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From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

November 29, 2000
Web posted at 8:00 p.m. Hong Kong time, 8:00 a.m. EST

As a Filipino, I have grown wearily accustomed to shocks. But I was well and truly jolted earlier this week when I attended the 13th Asian Development Bank workshop on the Asian Economic Outlook. There, Donald Hanna, head of Asia Pacific Economic and Market Analysis at Salomon Smith Barney, told us what the markets are saying about the poor old battered peso. Based on forward rates, some players apparently expect it to hit 57.7 to the dollar during the next 12 months. This implies a depreciation of more than 16% from today's rate of just over 49 pesos.

According to Hanna, the forecast for the peso in the next three months is 49 to the dollar, while the forward rate -that is the rate banks will sell dollars to the peso-holder today for repayment in three months -is 52.50 pesos. In the next six months, he expects the peso to improve to 47, although the forward rate is 54.60, a depreciation of about 10.5% from today's rate. For the next 12 months, Hanna's forecast rate remains at 47 pesos per dollar, but the forward rate is 57.7 pesos. This is the worst forward rate among nine Asian currencies Hanna studied. The only one that comes even vaguely close is Indonesia's rupiah, with a forward rate of 10,255 to the dollar in 12 months, implying a 7% depreciation. The Philippines and Indonesia have the worst-performing economies in Southeast Asia today, largely because of their political problems.

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Salomon Smith Barney/Citibank projects GDP growth for the Philippines of 3.5% this year and only 2.8% next year. For Indonesia, its figures are 3.9% this year and 4.4% next year -giving the two countries the lowest GDP growth rates in ASEAN. Malaysia's GDP is forecast to grow by 8% this year and 6% in 2001, Singapore's by 9.8% this year and 6% in 2001; and Thailand's by 4.2% this year and 4.7% in 2001. Interestingly, Salomon's growth for Singapore is more bullish than the International Monetary Fund's (7.9%), the World Bank's (8.1%) and the ADB's (8%).

"The Philippines' economic performance is 100% linked to its political crisis," asserts economist Ponciano Intal of Manila's Dela Salle University. He frets that the Philippines may miss out on the electronics and information technology boom (although that is slowing down at the moment) if it does not improve its capacity to manufacture higher-electronic items like wafers. "To do that, you need foreign investment -and foreign investment won't come unless [President Joseph] Estrada resigns," he says. Low-end assembly work and semiconductor parts still comprise most of the country's electronics exports which at present is booming.

ADB economist Sailesh K. Jha believes Indonesia is in a far worse situation than the Philippines, economically and politically, because of its problem of ethnic conflicts. Paralyzingly, the clashes are in areas that are rich in mineral resources. Dong Tao of Credit Suisse First Boston also picks Indonesia, Philippines and Thailand, as Asia's problem countries. "There are a lot of political issues in these countries, [though] I assume two to three years down the road, they can be resolved," he says. "But there are some fundamental [economic] problems. Fiscal sustainability is a key issue. Indonesia needs to do the following in the next 10 years: grow its economy by at least 6%, compared with 4% currently; it needs to have 6% of surplus as a percentage of GDP compared to minus 3% at present; and it needs to sell 1.8% of state assets before it can get back to [a sound] fiscal footing." He says the Philippines has similar problems -having to grow 6%, manage its fiscal deficit, and sell state assets. As for Thailand, Dong says "it needs to fix its banking system." He warns that these three countries need to improve their electronic production lines and for that they must attract Japanese or Taiwanese capital. However, Japanese capital is not moving much, while Taiwan's is headed to China." Dong warns: "Without new capital sources, it's going to be difficult."

If that's the case, then trouble is on the way. According to Veerathai Santiprabhob of Siam Commercial Bank, foreign direct investment in the Philippines has fallen from $1.2 billion in 1997 to just $700 million in 1999. Thailand's foreign investment has followed a similar pattern, from $3.7 billion in 1997 to $7.4 billion and down to $6.1 billion in 1999. Indonesia is suffering from capital flight. Foreign investment amounted to $4.7 billion in 1997 but was negative $0.4 billion in 1998 and negative $3.3 billion in 1999. "Indonesia [has] capital flight problems in the extreme," says Salomon's Hanna.

Philippine Economic Planning Secretary Felipe Medalla reported that the country's GDP grew by 4.8% during the third quarter, far exceeding market expectations of 4%. He calls that "a pleasant surprise". Yes, it was, but the growth took place before Ilocos Sur provincial governor Luis "Chavit" Singson came out with his allegations that he gave $11 million in bribes from illegal gambling syndicates and tobacco tax money to President Estrada over a two-year period.

The third-quarter growth came from three sources: agriculture, services, and industry, which expanded by 5.5%, 4.9%, and 4.4%, respectively. As for the last quarter of the year and next year, well, that's another story. A look at the forward exchange rates and the direction of foreign investments suggests that story could have an unhappy ending.

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