By: Martin Hutchinson, Global Markets Analyst
On May 9, Philippine voters shook up their political system by electing a Trump-like nationalist from outside of their traditional oligarchy.
Luckily, the bombastic Rodrigo Duterte has a good track record as the Mayor of Davao and, more importantly for us as investors, he’s not a socialist. Like Thailand’s Thaksin Shinawatra (elected in 2001), his goal is to distribute the Philippines’ new wealth beyond Manila to the whole archipelago.
Hopefully, he’ll meet a better fate than Shinawatra, who was forced out by a coup in 2006. His election certainly bodes well for the country’s economy, as well as its companies.
Spreading the Wealth
Since dictator Ferdinand Marcos was ousted in 1986, the Philippines’ politics have been dominated by a number of elite families.
For example, outgoing President Benigno Aquino was the son of the 1986-92 President Corazon Aquino, who won the election that succeeded Marcos’ ouster.
Economic growth was sluggish for decades due to corruption, but picked up under Benigno Aquino, with the Philippines rising from 138 to 95 out of 167 countries on the Transparency International Corruption Perceptions Index.
The business process outsourcing industry has been growing especially fast, providing well-paid opportunities for Filipinos as well as opportunities for them to further develop their skills.
That economic development has been heavily concentrated around Manila, which explains Duterte’s goal of spreading the wealth. For example, the southern island of Mindanao has seen little growth and has living standards about half of those of the capital region. It also has a substantial problem with Islamist guerilla insurgency.
This situation is similar to Thailand from 15 years ago. Growth was rapid in the 1980s and early 1990s, but remained largely concentrated around Bangkok, with a massive real estate boom that culminated in the Asian crisis of 1997 and a collapse in value of the stock market, real estate prices, and the Thai baht.
Shinawatra, a telecom tycoon, was elected in 2001 with massive support from rural Thais on his promise to spread the benefits of growth more equally. He achieved this while maintaining economic growth, but earned the enmity of the Bangkok elite, including King Bhumibol, and was ousted by a coup in 2006.
His sister later returned with a short-lived government, but another coup ousted her. A military government now rules the country, and there’s no sign of any kind of return to democracy.
In the Philippines election, Duterte won with about 38% of the vote, with the two candidates supported by Aquino running second and third, more than 10% behind him.
There’s no election run-off in the Philippines, so Duterte will be inaugurated on June 30.
The Vice Presidency, also an important position, is elected separately. Here, Ferdinand “Bongbong” Marcos, the son of the former dictator, narrowly lost to Leni Robredo, an ally of Benigno Aquino.
A Bright Future
Duterte is no tycoon. But as the long-standing and effective mayor of Davao, a city of 1.4 million people on Mindanao island, he made the city safer and less corrupt, albeit using draconian methods against criminals.
Like Shinawatra, not only does he promise to spread the benefits of economic growth through the archipelago – he’s also not part of the traditional ruling elite.
He does have a habit of making Donald Trump-like statements, which shock the delicate and sophisticated and enthuse his mass following. (In fact, he’s worse than Trump, who hasn’t promised mass executions of criminals, as far as I know.)
As I mentioned to Currency and Capital subscribers, what’s most important for us as investors is that Duterte shows no signs of socialism or grandiose public spending plans.
His economic advisor and probable finance minister is Carlos Garcia Dominguez, a former chairman of Philippine Airways and the Manila Hotel. He has also held office in two of the better recent Philippine governments, those of Corazon Aquino (1986-92) and Fidel Ramos (1992-98). The latter was an especially good president economically.
So as investors, there are two questions we must answer about Duterte:
- Will his desire to spread economic growth more widely lead to massive public spending or a distortion of the markets? Here, given his economic advisors, that outcome seems unlikely. After all, if Shinawatra could combine rural development and growth in Thailand, Duterte should be able to do so in the Philippines.
- Assuming Duterte governs competently, will he be impeached by the Philippine Congress, where (results won’t be known until May 25) he’s unlikely to control a majority? There is a precedent here. The Philippine electorate elected film actor Joseph Estrada in 1998. He was impeached in 2001. If Duterte alienates the elite sufficiently, this is a danger, especially with the elite-friendly Robredo as Vice President.
If he isn’t impeached, Duterte’s term will last six years, and he won’t be able to run again. In spite of a generally skeptical international reaction to his election, the Manila stock market approved of him, rising 5% over the two days after his election.
The Philippines’ economy is in excellent shape with 6% growth and a balance of payments surplus. The Economist’s panel of experts forecast a budget deficit at a moderate 2.1% of gross domestic product (GDP) in 2016.
The market is worth a modest investment, perhaps through the iShares MSCI Philippines ETF (EPHE).
For 27 years, Martin Hutchinson was an international merchant banker in London, New York, and Zagreb. He ran derivatives platforms for two European banks before serving as director of a Spanish venture capital company, advisor to the Korean company Sunkyong, and chairman of a U.S. modular building company. In Zagreb, he established the Croatian debt capital markets, set up the corporate finance operations of Privredna Banka Zagreb, and arranged for the monetization of 800,000 frozen Macedonian foreign currency savings accounts. He has been a financial journalist for over 14 years, and is the author of Great Conservatives and co-author of Alchemists of Loss, which details the causes and consequences of the 2008 financial crash. He currently publishes a weekly column called The Bear’s Lair, in which he comments on the economy and market. He is also a correspondent forReuters’ BreakingViews. Martin has a first class Honors Degree from Trinity College Cambridge and an MBA from Harvard Business School.