Economy unharmed by martial rule in Mindanao

The implementation of martial law in Mindanao has yet to impact on the economy but debt watcher Moody’s Investors Service warned that placing the entire country under military rule could undermine investor confidence.

In a briefing yesterday, Christian de Guzman, vice president and senior credit officer at Moody’s, said the fighting between government forces and extremists in Marawi City was one of the reasons for the perceived “more significant” political risks in the Philippines, the other reason was external—the tensions in the South China Sea.

But since the fighting has been contained in Marawi, there was no effect thus far on the overall reform agenda nor economic growth, De Guzman said. “The increase in domestic political risk has not undermined the economic agenda.”

De Guzman added that despite martial law covering the entire Mindanao, economic activity across the island was not disrupted significantly.

He said the Autonomous Region in Muslim Mindanao as a whole contributed only less than 1 percent to the national gross domestic product.

“As long as what is going on in Marawi is limited in a particular area, it will not impact” on the national economy, De Guzman said.

Martial law was declared in Mindanao on May 23 after ISIS supporters occupied Marawi. After over a month, fighting is still ongoing.

However, an expansion of martial law to cover the entire country “has potential to undermine investor confidence given prior experience,” De Guzman said, referring to the military rule under then President Ferdinand Marcos.

He pointed out that nationwide martial law could be a “polarizing, controversial” issue.

De Guzman added that expansion of martial law would imply a spread of violence outside Marawi, hence more disruptions to economic activity in a bigger area.

Despite heightened political risks in the country, De Guzman said the macroeconomic fundamentals remained sound, such that Moody’s expected the economy to grow by 6.5 percent this year and 6.8 percent next year.

“The outlook remains intact—we expect the Philippines to grow at an elevated pace compared to similarly rated economies,” according to De Guzman.

Last week, 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,” Moody’s added.

“However, the confrontational nature of the administration’s political agenda could potentially reduce the effectiveness of governance, or negatively affect investment and growth,” according to Moody’s.

The debt watcher also last week affirmed the country’s investment grade credit rating of Baa2, while maintaining a stable outlook.

“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,” it said.

“Set against that positive trend, domestic political developments could potentially undermine institutional strength and economic performance. Moreover, while broad macroeconomic stability has been maintained so far, a number of metrics indicate material capacity constraints that signal a risk of overheating,” it added.