The ‘S’ word again

Ben D. Kritz

Ben D. Kritz

Dow Jones is a bit skeptical about the Philippines’ apparent economic resurgence.

In a commentary that was picked up by the Manila Bulletin last week, the financial consulting and news conglomerate ticked off the by now familiar list of economic achievements that have developed over the last ten years or so: High levels of foreign investment in the equities and securities markets, GDP growth that is among the highest in Asia, and drastically reduced government debt and budget deficit levels.

It is the same story being repeated by many commentators, and most of them are impressed by it. Dow Jones is apparently not.

“Manila’s long spate of belt-tightening neglected much-needed investment in infrastructure, inhibiting new investment and job creation,” it said. “That’s where the Philippines’ glossy brochure starts to show signs of fading. While GDP growth has recovered since the global financial crisis, growth in per-capita incomes has been steadily slowing since 2010 when President Benigno Aquino took office. Investment growth has been slowing since 2012.”

The article assesses the likelihood of President B.S. Aquino 3rd’s promises to increase infrastructure investment being realized as low, pointing out the embarrassing results of the government’s ballyhooed public-private partnership program—59 projects listed but only eight awarded in four years, and none of those completed yet. Although next year is an election year, which will encourage acceleration in both government and private-sector spending as this year progresses, the commentary correctly points out that the greater part of that will be short-term spending; concerns about corruption and the tendency of contracts to not survive the transition from one administration to the next here will keep bigger plans on the shelf until the latter half of 2016.

The problem that seems to concern Dow Jones the most, however, is that “Manila’s vaunted current account deficit may also have been photo-shopped.” The current account balance, which in a report by this paper yesterday was forecast by several analysts to rise to a surplus of 2 percent or 3 percent of GDP this year, likely ended 2014 with a deficit of about $3.5 billion, but Dow Jones thinks it may be much worse than that, because of the country’s persistent trade deficit, which is significantly aggravated by smuggling.

There’s that ‘S’ word again, the one the current administration has tried to avoid using ever since more than 2,000 uncleared shipping containers vanished into thin air in a four-month period at the beginning of 2011. The indicators of an ongoing problem are disturbingly clear. Despite, or maybe because of, frequent wholesale changes in Customs personnel and management, an enormous volume of imports continues to escape detection, with recent high-profile successes like the laying of charges against numerous figures involved in the “garlic cartel” clearly being just a drop in the bucket. The US, for example, recorded $2.1 billion in exports to the Philippines in the third quarter of last year, but the Philippines only recorded $1.4 billion in imports from the US. The discrepancy is even bigger with respect to trade with China—about $3.8 billion in the same period, according to Dow Jones.

Even the local news confirms the continuing widespread extent of the problem. Three weeks ago, an impounded ship carrying a substantial cargo of rice smuggled from Vietnam disappeared from the port of Zamboanga; this week, authorities are searching— probably in vain—for another, smaller vessel carrying 42 tons of black market sugar.

The smuggling problem has gone from bad to worse under the Aquino Administration, not because of disappearing containers and ships—although those definitely contribute to the problem—but because of the increase in technical smuggling, which the present government has unwittingly made easier by its attempts to clean up Customs.

Here’s an example of how technical smuggling works from my own experience years ago when I spent a period being tasked to manage imports of race cars and related components from various places in Europe to the US: The US has strict anti-dumping laws covering imports of bearings, and the average race car (for the motorheads out there, these were BMW E-46 series M3 coupes used for the American LeMans Series) uses about 300 of them. Although my company was in no sense whatsoever participating in “dumping,” any listing of a “bearing” on a customs declaration form would hold up an entire shipment for inspection, which was obviously a great inconvenience for us. So to avoid that, a “bearing” would become something else on the declaration form; “friction reducer” was one of my favorites. It wasn’t a lie, strictly speaking, but it wasn’t exactly kosher, either; a “bearing” carries a much higher tax rate than a generic “friction reducer.”

It takes experience and a certain “feel” on the part of a customs inspector to spot those kinds of questionable entries, and that is where the Aquino Administration has primarily failed in its well-meaning effort to curb smuggling. By constantly replacing Customs personnel (there is a rumor floating around that current Customs chief John Sevilla is on his way out, although this has been denied), the entire bureau is practically in a constant state of being new on the job; the necessary experience, the “feel” for the job is lacking, and sharp-witted brokers and locators like I once was are having a field day with it.

It is the sort of problem that can only really be solved with time and consistency, neither of which the present Administration possesses. If Dow Jones is right—and my opinion is that they probably are—we are likely to see some currently admirable economic indicators take a sudden turn for the worse in the next few months.

But of course, as the Dow Jones article did point out, the beaches here are actually quite nice.


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