POLITICAL ISSUES are unlikely to derail the Philippines’ robust growth prospects as economic reforms are expected to stay on track, Nomura analysts said in a new report.
“The main risk to our otherwise positive view stems from domestic politics, specifically an escalation of the campaign against drugs, which could continue to weigh on investor sentiment,” Nomura said in its Asia 2017 Outlook report.
“That said, if reforms continue, as we expect, their positive implications for growth are unlikely to be overshadowed by a pick-up in political risk premia.”
The Dec. 8 report also noted that “[t]he Philippine economy starts 2017 from a position of strength and can better withstand the impact of rising external risks than most other countries in Asia…”
“Domestic demand should remain the overarching driver, particularly investment spending, which we still expect to rise and offset the negative contribution from net exports.”
Gross domestic product (GDP) growth averaged seven percent as of end-September, led by a 7.1% expansion last quarter, against the government’s 6-7% target for the entire year.
President Rodrigo R. Duterte has been a headline-grabber in the first six months of his presidency due to tirades against the country’s western allies and economic partners, an abrupt policy pivot towards China and Russia, as well as his threats to kill narcotics peddlers and users that the political opposition has blamed for thousands of deaths on the streets since he took power on June 30.
“We are less concerned with the potential for adverse changes to foreign policy. President Duterte’s pivot to China should help reduce tensions in the South China Sea which should also prove beneficial to the region, while the pronouncements to reduce ties with the US are unlikely to get public support, although there is some uncertainty still over the Trump presidency,” Nomura added.
Economists Euben Paracuelles and Lavanya Venkateswaran also cited “early signs” that the administration will stay true to the 10-point socioeconomic agenda it unveiled even before Mr. Duterte took office and which signaled policy continuity from reforms of the past that have been credited for today’s strong growth momentum.
“There are early signs of strong adherence to the 10-point economic agenda, which stresses policy continuity and more reforms,” the report read.
“We believe the government will likely make steady progress on cutting red tape and corruption, which we view as a credible commitment from the president given his track record of promoting good governance in Davao,” it added, referring to Mr. Duterte’s bailiwick where he had served as mayor for three years.
“We also see a high likelihood of comprehensive tax reforms, including cuts to both personal and corporate tax rates, which have already been presented to Congress.”
Various government agencies have reviewed current procedures to streamline frontline services, in keeping with Mr. Duterte’s order during his inaugural State of the Nation Address.
At the same time, the first tranche of the Finance department’s tax reform package has been submitted to the House of Representatives which would entail lowering income tax rates for individual taxpayers, to be offset by a wider value-added tax base and higher oil excise levy. The entire five-phased tax reform program was initially estimated to generate P368.1 billion in cumulative net collections over a three-year period, with P566.4 billion in projected overall gains expected to offset P198.3 billion in funds to be foregone.
Such reforms are expected to attract more foreign direct investments to the Philippines, which in turn are projected to generate more jobs while also boosting the country’s external payments position.
The economists also said that a narrower current account surplus should not be a concern, as surging imports — especially capital goods — that outpace exports signal strong investments ahead.
“We are not concerned with the narrowing current account surplus… because it reflects a much-needed increase in investment ratios,” the analysts said.
Moreover, the wider fiscal deficits are unlikely to crowd out private investments which, if anything, are also picking up,” they added, saying “[t]his is a key reason why real GDP growth has strengthened over the last few years.”
Nomura expects Philippine GDP to grow by 6.9% this year, 6.3% in 2017 and 6.5% in 2018, which are higher than forecasts given by other banks and international credit raters.
The Duterte administration plans to ramp up infrastructure spending to as high as 7% of GDP from a target of about 5% currently, with amounts to be spent over the next six years to reach as much as P9 trillion. This is seen to assist annual growth to average 7-8%, while trimming poverty and unemployment rates.
10 December 2016
By Melissa Luz T. Lopez
