Security: Achilles heel of the Philippines

IT SEEMS that the Philippines can never get things right. On August 23, the same day that government figures showed that second-quarter economic growth had exceeded market expectations, a botched hostage rescue attempt resulting in the deaths of at least eight Hong Kong tourists focused attention yet again on one of the nation's most serious problems: security. Few investors are likely to be interested in a country in which poor training and equipment, not to mention outright corruption, prevent the police from protecting the public. A long-running insurgency in the south also needs to be urgently addressed.

According to the 2010 Asean Investment Surveillance Report prepared for last month's Asean economic ministers meeting, the Philippines accounted for a mere 3.92 per cent of the foreign direct investment that flowed into Asean between 2007 and last year. Any repeat of last week's tragedy, and this situation could last well into the term of recently installed President Benigno Aquino.

The impact on the country's struggling tourism industry is not difficult to imagine either. Responding to the wide publicity the hostage incident received in the international media, both China and Hong Kong have urged their citizens not to travel to the Philippines. On Sunday, thousands of protesters in Hong Kong denounced the bungled operation and the apparent reluctance of Philippine officials to apologise. And tourism secretary Alberto Lim has already said he expects this year's 3.3 million visitor target to be missed.

What is so frustrating about the situation is that security issues aside the Philippines has a good story to tell. According to the National Statistical Coordination Board, gross domestic product rose 7.9 per cent year-on-year in the second quarter, well ahead of market expectations of around 6.3 per cent. Inflation is also steady at a seven-month low, encouraging the central bank to continue holding down its key benchmark interest rate. Strong export growth, an improvement in investor and consumer confidence, as well as the relatively peaceful conduct of local and national elections, have played an important part in economic growth so far this year. And while pessimists can point to the short-term effect of election spending on consumer demand, this has to be set against the negative impact of the El Nino weather phenomenon on agriculture and fisheries.

Indeed, the increasingly favourable economic conditions before the hostage incident were already encouraging companies to rethink their strategies. Cargotec, one of Europe's largest crane-makers, told the local media last month that the company was ramping up its marketing and sales efforts in expectation of a rise in demand for its logistics-related goods and services.

Unfortunately, signs of a possible slowdown in global trade suggest that the economic momentum may not be sustainable. A 15 per cent decline in raw material imports in June, for example, could signal trouble ahead. "Those are all inputs to the manufacturing sector, so it could mean that the manufacturing sector is seeing fewer orders, so there is less need for import materials," says Simon Wong, an economist at Standard Chartered Bank in Hong Kong.

Far more critical for foreign investors, however, is the economy's long-term growth prospects. And, as always, this depends largely upon the policies adopted by the national leadership. Apart from security issues, potential investors will be looking at the extent to which President Aquino is prepared to change longstanding policies hobbling economic expansion. Constitutional and statutory limitations, for example, currently limit the extent to which the country is able to comply with liberalisation moves under the Asean Comprehensive Investment Agreement. At a recent forum in Manila, British tax expert Philip Truscott highlighted yet another issue. Based on the country's population, the Philippine government should be generating at least 235 billion pesos in revenue from the income of professionals, including small- time entrepreneurs. But, because of the tedious process and high cost of getting business permits from local governments, most small businessmen prefer to operate in the underground economy, beyond the reach of the Bureau of Internal Revenue. As a result only about 157 million pesos in revenue was being generated.

The current system, argued Dr Truscott, also deprived the poor of legal certainty when setting up businesses. It had become a major source of corruption as anxious applicants hand over additional cash to facilitate government approvals. To his credit, President Aquino appears to be moving in the right direction, having ordered interior and local government secretary Jesse Robredo to focus on eliminating bureaucratic red tape. The most important priority now, however, is to deal with the fallout from the August 23 incident. Unless everyone can be convinced the country is safe, the economic impact of such reforms is likely to be limited.

The Straits Times/ANN