Sharp policy swings limit the Philippines’ ability to cash in on China’s outbound infrastructure spree.
After Philippine President Rodrigo Duterte came to power in 2016, relations with China improved. Trade and tourism grew and investment pledges streamed. Duterte’s flagship infrastructure program, “Build, Build, Build,” saw synergy with China’s Belt and Road Initiative and negotiations for a proposed joint oil and gas exploration in the South China Sea began.
But with just two years left in office for the Duterte administration, political risks associated with leadership change may dampen Chinese expectations for big-ticket projects and a resource cooperation deal over a disputed sea.
The Philippines has one of the most volatile ties with China in Southeast Asia. Extreme swings in Manila’s approach toward its big northern neighbor manifested in the shift from an accommodating Arroyo administration (2001-2010) to a confrontational Aquino government (2010-2016).
When Duterte took the helm from Benigno Aquino, the pendulum returned to a friendly stance. But with another leadership change looming on the horizon, concerns about where the pendulum might land in 2022 are giving jitters to Chinese investors, official pronouncements aside.
The wariness is not unwarranted. A national broadband-network project with Chinese telecommunications firm ZTE was canceled in 2007. A trilateral offshore exploration agreement in the South China Sea among the state-owned energy companies of the Philippines, Vietnam and China was discontinued in 2008. A railway being built by Chinese state-owned enterprise Sinomach to link Manila with neighboring province Bulacan was suspended and eventually canceled in 2012.
These uninviting precedents diminish, if not determine, Beijing’s eagerness to work with Manila in addressing the latter’s infrastructure woes despite improving ties in recent years.
In contrast, other Chinese-backed projects in Southeast Asia fared better. The East Coast Rail project in Malaysia survived the transition among three leaderships – Najib Razak, Mahathir Mohamad and Muhyiddin Yassin. Controversies that initially hounded the project led to its reconfiguration during Mahathir’s time in office, after which it was resumed.
In Indonesia, the re-election of President Joko Widodo guarantees the continuity of the Jakarta-Bandung railway project, the country’s first high-speed line. In Thailand, the shift from civilian to a military-backed leadership did not halt plans to work with Beijing. A contract for the proposed Bangkok-Nakhon Ratchasima railway line is expected to be signed by October.
Likewise, political reforms in Myanmar since 2011 did not upset the China-Myanmar Economic Corridor projects with the Muse-Mandalay railway line set to start this year.
Thus, compared with its neighbors, the Philippines has been a laggard in terms of sustaining Chinese investments. Big-ticket projects like railways take time to prepare and execute especially in countries with weak absorptive capacity. Hence disruption that comes with leadership change is a serious risk that can discourage investors. Keeping top-level support that can weather domestic political power shifts is thus important.
While unresolved maritime disputes do affect bilateral ties, they are not necessarily deal breakers, as Indonesia and Malaysia showed. Neither is corruption or irregularities an obstacle that cannot be hurdled as renegotiation is available, as Malaysia resorted to. But Manila’s sharp policy swings are holding back Chinese enterprises from expanding infrastructure commitments in the country.
And while the Covid-19 pandemic slowed Chinese-backed regional infrastructure projects, they have since gathered steam. The Malaysian East Coast Rail project resumed in late April. The Jakarta Bandung line is nearly half complete, with a third tunnel finished in April. A 174-kilometer road that runs along the Cambodia-Thailand border was inaugurated in February and construction for a new airport at Siem Reap, which will be Cambodia’s largest upon completion, began in March.
In the Philippines, the Chinese-funded Kaliwa Dam that can enhance Metro Manila’s water security is expected to break ground this month or next. A cargo rail service to link Subic and Clark on the main island of Luzon has entered procurement stage. But prospects for other mega-projects like railways to southern Luzon and Mindanao are unclear.
Progress on projects that encroach on indigenous lands and fragile ecosystems like the Kaliwa Dam may stall because of public opposition. This also happened with the suspended China-funded Myitsone Dam in Myanmar. Meanwhile, renewed tensions aside, the slump in global energy markets also reduce the urgency of pursuing joint development in the South China Sea.
Getting a project to hit the ground generally provides some insurance against an abrupt turnaround. But while this may be the case for other countries in the region, it does not necessarily hold for the Philippines.
For instance, the China-backed Northrail project linking Manila with Malolos in neighboring Bulacan province was derailed despite commencement of construction. The project hatched during Gloria Macapagal Arroyo’s presidency was discontinued with no alternative provided during Aquino’s watch.
Thus while projects under development like the southern Luzon and Mindanao railways are more susceptible to getting scuttled, even projects that matured into implementation stage are not safe.
Political disruption remains by far the biggest risk for infrastructure investors in the Philippines.
Insulating deals from domestic political oscillations will go a long way in sending the right signals not only to China, but to other foreign investors as well. An even-handed approach in dealing with Beijing to manage disputes while advancing economic ties is imperative.