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The Philippines: beyond the crisis - address at the launch of the East Asia Analytical Unit's Report on the Philippines, Sofitel Hotel, Melbourne



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Speech

by the

Minister for Foreign Affairs The Hon. Alexander Downer MP

to the

Launch of the East Asia Analytical Unit’s Report on the Philippines

The Philippines: Beyond the Crisis

Sofitel Hotel Melbourne, 4 May 1998

(Check Against Delivery)

The Philippines: Beyond the Crisis

Speech by the Hon Alexander Downer, MP, Minister for Foreign Affairs, to the launch of the East Asia Analytical Unit’s Report on the Philippines, 4 May, Melbourne.

Introduction

Her Excellency Mrs Delia Domingo Albert, Philippine Ambassador to Australia, Mr Miles Kupa, Australian Ambassador to the Philippines, Mr Michael McDonald, President of the Australia-Philippine Business Council, Dr Frances Perkins, Head of the East Asia Analytical Unit, other distinguished guests, ladies and gentlemen.

The Philippines is a nation which matters more and more to Australia. At the heart of East Asia and with a good record of growth in recent years - even after the ravages of significant currency depreciation - the Philippines has in recent times enhanced its profile internationally and within the region.

The Philippines is clearly a regional partner on the move.

The Philippines is also a country which shares our views on the need to keep the momentum of regional trade and investment liberalisation going and on the need to continue to enhance regional security.

I have personally, therefore, made every effort to reinvigorate Australia’s relationship with the Philippines.

When I visited the Philippines in October last year I expressed confidence that the Philippines under President Ramos had got a number of very important things right in tackling the problems the President faced when elected in 1992. First, difficult internal security issues have been addressed in a sensitive and effective way to restore the country’s political stability; second, after decades of inward looking protectionist policies the Philippines has become one of the most open economies in the region; and third, key sectoral reforms, including - very importantly - the finance sector, have moved the economy forward steadily.

I am therefore very pleased to be here today to launch the excellent report of the East Asia Analytical Unit (EAAU) of the Department of Foreign Affairs and Trade titled The Philippines: Beyond the Crisis. The report certainly bears out the confidence I expressed in the Philippines in Manila last year.

Indeed, the study’s title is an apt one as a key finding is that, with exports growing and interest rates falling, the Philippines looks set for a relatively rapid recovery from the effects of the region’s recent financial difficulties. The Philippines, as the report indicates, already has in place many of the financial sector reforms which other regional economies are only now addressing. This has clearly stood them in very good stead over the last nine months or so.

It is particularly appropriate that the report takes stock of the Philippines’ progress at this time, as the country is shortly to go to the polls to elect a new President. Australia looks forward to continuing its strong friendship with the new leadership of the Philippines. We are

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confident the next President will continue the open and progressive policies of the Ramos administration which have brought the country hard-earned success in recent times.

Over the last six years, the East Asia Analytical Unit has brought out nineteen reports which have covered the length and breadth of East Asia. These have proved very valuable tools for Australian business. And I am pleased to say this report continues that fine tradition in providing essential detail on how far the Philippines has come in the years since the 1986 People Power revolution. It also points to important areas of opportunity at a time when the cost of investing has fallen considerably as well as to areas where infrastructure and other constraints continue to pose difficulties for investors.

I will come back shortly to the detailed findings of the report but I would like first to elaborate a little on how our very important relationship with the Philippines has been growing strongly in recent times.

PART ONE: The New Era for Australia and the Philippines

When I visited Manila last October I said that Australia and the Philippines were on the threshold of a new era in their relationship. I was encouraged by some of the very positive developments which have occurred in the bilateral relationship in the past few years.

Our two countries have enjoyed for a long time a relationship which has achieved a great deal across a broad range of fields. Recently the relationship has deepened considerably. For example, we have cooperated closely in pursuing trade and investment liberalisation throughout the region. This was particularly the case in 1996 during the Philippines’ year as APEC chair, when the all important building blocks of liberalisation - APEC economies’ Individual Action Plans- were agreed upon. We have also worked together in the ASEAN Regional Forum to develop further the stability and security of the region - and I look forward to working closely with the Philippines again at the next meeting to be held in Manila in July.

Also, two-way trade has more than tripled since 1990 to reach $A1.7 billion in 1997 and the number of Australian firms investing in the Philippines has been steadily increasing in the 1990s. Similarly, we hope the Philippines will look to Australia as an attractive investment destination - and I know that major Philippine conglomerates San Miguel and Ayala have recently made significant investments here. Moreover, although it is not well-known that Australia provides substantial amounts of development assistance to the Philippines, we are in fact the second largest provider of grant assistance behind Japan. And we have been the Philippines’ largest provider of defence training.

In addition around 140,000 Australian residents originally hail from the Philippines, making the links between our two peoples very strong.

But the challenge for all of us has been to make more visible the extent to which Australia and the Philippines are actively engaged with each other. Philippine Foreign Secretary Siazon and I agreed last year that we would both work hard to that end.

I was therefore very pleased while in Manila last year to be able to participate in the first Philippines Australia Dialogue, the most high-powered gathering of Australian and Filipino business, academic and government talent brought together to date. The Dialogue, which Philippine Foreign Secretary Siazon and I had earlier agreed to establish, is a key vehicle for

strengthening our trade and investment and for advancing other aspects of our bilateral

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relationship as it brings together key decision makers from the private and public sectors of each country.

I found it a very valuable opportunity to sit down with business leaders and hear first-hand their views on how Australia and the Philippines can develop their economic relationship even further. It brought home to me the depth of our relationship and the extent to which it has developed in the last few years. I look forward to the next Dialogue which I understand will take place in Brisbane in November.

I also announced on my visit to the Philippines last year that, in recognition of the importance of 1998 as the Philippine centenary of independence from Spanish colonial rule, we will hold in Manila the ‘All the Best from Australia’ festival in November. The festival, which will run for two to three weeks, will showcase the best Australia has to offer in business, science and technology, education, culture and sport.

Another recent important development in our relationship was the first meeting, held last November in Manila, of a formal dialogue between our officials on regional security issues. Both our countries have sought to strengthen the region’s security through our membership of the ASEAN Regional Forum and by building up a series of interlinking dialogues. This formal exchange between our two countries was an important step in advancing that process.

So, as you can see, there is a developing momentum to the Australia-Philippines relationship which I think is set to increase this year.

An important reason why that will be so is, of course, today’s release of the East Asia Analytical Unit’s study of the Philippines. I would like therefore to outline for you in more detail what this important report has concluded.

PART TWO: The Philippines: Beyond the Crisis

The report’s findings cover three broad areas:

• the impact of the recent regional financial instability on the Philippines;

• the Philippines’ reform achievements and priority areas for further reform; and finally

• the trade and investment implications for Australia.

The Philippines and the Regional Financial Instability

The Philippines has survived the regional financial instability relatively well. At present levels the peso has depreciated by around 31 per cent against the US dollar since 1 July last year. However, on the bright side, some Philippine economists believe that the exchange rate has been overvalued for many years and that the peso depreciation should therefore enhance

Philippine trade competitiveness and encourage labour intensive export industries such as textiles and agriculture. The Philippines should also become more competitive against Chinese, Latin American and Caribbean exports and over time the depreciation should lessen substantially the Philippines’ chronic trade deficit. Less than ten months after the peso’s initial fall, there are already indications that this is starting to happen.

The large depreciation has of course created difficulties for public and private foreign currency borrowers, but so far there have been relatively few corporate failures and only one

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or two financial sector failures. A major reason why the Philippines has had fewer problems than some of its Asian neighbours is its relatively strong prudential controls. Indeed the Philippines is now reaping the rewards of successive IMF programs since the 1970s and of the Ramos administration’s economic reforms - particularly in the banking sector.

Another encouraging sign for the Philippines is that exports are continuing to grow rapidly. With over half of its exports going to the USA and EU the Philippines is less exposed than some of its neighbours to the weakening in regional growth. There has been something of a return in investor confidence in the Philippines and the stock market, while still well below pre-depreciation levels, has begun to pick up again. While economic growth will fall from its

1997 level of around 5 per cent, it looks set to remain above 2 per cent in 1998 and rise further in 1999.

Nonetheless, just as in the rest of the region the growth outlook depends critically on maintaining the momentum of reform. I’d therefore like to turn now to the Philippines’ very strong record of wide ranging reform in recent times as well as to areas where President Ramos’s successor will want to take that record forward.

Reform Achievements and Priority Areas for Further Reform

The report finds that President Ramos’s outstanding achievements of the last six years build in many areas on excellent groundwork laid by President Aquino in the 1980s. Key areas where major progress has been made include trade and investment policies, financial policies and infrastructure policies.

Over the past decade the Philippines has dramatically liberalised trade, cutting tariff and import restrictions. The Philippines has moved from being one of the most protectionist economies in the region to one of the most open. Under unilateral liberalisation and commitments within APEC the vast majority of tariffs will fall to between 2 and 5 per cent by 2004. As in Australia, this trade liberalisation policy has already generated dramatic growth in non-traditional manufactured exports. In the Philippines the main growth area has been electronics.

There has also been substantial liberalisation of foreign investment. The 1991 Foreign Investment Act has allowed full foreign equity participation in the majority of sectors. Given the Philippines’ improving economic prospects in the mid 1990s and its increased political stability, this liberalisation saw foreign direct investment increase substantially between 1993 and 1996. The most spectacular example of the success of these policies are the Philippine economic zones where both domestic and foreign investment has surged. In the former US

naval base of Subic Bay, for example, major multinationals such as Federal Express and Acer are present. It is notable that an Australian firm, Electruck Pacific, is among the top three export earners at Subic with its world class industrial lifts and cranes.

There are, however, some critical areas where further liberalisation of FDI restrictions is necessary. The most notable of these include retail trade, distribution and some areas of infrastructure investment.

As I mentioned earlier the financial sector reforms undertaken in the Philippines over the past few years played a major role in helping to insulate the country from the worst excesses of the region’s financial instability. Key reforms include progressively tightening prudential

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standards, reorganising a more independent Philippine central bank and allowing more competition from new domestic and foreign banks.

The regional financial instability has only increased the importance of further reforms if the Philippines is to minimise its exposure to volatility in international financial markets. Some important reforms have been introduced in the wake of recent financial instability, including

the increase in minimum capitalisation requirements and the accelerated introduction of a mandatory two per cent loan-loss provision. Another key area where further progress is needed is for the central bank to continue to improve its means of detecting and addressing corporate and banking weakness at an early stage.

Infrastructure reforms are perhaps the best publicised of President Ramos’s reform achievements. This is with very good reason. Earlier this decade Manila regularly suffered the infamous 12 hour a day "brownouts" - what we would call blackouts. In a relatively short time the Philippines has now become an Asian market leader in appropriate and efficient forms of private sector participation in telecommunications, road and rail transport but particularly electricity provision.

These reforms are making a real difference to the lives of ordinary Filipinos. Nonetheless, given the critical infrastructure shortages that still exist in the Philippines it is crucial that the country continue to use and develop world’s best practice forms of private sector infrastructure provision.

The Philippine Government also undertook major reforms in the mining industry, culminating in the Mining Act of 1995. The report notes that unfortunately, reforms have now stalled due to court challenges to the Act’s constitutionality, changes in the mining tax regime, delays in issuing new exploration licences and uncertainty over whether the state continues4o control mineral resources in the wake of the recent passage of the Indigenous Peoples’ Rights Act.

There seems little doubt that the Philippines is richly endowed with mineral resources. If the reform process can be restarted and the confidence of mining investors restored I have no doubt that Australian investment in the Philippine mining industry could increase dramatically and further transform the two-way commercial relationship.

I have outlined for you the Philippines’ relatively healthy economic situation and reform achievements which have allowed it to enjoy reasonable growth and confidence at a time when some other East Asian countries are facing negative growth. Clearly there are opportunities here for Australian businesses to expand our trade and investment relationship.

Trade and Investment Implications for Australia

Given its location in the heart of Asia, its solid record of growth and stability in the 1990s, its large population and its bright economic prospects few could doubt that the Philippines will become an increasingly important trade and investment partner for Australia over time.

The Philippines is already a significant economic partner for Australia in the Asia-Pacific region - indeed our fifteenth largest export market. Total Australian exports to the Philippines were worth $A1.3 billion in 1997 - up significantly from less than $A400 million in 1990. Also, in 1997 Australia imported $A377 million worth of goods from the Philippines, but these imports are growing almost as rapidly as Australian exports. Moreover, some of the

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higher profile and larger Australian companies to have major investments in the Philippines include ANZ, Colonial, Leighton, James Bardie, John Holland, P & O and WMC.

A key message which I have been seeking to convey to Australian business over the last six months is - don’t walk away from the region when the going gets tough. Certainly Australian business in the Philippines has not done so and I expect that they will reap rewards for enduring when things looked most difficult late last year. In the midst of the regional financial difficulties James Bardie bought out their joint venture partner while P & O substantially increased its Philippine port investments. It is also interesting to note that between January

1997 and April 1998, which is of course a period which has been dominated by the regional financial turmoil, membership of the Australia-Philippines Business Council increased from 50 to 163.

I think that certainly indicates that Australian business interest in the Philippines is developing strongly and sustainably.

I think that with this report now providing a valuable tool for the increasing numbers of Australian businesses interested in trading and investing in the Philippines, the figures for trade and investment between our two countries can only increase.

Conclusion

Let me conclude by congratulating the East Asia Analytical Unit on producing this important report at a critical time for Australia and for the Philippines. The impact of the East Asian crisis is being felt by both of us but I take heart in this report’s assessment that the Philippines is about to move beyond the crisis.

The East Asia Analytical Unit is one of the Government’s chief instruments for Asia-related analysis and planning. It regularly produces high quality reports on emerging economic trends in East Asia, examining what these developments mean for Australian business, government and the community in general, and how we might better take advantage of them.

I therefore encourage business people who haven’t yet examined the Philippines’ good economic prospects to take a close look at this excellent report.

Australia and the Philippines are in many senses natural partners in the region, with much in common.

The Philippines, as I said earlier, is a regional partner on the move.

The new administration which will take office in July, after the national elections to be held next week, will have the opportunity to maintain this momentum.

Whoever is elected president, it will be important for the Philippines - and for Australia as a business partner - that the directions of economic policy will be sound.

We will also wish to continue to work constructively with the new administration on regional issues, be they economic, foreign policy or security in nature.

We look forward to developing the bilateral relationship still more intensively with the next administration.