Philippines: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|B||The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.|
Growth should remain strong
The economy, in 2016, should remain vigorous with household consumption still the main driving force (70% of GDP). This will continue to benefit from substantial remittances from abroad, the rapid expansion of credit. Besides, the low level of energy prices helps to sustain purchasing power. Inflation, despite a slight upturn, should remain reasonable and within the central bank target range (2%-4%).
Although China is the 3rd largest buyer of Philippine exports, the country is likely to be relatively unaffected by the slowing Chinese economy. Exports of electronic goods should remain strong, benefiting from booming smartphone sales. The business process outsourcing (BPO) sector, which represents 25% of exports, should also remain dynamic.
In addition, despite the government experiencing problems in budgetary execution and with public spending below the forecasts for 2015, these are set to pick-up this year. Indeed, public spending has been strong during the first quarter because of the Presidential election in May. The Public Private Partnership program initiated by President Aquino is also starting to bear fruit and should help boost infrastructure improvements. Investors nevertheless remain cautious as Rodrigo Duterte, who was elected in May and is due to take office on June 30, is very controversial. However he should continue the policy implemented by his predecessor and may work with members of his team. Finally, the country will still be suffering from infrastructure inadequacies, in particular for electricity. The construction sector should therefore see rapid growth.
The financial situation of the country remains very sound
The macroeconomic fundamentals of the Philippine economy have improved significantly over recent years. Although the budget balance is likely to deteriorate in 2016, following increased spending for the reconstruction and development of infrastructures as well as tax exemptions allocated to certain sectors. However, the public debt should continue to shrink if the measures decided by the elected President are in line with those from his predecessor.
In terms of its external accounts, the Philippines should maintain its current account surplus in 2016. Remittances from its expatriates (accounting for more than 7% of GDP in 2015) have proven particularly resilient during the crisis and this trend should continue.
Nevertheless, the trade balance should worsen due to the rapid rise in imports stimulated both by household consumption and the input needs for industry. Exports of services (particularly the outsourcing of company services) have experienced an upward trend over the past few years. In this context, its currency reserves should remain at a very comfortable level (more than 10 months of imports in 2016).
A new controversial president will lead the country
The Constitution from the Philippines does not allow a second term of office thus B. Aquino, elected in 2010, couldn’t stand for reelection during the May 2016’s presidential campaign. As expected according to surveys, Rodrigo Duterte won and will take office on June 30. He has been a very controversial candidate because of his violent declarations during the campaign and because of the explosion of extrajudicial killings during his terms as the mayor of Davao. He has promised to tackle criminality. Despite strong economic performance during Aquino’s term, Filipinos have chosen an anti-establishment candidate. Indeed growth has not been inclusive enough and poverty is still high in the country. He knows little about foreign policy and has no economic policy. Thus he should follow advises from skilled counselors. He will push to rewrite Constitution and change for a federal system of government. He also declared that policies in force in Davao will be implemented nationwide (including a late-night drinking ban and a curfew for unescorted minors).
Besides, tensions remain high in the territorial dispute between the Philippines and China. This disagreement is scheduled for consideration by an international Tribunal. Furthermore, a peace agreement was negotiated, in October 2012, with the armed rebel group which has claimed the creation of an independent Islamic State on the Island of Mindanao for the last 40 years. This was subsequently confirmed in August 2014 with an agreement on the framework law about autonomy for this region. However, this agreement has not been confirmed by the Congress so far.
Finally, in spite of ambitious targets to improve governance set by President Aquino, the country still suffers from major shortcomings concerning corruption (the country is ranked at 126th out of 215 by the World Bank). Shortcomings also persist concerning respect for the rule of law and the quality of regulations.