Philippine Economy Withstands Latest Corruption Scandal

The latest Philippine corruption scandal could bolster President Benigno Aquino III’s own war against graft—and lead to further investor confidence in the country’s economy.

Prosecutors this week filed graft charges against three prominent senators, two former lawmakers and a businesswoman for their alleged roles in misusing more than $200 million in state funds, a scandal that has rocked the Philippines’ political system. All six persons charged so far, including a former Senate president, have denied wrongdoing.

An outpouring of anticorruption protests have followed the news of the scandal since it first broke. On Aug. 26, some 80,000 protesters thronged Luneta Park in the center of Manila to urge an end to pork-barrel discretionary spending funds for lawmakers.

But instead of weighing the country down, the main Philippine stock market index has gained 10% since the August demonstration. The country already has withstood this year’s emerging market shakeout better than many of its peers. By taking aim at the corruption that has plagued this nation of 100 million people, President Aquino has helped change investor perceptions about the islands’ economic potential.

Some analysts see the market gain as a sign that investors are paying closer attention to the differences between various emerging markets—and especially between those, like the Philippines, that used Asia’s boom years to put their houses in order, and other countries that instead took advantage of easy money to mask their problems.

Ramon Casiple, executive director at the Institute for Political and Economic Reform, a Manila-based think tank, suggested that the Philippines is at a turning point: “President Aquino…has the option now of continuing his anticorruption reforms by going along with the public sentiment and ending pork-barrel spending. If he does that, it’s tantamount to upending the entire political-patronage system in the Philippines.”

So far, Mr. Aquino has pledged to abolish the current system of discretionary-spending funds and prosecute politicians alleged to have diverted state funds to fictitious or artificially inflated development projects.

“The size of the crowds is helping to reinforce what Mr. Aquino needs to do,” said Luz Lorenzo, an economist at Maybank Kim Eng Securities.

Some Filipinos would like to see Mr. Aquino do more, including abolishing his own spending fund and removing discretionary spending entirely, instead of subjecting it to national-level budget scrutiny, as he currently proposes.

“At the moment, I think he wants to compromise and maintain support in Congress,” Mr. Casiple. “But the pressure from his own supporters in the middle class is growing, and it’s difficult to predict what he will do.”

Mr. Aquino, 53 years old, already has had a decisive impact on the Philippines since being elected president in 2010 in an outpouring of mass support following the death of his mother, former president and democracy icon Corazon Aquino.

The Philippines’ budget deficit fell to 2.3% of gross domestic product last year compared with a record-high 3.5% the year Mr. Aquino was elected. Mr. Aquino implemented policies such as introducing online bidding for government contracts, and ratings firms Standard & Poor’s and Fitch Ratings responded by giving the country investment grade rankings earlier this year. That allows the government to borrow more cheaply to refinance debts and lets its central bank keep interest rates at record lows. In the first half of the year, the Philippine economy grew 7.6% on year, faster than China.

Trinh Nguyen, an economist with HSBC in Hong Kong, says one result is that the Philippines is in an unusual position in that its challenge isn’t to trim deficits, as is the case in countries such as Indonesia and Brazil, but to find ways to spend money. “It goes to show that you do get the rewards if you work at it,” she said.

The Philippines still has its share of problems. Around 28% of the country’s population is living in poverty. And a Muslim rebel group’s attack on Zamboanga City in the southern Philippines this month is a bloody reminder of the security problems that stymie development in some of the country’s further-flung regions. The predominantly Christian country is the only nation in the world to be battling both Muslim and Communist insurgencies.

Still, the Philippines’ continuing fight against corruption points to the gains that other emerging economies might achieve if they tackle their own problems, whether they be nationalist protectionist policies in Indonesia or a growing dependence on populist subsidies in Thailand.

“The recent capital outflows from Asia could be a blessing in disguise,” a research report from Nomura notes. The bank says the past weeks’ market turmoil could encourage governments to act “before economic fundamentals worsen so much that full-blown financial crisis becomes unavoidable.”

Source: James Hookway, Wall Street Journal, September 17, 2013