Politics elevates risks for economy

Manila-based professional services firm WR Advisory Group last week released its inaugural Philippine Political and Country Outlook Report which warned that the Philippines faces an elevated and deteriorating outlook for its political stability, policy and regulatory, fiscal and sovereign and its economic growth.

The report assesses country risk across eight sub-categories spanning governance (political stability, institutional integrity, policy and regulatory), macroeconomic structure (fiscal and sovereign, external and geopolitical) and the operating environment (social and labor, economic growth, security).

Out of the eight sub-categories, only fiscal and sovereign risk was determined to be high, while six of the remaining categories were elevated, while security risk remained low.

Four categories — political stability, policy and regulatory risk, fiscal and sovereign risk and economic growth risk — carried a deteriorating outlook, while institutional integrity, external and geopolitical risk, social and labor risk and security risk were assessed as stable.

Factional data collected by WR confirms that the Marcos administration is operating from a comparatively thin  political base. Only 18 percent identified with the Marcos faction in June, down four percentage points from March.

Duterte-aligned respondents, on the other hand, increased to 37 percent, while the opposition rose to 20 percent. A further  24 percent selected none of the factions. The Duterte bloc is particularly dominant in Mindanao where it  accounts for approximately 80 percent of respondents.

By contrast, the Marcos faction is strongest among  respondents aged 60 and above, suggesting that its base is both narrower and demographically older.

According to Robin Michael Garcia, president and CEO of WR Advisory Group and WR Numero Research, his firm’s first political risk report brings unmatched depth and nuance to the market. Markets, he said, are deeply embedded in politics and society, yet Filipino firms have long lacked reliable political risk analysis to navigate multifaceted uncertainties.

The WR Advisory report, he said, finds the dominant risk picture is increasingly economic and institutional, citing that the national government debt rose to P19.07 trillion by the end of the second quarter, equivalent to 66 percent of gross domestic product while debt service reached P1.23 trillion through the first half, with both S&P and Fitch issuing negative rating signals during the quarter.

Economic growth slowed further to 2.3 percent year-on-year in the second quarter of this year, the fourth consecutive quarter of deceleration as foreign direct investments net inflows fell 33.4 percent through May, and the BSP reversed its easing cycle with two rate increases in response to elevated inflation.

These pressures, the WR report said,  are occurring alongside continued political fragmentation.

Economic insecurity, the report elaborated, is reinforcing this political dissatisfaction. Thirty-two percent of respondents said their household had difficulty meeting basic needs every day, an increase of nearly 10 percentage  points from March.

A further 29 percent experienced such difficulty once or twice a week.

In total, more  than six in 10 respondents reported struggling with basic needs at least weekly.

These findings do not by themselves demonstrate political instability, but they reduce public tolerance for political  conflict and narrow the administration’s margin for error.

WR Group’s outlook reflects three inputs: scheduled events in the window ahead, the trend direction already visible across the current evidence window and structural factors not fully captured in the quarterly score itself.

A “deteriorating” rating, it was explained, echoes a trajectory that points toward a higher risk score next quarter.

It means the drivers behind the current assessment are getting worse, not stabilizing and nothing scheduled in the forward window is positioned to reverse that.

The outlook, WR Advisory reiterated, is deteriorating. It pointed out that the BSP is boxed in. It cannot ease without risking a fresh inflation flare, and it cannot tighten further without deepening a slowdown that’s already at a 16-year low outside the pandemic.

That points toward a hold pattern that offers no near-term support to growth,  not a resolution. FDI’s own forecast was cut for the full year. No indicator in the 90-day forward window points strongly toward stabilization.

It cited that GDP growth fell to 2.3 percent in the second quarter, the weakest quarter since 2009 outside the pandemic, the third straight quarter below target and the fourth straight quarter of deceleration.

FDI net inflows fell 33.4 percent year-on-year through May, past the methodology’s 20 percent decline threshold, with May posting the lowest monthly total in over 11 years.

The BSP reversed from 225 basis points of cumulative cuts to two consecutive hikes,  constrained by inflation that peaked at 7.2 percent in April, leaving little room to support growth  from here.

The second quarter GDP print of 2.3 percent, released Aug. 7, it added, confirmed continued economic deceleration, the weakest quarter since 2009 outside the pandemic, down from the first quarter’s 2.8 percent. First- half growth averaged 2.6 percent, well below even the government’s own revised full-year target of 3.5 to 4.5 percent.

PSA and multiple bank economists attributed the  Q2 slowdown to elevated inflation compressing household spending and continued weak public infrastructure disbursement. This is now three consecutive quarters materially below target, and  four consecutive quarters of decelerating growth.

The report, however, maintained that external, social and security pressures remained substantial, but contained.

Among others, Chinese operations around Scarborough Shoal continued, but so did the expanded multinational military exercises. Inflation peaked at 7.2 percent in

April, which led to transport and wage sector pressures, but underemployment improved. These suggest a combined picture of accumulating fiscal, economic and political constraints without simultaneous deterioration of country risk.