Previous Quarterly Editions
Expropriation Risk: 47 47 48 50 Political Violence Risk: 46 48 49 48 Terrorism Risk: 64 65 65 65 Exchange Transfer and Trade Sanction Risk: 30 32 34 36 Sovereign Default Risk: 38 38 38 40
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During his third annual State of the Nation Address (SONA) in July, President Rodrigo Duterte again called for faster liberalisation of the economy. Although using a calmer tone this time, he focused heavily on those parts of his economic reform agenda that are still facing delays. These include the outlawing of short-term labour contracts, and the new Tax Reform for Acceleration and Inclusion bill, known as TRAIN 2, that would lower corporate income tax while reducing tax incentives. His pledge to reduce living costs has been a major part of his electoral appeal, and his current determination to lower prices for rice and reduce fees for mobile phone and internet access comes as rising inflation threatens purchasing power and puts upward pressure on interest rates. In July, year-on-year inflation reached 5.7%, having increased every month this year, and rising food prices mean that the impact is greater on low-income households.
The central bank has been increasing interest rates in an effort to control inflation but with little success so far. Inflation appears to be contributing to a decline in Duterte’s approval ratings, which by mid-year had reached the lowest point of his presidency. The fall has been particularly sharp in Metro Manila. Campaigning against rising rice prices, which went up by 10% during the first half of 2018, makes political sense as a quota system for imports keeps prices high by limiting access to supplies from Thailand and Vietnam. Both of those countries, together with Australia, are threatening action against the quota at the WTO, but, much to Duterte’s frustration, the bill to repeal it is making only very slow progress through the legislature thanks to the domestic rice lobby. Duterte is urging that the quota be replaced by a tariff on imported rice, which would gain the government considerable revenue while still reducing the current price of rice, but domestic rice farmers fear they will be competitive even with a tariff of 35% and have been fighting the move fiercely. The telecoms sector, which includes internet access, remains an effective duopoly that keeps prices high. The current legislative environment discourages foreign firms from entering by limiting foreign ownership to 60%. However, recent regulatory changes have reduced interconnection fees and removed the requirement that the third national licence must be auctioned rather than awarded. Duterte has recently been courting a Chinese telecoms company to apply. The president’s frustration appears to be behind his attempt in September to engineer the arrest of the core group of senators that opposes his legislation in the upper house. The economy faulted slightly the first half of 2018, falling behind the annual figure of 6.8% for 2017 and putting this year’s target of 7-8% in some jeapodary even though the rate of infrastructure spending remains on track to take 17% of public spending this year.
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President Duterte’s involvement in regulatory decisions continues to worry investors. In August, saying that no further casinos would be built during his administration, he cancelled a 1.5-billion-dollar project to build a casino south of Manila just a month after it had been approved by the state regulator. In April, he had cancelled a casino project on Boracay island, also after it had been approved. After several years of toxic relations over the South China Sea under Duterte’s predecessor, a major breakthrough in China-Philippines energy cooperation looks likely before the end of the year if the two sides can finalise an agreement to exploit hydrocarbon resources in a disputed area of the South China Sea. The expected deal would involve a 60:40 revenue-sharing arrangement in favour of the Philippines.
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The long-awaited Bangsamoro Basic Law, which the president signed in July, should encourage completion of a peace deal between Manila and the insurgent Moro Islamic Liberation Front on Mindanao. However, it will have no effect on the island's militant groups linked to the Islamic State group, who have continued to recruit there since the extraordinarily successful attack on Marawi City last year, from which 300 of the attackers are believed to have escaped. Meanwhile, there has been a rise in clashes with the New People’s Army (NPA) in Northern Mindanao, Davao and the Caraga regions after Duterte declared the NPA to be a terrorist organisation.
TREND ► OUTLOOK ▲
The Philippines is one of the country’s at greatest risk of terrorist attacks in South-east Asia. Being an archipelago makes tracking suspects harder and its political freedoms can be exploited by extremists. The Islamic militants who seized control of Marawi City in Mindanao and then held it for 154 days in 2017 left the city destroyed and over 300,00 people displaced. In July, the Philippine military received its third shipment of weapons from China for use in counterterrorism operations.
In May, the central bank increased interest rates by 25 basis points to 3.25%, the first rise since September 2014, but quick subsequent rises in June and August have brought rates to 4% as the bank struggles with inflation. Government hopes of keeping annual inflation below 4% this year are clearly at risk. The peso weakened by some 5% against the dollar during the first half of 2018, largely on expectations of a US rate hike rather than concerns about the domestic economy.
TREND ▲ OUTLOOK ▼
The budget deficit for January-March 2018 was 4.1% of GDP compared with 2.3% a year earlier. The additional tax revenue that the administration expects once TRAIN 2 has been enacted is becoming crucial as the infrastructure building that powers Duterte’s economic programme puts increasing strain on the budget, even though the exact revenue it will produce is disputed. The government’s issue of a ‘samuri’ yen-denominated bond in August brought in a higher-than-expected 1.38 billion dollars, which will help with infrastructure spending. The debt to GDP ratio, which has been around 42% in recent years, should fall below 40% this year and foreign reserves have strengthened slightly.
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