Factbox: Key political risks to watch in the Philippines

Posted at 12/05/11 7:19 PM

MANILA, Philippines - President Benigno Aquino is trying to lure investors to the Philippines, but has troubles at home: in late October, rumours of an army plot to overthrow him surfaced, even as he wrestles with violent Muslim rebels and a worsening security situation.

Aquino is also trying to deal with perennial problems such as corruption and creaking infrastructure, as Manila tries to press its claims in the contested South China Sea, and manage its changing relationships with China and the United States.

In November, Aquino's anti-corruption campaign hit the headlines as former President Gloria Macapagal Arroyo was arrested and charged with electoral fraud.





The cost of insuring against default on 5-year sovereign debt was just below 190 basis points at the start of December. It has traded choppily after rising to its highest in nearly 2-1/2 years in September due to market turmoil over a darkening global outlook and Europe's debt woes.

Following is a summary of political risks to watch:


Internal security remains a weak spot, 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.

In late November, a crude bomb exploded near a memorial for 58 victims of the Philippines' worst election-related violence hours before the start of a rally to commemorate the attack two years ago. That followed deadly fighting in October between Philippine soldiers and a group of Muslim separatists on a southern island forced thousands of people to flee their homes and created a new problem for stalled peace talks to end the long-running insurgency.

Aquino held talks with the Moro Islamic Liberation Front's (MILF) leader in Tokyo in August to accelerate the peace process, but the momentum appeared to have stalled after the separatists rejected Manila's proposal to end the conflict.

MILF is not the only active rebel group. Earlier in October, around 200 Maoist guerillas attacked three private mining projects on southern island Mindanao, destroying around $70 million worth of equipment, and threatening more attacks.

Also in the south, three people were killed in a bomb attack in Zamboanga city in November, the third hostel bombing in the south since September. The attacks were blamed on an Islamist militant group.

What to watch:

-- The army's patience with the peace process, and with Aquino. Coup attempts have happened in the Philippines before, and some within the army are angry with Aquino for not taking a tougher line with MILF.

-- 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.

-- The Maoists are refusing to return to talks until some prisoners are released, and they continue to attack government forces. The sincerity of the Maoists in seeking peace has been doubted by analysts.


Tensions have eased since the middle of the year, after a number of incidents with Chinese ships in waters claimed by both countries off the Philippine coast. But the issue of sovereignty, and therefore ownership of the minerals and gas beneath the seabed, remains unresolved.

Manila will not surrender claims to its exclusive economic zone, as defined by the United Nations, but it cannot hope to confront China militarily, and is wary of spoiling relations with the region's superpower.

China bases its claims on historical sovereignty, and has rejected Manila's request for U.N. arbitration.

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, and was unhappy that President Obama raised the issue during an Asia-Pacific summit in November. Soon after that, China said it would conduct naval drills in the western Pacific.

What to watch:

-- Fresh approaches by Manila to pursue its claims on the disputed Spratly Islands. Aquino told Reuters in September that Manila was looking into at least five other options to pursue its claims after China rejected arbitration.

-- Spending on upgrades of air and naval equipment, including radar stations. The Philippines says it needs to build a basic defence capability, and its actions are in no way aggressive.


Aquino remains immensely popular with voters, and his administration seems to have regained momentum after a lull in the first half of 2011 when he was criticised for a lack of drive.

The arrest in November of former Philippine leader Gloria Macapagal Arroyo for vote rigging has put Aquino's anti-graft stance firmly back in the public eye, but there is also a risk that the Arroyo case could create uncertainty for investors if it becomes a protracted political and legal battle.

The government's strength has been economic management, including reducing the budget deficit by improving revenue collection and controlling spending, but the worsening outlook for the global economy is hitting the Philippines.

Though Fitch in June raised its rating on the Philippines to just one notch below investment grade, an investment grade rating requires a stronger revenue base, including new and/or higher taxes, but the government says this is not on the agenda this year.

It is considering raising about $1 billion through a global bond issue in January 2012, a senior government official said in November.

Manila raised $1.25 billion in global peso bonds in January this year and $1.5 billion in new 2026 global bonds in March.

In October, the government said it expects growth this year to be between 4.5 to 5.5 percent, lower than a 5-6 percent growth target under its budget assumptions for the year, it said in October.

What to watch:

-- Progress of the Arroyo case in court.

-- Appetite among investors for the possible bond issue.

-- Any more growth forecast reductions, and central bank policy moves.

-- Foreign and domestic investors' interest in big infrastructure projects. A centerpiece policy of Aquino, the launch has been repeatedly delayed and in that time the global investment environment has soured.