Political scandals undermining the economy

MANILA, Philippines--ONLY A FORTNIGHT AGO, A REGIONAL economist of the British

banking giant, Hong Kong Shanghai Banking Corp., warned that the political scandals
rocking the government could halt the momentum of economic growth that has seen the
Gross Domestic Product grow to a record 7.5 percent in the second quarter of 2007 in a
period of uninterrupted growth over 27 quarters.

Frederic Neumann wrote in a commentary: “We view the recent political scandals as
severely undermining the President’s ability to persuade the Congress to pass new
policy initiatives to advance structural reforms ... The scandals will make it harder for the
President to advance a new wave of policy reforms, especially relating to improving the
underlying public finance sector finances.”

Neumann noted that the government had made a commitment to wipe out its budget
deficits and was closing in on its full-year deficit target of P63 billlion, with the help of
privatization proceeds, but its fiscal performance was “less impressive,” suggesting that
more reforms were needed.

Ambitious expenditure plans and a sluggish tax collection were likely to keep the budget
in deficit for the foreseeable future, he said. “There has been no material improvement
in tax collections to support sustained increase in spending on infrastructure and social
services.”

The scandals, he said, had “eroded the public goodwill that had been rebuilt as a result
of faster economic activity and a stronger Philippine peso allowing for easy monetary
stance by the Central Bank.” He mentioned the recent spate of scandals that have
roiled the government, including the congressional investigations of the national
broadband project contract with the Chinese firm, ZTE Corp., the cash payoffs to
congressmen and governors inside the presidential palace, as unsettling events that
have impaired the President’s capacity to push further reforms to finance her ambitious
infrastructure programs.

Since the commentary was published on Oct. 22, the government has been embroiled
in new controversies that could only have weakened further the President’s capacity to
press for further fiscal initiatives and poisoned the environment for cooperation between
her and Congress. The more recent turbulence is being stirred up by impeachment
complaints lodged against the President in the House of Representatives and the
turmoil inside the ruling majority coalition, among the President’s allies (among them
Speaker Jose de Venecia and Sen. Juan Ponce Enrile over the alleged bribery in the
broadband project). These conflicts, arising from governance issues, threaten to break
up the administration coalition in Congress.

This turbulent political environment highlights the salience of governance issues as a

decisive element in sustaining high economic growth and establishing political stability
as a foundation for growth. These issues, particularly over corruption, are asserting
themselves more aggressively as the focus of public debate. Businessmen, both
domestic and international, are increasingly expressing concerns over the impact of
political turmoil on the economic agenda.

During the past six years of the embattled Arroyo administration, the economy seemed
to have grown autonomously relative to political turbulence. It has grown despite the
battering by a series of political crises. The business sector has increasingly manifested
its concern over the disruptive effects of political turmoil and instability on sustaining
economic growth.

Politics appears to have taken primacy over economics in determining the sustainability
of growth. As Neumann pointed out, the scandals were starting to hurt the
administration’s ability to manage the economy. The message from the business sector
is that there’s a limit to abusing the economy’s ability to absorb the shocks of political
turmoil.

Last September, former Socioeconomic Planning Secretary Cielito Habito wrote in the
Inquirer, “If persistent weaknesses in governance continue to get in the way of business
confidence, then no amount of new infrastructure spending will stimulate more durable
private investment growth at the rates needed to sustain 7.5 percent growth or higher.”
Economists have uniformly pointed out that the growth had been driven by government
infrastructure spending and domestic consumption spending resulting from the high
level of remittances of overseas Filipino workers—not by a high investment rate.

The infrastructure program is underpinned by foreign borrowing and foreign

investments. Revenue collection shortfalls have recently worried fiscal authorities. Last
July, Fitch Ratings reported that poor revenue collections in the first half of 2007 made it
unlikely that the country would keep its budget deficit within the P63-billion ceiling. “The
positive momentum behind the Philippine fiscal performance in recent years faltered
badly in early 2007, particularly with respect to tax collection,” Fitch reported.

Last Nov. 5, President Macapagal-Arroyo reminded her allies in Congress and the
opposition that they have a duty to the people to “continue with the gains” in the
economy and not stop the progress. She said the people deserved peace, order and
stability with the help of officials.

This was another way of saying, “Let’s move on,” and looks the other way from the
scandals. And she said this in the midst of the growing scandals, and increasing signs
that the economic gains are sitting on the bubble of political instability.