Moody’s sees growth on track to target

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Marawi City siege
Government forces advance past damaged buildings in Marawi City in this Aug. 30 photo. Massive spending for the city's rehabilitation and reconstruction is not expected to unduly weigh on state finances. -- AFP

THE PHILIPPINES remains on track to hit the low end of the government’s growth goal this year, with improving global prospects expected to support the economy through remittances alongside increased public spending at home, a credit rater said.

In its regular update, Moody’s Investors Service said the Philippine economy will grow by 6.5% this year and will continue to enjoy “high” economic strength on the back of favorable domestic conditions and improving global growth.

“We expect the strong growth to be sustained, driven largely by the private sector. We expect remittances from overseas Filipinos to benefit from the ongoing recovery and stabilization in growth in the United States and Asia, balancing out some of the weakness from parts of the Middle East,” the debt watcher said in a Nov. 23 report.

Moody’s kept its “Baa2” rating — one notch above minimum investment grade — with a “stable” outlook for the Philippines back in June.

Gross domestic product (GDP) growth averaged 6.7% in the nine months to September, pulled up by the third quarter’s faster-than-expected 6.9% climb. Despite this, the credit rater held on to its full-year estimate, which matches the low end of the 6.5-7.5% growth goal of the administration of President Rodrigo R. Duterte.

“The slowing of remittances likely spilled over to private consumption expenditure in the national accounts…,” Moody’s said, referring to remittances’ 8.3% decline in September.

“Nevertheless, we expect the Philippine economy to sustain its rapid pace of growth, supported by strong private-sector investment, public spending and external demand.”

Moody’s sees growth improving to 6.6% by 2018 and noted that “improved execution” of government spending could pull the pace closer to the 7-8% government target.

At the same time, it flagged that the ambitious P8.44-trillion infrastructure spending plan of the government may not materialize without the passage of the tax reform program, whose first package is being fine-tuned in the Senate after the House of Representatives approved its version on May 31.

Overall, external demand conditions will remain “supportive” through 2019 despite a possible slowdown in remittances from several areas. The steady stream of remittances from overseas Filipino workers as well as receipts from business process outsourcing (BPO) have been propping up domestic prospects by fuelling household spending that contributes about three-fifths to GDP and injecting additional liquidity in the financial system.

Moody’s also gave a “moderate (+)” score for the Philippines’ institutional strength, referring to the effective use of monetary policy tools by the Bangko Sentral ng Pilipinas (BSP) to manage overall price increases as well as volatilities in the financial system.

At the same time, relatively low government debt and minimal reliance on external borrowings enhance fiscal strength.

Still, domestic political risks continue to hound the Philippines, although such concerns remain “low” as the administration’s focus on security and illegal drugs have so far not weighed on domestic growth prospects. The five-month battle to retake Marawi City from Islamic State-inspired militants also had “limited impact” on total economic activity, Moody’s said, that “costs of the rehabilitation and reconstruction of Marawi are not likely to impose a significant burden of fiscal finances.”

“Strong domestic demand provides a buffer against external economic shocks, such as those posed by slowing global trade and the turn in global commodity prices that have hurt other emerging markets in recent years,” the report read.

“Moreover, favorable demographics in the form of a young and growing population support private consumption and reduce the burden of aging-related costs on the economy and government finances.

The debt watcher also downplayed concerns over a wider balance of payments deficit, which does not pose a “significant” risk with the country armed with more than enough reserves to support its transactions with the rest of the world.

Moody’s said the Philippines’ “credit profile could improve if the predictability and stability of the political climate were to improve, or if the government succeeded in defusing the signs of prospective overheating in the economy and the financial system.”

On the other hand, any “rapid escalation of domestic political conflicts that undermine the country’s institutional strength and the government’s reform agenda” would be a factor that could hurt the country’s credit-worthiness. — Melissa Luz T. Lopez

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