Overall, President Arroyo's stated goal is to eradicate poverty in the Philippines within a decade, although she knows that she has only three years left in her present term, something that signals her desire to seek another term. While the Constitution grants the president a single six-year term, President Arroyo is at present serving out the remaining three-year term of ousted President Estrada and is therefore qualified to seek another term in her own right.

On the positive side, the Arroyo administration has been fairly successful in painting an atmosphere of good governance. Its economic policies have so far been consistent in attracting more foreign direct investment. With more economic reform measures in the offing, the Arroyo administration hopes to entice foreign investors with tax breaks and other incentives that are comparable to those of Singapore, Malaysia or Thailand.

One important piece of legislation that recently excited foreign investors is the Power Restructuring Act, which seeks to privatize the country's power industry. This law has set the tone of the government's approach towards opening its economy to foreign capital. The country is now allowing 100 percent foreign ownership in most industries (except mass media). It has recently deregulated its oil, banking, insurance, shipping, telecommunications and retail trade industries and has removed the monopoly structures in the market.

Foreign investors are given the most convenient locations for their capital. Highly secured and well-equipped economic zones have been established in different parts of the country to host the manufacturing centres and distribution channels of foreign companies. The country's commercial business districts (CBDs) now serve regional headquarters (RHQs) and regional operating headquarters (ROHQs) of giant multinational firms like AOL, Caltex, Fluor Daniel, Watson Wyatt, Andersen Consulting and Procter and Gamble. However, that being said, the Philippines continues to grapple with poor infrastructural problems of which those in the transport and communications sectors probably impact most severely on foreign operations in this country.

Despite the slowdown of the economy, the number of foreign direct investments is also on the rise. While the situation can be described as anything but bullish at this point, its potential remains strong. Such potential, however, would not readily translate into improved economic growth until the government resolves the single biggest hurdle to development - the poor peace and order situation.

Such an atmosphere of political instability, in tandem with the weakness of the global economy, is keeping the Philippines from achieving higher growth rates. After expanding by only 4 percent last year, the gross domestic product (GDP) of the Philippines is forecast to grow by only 3.3 to 3.8 percent this year. Even this is seen in some quarters as an optimistic target, as the economy expanded by only 3.3 percent in the first half of the year.

For one thing, this could be seen as good news for a country, which has just survived two people's revolts in the span of only five months. Even the more stable regional economies such as those of Singapore, Taiwan, and Malaysia have been in trouble in the past quarter as a result of the sluggish demand for electronic products, which make up most of their exports.

In its initial evaluation mainly based on preliminary reports from the two sectors, the National Economic Development Authority (NEDA) said that the growth of gross domestic product (GDP) from April to June, which is 3.3 percent, YoY, and 1.5 percent, QoQ, has also kept the Philippines out of technical recession. GDP grew by 2.5 percent, YoY, in the first three months of the year but contracted by 0.5 percent, QoQ. Had GDP shrunk, QoQ, in the second quarter of the year, the economy could have been classified in technical recession.

Despite the slump in exports, the economy looks that it will likely avoid such a technical recession on the strength of performance of the agriculture and services sectors. According to NEDA, the agriculture sector posted a 3 percent growth, YoY, in the second quarter of the year while the services sector expanded by 3.8 percent, YoY, during the period. The industrial sector grew by 2.7 percent during the quarter.

For the whole year, the government expects that the agricultural sector will post a 2.5 to 3.3 percent growth; industry, 1.8 to 2.3 percent; and services, 4.7 to 5.1 percent. It forecasts that the GDP will expand by 3.3 to 3.8 percent this year and by 4.1 to 4.7 percent next year.

Next year, the government estimates a GDP growth rate of 4.5 to 5.0 percent, down from the original projection of 4.9 to 5.5 percent. The GNP, meanwhile, is expected to grow at 4.8 to 5.3 percent, down from the earlier target of 5.1 to 5.6 percent.

One key factor on the restrained expansion of the Philippine economy is the fiscal deficit - estimated to be between P145 billion to P225 billion, which the National Economic Development Authority (NEDA) admits, will be hard to manage. A manageable fiscal deficit is below 2.5 percent of the GNP or 3.9 percent of the GDP. But even the most optimistic target of P131-billion deficit represents 4.8 percent of the GDP. The only immediate recourse would be bridge financing with the help of the IMF and the Asian Development Bank (ADB).

President Arroyo has vowed to "tighten our belts" and "use money wisely" to plug the loophole, but such efforts are hampered by the government's poor tax collection performance. Both the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) have missed their revenue targets for the semester.

Meanwhile, the Finance Department claimed that the government had lost more than P100 billion in uncollected taxes last year due to leakage in the implementation of the 10-percent value added tax under the Comprehensive Tax Reform Program. Finance Secretary Alberto Romulo blamed the Tax Bureau for the mess, saying it failed to implement the tax policies of the government. Aside from the P100 billion in uncollected taxes, the finance department also claimed that the government lost about P124 billion in revenues because of the tax breaks given to foreign investments. Trade officials, however, have a different version on this.

Recently, foreign investment bank Morgan Stanley Dean Witter has fingered the Philippines as an emerging haven for tax evaders. It said the Philippines needs to overhaul its tax collection regime as a prelude to any meaningful economic reform. It blamed distortions caused by tax perks granted to companies as a major factor in the government's poor tax collection.

The investment bank said the country's tax effort ratio has never exceeded 20 percent and that the government has lost potential tax revenues equal to about 10 percent of GNP yearly during the last 10 years. It added that the country's savings ratio to GDP last year was only 17.6 percent. In comparison, Singapore's savings ratio is estimated at 48.2 percent of its GDP; Malaysia, 41.9 percent; Thailand, 35 percent; and Indonesia, 28.7 percent.

As a result of the revenue shortfall, the government is considering borrowing an additional P16 billion this year. It has in fact raised its borrowing program to P191 billion from an original P180 billion and faces the prospect of raising it again during the second half of the year.

A big chunk of the national budget is now paid to offset the annual interests of these debts which include those of state-owned corporations. The national government is obligated to pay some P600 billion (US$11.9 billion) in contingent liabilities on behalf of these corporations over the next 20 years. These obligations cover guarantees extended to government-owned and controlled corporations and infrastructure projects.

In May, the country's total foreign and local debt soared 15 percent to P2.239 trillion (approximately US$43.9 billion) from P1.944 trillion (US$38.1 billion) a year earlier, behind the government's aggressive borrowing and the depreciation of the peso, which has lost over 20 percent of its value in the past 12 months. The figure also represents a 3.8 percent increase over the P2.156 trillion recorded by the end of 2000.

According to the Bureau of Treasury, the country's domestic borrowings, accounting for more than half of the total debt stock, hit P1.147 trillion in May while the country's foreign obligations reached P1.091 trillion. The Philippine national government is said to be borrowing some P7 billion every week from the local private sector by issuing T-bills and bonds.

Faced with a burgeoning fiscal deficit, the government plans to keep borrowing to augment the finances for infrastructures and services. The government's budget deficit is expected to reach at least P145 billion this year and P130 billion next year. The country had a budget gap of P136 billion last year. Next year, the government plans to borrow some P267.5 billion, P138.6 billion of which will be sourced from foreign creditors and P128.8 billion from domestic financial institutions.

Then, there is the high inflation rate, which shot up to 6.5 percent in the first three months of the year. During the same period last year, the inflation rate was at a low of 2.6 percent. The recent increase has been caused primarily by a rise in the prices of food, beverages and tobacco as well as in the cost of services. In times like this, the poorer Filipinos carry the brunt of high prices of commodities.

The Arroyo administration proposes a P734-billion (US$14.83 billion) budget for 2002, 10 percent higher than this year's P694-billion (US$14.02 billion) allocation. The proposed 2002 budget is expected to support the government-projected 4.7 percent growth rate in the gross domestic product (GDP) and an average 5 percent inflation rate next year. To realize this, the government is toying with an overhaul of the graft-ridden Bureau of Internal Revenue (BIR) and even replacing it with a totally new tax collection agency.