• The economic benefits from revitalised ties between the Philippines and China are yet to materialise as bureaucratic bottlenecks delay the government’s infrastructure plans.
  • A panda bond issuance and a more liberal foreign investment regime could lead to higher Chinese investment.
  • Tourism has so far been the biggest winner of the recent friendship as more Chinese people travel to the Philippines.

Nearly a year after Philippine president Rodrigo Duterte visited China, the trumpeted economic benefits for Manila from a rekindled friendship with Beijing have so far been limited.

Mr Duterte moved his country away from the US and towards China when he downplayed a United Nations ruling in favour of the Philippines over China’s claims in the South China Sea. However, few of the gains he promised would result from the friendship have materialised. Chinese foreign direct investment (FDI) remains low when compared with Indonesia, Malaysia and Thailand, and projects that are to be financed by official development assistance (ODA) from Beijing have not been started.

Slow spending

China promised billions of dollars in loans and grants for infrastructure projects. However, of the seven initial works to be funded by Beijing, worth an estimated $32bn, only one has received final approval: the relatively inexpensive construction of two bridges in Manila. The loan amounts for three of the projects are yet to be determined and three are awaiting feasibility studies (see table).

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While the Duterte administration has promised to streamline and speed up the ODA process, delays loom. The government agencies assigned to construct the projects, together with Chinese partners, are historically slow in spending ODA funds because of bureaucratic inefficiency. They include the Transportation Department and the National Irrigation Agency, which will handle three of the seven projects, including the $30bn south line of the North-South Railway — the largest undertaking the Chinese are involved with to date. The agencies’ capacity to absorb ODA funds has essentially not improved since 2006 (see chart).

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In addition to the seven projects, both countries agreed that China would study the feasibility of another 10, worth $7.3bn, mostly in infrastructure (see table). The Philippine government had set a six-month deadline to negotiate the terms for each study. However, as of June, the most recent month for which public information is available, no terms had been agreed.

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The Philippines is not obliged to hand project construction to China after studies are completed, so even small ventures face other potential delays. The Philippine government could decide to build a project on its own, ask another donor to take it on, or invite the private sector to bid.

Mr Duterte’s economic officials have been critical of underspending on infrastructure by the previous administration of Benigno Aquino, which they said hurt growth. But infrastructure spending under Mr Duterte has not picked up. Although China has become by far the largest provider of grants and concessionary loans to the Philippines (see chart), slow government spending and delays in getting Chinese-funded projects off the ground could derail the Duterte government’s 8.4tn pesos ($165bn) “Build, Build, Build” infrastructure agenda.

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Panda diplomacy

The Philippines plans to issue $200m in panda bonds — renminbi-denominated bonds issued in China by a foreign entity. The initial bond issue is small when compared with the Philippines’ funding needs but, if successful, would open an additional way for the government to tap the Chinese for infrastructure finance and benefit from the renewed friendship.

The offer is planned for this year but no date has been set. “We are still watching the market to make sure panda rates are competitive with comparable dollar bond issue,” National Treasurer Rosalia de Leon told FTCR.

Chinese FDI to the Philippines remains far below the level for other major Asean economies (see table). We do not see this changing soon, but growth could accelerate in 2018 once the government reduces the number of sectors closed to foreign investors, or sectors where foreigners are restricted to 40 per cent of total equity.

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Socioeconomic Planning Secretary Ernesto Pernia said on September 14 that the government would open more industries, including construction, to higher foreign ownership. This bodes well for Chinese contractors, some of whom entered infrastructure deals with their Philippine counterparts during Mr Duterte’s visit to Beijing. Details of the projects have not been released but they include bridges, toll roads and land reclamation.

Tourism’s the winner

One sector that has already benefited from closer relations is tourism. In October last year, China lifted a travel advisory that had been in effect since 2014 discouraging its citizens from travelling to the Philippines. As of the first half of 2017, Chinese tourism grew by 33.4 per cent year on year (see chart).

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— Prinz Magtulis, Philippines researcher

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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