Philippine peso’s troubles just beginning

The peso is down 8% and investors are dumping stocks amid doubts about Duterte’s economic agenda.

By WILLIAM PESEK, Mar 22, 2017

Philippine’s President Rodrigo Duterte gestures as he answers a question during a press conference at the Malacanang palace in Manila.

You can spin voters and the media, but currency traders are a harder lot to fool. That’s dawning on Filipinos as markets render a damning verdict on Rodrigo Duterte’s 266 days in the presidential palace.

The peso – down nearly 8% in that time – is buckling under the weight of a chaotic and distracted administration with little time for economic reforms. Lots of body bags – more than 8,000 and counting – but no big wins on attacking poverty, increasing job growth or improving infrastructure. Now, those bodies, casualties of Duterte’s war on drugs, are fueling impeachment talk in Manila.

A longshot, perhaps, but this sudden surge of palace intrigue could further impede whatever economic agenda Duterte might have up his sleeve – and hit the peso even harder. Already, his vendetta against drug pushers and users has derailed much of the momentum that followed populist Duterte into the palace on June 30th.

Prior to that day, investors had been clamoring for peso assets thanks to predecessor Benigno Aquino’s structural upgrade drive. Aquino’s efforts from 2010 to 2016 to increase transparency, strengthen government accountability and repair the national balance sheet won the Philippines its first ever investment grade ratings. Much was left undone, of course. Turning around a long-neglected economy and a notoriously corrupt political system isn’t a six-year job. Voters hoped strongman Duterte would turn Aquinonomics up to 11.

“Duterte Harry,” as he’s known, made his tough-on-crime bones as mayor of Davao City. Voters were also enamored with his economic successes in that southern city, including less inequality than many other Philippine metropolises, his willingness to take on vested interests and attention to improving roads, bridges, ports and power grids. Just as Indians turned to Narendra Modi to take his “Gujarat model” national, Filipinos figured Duterte would drain the swamp in Manila and increase prosperity.

Instead, the peso started this month at 10-year lows, a clear sign investors doubt the “Davao City model” argument. Duterte is being haunted by allegations of involvement with corruption and unlawful killings during his mayor days. While he denies it, the impeachment complaint filed by opposition politician Gary Alejano highlights the magnitude of the resistance Duterte faces – opposition that will make it increasingly difficult to implement economic upgrades. Vice President Leni Robredo, meanwhile, is calling out what she sees as Duterte’s human rights abuses.

Robredo’s public opposition, unprecedented in Philippine history, “will spark questions including among international partners as to the stability of the Philippines’ government,” says Christian Lewis of Eurasia Group. Overseas investors, too, who as of early March had sold more than a net $120 million of Philippine stocks this year.

The outflows could easily accelerate as Duterte Harry’s government descends into “Game of Thrones” farce. He’s tried to oust Robredo, excluding her from policy deliberations and cabinet meetings. Speculation is rife that he wants to replace her with Ferdinand Marcos Jr., son of the former dictator who morphed one of Asia’s richest economies into the “Sick Man of Asia.” Duterte faces accusations of Marcos-like behavior: amassing $40 million and arresting Senator Leila de Lima, a vocal critic, on charges many deem questionable.

DUTERTE IS IN THERE’S-NOTHING-TO-SEE-HERE MODE: trade talks with Chinese Vice Premier Wang Yang, visiting Thailand to discuss South China Sea issues, swinging by Myanmar to “strengthen partnerships,” scoffing at talk of the International Criminal Court putting him on trial over his anti-drug crusade, telling business groups more prosperous days are on the way.

Currency traders aren’t buying it, and wisely so. Duterte’s machine-gun fire squads are distracting him from lowering personal income, corporate and inheritance tax rates, boosting levies on fuel, vehicles, cigarettes and alcohol, reducing tax evasion, attacking official graft, crafting a clear mining policy to tap vast stores of national resources and doing something about productivity-killing traffic in Manila. Each of these changes is vital to attracting foreign capital to pay for better infrastructure, education and healthcare. Each is needed to move the Philippines up on global competitiveness rankings. It’s currently 57th on the World Economic Forum’s index, trailing Slovenia and Turkey.

There’s still time for a presidency course correction. But Duterte must act fast, and convincingly. In September, just 83 days into his term, Standard & Poor’s threatened Manila’s credit rating, warning about policy unpredictability and a drug war that “could undermine respect for the rule of law and human rights.” As if investors weren’t spooked enough, Duterte lashed out at S&P in an expletive-laden rant. “I would say to the ratings [agencies] in business and the economy, so be it. Leave us. Then we will start on our own. I can go to China, I can go to Russia. I had a talk with them, they are waiting for me. So what the hell?”

Currency traders are wondering as much, too. Only they’re not asking questions. They’re selling.