The Philippines: The Price of Terror

As the Philippines battles a spate of attacks, its economy suffers

Call it overconfidence. To celebrate a series of strikes against crime and terror, Philippine President Gloria Macapagal-Arroyo and four Cabinet members appeared on the cover of glossy Philippine Tatler magazine in September, sporting sunglasses and black suits inspired by the hit film Men in Black. The tough-woman pose came after soldiers in June had killed Abu Sabaya, the notorious commander of the Islamic extremist Abu Sayyaf Group, and his ragtag followers appeared to be on the run. Arroyo had also concluded a ceasefire with the rebel Moro Islamic Liberation Front after decades of war, and the President's popularity was at an all-time high.

Arroyo declared victory too soon. Since the beginning of October, the nation has been shaken by four separate terrorist bombings, leaving 14 people dead. Three of those attacks took place in the city of Zamboanga--a comfortable 800 kilometers from the capital. But on Oct. 18, a blast ripped through a public bus in Manila, killing two and shattering the illusion that the security problem was confined to the south. On Oct. 23, police arrested five members of Abu Sayyaf in the Zamboanga attacks, but no one has yet been charged in the Manila bombing. "This brings things a lot closer to home," says a Manila-based Western diplomat.

The attacks make it that much harder for Arroyo to focus on the Philippines' economic problems. Swept into office in January, 2001, after President Joseph Estrada was ousted in a corruption scandal, Arroyo promised to repair chronic budget deficits, relaunch government privatization and infrastructure projects, and bring back fleeing foreign investment. Bright, well-educated--the 55-year-old former vice-president has a PhD in economics--and considered squeaky clean, Arroyo presented a welcome change from Estrada, a womanizing former movie heartthrob known for cronyism and lax management.

Instead, the President has been forced to devote her energies to security. In the spring of 2001, Abu Sayyaf kidnapped an American missionary couple and dozens of others. In November, a separatist group on the southern island of Jolo launched an insurgency. Then the U.S.--focusing on the Philippines as a suspected center of al Qaeda-inspired terrorism--sent 1,000 troops to help track terrorists. And now Arroyo must face the bombings.

While she battles the terrorist monsters, economic problems have festered. Unemployment today stands at 11.2%, virtually unchanged from her inauguration. Although Arroyo promised to fight poverty, 44% of Filipinos still live on less than $2 a day--the same level as when she took office. And she has failed to reverse a five-year slide in foreign direct investment.

True, the economy is expected to grow 4% this year, thanks to a strong rebound in exports of electronics. But that growth masks the spreading rot underneath. More than 17% of loans by Filipino banks were listed as nonperforming in August, up from 14.9% when Arroyo took office. And by July, the fiscal deficit had exceeded Arroyo's target for the entire year. Rampant tax evasion is part of the problem, but critics say that tax receipts won't increase so long as graft pervades everything from customs to motor vehicle registration. Corruption "is incredibly widespread," says Edgardo J. Angara, leader of the opposition Laban Ng Demokratikong Pilipino party. Jose Isidro N. Camacho, Arroyo's Finance Secretary, counters that tax collection was nearly on target in September, although he concedes there has been a shortfall for most of the year. "We are continuously improving the [tax] agency's performance," he says.

Plans for privatization have also bogged down. The proposed sales of Philippine National Bank, Manila Electric Co., and the state monopoly National Power Co. are all stalled. And even if the sales were to go forward, buyers might be scarce. "In the wake of Bali and the local bombings, who is going to want to buy them?" asks Robert Broadfoot, managing director of Political & Economic Risk Consultancy Ltd. in Hong Kong.

One sector that's already suffering: tourism. The Makati Shangri-La luxury hotel in Manila's business district has seen 450 cancellations just in the last two weeks. "We've definitely lost a lot of bookings, and it's directly linked to the bombings," says general manager Richard W. Riley. Japan has warned its citizens to avoid bars, and concerts by touring Western music groups have been cancelled.

To be sure, most business execs with experience in the Philippines aren't packing their bags yet. "Everybody is in a heightened state of alert, but I don't see anybody panicking," says George Henefeld, president of the American Chamber of Commerce. Foreigners have been living under the threat of kidnappings and bombings for years. Indeed, Manila is no stranger to terrorism. In December, 2000, an Islamic group killed 20 people with a series of bombs. Since then, body searches at malls and building entrances have become routine, and many middle-class homes have 24-hour guards. "We have been here for 22 years and gone through so many calamities," says Norberto Viera, managing director of Texas Instruments Philippines, which has invested $700 million in the country and employs 1,400 at its semiconductor plant. "So far we have confidence in the country."

Still, anxiety in Manila is at a high pitch. "This is different given what happened in Bali," says Lance Gokongwei, chairman of Cebu Pacific Air Inc. "People are jumpier now and talking about [the Manila bus bombing] much more than previous ones."

Arroyo's failure to identify the culprits in the Manila attack is only adding to the unease. "It shows that she is not in control and doesn't know what to do," says Benito Lim, retired professor of political science at the University of the Philippines. "This is the lowest point since she took office." Indeed, even before the latest explosions, opinion polls placed her well behind former Education Secretary Raul Roco and film star Fernando Poe Jr. as the favorite to win the 2004 presidential elections. Since it is clearly her ambition to stay around a while, Arroyo will have to wage her war against terrorism, and her fight for economic reform, as tenaciously as those Men in Black battled their own demons.

By Frederik Balfour in Manila

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