HL economy can withstand credit, growth risks post-Yolanda – Moody’s

The Philippines’ economy has enough fuel to withstand the risks posed by the damage caused by killer Typhoon Yolanda and the eventual tapering of the US Federal Reserves’ bond purchases, debt-watcher Moody’s Investors Service said.

“We expect the Philippines to sustain high growth relative to peers over the 2-3 year rating horizon,” Moody’s said in a December 5 credit report sent to media on Tuesday.

The Philippines’ “strong growth performance” supports the view that its potential has “improved significantly,” the debt-watcher said.

The Philippine economy grew by 7.4 percent in the first three quarters, the fastest in Southeast Asia.

A healthy current account surplus, which grew by 9.1 percent to $2.5 billion in the second quarter, and domestic demand for government bonds provided a “strong buffer” against external financial shocks like the Fed’s looming cut in stimulus, said Moody’s.

Last October, the credit rating agency lifted the Philippines from junk status because of a narrowing fiscal deficit and political stability. The move came in the wake of investment-grade ratings from Fitch Ratings and Standard Poor’s earlier this year.

Moody’s was the only debt-watcher that gave the Philippines a positive ratings outlook, pointing to the likelihood of another credit rating upgrade.

“The positive rating outlook reflects Moody’s expectation that prevailing economic and fiscal trends will continue over the next one to two years, and that the Philippines’ healthy external position is likely to remain intact,” the ratings agency said in a statement tied with the report.

The Philippines, however, still faces credit challenges.

In the report, Moody’s noted that the Philippines’ per capita income is low, higher only than India among investment grade countries.

Moreover, Philippine revenues’ ratio to the gross domestic product remains relatively “low” despite gains from more efficient tax administration which allowed the Aquino administration to spend higher for infrastructure development.

Much of the country’s debt is also in foreign currency, making it “susceptible” to foreign exchange volatility compared with other investment grade countries.

Yolanda’s impact

The “favorable” political backdrop that allowed policy reforms “could be threatened by ongoing deliberations related to discretionary spending by politicians or perceptions of an inadequate response” to Typhoon Yolanda.

Typhoon Yolanda, which smashed through Central Philippines last Nov. 8, poses downside risks to Moody’s 2013 Philippine growth forecast of 7 percent.

“GDP in the affected regions may slow sharply in the fourth quarter,” Moody’s said.

Socioeconomic Planning Secretary Arsenio Balisacan has said damage caused by Typhoon Yolanda will dent growth, but maintained that the government will hit its 6 to 7 percent target this year.

Nevertheless, Moody’s report also said that the government has ample fiscal space to accommodate additional spending for relief and reconstruction. International aid will mitigate stresses on the government’s fiscal position.

Despite this rosy picture of the economy, Bank of the Philippine Islands lead economist Emilio Neri Jr. noted that delays in the disbursement of reconstruction funds add to possible risks in 2014.

“The timing of rehabilitation and reconstruction will be critical. There can be a gap in growth if the mobilization of funds are not as fast as expected,” Neri said in an interview with GMA News Online. – VS/BM, GMA News