Duterte inherits $300-b economy

Investors bought stocks of companies with a strong presence in Mindanao and dumped equities related to liquor and cigarettes last week, as they speculated on the economic platform of Davao City mayor Rodrigo Duterte, who is poised to become the next president.

Duterte, a 71-year-old lawyer who caught the imagination of Filipino voters because of his firebrand politics and brash language during the campaign period, cornered around 38 percent of the votes, the highest among five contenders, during the May 9 presidential election and was scheduled to be inaugurated 16th Philippine president on June 30.

His general and quick pronouncements about being “leftist” worried investors while his  “rape” remarks shocked members of the diplomatic corps.  His push for federal form of government and constitutional amendments also raised suspicion among businessmen.

Businessmen fear that a policy misstep could derail economic growth and throw thousands of Filipinos out of jobs.  Duterte is inheriting an economy that grew nearly tenfold over the past three decades, from $33.1 billion in 1986 to more than $300 billion in terms of nominal gross domestic product today, as per capita income also increased five times from $591 to over $3,000 over the same period. Philippine population nearly doubled over the past 30 years.

Growth became possible as Bangko Sentral ng Pilipinas successfully controlled runaway inflation and tamed the peso-dollar exchange rate, two crucial factors in economic stability.  With annual foreign exchange inflows of more than $60 billion in terms of workers’ remittances, business process outsourcing revenues and tourism receipts, the economy now enjoys a balance of payments surplus as well as record gross international reserves.  The Philippines is also recognized as the fastest growing real estate and automotive market in the world today.

Despite these economic feats that saw the rise of major conglomerates, poverty and hunger remain widespread especially in rural areas. In cities, record vehicle sales and construction of commercial districts resulted in road congestion, as the government failed to convince property developers to construct mass housing in centers of economic activities.

Healthcare and education costs have been increasing, as the Aquino administration attempted to privatize public hospitals and state-run universities, while selectively trying to keep the operation of mass rail transit, which is one of the least efficient in the world.

As president, Duterte will be in charge of a government with a record budget of more than P3 trillion to serve 105 million Filipinos.  The Philippines also posted an average annual growth of 6.2 percent over the past six years, one of the fastest among emerging economies. Over the next six years, the Philippines is projected to become an upper-middle-income economy, joining Southeast Asian neighbors Thailand, Malaysia and Indonesia.  By 2050, the Philippines is projected to be one of the largest economies on the planet, given its young population, with an average age of 23.5 years today.

To calm the anxious business community, Carlos Dominguez, a former agriculture secretary who served as a campaign finance manager of Duterte, unveiled an eight-point economic agenda. “We will continue and maintain the current macroeconomic policies,” Dominguez said in a televised news briefing from Davao City.  Dominguez, an economics graduate, owns a popular hotel in Davao and is Duterte’s childhood friend. He was also a banker and a director in several mining, agriculture and manufacturing companies.

Dominguez said the continuation of current macroeconomic policies will be complemented by reforms in the Bureau of Internal Revenue and the Bureau of Customs. The Duterte administration will also accelerate infrastructure spending to account for 5 percent of the gross domestic product and address major bottlenecks in the public-private-partnership program.

The new government will attract more foreign direct investments by addressing restrictive economic provisions in the 1987 Constitution and follow the economic model in Davao City. “We will use Davao City model where licenses for doing business are given the shortest possible time,” Dominguez said.

It will pursue a genuine agricultural development strategy that provides support services to small farmers to increase productivity, improve market access and develop agricultural value chain by forging partnership with agribusiness firms. “It means we are going to encourage more agriculture processing. This is a rural development strategy, not just an agricultural strategy,” Dominguez said.

Dominguez said the Duterte administration will address the bottlenecks in land administration and management system by ensuring security of land tenure to encourage investments and make projects more bankable by addressing bottlenecks among four land titling agencies.  It will also strengthen basic education with focus on skills in communication, mathematics and logical thinking and grant scholarship for tertiary education which are relevant to the needs of the private sector.

The seventh economic agenda is to improve the income tax system to enable those who earn little to have more money in their pockets, by indexing tax to the inflation rate. Finally, it will expand and improve implementation of the conditional cash transfer program, which extends subsidies for the education of poor children.

While pursuing the eight-point economic agenda, the Duterte administration will remove opportunities for corruption, catch people involved in corruption, promote tourism in rural areas and expand PhilHealth coverage.

Dominguez, who is likely be appointed as Duterte’s head of economic team and finance secretary, said the new administration would push for changes to the 1987 constitution and review foreign ownership limits. 

Other possible members of the Duterte Cabinet are former press secretary Jesus Dureza and vice-presidential candidate Alan Peter Cayetano, after a one-year rest.  Duterte may also seek advice from former president Fidel Ramos, who was caught in a photograph endorsing Duterte during the campaign period.

The Philippine peso and the local stocks rallied last week, after the generally peaceful elections gave a clear mandate to the next president.  Property developers saw their stocks rise, as they are expected to benefit from Duterte’s push for countryside development.  On the other hand, stocks of LT Group and Emperador Inc., which sell cigarettes and liquor, fell on speculation that Duterte will declare nationwide smoking ban on public areas and limit the sale of alcoholic drinks to certain hours, replicating the policy in Davao City.

In his previous appearance before the elite Makati Business Club, Duterte said the land reform program had failed to uplift the income of Filipino farmers.  Davao City is known for large banana and pineapple plantations.  Duterte also said progress would only be possible if there is “peace and order.”

International credit rating agencies, which bestowed the Philippines sovereign investment-grade ratings under the Aquino administration, believe that the country will continue to perform well under a Duterte presidency.

“We expect fiscal and economic policies under the incoming administration to remain supportive of the ‘BBB’ long-term rating on the Philippines,” Standard & Poor’s said.

“We expect the incoming administration to continue with policies that had contributed to sovereign rating improvements in the past few years. Duterte’s track record of more than 20 years in Davao gives few indications that he would embark on economic policies significantly different from the Arroyo and Aquino administrations,” S&P said.

“Consequently, we believe the new administration will maintain fiscal policy to keep fiscal deficits to low single-digits. Policies affecting businesses are also likely to be supportive of continued investment growth. In the near term, however, businesses in the country may be more cautious about expanding given the uncertainties over the new government’s policy orientation,” it said.

Fitch Ratings also said the results of the presidential elections would not have “immediate” impact on the sovereign rating and outlook of the Philippines.

Fitch said it continues to view the Philippines’ underlying economic fundamentals as a strength. These include the strong net external creditor position, declining general government debt and deficit levels and positive growth momentum. 

London-based think tank Capital Economics is not as optimistic.  “With the highly controversial Rodrigo Duterte riding high in the polls ahead of presidential elections, the country could be about to take a backward step,” Capital Economics said in its Emerging Asia Weekly issue, ahead of the May 9 elections.

“One of the key features of the past six years has been a return to political stability and an absence of coup attempts. The military might not be as tolerant of someone who wants to change the system,” Capital Economics said. 

French investment bank Natixis, however, believes that Duterte should not be judged according to his off-the-cuff remarks.  “We argue that if we judge a man by his actions and not his words, then Duterte may actually be rather positive for the Philippines and is the right person to take the country to the next level,” Natixis senior economist Trinh Nguyen said.

“Both the Arroyo and Aquino administrations lowered the fiscal deficit, improved external balances, and boosted growth. The next step is to resolve long-standing challenges such as security, infrastructure and jobs. And Duterte’s transition team 8-point economic plan seems sane and credible, in sharp contrast to his crass remarks,” Nguyen said.