In a year of depressing economic stories in Asia, none arguably is more of a downer than the relapse of the region’s “sick man”
Granted, the Philippines under Rodrigo Duterte had been an economic car-crash-in-slow-motion since 2016. But it took the pandemic to really drive the nation off the path toward Asian tigerdom it was on prior to his arrival in the presidential palace.
In recent years, “the Philippines was one of the fastest growing economies in the world,” says Brookings Institution economist Ronald Mendoza. “It finally shed its ‘sick man of Asia’ reputation, obtained during the economic collapse towards the end of the Ferdinand Marcos regime in the mid-1980s. After decades of painstaking reform — not to mention paying back debts incurred under the dictatorship — the country’s economic renaissance took root in the decade prior to the pandemic.”
Yet the Duterte era had already weakened the economy’s immune system before Covid-19 hit. It allowed all too many of the nation’s bad old habits to return — not least rampant corruption.
While the pandemic gets most of the blame, it was the Duterte policies from 2016 to 2019 that left the place such easy prey for Covid-19 turbulence. This neglect also explains why Manila is experiencing the worst of the stock-market rout hitting Southeast Asia this month.
When Duterte took office, the Philippines was the toast of the region. Predecessor Benigno Aquino had spent the previous six years tending to the Marcos-era dysfunction that had trapped so many Filipinos in poverty and forced more than 10% of the population to work abroad so they could wire salaries back home.
From 2010 to 2016, Aquino surrounded himself with capable ministers, attacked graft, increased transparency and public accountability, went after tax cheats and strengthened government institutions. He even took on the powerful Catholic Church to devise population control measures.
In short order, Manila won its first-ever investment-grade rating from all three major credit-grading companies. The Philippines was raking in billions of dollars of foreign direct investment. Economic growth rates entered the 8% range, rivaling China.
Duterte was elected to turbocharge the Aquino-era reforms. He’d earned folk-hero status from his 22 years running the southern city of Davao. As a tough-talking mayor, Duterte was reputed to have generated faster growth rates and lower crime rates than the national average. Voters saw him as just the accelerator Manila needed to find another economic gear — a higher one.
Unfortunately, Duterte pivoted to law and order, figuring the economy could wait.
Most Southeast Asian countries face challenges with illegal drugs. Only Duterte waged a bloody, whole-of-government assault on the narcotics trade. Suddenly, the Philippines was getting more global attention from human-rights groups – the bad kind – than from investment banks.
Covid-19 changed everything. Before the pandemic, Duterte could live off the rapid gross domestic product rates he inherited. Nor was the microeconomic backsliding since 2016 front-page news. The pandemic, though, found a Duterte government unready for prime time.
The chaotic response to the pandemic made the Philippines one of the worst places to be these last 22 months. In late October, Duterte’s Philippines was worst-in-the-class in Bloomberg’s Covid Resilience Ranking for a botched response. It put Manila well behind Indonesia, Vietnam and other regional rivals.
It also sheds some light on why the Manila stock exchange has experienced the worst of a regionwide selloff. Between the Omicron variant and the specter of US Federal Reserve rate hikes, global investors are moving cash into perceived safe-havens.
Corruption comeback
Duterte’s shaky Covid-19 response has punters paying more attention to perhaps the most damning metric of recent years: Manila’s deteriorating corruption rankings.
The most followed metric comes from Transparency International, which publishes the annual corruption perceptions index. In the latest, Manila’s ranking worsened to 115th out of 180 economies.
In 2019 alone, the Philippines dropped to 113th from 99th place in 2018. Aquino had bequeathed Duterte a 95th ranking – progress the current president is undoing year after year. The more a government’s mechanics and focus are warped by corruption, the less equipped it is to handle a pandemic – or increase combativeness. This dynamic is playing out exactly as feared.
Things could be about to get worse as electioneering for the May 9 presidential contest gets underway. Constitutionally, Duterte can only serve one term. So, Duterte is backing Ferdinand Marcos Jr, namesake of the earlier mentioned dictator who created the kleptocratic system Aquino worked to dismantle.
When Marcos Sr was elected in 1965, the Philippines was a booming economy and tipped to be the Japan of Southeast Asia. Over the next 31 years, until he was ousted amid “People Power” protests in 1986, Marcos gutted the economy. Around the time Aquino arrived in office 24 years later, Transparency International was ranking the Philippines in the same orbit as Nigeria.
Many investors fear what a Marcos 2.0 regime might do to a geopolitically vital nation.
“Corruption and cronyism will be significant watchpoints under Marcos,” says analyst Peter Mumford at Eurasia Group. “Though,” he adds, “this has been the case under most presidents, including – despite his populist ‘drain the swamp’ rhetoric – Duterte.”
Marcos #2?
A big problem is how Duterte has a Donald Trump-like skill for getting supporters to vote against their economic interests. To be sure, Duterte also learned this trick from Aquino’s predecessor Gloria Arroyo and former President Joseph Estrada before her.
The strategy is to get growth to 5% or above via massive government spending – all financed with new debt – and then move on to other pursuits. Early in his term, Duterte rested on Aquino’s laurels. Then Duterte undid many of Aquino’s pro-transparency reforms on, say, giant infrastructure projects.
Aquino made openness, accountability, environmental studies and public-private partnerships central to building projects, in part to root out corruption. Duterte felt that was too slow and bureaucratic. The pivot back to some of the old ways is great for rent-seeking middlemen, but few others.
While no one knows where the Omicron variant will take the global economy, Simon Knapp at Oxford Economics says that “after being hit by major disruptions battling the pandemic in 2021, Japan, Indonesia, Malaysia, the Philippines, and Thailand will all see stronger growth in 2022.”
He adds that “given the scope for catch-up from the worst of the crisis, we expect Indonesia, Malaysia, the Philippines, and Vietnam to all grow by 6 percent or more next year,” or nearly double the 2021 pace.
That could help Duterte make the case for a Marcos-Sara Duterte government, arguing it represents continuity. Yet, as many economists point out, the loss of reform momentum is leaving the Philippines weaker today than it was in 2016 – and on a more fragile trajectory going forward.
“As the recovery gains traction, it will be important to enhance private sector participation in the recovery by deepening current efforts to make the country’s business environment favorable to job creation while upskilling the workers so that they can benefit from new or emerging job opportunities,” says World Bank economist Ndiame Diop.
Diop adds that reforms to open more sectors to foreign investments, streamline administrative procedures to facilitate market entry and encourage firms to adopt new technology are measures that can boost private sector growth, create more jobs, and strengthen recovery.
Will any of that happen in a Marcos-Duterte era? The odds are depressingly low.