Strategy Note /

Philippines: Duterte's dynastic drama

  • Duterte will run for Vice-President in May 2022, potentially unifying his voters behind one Presidential candidate

  • But all candidates have similar policies: reform where vested interest allows, balance US and China, confront insecurity

  • Equities attractively valued and FX risk low, but new reforms unlikely until after election and Covid risk to growth

Philippines: Duterte's dynastic drama
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
25 August 2021
Published byTellimer Research

Incumbent President Rodrigo Duterte will contest the Vice-President post in the next election, scheduled for May 2022, according to local press reports on 24 August. This does not look like a development which alters the attractively valued investment case.

Duterte's explicit endorsement of one Presidential candidate may unify the voter base, which brought him to power in 2016 and avoid its fracture by multiple candidates that could appeal to it. This may improve the likelihood of continuity in policy. However, there is no substantial difference in policy between not merely these different candidates but those across all parties too.

And if Duterte were to serve as a VP under a President he opposed, then that would not lead to any political dysfunction, given that political power is overwhelmingly concentrated in the position of the Presidency – just ask VP Robredo whose criticisms of Duterte have been shouted into the wind during the current term.

Philippines equities are attractively valued relative to history, FX rate risk is low, and forecast growth is high (over 6% real GDP growth over 2021-2 on IMF forecasts) but vulnerable, as elsewhere, to Covid disruption. Further reforms before the 2022 election are unlikely but should resume thereafter, regardless of who wins the election.

2022 election: High on drama, low on substance

Duterte's announcement leads to more questions than answers:

  • Has Duterte already allied with a running mate for the Presidential post, eg Bong Go, a member of the same PDP-Laban ruling party, and Duterte's special assistant but has very low opinion poll support, at merely 3%?

  • Is he is acting as a stalking horse before his daughter Sara Duterte announces her Presidential candidacy, despite her public protestations that this is not her intention, at least in the 2022 election, despite leading opinion poll support, at 28%?

  • Even if Duterte does stand for the VP election, will whomever he is allied with, win the Presidential election?

Philippines poll on voting intention for Presidential election

In the Philippines, Presidents are restricted to a single five-year term and Vice-Presidents are elected separately. This can result in the two posts being won by candidates from separate, opposing parties, and the VP acting as a critic of the President.

This has occurred in Duterte's ongoing term, with VP Robredo an open critic of Duterte's rhetoric and policies on human rights, violence and authoritarianism. However, executive power is concentrated in the President and VP Robredo has largely shouted into the wind and was even charged (unsuccessfully) with sedition.

The President of the Philippines is an unusually powerful position by the standards of most multi-party republics in the emerging and frontier markets. Although there is a single-term limit, the range of executive powers relative to the legislature and, at least in name, to the military is rare. In this Presidential system, politics is dominated by personalities more than political parties.

However, the investment risk associated with the election is low because economic policy is not a key debate. The Philippines, like most others in Asia, does not have the same polarisation between left and right as seen across LatAm. All candidates, of course, promise a higher-growth, more equitable economic future, but there appears little difference on the path to get there.

Even Duterte's own populist targeting of big corporates at the start of 2020 did not last long and was likely, at least partly, motivated by settling political scores. Overall, the stuttering reforms on tax and upgrade of infrastructure should survive the next election.

Issues like domestic security and foreign relations tend to draw more debate. Duterte's successor may not persist with authoritarian measures on domestic security, but will have no option but to continue walking the tightrope between the US and China.

Philippines potential presidential candidates in May 2022

Equities are attractively valued

Philippines equities (PSEi Index) are down 7% ytd in US$ total return terms, underperforming MSCI FEM (up 2%) and Asia ex-Japan (down 2%), and well below the best performers among its peers (Bangladesh up 27%, Vietnam up 20%).

Valuation looks attractive relative to history: trailing PB is 1.7x, a 20% discount to the 5-year median, albeit for merely 7.5% ROE, and forward 2021 PE is 19.5x, a 10% premium to the 5-year median, for 26% consensus earnings growth in 2022.

For foreign investors, FX rate risks look low, with an average current account deficit of under 1.5% over 2021-22 (IMF forecasts), short-term external debt to GDP of 5%, and FX reserves of over 11 months of import cover.

For local investors, forward dividend yield of 1.7% is attractive compared to real interest rate of negative 2%, less so compared to 5-year local currency government bond yield of 3%.

Related reading

Philippines after Duterte: 2022 presidential election hopefuls, June 2021

Philippines: Walking the tightrope between US and China in the South China Sea, May 2021

Philippines cuts tax rate, reform upside in Duterte's last year, February 2021

Philippines FDI reform: 5 charts show why it is needed, March 2021

China manufacturing is irreplaceable but India and other Asians can win share, June 2020

Philippines: Duterte softens stance on big business, May 2020

Philippines: Contract revision spoiler, January 2020