President Duterte has not been a “disaster” for the economy, as some feared, in his first two years in office, but his “erratic and crass” behavior could be a disaster waiting to happen, London-based economic research firm Capital Economics said on Tuesday.
“Growth has remained strong, while economic policy has been left in the hands of technocrats, who have pushed through a number of sensible reforms,” Capital Economics senior Asia economist Gareth Leather said in the report “Philippines: A two-year progress report on President Duterte.”
The gross domestic product grew by 6.8 percent in the first quarter, below the 7-8 percent target for 2018, but still among the fastest expansion in the region.
“For the most part, Duterte has stuck to his campaign promise by staying out of the day-to-day running of the economy. Instead, he has delegated economic management to a few respected officials, most importantly, Carlos Dominguez as finance minister, who has provided reassurance to investors concerned about Duterte’s war on drugs and other controversial policies,” Capital Economics noted.
It pointed to two achievements of the Duterte administration so far: the ambitious “Build, Build, Build” infrastructure program, and the comprehensive tax reform program, the first package of which was signed into law, the Tax Reform for Acceleration and Inclusion Act or TRAIN Law, by the President in December.
It noted that spending on infrastructure was expected to hit 5.3 percent of GDP this year and more than 7 percent by 2022, up from 4.1 percent in 2016.
“If it is to achieve this target while keeping the budget deficit within the 3-percent-of-GDP ceiling, the government will need to raise more revenue,” Capital Economics said, noting that the government was making progress in this area given the TRAIN Law.
However, it noted that the massive infrastructure push and tax reform had also “[created] some problems” to the economy.
“The first has been a big increase in inflation. Following the increase in taxes at the start of the year, inflation now stands at a seven-year high. The infrastructure drive has also led to a surge in imports of capital goods, which has contributed to the sharp deterioration in the country’s current account position and put the currency under downward pressure,” it said.
As of end-May, the headline inflation rate averaged 4.1 percent, breaching the government’s 2-4 percent target for the year.
The peso slid to nearly 12-year lows against the dollar in recent weeks.
“A longer term concern is Duterte’s erratic and crass leadership style, which is showing signs of putting off investors,” Capital Economics said.
A “bigger” worry for businessmen was “a string of inflammatory comments and policy changes by Duterte that have raised concerns in the minds of investors over the President’s judgement and commitment to the rule of law,” it said.
“The President’s war on drugs, which has claimed an estimated 20,000 lives, has generated negative headlines across the world. Duterte’s threat to upend the country’s foreign policy by ‘opening an alliance’ with China risks undermining its much more important relationship with the US. Threats to declare martial law across the whole country and the sacking of the country’s chief justice have led to worrying comparisons with the disastrous presidency of the dictator Ferdinand Marcos,” Capital Economics said.
“The Philippines’ own history shows how poor leadership and political uncertainty can hold back an economy. The biggest risk for the Philippines is that history now repeats itself. There are already signs that things are taking a turn for the worse,” it said.
Capital economics said that since Mr. Duterte came to power, the stock market had underperformed, inflows into the country’s equity market had dropped, while pledges of foreign direct investment had fallen, Capital Economics said. “If investment starts to slow sharply, medium-term growth prospects will suffer.”
“So far, there does not appear to have been much impact on growth. The economy remains one of the fastest growing in the region. Over the next year, the economy should continue to grow rapidly, helped by strong export demand, rapid credit growth, buoyant consumer sentiment and big increases in government spending,” it added.