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Philippine President Rodrigo Duterte holds up cash for evacuees from the fighting in Marawi while visiting an evacuation center in Iligan on June 20.   © Reuters

Philippines Inc., investors march to beat of Duterte's drum

Infrastructure-related stocks up as maverick leader finishes first year

CLIFF VENZON, Nikkei staff writer | Philippines

MANILA -- At a station-marking ceremony for the upcoming 106km Manila-Clark railway project, Transportation Secretary Arthur Tugade announced a part of a grand plan that seeks to define President Rodrigo Duterte's economic legacy.

"We hope to finish the term of President Duterte with at least 1,000km of railway system all over the country," Tugade said Monday. The Southeast Asian nation's four current rail lines service a combined distance of less than 100km.

Duterte's government wants to usher in a "golden age of infrastructure," and the 255 billion peso ($5.05 billion) Japan-funded railway is just one of the 61 projects lined up in his ambitious plan.

By building a railway between Manila and a secondary airport in Clark, a former military base in the north, the government hopes to cut travel time by 70% and address congestion at the capital's bursting airport.

The president's infrastructure initiative, which involves 8.4 trillion pesos in planned spending over his six-year term, is unprecedented. But companies and investors are betting on it.

Shares in DMCI Holdings, one of the biggest construction companies in the Philippines, had risen 11.9% from a year earlier Friday, while smaller builder Megawide Construction had nearly tripled.

The benchmark Philippine Stock Exchange index was up just 0.6% on Friday compared with the same day last year, Duterte's first day in office. Local analysts attributed the performance to volatility due to the British vote to exit the European Union, the election of protectionist Donald Trump as president of the U.S. and rising interest rates there, as well as uncertainties brought about by the change of leadership in the Philippines.

Amid expectations of ramped-up infrastructure activity, DMCI is entering cement production, the company announced in early June. Duterte plans to increase infrastructure spending to 7.4% of gross domestic product by 2022, nearly double the 2015 share. Existing cement makers are in expansion mode. Aboitiz group unit Republic Cement is pouring as much as $300 million into bolstering cement output by an additional 1 million tons over the next five years.

Cemex Philippines, a unit of the Mexican cement maker, and Eagle Cement, a personal investment of San Miguel President Ramon Ang, went public during Duterte's administration to bankroll their expansions.

Duterte's brutal anti-drug campaign and unconventional diplomacy have grabbed headlines, but businesses have remained bullish. His top economic priority is continuity in macroeconomic policy -- a promise seen as kept after Deputy Gov. Nestor Espenilla was recently named the next governor of the central bank.

The Philippines' animal spirits have been unleashed since Duterte's election, Natixis economist Trinh Nguyen said in a report Thursday, noting that "corporates are investing more" and that "loan growth has been double digits since 2016."

Such major conglomerates as Ayala Corp. and JG Summit Holdings are jacking up capital spending around 15% this year in a sign of confidence in the economy under Duterte.

The Philippine economy expanded 6.4% in the first quarter, driven by consumption, which is supported by business process outsourcing and steady overseas remittances that together total around $50 billion annually -- nearly a fifth of GDP. The government aims for up to 8% growth over the next three years.

SM Investments, which owns the largest mall developer and retailer, saw its shares rise 24.6% from a year earlier, while unit BDO Unibank, the nation's largest lender, gained 15.9%.

But at the same time, tougher competition in the consumer sector has hurt Universal Robina. The Philippine food and beverage company, which has footprints in Southeast Asia and Oceania, was one of the biggest losers among major companies, with its shares down 21.7% from June 30 of last year. This dragged down parent company JG Summit, which slid 5.8%.

Duterte, who is wrapping up his first year with solid popular support, is working to overhaul the nation's tax system for the first time in 20 years. His reforms call for personal and corporate income tax cuts, which are to be offset by higher excise taxes on oil, car, liquor and tobacco purchases, among other things. Other companies have been hit by the proposal.

GT Capital Holdings, which distributes Toyota Motor vehicles in the country, saw its shares sink 16%. LT Group, which produces tobacco and liquor, fell 7.7%, with Duterte having also signed an order in May to ban public smoking.

Duterte also upended the Philippines' foreign policy, aligning himself with Asian neighbors, including maritime foe China, while keeping a distance from key ally the U.S. He made a four-day trip to China in October to repair diplomatic ties damaged by the South China Sea territorial dispute. Beijing sent him home with $24 billion in investment and credit line deals.

Thanks to revitalized relations, more Chinese tourists are now visiting the Philippines, according to industry and government officials. Shares of Bloomberry Resorts, which has reported surging Chinese arrivals at the Solaire casino in Manila, climbed 39%.

But there are also headwinds. Duterte's infrastructure buildup could widen the fiscal deficit and turn the current-account balance's surplus negative, prodding the central bank to let the peso weaken, investment bank Natixis said in a report Thursday. The infrastructure spending kick could also stoke inflation and could prompt the central bank to raise interest rates.

A weak peso could burden companies with foreign-denominated debts, while higher interest rates could make capital more expensive. But Lexter Azurin, senior analyst for AB Capital Securities, said he does not expect these to be major dampeners for corporate Philippines.

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