Duterte Has Investors Spellbound Adding Boon to Emerging Markets

  • Peso is only Asian currency to rise versus dollar this month
  • Currency will benefit from current-account surplus, ANZ says

Duterte's Economic Challenges: Should Investors Worry?

Rodrigo Duterte is reinvigorating financial markets in the Philippines with his transformation into a business-friendly leader.

The peso is alone among Asian peers in gaining versus the dollar this month and is also the best performer in emerging markets worldwide. That’s a contrast to April, when it dropped against all of its regional counterparts as Duterte made a range of inflammatory comments before the presidential vote. Having won the May 9 election, he now says he’s open to greater foreign ownership of businesses and will seek to eliminate corruption in the tax system. 

Rodrigo Duterte

Photographer: Taylor Weidman/Bloomberg

“President-elect Duterte has conducted himself more as a statesman rather than a campaign brawler,” said Joey Cuyegkeng, an economist at ING Groep NV in Manila. “He’s now toning down and facing reality on what has to be done. Market-friendly actions would help sustain the peso’s strength.”

It’s an extra boost for a currency that already benefits from the Philippines’ current-account surplus, inflows from overseas workers’ remittances and revenue from the outsourcing of business processes. The peso’s decline before the vote was “excessive” given those advantages, Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore, wrote in a client note a day after the election. And equities are also gaining -- the nation’s benchmark stock index is the world’s third-best performer this month.

Thawing Markets

A more stable Philippines is adding to the allure of emerging markets around the world. Investors are also gaining confidence that China’s economy will avoid a severe slowdown and expectations have built that the Federal Reserve will delay raising interest rates. In Brazil, the political crisis may be moving closer to a resolution with the nation’s senate voting to suspend President Dilma Rousseff.

The peso has surged 0.7 percent this month to 46.555 per dollar at the close of trading in Manila on Friday, while all of its 11 Asian counterparts have weakened. The Philippine currency dropped 1.7 percent in April, before jumping 1.1 percent in the two days after the election -- the biggest back-to-back advance since May 2014.

Confidence Grows

The Philippine Composite Stock Index climbed to a nine-month high Friday and has the highest valuation among Asian equities based on current-year estimated earnings. The nation’s government bonds returned 0.7 percent in the past month, the best performance in Asia, with 0.5 percent of that coming in the three days following the vote, based on Bloomberg indexes.

QuickTake Philippines Path

Duterte, who championed crime-fighting during his 22 years as mayor of Davao City in the southern-Philippines island of Mindanao, this week hinted at possible cabinet appointees. Among these is former agriculture secretary and businessman Carlos Dominguez, who said Thursday that the new president will continue with the nation’s current macroeconomic policy and accelerate infrastructure spending.

“For the moment, everybody is saying the right things,” said Paolo Magpale, a treasurer in Manila at BDO Private Bank, a unit of the country’s largest lender.

Controversial Comments

That wasn’t the case as recently as last month. The peso fell in April after the 71-year-old Duterte refused to apologize for controversial comments about the rape of an Australian missionary in a 1989 prison riot. Before the election, he ranked behind his two closest rivals in a Bloomberg survey of economists on which candidate would best steer economic policy.

Duterte’s test now will be to retain market confidence as he turns his words into actions.

“A forceful campaign against crime and corruption could reap benefits for the Philippine economy over the long run,” said Andrew Wood, the Singapore-based head of Asia country risk at BMI Research, part of Fitch Group. “However, the methods by which Duterte goes about this will be hugely important. Too aggressive and he risks undermining near-term business sentiment and economic growth.”

Central bank Deputy Governor Diwa Guinigundo said at a briefing on Thursday that market players were still waiting for a more specific statement from Duterte on his vision as well as his specific programs. “That will further cement market confidence in the process,” he said. “We may have good fundamentals but if market sentiment is negative, then you would be seeing volatilities in the foreign-exchange markets.”

Best Forecaster

National Australia Bank Ltd., the most-accurate peso forecaster in Bloomberg’s latest rankings, says the currency is poised to extend its recent gains. Median estimates in a Bloomberg survey put it 2.6 percent weaker by year-end at 47.8 per dollar.

“The peso could continue to see a little more near-term upside as part of the relief rally, especially if the new president is able to convince markets that he’s able to combine his strong management track record with vision and political skills,” said Julian Wee, a senior market strategist at NAB in Singapore. “The Philippines’ strong growth rate and healthy balance of payments position should enable the peso to outperform most Asian counterparts.”

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