Investors are losing appetite towards the Philippines as the government appears to focus heavily on its drug crackdown at the expense of economic reform, analysts at the Economist Intelligence Unit (EIU) said, flagging a potential unraveling of fiscal policies that had otherwise helped the country outperform peers in the past six years.

“While the current government is very much ambitious in trying to clean the streets of Manila by a crackdown on drug use and criminality in general, this has caused a major unrest internationally which has significantly affected investor perceptions of the government in charge at the moment and its next six years, which will end in 2022.”

EIU’s comment adds to growing statements of concern among other analysts earlier that President Rodrigo R. Duterte’s preoccupation with the war on narcotics could hold back progress in putting economic reforms in place.

Early into his election campaign, Mr. Duterte had been vocal about prioritizing the drive against narcotics as the biggest problem plaguing the country, saying he would order drug addicts and criminals killed and feed their corpses to fish in Manila Bay. Nearly four months into his administration, the nationwide crackdown has left over 3,000 people dead — about half in the hands of the police and the rest of the cases still under investigation — leading human rights groups and other observers to note that the killings appear to be state-sanctioned.

Mr. Chanco described the policy environment in Mr. Duterte’s first four months in office as “unpredictable” and cited growing concern among foreign investors that the government appears to have zoomed in on the war on drugs without giving similar attention to the economic front.

“Part of the reasons why this archipelago of 7,000 islands was able to sustain economic growth of over 6% this past few years is because of prudent economic policies of the previous administration, which for one, saw the government put its fiscal house in better order,” Mr. Chanco said.

“While it is still in its very early days, the country’s new government looks to be heading towards undoing some of that progress which risks undermining the confidence of investors,” he warned.

“The current administration’s controversial war on drugs is not helping matters on this front, either.”

Palace spokesmen did not reply to a request for comment.

Credit rater S&P Global Ratings affirmed the country’s investment grade status last month, but warned of “rising uncertainties” under Mr. Duterte, particularly in terms of policy predictability.

And just last week, Moody’s Investors Service raised its growth forecast for the Philippines to 6.5% this year and for 2017, but warned that the anti-drug war and general politics could “detract attention away from economic and fiscal reform.”

The same week also saw Nomura saying that it saw “a bigger risk from the war on drugs, as more negative headlines could weigh on sentiment and potentially prove a distraction to sound economic policy making or even lead to a reversal of policy.”

WHERE’S THE PLAN?
“One of the main factors that would turn off many investors in our view is that the current government hasn’t specifically outlined a clear economic reform plan that would encourage more investors to participate in the Philippines’ booming economy, [with] the fact that most of the administration’s efforts are more towards criminality and drug use,” EIU’s Mr. Chanco said.

“We don’t see any reform momentum on the economic side of things which will impact not only Manila as a city but also the Philippines in general.”

Mr. Duterte’s economic team bared a 10-point socioeconomic agenda just days after his landslide win in the May 9 polls, assuring investors with signals of continuity from the economic policies of his predecessor that had won for the country investor-grade credit rating in 2013.

The plan focused on achieving more inclusive growth, additional foreign investments by relaxing ownership limits, lower personal and corporate income taxes, and greater ease of doing business in the country, among others.

Analysts, however, have said they await concrete expressions of these proposed reforms in terms of laws and updated regulations beyond the President’s promises.

Mr. Chanco said that economic growth is expected to remain intact, with household consumption largely fueling expansion, despite Mr. Duterte’s verbal attacks on the United States.

“I think in the near term there wouldn’t be much impact on the Philippine economy. Most of the foreign investments are coming from the US, and it seems from the looks of it that investors are willing to take a wait-and-see game with the new administration,” Mr. Chanco said.

“While the current administration may want to turn towards more to China, certain legacy issues that tie both US and the Philippines together will not be erased in the near term.”

These remarks came ahead of Mr. Duterte’s speech in Beijing on Thursday night where he spoke of his “separation” from the US’ military and economic hold. This was later on clarified by his men and by the President himself to mean a foreign policy shift towards Southeast Asia, China, Japan and South Korea rather than a break with the West.

Economic managers have repeatedly said that investors should anchor their decisions on the Philippines’ sound macrofundamentals, instead of getting carried away by negative sentiment.

NO IMPACT ON GROWTH YET
“Certainly, most of the Philippines is still very much driven by domestic demand which we can’t forget. It’s not so much an economy driven by foreign investments,” the EIU analyst added.

“As long as remittances continue to flow to the Philippines regardless of where the US and the Philippines’ ties go in the next few years, Philippine consumers will remain strong and concrete, helping to keep growth to around 5.5-6% on average.”

Economic growth averaged 6.9% last semester, driven by a surge in investments and a boost from election-related spending.

Multilateral lenders last month hiked their Philippine economic growth forecasts to 6.4% for this year, which if realized will hit the government’s 6-7% growth goal.

Sought for his views, International Monetary Fund country representative Shanaka Jayanath Peiris said that Mr. Duterte’s statements will have no impact on the lender’s economic forecasts for now.

“In the economic outlook, we can only assess the impact when there is greater clarity whether there is a change in economic policy, and if so, what the detailed changes might be,” Mr. Peiris said in an e-mail last weekend.

“At the moment, we don’t have information on any changes in economic policy and thus have not changed our outlook from the 2016 Article IV consultation report.”

Source: www.bworldonline.com