Credit raters warn of possible spillovers of Trump policies on PHL

By Luisa Maria Jacinta C. Jocson, Reporter

CREDIT RATING AGENCIES are warning of the potential spillovers of US President-elect Donald J. Trump’s economic policies on the Philippines, which could hurt growth and potentially its credit rating outlook.

“There are a few overlapping channels through which the incoming US administration’s potential policies might affect the Philippines. Trade protectionism could affect Philippines’ exports directly, and via lower global growth,” Krisjanis Krustins, director at Fitch Ratings’ Asia-Pacific Sovereigns team, said in an e-mail.

When Fitch Ratings affirmed the country’s rating in June, it noted a few factors that could lead to a negative rating action, he said.

These include reduced confidence in strong, stable medium-term economic growth, failure to maintain a stable government debt-to-gross domestic product ratio and significant deterioration in foreign currency reserves.

“Although external developments, such as in the US, affect these factors, they also depend on the policies and policy responses of the Philippine authorities,” Mr. Krustins said.

“A stable outlook generally indicates that we do not anticipate a rating change within one to two years, although we constantly reassess developments,” he added.

Fitch Ratings in a separate report said that the re-election of Mr. Trump will have “ramifications for many sovereign credit profiles, but the scale of any effects on ratings will ultimately depend on the policies pursued by his administration.”

“The policy responses of affected sovereigns and their rating headroom will also be relevant for the overall effect on their credit profiles,” the debt watcher added.

Markets are pricing in the impact of Mr. Trump’s proposed policies that include a hike in import tariffs on Asian economies, as well as stricter immigration measures.

“Trump’s re-election will bring substantial changes with significant implications for the US and the Asia-Pacific region,” Moody’s Analytics said in a commentary, citing “reduced business confidence, and financial market upheaval.”

“The most significant economic policy change under a Trump presidency will be the adoption of higher broader-based tariffs on imports to the US,” Moody’s Analytics economist Sarah Tan said in an e-mail.

Mr. Trump, who assumes the presidency in late January, has vowed to impose tariffs of 60% on Chinese imports into the US and duties of 10%-20% on goods from elsewhere.

Mr. Trump also wants to extend expiring 2017 tax cuts and enact new tax breaks, which budget forecasters say could add new debt of $7.5 trillion over 10 years.

“This will weaken demand for Philippine exports, hurting the economy as the US is its largest export destination. Electronic goods including office machine parts and integrated circuits are the main products exported to the US,” Ms. Tan added.

Latest data from the Philippine Statistics Authority showed the United States was the top destination of Philippine-made goods in September, accounting for 17.3% of the total.

On the other hand, Ms. Tan said that higher tariffs on China could benefit the Philippines as Chinese manufacturers may want to diversify production.

“Given its proximity, the Philippines is likely a logical choice for those manufacturers. This could also increase foreign investment into the Philippines, supporting its economy in the long run.”

“However, geopolitical tensions between the Philippines and China over their territorial claim of the West Philippine Sea, or the South China Sea, could put a lid on those benefits,” she added.

Mr. Trump’s immigration policies may also dampen remittance flows, a key driver of economic activity in the Philippines.

“Besides exports, another channel of impact on the Philippines is its sizeable overseas Filipino workers,” Ms. Tan said.

“President-elect Trump is likely to impose a much more restrictive immigration policy and aggressively pursue deportations. This will not only impact the Philippines’ labor market but also remittance inflow.”

Nearly half of the Philippines’ overall remittances typically comes from the United States. Latest data from the central bank showed remittances from the US accounted for 41.3% of the total as of end-September.

“Tighter immigration policies could affect remittance flows from the US. Protectionism, immigration controls and fiscal expansion could all put pressure on US inflation and policy rates, which could put pressure on emerging market currencies, including the Philippine peso,” Mr. Krustins added.

Mr. Trump has made stricter border control measures a key part of his platform, vowing to conduct mass deportation of illegal immigrants.

Meanwhile, local currencies in emerging markets such as the Philippines are seen to weaken against the dollar following the election results.

“This reflects market concerns about a potentially less dovish Fed, the heightened risk of new US import tariffs, and, in some cases, geopolitical tensions,” S&P Global Ratings said in a recent report.

The peso closed at P58.87 a dollar on Friday, strengthening by 13 centavos from its record-low P59 finish on Thursday.

The Bangko Sentral ng Pilipinas said in a statement on Friday the recent depreciation of the currency is due to a “strong US dollar story due to the rising geopolitical tensions.”

“The peso traded in line with the regional currencies we benchmark against,” it added.

Asia-Pacific currencies are under fresh depreciation pressures, Moody’s Analytics said in a separate commentary.

“If this pressure is sustained, central banks in the region may need to keep rates higher for longer or hike.”

“In the medium term, however, the direction of travel is less clear — Trump’s long-standing preference is for low interest rates, and he views US dollar strength as a problem,” it added.