GLOBAL debt watchdog Moody’s Investors Service said the Philippines’ growth story is likely to be sustained in the years ahead but warned the Duterte administration’s war on drugs is a rising risk that needs to be watched out for.
In a report Friday, Moody’s said the credit profile of the Philippines balanced sound economic and fiscal fundamentals against structural challenges to competitiveness and rising political risks.
“We expect robust economic growth to be sustained over the next few years, aided by the government’s focus on infrastructure development, buoyant private sector investment, and the recovery in external demand,” Moody’s said.
But Moody’s was quick to add the re-emergence of conflict in the southern Philippines, as well as the Duterte administration’s focus on the eradication of illegal drugs “represents a rising but unlikely risk of a deterioration in economic performance and institutional strength.”
Moody’s conclusions are contained in a just-released annual credit analysis titled “Government of the Philippines—Baa2 Stable”.
“We project real GDP growth to be broadly stable in the remainder of 2017 and to average 6.5 percent for the year as a whole, which is at the lower end of the government’s forecast range of 6.5 percent to 7.5 percent,” Moody’s said.
Moody’s also retained its projection for 2018 at 6.8 percent, below the government’s target of 7.0 percent to 8.0 percent given the uncertainties on the proposed comprehensive tax reform program, which is currently being considered by the upper house of Congress.
Aside from the war on drugs, Moody’s also said the worsening of the Islamist insurgency in Mindanao could lead to an expansion of martial law, undermine both foreign and domestic business confidence, and disrupt economic activity in other parts of the country.
It said fiscal deficits were also widening, but ongoing debt consolidation and improving debt affordability give the government fiscal space to accommodate higher infrastructure spending and wider budget deficits.
“Further improvement in fiscal metrics will largely depend on whether the proposed tax reforms can effectively bolster revenue generation. Administrative reforms have led to higher government revenue in recent years, but revenue remains low as a share of GDP compared to peers, which in turn constrains room for greater spending,” it said.
However, fiscal strength remains weak compared with similarly rated peers.
The Philippines currently enjoys a “Baa2” credit rating from Moody’s, a notch higher than the speculative investment grade, with a stable outlook.
Moody’s said the stable outlook on the Philippines’ rating indicated that upside and downside risks were balanced. On the upside, strong GDP growth could accelerate even further, especially if the government achieves higher investment spending.
On the downside, capacity constraints are emerging and could prove more stringent than currently envisage, giving rise to inflationary pressure. High credit growth since 2014 also exposes the banking system to unseasoned asset quality risk, Moody’s said.