PH to weather structural challenges, political risks – Moody’s

Debt-watcher Moody’s Investors Service said the Philippines could weather structural challenges to competitiveness and rising political risks owing to the nation’s sound economic and fiscal fundamentals.

Moody’s, one of the three major international credit rating agencies, said yesterday that the country’s credit profile at “Baa2 Stable,” which is two notches above the minimum investment grade, balances sound economic and fiscal fundamentals.

“We expect robust economic growth to be sustained over the next few years, aided by the government's focus on infrastructure development, buoyant private sector investment, and the recovery in external demand,” Moody’s said in a statement.

While re-emergence of conflict in the southern Philippines as well as the Duterte administration's focus on the eradication of illegal drugs represents a rising, Moody’s noted it is unlikely risk of a deterioration in economic performance and institutional strength.

Based on Moody’s report “Government of the Philippines—Baa2 Stable,” the rating agency said the country's credit profile in terms of economic strength is “High,” institutional strength is “Moderate positive,” fiscal strength is “Moderate negative” and susceptibility to event risk is “Low positive.”

These are the four main analytic factors in Moody's Sovereign Bond Rating Methodology.

Meanwhile, Moody’s is projecting that the country’s economy, as measured by gross domestic product (GDP), may grow “broadly stable in the remainder of 2017.”

Moody’s expects the nation’s annual domestic output to average 6.5 percent this year, at the lower end of the government's forecast range of 6.5 percent to 7.5 percent.

“We have also retained our projection for 2018 at 6.8 percent, below the government's target of 7.0 percent to 8.0 percent given continued uncertainties regarding the proposed comprehensive tax reform program (CTRP), which is currently being considered by the upper house of Congress,” Moody’s said.

“In the absence of a significant boost to government revenues from the passage of the CTRP, the government will likely pare back its plan to aggressively increase its spending on infrastructure,” the rating agency added.

Other downside risks include a worsening of the Islamist insurgency in Mindanao that could lead to an expansion of martial law, undermine both foreign and domestic business confidence, and disrupt economic activity in other parts of the country, Moody’s said.

“Fiscal deficits are also widening, but ongoing debt consolidation and improving debt affordability give the government fiscal space to accommodate higher infrastructure spending and wider budget deficits,” Moody said.

“Further improvement in fiscal metrics will largely depend on whether the proposed tax reforms can effectively bolster revenue generation,” it added.

While the government reforms have led to higher government revenue in recent years, Moody’s said state income remains low as a share of GDP compared to peers, which in turn constrains room

for greater spending.

However, fiscal strength remains weak compared to similarly rated peers, Moody’s said.

“The stable outlook on the Philippines' rating indicates that upside and downside risks are balanced. On the upside, strong GDP growth could accelerate even further, especially if the government achieves higher investment spending,” Moody’s said.

“On the downside, capacity constraints are emerging and could prove more stringent than we currently envisage, giving rise to inflationary pressure. High credit growth since 2014 also exposes the banking system to unseasoned asset quality risk,” it added.