Moody’s Investors Service said the current security situation in the Philippines—referring to the heightened security alert following the deadly Sept. 2 bombing in Davao City—has limited impact on the country’s credit ratings, but the debt watcher warned of a “clouded” economic outlook if recent events lead to prolonged uncertainty.
It said President Rodrigo Duterte’s spending of political capital to defend his campaign against illegal drugs could exact a toll on his government in terms of lost opportunity for urgent economic reform.
“The near-term sovereign credit impact of these developments is limited as we do not expect them to change economic and fiscal policies or outcomes,” Moody’s said in a report released Wednesday.
On September 2, a bomb exploded at a night market in Davao City, killing 14 people, injuring dozens of others and prompting President Rodrigo Duterte to declare a state of lawlessness nationwide the following day.
Before leaving the country to attend the Association of Southeast Asian Nations (Asean) Summit in Laos, the Chief Executive on Monday raised the declaration of “state of lawlessness” into a state of “national emergency owing to lawless violence in Mindanao.”
The declaration allows for heightened security measures, including stepped-up deployment of soldiers and policemen in key areas.
Moody’s does not expect the recent events to meaningfully derail the country’s economic momentum, noting that the Philippines’ 6.9 percent gross domestic product (GDP) growth in the first half of 2016 is a stronger performance than similarly rated peers.
“At this stage and, as long as the interventions under the state of lawlessness do not affect businesses nationwide, we assume that investment decisions will not be materially affected,” it said.
“We also do not expect any shifts in economic policy stemming from last weekend’s developments,” it added.
Call for increased defense/security budget
However, the credit rating agency pointed out that the recent events reinforced the administration’s call for increased defense and security expenditure in the ongoing deliberations over the 2017 budget, including a 24.5 percent rise in allocations for the police to 3.3 percent of total expenditure from 3 percent in the 2016 budget.
President Duterte’s increasingly controversial law and order policies could exact an opportunity cost for reform, it said.
“More recently, the President has deployed his considerable political capital in defense of his campaign on drugs and has engaged key legislators in highly publicized disputes, which—if protracted—could detract attention from the implementation of important economic reforms,” it said.
In Moody’s assessment, the Philippines’ susceptibility to political risks is low.
“We do not believe that a significant intensification of the security response—such as an imposition of Martial Law, which requires congressional approval— is likely, given the current system of checks and balances,” it said.
The credit watchdog stressed in particular the government’s assurance that the declaration of state of lawlessness calls for a stepped-up security presence without the suspension of civil liberties.
The main challenge facing policymakers is sustaining the positive trajectory of institutional quality through the political cycle, which had improved since 2011.
“Should this improvement continue in conjunction with robust economic and fiscal performance, it would support positive momentum in the sovereign credit profile,” Moody’s noted.
“However, if recent events lead to prolonged uncertainty around security or economic policy, such a development would eventually dampen business confidence and, consequently, economic outcomes,” it said.