Is President Duterte’s political balancing between US and China cause for concern for the property industry?
In the last few months that President Rodrigo Duterte has held the helm as the President of the Philippines, we have seen significant changes to the Philippines foreign policy that include a seeming disengagement with the United States of America and a renewal of ties with China and Russia. On 21st October, 2016, he announced, while on a visit to Beijing, a “separation from the United States, both in military and economic [matters]”. This has caused much concern and investor confidence took a hit.
While the immediate slump of the stock market and the weakening of the Peso to a seven-year low might be seen as short term knee-jerk reactions, what we should be more concerned about is the possible ramifications of such a position on Philippines economy and trade.
The US continues to be one of the largest export markets for the Philippines and was the second largest in 2015 at 15% behind Japan (21.1%). In total trade terms, Japan remains the largest trading partner followed by China which is also the largest import partner for the Philippines. Given the growing appetite of China for trade and presence in Asia, we can certainly understand the need for the Philippines to balance itself between its import and export partners.
BPO & OFW FACTOR
Despite the current global uncertainties, the Philippines remains one of the best performing economies this year with its GDP growing at 7% YoY in 2Q 2016. The main drivers of the current Philippines economy are Overseas Filipino Workers remittances (OFW), Business Process Outsourcing (BPO) and Foreign Direct Investment (FDI). All three sectors are prospering with OFW remittances projected to increase by 3% to US$26.6 bil. BPO is projected to grow by 17% to US$24 bil in 2016 while FDI tripled to US$3.5 bil in the first four months of 2016 as compared with 2015. There is a pivotal shift in the economy with BPO set to overtake OFW in 2017 if current growth is maintained, a feat achieved with a young, English-literate workforce and Special Economic Zones set up since 1995.[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5,6,7,8″ ihc_mb_template=”1″ ]
BPO, however, is also the industry where a shift away from the US might hurt them the most. It is estimated that as high as 77% of all BPO services originate from US-based companies such as Amazon, American Express and Citibank. A political shift will definitely be felt in this growing sector, and the economy as a whole. Moreover, the OFW sector, while still growing is showing signs of slowing down and the US accounts for 6.1% of OFW. If we were to consider the unlikely scenario that the majority of the US companies pull out of the BPO sector in the Philippines, China alone would be hard-pressed to make up the shortfalls in these two sectors as the entire Asia-Pacific region only makes up 23% of BPO and China accounts for less than 2.8% of OFW.
The Philippines property market would definitely be impacted by such major economic shifts, particularly in the residential and office sectors.
In the Philippines, about 50% of newly-completed luxury condominiums are bought by locals. The growth of OFW and BPO has fuelled strong demand for luxury condominiums. While there is a significant amount of supply anticipated to come into the market all through 2020, the number launches are steadily decreasing signalling a slowdown in a continuing upward trend.
A decline in BPO and OFW would naturally lead to decreased spending power and thus demand for housing. That, and a potential oversupply especially in key areas which attract significant foreign purchases as well as weak average income per capita could mean a tumble in home prices if not carefully managed.
The office sector continues to remain tight in the short term due to the high take-up rate. Pre-commitment for new developments in Metro Manila is primarily by BPO companies along with some IT and financial services firms.
Due to delayed completion, we are seeing a lower than expected supply for 2016, resulting in statistically lower vacancy rates. This would mean much higher than expected supply coming into the market in 2017 and 2018. The continuing effort by the government to relocate offices from Metro Manila in the next few years will likely lead to an oversupply. Any slowdown of the BPO market will also drive up vacancy rates further.
THE REALITY …
While that does seem to be a rather negative outcome, the chances of it happening is realistically-speaking low. The relationship between the US and the Philippines will have to deteriorate to the point of open hostility and I do not think that the words of the President alone without similar endorsements from the Senate and business community are conclusive. While the relationship may be currently strained, the low cost and English fluency advantages as well as the sunk costs for the BPO business will translate into a high level of tolerance for the current differences.
THE RENMINBI & RUBLE EFFECT
What would be more interesting and more advantageous to the Philippines is the China factor. As trading partnership with China opens up and tensions over the South China Sea ease off, the Philippines will be able to access markets that were previously not available to them. More favourable trade terms will also have a positive economic impact as China is now its second largest trading partner.
Foreign aid from China and Russia could outweigh what the Philippines is currently receiving from the US. President Duterte’s negotiations seem to have borne fruit as China has already scaled down their presence at the disputed Scarborough Shoal. He has also secured various agreements and Memorandum of Understandings amounting to a notional $13.5 bil in trade and investment. This will have a long-term positive impact and could be just the start of the Philippines bringing its economy to the next level.
JONATHAN JIE is Head of Projects & Operations at RunningStream International Pte Ltd based in Singapore.[/ihc-hide-content]