Previous Quarterly Editions
Expropriation Risk: 47 48 50 51 Political Violence Risk: 48 49 48 48 Terrorism Risk: 65 65 65 65 Exchange Transfer and Trade Sanction Risk: 32 34 36 36 Sovereign Default Risk: 38 38 40 42
TREND ▲ OUTLOOK ▲
President Rodrigo Duterte is facing increasing criticism over his government’s ties to Beijing. During President Xi’s two-day visit to the Philippines in November, the first by a Chinese leader for thirteen years, the two sides agreed to push forward with proposals to jointly explore for oil and gas in the South China Sea. Duterte is a long-time proponent of cooperating with Beijing. One of his first moves after coming to office in 2016 was to downplay the ruling of an international tribunal that rejected China’s expansive claims of maritime sovereignty, which included areas within Manila’s exclusive economic zone. Duterte has been rewarded with a rise in Chinese tourist numbers of 40% in 2017 and 35% in 2018 that has made China the second largest source of visitor to the country after South Koreans. He has also gained easier access to Chinese markets for Philippine fruit and seafood exports. China committed to making substantial investment in the country’s infrastructure after he won the presidency, although there has been little progress so far. However, as a result of domestic opposition, the agreement signed in November on oil and gas exploration is much less specific than the two governments had initially hoped. Opinion polls show widespread scepticism of China’s motives and a strong feeling that the president is allowing China to trespass on Filipino sovereignty. Any final deal to allow China exploration rights would be challenged in the Supreme Court. At home, Duterte’s signature tax reform, which would lower the corporate tax rate to stimulate job growth, remains stalled in the Senate amid worries about its impact on inflation. This reached the the highest level for a decade in October at 6.7%. Duterte responded by removing barriers to food imports, particularly rice, where the quota system has been driving up prices. Duterte is urging that the quota be replaced by a tariff on imported rice, which would gain the government considerable revenue while still reducing retail prices. But domestic rice farmers, who fear that they will be unable to compete with imports even if the tariff is set at 35%, have been fighting the move fiercely. The president has had more success in breaking the country’s telecoms duopoly, which has kept prices high, having actively courted Chinese companies to apply for a third operating licence. This was provisionally awarded in November to a consortium led by China Telecom and a Mindanao-based partner. The midterm elections in May for the House of Representatives and half of the Senate will provide a good test of how far Duterte’s personal popularity, which has held up relatively well despite rising prices and concerns about his health and stamina, still translates into political support. His allies look likely to retain control of the House without winning a working majority in the Senate. Growth in 2018 was 6.2%, below the government’s target range of 6.5-6.9% and showing an accelerating downward trend from 6.9% in 2016 and 6.7% in 2017.
Expropriation Risk
In addition to concerns about inflation, Durterte’s tax reform initiative, which would reduce the basic rate of corporate tax from 30% to 20% while eliminating many of the tax incentives for businesses, is being criticised for putting investment at risk. The Philippine Economic Zone Authority has warned that eliminating tax incentives for companies located in its zones will mean less foreign investment and fewer jobs, and its argument has won considerable support among legislators in the upper house. As a result, at least some incentives are likely to remain when a compromise is reached, although this is not expected to happen during the current legislative session. President Duterte’s involvement in a wide range of regulatory decisions continues to worry investors.
TREND ► OUTLOOK ▼
The next step for the Bangsamoro Basic Law that the president signed in July 2018 and which approves greater autonomy for the Bangsamoro region, including more control over its natural resources, is approval via the plebiscites being held on the island of Mindanao in January and February. A strong vote in favour, which both the government and the Moro Islamic Liberation Front hope to see, should mean a boost for foreign investment into Mindanao. Islamist extremist groups oppose the change, however, and there were deadly bomb attacks against a shopping mall in December and a church in Sulu in January. Militant groups on Mindanao with links to the Islamic State group continue to recruit in the wake of their extraordinarily successful attack on Marawi City.
Martial law will remain in place on Mindanao until the end of 2019, even though the Islamist attack on Marawi City that triggered its imposition was defeated in 2017. Manila argues that extending martial law will make it easier to hold the plebiscites on the new law but the Duterte administration will be closely watched to ensure that martial law is not used to suppress political opponents while ostensibly containing security risks. The reconstruction of Marawi City, initially awarded to a Chinese consortium that was eventually disqualified, has been poorly handled.
TREND ► OUTLOOK ▲
The central bank raised interest rates five times to 4.75% during 2018 as it tried to wrestle inflation back towards its target of 2-4% and stem a fall in the value of the peso. It saw some success at the end of the year and expects inflation to be below 4% by April. However, with real interest rates still negative, it may well need to make further increases during 2019 to protect the currency.
TREND ▲ OUTLOOK ▼
With government spending increasing by double digits for five quarters in a row, the budget deficit continues to grow. This makes the additional revenue promised by the administration’s proposed tax reforms increasingly crucial, as the infrastructure construction that powers Duterte’s economic programme is putting increasing strain on the budget. The country’s debt-to-GDP ratio, which has been around 42% in recent years, actually fell in 2018 thanks to growth in the economy, while foreign reserves strengthened slightly.
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