The Singapore Summit
Speech of Finance Secretary Cesar V. Purisima
September 19, 2015
Thank you for those kind words. Ever since I met George, I’ve been listening to him so this is my first time I will be to talk before George so the pressure is on. George is one of the smartest people I’ve met. He’s able to look at issues and give the historical perspective easily. Events like this have become ever more important as we seek to make sense of the challenges being presented to us in the world today. Let me name three:
First – Uncertain growth and the lack of aggregate demand. In the first summit in 2012, Prime Minister Lee identified economic problems facing the US and Europe as critical risks. Four years on, Europe is still flirting with episodes of crisis, and the United States is still trying to find a clear way forward. Now, we also have to add to the mix the so-called slowdown of China and the flight of capital from emerging markets. This has led to the uncertainty of growth prospects for the global economy and the volatility in the capital markets, the threat of a vicious cycle rearing its ugly head. The global demand model is skewed when the prosperity of three-fourths of the world is dependent on the one-fourth.
In an increasingly connected world, volatility spreads quickly. In recent weeks, we have seen volatility in markets, and this created yet new questions that still have to be answered.
Second – Climate change. Climate change is real. We started 2015 with the eastern seaboard of the US facing one of the coldest winters ever. Yet globally, 2015 is shaping up to become the warmest year with six out of eight months this year hitting the high notes and setting new records. In the Philippines, three of the deadliest typhoons happened in the last 4 years. Globally for the first time, losses due to natural disasters exceeded US$100 billion in 3 consecutive years. Asia-Pacific bears the brunt of this with an estimated US$ 71.3 billion in annual losses. Speaking at the start of this month in Alaska, President Obama commented that “few things have as negative an impact on our economy as climate change.” And yet we have devoted more attention to things other than climate change.
Third – Geopolitical risk. In 2012, Prime Minister Lee identified as risks the rising nationalism in different places for different reasons, and the shift in strategic balance as China becomes stronger. Now, we have to add Russia’s adventurism, the emergence of groups such as ISIS and the resulting migrant situation. During the Milken Institute Asia Summit yesterday, the panel on Global Risk focused on the shifts in geopolitics and how the global economy will be deeply affected by these shifts. Someone whose name I unfortunately cannot recall said it best and I paraphrase: “Even in geopolitics, we are all price takers, like in markets. We are only able to piece together the consequences of these events later on, prompting our response to be more reactive rather than proactive.”
These three external challenges I mentioned, plus the domestic sociopolitical issues, are among the challenges leaders of countries, and even companies, have to contend with. The challenges that shape the course of nations become increasingly complex–such is simply the nature of the global context we confront today.
While the Philippines is not immune to the impact of these global challenges, we have thankfully been able to maneuver our economy to safe harbors through the current upheaval. Our average growth of 6.0% from 2010 to 2014 is the highest 5-year growth we’ve since the 1970s, allowing us to shed the label “Sick Man of Asia” and to replace it with “Bright Spot in Asia.”
Do allow me to share with you our experiences in confronting our unique set of challenges. The keys to our story are:
One – Good Governance
Two – Strong macroeconomic fundamentals
Three – Policy Reform
And finally – Partnership with our people, which I call the ultimate PPP (Public Private Partnership)
First, President Aquino instituted good governance. The Philippines has had a bad reputation in this regard. Yet in 2010, something changed. President Aquino took office with a very large mandate and a platform for reform. Yes, there was skepticism from the international community at first, but the Administration’s actions spoke louder than words. The impossible started to happen.
We enforced our laws. We involved the people in filing complaints against corrupt officials and we filed cases against them. We championed radical reforms in our budget process, opening it up for all to see using technology. We practiced zero-based budgeting, performance-informed budgeting, grassroots participatory budgeting, as well as earning accolades for the use of technology in this regard.
The reforming zeal of the Aquino Administration has allowed us to make progress through greater transparency, improved governance of financial institutions, fiscal responsibility creating increased fiscal space.
Standing here in Singapore, it’s a great view from the summit indeed where we see this great country that was built on the foundation of anti-corruption and meritocracy when it gained its independence 50 years ago. As former Prime Minister Lee Kuan Yew once stated: “In the Third World, a clean, efficient, rational, and predictable government is a competitive advantage.”
Second – strong macroeconomic fundamentals. We firmly focused on strengthening our macroeconomic fundamentals. As ‘hot money’ looked for new homes in the east, we managed our fiscal position prudently– We have external strength, fiscal health, and adequately low inflation. We have minimized our risk and exposure though orchestrating sustained reductions in our external debt-to-GDP ratio, from 36.9% of GDP in 2009 to 26.1% in the first quarter of this year. Our general government debt decreased from 44.3% in 2009 to 36.4% in 2014. Since 2010, our external debt is all long term, and our domestic debt maturity improved from 54% long-term to 83% long-term. Thus, our interest expense as a percent of revenues was 16.8% in 2014, down from 24.8% in 2009. We have sustained our foreign exchange reserves at above 10 months’ import cover since 2010. We have had 13 years of consecutive current account surplus since 2003. We have improved the quality and diversity of our investments and export markets. For example, we are now the 4th largest shipbuilding country and the second largest in the business outsourcing industry.
Third, Policy reform. We set out to institutionalize our good governance reforms by enacting policies and legislation to address our constraints to growth. We legislated the following: a reproductive health law, amendments to the Sin Tax law, enhanced basic education to follow the global standard of K to 12, a state-owned enterprises governance law, allowing full entry of foreign banks, amendments to the cabotage law, and a competition law. All our policy reforms focused on increasing competitiveness of the Philippines.
Last but not the least, we have established a firm partnership with our people, which is the ultimate Public-Private Partnership. A strong mandate translates into political capital. The support of the people has allowed President Aquino to challenge vested interests and enact reforms that benefit the majority instead of the few. These were battles that cost political capital, but the interesting thing is that President Aquino gained more political capital when he spent it on reforms. A good example was when he worked with Congress to impeach the Chief Justice of the Supreme Court for unexplained wealth. As a result, President Aquino has enjoyed five years of positive ratings, even his lowest ratings are still higher than the highest ratings of the previous Presidents. This has also translated to congressional support to enact key legislation mentioned above.
President Aquino understood the power of creating virtuous cycles of confidence. Because both Filipinos and our neighbors such as yourselves had renewed confidence in our country, our credit ratings improved, resulting in cheaper financing. Our people now have the confidence to buy cars, apartments, and other investments for the long-term, driving economic growth. In fact, car sales are up 27% this year. Likewise, companies in the Philippines now risk five to ten year corporate plans, when the norm used to be planning around one to three years. In the capital markets, our best corporates are now investment grade, and they have increasingly been borrowing for longer maturity as well. Externally, if you look at foreign direct investment, flows into the Philippines increased by 51% from the previous decade. Net FDI growth was one of the highest in the last three years, up 66% in 2014.
Our public investment in infrastructure has increased from 2% of GDP to 5%. Our Public-Private Partnership is a reminder of the renewed confidence in the country. We have awarded 10 projects worth US$4.2 billion, and have over 50 projects in the pipeline including highways, rail and ports needed to sustain our economic growth under a PPP program. Mark Johnson, Chairman of the Asia-Pacific Infrastructure Partnership noted earlier this year that “the Philippines has made better and faster progress in PPP than many other economies.”
But we still have a long way if we want to address our ultimate goal of alleviating poverty and improving the lives of our people. We need to continue our growth for the next 10 to 15 years, and even longer. To do this, we must continue to do the following: Continue investments in Infrastructure, continue our investments in our people, and continue to reform policy
First – Investing in Infrastructure. To meet the needs of the growing country, and to ensure the country is able to integrate with the global supply chain, we must continue spending at least 5% of GDP in the years to come. Continuing a credible PPP program will also strengthen the country’s ability to mobilize public and private resources for infrastructure. Quality infrastructure is vital to competitiveness. Our success in the BPO industry would not have been possible without out world-class telecoms infrastructure. I still remember the speech of former Prime Minister Lee Kwan Yew in 1992 when he quipped that “The joke in the Philippines is that 98% of the population is waiting for a telephone, and the other 2% for a dial tone.” I am not sure whether then President Ramos liberalized our telecoms industry in reaction to former PM LKY’s comments, but we open up the sector to competition soon after. This is also an example where technology allows latecomers to leapfrog because we jumped to mobile telephony.
Second – Investing in our people. We were able to invest in a skilled, trained and healthy community. After all, economies are about people. The Philippines just entered our demographic sweet spot and we are expected to hit a middle-income inflection point where GDP per capita could reach $6,000. To capitalize on these two sweet spots, we strengthened a priority program using conditional cash transfers to improve the health, nutrition and education of children. We increased the budget for this program by more than 6 times since the President took office. Since 2010, we doubled our education budget, and we tripled our health budget. We expanded national health insurance coverage to 88% up from only 51% in 2010. The only way we will be able to realize our demographic dividend is through an educated and healthy population. After all, Education, especially in technology, is the great equalizer.
Third – Reforming policy. We need to continue institutionalizing good governance in all branches of government. Government service must draw the best and brightest, which can only be done through civil service reform. Officials must be paid based on performance. We must continue to open up our economy and establish a true meritocracy in government. Good governance after all is good economics.
Such reforms can be undertaken by a single country looking to confront its internal challenges. However, individual nations can only do so much to combat the externalities and complexities we face today. Like banks merging to face larger threats, we need to band together in order to confront the challenges of our new normal.
ASEAN represents a tremendous opportunity for the Southeast Asian countries. Taken as one, our middle class of 190 million persons is already larger than that of the United States at 180 million. By 2020, according to Nielsen research, the ASEAN middle class will be larger than that of Brazil, US, France, Germany and the UK combined.
This is precisely why ASEAN lends us the leverage we need to come out on the topside of this wave of challenges. Adapting to change is easier to attain together: I believe we can be more than just the sum of our individual strengths as nations. Paraphrasing a popular misquote from Charles Darwin, “it is not the strongest of the countries or economies that survives, nor the most intelligent. It is the one that most adapts to change.” ASEAN’s promise has me convinced that the game of societal evolution need not be zero-sum. Allow me to give you at least three reasons why:
First – ASEAN can look inward to combat uncertain growth and the lack of aggregate demand. If we could increase intra-ASEAN trade from 24% to 40%, the incremental impact on the ASEAN economy could translate to 2.5 trillion dollars annually especially if we are able to change the nature of trade from intermediate goods to final consumption goods. McKinsey estimates required infrastructure and real estate investment at US$7 trillion from 2014 to 2030. Financing this need can also be another engine for growth. Our financial sector must deepen and integrate to withstand global stresses and to satisfy the increasing demands for long-term and risk-sharing capital. Capital markets have a big role in increasing productivity, diversifying sources of financing, and mitigating capital flow volatility. We must complement our reliance on the US, Europe, and Japan by looking to our neighbors, India and China. Odds come out more in our favor when we bet on ourselves.
Second – ASEAN can form a unique voice in building multilateral cooperation on climate change. We recognized the urgency of coming up with solutions to climate change by responding as one region through ‘One ASEAN, One Response’, which enables us to recover faster and at the same time lowers economic costs by shortening recovery time.
We can also look at disaster risk mitigation as a region. The Philippines for example is looking at a program loan from the World Bank that shall help the government better manage fiscal risk if and when severe natural disaster hits the country – this pioneering product will write off a portion of our loan in case such an event happens. This will give us the ability to protect our fiscal future, and not rely on the course of Mother Nature. Together, ASEAN could consider a Chiang Mai-like initiative where we create a pool of funds to be used as collective insurance for the region.
Third – ASEAN is the natural forum to act as a stabilizing voice in a region with increasing tensions as geopolitical shifts occur. Following the ASEAN way to reach consensus, and not compromise, has allowed the region to build trust. It has also shown the feasibility of diverse countries working together to achieve common goals. While ASEAN now has become more synonymous to economic cooperation and integration, its original purpose in 1967 was to safeguard the peace and stability of the region as the world then was faced with ideologically driven global conflict. We must rekindle our role in this way. Less I be misinterpreted, I am not referring to a military alliance. I am referring to cooperation amongst ASEAN in resolving issues. A good example was the role of Malaysia in helping the Philippines resolve its long dispute southern Philippines by acting as facilitator. Likewise, ASEAN acts as a moderating voice for those with disputes in the South China Sea.
The challenges for ASEAN are not insurmountable so long as all the members are prepared to accept and embrace change. Just as the Philippines sets itself on a course to change the old ways, so too can ASEAN follow that path of renewal and change. While change is inevitable, adaptability is not. As the external forces shake the world’s foundations, we are measured by how readily we are willing to adapt and to succeed in each new normal.
Perhaps the global community, and ASEAN specifically, must also find the fundamental principles that will carry us forward to the next century; it must moreover make adaptability to change the central character of our societies today.
Thank you for your time.
Source: Department of Finance