Thirty percent of additional revenues generated by VAT reforms are slated to be spent on social services and much-needed improvements in transportation, energy and irrigation infrastructure.

Shrugging off political uncertainty and a rising currency, the Philippine economy is enjoying steady growth. Plenty of pitfalls remain, however. Philippine politics is rarely dull, and 2007 is likely to be no different. While the country has been enjoying increasing economic growth boosted by inflows of remittances from Filipinos abroad and a bullish stock market.
According to Bloomberg, some anticipate that if she loses control of both houses in the congressional elections, the opposition will commence impeachment proceedings against her. That is the worst-case scenario, says Ces Tanchoco, bank economist and investor relations officer at Bank of the Philippine Islands (BPI).
Tanchoco and other economists are resolutely upbeat that Arroyo will survive the forthcoming elections and remain in power for another three years.
“Politics is always a risk in the Philippines, but the political situation is relatively stable, and we expect Arroyo to remain in power until 2010,“ says Frances Cheung, a Hong Kong-based economist with Standard Chartered Bank.
Standard Chartered does anticipate some volatility in money market rates in the lead up to mid-May’s elections, but Cheung says this is likely to dissipate after the elections. For investors, long-term confidence in the Philippines should not be a major concern.
In late February the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), announced measures to curb the rapid appreciation of the peso, which rose 8.3 percent against the US dollar in 2006. Despite a strong peso having a minimal impact on the exports sector, Cheung says the central bank needed to be seen to be doing something to curb its strength, so it introduced trading limits.
Any negative market reaction is also likely to be countered by the surge in international remittances from Filipinos abroad, which increased 37 percent year-on-year in December 2006. According to TCW, the increase in remittances is also likely to offset any negative impact from rising oil prices on the current account and will contribute to “resilient“ private consumption, which should see the Philippine economy grow by 5 percent in 2007.
The government’s Medium-Term Philippine Development Plan predicts economic growth rates of 7 to 8 percent by 2010; however, most economists believe these projections are overly optimistic.
“The Philippines has achieved growth rates of 6.8 percent but not on a sustainable basis,“ says Tanchoco, adding that on a real adjusted population-growth basis, the Philippine economy is growing at a rate of only 3.5 percent, which is not enough to trim high poverty rates.
“The potential for growth of 7 to 8 percent is there, but it is a matter of the government being able to enact sustainable macro and micro reforms,“ she adds.
The Philippine economy has long relied on the strength of its electronics exports sector. Despite increasing competition from neighboring Southeast Asian countries, Sambor believes electronics firms are unlikely to diversify away from the Philippines in the short-term.
However, the challenge, he says, is to add value beyond assembly of electronics products. “The government recognizes that other countries have passed the Philippines by in terms of labor costs,“ says Tanchoco.
In recent years the Philippines has enjoyed some success in the back-office business-process outsourcing space. Private sector investment and FDI are also likely to receive a boost on the back of increased social and infrastructure spending by the Arroyo government.
Thirty percent of additional revenues generated by VAT reforms are slated to be spent on social services and much-needed improvements in transportation, energy and irrigation infrastructure. This follows a period of constrained spending by the government as congress failed to approve the 2006 budget.
The more recent trend of fiscal restraint helped rein in the public sector deficit, which fell from a peak of 5.2 percent in 2003 to an estimated 0.9 to 1 percent in 2006. Concerns remain regarding the country’s employment growth and high poverty rates.
Poverty rates have fallen to 30 percent from previous levels around 45 percent, but that is still high compared with other countries in the region. The government’s Development Policy Support Program is geared toward introducing reforms, including anti-corruption initiatives and enhanced tax collection, to create sustainable economic growth, reduce poverty and create jobs.
However, economists maintain that poverty is unlikely to be alleviated in the short term, and despite concerted efforts to reduce the fiscal deficit, one of the biggest challenges the government faces is on the public debt side, says Sambor of TCW: “The Philippines’ public debt rating is still quite high, especially when compared with Indonesia. Some measures were introduced last year to improve external debt ratios, but they are at the early stages.“

Russia’s attempts to broaden its economic base away from a resource-driven model are proving as profitable as they are successful.
Russia is becoming more authoritative, there is considerable uncertainty over who will be the next president, and sentiment toward the country’s markets was roiled by the recent upsurge in global volatility. But the country remains a growth story, fueled by rising incomes and an accelerating shift away from a resource-driven export model toward one based more on domestic demand for goods and services, Gfmag.com reported.
Russia’s economy is powering ahead, with GDP expected to have swelled by 6.3 percent. Leading international economic forecasters see growth at 6 percent in 2007.
That means that Russia has avoided the key pitfall that tripped up many other resource-driven economies, in which sectors other than resources were crowded out.
Anna Yudina, an analyst at Raiffeisen Zentralbank in Moscow, points out that “steady growth in household incomes, along with the rapid growth in consumer financing, has bolstered support for private consumption. Over the last couple of years real growth of more than 11 percent in private consumption has accounted for more than 80 percent of the growth in GDP and boosted the development of consumer-oriented industries.“
Take just one industry: the food sector. Russia has come a long way from the days when shop windows were empty or contained sorry displays of dusty cans. But compared to the West, it still has far to go. The top-five players control just 8 percent of the market, according to Svetlana Sukhanova, an analyst at UBS in Moscow.
That compares to a figure of 35 percent in the United States and between 60 and 80 percent in Western Europe. That fragmentation is changing fast, as modern retail formats--otherwise known as supermarkets--take over. In 2006 just 28 percent of food sales were made through supermarkets; by 2010 UBS estimates that percentage will have risen to 45 percent.
That consolidation will almost certainly not just be a domestic affair. International retail chains have long had a toehold in the fastest-growing markets such as Moscow and St. Petersburg. But the action is getting hotter. Russian hypermarket chain Karusel was reported to be in talks with a US retail giant at the end of February.
Karusel has already granted an option to Amsterdam-based food retailer X5, entitling it to buy 100 percent of its stock. X5, which is Russia’s largest food retailer based on sales, confirmed in late February that it would exercise that option if the price were right.
Such developments have been reflected in the shift of emphasis in stock buying. During 2006 and the first few months of 2007, companies outside the hydrocarbon sector--metals, utilities, consumer companies--saw much faster growth in their stock prices than oil and gas plays.
Spurred by this attention, a large number of companies have offered stock on the Russian markets for the first time, while many of those already listed have turned their attention overseas. Analysts expect up to $30 billion of IPOs and placements on the Russian market in 2007.
Russia’s increased clout in world markets has already been reflected in a rebalancing of the key MSCI index in late February. At 10.6 percent of the global emerging markets index, Russia now commands bigger weightings than either Brazil or China.
One key element of the Russian economic revival story has been the remaking of its financial sector. The country’s banks are on a searing run, churning out record profits as they benefit from the country’s booming economy and restructuring.
Bank profits are rising fast, too. State-owned VTB recorded a 400 percent increase in year-on-year profits for the first six months of 2006. But even at that level, internal profit generation is not enough to keep pace with demand for loans.
VTB, despite a December 2005 $1.5 billion cash injection from the government, is mulling a float on London and Moscow stock exchanges later this year. VTB’s case might be unique--it is the nearest that Russia has to a national champion in the banking industry--but many other banks are urgently contemplating capital injections.
The central bank is widely regarded as a committed--and reasonably effective--regulator. It has withdrawn licenses from institutions that don’t meet required standards or have question marks over their ownership. Overseas investors can now buy shares in Russian banks without the prior approval of the central bank.
Foreign ownership has been a key source of renewal for the banking sector, importing international standards and expertise. But there may well still be some way to go in Russia; in countries such as Croatia, the Czech Republic and Hungary, over 80 percent of bank assets were in foreign hands by early 2006.

It’s not uncommon to see children in Monrovia doing their homework at night under street lamps where once there was only darkness.
Lights were restored to Monrovia’s street corners just months ago as part of an international effort to help Liberia rebuild. They’re a sign of hope that Monrovia may once again be bustling and prosperous. But Monrovia--and Liberia--still have a long way to go, ReliefWeb said.
Fourteen years of civil war shattered the country’s infrastructure and economy, leaving few passable roads, rampant unemployment (the Liberian government estimates 85 percent of formal workers are unemployed or underemployed), low average life expectancy (47.7 years), high illiteracy (approximately 70 percent), and an estimated 76 percent of the country’s 3.3 million people living on less than $1 a day.
According to the World Bank, a high-level meeting in Washington took a close look at Liberia’s prospects for recovery and growth, its progress under a year-old democratically elected government, and its critical role in maintaining peace in the West Africa region.
The Liberia Partners’ Forum was co-hosted by the World Bank, United Nations, International Monetary Fund, United States Government, African Development Bank and European Commission. The forum also included delegations from at least 21 countries, many of whom contributed to $500 million in pledges for Liberia at a donors’ conference three years ago.
With those emergency funds running out, and hundreds of millions (in US dollars) still needed to rebuild the country, the forum aimed to secure international approval and support for the country’s reconstruction and development strategy, and explore new funding possibilities.

Progress Seen
Many in Africa and elsewhere view President Johnson Sirleaf--former World Bank economist, former head of the Africa Bureau of the UN Development Program, and the first female head of state in Africa--as capable of turning the country around.
The war destroyed roads, bridges, hospitals, and schools, and cut off clean water, electric power, and other services. It orphaned an estimated 230,000 children, along with HIV/AIDS and other diseases, according to UNICEF.
But the country has become more stable and secure during Johnson Sirleaf’s first year in office, thanks in part to the continued presence of 15,000 UN peacekeepers, says Luigi Giovine, Liberia Country Manager for the World Bank.
Liberian exports increased by 25 percent, clean water and electricity were restored to parts of Monrovia for the first time in 15 years, economic reforms increased government revenues by nearly 50 percent, and the economy grew at a rate of 8 percent, with growth expected to continue at that rate.
The World Bank has contributed $103 million in trust fund money and grants to the rebuilding effort and has been working closely with the government to restore 950 km of critical roads, including 400 km of rural road, Monrovia’s crumbling port, and the country’s only international airport. The Bank lends further support to public financial management, forest management, agriculture and community driven development in the country’s rural areas.
While much more needs to be done, including providing health and education to isolated rural regions where such services are practically non-existent, and restoring power, water and otherwise rehabilitating urban areas, major changes have occurred since Giovine arrived in Liberia nearly three years ago.

Learning Curve
Part of the World Bank’s mission is to strengthen the government’s ability to manage the kinds of large development projects needed to rebuild the country.
Gylfi Palsson, a transport specialist heading up the Bank’s major infrastructure projects in Liberia, says it became clear over the last 10 months that it would be as important to help the government expand its capacity to manage and plan for development as to build new roads or shore up crumbling infrastructure.
The new government is “progressive“ and “very proactively addressing the problems of the past,“ but lacks experience in procedures, processes, procurement, and supervising contracts--skills the Bank team has helped the agency build over several months, says Palsson.
Mindful of the country’s high unemployment rate, projects to improve roads, agriculture, and public works aim to hire as many local people as possible, says Giovine.
But projects have also been hampered by lack of skilled personnel willing to come to Liberia to work, Palsson says. Such workers may view Liberia as too risky, he adds.
While factional strife has decreased over the last year, more needs to be done to support a secure environment for development, acknowledges Giovine. “A stable Liberia is a critical factor affecting the stability of the entire region.“