Market Focus : ‘Sick Man’ of Asia Is Making a Healthy Economic Recovery : Led by a boom in exports, the Philippines is finally catching up with its neighbors.
If President Clinton peeked at the back of his wristwatch, a Timex Ironman, he might be surprised to learn that this quintessentially American timepiece was made here in the booming center of the Philippines.
Timex is one of the largest employers in this Southeast Asian country, with 6,000 employees working three shifts at a sprawling factory complex at the Mactan Island Export Zone, just offshore from the big island of Cebu.
More than 80% of the company’s watches are now made here, say Timex officials, who made the decision to move their operations out of the United States two decades ago in the face of spiraling labor costs, going first to Europe and South Korea, then to the Philippines.
“We’re very bullish about Cebu,” exudes Stephen Trombitas, president of TMX International Ltd., the company’s overseas arm. “We’re making a multimillion-dollar expansion and expect to increase output by 20%. It’s very, very easy to produce here.”
Long regarded as “the sick man of Asia,” the Philippines is pulling out of a decade-long slump. The economy grew by 4.3% last year and government economists are predicting a 5% increase this year, a figure which only a few years ago would have been regarded as astonishing.
More important, unlike previous economic expansions, the boom this time is being led by exports, up 19.5% last year. That was one of the highest rates in Asia, where exports are a way of life.
Foreign companies, which in the 1980s shunned the Philippines as a land plagued by coups, earthquakes and the largest volcanic eruption of the 20th Century, are now piling into export areas such as Cebu and the southern city of Davao.
Cebu city Mayor Tomas R. Osmena noted in an interview that exports from the island have been increasing by 18% annually for more than a decade. They now total about $1 billion a year.
Cebu has been such a success, in fact, that the island is now suffering the first signs of traffic jams and water shortages associated with too much growth. A survey conducted by the U.S. Chamber of Commerce indicated that American firms were planning to invest $1.2 billion in the Philippines during 1995 alone. Money is also pouring in from Singapore, Taiwan and Hong Kong, and plants are being opened in most parts of the island nation.
Acer Computer, the giant Taiwanese hardware manufacturer, announced last week that it was setting up a $26-million assembly plant at Subic Bay, the former U.S. naval base northwest of Manila, on the main island of Luzon. The base was converted into a manufacturing zone and regional transport hub after the Americans were kicked out in 1992.
Foreign companies such as Acer and Timex are primarily attracted by cheap labor--most workers earn a minimum wage of $5 a day, and unions are not allowed in the export zones. While low paid, the workers nonetheless are often highly educated, speak fluent English, and many have technical skills.
When National Semiconductor placed a help-wanted advertisement for technicians, more than 1,000 qualified people turned up at the factory gates for a job interview.
“The Philippines is on the threshold of an economic miracle--if the leaders take bold action now,” Michel Camdessus, managing director of the International Monetary Fund, commented during a visit late last year. Missing for many years, it’s the kind of praise the country is beginning to hear on a daily basis.
“We believe that the Philippines is in its strongest position in more than a decade, with improved economic performance and political stability providing the foundation for further consolidation of recent achievements,” noted a report on Asia issued early this month by Salomon Bros., a New York brokerage.
Much of the credit for the turnaround is being given to President Fidel V. Ramos, the cigar-chomping former general who as deputy chief of staff of the armed forces prophetically refused to back late President Ferdinand E. Marcos at the height of the “people power” revolution in 1986, leading to Marcos’ overthrow and replacement by Corazon Aquino, the leader of the opposition.
The West Point-educated Ramos is more of a civil engineer than a student of economics, but since his election in 1992 as Aquino’s successor, he has gently prodded the Philippines down the path of sweeping economic reform.
In addition, Ramos provided the country with peace and stability, in sharp contrast to the series of violent coups that shook international confidence in the Aquino administration. Ramos also has been lucky: The Aquino regime was shaken by losses caused by the June, 1991, eruption of Mt. Pinatubo and other natural calamities. His term has seen fewer distracting emergencies of the sort.
“Ramos is more of a consensus politician than a tough leader,” said Matthew S. Sutherland, research director at Philippine Asia Equity Securities Inc. “Ramos’ biggest achievement is political stability--a lot of Filipinos are coming back from the United States and bringing back money they took out years ago.”
Support for Ramos’ reform program now seems even more assured after supporters of his political alliance won nine out of 12 seats contested in Senate elections in May and 180 of the 204 seats in the House of Representatives.
“Our achievements may not yet approximate what our more prosperous Asia-Pacific neighbors have done,” Ramos noted in a speech after the election, “but there is no question as to the correctness of the route we are taking and the gains we have made.”
From a business point of view, clearly the most important reform was a decision to open the country’s electricity-generating industry to foreign private companies. Like many of the reforms now coming to fruition, the change was implemented under the Aquino government, but it has only recently ended the daily tribulation of widespread blackouts that hobbled manufacturing output and made life a misery without air conditioning and elevators.
Rahul Khullar, an economist at the Asian Development Bank, said Ramos has implemented a structural shift in the economy that breaks the past pattern of Philippine governments trying to spend their way to prosperity. He has also ended the domination of the economy by a few rich families that had monopoly power in major industries.
“He has a vision of using the private sector as the engine for growth and seems determined to implement reforms no matter who it hurts,” Khullar said. Even the Philippines’ national airline and telephone company, the sacred cows of the corporate world, have been confronted with outside competition for the first time.
With the backing of the International Monetary Fund, Ramos lowered tariffs and other trade barriers, made the peso a convertible currency, liquidated the Central Bank and replaced it with an independent institution, imposed a value-added tax on consumption and opened the banking industry to foreign ownership, giving licenses to 10 outside banks.
Not even the relatively developed economies of South Korea or Malaysia allow foreign banks to compete with local institutions.
Ramos also enthusiastically embraced the concept of build-operate-transfer, which had been used on an experimental basis in the United States, to help finance infrastructure projects. Under the formula, private developers build projects such as roads and bridges with their own funds and are allowed to make a profit on tolls for a set number of years. Then the projects are turned over to the government.
One indicator of the long-term faith in the country came when the government auctioned off a military base in Manila to the private sector earlier this year for real estate development. The developers paid more than $1 billion, which they don’t expect to earn back for 10 years.
Through such privatizations, the Ramos administration balanced the government’s budget in 1994 and plans to do so again this year. The deficit in 1990 was 5% of the country’s gross domestic product; last year it was a mere 0.1%. The prudent fiscal policy has helped bring inflation down from 19% a year in 1991 to about 8% now.
The economy is so vibrant that the peso appreciated against the U.S. dollar last year and the government had to buy $7 billion to prevent the peso from going up even further. The cash hoard now constitutes a healthy foreign-reserve nest egg.
The budget was balanced last year thanks mainly to sales of public companies such as the state oil monopoly. The government appears to recognize that this success is only a one-time benefit and is proposing sweeping tax-reform legislation to close the gap in the longer run. The Philippines has had a bad record of tax collection, aggravated by corruption, with just 15% of the people estimated to pay any tax at all. One company, San Miguel Breweries, accounts for 40% of the country’s tax revenues.
Another cloud on the horizon is a large trade deficit, which grew last year to $3 billion despite the large increase in exports. But a hefty percentage of the imports were capital machinery that will eventually make more goods for export.
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Gaining Ground
The Philippines’ economy has made great strides although it still lags behind many in the region.
Growth rate of Philippines’ gross domestic product
***
1995 growth rate of selected nations’ 1995 gross domestic product*
Indonesia: 7.1%
Malaysia: 8.5%
Thailand: 8.6%
Viet Nam: 8.9%
* Note: Projected
SOURCE: Asian Development Bank
