Duterte remarks seen a risk to growth

October 19, 2016 at 12:00

Duterte remarks seen a risk to growth

By:  | 12:44 AM October 19, 2016

The Duterte administration’s 10-point socioeconomic agenda aimed at slashing poverty incidence as well as the move to reform the tax system are seen credit positive by debt watcher Moody’s Investors Service, although it cautioned that the President’s rhetoric  could adversely affect economic ties with long-time trading partners.

In an Oct. 17 credit analysis report, Moody’s said the Philippines’ investment grade credit rating of “Baa2” with a stable outlook “incorporates sound economic and fiscal fundamentals.”

“Low and stable inflation, aided by global oil prices, has supported robust private consumption. The pick-up in government spending over the past year has also stimulated capital formation without derailing debt consolidation. The strength of domestic demand and services exports will provide a strong buffer to external headwinds to merchandise trade and remittance growth over the next one to two years,” Moody’ said.

Infrastructure development

Despite emergence of “some uncertainty over the direction of policy” following a change in administration, Moody’s said it expected “economic and fiscal governance to be anchored by the administration’s well-defined development agenda,” referring to the 10-point socioeconomic agenda that aimed to slash poverty incidence to 17 percent by 2022 from 26 percent at present.

“In particular, an acceleration of infrastructure development and the passage of comprehensive tax reform would be credit positive. Progress on this agenda could ultimately depend on how the President deploys his considerable political capital; a sustained focus on political matters could detract attention away from economic and fiscal reform,” Moody’s said.

While the socioeconomic agenda “points to policy continuity,” the debt watcher noted that risks emerged from the President’s controversial remarks, such as those addressed to leaders of the United States, the European Union and the United Nations, coupled with the war against illegal drugs being waged by his administration.

“The President’s rhetoric on foreign relations and his campaign against illicit drugs have made some overseas investors nervous. This could pose downside risks to investment and, ultimately, economic growth,” Moody’s said.

Economic policy

Still, “contrary to concerns that the President’s foreign policy statements could foreshadow a turn toward a more nationalistic economic policy, there is little indication that the government would implement anti-foreign measures that would hinder long-term foreign direct investments (FDI),” Moody’s said.

“Indeed, the relaxation of constitutional restrictions on foreign ownership in different sectors of the economy and increasing competition are key points in the aforementioned socioeconomic agenda. The Philippines’ constitution stipulates that certain investments must include 60-percent domestic ownership. Such a requirement reduces foreign investment appetite. The government plans to relax these restrictions to boost FDI inflows, particularly towards its infrastructure development program,” it noted.

Moody’s rated political risk in the country as “low,” although it warned that “a prolonged focus on political matters could detract attention away from the reform agenda, particularly those related to economic and fiscal matters.”

Also, “the President’s rhetoric towards critics of the war on drugs, including the US and the European Union, has the potential to strain long-standing security and trade relations.”

“Nonetheless, the president’s pronouncements—including a threat to wind up joint military exercises with US armed forces—have not led to official policy changes,” it noted.

As for the “more independent foreign policy” pivoting to China, Moody’s said it “has driven concerns over policy uncertainty more broadly.”

In general, Moody’s sees the Philippines’ economic strength as “high,” institutional as well as fiscal strength deemed “moderate,” while susceptibility to event risks was “low.”

Source: www.business.inquirer.net

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