Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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More Certainties Than Alleged Uncertainties

              The colorful, mercurial and impulsive style of President Rody Duterte has prompted credit rating agencies and some foreign chambers of commerce to raise the alarm flag about the investment climate in the Philippines.  It is possible we may not get any credit upgrade for the coming months or even years.  It is possible that some U.S. and European investors may cancel or at least postpone their investment decisions in the Philippines until PDu30 can modify his harsh language and/or issue more consistent policy statements. Knowing how ingrained some of his linguistic outbursts and biases against the U.S. are, it may take some time before the cloud of uncertainties can be removed from the horizon of the Philippine economy.  Investors would have no other alternative but to take chances, which after all is the very essence of entrepreneurship, i.e. assuming risks.

             First, let me try to lessen the anguish about the foul language used by the Cebuano-speaking President.  As I have told audiences of expats and foreign diplomats, in the name of objectivity, there is need to remind journalists to translate his colorful language more accurately.  When the President uses the “p” word or equivalent every time his temper flares, what comes out of his mouth is an expletive very much like the “F” word that some Americans use when they are angry.  When some of us use the milder expletive “Damned it” to express our anger, we know we are not condemning our addressee to literally go to hell.  By the same token, when the “p” word (borrowed from Spanish) is used in a vulgar conversation, it is not accurate to say that the one uttering it is calling the addressee a “son of a whore.”  I am not implying, however, that we should excuse the President for using foul language in his public statements. He should remember he is occupying the highest leadership position in the land.  He is giving a very bad example especially to the youth.  He is destroying the widespread image of the Filipino as a gentle, amiable, polite and caring person, an image that has endeared especially the Overseas Filipino Workers in their respective host countries and has explained our outstanding success as Number One in customer service or call centers. As a man endowed with a free will, the President can still be helped by the people closest to him to use less objectionable expressions when expressing his anger.

             Even assuming that it may take time for the President to change his style, I enjoin creditors and investors to focus on the certainties about the Philippine economy.  They will realize that what we can posit for certain about the Philippine economy will make the uncertainties perceived by the likes of Standard and Poor pale into insignificance.   First, the Philippine economy will be enjoying for many more years the close to $30 billion of annual remittances from the OFWs.  From what I have observed over the last ten years, this source of a consumption-led growth has increased at 3 to 5% annually through all the crises that the global economy has suffered (e.g. the Great Recession, the political crises in the Middle East, the precipitous decline in the price of oil, etc.)  Second, whatever happens to political leadership at the national level, the young, growing and English speaking population of the Philippines will continue to make the Philippines a preferred site for the global Business Process Outsourcing and Knowledge Process Outsourcing industries.  In the next two years, this sunrise industry will be generating also close to $30 billion annually and growing at 15% from year to year, employing close to 1.5 million highly educated Filipinos.  The incomes generated by these two engines of growth will feed into the consumption sector and will generate large investments in retailing; the hospitality business (to cater to the 40 million domestic tourists resulting from the expansion of the middle class); and expansion of manufacturing of food, fashion goods and furniture and fixtures.  Construction and real estate will continue to benefit from the demand for more middle-priced condominium and residential units and for office spaces to cater to the BPO-IT sector, with more of the expansion in the second-tier cities like Iloilo, Bacolod, Davao, Cagayan de Oro, Laoag and others outside the National Capital Region.

             We can also count as certainties the maintenance of a stable financial sector by a very competent Central Bank that has admirably institutionalized inflation targeting tools, keeping average inflation at the level of 2 to 3% annually and moderating the depreciation of the Philippine peso.  We can also consider as certain the ability of the Department of Finance and the Department of the Budget to continue maintaining fiscal discipline which began during the Administration of former President Gloria Macapagal Arroyo.  I would give 80 percent probability to our having a new tax structure that would lower the corporate income tax and the tax burden on the middle-income households (those earning between P1 to P3 million annually).  Despite the lowering of taxes on these two sectors, there will be compensating increases in income taxes for the very rich, specific taxes on unhealthy drinks and other consumer items, and from here-to-fore tax exempt industries that are profitable enough to survive without tax privileges.  I will also count as a certainty the greater ability of the present Administration to implement at least 17 more Private-Public Partnership Projects for the whole year of 2017.  Add to this the willingness of the decision makers in the fiscal sector to significantly increase government spending on infrastructures to as much as 7% of GDP.  Underspending by the Government on public works will be a thing of the past.

             Fortunately, the Philippine financial sector is awash with liquidity, making it possible for all these investments to be financed mostly form local funds.  Even if temporarily, the uncertainties perceived by U.S. and European entities should slow down the influx of foreign portfolio and direct investments, there will be enough funding from local sources that can enable the Philippine economy to grow at more than 7% in 2017.  If we are able to address the concerns of foreign investors and creditors about the Duterte style of management during the first year of his presidency and are able to amend the restrictions on foreign direct investments still found in the Philippine Constitution, a growth rate of 8 to 10 percent is achievable from 2018 to 2022.  With a more open attitude towards foreign direct investments, we do not even have to wait for investors from the U.S. and Europe where leaders are more understandably very sensitive about human rights violations.  There are numerous investors from our Northeast Asian neighbors (China, Japan, South Korea and Taiwan) who are less touchy about human rights and can significantly increase their investments in the Philippines, especially in infrastructures (airports, railways, power plants), manufacturing, agribusiness and logistics.

             I have not even inputted into my calculations the possible large increase of infrastructure spending that can result from the more proactive role that will be played by some Governors and Mayors as they fully implement the provisions of the Local Government Code of 1991 under which they can raise revenues and spend on their own projects without the need to get the nod from National Government.  The desire of President Duterte to move towards a federal form of government would augur well for some governors and mayors to already declare their respective territories as virtual federal states under the Local Government Code.  I see this happening in such provinces as Batangas, Palawan, Negros Occidental, Iloilo, Quezon, Aurora, Ilocos Norte, Davao and other areas where the local government officials can hit the ground running in implementing their respective infrastructure projects. Those who become indecisive because of the alleged or real uncertainties clouding the investment horizon in the first one hundred days of the Duterte Administration are in danger of missing the business opportunities that can be clearly discerned from the certainties I have enumerated above. For comments, my email address is bernardo.villegas@uap.asia.