The US presidential election: What’s at stake for PH

As America elects a new president on Nov. 8, Philippine financial markets brace for what could be a game-changing development that could gnaw on the country’s thriving business process outsourcing industry (BPO).

While a lot of concerns have been raised on the impact of President Duterte’s anti-US rhetoric on the BPO industry in the Philippines—a long-time ally and former colony of America, anxiety has escalated over the tight race between Democrat Hillary Clinton and Republican Donald Trump.

“The US elections may have an impact in the same way that the Philippine elections have had an impact on the US—a potential shift in foreign policy. For the Philippines, as an example, a neutral US policy on outsourcing by their firms is favorable to our BPO industry. It remains to be seen whether the new US president will change his/her mind over this policy. This could have an impact on expectations over economic growth,” said Jose Mari Lacson, head of research at ATR Asset Management.

Ahead of the US elections, the Philippine Stock Exchange index has given up most gains seen since the country elected Mr. Duterte as President in May, mostly attributed to jitters over US interest rate policy.
In recent weeks, the run-up to the US elections has dampened investor sentiment although not just in the Philippines but across global markets.

“The protectionist stand of a Trump administration on US outsourcing could put at risk the growth momentum of the country’s BPO industry, where eight out of the top 10 BPO companies are US based,” said Marvin Fausto, a fund manager at COL Financial and president of the IFE Financial Advisers Inc.

“A Trump win could lead to anticipation that his protectionist and anti-immigration campaign promises will be carried out, possibly weakening the prospects for the Philippine outsourcing sector as well as a sizeable chunk of overseas remittances. This has become even more crucial to the medium term outlook of the Philippine economy considering the controversial statements made by our President over the past two months,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands.

During his state visit to China in October, President Duterte announced the country’s military and economic “separation” from the US, which he later clarified to mean the pursuit of a more independent foreign policy and not necessarily reneging on existing military exercises with the US. The President, however, insisted later that he wanted foreign troops out of the Philippines in two years.

Property consulting firm Colliers estimated that the information technology/business process management industry had been generating $168 billion in revenue in India and the Philippines. It is expected to grow to between $250 billion and $300 billion by early 2020s. This industry currently provides 1.2 million jobs in the Philippines and 3.7 million jobs in India.
“A Trump win or the risk of a protracted election protest (if Clinton wins) is seen to lead to a severe risk-off episode worldwide in the near term, which could result in capital outflows from emerging markets (including the Philippines) toward safer assets in developed markets,” Neri said.

“Headwinds on the Philippine balance of payments position will be untimely, considering that our current account surplus is shrinking and even expected to revert to deficits by 2018,” the economist added.

American global banking giant Citigroup still sees a Clinton win as base case scenario, assigning the probability of a Trump win at 25 percent.

“A sudden tightening in the odds for the US election is feeding considerable market nervousness. Given the binary nature of election outcomes, it is likely that investors will continue to shed portfolio risk into the event,” Citi said in a research note.

“Although many elections appear to have dramatic consequences, a few have the potential to change the established global order by as much as this US presidential election could,” Citi said in a research note dated Nov. 3.

Citi said a Trump victory would substantially raise political uncertainty and “seriously raise the risks of a global trade war and of a potential reorganization of the established international order.”

Against the backdrop of a challenging global economic environment and fragile political climate in many parts of the world, Citi said such uncertainty could damage business sentiment and investor confidence, in turn, feeding through to global policy decisions.

“By contrast, a clean Clinton victory would likely represent a continuation of the status quo, thus, reducing uncertainty but making a December (US Federal Reserve) Fed rate hike more likely,” Citi said.

Investors must also recognize more subtle complexities, Citi said, adding that this election was not just about a Trump or Clinton victory anymore.

According to Citi, there are two additional risk scenarios to consider: (1) a clean sweep by the Democrats, in which they take care of the White House, Senate and the House, and (2) a very slim Clinton victory, which may embolden Trump not to concede. “Although these scenarios are admittedly improbable, investors should not rule them out in this election. In the first instance, we would expect risk aversion to rise and US equities to weaken modestly. But in the second scenario, investors should brace for significant market volatility that may be prolonged until the results are clarified,” Citi said.

Positioning will determine the scale of post-election market moves although the increase in uncertainty in recent weeks had already prompted global investors to pare down their exposure to Asian emerging markets, Citi said.

“Only in Indonesia and India, and to a lesser degree in Singapore, are there still net long duration or net received positions. In Taiwan and Korea net positioning is probably a small steepener, while in Thailand and Philippines too investors are likely be slightly underweight,” it said.