Previous Quarterly Editions
Expropriation Risk: 51 51 52 52 ► Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 69 66 70 73 ▲ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 47 47 47 57 ▲
TREND▲
By the end of August, COVID-19 cases in the Philippines had surged to new national records, with total cases rising to 1.9 million and deaths over 33,000. The government extended restrictions in Manila, the virus epicentre, and its environs, as well as some provinces into mid-September. Some businesses are allowed to operate at 50% capacity, but others that deal closely with the public remain shuttered. Government health officials expect the numbers to rise further in the next few weeks.
On paper, the government has procured nearly 200 million doses of COVID-19 vaccine, enough to inoculate the entire adult population; 49 million are in hand with another 42 million to arrive in September. However, vaccine delivery is far from organised, and the Philippines has higher rates of vaccine hesitancy than other South-east Asian countries, although willingness to be inoculated has risen steadily with the latest surge and stands at nearly 50%. There are multiple reasons for this hesitancy, from distrust of specific vaccines (particularly Chinese-made ones) to conspiracy theories that have circulated to the Philippines from US-based right-wing groups.
Economic growth remains weak as the Philippines’ economic model -- led by services, tourism and remittances -- proves to be particularly vulnerable in a global pandemic. The economy contracted 1.3% in the April-June period, after 0.3% growth in the first quarter. With the Delta variant of COVID-19 still raging, the economy is expected to be hit again in the third quarter of 2021. However, given the 9.5% contraction of 2020, these numbers signify impressive year-on-year growth.
The Philippines continues to have one of the region’s highest unemployment rates at 8.7% in June. Government handling of the pandemic is also believed to be particularly ineffective as officials seem unable to settle upon a containment strategy. The country has implemented one of the world’s longest lockdowns, but without flattening the COVID-19 infections curve.
The pandemic has not slowed two major threats to Philippine security: increasing Chinese assertiveness in the South China Sea, and extremists in the southern province of Mindanao that are inspired in part by Islamic State. Manila may see a slight easing of the maritime threat with the agreement in late July for the renewal of the US-Philippines Visiting Forces Agreement. However, the threat of Islamic extremism in Mindanao is almost certain to increase following the Taliban victory in Afghanistan in August and fighting among terrorist groups in the Middle East that will seek proxies in other regions as a result.
In 2022, the country will elect a new president. There had been speculation that current President Rodrigo Duterte would seek the vice-presidency and thereby effectively sidestep the one-term presidential limit: while his daughter ran for the presidency, Duterte could be the ‘power behind the throne’. However, Duterte said in August that he intends to leave politics. Nonetheless, he would still remain influential.
TREND ►
The possibility that Duterte’s political influence will continue through another six-year term means that government threats against certain sectors, including telecommunications, will remain. However, commitment to improving the overall investment climate appears to remain strong.
Although the Philippine bureaucratic and judicial systems remain slow and corrupt at times, the broad portfolio of pending legislation that would affect foreign investment is more hopeful. This includes amendments to the Foreign Investment Act, the Retail Trade Liberalization Act, and the Public Service Act. The last seeks to clarify the definition of a public utility company, in which foreign investment is capped at 40% by the constitution.
In the short-term, COVID-19 lockdowns and emergency decrees give the government and security forces enhanced powers and therefore militate against political violence. A broader re-opening of society and the economy is sure to signal the return of Duterte’s campaign against drug dealers -- the campaign has been criticised for stoking vigilantism, with the police also accused. However, Duterte is one of the most popular presidents in Philippine history, opinion polling shows -- depending on who succeeds Duterte as president, his crackdown on illegal narcotics and other more populist policies could outlast his presidency.
TREND ▲
The fall of Afghanistan to the Taliban in August will re-energise extremist groups in other regions. Open war between the Taliban and Islamic State (IS), and likely between a re-energised Al-Qaida and IS, will unleash greater competition among them for recruits and funding from other regions. Nowhere in South-east Asia is this likely to reverberate as strongly as in Muslim Mindanao, where local extremist groups are practiced in aligning with global networks.
There is little doubt that these dynamics will increase the Philippines’ terrorism risk. Three factors, however, may counteract that. First, the US-Philippines Visiting Forces Agreement covers counterterrorism as well as maritime security, and its renewal is timely. Second, Duterte is committed to counterterrorism and is inclined to pair security measures with some degree of autonomy for Mindanao. Finally, but temporarily, COVID-19 restrictions give the government greater powers to restrict movement, which may help tamp down an immediate response to the events in Afghanistan.
In mid-2021, the peso experienced a period of relative volatility of just over 5%, dropping to its lowest level in a year, due in part to a rise in import and oil prices. In July, the Philippines was the worst currency performer in Asia. However, the peso is unlikely to be in a downward spiral; the government expects a boost in the currency from higher remittances from overseas workers during the end-year season, especially as COVID-19-related restrictions on labour and movement are gradually lifted.
To date, the European Union has yet to act on its threat of September 2020 to remove the Philippines’ ‘Generalised Scheme of Preferences Plus’ trade preferences on human rights grounds, and relations between Manila and Brussels seem to have improved slightly with effort from both sides. Wary that the Biden administration may be more critical of human rights than was now-former US President Donald Trump, Duterte has scaled back his harsh rhetoric about the European Union.
For its part, Brussels did not relish heightened tensions with Manila as the Philippines rotated into the role of ASEAN Coordinator for Dialogue with the European Union in August, a position it will hold until 2024. In December, the European Union acquired the status of an ASEAN ‘strategic partner’ and intends to expand activity in South-east Asia as the pandemic permits.
The ratio of the Philippines’ debt-to-gross domestic product was 54.5% at the end of 2020, but as of July, the 2021 ratio is expected to hit the 60% mark. This will motivate officials to take action to lower the ratio to avoid downgrades by global credit rating indices. No clear plan has emerged as government economists debate the merits of schemes to promote quick growth over ‘penny pinching’ measures. Although slightly alarmed by the prospect of downgrades, the government broadly views the problem as temporary and connected to the pandemic.
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