TRANSCRIPT: The Asset Interview with Daniel Yu – Sec. Cesar V. Purisima, November 2012

On credit rating actions

Purisima: If you look at it from a credit rating standpoint, we’re now back where what Mrs. Arroyo inherited. When she went into office, we were all one notch below investment grade. During her nine years, we really went down. That just shows you that good governance is important because ever since President Aquino came to office, we’ve had 9 positive rating actions putting us right now at the cusp of investment grade and I’m confident that if we just continue with what we’re doing, we’ll be able to accomplish that sooner rather than later. And if you look at how he’s changed the way the government is now. We’re sending the signal from the top how he wants governance to be and as a result, we’ve gotten what we refer to as dividends from a fiscal standpoint which was identified before as one of the constraints to the growth of the Philippines.

We’ve charted at the beginning of his term medium term fiscal consolidation program. I believe we’re well on the way to accomplishing that. Last year we hit our target of 2%, way below program which is 2% deficit to GDP. Our goal is to maintain that from 2013 onwards. This year, our target is 2.6% to GDP. What we accomplish this year will be lower but more than the deficit, it’s the composition of our revenue and expenses. When you look at the revenues, we’ve improved our tax and revenue efficiencies to 2%. In terms of expenses, we’ve been able to reshape the budget because of the fiscal space we’ve created. For example, interest as a percentage of the budget has gone down to 16.6%. It was 20% when we took over and a month after the Asian crisis, that was over 20%. That just shows you how much better positioned we are. There are countries whose interest rates are going up. In any environment there are countries whose cost of borrowing increases and countries whose cost of borrowing decreases. We happen to be those which the market likes in terms of what we’re doing. Obviously, the general cost of interest rates are lower but I think when you look at our 90-day rate which is well below 1%. These are unprecedented levels. When we issue our bonds, these are oversubscribed many times over including the latest we’ve issued, that onshore dollar bond of US$500 million that was oversubscribed 3 and a half times.

When you look at the break down, we’ve been able to increase education allotment from P215 billion to close to P300 billion. We’ve been able to increase health to P68 billion. We’ve also been able to increase conditional cash transfers from P10-P40 billion and we want to double that again, close to P80 billion. We’ve been able to increase infrastructure and that’s because we’ve been able to reduce wastage and corruption. We’ve been able to reduce interest costs. We’ve been able to increase our efficiency in revenue. And that makes a lot of difference because if you look at our growth in the past 10 years, our trend growth is 4.7%. This year, after three quarters we’re at 6.5%-7.1%. This is I think important to point out from at least three standpoint:1) we’re doing it when the global economy is having difficulties; 2) we’re doing it despite the fact that mining went down; 3) when you look at exports that last month increased 22%, our exports year to date is also up when the global trend is exports down. From the exports standpoint, I think you’re seeing increasing diversification.

Our goal is having 10 million tourists by the end of 2016. You have mining, we’re the 5th most mineralized country in the world. We’re in the process of revisiting and rationalizing the regulatory environment so we really have responsible mining that benefits the country. You have agriculture. We’re still very inefficient when it comes to agriculture. When you look at rice alone, we have over 4 million hectares devoted to rice production, producing about 16 million tons and our demand is about 17.3 million tons, with a deficit of 1.3 but when you analyze the production chain, 13% at the back end is wasted because of poor storage, at least 30% is not produced because of recycling of seeds, lack of use of fertilizer. When you add the two, that’s 60% easily that we can increase production making us a net exporter and that’s the goal of the president. You have our manufacturing sector. It grew 5% in the last quarter, there is tremendous opportunity there. We have a couple of new shipbuilding operations that’s been set up and other specialty vessels. For a country with no steel industry, we’re now 4th largest in the world. The reason for that is our deep skills in welding.

So, fiscal consolidation, the growth that has resulted out of the policies of the government then the third thing I’d like to highlight is our balance sheet which is very strong. Our debt now is much less than our total reserves which are at historic highs. As a net creditor country, we contributed to the IMF fund which was raised for Europe. As you know, we were once a major user of the IMF resources. The debt to GDP is less than 15% and decreasing. Our foreign debt to GDP is less than 28% and decreasing. The maturity profile of our debt is very favourable, over 11 years, both foreign and local. There is no more bunching up, the costs continue to decrease. We have a structurally very strong balance sheet. The macroeconomic environment is also well managed. The inflation is well within the 3-5 percent policy range.

We are also in the process of addressing the infrastructure gap. We’ve been accelerating the launching of PPP projects. Not only have we increased the allotment for infrastructure in the budget, we’re also inviting the private sector. Last year, we wanted to launch ten but we were only able to launch one. That’s because we realized that a lot of the feasibility studies that we inherited needed updating and we needed to rationalize the process. This year, we are still hoping that we can launch eight; we’ve only launched four so far. There’s a couple approved by the National Economic Board already but more importantly next year we can launch on a regular basis our PPP projects because we’ve already set a backlog. So, infrastructure is something that is a priority. Infrastructure relating to tourism. We’re about to open a new airport in Cagayan de Oro, we’re upgrading several airports including that of Mactan. Power is also a focus, mass transit and toll ways are an important focus. We’ve bidded out 10,000 school rooms; we’re about to bid more. The president wants to close the gap of about 66,000 school rooms by the end of next year. If he’s able to do that, he’s going to be the first president to be able to solve that gap ever in the history of the Philippines. Infrastructure is an important focus. It’s going to be the driver for growth several ways. It will help us absolve the flow of dollars coming from abroad and from the fact that we’re a current account surplus country driven by BPOs and foreign remittances. The BPO is growing 20% per year and remittances continue to be healthy. That is why tourism can be the third leg for that current account surplus strength. Infrastructure will also help our businesses more competitive and help us continue to attract investments into manufacturing.

We’ve also been trying to align some policy issues. When we said tourism is a priority, the president because of his political capital, was able to pass and approve open sky outside Metro Manila. I think that’s very important because it will allow an increase in the frequencies of flights in the Philippines. Without that, it’s hard for tourists to come to the Philippines directly. So, we’re continuing to work on all these policy areas. There are still a lot of work to be done but the important thing is we want to open up the country.

There are now over 160 countries that have no visa requirements and we continue to review our policies on that. We have incentives that we grant for investors in the tourist space. That’s what’s happening and I feel good about it and I think it all emanates from the fact that we have a president who was elected with the largest mandate ever in the Philippines, whose level of support from our people, as we speak, is around 80%. No Philippine president has accomplished this kind of mandate or support. In fact, it’s unprecedented for a president to be this popular.

As you know, corruption is a major issue. In the executive department he has direct influence. In the legislative department, he has influence because of his strong majority. But the judiciary, which is independent, he had very little influence and he had to deal with the problem head on by impeaching the chief justice who was perceived to be improperly appointed by the previous president. No one expected the president to succeed. Clearly showing that Filipinos are tired of the old ways of doing things. The important point is we’re about to keep on tipping points in the many areas of the national psyche in terms of the people believing that the government can be good, that the country can actually attain its true potential. Tipping point in terms of support from the local business community. We’re seeing unprecedented amounts of money being committed to the future by all the business groups in the country. This is, I think, the biggest dividend. After all, the economy is about people, it’s about business. The government is just there to create the right environment. And I call this the true PPP. And that’s what we’re trying to do.

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On consolidating challenges from inherited problems

Purisima: I’ll give you an example. Before we took over, when someone builds a road, they didn’t care if it was connected to the national road network master plan. They didn’t care if there was a work program or not. As a result, we have roads in the rural area that was one lane paved, then the next few kilometres not paved, then the next kilometre paved. I’m sure you’ve seen those. Roads like that won’t improve the efficiency of the road network. So, the first thing the president said was 1) you must have a work program because without the work program, we’re not going to approve the construction; 2) the road must be connected to the national road network and 3) there must be a certain level of quality. The interesting thing that has happened is we’ve accomplished, based on the reports of the DPWH, to improve the quality at lower costs and at a much shorter time. For a while, they were thinking of slowing down, that this is just a passing storm of good governance. But they realized that this one was for good so towards the latter part of 2011, they started to pick up again. We’ve seen that pick up this year so for the third quarter for example, construction was up 24%. Anecdotally, I heard from the cement companies that they’re in full capacity. In fact, I met with the CEO of Holcim, one of the world’s largest cement companies and he wants to visit the Philippines. He said they’re thinking of putting up more plants in the country and that just shows you that things are moving in the right direction. Before, they have to shut down some lines because they’re under capacity.

On how far PH has improved in curbing corruption

Purisima: I want to say that corruption is not going to be eliminated overnight. It’s been there a long time and it will take a many critical actions to reduce it dramatically. We’ve sent a very direct signal already from the very top. If you ask me, corruption before is at least 30% up to 50% from the top but it’s no longer there. From that standpoint, you can say corruption has been reduced at least half in the country. Secondly, because of our stricter standards in terms of disbursing the money, corruption opportunities has also decreased.

To fight corruption which I think is a journey, we need to invest in institutions. We need the private sector to work closely with us. We need a judiciary to be with us all the way. I think, the right steps have been made in terms of sending the signal from the top and in terms of prosecuting people. We’ve been filing cases every Thursday. I think changing the perception, changing the way things are done will help people adjust slowly and will ultimately comply with the law. I think we’ve improved. We haven’t done formal studies but I think that will ultimately be done. Putting corruption at the front and center of the agenda is part of the president’s good governance as a basis for good economics.

On mining and tourism opportunities

Purisima: That’s why the president is fighting this fight of rationalizing the rules and policies involving mining. For example, after we’re done, he said there will be no mining zones. Personally, I support Palawan to be a ‘No Mining Zone’ because there are existing zones there. Palawan, based on the McKenzie study, is potentially the Maldives of the East. Beautiful islands in the right part of the country and within the coral triangle. Both for tourism and agriculture. And honestly, there are areas that will not be opened up for mining because we’re blessed with mineral resources. We’ve seen in other mining countries how it can be done responsibly. They have rehabilitation programs and funds for post-mining and I think we just have to strengthen that and communities will also have to benefit in terms of better infrastructure, better job opportunities, better health services, better education, and just giving them access to the benefits of modern life in their respective location.

What we’re really excited about is how we can create convergence among different agencies. Convergence in tourism and agriculture. For us, that offers many job opportunities in the rural area as tourism gets more traction in the country. As you know, the most beautiful places are in the most remote areas. This will give a ready market for the produce, ready jobs for those working in that area so this becomes an engine for growth. Also, the convergence between agriculture and light manufacturing. When you want to visit a country, you want souvenirs. We need to spur creativity in these remote areas so when you go to Boracay, there will be more variety of gifts and that’s what we’re working on. We’re seeking out talented Filipinos to help us. Convergence between tourism and services. For example, there’s a thrust right now to internationalize Philippine massage and Philippine cuisine so it becomes more acceptable to the palate of tourists and more presentable.

On FDIs

Purisima: First, I’d like to point out that the Philippines has a really long history of multinationals operating successfully in the country. You can go on and on in naming them. I think we’ve established the fact that the Philippines has been a great home for foreign investment for a long time. Secondly, those that have focused on the negative rather than the positive, I think, will miss out on opportunities because if you are a smart businessman and you are focused on opportunities, you look at the rate of change and the direction of change. And we certainly have the right direction and the right rate of change. If they don’t want to come, we cannot force them but there are those who have in fact rated us as number 2 or number 1 in outsourcing in many categories and these are not local firms. Where the FDI meter will really move is in the infrastructure when that kicks in. I’m confident it will kick in. But the interesting thing that has happened is that when foreign companies come in here, they need not bring their dollars because we have enough dollars in the country. All we want from them is their technology and their experience in building infrastructure because we can fund our own infrastructure from the local capital markets. That is why for me, it’s less the FDI meter. It’s really about the technology, the culture and the experience that they’re going to bring. I’m confident that is changing as we speak now. There were over 300 companies that went to Manila looking for opportunities.

Our job as a government is to make sure 1) we’re building infrastructure, 2) we set up the right environment because the key differentiator of our country is demography. We have about a hundred million people that’s about to enter a sweet spot where more than a majority of people will be in working age. While other economies are aging populations, we will be the working generation. And it’s the right time for us because by 2015 we will have Asean integration.  And in an integrated Asean with an economy of over 2.2 trillion, we’ll have the second largest population but I think the largest mobile population.

We’re excited for the future. I think things have aligned for us in the right time.

There’s a quote that says “IF you’re in the storm, don’t fret the storm. Learn to dance in the rain.” We, in the Philippines, we’re often hit by storms. In fact, as we speak, we’re being hit by a storm. We have to accept these as challenges because this also presents opportunities. That’s the attitude of this country right now because the one thing that has held us back in the past 40 years is bad governance.

We are a blessed country: good country, speaks English well, both naturally endowed with minerals and beauty. So, why are we underperforming? Singapore overperforming without water? Governance. Finally, good governance has dawned in the country and in a big way because it’s from the top, with the president and the mandate and he’s really walking his talk. And I can really compare because I’ve worked under two presidents.

Six years is definitely a good start. It’s taken us four generations to where we are now. It will take just as long to take us where we want to be. But they key really is to build deep enough foundation so the people will change their expectations form being apathetic.

On looking forward

Purisima: It’s really about follow through, about continuing on the program. It’s not sexy but it’s about rolling up your sleeves and continuing to do the things that need to be fixed.  People and demography are our strengths right now. If we don’t manage our programs properly, we’ll have resource issues. As they say, too much of anything is not good. So, we have a good demographic profile but we need to make sure we manage it so we’re able to reap the dividends from that by making sure that they’re healthy, that they’re educated and that they have the opportunity. Because it’s useless to have the right demographic profile if they are not healthy, not educated and do not have the opportunity.