Proclamation’s credit impact limited – Moody’s
‘State of lawless violence’
Moody’s Investor Service said yesterday President Duterte’s proclamation of a “state of lawless violence” would have a limited immediate impact on the country’s sovereign credit unless there is “prolonged uncertainty.”
“The near-term sovereign credit impact of these developments is limited as we do not expect them to change economic and fiscal policies or outcomes,” said Moody’s senior credit officer Christian de Guzman. “However, if recent events lead to prolonged uncertainty around security or economic policy, such a development would eventually dampen business confidence and, consequently, economic outcomes,” he added
Currently, Moody’s has a “Baa2” stable rating for the Philippines which is a notch above investment grade.
De Guzman said that with the economy growing an average of 6.9 percent year-on-year as of end-June, the “recent events” will not derail the growth momentum.
De Guzman said its “susceptibility to political risks (are) low.”
“We do not believe that a significant intensification of the security response – such as an imposition of martial law, which requires congressional approval – is likely, given the current system of checks and balances. In particular, the government has stated that the declaration of state of lawlessness calls for a stepped-up security presence without a suspension of civil liberties,” he explained.
“The main challenge facing Philippine policymakers is sustaining the positive trajectory of institutional quality through the political cycle,” added de Guzman. “Should this improvement continue in conjunction with robust economic and fiscal performance, it would support positive momentum in the sovereign credit profile. However, in the event of greater uncertainty about policies and policy effectiveness, the economic outlook would become clouded, capping any positive momentum.”
Meanwhile, losses in Philippine stocks were accelerating as foreigners keep pulling money from Asia’s most expensive market amid speculation the outbursts of President Rodrigo Duterte are hurting investor sentiment, Bloomberg News said in a report.
The Philippine Stock Exchange index dropped for a third day, lost 1.2 percent to 7,624.25 at the midday break in Manila, on course for the biggest decline in a month. The gauge has fallen 5.9 percent from a 15-month high on July 21, paring its gain this year to 9.7 percent. Foreign funds have pulled $276 million from local shares in a 10-day run of of outflows through Tuesday.
Duterte’s threat to swear at US President Barack Obama if he criticized an anti-drug campaign that’s left around 2,400 dead, and the subsequent cancellation of
a meeting between the leaders, “didn’t sit well” with overseas investors, said Rafael Palma Gil, a portfolio manager at Rizal Commercial Banking Group in Manila. Duterte’s behavior is taking the shine off a market that had been an investor favorite due to the highest economic growth rate among major Asian economies.
“The latest incident raises concern that President Duterte’s unpredictable behavior in politics will be disruptive and could eventually spill into economics and business,” said Jonathan Ravelas, chief market strategist at BDO Unibank, Inc., the Philippines’ biggest lender. It’s “further weakened a market that’s already been made vulnerable by uncertainty over US interest rates, elevated valuations and overseas fund withdrawals,” he said.
The Philippine index is trading at 18.3 times 12-month estimated earnings. While that’s down from 19.6 in July, it’s still the highest in Asia and at a 31 percent premium to the MSCI Asia Pacific Index. The country’s economy expanded seven percent last quarter from a year earlier, after 6.8 percent growth in the first three months of 2016.
Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank’s Ravelas. The gauge could fall as low as 7,330 in the next two months as the budget deficit is set to rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group, Inc. in Manila, said.