The Market Monitor Minding the Nation's Business
Credit-rating firms are keeping a wait-and-see attitude on the administration of presumptive President Rodrigo Duterte, the tough-talking former Davao City mayor whose lead over his rivals in the last presidential election appears to have become insurmountable.
Although the official results have yet to be announced, all of his rivals, with the exception of Sen. Miriam Defensor-Santiago, have conceded defeat
But one of credit raters, Standard & Poor’s Global Ratings (S&P), issued a warning on political confrontations when Duterte assumes the presidency, saying these may weaken the investment grade on the country.
“The key question in the Philippines is whether political stability will continue after the presidential election. A return of political confrontations could weaken the improving trend for sovereign credit metrics,” it said.
Fitch Ratings said the outcome of the elections would not have any immediate impact on the country’s rating or outlook, but noted it would have to wait and see whether the improvement in governance standards under the Aquino administration could be sustained by the new administration.
“If that were to occur, it could be positive for ratings. Fitch will monitor further developments closely,” it said.
“Fitch, however, continues to view Philippines’s underlying economic fundamentals as strength, given its strong net external-creditor position, declining general government debt and deficit levels, and positive growth momentum.”
S&P also said its sovereign-credit ratings on the Philippines were “unaffected” by the elections, even as it expected fiscal and economic policies under the incoming administration “to remain supportive of the ‘BBB’ [or two notches above investment grade] long-term rating” on the Philippines.
“Based on unofficial estimates, Duterte is likely to become the next president of the Philippines. Mayor Duterte campaigned on an anti-crime platform and promised to push for constitutional reforms,” S&P said, noting, however, that he has given few details regarding the shape of economic policies to come under his presidency.
No policy changes
“Nevertheless, we expect the incoming administration to continue with policies that had contributed to sovereign rating improvements in the past few years,” it added.
Duterte’s track record of more than 20 years in Davao gives few indications that he would embark on economic policies significantly different from the Arroyo and Aquino administrations, S&P said, expressing its belief that the Duterte administration would maintain a fiscal policy of keeping fiscal deficits at low single digits.
“Policies affecting businesses are also likely to be supportive of continued investment growth. In the near term, however, businesses in the country may be more cautious about expanding, given the uncertainties over the new government’s policy orientation,” S&P added.
Required compromises
S&P also noted that it might take some time for Duterte, who is used to “a hands-on approach in governing a city that is his political base” to get accustomed to “the many compromises required in the national leadership position.”
It added that some measures Duterte is considering could change the status quo, “including liberalizing the [telecommunications] sector and constitutional amendments to strengthen the power of local governments” and that he could face strong resistance if he pushed some of these changes aggressively.
“And if Duterte’s style leads to serious political battles, it could damage one of the Aquino administration’s key achievements—a sustained period of political stability,” S&P said.
It also said“this stability had improved consumer and investor sentiments, which helps to explain the stronger investment spending and economic growth during this [Aquino]presidency.”
“They also contributed to our two rating upgrades on the Philippines since 2013,” it added.
The report noted that Duterte hails from a regional political family and that he has been credited for making the city one of the safest in the country “with his controversial tough stance against crime.”
Cautionary tale
Duterte would be the second recent president to come from outside elite families that traditionally dominated national politics, it said.
“The experience of the first, Joseph Estrada, provides a cautionary tale. During his two-and-a-half years as president, Estrada had implemented policies that negatively affected the interests of some of the Filipino elites,” it added.
Among these policies were limiting the use of sovereign guarantees for government contracts with private suppliers and expanding rural land reform.
“His weak relationship with these powerful interests could have been a reason for his ouster in early 2001,” S&P said.
Political uncertainty
The risk of political uncertainty is, therefore, somewhat higher in a Duterte presidency, S&P said.
“All the other presidential candidates have experience with national politics. A couple of them are also from families with long involvements in national politics,” it said. Candidates other than Duterte “are widely expected to pursue gradual policy changes, not unlike the Aquino administration,” it added.
Shifts in political forces in a few Southeast Asian countries may undermine support for sovereign creditworthiness, the report added.
“Most parts of Southeast Asia have stable sovereign-credit trends, despite the global economic uncertainties in recent years. This is because of their strong external balance sheets and steady growth in domestic demand,” it said.
But these attributes balance the impact of weak external developments only if political and policy stability exists, it said.
“Domestic developments in a few Southeast Asian countries could have implications for the sovereigns’ credit trends,” S&P Global Ratings analyst Kim Eng Tan said. “In some scenarios, their credit support may weaken or an existing positive trend may halt.” LUIS LEONCIO