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Duterte's antics shake investor confidence in the Philippines

The honeymoon period of Philippine president Rodrigo Duterte appears to be over.

Foreign investors are pulling money out of the country's stock market rapidly, riled by a series of remarks made by the acid-tongued Duterte against key ally U.S. and China that have cast doubts over the future of the country's foreign policies as well as his handling of the economy.

Official data from the Philippine stock exchange showed the net foreign transactions on the benchmark Philippine Stock Exchange (PSE) index fell every week between August 15 and September 16.

The Philippine peso dropped 3.37 per cent against the dollar during this period, while the benchmark index has been the worst performer in the region over a one-month period.

The PSE index fell 4.48 percent, compared to a 2.99 percent drop in Thailand's SET and a 1.74 percent decline in the Jakarta composite index.

"The President's statements have been very volatile these past few days, and it's starting to be a concern," Lexter Azurin, research head at Manila-based Unicapital Securities, told CNBC by email.

The former mayor of Davao city made headlines after threatening China with a 'bloody' confrontation over the South China Sea dispute; he antagonized the U.S. by publicly insulting President Barack Obama calling for the withdrawal of special forces troops from southern Philippines and by suggesting he was considering acquiring defense equipment from Russia and China.

The constant flip-flops have undermined a key source of comfort for foreign investors in the Philippines: Stability.

Many observers had expected the new regime to continue with policies that have ensured the Philippines has clocked some of the fastest growth rates in the world.

Now there are worries that the president's erratic outbursts may end up distracting from the task at hand.

French investment bank Natixis' senior economist, Trinh Nguyen, told CNBC's "Squawk Box" last week the "off-the-cuff" remarks about the U.S. were significant because the Philippines had "traditionally been a very strategic ally of the U.S."

In the country's territorial dispute with China in the South China Sea, the U.S. had been a vocal backer of the Philippines.

"They just recently had an agreement with the military for weapons sharing ... [and now] the military is trying to put out the damage [caused by] the comments," she said.

But there are some upsides to Duterte's policy stance, according to analysts.

Nomura's Asia equity strategists reckoned Duterte's recent outreach to China could prove to be a smart move if a Trump presidency becomes apparent.

Trump previously referred to the Philippines as one of the "terrorist nations" while taking a swipe at immigrants at an August rally, according to Reuters.

The Nomura strategists reiterated their neutral position in the Philippines in a recent note, citing a reassessment after the start of the U.S. presidential debates.

Economic fundamentals in the Philippines appeared strong, with healthy domestic consumption offsetting headwinds from overseas.

According to Azurin, private consumption accounts for 70 percent of the total economy and a robust growth in business process outsourcing sector would likely add to the country's growth story in the next few years.

Azurin added that Duterte's proposed tax reforms, part of his 10-point economic plan announced in June, could lead to higher domestic consumption.

In the April-June quarter, the Philippines was the second fastest growing economy in Asia, registering a 7.0 percent annual expansion, a touch lower than India's 7.1 percent but faster than China's 6.7 percent growth in the same period.

Natixis' Nguyen agreed that many of Duterte's proposed policies, such as liberalizing foreign direct investments and increasing infrastructure investment, should theoretically be positive news for investors - but Duterte's remarks were overshadowing them.

"President Duterte's 10-point economic agenda is spot-on in terms of intent. Still, action on this economic agenda is so far lacking," the Nomura strategists added.

In recent months, Duterte's focus had been fixed on his government's war on drugs, where scores of Filipinos have died, earning him criticism from international bodies over possible human rights abuse.

"It seems that the current administration has lost its focus on prioritizing economic programs, and leaning towards more on solving the drug problem in the country," said Azurin.

Duterte has also gone after some of the country's miners for failing to follow environmental regulations as well as after online gambling.

Making things harder for investors was the fact that the Philippine market was relatively more expensive than its regional peers, which Azurin said meant foreign investors were "looking for more catalysts" to justify current valuations and continue trading in the market.

Moreover, if the U.S. Federal Reserve were to raise interest rates either on Wednesday or in December, it would likely result in capital outflow from emerging markets, including the Philippines, back into developed markets.

Nguyen said the Philippines can fund itself in the face of outflows, but it remains to be seen if the country would be able to create the jobs it needs to sustain the livelihood of its people and ensure consumption stays buoyant.

"That would come from domestic firms, but it also needs foreign direct investment and is not going to be able to realize its beneficial demographic dividend if the right policy is not in place," said Nguyen.

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