Philippines moves to keep growth on track

The Philippines is one of the fastest-growing economies in the world. But have infrastructure shortfalls, weak tax revenues and tight rules for foreign companies held the country back from even faster growth? Sonny Dominguez, the country’s finance minister, intends to find out.

  • By Matthew Thomas
  • 12 Oct 2018
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The Philippines gets plenty of international press nowadays, but it is usually for the wrong reasons. Rodrigo Duterte, the country’s president, is prone to unscripted, sometimes vulgar outbursts. The recent arrest of a political opponent drew sharp criticism. His prolonged campaign against drug use is, to say the least, highly controversial.

But what is not controversial is the economic miracle taking place in the Philippines. The country can now boast one of the fastest growing economies in the world. It grew by 6.7% in 2017, and the Asian Development Bank thinks it can achieve 6.4% growth this year and 6.7% in 2019. (These numbers are, however, down from earlier estimates.)

This growth is not, in itself, remarkable for the country. Between 2010 and 2016, the start and end of the administration of Benigno Aquino III, Duterte’s predecessor, the country achieved average annual growth of 6.28%. The difference now is the sharp emphasis the government is making on converting economic growth into lasting change.

The most obvious attempts are in the development of infrastructure. Whereas Aquino struck a cautious tone, officially promoting public-private partnerships (PPPs) but erecting a number of checks and balances which slowed down approvals, Duterte has taken the direct approach. His infrastructure programme — known simply as ‘Build, Build, Build’ — has promised to swap hypothetical arguments for practical change.

The government has also pushed for a sweeping series of tax reforms, the first stages of which have already been approved by Congress. Carlos ‘Sonny’ Dominguez, the country’s finance minister, sees these tax reforms as an essential policy to convert economic growth now into prolonged — and more equitable — growth in the future. 

SONNY SIDE UP

Duterte made clear during the election that he did not consider himself an economist. “Why would I attempt to be a smart aleck if I am really not?” he said. “If I get to be president I would employ the economic minds of the country.”

He appears to have kept his word, particularly with his appointment of Dominguez. When this correspondent talked to some of the most senior businessmen and bankers in the Philippines following Duterte’s electoral victory in June 2016 — a time when much of the establishment were still unsure what to expect from the brash former mayor of Davao — the feedback on Dominguez was universally positive.

This was partly because he wasn’t seen as a political figure. He had previously served in government, running the ministries of natural resources and agriculture during the presidency of Corazon Aquino. But his main reputation was earned in business. He has worked as a senior executive for some of the biggest firms in the Philippines, including as chairman of Philippine Airlines, the country’s flagship carrier.

This background has made Dominguez aware that it is businesses, rather than governments, that drive economic growth. As a result, the Duterte administration is taking a much more welcoming approach to foreign businesses.

The Foreign Investment Act, first signed in 1991, gives Philippine governments considerable leeway on what sectors they will allow foreign direct investment into, largely through a ‘negative list’ which rules out specific industries.

The negative list is updated every two years and often contains small tweaks. But the Duterte administration is planning a major transformation. Among industries reportedly being opened up to foreign companies are construction of public works and internet services, two areas that address both the hard and soft infrastructure hurdles facing the Philippines.

But although it is clear that Dominguez respects the role of business, he is also a pragmatist. Whereas the Aquino administration put emphasis on PPPs to hit infrastructure spending targets, Dominguez takes a more open approach — appearing willing to do whatever it takes.

Dominguez made these priorities clear at an economic briefing in Manila on September 18, speaking to an audience of analysts, investors, chief executives and representatives from the multilateral lenders who appear so crucial to helping the Philippines realise its infrastructure spending targets. He told the audience that the government was keen on hybrid PPPs, where the government essentially takes the early funding burden but passes on completed projects to the private sector.

But Dominguez also noted the importance of bilateral links. China, which Duterte has undeniably courted since coming into office, has committed $9bn of investments and aid, Dominguez said. Japan, not to be left out, has offered up the same. South Korea has committed $1bn.

There is also major potential to get money from multilateral lenders, who see the chance for a clear win in the Philippines. On September 20, two days after Dominguez’s speech, the ADB said it expected to lend $7.8bn, or around $2bn each year, between 2018 and 2021.

The Philippines growth story is not without risks. Inflation is rising, despite the best efforts of the central bank. The looming trade war between China and the United States creates uncertainty for economies across Asia. The Philippine peso is one of the worst performing currencies in Asia this year.

But the finance ministry, helmed by Dominguez, appears to be making the right moves to ensure that growth continues — even if it is Duterte who hogs the headlines.

  • By Matthew Thomas
  • 12 Oct 2018

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5 SG Corporate & Investment Banking 32,244.80 125 4.97%

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