PHILIPPINES OUTLOOK NOT AS VOLATILE AS DUTERTE'S RHETORIC

By Martin Yupangco and Paul Gary Bograd

President Rodrigo Duterte gives a thumbs up during a press conference in Davao City in September of 2016. Photo by Karl Norman Alonzo/ PPD

No democratically elected leader in recent times in Asia has been more inflammatory in his or her public rhetoric than new Philippine President Rodrigo Duterte. His words have raised serious concerns among companies and investors about where the Philippines is headed. But in fact, Duterte’s pursuit of a realignment of the Philippines with regard to the US and China may be better characterized as a strategic re-adjustment. More importantly, he has begun to implement a pro-trade and pro-consumer economic reform agenda.

Duterte’s sharp criticisms of the US have piqued concerns in Washington. But the trajectory for the Philippines is not nearly as concerning as Duterte’s unsettling rhetoric might suggest. And Duterte’s “pivot” toward China is neither radical nor surprising. Duterte was quite clear during his campaign that he would reverse the Aquino administration’s confrontational strategy toward China. He appears to believe deeply that the long term economic interests of the average Filipino are better served by an “independent” foreign policy posture that can take advantage of the Philippines’ location to become a supplier of raw materials and food supplies to China. The economic opportunities created by Chinese demand could motivate radical reform in the Philippines’ agricultural / rural economy, which provides employment and livelihood to 45% of the Filipino population.

Indeed, Duterte’s pivot has already raised the potential for significant economic gains for the Philippines. During his trip to Beijing in October he signed deals worth US$24bn with Chinese firms and investment funds (though almost all of these were memoranda of understanding, not formal agreements). These proposals include important infrastructure investments that are essential to long term economic growth and job creation in the Philippines.

Duterte’s pivot has also raised the specter of popular backlash within the country. After all, public opinion research in the Philippines shows distinct “pro-American” sentiment and skepticism of China among most Filipinos. That backlash has not yet occurred and, if his China re-adjustment succeeds, Duterte will likely be able to navigate domestic political pressures while continuing to move forward with his preferred policies. In national election after national election, and in Presidential administration after Presidential administration in the Philippines, basic personal economic issues of the population – like jobs, prices and wage levels – have been the key drivers to a politician’s long term popularity and trust levels. If the China re-adjustment provides improvement in any of these personal economic indicators, the President will undoubtedly move public opinion in a positive direction toward China.

Duterte’s primary challenge will be to manage a Philippine military leadership and foreign policy establishment that is strongly sympathetic to the US. His recent promises to align with the “ideological flow” of Moscow and Beijing have made this a tough task for Duterte. But the President will likely not follow through with many of his more extreme comments about abrogating all defense relationships with the US. No significant specific military or security arrangements, agreements or activities have been changed to date.

Moreover, while China will certainly seek to improve relations with the Philippines, Beijing does not have an overriding interest in seeing the Philippines become a potential flashpoint in US-China relations. So Beijing will limit how far it is willing to go on defense and military cooperation. Beijing is also aware of the potential for another flip back toward the US after Duterte leaves office.

Meantime, macroeconomic policy is a bright spot for the Duterte administration. Widely- respected Finance Secretary Carlos Dominguez has proposed a progressive tax reform and a financial transparency program that moves the Philippines further into the mainstream of global financial regulation.

In addition, Duterte’s allies have control of Congress (his close allies lead both houses). Despite this, his proposed tax and infrastructure plans have met with stiff legislative resistance, as have proposed labor reforms seeking to end short term employment contractualization. So Duterte may have to turn away from the war on drugs and criminality and spend some of his time and political capital pushing his economic reform agenda. But Congress should be amenable to his efforts.

The government is also pursuing a much less protectionist and pro-consumer policy with regard to rice imports, eliminating obstacles to foreign rice that have stood for decades. Additional rice imports would expose domestic producers to competition, lowering prices for consumers. Similarly, the protected sugar industry, which is a prime representative of the “oligarch” economics so often the target of Duterte’s ire, may be next in line for the aggressive enforcement of “open market” policies that will lower consumer costs throughout the food chain.

Finally, a major litmus test for Duterte’s economic policies will be regulation of the crucial mining industry. The industry was surprised and horrified by Duterte’s appointment of Gina Lopez, a self-described anti-mining activist, as Secretary of the Department of Environment and Natural Resources. Within weeks of her appointment she personally confronted the Australian and Canadian ambassadors, telling them their mining activities are no longer welcome in the Philippines. But in the past weeks, Lopez has become somewhat less radical in her anti-mining rhetoric and, despite her previous rhetoric, has not closed any foreign mining operations. This too engenders hope that the government will generally pursue market-friendly business and economic policies.

Martin Yupangco is the Founder & Managing Director of Optima Strategies Limited, an international strategy, government & public affairs, and stakeholder relations firm. Mr. Yupangco is also the Asia Director of Bench Walk Advisors, a litigation funder and legal capital solutions provider.

Paul Bograd is the Chairman of the Board of Evident Communications, a Manila based consultancy providing digital based marketing, content creation, public affairs, community management, and strategic research services.

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