As Asia booms, the Philippines is awash in red ink

Government debt has reached 80 percent of GDP.

After five years of medical school followed by a round-the-clock residency, Malou Ombac is back in school - for a nursing diploma. Dr. Ombac, a 37-year-old pediatrician in private practice, sees nursing as her ticket to a better- paying job in Europe or North America.

"I never imagined that after I became a doctor, I'd be taking a class in something lower than my profession. I used to think I'd be well off as a doctor," she says.

It's a cry that resonates among professionals across the Philippines, who fear that their country is sleepwalking into another economic crash. The government's debt has reached 80 percent of GDP, and $5 billion in foreign borrowings falls due next year. President Gloria Arroyo declared a fiscal crisis in August, only to retract her warning three months later.

Filipinos seeking foreign jobs is nothing new: around 10 percent of the country's 84 million people already work overseas, sending home an estimated $12 billion a year. But the flood of would-be nurses underscores the disbelief of middle-class professionals in an economic turnaround that can safeguard their future.

"Its more than a [government] fiscal crisis. It's a crisis in understanding where we are and what's going to happen," says Alex Magno, an economist and informal adviser to President Arroyo.

The Philippines debt crunch comes as East Asia hits its strongest economic patch since 1997, helped by China's rapid expansion. Even the Philippines looks strong on paper: it grew by 6.3 percent in the third quarter.

But its government is awash in red ink and unable to collect enough taxes to cover expenses, forcing a freeze on public spending. Payments on the country's spiraling debt, estimated at $96 billion, are the biggest item on the budget. While most Asian currencies are gaining on the dollar, the Philippine peso hit record lows in 2004.

Fearing an Argentina-style meltdown, advisers are urging Arroyo, a Harvard-trained economist, to hike taxes and end generous exemptions for well-connected industries. In response, Congress has tentatively agreed to raise VAT and fuel taxes, along with so-called "sin taxes" on alcohol and tobacco.

Even the president's allies admit that these measures are, at best, a stop-gap solution. "It will keep us afloat but we won't reach the shore. I don't think we will ever reach the shore," says Joey Salceda, chairman of the House Committee on Economic Affairs and a member of Arroyo's coalition.

Analysts point out that the Philippines has lagged behind its neighbors for decades, a hostage to political infighting and protectionist policies. Communist Vietnam, a newcomer to capitalism, now lures more foreign investment than the Philippines, where English is widely spoken and company laws are modeled on the US.

Few expect Arroyo, who was reelected in May amid accusations of fraud from the opposition camp, to revamp the lopsided economy. "There is an opportunity for serious reform measures, but we're just patching it up with rubber bands and chewing gum," says Joel Rocamora, director of the Institute for Popular Democracy.

An example is the "sin tax" bill, he adds. Instead of linking taxes to inflation, as originally proposed, lawmakers kept their power to adjust the levies, to the delight of corporate lobbyists. Arroyo also dropped plans for higher telecoms taxes after companies and consumer groups complained.

Critics also say that Arroyo has done nothing to curtail growth in population, expected to double in the next 30 years.

Back at her Sunday class, Dr. Ombac says her mind isn't made up to leave, even if she passes the nursing board exam. For one thing, her husband wants to stay in Manila. Then there are lawmaker proposals to require newly qualified nurses to work in the Philippines for two years in a bid to stop the outflow.

"It's not that we are pessimistic," Ombac says, indicating her classmates. "But we need to be realistic."