Philippines’ Duterte causes mixed feelings as he pivots towards Asia

There is no place in the Philippines where president Rodrigo Duterte is more popular than Davao. The capital city of southernmost major island Mindanao, Davao was the first testing ground for Mr Duterte’s peace-and-order approach as he ruled over the city as mayor for more than 22 years over different terms. He secured Davao with a ruthless war on crime that earned him the nickname of 'the Punisher', before paving the way for its economic renaissance.

“When I started doing business here [in Davao] in 1973, there were problems of kidnappings, bombing, extortion,” says local businessman Bonifacio T Tan. “[Mr Duterte] solved those problems, then businesses started asking about his economic agenda. But he is not a businessman, and as long as peace and order was preserved, he would delegate economic issues to the business community.”

Ruffled feathers

Today, Davao is one of the fastest growing cities in the country and Mr Duterte has taken his tough approach to Manila after his landslide victory in the May 2016 elections. After just five months in office, he has already emerged as the most polarising president in the recent history of the Philippines.

Thousands of extrajudicial killings linked to his quest for peace and order across the country have drawn criticism from human rights organisations. At the same time, the president’s inflammatory remarks about the US, which coincided with his pivot to China, have strained ties with Washington, the country’s closest military and economic partner, and created concern within the American business community.

However, Mr Duterte remains extremely popular at home, and the Philippines' current economic success gives him plenty of room of manoeuvre. He may have spoilt the mood of US investors, but the Philippines economy is growing at an annual 7% and attracting an increasing number of foreign investors. An ambitious plan of reform is now in the making, to unleash further economic potential and eventually improve the lives of the millions that still live in poverty.

Growing FDI

Foreign investment in the Philippines has been growing continuously over the past few years on the back of the country’s solid economic performance, with GDP growth of 5.9% in 2015, against 4.4% for the whole of south-east Asia. It is expected to grow by 7% in 2016.

Foreign investors announced new greenfield projects worth $8.6bn in the first 10 months of 2016, which exceeds the $8.5bn achieved in full-year 2015, and is the best FDI performance since 2009, according to figures from greenfield investment monitor fDi Markets.

“The overall strength of the Philippines really is its domestic market,” says Ceferino Rodolfo, undersecretary for the industry development group of the Philippines Department of Trade and Industry (DTI).

“We want to increase the flow of investment targeting this fast-growing market and use the country as a regional base to export manufacturing,” he says, adding that the DTI aims to increase annual FDI inflows to $20bn by 2022.

Despite the growing inflows of investment attracted in the past years, the Philippines has yet to close the investment gap it accumulated with its Association of South-east Asian Nations (Asean) partners. Its stock of FDI amounted to $59.3bn at the end of 2015, way below the levels observed in major Asean partners such as Indonesia ($224.8bn), Thailand ($175.4bn), Malaysia ($117.6bn) and Vietnam ($102.8bn), according to figures from Unctad.

Infrastructure boost and restrictions

“High power costs, one of the worst infrastructures in south-east Asia, and red tape have been hampering investment for years,” says Crisanto Frianeza, secretary-general of the Philippine chamber of commerce and industry.

Manila’s infamous traffic jams are an iconic sign of the country’s poor infrastructure, exacerbated by the rapid economic development of recent years. This has a direct impact on the competitiveness of local production as “it’s more expensive to ship goods from one part of the archipelago to Manila, than to import them”, says Mr Frianeza.

Mr Duterte has emphasised the need to pursue a sustained increase in infrastructure spending to about 5% of GDP, from about 2% in previous administrations. His predecessors did not ignore the problem, but struggled to deliver on their infrastructure commitments. “This government can make it because it has the leadership to do so,” says Nobuo Fujii, executive director of the Japanese chamber of commerce and industry in Manila.

At the same time, Mr Duterte’s cabinet also seems willing to ease the restrictions that limit investment in key sectors of the economy.

“We are planning to take out of the investment negative list sectors such as retail, public utilities, education and media, and open them to foreign investors in the form of 70/30 joint ventures,” says Ernesto Pernia, head of the National Economic and Development Authority and secretary for socioeconomic planning. The government aims to push through these measures in the first half of 2017.

BPO and manufacturing boom

Some sectors with no limitations on foreign investment have already experienced an FDI boom in the Philippines. Business process outsourcing is one that has emerged as a main driver of the country’s economic growth. Even if salaries are higher than in neighbouring countries such as Vietnam, dozens of US and European companies have set up support centres in the Philippines to take advantage of its English-speaking population.

Today, the sector generates $23bn in annual revenues, or 8% of the GDP, with about 70% generated directly or indirectly by US companies. The local IT-Business Process Association believes it can grow its turnover to $38.9bn by 2022.

Investment in manufacturing, which has been slowed by the country’s relative high production costs, is also taking off. “We are seeing a resurgence of the manufacturing sector as it grew between 8% to 12% in the past five years, from 3% to 4% in the previous five years,” says Mr Ceferino.

Asian partners have made up half of foreign investment in the industrial sector in the past five years. Japanese companies have been particularly active in setting up facilities in the country as they move production out of China, as has been the case for major producers of printing devices such as Canon and Brother.

Pivot to Asia

Trade and investment ties with Asian neighbours are set to get stronger as Mr Duterte is championing a rebalancing of foreign policy away from the US towards rising regional forces such as China. He backed up this shift with an escalating anti-US rhetoric that reached its climax during a recent state visit to China in late October, where he announced military and economic “separation” from Washington.

“It’s all about rebalancing the economy,” says Mr Pernia. “We want to be part of a better integrated Asia, with closer neighbours with whom we share a common culture and have a better understanding. We don’t want to be dominated by one country.”

Mr Duterte’s visit to Beijing was aimed at fully restoring friendship between the two countries as he froze any follow-up to the UN ruling granting the Philippines rights over disputed waters in the South China Sea. This rapprochement paid immediate dividends as Beijing pledged funding and investment of as much as $24bn, most of which is functional to the government’s agenda for infrastructure development. Mr Duterte also travelled to Japan, Philippines' second largest source of FDI, where he bagged investment promises for another $1.8bn.

Should US investment drop as a result of Mr Duterte’s rhetoric – there was a palpable malaise within the US investment community in Manila in November, and US figures are already waning – together with president-elect Donald Trump’s anti-outsourcing stance, Asian investors are ready to fill the void. In the first 10 months of 2016 they have invested 34% more than US and European investors combined. The Philippines’ decision to tilt towards Asia may continue to generate debate and controversy, but it is already happening.