Philippines: President-Elect Duterte Prompts Concern Over Economic Policy

 
 

Davao City mayor Rodrigo Duterte was declared the winner of the Philippines’ May 9 presidential election and is set to be sworn into office on June 30, after winning 38 percent of the popular vote.

Duterte’s election brings to a close the six-year presidency of Benigno Aquino, under whom the Philippines became one of Asia’s fastest expanding economies, growing at an average rate of 6.2 percent a year since 2010. Duterte’s firebrand campaign focused on crime and corruption with less attention given to his economic policy, which remained inconsistent and undeveloped throughout the electoral period. Foreign investors have been especially concerned by Duterte’s reputation for unpredictability and disregard for the rule of law, particularly in light of allegations that extra-judicial killings were carried out under his authority while mayor of Davao.

Responding to these concerns, on May 13 Duterte published an “eight-point plan” of economic proposals, which contained a number of business-friendly proposals designed to reassure investors:

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  1. Continue and maintain current macroeconomic policies, while reforming the tax collection system;
  2. Accelerate infrastructure spending to reduce inefficiencies in public-private partnerships (PPP);
  3. Improve the investment climate by addressing ownership restrictions to foreign firms;
  4. Develop the agricultural sector through business support to farmers;
  5. Address bottlenecks in land administration and management systems;
  6. Strengthen the educational system to improve the skills of the workforce;
  7. Introduce a lower or more progressive income tax system;
  8. Expand and improve the conditional cash transfer program.

Duterte now faces the difficult task of responding to pressure from investors to maintain growth, while simultaneously living up to his populist campaign promises to create jobs and boost wages.

No major shift in economic policy

Given the Philippines’ economic success in the past six years, Duterte has stated he plans to pursue an economic policy that is consistent with that developed by Aquino and as yet no radical policy changes have been announced. The president-elect has acknowledged he lacks economic experience and has stated he will rely on a team of technocrats to form specific economic policies, as was the case when he was mayor of Davao. Initial proposals outlined in his eight-point plan are in line with those of the Aquino government and include plans to raise infrastructure investment to 5 percent of GDP (up from 2.55 percent in 2015), and to streamline the tax collection process by addressing corruption and inefficiencies.

On the issue of foreign ownership, Duterte has expressed an interest in a number of policies that would ease foreign investment in the Philippines. Specifically, he has already revealed plans to increase the cap on foreign ownership of corporations from 40 percent to 70 percent by amending the 1987 constitution. Although the team ruled out similar changes to land ownership laws that restrict direct foreign ownership of property, Duterte says he will extend land leasing limits for foreign firms from 25 years to 40 years. His team also said it plans to cut the corporate tax rate, which currently stands at 30 percent, though it is unclear by how much.

Duterte is also looking to incentivize investment in rural areas by streamlining coordination between the country’s four land agencies – the Department of Agriculture, Land Registration Authority, Department for Environment and Natural Resources, and the National Commission on Indigenous Peoples. The Philippines’ property market is known for its cumbersome bureaucracy, with businesses often suffering from a lack of coordination between the agencies over land ownership registries and unclear land titles between landlords and tenants. Duterte’s team has, however, revealed few details of how their reforms would tackle these issues, and the failure of previous administrations to overcome the same challenges casts doubt on the president-elect’s land reform plans.

Uncertainty over PPP program

One area in particular that carries potential regulatory risks is Duterte’s position on the public private partnership (PPP) program, which forms an essential component of infrastructure development and economic growth. Duterte has promised to fix the bureaucracy responsible for overseeing PPPs, which has faced repeated criticism for delays, political interference, and corruption. The PPP Center, which was founded in 2010 to coordinate and facilitate public investments with private partners, has only awarded 12 projects, with many more delayed or in negotiation stages.

Although Duterte has promised to implement PPP projects more quickly, he also plans to rid the PPP Center of its existing bidding procedures, claiming this will mean contracts can be awarded on the basis of quality over cost. This would significantly reduce transparency in the procurement process as decisions would now be made by an appointed committee with little independent oversight. The review of the PPP Center’s processes also has the potential to delay the passage of the PPP Act, which would strengthen the legal framework for private sector involvement in public infrastructure projects, but has faced repeated delays in Congress.

Congress or Federation

Duterte’s plan to abolish the current congressional system and replace it with a federal government creates a further degree of uncertainty for investors over the course of the next administration. The president-elect has called for a constitutional referendum within two years, with the aim of establishing a federal system that would transfer more powers and greater funding to local authorities. It is not clear what model of federalism Duterte prefers, but he has indicated the central government would remain responsible for foreign affairs, customs and national defence, without specifying what responsibilities would be transferred to state governments. If pursued, businesses could face complex renegotiation processes for contracts previously signed with Manila which would now fall under regional or state jurisdictions. A poorly coordinated federal system also risks complicating tax policies and infrastructure projects that run across state borders due to differing local regulations.

The constitutional reform campaign is likely to dominate political debate over the next two years, requiring Duterte to consolidate his position in Congress and build a strong coalition behind his legislative agenda. In the Lower House, Duterte’s PDP-Laban has already formed coalitions with the Nacionalista Party, the Lakas-CMD, and the Nationalist People’s Coalition, and consensus-building in Congress will remain a core characteristic of Duterte’s first six months office. Although longer term uncertainties surround the federal project, the need to build political consensus both within Congress and among the general population will reduce the risk of radical changes in economic policy in the short to medium term.

Jack Wagner is an Asia analyst at Protection Group International (PGI), a London-based risk management firm. Sign up to the PGI Risk Portal for free geopolitical monitoring and analysis.

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