Delivered at the Peninsula Hotel, Manila, February 17, 2011
Someone once told me that fund managers are normally young. And they tend to be too young to have experience from the previous crisis so they tend to be bullish and they also tend to panic quickly. So I start my talk from picking up a word from the opening remarks of President Ferrer:
Nervousness.
The people are nervous right now. So I think the best way to allay your fears would be to compare where we were just after the Asian crisis to where we are right now. Just after the Asian crisis, the NPL ratio was about 18 percent, approximately. I believe now it’s around 3 percent. The gross international reserves of the Philippines is approximately $62 billion right now. Just after the 1997 Asian crisis, it was probably around $12 billion. The balance of payments was negative at that time. Last year, we probably had the highest BOP surplus of the country at 14.4 billion. Last year also we had $18 billion in remittances. Just after the crisis, it was probably around $5-6 billion. And we can go and on and on comparing the statistics; and the statistics right now is so much better than what it was then. And we survived that crisis, which I think was quite difficult.
And when you look at the industry in the Philippines, around the Asian crisis, I think we didn’t have a BPO industry to speak of. Now we have an industry that’s second in the world to India with revenue of approximately $9 billion, and projected to grow at least 20 percent more per year for the next five years. You can also talk of the ship-building industry where we’re now number four in the world, behind South Korea, China, and Japan. And again, then, I don’t think we were anywhere near the top ten. The semiconductor industry was already there and there were concerns about the sustainability of that industry. It accounted for two-thirds at that time of our exports. Last year, it accounted for 60 percent and people are no longer talking about sustainability issues because it’s fully integrated with Asean.
And between then and now, we went through leadership issues. Leadership with mandate issues, credibility issues. Now we have a president with the largest mandate ever of a Philippine president. Last year, we had a 7.3 percent GDP growth rate which was the highest since 1976. Most of the fund managers here were probably not yet born.
The revenues of the Bureau of Internal Revenue was up 9 percent against the previous year, and the Bureau of Customs up 17 percent against the previous year. For the month of January, the Bureau of Customs and Bureau of Internal Revenue exceeded their targets. So, I ask you, why are you worried about the future?
When you look at the Philippines from a strategic standpoint, we’re right in the center of what is going to be the most dynamic economic region for the next 30 to 50 years. We’re going to be part of an integrated economic community of at least 600 million people with rapidly growing incomes by the year 2015. And we’re positioning this integrated community to be at the heart of Asian trade—with China, with India, even with Australia and New Zealand.
So, I’m bullish about the future of the Philippines. So is the President of the Philippines. Yes, we have challenges and we’re addressing that. And we’re using the political capital of the president to make fundamental changes. He wants to create a new future for our people, a future where governance is done in Daylight, not in backroom deals or midnight deals. He’d like to have a future where there is decreasing poverty rather than the increase in poverty we’ve had despite the 48 straight quarters of growth since the Asian crisis. He’d like a government which we can consider an island of excellence just like the BPO industry, the semiconductor industry. The ship-building industry I think can be considered as an up and coming island of excellence.
All of these he’d like to do amid a world that is rapidly changing, where boundaries are becoming less important, where what’s important is to be a part of global supply chains, where what’s more important is to have these islands of excellence that are globally competitive. That is going to be a challenge for us—to find our niche in this integrated Asean, in this new economic dynamic that’s shaping up: a world where there’s shift from the developed countries to emerging markets, where the export oil that generated large reserves of most of the countries in the region may no longer be enough as the engine of growth, where the key is really investing in domestic markets—igniting the domestic markets, so that we can make it the engine for growth.
So, there are so many changes going on but at the same time, we’re bullish, because we’re blessed to be right in the middle of a very dynamic economic region. To make sure that this new future that he’s trying to create happens, the president is dealing with the three key reasons why we have underperformed the past twenty years. One is corruption; two is wrong policies; and the third is reducing the infrastructure gap between us and our competitor countries.
On the fight against corruption: this is going to be a long fight. It has to be won step by step. There are no shortcuts. But we’re fighting it across many fronts. First is in sending the right signal, that it’s no longer business as usual, that we do not tolerate corruption. Two, in increasing the risk that those who participate in corruption face, both in the private sector and the public sector. Third, by rationalizing our processes, investing in technology, investing in external information so that we can drive performance, in particular, in our agencies—the Department of Finance, the Bureau of Internal Revenue, and the Bureau of Customs. We will be doing this in the next few years.
The next few years won’t be enough. The challenge for us is to invest in the organizations so that this can be continued in the next administration.
So, we will fight it, step by step. Make sure that the skeptics among you become believers. Just this morning, Customs filed another case. So the next step there is for the cases to be filed to the courts. Several of those were filed in 2005 during my first stint as Secretary of Finance, [and] were resolved with a conviction by the Court of Tax Appeals. It’s a little bit slow, but once we convince people that finally you can go to prison for tax evasion or for smuggling, then I believe we will be able to make a major dent in our losses from both these two crimes.
On policies, the president is about to sign the Open Skies Policy outside NAIA. This was announced last November and the EO actually on his desk. Policies like these are very important. I mentioned the BPO industry earlier. Without a policy shift in telecom in 1995, done by President Ramos in reaction to a speech by Lee Kuan Yeuw, we will not have the BPO industry that we’re so proud of now, because that policy shift liberalized the industry and made the industry very competitive and reduced the telecom cost. That’s what we’re also hoping for the airline industry and the tourism industry.
Bali—before President Suharto liberalized the airline policy in Bali—only had less than 50,000 tourist visitors, and now it’s the engine for tourism for Indonesia. And that’s what we’d like to happen, because tourism is the one industry that we believe is a low-hanging opportunity for the country. We just need to make sure we have the right policies and also invest in infrastructure to make sure the access of tourists in and out of the country becomes much easier. And I’m confident that the number we hit last year, which was a record 3.5 million, about 20 percent higher than the year before that, can easily be doubled. That’s the target of the Secretary of Tourism. And we’re confident because our neighbors have numbers much higher than that. Malaysia has over 20 million. There are many opportunities. We just have to address these three things.
On infrastructure: as we’ve announced in November, we are using the PPP mode because there’s very little space in our budget for investment in infrastructure. We have to tap the capital of the private sector, the expertise and technology of the private sector in reducing this gap. The program we’ve launched addresses some of the problems we faced in the past. So the trust now will be solicited projects rather than unsolicited projects. There will be an assurance that the contract provisions are implemented, there’s assurance that it will be approved or decided upon within six months, creating a more conducive capital market for long-term infrastructure financing.
The only problem with solicited projects is it takes a long time to launch, because you have to do your homework. You have to complete the feasibility studies whereas in the unsolicited mode, it’s the private sector that actually did the feasibility study. So, that’s what’s taking us some time.
In the past, we’ve made many mistakes in our PPP initiative; that’s why it did not take off as well as we wanted it. A lot of the projects of the past were mainly unsolicited projects. NAIA3, in particular, is a highly visible one where the original proponent lost out to a Swiss challenger, and subsequently they changed the terms, and the rest is history. They went through litigation and arbitrations. So, those things we’ll try to avoid.
Another challenge we have that we’re dealing with is how to manage local governments. The President, with his political capital, sent a clear signal to local governments that, one: we’d like to partner with them in building economy for our country because all business is local. Secondly, we’d like to make sure that they are business friendly.
In short, the Aquino administration is committed to making the Philippines a more predictable environment for business, where things will be done in a transparent manner. And I hope we will be rewarded by this in increase in investments especially from our friends abroad. As you know, the growth of the country has been driven the past 48 quarters by consumption, and there, the key to moving it to a higher plane and sustaining it, is increasing the investment component of it—and that’s going to be our challenge. In fact, that’s how we’d like to direct the flow of money in the emerging markets, including ourselves, to direct it to productive purposes rather than speculative areas. We’re working closely with the BSP on this, and the other agencies of government to make sure that that thing happens.
The challenge all over the region is how to tap the burgeoning reserves of everyone for infrastructure investment. The ADB estimates that the region as a whole will need about $8 trillion in infrastructure investments to realize the growth potential of the region. Again, if you look at the research of the region, it’s not $8 trillion, but it’s somewhere close to that number, and for us our challenge is how to do that. And finance ministers have initiated an infrastructure fund where several of us contributed, including the ADB; and our hope, although it’s starting with a capital of I think less than $400 million and, with leverage, will probably reach $800 million, I hope this will be well […] so that it attains an AA credit rating and may be eligible for investments of the central banks of the region. Because that can be one of the ways we can funnel some of the reserves to a fund that can invest in the country.
In the Philippines, there are restrictions on the part of the Central Bank to invest its reserves in less than investment grade papers such as the Philippines. I think that’s a good restriction, but I think we have to find a way, especially if to be able to tap that to facilitate infrastructure investment in the country.
So, the thrust is to continue to simplify processes, create an environment that would even more make you comfortable in leaving your money in the Philippines. When you look at the statistics now, and just after the Asian crisis, I don’t think there’s really reason for nervousness. We should always be nimble and look at the potential problems that we will face. And that’s what we’re doing.
Food prices is something we’ll have to deal with; and we’re working closely with the Department of Agriculture and the NFA, because there’s still a lot of potential in our agriculture sector—increasing its productivity by investing in infrastructure, by giving access to credit to farmers, by re-engineering the value chain, working with the private sector in doing this. There’s so much opportunity there, and to be able to do that, we not only assure our food security, but at the same time keep it at reasonable prices, because as you know it’s the biggest driver of wages. This is a crucial area of intervention by government bought from a policy standpoint—financing and infrastructure standpoint. It’s also a major factor in addressing the poverty situation in the country. The bulk of poverty in the Philippines is rural poverty. In fact, the worst cases of poverty are in the rural areas.
The Philippines, I think, is poised for bigger things. President Aquino is committed to using his political capital to address major challenges, both within the executive department, in local governments and other arms of government. For those of us who supported him, I would like to ask you to continue to support him, and give him the benefit of the doubt, because it took us a long time to dig the hole we got ourselves into. As you know, the Philippines used to be among the top economies in the region, and now, we’re in the lower half. So, it will also take a long time to get things right. But the important thing is we’re working in the right direction; and, finally, I think things are aligned.
So, with that note, I’d like to thank you for this opportunity to share with you our views on the current administration. Thank you and good afternoon.
