Strategy Note /

Philippines: Duterte softens stance on big business, positive

  • Risk of revision to government contracts with private companies (Ayala, Metro Pacific, San Miguel) seemingly recedes

  • President Duterte publicly apologised to heads of Ayala and Metro Pacific on 4 May for his "hurtful words"

  • Next Presidential election in May 2022: Duterte limited to one term but his daughter Sara (Mayor of Davao City) can run

Philippines: Duterte softens stance on big business, positive
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
5 May 2020
Published byTellimer Research

Duterte signals a climb down on contract revisions

President Duterte's public apology on 4 May to the heads of some of the country's largest private sector businesses appears to de-escalate the risk of material revisions to contracts (first mooted in January 2020) involving private companies and the government. 

Examples of publicly listed companies that have contracts with the government to manage utility, land, and transport assets include: Ayala Corp, Ayala Land, DMCI, Metro Pacific, Manila Water, and San Miguel.

The contract revision risk for Philippines was obviously superseded by Covid-19 concerns (Manila has been in lockdown since mid-March) but this should raise confidence in the post Covid-19 outlook. Ironically, it was the contribution of big business to the counter Covid-19 response that Duterte used as a pretext for softening his tone. 

With the next presidential election due in May 2022, Duterte constitutionally restricted to a single term, and the need to establish a path to succession (either for his daughter and Davao City mayor, Sara, or a scion from another politically aligned dynasty, eg from the families of Marcos, Villar, Cayetano), the consideration of campaign support also may have prompted this change of tone.

Equities cheap versus history, underperformed EM peers, amid well-known concerns

Philippines equities, measured by the local PSEi index, are down 26% ytd compared to declines of 15%, 20% and 28% for MSCI Asia ex-Japan, EM and FEM, respectively. Trailing price/book is 1.3x (12% ROE), a 43% discount to the 5-year median. Trailing price/earnings is 12.6x, a 38% discount to the 5-year median.

There is little insulation from the damage to domestic economic activity from Covid-19 or from the transmission of lower oil prices via GCC remittances, but Philippines equities are cheap versus history, FX rate risks are low, geopolitics is relatively supportive with relations with the US and China more appropriately balanced under Duterte, and normalised growth should be helped by efforts to improve tax collection and upgrade infrastructure (efforts which should resume post Covid-19).

Related reading

Philippines: Contract revision spoiler, 21 January 2020

If remittances drop 20% who is exposed in emerging and frontier markets?, 29 April 2020

Philippines: US to China rebalance continues, not cause for alarm, 12 February 2020