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The Philippines

As US-China trade war intensifies, Philippines seeks to balance ties and even benefit from mounting tensions

The Philippine government is poised to award a contract to rebuild the city of Marawi to a Chinese state-owned firm but has emphasised there is no risk of falling prey to a ‘debt trap’

PUBLISHED : Friday, 12 October, 2018, 9:16am
UPDATED : Friday, 12 October, 2018, 7:30pm

The US-China trade war has sent a ripple of uncertainty through the global economy but there may be a silver lining for the Philippines, even as it seeks to balance its ties and chart a middle path between its two most powerful partners. The upshot, according to government officials, is that increased infrastructure spending will eventually allow the Philippines to become “the workforce for the entire world”.

According to Ernesto Pernia, the country’s socioeconomic planning secretary, the US-China trade war should benefit the Philippine economy, helping increase exports by 5 per cent as the country becomes an alternative source of products and even a site for supply chains.

There are already signs electronics and computer components, previously sourced from China, are now coming from the Philippines. Pernia told the South China Morning Post exports would rise by a net US$34 million this year, and US$50 million next year.

There is a “strong possibility” some supply chains will permanently shift from China to the Philippines but the government currently has no hard data on whether this is already happening, he added.

Another senior government official told the Post “there are foreign [non-Chinese] companies transferring from China to the Philippines because of the trade war”.

“The reason is due to the additional tariff imposed by the US government on goods coming from China, which makes goods coming from the Philippines cheaper,” the official said, speaking on condition of anonymity.

However, he admitted Chinese firms were not “rushing to go to Manila at the moment” because of safety concerns and government proposals to end certain corporate tax perks.

Jonas Ravelas, chief market strategist of BDO Unibank, said there had been “a lot of trade missions” from China and they seemed to be looking at the property market, particularly private condominiums.

Both Pernia and Budget Secretary Benjamin Diokno, speaking on the sidelines of the World Bank and IMF meetings in Bali, stressed the Philippines was not taking sides in the US-China trade dispute and did not feel pressure to do so.

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“We are friends to everybody and enemies of no one,” Diokno said.

The Philippine government has recently taken steps to improve its relationship with China, including agreeing this week to participate in a naval training exercise with China and other members of the Association of South East Asian Nations (Asean).

The government is also poised to award a contract to rebuild the city of Marawi to PowerChina, a Chinese state-owned firm, over the objections of local officials who prefer a domestic firm. Marawi was destroyed last year during fighting between government troops and militants aligned with Islamic State.

However, Manila has also agreed to increase its military training exercises with the US, which helped the Philippine government defeat the militants.

Even if the trade war escalates, Pernia said the impact on the Philippine economy should be limited because Philippine growth is driven more by internal consumption and investment than foreign demand.

The country of 103 million is one of the fastest-growing economies in Asia, although the IMF predicts growth will ease slightly this year to 6.5 per cent from 6.7 per cent last year, before accelerating to 6.6 per cent in 2019 and 6.9 per cent in 2020.

Investment in manufacturing has increased by 47.8 per cent in the first quarter of this year compared to a year earlier, up from growth of 35.5 per cent for all of 2017 and only 12.9 per cent in 2016. The growth of manufacturing outpaced that of services last year, a reversal from previous years.

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Diokno added that a slowdown in global trade and growth would also lower the cost of construction materials, and so benefit the country’s Build, Build, Build infrastructure investment programme.

He and Pernia dismissed the idea the Philippines could fall prey to a Chinese “debt trap”. There has been a degree of backlash against Beijing’s ambitious “Belt and Road Initiative”, which spans more than 65 countries, and the risk developing countries run when incurring debts they cannot repay. In December 2017, Sri Lanka’s Hambantota Port was handed over to China Merchants Port Holdings on a 99-year lease as part of a deal to reduce government debt.

Diokno pointed out that China had not benefited disproportionately from the infrastructure initiative, having secured bids worth US$9 billion, the same amount as Japan.

Still, the Japanese, who have a long history of investment in the Philippines, are focusing on new projects at a faster rate given the perception that the Chinese are being very aggressive in their bidding, Diokno said.

In the first half of the year, infrastructure spending increased 41.6 per cent to 870 billion pesos (US$16 billion), representing 26 per cent of the budget, he added. Infrastructure spending averaged 2.6 per cent of GDP for the last 50 years, but under the Build, Build, Build programme, such spending is forecast to rise to 7 per cent of GDP in 2022.

The programme is also investing in “social infrastructure”, such as hospitals and schools. Among other things, it has increased basic education to 12 years from 10 previously to train the country’s very young population, which has a median age of 24. The government is focusing on training in sciences, technology, and innovation, so that the country can build disruptive, high-valued added industries.

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Ravelas said the Philippines was “seeing the fruits today” of efforts by former President Benigno Aquino III’s government. They added a vocational-technical track to the country’s educational system and the current government gave it a boost through free college education, he said.

“Given its very young population. Philippines is able to manufacture the needs of the new economy, whatever it is,” he said.

He noted the increase in taxes raised through the current administration’s controversial Tax Reform for Acceleration and Inclusion law (TRAIN) scheme was meant for developing infrastructure and people.

“Roughly 70% raised from TRAIN is supposed to go to infrastructure; 30% will most likely go to social capital,” he said, adding bottlenecks in housing needed to be addressed and agricultural yields increased.

Diokno said the large and growing number of young workers in the Philippines was “a formidable asset in an ageing world”.

“Almost everyone speaks English. We can be the workforce for the entire world.”

Additional reporting by Raissa Robles