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Duterte shaken by inflation storm

Facing risk of election losses, Philippines leader must not resort to populist handouts

| Philippines
Philippine President Rodrigo Duterte must resist the temptation for giveaways to prop up his popularity.   © Reuters

Ahead of the Philippines' crucial midterm elections, where as many as 18,000 elected offices are up for grabs, President Rodrigo Duterte is grappling with an economic conundrum.

After years of moderate inflation and high growth, the Philippines has become the regional "inflation king," posting the highest inflation rate among key economies in the Asia-Pacific.

Surging inflation, which has recently hit 6.7%, has gone hand-in-hand with slowing economic growth, a falling currency, and an unprecedented decline in remittances from overseas Filipinos, putting into question the dynamism of the Philippine economy.

Amid economic troubles, the president's approval ratings have hit the lowest levels, dropping by 13 points in one survey (from 88% to 75%), and settling at net approval rating of 54% (from a high of 80s last year) in another, with his key allies now struggling in the most important of next year's elections senate race.

To maintain his political capital, the sometimes-tempestuous Duterte will have to demonstrate calm -- a quality not generally seen as his strong point -- and provide workable solutions to economic problems.

Meanwhile, his economic managers must ensure short-term political demands will not derail much-needed long-term reforms to ensure sustained development in Southeast Asia's second largest nation.

Three years into office, the charismatic Duterte is finally showing signs of political vulnerability, as he openly waxes fatalistic and looks powerless vis-a-vis a troubled economy.

To be fair, the Philippines is still expected to feature among Asia's fastest growing economies. But inflation could serve as Duterte's Achilles heel, since it disproportionately affects the poorest Filipinos, who constitute the majority of voters.

In September, the country posted a 6.7% inflation rate, the highest in almost a decade and well above the 4% target of the Philippine Central Bank (BSP).

In the past year, the prices of basic goods such as vegetables (up by 20%) and fish (up by 12%) have increased by double-digits. Poorer Filipinos, who spend the bulk of their income on basic goods, have borne the brunt.

Rising prices have been accompanied by a slowing economy, raising concerns over the Philippines' overall economic health under Duterte. The World Bank (from 6.8% to 6.5%), and the International Monetary Fund (from 6.7% to 6.5%), have downgraded growth forecasts for gross domestic product this year.

The Philippine Department of Finance expects a 6.5% rise, considerably lower than its 7-8% target. The Philippe Peso has hit a 13-year low, and is currently among the worst-performing currencies in emerging markets, further raising costs of imports amid an import-hungry infrastructure expansion program.

To add to government's troubles, remittances from overseas Filipinos, a backbone of the economy, slipped by almost 1% in August after years of steady growth.

The inflationary surge is the result of a "perfect storm," as Filipino consumers struggle with rising global oil prices, a weakening currency, new taxes on fuel and basic goods, and widespread mismanagement of the country's food supply.

The rise in food commodities has been responsible for almost half of overall increase in the consumer price index. Natural disasters, particularly Typhoon Mangkhut, which destroyed more than 250,000 tonnes of rice across the fertile lands of the northern Philippines, has contributed to shortages in a dramatic way.

Unsurprisingly, the government is desperately searching for scapegoats. In September, Duterte fired the head of the country's National Food Authority (NFA), which is in charge of regulating food supply in the country to ensure affordable costs for consumers without undermining domestic agricultural productivity.

In October, the government removed food import quotas, instituting a free-for-all licensing arrangement -- the so-called Rice Tariffication measure, which allows any trader to import rice and basic foods at fixed-rate duties.

The deluge of cheap imported rice and food, however, risks destroying the livelihoods of millions of farmers and food producers, who constitute almost a third of the nation's workforce.

The government has beseeched major food producers, such as the Philippine Baking Industry Group, to not raise prices, and it has postponed imposing new taxes on fuel, which, according Budget Secretary Benjamin Diokno, could cost around 40 billion pesos ($742.6 million) in lost revenues.

Duterte has seemed out of touch, blaming "corrupt" rice hoarders, the Sino-American trade war and rising oil prices for the inflationary spike. Many experts and ordinary people, however, blame new taxes, namely the Tax Reform for Acceleration and Inclusion (TRAIN), which raises income tax on higher earners and key commodities like fuel, as well as government mismanagement of the food supply.

Even worse, the president of putting his credibility into question by sounding fatalistic, lamenting there is "nothing government can do" about inflation. He has warned the Filipino people, "This is not the end of the story, guys... we will have more difficult times ahead. If you want to go berserk, let's all go berserk because I am affected by hardship too."

Sensing growing public discontent, independents and opposition candidates have sought to turn the midterm elections into a referendum on a populist president, who shows limited understanding of economic fundamentals.

In a surprising move, Duterte's former presidential rival, Manuel "Mar" Roxas III, is expected to contest for a senate seat next year, hoping to emerge as leader of an energized opposition. If current numbers hold true, independents and opposition members could dominate the senate next year, with Duterte's key allies in minority.

In contrast, Duterte's chief allies, his executive assistant Bong Ho and former police chief Bato Dela Rosa, are still struggling in the surveys to secure a seat in the senate.

The Duterte administration, however, should avoid damaging long-term growth prospects with politically motivated handouts. It should protect domestic food producers against cheap imports, press ahead with further much-needed tax reforms to expand its revenue base, and restore public confidence by properly communicating an effective anti-inflation strategy.

But, if the president sticks to his populist instincts he will do what he can to shore up his political support and key allies' in the midterm elections. That may work in the short term. But in the long run, it could undermine the Philippines' economic dynamism, hurting the poorer Filipinos the most, precisely the very people he has pledged to help.

Richard Heydarian is a Manila-based academic, columnist and author; his latest book is "The Rise of Duterte: A Populist Revolt Against Elite Democracy."

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