Index trend
Previous quarterly editions
Expropriation Risk: 54 ► Political Violence Risk: 49 ► Terrorism Risk: 84 ▲ Exchange Transfer and Trade Sanction Risk: 44 ► Sovereign Default Risk: 56 ►
Overall Risk Temperature: 60 (Significant 1) ►
Special topic:
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives 1 = Not at all5 = Gray zone action is a core tactic
2
Impact of inbound gray zone attacks on the country 1 = Negligible impact5 = Significant impact on economic growth and/or political stability
3
The maritime states of Southeast Asia are locked into a long-standing but expanding gray zone conflict with China in the South China Sea. This is fueled by conflicting territorial claims in the Spratly Islands (among China, Taiwan, the Philippines, Malaysia and Vietnam) and the Paracels (among Vietnam, China and Taiwan) but also by China’s claim to sovereignty over almost the entirety of the South China Sea as indicated by a “nine-dash line” drawn on Chinese maps. This last issue has brought Indonesia and Singapore into the gray zone conflict, although Chinese incursions to date have focused on Indonesia rather than Singapore.
In this threat environment, since early 2023 the Philippines has been the target of more aggressive gray zone actions from China than the other Southeast Asian claimants. There are three main reasons for this. The first is Philippines President Ferdinand Marcos Jr.’s approach to Beijing since his election in 2022. Marcos’s position is less conciliatory than that of his predecessor, Rodrigo Duterte, who announced upon his election in 2016 that he would not seek to enforce the ruling of the Arbitration Tribunal of the United Nations Convention on the Law of the Sea that major elements of China’s claim to the South China Sea were unlawful. Although both leaders aspired to improve economic relations with China, Marcos was firm in opposing Chinese aggression in the Philippines’s exclusive economic zone (EEZ).
The second factor is Marcos’ policy of strengthening the Philippines-U.S. alliance and, in particular, the expansion of U.S. “flexible basing” to five new sites on Philippine territory. Beijing is equally opposed to the Philippines’s growing defense relationship with Japan and to the new trilateral configuration with Japan, the Philippines and the U.S. unveiled at a Trilateral Summit in Washington in April 2024.
The third factor is that among the regional powers — particularly China, Japan and the U.S. — the Philippines is gaining greater significance in the conflict in the Taiwan Strait, because of Manila’s stronger defense ties to Washington and Tokyo and because of its geographical location. China and the U.S. each believe the other would attempt to use the Philippines in its strategic game plan to attack or defend Taiwan. For its part, the Marcos administration believes that collateral damage to the Philippines is inevitable if war breaks out between China and the U.S. in the Taiwan Strait; however, the government believes neutrality for the Philippines would be impossible and continues to lean toward Washington.
Most gray zone conflict between China and the Philippines occurs around Second Thomas Shoal in the Philippines’s EEZ and specifically over the Sierra Madre, the derelict Second World War battleship the Philippines navy moved to the shoal in 1999 to underscore its status as Philippine territory. Manila accuses the Chinese maritime militia of interfering with Philippine attempts to resupply the ship to enable naval personnel to staff it.
Beijing accuses the Philippines of attempting to turn Second Thomas Shoal into a naval base. After an acute incident in June when Chinese attempts to interfere with a resupply mission to the Sierra Madre resulted in injuries to Philippine sailors, the two countries struck an informal agreement to reduce conflict over the ship, although they have not released the text of any such agreement. In the meantime, China has expanded its incursions into the Philippines EEZ to include Sabina Shoal, next to Second Thomas Shoal.
The next several months will see continued gray zone conflict between the Philippines and China, although it is highly unlikely to expand to major military conflict. Both countries await the results of the U.S. November elections before calculating their onward strategies; over the longer term, Beijing will also watch closely for the prospects of a return to power of the Duterte family in 2028.
Expropriation Risk 53 (Medium) TREND ►
The expropriation risk to foreign companies in the Philippines is moderate at present, as foreign and domestic commercial entities are subject to the same laws, except for a few designated sectors. This can, however, vary from one political administration to the next; for example, former President Rodrigo Duterte attempted to control the telecommunications sector with threats of expropriation, and he terminated the license of a television network primarily because of its criticism of his government.
The efforts of President Marcos to reassure foreign investors with constitutional changes in 2025 have yet to make headway and continue to exacerbate tensions between the political camps of Marcos and Sara Duterte, his vice president. The outcome of the 2025 midterm elections will influence his decision on whether to continue down this path.
In the meantime, the prospects for greater foreign investment are bright with a pledge by the U.S. and Japan to mobilize $1 billion for infrastructure development in the Luzon Economic Corridor. However, Washington’s willingness to hold up its end of the promise could be influenced by the outcome of U.S. elections in November.
Political Violence Risk 49 (Medium) TREND ►
The Philippines’ brisk economic growth rate, compared with other Southeast Asian countries, has yet to blunt the continued impact of high food and energy prices on the domestic population. However, any tendency toward political violence has been muted by public support for Marcos’ strong stand against China in the South China Sea and his role in strengthening security relations with the U.S. and Japan.
At the same time, the political marriage of convenience between the Marcos and Duterte dynasties is clearly at an end: Although Sara Duterte has retained her role as vice president — the election for which is separate from that of the president — she has resigned her other cabinet positions. Her father and two brothers have announced they will run for the Senate in the 2025 elections.
That said, in the legislative supermajority once enjoyed by the Marcos-Duterte administration, Marcos holds the greatest number of seats, although he could lose some in next year’s polls. Since Philippine presidents serve only one six-year term, his main political challenge will be to identify an heir for the 2028 election, without which the Duterte dynasty is almost certain to regain control.
Terrorism Risk 81 (High) TREND ▲
Although the Philippines has had no major terrorist attacks on its territory in seven years, some shifts in the fundamentals suggest rising risk. Internal politics are increasingly contentious as the Marcos and Duterte political clans clash: The dominance of the Duterte family in Mindanao in the south all but assures the province will be pulled further into this rivalry.
In July, the Indonesian government announced the break-up of the Jemaah Islamiyah, Southeast Asia’s homegrown terrorist network. Although this may benefit Jakarta’s counterterrorism effort, it will encourage splinter groups to become more active in other areas of the region, particularly the southern Philippines.
Lastly, a recent assessment of the government’s counterterrorism strategy shows that the focus on local jihadist movements tends to downplay the threat posed by more organized and connected regional and international extremist movements.
Exchange Transfer and Trade Sanctions Risk 44 (Medium low) TREND ►
The Philippines continues to be one of the star economic performers in Southeast Asia. The Asian Development Bank forecasts GDP growth for 2024 at 6% and 6.25% for 2025. The government posted second-quarter year-on-year growth of 6.3%.
In July, the central bank amended foreign exchange reporting rules, a move that is expected to strengthen supervision of banks and so improve financial stability.
As a U.S. treaty ally, Manila has avoided weapons purchase from Russia since Moscow’s 2022 invasion of Ukraine. At present, there are no international sanctions on the Philippines, but the country remains vulnerable to restrictions on Philippine entities for terrorist financing because of the ongoing situation in Mindanao.
Sovereign Default Risk 56 (Significant) TREND ►
The Philippines’ debt-to-GDP ratio continues to inch up by small amounts: In mid-September, the central bank reported that debt had risen by $1.4 billion, or 1.2%, since the end of March. The bank described this as a manageable rise. The increase was attributed to the government’s issuance of global bonds under the Sustainable Finance Framework and the depreciation of the peso against the U.S. dollar. The national debt is forecast to increase continuously between 2024 and 2029 by 37.66%, reaching a new peak of $361.44 billion in 2029.
