Philippines – Duterte Popular as Economy Thrives

On December 10, Fitch raised the Philippines’ sovereign credit rating from BBB- to the higher investment grade of BBB, in line with the assessment of Standard and Poor’s, and a notch above Moody’s. Government officials pointed to the move as a vote of confidence in the pro-growth economic strategy implemented by the government of President Rodrigo Duterte, which entails a traditional Keynesian recipe of relying on heavy stimulus spending by the state to fuel domestic demand.

There is little sign of a risk of overheating and the rapid expansion of GDP has kept the debt-to-GDP ratio on a downward trajectory, despite the government’s reliance on borrowing to finance its stimulus program. Moreover, a recent bump in Duterte’s already high approval rating will create a disincentive for lawmakers to impede implementation of the president’s policy agenda before the mid-term congressional elections in May 2019.

That said, net inflows of FDI, already low by regional standards, fell by nearly 24% (year-on-year) in the January–May period. Moreover, only a small portion of the $3 billion total for the five-month period represented investment in newly licensed projects, as opposed to intracompany loans and reinvested earnings, and the recent approval of a steep reduction in the US corporate tax rate could have a significant negative impact on the latter going forward.

To Duterte’s credit, his aggressive approach to dealing with the threat posed by armed groups has borne fruit; in October, the armed forces liberated the southern city of Marawi, parts of which had been occupied for months by rebels affiliated with ISIL. Likewise, his government hosted a successful ASEAN summit last month, and the president scored a major legislative victory in December by securing congressional approval of a package of income-tax cuts.

The potential for political instability is present. Duterte’s attacks on the media and his threats to disband or defund state institutions responsible for ensuring government accountability (often on the grounds that they are riddled with corruption) have reinforced the perception among his opponents that he is an aspiring dictator, and moves such as a recent request for a one-year extension of martial law in the troubled southern region of Mindanao have done nothing to dispel such suspicions.

However, voters are likely to tolerate Duterte’s personal and policy excesses, and deliver him a majority at the mid-term elections, as long as the economy continues to perform well. Robust spending on infrastructure projects, along with tax and wage policies designed to stimulate domestic consumption, helped to lift year-on-year real GDP growth to 6.9% in the third quarter of 2017, putting Philippines on track to achieve annual growth of more than 6.5% this year.

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