Debt watchers, economists see policy continuity in Senate results

MANILA, Philippines — The likely entry of more administration allies in the Senate ensures policy continuity during the remainder of President Duterte’s six-year term and is seen to ease the passage of economic reforms, financial experts said.

“The strong performance by Duterte’s supporters in the midterm elections should lead to further progress on pushing through economic reforms,” London-based think tank Capital Economics said.

Sagarika Chandra, associate director of the sovereigns team at debt watcher Fitch Ratings, said this outcome “could bode well for policy continuity during the President’s remaining term.”

“The key economic factors that we would be watching in the period ahead remain - the Philippines’ growth outlook, progress on tax reforms and fiscal policies,” Chandra said.

The debt watcher has assigned a BBB rating or a notch above minimum investment grade on the Philippines.

Its research arm, Fitch Solutions, said initial results from the May 13 mid-term elections suggest incumbent President Duterte has further consolidated his power, ahead of the final three years of his term.

“The election was widely seen as a test of Duterte’s popularity and as an opportunity for him to consolidate power by gaining control of the Senate, which had proved an obstacle to his policy plans in the first three years of his presidency,” Fitch Solutions said.

It added that the strong show of support for President Duterte would both give him the confidence and ability to push ahead with his reform program.

“The Senate has proved a sticking point for Duterte, as seen by the delay to the passing of the 2019 budget. Duterte will hope that with increased support in the Senate, his reforms and fiscal plans will face less obstacles,” it said.

Fitch Solutions said key reforms include shifting towards a federal system of governance, cutting corporate tax rates and the reinstating of the death penalty.

However, it said reduced opposition within the Senate lowers the potential for checks and balances on Duterte’s administration and may over time see a decline in the long-term political risk index score of 65.4 out of 100 for the country.

“The result gives Duterte a majority in the 24-seat Senate, and should make it easier for the President to push through legislation,” Capital Economics said.

It highlighted that the Duterte administration has so far introduced a number of useful economic reforms such as the TRAIN law and scrapping of import rice quotas.

The enactment of the first batch of tax measures under TRAIN last year, has widened the tax base and raised government revenues.

“This should help to fund the much-needed upgrades to the country’s infrastructure which we have long argued is vital to improving the economy’s long-term prospect,” Capital Economics said.

Meanwhile, the scrapping of rice quotas has resulted tin lower rice prices. The opening up the agricultural sector to more competition is seen to help boost productivity over the longer term.

For his part, Nomura Securities economist Euben Paracuelles said the outcome of the mid-term elections is supportive of political stability and the government’s reform agenda.

Fiscal reform, which has been delayed and has lost some visibility, is likely back on the radar screen as a result of President Duterte’s stronger support base in Congress after the mid-terms.

“Specifically, we believe the next package on fiscal incentive rationalization combined with corporate income tax cuts may now have a more realistic chance of enactment than not within this year,” Paracuelles added.

Paracuelles said the passing fiscal reforms remains crucial, as these are designed to help fund an ambitious infrastructure program while at the same time maintaining fiscal sustainability.

Robert Dan Roces, chief economist at Security Bank, said future budget proposals may most likely be passed within the time frame and the tax reform program would likely be revived as the Senate is now controlled by administration bets.

“With the credit rating upgrade recently, both chambers will consider expediting passage of those bills that will boost the country’s chance for an A rating upgrade,” Roces said.