Time for Duterte to deliver on ‘golden age’ vow

The Philippine economy boomed last year, lifting a country once regarded as ‘the sick man of Asia’ among the region’s most buoyant and vibrant economic achievers.

The Philippines Statistics Authority recently announced that gross domestic product (GDP) expanded 6.7% in 2017, among the fastest clips in East Asia lagging only China (6.9%) and Vietnam (6.8%).

This year could be even better, with economists projecting GDP growth of anywhere between 6.7-7.5% driven by expected strong infrastructure spending and tax reforms that aim at boosting government revenues.

President Rodrigo Duterte’s economic success so far owes largely to the inherited reforms and fiscal consolidation of the previous Benigno Aquino III administration. Aquino’s reforms, including a high-profile anticorruption drive, earned a series of credit rating upgrades that boosted foreign confidence and investment.

But has Duterte done enough to sustain the fast growth and confidence in his economic management, or is a reversal likely on the cards? Despite the economy’s recent strong performance and this year’s rosy growth projections, there are several underlying causes for concern, many of them political.

There are already signs of an incipient downturn. New investments dropped by an alarming 90% in the first half of 2017, as many foreigners shied from making new outlays due to rising political uncertainties, including a new drive to change the country’s political system through constitutional change.

Foreign reluctance to invest was also likely fueled by Duterte’s often vulgar and nationalistic jabs at Western leaders, as he shifted his government’s diplomacy more in line with China. At the same time, a promised flood of new Chinese investment, including avowed big infrastructure projects, has not yet arrived for unclear reasons.

Chinese President Xi Jinping (back-right) and Philippines President Rodrigo Duterte (back-left) attend a signing ceremony at the Belt and Road Forum in Beijing, May 15, 2017. Reuters/Etienne Oliveau

The local peso currency hit record lows last year, plumbing levels not seen in over a decade. That, in turn, contributed to weakened household consumption, traditionally one of the nation’s main economic drivers.

Joblessness and self-rated poverty also worsened, while the Philippines plunged in key global rankings, including the World Bank’s ‘Doing Business’ report released in October, which saw the country’s position slip 14 notches to 113th from the previous year’s 99th. Traffic in Metro Manila – despite Duterte’s campaign trail promise to solve the snarl – has also worsened.

Those weaknesses and failings haven’t hit Duterte’s popularity ratings, yet. After a temporary dip, his ‘satisfaction ratings’ rose 10 points to +58% by December, according to a local poll. It marked the second highest rating among the last six Philippine Presidents over the same period, falling just a point under former President Fidel Ramos’ +59%.

Not even Duterte’s contentious move to extend martial law in Mindanao for another year undermined his rejuvenated popularity. Nor has his internationally condemned lethal ‘war on drugs’ campaign. Filipinos seem to have embraced reputedly more subdued tactics as a necessary evil to cut crime and bring law and order to their communities.

Human Rights Watch, a US-based rights lobby, recently estimated 12,000 people have been killed so far in the campaign; the government disputes that figure as “exaggerated.”

A dead body of an alleged drug dealer, his face covered with packing tape, in Manila.

Photo: AFP/Noel Celis 

Duterte’s equally strong support in Congress, especially in the lower house, allowed him to push through his much-touted tax reform bill, dubbed TRAIN (Tax Reform for Acceleration and Inclusion), with relative ease in mid-December.

While the plan will increase taxes on consumption, there has so far been very little criticism of the measure, which the government has promised will “put more money in the pockets” of low-wage workers by exempting those who earn less than 21,000 pesos (US$400) a month.

That muted response could grow vocal if tax exemptions for the poor aren’t enough to shield them from the inflationary impact of new excise taxes on almost every product they consume.

Some analysts project those higher taxes could cause many small businesses to close shop as inflation curbs consumption, especially among lower income groups, currently among Duterte’s most fervent supporters.

The poor are already suffering under his rule. Local pollster Social Weather Stations’ (SWS) latest survey shows that the number of Filipinos who suffered involuntary hunger rose in the last quarter of 2017 by 4 percentage points to 15.9%, hitting an estimated 3.6 million families.

Moreover, the excise tax hike will be implemented against other economic headwinds. Remittances from Filipinos working abroad could dwindle as changing global attitudes threaten to limit overseas job prospects and other economic opportunities.

Overseas Filipino Workers (OFW) before boarding a flight at an international airport in Manila January 12, 2015. Photo: Reuters/Romeo Ranoco

Meanwhile, Socioeconomic Planning Secretary Ernesto Pernia recently said growth in the US$23 billion business process outsourcing (BPO) sector, the country’s top employer with almost 1.2 million workers and one of the economy’s top two dollar earners, has plateaued. (Foreign remittances are the other top dollar earner.)

Government plans for all-out spending on a self-claimed “golden age” of infrastructure building, with some US$71.8 billion scheduled over the next three years and possibly up to US$180 billion through 2025, could also impact negatively on the economy if the funds are not well spent, as has been the case in the past.

Duterte’s administration has promised this year will be the busiest for building, with 34 of 75 announced flagship projects, around one-third of them airports, scheduled to break ground. That compares to just 15 major projects started last year.

Philippine governments have a poor track record of implementing big infrastructure projects and finishing them on time and within budget, especially with multiple projects running simultaneously. Corruption is also a perennial issue, often leading to shoddy work.

There are already questions about where the government will get all the skilled labor needed to complete multiple big projects. The head of the Philippine Chamber of Commerce and Industry, George Barcelon, recently said that the lack of skilled labor is often the cause of delays in private sector projects.

Restrictions on foreign equity and participation in the construction industry raises more questions, including if there is enough capability among local players to take on massive multiple projects without slowing down private sector-led projects, as contractors shift towards potentially fatter and less rigorously scrutinized state ones.

A construction worker on the 5.58 kilometer elevated highway project in Caloocan City, metro Manila, on August 2, 2017. Reuters/Romeo Ranoco

The Philippines posted its biggest-ever trade deficit in November as imports of capital goods for building surged. That’s put pressure on the balance of payments which will likely accelerate this year, some fear to unsustainable levels. The peso has already resumed last year’s downward trend, falling back recently to 51 pesos to the dollar.

But the biggest potential risk to the economy is arguably political. A determined move by pro-Duterte politicians in the Lower House of Congress to amend the constitution under the guise of improving the business climate by removing various protectionist provisions is making political waves that if allowed to build could hit stability.

Critics of charter change say it is self-serving as proponents also aim to extend their own terms in office, including that of the president, through a proposed shift to a parliamentary system. Duterte is currently limited by law to one six-year term; he has strenuously denied he has ambitions to serve longer.

Interestingly, the same protectionist provisions in the constitution pro-Duterte congressmen now aim to overturn were recently used to silence one his toughest and credible media critics.

The Securities and Exchange Commission said earlier this month it would cancel the certificate of incorporation of online media publication Rappler for allegedly violating foreign ownership restrictions on media companies enshrined in the constitution.

Rappler has denied it violated the law and has challenged the order in court, but fears are rising Duterte’s government is moving to eliminate the few remaining checks and balances left on his rule, raising concerns of transparency and accountability at a time of rising economic uncertainty and surging government spending.