President of the Philippines, Rodrigo Duterte began the second half of his six-year term in late July. These are some of the challenges and opportunities that could emerge for business in the last three years of his presidency.
Four key risk points:
1. Duterte appears likely to sustain a moderate-to-high level of popular support, which reduces the likelihood of him resorting to controversial pronouncements and decisions that marred his first three years in office.
2. His administration’s focus on the telecommunications and infrastructure sectors is likely to incrementally improve the country’s operating environment. New policies will adjust fiscal incentives and encourage investments outside the Manila capital district.
3. However, other key elements in Duterte’s reform agenda, particularly those relating to labour regulation, the ease of doing business and market access, are unlikely to be carried out in the coming years.
4. Corruption scandals and Duterte’s pro-China foreign policy are likely to constitute occasional sources of political tension in the lead-up to the 2022 presidential election, and cause uncertainty for affected projects and sectors.
And the category is … confidence
The latest polling data (published in July) from domestic pollsters Social Weather Station (SWS) and Pulse Asia, combined with the outcome of the mid-term elections in May, indicate that Duterte is currently enjoying the highest level of domestic popularity in his presidency (he obtained an 80% approval rating in the SWS poll and 85% in Pulse Asia’s survey). There is a credible chance that his approval ratings will follow the pattern of those of his last five predecessors and suffer a drastic fall in the next two years, but several factors make this less likely. These include the Duterte administration’s ability to effectively communicate its accomplishments and stifle criticism, the president’s ability to keep his congressional coalition intact and the widely held assumption that his daughter and Davao city (southern Philippines) mayor, Sara Duterte, will make a formidable candidate in the 2022 presidential election (which prevents Duterte from becoming a lame duck president) – factors which the country’s previous chief executives were not able to take advantage of.
In any case, Duterte enters the second half of his presidency confident as ever. As long as his domestic popularity remains high, he is unlikely to resort to decisions and pronouncements that were designed to silence the political opposition but inadvertently spooked investors, such as previous attempts to imprison high-profile critics and threats to establish a “revolutionary government”.
Mixed forecast for reform outlook
In terms of Duterte’s reform agenda, his administration’s focus on telecoms and infrastructure since 2016 has delivered the most apparent results, given that these sectors had the most room for improvement. Duterte’s fiery rhetoric against the country’s two telecoms giants made improving mobile and internet services in the country – which are slower and more expensive than those in less developed markets like Laos and Myanmar – a top priority. A competitive bidding process in November 2018 paved the way for the scheduled launch of a new major player in the sector by 2020 (albeit led by a businessman close to Duterte). Emergent players in the broadband space were also able to take advantage of Duterte’s popular agenda for the sector to grow their market share vis-à-vis the two incumbents.
Although the government’s infrastructure spending in 2018 reached its highest level at 5.1% of GDP, this figure is lower than the spending target of 6.3% for the year due to major implementation challenges in the Department of Transportation (DOTr) and Department of Public Works and Highways (DPWH). Further, out of the 75 projects that are part of the administration’s ambitious infrastructure programme, only two have been completed and nine are under construction thus far. Nevertheless, the pace of implementing this programme is likely to improve in the coming years as the government gradually overcomes teething issues associated with the rapid expansion of infrastructure financing under Duterte. This includes financing through unprecedented loans from international financial institutions, and other countries such as Japan and China.
To increase government revenues and repay loans, the Duterte administration is likely to prioritise tax reforms, which would have a mixed impact on foreign businesses. For example, the second package of the government’s tax reform programme, which Congress (legislature) will tackle in the coming months, seeks to lower the corporate income tax rate (currently at 30%), but offset these by rationalising fiscal incentives in sectors like manufacturing and business process outsourcing (BPO). The government is also likely to be less willing to grant tax incentives for companies that want to set up facilities and operations in Manila to encourage development outside the capital district – one of Duterte’s key campaign pledges.
Other key elements in Duterte’s reform agenda – such as labour regulations – are much less likely to yield results. The high costs of recruiting and terminating employees have resulted in the widespread practice of labour contractualisation, which Duterte vowed to end. However, the administration has so far relied on arbitrarily ordering companies to “regularise” its workers in order to appease labour groups. There are no indications that Duterte will be able to implement labour reforms amid labour groups’ intransigence and domestic conglomerates’ clout.
The administration also lacks the political will to improve the ease of doing business, for which the World Bank rates the Philippines as much worse (124th out of 190 economies in 2018) than regional peers like Indonesia (73rd) and Vietnam (69th). The much-celebrated Revised Corporation Code and Ease of Doing Business Law are unlikely to bring about meaningful improvements in this regard. This is mainly because onerous processes at the local government levels (province, city and village) constitute the most common sources of operational challenges encountered by businesses. Given national-level politicians’ reliance on local officials for support and endorsement during election campaigns, Duterte is unlikely to successfully implement reforms in cutting red tape during his remaining term in office; he has over the last three years demonstrated his reluctance to alter dynamics within the local government levels.
Hopes that the constitutional limits on foreign investments – capped at 40% in sectors such as public utilities – would be lifted have likewise dissipated since it became apparent that efforts to amend the constitution were grossly mismanaged. The opportunity costs that these foreign capital restrictions represent are likely to become more significant in the coming years amid a negative outlook on the economy’s main sources of foreign exchange, namely overseas remittances and the BPO sector.
Cloudy with a chance of political tension
Duterte’s reform agenda is likely to take a back seat to considerations related to the 2022 presidential election, to which the administration’s attention and resources are increasingly likely to be devoted in the coming years. Business and political interests that have disproportionately benefitted under Duterte are profoundly incentivised to ensure that Sara Duterte succeeds her father in 2022. Meanwhile, other presidential aspirants who wish to challenge her are likely to quietly undermine her father in the coming years. These individuals are likely to fuel controversies (probably through proxies) involving Duterte’s soft stance on perceived Chinese aggression in the South China Sea and on the proliferation of Chinese workers in the country. Corruption scandals that involve Duterte’s inner circle or family members are also likely to be part of such efforts. Potential controversies could compel Duterte to suspend projects or government programmes to maintain his daughter’s prospects in 2022, posing operational risks for affected businesses.
Part of the Big Picture Series, taken from Seerist.