Moody’s: Shift to federalism a downside risk for PH economy

Debt watcher Moody’s Investors Service on Friday said the Philippines’ planned shift to a federal form of government could be a downside risk for the economy, especially on the country’s fiscal position.

Moody’s nonetheless kept its Baa2 credit rating for the Philippines, one notch above the minimum investment grade, with a stable outlook.

“Moody’s expects that growth will remain robust and that the Philippines’ fiscal metrics will strengthen somewhat as the government continues to make progress on its socioeconomic reform agenda, but these trends are likely to fall short of bringing the Philippines’ credit profile in line with higher-rated countries,” it said in a statement.

However, “policymakers face challenges in managing the current inflationary pressures,” Moody’s said.

In the first half of the year, headline inflation averaged 4.3 percent, above the government’s full-year target range of 2-4 percent.

The Bangko Sentral ng Pilipinas’ (BSP) policymaking Monetary Board already raised the key interest or policy rate to 3.5 percent or by 25 basis points each in May and June following higher-than-expected rate of increase in the prices of basic goods.

Also, “domestic political developments and prospective changes to governance frameworks, including a shift to a federal form of government, present downside risks to the country’s institutional and fiscal profile,” Moody’s added.

On the political front, Moody’s said that “the Philippine president’s contentious policies on law and order over the past two years as well as other political controversies may have a negative impact on the Philippines’ attractiveness to financial and physical asset investors.”

Moody’s was referring to President Rodrigo Duterte’s “war” against illegal drugs, which was highly criticized in international circles for the alleged extrajudicial killings as a result of the anti-drug campaign.

“In addition, prospective changes to governance frameworks could have negative implications for public finances. These include the recent Supreme Court ruling that redefines the share of national government revenue to be transferred to local levels of government, as well as the proposed shift to a federal form of government from the current centralized form of government,” Moody’s said.

“In each of these cases, the fiscal impact will in part be determined by the degree to which spending commitments will be devolved to the local levels of government,” according to Moody’s.

To recall, the Supreme Court recently ruled that the “just share” of local government units’ internal revenue allotment must be coming from all national taxes and not only from national internal revenue taxes as currently being done.

“All national taxes” meant including collections from import duties and other levies by the Bureau of Customs, among other revenue-collecting agencies.

Internal revenue taxes, meanwhile, referred to those collected by the Bureau of Internal Revenue such as documentary stamp tax, donor’s tax, excise tax, estate tax, income tax, as well as value-added tax.

Budget Secretary Benjamin Diokno had said that implementing the ruling would cost between P1.2 trillion and P6 trillion, based on various estimates, and would bring about an unmanageable public sector deficit that the national government cannot afford.

As for the proposed shift to federalism, Moody’s warned that doing so “would also likely incur an expansion in the aggregate size of the government and, hence, public expenditure.”

“At the same time, there may be a gap between the national and local levels of government with respect to their ability to manage fiscal resources, posing a risk to the improved fiscal discipline that has characterized national government finances over the past decade,” Moody’s said.

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.

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.

The Philippines current enjoys investment grade credit ratings from the top three debt watchers, namely Moody’s, Fitch Ratings and S&P Global Ratings.   /vvp