Speaking to FinanceAsia at the recent CSFB investor conference in Hong Kong the message from Alberto Romulo comes across loud and clear. "The climate is good now for investment in the Philippines. The new government of our president Gloria Macapagal-Arroyo welcomes new foreign investment." At first glance this might appear glib – what country does not welcome foreign investment? But the message belies a deeper truth.
The new government of the Philippines knows that it has had a credibility problem. The varied venalities of the Estrada administration have hurt the country deeply. Foreign investment – either portfolio investment or direct investment – dried up. The stock market became the worst performer in Asia, the peso collapsed against the dollar and the domestic economy slowed to a snail's pace of growth.
Romulo knows this all too well. And quite rightly he sees the main task of the new administration as being one of restoring overall confidence in the country. "The main thing is that we now have a government where the president and the rest of the administration are committed to transparency, a level playing field and the rule of law," he stresses. "This is a government which will have high moral standards so that the practices of the past will remain in the past. If you come to the Philippines now, your investment will be based on merit, not because you know somebody. We will create an investor friendly and market friendly environment."
This determination in great part must come from an understanding of what went before. Romulo was integral to the People Power II revolution that ousted former president Estrada. However inspiring that peaceful transition of power, it was of questionable legitimacy. To counter that, the present administration must be a paragon of virtue. That will be the only way that the country as a whole will regain the confidence of the international community and the administration will get the full backing of the populace.
Romulo's plan appears to be to recreate a market that is generally conducive to business, and not to instigate specific reforms, laws, amendments or tax breaks. He stresses the importance of peace in Mindanao, the development of local infrastructure and the reduction of bureaucracy. All worthy stuff, and all desperately needed but perhaps short on a few of the specifics that investors might have been looking for.
"The onset of peace in Mindanao will be important. Domestic and foreign investors have shied away from Mindanao due to the hostilities there. We hope that Mindanao can resume its role as one of the investor friendly sites in the Philippines." He believes that 18% of the Philippines' GDP should come from Mindanao and 25% of the employment should be in the troubled southern region, the home of many Muslim Filipinos. He refers to this as the peace dividend – a rather grand term perhaps, but certainly a worthy ambition.
He also shows great understanding of the frustrations that many have faced when dealing with the vagaries of Filipino infrastructure. The infamous ride from Manila's airport is matched by local brown outs, lack of regional roads and sometimes dodgy communications links. "We have to improve the infrastructure. We may have an austerity budget and we have ensured that we cut down on the non-essential spending. But infrastructure [spending] remains."
He agrees that there is still room for a few fiscal incentives, but the real job lies in getting all the underlying incentives in place. "Certainly we should continue to have fiscal incentives, but as the foreign business people tell us, there are many other incentives for foreign investors to come to the Philippines." He believes when his government has tackled the issues of corruption, infrastructure and bureaucracy, these will be incentives enough for investors to return.
So far he believes the government's policies are working. He cites Bureau of Investment figures that show that in the first quarter of 2001, the Philippines recorded 56% more investment than in the equivalent period of 2000. Similarly, the comparison for exports is even more stark – an increase of 256%. "These signs are good and I trust they will continue."
Romulo's reluctance to use sweeping fiscal incentives and tax breaks to lure back foreign investors is understandable as the country is running its worst ever budget deficit. Another poison pill inherited from Estrada, the deficit stands at around Ps145 billion or 4% of GDP. According to Romulo, this is down from Ps225 billion and headed toward 6% of GDP when the Macapagal-Arroyo administration came into power, a level that Romulo describes as "unreasonable".
Overall Romulo aims to keep this deficit at 4% of GDP in the near term and to reduce it to a surplus by 2004. "As our economy grows we should be able to increase our tax collection," he says. "Once we increase our tax collection through an expanded tax base, we should be able to bridge the expected budgetary shortfall anyway. We hope we will be able to contain [the budget deficit] for the medium term."
Increasing the tax base is what every government and finance minister wants to do and they usually run into political problems. In the highly politicized environment in the Philippines, it will prove a hard task. But Romulo's solution is similar to that of getting the investors back – sort out the basics and the overall levels should increase. He plans to instigate a more professional collection system with the focus on better human resources and technology, rather than promulgating a whole raft of new taxes which Congress would find difficult to pass.
His aim is to get the tax base to 15% of GDP by next year through this improved efficiency. This is still away from the 17% level seen in the Ramos administration but up from the dire level of 13% under Estrada. Further revenue will come from the privatization of state owned assets, he believes.
Proposing privatizations that never quite manage to get done is a favourite game for many Asian politicians. But Romulo is adamant. "We are committed to privatization. We feel that government should get out and leave business to the private sector," he says. "We are privatizing Meralco [Manila Electric], Napocor [National Power Corp.], IBC Channel 13, Islamic Bank, Philippine National Construction Corporation and some other properties and assets." Apart from the sale of Napocor, the sale of the other assets he believes will generate revenue of up to Ps9 billion in the next year. "That will help us a lot with our budgetary shortfall."
Napocor's privatization is subject to the passing of the Omnibus Power Bill – a bill that has wound its way through a tortured political peregrination over the past few years. It is something of a talisman for reformists in and out of the country who see its passage as a sign that the political process can handle the sale of state assets to foreigners on a meaningful scale. Romulo believes that by the end of the present Congressional session on June 30th the bill will get passed.
Another concern of observers is how the Philippines is one of only two countries in the world that has two sovereign borrowers – in this case the Department of Finance and the central bank (Bangko Sentral ng Pilipinas). BSP suffered considerable abuse under the Marcos administration when it was not only the agent of monetary policy but was also the agent of fiscal policy. It was effectively looted and went bankrupt.
Romulo himself was the author of the new BSP law, which is still in effect today. This ensures the BSP's independence in monetary matters and gives tax collection authority to the Department of Finance, which oversees the two collection agencies: the Customs and the Bureau of Internal Revenue. In recent years, the BSP has been taking out loans in the international markets while the Department of Finance has been issuing bonds. There has been some concern that the two are competing for funds and so not getting the most cost effective finance.
Romulo naturally dismisses this, asserting that the two bodies have a good working relationship. The fortuitously low levels of domestic interest rates have made Romulo's job somewhat easier. In single digits due to the high levels of liquidity in the domestic banking sector, these interest rates should encourage the government to try to finance the deficit onshore. However Romulo is aware that this could crowd out the local borrowers and push up domestic interest rates, something he is obviously keen to avoid. And so he keeps an open eye on the international markets and will go abroad if needs be. "[When] we have a deficit we should have a good mix between domestic and foreign sourcing. That is what we are going to do."
Overall, Romulo appears to be more of a politician than a technocrat. He is an accomplished lawyer and lawmaker who seems at ease with the demands of international finance. His family business is well known as one of the leading Philippine law firms. He has also been in government for over 15 years, serving as Secretary for the Budget during the Acquino administration as well as being leader of the Senate under Ramos. These stints should help him in what is arguably one of the more difficult jobs in the administration. Being Secretary of the Department of Finance is a job that requires great balancing skills: negotiating taxes through Congress while talking to international bond investors; serving on the BSP board while issuing local Treasury bills; privatizing state assets while winning elections. Romulo comes across as a man skilled and adept at handling such challenges. His charm and affability alone should see him through.
