The Philippines needs to spend much more on roads and other infrastructure. Photographer: Jes Aznar/Bloomberg.
The Philippines needs to spend much more on roads and other infrastructure. Photographer: Jes Aznar/Bloomberg.

There was a fascinating moment at the Philippines's coming-out party this week: Finance Secretary Cesar Purisima compared notes with one of his best-known predecessors, Jose Camacho, who held the job from 2001 to 2003.

They bumped into one another on the sidelines of the World Economic Forum in Manila. Hosting this year's Davos of Asia is a victory-lap moment for Purisima and his boss, President Benigno Aquino. The buzz among the visiting masters of the economic universe is of Philippine renewal: In four short years, the nation of 107 million has gone from "sick man of Asia" to investment-grade darling.

Still, Purisima's tete-a-tete with Camacho recalled the need to stay cautious. Camacho, a respected investment banker, wowed global markets a dozen years ago with his talk of good governance and reform. Unfortunately, his boss, Gloria Arroyo, had other priorities, including allegedly lining her family's pockets. The devastating setback that was Arroyo's 2001-2010 presidency (coming after the equally ill-starred term of Joseph Estrada) wiped out Fidel Ramos's efforts to heal the economy from 1992 to 1998. During the Ramos presidency, the nation sailed around the Asian financial crisis and achieved a budget surplus. And then, poof, it was all gone.

The moral is this: Economic upgrades are only as effective as the next leader who comes along. As the well-intentioned Camacho found, the misplaced priorities of one president can completely devastate all the good done by reformers past. In Aquino, Purisima has a boss who believes in repairing finances and attacking corruption. But Aquino is constitutionally barred from running again in 2016.

"Everyone is concerned about 2016, and rightfully so," says Camacho, who's now Asia vice chairman at Credit Suisse Group in Singapore. "Soon people will stop investing as they wonder about who, and what, comes next."

The Philippines may already have reached that point, if foreign direct investment trends are any guide. Even with last year's uptick to the $3.9 billion mark, the Philippines still trails Malaysia, Indonesia, Singapore, Thailand and Vietnam. Why? Many will say it has to do with the high cost of power, regulatory uncertainty or corruption -- or some combination of the three. But even lower-rated and more corrupt Indonesia outpaces the Philippines when it comes to long-term foreign direct investment. I'd argue 2016 is why.

The Philippines has been a "major beneficiary of the zero-interest-rate regimes" from Washington to Tokyo, as Ateneo de Manila University's Richard Javad Heydarian explains. But after four years of turning the economy around, you'd think Aquino would be getting more than just hot-money flows.

Aquino needs to move faster to open various sectors of the economy -- including energy, mining and tourism -- to foreign investors. The Philippines lags neighbors from Thailand to Malaysia in infrastructure spending. It's great that spending on new roads, ports and bridges will double by 2016, but at 5 percent of gross domestic product, it will still be inadequate. Increased education spending is vital in a nation in which about 34 percent of the population is younger than 15. Aquino rarely misses a chance to tout this "demographic dividend." It could easily become a demographic nightmare if the Philippines isn't preparing its young workforce for an increasingly competitive world or creating enough jobs.

Yes, money for such programs is tight, but mostly because Manila isn't collecting enough taxes from wealthy citizens. Nor is it doing enough to rein in corruption at the Bureau of Customs, where creative invoicing and smuggling has cost Filipinos at least $23 billion, or nearly 10 percent of GDP, since 1990, according to Washington-based think tank Global Financial Integrity. Think of how many schools and training programs that kind of money could fund.

Granted, Aquino is a very busy man these days, juggling the economy and China's ever-expanding territorial claims in Asia. In a Bloomberg Television interview, he admitted puzzlement over China's actions given its stated desire to deepen economic ties with Southeast Asia and be seen as a regional partner. "There are very few days," Aquino said, "that I don't start the day asking, 'What does China gain from all this?'"

The key for Aquino himself is addressing a "two-speed economy" that works for the elite but not for the vast majority of Filipinos, says Christopher Po, chief executive officer of food giant Century Pacific Group. While the nation is off to a great start, Aquino and Purisima must remember that their work has only just begun. They need to cement the gains they've made so far and consider thinking a bit bigger while things are good.

"The president needs to expand his agenda beyond good governance," Camacho says. "He's not talking enough about FDI, creating jobs or making sure the good times last."

Sage words from a man who knows personally how easily the Philippines can relapse back into its sick old ways.

To contact the writer of this article: William Pesek at wpesek@bloomberg.net.

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net.