PHILIPPINES: Duterte’s motive is the key

● Since year-end, the administration of President Rodrigo Duterte has seemingly escalated its feud against three of the country’s largest and most prominent business groups. ● The conventional wisdom in Manila is still that Duterte is mainly playing to the crowd, and that his economic managers can broker a reasonable compromise (at least on the issue of the water concession agreements). ● But the key to understanding the real risk to these groups is Duterte’s motive, which remains opaque. On 30 December, Duterte publicly warned the Lopez family, which owns ABS-CBN, the country’s largest broadcasting and media network, that they would be better off selling the company, only weeks after he warned that its legislative license would not be renewed. Soon afterwards, he threatened to criminally charge with syndicated fraud the Ayala family, the country’s oldest conglomerate, and Manuel Pangilinan, who runs Metro Pacific, the holding company in the Philippines of Indonesia’s Salim group, for what he claims are their lopsided concession contracts to run the capital’s water and sewerage system until 2037. Following a 6 January cabinet meeting, the presidential spokesperson said the administration would offer the two concessionaires, Manila Water of the Ayalas and Maynilad Water Services of Metro Pacific, new contracts soon, and should they refuse to accept them, then the government would effectively nationalize their operations. Is Duterte’s bark worse than his bite? Duterte’s continued display of contempt against the two water utilities and ABS-CBN is a tactic to enhance his credentials as an outsider to the country’s entrenched elite networks, which was key in his 2016 victory and likely helps sustain his popularity. The administration’s narrative in these controversies is that Duterte is the defender of the public interest against the oligarchs who he claims (and probably really believes) have disproportionately accumulated economic wealth through their control of capital, ties to powerful politicians and ability to capture regulatory institutions. After all, any change in the agreements no matter how minor could still be hailed by the administration as a success and would likely taken as such by the president’s supporters. Even if Duterte were to fall short of his promise to remove the provisions he considers as onerous or disadvantageous, or to shut down ABS-CBN, this would be cast not as a failure by the administration but as further proof of how strongly entrenched the elites are and of their resistance to the president’s reforms — another reason to further rally around him against his enemies. His continued attacks could eventually dent private sector confidence and investment with real effects on the economy, but this is a medium-term risk that, for Duterte, is far outweighed by the political benefits of taking on these businesses today as the perceived champion of the public. After all, as long as the broader macro numbers — economic growth, real estate, the exchange rate and inflation — continue to improve or remain relatively stable, Duterte’s popularity with the politically-powerful middle class will be unaffected by these disputes. Avoiding a direct confrontation with the president, and instead working through his cabinet ministers, is seen by his targets as the most viable strategy, on the assumption that the president’s statements are more bluster meant to gain media mileage and express personal frustrations than being part of a strategic agenda or one driven by vested interests. The owners of the two water companies likely believe that the president can only go so far with his rhetoric and that he will eventually have to rely on Justice Secretary Menardo Gueverra and Finance Secretary Carlos Dominguez for the specifics. Both, this thinking likely goes, are bound to recognize the adverse legal consequences of confiscatory and arbitrary government action or unwarranted criminal prosecution (such as the syndicated fraud that Duterte is threatening them with). ABS-CBN may be in a slightly worse position, however. Legally, it has no recourse if Congress decides not to renew its license, unlike the water utilities, which have existing contracts and could challenge arbitrary government action. Also, Duterte’s animosity against the media company seems more personal, as he often cites its supposed bias against his government and its policies, especially the drug war. Finally, there is speculation that another business group — one possibly seen as friendlier to the administration — could eventually acquire the network. The company has allies in congress and is very experienced in lobbying for its interests, but it remains to be seen whether this will be enough against presidential pressure. The real danger is if vested interests are driving policy The risk to the two companies is if Duterte’s actions are being driven by some personal ideology or belief that there can really be no compromise with them or, more importantly, if there are powerful vested interests working directly or indirectly to push the president towards extreme outcomes. In this scenario, even his economic managers may be unable to convince the president to behave reasonably. This may be a low-probability risk for now given Duterte’s historical willingness to concede on technical and legal issues to his cabinet, but given the opacity of presidential decision-making, it cannot be dismissed. Furthermore, Duterte’s latest tirade means that he views the Ayalas and Metro Pacific and their many businesses as emblematic of the oligarchy that he often rails against, which means that they could be vulnerable to other opportunistic attacks in their other regulated businesses such as power and infrastructure even if they make substantial concessions on their water concession agreements. After all, the decision to expedite the entry of a third telco last year that directly competes with Ayala’s Globe Telecommunications and Metro Pacific’s PLDT and Smart Telecommunications was the result of public discontent at their services, in the same way that the review of their water contracts was triggered by shortages in summer last year.

January 7, 2020

PHILIPPINES: Duterte’s motive is the key

BY Bob Herrera-Lim

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January 7, 2020

PHILIPPINES: Duterte’s motive is the key

BY Bob Herrera-Lim

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