Jemaah Islamiah

Political risks to watch in Philippines

Political risks to watch in Philippines
By Manny Mogato,

MANILA – The Philippines is gearing up for presidential elections in May, with investors wary due to concerns over policy effectiveness, corruption and security.

Sovereign 5-year credit default swap spreads for the Philippines trade around 159 basis points, down from 210 in mid-February. The stock market has risen to two-year highs, but foreign investors have been largely absent. So far this year they were net buyers of about $140 million of shares, stock exchange data shows.

Following is a summary of risks to watch in the Philippines:


The Philippines elects a new president on May 10, and many of the candidates are already making populist policy promises.

The son of revered former President Corazon “Cory” Aquino, Senator Benigno “Noynoy” Aquino, continues to lead opinion polls. His lead has widened after billionaire lawmaker Manuel “Manny” Villar’s support dropped 6 points in the latest opinion poll.

Former President Joseph Estrada’s numbers have also risen, making him a clear third among the nine candidates. Continued gains for Estrada would worry markets because of his lack of fiscal discipline and stories of policy being formulated during late-night drinking sessions with gambling buddies.

Former defence chief Gilberto “Gibo” Teodoro, the candidate of President Gloria Macapagal Arroyo’s party, is a distant fourth in opinion polling with single-digit support.

Last week’s start of campaigning for local positions could boost Teodoro if he can tap his party’s national reach. Fifty of the country’s 80 governors have supported his candidacy.

But if Teodoro does not lift his ratings soon, analysts think Arroyo’s supporters could swing behind Villar.

What to watch:

— The candidates and their platforms. As clear frontrunners emerge, their policy pledges and the implications for investment, governance and security will impact markets.

— The stance of leading candidates on fiscal management will be a particular focus, given the necessity of boosting revenues and curbing spending to cut the budget deficit.

— The worst-case scenario for markets would be a failed election that does not produce a clear and credible winner. This could be because of severe election violence and intimidation, or possible problems in a new automated voting system. In a research note, Barclays Capital estimated a 10 percent chance of election failure, 30 percent chance of a smooth election, and 60 percent chance of a “bumpy ride” which sees some delays and unrest but eventually produces a credible result.


Security in the southern Philippines remains poor. Peace talks with the Moro Islamic Liberation Front, the largest Muslim rebel group, collapsed in 2008 although the two sides have now pledged to strike an interim deal before June 30. The smaller but deadlier Abu Sayyaf militant group, linked to the regional Jemaah Islamiah movement, presents an ongoing problem despite recent tactical successes by U.S.-backed Filipino troops. Maoist-led guerrillas had already closed the door for any effort to revive talks with the government of President Gloria Macapagal Arroyo, who is stepping down from power in three months.

Arroyo declared martial law in the southern province of Maguindanao in December after a massacre of civilians there. Although the curbs on civil liberties were restricted to that province and were lifted later in the month, some analysts say martial law could be imposed elsewhere and elections postponed if violence spreads. Strongman Ferdinand Marcos, who ruled the Philippines for over two decades until the mid-1980s, used the pretext of violence to order martial law.

What to watch:

— Evidence that progress is being made towards resolving one or more armed conflicts, ending extortion from businesses, reducing the kidnapping threat to business people and opening up resource-rich Mindanao to investment would be broadly positive. “Security concerns have limited the appetite for foreign investment, and without the restoration of peace in the region, regional developmental disparities are set to widen. Investors will closely watch candidates’ policies on resolving the conflict,” Standard Chartered said in a recent research note.

— Markets have long worried that the unpopular Arroyo, who is not eligible to contest another term, could try to extend her stay in power. Some critics say that if the automated polls fail she could use potential civil unrest to impose military rule. In March, Arroyo named a loyal general as the new military chief, and got approval from the Supreme Court to appoint a new chief justice. Rumours have swirled of a military takeover in the event of a failed election; the military has said the constitution will be respected.


The Philippines has a reputation for endemic corruption and persistent instability that undermines many of its comparative advantages. Corruption extends through all levels of government and is a serious barrier to attracting more investment. Business had expected a better environment under Arroyo compared to the excesses of the Estrada regime, but the current administration appears to be no better, or indeed worse.

The massacre of 57 people in Maguindanao late last year has focused attention on the rule of law, and the ongoing trial of the suspects, which has been indefinitely suspended since middle of February due to legal questions, will be watched to see whether it is fair or reinforces perceptions of a culture of impunity.

What to watch:

— Trend in corruption level. Transparency International’s 2009 Corruption Perceptions Index suggested a marginal improvement from the previous year, with the Philippines rising to 139th out of 180 countries from 141st the previous year.

— Strengthening or worsening in the rule of law. The World Bank’s World Governance Indicators showed perceptions of rule of law in the Philippines falling over the past decade, even sinking below Vietnam, viewed as a risky frontier market. These figures are watched particularly by longer-term investors and they show the Philippines is in danger of losing more investment to regional competitors unless it can reverse the slide.