BENEATH THE NOISE: A POSITIVE STORY FOR THE PHILIPPINES
By Martin Yupangco & Paul Gary Bograd
President Rodrigo Duterte arrives at the Villamor Airbase in Pasay City to attend the 48th anniversary of the 250th Presidential Airlift Wing on September 13, 2016. Photo by King Rodriguez/ PPD
In a pre-election analysis we advised those with an interest in the Philippines to look beyond the disturbing and confusing campaign and post-election rhetoric of then President Elect Rodrigo Duterte. Instead we advised to look at his impressive 30-year track record as Mayor of Davao City in the Southern Philippines.
Well, that advice is still valid but much, much more difficult to do.
Words and ideas matter. And the outlandish rhetoric and positioning President Duterte has been using have been confusing not only to Filipinos and the world, but even to his Chinese hosts during his trip to Beijing in late October. Even the stone faces of Chinese officials as President Duterte promised to align with Russia and China against the world, suggested that his words may be undermining the reasonable geopolitical positioning he has undertaken in his first 100 days.
Perhaps even more destructive in Duterte’s language and rhetoric is that he has established a Pavlovian response to anything he says among international media and the global diplomatic establishment. The immediate reaction to anything he says is skeptical and sometimes distorted.
But Duterte also has a four-month track record as President that is worth looking at before making a complete judgment about investment or other transactions in the Philippines. That track record is much more stable and positive than his rhetoric might suggest.
Geopolitical Shift Not That Surprising and Will Bring Economic Benefits
Duterte’s hard turn toward Beijing has created plenty of angst in Washington. But his “pivot” toward China is neither radical nor illogical nor surprising. Duterte was quite clear during his campaign that he would reverse the Aquino administration’s confrontational strategy toward China.
He has breathtakingly done so. And he has done so with some risk to his domestic “political capital”.
Public opinion research in the Philippines shows a distinct “pro-American” and China skeptical attitude among rank and file Filipinos.
But Duterte clearly believes that the long term economic interests of the average Filipino are better served by an independent economic and political positioning. On this front, he’s probably right. By opening more trade and investment links to mainland China, the Philippines will be able to capitalize on its geographic position by becoming a natural supplier of necessary items for China’s long-term growth, particularly raw materials and capital stocks. Indeed, opening the door to greater food exports to China could create the kind of demand that would motivate a radical reform in the Philippines’ agricultural economy, which is key to the long term economic health of 45% of the Filipino population.
Chinese investment into the Philippines could also be an economic boon. Duterte oversaw the signing of US$24 billion dollars in China business deals during his visit. (Though these “deals” are Memoranda of Understanding (MoU’s), which are not formal agreements but represent intentions more than actual transactions.) These investments would drive an infrastructure build-out that is essential to long term economic growth and job creation in the Philippines. This kind of foreign assistance is seen by the Duterte administration and others as more important than the largely “consultant driven” patronage ideology of western foreign assistance.
Lastly are three more sensitive and nuanced implications of the “pivot” to China that investors must understand:
Firstly, Duterte must now manage a Philippine military leadership that is highly sympathetic to the United States given decades of cooperation and military assistance. Already, the country’s elite foreign policy establishment is sharply criticizing Duterte’s foreign policies. This now presents significant risk to Duterte’s ability to pursue reform in other areas. And this complication has occurred not because of any concrete action to date but because of the president’s words. No significant specific military or security arrangements, agreements or activities have been changed to date.
The other two factors to consider are more positive, though. The second point is that Duterte’s “pivot” to China and de facto acceptance of the status quo of China’s behavior in the South China Sea may provide the Philippines with a better opportunity to participate in the future development of natural resources in that area. It is as yet unclear how far Beijing will be willing to go, but the Philippines now has a better shot at cooperating with Beijing than it did before Duterte.
Thirdly, the geopolitical risk may not actually be that high. Without a doubt, having the Philippines and China on friendly terms has greatly reduced a potential flash-point for tension in the South China Sea in the near-term. And at the same time, Beijing may not be that comfortable with using the Philippines as a tension point with the US. Today China and the United States have a sort of financial “Mutually Assured Destruction” relationship, and the Chinese and the Americans need each other more than they need the Philippines. Beijing also has good reason to wonder whether any closer relationship with the Philippines could last beyond Duterte’s administration.
Anti-Drug Campaign Politically Popular But Raises Risks for Investors
The issues surrounding President Duterte’s anti-drug and anti- criminality campaign are also key to looking beyond the President’s rhetoric. Again, let’s look at the reality and fundamentals of the situation.
It is estimated that there have been 3,500 – 4,000 deaths related to anti-drug efforts (this includes the period after the May 10 elections to present) during the past four months of the Duterte administration. Without a doubt, some of these deaths have been extrajudicial, and Duterte bears at least some responsibility for creating an environment that allowed that to happen.
But for defenders of the President, and perhaps to the 91% of Filipinos who express confidence in the President’s leadership, many of these deaths are the result of a badly needed war on a destructive drug culture. They see human rights in the context of their own human rights to send their children to school free from the threat of drug trafficking. They see human rights in the context of their own human rights to be safe from the very real drug related robberies and other violent crimes in their homes and neighborhoods.
And for some, they see President Duterte as being held to a different standard than was applied to similar successful anti-drug campaigns in Thailand, Indonesia, China and even the early history of Singapore.
Does the complexity of this controversy on human rights abuses have meaning for potential investors and others who care about the Philippines? The answer is yes and dramatically so.
If these accusations become formal charges many bilateral and institutional relationships and transactions will fall under regulatory and statutory restrictions, with potential liability for those involved in exposed relationships.
Economic Policies Have Been Solid
The other major story for the Philippines right now is that Duterte is pursuing a set of savvy, heterodox economic policies centered on difficult reform. Here too – Duterte’s rhetoric has raised uncertainty, but the realities of his policies are more comforting. For example, when S&P made its first post-election analysis of the Duterte Administration in September 2016 it reaffirmed the country’s investment grade rating but felt compelled to comment that a credit rating upgrade for the Philippines was "unlikely" over the next two years as President Rodrigo Duterte's bloody war on drugs and tough rhetoric "diminished somewhat" the predictability of economic policy-making. Moody’s and others have made similar comments.
It is important to note that all the agencies reaffirmed both the macro-economic stability and the investment grade ratings, however. This should give investors and companies more confidence in the country’s medium-term trajectory.
In fact, macro-economic policy remains a bright spot for the Duterte administration. Finance Secretary Carlos Dominguez has international respect and has proposed progressive tax reform and financial transparency programs that move the Philippines further into the mainstream of the global financial structure and position it to seize the benefits of that positioning. Dominguez has become the “go to guy” to understand and contextualize the President’s rhetoric and the practical realities of Philippine public policy.
Mining Is a Litmus Test
A major litmus test for Duterte will be how he manages the mining industry. Major economic partners Australia and Japan have massive joint venture operations in the sector, and the end user of much of the Philippine mining industry is China. The geopolitical implications of the stability and reliability of supply of these essential raw materials is at the foundation of future economic relations with China.
The President shook the foundations of the industry with the appointment of Gina Lopez, a self-described anti-mining activist, as Secretary of the Department of Environment and Natural Resources upon taking office. Within weeks of her appointment she told the Australian and Canadian ambassadors that their country’s mining activities are no longer welcome in the Philippines. She has publicly stated that her opinions about mining will circumvent actual laws and regulations. She has promised to shut down international operations, even though these mostly large-scale investments abide by international mining standards. Meanwhile, she has been less rigorous in confronting small scale mining which is largely less compliant with environmental and community development standards.
Here, too, words are one thing – and actions, another. President Duterte to his credit has been consistent in supporting “responsible” mining that adheres to Australian and Canadian standards. And in recent weeks Ms. Lopez has become somewhat less radical in her anti-mining rhetoric. To date she has not taken any steps to close any international mining operations.
Negotiations with the “Left” Are Moving Forward, but Managing Rural Policies Will Be Hard
The Philippines is one of the few countries in the world with a remaining Communist Party that maintains an armed, insurgent force (the NPA). Early in his term Duterte threatened to stop any negotiations with the NPA unless it agreed to the government terms of a ceasefire. But since then he has identified the leftist insurgency as one that could be peacefully brought into his government through negotiation and a reversal of earlier policies of incarceration and exile. Negotiations with the NPA are currently underway in Europe.
But at the same time, Duterte’s willingness to court the left is becoming an obstacle to both economic development and anti-poverty programs. The Department of Agrarian Reform (DAR) under Duterte have recently espoused policies that would unravel agrarian reform policies and contracts that have been in place for decades. Doing so could significantly interrupt agricultural export capabilities and hard won commitments from Japan and China to increase agricultural imports. Moreover, abandoning these reforms could displace thousands of land reform beneficiaries who have incomes as much as 4x that of other farmers.
The most visible and arguably the most successful anti-poverty program in modern Philippine history, the conditional cash transfer program (CCT, which provides welfare to participants who meet certain behavioral criteria like sending their children to school and pre-natal care) is also under ideological attack from leftist voices in the country. This despite the fact that the World Bank in 2015 called the program “one of the best- targeted social safety net programs in the world.” While it is politically untenable for the government to end the program, the left has historically opposed this type of anti- poverty initiative in favor of more ideologically based economic changes. Again, despite some of his allies on the left with the CCT, so far President Duterte has resisted taking concrete actions to change it.
Don’t Panic, Focus On the Fundamentals
To summarize, investors and companies with, or considering, long term exposure to the Philippines should rely on the same basic fundamentals and foundations of any investment or transaction that would have been used before Duterte’s election. The country’s “political risk premium” is not as high as Duterte’s rhetoric might suggest. Other than the aggressive war on drugs, which is actually popular politically in the Philippines, very little tangible change in the basics and fundamentals of any Philippine investment has taken place. The macro-economics are still sound and Duterte’s administration is managing them well on key issues. The work force is still highly motivated with extraordinary work ethic and unique skills and training especially suited to certain industries; and government incentives are unchanged. At the same time, the fruits of a more robust economic relationship with China are yet to blossom.
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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