Economic Update

The signing of a peace agreement between the Philippines government and separatist rebels on the island of Mindanao may result in significant social and economic benefits, including a much-needed boost to the agriculture sector, which has long lagged behind regional rivals.

On October 7, President Benigno Aquino III announced the government had brokered an agreement with the leaders of the Moro Islamic Liberation Front (MILF). Both sides have said the agreement will put an end to some 40 years of conflict on the resource-rich island, with some estimates putting the death toll at 120,000.

Under the preliminary agreement, the MILF will renounce its long-held objective for establishing an independent state, but Mindanao will be given a high degree of autonomy within the national structure. Announcing the agreement, Aquino said, “The hands that once held rifles will be put to use tilling land, selling produce, manning work stations and opening doorways of opportunity for other citizens”.

Two days after the peace deal was announced, ratings agency Fitch issued a revised note on the economy, setting out what its analysts saw as some of the immediate benefits of the agreement and stressing the advantages of a strengthened agriculture sector.

“The increase in arable land resources would also improve food security, with potential benefits to inflation management over the longer term. Such factors are supportive of a sustained rise in the investment rate, which has increased to 22% of GDP in 2011,” the agency said.

However, Fitch did strike a cautious note, saying that a permanent deal is not a certain outcome, and other constraints on investment growth, such as a weak overall investment climate and low fiscal revenue base, still need to be addressed.

The government is hopeful that the investment climate will warm up appreciably in the short term, and there are already signs of change on the horizon. One of the world’s leading crude palm oil producer, Malaysia-based Felda Global Ventures, has already expressed interest in a potential investment in Mindanao.

In an interview with Reuters news agency on October 8, just one day after the framework for the peace deal had been unveiled, Sabri Ahmad, the CEO of Felda, said his company was looking to tap into the local market. “We will go there for oil palms,” Ahmad said. “There is ample area for oil palms to meet strong local demand.”

The market is there to be developed, as the Philippines currently has to import more than 500,000 tonnes of crude palm oil, most of which is processed and used for cooking. By developing some of the 1m ha of grasslands on Mindanao that the Philippines Palm Oil Development Council says is suitable for palm oil cultivation, the country could help bridge the supply-demand gap for vegetable oils, as well as create employment and revenue for local farmers.

Jesus L Arranza, the president and CEO of CIIF Oil Mills Group, also believes there are investment opportunities in Mindanao. “Once we have attained peace in Mindanao, we will be opening the gates to a virgin area for agriculture and manufacturing. Right now, investors are afraid to go to Mindanao, which is why it remains a vastly untapped area for business,” he said in an interview with The Business Mirror in early October.

Certainly, however, a lot of work will need to be done before Mindanao’s agriculture sector can truly blossom. The region lacks adequate infrastructure and farming technology, which currently holds back growth, but once these issues are addressed, a number of opportunities should become available for the construction and logistics sectors, as well as farm equipment manufacturers.

Additionally, Mindanao’s fields and plantations could make a significant contribution to the national economy. Though a major source of employment, agriculture only represents 11% of GDP, far behind the 32% for industry and 57% for the services sector.

Even if all goes smoothly in the peace process, it will not be until 2016 that the final pieces of the plan are put in place. Disruptions to the process could also see it being derailed, as evidenced by events in the past. However, both sides appear to be ready for an era of peace, which should result in a period of sustained growth for both Mindanao and the Philippines.