FOR: The President and CEO FROM: Strategic Planning Office (SPO)

SUBJECT: Investment Prospects in the Philippines - Executive Summary

AS instructed, submitted here with is the SPO update and assessment of prospects for investments in the Philippines one year after the change in government. As in previous reports, the main sections are Political/Security, Economy/Business, and Recommendations. Here are the report highlights:

Political/security
1.    The Philippines remains secure and stable, despite tensions with China over disputed waters and islands in the South China Sea. Both nations are expected to avoid hostilities, although diplomatic protests and military posturing may continue. If China’s more assertive posture continues, the Philippines will likely boost security ties with the United States. It is also pressing for a code of conduct to avoid conflict in disputed areas, with either China’s agreement or America’s backing.

2.    President Benigno Aquino 3rd continues to enjoy positive net approval, trust and satisfaction ratings, although they have fallen by double-digits since late 2010. Due to economic difficulties as well as Aquino’s reputed poor work ethic, his ratings may drop again in midyear, though still stay positive. But there is no reported threat of widespead unrest or extra-constitutional moves against the government.

3.    Domestic security has deteriorated somewhat due to increased attacks and extortion by the communist New People’s Army, perhaps encouraged by the President’s inaction over the NPA’s more aggressive stance. However, the eight-year ceasefire with the separatist Moro Islamic Liberation Front has held well, although there are small-scale terrorist incidents in the south.

4.    The President’s clout was amply demonstrated in the Ombudsman’s impeachment by the House of Representatives in March, and her resignation before her Senate trial was to begin last month. Palace influence, including budget releases, also led Congress to pass a bill postponing to 2013 this year’s election of regional leaders and legislators in the Autonomous Region in Muslim Mindanao (ARMM).

5.    Nonetheless, President Aquino has lost some stature due to the resignation of his widely respected Transportation Secretary, reportedly over Aquino’s pressure over policies and projects affecting allies and associates. The opposition and media critics have now jumped on this recurring tendency of the President to show favor toward officials in his camp. His push to defer the ARMM election and appoint officers in charge to take over the region, will also stir unrest, since 51 percent of Filipinos, including a big majority in Muslim Mindanao, oppose postponement.

6.    A further political complication, former senator and losing vice-presidential bet Mar Roxas and others in his camp are to be appointed to top positions; Roxas is the new Transportation Secretary. This may intensify frictions between his camp and the President’s own supporters as well as those of Vice-President Jejomar Binay, a longtime loyalist of the Aquino family. If the President is unable to rein in politicking within his government, the resulting dissonance would further erode his clout and portray him as ineffective and weak, while encouraging challenges to his power.


Economy/business
7.     The economy has continued its unprecedented run of more than a decade of uninterrupted growth, despite global recession, war in Central and West Asia, and domestic challenges to security and stability. But after near-record growth of 7.7 percent last year, GDP has slowed to 4.9 percent expansion in the first quarter of 2011 compared with a year ago. However, the January-March growth rate did accelerate to 1.9 percent increment over the previous quarter, up from 0.5 percent-0.6 percent in the last two quarters of 2010.

8.    If the quarterly growth rate of 1.9 percent is sustained throughout 2011, then the annual expansion would be a robust 7.8 percent. But certain factors may drag down the economy. Among them: rising inflation and interest rates, diminished business and consumer confidence, and the June-August rainy season, which has delayed infrastructure. Thus, while the Budget Department is trying to catch up on delayed fund releases, with at least P4 billion made available the past week, the major public works outlays will have to wait till September.

9.    The economic boost from external sources are also down. Merchandise exports rose 4 percent in March, down by half from 8.3 percent in February. Foreign direct investments fell by half in the first quarter from a year ago, although total investment was up. Remittances from overseas Filipinos, which averaged 15 percent annual growth in the past two decades, increased just 4 percent in March, down from 6.2 percent the previous month. Meanwhile, a recent survey showed rising unemployment. All these factors point to reduced incomes and spending, which would further dampen GDP growth.

10.     Regarding the much-touted private-public partnerships program (PPP), which SPO was specifically tasked to evaluate, there is no significant progress to report since the investors conference last November. Of the 10 PPP projects planned for bidding this year, only one is ready: the management contract for Metro Manila’s commuter train lines. However, the change in Transportation Secretaries has delayed this rollout. Another problem: part of the rail network, the MRT system, is already in private hands, acquired by the group of utilities and infrastructure magnate Manuel Pangilinan of Hong Kong-based First Pacific.

11.     Top government officials constantly promise that the 10 projects would be bid out this year. Yet last week, even the Cabinet economic cluster seemed to signal that the PPP projects may not pan out as planned. They noted that government spending on infrastructure is projected at P750 billion till 2016, triple the PPP target of P250 billion. Hence, the Board should maintain its policy of awaiting concrete and specific action on PPP projects before making any investment commitments.

12.     A further concern is the current administration’s reported cancelation of major infrastructure contracts which had already received technical approval from the economic planning agency, as well as legal and financial assent from the Justice Department and the central bank’s Monetary Board, which includes the Finance and Budget Secretaries. These projects now in limbo include the dredging of Laguna Lake near Manila, the revival of a major nickel mine, and the building of 72 roll-on-roll-off ports. These actions by the government add to past fears stirred by the controversial scrapping of the PPP deal to build Manila airport’s third terminal.


Recommendations
13.     Given the apparent repeat of that episode in at least three new contracts with major foreign companies, SPO cannot but warn against participating in any PPP undertaking in the Philippines until its government shows that it honors all contracts perfected in compliances with applicable laws and rules. This assessment of the country’s contractual integrity shall be based on its handling of the above-mentioned projects in dredging, mining, and ports.

14.     Furthermore, SPO will continue to review investment prospects and proposals in other countries, where contractual compliance is better assured, and political factors are less likely to affect implementation. While the Philippines continues to offer attractive returns in certain areas, including infrastructure, the Board must also seriously consider the risk and uncertainty engendered by past and present government actions and by the political considerations reportedly behind them.

The full report attached gives full details of the political, security, economic, business, and governance issues raised above. We hope this paper complies with the Board’s directive, and helps its assessment of the Philippines’ investment climate.

Berton Woodrow, PhD
Senior Economist

Ricardo Saludo heads the Center for Strategy, Enterprise & Intelligence ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it. ), which publishes The CenSEI Report, providing analytic research on national, business and global issues.