‘Hot money’ main source of investments in Q1 — study

The Philippine economy showed signs of resiliency in the first quarter of 2005, with the peso appreciating, interest rates softening, and the equities market growing — but mostly due to the inflow of foreign portfolio investments which, if not closely monitored, can further damage the still ailing economy.

Chronic corruption, as well as the national debt, which has ballooned to P3.36 trillion are also major challenges confronting the country’s economic managers.

A study conducted by Stratbase Public Affairs and Research Consultancy Group showed that foreign portfolio investments, or "hot money," registered at $518 million in January alone, or six percent higher than the $486.8 million posted for the whole of 2004. The heavy inflow was a result of the surge of capital poured into the stock market and the local money market.

The study warned though that the hot money phenomenon is not likely to last as these speculative investments can leave the country just as easily as they came in.

"The sudden outflow of portfolio investments can damage the economy by causing declines in asset prices similar to that experienced during the 1997 Asian financial crisis," the study warned.

"Remittances by overseas Filipino workers may start decelerating in the second quarter of the year compared with fourth quarter figures. It may even decline because other countries are heavily exporting labor, too, while many Arab countries are beginning to realize the value of self-reliance."

The government should also relentlessly pursue a genuine reform agenda addressing major structural economic problems to sustain the economic gains generated in 2004.

Stratbase identified five structural problems that continue to beleaguer the country’s economy — chronic fiscal deficit, ballooning national debt, poor revenue effort, low direct foreign investment, and poor governance.

The study also underscored the worsening state of graft and corruption in the government, cautioning that the vicious cycle of corrupt politics and poor governance will continue to haunt Filipinos if no drastic measures were taken. The continued perception that public institutions such as the Bureau of Customs and Bureau of Internal Revenue are riddled with graft and corruption makes it difficult for government to introduce new tax measures.

Dr. Ponciano Intal of De La Salle University said infrastructure investment is also a key area where the country must improve in order to compete effectively in the global market. In the 2004 World Competitiveness Yearbook, the Philippines ranked second to the bottom among 60 countries in the infrastructure category.

"There is a need for infrastructure development which involves adoption of more realistic, depoliticized and market oriented user charges that would encourage the private provision of infrastructural facilities," Dr. Intal said.

On the issue of the national debt, a separate study done by a group of economics professors from the University of the Philippines attributed the more than one-third, or 37 percent, of the national debt build up to "non-budgetary accounts" and off-book items such as assumed liabilities and lending to corporations.

More than the fiscal position of the national government, the Stratbase study pointed out that the worsening state of the consolidated public sector deficit should be scrutinized.

The National Government deficit of P184.5 billion for 2005 does not include the impact of shouldering the P600 billion debt of the National Power Corporation which will increase this year’s deficit by P36.7 billion due to additional interest payments. This will mean that the actual NG deficit will reach P221.23 billion, the highest budget deficit in history.

"On the whole, the economy’s growth remains narrow, shallow and hollow," the study said. "This economic growth has not generated substantial number of jobs, which the government hoped to create as contained in the 2004-2010 Medium Term Development Plan."

Multilateral lenders, business groups and private economists also predict modest growth in 2005 compared to the over-optimistic government economic managers. Still, a crucial goal is the creation of a business environment where there would be a significant increase in investor confidence.

STRATBASE is a full service public affairs and research consultancy group specializing in government relations and communication strategies. It is composed of highly competent individuals from both the business and the public sector with different fields of specializations and solid backgrounds in public affairs, policy research and analysis, political management, and issue advocacy campaigns.