War On Graft Fuels Growth

MANILA, Philippines - A middle-class woman is headed to jail for tax evasion.

That wouldn't make headlines in many countries, but it's big news in the Philippines. It was enough to send President Benigno S. Aquino III reaching excitedly for his phone during an interview this week to retrieve a message about the case from his tax chief.

Businesswoman Gloria Kintanar had just exhausted her appeals and would become the first tax evader in Philippine history to be jailed - once authorities deal with her claim of illness at the hospital where she is under arrest.

"Once her claim is verified ... she will be escorted to jail to serve her sentence," Aquino told Reuters, brandishing his mobile phone. "Finally somebody is going to go to jail for a white-collar crime."

With such victories, Aquino says he is puncturing a culture of impunity that is at the heart of decades of sub-par economic performance in the Philippines and has mired it in poverty.

The Philippines, a US colony until 1946, was one of Asia's wealthiest nations in the 1950s but now one-third of the 94 million population lives below the poverty line.

Growth was anemic and infrastructure remains mostly woeful.

In the intervening years, the Philippines has promised much but delivered little. But a growing number of analysts and investors say this time the Philippines promises to leapfrog into a higher growth pattern with signs that Aquino is serious about tackling old problems of graft and tax dodging.

"'The attitude has changed, I think," the 52-year-old bachelor said at Malacañang, a few days after marking two years in power. "We have people who had given up on the country (who are now) coming back."

Aquino is being helped by low interest rates, improved fiscal management, and a confident middle class of consumers whose spending is fueled by the huge $1.6 billion in monthly remittances from millions of Filipinos working overseas.

The economy grew 6.4 percent in the first three months of the year, second only to China among Asian economies, and Aquino told Reuters he expected it to accelerate in the second quarter.

The government is aiming for an expansion of 5-6 percent in 2012, making the Philippines a rare hotspot of growth as Europe remains hobbled by its debt crisis, the United States struggles to recover and even China shows signs of a slowdown.

Economists point to a rebound in confidence among businesses operating in the country, partly due to signs that Aquino is fulfilling his campaign pledge to go after graft.

In a landmark victory, Aquino succeeded in his bid to impeach the country's Chief Justice Renato C. Corona on corruption charges in May. Next in the firing line of the gun-enthusiast president is his predecessor Gloria Macapagal Arroyo, who is under arrest awaiting a trial on graft charges.

Companies Upbeat

Just as important as Corona's ouster, the impeachment vote by a majority of senators showed that Aquino can control an often unruly Congress - boding well for the passage of long-delayed tax reforms that are crucial to boosting weak revenues and securing a coveted rise to investment-grade credit status by major ratings agencies.

"The governance issue which has always been the problem of the Philippines for many years has somehow turned around, and that is what we have seen with the new administration," said Maria Theresa Marcial-Javier, senior vice president at BPI Asset Management, which manages more than $16 billion in assets.

Philippine companies were the most optimistic in Asia in the second quarter, according to the Thomson Reuters/INSEAD Asia Business Sentiment Index, bucking a gloomier regional tone.

The country's stock market has gained 20 percent this year, hitting record highs and stretching valuations that are among the region's highest.

Assets under management of Philippine-focused mutual funds and exchange-traded funds hit an all-time peak of $6.5 billion in April, up from a pre-crisis high of $4.4 billion in June 2007, according to global fund tracker Thomson Reuters Lipper.

"Big conglomerates have never been so busy getting involved with government," said Euben Paracuelles, regional economist at Nomura. "This is a structural change. Big companies for decades haven't been investing because the government was so corrupt."

The government brought down its debt-to-GDP ratio to 51 percent in 2011, a 13-year low, and has made headway in weaning itself off costly foreign debt.

Tax revenues - hobbled by chronic evasion - remain a weak spot. But the government has kept its budget deficit well below programmed levels - at P22.8 billion ($547 million) in the first five months of this year, a fifth of its goal.

'A Deluge Of Convictions'

Aquino boasted that the Philippines was now able to borrow at rates equivalent to several notches higher than the country's current sovereign rating, helping to save it about $1 billion in interest rate payments last year.

"Just to be a little bit diplomatic, I won't mention which countries we were compared to of the first world," he said.

Sceptics say that Aquino, from a blue-blood Philippine political family with a mother who was president and a father a slain democracy hero, has been more talk than action. His high-profile impeachment of Corona has not been matched by convictions lower down the chain of corruption, something he says will take time.

The tax evasion case that finally resulted in a four-year jail sentence for businesswoman Kintanar began in 2005, showing how slowly the wheels of justice turn here. Previous tax evasion charges against influential figures such as former first lady Imelda Marcos - now a congresswoman - and one of the country's richest businessmen, Lucio Tan, have been dismissed by courts.

Aquino insisted that the flow of convictions would pick up as his efforts to go after tax cheats and push for quicker cases take effect. He aims to raise tax revenue as a ratio of GDP to 15 percent by 2016, around the same level as Malaysia, from about 12 percent now.

"Pretty soon I think, I won't give you a specific time, there will be a deluge of convictions," Aquino said.

Aquino's plan to boost infrastructure development through Private-Public Partnerships (PPPs) has made little headway a third of the way through his six-year term.

Only one PPP project has been successfully bid out, leading to criticism that the system is not working. Aquino said the pace would pick up this year with eight projects expected to be finalized, though analysts say they would be impressed if half that many get off the ground. (Factbox on PPPs:)

"Hot money investors will continue to be attracted to Philippines equities, but the bricks and mortar foreign investment community remains very cautious," said Scott Harrison, managing director of the Pacific Strategies & Assessments consultancy.

"Infrastructure is extremely inadequate and looming power shortages make the Philippines a much less desirable destination for investment than most of Manila's neighbors in ASEAN (Association of South East Asian Nations)."

Decrepit

Net foreign direct investment in the Philippines climbed to $850 million in the first quarter, up by nearly three-quarters from a year ago, but it remains way below that of its neighbors, Indonesia and Thailand. Investment at around a fifth of gross domestic product (GDP) is among Asia's lowest, evident in the country's decrepit roads, railways and ports.

Even optimists say the current upswing owes more to a sweet spot of loose monetary policy and the rebuilding of the country's balance sheets than to Aquino's anti-corruption and investment efforts.

"That's what's making the economy tick," said Edward Teather, an economist at UBS in Singapore. "Mr. Aquino and his administration is supplying icing on the cake by delivering some movement on the business environment."

Nevertheless, Aquino's honeymoon with investors may sour if he cannot keep up his corruption drive or achieve breakthroughs on tax reform and infrastructure projects in the coming year.

He is pushing Congress to pass amendments to a "sin" tax on cigarettes and alcohol this year that Nomura estimates would boost revenues by 0.2 percent of GDP. Although tax hikes are unpopular, both chambers of Congress are stacked with Aquino's allies and the bill is likely to pass with no major changes.

Aquino told Reuters he believed it would be passed this year.

Ratings agencies say passage of the new tax is crucial if the Philippines is to secure investment grade status in the coming years following several recent credit upgrades. That would put it in the same bracket as neighboring Indonesia and open the way for a fresh rush of investment.

"To sustain this momentum and to sustain the positive sentiment in the investment market in general, those expectations have to come into fruition, it has to happen," said Marcial-Javier at BPI Asset Management.

Modest Targets

Malacañang on Tuesday said the Philippine government will stick to its five to 6 percent GDP growth for this year amid optimism that the second quarter GDP will surpass the 6.4 percent GDP in the first quarter.

"We're going to stick to our target of five to six percent for the whole year," Presidential Communications Development and Strategic Planning Office (PCDSPO) Secretary Ricky Carandang said, given the global economic environment.

Carandang cited the global economic uncertainty due to the economic crisis experienced by European countries such as Greece and Spain, as well as Japan's economic recovery from the twin disasters in 2011.

Still, the government is optimistic that the second quarter GDP will be able to surpass the 6.4 percent GDP in the first quarter.

"The same factors that led to the growth in the first quarter seems to be present and perhaps even more in the second quarter, which is where we're seeing some confidence that second quarter could be very strong," Carandang said.

Carandang meanwhile said trade implications on Philippine banana exports to China had been discussed by the President and his economic cluster. He said phytosanitary issues on Philippine banana exports are already being addressed.

He noted that there are more Philippine investments to China than Chinese investments to the Philippines.

"We'd love to see more Chinese investments here at this point; we'd love to see their investments reach the level of ours but at this point, that hasn't happened," he added. -with a report from Madel R. Sabater

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