Debt watcher Standard & Poor’s (S&P) Global Ratings said the Philippines’ economic trend is stable but low income levels, inadequate infrastructure, and a weak regulatory track record remain key constraints to growth.
“The Philippines’ economic trend is stable in our opinion. We expect the country’s strengthening external profile, moderating inflation, and improved external debt position to support the economy,” it said in a newly released report assessing the economy and the banking industry.
However, its assessment of economic risk in the Philippines reflects the country’s low income levels and inadequate infrastructure, which together hamper economic diversification and growth.
The ratings giant also raised concerns about gaps in the country’s regulatory framework, and said that these need to be addressed to improve the business climate in the country.
Per capita GDP
S&P noted that the Philippines has a low income level but a comparatively diversified economy, and estimated real gross domestic product (GDP) per capita will rise by 4.4 percent to near $3,000 in 2016, an acceleration from 4.1 percent in 2015.
It projected real GDP per capita growth to average 4.6 percent over 2017 to 2019, reflecting the modest outlooks for the Philippines’ trading partners.
“High household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity. Uncertain conditions in export markets and inadequate infrastructure, mainly in transportation and energy, are the main downside risks to our growth outlook,” it said.
Going forward, the credit ratings firm said without the closure of infrastructure gaps and improvements in the business climate through regulatory reforms, the Philippines may not achieve lower-middle-income status, defined as per capita GDP exceeding $3,000, in 2017.
Meanwhile, it views the banking industry risk trend as stable, noting that banks’ well-established domestic franchises will help domestic banks to sustain a strong, stable, and diversified customer deposit profile.
S&P suggested the risk of a sharp correction or asset bubbles will remain manageable, given the measures taken by the Bangko Sentral ng Pilipinas (BSP) to curb excessive growth in the property segment.
It said regulatory standards are broadly in line with international standards—and in some instances more stringent.
“However, inadequate legislation and legal protection for supervisory staff weaken the regulator’s ability to implement prudential measures. The government’s attempts to amend the legislation have so far been protracted,” it pointed out.
The debt watcher said even though the credit quality of the banks has been improving over the years, poor transparency and inefficient legal infrastructure might limit any material reduction in the credit risk of banks operating in the country.
“Despite adequate regulation, we view the Philippines’ regulatory track record as weak,” it said.
S&P explained that the legal protection offered to supervisory staff when performing their duties is inadequate, and this has undermined the implementation of prudent policies and measures.
“Specifically, supervisors are civilly liable if they have not applied ‘extraordinary diligence,’ an onerous requirement, in our view,” it said.
The credit rater said although the government is taking steps to amend the BSP charter to strengthen the central bank’s supervisory powers, it has been a protracted process.
Moreover, it underscored that governance and transparency in the Philippine banking industry is weak.
“We observe gaps in the disclosure of banks’ quarterly and semi-annual financial statements. The statements have inadequate notes to accounts and lack detail, particularly on asset quality disclosures,” it said.