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Duterte and the economy

Srinivas MazumdaruMay 10, 2016

Brash and irascible city mayor Rodrigo Duterte is all set to be sworn in as the next president of the Philippines. DW examines what this means for the nation's economy, which has seen buoyant expansion in recent years.

Philippinen Präsidentschaftskandidat Rodrigo Duterte
Image: picture-alliance/AP Photo/B. Marquez

71-year-old Duterte, the longtime mayor of the southern city of Davao, has claimed victory in the presidential election held on Monday, May 9, after his opponents conceded defeat.

His campaign for president in the past several months was characterized by provocative and profane rhetoric, but shed little light in terms of economic policies.

This has given rise to uncertainty among firms and investors about the measures Duterte and his team are willing to take to keep economic growth on track while easing restrictions on doing business.

"A string of highly controversial comments has unnerved investors, and his victory represents a step into the unknown," Gareth Leather, Asia economist at the UK-based economic research consultancy Capital Economics, said in a research note.

The Philippines has been one of the fastest-expanding economies in the region in recent times, with growth averaging 6.2 percent in the last six years under the outgoing President Benigno Aquino.

During this period, the country also recorded a significant improvement in the area of fiscal deficit and implemented reforms needed for bolstering growth. As a consequence, the country's credit rating also improved to an investment grade.

A slew of challenges

But despite the Aquino administration's successes, a multitude of problems continue to badger the Southeast Asian economy.

One of the most populous nations in the region, with some 100 million people, the Philippines has over a quarter of its population mired in poverty. At the same time, it has witnessed a swelling gap between the rich and the poor, in addition to worries over rampant corruption, poor quality of public services and deficient physical infrastructure, including roads, ports and airports.

Symbolbild Slum
Over a quarter of the Philippine population is mired in povertyImage: Getty Images/AFP/T. Aljibe

While Duterte's campaign focused on slamming the political establishment in the capital Manila and on combating crime, he barely addressed the economy. However, news agency Reuters quoted him as saying on Monday, May 9, that he would "hire the best economic minds" to run the nation's economy.

He also declared in the southern city of Davao that he would seek to ease restrictions on foreign ownership in all industries, except when it comes to buying land.

But analysts remain skeptical about the new leader's willingness to push through the much-needed reforms. "His apparent lack of interest and knowledge on the subject suggests that economic reform is unlikely to be high up on his list of priorities when he becomes president," noted Leather.

Steven Rood, Philippines Country Representative at The Asia Foundation, says foreign investment flows into the country are likely to be the most volatile in the coming months, as the image of the Philippines shifts from the generally positive view of the Aquino administration to the new Duterte government. "Companies and investors will be looking for reassurance, as Duterte selects his team and announces policy," he told DW.

Boosting investment

There are a range of measures the new government can take to accelerate economic development in the country, say economists. These include steps to stimulate investment in physical infrastructure as well as to simplify regulations and cut back bureaucratic red tape.

"Increased infrastructure investment would not only directly benefit the economy by creating jobs but would help position the country for better growth in the future," Rood stressed, pointing out the problems the country is facing due to bad infrastructure: "Tourism is being held back by airport inadequacies, poor transport infrastructure is adding to logistics costs, and slow Internet connectivity is hampering growth in the IT sector."

Experts say the new government under Duterte will have to address these issues in order to ramp up economic activity and generate jobs for the large numbers of new workers entering the nation's labor force each year.

The nation's services sector - particularly the business process outsourcing (BPO) industry - along with remittances from Filipino workers abroad, have so far been the economy's main growth drivers. However, the BPO sector, which includes back-office operations, call centers and data transcription services, provides jobs only to a small section of the nation's workforce.

Meanwhile, the agricultural sector has long lagged behind and it is the area where most poor Filipinos are employed. This is why experts say new agricultural policies are needed to help farmers move into higher value-added crops, to improve yields and to encourage agri-businesses.

Nevertheless, economists argue that the nation's long-term growth and job creation prospects depend on its ability to develop its manufacturing sector by drawing in foreign investment.

No immediate downturn?

In the short- to medium-term, Rood says, the fundamentals are strong enough for the Philippine economy to grow at a pace of five to six percent. "To bolster expansion above that level, the Duterte administration must attract more foreign investment, increase competition throughout the economy, and raise the productivity of farmers."

Experts at Capital Economics also keep their growth forecast for the Philippines unchanged at 6.5 percent for this year and the next. Although the economists maintain a cautious tone with regard to the economy in the medium term, they don't expect an abrupt slump in expansion.

"Although Duterte's election undoubtedly represents a downside risk, the fact that he seems content to leave the economy in the hands of more qualified people provides some reassurance that policymaking will not deteriorate overnight," analyst Leather noted.