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S&P tags downside risks to Philippine growth

The Duterte administration has adopted a 10-point agenda to address the high poverty rate in the country. It also raised the budget deficit ceiling to three percent of GDP instead of two percent of GDP as it intends to ramp up infrastructure spending. 

External factors, political issues

MANILA, Philippines – S&P Global Ratings said external factors as well as local and regional political issues pose downside risks to the strong economic performance of the Philippines.

In its latest Asia Pacific Economic Snapshots, S&P said external factors include the continued economic slowdown in China as well as the volatile global market brought about by the impending interest rate increase by the US Federal Reserve.

“The main downside risks to the Philippine economy continue to come from external factors, such as a sharper-than-expected downturn in China or repeated bouts of market turbulence. Recently, tail risks from local and regional political issues have appeared as well,” S&P said.

The economy grew seven percent in the second quarter from 6.8 percent in the first quarter.

This brought the average GDP growth to 6.9 percent in the first half from 5.5 percent in the same period last year.

“Economic and demographic fundamentals continue to drive a strong domestic demand story, as indicated by nearly seven percent growth in the first half of the year,” S&P said.

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The Duterte administration has adopted a 10-point agenda to address the high poverty rate in the country. It also raised the budget deficit ceiling to three percent of GDP instead of two percent of GDP as it intends to ramp up infrastructure spending.

President Duterte also committed to pursue the reforms undertaken by the previous administrations.

“The new administration’s economic policies appear sound, targeting higher infrastructure and education spending, among others,” S&P said.

The international rating agency, however, said investors are wary about the tirade of President Duterte against US President Barack Obama and UN secretary general Ban Ki-moon over the rise in the number of extra judicial killings in the Philippines.

President Duterte launched the tirade before leaving for Laos for the Asean Summit early this month.

“However, international investors may be getting worried about potential diplomatic complications and short-term law and order issues on the ground. The peso has been one of the region’s weakest performers since June,” S&P said.

The rating agency is confident the Philippines would book an average 6.5 percent GDP growth over the next few years fuelled by strong consumption, higher investments, and the booming business process outsourcing industry.

“Underlying demographic trends will drive growth of around 6.5 percent over the next few years, despite significant headwinds from sluggish external demand. The growing and increasingly educated middle class, combined with a booming outsourcing industry, continues to boost consumption and investment,” S&P said.

The debt watcher sees the Philippine economy expanding by 6.1 percent this year and by 6.3 percent next year before slowing down to 6.2 percent.

Moody’s Investor Service senior credit officer Christian de Guzman earlier said recent security and political developments under the Duterte administration pose limited impact on the country’s investment grade credit rating.

Moody’s said the declaration of the ”state of lawlessness” after an explosion in Davao City that killed 15 persons as well as the Duterte administration’s increasingly controversial law and order policies that led to the tirade against Obama and Ban would not affect the country’s credit rating over the near term.

Moody’s Baa2 together with S&P Global Ratings’ BBB rating on the Philippines is one notch above investment grade while the BBB- rating of Fitch Ratings is equivalent to minimum investment grade.

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