Philippine future bleak, says Bear Stearns analyst

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Philippine future bleak, says Bear Stearns analyst
Posted: 2:42 AM Jan. 17, 2006
Daxim L. Lucas
Inquirer

THE Philippines faces a "bleak" future despite recent gains in the financial markets because the government continues to shy away from meaningful structural reforms, an analyst at US investment bank Bear, Stearns & Co. said.

Many foreign investors remained wary of the country's prospects, said John Stuermer, whose analysis of the Philippine politico-economic situation dates back to 1986.

"The long-term future, in terms of raising employment and investments is very, very bleak," said at a forum of the Foreign Correspondents Association of the Philippines.

Bear Stearns is the investment bank that cheered on President Gloria Macapagal-Arroyo's drive to reform government finances last year, mainly through an expanded value-added tax law.

Stuermer acknowledged that he was responsible for making the controversial prediction in July 2005 that Arroyo would survive an impeachment complaint filed against her in Congress -- at least until January 2006.

"It's now January 2006," he said.

Stuermer is giving the President a 50- to 60-percent chance of remaining in office under the present system of government.

"GMA [Arroyo] is tougher politically than the opposition expected," he said. "The longer impeachment and Cha-cha [proposal for Charter change] go on, the more GMA's political support will recover."

Stuermer also said there was a 25- to 30-percent chance that the Philippines would shift to a parliamentary form of government.

He noted that there was little public support for the proposal, which he said was "mainly a creation of Manila's elite."

He said there was only a 15- to 20-percent chance that Arroyo would be impeached by the House of Representatives and convicted by the Senate.

"GMA's allies control the lower house and will undermine the impeachment process with procedural obstructionism," he said.

The House of Representatives rejected an impeachment complaint against Arroyo in September. The opposition bloc has said it will file another impeachment case against her this year.

Stuermer's bearish economic assessment came even as he acknowledged the peso was one of the best-performing currencies in the region.

He also took note of the resurgent stock market, the respectable pace of economic growth, and the "marginal" slowdown in the acceleration of consumer prices.

"The short-term view is positive," he said. "Everything is coming up roses."

But he said he was "not that optimistic" in general terms. "Yes, we'll have a five- to six-percent growth each year" in the domestic economy. "Everything is improving, but it has no impact on the standard of living for Filipinos."

Stuermer's assessment echoes that of Senator Manuel Roxas II, who pointed out that the benefits of a strengthening peso against the US dollar was not felt by the majority of Filipinos.

Stuermer described the economy as "very resilient," noting that the last time the gross domestic product contracted was in the wake of the Asian financial crisis in 1997.

Even then, he said, the contraction was due to the drought-inducing El Niño weather disruption, which cut agricultural output. "It is very hard to make the Philippine economy collapse in any given year."

The Bear Stearns analyst believed, however, that this resilience would be the country's undoing.

"The downside is this: There is now a downside for bad political behavior," he said. "The Philippines' political class has no incentive for good political behavior."

Because the bulk of economic growth still depends on agricultural output, which is largely immune from politics, political squabbles can only depress growth by so much.

Benjamin Diokno, a professor at the University of the Philippines' School of Economics, underscored this point in a presentation.

He showed that the Philippine economy historically has grown by an average of four percent annually despite various boom-and-bust cycles, mainly because of built-in safeguards like the country's dependence on agriculture.

This means there is "little incentive for meaningful structural reform that will attract real investments," he said.

He said the last round of genuine structural reforms in the Philippines came in 1986 with the toppling of the Ferdinand Marcos dictatorship.

"Now, the only 'out' is to send your mother abroad to work as a maid," he said. "This is having negative social implications."

Diokno, who served as budget secretary of former president Joseph Estrada, predicted that the economy would grow by 4.6 percent this year, compared with the government's growth target of 6.3-7.4 percent.

He said the economy continued to be threatened by the possibility of high interest rates, a potential surge in international crude oil prices to $70 per barrel, a decline in income from electronics exports, and political instability. With INQ7.net

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