Duterte may be popular, but he’s terrifying investors
Since President Rodrigo Duterte took office and spooked foreign investors with erratic diplomatic, law and order, and economic policies, Philippines stock shares and the peso continued to crater.
With the MSCI index up 3% through October, the Philippines has been an Asian laggard after its early year double-digit spurt. Duterte blasted Western criticism of drug crime extrajudicial killings claiming 3000 lives to date, and promoted a China aid, investment, and security tilt away from the US and Japan with recent acceptance of a US$9 billion credit package and silence on South China Sea territorial disputes.
The American Chamber of Commerce in Manila warned in September that his geopolitical shift could “harm longstanding optimism,” as ratings agency S&P cited “undermined human rights.” Foreign fund managers dumped equities throughout the month as Planning Secretary Ernesto Pernia blamed “adverse international press” for dampening FDI sentiment as well, which fell 40% in June from the same time in 2015.
He and a team of technocrats unveiled tax, power and land, and industry ownership reforms to boost overseas confidence, but the agenda has uncertain presidential backing and is overshadowed by regular tirades not just against historic outside allies but “business oligarchs” at home, where a sweep has been ordered against prominent mining and gaming companies.
GDP growth topped the region at 7% the last quarter, on sturdy domestic demand reflected in auto sales and 15% bank credit expansion. Inflation is tame at less than 2%, while the fiscal deficit will rise toward 3% of GDP on new infrastructure spending described by Finance Secretary Carlos Dominguez as the “big difference” with the predecessor Aquino administration.
In external accounts, a trade deficit has opened with heavy capital goods imports despite solid services exports from outsourcing, and annual remittances are expected to be flat at US$25 billion. Capital account outflows accelerated over the President’s first 100 days in power not just from portfolio investor exit, but local saver switching into dollars and money flight abroad, combining for a 2.5% peso loss against the dollar.
According to the mining association, US$25 billion in projects are on hold, with the government moving against existing operations for environmental damage and other possible violations. Labor department officials have also singled out big retail chains like 7-11 for not providing regular employment contracts.
Moody’s affirmed the investment-grade sovereign rating with a stable outlook in October, but pointed out that the sound direction charted in the 10-point Socioeconomic Development Agenda was offset by “less predictable” political risks. The World Bank projected continued 6%-plus growth in 2017, but cautioned about medium-term fiscal challenges with planned stimulus.
Fitch Ratings echoed the potential danger, as tax revenue dropped 10% from the year before in August. Proposed changes would tighten compliance and broaden VAT, and target the wealthy for higher levies. Despite the infrastructure commitment, electricity access fell again in the “Doing Business” report compiled by the National Competitiveness Council, as the country ranks 100 out of 190 countries in the World Bank’s counterpart flagship publication.
The banking system has traditionally been underleveraged, with ASEAN’s lowest loan-deposit ratio, but credit spiked 20 percent at major institutions in recent months encouraged by government pump-priming. Remittance flows have also been a driver, but they will only increase 2 percent this year, the smallest jump in a decade, according to the World Bank.
Almost 10,000 expatriate workers lost their jobs in Saudi Arabia this year and the layoff trend will deepen even with oil price rebound as the Kingdom promotes local youth hiring, the Foreign Affairs Ministry warns. Loan officers have started to tighten standards for real estate exposure in particular, as reflected in the central bank third quarter survey of conditions. It also reported continued sector consolidation with rural bank closure especially, as foreign banks granted new entry scope in July from the longstanding cap on 10 participants remain in wait and see mode pending clarity on future treatment.
President Duterte’s opinion approval was 85 percent in October as he attributed peso weakness to foreign “manipulation,” and currency trading may be next on the crackdown list inviting business and financial community push-back against economic as well as diplomatic bullying.