MANILA, Nov 11 (Reuters) - In October, the government and
the country's largest Muslim rebel group agreed a preliminary
deal that may end a 40-year conflict that has killed more than
120,000 and displaced 2 million.
President Benigno Aquino hopes this will pave the way for
economic growth and development in the south, a poor region but
one that sits on considerable resources.
Moody's upgraded its ratings of the county in October,
following Standard & Poor's in July, though S&P said further
upgrades depend on Manila raising income levels or sustaining
revenue reforms.
The economy grew by 6.1 percent in the first half of 2012,
and the government is targeting full-year growth of 5-6 percent,
much higher than last year's 3.9 percent.
Still, in a reminder that much of the capital city is
dilapidated and vulnerable to natural disaster, heavy rains in
August swamped huge swathes of Manila, killing at least 145
people and leaving hundreds of thousands homeless.
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+
MOODY'S: Ba1 (Upgraded from Ba2 on Oct. 29)
FITCH: BB+
Following is a summary of political risks to watch:
INTERNAL SECURITY
Negotiators from the government and the Muslim rebel group
Moro Islamic Liberation Front (MILF) reached a deal on a roadmap
to set up a new autonomous Bangsamoro region in the south of the
mainly Roman Catholic state, signalling an end to a long
insurgency.
Still, the 11,000-member MILF is not the only active rebel
group. Maoist guerrillas have attacked private mining projects
on southern island Mindanao, destroying around $70 million worth
of equipment, and threatening more attacks.
In general, internal security remains weak, 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.
What to watch:
- Implementation of the political deal to set up an
autonomous region. This will include the demobilisation,
disarmament and reintegration of former Muslim rebel fighters,
imposition of local taxes to cut government subsidies, and
revenue-sharing arrangements with oil and gas producers.
- 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.
- Outcome of the next round of peace negotiations in
November in Kuala Lumpur, intended to spell out details of the
political deal to end the conflict.
SOUTH CHINA SEA
The Philippines is at the centre of Asia's most likely
military flashpoint: the South China Sea. In July, a regional
summit failed to agree a position on the competing claims of
various nations, and what appears to be the increasing alignment
of Washington with Manila risks infuriating China.
In July, President Benigno Aquino told Reuters the
Philippines may ask the United States to deploy spy planes over
the South China Sea to help monitor the waters. 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 September one of Aquino's trusted political advisers,
Interior Secretary Manuel Roxas, met with China's
leader-in-waiting Xi Jinping to discuss ways to normalise
relations. Roxas agreed not to internationalise the Scarborough
Shoal issue and to keep talks at a bilateral level while Manila
is drafting a policy on territorial disputes in the South China
Sea.
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 has said Manila is looking into
at least five other options to pursue its claims after China
rejected arbitration, including asking for intervention from the
International Tribunal on the Law of the Sea (ITLOS) in Germany.
Commercial activity in the South China Sea.
- Manila has accepted exploration bids on two oil and gas in
the disputed areas, 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 plans to roll out $1.8 billion in defence
spending in the next four years, but says its actions are not
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 that were cut in October, 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 government is aiming for an expansion of 5-6 percent in
2012, which would make the Philippines a rare example of growth
in contrast to Europe and the United States, so much so that
overheating may be one of the greatest economic risks.
Authorities are struggling to control an inflow of capital
that has pushed up the currency and threatens asset price
bubbles.
The arrest last year of former Philippine leader Gloria
Macapagal Arroyo for vote-rigging 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.
In October this year, the anti-graft court ordered Arroyo's
arrest over the misuse of state lottery fund, an offence that
could put her back under police detention.
In August, Aquino's allies in the lower house of Congress
voted to speed up the passage of a highly controversial
reproductive health bill, moving it closer to approval.
What to watch:
- Passage of a new law raising tax rates on alcohol and
cigarettes. Ratings agencies say the tax reform measure will
help the Philippines achieve investment grade status. When the
mining moratorium is lifted, and how 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.
- Political fallout from Aquino's challenge to the
influential Roman Catholic bishops in pushing reform of
contraception laws. The bill would require government to provide
free reproductive health services, an idea which has been
blocked by the religious lobby for nearly 20 years.
(Editing by Daniel Magnowski)