(Bloomberg) -- Soon after he became president of the Philippines in 2016, Rodrigo Duterte ordered government officials “to refrain from changing and bending the rules of government contracts.”
Halfway through his six-year term, Duterte’s commitment is under question. In December, the firebrand leader ordered the renegotiation of long-agreed contracts for Manila Water Co. and Maynilad Water Services Inc. to supply the capital until 2037. He also said his government will not pay billions of pesos to Manila Water for delayed tariff increases as ordered by a court, while threatening to jail owners of both water providers.
Stock Rout Hits $2.4 Billion on Shock Manila Water Dispute (2)
The sudden review, triggered by what Duterte says are “onerous provisions” in the contracts, highlights the elevated regulatory risk in the Philippines compared to other major markets in the region, according to Fitch Solutions Inc.
Investors fear the water dispute could pave the way for the state to probe other agreements it deems “disadvantageous,” threatening the financial viability of companies involved, James Su, Fitch Solutions’ infrastructure analyst, wrote in a research note in December.
Muddy Waters
The water issue is the latest in a history of contractual disputes that have caused companies like Fraport AG and Suez SA to leave the Philippines. It also comes as the country, competing with its Southeast Asian neighbors for foreign investment, is seeking to lure companies to join an 8-trillion-peso ($157 billion) infrastructure program.
Foreign investors are “sensitive” to a country’s reputation in honoring contracts, said John Forbes, a senior adviser of the American Chamber of Commerce of the Philippines. They are likely seeing greater risk in the Philippines as Duterte, like previous presidents, redefines what “onerous” deals are, he said.
Duterte’s economic managers have sought to dispel fears of uncertainty. “It is an isolated incident” and won’t go beyond the sector, Economic Planning Secretary Ernesto Pernia said when asked whether other utilities could come under scrutiny next.
In a Dec. 30 speech where he threatened to sue owners of the water companies, Duterte also suggested that the franchise of a television network he accuses of bias may not be renewed. He urged its owners to sell before the franchise expires in March.
Image Boost
Duterte says some provisions in the water contracts prevent government from interfering in setting tariffs and provide generous performance guarantees for the companies. The sudden review of the deals, signed in 1997 and renewed in 2009, harks back to moves by past Philippine leaders who questioned agreements signed by their predecessors.
Justice Secretary Menardo Guevarra, the man tasked to lead the review of the water contracts, said public interest is the key consideration.
“These profit-oriented foreign investments, we couldn’t care less about them. What we want are foreign investments with a sense of corporate social responsibility,” he said when asked about the review’s possible impact on business confidence.
In December when Duterte repeatedly spoke against the water companies, foreign investors sold net $173 million of Philippine stocks, ten times more than a year ago. Manila Water, parent Ayala Corp., and Maynilad owners DMCI Holdings Inc. and Metro Pacific Investments Corp. have lost $1.7 billion in market value since early December when he said he wants new water contracts for the Philippine capital.
The president’s attack -- which comes on the heels of Manila’s most severe water shortage in a decade -- burnishes his populist image and his promise to go after oligarchs, said Ramon Casiple, who heads the Institute for Political and Electoral Reform. Duterte has the highest popularity rating among top Philippine officials, with more than 80% of Filipinos trusting him, according to a Pulse Asia survey in December.
“Elite capture of regulatory agencies, profit-oriented policies and monopolies are publicly known factors,” Casiple said. “No previous president has successfully tackled these problems.”
Ratings Impact
While Duterte’s tirades have sent some stock investors fleeing, their impact on the economy has yet to be seen. Moody’s Investors Service said any regulatory risk from the water dispute won’t likely affect the Philippines’ overall credit rating, which stands at Baa2, the second-lowest investment grade.
“We are watching the situation, but there also are more material developments that we are looking at that could affect the Philippines’ credit profile,” Moody’s senior vice president Christian de Guzman said in a phone interview. Items include the passage of the 2020 budget and tax-reform bills, he said.
Duterte is set to make an announcement on the water deals Jan. 6, according to presidential spokesman Salvador Panelo. Both Manila Water and Maynilad have said they’re willing to work with the government to draw up better contracts.
“We wait,” Isidro Consunji, chairman and president of DMCI Holdings Inc. said in a phone interview. “What else can we do but wait?”