Bonifacio Global City C3 Block, Taguig City, Metro Manila, Philippines. Bonifacio Global City has been expanded to include this new block as the high end part of the area. This are contains some restaurants as well as some well known high-end brands of clothing and accessories. This block also features the new Dolby Atom and 4-D cinemas. Photo:ryancapulong.com
Signs point to continued growth under Duterte
President Rodrigo Duterte and former President Benigno Aquino present a study in contrasts in leadership styles. The question is whether the differences in personality will affect the politics, policies and, ultimately, the economic performance of the Philippines.
The new government will be formulating its economic and fiscal strategies against a favorable economic and fiscal backdrop. Average real gross domestic product growth since Aquino took office in mid-2010 has been higher than in any previous administration since the 1986 "People Power" revolution. During the January-March quarter of 2016, national government debt fell to its lowest level as a share of GDP since 1997.
These favorable factors led to the Philippines' sovereign credit rating rising by four notches to Baa2 from Ba3 during Aquino's six-year term. Notably, the country's rating went to investment-grade for the first time in 2013.
STAYING THE COURSE
Duterte's party has outlined a 10-point economic agenda that underscores broad policy continuity. The agenda's primary emphasis is on maintaining current macroeconomic policies, and also builds on the key themes emphasized by the Aquino administration, such as ensuring the attractiveness of the Philippines to foreign investors, enhancing tax administration and accelerating infrastructure development.
In line with the anti-establishment bent of his electoral campaign, Duterte has also emphasized that he will focus on more inclusive growth, as seen by his agenda's inclusion of more support for agriculture and education, and the expansion of transfers to low-income households.
The most radical departure that Duterte has indicated he would make from Aquino's economic policy is his willingness to liberalize foreign investment restrictions via changes to the 1987 Constitution. Limits in this area have contributed to the Philippines' low levels of foreign direct investment relative to other countries. The easing of ownership restrictions could significantly support medium-term economic growth.
The credit implications of any future policies for the country will only become apparent over the coming months. In particular, the new government has signaled its willingness to tolerate wider fiscal deficits to accommodate more spending. However, this would entail stepping up public spending -- a departure from the persistent underspending that has contributed to narrow fiscal deficits for much of the past six years.
Indeed, between 2010 and 2015, the Philippines recorded one of the narrowest deficits among emerging countries in the Association of Southeast Asian Nations. In fact, the Philippines was the only country in the bloc to record a fall in general government debt as a share of GDP over that time.
Notwithstanding the impact of any imminent shifts in fiscal policy, growth should remain robust through at least the next two years, and the Philippine central bank will likely maintain its focus on sustaining macroeconomic and financial stability.
Unlike many other more commodity-dependent emerging markets, the Philippines has not experienced a negative terms of trade shock from the turn in commodity prices since 2014. Also, lower prices for energy and food imports have stimulated private consumption, which reached a multiyear high in 2015.
At the same time, rapidly growing services exports and healthy domestic demand have proved resilient to negative spillover from the slowing of the Chinese economy.
POLITICAL RISK
When it comes to sovereign credit ratings, credit analysts have to deal with the assessment of political stability.
As for whether a government under Duterte will be stable, his clear victory in the May election is comparable to Aquino's 15.8-percentage-point advantage during the 2010 polls, and is supportive of political stability. Moreover, a majority of legislators in the House of Representatives are said to align themselves with Duterte, further bolstering the prospects of reform.
The margins of victory in 2010 and 2016 stand in contrast to the 3.5-percentage-point win by Gloria Macapagal Arroyo in the 2004 presidential vote. Combined with subsequent allegations of cheating, Arroyo's narrow margin contributed to recurring challenges to her electoral legitimacy, including attempted coups, impeachment complaints and a mass resignation of cabinet secretaries in 2005.
The Arroyo administration was marked by declining scores in the World Bank's Worldwide Governance Indicators, including those for political stability and the absence of violence, control of corruption and rule of law.
The WGI provide some useful angles to assess the quality of governance across a wide set of countries according to six dimensions: voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption.
These indicators have generally improved since 2010, reflecting the Aquino administration's emphasis on good governance. Over the past few years, policymaking -- such as the budgetary process -- has become more transparent and predictable. The government has also worked toward deregulation to enhance ease of doing business.
The introduction of a competition law has also helped to level the playing field in the private sector. This situation has in turn contributed to stronger investor confidence and economic performance, as well as higher credit ratings.
Duterte's campaign emphasized law and order issues, and burnished the mayor's reputation for being tough on crime and corruption -- a stance somewhat aligned with the "straight path" that Aquino has espoused. However, the new president's comments promoting an extrajudicial approach to addressing crime, for instance, have attracted widespread criticism and could weigh on such elements of governance as the rule of law, political stability and the absence of violence.
We will soon find out whether Duterte's more controversial pronouncements on the campaign trail will translate into actual policy, and if the improving trend in governance will continue. – Nikkei Asia Review
Christian de Guzman is a vice president and senior credit officer for Moody's Investors Service.
