International credit watcher Moody’s Investors Service has opted to retain the country’s credit rating, noting that while macroeconomic fundamentals remain sound, the shaky political situation could stifle investment inflows and growth in the future.
Moody’s on Monday announced its decision to maintain its investment-grade rating for the Philippines with a stable outlook—which means that the economy is expected to perform steadily over the next 12 to 18 months. Moody’s said the government of the Philippines still has a “Baa2” long-term issuer and senior unsecured debt rating—two notches above the minimum investment-grade rating.
The affirmation of the rating, as well as the assignment of a stable outlook, came after the agency’s assessment that risks to the Philippines remain balanced on the positive and negative side.
In particular, Moody’s said it expects that the Philippines’s economic performance to remain strong and debt consolidation to continue.
“The Philippines’s real GDP growth averaged 6.4 percent per year between 2014 and 2016, more than twice the corresponding median for “Baa2”-rated countries. We expect growth to be sustained at above 6 percent per year over the next two years, driven largely by the private sector,” Moody’s said. Household consumption will remain the key driver to the country’s economy, according to Moody’s projections, as supported by remittances from overseas Filipino workers.
The country’s investment climate is also seen to sustain its growth trajectory in the near to medium term, although actual values remain significantly below similarly rated peers. Demographics will also be a key upside risk to the country’s growth, as a young and growing population is seen to impart stability to private consumption growth and reduce the burden of aging-related costs on government finances.
However, set against these positive trends, Moody’s said recent events, such as the conflict in Marawi City and the subsequent imposition of martial law in Mindanao, are examples of escalating domestic political risks that could weaken institutional strength and economic growth, should they multiply and escalate.
“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. To date, the credit watcher said neither appears an immediate concern.
“These events do not appear to have weighed on economic growth. Nor do they appear to have derailed the government’s economic-reform agenda; indeed, the Comprehensive Tax Reform Package recently passed through the lower house of Congress, in part due to the intervention of the president,” Moody’s said.
“However, the confrontational nature of the administration’s political agenda could potentially reduce the effectiveness of governance, or negatively affect investment and growth,” it added.
Potential deterrents to growth from global developments, meanwhile, include the possibility of a deeper row in the Middle East that might affect remittances. The passage of US policies that could encourage on-shoring of jobs could also have a negative impact on services exports, particularly of the business-process outsourcing sector.
“Moreover, while broad macroeconomic stability has been maintained, so far, a number of metrics indicate material capacity constraints that signal a risk of overheating,” the credit watcher added.
Thus, Moody’s said they could consider raising the country’s rating if 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. Greater revenue mobilization that would lead to a greater convergence of fiscal metrics with higher-rated peers would also be credit positive.
On the other hand, the emergence of macroeconomic instability, leading to a deterioration in fiscal and government debt metrics and an erosion of the country’s external payments position, would exert downward pressure on the rating.
A rapid escalation of domestic political conflict that undermined institutional strength and the government’s reform agenda would also be deemed as credit negative.
Along with the overall rating, Moody’s has also affirmed the government’s local currency and foreign currency senior unsecured ratings at “Baa2”, the government’s foreign currency senior unsecured shelf rating at (P)Baa2 and the senior unsecured ratings for the liabilities of the country’s Central Bank, Bangko Sentral ng Pilipinas (BSP), at “Baa2”. The outlook on BSP has been removed.