President’s actions seen undermining reform agenda

The Duterte administration’s reform agenda is being overshadowed by the President’s “erratic and inflammatory actions,” discouraging investors from doing business in the country, London-based economic research firm Capital Economics said.

In the report “Duterte undermining reform prospects in the Philippines,” Capital Economics said “struggles to push through much-needed tax reform in the Philippines are the first sign that President Duterte’s controversial war on drugs and offensive behavior is undermining the efforts of his administration to reform the economy.”

“Given that parties which support Duterte hold a big majority in Congress, the President should in theory have no problem pushing through legislation. But, with support for Duterte starting to wane, there is a risk that his reform plans are being put in jeopardy. We are especially concerned about the outlook for the administration’s ambitious tax reforms, which are aimed at simplifying the tax system and raising much-needed revenues,” Capital Economics said.

Before Congress went on break, the House ways and means committee sent the first package of the comprehensive tax reform program proposal of the administration back to the drawing board, reverted House Bill (HB) No. 4774 back to the technical working group as it wanted to consolidate similar House bills with the Department of Finance’s version.

HB 4774 contained the DOF’s proposal to lower personal income taxes, broaden the value-added tax base by cutting down on exemptions, increase excise taxes on petroleum and automobiles, and reduce estate and donors’ tax rates.

Capital Economics said that “raising more revenue is essential if the government is to meet its ambitious plans to raise infrastructure spending to 6 percent of GDP (gross domestic product).”

“The country’s poor infrastructure is a key drag on economic growth, and improving the country’s road and port network is essential if the country is to establish a competitive manufacturing sector,” it noted.

However, Capital Economics said it did not help that “there has been no let-up in President Duterte’s erratic and inflammatory actions which are continuing to unnerve investors.”

“The killing of over 8,000 people without trial, calling of the [former] President of the United States a ‘son of a whore’ and statements in which he appeared to praise Hitler have contributed to the marked underperformance of the country’s financial markets in recent months,” Capital Economics said.

It said the “falling stock markets and a weak currency are not on their own a major threat to the economy,” noting that share ownership in the Philippines was low, which meant the impact on the economy of falling prices through adverse ‘wealth effects’ was unlikely to be significant.

It added that the low levels of foreign currency debt and benign inflation meant the risks to the economy from the peso fall were limited. The economy, it said, should even benefit from a falling currency as it should lead to an improvement in export competitiveness, Capital Economics said.

Still, Capital Economics warned that “[President] Duterte could also struggle to get other parts of his domestic agenda passed if Congress decides to turn against him.”

“There is a risk that a peace deal with Muslim rebel groups on the southern island of Mindanao will be rejected, so could parts of his 10-point economic agenda,” it said.

While Capital Economics said it was expecting the Philippine economy to grow by 6.5 percent this year on the back of low interest rates, buoyant consumer sentiment and substantial government spending growth, it cautioned that “the main risks to the outlook are likely to be over the medium term.”