Twin foreign policy developments seen favoring Philippines

By Melissa Luz T. Lopez, Businessworld, Jan. 28, 2017

PRESIDENT Rodrigo R. Duterte’s shift to a “multilateral” foreign policy and the United States’ pullout from the Trans Pacific Partnership (TPP) arrangement that excludes the Philippines are expected to help boost the latter’s trade and investments, according to analytical notes released on Friday.

Newly seated US President Donald J. Trump’s protectionist slant, however, bears watching for the risk it poses Asia-Pacific (APAC) economies.

REBALANCING

Mr. Duterte’s foreign policy rebalancing towards regional neighbors is expected to fast-track the recovery of exports and help assure six percent economic growth over the next few years, said analysts at BMI Research, adding to a push from bigger state spending and an improved business climate.

BMI expects economic growth to clock 6.3% in 2017, staying robust although slightly slower than last year’s 6.8% average as trade and investments are expected to remain growing in the months ahead.

If realized, however, this would miss the government’s 6.5-7.5% growth goal for the year.

“(Mr.) Duterte’s pragmatic and friendly posture towards China and Japan will help to boost trade and investment relations with the two economic powerhouses in the region, further reinforcing our positive view on the economy,” the Fitch unit said in a Jan. 27 report, referring to statements made by the President on cultivating closer ties with Asian economies.

This will help sustain a six percent average economic expansion “over the coming years,” BMI analysts added.

In an Oct. 20 speech in Beijing, Mr. Duterte announced his “separation” from the US in military and economic terms, although Cabinet officials explained the morning after that he meant the Philippines will merely develop closer ties with Asian economies like China without cutting ties with the US.

The President has since visited Asian countries in his first six months in office, raking in billions of investment pledges.

Mr. Duterte has since claimed rapport with Mr. Trump, departing from his hostility towards former president Barack H. Obama for the latter’s statement of concern over the Philippines’ bloody anti-narcotics war.

Exports are expected to recover further under Mr. Duterte — both in terms of goods and services like business process outsourcing (BPO) — although risks lie ahead with possible policy changes in the United States.

“[W]e expect the Philippine export sector to remain a key beneficiary of the shift in (Mr.) Duterte’s diplomatic stance, as well as the investment boom. The external sector has remained resilient in spite of global trade slowdown, registering a real growth rate of 10.4% year-on-year in Q416, with service exports (which are dominated by BPO) surging by 13.6% year-on-year,” the Fitch unit noted.

TRUMP FACTOR

“On the downside,” BMI added, “Donald Trump’s anti-trade rhetoric could see US outward investment decline over the coming quarters as his administration threatens to slap tariffs on companies who refuse to put ‘America first’ and bring jobs back to the US.”

“The Philippine BPO sector could bear the brunt of Trump’s protectionist policies given that the industry is dominated by American firms.”

Merchandise exports have been on the decline during the past year, mirroring weak global activity as it posted a 5.2% drop as of end-November, according to preliminary data from the Philippine Statistics Authority.

On the other hand, BPO receipts and overseas workers’ remittances have helped offset the trade in goods deficit and kept the current account in surplus as of end-September, according to the Bangko Sentral ng Pilipinas.

Overall, an above-6% growth is penciled for the year given plans to substantially increase government spending particularly on infrastructure, coupled with gains in improving the ease of doing business in the Philippines that should attract more foreign investments.

Much also depends on how fast the government would roll out infrastructure projects and public-private partnership deals, BMI said.

“Even though the Philippines boasts a large, cheap and relatively well-educated workforce — with English being one of the two national languages — foreign investors have often been deterred by the poor business environment,” the report read.

“However, we expect this trend to continue to reverse going forward.”

The government is looking to spend as much as P9 trillion over the next six years on public infrastructure to raise its share to seven percent of gross domestic product (GDP), which in turn is expect to bring average growth to a high of eight percent while trimming poverty to a record low by 2022.

UNEXPECTED BOON

Moreover, the US pullout this week from the TPP will spare non-participants like the Philippines from potential diversion of trade and investments to those included in the arrangement, Fitch Ratings said separately, even as Mr. Trump’s “protectionist” slant could hurt Asia-Pacific economies.

On Monday, Mr. Trump signed an executive order that formally pulled out the US from the TPP — an alliance formed by his predecessor Barack H. Obama — effectively loosening ties with Asia, with the Republican president saying he would negotiate “one-on-one” trade deals with other economies instead.

Although the TPP was believed promising for regional integration and economic growth among participants, Fitch said the arrangement was unlikely to be a “game-changer”.

The Philippines is among the least exposed to the TPP fallout, Fitch said, and may actually find room to swoop in and take the American deals previously limited to bloc members.

“Member countries will miss out on potential benefits, but non-participants will be spared the potentially damaging effects that could have ensued from trade and investment being diverted to TPP participants. China, Indonesia, the Philippines and Thailand were notable non-participants in APAC, although some may have come under pressure to join later on,” Fitch said in a statement sent on Friday.

“The TPP would have lowered tariffs among its 12 member countries… The TPP, therefore, had the potential to help drive structural reforms that could have raised productivity and lifted foreign investment in a number of economies, particularly those with weaker business environments.”

The previous administration of former president Benigno S. C. Aquino III had started informal talks as it considered joining the TPP, but did not formally pursue membership since the Philippines would have been forced to lift foreign ownership limits that are enshrined in its constitution — a reform the past administration had opposed.

Minus the US, TPP participants now consist of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, said to account for about 40% of global trade, Reuters reported.

Fitch said Vietnam would have been among the biggest winners under the international deal, with the potential to boost GDP by 8% come 2030 according to market studies. Malaysia, Singapore, and Japan are also likely to profit from their TPP links, given their trade exposure to other member economies, the credit rater said.

The credit rater said a bigger concern would be Mr. Trump’s overall protectionist stance, which is a campaign promise that took shape during his inauguration speech that centered on an “America-first” policy.

A potential US “trade war” with China could spill over to Asian economies, Fitch pointed out.

“We believe this could potentially be more relevant to the APAC economic outlook than US withdrawal from TPP,” the debt watcher said.

VULNERABILITY ‘HIGH’

For Nomura, “the Philippine economy remains on solid footing, with a strong growth outlook and falling unemployment rates… supported by structural reforms that are boosting investment spending which, in turn, is pushing potential growth higher to 6.2%.”

“We think reforms will continue under the new government of President Duterte, particularly on reducing corruption and red tape, and implementing tax reforms designed to support an ambitious infrastructure agenda,” Nomura said in a report, titled: EMs struggle with “America-first” policy.

“FDI inflows are also rising, supported in part by a full liberalization of the foreign ownership in the banking sector,” it added of foreign direct investments.

At the same time, the Philippines’ vulnerability to US protectionist policies is “high”.

“There are a number of channels through which the Philippines could be affected,” Nomura noted, citing the Philippines’ merchandise trade surplus with the US that is equivalent to 0.7% of GDP.

“If the US tightens its immigration policies — which leads to fewer migrant workers — this could impact remittances inflows back to the Philippines. The US is host to 34.5% of the total overseas Filipino population, which we estimate comprises about 31% of total worker remittances,” it added.

“(Mr.) Trump’s commitment to bring jobs back to the US may also affect the increasingly important BPO sector, which caters mostly to US corporates. FX revenues from the BPO sector are projected to equal total worker remittances (about nine percent of GDP) in the next few years.”