Three major Philippines business groups are confident that the stunning performance of the economy in the first quarter of the year will prompt President Aquino and his economic advisers to institute more reforms that will benefit the country.

“What that [first-quarter economic performance] gave businessmen is hope. We have become hopeful that changes are already being implemented,” said Vice President Donald Dee of the Philippine Chamber of Commerce and Industry (PCCI) in a telephone interview.

The performance of the economy in the first quarter of the year as measured by gross domestic product (GDP) exceeded expectations of analysts and even those of local businessmen.

The PCCI, the Employers Confederation of the Philippines (Ecop) and the Philippine Exporters Confederation Inc. (Philexport) all said the 7.8-percent GDP growth was a “pleasant surprise” for them.

Dee said credit should go to President Aquino, who has shown his sincerity in pursuing his good-government platform.

Ecop President Edgar Lacson said the performance of the economy in the first quarter has also given businessmen more confidence.

“The first-quarter GDP showed that the private sector and the government could deliver good performance,” said Lacson also in a telephone interview.

But while the economy’s performance in the first quarter was a cause for celebration, the three major business groups said more work is needed to be done to sustain a high economic growth rate in the coming years.

“What we should look into is how we can sustain the first-quarter performance. Huwag tayo tumingin sa isang quarter lang,” said Philexport President Sergio Ortiz-Luis Jr.

The three groups said election spending was a key factor in the phenomenal first-quarter GDP growth rate from January to March.

“Without election spending, GDP growth in the first quarter could have settled anywhere from 6.6 percent to 6.8 percent,” said Dee. But others said government spending also contributed to the growth.

Ecop’s Lacson said the government must now focus on strengthening the country’s manufacturing sector, where more jobs could be created.

“In manufacturing, even unskilled workers and those who are not college graduates could be hired,” he said.

To make the manufacturing sector of the Philippines more attractive, Lacson said the government should seriously look into bringing down the cost of power, address yearly salary increases and create a more stable policy environment.

“In the case of salary increases, a petition is filed every year and it is always granted. It’s a one-size-fits-all system and does not take into account the capability of companies to give it,” said Lacson.

For the export sector, which has been battered by the appreciation of the peso and recession in the country’s major markets, Philexport pushed for more investments in the product development and export promotions.

“We cannot leave the export sector to chance. Funds should be allocated to the sector and exporters should be made to decide what they would do with it,” said Ortiz-Luis.

Dee said the PCCI would go for an antitrust policy and the rationalization of fiscal incentives once the 16th Congress opens. He said the group also wants a review of the country’s taxation system, in particular the high corporate tax.

“Corporate tax in the Philippines is very high at 35 percent, unlike in other Asean members like Thailand, where corporate tax is only 20 percent,” he said.

All three business groups also agreed that the government must continue with infrastructure spending so the Philippines can catch up with the rest of its Asean neighbors.

Data released by the National Statistical Coordination Board (NSCB) showed the country’s economic growth was the highest posted under the Aquino administration and was the highest growth in major East and Southeast Asian economies.

Socioeconomic Planning Secretary Arsenio M. Balisacan said the country’s growth was fueled by business confidence and consumer optimism. He said while the government’s construction expenditures have risen to over 40 percent, private-sector spending on infrastructure has also increased by over 30 percent.

The NSCB said services expanded by 7 percent; industry by 10.9 percent; and the agriculture sector by 3.3 percent. The government said heightened domestic demand led to the local manufacturing sector growing at an impressive rate of 9.7 percent.

Also stirring growth is the construction sector, which grew 32.5 percent from January to March this year, indicating a good positioning toward an industry-led economy.

Original article in Business Mirror (the No 1 Business Daily Newspaper in the Philippines)

A UKTI Report from the British Embassy Manila.
An earlier-than-expected upgrade for the Philippines given by London-based Fitch Ratings. This was not unexpected and represents an important milestone rather than a break in the trend or end point. But, for the Philippines, important and historic recognition of the economic progress it has made.

The change and why it was made.

On 27 March, Fitch upgraded Philippines bonds from BB+ to BBB- therefore awarding the Philippines its first ever investment grade rating. The upgrade was widely expected to occur although this was a quarter or two earlier than most predictions. Economic growth of 6.6% in 2012, a reduction of the debt to GDP ratio and a reduction of the foreign denominated share of debt from 53% to 47% were cited by Fitch as main reasons for the upgrade. Increasing remittances as judged by US$ deposits, bucking both the gloomy global trend and the lingering effects of the global financial crisis, were other positive factors. Monetary policy was another area cited as a source of increased confidence. The Central Bank’s policies were deemed effective in maintaining price, foreign exchange and financial sector stability.

The macroeconomic numbers are strong but the intangibles also contributed to the early upgrade, including confidence in anti-corruption efforts and the political stability achieved post -2010 including passing of important economic legislation in 2012 such as sin tax reform and reproductive health bills. The upgrade puts the Philippines on the same investment standing as India and Indonesia. The stock market rose 2.74% on the day of the upgrade announcement and is currently 100% higher than when President Aquino took office in 2010. On the heels of the sovereign bond rating upgrade, Fitch also upped ratings for local banks, the national utility company (NAPOCOR), and a large telecom company (PLDT).

Areas for further development
Fitch mentioned areas where the Philippines remains below par, including average income (PHL: $2,600 vs the BBB- median: $10,300) and tax take (PHL: 18.3% vs the BBB- median: 32.3%). It will take a while before the Philippine average income increases to even half of the median. Poverty remains a major concern. Progress should be possible more quickly on the tax take. In addition to the sin tax legislation, efforts are underway to improve the skills of tax officers and to root out corrupt officials, although the results have been mixed. So far close to 200 tax officers have been dismissed from service for ineptitude or corruption, and 135 cases of tax evasion have been filed, with a total tax value of £700 million. However, 18 of the cases have been dismissed due to lack of evidence and there has yet to be a successful conviction, in part due to the pace of the legal system.

Comment
After a history of poor financial mismanagement and considerable indebtedness, the Aquino Administration can be justifiably content with the upgrade. Although the upgrade had been well signposted the local reaction was jubilant with the Administration, not unfairly, branding this as validation of its economic credentials and the hard work it has put into improving the business environment. The Head of the Central Bank and Finance Minister are both well respected in business circles and this has helped to increase confidence in the markets. The other rating agencies are likely to follow in short order. In amongst the self congratulation, there is also an understanding that consistency and sustained action is necessary and of the scale of the challenges that lie ahead. As Commissioner Henares of the tax agency said, “We’re trying to change 100 plus years of wrong doing.” Making sure that the changes endure from this administration to the next will increasingly become the focus of domestic and market analysts. But the overall direction of travel is positive.

Editor’s note:

National Credit Ratings
In certain markets, Fitch Ratings provides National Ratings, which are an assessment of credit quality relative to the rating of the lowest credit risk in a country. This lowest risk will normally, although not always, be assigned to all financial commitments issued or guaranteed by the sovereign state. National Ratings are not intended to be internationally comparable and are denoted by a special identifier for the country concerned. The performance of National Ratings will also not be strictly comparable over time, given the moving calibration of the entire scale to the entity or entities with the lowest credit risk in a country, whose creditworthiness relative to other entities internationally may change significantly over time.

‘BBB’ National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.