Philippines would benefit from a “benign strongman”

With the Philippines going to the polls to elect their next president today, fund managers have voiced optimism for what frontrunner Rodrigo Duterte could achieve as president, despite the controversy he has attracted. But they also stress that a success for the Davao City mayor​, in the country's fifth general election since dictator Ferdinand Marcos was deposed, would bring with it risks.

Nicknamed 'the Punisher', Duterte has been accused of using 'death squads' to cut the crime rate in Davao City and has promised to unleash a bloody crackdown on criminals if elected as president. Meanwhile, he caused widespread outrage with comments last month following the rape and killing of a female Australian missionary. He initially refused to apologise, but ultimately did so. Such forthright rhetoric has seen Duterte compared to US presidential hopeful Donald Trump.

Despite this background, Duterte has in fact widened his lead over his rivals to replace Benigno Aquino III to 11 points, according to reports over the weekend. The other candidates are Grace Poe, a first-term senator; Jejomar Binay, the current vice-president; and Mar Roxas, Aquino’s annointed successor. 

Duterte has been controversial but effective, said Lim SooHai, lead manager of the $400 million Baring Asean Frontiers Fund. The question is whether he could replicate his success in Davao City on a national scale, he noted. The fund is overweight the Philippines relative to the MSCI Southeast Asian index, in which its weighting is 9.88%.

One fund manager, who asked not to be named, said a “benign strongman” such as Duterte could act as a decisive leader and push through policies to boost economic growth. He added that investors wanted to see clear policy direction and good execution. 

“Duterte has a track record of keeping his city safe,” noted the unnamed executive. “The method deployed is controversial, but maybe on the national level it will be toned down because the legal system makes it difficult to be a cowboy.

“But the risk is there. Absolute power corrupts absolutely, so how do you ensure the Marcos regime does not happen again? There’s no guarantee.”

Others offer starker warnings about the potential repercussions of a Duterte victory. London-based research house Capital Economics said in a note on Friday that the Philippine economy could be about to take a “backward step” if he were voted in. 

Domestic financial markets, which have sold off as his victory has looked more likely, would probably fall further, added Capital Economics, and there could be the risk of a possible coup attempt. 

In terms of specific areas where action is needed, Lim wants to see more progress in infrastructure spending. “Benigno Aquino III’s agenda on infrastructure spending was not ambitious, but his delivery has also been slightly disappointing,” said Lim.

Some progress has been made on improving infrastructure, but it has not lived up to the optimism that accompanied Aquino’s election, he added. Improvements in this area are needed to help further boost economic growth, such as from tourism, he noted.

Still, Lim pointed to positive tailwinds for the Philippine economy: it has a young population, it is an attractive destination for business process outsourcing, remittances from overseas workers are still coming. “These engines of growth will continue."

Mark Mobius, executive chairman of the Templeton Emerging Market Group, said maintaining stability was key to continued growth. It was perhaps surprising, then, that he said he did not think a Duterte win would be a negative for the Philippines. 

Mobius added that it was critical for the country to establish friendly relations with China and strengthen its relationship with other Asean economies. 

Franklin Templeton has a relatively small allocation of $100 million to the Philippines, with Mobius pointing to low stock liquidity and the fact that there are not many cheap shares in the market.