Philippines: Economy and markets around elections

The Philippines heads to the elections in early-May to select its new leaders. We analyse the election impact on the economy and markets through an event study.
Group Research,chua Han Teng20 Apr 2022
  • The Philippines will hold elections in May to choose its leaders to steer the post-COVID economy
  • A degree of policy continuity is likely
  • We analyse the election impact on the economy via an event study
  • Growth on average rose and peaked a quarter before elections, trending lower after the polls
  • Net investment flows were broadly stronger after the polls
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Below is a summary; for the detailed and full report, please download the PDF

The Philippines heads to elections on May 9. The president and vice-president positions, alongside a large number of congress seats, will be selected. The elections come at a critical juncture for the Philippine economy, which has suffered significantly from the COVID-19 pandemic towards the tail end of Duterte’s six-year administration. Incumbent president Rodrigo Duterte is not eligible for re-election due to a single term limit set by the constitution.

The selected leaders will be responsible for steering the Philippine economic recovery in the post-pandemic environment, but contend with a higher fiscal deficit, larger government debt, and wider current account deficit.

Voters choose the posts of president and vice president separately. Candidates however have tended to form strong partnerships to shore up their election prospects. Amid the large slate of candidates, Ferdinand Marcos Jr (Bongbong) - son of former President Marcos Sr, and Sara Duterte - daughter of the incumbent president - (also known as UniTeam) are frontrunners by a significant margin based on the Pulse Asia opinion poll.

We think that a decent degree of policy continuity is likely for the Philippines. The UniTeam has committed to the current administration’s ‘Build, Build, Build’ infrastructure program, improving digital infrastructure, combating corruption, and rooting out illegal drugs. The pair’s stance on public finances is however unclear. Leni Robredo, who is the incumbent vice president but trailing Bong Bong in the opinion polls, is widely perceived to be market friendly. She favours transparency and accountability. She also champions the ‘Build, Build, Build’ program but with an emphasis on private-public partnership. On public finances, she has acknowledged the country’s high borrowings driven by pandemic, suggesting an intention to ensure debt sustainability, if she secures victory.

We stick to analysing Philippine’s economy and market performances surrounding the elections, without predicting the outcome. The results can shift in the final hour due to the personality-driven contest. We specifically look at the trajectory of growth, fiscal, inflation, investment flows, and market performances - equities and the currency - in the quarters before and after the elections to identify potential cycles.

We evaluate five elections from 1992 in this event study. It considers the polls held under the constitution where the six-year term limits were implemented. The elections occurred under varying domestic and external conditions. We average the economic and market variables and consider the volatility around the data’s average to tease out trends that occurred during election seasons.

Real GDP growth

Philippines domestically driven economic growth picked up on average prior to the elections. Growth was boosted by consumption enhancing measures and government election-related spending. The expansion rose and peaked a quarter pre-elections, before trending lower and bottoming out two quarters after the polls.

Fiscal dynamics

We looked closer at fiscal expenditures surrounding the elections, which appeared to reflect election spending before the votes that boosted economic growth. Government spending growth picked up on average until two quarters before the elections, before trending to slower increases post elections.

Inflation trends

Past cycles showed that Philippines’ headline YoY consumer price inflation cooled before elections and picked up thereafter. In our view, inflation trends are likely influenced by factors outside the election cycle. Our analysis in ASEAN-5: Evaluating key inflation drivers decomposed headline inflation drivers for the region, revealing that Philippines’ top-line inflation fluctuations have come at the mercy of global drivers and international price developments such as global crude oil prices and domestic developments.

Foreign investment flows

We looked at investor confidence in the Philippines around elections through two forms of foreign investment flows: 1) more volatile portfolio flows that could be driven by global risk appetite and domestic developments, beyond the election cycle; 2) relatively stable direct investments (DI) that are influenced by structural factors such as the business environment, long-term growth prospects, and the government’s policy agenda. We look at the flows in net terms as a share of nominal GDP from the BOP account.

Net portfolio investment flows: Net portfolio flows hovered around the zero-mark until one quarter after the elections on average, with one standard deviation of ~0.7% of GDP around the mean. These were followed by an improvement in the next couple of quarters, possibly as uncertainty eased.

Net direct investment (DI) flows: Net DI inflows were on average higher post-elections than pre-elections. New investments typically cooled ahead of the elections amid heightened unpredictability over policy continuity, while greater clarity over the new government drew new investments after the polls.

Financial market performances

We track financial market performances in the Philippines around elections through equities (the benchmark Philippine Stock Exchange Composite Index) and the currency (spot Philippine peso against the US dollar), both in YoY terms.

Equities: Philippines’ equities performed well on average around election seasons. The pace of increases picked up and peaked two quarters prior to the election quarter, before stabilising into the elections and up to four quarters after the votes.

Currency: The Philippine peso depreciated against the US dollar by almost 7% YoY on average up to four quarters prior to the elections. The currency’s weakness moderated following the polls, before appreciating on average after around three to four quarters post elections.

To read the full report, click here to Download the PDF.

Chua Han Teng, CFA

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