FACTBOX-Key political risks to watch in the Philippines

MANILA, Feb 20 (Reuters) - The government and the country's

largest Muslim rebel group have 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.

In 2012, the economy grew 6.6 percent, beating expectations

and putting its rate of expansion second only to China.

Still, much of the country is dilapidated and vulnerable to

natural disaster. Typhoon Bopha killed thousands in the south

late last year, and heavy rains in August swamped huge swathes

of Manila, killing more than 100 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.

SOUTH CHINA SEA

The Philippines is at the centre of Asia's most likely

military flashpoint: the South China Sea. Last year 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 January the Philippines asked an international tribunal

to intervene in its longstanding dispute with China and declare

that Beijing's claims are invalid, a move China rejected.

That came soon after U.S. and Philippine officials agreed on

an increase in the number of U.S. military ships, aircraft and

troops rotating through the Philippines, though officials from

both countries say there is no plan to revive permanent U.S.

military bases there.

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.

What to watch:

- New security arrangements between Washington and Manila to

increase the U.S. military footprint in the Philippines, the

U.S. fighter jets and warships the Philippines is able to buy,

and how China responds to any Filipino military buildup.

- Any action taken by the tribunal of the United Nations

Convention on the Law of the Sea (UNCLOS) on Manila's request

for intervention.

- 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.

ECONOMIC GROWTH; CHURCH V STATE?

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. With 6.6 percent

growth in 2012, the Philippines is an example of expansion in

contrast to Europe and the United States.

Authorities are struggling to control an inflow of capital

that has pushed up the currency and threatens asset price

bubbles, and government is concerned about the impact of a

strong peso on the competitiveness of its exports and the

growing outsourcing sector.

Separately, Parliament approved in December a highly

controversial reproductive health bill, requiring the government

to hand out contraceptives to poor people, a policy bitterly

opposed by the Catholic church.

The move, the first time in more than a decade an elected

politician has taken on the bishops and won, was a sign of

Aquino's confidence and his bedrock of national support, but is

unlikely to be the last battle between church and state.

What to watch:

- Possible ratings upgrades after the passage of new alcohol

and tobacco sales tax rates. The tax reform measures are likely

to push the Philippines towards investment grade.

- When the mining moratorium is lifted, and how quickly

resources firms start work on new projects.

- 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.

(Editing by Daniel Magnowski)

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