By Riza Lozada
Credit watchdog Moody’s Investors Service (Moody’s) warned in a country report that a rapid escalation of domestic political conflict that undermines institutional strength and the government’s reform agenda would be “credit negative.”
Moody’s assessment indicated a slight increase in political risk reflecting “recent developments, including the re-emergence of conflict and subsequent imposition of martial law in Mindanao, as well as the current administration’s focus on law and order and its campaign against illegal drugs.”
The continuing conflict in Marawi, a city in the Autonomous Region in Muslim Mindanao (ARMM), and the imposition of martial law covering the wider area of the island of Mindanao, where Marawi is located, has so far not weighed on the country’s economic growth, Moody’s, however, stated.
The effect of the Islamic State (IS)-inspired conflict was contained in Marawi City, preventing a significant effect on the overall economy.
Moody’s said Mindanao accounted for 15 percent of gross domestic product (GDP) in 2016, and contributed less than one percentage point to the country’s real GDP growth of 6.9 percent in the same year.
ARMM in which Marawi City is located accounts for only 0.7 percent of GDP.
Political analysts and government critics are concerned over an expansion in martial law, it said.
Prior to the attack on Marawi by Muslim insurgents, President Duterte had suggested that martial law, together with expanded emergency powers, could address issues other than domestic terrorism or rebellion, including the war on drugs and traffic congestion in Metro Manila.
An unchecked expansion of the president’s authority could weaken constitutional checks and balances, and undermine the buoyant private sector sentiment that has underpinned the Philippines’s robust economic performance.
“Moreover, while we expect strong economic and fiscal governance to remain, a prolonged focus on political matters could draw attention away from the government’s reform agenda, particularly economic and fiscal reforms including the Comprehensive Tax Reform Program (CTRP),” Moody’s said.
Legislators aligned with the president hold a majority in Congress, while his high public approval rating is a signal of broad support for the administration’s stance on law and order.
As the current government seeks to pursue a more independent foreign policy, geopolitical risks have become less predictable, although Moody’s said such risks remain low.
Closer relations with China have eased tensions over territorial disputes in the South China Sea, and have also led to an expansion of trade and investment, it added.
The president’s controversial rhetoric towards the US at the outset of his administration has cooled. The various threats to suspend or pull back from the bilateral relationship with the US have not led to official policy changes, as demonstrated by technical assistance by the US military in Marawi.
Moody’s, however, said the economic momentum of the country is expected to be maintained with the increase in younger population fueling economic growth..
Along with tentative improvements in the business climate and infrastructure, a young and growing population continues to bolster long-term economic prospects, it said. Moody’s said unlike in some other countries in the region, such as China or Thailand, the Philippines does not face a demographic squeeze of an ageing population.
The United Nations projects the proportion of the working-age population relative to the total population will increase up until 2020, and remain stable through to 2040.
“Strong and sustained population growth supports the economy’s potential and mitigates the burden of costs of an ageing population on government finances,” it said.
The Philippines’ “Moderate” score for institutional strength reflects its rankings on cross-country surveys such as the Worldwide Governance Indicators (WGI) and a track record of policy effectiveness, as suggested by its low and stable inflation, Moody’s added.
At the same time, the Bangko Sentral ng Pilipinas (BSP) has a strong record of maintaining monetary and financial stability.
“Inflation expectations are well anchored, while liquidity is being proactively managed in the context of volatile capital flows. In addition, the central bank’s supervision of the banking system has bolstered financial soundness and market discipline,” it said.
In 2015, the country’s Government Effectiveness ranking slightly slipped to the 47th percentile among Moody’s-rated countries, from the 49th percentile the previous year. However, the ranking is still in line with regional peers such as India (46th), and higher than Indonesia (32nd) and Colombia (40th). The Philippines’ ranking for this indicator is worse than Bulgaria (51st), Thailand (57th), and South Africa (56th). Although the Philippines’ rankings for Control of Corruption and Rule of Law have remained just above the bottom 30 percent since 2013, they mark an improvement on lows reached in 2010.
The administration of President Rodrigo Duterte was elected in 2016, but the latest WGI scores largely reflect an assessment of the prior government under President Benigno Aquino III, whose mantra was good governance. With an emphasis on continuity, the Duterte administration’s 10-point socioeconomic agenda provides an anchor for economic and fiscal policy amid concerns related to the administration’s focus on law and order and initial uncertainty on foreign policy.
Track record of macroeconomic stability and debt consolidation boosts policy credibility.
The BSP has a long record of maintaining monetary and financial stability. Against the backdrop of strong economic growth, we expect macroeconomic stability to continue, although not without emerging pressures on wages, price levels and the current account.
Tighter labor markets, corresponding to anecdotal evidence of shortages in certain professions, have led to wage growth over the past year.
“Increasing wages, along with higher global oil prices over the past year, have led to a rise in inflation to within the BSP’s target band. Lower commodity prices, including for petroleum and other energy goods, contributed to lower-than targeted inflation for much of the past two years. We expect that inflation will remain within the central bank’s target band of two to four percent,” it added.
The Philippines’ credit profile balances sound economic and fiscal fundamentals against structural challenges to competitiveness and rising political risks, it said.
“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. The re-emergence of conflict in the southern Philippines, and the administration’s focus on the eradication of illegal drugs, represents a rising but unlikely risk to economic performance and institutional strength,” Moody’s said.
The assessment on the Philippines’ economic strength is “High”, which reflects its capacity to absorb shocks thanks to its rapid growth, large scale, and economic diversification, although this is somewhat undermined by low income levels, according to Moody’s.
The Philippines’ young and growing population, robust growth in investment, and potential large-scale improvements in infrastructure, support economic strength, it added.
Moody’s said at around $300 billion in 2016, the Philippine economy is larger than 75 percent of Moody’s-rated countries and is just above the $288 billion median for investment-grade sovereigns.
“But the Philippines’ GDP per capita was $7,728 on a purchasing power parity (PPP)-adjusted basis in 2016, putting it in the bottom fifth of rated countries and posing a prominent constraint to economic strength. Only India (Baa3 positive) has a lower per capita income among investment-grade countries,” it said.
“When assessing households’ capacity to absorb negative economic shocks, we take into account the full range of revenue sources. With large remittance inflows of 8.8 percent of gross domestic product (GDP), gross national income (GNI) gives a different picture of income levels in the Philippines compared with GDP. In 2016, GNI was 20.4 percent larger than GDP,” it said.