippines was hard hit, unable to buy the supplies it needs for its people.
“We have not really pushed self-sufficiency [on food] as a policy because in the past the supply of rice internationally was available,” Teves says. The gradual removal of supply from the international markets, coupled with a failure to push through a planned irrigation program and increasing input costs such as fertiliser, has made self-sufficiency more of a priority. “We need to stress food security: 88 or 90% [self-sufficiency] is still a bit risky given the situation we are faced with today.” He says in three to five years the country aims to reach 95 to 100% sufficiency.
Like many countries in the region, the Philippines faces a challenging environment for monetary policy. Central banks like Bangko Sentral ng Pilipinas must decide which is the greater of two threats: flagging growth caused by a slowing US economy; or inflation. In fact, the Philippines is one of the only countries in the region to be loosening monetary policy at a time when others in the region are tightening it or trying to keep it in balance. Teves calls the situation “a dilemma, because we have a large number of people who are still below the poverty level, and inflation is a major factor in terms of their well-being and ability to cope. At the same time, we also need to make sure we retain a higher level of growth because we need to provide jobs for people.”
The only bright spot has been the increasing strength of the peso against the dollar, which has at least partially offset the impact of the oil price, but even so, at US$120 a barrel, “it’s going to hurt us,” Teves says.”I wish it would come down lower than it is right now, but we don’t have control over it.”
It’s certainly not just the Philippines that faces this dilemma. “Food price inflation across the region is likely to press higher, reflecting not only supply shocks but also strong demand growth,” notes HSBC economist Frederic Neumann in a recent note. “Policy makers will have to address the issue head-on, as neglect will lead to second-round effects and deepen inflation.” Neumann argues that Vietnam and Indonesia are furthest behind the curve in adapting monetary policy to deal with price inflation; “Vietnam has negative real policy rates in double digits.”
All sorts of wild and wonderful ideas are coming out of Asian central banks under this pressure: a proposal from Thailand suggests an OPEC-styled rice cartel, while India’s finance minister, P Chidambaram, recently mooted banning commodity futures.
From where Teves stands, there is little option for the Philippines but to keep doing what they already were, chiefly improving efforts on tax. Teves wants tax revenues to hit 15% of GDP this year, which looks achievable from 14% now; he expects privatisation to make less of a contribution this year, though. “I’d like Congress to help us in terms of rationalising our fiscal incentives,” he adds. “Right now there is a heavy emphasis on income tax holidays. We would like incentives to be more practical and really helpful to those who are starting business, and to work on some of the red tape.”
There’s another warning light too. The Philippines benefits enormously from the millions of its people who work overseas, even (in fact especially) those who work in low-paid domestic helper jobs in Hong Kong, Singapore and the Gulf. Their remittances to families back home have in the past been a vital capital inflow, and in previous years have gone so far as to counteract rises in the oil price. Now they, too, seem to be slowing, perhaps as a consequence of the flagging US economy, where many Filipinos are based. “I hope that is just an aberration,” says Teves. “They help us.”
