S&P flags ‘rising uncertainties’ in PH amid ‘diminished’ policy stability

A grafitti of President Rodrigo Duterte is seen in Marikina City.
INQUIRER PHOTO / RICHARD A. REYES

For debt watcher S&P Global Rating, President Rodrigo R. Duterte’s law and order thrust “could undermine respect for the rule of law and human rights, through the direct challenges it presents to the legitimacy of the judiciary, media and other democratic institutions.”

In a statement Wednesday, S&P noted that President Duterte “has a strong focus on improving law and order, which has allegedly resulted in numerous instances of extrajudicial killings since he came to power.”

“When combined with the President’s policy pronouncements elsewhere on foreign policy and national security, we believe that the stability and predictability of policymaking has diminished somewhat,” according to S&P.

As such, S&P said “a higher rating is unlikely over our two-year ratings horizon” for the Philippines.

“The ratings on the Philippines reflect our assessment of its lower middle-income economy and rising uncertainties surrounding the stability, predictability, and accountability of its new government,” S&P said.

The said weaknesses were nonetheless offset by the country’s strong external position on the back of increasing foreign exchange reserves as well as low and decreasing foreign debt, it added.

In this regard, S&P kept the Philippines’ credit rating one notch above investment grade, affirming the current ‘BBB’ long-term as well as ‘A-2’ short-term sovereign credit ratings, with a stable outlook.

Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances is also related to a country’s performance, credit scores serve as a proxy grade for the economy.

Also, improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.

However, foreign investors’ interest to pour money into what was Asia’s rising star amid robust economic growth in the past six years were seen souring after President Duterte recently voiced controversial remarks against US President Barack Obama, the United Nations and the European Union, which were among the country’s top trading partners.
S&P nonetheless said it believes that the Duterte government “will broadly continue with the fiscal and economic development policies of the previous administration.”

“In spite of additional spending on poverty reduction and social and economic infrastructure, we forecast fiscal deficits to average around 1 percent of GDP [gross domestic product] over 2016-2018,” S&P said, even as economic managers had raised the budget-deficit ceiling to 3 percent of GDP to ramp up infrastructure spending.

“We estimate the deficits will allow the net general government debt burden to decline to about 18 percent of GDP in 2019 from its peak of 28 percent of GDP in 2010, which represents a ratings’ strength,” it added.

While the Duterte administration has good intentions as far as widening the budget deficit to plug the infrastructure gap is concerned, S&P said it believes that “the rising pressure on the Philippines’ institutional and governance settings has the potential to hamper the ability to develop and implement swift policy responses.”

While S&P would unlikely raise its credit ratings for the Philippines in the near term, it said they “may raise the ratings if continued fiscal improvements under the new administration boost investment and economic growth prospects, or if improvements in the policy environment lead us to a better assessment of institutional and governance effectiveness.”

On the flip side, S&P said they may lower the Philippines’ ratings “if, under the new administration, the reform agenda stalls or if there is a reversal of the recent gains in the Philippines’ fiscal or external positions.”

In a separate statement issued by the government’s Investor Relations Office, Finance Secretary Carlos G. Dominguez welcomed the debt watcher’s latest move, saying that “it affirms that the Duterte administration is on the right track in pursuing its 10-point socioeconomic agenda that aims to keep the Philippine economy on its high growth path.”

“The continued investment-grade rating gives the new government greater resolve to transform the economy into a truly inclusive one by pursuing, among others, a tax reform plan that seeks to generate enough revenues to grow the middle class, energize the corporate sector, and raise investments in human capital and social protection to drastically reduce poverty incidence,” Dominguez said,

However, the Finance chief did not agree with S&P’s opinion that policy predictability and stability “somewhat diminished” when the Duterte administration took over.

“The administration’s economic pronouncements have been clear and consistent from the very beginning,” Dominguez was quoted by the IRO as saying, further pointing out that “the Duterte administration’s 10-point socioeconomic agenda was announced early—even prior to the President’s formal inauguration—and that the action plans to realize the agenda have already been operationalized.

“The Duterte administration is loud and clear in its message. We want to achieve a kind of economic growth that is not only robust and sustainable but one that actually lifts significantly more Filipinos out of poverty,” Dominguez said.

“If one is able to see through the noise created by negative headlines, he may have better and comprehensive understanding of the exciting, positive changes that are ahead of the Philippines,” the Finance added.

For his part, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said: “The Philippines’ ability to keep its credit rating well within the investment grade scale, which has transcended change in political leadership, is a testament that the country’s economic gains have been built from deeply rooted structural and sound policy reforms over the years.”

“Through continued conduct of sound monetary policy and prudent bank supervision, as well as efficient management of the country’s external accounts, the BSP will help make sure these economic gains are further enhanced moving forward,” Tetangco added.

With regards the economy, S&P noted of strong macroeconomic fundamentals, but external factors coupled with infrastructure lack are seen tempering economic growth.

“The Philippines has a low income but comparatively diversified economy; we estimate GDP per capita will rise by 4.4 percent to about $3,000 in 2016, from 4.1 percent in 2015. We project GDP per capita will average 4.6 percent over 2017-2019, reflecting the modest outlooks for the Philippines’ trading partners. High household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity. These strengths will likely be underpinned by strong household and company balance sheets, sound growth in jobs and income, inward remittance flows, and an adequately performing financial system,”S&P said.

However, “uncertain conditions in export markets and inadequate infrastructure mainly in transportation and energy are the main downside risks to our growth outlook,” according to S&P.

“Without the closure of infrastructure gaps and improvements in the business climate through greater political stability and regulatory reforms, the Philippines may not achieve middle-income status in 2017, where per capita GDP exceeds $3,000,” the debt watcher said.

“With the Philippines’ fiscal settings remaining sound, its external metrics are strong. The current account is likely to remain in surplus (averaging 2 percent of GDP annually to 2019), reflecting robust services exports (including mainly tourism, healthcare, maritime, and business process outsourcing), large remittance inflows, and lower oil prices. Competitive unit labor costs relative to peers’ (such as Thailand and Indonesia) and a large young, educated, and flexible labor market imply further strength in services exports over the next five years. Participation in free trade agreements could provide further upside to the Philippines’ export earnings,” S&P said.

“We expect the Philippines to remain in a net external creditor position, demonstrated by its net external debt averaging about negative 16 percent over 2016-2019. External liquidity will also remain a sound 67 percent on average over the period. We do not envisage a marked deterioration in the Philippines’ external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors,” S&P added.

“Other factors that mitigate risks associated with the Philippines’ international liabilities include a very low reliance on external savings by its bank and company sectors, as well as the low and mainly long-term nature of the government’s external borrowings,” according to S&P.