10/18/2012 09:29 am ET Updated Dec 18, 2012

Is the Philippines the Next Tiger Economy?

As emerging economic giants of Brazil, Russia, China, and India whimper, global investors are increasingly enthralled by the bang of more compact, democratic and dynamic economies. A combination of robust domestic spending, macroeconomic buoyancy, and labor-market flexibility has more than compensated for their smaller size. The new darlings of international finance include countries such as Turkey, Indonesia, and the Philippines. While the two Muslim nations are well on their way to join the elite group of trillion-dollar economies, the Philippines is relishing a strong economic momentum.

Amid global fears of a double-dip recession, the Philippines represents a countercyclical story of growth and resilience. It is expected to expand by 5.5-6 percent this year. The currency has been relatively strong, while the stock market has been among the most bullish in Asia. The first quarter was most encouraging: the economy grew above 6 percent, while exports expanded by 7.7 percent. The country is also enjoying an 'era of moderation': interest rates are at around 4 percent, inflation is barely above 3 percent, and the debt-to-GDP ratio is at a historic low -- allowing considerable space for borrowing and monetary easing.

This sound economic environment explains why even "Dr. Doom" Nouriel Roubini has identified the Philippines as among the most resilient of key Asian economies in terms of responding to a major global shock. According to the Roubini Global Economics report, the country has considerable monetary-fiscal wiggle room to respond to growing volatility in the center-economies (i.e., euro zone, U.S., Japan, and China) and geopolitical uncertainties in the Persian Gulf.

As a result, all major credit agencies have upgraded Philippines ratings, currently just a notch below the 'investment grade' level.

So why is East Asia's 'sick man' suddenly booming? Well, similar to its peers in Ankara and Jakarta, the secret to Manila' economic upswing lies in improved governance and political stability. After a decade of democratic reversals, anemic economic performance, and widespread public dissatisfaction, the new Aquino administration is laying down the foundation of perhaps the next tiger economy in Asia.

Since taking office in 2010, President Aquino -- intent on rooting out corruption -- has successfully managed to impeach leading magistrates accused of corruption and administrative misconduct, paving the way for the prosecution of the former President Gloria Arroyo. To enhance transparency, he has aggressively lobbied for the passage of a Freedom of Information (FOI) bill in the legislature. Meanwhile, he astutely navigated through the country's intricate state-church relations by helping his legislative allies to pass the controversial Reproductive Health (RH) bill, giving the state potential control over the country's explosive population growth.

In terms of conflict-resolution, the President has successfully concluded a 'framework agreement' with the country's main rebel group, the Moro Islamic Liberation Front (MILF). This could be the beginning of a long but fulfilling process of reconciliation, reconstruction, and sustained development in the country's southern island of Mindanao.

Recognizing the depth of his country's poverty and inequality, Aquino has engaged in a massive 'conditional cash transfer' program, targeting the most vulnerable sectors. There are also some signs of economic trickle-down: the second-quarter of 2012 has reported notable declines in adult unemployment (from 28.6 to 34.4 percent) and hunger (from 23.8 to 18.4 percent) compared to the first quarter, according to the Social Weather Station (SWS).
The government has also heavily relied on Public-Private Partnership (PPP) Projects to boost Philippines' flailing infrastructure and enhance investment-attractiveness. In less than 16 months it finalized a major PPP project.

It is these efforts that partly explain the Philippines' impressive performance in this year's economic competitiveness survey, with the country jumping by 10 notches in global rankings compared to last year. No wonder, an inspired Aquino recently declared, "We are now reaping economic benefits of good governance."

However, the true test of the new administration's mettle lies in achieving 'inclusive and sustainable' growth. By any measure, the Philippines is a land of extremes and mind-bugling contradictions. A third of the country's capital, Metro-Manila, is filled with 'shanty towns,' but it also boasts one of the world's biggest shopping malls, namely Mall of Asia and SM North Edsa, while benefiting from an impressive real estate boom, showcasing lush structures such as the Resorts World casino complex, a $4 billion Entertainment City complex, and a Versace-designed residential Tower (first of its kind in Asia). Global celebrities such as Paris Hilton and Donald Trump have lent their name to major residential projects in the country, namely the Azuri Urban resorts residences (showcasing a jaw-dropping man-made beach) and the $150 million Trump Tower.

It takes a cocktail of unyielding leadership and sustained implementation of right policies to address the country's structural imbalances. According to a recent authoritative study by the Asian Development Bank (ADB), entitled "Taking the Right Road to Inclusive Growth," the country's economic growth has not only failed to make dramatic and much-needed improvements in terms of poverty-alleviation and employment-generation, but it is ultimately 'unsustainable' -- unless there is significant diversification of an essentially service -- and remittance-dependent economy. This means the country needs to build a strong manufacturing base.

Party to a whole host of international trade regimes that have liberalized the Philippines' manufacturing markets, atop an appreciating currency, the country has been suffering from marked de-industrialization in recent decades. As a result, real wages have practically stagnated in the last three decades, with much of the population denied access to stable and well-paying jobs -- relying instead on remittances, insecure and low-paying jobs in the service sectors, or/and totally enmeshed in the informal economy. Moreover, the Philippines still struggles to attract investments. According to the IFC's 2012 Doing Business Survey, which looks at the overall investment environment, the Philippines ranks 136th out of 183 countries.

Clearly, reviving industries and improving the country's overall investment climate will require a much more structural and strategic economic approach, something which is glaringly absent in the current administration's agenda. But at least, there is finally a semblance of badly-needed macroeconomic and political stability.