By Manuel Mogato
MANILA, July 5 (Reuters) – President Benigno Aquino wants to
win the Philippines a credit rating update and bring in more
foreign investment, and he claims to have made progress in his
campaign against corruption.
At the start of July, Standard & Poor’s raised its rating to
one notch below investment grade, but said further upgrades
depend on Manila raising income levels or sustaining revenue
reforms.
The Filipino economy grew by 3.7 percent in 2011, well below
a government target of between 4.5 and 5.5 percent, but
officials say this year’s figures will be better.
Internationally, by far the greatest concern is the South
China Sea, contested waters where the U.S.-backed Philippines
are increasingly running up against China.
RATINGS: (Unchanged unless stated:)
S&P;: BB+ (upgraded from BB on July 4)
MOODY’S: Ba2
FITCH: BB+
The cost of insuring against default on 5-year sovereign
debt was around 150 basis points in early July,
down around 35 points since the start of the year.
Following is a summary of political risks to watch:
SOUTH CHINA SEA
The Philippines may ask the United States to deploy spy
planes over the South China Sea to help monitor the disputed
waters, President Benigno Aquino told Reuters at the start of
July, a move almost certain to worsen tensions with its giant
neighbour China.
That announcement came only months after its foreign
minister said it is offering the U.S. greater access to its
airfields and may open new areas for soldiers to use.
The U.S. pledged to triple military aid to Manila in 2012
after high-level talks in Washington on April 30, raising the
risk of further speeding a regional arms buildup that is already
underway.
Manila will not surrender claims to its exclusive economic
zone, as defined by the United Nations, but it cannot hope to
confront China militarily.
Beijing wants one-one-negotiations, but Manila and other
claimants prefer a multilateral approach, which opens the way
for an indirect role for the United States. China wants the
United States to stay out of the dispute.
In April, two huge Chinese maritime surveillance vessels
prevented a Philippine Navy boat, its largest and latest
donation from the United States, from arresting eight fishing
boats collecting sharks, corals and giant clams in Scarborough
Shoal, about 124 nautical miles west of the former U.S. navy
base in Subic.
The move led to a sea standoff, raising tension in the area,
fuelling fears the territorial dispute could spill over into
China trade and tourism restrictions. In June, the situation
eased slightly when Aquino ordered its vessels to return home
due to bad weather in the area.
What to watch:
– New security arrangements between Washington and Manila to
increase the U.S. military footprint in the Philippines, and the
U.S. fighter jets and warships the Philippines is able to buy.
– Fresh approaches by Manila to pursue its claims on the
disputed Spratly Islands. Aquino told Reuters in September that
Manila was looking into at least five other options to pursue
its claims after China rejected arbitration.
– Commercial activity in the South China Sea. Manila has
awarded two oil and gas contracts there, and an Anglo-Filipino
company may start drilling oil wells later this year in the Reed
Bank, another area claimed by China.
– Spending on upgrades of air and naval equipment, including
radar stations. The Philippines says it needs to build a basic
defence capability, and its actions are in no way aggressive.
MINING INVESTMENT RESTART, ECONOMIC GROWTH
Mining firms want the Philippines to lift an 18-month
moratorium on new projects, but this will not happen until
lawmakers approve new legislation on mineral revenues and a
presidential executive order is signed.
Congressional approval is likely to hold up permits further,
stalling up to $12 billion in new investments planned over the
next five years, including Southeast Asia’s biggest undeveloped
copper-gold mine, the $5.9 billion Tampakan project by global
miner Xstrata Plc and Australia’s Indophil Resources NL
in the south of the country.
Still, the economy is performing well, helped by low
interest rates, improved fiscal management, and an increasingly
confident middle class whose spending is underpinned by the huge
$1.6 billion in monthly remittances from millions of Filipinos
working overseas.
The economy grew 6.4 percent in the first three months of
the year, second only to China among Asian economies, and Aquino
expects that rate to accelerate in the second quarter.
The government is aiming for an expansion of 5-6 percent in
2012, making the Philippines a rare example of growth in
contrast to Europe and the United States.
The arrest in November of former Philippine leader Gloria
Macapagal Arroyo for vote-rigging has put Aquino’s anti-graft
stance firmly back in the public eye, but there is also a risk
that the Arroyo case could create uncertainty for investors if
it becomes a protracted political and legal battle, and prove a
distraction from the work of economic reform.
The government’s efforts to prosecute Arroyo will be boosted
by the removal from office of Renato Corona, head of the
15-member Supreme Court, seen by Aquino as an obstacle to his
anti-corruption campaign. The Senate voted in late May to oust
the judge for failing to disclose his wealth.
What to watch:
– Passage of a new tax of alcohol and cigarettes. Ratings
agencies say the new tax is crucial if the Philippines is to
secure investment grade status.
– When the mining moratorium is lifted, and quickly
resources firms start work on new projects.
– Progress of the Arroyo case in court, and potential
political fallout from removal of the country’s top judge.
– Growth figures, and central bank policy moves.
INTERNAL SECURITY
Internal security remains a weak spot, persistently
highlighted by foreign embassies in travel advisories, with law
enforcement hobbled by corruption, lack of police resources, and
easy availability of guns on the street.
Aquino held talks with the Moro Islamic Liberation Front’s
(MILF) leader in Tokyo last year to accelerate the peace
process. In late March, negotiators from the two sides signed a
document in Kuala Lumpur, agreeing on at least 10 points that
will set the direction of the peace talks.
The rebels also secured the government’s commitment to set
up a new political entity for Muslim minority in the south of
the mainly Catholic state in Southeast Asia.
MILF is not the only active rebel group. In October, around
200 Maoist guerrillas attacked three private mining projects on
southern island Mindanao, destroying around $70 million worth of
equipment, and threatening more attacks.
In late March, communist rebels from the New People’s Army
(NPA) threatened to attack power companies in the south. Talks
with the main communist rebel group remained stalled since 2011.
What to watch:
– The army’s patience with the peace process, and with
Aquino. Coup attempts are not unknown in the Philippines, and
some within the army are angry with Aquino for not taking a
tougher line with MILF, though an overthrow seems very unlikely.
– Any more attacks on mines or other businesses, and how
investors respond. The Philippine army has said it lacks the
resources, so has asked firms to hire private militias to guard
their businesses.
(Editing by Daniel Magnowski)
