Philippines’ pivot

Foreign investment has finally emerged as a key element in the successful consumption-based recipe that is propelling the Philippines economy to the forefront of south-east Asia’s growth frontier. Foreign investment in particular has reached new heights at $7.9bn in 2016, from $5.6bn a year earlier, according to figures from Bangko Sentral ng Pilipinas, the country's central bank. This sharp growth is the result of the disruptive policies brought about by president Rodrigo Duterte, rather than continuity.  


“In the past, investment was mainly driven by US investors,” says Diwa Guinigundo, the central bank deputy governor in charge of monetary stability. “[Now] there is a scope for allowing and encouraging investors from Asean+3 countries to come in and participate in the growth process of the Philippines.”

In fact, the country’s pivot to Asia – emphasised by Mr Duterte’s anti-US rhetoric and combined with US president Donald Trump’s America First policies – deeply resonated in the mind of US investors. US FDI into the country has dwindling, totalling $76.6m in 2016, from $633.7m a year earlier, according to central bank figures. Meanwhile, investment from Asian partners rose, with Japanese FDI growing threefold to $993.1m, and FDI from Asian newly industrialised economies rising to $770.7m in 2016, from $226m in 2015.

Looking forward, the central bank believes the fundamentals of the Philippines’ economic growth remain sound. “There is no overheating in the Philippines,” says Mr Guinigundo, who highlights that inflation remains under control and is expected to be 3.4% and 3% in 2017 and 2018, respectively, despite robust economic growth estimated at more than 6% over those two years.

“What we expect to happen in 2017 is inflation to peak, then we expect inflation to [move] back in 2018 and 2019. That being the case, there is no reason at this point why we should tweak monetary policy,” says Mr Guinigundo.

The bank is transitioning power from governor Amando Tetangco Jr, who led the institution for 12 years, to Nestor Espenilla, who will take over from July onwards. If financial stability remains the institution’s top priority, it will not overlook some of the opportunities and challenges brought about by high economic growth in a country where 26 million people live in poverty, according to 2016 government figures.  

“Achieving high growth is not enough,” says Mr Guinigundo. “It’s important that the financial system empowers the unbanked and underbanked segments of the society so that they themselves can participate in the growth process. It’s important that the fruits of development accrue to those in the bottom 30% of population.”

Sri Lanka’s financial headache

Sri Lanka is trying to escape from a challenging debt spiral through a combination of foreign investment and fiscal consolidation, backed up by support from the IMF. However, after agreeing on a $1.5bn loan in June 2016, the IMF is now asking the government to refine a key fiscal reform, the inland revenue bill, aimed at modernising tax collection in Sri Lanka to unlock a third $168m tranche of the extended fund facility approved last year.

“It wanted us to be more specific on certain amendments,” says Ravi Karunanayake, Sri Lanka’s former finance minister.  

“When we went into agreement with the IMF, we did it in the best interests of the country, rather than for the sake of complying with the indication of multilateral agencies. We had our own future shaped, and we told it we need longer for some of the reforms it wanted us to do.”

The IMF reportedly raised doubts over a set of tax exemptions the cabinet approved without previous consultation. However, Mr Karunanayake reiterates his confidence that the “fund would approve the third tranche in June as our fiscal performance has been excellent”.

The government is trying to broaden the fiscal base and is committed to reducing the fiscal deficit to 3.5% by 2020. At the same time, it has to deal with the high level of debt inherited from the previous administration led by president Mahinda Rajapaska. Total debt is at about 76% of GDP and servicing it soaks up the equivalent of 95% of total fiscal revenues, according to government figures.

“We are pursuing a genuine investment and foreign drive; it’s not about government borrowing like it used to be in the past,” says Mr Karunanayake. “We are trying to convert debt into equity. In that way it becomes FDI and the pressure on the liability side is reduced.”

The government used this approach in renegotiating a Chinese concessional loan for the development of the Hambantota port on the island’s southern shores, which it converted into a 99-year concession in favour of state-owned China Merchants Port Holdings Company.

However, Sri Lanka’s governments have recurrently lacked consistency in their decision making, and a recent cabinet reshuffle, which saw Mr Kurunanayake swap roles with former foreign minister Mangala Samaraweera raised new questions over the government's ability to pull off its ambitious reform agenda.  

India and China power on

Recent developments in India and China have continued to dominate the debate over the future of Asian economy as whole. If the assertive reforms agenda carried out by prime minister Narendra Modi in India is a turning point in the country’s traditionally slow and inefficient governance, China is approaching a key moment in October, when president Xi Jinping will seek a second mandate in the 19th National Congress of the Communist Party.

“The demonetisation programme in India was a surprise, and I don’t think it was executed particularly well,” says Paul Gruenwald, managing director and chief economist for the Asia-Pacific region of credit rating agency S&P Global.

Mr Modi abruptly scrapped the value of nearly 86% of the banknotes in circulation in a TV announcement in November, in a move aimed at legalising the country’s extensive black economy and promoting electronic forms of payments. However, cash shortages hit businesses and consumers alike across the country, and inevitably took a toll on the economic cycle.

“There was a steep drop in activity in November, but it looks like most of the damage has been reversed. And the reform agenda has been pretty good with the Goods and Services Tax, financial inclusion reforms and the investment reforms. All-in-all we are comfortable sticking to our 7.5% growth estimate over the medium term,” says Mr Gruenwald.

If India’s demonetisation programme made many frown, there seems to be a broad consensus over the bright future of the Chinese economy, despite the looming challenges related to its bad credit and inefficient state behemoths.

“We are not in the ‘hard landing’ camp. But nobody is asking questions about excessive credit growth, non-performing loans in banks and slow structural reform agenda,” says Mr Gruenwald. “We don’t see any near-term danger, but we don’t see this macroeconomic path as sustainable over the medium term. With congress approaching, we don’t expect anything dramatic to happen this year, but we hope for a pick-up of structural reforms to address structural issues in President Xi’s likely second term.”

Any reform agenda will have to deal with the wide universe of Chinese state-owned enterprises (SOEs). “They really have to start reforming the SOEs, which are a drag on growth, but also an important factor of political stability as they generate a lot of jobs,” says Mr Gruenwald.  

The ageing problem

Asia is ageing fast. It will take only 22 years for China to double its population aged 65 and over, in sharp contrast to European countries such as France or Sweden, which took a respective 126 years and 84 years to see their elderly populations double. Ageing dynamics in other Asian countries such as Vietnam, Cambodia and Laos could unfold even faster.

Facing such a challenge, authorities across the continent are being urged to consider the introduction of long-term care and insurance systems to weather the demographic storm that is gathering. The Japan International Cooperation Agency (Jica) has been particularly active in passing on lessons rooted in Japan’s experience, where the challenges rising from an ageing society have been met with mixed results.

“Instead of spending a lot of money without a policy framework, we need to be very wise and effective and efficient, so that authorities in Asia don’t repeat the failures of Japan’s history, and make the best use of Japanese success stories,” says Toda Takao, Jica’s vice-president for human security and global health.

Instead of focusing first and foremost on investment, Jica is promoting a more holistic approach where policymaking factors in a wider number of variables, as well as relying upon international co-operation.

“My first priority on investment on an ageing population is wisdom sharing... for policy framework. The second one is human resource development. We need quality service on the ground so that people can rely on it. For that purpose, the quality of human capital and human service experts will be very important,” says Mr Takao.

“Money comes in as the very last factor. [Only when wisdom sharing and human resource development are carried out] can money then be used very efficiently and effectively.”

Jica is now working with authorities in Thailand, Vietnam and Sri Lanka to develop a successful set of policies to address ageing populations in these countries, but “almost all Asian countries are showing an interest to improve their policy frameworks and their measures on the ground”, says Mr Takao.