Philippines

Politics:

• Analysis

  Philippines politics: Sabah conflict may inflict political damage on Aquino

  In a sign that the Malaysian-brokered peace process between the Philippine government and the Moro Islamic Liberation Front (MILF) has not been irretrievably derailed by the recent clashes in the Malaysian state of Sabah, this week negotiators are set to meet again in the Malaysian capital, Kuala Lumpur. However, keeping the process on track has arguably cost the president, Benigno Aquino, valuable political capital. This may damage not only Mr Aquino's own popularity, but also that of the candidates who are campaigning as part of "Team PNoy" for positions in the Senate (the upper house of Congress) at the May mid-term elections.

  The recent announcement that further negotiations will held in Kuala Lumpur followed the arrival last week of additional Malaysian military monitors on the Southern Philippine island of Mindanao to help to oversee the ceasefire between the Armed Forces of the Philippines and the MILF. The two events are signs that the violent clashes in the eastern Malaysian state of Sabah between Malaysian security forces and followers of the self-proclaimed Sultan of Sulu, Jamalul Kiram III, which started over a month ago, have not hurt the peace process. On March 14th the head of the new group of peace monitors in Mindanao said he was confident that the Sabah conflict would not affect negotiations with the MILF.

  It also seems clear that the clashes in Sabah have not strained relations between the two South-east Asian neighbours. In recent weeks the Malaysian government has allowed Philippine consular officials and social workers to visit Filipino long-term residents and workers in Sabah who are temporarily living in evacuation centres to avoid being caught in the fighting. The actions of the Sultan of Sulu and his followers could have significantly damaged bilateral ties. This would have had negative consequences for the peace process, as it would have made it difficult-if not impossible-for Malaysia to host and mediate the talks.

  It remains unclear what exactly triggered the clashes in February. It appears that the sultan and his followers feel sidelined in the Philippine peace process, in which they feel they have a stake (as they fear that the Philippine government will cede control of large parts of the sultanate, which includes some of the southern Philippine islands, to the government of a proposed new autonomous region). Letters from the sultan to Mr Aquino (then the president-elect) in 2010 regarding the group's claim to sovereignty in Sabah mention this sense of being denied a significant part in the peace process. However, most of the letters were lost in what Mr Aquino has described as the "bureaucratic maze". The sultan's group wants some kind of role in the new political entity, although it is unclear precisely what this would be.

  Political capital expended

  However, keeping the peace process on track and Philippine-Malaysian relations cordial against the backdrop of the Sabah conflict, which has already resulted in the deaths of more than 60 Filipinos and Malaysians (both civilians and security personnel), could take its toll on the political stock of the president. Mr Aquino has been criticised by many commentators and politicians for failing to show sufficient sympathy for the sultan and his followers. Mr Aquino's statements and actions since the crisis began have gone against the grain of popular opinion in the Philippines, which tends to see the sultan as an underdog facing the full might of Malaysia. Mr Aquino has refused to talk to the sultan unless he calls his followers home, and has even warned the 74-year old leader that he could face criminal charges for inciting conflict with another country. The president has also described the Philippines' 40-year-old claim to Sabah as "dormant", and has indicated that he would prefer to keep it that way in view of Malaysia's crucial role as facilitator in the peace talks between the Philippine government and the MILF.

  According to an opinion poll by local survey group, Pulse Asia, by January this year Mr Aquino's approval ratings had already fallen by 12 percentage points since last November, to 66%, after he had come under fire from the country's powerful Roman Catholic bishops for supporting the controversial reproductive-health bill. Although support for the vice-president, Jejomar Binay, the leader of the main opposition United Nationalist Alliance (UNA) coalition, has also fallen, his approval ratings stood above the president's in January, at 69%.

  Mr Aquino's support ratings are likely to fall anew, amid incessant media criticism of his alleged mishandling of the Sabah crisis. The president's senatorial candidates in the May election were banking largely on receiving a boost from his endorsement, but they may now need to start making greater efforts to win election on their own merits. According to a survey by Asia Pulse in February of support for the senatorial contenders in the coming poll, among the 15 candidates who have a significant chance of winning (there are 12 Senate seats up for election), voters are tending to favour candidates representing Mr Aquino's roster of senatorial candidates, "Team PNoy": the 15 leading candidates consist of nine from Mr Aquino's Liberal Party-led coalition and six from the UNA.

  The president currently enjoys the support of the House of Representatives (the lower house, which will be re-elected in full in May), enabling him to pursue his legislative agenda, but he does not command a majority in the Senate. In the election campaign, Mr Aquino has much for which he can claim credit-notably the Philippine economy's peer-beating performance-to bolster the popularity of his ruling coalition. However, the Sabah conflict has roused popular sentiment against him, and could both damage his personal popularity and dent that of his senatorial candidates.

  March 18, 2013

• Background

  Philippines: Political forces at a glance

  Political outlook: Political forces at a glance

  Present government: Benigno Aquino was elected president in May 2010 with 42% of the votes cast, succeeding the previous holder of the post, Gloria Macapagal Arroyo. Mr Aquino's six-year period in office (under the constitution, he is permitted only a single term) began in July 2010 and will end in 2016.

  In the congressional election, which was also held in May 2010, the coalition that supported Ms Macapagal Arroyo, Lakas-Kabalikat ng Malayang Pilipino-Christian Muslim Democrat (Lakas-Kampi-CMD), initially emerged as the largest party in the House of Representatives (the lower house of Congress). But Lakas-Kampi-CMD subsequently suffered a large number of defections, with the result that Mr Aquino's Liberal Party (LP) became the largest force in the lower house. Taking into account the backing of smaller parties, Mr Aquino has in practice been able to count on the support of at least two-thirds of the lower house. By contrast, the Senate (the upper house), where the LP holds only four out of 24 seats, is more independent than the House of Representatives and represents a bigger stumbling block for the government as it attempts to press ahead with its legislative agenda.

  Next elections: The next presidential election will take place in 2016. Mid-term congressional elections for one-half of the seats in the Senate and all those in the House of Representatives will be held in May 2013.

  June 19, 2012

• Structure

  Philippines: Political structure

  Official name

  Republic of the Philippines

  Form of state

  Under the 1987 constitution, the government is based on a separation of powers between the executive presidency, a bicameral legislature and an independent judiciary

  The executive

  The president is chief executive, head of state and commander-in-chief, serves no more than one six-year term and may approve bills passed by Congress (the legislature) or exercise a veto, which can be overridden by a two-thirds majority of Congress. Cabinet appointments are subject to approval by the Congressional Commission on Appointments

  Legislature

  The Congress of the Philippines consists of the Senate (the upper house, with 23 members at present) and the House of Representatives (the lower house, which has 278 members, of whom 80% are directly elected and 20% are selected from party lists). Senators are elected for six-year terms and representatives for three-year terms. (The Senate normally has 24 members, but Benigno Aquino, who had been a senator, was elected president in 2010, meaning that his seat in the upper house is vacant. It should be filled at the mid-term elections in 2013, restoring the number of senators to 24.)

  Legal system

  Based on US common law; the 1987 constitution contains a Bill of Rights and provides for a judiciary with the Supreme Court at its apex

  National elections

  Elections took place in May 2010 for the president and vice-president, the House of Representatives and one-half of the Senate. The next legislative election (for the House of Representatives and one-half of the Senate) is due in May 2013; the next presidential election is due in 2016

  National government

  Mr Aquino became president for a six-year term in June 2010. However, his Liberal Party does not command a majority in either house of Congress

  Main political organisations

  Liberal Party; Lakas-Kabalikat ng Malayang Pilipino-Christian Muslim Democrat (Lakas-Kampi-CMD); Nacionalista Party; Nationalist People's Coalition (NPC); Pwersa ng Masang Pilipino (PMP); Partido Demokratiko Pilipino-Lakas ng Bayan (PDP-Laban); Communist Party of the Philippines (CPP); Moro National Liberation Front (MNLF); Moro Islamic Liberation Front (MILF)

  President: Benigno Aquino

  Vice-president: Jejomar Binay

  Key ministers

  Agriculture: Proceso Alcala

  Budget & management: Florencio Abad

  Defence: Voltaire Gazmin

  Education: Armin Luistro

  Energy: Jose Rene Almendras

  Environment: Ramon Paje

  Finance: Cesar Purisima

  Foreign affairs: Albert del Rosario

  Justice: Leila de Lima

  Trade & industry: Gregory Domingo

  Central bank governor

  Amando Tetangco

  March 11, 2013

• Outlook

  Philippines: Key developments

  Outlook for 2013-17

  • Benigno Aquino, who was elected president in 2010, continues to enjoy wide popular support, ensuring that the Philippines will enjoy a period of political stability until he stands down in 2016.
  • The president has made reasonably good progress on his reform agenda. The upcoming mid-term elections should help him to strengthen his power base and to see through the remaining pieces of legislation.
  • Relations with China will remain under strain as a result of the two countries' conflicting territorial claims in the South China Sea.
  • Although growth will slow somewhat in 2013, to 5.9%, the economy will continue to perform impressively, owing largely to strong growth in private consumption. Real GDP will expand by an annual average of 6% in 2014-17.
  • Consumer price inflation will average 3.9% in 2013, compared with 3.1% in 2012. Higher tax rates on alcohol and tobacco will put upward pressure on consumer prices, but global food and oil prices will decline this year.
  • As a result of substantial inflows of remittances from overseas workers, the current account will remain in surplus during the forecast period, to the tune of 3.4% of GDP on average.

  Review

  • On February 11th the three-month race for 12 positions in the Senate (the upper house of Congress) officially began. Some 33 candidates from 12 political parties are competing for the posts.
  • In February the Bangsamoro Transition Commission was formed, comprising government and Moro Islamic Liberation Front representatives, which will draft a basic law for a new self-governing political entity on Mindanao.
  • In mid-February an environmental compliance certificate for the Tampakan copper mine on Mindanao was finally granted to Sagittarius Mines, the local operator of Swiss-based Xstrata.
  • In value terms, merchandise exports grew by 16.5% year on year in December. In 2012 as a whole export growth averaged 7.6%, showing that the external sector has turned a corner following the contraction of 4.8% seen in 2011.
  • Cash remittances from overseas Filipino workers rose by 6.3% in 2012, to US$21.4bn, according to data from the Bangko Sentral ng Pilipinas (BSP, the central bank).
  • According to the BSP's business confidence index, which was released on February 22nd, the outlook for the Philippine economy during the first and second quarters of 2013 is positive.

  March 11, 2013

Economy:

• Background

  Philippines: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	103.8	Population growth	2.0
  GDP (US$ bn; market exchange rate)	250.3b	Real GDP growth	4.7
  GDP (US$ bn; purchasing power parity)	425.1	Real domestic demand growth	5.3
  GDP per head (US$; market exchange rate)	2,411.6	Inflation	4.9
  GDP per head (US$; purchasing power parity)	4,096.2	Current-account balance (% of GDP)	3.7
  Exchange rate (av) P:US$	42.2b	FDI inflows (% of GDP)	0.7
  a The Economist Intelligence Unit estimates. b Actual.

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  Background: The Philippine islands were ruled by Spain from 1565 to 1898, when the US took control. The islands became independent in 1946. The 21-year rule of Ferdinand Marcos (1965-86) was characterised by economic mismanagement and martial law. A democratic system was re-established under Corazon Aquino (1986-92) and was maintained under Fidel Ramos (1992-98) and Joseph Estrada (1998-2001). In 2001 Mr Estrada was removed in a military-backed civilian coup and replaced by his vice-president, Gloria Macapagal Arroyo, who won the presidential election in 2004. Mrs Aquino's son, Benigno Aquino, won the May 2010 presidential poll.

  Political structure: The Philippines has a presidential system of government, the president being limited to a single six-year term. Congress (the legislature) is modelled on the US system and comprises two directly elected bodies, the Senate (the upper house), normally with 24 members, and the House of Representatives (the lower house), with 278.

  Policy issues: The main policy challenge facing the government is the need to ensure stability in the public finances while boosting spending in crucial areas of the economy, such as infrastructure, education and healthcare. Poor tax administration, a limited tax base and the losses incurred by public-sector companies have been at the root of persistent deficits. The budget deficit widened to the equivalent of 3.7% of GDP in 2009, from 0.9% in 2008, owing to slower economic growth and tax cuts that were aimed at stimulating the economy. It remained around that level in 2010, but then narrowed to 2% of GDP in 2011 and to an estimated 1.4% in 2012.

  Taxation: The corporate income tax rate was raised from 32% to 35% in 2005, but it was lowered again in 2009, to 30%, and remains at that level. Personal income tax rates are structured into seven bands, ranging from 5% to 32% of annual income. Tax exemption levels start at P50,000 (around US$1,200) for individuals.

  Foreign trade: The merchandise trade deficit (on a balance-of-payments basis) stood at US$15.5bn in 2011. Exports totalled US$47.2bn in that year, while imports stood at US$62.7bn. The current account recorded a surplus of US$7.1bn in 2011, equivalent to 3.1% of GDP.

  Major exports 2011	% of total	Major imports 2011	% of total
  Electronic products	58.0	Capital goods	29.0
  Garments	3.2	Mineral fuels	16.5
  Coconut oil	3.2	Chemicals	9.0
  Petroleum products	1.2	Manufactured goods	7.1
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  China	26.4	China	19.0
  Japan	17.5	Japan	16.0
  US	17.2	US	12.3
  Singapore	11.0	South Korea	11.0

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  March 11, 2013

• Structure

  Philippines: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 11, 2013

• Outlook

  Philippines: Country outlook

  Philippines: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The Philippines is on course for a period of relative political stability in the forecast period. Benigno Aquino achieved a decisive victory in the May 2010 presidential election, beating the second-placed candidate, a former president, Joseph Estrada, by a record margin of more than 5m votes. Popular fondness for Mr Aquino's late mother, Corazon Aquino, the president from 1986 to 1992, is still providing a boost to his popularity. However, he has also made some good progress on implementing his legislative agenda, which has made him popular across a broad spectrum of Philippine society. His extension of the conditional cash transfers programme has appealed to the poor, and he has also sought to tackle corruption and make improvements within the business environment, which has proved popular with investors. All this will have gone some way towards helping him to achieve a 72% satisfaction rating in the latest survey by a local pollster, Social Weather Stations (SWS).

  ELECTION WATCH: The next presidential election is scheduled for 2016. Under the constitution, Mr Aquino cannot stand for re-election. In May 2013 the Philippines will hold elections for one-half of the seats in the Senate and the entire lower house. In the Philippines, mid-term polls typically give presidents an opportunity to strengthen their mandate in Congress; the latest survey by SWS puts the Liberal Party-led coalition ahead of the main opposition United Nationalist Alliance (UNA). Although Manuel Roxas, a member of the Liberal Party and the president's running-mate in the 2010 election, is Mr Aquino's preferred successor as president, the UNA is being led by the vice-president, Jejomar Binay of the Partido Demokratiko Pilipino-Lakas ng Bayan (PDP-Laban). Mr Binay narrowly defeated Mr Roxas at the last presidential poll and has made no secret of his intention to contest the post again when Mr Aquino's term ends. This would put him in competition with Mr Roxas and could create some instability in the governing coalition.

  INTERNATIONAL RELATIONS: Relations with the US are crucial for the Philippines and are likely to remain warm in the next five years. Aside from historical colonial connections, ties are strong for several reasons, including commercial relations (the US is one of the Philippines' main trading partners) and close military associations (the US army provides support for the Philippine government's campaign against Muslim separatists on Mindanao). There are signs that bilateral ties are strengthening further, with plans for increased defence co-operation, including maritime security, as part of the current "pivot" in US foreign policy towards Asia. China's value to the Philippines as a trading partner and a source of investment will grow in 2013-17. But Sino-Philippine relations will remain volatile, particularly following the recent decision by the Philippines to take the dispute over the two countries' conflicting territorial claims in the South China Sea to an arbitration tribunal under the UN Convention on the Law of the Sea. China's government, which prefers to deal with its disputes on a bilateral basis, has refused to take part in the arbitration.

  POLICY TRENDS: The main policy challenge for Mr Aquino's administration in the early part of the forecast period will be to strengthen the public finances. The government has abandoned the goal of balancing its budget, arguing that a fiscal deficit is unavoidable if public services are to be improved. The administration is targeting a budget deficit equivalent to 2% of GDP in 2013, although the Economist Intelligence Unit expects narrower deficits owing to the government's chronic underspending. In order to upgrade the country's inadequate infrastructure, the president plans to establish around 80 public-private partnerships (PPPs) by 2016 with aggregate investment capital of about P740bn (US$17.8bn). At least ten such projects had been expected to be put out to tender in 2011, but progress has been seriously behind schedule since then and is expected to remain sluggish in 2013.

  ECONOMIC GROWTH: The Philippine economy expanded by 6.6% in 2012 and is forecast to grow by 5.9% in 2013. The slowdown primarily reflects base effects. Private consumption, which accounts for over 70% of GDP, will grow by 5.5% in 2013, compared with 6.1% in 2012, following two years of above-average expansion. Consumption will be supported by a very slight pick-up in the global economy this year (which will boost growth in remittances from Filipinos working abroad), still-accommodative monetary policy and by government transfers. Fixed investment growth will slow to 5% in 2013, largely reflecting the high base in 2012, when investment rose by 8.7%. However, restrictive investment rules and a lack of progress on mining reforms will limit growth in private-sector investment this year. Public investment will also remain inadequate, as the government's PPP infrastructure scheme fails to take off. An upside risk to our investment forecast for 2013 could materialise if the Philippines receives an investment-grade rating from leading international credit-rating agencies, as appears fairly likely. Exports of goods and services will expand in 2013, although the pace of growth will slow compared with 2012 owing in part to that year's high base. Imports will also rise, albeit at a slower pace compared with last year, reflecting weaker private consumption growth and slower export expansion (which will reduce growth in imports of component parts).

  INFLATION: Consumer price inflation will average 3.9% in 2013, up from 3.1% in 2012, owing to a favourable base effect and strong domestic demand-side pressures. In addition, proposals announced in 2011 to inflation-index excise duties on alcohol and tobacco, which were approved in late 2012, will add to upward price pressures. However, the rate of inflation will be kept from accelerating too quickly as a result of lower global oil prices compared with 2012 (albeit still high by historical standards). Global food prices will continue to fall in 2013. In addition, inflows of foreign currency, including in the form of remittances, will continue to support the peso. We expect the currency to appreciate modestly against the US dollar in 2013, thereby helping to limit imported inflation. Efforts by the government to achieve rice self-sufficiency could also limit consumer price inflation. In 2014-17 price rises will average 4.7% a year. The Philippines' labour surplus will deter excessive wage demands, and real wages will thus rise only modestly during the forecast period.

  EXCHANGE RATES: We expect the peso to appreciate to P41.5:US$1 in 2013, from P42.2:US$1 in 2012. The local currency has strengthened in recent years, appreciating by over 10% between 2009 and 2012. Capital inflows have supported the peso. Amid strong inward flows, in July last year the Bangko Sentral ng Pilipinas (the central bank) announced rules tightening restrictions on flows of foreign capital into special deposit accounts and said that further measures might be forthcoming. The peso will then weaken slightly in 2014-15, in part reflecting the tightening of monetary policy by central banks in the developed world, and so making Philippine yields less attractive. The currency will stabilise at around P43.1:US$1 in 2016-17, with strong GDP growth and the Philippines' continued current-account surplus supporting the peso. However, our forecast for 2013 is subject to downside risk, as the currency would be vulnerable were global risk aversion to increase more sharply than we expect.

  EXTERNAL SECTOR: Despite the continuing merchandise trade deficit, a large surplus on the transfers account-owing to strong inflows of remittances from overseas Filipinos, as well as surpluses on the services and income accounts-will ensure that the current account remains in the black in 2013-17, to the tune of 3.4% of GDP on average, up from an estimated 3.1% in 2012. Although growth in merchandise exports will slow in 2013, the pace will quicken in 2014-17, to average 9.3% a year, reflecting a recovery in demand in overseas markets. The Philippines has recorded services surpluses since 2006 and will continue to do so throughout the forecast period. Services exports have been boosted by the country's growing importance as a base for business-process outsourcing, and this sector will expand further in the next five years. The income account will remain in surplus over 2013-17: significant debt interest payments and outflows on foreign investments in the Philippines will be offset by compensation for employees and income from Filipino investments abroad.

  March 11, 2013

• Forecast

  Philippines: Country forecast summary

  Country forecast overview: Highlights

  • A period of political stability is likely under the president, Benigno Aquino, who enjoys public support and can still count on the backing of a large majority in the House of Representatives (the lower house of Congress). He has made relatively good progress on his reform agenda, and the mid-term elections due in May, which typically serve as an opportunity for the incumbent to strengthen his power base, could help him to push through the remaining legislation.
  • Unlike his predecessors, Mr Aquino is unlikely to face "people power" protests, given that public opinion on his presidency is not sufficiently divided. If, however, popular perception of Mr Aquino deteriorates, and if his preferred successor, Manuel Roxas, fails to be perceived as a realistic option to become the next president, then Congress may move to start courting the next likely holder of the office (whoever that may be), rendering Mr Aquino a lame duck.
  • Internal security threats will persist, although the framework agreement for peace reached in October 2012 between the government and the main Muslim rebel group on Mindanao, the Moro Islamic Liberation Front, bodes well for an improvement in the security environment.
  • Mr Aquino's administration has abandoned the aim of balancing the budget in the medium term. The president has argued that deficits are unavoidable if public services are to be improved. However, chronic underspending means that the Economist Intelligence Unit expects the government to miss its budget deficit target in 2013. We forecast that the shortfall will be equivalent to just 1.8% of GDP in 2013, and will then average 1.6% in 2014-17.
  • The Bangko Sentral ng  Pilipinas (BSP, the central bank) cut its main policy interest rates for the fourth time last year in October. The rate reduction is likely to be the last in the current loosening phase, and we expect the BSP to start raising rates in late 2013.
  • We forecast that real GDP growth will remain strong in 2013, at 5.9%, compared with 6.6% in 2012. Economic growth will then average 6% a year in 2014-17. Remittances from overseas Filipinos will make a major contribution to the current-account surplus. Remittances will continue to rise in 2013-17 and will keep the current account in the black, despite large trade deficits.
  • GDP per head (at market exchange rates) remains low in the Philippines, at an estimated US$2,412 in 2012. It is expected to rise to US$3,743 by 2017. This will bring about a modest improvement in market opportunities, but it will leave average income levels lower than in many neighbouring countries.

  

  March 11, 2013

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Country Briefing

Land area

300,179 sq km

Population

94.9m (2011 UN estimate)

Main towns

Population in '000 (August 2007 census):

 Metro Manila (National Capital Region): 11,553

 Quezon City: 2,679

 Manila (capital) : 1,661

 Kalookan: 1,379

 Davao: 1,363

 Cebu: 799

 Zamboanga: 774

 Pasig: 617

 Taguig City: 613

 Valenzuela: 569

 Cagayan de Oro: 554

 Paranaque: 553

 Las Pinas: 532

 General Santos City: 530

 Bacolod: 499

 Iloilo: 419

Climate

Tropical

Weather in Manila (altitude 14 metres)

Hottest month, May, 24-34°C; coldest month, January, 21-30°C (average daily minimum and maximum); driest month, February, 13 mm average rainfall; wettest month, July, 432 mm average rainfall

Languages

Filipino (Tagalog), English and Spanish; many local dialects

Weights and measures

Metric system; also some local units

Currency

Peso (P); P1 = 100 centavos. Average exchange rate in 2012: P42.2:US$1

Time

8 hours ahead of GMT

Fiscal year

January-December

Public holidays

January 1st (New Year's Day); February 25th (EDSA Revolution Day); March 28th (Maundy Thursday); March 29th (Good Friday); March 30th (Black Saturday); April 9th (Valour Day); May 1st (Labour Day); June 12th (Independence Day);  August 21st (Ninoy Aquino Day); August 26th (National Heroes' Day);  November 1st (All Saints' Day); November 30th (Bonifacio Day); December 24th­25th (Christmas); December 30th (Rizal Day); December 31st (New Year's Eve)

January 16, 2013