Moody’s says political risks ‘less predictable’

By ANGELA CELIS, Malaya, October 19, 2016

Moody’s Investors Service yesterday said the country’s existing investment grade rating (Baa2) reflects sound economic and fiscal fundamentals but noted that political risks have become “less predictable.”

Moody’s is the second credit rating agency after Standard and Poor’s that warned against “diminished predictability and accountability” of the new government.

It pointed out that President Duterte’s rhetoric on foreign relations and his campaign against illicit drugs have made some overseas investors nervous.

“This could pose downside risks to investment, and ultimately, economic growth,” said Christian de Guzman, VP and senior credit officer for the Sovereign Risk Group of Moody’s.

Moody’s in its Annual Credit Analysis released yesterday however pointed out that although some uncertainty over the direction of policy has emerged, it expects economic and fiscal governance to be anchored by the administration’s development agenda.

Moody’s noted the new administration inherited an economy rapidly growing, debt burden dropping and with healthy external balances.

Moody’s said its investment grade rating is based on the assumption that economic and fiscal governance “will be anchored by the administration’s 10-point Socioeconomic Development Agenda, devolved to technocrats at the Cabinet level.”

Moody’s said progress on the development agenda would depend on how Duterte will deploy his considerable political capital to implement associated reforms.

The credit rater added that government success in speeding up infrastructure building and implementing tax reforms will increase possibility of an upgrade.

It warned a sustained focus on political issues could detract attention away from reform.

On the economic front, Moody’s noted the country’s low and stable inflation – aided by global oil prices – has supported robust private consumption.

“The pick-up in government spending over the past year has also stimulated capital formation without derailing debt consolidation. And, the strength of domestic demand and services exports will provide a strong buffer to external headwinds to merchandise trade and remittance growth over the next one to two years,” de Guzman said.

The Philippines is currently rated Baa2, a notch above investment grade, by Moody’s. Last December, Moody’s, after affirming the rating, also gave the country a stable outlook.

Moody’s said the stable outlook on the Philippines’ rating suggests that upside and downside risks are balanced for the next 12 to 18 months.

The report said should the government be able to raise more taxes, an upgrade will be possible.

A more significant decline in the government’s foreign-currency debt would also be credit positive, it added.

Downgrade will come from deterioration in borrowings. “Policies that deviate from the administration’s stated priorities could adversely affect our assessment of institutional strength,” de Guzman said.

“We assume that the government’s economic and fiscal management will be governed by the 10-point Socioeconomic Development Agenda, given to technocrats at the Cabinet level, and unaffected by the policy uncertainty related to law and order and foreign policy,” he added.

Finance secretary Carlos Dominguez III was asked to comment on this statement but has not yet responded as of press time.

However, the report said the country’s susceptibility to event risks, which describes a country’s vulnerability to various risks that could potentially force government to default on its debts, is favorably described as low.

Despite headline noise, Moody’s explained, political risk in the Philippines is still low given that sound policies both in the economic and political fronts remain intact.

“The president’s rhetoric towards critics of the war on drugs, including the US and the European Union, has the potential to strain long-standing security and trade relations. Nonetheless, the president’s pronouncements – including a threat to wind up joint military exercises with US armed forces – have not led to official policy changes,” the report said.

“Recent statements by top American and Filipino defense officials suggest that the Philippines’ relations with its most important strategic partner remain bound by a Mutual Defense Treaty signed in 1951. In the absence of a well-formulated articulation of the Duterte government’s foreign policy, geopolitical risks have become more unpredictable, although still low,” it added.

Meanwhile, Moody’s described the concrete plans of government to reform the tax system and accelerate infrastructure investments as being anchored on a “well defined development agenda.”

In a statement released by the Investor Relations Office, Dominguez welcomed the recognition given by Moody’s to the Duterte administration’s economic programs.

“The positive mention by Moody’s of the tax reform and infrastructure plans of the Duterte administration proves that by looking beyond headline noise, one would see sound macroeconomic fundamentals and a robust, credible and sensible overall socioeconomic development agenda for the Philippines,” Dominguez said.

“The Duterte administration has been clear since the very beginning of what it wants to achieve for our economy over the next six years, and we will strive to remain on course to hit it: sustained and robust growth that will have lifted significantly more Filipinos out of poverty by 2022,” he added.