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Consultancy says political risk a blot on PHL outlook

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Rodrigo R. Duterte
‘A longer term concern... is (President Rodrigo R.) Duterte’s erratic and crass leadership style, which is showing signs of putting off investors.’ -- Capital Economics -- AFP

BIGGER tax collections and a local infrastructure boom can be expected to help sustain Philippine economic growth, Capital Economics said in a report on Tuesday, even as it warned that persistent political uncertainties could dampen investor appetite.

“While higher inflation and the shift in the current account to the red will weigh on the country’s prospects, the much bigger concern for the economy over the long term is the string of inflammatory comments and policy changes which have raised concerns in the minds of investors over (President Rodrigo R.) Duterte’s judgement and commitment to the rule of law,” senior Asia economist Gareth Leather said in the report.

“The upshot is that while we expect growth to hold up well in the short term, the risks to growth are tilted firmly to the downside.”

The economic research consultancy noted that the growth momentum has been kept intact on the back of “sensible reforms” put in place two years into Mr. Duterte’s term.

The think tank branded the planned infrastructure spending boost as the “main achievement” of the current administration, building on gains of its predecessor. The Duterte administration plans to spend P8-9 trillion up to 2022, when it ends its six-year term, on its “Build, Build, Build” infrastructure development campaign, with such expenditures targeted to be equivalent to 7.3% of gross domestic product (GDP) by the final year.

And the fact the government has enacted the first of up to five planned tax reform packages is a good start to providing more funds for development priorities.

“Encouragingly, the government has started making progress in this area,” Capital Economics said, noting that more changes in the tax regime are due in the coming years.

State revenues totaled some P1.186 trillion as of May, up by a fifth from 2017’s first five months, while public disbursements grew a fourth to P1.33 trillion, according to latest available Treasury data.

At the same time, Mr. Leather cited surging inflation and a growing trade gap due to heavy importation of capital equipment as “short-term” concerns for the economy.

The Philippine economy grew by 6.8% in the first quarter versus a 7-8% goal for the full year, and Budget Secretary Benjamin E. Diokno said earlier this month that there is a chance that second-quarter GDP growth — scheduled to be reported on Aug. 9 — would clock at least seven percent.

Inflation, however, has breached the central bank’s 2-4% target range for full-year 2018 at 4.1% as of end-May. Slowing month-on-month inflation prompted the central bank in its June 20 policy review to slash its 2018 inflation forecast to 4.5% from 4.6% previously.

Other notable reforms include the order to ban cigarette smoking in public spaces, free contraceptives for the poor and a bigger budget for education, according to the report.

Capital Economics said Mr. Duterte’s decision to leave economic matters to the likes of Finance Secretary Carlos G. Dominguez III, Socioeconomic Planning Sec. Ernesto M. Pernia and Mr. Diokno provides “reassurance” to investors that economic management is insulated from the war on drugs and other controversial policies.

“A longer term concern, however, is Duterte’s erratic and crass leadership style, which is showing signs of putting off investors,” the report stated.

“So far, there does not appear to have been much impact on growth. The economy remains one of the fastest growing in the region,” it added.

“However, there are signs that this is being put at risk by Duterte. Improvements in the business environment appear to have ground to a halt,” the analyst said, citing falling foreign direct investment (FDI) pledges and the stock market’s volatility in the face of both foreign and domestic concerns.

FDI committed with investment promotion agencies dropped 37.9% to P14.2 billion in the first quarter from a year ago, according to the Philippine Statistics Authority. However, actual FDI inflows tracked by the central bank jumped by 43.5% as of end-March to hit $2.175 billion.

“The bigger risks are over the long term,” Mr. Leather said.

“The Philippines’ own history shows how poor leadership and political uncertainty can hold back an economy.” — Melissa Luz T. Lopez