A pro-Islamic State (IS) insurgency in Marawi City underscores growing concern over IS’ capabilities in Southeast Asia. The risk of property damage, death and injury will be elevated in coming weeks. Elevated levels of government investment in major infrastructure projects will drive medium-term economic growth in the Philippines. Tax reform will ensure that the fiscal deficit remains sustainable, reducing sovereign credit risks.
On 23 May 2017 around 200 militants stormed and captured Marawi City in the southern Mindanao region of the Philippines, following a failed attempt by the armed forces to capture Abu Sayyaf leader Isnilon Hapilon. The insurgency was carried out by the Maute Group, a pro-IS terrorist organisation. Within two days the group set fire to a church and two colleges and freed 107 inmates from the Marawi City jail. The Armed Forces of the Philippines (AFP) launched a counteroffensive on 23 May 2017, utilising air strikes, whilst militants have used rocket-propelled grenades. This significantly elevates the risk of property damage, death and injury in the city over the coming weeks. As of 21 June 2017, an estimated 350 people have been killed. The AFP claims to have retaken 90% of the city, although fighting is likely to continue for a number of weeks as troops clear the city. There are also concerns that more rebels could join the insurgency following the Eid al-Fitr holiday, slowing the government operation.
The insurgency reinforces concerns over IS and its affiliates’ capabilities in Southeast Asia. The incident has revealed that pro-IS militants are better funded and organised in the Philippines than previously suspected. As IS loses territory in Iraq and Syria, Southeast Asia is likely to see an uptick in returning fighters with combat experience. Many of these will return to Mindanao elevating the risk of improvised explosive device attacks in crowded civilian areas in the medium term.
The Philippines will remain one of the fastest growing economies in Asia in 2017, with real GDP growth forecasted at 6.3%. Growth will be driven by sustained foreign investment and expansionary fiscal policy. Duterte’s shift to a multilateral foreign policy will support elevated investment levels from China and Japan. In January 2017 China agreed to work with the country on 30 projects worth USD 3.7 billion, whilst Japan has pledged USD 9 billion of investment over 2017-2022. This will support the government’s spending plan to 2022, which aims to channel USD 72.1 billion into major infrastructure projects to improve logistics networks and enhance growth prospects.
Whilst the government will increase spending in coming years, the proposed comprehensive tax reform package (CTRP) will support revenue growth, allowing additional spending without elevating sovereign credit risks. Proposed tax reform will increase excise rates on oil and automobiles and reduce the number of goods and services exempted from value-added tax. As a result, the fiscal deficit, estimated at 2.7% in 2017, will remain below the statutory limit of 3.0%.
Duterte’s economic agenda has a significant focus on investment in transport infrastructure. 28 of 50 major projects designated as high priority by the government are in the transport sector. For example, in April 2017 San Miguel Corporation signed a USD 11.1 billion deal with the Philippine National Construction Corporation to build stage two of the Metro Manila Skyway.
Whilst the Philippines is open to foreign participation in infrastructure projects, Duterte is keen to reduce the use of public-private partnerships (PPP), in favour of official development assistance (ODA) schemes and an enhanced role for the Philippines’ government. A number of proposed projects have already been switched from PPPs to ODA-financed schemes, including the USD 4.5 billion Mega Manila Subway. However, Duterte has stated that existing PPP projects will be honoured, reducing the risk of contract alterations. The shift away from PPPs will reduce the risk of project delays. Under the existing PPP framework, only four of the 56 projects launched since 2010 were completed by January 2017.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Qatar, Brazil, Saudi Arabia and Mozambique, all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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