Matthews Asia Snapshot
Inside the Philippines
Week of 02 January 2018
Since taking office in mid-2016, Philippine President Rodrigo Duterte has made headlines for his tough talk and “strongman” style. He made a much-publicized break with the United States and has waged a war on drugs, both of which have created an impression of the Philippines around the world.
But looking past this external image during our recent visit, we found a country in solid health, growing at a 6%+1 pace on broad-based domestic and external demand, with leadership that is focused on poverty reduction and income redistribution. In mid-December, the federal government passed a key tax bill, the first of its broader tax reform program, which aims to reduce loopholes in the system while giving tax exemptions to a large proportion of lower income earners and includes a reduction in corporate taxes to 25% from 30%.2
The first bill raises the minimum threshold for personal income tax, giving lower-income households more disposable income and included a lower-than-expected auto tax and sugar tax, all of which will help fund a US$165 billion “Build, Build, Build” infrastructure plan spanning 75 large projects3 that should underpin productivity gains over the next two decades. Over the near term, resurgence in agriculture after several seasons of drought is boosting consumer confidence and spending. These developments have helped President Duterte secure a high approval rating domestically. Manila also drew favorable attention in November as host of the ASEAN summit that celebrated 50 years of progress, with U.S. President Donald Trump in attendance.
Whenever we visit the Philippines, we closely watch its manufacturing levels and keep a check on such emerging risks to the business process outsourcing (BPO) sector as automation, which is likely to reduce the labor force over time. This makes it imperative for the Philippines to discover new growth engines. The Duterte administration has responded by designating five priority industries for development: manufacturing (autos); agribusiness (high-value crops); infrastructure and logistics; information technology/ business process management; and tourism. Agriculture and tourism represent “low-hanging fruit,” given low productivity levels in farming and modest foreign tourism arrivals, while manufacturing may develop as power costs fall and logistics improve.
We are encouraged by the increase in certain manufacturing employment targets, and we believe that foreign direct investment in light manufacturing may also respond to efforts to improve labor force flexibility through the introduction of a new apprentice law that allows the hiring of non-tenured employees for up to two years at 75%4 of the minimum wage.
Although the country’s fiscal outlook generally bodes well for growth, the corollary will be the widening of fiscal and external balances. This year, the government appears on track to meet its ~3% of GDP fiscal deficit target5 following years of underspending.
Overall, the Philippines appears capable of continuing to deliver on solid GDP growth over an extended period. We are optimistic that corporate revenues can grow in this compelling environment.
Investment Strategist, ASEAN
2 Philstar Global
3 Republic of the Philippines, National Economic and Development Authority
4 Philippines Technical Education and Skills Development Authority
5 Republic of the Philippines Department of Budget and Management
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