Analysis: Philippine graft fight carries risk as Arroyo case

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The arrest of former Philippine leader Gloria Macapagal Arroyo for vote rigging has put President Benigno Aquino's campaign to tackle corruption where he wants it, in the headlines as he tries to rebuild the reputation of the laggard tiger economy.

Now he just needs investors to notice, while at the same time hoping that his efforts to highlight the campaign won't backfire by hampering economic growth and cementing the image of the Philippines as hopelessly graft-ridden.

Fighting corruption was the centerpiece of Aquino's election campaign last year, and while there have been many small steps he needed a high-profile case to show supporters that his promise to end impunity and hold people accountable was genuine.

"He's taking a big risk," said Peter Wallace, president of the Wallace Business Forum consultancy, who saw the arrest of Arroyo as a positive step in the campaign against graft.

"What he's trying to do is break the corruption trap in the Philippines. In doing so, he's slowed the economy down considerably," said Wallace.

The drive to root out corruption has led to much lower-than-expected government spending and delays in putting infrastructure projects out for tender as deals are reviewed and the government sets to build watertight contracts.

Wallace said had spending been as planned in the first half of the year, annual growth would have been 6.3 percent - more than 50 percent stronger than actual growth of 4 percent.

The payoff of hitting graft would be a cleaner and more open system in future, which should lead to better growth and more investment, but that is not a guaranteed outcome.

"He's moving more or less in the right direction, he's just got to move more quickly," said Wallace.

The Philippines is not the only country in Asia with a corruption problem, but it is one of the worst.

Anti-corruption organization Transparency International rated the Philippines 134th out of 178 countries in its 2010 Corruption Perceptions Index with a score of 2.4 out of a possible 10 -- worse than Vietnam on 2.7 and Indonesia on 2.8.

Finance Secretary Cesar Purisima has said one of the problems of exposing corruption is it can lead to a lower ranking on such surveys, reinforcing the notion that graft is flourishing.

Negative perceptions

Aquino wants to show Filipinos that they will be equal in the eyes of the law and treated fairly by their government -- and that includes holding the guilty accountable.

It extends to showing investors that contracts will be respected and that there will be a level playing field in business, as Aquino looks to foreigners to invest in infrastructure, mining and tourism to generate jobs and growth.

Success in tackling corruption should bring benefits on many fronts, he believes, including lower poverty, improved government finances, more confidence in police and the judiciary, and making the country more attractive for investment.

But one of the problems Aquino has run into is that despite the goodwill his election generated last year, negative perceptions are almost as entrenched as corruption.

This makes it hard to get back the country back on the radar of investors, who are favoring neighbors such as Indonesia and Vietnam even though they pose similar difficulties to the Philippines.

Data from the Association of South East Asian Nations shows the Philippines attracted $1.7 billion of foreign direct investment (FDI) in 2010, down 13 percent from 2009 and compared with $8 billion for Vietnam and $13.3 billion for Indonesia.

Central bank data shows FDI of $810 million in the first eight months of 2011, down 19 percent on the 2010 level, which in turn was 39 percent lower than the first eight months of 2009.

Noise could distract

The administration has been filing cases against tax evaders, moved to be more transparent in how public money is spent, and managed to get the corruption ombudsman, an Arroyo appointee, to step down amid criticism of her performance.

But those moves have failed to capture the public imagination, and the repeated delays in launching an infrastructure investment scheme have raised questions about the administration's organization and drive.

Just as Aquino's drive to root out corruption has weakened growth, at least in the short term, there is also a risk that the Arroyo case could create uncertainty in investors' minds if it becomes a protracted political and legal battle.

Arroyo lacks public support but remains influential and is a savvy and well-connected political operator. Many officials she appointed are still in office.

"Arroyo was already unpopular when she left office so the risk of political instability from, say, street protests that sympathize with her is fairly small," said Euben Paracuelles, an economist at Nomura in Singapore.

"That said, I do think this is getting far much more attention than it deserves and could add to already weak market sentiment from the external backdrop."

Arroyo has been in hospital since before her arrest. On Friday, she sought to be moved to house arrest, but prosecutors asked for her to be moved to a detention facility.

A protracted legal battle fought on numerous fronts in the courts, and the possibility of showdowns between the administration and the judiciary, could worry investors as they cast an eye over the Philippines.

"Higher noise level might cloud market perception and distract investment prospects, leading to delays in investment decisions or rating changes that might have occurred earlier without the noise," Citigroup economist Jun Trinidad said.

For Aquino, that seems to be a risk worth taking as he vows to leave the Philippines a better place for the next generation.

"They are saying we are too aggressive in going after the corrupt and those who committed wrongdoings," the president said this week in a speech at the headquarters of the National Bureau of Investigation.

"My answer to them: just how aggressive they were in robbing the people of their money before, I will be triply aggressive in revving up to make them responsible now."

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