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Duterte's ambitious plans have hit some stumbling blocks

Martial law, shaky investor confidence could stall economic performance

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Philippine President Rodrigo Duterte salutes an honor guard at Ninoy Aquino International Airport south of Manila on May 24.   © Reuters

MANILA More than a little out of character, Philippine President Rodrigo Duterte, the country's normally outspoken leader, found himself on June 20 begging for forgiveness from people displaced by one of the country's worst terror attacks.

"Soon, I hope you will find a new heart to forgive my soldiers, the government and me for declaring martial law," Duterte told relatives of some 170 families at an evacuation center in Iligan, a city about 40km north of Marawi, ground zero of a monthlong battle between government troops and Islamic State-aligned militants. "I had no choice, Marawi was being destroyed. I have to drive them out."

"We will rehabilitate Marawi. It will be beautiful again," the country's first president from Mindanao assured them.

At the outbreak of fighting on May 23, Duterte immediately imposed military rule over the entire island, where Davao, a city he governed for over 20 years, is located. The military later launched almost daily airstrikes, bombing neighborhoods controlled by Maute militants, who are aided by fighters from Indonesia and Malaysia.

MAINTAINING MOMENTUM The siege in the predominantly Muslim city of Marawi, which the president says is the hometown of his paternal grandmother, is an irony of sorts for the new government. During the presidential campaign last year, Duterte had promised a peaceful Mindanao and crime-free nation within the first six months of his administration, arguing that the two were prerequisites for economic progress.

Duterte's economic team has said the crisis would not damage the country's economic prospects. However, it reminds long-term foreign investors that domestic security is still a concern, according to Trinh Nguyen, an economist at investment bank Natixis in Hong Kong.

Critics say that Duterte, who marks his first year in office on June 30, was so focused on the drug war that he failed to see the Islamic State group's growing influence in Mindanao.

"The crisis in Marawi is not Duterte's fault, but he needs to address it," noted Alvin Ang, an economist at Ateneo de Manila University. Ang said the siege has hit tourism in the south and that prolonged military operations in the city along with subsequent reconstruction could increase the country's deficit. Duterte is already readying 20 billion pesos ($398 million) for repair efforts.

The crisis in Duterte's home region is a blow to his hopes of creating a progressive and inclusive nation -- a central campaign plank that helped propel him into office.

Duterte has been able to sustain the economic momentum he inherited from his predecessors, who shored up government revenues. The 16th president of the Philippines also took over an economy powered by growth from overseas remittances and business outsourcing, which combined to bring in about $50 billion annually, or nearly a fifth of the gross domestic product.

His government wants to build on past gains, and hopes to cut the poverty rate from the 21.6% in 2015 to 14% by 2022, the year Duterte's six-year term ends.

In the first quarter of 2017, the economy expanded 6.4%, spurred by traditional growth drivers such as consumption and the service sector. While falling short of the targeted 6.5-7.5%, the country still has one of the fastest growing economies in Asia. Meanwhile, overseas Filipinos' cash remittances to the country reached about $9.03 billion in January-April, a 4.2% increase compared to the same period last year.

Leading economic indicators before the siege also suggested investor confidence. Net foreign direct investments from January to March grew by 16.6% to $1.6 billion. Investments registered with the Philippine Economic Zone Authority rose by 50% during the same period, following a 26% dip last year amid uncertainties about the new government's economic policies. The benchmark Philippine Stock Exchange index is up about 15% year-to-date.

George Barcelon, president of the Philippine Chamber of Commerce and Industry, said businessmen are "positive" on Duterte, who promised to accelerate infrastructure development.

"We've seen a steady growth, while peace and order improved," he said, calling the crisis in Marawi "an isolated issue."

GRAND PLANS The current economic blueprint calls for Duterte to spend 8.4 trillion pesos during his six-year term to usher in what he calls a "golden age" of infrastructure. This would mean nearly doubling government infrastructure spending to 7.4% of nominal GDP by 2022 from 2015.

Duterte is set to approve 738 billion pesos worth of infrastructure projects, which include numerous railways, Socioeconomic Planning Secretary Ernesto Pernia said on January 20. "As far as infrastructure overhaul is concerned, we think that the government is doing a decent job to [maintain] the strong momentum from 2015," Gundy Cahyadi, an economist at DBS Bank in Singapore, told Nikkei Asian Review.

The president, who had an approval rating of 75% as of March, according to a survey by Social Weather Stations, is also using his clout to overhaul the country's tax system. In May, congress approved the first part of his five-point tax reform program, which aims to bankroll infrastructure spending. This is projected to yield 137 billion pesos in additional revenue, with the entire reform program expected to generate some 310 billion pesos, equivalent to 1.8% of GDP.

Duterte's tax plan involves cutting personal and corporate income taxes -- among the highest in Southeast Asia -- to empower middle-class consumers and lure investors. Lost revenue will be regained by imposing high excise taxes on oil, petroleum, sweetened beverages, alcohol and tobacco, among others.

NEW PARTNERS Upon assuming office, Duterte reconfigured the country's foreign policy to diversify sources of economic support, aligning the country with China and Russia while distancing it from the U.S., a long-time ally.

He set aside an arbitration victory that rejected Beijing's claim over nearly the entire South China Sea, including areas the Philippines considers part of its exclusive economic zone.

In October, he made a four-day visit to Beijing and returned home with $24 billion worth of credit and investment pledges. While in Beijing, he also announced his "separation from the U.S." A delighted Chinese government, for its part, lifted a ban on Philippine agricultural products. Chinese tourists, previously discouraged from visiting their maritime foe, have been eager to visit the Philippines.

Meanwhile, Japanese Prime Minister Shinzo Abe brought with him a 1 trillion yen investment package when he visited Manila in January.

The government has used development assistance from China and Japan to get large infrastructure projects rolling, relying less on the public-private partnerships favored by the former administration. Duterte wants to fast-track infrastructure development by doing away with the time-consuming auction process.

This approach, however, has left some domestic players feeling marginalized. Officials from San Miguel and Metro Pacific Investments, both involved in PPPs, have warned about ballooning public debt as the government relies heavily on ODA rather than local firms, who are eager to do the projects.

OVERSEAS BACKLASH Duterte's foreign policy may have yielded wins on the economic front but others are worried. "President Duterte's reversal of [former] President [Benigno] Aquino's approach to the South China Sea disputes with China have reinforced a long-standing view that the Philippines is an unpredictable and unreliable partner with a tendency to flip-flop on key issues," said Malcolm Cook, senior fellow at the ISEAS Yusof Ishak Institute in Singapore.

The president's statement as chairman of the Association of Southeast Asian Nations during the group's summit in April ignored Beijing's massive reclamation project in the South China Sea. Cook described it as including "the weakest language on the South China Sea disputes in the last five years."

In his zeal to tackle the crime and drug problems, Duterte has also alienated traditional partners like the U.S. and EU, who have raised concerns over the brutality of his controversial anti-narcotics campaign. Over 7,000 people suspected to be involved in illegal drugs have been killed, according to human rights groups. The government disputes this, however, saying only around 2,000 killings were drug-related.

MORE TO DO On June 22, Philippine armed forces chief General Eduardo Ano said the military was making gains in its efforts to retake Marawi, but could not say when clashes would end. The week when the general made his comments, a separate faction of Islamic militants attacked a village in Mindanao while communist rebels ambushed soldiers in the central Philippines, acts that further highlighted security issues.

But security is not the only issue confronting Duterte as he tries to attract badly needed investors. "The one hurdle that remains is how the economy remains relatively protected when compared to elsewhere in the region," DBS Bank's Cahyadi said, pointing to investment restrictions such as foreign ownership limits. "This is what Duterte had promised to bring -- a greater liberalization of the economy. So far, we have yet to see a breakthrough in this."

Rey Belleza, a 43-year-old Manila taxi driver of 17 years, has his own take on how Duterte's government has shaped up in the first year: "I can now pass through streets that used to be dangerous because of gangsters and drug addicts. But I have yet to feel that life in the Philippines is improving."

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