Terrorism could thwart one of the Philippines' growth engines

Homegrown militants in the Philippines are increasingly turning their focus to holiday hot-spots, potentially spelling trouble for the tourist-dependent economy.

Tourism makes up around 10 percent of national gross domestic product and the sector is seen as a key growth driver for the country. But Western embassies have issued travel warnings for three of the country's most frequented destinations — resort islands Cebu and Bohol as well as the popular Palawan province — over the past month amid kidnapping risks to foreigners.

Philippine terror network Abu Sayyaf, whose name translates to 'bearer of the sword' in Arabic, is the primary suspect. Around 10 of its armed members infiltrated Bohol last month and unsuccessfully attempted to kidnap tourists, according to reports.

Map courtesy of the National Counterterrorism Center

No militants have been spotted in Palawan yet, and officials said they have deployed all assets to prevent terrorists from entering.

Despite a series of high-profile kidnappings targeting foreigners across its stronghold in the southern provinces, specifically Mindanao and the Sulu archipelago, Abu Sayyaf has yet to significantly hurt the number of foreign arrivals — the latest government data showed a 5.36 percent annual increase in visitors for February.

However, the group's recent activity presents a brewing threat to tourism, warned Eufracia Taylor, Asia analyst at political consulting firm Maplecroft. The majority of its ventures are around Mindanao and Sulu so pursuits outside of these regions are significant to the country's broader security environment, she noted.

The foiled raid in Bohol took Philippine officials by surprise, remarked Zachary Abuza, professor at the Washington-based National War College. "It was a shock that they targeted what was otherwise a very safe tourist destination."

If the organization successfully kidnap tourists in favored holiday destinations, tourism would certainly be affected, said Victor Manhit, managing director at the Philippines team of Bower Group Asia.

May 15, 2017: Philippine policemen (L) escorting funeral parlor employees carried the body of the second of the two Abu Sayyaf militants killed in an encounter with troops in Calape town, Bohol province.

The nation's Department of Tourism did not respond to CNBC's request for comment.

Abu Sayyaf is primarily rooted in separatism and seeks an independent Islamic state in the country. Previously linked to Al-Qaeda, the network has split into smaller factions in recent years, some of which have pledged allegiance to the Islamic State.

Piracy as well as ransom payments from kidnapping and hostage operations, which are carried out on land and sea, generate millions for the network and fund recruitment, weapons purchases as well as bribes for local officials — the syndicate earned $7.3 million from kidnappings during the first half of 2016, according to media reports.

Their expansion outside southern Philippines may be partly provoked by President Rodrigo Duterte's intensive military campaign against terrorism. Following the Bohol incident, Philippine security forces killed several suspected militants on the island, including Abu Sayyaf leader Joselito Melloria, Reuters said.

A key question is how much Abu Sayyaf's recent actions are about funding, versus reputation and ideology, according to Taylor.

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"If the group is primarily focused on building funds, they have better options than risking operations outside Mindanao. The effort involved in conducting an attack outside of their main territories would likely indicate an act of terror, rather than a straight case of kidnap-for-ransom."

And with Philippine and American forces deployed throughout Mindanao as part of counter terror operations, it may be easier for the syndicate to find kidnapping targets elsewhere, Manhit stated.

Going forward, Abu Sayyaf may be more concentrated on maritime kidnappings through the Celebes and Sulu Seas that are bordered by Indonesia, Malaysia and the Philippines, according to Abuza.

Maritime capabilities and cooperation between the three countries remain weak, making the area "low risk, high reward," he explained.