S&P’s Reward Awaits One-Time Sick Man of Asia: William Pesek
It is often a fool’s errand to predict turning points in the more erratic Asian economies. Nowhere is that truer than the Philippines, whose greatest consistency seems to be disappointing the optimists.
With Europe sliding, America limping, Japan shrinking and the once-unstoppable China slowing, it’s anyone’s guess where the Philippines might be in three years. At the risk of looking foolish in, say, 2015, I think it will be in a far better financial place than it has been in a decade.
My faith rests on four things that Benigno Aquino has done since assuming the presidency in June 2010. These were moves that mark a keen understanding of what ails Asia’s 12th-biggest economy and flashes of courage that were absent in his three predecessors.
First, a nuanced focus on the economy. Gloria Arroyo seemed infatuated with raising gross domestic product during her tenure from 2001 to 2010. It was just talk. Arroyo, like Joseph Estrada (1998-2001) before her, was all about the cult of GDP that beguiles many Asian leaders. This obsession masks big cracks in economies with headline-grabbing growth rates that serve mainly to deflect political opposition.
One in four Filipinos (PGDYTY) lives on less than $1.25 a day. The Occupy Wall Street movement harps on the 1 percent. In the Philippines, it’s more like the 0.01 percent of politically connected citizens who reap the spoils of growth.
Aquino wants to tighten mining rules, cut tax breaks and review contracts to make sure average Filipinos benefit from natural resources and limit the industry’s impact on the environment. He is upgrading infrastructure to attract foreign investment that would create jobs.
The president moved swiftly to get a handle on the long- term budget deficit. That’s a vital step to reducing the waste and graft at the root of the nation’s dysfunction, but also winning the investment-grade credit rating that would accelerate the process.
Second, attacking corruption. Aquino, 52, is both the right guy and the wrong one to fight this battle. His mother was former President Corazon Aquino (1986-1992), who made up with integrity what she lacked in governing skills. She was the moral compass after two decades under dictator Ferdinand Marcos. The problem is that the Aquinos are among the major land-owning families that benefit from the extreme concentration of wealth.
Benigno Aquino has had no qualms in going after the billions that watchdog groups say Marcos looted. Marcos is the man Aquino’s opposition-leader father was trying to unseat when he was assassinated in 1983. The Marcos family has been staging a political comeback in recent years. Marcos’s wife, Imelda, she of the infamously large shoe collection, now sits in the House of Representatives.
The president is holding Arroyo, her husband and her son to account for alleged corruption. Aquino also is working to oust Supreme Court Chief Justice Renato Corona, a last-minute Arroyo appointee, who faces accusations that include favoring Arroyo in court decisions. While some in Manila smell an Aquino-versus- Arroyo family feud, I sense a bold effort to clean up the nation’s tainted judiciary.
Third, addressing overpopulation. The nation’s ranks are outgrowing the number of good-paying jobs being created, forcing more and more Filipinos to work overseas. Any talk of family planning is suppressed by the powerful Catholic Church, which is too politically active for comfort. Aquino risked the Vatican’s wrath with a “responsible parenthood” bill. Let’s hope more such steps are on the way.
The remittances that expatriate Filipinos send home boosts growth in the short run. But the money does little to build a foundation for organic growth and is a dangerous addiction that must be kicked. Gaining control of the birthrate is a key part of the solution.
Fourth, a gutsy stance toward China. In Asia, it is striking to hear what politicians say publicly about China’s growing dominance and what they really think. No one wants to anger Asia’s nascent military superpower or offend the biggest customer for their exports. Aquino is risking just that as he demands fairness in China’s claims to disputed islands in the South China Sea and cozies up to the U.S.
The Philippines is among a handful of nations claiming the resource-rich Spratly Islands, along with Malaysia, Vietnam, Brunei and China. Aquino refuses to bow to China’s demands, something that has enraged Beijing and prompted calls to punish the Philippines economically.
China’s rise poses a dilemma for Asian leaders. Aquino is showing Asia there’s scope for approaching China as a peer, rather than a subordinate.
Of course, the Philippines (PHLFUDRT) has demonstrated a unique ability to scuttle the most virtuous of cycles. All too often, its eccentricities pop up to remind investors why it’s often called the “Sick Man of Asia.” This track record is a big reason the Philippines is rated BB by Standard & Poor’s and Ba2 by Moody’s Investors Service. Both ratings are the second- highest for junk bonds.
Credit raters are perhaps too busy downgrading the top 10 economies to reward progress in the smaller ones. Investors who act in anticipation of Philippine upgrades are unlikely to regret it. Sometimes, foolishness has its benefits.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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