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Better PHL-China ties expected to boost construction

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IMPROVED BILATERAL relations between the Philippines and China will boost the construction industry, according to the Fitch Group’s research arm, as it raised its forecast for that sector.

Fitch Solutions said in a Dec. 14 note that the Philippines’ construction industry could grow by an average of nine percent in 2019-2027, faster than its initial estimate of 8.8%.

“Growth of the construction industry in the Philippines will be boosted by improving bilateral ties with China. In light of the positive developments between the two nations, we have made an upward revision on our forecast to the long-term growth rate for the Philippine construction industry from an average growth of 8.8% to 9.0% between 2019 and 2027,” Fitch Solutions said in its note.

Philippine Statistics Authority data show public and private construction growing by 13.3% as of September from 5.3% in 2017’s counterpart nine months.

“We expect increased Chinese involvement in the road and railway sectors in particular, given China’s expertise in the construction of such projects, which will help to drive growth,” Fitch Solutions added.

“However, we don’t rule out downside risks to this outlook given the history of geopolitical tensions between the two countries, which could resurface and hinder infrastructure cooperation,” it added, referring to both country’s contesting claims to an area in the South China Sea.

Chinese President Xi Jinping made a state visit to the Philippines on Nov. 20-21 that yielded 29 general agreements covering infrastructure, agriculture, trade, finance and humanitarian assistance. “We believe that the Philippine construction industry in particular is in pole position to benefit from agreements signed between the two leaders,” the note read.

China has so far agreed to provide some $9 billion worth of official development assistance (ODA) to the Philippines as part of some $24 billion in investment pledges made during President Rodrigo R. Duterte’s state visit to Beijing in October 2016 where he dramatically announced his “separation” from the United States.

“China’s willingness to invest and swift execution of agreements are welcoming signs for the infrastructure industry, where projects often progress slowly due to the existence of complex issues such as financing, land acquisition, lack of technical expertise and weak political will. Chinese involvement in Filipino projects is expected to expedite the progress of infrastructure projects, boosting the growth of the construction industry in the next decade,” Fitch Solutions said.

“We expect the construction of Chinese-backed Filipino projects to gather pace in the following years…”

About a third of the Duterte administration’s 75 flagship infrastructure projects are proposed to be funded by China.

The Duterte administration has so far inked two loan agreements with China, which include one worth $62.09 million for the Chico River Pump Irrigation Project and another worth $232.5 million for the New Centennial Water Source Kaliwa Dam Project. These are on top of grants for bridge projects, drug rehabilitation facilities and agricultural facilities, among others.

The Philippine National Railways’ South Long Haul Project and the Safe Philippines Project Phase I to be undertaken with Beijing’s help are inching towards a loan agreement.

Other projects lined up for China funding include: the Ambal-Simuay River and Rio Grande de Mindanao River Flood Control Projects, the Davao-Samal Bridge Construction Project, Pasig-Marikina River and Manggahan Floodway Bridges Construction Project, Subic-Clark Railway Project and the Rehabilitation of the Agus-Pulangi Hydroelectric Power Plants Project.

Fitch Solutions also said that while China has not been keen on rail projects in the Philippines so far, “riding on the positive momentum of improving ties between the Philippines and China, we anticipate Chinese companies to play a greater role in rail and road projects.”

“We note that the largest foreign investors in the road and rail sector currently are the United States and Japan, and China has little involvement in these sectors,” the note read.

“This competitive landscape is expected to change, however, with the two countries identifying transport as one of the key areas of cooperation under the ‘Infrastructure Cooperation Program between the Government of the Republic of the Philippines and the Government of the People’s Republic of China (ICP)’ agreement. Under this agreement, the Philippine government is able to tap into China’s extensive experience in road and railway construction to plug the country’s infrastructure gap.”

At the same time, both countries’ dispute over an area in the South China Sea will always be a Damocles sword over improving relations.

“As identified by our Country Risk Team, segments of the Philippine population have expressed discontent at the government’s welcoming stance towards China. The South China Sea dispute will continue to pose a downside risk as projects can potentially be suspended or cancelled if tension between the two nations escalate. Such a risk will be amplified once the leadership transition takes place during the 2022 Philippine Presidential Election, where the current President Rodrigo Duterte is expected to step down,” the note read.

The Duterte administration has chosen to stay mum in its dealings with China when it comes to enforcement of a 2016 international arbitral ruling that struck down Beijing’s vague basis for claiming much of the South China Sea. Instead, the government has been working on a joint exploration agreement with China for the resources in the disputed waters. — Elijah Joseph C. Tubayan

Which countries are home to companies involved in Philippine road and railway development?

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