Ask cynics - myself included - if glory days have reached the Philippines economy and they'll pooh-pooh the idea. Ask if Gloria Macapagal Arroyo's star is finally starting to rise, after a pitiful one-plus term as president of a republic to which banana is naturally associated, they'll laugh at such an idiocy. It's still a banana republic, they'll say. No doubt Arroyo's minders will furiously counter with figures released through May that tell a different story: The economy doesn't look like its old basket-case self, and Arroyo's star isn't waning. But don't pop the champagne bottles just yet.

The long haul out of foreign debt and a serious budget deficit are still bedevilling the Friedmanite economist president. That's not all: Arroyo has other fights on her hands. Example: Why are portfolio investments rising rapidly and direct foreign investments reversing? Government figures showed mid-May that local and foreign investors seeking huge incentives with the Board of Investments and the Philippine Economic Zone Authority during the first quarter this year plunged by almost 50%, year-on-year, to 65.61 billion peso from 129.94 billion peso.

Conversely, Bangko Sentral (central bank) figures showed portfolio investments, or hot money, reached US$783 million in April. That's more than enough to offset US$503.2 million in outflows. Wielding a net US$279.8 million, foreign investors hedged their bets on the Philippines economy by putting their loot in local financial markets - the same month. Meaning investors pulled money out of the real economy and are betting on the financial economy. Sounds familiar? It's devilishly pre-1997 Asia. And it's not so far fetched if you dig around for numbers all over the region.

It's not hard to see why foreign - and local - investors are making a beeline for stocks and bonds over new manufacturing factories. Inflation has blown out way above Arroyo's targeted 5%-6% for 2005 to 8.5% - at least. Not that inflation is a bad thing. If anything, it says the economy is healthy. And that should attract more investments, and it is, but not the sort Manila wants. Here's the problem: Higher inflation means higher prices, and while business may rub its hands gleefully, it makes central banks nervous.

No question Bangko Sentral is feeling political pressure from Malacanang Palace not to be too hasty, but it probably already has its finger on the interest rate trigger. If rates go up, borrowing costs will soar and real wages will lag further behind, creating political headaches for the government. Think Argentina - the other of the world's banana republics. What you'll get is akin to a dog chasing its own tail in a vicious circle. When that happens, uncertainty creeps into investor calculations, who'll either bail out or find safer havens in the same economy - or elsewhere. That's just what they're doing.

Already global ratings agency Moody's Investor Services has dumped on the Philippines' credit risk, slashing the Philippines' sovereign ratings in two steps in February to four rungs below investment-grade. Why? It is worried about a potentially damaging build-up of public debt. Manila bristled at Moody's downgrade, arguing the Philippines' debt burden was in long-term

obligations. The country's tax revenue base should expand sufficiently over two years, with new tax measures just passed, to take care of Manila's debt problem. Moody's could be right but it sometimes behaves like the ham-fisted International Monetary Fund whose post-1997 policies merely worsened Indonesia's economic woes after Asia's worst economic crisis.

More taxes

Yet the manner in which economist Arroyo is setting out to tackle the Philippines' long-term debt problem is by raising more taxes and not by nabbing tax cheats - notably, and invariably, rich Filipinos and foreigners. Arroyo is raising value-added tax (VAT). The desperate economist president won't stop there. She's also passing laws to raise corporate income tax by three percentage points to 35%, raising combined annual income for Manila by P56-P61 billion. And with VAT going up from 10% to 12%, Arroyo hopes to rip off from her people another P97- P105 billion.

This is no Robin Hood stuff in a country where at least 70% of people live in wretched poverty - without hope of a better future. But if this all the economist president can come up with as a long-term strategy to avoid being labelled a banana republic, little wonder then why long-term investors have turned short-termists, buying stocks and bonds instead for quick, higher and entirely speculative returns. Not that hot money investors shouldn't get a hiding; their blinkered analyses have typically overlooked the Philippines' gross domestic product at 5.6% and gross national product a shade less.

On the other hand, if the economy is growing so strongly, Manila's coffers should be brimming with foreign exchange revenue. It isn't. The Philippines foreign debt obligations still have a chokehold on the budget's purse-strings - like Argentina. It will kill the goose, and the gander. Which is why economist president Arroyo's strident claims that the US$750 million the government raised through the reopening of its 10-year and 25-year bonds, which were eight times oversubscribed, are simply unconvincing. Arroyo is up to her old tricks - grasping at economic policies that may work, not ones that would work.

MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.