Philippines Politics May 2016


Rodrigo Duterte set for presidency; economic prospects remain bright

Long-serving Davao City Mayor Rodrigo Duterte appears to have won the 9 May presidential elections with a surprisingly wide margin, according to early unofficial results. If confirmed, Duterte, who ran for the Philippine Democratic Party-People’s Power Party (PDP-Laban), will replace incumbent President Benigno Aquino III and start his six-year term on 30 June. Aquino was ineligible to run for reelection. Overall, Duterte is expected to broadly continue the reform momentum and progress achieved in recent years and the Philippines’ robust growth story is likely set to last, partly thanks to the country’s strong fundamentals. However, investor confidence will likely remain somewhat restrained until more details are known about Duterte’s economic agenda and key positions in the new government, including the Vice-President and new Cabinet members.

While final election results are still outstanding, unofficial results clearly point to Duterte’s victory in the presidential race. According to the unofficial tally compiled by the Commission on Elections (Comelec) and the Parish Pastoral Council for Responsible Voting, Duterte secured 38.6% of votes with over 96% of the vote counted. The current administration’s candidate Manuel Roxas II from the Liberal Party (LP) came in second, with 23.4% of the vote, followed by independent candidate Senator Grace Poe, who obtained 21.6% of the vote. Besides the President, a new Vice-President, members of the House of Representatives, 12 out of 24 senators, and local government officials were elected. Unofficial results regarding the vice-presidency are not conclusive yet and point to a narrow race between Maria ‘Leni’ Robredo from the LP and independent candidate Ferdinand Marcos Jr.

At this point, the key question is will Duterte be able to secure economic progress made under Aquino III and continue economic reforms? Duterte campaigned mainly on a platform to suppress crime, reduce corruption and to make government more efficient and effective, and gave little details about his economic agenda. However, Duterte’s election promise to ramp up infrastructure spending points to the continuity of the outgoing administration’s efforts to resolve the Philippines’ large infrastructure bottlenecks and foster long-term growth. This plan, together with his pledges to improve crime-fighting strategies, lift police wages and provide support to farmers, as well as boost spending on healthcare and education, will likely lead to an overall increase in public spending. Against this backdrop, Duterte’s plans to maintain the comparatively high corporate and income tax rates, to abolish discretionary funds such as the priority development assistance funds—which in the past were often suspected of corruption—and to enhance the public-private-partnership program might balance some the expected higher state spending from the revenue side. Moreover, Duterte’s plans to relax some restrictions on foreign ownership in the country are widely-seen as business friendly and as supportive for investment and competition.

Under Duterte’s rule, Davao City performed well in recent years in several areas such as investment, transparency, education and healthcare, which provides some hope that Duterte’s governance might also foster economic and social progress at the national level. On the downside, Duterte’s controversial remarks during his election campaign sparked uncertainty about his capacity to maintain good relationship with the business and international community. That said, much will hinge on Duterte’s Cabinet appointments, as they will provide better insights into his economic agenda. So far, Duterte has stated that he plans to offer several Cabinet posts—including the Labor and Environment Departments—to the Communist Party in order to revive talks to end a long-standing and violent conflict with communist rebels. Another key concern is that Duterte will likely have less control over Congress than Aquino III had, which points to slower policy implementation. Moreover, Duterte’s plan to shift towards a more federal form of government might introduce a legal reform process that could increase political uncertainty in the longer-term. Commenting on the elections, economists at Nomura, points out:

“We believe investors will be cautious until there is clear evidence that Duterte can make good use of this mandate to promote reforms. As such, all eyes will be on his cabinet appointments but also, in the near term, the vice-presidential race which is still far from certain. In the longer term, our base case remains that Duterte’s policy approach will ultimately be pragmatic and is unlikely to reverse the reforms of the outgoing Aquino administration. A key challenge, however, is that Duterte may not have control over Congress, unlike his predecessor.”

Despite many unknowns regarding Duterte’s economic policies, strong fundamentals are supporting the economic outlook. FocusEconomics Consensus Forecast panelists expect the economy to expand 6.0% in 2016, which is unchanged from last month’s estimate. For 2017, they also expect economic growth of 6.0%.

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