Duterte­nomics

Has Filipino strong­man and pres­i­dent Rodrigo Duterte cured the “Sick Man of Asia”?

Norway-Asia Business Review - - Snapshots - SOFIE LISBY

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.

Duterte­nomics

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.”

PHOTO: WIKIPEDIA/ACE MORANDANTE

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

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