Philippine stocks were up 15% on the MSCI Index through July as a leading Asia performer, as President Duterte mixed a clear anti-crime and drug campaign with muddled economic messages around his populist agenda for higher infrastructure and social spending.
He earned the moniker the Duterte Harry, as well as UN Human Rights condemnation, by unleashing the police and vigilantes to apprehend and kill thousands of suspected criminals and narcotics traffickers. The extrajudicial actions have been questioned by the media and Catholic Church, but the President ignored criticism and also directed an epithet at the US Ambassador when he protested.
The business community has taken the harsh law and order stance in stride but “oligarchs,” such as former trade minister Roberto Ongpin charged with insider trading, have been likewise targeted. Executives fear that hard-won fiscal discipline will be eroded with competing public investment and tax priorities, and the mining industry separately was shocked by an August decision threatening widespread closures for environmental damage.
GDP growth was 7% for the quarter ended in June, and Economic Planning Secretary Ernesto Pena predicts a further uptick to 8%. However, agriculture output fell 2% for the fifth consecutive quarterly retreat, with rural income weakness reinforcing the 25% poverty rate, and he called for “more inclusive, inequality-reducing” policies.
Finance Secretary Carlos Dominguez stressed these goals in his 2017 budget blueprint raising outlays 12% overall, and education allocation the most at over 30%, including for family planning.
The fiscal deficit would climb from 2.5% to 3% of GDP as the President’s team promised a “golden age of public infrastructure” to reach 7% of GDP, in part for hosting of the ASEAN summit next year. The police get a 25% increase, both for job creation and to extend the signature security sweep in Manila and other major cities.
To finance this largesse, the government will unveil tax reforms in September, expected to include a 5% corporate income cut to 25% to match the rest of the region, foreign investor incentive rollback, and better collection to improve the paltry 12% of GDP revenue ratio.
Japanese companies, which invested $1.5 billion in 2015 as the second biggest source behind US firms, have warned that special zone fiscal advantage elimination will hurt future participation. In their absence, the local chamber of commerce director cited more attractive neighboring destinations without the Philippines’ high electricity cost and supply chain isolation. However, inflows through April show the country gained share, on track for an annual $8 billion total mainly at Thailand’s expense with its military rule and economic slowdown.
According to an August report by European banking group Natixis, an additional advantage is the current status as “most immune” to Chinese currency and trade fallout, even as tensions build over competing South China Sea natural resource and territorial claims with July’s arbitration ruling against Beijing.
Consumer sentiment remains buoyant, with motor vehicle sales almost doubling on an annual basis in June, aided by near 20 % bank credit growth. Leverage is the lowest in the region behind Indonesia, with non-financial sector debt to GDP just 110% last year, and the bad loan ratio is under 2%.
The central bank has kept interest rates on hold with the inflation forecast just cut to 1.8%, as it sees “wiggle room” through reserve requirement easing first should the economy slacken. In the balance of payments, the current account surplus will be negligible on steep import demand, offset by a projected 4 percent remittance rise this year. The peso has strengthened against the dollar, enabling further foreign exchange liberalization for individuals and businesses to automatically access $500,000 and $1 million, respectively.
An emergency yen swap line has been finalized, but for now local currency liquidity is abundant and has poured into bonds along with equities, with mall operator SM Prime issuing a 10 billion peso bond in July at just over 4% yield.
However, in the wake of early exuberance, President Duterte’s incipient fiscal and business strategies could soon squeeze confidence and cash flow, and dent the investment-grade sovereign credit rating along with the human rights one.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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