GLOBAL debt watcher Moody’s Investors Service said the unpredictability of political risk in the Philippines could negatively affect economic and fiscal reforms and eventually threaten the sustained expansion of the economy.
In its 2017 Outlook for the Asia-Pacific region released Tuesday, Moody’s said political risk in the Philippines remained low “but more unpredictable than before.”
Since Philippines President Rodrigo Duterte came to power in June 2016, he has clashed with legislators over extrajudicial killings linked to the war on drugs and sparked controversy over allowing a hero’s burial for late president Ferdinand Marcos,” Moody’s said.
“While Mr. Duterte has high approval ratings, a prolonged focus on political matters could detract attention from economic and fiscal reforms,” it said.
Moody’s, however, said the Philippines was on the right track of making significant improvements in the business operating environment and greater infrastructure investment.
It said the thrust of fiscal policy has been to increase revenue and provide space to increase spending on projects including transportation and electricity generation. “In both cases, poor infrastructure has been a significant constraint on the economy,” it said.
Duterte earlier expressed his intent to pursue a more independent foreign policy—including by ending joint military exercises with the US—and signaled closer ties with Beijing, dismissing the Permanent Court of Arbitration ruling in July 2016 that invalidated China’s territorial claims to much of the South China Sea.
“While this has yet to translate to official policy changes, political risks are more unpredictable than they were before,” Moody’s said.
Moody’s also said that the risk that tensions in the East or South China Seas lead to outright conflict involving China on the one hand and Japan, the Philippines or Vietnam on the other was extremely low.
Overall, Moody’s said the 2017 outlook for the creditworthiness of sovereigns in Asia Pacific was stable, reflecting a mix of credit-supportive and credit-challenging factors. It said rising income levels and strengthening institutions would offer support to several sovereign credit profiles in the region.
“However, although GDP growth in the region remains relatively robust, lackluster growth in global trade and capital outflows may weigh on the credit profiles of those more dependent on external demand or financing. Given this context, credit outcomes in 2017 will be determined by the effectiveness of ongoing reform efforts and the evolution of political risks,” it said.
Moody’s upgraded the Philippines’ sovereign rating to Baa2 from Baa3 with a stable outlook on Dec. 11, 2014. This rating put it at par with the “BBB” grade with a stable outlook given by Standard & Poor’s on May 8, 2014. The ratings were the highest so far in the country’s history.