But warns of sustained pressure from spending bottlenecks
The Philippines is expected to sustain its economic momentum in the near term but fiscal expenditure bottlenecks are continuing to pressure growth, debt watcher Moody’s Investors Service said on Monday.
The ratings firm, in an annual update to investors, maintained its stable outlook for the country. It said the Philippines’ economic strength was “high”, institutional and fiscal strength were both “moderate”, and susceptibility to event risk “low”.
“The Philippines’ Baa2 government bond rating reflects the economy’s resilience to the current headwinds buffeting neighboring countries and emerging markets as a whole,” Moody’s said in a credit analysis published on Monday.
Analysts agreed, describing Moody’s report as an affirmation that the Philippines was well-prepared to handle capital flight and foreign exchange volatility – fears of which have been raised should the US Federal Reserve begin raising policy rates.
The stable outlook for the Baa2 rating —a notch above minimum investment grade—means it is unlikely to change over the short term and that Moody’s expects positive economic and fiscal trends to be sustained over the next one to two years.
In its latest report, the credit ratings firm cited a host of factors that placed the country well ahead of other emerging markets in terms of managing external adversities. These include strong domestic consumption, a healthy external payments position, a stable banking sector, the rising contribution of private-sector investments to growth and benign inflation.
“Stable domestic demand has cushioned the effects of weaker exports amid slowing growth in much of the Asia Pacific region,” Moody’s said.
The Philippines’ current account, meanwhile, has benefited substantially from lower oil.
In addition, the credit ratings agency said the Philippines banking system was virtually immune to contagion from external shocks.
“It is largely deposit-funded—aided in part by the steady flow of remittances—and exhibits a lack of dependence on external funding and low exposure to the export sector. Even foreign currency lending is fully backed by onshore sources of foreign currency financing, primarily deposits,” it said.
While the fiscal impulse has been uneven, Moody’s said the private sector’s contribution to growth has been stable largely due to robust household consumption, which has been aided in recent quarters by lower food and fuel prices and despite the negative contribution from net exports.
It noted that the central bank had an increasingly strong record of maintaining monetary and financial stability, with well-anchored inflation expectations, a relatively stable peso and liquidity being proactively managed in the context of volatile capital flows.
However, Moody’s stressed that bottlenecks in fiscal expenditures have continued to weigh on growth and could threaten the government’s capacity to meet its goal of increasing infrastructure spending to at least 5 percent of gross domestic product by 2016.
“The effectiveness of infrastructure development will determine the long-term prospects for economic diversification and ultimately growth,” it said.
Moody’s nevertheless noted that the government’s public-private partnership program has gained some traction following a slow start at the start of the Aquino administration.
Analysts said Moody’s stable outlook for the Philippines meant that it expected the economy to withstand the impact of external volatilities, particularly capital flight.
“If their view were that we would be vulnerable to capital flight and foreign exchange market volatilities, they would have put a negative outlook within the same grade,” said Victor Abola, economist from the University of Asia and the Pacific.
Patrick Ella, economist at Security Bank Corp., said the outlook verified the view that the country is best prepared to withstand external volatilities compared with its peers.
“As for capital flight, I think this will be inevitable if and when a financial stress period occurs, but we are likely to see the least stress,” Ella said.