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Moody’s keeps Philippines grade but flags risks

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By Melissa Luz T. Lopez, Senior Reporter

MOODY’s Investors Service kept its rating on the Philippines yesterday, even as it flagged local political developments and potential overheating risks that could weigh on the economy’s otherwise robust growth potential.

In a statement, the debt watcher affirmed the country’s “Baa2” rating for the Philippines’ long-term issuer and senior unsecured debt ratings — a notch higher than minimum investment grade — and kept its local currency and foreign currency senior unsecured ratings unchanged.

The rating outlook — for up to two years — remains stable, signalling a balance between positive and negative developments that could affect the Philippine economy.

“The Philippines’ Baa2 rating reflects high economic strength that balances the country’s large scale and rapid growth against low per capita income relative to peers,” Moody’s said.

“Our assessment of its institutional strength incorporates a long track record of sustaining macroeconomic and financial stability, despite weaker Worldwide Governance Indicators as compared to other investment grade countries.”

Moody’s expects gross domestic product (GDP) to remain above six percent, but flagged early signs that growth could slow after hitting 6.9% in 2016,  dampened by the impact on economic activity of a worsening of the security situation.

“We expect growth to be sustained at above six percent per year over the next two years, driven largely by the private sector,” the credit rater said.

“Set against that positive trend, domestic political developments could potentially undermine institutional strength and economic performance,” Moody’s added.

“Moreover, while broad macroeconomic stability has been maintained so far, a number of metrics indicate material capacity constraints that signal a risk of overheating.”

Despite these concerns, Moody’s said that regulators have so far responded well to emerging signs of overheating, with the central bank taking ample prudential measures to keep inflation and credit growth in check, as well as bank capitalization healthy.

“Looking ahead, the government’s ability to continue to contain these rising pressures will depend in part on its efforts to raise investment in order to enhance infrastructure and address economic bottlenecks,” Moody’s said.

The government’s infrastructure plan is seen to fuel GDP growth closer to a 7-8% target, although Moody’s said that the P8.4-trillion spending goal till 2022 is “unlikely to be achieved in… entirety.”

Philippine GDP grew by 6.4% in the first quarter, slower than the 6.6% clocked in the last three months of 2016 and below the government’s 6.5-7.5% goal this year.

A steady stream of inflows from worker remittances, exports, receipts from business process outsourcing and foreign direct investments should support domestic activity, coupled with a young population that will stimulate further consumption, Moody’s added.

These come against the backdrop of a declining share of government debt, which slipped to 38.3% of GDP in 2016; a “healthy” banking system; and hefty reserves held by the central bank at $82.066 billion as of May, which can cover over five times the country’s short-term external debt.

On the other hand, the debt watcher flagged risks from the ongoing conflict in Marawi City — which has stretched to over a month as government forces struggle to reclaim land from extremists aligned with the Islamic State — as one that could undermine investor appetite towards the Philippines.

“Downside risks include a worsening of the Islamist insurgency that could lead to an expansion of martial law, undermine domestic business confidence, and disrupt economic activity including in economically significant regions,” Moody’s said, referring to earlier threats by President Rodrigo R. Duterte to stretch his martial law declaration to the rest of the country.

It also flagged the “confrontational” stance taken by the Duterte administration in pursuing its political agenda as a concern, saying that it could “potentially reduce the effectiveness of governance” and pull back investments.

“To date, neither appears an immediate concern. These events do not appear to have weighed on economic growth,” Moody’s analysts said, noting that the government’s reform agenda remains intact, as seen in the passage of its tax reform plan at the House of Representatives.

Looking ahead, an improvement in the political climate, coupled with success in addressing symptoms of the economy’s overheating will help push the Philippines’ ratings upward, while a “rapid escalation” of domestic conflicts will likely weigh on the grade.

“Upward pressure on the sovereign’s rating would arise should the predictability and stability of the political climate improve, or should the government succeed in defusing signs of prospective overheating in the economy and financial system,” the debt watcher said.

A higher credit rating would mean lower borrowing costs for the country, as it makes the Philippines more attractive and reliable for investors to pour funds into.

In a separate June 19 note, Moody’s said the chances of the Philippines defaulting on its debt have been “abating”, as economic growth remains robust and state debt low.