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Moody’s flags rising political risk

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By Melissa Luz T. Lopez
Senior Reporter

“POLITICAL POSITIONING” ahead of elections — as signaled by delayed approval of the proposed 2019 national budget and several tax reforms — could dampen Philippine growth prospects, Moody’s Investors Service said.


Despite this, the country’s credit rating will likely remain intact for now, said Moody’s senior credit officer Christian de Guzman.

“We had previously acknowledged that political risks — both geopolitical and domestic risks — in the Philippine have risen… ” Mr. De Guzman said in a webcast on Thursday.

“Rather than political infighting in the Philippines, what we see is a political calendar having an impact with regards to reform and the functioning of the government.”

Moody’s affirmed its “Baa2” rating — a notch above minimum investment grade — with a “stable” outlook for the Philippines in July last year, but flagged that domestic political developments, particularly a weak rule of law and control versus corruption, could weigh on investor appetite.

The legislative landscape has since evolved, with little room to get priority bills passed into law just months ahead of the May 13 midterm elections that will see 12 senators replaced and the 300 members of the House of Representatives seeking fresh terms.

“With elections on the way in May, there has been a lot of political positioning that has threatened the backtracking of important tax reforms that were effective at the beginning of last year, as the tax reforms are demonized as one of the main drivers of high inflation,” the Moody’s analyst said, referring to previous attempts to revoke Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act that is just the first of up to five such packages, as consumer prices surged.

Succeeding tax reforms proposed by the Department of Finance, including one that will cut corporate income tax rates and revamp fiscal incentives, appear unlikely to pass anytime soon.

Apparent political considerations have also kept Congress so far from approving the P3.575-trillion national budget for 2019, which Mr. De Guzman flagged as a potential growth dampener.

“One of the biggest offshoots of that is the inability of the Philippines to pass the budget on time. We will see when Congress reconvenes next week whether they can pass the budget, but the inability means there could be downside risks to public spending,” Mr. De Guzman said, adding that this could reverse progress made in addressing problems of underspending.

Budget Secretary Benjamin E. Diokno warned in November last year that failing to approve the budget on time will mean a delay in the rollout of new projects, since these will be left unfunded.

The Senate, which blames the House of Representatives for being about a month late in approving the proposed 2019 national budget, has vowed to approve the new spending plan by early next month. But then the Executive will run against the 45-day ban on public works ahead of the May 13 legislative and local elections.

The government usually front-loads public works projects in the first semester, as the rains and storms usually arrive in the second half.

The Duterte administration is counting on its aggressive infrastructure push to propel economic growth to 7-8% this year until 2022 — at a time when household spending has been easing due to rising costs — from a 6.3% average in 2010-2016.

The recent revived push for a shift to a federal government form has also been a curveball.

“However, none of these political developments pose a material risk in terms of the Philippines’ credit profile, which continues to be bolstered by a fairly healthy growth and a steady and improving fiscal profile on the back of revenue reform,” Mr. De Guzman added.

As of November last year, Moody’s saw Philippine economic growth clocking in at 6.2% this year from an estimated 6.3% in 2018, against 2017’s actual 6.7%.

The Philippines can also be expected to have a “moderate exposure” to the trade war between the United States and China, which is seen to dampen trade and growth prospects across Asia and the Pacific.