TEXT-Fitch: Mindanao accord may herald boost for Philippines growth

(The following statement was released by the rating agency)

Oct 09 - A lasting peace deal in the Philippine island group of Mindanao would be supportiveof both public and private sector investment in the area, and may boost the investment rate forthe economy as a whole, supporting economic growth, Fitch Ratings says. However, apermanent deal is not a certain outcome, and other constraints on investmentgrowth still need to be addressed - such as a weak overall investment climateand low fiscal revenue base.

A previous settlement in 2008 to the four-decade-old conflict was blocked by theSupreme Court on the grounds that then-President, Gloria Arroyo, had notconsulted widely enough on its terms. The latest framework agreement between thegovernment and the Moro Islamic Liberation Front to create a new self-governingentity for Muslim majority areas, announced by President Aquino on 7 October,appears to contain more detail than the 2008 deal, but many of the finer pointsare still to be fleshed out. These include the key question of exactly howresource revenues will be shared. Reaching a final settlement will take time.

Stability in the region would help ease foreign investor concerns regardingpolitical risk, and may bolster domestic confidence. Reduced military spendingwould also create the opportunity for further government investment ininfrastructure (including social infrastructure). The increase in arable landresources would also improve food security, with potential benefits to inflationmanagement over the longer term. Such factors are supportive of a sustained risein the investment rate, which has increased to 22% of GDP in 2011 (above the'BB' range median of 21% and up from a trough of 16.6% in 2009). We expectaccelerating investment in 2012 to help push full-year GDP growth up to 5.5%,from 3.9% last year. GDP per capita in the Autonomous Region of Muslim Mindanaois one quarter of the level in the Philippines as a whole.

The ramifications of a possible Mindanao settlement for investment cannot belooked at in isolation, however. Fitch has previously commented that a sustainedincrease in the investment rate may require improvements in the businessenvironment beyond those already achieved by the Aquino administration, as wellas a greater focus on more substantial economic and fiscal reform. Thedebt/revenues ratio of 300% is nearly double the 'BB' range median, and thegrowth in the fiscal revenue base following administrative improvements in 2011needs to be sustained to create fiscal space for greater public investment.

An end to violence in Mindanao would reduce the costs for resource companies ofseeking to do business there, but does not eliminate other problems encountered- such as bureaucratic inefficiency and corruption. These have hampered thePhilippines' ability to attract FDI inflows. The approach of the demographicwindow in the Philippines in 2015 will make attracting both foreign and domesticinvestment to catalyse growth even more important.

Fitch affirmed the Philippine sovereign's 'BB+' rating with a Stable Outlook inJune. Improvements in governance and the business environment that lead tostronger investment and firmer medium-term growth prospects would put upwardpressure on the ratings if they prove more sustainable than in the past.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, ReutersMessaging:Debanjali.Ghosh.reuters.com@reuters.net))