President Rodrigo Duterte hosts a dinner with the members of Wallace Business Forum in the Malacañan Palace on December 12, 2016. Also in the photo is Wallace Business Forum Founder Peter Wallace.
Presidential photo/Ace Morandante
Businesses welcome economic reforms as political risks persist
Ian Nicolas Cigaral ( - February 20, 2020 - 4:17pm

MANILA, Philippines (Update 2, 6:24 p.m.) — When he entered office in June 2016, President Duterte vowed to free the Philippines from the “clutches” of traditional business elite and open up the economy to foreign competition. Nearly four years into his single six-year term, his economic advisers are one in trumpeting economic gains, from a third telco player to opening up the rice industry.

A new accomplishment is likely to be added on that list soon after Duterte’s allies in the House of Representatives approved on second reading Tuesday a priority bill that amends the Public Service Act (PSA) and allow full foreign ownership of critical public services such as telecommunications, irrigation, sewerage systems, power supply and transportation facilities.

Business groups have welcomed the Lower House’s vote and so did economists that have long batted for the lifting of the charter’s foreign ownership restrictions. For them, it shows that despite Duterte’s controversial statements against certain businesses, the PSA reform shows the president is on top of his game.

“It can certainly appease and encourage investors to see in a different light the current decisions of the government,” Cid Terosa, economist at University of Asia and the Pacific, said in an interview.

John Forbes, senior advisor at American Chamber of Commerce that had long pushed for the Philippines to open up more economic sectors, agreed. 

“The PSA is a key reform that should attract many new investors in public services and increase competition to the benefit of Filipino consumers.” 

At the same time though, the same people reminded that the euphoria over the reforms is masked by Duterte’s persistent attacks on businesspeople he called “monsters.” The impact is already being felt with crucial foreign investments plummeting as political risks scare away investors at a time Duterte is also scrambling to finish his trillion-peso “Build, Build, Build” infrastructure ambitions.


Reform recognized

Since December last year, Duterte has blasted Ayala-led Manila Water Co. Inc. and Maynilad Water Services led by Manuel V. Pangilinan for their supposedly “onerous” contracts with the government way back in 2001. 

Last month, the chief executive started attacking media firm ABS-CBN Corp., punctuated by a pending petition from state lawyers to null the network’s franchise that resulted into P258-million worth of market capitalization losses. Shares of these companies are now struggling to recover.

READ: BSP chief: Review of gov’t contracts with businesses won’t dampen investor confidence | ABS-CBN shutdown a blow to economic diversity, investor confidence

For Calixto Chikiamco, director of think tank Institute for Development and Econometric Analysis, said Duterte's rants against Manila’s water concessionaires and ABS-CBN is limited to those industries and should not affect the over-all investor environment.

“Outside of these areas, if foreign investment in transportation and telecoms is liberalized, then we can expect more direct investments in those sectors,” he said in a separate e-mail.

“Better if the administration lifts the foreign ownership restrictions in the Constitution,” he added.

The bill, once enacted, would end persistent concerns over foreign ownership of certain companies in industries where foreign exposure is currently limited to 40%. On the current scenario, the immediate impact would be felt on ride-hailing apps like Angkas which caught regulatory scrutiny for allegedly being fully-owned by its Singaporean chief executive, Angeline Tham. The company has denied the allegations.

New foreign players also stand to benefit. Indonesian ride-hailing unicorn GoJek, which has struggled to enter the local market because of similar foreign ownership issues, may find its problem resolved once the bill is signed into law. This, in turn, would allow the company to challenge Grab’s local market dominance and benefit commuters through lower fares.

On the other hand, red flags have also been raised about the bill’s progress at a time Chinese firms are setting afoot in the local business landscape. The concerns are rooted on Chinese companies’ global reputation as state conduits tasked to gather intelligence on other countries, allegations denied by Dito Telecommunity, the third telco player 40% owned by China Telecommunications Corp.   

Sanctity of contracts

That said, observers have generally applauded past economic liberalization efforts such as the lifting of rice import caps, and the progress on PSA reform is an added milestone to the list.

The latest recognition was given by Fitch Ratings, a debt watcher, last February 10. The credit rater revised to “positive” from “neutral” its outlook for the Philippines’ BBB- rating, indicating an upgrade is likely over the next two years.

READ: Philippines inches closer to rating upgrade after Fitch raises outlook to 'positive'

Interestingly, Duterte’s recent economic reforms have failed to impress foreign investors alike.  The benchmark Philippine Stock Exchange index is taking a beating so far this year, losing 5.4% as of Wednesday since the last trading day of 2019, worsened by investor apprehensions over the spread of Coronavirus Disease-19 in the region.

The country is also losing more productive inflows. Central bank data show job-generating net foreign direct investment (FDI) inflows likely closed 2019 down for the second straight year, with its latest tally as of November already showing a contraction of 30% year-on-year.

While part of investor concerns center on uncertainties surrounding a government plan to reduce tax perks, FDI in other Southeast Asian countries in the region like Malaysia and Singapore continued to be on the uptrend.

Some analysts believe investors are starting to weigh political risks associated with Duterte’s pronouncements. This includes a unilateral review by the government of valid contracts with the private sector, which for Michael Ricafort, economist at Rizal Commercial Banking Corp, is a big turn-off.  

“Sanctity of contracts or not changing the rules in the middle of the game would help assure foreign investors,” he said.

Emilio Neri Jr., lead economist at Bank of the Philippine Islands, went as far as questioning Fitch’s latest positive credit action on the Philippines. “The question is whether Fitch dug enough information on whether predictability is improving, stable or actually deteriorating,” he said in an e-mail.

With clock ticking, Duterte’s economic team has put forward more economic reforms on the table, including lifting sugar import barriers and removing protection to local retailers so that more foreign retail brands can enter.

Whether these measures or Duterte’s “rants,” as Chikiamco has said, would resonate more to investors remains to be seen. 

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