The Philippines’ transport market

From the moment Rodrigo Duterte was elected in May 2016, the controversial President of the Philippines didn’t waste any time getting to work. First came a brutal anti-narcotics campaign that has driven up homicides in the country, followed by the public denunciation of US President Barack Obama and a threat to withdraw from the United Nations.

“Duterte is not just crass and brutal, he is alarmingly volatile,” The Economist was quick to judge, claiming that investors are now demanding a higher risk premium to hold Philippine assets, while locals worry about the President denouncing their businesses as transgressors without producing any evidence.

“All this, naturally, frightens both local and foreign investors and threatens to undermine the Philippines’ newly acquired status as South-East Asia’s economic star,” The Economist elaborated – pointing to a different, less violent narrative that has budded parallel to Duterte’s much publicised war on crime.

According to the World Bank, the Philippines is an ASEAN powerhouse in the making. The country’s economy grew seven per cent year-on-year in the second quarter of 2016  – roughly double the long-run rate, and faster even than China. The population is young and English speaking, and a booming service sector is keeping talent from seeking their fortunes abroad, in turn anchoring strong domestic consumption.

For a country that was once dubbed the Sick Man of Asia, that’s a promising turn of events, says Motoo Konishi, the World Bank’s Country Director for the Philippines. “There is macroeconomic stability, and the fiscal situation of the government is sound and improving [too].”

Konishi’s verdict was backed by a Reuters report in August that labelled the Philippines as “Asia’s fastest-growing economy”. However, it’s not Duterte who is to thank for having put the nation into such a strong financial position. “During the six-year term of Duterte’s predecessor, Benigno Aquino, the Philippine stock market boomed,” The Economist pointed out. “Duterte thus took over a country that was doing very well economically.”

Herein lies the true Philippine dilemma: With a campaign focusing not on abstractions such as foreign investment and the proper strategic balance between China and America, but on quotidian concerns such crime, traffic and corruption, Duterte made a significant change to the nation’s narrative and risked losing a hold of the economy.

“Duterte won the presidency on a populist platform promising ‘real change’ and inclusive growth, which means that everyone benefits from economic growth. Now critics are saying they are getting tired of the administration touting the war on drugs as an achievement and calling Duterte a one trick pony,” comments Deutsche Welle correspondent, Ana Santos – pointing to an article in the South China Morning Post, where Steven Keithley wrote that the drug wars were merely a smokescreen masking Duterte’s inability to make hard decisions on economic plans and territorial disputes in the South China Sea.

In fact, Duterte has readily admitted that economic policy is not his strong suit and promised to “employ the economic minds of the country” and leave it to them. His advisers duly released a sensible ten-point plan for the economy that emphasised macroeconomic stability, improved infrastructure, reduced red tape and a more straightforward and predictable system of land ownership.

The question, now, is just how much of a course correction will he truly get underway? “Unfortunately, Duterte’s love of lynching and his propensity to slander the mothers of foreign dignitaries are making investors nervous,” The Economist’s September issue stated bluntly, hinting to a warning issued by the American Chamber of Commerce last month that said the anti-drug campaign effectively called the government’s commitment to the rule of law into question.

“Many investors have been turned off by the threatening remarks made by Duterte against the US and China, casting doubt on the future of Manila’s foreign policies and his handling of the economy,” CNBC re-emphasised, with Santos saying “the lack of direction is leading to investor jitters and confusion, particularly in the mining sector.”

As a result, local businesses are rapidly starting to question Duterte’s economic prowess, with many expecting the drug trade to only subside temporarily going into 2017, while the damage done to democratic institutions and business confidence could linger. That, in turn, could also affect the commercial road transport realm, which is traditionally tied to GDP and domestic consumption data.

Another unknown is Duterte’s policy on infrastructure development. According to research by the Oxford Business Group, road transport is essential for the Philippine economy, with 58 per cent of all cargo travelling by road – but the nation’s road network remains largely underdeveloped. While the shortcoming is mostly due to the country’s mountainous topography, critics argue that Duterte still has to ‘walk the walk’ following the publication of his ten-point plan. In the country’s capital of Manila, an estimated 4.6 per cent of GDP are already lost to traffic every year.

In a move to solve the problem, the Metropolitan Manila Development Authority (MMDA) implemented a truck ban in September last year that hindered both articulated combinations and rigid trucks from entering metro Manila. While somewhat successful at keeping traffic at bay, the ban simultaneously undermined the supply chain and kept a range of infrastructure projects from coming off the ground – effectively creating a catch-22 for the local logistics community.

One solution could lie in the apparent thaw in previously frosty relations between Manila and Beijing, ties that had been strained over China’s assertive territorial claims in the South China Sea, which the Philippines and several other neighbouring countries have rebuffed. In October, Philippine Finance Minister, Carlos Dominguez, announced that President Duterte would seek billions in infrastructure investments from China over the coming months – which Chinese firms are open to providing, according to Business Insider.

“The clouds are fading away. The sun is rising over the horizon and will shine beautifully on the new chapter of bilateral relations,” Zhao Jianhua, the Chinese ambassador to the Philippines, is quoted as saying.

Regardless of infrastructure shortcomings and political uncertainty, though, the country’s transport equipment industry still has every reason to remain optimistic – too big are the opportunities that come with the nation’s economic boom, even under controversial leadership. According to the Philippine Statistics Authority, the country’s transport equipment industry grew a staggering 37.4 per cent in August 2016, year-on-year, signifying that even in troublesome times, there is a need for trucking to keep the economy going.

The remaining question is whether or not the Duterte administration will provide the right framework for that growth to continue or whether controversial policy-making will scare off investment into new equipment and slow down the economy as a whole.

The pessimistic view sees Duterte continuing to lose support and alienate industry, The Economist recapped. But even the World Bank had to admit that, “notwithstanding lingering uncertainty about the administration’s reform agenda, the Philippines will continue to grow.”

As such, optimists speculate that if Duterte does follow through on budding pledges to improve infrastructure and boost rural development, he might even leave the Philippines in a better condition than he found it.

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