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The Philippines is on a Convincing Growth Path Author(s): Barbara Meynert Date: Jun 14, 2013 Theme(s): Trade & Investment Publications: Opinions & Speeches The Philippines is at a defining moment of growth and economic potential after finally overcoming many of its historical problems, writes Fung Global Institute Board Member Barbara Meynert. Though it is poised to take off, the Philippines must still resolve some geopolitical uncertainties. In the first quarter of 2013, the Philippines grew by a seasonally adjusted 2.2 per cent over the previous quarter and by 7.8 per cent year-on-year. This makes it Asia’s fastest growing economy, surpassing China’s 1.6 per cent quarterly growth and 7.7 per cent annual growth. The latest figure is the highest in more than two years of straight quarterly growths and convincingly left behind the 3 per cent trend growth of the 1990’s. The financial performance of the country has also been remarkable with foreign exchange reserves rising steadily in the past several years to reach over $80 billion. The performance has not gone unnoticed. Funds have been pouring into the stock market, which rose 30 per cent in 2012 and again by 18 per cent in the first quarter this year. The real reward for the Philippines and President Aquino is the upgrade of the country’s credit rating. Fitch Ratings awarded the Philippines its first ever investment-grade credit rating this March, followed by Standard and Poor in May. This came at the same time that Indonesia, Asean’s largest economy and a member of the G20 Group, received a slight downgrade on its credit rating. Over 10 million Filipinos, about a quarter of the country’s labour force, live or work abroad in over 200 countries. Their remittances, equivalent to 8.5 per cent of GDP, help to plug its trade deficit and contribute to the rising foreign exchange reserves. As a reflection of rising prosperity, the remittances are now more likely to be saved, invested or used to set up small businesses than for repaying debt or consumption, as was the case ten years ago. Some Filipinos are returning home bringing with them not only money but also skills acquired overseas. The service sector is gaining in importance accounting for over 50 per cent of GDP with a booming back-office industry, which contributes over $10 billion a year to the economy. Things have not always been this way for the Philippines. In fact, the country was known as the sick man of South East Asia. It was badly managed, corrupt and poor. It was colonised by Spain, in the 16th century, and was then ceded to the USA in the 19th century. It gained independence after World War II but did not participate in the industrialisation that brought prosperity to many of its neighbours; instead it reversed into economic decline. The perception then was that the Philippines had more in common with the former Spanish colonies in South America than with the other Asian countries. The good news does not stop on the economic front. Last October the Philippines government and the main Muslim rebel group in the southern region of Mindanao, the Moro Islamic Liberation Front, agreed to an outline of a peace deal. The plan envisages the establishment by 2016 of an autonomous Muslim area in Mindanao, to be called Bangsamoro. The proposed Bangsamoro will have budgetary autonomy, a fair share of revenue from the extraction of Mindanao’s resources, its own police force, and sharia laws for Muslims. In exchange for autonomy, the Front will end its armed campaign for independence. If this peace plan works, it would bring an end to over four decades of separatist insurgency that has killed over 100,000 people and displaced two million more. The Mindanao model, which Malaysia helped to mediate, has significance beyond the borders of the Philippines. It could be used by Thailand and Myanmar as a possible solution in their own countries. Armed Muslim groups in Thailand’s deep south have spent decades fighting for an independent Pattani state. In Myanmar, armed militias from ethnic groups like the Karen and the Kachin have been battling for some independence from the central government for more than five decades. A successful application of the Mindanao model to these areas would help to save lives and increase prosperity in Asean as a whole. While the sick-man Philippines is on a healthy growth path, there are still many challenges ahead although they now look less intractable. On the economic front, the benefits of faster economic growth have yet to trickle down fully. With a fast growing population of almost 100 million, job creation cannot keep up with the around one million entrants to the job market every year. Unemployment is a high 7.5 per cent; the schemes of public-private partnerships that are meant to improve woeful infrastructure have not gone well; tax still accounts for a miserable 14 per cent of GDP, half the level of Malaysia; and the proportion of people below the poverty line remains stubbornly at around 28 per cent of the population. The Philippines is one of the claimants to the Spratley Islands in the South China Sea, putting it in confrontation with other claimants including China with whom tension has been running high. In a recent speech marking the 115th anniversary of independence from Spain, President Aquino said, in an oblique reference to China, that the Philippines has not claimed territory that clearly belongs to another country but only asks that “our territory, rights and dignity be respected”. In the same speech, he also said that in the next five years, some $1.8 billion would be spent to modernize the armed forces. If anything, combined with strong economy and new political stability, this reflects a growing confidence in the Philippines that it could become a major player in the region.