The Philippines is no longer the “sick man of Asia,” but its economy is showing troubling signs of a relapse at the very worst moment as Covid-19 slams the region.
The World Bank sees its economy contracting 8.3% in 2020, more than double the 3.6% drop the lender predicted four months ago. Sister institution the International Monetary Fund thinks President Rodrigo Duterte’s nation will be left “significantly scarred” for years to come.
Investors know this all too well. The Philippine stock market is down 20% this year – one of Asia’s worst performers – and the peso is down more than 4% since January.
Yet some of that scarring began long before Manila confirmed its first coronavirus cases early this year. And much of it can be laid at the door of Duterte.
The president has famously – or notoriously, if you prefer – unleashed a lethal war upon drugs, but also suffers from his own macro-economic addictions – addictions that are drawing his eye away from key tasks.
The rash of problems that beset the country can be traced back to the days of the Ferdinand Marcos regime, that crashed out in 1986. The recurrence of dysfunction began in June 2016 when Duterte moved into the presidential palace.
Duterte took over the reins from Benigno Aquino, who over the preceding six years had worked to extract the Philippines from the Marcos Inc kleptocracy that had clung on for decades, and still holds major sway today.
Aquino increased transparency and accountability and repaired the national balance sheet enough to win Manila’s first investment-grade rating ever. Before long, the nation’s growth rate was rivaling China’s.
The Aquino clan walks with unmistakable Shakespearean echoes. In 1983, Benigno’s father challenged Marcos for power, only to be assassinated on the airport tarmac in Manila. His mother, Corazon, led subsequent people-power protests that prompted Marcos to flee the county. She replaced Marcos as president in 1986.
It fell to the son to finish the work of his parents – until Duterte entered from stage left.
He was elected to the presidency on the strength of his 22 years as the tough-guy mayor of the notoriously hard-to-govern southern Davao City. There, he’d become a folk hero thanks to Davao often performing better in terms of economic growth, crime and efficiency than the national average.
The task ahead of him on the national front was clear: turbocharge Aquino’s reforms.
But instead, Duterte pivoted to a war of choice against the drug trade, shelving economic reforms. Most governments in Southeast Asia face narcotics-industry troubles. Only Duterte’s, though, deputized bands of gunmen to fire and kill at will – in ways that alarmed Amnesty International and foreign investors alike.
Four-plus years on, the Philippine economy is paying the price for Duterte’s law-and-order distraction. On his watch, Manila lost the ground it had gained during the Aquino years on several fronts, including the campaign against graft.
Between 2018 and 2019 alone, Manila’s grade in Transparency International’s Corruption Perceptions index fell 14 notches to 113th. The Philippines risks plunging back toward the 146th place ranking that Aquino inherited when he took office in 2010.
One big reason is speed. Aquino’s government tended to be slow in greenlighting massive infrastructure projects. His public-private partnership model prioritized checks and balances and environment sustainability. Laudable goals, but they created the impression of gridlock.
Duterte, though, okayed several giant projects contributing to Manila’s plunging corruption ranking. Equally bad, Duterte favors a government-led model that may see a return of excessive borrowing and fresh opportunities for myriad rent-seeking middlemen that Aquino removed from the equation.
By being Mr Macro to Aquino’s Mr Micro, Duterte’s economy slowed faster than its peers. Here, a couple of economic addictions that Duterte’s gunmen can’t stop are boomeranging on the economy.
One addiction is to rapid gross domestic product growth. All too often, Philippine leaders think their job is done when GDP growth exceeds 5%, and move on.
That was certainly the pattern in the nine-plus years Gloria Arroyo, Aquino’s predecessor, spent in the presidential palace. Ditto for the two-and-a-half years from 1998 to 2001 when Joseph Estrada ran the nation.
Over that 12-year period, the Philippine government was far more obsessed with the quantity of growth than the quality. And now, it seems, Duterte, too.
The second addiction is remittances. Along with weak consumer confidence, Southeast Asia’s No 3 economy is seeing extreme volatility in the cash more than 10 million Filipinos working abroad send home to families.
These inflows are a lifeline for domestic retail sales, property prices and Manila’s balance of payments. Yet they’re a major vulnerability amid a pandemic emptying the hotels, restaurants, cruise ships and construction sites employing Philippine staff around the globe.
“The loss of remittance support to household consumption will likely be felt well into 2021, weighing on prospects for a quick economic recovery,” says economist Nicholas Mapa of Dutch bank ING. He adds it could further dent the peso “with import demand expected to bounce at a time wherein structural flows from remittances and business processing services remain fragile.”
Remittance economies suffer other problems, too.
One is a brain drain as so much of the young labor force flocks abroad. It puts workers in harm’s way when social unrest breaks out or a pandemic hits. It also dis-incentivizes Philippine governments to create good-paying jobs at home.
Duterte is deepening this addiction.
Since 2016, he’s championed creating the Overseas Filipino Bank to grow the diaspora sending money home. He wants a cabinet-level department to oversee the exporting-people process.
These are hardly the actions of a leader looking to kick the economy’s remittances habit.
Good signs, bad signs
The good news is that Duterte’s team is indeed taking scattered steps to raise the nation’s economic game.
Last month, the Philippine Stock Exchange revised startup-listing rules for small-and-medium-size enterprises to catch up with neighboring economies. The changes, says PSE President Ramon Monzon, are so that Manila “can be aligned to what is practiced in the region.”
The bad news is that Duterte isn’t doing nearly enough to create more jobs from newly-minted companies or increase competitiveness. Indonesia, for example, is blowing the doors off the Philippines on the tech “unicorn” front – by five to one.
On top of those thousands of drug-war body bags worrying Amnesty International, Duterte’s clampdown on media freedoms may give pause to multinational companies looking to diversify production.
Reduced transparency – and accountability – is driving up the cost of investing in the Philippines. The last thing Manila’s Covid-19-weakened economy needs is overseas punters having yet more reasons to avoid its economy.
There’s optimism that 2021 will be a better year. IMF economist Yongzheng Yang is betting on “pent-up demand” after months of strict coronavirus quarantines. Even so, “it will take a couple of years before real GDP returns to the pre-pandemic – 2019 – level,” Yang says.
Kelly Bird, Philippine country director at Asian Development Bank, hopes the “worst is now over and that the contraction in GDP bottomed out.”
The ADB, based in Manila, has been doing its part.
Bird says it “has thrown its full support to the government’s Covid-19 response,” providing about US$2.3 billion in loans and grants to support the pandemic containment moves.
In the best-case scenario, Bird says, “we expect the recovery to be slow and fragile for the rest of this year, and growth to accelerate in 2021 on the back of additional fiscal support and an accommodative monetary policy stance.”
Yet two caveats loom large here.
One is that a second wave of Covid-19 infections could quickly scuttle optimism about 2021. The second is how little Duterte has done these last 1,575 days to build economic muscle as the region around him limbers up for the future. That’s undermining the entire financial system.
“Weak domestic consumption and accelerating credit impairment are turning banks’ operating environment more challenging,” says analyst Willie Tanoto at Fitch Ratings. He flags concerns about “further asset-quality deterioration in 2021.”
Credit costs, he says, “are likely to remain elevated in 2021 even as they decline from 2020’s unusually high levels, which will exert continuing pressure on earnings and profitability.”
The second caveat is the real problem: The last 51-plus months have been more about law and order, settling scores and even rehabilitating the Marcos name than building on Aquino’s reform success. This latter effort has Duterte advocating for Ferdinand Marcos Jr to serve as vice-president.
Amid Manila’s bluster and bloodshed, Vietnam is winning a disproportionate amount of the business from multilateral companies diversifying away from China. And nearby Indonesia is cultivating a startup scene that’s leaving the Philippines behind.
Duterte’s strategy of resting on Aquino’s economic laurels is backfiring on Manila at the worst possible moment. And ensuring that 2021 could be an even bumpier year for a nation that just a few years ago seemed on the mend.