MOODY’s Investors Service has further reduced its projection for overall Philippine economic expansion, which disappointed at a four-year-low 5.5% last quarter and clocked in at the same pace in the first half against the government’s 6-7% target for 2019, even as it said “domestic demand” — especially government spending — should pick up this semester.

In its annual credit analysis on the Philippines, e-mailed to journalists on Friday, the credit rater said it “expects economic growth to recover from the temporary slowdown precipitated by the budget delay in the first half of 2019”.

The government had operated on a reenacted 2018 budget from January to April 15, when President Rodrigo R. Duterte signed this year’s national budget into law but vetoed P95.3 billion in funds that were not in sync with state priorities, slashing the total to P3.662 trillion.

The impact could be seen in official infrastructure and other capital outlays data showing that disbursements fell by 11.7% year-on-year to P311.4 billion last semester, missing a P392.9-billion program for that period by a fifth.

Moody’s slashed its projection for Philippine GDP expansion further to 5.8% for this year, from the six percent it gave at the end of May in the face of delayed budget enactment and from the 6.2% in had penciled in February. The country grew by 6.2% last year against the government’s 6.5-6.9% target for 2018.

“Our expectation of a recovery in domestic demand in the second half of this year and into next year underpins our full-year forecasts for real GDP growth of 5.8% in 2019 and 6.2% in 2020,” read the report, which said further that the “Philippines’ fiscal reform and stable economic growth support [the country’s] credit profile”.

At the same time, “[a]lthough the government has formulated aggressive catch-up plans for spending in the second half of the year, it is unlikely to fully execute its budget.”

The Philippines has a “Baa2” sovereign rating from Moody’s — a notch above minimum investment grade — with a “stable” outlook, indicating “a low likelihood of rating change over the medium term”.

Still, “the momentum for fiscal reform has been sustained, improving prospects for a further improvement in the Philippines’ fiscal profile.”

Moody’s said it still assesses the Philippines’ “economic strength” — in terms of economic structure, primarily reflected in economic growth, scale of the economy and wealth, as well as structural factors that point to a country’s long-term economic robustness and shock-absorption capacity — as “high”, with country’s $331-billion nominal GDP in 2018 larger than more than 70% of rated sovereigns but slightly below the $341-billion median for investment-grade sovereigns, while the Philippines’ economic output in 2018 was well above the “Baa”-rated median of around $240 billion.

The Philippines’ “institutional strength” score was “moderate(+)” on “the government’s demonstrated ability to pursue its economic and fiscal reform agenda in the face of increasing political noise” and the country’s “longer track record of sustaining improvements in its fiscal profile than its peers.”

The country’s “fiscal strength” is “moderate”, with “successive years of higher revenue leading to improved debt affordability, although the latter remains weak compared with most ‘Baa’-rated peers”.

“The outlook for revenue generation in the next two years appears to be strong on the back of tax reform and improved tax compliance,” the report read.

The government had been able to enact its most difficult, comprehensive reform package: the first one which slashed personal income tax rates but either raised or added levies on several other goods and services. It has also further increased excise tax rates on tobacco and allied products and is offering amnesty in order to further widen its tax base.

Still in the pipeline — targeted in the next two years — are proposals for higher excise tax rates for alcohol products, revisions to existing motor vehicle user charges, increases in the government’s share of mining revenue, a centralized framework for taxation of real property and a simpler capital income tax system.

But while “[t]he strong pro-administration majority in both houses of the legislature enhances the prospects for further reform… the government has a comparatively short window of about two years to pursue its legislative agenda,” Moody’s said.

“We expect campaigning to detract attention away from reform in the year prior to the next general election scheduled for 2022,” it explained.

“Moreover, the impasse between the House of Representatives and the Senate that led to the delay in the passing of the 2019 budget illustrates how political infighting can influence economic and fiscal outcomes, if somewhat temporarily.”

Finally, Moody’s sees a “low(+)” “event risk” — covering the country’s vulnerability to the risk that sudden events may severely strain public finances, thus increasing the country’s probability of default. Such risks include political, government liquidity, banking sector and external vulnerability risks.

• The country has a “low(+)” political risk in the Philippines, with President Rodrigo R. Duterte maintaining high public satisfaction ratings despite controversies. That, and overwhelming victory of candidates — especially for the House and the Senate — whom he had supported in the May 13 midterm elections “suggest overwhelming support for the government’s reform agenda”.

• The Philippines has a “very low(-)” government liquidity risk, reflecting “the government’s manageable gross borrowing requirements, low participation of nonresident investors in the local bond market, as well as sustained appetite among international investors for the government’s external, foreign-currency issuances”.

• Banking sector risk is “low(+)”, since “the Philippine banking system as a whole is well capitalized, profitable and competently managed, thus posing limited contingent risks to the government”.

• External vulnerability risk is “very low”, reflecting “structural reversion of the current account to a deficit and the persistence of the negative net international investment position, both of which place the Philippines as more susceptible to external shocks when compared with peers”.

The report said that the Philippines’ “rating is likely to be upgraded” on improvements in per capita income, revenue generation and debt affordability compared with higher-rated peers.

But it could be “downgraded if macroeconomic stability were to be threatened by unabated overheating pressures leading to a deterioration in fiscal and government debt metrics and an erosion of the country’s external payments position”.

“The reversal of reforms that have supported recent gains in economic and fiscal strength would also likely lead to a downgrade.”