Crossroads (Toward Philippine economic and social progress)
Philippine Star, 2 November 2016


When President Duterte announced during  his China visit that the Philippines was“separating from the United States” militarily and economically, he shocked his countrymen and the US too.

This development introduced a different message to many observers, including foreign investors and businessmen with a growing interest and commitment to the country’s future.

The President’s statement introduced an element of uncertainty concerning the country’s economic future. Indeed, upon his return home, it became essential to explain in order to limit damage.

As it turned out, President Duterte was articulating a pivot toward “an independent foreign policy.” He was not “breaking relations” with the United States. Normal relations would continue. He had hinted in a number of occasions that a re-examination of the country’s military cooperation with the United States would be taken.

However, in his visit to Japan (which quickly followed the China trip), President Duterte affirmed support of Japan’s security arrangements in the region. The United States is strongly allied with Japan on issues of security in Asia and the Pacific, specifically the conduct of trade and navigation in the South China Sea.

The best clarification given as “damage control” is attributed to his economic managers. The Philippines seeks a rebalancing of relations, especially with Asian neighbors. Put in this context, there is little alarming about the expansion of relations with China..

Economic uncertainty rises. Greater economic uncertainty has arisen in view of the anticipated prolonged war against illegal drugs which will continue to demand resources from the government. This has been aggravated by intermittent and unexpected opinions expressed by the President, often cursing or expressing strong opinions against his favorite targets, those who criticize the war on drugs.

Of course, another consequence of this is government’s relations with international and bilateral institutions. The President’s reactions to criticisms leveled at the human rights aspect of the war on illegal drugs has led President Duterte, in his inimitable personal style, to use strong language and undiplomatic messages that involve institutions, and even other leaders and officials. This has created for him a special, colorful and volatile identity in the minds of other observers.

The President’s intemperate responses to criticisms have become the stuff of legend. They have accumulated a pool of impressions in the press and media reports, spreading beyond the national boundary and finding their way to international consciousness.

Some signs of increased volatility can be found in several short term indicators. We see this from the nervousness of investors as they begin to hesitate to look at the country favorably, because they hear of negative news.

Three signs of weakness come to mind: (1) Stock market volatility has been high (2) Peso depreciation has been marked especially in recent months (3) Investors delay and hold back.

Stock market. Stock market volatility is to be expected. Early during the advent of the Duterte administration, the market index rose, which was a sign of positive assessment. In fact, by late July to early August, the market peaked beyond the 8,100 limit. This was not sustained and the index fell back to 7,500.

Market volatility has been influenced by adjustment of investors to the impending interest rate hike of the US Fed. Additional fluctuations have been due to reactions to the uncertainty posed by presidential statements.

There has been a massive net outflow of portfolio investments in Philippine stocks. Some of the outflows have gone to other safe investment havens.

Peso depreciation.  The peso has remained within a range of 46 to 47 pesos per dollar for sometime. Since the advent of the Duterte administration, there has been a marked decline.

This is partly due to the massive portfolio net outflows. In September, the decline of the peso was significant. Prior to September, the peso was the most stable among the Asian currencies. But since September, the peso has become the weakest currency among its neighbors, falling to the 48 pesos range per dollar. Indeed, many Asian countries have tracked the US dollar or have slightly been ahead of it.

The weakening of the peso could be seen in a better light. It might induce more exports. For this to happen on a large scale, the country has to host a larger level of foreign direct investments engaged in exports to many countries.

FDIs hold back. Recently, the president of the European Chamber of Commerce of the Philippines complained it has become more difficult to represent or to sell the Philippines abroad. It is alarming to a certain extent, because we have been building relationships with the region in all aspects. We tried to level the playing field, not only for bringing Filipino companies to Europe but also bringing European companies to the Philippines.”

Such problem exists for many other investors as well.

Yet, macro fundamentals still solid. Despite these problems, Philippine economic fundamentals are intact and solid. So far.

The balance of payments under current conditions is strong. The government spending program and resultant high growth rate could be sustained once the tax reform program is put in place.

To get the growth engine to work better, as many participants as possible must be included.

Need for broader economic partnerships. Perhaps President Duterte will learn to be less combative with all outside institutions and take a more pragmatic approach in realizing a quicker path to growth. In actively seeking trade and investments and good relations with China and Japan, he moves the country toward that path.

But this should not be at the expense of shelving long standing good economic relations with the US. No country really can succeed well without developing good working relationships with the most important economic power.

China’ growth itself is dependent on a strong, progressive, and competitive economic relationship with the US. The same is true with Japan. All the major economies in East Asia have strong economic ties in terms of trade, investment and finance with the United States.

We cannot afford to antagonize investments from the US and Europe. In general, addition is better than subtraction.