Moody’s affirms Philippines Baa2 rating, points out domestic risks

June 27, 2017

Moody's Investors Service on Tuesday affirmed the Philippines' Baa2 long-term issuer and senior unsecured debt ratings and maintained the outlook at stable. In a statement, Moody’s said:” the affirmation of the Baa2 rating and the assignment of a stable outlook balances positive and negative factors.” On the positive side, Moody's expects that the Philippines' economic performance will remain strong while debt consolidation will continue and foster further convergence of key fiscal metrics versus corresponding peer medians. Moody’s added domestic political developments could potentially undermine institutional strength and economic performance. “While broad macroeconomic stability has been maintained so far, a number of metrics indicate material capacity constraints that signal a risk of overheating,” the ratings agency said. “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. “In addition, any further shock to growth in the GCC ( Gulf Cooperation Council) region could reduce remittance inflows. And US policies that could encourage onshoring of jobs could have a negative impact on BPO ( Business Process Outsourcing) exports. Moody’s said “recent events such as the conflict in Marawi and the subsequent imposition of martial law in Mindanao are examples of escalating domestic political risks that could, should they multiply and escalate, undermine institutional strength and, ultimately, economic growth.” “To date, 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.”, said Moody’s. It added the Comprehensive Tax Reform Package recently passed through the lower house of Congress, in part due to the intervention of the President. “However, the confrontational nature of the administration's political agenda could potentially reduce the effectiveness of governance, or negatively affect investment and growth,” said Moody’s. Moody’s expects growth to be sustained above six percent per year over the next two years, driven largely by the private sector. It said “household consumption will continue to be supported by the stability of remittances from overseas Filipino workers.” FDI inflows--which saw a record high in 2016 of $7.9 billion (2.6 percent of GDP, up 40.7 percent vs. 2015), but remain lower than in other countries in the region--will provide ongoing diversification of the economy. Improvement in the external environment is positive for goods exports and business process outsourcing (BPO) receipts, which comprise the bulk of services exports, Moody’s added. DMS