Saturday, November 7, 2009
Philippines R-Japan economic relations: Quo vadis under Hatoyama?
(This is the country paper the author delivered during the symposium titled “Recovery from the Financial and Economic Crisis and Japan-Asean Partnership” held on October 29 at the Keidanren Kaikan in Tokyo, Japan. Organized by the Keizai Koho Center, the symposium had an audience of close to a hundredbusiness executives from Japan’s biggest companies. This paper elicited attention of Japan media.)
THE electoral victory of the Democratic Party of Japan (DPJ) nearly two months ago has generated uncertainty about the future path of cooperation between the world’s second largest economy and the Philippines, among other member-states of the Association of Southeast Asian Nations (Asean).
In a New York Times article published a few days before the left-of-center DPJ was swept into power, Party President Yukio Hatoyama, who subsequently assumed the post of prime minister, indicated that the new ruling party would make a clean break from its right-wing predecessor, the Liberal Democratic Party (LDP), which has ruled Japan for nearly half a century.
Hatoyama said there was a need to rein in American-style globalism. He squarely laid the blame for Japan’s economic malaise on the successive LDP governments starting with the term of Junichiro Koizumi in 2001.
In its election manifesto, the winning DPJ signaled a shift toward domestic concerns, including vast welfare spending that is likely to put pressure on Japan’s fiscal position.
Furthermore, the DPJ indicated its resolve to break Japan’s Iron Triangle, or the decades-old cozy relationship among LDP, bureaucrats and big businesses that turned your country into the world’s second largest economy, and a key source of foreign direct investment (FDI) in developing countries like the Philippines.
We in the Philippines had known of only one Japanese political party—the LDP whose leadership forged Japan’s policy on Asean and on individual member-states of the regional group. This policy is anchored on close ties with the US, which in turn served as a key export market for Japan and other emerging Asian economies that flanked Tokyo in line with its flying geese strategy.
Fate of Samurai bond guarantee
For the Philippines, the DPJ’s victory had an immediate significance, namely the fate of Manila’s quest for Tokyo’s support to a planned Samurai bond offering.
Shortly before it lost power to the DPJ, the LDP-led government had given its consent to the Philippine request for a Japan Bank for International Cooperation (JBIC) guarantee—a plea made by President Gloria Arroyo during her last state visit to Japan.
JBIC has yet to issue the promised guarantee, as it is still in discussions with Manila over the fee the lender would charge for the assistance.
A third global bond offering had eased the pressure on the Arroyo administration to cough up more money to plug a wider-than-expected budget deficit this year.
The government has suspended its budget deficit-reduction program to accommodate higher public spending meant to cushion the Philippines from the impact of the global economic crisis.
But Manila is still banking on the Samurai bond issuance if not to bridge this year’s fiscal gap, then to pre-fund next year’s financing requirements, especially since tax revenues are not expected to fully recover from the economic slowdown just yet.
Japan as top source of FDI
But beyond the issue of the guarantee fee, the Philippines—and other Asean countries for that matter—had enjoyed Japanese financial support for several decades under successive LDP leaderships.
In our case, the Japanese—particularly you, the members of the Keidanren—had been the Philippines’ top source of FDI. This is evident from the vast assembly operations established by Japanese automotive and electronics companies in the many export-processing zones throughout the Philippines.
Like other foreign investors, Japanese businesses had been drawn to the Philippines partly because of the country’s strong macroeconomic fundamentals.
Before the global financial crisis struck, the Philippine economy had grown at a three-decade high of 7.1 percent in 2007. It was the second fastest-growing economy next to Singapore among the Asean-5.
Domestic inflation had eased to a two-decade low of 2.8 percent, while the benchmark 91-day Treasury bill slid to 3.4 percent, its lowest on record.
The low interest-rate regime had allowed bank loans to maintain double-digit growth rates even as lenders trimmed their non-performing loan (NPL) ratio to pre-Asian financial crisis levels.
The Philippines’ strong macroeconomic fundamentals underpinned the corporate sector’s double-digit profit growth.
Capital flight, credit tightness
After the US sub-prime market blew, the Philippines immediately felt the impact as both FDI and foreign portfolio investment inflows vanished. The collapse of Lehman Brothers in September last year accelerated the flight of foreign capital from the Philippines, exposing the country’s foreign dependence amid insufficient domestic savings to fuel economic expansion.
While domestic lenders’ exposure to toxic sub-prime assets was nil, the global credit crunch nonetheless heightened caution in the banking community, which has vivid memories of the Asian financial crisis and the damage it inflicted on their balance sheets.
Although nominal lending rates remained low—thanks to the Philippine central bank’s monetary easing from the end of last year to middle of this year—banks tightened their credit standards nonetheless.
We have begun to witness the impact of this tightening, as loan growth slowed to the single-digit rates in recent months.
In the real economy, the first to take a hit were exports, which contracted by double-digits through September. This contraction was mirrored in the drop in manufacturing output, as well as in the slowdown in job creation in that sector.
Those of you who maintain assembly operations in the many economic zones in and around the Philippine capital know only too well this sad state of affairs.
Domestic economy spares RP from recession
So far, the Philippines has escaped a contraction even as its export markets in the developed world—as well as many neighboring countries—suffered a recession.
What has spared the Philippines from the worst global crisis since the Great Depression of the 1930s is our huge domestic economy.
Unlike our neighbors in Asia whose growth was driven by huge export machines, personal consumption expenditures (PCE) remain the main engine of Philippine economic expansion, fuelled by billions of dollars in remittances from overseas Filipino workers (OFWs).
Even so, personal consumption expenditures took a hit from the current global turmoil—a puzzle for many economists as remittances continued to grow, albeit down to single-digit rates. The likely explanation is that the economic slowdown in many countries hosting OFWs shook the confidence of their beneficiaries, thus causing them to trim if not postpone expenditures.
To a certain extent, what we’re seeing is a repeat of the Asian financial crisis, when OFW money largely kept the Philippine economy afloat. To recall, we contracted the least among the Asean-5 back then.
Typhoons dampen near-term prospects
Over the past month or so, there has been talk of an Asia-led global economic recovery, as the region—including the Philippines—appears to have been the first to emerge from the worldwide rout.
But a series of typhoons placed a damper on the Philippines’ near-term economic prospects. As I speak, the government has yet to tally the final cost of the typhoons in terms of damage to infrastructure and to farm output, which comprises a fifth of Philippine gross domestic product (GDP).
The first of two typhoons also submerged half of Metro Manila in floods, thus likely to erode consumer confidence in the National Capital Region, which accounts for a third of the country’s GDP.
Consequently, the government is pushing for a supplemental budget and has asked the international donor community—including Japan—for additional official development assistance (ODA), or at least permission to realign already committed funds to the relief and rehabilitation effort.
The Arroyo administration also created a Reconstruction Commission, which is tasked to, among others, solicit funds from the private sector and the donor community.
To date, the World Bank has agreed to realign existing loan commitments. A similar commitment from Japan, which remains the Philippines’ biggest source of ODA, would be a big boost to our post-typhoon rehabilitation efforts.
Despite your country’s huge share of ODA to the Philippines, Japanese aid, however, has gone down through the years, with countries like China picking up the slack.
Questions about Japan’s commitments
The DPJ’s assumption to power has raised questions about Japan’s commitment to the direction taken by previous LDP-led governments vis-à-vis its traditional partners like the Philippines.
If the Hatoyama government fulfils its welfare promises to the Japanese people, then would this fiscal spending crowd out ODA for countries like the Philippines?
Would the new government in Tokyo finance its pro-people public spending through heavy taxation of the business sector? If so, how would this affect Japanese corporate investments abroad?
Having said the above, we cannot deny the overwhelming victory of the DPJ during the Lower House elections, as well as the Hatoyama government’s very high approval rating among the Japanese people a month after the polls. These provide hope that the new administration can muster enough public support for its touted break from tradition.
It is with such trepidation—and hope—therefore that the historic change in Japan’s national leadership is viewed in the Philippines and elsewhere.
By Arnold S. Tenorio, Business Editor Manila Times