The news flow out of the Philippines at the moment inevitably turns to the "war on drugs" launched by the country's hothead president, Rodrigo Duterte.
He's Asia's Trump, as I wrote last May. He has made multiple claims, which he sometimes then denies, that he participated in death squads while mayor of the southern city of Davao. He threatened to ride a jet ski out to islands contested with China to plant the Filipino flag. Then he tries to make friends with Beijing.
That grandstanding distracts from the country's economic progress, which has been exceptional of late. On the back of the boom in call centers and other outsourced back-office functions, gross domestic product grew 6.8% last year and looks set to exceed 6.5% every year of this decade bar 2011, according to Oxford Economics forecasts.
Duterte said he didn't know a lot about business when he took office, and that he would leave it to his team. They're winning.
One of the most dramatic and positive changes that they appear about to push through is a complete overhaul of the country's tax system. The aim is to make it more efficient, fair and, frankly, intelligible. That opens up strong investment themes that I'll address later in this article.
The overarching scheme is known as the Comprehensive Tax Reform Program, but the Department of Finance has wisely sought to take a pragmatic approach that pushes through change in pieces. The first package should go through this year, perhaps as early as the third quarter. This should broaden the tax base, cut personal and corporate income tax, and make the Philippines more competitive as a destination for foreign direct investment.
We shouldn't downplay the street-level tragedy that is occurring in the Philippines. Almost 9,000 people, mainly small-time dealers and users, have been killed in the fight against narcotics since Duterte took office on June 30, according to Reuters.
But there's a middle class that is emerging, too. The Philippines, with its virtually nationwide fluency in English, was championed as the next "Asian tiger" to boom -- in the 1950s. Rampant corruption and horrible leadership completely derailed that progress. It looks to finally be delivering on that early promise.
Tax is high in the Philippines. The standard sales tax, at 12%, is the highest in Southeast Asia. Corporate income tax is also the highest in Southeast Asia, deterring foreign companies from starting Filipino operations. The highest marginal income tax rate is 32%, putting it atop the Southeast Asian pile, bar Thailand's 35%.
But tax is also basically "optional" in the Philippines, like in most emerging markets. Only 22% of the 1.8 million professionals in the Philippines file at all. Those that do declare income, declare an amount similar to someone earning minimum wage -- ludicrously low.
Ultimately, the Duterte administration changes would reduce personal income tax for almost all individuals and companies. Reforms should benefit the vast majority of equities in the long run.
That's something U.S. investors can play through exchange-traded funds such as the iShares MSCI Philippines ETF (EPHE) , which ETFdb.com lists as the only country-specific fund. It's still pretty small, at $176 million in assets under management. Of course, there are broader options, such as the iShares MSCI Emerging Markets Asia ETF (EEMA) , but the impact of any tax changes in one nation would likely be tiny there.
The industries that benefit the most from the immediate change in tax policy are the bank, property and retail sectors. The companies to target are the sprawling conglomerates that tend to sprout in Asia, where business expansion often involves opportunity more than planning. They have the extensive networks and diverse business models to benefit from the broad impact of such nationwide changes in policy.
SM Investments operates the country's biggest retailer, SM Retail, so it would benefit from higher incomes. It has a dominant position in department stores and modern grocery stores. Nomura estimates revenues should rise 32% by 2020, from 2016.
GT Capital is the holding company for the Ty family, which has its fingers in just about all the pies. Nomura forecasts annual compound growth of 13% through fiscal 2019.
GT Capital in partnership with Toyota Motor (TM) and Mitsui (MITSY) is the distributor of Toyota cars and parts -- and finances those vehicles to boot. It owns MBT, one of the country's Big Three banks, outright as well as Philippine AXA Life Insurance, in conjunction with AXA (AXAHY) . It develops property through Federal Land. And Metro Pacific Investments (MPCIY) builds and operates power stations, toll roads, water systems and hospitals.
The Alliance Global Group owns Megaworld (MGAWY) , the largest business-process outsourcing company in the Philippines. It also counts the world's largest brandy producer in terms of volume, Emperador, among its subsidiaries. And another consumer-discretionary play stems from Travellers International Hotel PH:RWM, which is the country's first developer of "integrated resorts," the euphemism for casino resorts in Southeast Asia.
Someone's gain is inevitably someone else's pain, at least short-term. The introduction of new taxes and the removal of certain tax incentives will be near-term drags on the consumer, power and energy sectors, the Nomura team concludes.
The Philippines has some of the worst infrastructure in the world, last year ranking 112 out of 138 nations for infrastructure quality in the World Economic Forum's global competitiveness index. To be honest, it's virtually impossible to connect the supply-and-demand dots in the Philippines, with 7,100 islands, and Indonesia, with more than 17,000.
But thanks to changes in taxation, both nations have pledged to spend massively in that area under leaders who are the first, in each case, to come from "the masses" rather than the political and business elite. Given their backgrounds, Duterte and his Indonesian counterpart, Joko "Jokowi" Widodo, might actually do something about helping those masses get goods, get around, and get to town.
That, and more money in the "official" system, is very good for business.