Even with the Duterte administration’s plans to ramp up public investments, especially in infrastructure, political uncertainty is seen dampening private investment and dragging growth, according to London-based economic research firm Capital Economics.
In a report titled “Investment could be a future weak spot for the Philippines,” Capital Economics noted that from 2010 to 2016, investment growth averaged more than 10 percent, exceeding the below 4 percent annual increase in the 2000s and about 2 percent yearly growth during the 1990s.
“A key factor behind the surge in investment growth has been the establishment of political stability brought about by the presidency of Benigno Aquino (III),” Capital Economics said.
It said military coup attempts and corruption scandals, which were a common feature of political life in the country for much of the postwar period, were notably absent during Aquino’s presidency.
The research firm also noted improvements in the business environment during Aquino’s term.
“The Philippines jumped in the rankings of various international league tables that aimed to measure competitiveness, the number of business regulations and corruption levels,” it added, noting the progress in the country’s competitiveness rankings in the surveys of Heritage Foundation, Transparency International, the World Bank, and the World Economic Forum (WEF) between 2010 and 2016.
Capital Economics nonetheless noted that the share of investment to gross domestic product (GDP) in the Philippines, at over 20 percent in 2016, still lagged behind most of its Asian neighbors.
“If the Philippines is to maintain rapid growth, it requires more capital deepening. It is no surprise that the fastest-growing emerging markets over the past couple of decades have typically been those with high investment rates,” Capital Economics noted.
On the Duterte administration, Capital Economics welcomed its plan to jack up investments in hard infrastructure.
“The latest budget projects that government spending on infrastructure will rise to 6 percent of GDP by 2020, from 4 percent in 2016. However, the World Bank has estimated that developing countries such as the Philippines needed to spend the equivalent of 5.5 percent of their GDP a year to ensure that inadequate infrastructure doesn’t become a major drag on development,” it said.
The low level of government debt and small budget deficit mean the Philippines has the fiscal space to borrow and invest more, Capital Economics said.
However, Capital Economics warned that the outlook for private investment was “less promising.”
If companies are to invest, they need a stable and predictable business environment, it said.
“While President Duterte has not been the disaster for the economy that some feared, there are signs the new president’s war on drugs, his erratic policymaking style and the worsening security situation in the south of the country is starting to weigh on investment prospects,” the research firm said.
“Having climbed up the business rankings under Benigno Aquino, improvements to the business environment appear to have ground to a halt,” Capital Economics added, citing the Philippines’ slight decline in the WEF’s Global Competitiveness Ranking for 2017.
“There are already signs investors are starting to think twice before committing to long-term investments in the country. Having grown rapidly between 2010 and 2016, foreign direct investment was 15 percent lower in the first six months of 2017 than over the same period a year ago,” it said.
It said that despite the government’s ambitious infrastructure plans, increased political uncertainty was likely to drag heavily on investment.
“The worsening outlook for investment is one of the key reasons why we think the Philippines will slightly disappoint expectations over the coming years. Whereas both the consensus and the International Monetary Fund are expecting growth over the next five years of around 6.5-7 percent, we think growth is likely to be closer to 6 percent,” according to Capital Economics.