Key political risks to watch in the Philippines

Posted at 02/20/2013 12:15 PM

MANILA - The government and the country's largest Muslim rebel group have agreed a preliminary deal that may end a 40-year conflict that has killed more than 120,000 and displaced 2 million.

President Benigno Aquino hopes this will pave the way for economic growth and development in the south, a poor region but one that sits on considerable resources.

Moody's upgraded its ratings of the county in October, following Standard & Poor's in July, though S&P said further upgrades depend on Manila raising income levels or sustaining revenue reforms.

In 2012, the economy grew 6.6 percent, beating expectations and putting its rate of expansion second only to China.

Still, much of the country is dilapidated and vulnerable to natural disaster. Typhoon Bopha (Pablo) killed thousands in the south late last year, and heavy rains in August swamped huge swathes of Manila, killing more than 100 people and leaving hundreds of thousands homeless.

Internationally, by far the greatest concern is the South China Sea, contested waters where the US-backed Philippines are increasingly running up against China.

Following is a summary of political risks to watch:

INTERNAL SECURITY

Negotiators from the government and the Muslim rebel group Moro Islamic Liberation Front (MILF) reached a deal on a roadmap to set up a new autonomous Bangsamoro region in the south of the mainly Roman Catholic state, signaling an end to a long insurgency.

Still, the 11,000-member MILF is not the only active rebel group. Maoist guerrillas have attacked private mining projects on southern island Mindanao, destroying around $70 million worth of equipment, and threatening more attacks.

In general, internal security remains weak, persistently highlighted by foreign embassies in travel advisories, with law enforcement hobbled by corruption, lack of police resources, and easy availability of guns on the street.

What to watch:

- Implementation of the political deal to set up an autonomous region. This will include the demobilization, disarmament and reintegration of former Muslim rebel fighters, imposition of local taxes to cut government subsidies, and revenue-sharing arrangements with oil and gas producers.

- Any more attacks on mines or other businesses, and how investors respond. The Philippine army has said it lacks the resources, so has asked firms to hire private militias to guard their businesses.

SOUTH CHINA SEA

The Philippines is at the centre of Asia's most likely military flashpoint: the South China Sea. Last year a regional summit failed to agree a position on the competing claims of various nations, and what appears to be the increasing alignment of Washington with Manila risks infuriating China.

In January the Philippines asked an international tribunal to intervene in its longstanding dispute with China and declare that Beijing's claims are invalid, a move China rejected.

That came soon after U.S. and Philippine officials agreed on an increase in the number of U.S. military ships, aircraft and troops rotating through the Philippines, though officials from both countries say there is no plan to revive permanent U.S. military bases there.

Manila will not surrender claims to its exclusive economic zone, as defined by the United Nations, but it cannot hope to confront China militarily.

Beijing wants one-one-negotiations, but Manila and other claimants prefer a multilateral approach, which opens the way for an indirect role for the United States. China wants the United States to stay out of the dispute.

What to watch:

- New security arrangements between Washington and Manila to increase the U.S. military footprint in the Philippines, the U.S. fighter jets and warships the Philippines is able to buy, and how China responds to any Filipino military buildup.

- Any action taken by the tribunal of the United Nations Convention on the Law of the Sea (UNCLOS) on Manila's request for intervention.

- Fresh approaches by Manila to pursue its claims on the disputed Spratly Islands. Aquino has said Manila is looking into at least five other options to pursue its claims after China rejected arbitration, including asking for intervention from the International Tribunal on the Law of the Sea (ITLOS) in Germany. Commercial activity in the South China Sea. Manila has accepted exploration bids on two oil and gas in the disputed areas, and an Anglo-Filipino company may start drilling oil wells later this year in the Reed Bank, another area claimed by China.

- Spending on upgrades of air and naval equipment, including radar stations. The Philippines plans to roll out $1.8 billion in defense spending in the next four years, but says its actions are not aggressive.

ECONOMIC GROWTH; CHURCH V STATE?

Mining firms want the Philippines to lift an 18-month moratorium on new projects, but this will not happen until lawmakers approve new legislation on mineral revenues and a presidential executive order is signed.

Congressional approval is likely to hold up permits further, stalling up to $12 billion in new investments planned over the next five years, including Southeast Asia's biggest undeveloped copper-gold mine, the $5.9 billion Tampakan project by global miner Xstrata Plc and Australia's Indophil Resources NL in the south of the country.

Still, the economy is performing well. With 6.6 percent growth in 2012, the Philippines is an example of expansion in contrast to Europe and the United States.

Authorities are struggling to control an inflow of capital that has pushed up the currency and threatens asset price bubbles, and government is concerned about the impact of a strong peso on the competitiveness of its exports and the growing outsourcing sector.

Separately, Parliament approved in December a highly controversial reproductive health bill, requiring the government to hand out contraceptives to poor people, a policy bitterly opposed by the Catholic church.

The move, the first time in more than a decade an elected politician has taken on the bishops and won, was a sign of Aquino's confidence and his bedrock of national support, but is unlikely to be the last battle between church and state.

What to watch:

- Possible ratings upgrades after the passage of new alcohol and tobacco sales tax rates. The tax reform measures are likely to push the Philippines towards investment grade.

- When the mining moratorium is lifted, and how quickly resources firms start work on new projects.

- Growth figures, and central bank policy moves.

- Political fallout from Aquino's challenge to the influential Roman Catholic bishops in pushing reform of contraception laws.