Political risk low but uncertainty rises

THE PHILIPPINES’ credit rating should remain stable over the year ahead, Moody’s Investors Service said in a new report that nevertheless flagged that still-low political risk has become “more unpredictable” under President Rodrigo R. Duterte.

“For the Philippines, political risk is low, but more unpredictable than before,” Moody’s said in its 2017 outlook for Asia-Pacific economies published yesterday, citing developments that have divided the nation in the first six months of the new president’s term.

“Since Philippines President Rodrigo Duterte came to power in June 2016, he has clashed with legislators over extrajudicial killings linked to the war on drugs and sparked controversy over allowing a hero’s burial for late President Ferdinand Marcos,” the debt watcher said.

“While Mr. Duterte has high approval ratings, a prolonged focus on political matters could detract attention from economic and fiscal reforms.”

Since December 2014, the Philippines has maintained a “Baa2” rating with stable outlook from Moody’s — a notch above minimum investment grade — helping to keep borrowing costs low.

Mr. Duterte’s avowed pursuit of an “independent” foreign policy also bears watching, Moody’s said, noting that “[w]hile this has yet to translate to official policy changes,” it has made political risks “more unpredictable than they were before.”

Mr. Duterte has said that the Philippines is ready to “set aside” its victory at the Permanent Court of Arbitration, which in July last year upheld the country’s maritime rights in parts of the South China Sea that fell within its exclusive economic zone but which China forcibly denied.

Still, Moody’s said chances of armed clashes between China on the one hand and Japan, the Philippines and Vietnam on the other over their maritime disputes were “extremely low.”

Reforms in ease of doing business and greater attention on infrastructure development were cited as gains for the economy.

“Governments in Indonesia and the Philippines, among others, have emphasized improvements in the business operating environment and greater infrastructure investment,” the report read.

“The thrust of fiscal policy has been to increase revenue and provide space to ramp up spending on projects including transportation and electricity generation. In both cases, poor infrastructure has been a significant constraint on the economy.”

Moody’s expects Philippine gross domestic product growth to clock 6.5% both in 2016 and 2017.

The debt watcher said it holds a “stable” outlook for the Philippines and for the rest of Asia and the Pacific, amid expectations that growth will remain “relatively robust” despite a slump in global demand that could weigh on prospects for countries with bigger external trade exposure.

“The stable outlook reflects a mix of credit- supportive and credit- challenging factors,” the report read.

“We expect weak global trade, tighter external financing and, potentially, increasingly constraining capital outflows limiting policy effectiveness in China to shape credit profiles. But so too will rising income levels and strengthening institutions in parts of the region. Domestic political and geopolitical tensions could exacerbate negative credit drivers or derail credit-supportive factors.”

In a speech yesterday, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said the biggest immediate threat to the local economy would be financial market volatility due to the global impact of additional United States interest rate hikes, as well as additional fiscal stimuli from the European and Japanese central banks.

Mr. Tetangco also cited local political noise as one of the domestic sources of concern, coupled with weather disturbance, traffic congestion and lack of infrastructure.

Other risks include rising populism worldwide, further weakening of global growth, as well as possible slowdown in remittances from Filipinos abroad and in business process outsourcing sales growth, the BSP chief added.

“The operating environment has indeed become more difficult. Noise and global economic developments are creating financial market volatility, which is complicating policy formulation and implementation,” Mr. Tetangco told members of the Tuesday Club meeting.

“Nevertheless, our underlying growth story remains strong, and the support of economic policies continues to be strong as well.”

The Philippine economy grew 7% in 2016’s first three quarters, already hitting the top end of the government’s 6-7% full-year target. The government targets the economy to grow 6.5-7.5% this year. —