Philippines curbs imports while trying to raise exports

Just two years ago, before its economy collapsed, the Philippines looked like it would become an industrial giant in the Asia Pacific region. All signs pointed to a rapidly growing economy with moderately stable prices and booming external trade.

Foreign investors, shying away from countries like Hong Kong and Singapore, which had priced themselves out of manufacturing, were expected to take their business to the 7,100-island archipelago with its low- cost labor, highly educated work force and abundant natural resources.

According to the World Bank, the Philippines was becoming a new industrializing country. Foreign commercial banks, including Canadian lenders, provided easy credit for the anticipated expansion.

But the promise of prosperity disappeared. Political turmoil, marked by the assassination of opposition leader Benigno Aquino, was followed by a flight of capital and surging inflation. Gone for now are the prospects the Philippines held out to traders and foreign investors. “If you are thinking of investing in the Philippines in the short term, forget it,” said Bernardo Villegas, the outspoken senior vice- president of the Manila-based think tank, the Centre for Research and Communication. “The potential investor is not being promised a bed of roses in the Philippines. There continue to be serious political risks, not the least of which is the increasing social discontent resulting from the worst economic crisis to hit the country since the Second World War,” he told Canadian investors in Toronto recently.

Canada-Philippines trade, once rising at a steady pace, has declined, with the Philippines imposition of import quotas on non- essential goods to conserve foreign earnings. The Philippines is curbingimports while trying to raise sales abroad.

Canadian exports peaked at $102-million in 1982, but declined to $57- million last year. The Philippines is now buying mainly iron ore, potash and zinc blocks – essentials for its manufacturing industry and agriculture.

Canadian imports from the Philippines of clothing, coconut products, green coffee and canned pineapple totalled $117-million last year, up from $82-million in 1982. “The Philippines is the sick child of the Pacific,” said Frank Petrie, president of the Canadian Export Association. “It is better off for (Canadian businesses) to look at other countries in the area.” The federal Government excludes the Phillipines from plans for major trade and investment initiatives in the Pacific Rim. “The Philippines cannot be included in our growth projections in Asia,” said David Horley, a spokesman with the Department of External Affairs.

Currently, Canada is the sixth-largest investor in the Philippines, primarily in oil exploration, manufacturing, banking, insurance and mining.

With the Philippines economy in dire trouble and the accompanying social unrest, Canadian investors are not willing to sign new contracts until the picture clears. Canadian commercial banks have stopped lending and are trying to limit their losses. Federal Government trade assistance is more difficult to obtain.

Canadian importers complain about the reliability of deliveries, even when they have firm agreements.

This was not always the case. In the 1970s, the Philippines shared in the economic explosion that saw Asia Pacific countries achieve the fastest growth rates in the world.

The Philippines’ gross domestic product was growing between 5 and 7 per cent annually, fueled by increased revenue from the traditional exports of copper, gold, coconut products, sugar and pineapples.

But the economy started running into problems and investor confidence nosedived about the time Mr. Aquino was assassinated.

Taxes rose steeply to offset shrinking government revenues, the trade deficit widened to $24-million (U.S.), and government spending went out of control.

Political stability, a vital ingredient for foreign investment, could not be assured.

Foreign investors pulled their money out. Wealthier nationals did likewise and, according to estimates, have “salted” away about $30-billion in foreign accounts. Cash flow and balance of payments problems ensued.

At the same time, international commodity prices dropped sharply and remained low, and imported oil was more expensive.

The Philippines GNP declined by an estimated 6.5 per cent last year and is expected to fall another 1.5 per cent this year. This compares with growth in neighboring economies of between 4 and 9 per cent.

In 1984, inflation was 52 per cent and is estimated to be 35 per cent this year, up from the 10 per cent increases in 1981 and 1982. Neighboring countries experienced inflation between 1.7 and 9 per cent last year. “The Philippines economy in early 1985 is a big puzzle to many,” said Mr. Villegas. “Sticking out like a sore thumb in the booming Asia Pacific region, it was the only East Asian economy that suffered a GNP decline in 1984. It is also the only economy in the region that is burdened with double- digit inflation.” Government restraint and pressure by business for concessions have marginally improved the economic climate. But concerns about political stability, a successor to President Ferdinand Marcos, and the threat to foreigners posed by the Communist New People’s Army are still on the minds of investors, Mr. Villegas said. “The political and social aspects of country risk (are) of greater interest than the exclusively economic issues,” he said.

The Government views the situation differently. When the economy has undergone the restructuring demanded by the International Monetary Fund in return for foreign debt rescheduling, the social problems will disappear and the Philippines will regain economic presperity comparable with that of its Asian partners, it said.

Canadian investment and technology could help this diversification by developing specific businesses, such as food processing and packaging, and bringing local products up to international standards.

The Philippines is looking for an export- led recovery. Canadian “specialists” are needed in labor-intensive, export-oriented industries and the Government is doing everything possible to attract them, said Nina Gabor, director of the country’s Bureau of Foreign Trade.

Priority areas include electronic components, garments, finished wood products, footwear, processed food products, and construction and other manpower services. Investment opportunities also exist in telecommunications and electricity generation and distribution.

The amount of bureaucracy foreigners encounter is falling. In the past, some investors needed approval from 35 different agencies. Now they need only 15 approvals and that will be reduced further, Mrs. Gabor said on a recent promotional tour in Toronto.

She said the Philippines is planning to remove tariffs on imported hides from Canada to help the leather industry. The ceiling on foreign ownership in some industries has been lifted also.

These changes make the Philippines more attractive as a long- term investment. Using only economic criteria, investors who have written off the Philippines for the next five years should reconsider, Mr. Villegas said. “Over the long run, the domestic market for food products, appliances, pulp and paper, chemicals and other manufacturing articles can once again grow over 6 per cent per annum as the economy rejoins the new industrializing countries of the booming Asia Pacific region.” Near-term prospects are better for projects that are being supported by international development agencies.

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