Previous Quarterly Editions
Expropriation Risk: 53 51 53 56 Political Violence Risk: 48 48 48 44 Terrorism Risk: 67 68 69 69 Exchange Transfer and Trade Sanction Risk: 37 36 36 38 Sovereign Default Risk: 42 42 43 45
TREND ▲ OUTLOOK ▲
Having built up his support in both houses of the legislature after last year’s elections and managed to retain staggeringly high approval ratings since taking office in 2016, there was little surprise when Congress granted President Rodrigo Duterte full control of the economy as part of wide-reaching emergency powers to combat the impact of COVID-19. After an initial attempt to simply suspend travel to and from Metro Manila was abandoned after just one day as so many still tried to get to work, Duterte moved quickly in mid-March 2020 to impose an "enhanced community quarantine" on Luzon, the largest of the three main Philippine island groups and home to half the population. This required all businesses to switch to remote working or close while only permitting residents to leave their homes to buy food and medicine. Duterte denied that the curbs on Luzon amounted to an imposition of martial law, something of which the country has experience, but made clear that anyone flouting the restrictions would be arrested by police or the military and jailed. Appreciating the impact of the quarantine on people’s ability to earn a living, the government introduced two stimulus packages, one worth 4 billion USD to support an Emergency Subsidy Program and the other worth 500 million USD to provide help to the most affected sectors such as tourism. There are also cash handouts for roughly 18 million poor households during April 2020 and May 2020, and possibly for longer. This is crucial because the government expects the country to lose more than 5 billion USD in overseas remittances from Filipino workers who lose their jobs due to the global slowdown resulting from the virus. It also expects as many as half a million of these workers to return to the country this year, placing additional strain on government services. The health sector is already stretched, as the country is already one of four in the world suffering from a major epidemic of measles, a disease which killed 140,000 people worldwide in 2018. In February 2020, the government notified Washington that Manila was withdrawing from the 1998 Visiting Forces Agreement (VFA), which provides a legal framework for US military personnel to deploy to the Philippines on a temporary basis. The move has not been a major blow to Washington, which has done little to avert it given Duterte’s evident antipathy to the US and its own confidence that other South-east Asian countries such as Singapore will be glad to increase their defence cooperation with the United States. However, the move will deprive the US military of access to Philippine locations from which it can conduct 'freedom of navigation' operations and monitor Chinese military activities in the South China Sea and Taiwan Strait. It will also damage the US-Philippine security alliance, which has been worth half a billion USD to Manila since 2016, while being likely to provide some benefit to Beijing. Duterte’s support for China is the one issue on which many Filipinos disagree with him, especially over his tolerance of aggressive Chinese fishing in Philippine waters. The decision on the VFA does not become final until August 2020, and there is a possibility that his pro-US defence minister may yet persuade Duterte to change his mind. The speculation at the start of this year about the president’s health, which followed his absence from several engagements due to illness, has since subsided. However, relations remained strained with his vice president, who is elected separately under the Filipino system and is a critic of the president, making succession a potential issue.
The business community continues to worry about the president’s readiness to intervene in issues and change policies and contracts with little warning. During just the first two months of 2020, his administration raised the possibility of cancelling the contracts of two companies that hold concessions to provide water for the capital and take water distribution back into state ownership, asked the Supreme Court to cancel the franchise of the country's largest media conglomerate, and prepared to terminate the VFA with implications for jobs and contracts. The mining industry, in particular, has been on edge over his vacillating approach to the sector. The control he now exercises over the economy during the COVID-19 emergency will heighten concerns.
TREND ▼ OUTLOOK ►
Last year’s concern about Chinese competition for jobs added to a discernible rise in anti-Chinese sentiment, and this has increased following the trajectory of the virus. Any further clashes with China involving fishing rights or claims to the South China Sea will increase resentment, and that could provide an outlet for general frustration once the restrictions associated with the virus are lifted. Final confirmation of greater autonomy for the Bangsamoro region should boost foreign investment into Mindanao when normality returns, which Manila hopes will counter the ongoing Islamist presence there.
TREND ► OUTLOOK ►
President Duterte lifted martial law on Mindanao at the start of the year on the grounds that the army has done enough to degrade the operational capacity of the Islamic State-aligned Abu Sayyaf group. However, there were more bomb attacks in December 2019, and the military presence has remained very much in place as a deterrent to local communist insurgents as well as Islamist militant groups. Duterte sees this as an acceptable price for officially ending a situation that has deepened Muslim Mindanao’s alienation from the island’s Christian majority and the country more generally.
Inflation rose during the second half of 2019 but remained comfortably within the central bank’s target range of 2-4% and well down on the high of 7% seen in 2018. The central bank made some small cuts to interest rates last year under its new governor, who was brought in from the budget ministry to encourage a more expansionary approach. However, three cuts so far this year have brought the rate to a record low of 2.75% and the bank has made clear that it is prepared to make further cuts totalling as much as 200 basis points to help protect the economy during the virus crisis.
Duterte’s policy of pushing double-digit growth in public spending was a major feature of the 2020 budget and the fiscal deficit was already looking likely to surpass last year’s figure of 3.2% of GDP. It will clearly be accelerated by the need to respond to the virus outbreak. However, the government went into the crisis having brought the debt-to-GDP ratio to below 40%, accumulated reserves that are above 85 billion USD, and ensured that the country has a stable investment rating. Much now depends on Duterte’s ability to minimise the virus-related damage to the economy through the effective use of government stimulus packages.
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