From the start, Philippine President Rodrigo Duterte has sought to be a game changer. The first president from the remote southern region of Mindanao, he swept to victory in 2016 elections by advocating a ruthless approach to crime, promising to spread economic development to far-flung regions and vowing to end chronic insurgencies.
But since coming to power, Duterte has also experienced some setbacks. A 153-day Islamic State takeover jeopardized Duterte's peace efforts in Muslim Mindanao and forced him to turn to the United States — which he had moved away from in making pragmatic overtures to China to fuel investment and calm maritime tensions — for support. In fact, those very overtures to Beijing have also incited stiff (albeit intermittent) domestic criticism, compounded by the slow pace of Chinese investment in the Philippines. Elsewhere, legislative infighting over the budget has delayed the rollout of key infrastructure projects, dragging down early 2019 growth numbers.
Stratfor has long tracked the Philippines' efforts to balance between the United States and China amid their great power competition. Under President Rodrigo Duterte, the Philippines has made major overtures to Beijing, acquiescing to China's activities in the South China Sea. As Duterte enters the second half of his term, he enjoys great support, but his future success depends on continued material gain from that outreach.
Nevertheless, the man known as "The Punisher" has proven to be wildly popular, managing to sustain his controversial drug war, attracting record foreign direct investment (FDI), advancing the Mindanao peace process and maintaining healthy growth numbers overall. Now, midway through his single term, Duterte's allies have made a strong showing in elections that will help him move forward on key agenda items. At stake are ambitious objectives to implement a federal system of government, raise FDI limits and revamp the mineral sector, among others. Amid the Philippines' careful balancing act between the United States and China, Duterte's domestic fortunes will ultimately determine whether he can expend the political capital to sustain his foreign policy aims, revamp the Philippines' governing structure and anoint a successor who can carry on his legacy.
A Confirmation of Support
Philippine voters went to the polls May 13, casting their ballots for 12 members of the Senate, House of Representatives and nearly 18,000 local offices. Even before the vote, Duterte's PDP-Laban party held 113 of 297 seats in the House of Representatives, but thanks to his wider Coalition for Change, his allies possessed a supermajority of 248 in the chamber. In the Senate, it was a similar story, with the coalition holding 17 of 24 seats.
But given the fractious nature of Philippine politics, Duterte has not enjoyed smooth sailing on all fronts, especially in the Senate. In the upper house, Duterte's allies have not remained tightly disciplined, as some occasionally take independent stands against key presidential proposals. In the House, too, Duterte suffered a surprise defeat in July 2018 when the speaker, an ally of the president, lost his position in a house vote. Disagreements about the new speaker, former President Gloria Macapagal Arroyo, created an impasse over the 2018 national budget, meaning the document did not pass until 2019. This uncertainty dealt a major blow to economic growth at the start of the year, partly due to delays in infrastructure projects.
In the wake of the elections, however, Duterte appears to have consolidated his position even further and brought a number of handpicked candidates — personal allies from outside his own party who may toe the president's line more readily — into the Senate. Additionally, Duterte's approval ratings show no sign of flagging — something that will no doubt sway legislators to back him on many issues. In terms of the House, meanwhile, the postelection landscape may usher in a new speaker better able to secure consensus.
Although much has gone well for Duterte in the elections, his fortunes are by no means guaranteed.
Duterte also stands to prosper from turnover at the Supreme Court, which has so far hindered his plans for constitutional changes and his proposals for joint energy exploration with Beijing in the South China Sea. This year, however, Duterte appointees will finally form a majority in the 14-person institution, as the president's administration will replace five retiring justices — having previously appointed seven other judges.
Duterte's strong domestic position has foreign policy ramifications as well. The president has been the driving force behind the Philippines' conciliatory outreach to Beijing. And while the president has taken care to ensure the Philippines does not completely burn bridges with the United States, investment and infrastructure deals with China have bolstered Duterte's domestic fortunes, giving him a strong hand to continue those overtures regardless of any potential domestic criticism.
Although much has gone well for Duterte in the elections, his fortunes are by no means guaranteed. His predecessor, Benigno Aquino III, won a sweeping victory in midterm legislative elections in 2013, only to become a lame-duck president not long after due to corruption scandals and a disastrously mishandled counterterrorism raid. And, as evidenced by Duterte's first three years in office, internal disputes prove that large coalitions in both legislative houses don't guarantee that he can ram through his policies.
What's more, Duterte also faces the unique issue of trying to ensure continuity in his policies given that he, as a political outsider, cannot rely on a large party machinery to guarantee his political legacy. For now, his likely chosen successor is his daughter, Davao City Mayor Sara Duterte-Carpio, but her lack of a wider support base means her prospects of becoming the next president are still in question. And, if questions begin to swirl about the staying power of Duterte's agenda, political allies could hesitate in resolutely defending his policies. In the end, the prospects for continuity rest on Duterte's ability to maintain his impressive levels of support so that he can cultivate more allies and eventually propel a successor into power.
In pursuing such a goal, the economy will be key. For the past three years, the Philippine economy has grown at a steady clip, boosting Duterte's political fortunes. In 2016, the Philippines charted the second-highest economic growth in the Association of Southeast Asian Nations (ASEAN) at 6.9 percent, just behind Laos. In 2017, the country's growth totaled 6.7 percent, the fifth greatest in the subregion, while the country posted 6.2 percent growth last year. At the same time, gross domestic product (GDP) per capita has risen steadily under Duterte, hitting more than 5 percent in 2016 and 2017, in contrast to the 4.5 percent growth under Aquino.
But there have been headwinds that might challenge Duterte going forward. In April, the International Monetary Fund downgraded its estimated 2019 GDP growth for the Philippines to 6.5 percent, citing ongoing global trade tensions. And in the first quarter of 2019, the national statistical authority announced growth figures of 5.6 percent, likely due to massive delays in the implementation of the budget, which halted vital infrastructure projects at a time when the country was suffering from El Nino-related drought. Meanwhile, the Philippines witnessed a spike in inflation in 2018 that hit a high of 6.7 percent (and 5.2 percent overall for 2018) — the highest levels in nearly a decade. While this has eased back down to an average of 3.8 percent in the first quarter of 2019, it still presents a potential source of discontent with Duterte.
In order to sustain economic growth, the president will need to continue his massive push to attract foreign investment. In this, China's largesse will be key — particularly for infrastructure projects in less developed regions. At the same time, reforms to tax and FDI laws, as well as a potential decision to end a mineral development moratorium, will be high on his priorities.
To date, Duterte's investment push has been successful. In spite of a slight drop-off of 4 percent in 2018, the president's tenure has delivered record-high FDI — $8.3 billion in 2016, $10 billion in 2017 and $9.8 billion in 2018. Furthermore, Duterte's government appears poised to deliver on a long-promised foreign investment windfall that stems in part from Manila's cozier relations with Beijing. Indeed, China accounted for just 3 percent of the total approved FDI for the Philippines from 2010 to 2017, but it skyrocketed over 2,000 percent in 2018 to grab 28 percent of the total.
But in spite of the robust investment figures, the Philippines still trails other members of ASEAN, like Vietnam, which attracted twice as much as the archipelago in 2017, and Indonesia, which drew three times the amount. The discrepancy is partly the result of infrastructure deficits in the Philippines — a major target of Duterte's "Build Build Build" initiative, which began in 2016 and has grabbed the lion's share of Chinese investment.
In the meantime, the Philippines also has several legal hurdles that Duterte hopes to clear following the midterm elections. Building on his moves to ease restrictions on foreign ownership by shortening the Regular Foreign Investment Negative List, Duterte's administration has set the goal of constitutional reform to remove limits on numerous sectors that cap foreign ownership at 40 percent.
For one, the country's high corporate tax rate of 30 percent (one of the highest in ASEAN) has dampened investment. Duterte has proposed a tax reform package that would drop this figure to around 20 percent over a decade amid plans to recoup the costs by phasing out tax incentives for certain export processing activities. Such a move would follow a first raft of tax reforms that went into effect at the start of 2018, lowering the income tax but raising taxes on consumption at the cost of greater inflation. While the House approved this second tax reform package in September 2018, the bill has stalled in the Senate since November 2018. If passed, the tax bill would raise the government's share of mining revenue, an objective that, if reached, could entail the repeal of a 2012 executive order that froze new mining projects, opening the country to billions of dollars in potential investment.
Helping Out Far-Flung Regions
Duterte ran as an outsider who would help spread development outside of the Philippines' northern economic core to alleviate deep regional inequality. Thanks to his favorable political position, Duterte will work to attract investment to the Philippines' restive Muslim south as a way of calming a potential spike in insurgent or terrorist activity. In 2018, he managed to fulfill a pledge to mainstream militants by giving them a hand in government, helping them outflank their extremist rivals. In parallel to the peace process between Manila and militants, the underdeveloped region of Northern Mindanao, which is close to the insurgent zone, drew a staggering 37 percent of the country's FDI in 2018, beating out the National Capital Region around Manila. Indeed, the gross regional domestic product of several outlying regions has outpaced the national average during the first three years of Duterte's tenure.
But Duterte also promised deep constitutional changes that will grant all the country's regions greater local governance and regulatory authority as part of a massive federalist overhaul. Such reforms, however, have languished in the Senate after passing the House of Representatives, scuttling Duterte's earlier goal of passing the relevant laws in 2018 and holding a referendum this year. With numerous other priorities on the Senate's agenda, along with unresolved concerns about the federal overhaul, the bill may expire, which would require a new vote in July in a changed House before the motion would return to the Senate. With the president already in the second half of his tenure, Duterte's allies may not wish to risk their political standing by backing such sweeping changes if Duterte fails to build a dynasty that will endure beyond his term.
In spite of his outsider status and unconventional policies, Duterte has proven extremely resilient over the past three years, and all signs suggest he will continue to enjoy a strong hand in the second half of his term. Given the Philippines' need to maintain robust investment, particularly in more remote and unstable corners of the island nation, Duterte will continue to beat a path to China's door. At the same time, the president's growing stable of Supreme Court justices could help him finally surmount some of the barriers to joint development with China. That said, a dip in economic performance, as well as any political stalemates, could give the opposition an opportunity to whip up public sentiment against Duterte's overtures to China. That's why domestic considerations will ultimately determine Duterte's actions and political fortunes — both at home and abroad.