Previous Quarterly Editions
Expropriation Risk: 50 51 53 51 Political Violence Risk: 48 48 48 48 Terrorism Risk: 65 65 67 68 Exchange Transfer and Trade Sanction Risk: 36 36 37 36 Sovereign Default Risk: 40 42 42 42
TREND ▼ OUTLOOK ▲
President Duterte’s success in the midterm elections has been followed by a relatively bumpy patch for his key policies. In May, voters gave his supporters more than two-thirds of the Senate to add to their supermajority in the House, with the additional strength in the Senate giving Duterte more backing for his policies. However, this greater political latitude for the president is tempered by some worrying economic trends. The economy grew by 5.6% year-on-year in the first quarter of 2019, a four-year low, before slipping again to 5.5% in the second quarter. Although most countries would envy such figures, for the Philippines they represent the slowest growth for almost five years. The economy will now need to grow at an unlikely 6.4% during the second half of 2019 just to reach the bottom end of the government’s target of 6-7% for the year. The Duterte administration has counted on high levels of government spending, mainly on infrastructure, to stimulate the levels of growth needed to fund social programmes, particularly the new universal healthcare initiative that he signed into law in February in fulfilment of a major 2016 campaign promise. Duterte’s personal ratings remain extremely high, with mid-year polls showing around 80% of adult Filipinos satisfied with his performance and only 10-15% dissatisfied. He continues to have strong popular support for his war on drugs despite the increasing international concerns about extrajudicial killings, and looks likely to get the restoration of the death penalty for drug-related crimes using his increased support in the Senate. However, his pro-Beijing stance continues to put him at odds with public opinion, creating a potential political vulnerability. In June, he was forced to tighten the rules on foreign workers after complaints that Chinese nationals are now monopolising the supply of foreign worker permits, and then faced a backlash for what many regarded as insufficient outrage when a Chinese trawler hit a Philippine fishing boat and left its crew stranded in the water. His response was to extend a constitutionally questionable invitation to Chinese boats to fish in parts of the South China Sea over which the Philippines has exclusive rights, daring his critics to impeach him. Part of his thinking may be to push Beijing into speeding up provision of the tangible economic assistance that has been promised since Duterte backed Chinese claims to the South China Sea during his first election campaign. He may also take up President Trump’s invitation to visit the White House, possibly before the end of the year, even though Trump’s offer of a free trade agreement made in late 2017 seems no longer on the table.
TREND ▼ OUTLOOK ►
Following the midterm elections, President Duterte was able to achieve one of his high-profile reforms with the awarding of a third mobile telecoms licence to challenge the long-standing duopoly of PLDT and Globe Telecom. Having publicly appealed for Chinese companies to bid, in July the licence was officially awarded to a consortium in which China Telecom holds the maximum legal stake for foreign investors of 40% alongside two small local partners, both of which are controlled by a major Davao-based donor to Duterte’s election campaigns. In a related move, PLDT and Globe are preparing to install 5G equipment from Huawei. Duterte’s demand in April that all government contracts be reviewed to identify those which could "disadvantage" the Philippine people has not led to any meaningful action, suggesting it was primarily a campaign move ahead of the midterms. However, investors remain wary of the potential for the president’s populist positions to have commercial consequences.
TREND ► OUTLOOK ▲
While the level of concern about Chinese competition for jobs far outstrips the scale of the problem, it adds to a discernible rise in anti-Chinese sentiment that appears on a collision course with Duterte’s determination to deepen Chinese involvement in the economy. Another incident in the South China Sea could see significant anti-Chinese protests. The plebiscites on Mindanao earlier this year approved greater autonomy for the Bangsamoro region, including more control over its natural resources. One consequence should be a boost for foreign investment into Mindanao, which Manila hopes will counter the growing Islamist presence.
TREND ▲ OUTLOOK ▲
The Philippine-based Abu Sayyaf Group (ASG), which is the most active and capable militant group in South-east Asia, is now aligned with Islamic State as part of its proclaimed East Asia Province. It has recently been concentrating its activity in Sulu province, using suicide bombers and ambushes to attack armed forces there. The government has vowed to dislodge it by the end of the year, although this looks ambitious. There is likely to be a rise in clashes between security personnel and communist rebel groups across Mindanao in the coming months now that Duterte has declared a "permanent termination" of formal talks.
Having pushed up its interest rate five times for a total increase of 175 basis points during 2018 because of concerns about inflation, the central bank has reduced the rate twice so far this year, each time by 25 basis points after the disappointing quarterly growth figures, to 4.25%. Last year’s rate rises and a fall in prices for rice and power have brought inflation comfortably back inside the 2-4% target range. The surprise move that saw Benjamin Diokno leave the budget ministry to head the central bank earlier this year suggests that the bank will continue to take steps to support growth, and at least one more rate cut is likely before the end of the year.
The budget for 2020, unveiled in August, continues Duterte’s double-digit growth in public spending while adding an emphasis on education to the continuing stress on infrastructure. Although revenue projections were not presented at the same time, the fiscal deficit looks likely to creep above last year’s 3.2% of GDP. However, the debt-to-GDP ratio is now below 40%, reserves are above 85 billion dollars, the country has a stable investment rating, and the government was able to issue a 750-million-euro Eurobond in May with little difficulty. Much now depends on Duterte’s ability to raise more revenue from a slowing economy.
Return to contents Next Chapter