The Philippines is poised to sustain robust economic growth in the near term, but President Duterte’s “aggressive foreign policy moves” as well as the negative perception on the war being waged against illegal drugs may deter investors, the Washington-based Institute of International Finance (IIF) said.
In a Nov. 10 report titled “Philippines: Navigating Troubled Waters,” IIF economists Bejoy Das Gupta and Kevin Sanker said that among the Duterte administration’s positive policy actions so far include the plan “to use fiscal space to increase spending in key areas, such as infrastructure and social programs, after several years of undershooting the deficit target.”
The IIF noted that Duterte was elected into office “on a message of inclusive growth, controlling crime, and improving infrastructure and the business climate,” and the administration is seeking to fulfill its campaign promises through the 10-point socioeconomic agenda, according to the report, a copy of which was provided to the Inquirer.
The agenda is ultimately aimed at slashing poverty incidence to 13-15 percent by 2022 from 21.6 percent last year.
“The economic program of the new government reflects the electoral mandate and is aimed at building on recent gains. The adjustments being made to the policy framework, based on the new administration’s priorities, include increasing the fiscal deficit, bolstering schemes focusing on more equitable growth and development, implementing tax reform, and ramping up investment in deficient infrastructure. The government has also adjusted public-private partnership (PPP) policy to attract more foreign investment and further advance infrastructure development by accelerating the project awarding and implementation process,” the IIF said.
“In addition to streamlining the PPP process, the government hopes to increase FDI (foreign direct investment) inflows more broadly by making it easier to do business through reducing red tape and graft, and raising foreign ownership limits (excluding land), along with lowering corporate income tax rates. President Duterte’s recent trips to China and Japan, and subsequent pledges of investment and loans from them, are an early indication of efforts to secure new economic partnerships in the region,” the IIF added.
However, “despite the positive factors, President Duterte’s aggressive response to criticism of his antidrug and anticrime campaign has antagonized key western allies, while his controversial mixed messages on the South China Sea territorial dispute in an apparent effort to reach out to China has also rattled financial markets,” the IIF noted.
“Downside risks stem largely from political distractions slowing the implementation of economic reforms needed to sustain the strong economic performance,” it added.
For instance, while the pivot to Asia, particularly to China, could boost FDI, tourism as well as trade, the IIF noted that the “independent” foreign policy being pursued by the Duterte administration had also “drawn negative attention.”
“The President’s seemingly closer relationship with China and bilateral approach to resolving conflicting South China Sea claims could potentially exacerbate tensions with other neighboring claimant countries besides resulting in a backlash at home. Given the large amount of cargo that passes through those waters, an escalated conflict at sea could disrupt marine traffic and adversely affect trade more broadly. Sluggish global trade, including shipments to China, are already weighing down exports and are a drag on growth, but somewhat mitigated by domestic demand,” the IIF said.
Duterte’s earlier pronouncement of cutting off economic and military ties with the United States, a long-time ally, may also sour investor sentiment.
“Although Duterte has since distanced himself from some of his more controversial statements, appointed Mr. Trump’s business partner as the Philippines’ new trade envoy to the US, and other government officials have sought to calm foreign investors, the uncertainty created by the rhetoric may well negatively impact foreign capital inflows,” according to the IIF, citing that FDI inflows were “at risk of slackening” alongside a weaker peso, falling stock market as well as rising bond yields.
“More broadly, there is a danger that the antidrug and anticrime campaign and controversial foreign policy initiatives could prove to be a bigger impediment if authorities have to continually reassure investors and creditors rather than focus on improving economic policy making and implementation,” the IIF said.
The IIF was nonetheless optimistic about the country’s growth prospects this year and next year. “While the administration has to navigate these troubled waters, strong expansion in domestic demand should help generate real GDP (gross domestic product) growth of 6.3 percent in 2016 and 6.1 percent in 2017, up from 5.9 percent in 2015,” it said. The government targets 6-7 percent GDP growth this year and further expand by 6.5-7.5 percent next year.
On its website, the IIF claims to be “the global association of the financial industry, with close to 500 members from 70 countries.”
Among its members are prominent commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, as well as central banks and development banks, the IIF added.