This is the continuation of my column last week sharing our presentation to international subscribers of GlobalSource Partners ( at a teleconference on July 23.

So how do we get from our estimate of 6% to government’s 7-8% growth target? I would describe 7-8% as aspirational, considering especially the current global trade environment that has dampened export growth. Although we said Build, Build, Build will add to domestic demand growth, there is high import leakage (40-60% per IMF). An example is cement where imports have grown by a Compound annual growth rate (CAGR) of 30% in the last three years. Also, as we said, all the building activity will aggravate strains on traffic, logistics, and power supply, not to mention that manufacturing plants have been operating at over 80% capacity for some time now.

So, growth will be 6%, maybe even 6.5%, inflation is under control especially with freer rice trade, and markets expect easier local monetary policies ahead consistent with the US Fed’s stance. For a time, there were worries about rising risks from the twin deficits, fiscal and external, in an environment of tightening global monetary and financial conditions. But these have subsided with the changed environment and, at the end of the day, we go back to the basic driver of both deficits which is domestic investment activity, both public and private, which are necessary to propel GDP growth to higher rates in the future. Also, the country has built up ample international reserves to serve as a cushion for higher current account deficits. Based on the IMF reserve adequacy computations, the Philippines has one of the highest ARA (Assessment of Reserve Adequacy) metric (1.83 as of June).

Let me add a word on the trade war. Exports, though still important, have not been big driver of Philippine growth. To illustrate, per our estimate, on a value-added basis, export earnings last year amounted to $35 billion or 11% of GDP compared with a total of $50 billion or 15% of GDP for remittances and BPO. Ten years ago, the comparative numbers were both around 14% of GDP. So, my prognosis is that while we will be affected, the overall impact will not drag growth in a major way. But neither is the Philippines expected to gain significantly from ongoing shifts in production bases. Competitiveness issues remain the key constraints in the short-term. (N.B. Since our July teleconference, trade war and global recession risks have intensified with new Trump tweets and tariffs.)

I will also add three tail risks, one is on the sustainability of Philippine Online Gaming Operator (POGO). The other is a possible power shortage, and the third is a key man risk.

First, the risk that the POGO game ends. There has been talk about Premier Xi Jinping asking for President Rodrigo Duterte’s help to do something about it, a strange request until one considers how closely the industry is perhaps tied to the Duterte administration’s China pivot. However, its continued growth, or even existence is vulnerable to change in the Chinese government’s sentiment, for example, less friendly relations with the next Philippine administration, or a crackdown on money laundering that could be initiated by Chinese authorities or multilateral watchdogs. A sudden stop would have adverse effects not only on direct employment but also on real estate prices, office space demand, and banking profitability. (N.B. POGO’s “game over” risks has increased considerably with progressively firmer diplomatic communications against it by the Chinese embassy since our July teleconference.)

My second tail risk is a power shortage. From a situation of surplus power forecast three years ago, the main grid — which includes Metro Manila services — suffered sporadic shortages and red and yellow alerts earlier this year due to unplanned outages/plant shutdowns and the El Niño drought. Reserves have grown thin due to delays in approvals of several power plants, a long story involving the Supreme Court, the Energy Regulatory Commission (ERC), weak oversight and slow regulatory response. While the ERC seems to be trying to clear the backlog, there is a tail risk that the thin reserves will grow even thinner should there be more delays before new plants come on stream to meet the growing power demand in line with GDP growth.

My third tail risk is a key man risk. If, for whatever reason, Finance Secretary Carlos Dominguez III drops out of the scene, all bets are off. Secretary Dominguez, a highly regarded business executive and technocrat, a classmate of President Duterte from kindergarten and his most trusted political ally and confidant for decades, is likely irreplaceable. Without Secretary Dominguez, it may be difficult to check populists measures that threaten macro stability.

I now come to my last topic, politics. Notwithstanding his international image as a despot, President Duterte is very, very popular locally. He enjoys the support of 85% of Filipinos nationwide and he drove the point home in his State of the Nation Address the other day by highlighting the fact that only 3% of survey respondents disapproved of him, the other 11% are “undecided.” Such approval ratings are historically unparalleled.

For a while, there were concerns that the President, with this much political capital and overwhelming influence over the country’s democratic institutions (Congress, the Supreme Court, constitutional bodies such as the Ombudsman, Comelec), and unrestrained in dealing with the media, the church, oligarchs, however he defines them, or anyone in the opposition, may try to do what it takes to change the Constitution and shift to whatever form of government that would keep him in power. At least based on what he said in his State of the Nation Address, he appears to have given up on the campaign promise to a shift to federalism (which his economic managers called “a fiscal nightmare.”) Not a word was mentioned on it during his speech and he told media afterwards that “I’m out of it.”

But he is clearly not a lame duck at this point. After the midterm elections, he has even stronger supermajority support in both houses of Congress. And, without the charter change distraction, the next one to one-and-a-half years would be good for the economic reform agenda. This is why I am very confident that the remaining tax reform packages will pass quickly.

After that, the last year, year-and-a-half of the presidency would be mostly about succession and positioning for the 2022 presidential elections. The Philippine Constitution limits the president’s term of office to a single six-year term. In one of our earlier reports, we observed that historically, only one incumbent, Cory Aquino, had succeeded in making her anointed successor, Fidel Ramos, win, and narrowly at that. History has not been kind to ex-Presidents who did not manage their succession well. Since 1986, one went into exile, one was under house arrest after being thrown out of office, one spent five years in a military hospital with a neck brace. The last president has several criminal cases hanging over his head.

President Duterte’s goal then for 2022 is to choose a successor who will keep him out of harm’s way. This is where his daughter and her HNP (Hugpong ng Pagbabago) party come in. The daughter is Davao Mayor Sara Duterte, who rose to fame decades ago by punching, on camera, a local government executive who went against her orders in an incident involving the demolition of shanties. Like the father, she is a very popular figure and the betting at present is that she will be the anointed one.

But it is too early to say who the “Presidentiables” will be in 2022, much less who will prevail. Random names I’ve heard include any of three Villars (ex-Senator Manny Villar, ranked richest in the Philippines by Forbes magazine, his wife Cynthia who topped the last senatorial race, and their son, current Public Works Secretary Mark), Senator Grace Poe (who ran and lost to President Duterte), and Senator Manny Pacquiao, the Pacman.

We need to bear in mind some history lessons from Philippine elections. One, in a multi-contested election, as has been recent history, a candidate without a clear majority can win. Winners have been surprises. Two, I am also reminded that “necropolitics” has defined presidential election outcomes on more than one occasion in the past. The story of both Aquino presidents. A third lesson from election history, unlike elsewhere, here it is not the early bird who catches the worm. It is the second mouse who gets the cheese.

And speaking of necropolitics, my political tail risk is the death of President Duterte in office. The President is 74 years old and rumored to be sick. His Vice-President, Leni Robredo, an opposition leader, has reportedly doubled her security detail to discourage any assassination attempt by those who may be adversely impacted by inevitable drastic changes. Even the more likely smooth assumption, as the Constitution mandates, could be disruptive — there will be changes in policy across a wide field, projects will be reviewed, there will be leadership changes across major departments.

To summarize: The key messages I would like to leave with you today are: 1.) the economy is doing well thanks to the economic team that has also been able to push for good economic reforms; 2.) the Build, Build, Build infrastructure program is moving forward with government spending reportedly up to 5% of GDP, a level that I think can be sustained through 2022; 3.) economic growth at 6% to 6.5% over the next three years is resilient but will be hard to sustain if higher than that; and 4.) on the political side… well, we don’t really know… the genius of the man is in keeping everybody guessing.


Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.