Previous Quarterly Editions
Expropriation Risk: 48 50 51 53 Political Violence Risk: 49 48 48 48 Terrorism Risk: 65 65 65 67 Exchange Transfer and Trade Sanction Risk: 34 36 36 37 Sovereign Default Risk: 38 40 42 42
TREND ▲ OUTLOOK ▲
In the Philippines, as elsewhere, midterm elections are largely a referendum on the presidency. The contest in May for all 297 seats in the House of Representatives and half of the 24 seats in the Senate was no exception and proved a significant success for President Rodrigo Duterte. They gave his supporters more than two-thirds of the Senate to add to their supermajority in the House, making some of the major policy changes he seeks more accessible. Perhaps more importantly from the president’s personal perspective, nine of the twelve Senate contests were won by those standing for the 'Faction for Change' coalition that was put together and managed by his daughter Sara. Although she chose not to stand for the Senate herself, preferring to remain as mayor of Davao, this performance gives Sara a strong foundation for a campaign to succeed her father as president in 2022. However, this greater political latitude for the president is tempered by some worrying economic trends. The economy grew by 5.6% year-on-year in the first quarter of 2019. While this would be enviable in most countries, it represents a four-year low for the Philippines as export volumes were hit by slowing global trade and government spending was reduced to single-digit growth for the first time in six quarters by the delay in passing the 2019 budget. Growth may not reach Duterte’s target of 6.5% for 2019 unless the country can benefit from a rise in activity resulting from the US-China trade dispute. Duterte needs to re-energise growth to help pay for the Universal Health Care Act that he signed into law in February in fulfilment of a major 2016 campaign promise. The legislation significantly expands the government's planned financial commitments to PhilHealth, the public sector health insurance provider that covers 95% of the population. The Department of Health estimates that implementing the Act will cost the government around 5.5 billion dollars in 2019. Duterte expects to pay for the expansion of healthcare with revenue from ‘sin’ taxes on alcohol, tobacco and gambling as well as a doubling of premiums for PhilHealth users to 5% of monthly income. One of Duterte’s policy initiatives that should get completed now that the midterms are over is the ending of an effective duopoly in the telecoms sector. Duterte has pledged that more competition will reduce prices, a popular position in a country where mobile phones are the main means of accessing the internet. Relations with Beijing have deteriorated again over the South China Sea. In April, Duterte told Beijing to “lay off” the Philippine controlled Thitu (Pagasa) Island, claiming with some cause that China had sent 200 fishing boats to the island that are in fact crewed by a maritime militia of irregular forces that Beijing uses to implement its maritime policies. Their apparent aim is to hamper Philippine construction work on the island.
In April, President Duterte ordered a review of all government contracts that would identify "onerous" provisions that could "disadvantage" the Philippine people, with greatest scrutiny given to contracts signed with private companies for public utilities and contracts for foreign loans. The move appears to have been triggered by an arbitration case won by a company holding a water concession that sought compensation from the government after it blocked a proposed rate hike. Most investors, both foreign and domestic, holding stakes in companies with government contracts have chosen to regard this as an example of the president blowing off steam and doing so in a politically astute way ahead of the midterms. But there have been occasions during the first half of his presidency when appeals to populist sentiment have had commercial consequences, and the spat over the water utility is a reminder of how unpredictably disruptive the president’s intervention in regulatory issues can be.
TREND ► OUTLOOK ▲
The plebiscite in Mindanao earlier this year approved greater autonomy for the Bangsamoro region, including more control over its natural resources. One consequence should be a boost for foreign investment into Mindanao. However, despite Duterte’s success in the midterm elections, developments in Bangsamoro are unlikely to signal a trend towards federalism despite the president’s support for the concept. Although still limited, there is a general and growing concern about competition for jobs from Chinese immigrants.
With attacks by guerrillas from the communist New People’s Army (NPA) on police and military personnel increasing on Mindanao to mark the 50th anniversary of the NPA’s founding, the government has stepped up its counterinsurgency operations. There is likely to be a rise in clashes between security personnel and suspected rebels across Mindanao in the coming months as hopes for a negotiated de-escalation recede following Duterte’s declaration in March of a "permanent termination" of formal talks.
TREND ▲ OUTLOOK ►
Although modest, the central bank’s decision to reduce interest rates by 25 basis points in response to the disappointing first quarter growth figures was significant for being the first cut in seven years. The bank had raised rates five times in 2018 alone to combat inflation and support the peso. With food inflation falling to just 3.0% in March from close to 10% just six months earlier, the bank has scope for more rate cuts to counteract slowing growth and is lowering the reserve ratio requirement by two percentage points to 16% in a move that should boost liquidity by around three billion dollars. The surprise move of Benjamin Diokno from the budget ministry to become its governor in March suggests that the central bank will continue to take steps to support economic growth.
Final figures for macroeconomic indicators from 2018 show that the budget deficit widened to 3.2% of GDP from 2.2% in 2017, the trade deficit widened from 8.7% to 12.5%, the balance of payment deficit reached 2.2% from 0.3%, and the current account deficit was 2.7% compared to 0.3%. However, the debt to GDP ratio is now below 40%, the country has a stable investment rating, and the government was able to issue a 750-million-euro Eurobond in May with little difficulty. Much now depends on Duterte’s ability to raise more revenue from a slowing economy.
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