After five years of moderate success, the Philippines in 2016 will enter into one of the highest risk scenarios for doing business that the country has experienced in years, according to a report by the Manila-based country risk firm Pacific Strategies and Assessments.

“A confluence of political, security, geopolitical and economic conditions in the coming year will have a major impact on whether the country moves forward as a peaceful, economically vibrant emerging market or descends back into the state of a struggling, politically unstable republic,” according to the report, available only by subscription.

Although recent election cycles have gone smoothly since at least 2010 with the elevation to the presidency of Benigno S. Aquino III, PSA says the most potentially disruptive event for the coming year will be the national elections scheduled for May in which a new president, vice president, senators and members of congress will be chosen, along with thousands of other officials, including governors, mayors and village council leaders.

Gunfire once an electoral phenomenon

Prior to 2010, elections were an occasion for such intense gunfire that the Red Cross regularly scheduled critical sites to stockpile medical supplies. That has not appeared to be the case in recent elections.

The potential disqualification of Sen. Grace Poe, one of the most popular candidates, and the entry of the controversial candidate Rodrigo Duterte, the mayor of Davao City, has added a higher level of uncertainty to the election.

“If voters are denied the chance to vote for a candidate such as Poe, who is seen as an honest newcomer, there could be unrest,” the report continues. “Some will see the election as illegitimate if Poe is denied the chance to run. If a political enemy of Poe is elected, she could be a powerful destabilizing force.”

Duterte has called for constitutional change, a sensitive issue that many people fear would remove term limits and allow a return to dictatorial government. His open advocacy of death squads and vigilante justice is a destabilizing message that could erode the reforms and trust of the military and police.

Commitment to reform could stall

“The more general risk is that the next president will not maintain the anti-corruption efforts and fiscal reforms that the Aquino administration has implemented,” the report says. “Even the election of the administration-backed candidate, Manuel A. Roxas, is not a guarantee of the continuation of Aquino policies. If elected, Roxas would bring his own style and policies to the major challenges facing the country.”

After nearly six years in which it has consistently outperformed much of the rest of the region, the Philippines does face potential economic headwinds. The slowing Chinese economy is expected to affect the region although inward remittances from workers and former Filipino citizens living in the United States and other countries, plus a vibrant outsourcing industry, should prop up the Philippines to some extent as they have in the past.

In addition to the political and economic challenges, the Philippines is facing major internal and external security risks, as the report points out. The fate of the Bangsamoro Basic Law, the legal underpinning of the landmark peace deal with Mindanao’s largest Muslim rebel group, is still up in the air, delayed from a botched military operation last summer that cost the lives of more than 40 military personnel. With Aquino due to leave office next July, he will likely attempt to push it through before he goes.

The deal brought the first glimmer of hope that a semblance of order could be brought to Mindanao to jumpstart the economy of the southern Philippines, PSA says. “This, it was hoped, would build momentum toward a lasting peace and prosperity that lessens the incentives for Muslims in the south to support rebellion. The pending law is now mired in politics and its passage in a form that satisfies the rebels appears unlikely.”

Bangsamoro collapse possible

A collapse of the Bangsamoro Basic Law could trigger increased unrest in Mindanao or at the very least help maintain the status quo of ongoing periodic conflict fed by poverty and a culture of violent clan rivalries. Many longtime investors, and newcomers alike, have written off Mindanao as an investment destination.

If peace in the region changes this outlook, Mindanao could be the driver of economic growth in the country in the next decade, PSA says. Apart from the longstanding bane of insurgency, Mindanao risk is equally defined by a nexus of violent criminal groups, clan warfare and corruption fed by dynastic politics.

“Vast mining opportunities, as well as a young population that could be working in call centers, are just part of the economic windfall that could come from a peaceful Mindanao. In 2016, it will likely become clear whether Mindanao is to be a boost or a drag on the national economy.”

From an external security perspective, two momentous decisions will come in 2016. The Philippine Supreme Court is expected to rule in January on the Enhanced Defense Cooperation Agreement, or EDCA, with the United States. The deal would dramatically increase the number of United States military facilities, ships, aircraft, and personnel in the Philippines.

If the high court rejects the deal, or sends it to the Senate for ratification and possible major modification, it would be a significant setback for efforts to modernize the Armed Forces of the Philippines. The country is in the process of obtaining new warships from Indonesia and for the first time in 10 years will have fighter jets, Korean-built FA-50s.

Military modernization a must

The Philippine military, which has for decades been internally focused on fighting insurgents in the jungle and mountains, needs to rapidly scale up its expertise to manage fighters, sophisticated warships and other equipment needed for external defense. EDCA provides a low-cost way to provide a crash course on how to operate a modern military.

If the agreement is shot down, or watered down, the modernization of the Armed Forces of the Philippines will rely on private contractors, periodic joint military exercises and generally whatever expertise the country can hobble together. This will slow the ability to effectively use the new equipment it is obtaining.

Fighter jets with inexperienced pilots and questionable maintenance offer little hope of providing a credible defense to external threats. While true modernization of the Armed Forces will take decades and a level of political will not heretofore seen in the Philippines,​ a closer partnership with the US military signals a serious intent to maintain security in the South China Sea.

Who gets the South China Sea rocks?

Of equal importance to external security in 2016 is the decision by the United Nations’ Permanent Court of Arbitration on the case filed by the Philippines against China regarding its claims in the South China Sea. The court is expected to rule in July regarding the legal status of islets, rock outcroppings and other maritime features. This is considered likely to result in a legal ruling that makes it evident that China’s new artificial islands in the South China Sea have been built illegally.

“Whatever the ruling by the international court, the result will likely have a destabilizing effect on the Philippines. An affirmative ruling for the Philippines could result in a backlash from China, most likely in the form of economic and political moves. A ruling in favor of the Philippines could also encourage other claimants to take legal action against China, heightening the uncertainty in the region.

A ruling against the Philippines would leave the country with few options to regain control of its vast exclusive economic zone that is being gradually lost to China. The loss of the fishing grounds, seabed resources and maritime security along the country’s western edge could have a profound and long-lasting impact on the economy. If EDCA is approved, and the United States presence is increased in the country, it could also increase the likelihood of conflict with China on the doorstep of the Philippines.

“For companies and individuals doing business in the Philippines, 2016 will likely be a year of increased risk, major political and economic changes, and business operations uncertainty.”