(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 regional markets, 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 WatersThe 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 ($156 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. Asked if other utilities would also come under scrutiny, Economic Planning Secretary Ernesto Pernia said the water dispute “is an isolated incident” and won’t have ramifications for other sectors.However, in a Dec. 30 speech where he threatened to sue owners of the water companies, Duterte also suggested that a television network he accuses of bias may not have its franchise renewed. He urged the station’s owners to sell before the franchise expires in March.At a televised briefing Monday, Duterte spokesman Salvador Panelo said all contracts that contradict the law and public interest will be reviewed and scrapped.“Investors will be more cautious,” he said, when asked about investor concerns over the review of water deals. “When they invest, they already know the correct terms that will not destroy other businesses.” Image BoostDuterte says some provisions in the water contracts prevent the government from interfering in setting rates, 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, who’s leading the review of the contracts, said public interest is the key consideration.Asked about the possible impact on business confidence, he said: “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.”In December, as 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 $1.8 billion in market value since early December.The impact on foreign direct investment won’t be clear for a while yet, but through September -- the most recent figures available -- FDI had declined for seven straight months compared to the year-earlier period, according to Philippine central bank data.Populist CredentialsDuterte’s attack on the water companies -- which comes on the heels of Manila’s most severe water shortage in a decade -- burnishes his populist image and his pledge to go after oligarchs, said Ramon Casiple, who heads the Institute for Political and Electoral Reform. More than 80% of Filipinos say they trust Duterte, who has the highest popularity rating among top Philippine officials, according to a Pulse Asia survey last month.“Elite capture of regulatory agencies, profit-oriented policies and monopolies are publicly known factors,” Casiple said. “No previous president has successfully tackled these problems.”Any impact to the
economy from Duterte’s tirades has yet to materialize. Moody’s Investors Service said any regulatory risk from the water dispute isn’t likely to 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 contracts Monday, according to Panelo. Manila Water fell as much as 6.8% in morning trading, while Metro Pacific and DMCI dropped as much as 2.6% and 2.8%, respectively. The water providers have said they’re willing to work with the government to draw up better contracts.“We wait,” DMCI Chairman and President Isidro Consunji said in a phone interview. “What else can we do but wait?”(Adds Duterte spokesman’s comments in 9th and 10th paragraphs)\--With assistance from Ian Sayson, Ditas Lopez and Cecilia Yap.To contact the reporters on this story: Andreo Calonzo in Manila at acalonzo1@bloomberg.net;Claire Jiao in Manila at cjiao5@bloomberg.netTo contact the editors responsible for this story: Cecilia Yap at cyap19@bloomberg.net, Michael S. ArnoldFor more articles like this, please visit us at bloomberg.com©2020 Bloomberg L.P.