A middle-class woman is headed to jail for tax evasion.
That would not make headlines in many countries, but it is big news in the Philippines. It was enough to send Philippine President Benigno Aquino III reaching excitedly for his phone during an interview this week to retrieve a message about the case from his tax chief.
Businesswoman Gloria Kintanar had just exhausted her appeals and would become the first tax evader in Philippine history to be jailed — once authorities deal with her claim of illness at the hospital where she is under arrest.
“Once her claim is verified ... she will be escorted to jail to serve her sentence,” Aquino said, brandishing his mobile phone. “Finally, somebody is going to go to jail for a white-collar crime.”
With such victories, Aquino says he is puncturing a culture of impunity that is at the heart of decades of sub-par economic performance in the Philippines and which has mired it in poverty.
The Philippines, a US colony until 1946, was one of Asia’s wealthiest nations in the 1950s, but now one-third of its 94 million citizens lives below the poverty line. Growth is anemic and infrastructure remains mostly woeful.
In the intervening years, the Philippines has promised much, but delivered little. However, a growing number of analysts and investors say this time the Philippines promises to leapfrog into a higher growth pattern, with signs that Aquino is serious about tackling old problems of graft and tax dodging.
“The attitude has changed, I think,” the 52-year-old bachelor said at the Malacanang Presidential Palace, a few days after marking two years in power. “We have people who had given up on the country [who are now] coming back.”
Aquino is being helped by low interest rates, improved fiscal management and a confident middle class of consumers, whose spending is fueled by the huge US$1.6 billion in monthly remittances from millions of Filipinos working overseas.
The economy grew 6.4 percent in the first three months of the year, second only to China among Asian economies, and Aquino said he expected it to accelerate in the second quarter. The government is aiming for an expansion of between 5 percent and 6 percent this year, making the Philippines a rare hot spot of growth as Europe remains hobbled by its debt crisis, the US struggles to recover and even China shows signs of a slowdown.
Economists point to a rebound in confidence among businesses operating in the country, partly due to signs that Aquino is fulfilling his campaign pledge to go after graft.
In a landmark victory, Aquino succeeded in his bid to impeach Philippine Supreme Court chief justice Renato Corona on corruption charges in May. Next in the firing line of the gun-enthusiast president is his predecessor, former Philippine president Gloria Macapagal Arroyo, who is under arrest awaiting a trial on graft charges.
Just as important as Corona’s ouster, the impeachment vote by a majority of senators showed that Aquino can control an often unruly Philippine Congress — boding well for the passage of long-delayed tax reforms that are crucial to boosting weak revenues and securing a coveted rise to investment-grade credit status by major ratings agencies.
“The governance issue, which has always been the problem of the Philippines for many years, has somehow turned around and that is what we have seen with the new administration,” said Maria Theresa Marcial-Javier, senior vice president at BPI Asset Management, which manages more than US$16 billion in assets.
Philippine companies were the most optimistic in Asia in the second quarter, according to the Thomson Reuters/INSEAD Asia Business Sentiment Index, bucking a gloomier regional tone.
The country’s stock market has gained 20 percent this year, hitting record highs and reaching valuations that are among the region’s highest.
Assets under management of Philippine-focused mutual funds and exchange-traded funds hit an all-time peak of US$6.5 billion in April, up from a pre-financial crisis high of US$4.4 billion in June 2007, according to global fund tracker Thomson Reuters Lipper.
“Big conglomerates have never been so busy getting involved with the government,” said Euben Paracuelles, regional economist at Nomura. “This is a structural change. Big companies for decades haven’t been investing because the government was so corrupt.”
The government brought down its debt-to-GDP ratio to 51 percent last year, a 13-year low, and it has made headway in weaning itself off costly foreign debt.
Tax revenues — hobbled by chronic evasion — remain a weak spot, but the government has kept its budget deficit well below programmed levels — at 22.8 billion pesos (US$547 million) in the first five months of this year, a fifth of its goal.
Aquino boasted that the Philippines was now able to borrow at rates equivalent to several notches higher than the country’s current sovereign rating, helping to save it about US$1 billion in interest rate payments last year.
“Just to be a little bit diplomatic, I won’t mention which countries we were compared to of the first world,” he said.
Skeptics say that Aquino, from a blue-blood Philippine political family with a mother who was president and a father who is a slain democracy hero, has been more talk than action. His high-profile impeachment of Corona has not been matched by convictions lower down the chain of corruption, something he says will take time.
The tax evasion case that finally resulted in a four-year jail sentence for Kintanar began in 2005, showing how slowly the wheels of justice turn. Previous tax evasion charges against influential figures, such as former Philippine first lady Imelda Marcos — now a congresswoman — and one of the country’s richest businessmen, Lucio Tan, have been dismissed by the courts.
Aquino insisted that the flow of convictions would pick up as his efforts to go after tax cheats and push for quicker cases take effect. He aims to raise tax revenue as a ratio of GDP from about 12 percent to 15 percent by 2016, about the same level as Malaysia.
“Pretty soon I think, I won’t give you a specific time, there will be a deluge of convictions,” Aquino said.
Aquino’s plan to boost infrastructure development through private-public partnerships has made little headway a third of the way through his six-year term.
Only one project has been successfully bid out, leading to criticism that the system is not working. Aquino said the pace would pick up this year with eight projects expected to be finalized, though analysts say they would be impressed if half that many get off the ground.
“Hot money investors will continue to be attracted to Philippines equities, but the bricks and mortar foreign investment community remains very cautious,” said Scott Harrison, managing director of the Pacific Strategies & Assessments consultancy. “Infrastructure is extremely inadequate and looming power shortages make the Philippines a much less desirable destination for investment than most of Manila’s neighbors in ASEAN.”
Net foreign direct investment in the Philippines climbed to US$850 million in the first quarter, up by nearly three-quarters from a year ago, but it remains way below that of its neighbors Indonesia and Thailand. Investment at about a fifth of GDP is among Asia’s lowest, evident in the country’s decrepit roads, railways and ports.
Even optimists say the current upswing owes more to a sweet spot of loose monetary policy and the rebuilding of the country’s balance sheets than to Aquino’s anti-corruption and investment efforts.
“That’s what’s making the economy tick,” said Edward Teather, an economist at UBS in Singapore. “Mr Aquino and his administration are supplying icing on the cake by delivering some movement on the business environment.”
Nevertheless, Aquino’s honeymoon with investors may sour if he cannot keep up his anti-corruption drive or achieve breakthroughs on tax reform and infrastructure projects in the coming year.
He is pushing Congress to pass amendments to a “sin” tax on cigarettes and alcohol this year that Nomura estimates would boost revenues by 0.2 percent of GDP. Although tax increases are unpopular, both chambers of Congress are stacked with Aquino’s allies and the bill is likely to pass with no major changes.
Aquino said he believed it would be passed this year.
Ratings agencies say passage of the new tax is crucial if the Philippines is to secure investment-grade status in the coming years, following several recent credit upgrades. That would put it in the same bracket as neighboring Indonesia and open the way for a fresh rush of investment.
“To sustain this momentum and to sustain the positive sentiment in the investment market in general, those expectations have to come into fruition, it has to happen,” Marcial-Javier said.
Additional reporting by Manuel Mogato,
Karen Lema in Manila and Nishant Kumar in Hong Kong
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