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Duterte and Kerry
Oana Aristide

The Philippines: Focused on Business

by Oana Aristide | Dun & Bradstreet Editor

August 24, 2016 | No Comments »

Amid struggling emerging markets, financial sector turbulence, and softening global economic growth, the Philippines seems to be doing quite well, thank you.

Concerns that President Rodrigo Duterte, who was elected in May, would wreak havoc on an economy that has been remarkably stable recently have proved unfounded so far. Instead, the stock market has soared, and the country’s economic growth actually accelerated from an already fast 6.8% year-on-year in first quarter 2016. Real GDP growth came in at 7% in Q2, faster than the consensus forecast, and faster than in China.

Two issues are clouding this otherwise positive outlook, however. One is the weakness of the foreign-trade sector: All of the Philippines’ growth can be accounted for by robust domestic demand, while the export sector is ailing.

The second issue is the surge in extrajudicial killings since Duterte’s election. In recent months around 1,800 deaths have been reported as being either drug-related vigilante killings or the effect of antidrug police operations. The new administration has vowed to reduce crime in the Philippines, but the methods it employs raise serious concerns about the rule of law in the country.

The president has openly condoned and encouraged extrajudicial killings of alleged drug dealers and criminals. In addition to human rights issues, this approach is very likely to encourage abuse of power by the police. Ambassadors of several nations have openly criticized these methods.

Though much of the recent growth in the Philippines occurred before the start of Duterte’s administration, the president’s cabinet and economic policy announcements appear to bode well for the future. Markets were reassured when Duterte opted for mostly competent policy makers. The new administration’s policies appear to be broadly business-friendly and to be boosting consumption.

The new cabinet wants to increase the budget deficit to 3% of GDP (from a projected 2.7% this year). The government aims to spend 7% of GDP on infrastructure, up from the 5% target of the previous administration. It also aims to increase spending on policing by 25% and education by 31%.

With regard to infrastructure, the Philippines has long been a regional laggard in investing in its transportation network. The country’s businesses have been lobbying for a wholesale upgrade. As such, the business community welcomes the new plans. However, implementation, not initiative, is what’s been frequently lacking, and it remains to be seen whether the ambitious plans will be carried out.

Other policy items on the agenda are lowering personal and corporate taxes and increasing the chronically low budgetary revenue by tackling tax evasion. On fiscal policy, the government is likely to increase alcohol and tobacco taxes, but refrain from increasing the sales tax. The mining sector is already facing tighter environmental regulations and stricter enforcement of existing ones (several nickel mines have been closed). The administration also seeks to resolve Manila’s congestion problems.

Moreover, the new government aims to increase growth to as much as 8% per year in the medium term. This is theoretically possible given the Philippines’ demographic makeup (the country has a demographic age-profile that favors economic growth) and the boost that could be received from an improved infrastructure (should those plans materialize).

Contrary to pre-election statements and the concerns of the international community, Duterte has offered a measured response to tension with China over the South China Sea, through which more than $5 trillion of global trade moves annually. An arbitration court in The Hague has ruled that China had no historic title over the South China Sea and that China had breached the Philippines’ sovereign rights there.

Chinese officials have rejected the legitimacy of the ruling, saying the country will take all necessary measures to protect its interests. The outlook for a lucrative solution to the conflict has increased. Though a complete Chinese concession is highly unlikely, it is possible that China will offer the Philippines shared rights to the natural resources in the area in exchange for ignoring the court’s ruling.

Oana Aristide is a Senior Economist on D&B’s Global Data, Insight and Analytics team. Based in the UK, she covers three Scandinavian countries as well as Romania, Japan, Malaysia, and the Philippines as a contributor to D&B’s Macro Market/Country Insight Products. She has a background in central banking.

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Photo courtesy of the US Department of State.

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