William Pesek

It’s become a cliché to point out that stock market rallies rarely reflect events in the real economy. Sometimes, though, surging valuations can be a contrarian indicator.

Take Manila, where the Philippine Stock Exchange is on a tear. The market slumped in 2018 to become one of the globe’s worst performers. The 13% drop marked the weakest showing since the 2008 Lehman Brothers crisis. Selling reflected high inflation, a chronic current-account deficit and a fears Donald Trump’s trade war would slam Asian growth.

Fast-forward 228 days, from the market’s late-November low, and all’s seems forgiven. The 22% jump since then puts Rodrigo Duterte’s market in bull-run territory. Local media gathered a few theories for why. Inflation cooled to a 2.7% annualized rate. The peso is no longer cascading lower (it’s up 2.8% this year). And the central bank is now in easing mode.

Trouble is, much of the change to which investors are responding is happening beyond Philippine borders. Inflation, for example, is easing virtually everywhere. The specter of Federal Reserve rate cuts has Asian currencies rising. Look no further than Thailand, where the baht’s 4.5% rally has stumped officials in Bangkok.

What’s more, rate cuts by Bangko Sentral ng Pilipinas aren’t the risk-on signal investors assume. The Philippines, remember, is still stuck with the same political uncertainty and policy drift that slammed both stocks and the peso in 2018.

Much of the excitement rests on the central bank’s about-face on interest rates. Last year, BSP officials tightened five times. The May rate cut–by 25 basis points to 4.5%–is seen as the first of many. But looser credit conditions merely treat the symptoms of what ails Southeast Asia’s No. 5 economy. In other words, the Philippines needs much more than rate cuts.

While one can cite many figures to dramatize the point, the most important, arguably, is 99. That is Manila’s ranking in Transparency International’s annual corruption perceptions index. When predecessor Benigno Aquino passed the baton to Duterte in 2016, Manila was No. 95. In 2010, Aquino inherited a 134th place economy, one that trailed even Nigeria.

Aquino set out to clean up a graft-plagued political system. He strengthened institutions, increased public accountability, went after tax-cheating tycoons and increased online public services to cut out myriad middlemen and women. Those efforts won Manila its first-ever investment-grade ratings, morphing the “sick man of Asia” into an investment darling.

In June 2016, Duterte took office with a mandate to accelerate the Aquino boom. Aquino, after all, merely put the Philippines on the right path. A single six-year presidential term is hardly time enough to repair a long-neglected financial system. And voters figured Duterte was just the man. 

Duterte’s 23-year track record running Davao City in the south won him national acclaim. Davao consistently generated rapid growth and featured better infrastructure, lower crime rates and less bureaucracy than the national average.

Yet as the nation’s 105 million people are funding, what works in a high-urbanized region of a couple of million people can’t easily be applied nationally. Indians are learning as much about Prime Minister Narendra Modi. His fabled success running the western state of Gujarat has yet to translate into success remaking Asia’s No. 3 economy.

In Duterte’s case, slippage in Transparency International rankings tells a more troubling story. Aquino raised Manila’s score a whopping 34 rungs–an average of 6.5 per year. Or consider Manila’s precipitous slide in the World Bank’s ease-of-doing-business tables. In 2016, the Philippines was in 103rd place. Today, it’s 124th. On Aquino’s watch, the Philippines bested Argentina by 18 spots; now it trails Buenos Aires by five.

Investors can debate why, but complacency on reform is the most obvious problem. Rather than focus on financial upgrades, Duterte pivoted to a war of choice against the drug trade, and a spectacularly bloody one at that. Many Southeast Asian nations face challenges with dealers and users. But Duterte’s putsch is raising hackles with the Human Rights Watch crowd and denting the nation’s soft power.

Duterte’s main economic contribution, meantime, suffers from its own overkill dynamic. At the center of his plan to get growth back into the 7%-8% range is a $180 billion “Build, Build, Build” infrastructure extravaganza. Who can quibble with increasing competitiveness via better roads, ports and power grids? Also, Manila’s “carmageddon” crisis, how locals refer to its epic traffic jams, is undermining gross domestic product and productivity.

The worry isn’t what Duterte wants to achieve but how he’s going about it. Predecessor Aquino favored a public-private-partnership model that relied heavily on investor capital and high levels of transparency and environmental sustainability. True, Aquino did himself no favors by moving glacially. But the speed with which Duterte is green-lighting projects, and his financing model, raise concerns about increased graft. 

Debt, too. By relying far more on government funding than on cash from the private sector, there’s reason to worry about a return of runaway borrowing. Duterte’s welcome mat for Chinese cash, meantime, comes with big strings attached. There also are reports that the infrastructure push suffers from a shortage of local skilled workers.

Again, Aquino left the reform job unfinished. Though he strengthened the national balance sheet and altered the narrative, job growth lagged. Nor did Aquino do enough to change Manila’s reliance on remittances and slow the flow of talent abroad. Duterte has gone the other way, institutionalizing the brain drain by creating a bank for overseas Filipinos. When he travels abroad, he holds Trump-like rallies with overseas workers, treating them like a vital part of his base.

At home, though, there’s little afoot to improve education and training to better compete in the globalized information economy. Laws concerning foreign investment and domestic venture capital dynamics are less attractive than those of neighbors. To date, Indonesia has created four tech unicorns. The Philippines, none.

No doubt, the Philippines is blessed with a vibrant corporate sector. It has evolved and often prospered despite a succession of chaotic governments. What’s most important now, though, isn’t that SM Investments Corp., BDO Unibank, Ayala Corp. and other giants expand their empires. It’s that the government create the conditions necessary for a startup boom.

At the moment, stock punters are enamored with the former narrative. If only the Philippines can hasten its 6.2% growth rate in 2018, the nation’s stock bourse can extend this year’s 12% surge. And perhaps it can. But there is little afoot below the surface to strengthen corporate governance, tame government corruption, revolutionize human capital or churn out unicorns at a pace even close to that of its neighbors.

In the longer term, the optimism coursing through Philippine stocks confront a sobering reality: there’s little going on in Manila to justify a rally based more on spin than reality.  

William Pesek

I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”

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