Like Estrada before him, Duterte ignores the economy at his peril

William Pesek

The “sick man of Asia” may need a return visit to the economic emergency room.

The Philippines managed to shed that dreaded moniker thanks to the tender care of Benigno Aquino’s intensive care team from 2010 to 2016.

President Aquino brought the national balance sheet under control, took a scalpel to corruption, unclogged Manila’s commercial arteries and bequeathed to the next shift a patient rallying toward revival.

Unfortunately, his successor, Rodrigo Duterte, has skipped more than a few ward rounds in these last 860-plus days. Rather than tap new methods to increase competitiveness, curb graft and strengthen institutions, Duterte engaged in a ghastly war on drugs and authoritarian bombast.

The costs of his economic neglect are swelling by the day: the slowest growth in three years; the worst consumption trends in four; and the highest inflation in almost a decade. The peso has plunged 6.4% since January and the central bank is rushing to implement the most aggressive monetary regimen since 2000.

The parallel should worry investors and corporate executives alike. The last time Bangko Sentral ng Pilipinas hit the brakes this hard — 150 basis points so far in 2018 — Joseph Estrada was literally being chased out of the presidential palace. Filipinos will tolerate a lot from their leaders, but not runaway inflation. Then, as now, skyrocketing costs are threatening the president’s political standing.

Estrada was impeached in 2001 on plunder charges. But it was economic angst that arguably turned the nation of 105 million people against him. Few see Duterte traveling a similar arc. But an unmistakable whiff of chaos is in Manila’s air.

This, of course, is not the focus of the business elites. Jaime Augusto Zobel typifies the economic realpolitik. The head of the nation’s oldest conglomerate, Ayala, argues the Philippines is a haven from Donald Trump’s trade war. Zobel is in talks with China to build one of the globe’s biggest tire factories in the Philippines. “With the tensions that have occurred, Southeast Asia [including the Philippines] has been, I think, an increasing beneficiary of the changes in the supply chain that have taken place,” he told Bloomberg.

There is still heady growth, of course. Not the China-like rates that Aquino produced, but 6.1% in the third quarter. There is also, however, overheating below the surface undermining the poor voters that propelled Duterte to victory.

Inflation is racing ahead of growth. The 6.7% rate reported in October puts consumer price gains far above the central bank’s 2-4% target.

Not a good look for a developing nation that only won investment-grade status in 2013. Even after recent increases, the 4.5% benchmark lending rate looks too low. There is chatter BSP should tighten again — as soon as Nov. 15. Yet there is also speculation that policymakers fear a public spat with Duterte, not unlike U.S. President Trump’s conflict with the Federal Reserve.

Thickening the plot: BSP Gov. Nestor Espenilla is currently on medical leave, receiving treatment for tongue cancer. Will Espenilla’s staff have the courage to act against inflation in his absence? The bigger question, though, is what Duterte’s team is doing to restore confidence in the peso. Indications are, not much.

The nation’s inflation surge is as much about supply as demand side. Higher rates will not fix the inefficiencies in food production and distribution of basic goods. Nor can Espenilla’s team control excise and value-added tax rates, which Duterte’s team raised rather clumsily.

Dutertenomics, meantime, is more concerned with the quantity of growth than the quality. In October, Social Weather Station found that 52% of Philippines families view themselves as poor, the highest in four years, and 10 points up on March. The poll threshold for households feeling “not poor” is average monthly income of just 10,000 pesos, or $189.

The multibillion-dollar “Build, Build, Build” program may be causing more pain than economic gain with the investment surge choking supply bottlenecks.

In his haste to start projects, Duterte scrapped many of Aquino’s moves to increase transparency, improve environmental protection and avoid a return to exploding public debt. Government debt as a percentage of gross domestic product is above 50%, up from 42.1% at end-2016. A related import wave is exacerbating the current-account deficit. Duterte’s reliance on public financing is widening budget shortfalls. This dual-deficit problem is hammering the peso, also adding to inflation risks.

The Trump-like dynamic imperiling the Philippines is unmistakable. Just like the property-tycoon-turned-president, much of Duterte’s support comes from lower-income voters who felt underserved by previous governments. Since taking office, Duterte, like Trump, has put his own pet projects over the needs of the masses.

Duterte’s bloody attack on drugs, which is decimating Manila’s global reputation, is the most obvious example. Manila’s standing in Transparency International’s corruption perceptions index, also warrants scrutiny. When Aquino took office, Manila ranked 134th, trailing Nigeria. When Duterte took over, Manila was 95th. In 28 months, Duterte’s neglect already knocked the Philippines back to 111th, behind Vietnam and Ethiopia.

In July, Moody’s Investors Service minced few words about Duterte’s “contentious” policies, which could have a “negative impact” on investor perceptions. That is credit-rater speak for a potential downgrade of Manila’s long-term foreign currency credit grade of Baa2 if Duterte stays his current course. That means getting those dual deficits under control, attacking corruption and investing more in education.

A court ruling Friday against Imelda Marcos could be a welcome sign anti-graft efforts are regaining momentum. The widow of late dictator Ferdinand Marcos, known for a 1,000-plus pair shoe collection, faces a jail term of at least six years for allegedly maintaining Swiss bank accounts. Only time will tell if this a one-off, or the start of a bigger campaign.

Sadly, Duterte is stepping up populist attacks on the judiciary, legislature and even the church. These Trumpian diversions have helped Duterte keep his approval ratings up, in the low 60s.

But two narratives bear watching. One: the Aquino boom that afforded Duterte with a powerful tailwind is over. Two: the base that enabled Duterte to survive controversies — the poor — is being slammed by soaring prices.

A similar scenario undid Estrada in 2001. In 1998, he took office with the wind at his back thanks to the bold reforms of predecessors. Rather than build on the momentum, Estrada pivoted to personal pursuits at the expense of economic change. The prospects that Duterte’s tenure will end with a crash are increasing. Many investors are already searching for an ambulance


William Pesek is an award-winning Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.” He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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