Has Filipino strongman and president Rodrigo Duterte cured the “Sick Man of Asia”?
For years, the Philippines has lagged behind many of its Southeast Asian neighbours in terms of economic growth and poverty reduction, earning it the label “Sick Man of Asia”. However, since the early 2010s the country has broken out of its mediocre growth patterns to become amongst the fastest growing nations in Asia.
The country’s economic growth breached the 6 percent mark in July 2015 and has not gone lower than that since. Growth was sustained at an average of 6.7 percent for 2017, a rate The World Bank expects to continue for 2018 and 2019. GDP grew at an annualised rate of 6.9 percent for the third and fourth quarter of 2017. The results were ahead of economists’ consensus forecasts and made the Philippines one of Asia’s bestperforming economies for the period, just behind Vietnam but slightly ahead of China., according to Financial Times.
Growth has been propped up by exceptionally low interest rates. The central bank has kept interest rates at a record low but experts warn that the bank may have to tighten policy as currency weakness adds to pressure on inflation. The peso dropped to an 11-year low in 2017 and is the worst performing unit in Asia. So far this year, it has dropped about 3.5 percent against the dollar, also the worst in Asia, according to ABS-CBN News. Furthermore, growth has been relatively shallow, and, some argue, non- inclusive. Unemployment remains high, as do poverty rates. Travel just short distances outside of Manila and the differences to the glitzy skyscrapers of Makati, the central business district of the capital, seem worlds away. As anyone who has spent hours in Manila’s rush hour traffic can attest, there are obvious infrastructure woes as well.
Although economic reform started long before the election of president Rodrigo Duterte, there is no denying the effects of his presidency on the economy, most notably the “Build, Build, Build” programme, dubbed “Dutertenomics”. The programme will see the Philippines embark on an ambitious USD180 billion infrastructure spending spree over the next decade, taking up an estimated 5 percent of the GDP and aimed at transforming the economy.
More than 70 large scale projects have been identified as part of the programme, including six airports, nine railways, three rapid bus transits, 32 roads and bridges and four seaports. The
larger objective is to bring down the cost of production, improve rural incomes, encourage countryside investments, improve the movement of goods and people, and create millions of jobs.
In the planning are also four energy facilities to help ensure low-cost and stable power supply, water resource and irrigation projects that will help raise agricultural output, flood control facilities to protect vulnerable communities, and several redevelopment programmes that will help meet the needs of an increasingly urban population.
Making new friends Where does Duterte find USD 180 billion for infrastructure projects? The president has been overtly critical of western countries, including long-time ally United States, and has withdrawn from a number of international treaties, including the Rome Statute, the treaty that established the International Criminal Court.
Instead, he has turned to China, working to normalise relations after years of heated and open disputes over South China Sea sovereignty. As a result, China has pledged USD 7.3 billion in infrastructure investments. In October last year, Duterte signed a raft of bilateral agreements with China and Russia, and announced that he would invite a Chinese company to run a third big entrant to the Philippines’ duopolycontrolled telecoms market, according to Forbes. Attracting foreign direct
investment High on Duterte’s agenda is a push to attract more foreign investment, which has been flagging. According to Financial Times, cumulative net FDI inflows fell 5 percent to USD 5.1 billion in the first eight months of 2017, from USD5.4 billion the previous year.
Corporate tax reforms have reduced the tax burden on smaller companies but at the same time have removed tax privileges long enjoyed by inward investors, especially in the business process outsourcing sector.
“For long, foreign investors were lured not only by the relatively cheap and highly skilled labour in the Philippines, but also tax holidays offered in new boom sectors as well as affordable office rent and real estate costs,” wrote Richard Heydarian, a Manila-based academic write in Nikkei Asian Review. “Now, these attractions are under question, as the government raises operating costs by slashing tax privileges and levies new taxes on real estate. New taxes on the growth sector such as business process outsourcing has put off some foreign investors. In particular, this has hit American companies, which have been a leading source of investments in the Philippines throughout history.”
During Duterte’s first year in office from mid-2016 to mid-2017, American investments dropped by 62 percent from 2016 to a 13-year low of PHP 8.36 billion (USD 160 million) in 2017. South Korean investment in the Philippines collapsed by as much as 93 percent in the same period, from a high of PHP 11.8 billion in 2016 to only PHP 873.2 million in 2017, as South Korean investors looked elsewhere, especially to Vietnam.
In November 2017, Duterte announced a directive to government agencies to start to scrap or ease barriers that foreigners face in various business and employment sectors in order to pursue stronger economic growth, create fairness and to enable partnerships to develop.
According to Reuters, the directive covered eight areas, including construction and repairs for governmentfunded projects, private recruitment for both domestic and overseas employment, teaching at higher education levels, as well as processing and “trading except retailing” of rice and corn. Human rights violations It is not just the tax reforms that are keeping foreign investors away. Duterte is facing a threat of rising Islamist rebellion in the country’s south, and his war on drugs, which has killed 3,800 drug suspects in 14 months, has been condemned by human rights groups and many foreign leaders. The country is currently looking at reinstating the death penalty for drug-related crimes.
In September 2017, credit ratings agency Moody’s Investors Service, although reaffirming the country’s investment-grade credit rating, pointed towards Duterte’s domestic conflicts a rising risk to the economy. “The reemergence of conflict in the southern Philippines, as well as the Duterte administration’s focus on the eradication of illegal drugs, represents a rising but unlikely risk of a deterioration in economic performance and institutional strength,” the credit ratings agency said.
“A worsening of the Islamist insurgency in Mindanao ... could lead to an expansion of martial law, undermine both foreign and domestic business confidence, and disrupt economic activity in other parts of the country,” it added.
Manila’s business community, however, remains positive, partly due to the appointment of a number of high profile technocrats such as former Asian Development Bank economic Ernesto Pernia, and Benjamin Diokno, a respected economist and veteran policymaker, in key policy positions. “Right now is a great time to invest,” Ebb Hinchliffe, executive director of the American Chamber of Commerce of the Philippines, told Financial Times. “This government is pro-business — just don’t listen to the president, listen at the cabinet level.”
Left: President Rodrigo Duterte delivering his first State of the Nation Address at the Batasang Pambansa with Senate President Aquilino Pimentel III and House Speaker Pantaleon Alvarez on July 25, 2016