The Philippines’ political transition is unlikely to have an immediate effect on the credit factors that support the Philippines’ Baa2 ratings and stable outlook, according to Moody’s Investors Service, noting that the credit implications of future policies will only become apparent over coming weeks and months.
Under the six-year term of outgoing President Benigno Aquino III that started in June 2010, the sovereign’s credit rating has risen four notches to Baa2 from Ba3. This reflects a pickup in economic growth, greater price stability, fiscal and debt consolidation, and a robust external payments position.
“While Mr. Rodrigo Duterte’s comments in the run-up to the election imply a degree of unpredictability regarding domestic security issues, human rights, and foreign policy, our baseline assumption is that there will be broad policy continuity as it relates to fiscal and economic management,” says Moody’s in an FAQ on the Credit Implications of the Election.
Moody’s expects that growth will remain relatively robust, and that Bangko Sentral ng Pilipinas (BSP), the central bank, will maintain its focus on sustaining macroeconomic and financial stability.
Moody’s also notes that unlike many other more commodity dependent emerging markets, the Philippines has not experienced a negative terms of trade shock from the turn in commodity prices since 2014. In contrast, lower prices for energy and food imports have stimulated private consumption, which reached a multi-year high in 2015.
At the same time, rapidly growing services exports and healthy domestic demand have provided resilient to negative spillovers from the slowing of the Chinese economy.
Impact on political stability and governance
Although the results of the vice presidential race—which is conducted separately from the presidential election—continue to be in doubt, Duterte’s lead is unlikely to be challenged as domestic and international observers regarded the elections as being largely free and fair.
Duterte’s campaign emphasized law and order issues, and burnished the mayor’s reputation for being tough on crime and corruption. Although this does not represent a departure from the “straight path” that Aquino espoused, Duterte’s comments promoting an extrajudicial approach to addressing crime, among others, have attracted widespread criticism.
One clear difference from the previous administration is that Duterte may not benefit from the strong majority in Congress enjoyed by the previous administration, during which Aquino’s Liberal Party and its coalition partners comprised 75% of the Senate and nearly 87% of the House of Representatives. Following this year’s elections, the Liberal Party will retain the largest share in the House, while Duterte’s party, PDP-Laban, has started to form coalitions with other parties.
While Duterte did not fully articulate a fiscal and economic strategy during the course of his campaign, some clarity is beginning to emerge. On 12 May, a spokesperson for Duterte presented an eight-point economic agenda that underscores broad policy continuity. While the agenda lacks detailed plans for achieving these objectives, if applied, they would be broadly supportive of growth. The eight points are as follows:
- Maintain the current macroeconomic policies. Reforms within tax collecting agencies will complement revenue collection efforts.
- Accelerate spending on infrastructure by addressing major bottlenecks, enhancing the Public-Private Partnership (PPP) program, and maintain the target for infrastructure spending at 5% of GDP.
- Ensure the attractiveness of the Philippines to foreign investors, and enhance business competitiveness. This also means reducing crime, and considering removing foreign investment restrictions in the constitution.
- Provide support services to small farmers to increase productivity and improve market access. Promote tourism in rural areas.
- Address bottlenecks in the land administration and management system.
- Strengthen basic education system and provide scholarships for tertiary education.
- Improve tax system, including by indexing tax collection to inflation.
- Expand and improve implementation of the conditional cash transfer program.
“This broad agenda has not informed a change in our projection for real GDP growth to average around 6% in 2016 and 2017, supported in part by the recent acceleration in government spending. A material improvement in revenue performance is also not yet evident, and we expect the Philippines’ fiscal deficit to remain narrow as compared to peers and support continued debt consolidation. Against this backdrop, price stability and a stable external payments position further anchors our Baa2 rating and stable outlook,” notes Moody’s.
During the election campaign, Duterte emphasized more inclusive growth. This goal is visible in the eight-point program’s inclusion of more support for agriculture and education, and the expansion of transfers to low-income households.
The fiscal and economic implications can only be estimated once details of the measures have emerged.
While the outgoing government made progress on furthering infrastructure development, increasing revenue collection, and reducing regulatory hurdles, it did so largely through administrative changes that have not been codified into law.
For example, it raised revenue by 2.5 percentage points of GDP between 2010 and 2015 almost exclusively through stricter enforcement measures. As Aquino promised “no new taxes” during his presidential campaign in 2010, tax reform was limited to a rebasing of excise duties on liquor and tobacco products.
The BSP has been an effective central bank, despite the absence of enhanced tools and protections called for in a bill that has failed to pass in Congress for a number of years. The government has had relative success in rolling out PPP infrastructure projects without the benefit of proposed changes to the Build-Operate-Transfer Law that could attract more private sector funding.
Progress on the institutionalization of these changes could support economic growth and therefore be credit positive, says Moody’s.