MANILA, June 8, 2003 (AFP) STAR - The Philippines' economic growth has exceeded expectations, inflation has fallen, the stock market has hit 11-month highs and even the perennial budget deficit problem may be coming under control.

But foreign investors are still grumbling, dimming the reflected glow infused by the latest positive economic figures on President Gloria Arroyo.

Gross domestic product (GDP) had expanded 4.5 percent from a year earlier in the three months to March, hitting the high end of official targets -- though the advance was slower compared to the previous quarter.

Domestic demand was the main driver amid a difficult global economic environment, giving Manila confidence it would achieve its full-year GDP growth target of between 4.2 and 5.2 percent.

The annualized inflation rate for May meanwhile fell to 2.7 percent, raising hopes the overall inflation rate for 2003 would range between 3.0 and 3.5 percent, down from official projections of 4.5 to 5.5 percent.

The news has encouraged foreign investors to reenter the stock market, propelling the Philippine Stock Exchange composite index to an 11-month high of 1,165.86 points on Thursday.

"Foreign investors have been in buying mode," said Ron Rodrigo of Accord Capital Equities.

"They see that most of our economic data, such as the deficit and GDP... is well within what the government had set out to achieve."

Analysts also credit signs of a US rebound and indications that the Philippines has escaped the worst of the Severe Acute Respiratory Syndrome (SARS) epidemic with the improvement.

"Clearly the Philippines is now in its healthiest state for the last five years," ING Financial Markets said in a new report.

But direct investors are not as happy as portfolio investors. Japan's ambassador Kojiro Takano told the press last week that Japanese investors were extremely worried about inconsistent government policies, poor infrastructure, budget deficit problems and the poor peace and order situation.

He cited sudden shifts in the tax system for automotive imports and seemingly-arbitrary fees and penalties from the customs and environmental agencies.

"Japanese companies who decided to invest here upon the active invitation of the Philippine government now share that general feeling of having been taken advantage of," Takano said, just days before Arroyo was due to depart for a trip to Japan.

Additionally, he said Japanese people in the Philippines felt they were "under constant danger."

Manila angrily summoned Takano to the foreign department to hear a protest.

But the American Chamber of Commerce in the Philippines has issued similar warnings and called for stronger reforms. The chamber cited the costs of bureaucracy, electricity, labour and transport which are higher than regional competitors.

Benvenuto Icamina, vice-president of the Manila-based Wallace Business Forum, says GDP and inflation figures may impress portfolio investors but not those who want to bring in factories.

"Those kind of figures can help short-term investments like the stock market but the investments that are here for the long term need a look at the long-term issues like peace and order, infrastructure and the way the government is being run," said Icamina whose firm advises multinationals here.

He said his company's surveys have found that few foreign companies were closing shop but that "most are not expanding or only expanding at a minimal scale."

Carlos Leung, an economist with the University of Asia and the Pacific, said investors' concerns are long-term problems which the Philippines has difficulty handling.

"One thing hard about the Philippines is policies keep on changing, one administration after another. We have never been known for long-term planning. Always short-term or medium-term," he said.

However, Cecilia Tanchoco, an economist for the Bank of the Philippine Islands, said Manila has made major progress and preliminary indications were that the budget deficit for the first three months of 2003 will be under the official ceiling.

"Fundamentally, what we're seeing is that there is some improvement. The fiscal front, it's being contained, it's being managed well. That's a positive development that has to be recognized."

However, she warned that if exports do not pick up and consumption is not sustained, then GDP growth this year would be be at only 3.5 to four percent.

Reported by: Sol Jose Vanzi

All rights reserved