On Monday May 9, some 55 million Filipinos will vote to elect their new president, vice-president, senators, and some 18,000 local officials. With a double digit lead over his closest rival, the anti-establishment and defiantly unrefined mayor of Davao City, Rodrigo “Digong” Duterte’s election as the 16th President of the Philippines appears imminent. The business community fret’s that Duterte’s election could unravel the 6.2% annual average GDP growth ushered in during the Aquino years amid wide consensus that the Philippines had finally shed its unwelcome “sick man of Asia” moniker.
It may not be total coincidence that the market turned in mid-March (see included picture) roughly at the same point in time that Dutert’e lead among the field of candidates grew. The market has continued to sink against the backdrop of his rise in the polls. The value of the peso has also sunk though its slide began back in January when Duterte was polling in 4th place (out of 5 candidates). Yes, he’s a firebrand. Yes, he’s polarizing. Yes, he seems to have no filter. But is Duterte’s rise driving this slump?
Markets generally, even in developed economies, are jittery around elections and the Philippines is no exception. That said, there is plenty the mayor of Davao has said that is cause for concern and we think that the market is beginning to price in the increasing likelihood of his election. We would expect to see the market slide further well into next week if he is elected.
The bigger question for now is if Duterte can administer a similar level of policy making on par with that of the Aquino administration? History teaches us that emerging markets can and do often grow rapidly in spite of politically unorthodox presidents. Indonesia, Thailand and Cambodia are but a few (not necessarily current) examples in the immediate region. Leaders can be unfathomably unpredictable when it comes to political discourse and yet put forward a highly pragmatic policy agenda underpinned by a continuity of technocratic capabilities. As Duterte ran predominantly on a crime-fighting platform we are left to suppose what his economic policy agenda will look like. However, the candidate has already alluded to the fact that he would in fact leave economic policy to the technocrats.
From our perspective, it’s not so much domestic economic policy that we would expect to deteriorate. Rather, there is sufficient reason (his 22 years as mayor of Davao as well as statements made on the campaign trail) to suppose that the integrity of the country’s institutions and political process will be severely challenged. This election cycle has taken on a remarkably anti-establishment tone with many Filipinos questioning the merits of democracy and even feeling some autocratic nostalgia. Duterte has managed to tap into this deep discontent which stems from the lack of inclusive growth, chronic corruption, rising crime and infrastructure bottlenecks. A growing number of Filipinos are feeling short-changed and frustrated with the democratic process, which is largely seen as a struggle between the political elite who dominate the economy.
If elected, as he likely will be, Duterte has pledged to suppress crime, illegal drugs and corruption in the country within three to six months under a “bloody” presidency that promised that “people will die”. Human rights groups have criticized the Davao mayor for his support and tolerance for extrajudicial killings in Davao City, which earned him the nickname “The Punisher” by Time magazine. If this comes into fruition, and it appears plausible he will be handed the mandate to do so, we would anticipate greater opportunities for corrupt practices across the executive, legislative and judicial branches in all its varied forms. Thus, at this stage, we are of the opinion that the Duterte presidency would cast a more indirect drag on the economy and the general business environment than perhaps others now suppose.