Previous Quarterly Editions
Expropriation Risk: 48 53 53 52 ►Political Violence Risk:51 51 51 51 ►Terrorism Risk:70 73 75 74 ▲Exchange Transfer and Trade Sanction Risk: 55 55 55 44 ▼Sovereign Default Risk:57 37 57 56 ►
TREND ►
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
The Philippines has slowly circled back to a strong security relationship with the U.S. after former President Rodrigo Duterte’s attempts to pull the country more closely into China’s orbit. Managing relations with Washington is a difficult balancing act for any Filipino politician: they must maintain some distance from Washington, one of the Philippines’ two historical colonial masters, while simultaneously demonstrating the ability to retain strong economic and security ties with the U.S.
Duterte intended to position China as Manila’s primary partner, promising the public substantial economic benefits and claiming that he could negotiate a cessation of China’s maritime interference in the Philippines’ Exclusive Economic Zone, located around the country’s coasts. He set aside the 2016 ruling by the Arbitration Tribunal of the UN Law of the Sea Treaty that had upheld Manila’s petition, entered by former President Benigno Aquino, in a territorial dispute with China. Duterte threatened to cancel the Visiting Forces Agreement (VFA), a key operational aspect of the U.S./Philippines alliance and vowed never to visit the U.S. as president (he did not).
However, Duterte was unable to deliver on his promises. China’s incursions into the West Philippine Sea increased in number and aggression. In 2018, he opened negotiations with Beijing on joint oil and gas explorations in the South China Sea but cancelled them in early 2022 for lack of any progress. Public opinion polls showed disapproval of his handling of the South China Sea and, after 18 months of dramatic starts and reversals, Duterte let renewal of the VFA go through in 2021. Of greatest disappointment was Duterte’s failure to secure the USD33 billion in infrastructure loans and economic assistance he promised. When he left office in June 2022, deals for only two infrastructure projects had been
signed, for a bridge and an irrigation system, neither of them completed.
Despite this discouraging record, current President Ferdinand Marcos Jr. has pledged to seek closer relations with China. However, he has also promised that he would better balance Philippines relations with China and with the U.S. He has done little to explain how he will accomplish this, and he made no mention of either country in his first State of the Nation Address.
In the meantime, Marcos has reacted to developments in the region. As tensions spiked in the Taiwan Strait in August, Marcos remarked to U.S. Secretary of State
Anthony Blinken, in Manila, that the Taiwan crisis demonstrated the need for the 1951 U.S./Philippines Mutual Defense Treaty.
U.S./Philippine economic relations took a modest step up when Manila joined the U.S.-driven Indo-Pacific Economic Framework in May. Even so, Marcos will attempt to pursue his goal of balancing Washington and Beijing, at least on a rhetorical basis. Nevertheless, the Philippines’ current alignment, a close military relationship with the U.S. and hopes of a more profitable economic relationship with China, will likely endure.
However, a serious uptick in tensions over Taiwan and a U.S. military response in the Strait would place a major strain on the U.S./Philippines alliance. Washington would likely press Manila for temporary basing rights to support the response, a request Manila would try to decline. At the same time, given its location, the Philippines would be vulnerable if China chose to attack Taiwan through a kinetic process that began in the South China Sea, a situation in which Manila might welcome U.S. protection.
In the meantime, Washington will seek to cultivate positive relations with Marcos, notwithstanding a complicated past, with the aim of strengthening the alliance.
Marcos has said he will support further liberalisation of investment, promising 100% foreign ownership in some sectors. He acknowledges this will require regulatory reform, which will likely need approval of the new Congress. If Marcos follows through, however, this will be a long and incremental process, subject to influence from special interests including the two political families at the top of the administration, Marcos and Duterte.
In the near-term, the prospects for significant or widespread political violence in the Philippines are low. Philippines presidents are elected for a six-year single term. The absolute majorities that ushered Marcos and Vice President Sara Duterte into office will translate into a ‘honeymoon period’ for the new administration. However, that period will be limited and could be curtailed if Marcos fails to keep economic growth moving past the COVID-19 pandemic or offers a weak response to Chinese assertiveness in the West Philippine Sea.
TREND ▲
In the 2022 Global Terrorism Index, the Philippines was rated 16th in the world for terrorist activity and vulnerability, the highest in South-east Asia. One aspect of this vulnerability is the Philippines’ configuration as an archipelago, which can make it difficult for the Philippines security forces to apprehend insurgents, while another is the historic tensions in the southern province of Mindanao.
With respect to Mindanao, Marcos has been slow to put forward his policy on the Bangsamoro peace process with the Moro Islamic Liberation Front, which could spark a resurgence in terrorist attacks. To counter this, however, reinvigoration of the U.S./Philippines alliance will help to stem a major increase in terrorism as US counter-terrorism assistance to the Philippines is a key component of the alliance.
TREND ▼
The deteriorating global economy, pushed downward by the disruption of supplies from Russia and Ukraine amid the crisis there, caused imports into the Philippines to widen the trade deficit in recent months. The peso fell to the mid-50s against the U.S. dollar, hitting new lows. This places new pressure on the central bank to raise interest rates; the situation may be eased by an expected increase in crucial remittances from overseas workers in 2022, which are estimated to rise by 4% over the 2021 totals.
Marcos has yet to make clear his policy on his predecessor’s campaign against drug dealers, and European nations will likely hold their fire on potential sanctions until he does. In July, Manila scrapped a deal to purchase helicopters from Russia, to avoid incurring U.S. sanctions. Most South-east Asian nations have demonstrated some willingness to risk secondary sanctions for cheaper oil and wheat but, except for Myanmar, they have less trouble jettisoning weapons deals with Moscow.
Return to contents Next Chapter
At the end of July, the Philippines government announced that the national debt had increased by 9.9% since the end of December 2021, but that the debt-to-GDP ratio had improved to 62.1% at the end of the second quarter of 2022, down from 63.5% in the first quarter. The Marcos administration’s economic team aims to cut the debt-to-GDP ratio to less than 60% by 2025 through a series of initiatives including new taxes, particularly on digital trade.
