Previous Quarterly Editions
Expropriation Risk: 51 51 51 52 Political Violence Risk: 51 51 51 51 Terrorism Risk: 69 69 66 70 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 47 47 47 47
TREND▲
Three factors influence stability in the Philippines in the near-term: the course of COVID-19; Philippines-US negotiations on renewal of the Visiting Forces Agreement (VFA); and the actions of the country’s mercurial but popular President, Rodrigo Duterte.
Since COVID-19 emerged in the Philippines in February 2021, the country has had over one million COVID-19 cases and over 18,000 deaths, the second-largest number in South-east Asia after Indonesia. By the beginning of April 2021, a slow vaccination roll-out and the spread of new variants kept 25 million people in lockdown, primarily in Manila and other populated areas.
An uneven COVID-19-fighting strategy has weakened the economy more than anticipated, and the Philippines posted a -9.5% growth rate in 2020. The first quarter of 2021 is expected to show the economy still in recession; the World Bank estimates that recovery will lag regional peers. However, the economy is forecast to begin growing in the second quarter.
At 8.8%, the Philippines has the highest unemployment rate in the region. At present, the government relies on China for COVID-19 vaccine but expects more than 400,000 doses of the Oxford-AstraZeneca vaccine in the second quarter of 2021. Moreover, the March 2021 announcement by the Quad (United States, Japan, Australia and India) of the planned production of one billion doses of Johnson & Johnson vaccine for the Indo-Pacific region should make a significant contribution to the Philippines’ vaccine stockpile- assuming India’s severe COVID-19 surge does not impede production and availability.
The pandemic has not slowed two major threats to Philippine security: increasing Chinese assertiveness in the South China Sea, and extremists in Mindanao inspired in part by Islamic State. Having completed construction and militarisation on most of the islands and rocks, it claims China’s navy is now deploying fleets, which range from naval warships to quasi-fishing boats, into the Exclusive Economic Zones (EEZs) of South-east Asian claimants. This, coupled with the promulgation of Beijing’s new coast guard law, which claims the authority to attack foreign vessels interfering with Chinese interests, has spiked alarm in Manila.
Duterte was forced to lodge a formal protest with Beijing, which runs counter to his four-year ‘charm offensive’ with China. A more substantive sign that the government is taking a harder line toward Beijing (with or without Duterte) came in January 2021 with the cancellation by the Cavite provincial government of a USD10bn contract with China Communications Construction Company, which was placed under US sanctions last August (2020), to upgrade the airport in Cavite province.
The cancellation was a major blow to Duterte’s plans to boost infrastructure and is likely a harbinger that Manila will renew the VFA by the August 2021 deadline. Negotiations with the US Biden administration were opened in late January 2021. In February 2021, Duterte demanded a significant increase in US military aid; Washington’s counteroffer appears to have satisfied the Philippines defence sector, although Duterte will likely have additional demands. The VFA also permits the United States to assist the Philippines in counterterrorism and in its military modernisation programme.
TREND ►
Duterte’s politicisation of the telecoms sector continued through 2020. After termination of the license of the ABS-CBN television network, Duterte put Globe Telecom and PLDT on notice (two of the most profitable operators in the region) to say that he may shut those companies down too. Duterte billed the threats as an attempt to break new oligarchies (he had earlier cancelled the concessions of water companies owned by the same families) but it was also an attempt to clear the way for Chinese telecom companies.
Apart from Duterte’s peeves, the risk of expropriation rises slightly given COVID-19-related economic disruption, which will cause many countries to re-examine the balance of state and private assets in critical sectors. However, this reaction will be tempered by Manila’s nascent attempts to move away from longstanding protectionism to attract greater foreign investment.
Duterte’s war against the national media continues to encourage violence against journalists, but the problem is more endemic: the press is subject to threats and reprisals locally, from politicians and criminal gangs. Moreover, as COVID-19 abates, Duterte’s campaign against illegal narcotics is expected to return to its previous pace; according to Human Rights Watch, more than 12,000 extra-judicial killings have been linked to the campaign.
However, widespread political protest is unlikely in the near-term. Although he has the strength in Congress to push forward a constitutional change to allow him another term, Duterte will likely leave office on schedule in 2022. Although his popularity is based on his image as a populist, he will have built enough of a political dynasty to ensure his family’s place in the political oligarchy.
TREND ▲
Although the Philippines has not suffered sustained terrorist attacks of the calibre of the six-week reign in Marawi City in 2017 by a local jihadist group aligned with Islamic State (IS), the Abu Sayyaf and other jihadist groups exhibit resilience. This is due to ideological and material encouragement from IS and, to a lesser degree, al-Qaida. It is also due to the conducive operating environment of the Philippines archipelago, which allows insurgents to elude government counterterrorism forces easily and encourages decentralisation. Continuing poverty in Mindanao, the Philippines’ southern island, is another contributing factor.
Although the government increased funding for fishing and agriculture in the Bangsamoro Autonomous Region, Mindanao went into the COVID-19 crisis with a 53% poverty rate. Moreover, in 2020, the first transactions using cryptocurrencies were conducted by Philippine extremist groups linked to IS, which opens the possibility of larger and easier transfer of funds for terrorist networks.
In recent years, the peso’s low volatility and strong external financing favoured it over several other emerging market currencies, and it is expected to strengthen as COVID-19 recedes and foreign interest in the Philippines increases. The peso is expected to strengthen against falling imports in 2021 and inflation is predicted at 3%, up slightly from 2.44% in 2020.
As the government attempts to steer the economy towards recovery in 2021, it faces some threat of trade sanctions from the European Union, after the European Parliament passed a resolution in September 2020 urging the European Commission to withdraw Manila’s ‘GSP-plus’ trade preferences, unless Manila showed significant improvements in its human rights practices.
The OECD rates the risk of default on public debt by the Philippines at low to moderate, although sub-sovereign institutions have occasionally defaulted. However, in February 2021, Philippine debt hit a new high of roughly USD215bn, largely because of borrowing for the government’s COVID-19 pandemic response. At the end of 2020, debt was 54.5% of gross domestic product.
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