Moody’s sees sustained robust growth

Sound macro fundamentals will keep the Philippine economy strong in the medium term even as global debt watcher Moody’s Investors Services sees “rising” political risks in the country.

“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 in a statement yesterday.

For this year, Moody’s projected gross domestic product (GDP) growth to remain “broadly stable” in the coming months to settle at 6.5 percent or at the lower end of the government’s target range of 6.5-7.5 percent.

Uncertainties

“We have also retained our projection for 2018 at 6.8 percent, below the government’s target of 7-8 percent, given continued uncertainties regarding the proposed comprehensive tax reform program (CTRP), which is currently being considered by the upper house of Congress,” Moody’s added. The first CTRP package pending at the Senate will cut the personal income tax rates while jacking up taxes on consumption.

Infrastructure projects

Moody’s deemed that “in the absence of a significant boost to government revenues from the passage of the CTRP, the government will likely pare back its plan to aggressively increase its spending on infrastructure,” referring to the ambitious “Build, Build, Build” program aimed at ushering in a “golden age of infrastructure.”

Fiscal metrics

Under “Build, Build, Build,” the government will roll out 75 flagship, “game-changing” infrastructure projects to be started and finished in the next six years, in line with the plan to spend up to P9 trillion on hard and modern infrastructure until 2022.

The Duterte administration had programmed a yearly budget deficit equivalent to 3 percent of GDP up to 2022, but Moody’s said this was not a cause for concern as “ongoing debt consolidation and improving debt affordability give the government fiscal space to accommodate higher infrastructure spending and wider budget deficits.”

Stable outlook

“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,” Moody’s said, noting that the Philippines’ fiscal strength “remains weak compared to similarly rated peers.”

Besides the delay in the passage of the first CTRP package, Moody’s warned that another downside risk was “a worsening of the Islamist insurgency in Mindanao that 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.”

“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,” the debt watcher said.

In general, “the stable outlook on the Philippines’ rating indicates that upside and downside risks are balanced,” according to Moody’s.

“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 we currently envisage, giving rise to inflationary pressure. High credit growth since 2014 also exposes the banking system to unseasoned asset quality risk,” it said.