Not A Moment Too Soon

Can Gloria Arroyo clean up Estrada's economic mess?

The end came with a swiftness that surprised even Joseph Estrada's most bitter foes. In less than 24 hours, the Philippine President's Cabinet disintegrated, the military deserted him, and the Supreme Court declared the post of President vacant. With protesters drawing closer by the hour to Malacanang Palace, Vice-President Gloria Macapagal Arroyo was hurriedly sworn in as the new chief executive shortly after noon on Jan. 20. The next day, Archbishop Jaime Sin celebrated a Mass of Thanksgiving: "Gloria in excelsis!" he chanted to emotional worshippers. The new reign had begun.

The change of leaders was constitutionally suspect; two days after his removal, Estrada was still calling his successor "acting President." But the soft coup handed the increasingly boisterous anti-Estrada movement what it wanted: the ouster of a hard-drinking former movie star who allegedly ran his nation like a racketeering operation--and nearly destroyed the economy in the process.

Now it is Arroyo's job to make emergency repairs. "It's a time to heal and a time to build," she said, pledging to restore moral government and fight poverty. Her ascension had an immediate impact. The stock market rallied 18% the day she took office, while the peso, which had been slumping for three months, jumped from 54 to 47 to the U.S. dollar, before falling back.

But Arroyo's longer-term challenges are daunting. She needs to boost growth (chart, page 23), cut into corruption, and woo back foreign investment--at a time when the U.S. economy is slowing and amid growing competition from other low-wage centers in China and Southeast Asia. She will have accomplished a great deal if she merely restores the economy to its condition at the departure of President Fidel V. Ramos, Estrada's predecessor.

Under Ramos, a former general, the Philippines was on track to become a tiger economy. He sorted out the nation's debilitating electricity problems, wooed investment in the key electronics export sector, and smashed a telecom monopoly. After 35 years of being a ward of the International Monetary Fund, the Philippines finally graduated from the IMF program in March of 1998. Estrada proceeded to squander many of those gains.

The diminutive Arroyo comes to her new job bearing outsize expectations. A member of Manila's elite, she is the daughter of former President Diosdado Macapagal, who ran the country in the early 1960s. As a senator from 1992 to 1998, Arroyo authored 55 bills, including privatization and export-promotion legislation. An economist trained in part at Georgetown University in Washington, D.C., she has the reputation of a hands-on manager who likes her meetings punctual and to the point. "She's quite determined, even somewhat impatient. She wants to get business done," says Jaime Augusto Zobel de Ayala II, president and co-chairman of Ayala Corp., flagship of the nation's largest conglomerate.

Still, apart from vague promises to restore business confidence and eradicate poverty, Arroyo has yet to lay out a convincing economic blueprint. What she is doing is plucking lieutenants from the pro-reform administrations of Presidents Corazon Aquino and Ramos.

One of Arroyo's first acts was to appoint Alberto G. Romulo as Finance Secretary. Romulo earned his reform stripes as Budget and Management Secretary under Aquino. As head of the Senate banking committee, he oversaw landmark banking reform. Another Cabinet heavyweight is Renato S. de Villa, who has been named Executive Secretary--the second most powerful position in government. De Villa was Defense Secretary under Ramos and had strong backing from the business community during an unsuccessful presidential bid in 1998. He holds a Masters in business management and has a reputation for getting things done. And, cementing the sense that this is a pragmatic, reformist administration, Ramos himself will play a key role in the government. Arroyo has appointed him as a special emissary, whose first job will be to represent her at the World Economic Forum in Davos in late January.

DAMAGE CONTROL. Before the new team can get serious about reform, it needs to clean up the mess Estrada left behind. And what a mess. Ramos had run a budget surplus, cleaned up the banking system, and turned such facilities as the old U.S. naval base at Subic Bay into thriving centers of trade. As a result, says Ramos' former Finance Secretary, Roberto de Ocampo, "the Philippines was looked at as the least affected by the Asian crisis. Then it went down the drain."

Estrada's shaky management and preference for the business interests of his cronies cast a pall over the economy. Foreign investment, essential for development, has plummeted. During the first half of 2000 it totaled $108 million, down from $566 million during the same period in the previous year. In the mid-1990s, the American Chamber of Commerce of the Philippines was holding several breakfast briefings a week for prospective foreign investors. "Now," says Amcham chief Robert M. Sears, "we're lucky to host one a quarter."

Clearing up the government's messy finances is a top priority. Romulo says they are in such rough shape that it could take as long as two years to balance the books. Last year, Manila ran a deficit of $2.87 billion, twice its original target. Thanks to years of state borrowing, debt service swallows 30% of the annual budget. Lowering interest rates--now at 12%--would help, but if they are cut too much, that could put downward pressure on the peso, which would raise the cost of servicing foreign debt.

On Jan. 22, Romulo said it was "imperative that interest rates are reduced as soon as possible." That day the central bank cut overnight rates half a percentage point and said they may fall another full point if the U.S. Federal Reserve cuts again on Jan. 31. But that would only take rates back to where they were in November, before they were hiked four percentage points to protect the peso.

HISTORY REPEATS. Arroyo is eager to send a message that transparency will be a hallmark of her administration, and that deals for business pals will not be countenanced. Her husband, attorney-businessman Jose Miguel Arroyo, has been telling associates that he'll take a break from his law practice, much to the relief of the new President's supporters. Advisers say she will soon reissue her father's first administrative order--prohibiting government agencies from doing business with family and friends.

One way to polish her anticorruption credentials would be to go after Estrada. When he left power, Estrada was in the midst of an impeachment trial, charged with taking bribes totaling $11 million. Arroyo's Bureau of Internal Revenue has frozen Citibank accounts belonging to him and his family. "People would like to see that there are consequences to crimes," says Lance Gokongwei, president of Cebu Pacific Air Inc., a domestic airline. "It sends a signal to the business community that the government is supportive of transparency." One Arroyo priority will be to enforce tough existing financial disclosure laws for officials.

Arroyo also needs to restore a sense of professionalism to a bureaucracy that lost its focus and became badly demoralized under Estrada's direction. Arroyo assured civil servants she planned no mass purges. But analysts say she will have to take a stiff broom to swathes of the bureaucracy, particularly the corruption-riddled tax and customs departments.

Over the longer haul, Arroyo needs to gut and rebuild much of the Philippines' dismal infrastructure. Little, for instance, repels newcomers to Manila more than the city's chaotic international airport. There's a surplus of power on the main island of Luzon but no way of getting it to the juice-starved southern island of Mindanao. Plans to build new highways to Subic Bay and a port in southern Luzon have gone nowhere. Only a two-lane road connects Manila with the northern city of Baguio. That means trucks loaded with semiconductor chips from Texas Instruments Inc.'s big Baguio plant must jostle for space with tractors towing sugar cane.

And then, of course, there is Arroyo's promise to help the poor. There are no quick fixes for the one-third of Filipinos--25 million people--who live on less than $1 a day. Education reform is key. Many poor Filipinos don't finish high school. The Education Department has been a political fiefdom, and Arroyo's new Education Secretary, Raul Roco, has vowed to raise teachers' salaries and stop the flow of kickbacks from publishers of substandard textbooks.

To help pay for roads, ports, and education programs, the new government needs to collect more taxes. Robin A. Gvozden, who analyzes the Philippines for Lehman Brothers Inc. in New York, says tax revenues in the mid-1990s were growing more than 20% a year. But in 1999 and 2000, they increased just 1.5% and 3%. Incoming Finance Secretary Romulo says $2 billion in back taxes remains unpaid. The courts have ordered individuals and companies to pay up, but Romulo says the Estrada government did nothing to enforce the orders. He vows to get tough with scofflaws. That will mean taking on the likes of tobacco king and Philippine Air owner Lucio Tan. "Teachers, policemen, and soldiers pay their taxes," says Romulo. "The big boys should pay theirs."

The Philippines has a number of basic reforms in place. A landmark securities bill was passed in August. It aims to consolidate an inefficient, loosely regulated industry. Simply enforcing the law will help get the Philippines on the right road again. But Estrada gutted the legislation by, among other things, postponing plans to raise capital requirements for the country's 186 brokerages.

FOREIGN INTEREST. Other reforms may have to wait. The Philippines has constitutional restrictions on foreign investment in utilities, property, retail businesses, and media. Amending those laws would send a strong signal to outside investors that Arroyo is serious about reform. But constitutional reform is an emotional issue for Filipinos, who thwarted attempts by Ramos and Estrada to change the constitution for fear they'd use the process to tighten their grip on power.

Now that Estrada is gone, foreign companies may start nibbling at the Philippines again. The government-run Board of Investment says that inquiries from potential overseas investors have surged since Estrada was forced out. And at least the political crisis did not prompt many foreign companies to flee. The country's software and back-office computer sector continues to thrive. Companies such as America Online, Trend Micro, and Caltex--attracted by the Philippines' pool of computer-literate, English-speaking workers--have stuck it out. In fact, over the last year, U.S.-based Accenture, formerly Andersen Consulting, has nearly doubled the number of Manila staff working on foreign accounts.

The Philippines may have acted just in time to avert disaster. In late January, the Federation of Philippine Industries was set to implement a four-day work week. There simply wasn't enough business activity to warrant a regular five-day week, and the employer's association wanted to avoid painful layoffs. The plan was shelved shortly after the new President's ascendancy.

Now Arroyo must make the most of her honeymoon. Foreign businesses want her to privatize the National Power Corp., at a stroke removing its losses from the government's books and raising money from the sale. Arroyo's team is expected to win a landslide in midterm elections on May 14, so she is unlikely to postpone such reforms in the interim. "I have no grandiose dreams to be a great President," Arroyo told Malacanang Palace staff. "But I want to be a good President." For the beleaguered Philippines, that would be enough.

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