Government Investment News Analysis

A week of victories

BPO in the Philippines
Good news for the Philippines

Good news all round for the Philippines – for the economy, business, peace, foreign relations – as a top ratings agency gives the Philippines another vote of confidence, as a major Philippine services sector (photo) looks assured of retaining its global strength, as the Philippine security forces decimate the Abu Sayyaf terror group and kill its leader-in-waiting, and as Washington makes moves to warm ties with Manila. All in all, not a bad week’s work.

These developments will depress Philippine President Rodrigo Duterte’s critics who for months now have been claiming that he’d wreck the economy, devastate business confidence, deter investment, that his law-and-order policies would not prosper and that he’d sever ties with the US. It’s hard to believe they could be so wrong on so many issues.

So let’s look at these developments briefly, in turn.

Investment ratings. On a “stable outlook” S&P Global Ratings has reaffirmed its ‘BBB’ status – one tick above investment grade – for the Philippines. Explaining its decision, the agency cited Duterte’s 10-point socioeconomic plan for poverty reduction, establishing a law-abiding society and peace settlements with Muslim separatists in the southern island of Mindanao. The president’s priorities for macro-economic stability by “orthodox fiscal, economic, and development policies” were also noted.

This comes on top of similar one-above investment-grade ratings from Moody’s (Baa2), NICE Ratings (BBB), R&I (BBB) and investment-grade from Fitch Ratings (BBB-). All are based on a positive outlook for the economy. The Japan Credit Rating Agency, meanwhile, puts the Philippines at BBB+, two notches above investment grade. In other words, the Philippines has made a clean sweep of all the major credit raters. They all agree the country’s credit worthiness as a debt re-payer is solid.

S&P did sound a note of caution though. It warned that for the Philippines to maintain its rate of economic growth, the infrastructure programme needed to be pushed forward and greater regulatory reforms needed to be implemented.

Of course, Duterte’s economic planners are well aware of this; unfortunately, however Congress doesn’t seem to have taken it fully on board. And nowhere is this more apparent than in a tax-reform package – a four part plan that will put the tax onus at the top-income end. Proposed last September by the Finance Department, the first tranche of this sweeping reform measure is now gathering dust in a committee in-tray somewhere in the House of Representatives. Nothing new there, we know.

But that plan was in part designed to fund Duterte’s bold “Build, Build, Build” infrastructure programme over the term of the administration – with spending targets of 5.4% of gross domestic product (GDP) this year and 7.1% by 2022 when he steps down. At the same time it was looking to boost the fiscal-gap equivalent from last year’s 2.4% of GDP to 3.0% this year.

We have no doubt that Congress will get it done – both Duterte and Finance Secretary, Carlos Dominguez, are pushing hard for this – but time is very much of the essence as so much of the sectoral restructuring, from tourism to telecoms, is tied in with the tax-reform package.

Business Process Outsourcing (BPO). Full economic integration by member states of the Association of Southeast Asian Nations (Asean) within the Asean Economic Community (AEC) will not threaten the Philippines’ standing as the world’s BPO mega-hub. This is the view of the Contact Center Association of the Philippines (CCAP) which, with 100-plus company members – between them producing more than 70% of the sector’s annual revenue – is a reliable advisory body for the industry.

Since its establishment in 2015, the AEC – a US$2.6 trillion market with a population of 622 million people (114 million more than the European Union) – has often been seen as presenting a challenge to the Philippines’ dominance in BOP, the argument being that it would come under an increasing challenge from fellow AEC members.

At the weekend that fear was dispelled by the CCAP’s operations director, Jay Santisteban. As the Asean Summit was winding down, he told media that BPO is now so “entrenched” in the Philippines that its top position is virtually assured.

We’d go further – we believe its position is virtually unassailable. While a number of Asean countries operate a call-centre sector, they’re largely for their domestic markets. Overseas contract business, moreover, is a small fraction of that in the Philippines.

Consequently, for them to make any sort of challenge they would need to make massive investments in the sector to upscale sufficiently to meet the Philippines’ capacity. The Philippines widespread fluency in English is another problem they’d have to overcome. These factors, said Santisteban, puts the Philippines in a unique position; “actually in a very good position,” he said.

Last year, outsourcing earned the Philippines US$23 billion. If the industry’s other large advisory organisation – the IT-Business Processing Association of the Philippines – is right, by the end of 2022 the sector will be generating US$40 billion and account for 15% of the total global BPO market.

Abu Sayyaf. On Friday, another high-profile leader of the Abu Sayyaf terrorist group, Alhabsy Misaya, was killed by Philippines’ Marines units during an action in the small town of Parang, Maguindanao province in the notorious Sulu Sea region of the southern island of Mindanao.

This was another top target of the Philippine security forces and his death will have been a major blow to the terror group which has faced a massive onslaught by the Philippine military over the past nine months. President Duterte has vowed to wipe them out and he’s keeping true to his word.

In January, Defence Secretary Delfin Lorenzana said that Abu Sayyaf would be destroyed in six months and it’s starting to look like that timetable is pretty much on track. But if it takes until the end of the year it will have been a remarkable achievement, given the serious lack of action against them over the past two administrations.

Misaya, described as a “sub leader’ – the rank from which the group’s future top leadership is drawn – has been linked to a number of Abu Sayyaf kidnappings. These took place in the southern Philippines – the Zamboanga Peninsular and islands in the Sulu Archipelago – as well as in Indonesian and Malaysian waters and the Malaysian state of Sabah in eastern Borneo.

His death follows that of another Abu Sayyaf sub-leader, Muamar Askali (nom de guerre: Abu Rami), who was killed in a firefight along with five of his group near Inabanga, Bohol, in the Central Visayas while en route to carry out a kidnapping operation at an island resort two weeks ago. Misaya was being tipped as Askali’s successor.

Armed Forces of the Philippines (AFP) battalions are heavily deployed in and around the Sulu Archipelago putting Abu Sayyaf in a virtual stranglehold. In that region there are currently 51 battalions – that’s around 22,500 troops – under the Western Mindanao Command. This is the biggest force the AFP has ever put in the field. Meanwhile, marine surveillance by Philippine Coastguard vessels along with Philippine Navy search-and-destroy missions across a vast expanse of the Sulu Sea continue to be stepped up.

Combined then, these operations on land and water, constitute the biggest and most comprehensive engagement of Abu Sayyaf ever. Other targets in the sights of the security forces are the Maute Group – responsible for the Christmas night-market bombing in Davao City – the Bangsamoro Freedom Fighters, and Ansar Al-Khilafah Philippines. All four groups are affiliated to the Islamic State of Iraq and Syria.

Philippine-US relations. To the disgust and irritation of Liberal politicians and their pet media, US President Donald Trump has invited President Duterte to visit the White House “to discuss the importance of the United States-Philippine alliance”. That invitation was made by phone on Saturday. Trump also affirmed that he would be in Manila in November for the Asean heads of government summit and the East Asia Summit – a trip he’s “looking forward to”.

Right now, Trump and Duterte – along with Russian President Vladimir Putin, who will also attend the Manila summits – are joint public enemy number one of Liberals globally. The reason being that none of these leaders share their world view.

According to a White House readout of the phone conversation, described as “very friendly,” Trump brought up the issue of the North Korean threat to global peace and Duterte’s efforts to rid his country of an illegal-drugs scourge. Although no details were released, Trump has previously supported the Philippine president’s War on Drugs.

Naturally, the media is having kittens over this and calling for a boycott of Duterte’s Washington visit. This is the same media, let’s not forget, that lauded its poster boy, former US president Barack Obama, when in 2007 as an Illinois senator, he invited the then president of Iran, Mahmoud Ahmadinejad – the head of a state that’s sworn “Death to America” – to speak at Liberal-Left motherhouse, Columbia University.

But then as usual, the only thing that’s consistent about the Liberal argument is its duplicity. Were the Left’s queen, Trump’s failed presidential challenger, Hilary Clinton, in the White House right now, then as sure as eggs are eggs that same media would be praising her political adroitness if she’d reached out to Duterte to normalise relations between the two countries.

Furthermore, weren’t these the same media that were lamenting the breakdown of US-Philippines relations six months ago? Weren’t they arguing how important they were and that all efforts should be made to restore them? The Liberals are so childishly predictable, it’s barely a challenge.

And so don’t expect any acknowledgement of these successes from the Philippine Liberal Party or from the anti-Duterte media at home or abroad which must be the worst sources for reliable investment information it’s possible to find. Anyone listening to them will already have lost opportunities to get in on the ground floor as Duterte overhauls infrastructure with a massive building programme and opens up sectors right across the spectrum encouraging foreign participation.

Thankfully – and though we’ve had to take a lot of flak for it – The Volatilian™ has stuck by supporting Duterte’s policies and we’re pleased we have. We also continue to maintain that Duterte is not just the best hope for the Philippines, we believe he’s the last hope if the major legacy problems that threaten sustainable economic development – endemic criminality, epidemic narcotics use, terrorism and secessionism – are to be defeated.

There was no more room under the carpet for these debilitating problems – the broad investment community knew it, favouring other Southeast Asian locations for their funds; the Filipino people knew it and, more to the point, Duterte knew it and was prepared to confront them all out.

These major obstacles have kept the Philippine people jobless and in poverty for decades, so no matter how unpopular Duterte’s policies are with the Liberal cause, he will pursue them to the end. And the brief snapshots above show that he’s continuing to make headway.