For the first time in a decade, bankers are now talking about the possibility of a credit-rating upgrade for the Philippines and not another demotion.

Earlier this month, Standard & Poor's and Fitch raised their outlooks on Philippine debt to stable from negative. Moody's Investors Service held back, citing political uncertainty and the need for more measures to trim government debt.

Despite Moody's caution, the Philippine picture is getting much brighter. A central bank poll late last week found executives more bullish on the outlook for their companies than at any period since the survey began in 2002.

Foreign direct investment is surging, totalling US$863 million in the first 10 months of last year - up 64 per cent over the whole of 2004.

The peso remains on a roll, boosted by a record level of remittances from overseas workers. Last year, it was Asia's best-performing currency, rising 6 per cent against the US dollar, while the Thai baht and Indonesian rupiah fell more than 5 per cent.

The Philippines is on the verge of unlocking its vast untapped mineral wealth, thanks to the government's pro-mining policies. And outsourcing continues to run at a lick, with the industry's umbrella body forecasting revenue this year rising 50 per cent over last year's US$1.8 billion.

True, the stock market has failed to maintain last year's stellar gains, but some analysts believe this is a temporary reaction to higher taxes that are helping lower the budget deficit, and that share prices will gather momentum, led by property and banking blue chips.

So, does this all mean the Philippines is finally starting to play catch-up with Asia's tiger economies? Or, as so often in the past, will it fail to go the distance?

'On the way, but far to go,' Thomas Crouch, the Asian Development Bank's country director for the Philippines, told the South China Morning Post. 'Complacency - understandably generated by things like the good fiscal performance or the massive inflow of remittances from overseas workers - must be avoided.'

With sound economic policies in place, the Philippines must now embed itself more firmly in the supply chain of its Asian neighbours to benefit from the region's rapid expansion, Mr Crouch said.

Much will also depend on the political situation, and especially the administration's bid to change the constitution to create what it believes will be a more efficient parliamentary form of government by abandoning the presidential system, inherited more than half a century ago from the Philippines' former US colonial rulers.

Some opponents of the so-called charter change, such as the influential Makati Business Club (MBC), believe the move is a red herring to deflect attention from charges of vote-rigging against Mrs Arroyo and ward off another election before her term ends in 2010.

'The whole discussion is divisive,' said MBC spokesman Guillermo Luz. 'There will be arguments over the changes and this will fall out on the economy.'

But supporters believe a parliamentary system could reduce corruption and patronage in government, which has hobbled the Philippine economy for generations.

'The political situation is a factor that hampers a lot of possibilities in the Philippines in terms of economic development,' said Steven Rood, country representative of the Asia Foundation.

But he said simply changing the system of government might not necessarily improve governance and generate more measures to strengthen the economy.

Two years into her second term, Mrs Arroyo has survived a mutiny and an impeachment attempt for allegedly trying to rig votes in the 2004 elections. She is not a popular president either: this is a country where the masses expect their leaders to exude bonhomie, but she comes across as too austere.

Whether the political noise in the Philippines will drown out the economic gains is becoming a major theme for investors tracking Southeast Asia's markets.

'We foresee limited political risks over the next six to nine months and remain bullish on the Philippines,' said Credit Suisse analyst Sailesh Jha in a report.

Credit Suisse expects a one-notch sovereign rating upgrade by one of two international credit-rating agencies as early as the third quarter of this year once more clarity is gained on the constitutional change, which it believe will eventually happen.

Jody Santiago, UBS head of Philippine research, is less sanguine, saying any renewed impeachment bid against Mrs Arroyo this year over charges of vote rigging would rock the boat. 'Investors want to see stability; not problems.'

But few would disagree with Ms Santiago's assessment that the government is starting to pull the country out of its dire fiscal straits: 'There really is a fundamental change happening here.'

This year, a deficit of 124.9 billion pesos ($18.68 million) is targeted after a much lower than expected deficit of 146.5 billion pesos last year. The goal is for a balanced budget by 2008.

After a long battle, the government succeeded in raising value-added tax (VAT) to 12 per cent from 10 per cent this month, which is expected to bring in 85 billion pesos in extra revenue this year.

Even so, revenue collection remains far too low. Fitch noted in it its upgrade report that Philippine tax revenue, expressed as a ratio of the gross domestic product, is near the bottom of 97 countries it rates.

'Investors will now want to see that the VAT is properly implemented and higher revenues are collected,' says Luz Lorenzo, ATR-Kim Eng Securities research head.

And, with growth of just over 5 per cent last year, the economy will have to run much faster to lift millions of Filipinos mired in poverty.

'Unfortunately, 5 per cent growth does not mean much to low-income people - we need growth of 7 per cent to 9 per cent,' said Finance Secretary Margarito Teves in a recent television interview.

Says Mr Rood: 'Things are getting better, but people also see that countries near the Philippines, such as Thailand and Vietnam, are growing much faster, and they have become discontented with that.'