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 supportive of both public and private sector investment in the area, and may boost the investment rate for the economy as a whole, supporting economic growth, Fitch Ratings says. However, a permanent deal is not a certain outcome, and other constraints on investment growth still need to be addressed - such as a weak overall investment climate and low fiscal revenue base.

A previous settlement in 2008 to the four-decade-old conflict was blocked by the Supreme Court on the grounds that then-President, Gloria Arroyo, had not consulted widely enough on its terms. The latest framework agreement between the government and the Moro Islamic Liberation Front to create a new self-governing entity 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 points are still to be fleshed out. These include the key question of exactly how resource revenues will be shared. Reaching a final settlement will take time.

Stability in the region would help ease foreign investor concerns regarding political risk, and may bolster domestic confidence. Reduced military spending would also create the opportunity for further government investment in infrastructure (including social infrastructure). The increase in arable land resources would also improve food security, with potential benefits to inflation management over the longer term. Such factors are supportive of a sustained rise in 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 expect accelerating 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 Mindanao is one quarter of the level in the Philippines as a whole.

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

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

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

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