Inflation, charter change risks to growth – Moody’s
Debt watcher Moody’s Investors Service has affirmed the Philippines’ “Baa2” investment grade rating, which carries a stable outlook, but warned that rising inflation and charter change were downside risks to the economy.
“The Baa2 rating incorporates a number of very positive credit features, including the high economic strength derived from a large and fast-growing economy, as well as improving fiscal strength based on moderate government debt levels and gains in debt affordability,” Moody’s said on Friday.
“These are balanced against more negative features which constrain the rating, principally low per capita incomes and, relatedly, still low revenue-raising capacity as compared to similarly rated peer countries,” it added.
The “Baa2” is a notch above minimum investment grade while the “stable” outlook means the rating is likely to remain unchanged over the next 12 to 18 months.
The debt watcher noted that the stable outlook also balanced positive and negative factors.
“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.
At the same time, the ratings agency believes that policymakers face challenges in managing current inflationary pressures.
The rise in inflation is expected to be transitory, based in part on the strong track record of Bangko Sentral ng Pilipinas, but significant capacity constraints related to the country’s topography, possibly persistent pressure on the currency and capital inflows, and a current account balance in slight deficit pose material challenges.
In addition, 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.
“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,” it noted.
Moreover, 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,” it claimed.
In each of these cases, the credit watchdog explained that the fiscal impact will in part be determined by the degree to which spending commitments will be devolved.
The shift to federalism will 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
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fiscal resources, posing a risk to the improved fiscal discipline that has characterized national government finances over the past decade,” Moody’s said.
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