How do CEOs in the Philippines feel about the drive towards federalism and decentralisation?

Before his election to the highest office in the land in mid-2016, President Rodrigo Duterte presented himself as an agent of change, the political outsider based in marginalised Mindanao who would shake up a political system historically dominated by powerful family dynasties.

While his abrasive style and uncompromising approach to perceived matters of national security have caused consternation among some international partners – particularly in the West – the former Davao mayor’s commitment to reshaping the country remains unswayed.

Underpinning President Duterte’s campaign was a pledge to pursue constitutional change in the form of a federal political system. In a yet-unpublished interview in Oxford Business Group’s forthcoming 2018 report on the Philippines, he underlines his belief that the redistribution of power away from Manila will accelerate provincial development, allowing local governments to more effectively respond to the needs of their citizens.

Opponents argue that a federal system could create new regional elites rather than foster inclusive development, and that constitutional change could allow President Duterte to extend his term in office and tighten his grip on the country’s institutions, an accusation the president rejects, as he publicly insists he has no intention of ruling beyond 2022.

The federalism question is quite divisive, and it remains unclear whether lawmakers will enact constitutional change. However, a plurality (43%) of CEOs who participated in the latest OBG Business Barometer: Philippines CEO Survey say a switch to a federal system or the empowerment of local government units would be advantageous or very advantageous to the country’s economic development, against 40% that think this would be disadvantageous or very disadvantageous.

In this, OBG’s second Business Barometer in the Philippines, we surveyed more than 130 C-suite executives in face-to-face meetings to gauge sentiment on various indicators, gaining valuable insight into how President Duterte’s agenda is perceived by the business community.

TRAIN influences feelings of tax competitiveness

Another cornerstone of President Duterte’s campaign was a pledge to enact wide-reaching tax reforms, thus creating a fairer and more efficient system that would generate revenue to help fund the administration’s flagship Build, Build, Build infrastructure initiative and social programmes.

The president has already enjoyed legislative success in this area: the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) came into effect on January 1, 2018. It exempts many low-wage workers from income tax but is also creating inflationary pressures due to higher excise taxes on fuel and certain consumer goods, leading some senior lawmakers to call for its suspension and review. The proposed second package is now being keenly debated by lawmakers and stakeholders, with much of the discussion focused on how the proposed rationalisation of incentives will affect investment inflows.

Against this backdrop of ongoing reform, executives appear unsatisfied with the current tax environment, with 71% describing it as uncompetitive or very uncompetitive on a global scale.

What is more, CEOs in the Philippines were more negative about the domestic tax environment than their peers in the five other countries that participated in our OBG Business Barometer: OBG in ASEAN CEO Survey published last month.

However, we should be careful about interpreting these negative results as a denouncement of TRAIN. Roughly two-thirds of the survey sample was collected prior to TRAIN coming into effect, and subsequent TRAIN packages may alter perceptions significantly. Prior to January 1, 82% felt the tax regime was uncompetitive or very uncompetitive, with this figure falling to 65% thereafter.

It will be interesting to see how these results change in our next business barometer once TRAIN’s longer-term implications for inflation, investment and growth are more apparent.

Robust economic growth continues to drive positive sentiment

Although the business community may be divided on the issue of federalism and uncertain about the long-term implications of tax reform, it is united by a common thread: overwhelming positivity about the business outlook. In fact, 92% of participants say they have positive or very positive expectations for local business conditions in the coming 12 months.

Meanwhile, 74% say their firm is likely or very likely to make a significant capital investment over the same period. In both of these indicators, sentiment in the Philippines is more positive than the regional average in our ASEAN CEO survey.

While this positivity is perhaps to be expected in an economy that has grown at a rate above 6% for six consecutive years, it is interesting to note that survey participants perceive government spending to have little influence on business activity. Indeed, 71% of CEOs report that government expenditure spurs less than 20% of business in their sector, indicating that the Philippines remains a market-driven economy, despite the elevated levels of public infrastructure investment under the Duterte administration.

As someone who has spent a tremendous amount of time in the Philippines over the past 12 months, I can confirm that this infectious positivity permeates much of the country. That is not to say the Philippines is without challenges: chronic income inequality and underemployment, rising inflation and a ballooning current account deficit pose both long- and short-term risks, while the persistence of martial law in Mindanao and the authorities’ blunt approach to law and order may cause some image-conscious international businesses to delay investment decisions.

Nevertheless, there are more than enough reasons to be optimistic, as one of Asia’s fastest-growing economies embarks on a $36bn infrastructure drive that should address many of its existing productivity bottlenecks.