Credit watchdog Moody’s Investors Service said the Marawi siege and the imposition of martial law in Mindanao will not have material impact on the Philippines’ robust economic outlook for the near term.
However, although unlikely to happen, potential challenges to the constitutional system of checks and balances could arrest or reverse the improvements in the rule of law over the past few years, it said in a commentary released on Wednesday.
On May 23, in the wake of a pro-Islamic State Maute Group attack on Marawi City, capital of Lanao del Sur, President Rodrigo Duterte declared martial law across Mindanao, a region that comprises the southern third of the Philippines.
“We expect the impact on economic activity from the crisis in Marawi to be minimal and short-lived,” Moody’s said.
Citing official statements that the military has regained control of most of Marawi as of May 30, it pointed out that congressional approval for martial law extension may not be needed for much longer, pending the full resolution of the situation.
With this, the credit ratings agency maintained its forecast for real gross domestic product (GDP) growth in the Philippines at 6.5 percent for 2017, or within the 6.5 percent to 7.5 percent official target of the government.
Moody’s cited some facts: Mindanao has about 24 percent of the Philippine population; it accounted for 15 percent of GDP in 2016 and contributed less than one percentage point to the country’s real GDP growth of 6.8 percent in the same year.
“Unless violence escalates markedy and/or martial law is extended and imposes significant constraints to the economy, the contribution of the region to national output will remain positive,” Moody’s stressed.
Moreover, the fighting has thus far been confined to Marawi, located in the Autonomous Region in Muslim Mindanao, which itself accounts for only 0.7 percent of GDP.
“There have only been limited disruptions to economic activity in other parts of Mindanao as authorities have sought to contain the spread of violence through enhanced surveillance,” the credit rater said.
Moody’s noted that beyond the immediate implications of the crisis in Marawi, President Duterte has publicly stated his willingness to bypass safeguards provided by the constitution against the arbitrary declaration of martial law, including the power of Congress and the Supreme Court to review, and even revoke, martial law.
It also acknowledged that Duterte has also previously threatened to invoke martial law to address other issues such as the eradication of drugs, which may not conform to the definition of “cases of invasion or rebellion” that is required under the constitution.
However, the agency cited the government’s effort to clarify the President’s position.
“Officials from the executive branch have since clarified that constitutional safeguards will be honored. Because of this clarification, we do not expect the extension of martial law beyond the resolution or dissipation of the immediate threat posed by the Marawi crisis,” the debt rater said.
Nevertheless, it said any challenges to the constitutional system of checks and balances could undermine the improvement in institutional strength in the Philippines.
In particular, Moody’s said, the country’s rule of law ranking in the Worldwide Governance Indicators has risen from the 26th percentile among rated countries in 2009 to the 32nd percentile in 2015, albeit still at low levels.
“Along with enhancements to government effectiveness and the control of corruption, the greater policy predictability afforded by better rule of law has underpinned a more favorable environment for economic growth and investment in recent years,” it said.
“It is unlikely recent developments in Mindanao will lead to changes in economic and fiscal policies, which continue to be anchored by Duterte’s well-articulated 10-point Socioeconomic Development Agenda that seeks to improve revenue generation through tax reform, lift infrastructure spending beyond 5 percent of GDP, and increase investment in human capital and development, among other measures. However, if recent events lead to prolonged uncertainty around security or governance, such a development would eventually dampen business confidence and, consequently, economic outcomes,” it concluded.