Philippines Strategy:Philippines wins international arbitration case against China

Event.

The Permanent Court of Arbitration (PCA) of the United Nations (UN) hasruled in favour of the Philippines in its arbitration case against China withregards to the South China Sea. The ruling is final and cannot be appealed.

Impact.

Not surprisingly, China rejects ruling. The international tribunal found thatChina not only violated the Philippines sovereign rights but also said that ithad no historic rights to its claimed nine dash line in the disputed area. Notsurprisingly, China has rejected the ruling by saying that this was null and voidfrom the beginning.

Hope is to get more concessions by way of investments. While a victoryfor the Philippines in the legal and possibly moral sense, enforcement, in ourview, would appear to be a near impossibility especially given China’shardline stance. We think that the best that the Philippines can hope for is togain some concessions, most tangibly by getting more investments fromChina into the Philippines.

Duterte appears to have a much better relationship with China thanpredecessor. Contrasting sharply with his predecessor Noynoy Aquino,President Rodrigo Duterte appears to have a much better relationship withChina. This lends hope towards a positive change by way of investments,which was almost non-existent from China throughout the entire six-year termof Aquino in 2010-2016. An indicator of Duterte’s better relationship would bethe much greater frequency of meetings with the ambassador to China at thisearly stage.

Outlook.

We believe that the prospect of improved relations with China brings someadditional positives to our generally optimistic outlook on the Philippinepolitical scene under the Duterte administration. We still have an overweightview of the country, with our favoured sectors being property, consumer, andbanking. Our top picks would be Ayala Land (ALI) and Metro Pacific (MPI).