Government Investment News Analysis

Banking on offshore assets

Relations with China will top the Philippine’s foreign-policy agenda. In fact, after law and order – and all that that entails – it looks like being the most important issue on the new government’s books. President Rodrigo Duterte will be seeking an early resolution to the standoff over the disputed South China Sea islands. And in that effort, he is very likely to bend the previous administration’s China-approach by a full 180 degrees.

As we suggested in Foreign relations – a rebalancing act, Manila-Beijing ties are set to get tighter, while those binding Manila and Washington will be loosened. Scarborough Shoal – a clutch of small rocky outcrops, claimed by both the Philippines and China – is the pot which is being played for here, and it will be the centerpiece of all dealings between the two Asian neighbours until a resolution has been found. Tricky affairs in the neighbourhood

What we’re really talking about then is trade and investment. Enough of each of those from China and the Scarborough Shoal problem will go away. In return, China will want either, full sovereignty over these rocks, a 99-year lease on them, a government-to-government joint venture to tap the resources that lie around them and beneath them, or some combination of these.

It’s hard to say whether this is a buyer’s or a seller’s market – after all ownership of these islands is disputed. That’s the point. But any decision made by the Permanent Court of Arbitration in The Hague – expected any day, and expected to rule in favour of the Philippines – is unlikely to carry weight in negotiations between these two neighbours. China refused to take part in the proceedings. Duterte, himself, was critical of his predecessor, Benigno Aquino’s move to put the issue before the court in the first place.

Furthermore, Duterte has real concerns over the Enhanced Defense Cooperation Agreement (EDCA) between the Philippines and the US, an April 2014 agreement which allows the US military a presence on half a dozen bases across the country for the next 10 years. The carrot dangled before then Aquino, by US President Barack Obama, was that the US Navy would strengthen security around Scarborough Shoal. Having been critical of the EDCA, Duterte is unlikely to play the Washington card on any dealings with China over the islands. Basically, both of them want the US out of their waters.

So what it will come down to is pragmatism; seeking a solution that is mutually beneficial to both sides. Beijing wants the island, or unimpeded access to them; Manila wants investment; and plenty of it.

China has already offered to build a railway for the Philippines and that’s one area of infrastructure where they need all the help they can get. PNR – not exactly an engine of growth.

This is also something which China does well and there’s plenty of precedence within Asean for rail tie-ups with the Mainland. A Lao-Chinese venture is presently laying track for a US$6.04 billion, 427-km line in Laos; a Thai-Chinese US$15 billion, 850-km rail system is also underway in Thailand, and there are similar projects in Vietnam and Myanmar.

The Philippines also wants its roads building – the Public-Private Partnership scheme made some progress here, but it’s been slow. A major capital injection from China could finally get the Philippines’ roads programme motoring. Chinese banks, if ventures elsewhere are anything to go by, will be very supportive of channeling building-bucks to infrastructural projects in the Philippines.

Furthermore, it’s not likely that Washington will be able to match Beijing dollar for dollar to participate in infrastructure schemes of this size. Duterte has sort of tested that: “Can you match the offer [for a railway]?” he asked America rhetorically, during a speech in Davao City recently. “Because if you cannot match the offer I will accept the goodwill of China”. And if deals are made with China, the basis for the bases re-agreement virtually becomes redundant. Manila wouldn’t need US security to protect it from its new friend.

Once formal talks over Scarborough Shoal start – informal soundings have almost certainly already been taken – neither side will want to hang about. They will both want this done and dusted as soon as possible. We would not be surprised if an announcement of a resolution to the problem is made before year end. But whatever deal Duterte makes with China, it will bear the Philippines-First stamp.